Question

The Nanjo Van(NV) Sdn Bhd is a private limited company incorporated in Malaysia. Starting its business in the last 5 years, NV already employs 70 dispatch staffs for delivery services. The company currently owns 15 vans and 20 motorcycles, some were purchased new, and some were acquired second-hand.

Since the pandemic of Covid-19 early 2020, the company suffers from inadequate resources as many trading companies now need transport facilities to sell their products. The company then decides to lease 10 more vans from a lessor in town under a 15-year leasehold agreement. This lease comes with purchase option at huge discounted price and most likely the company will buy the vehicles at the end of the lease term.

Full details of all vehicles owned by the company are maintained in a non-current asset register. But the leasehold vehicles are only recorded in the form of their monthly rentals in expense.

Required:

1. Identify the four (4) most important assertions for the audit of the vehicles owned by Nanjo Van(NV) Sdn Bhd. For each assertion, suggest the most appropriate substantive audit evidence you would gather and evaluate in addressing each assertion.

(10 Marks)

2. List and describe two (2) audit work you should perform on the 10 vehicles which are leased from the lessor in town.

(5 Marks)                      

(Total: 15 Marks)

Answer 1

ASSERTIONS:

1. Vehicle Cost Information

To properly measure fleet cost, the myriad individual transactions that comprise each vehicle’s record must include certain pieces of information to accurately maintain the overall record.

For each expense category, we must pull a sample number of invoices or records, say, every 10th transaction for maintenance, one in three for accident reports. We should Audit the record for the list of required data and produce statistics showing the percentage of compliance. The results will reveal not only where the information is deficient, but other shortcomings as well, such as an improperly authorized maintenance transaction. If necessary, remedial action can be taken to further minimize instances in which information was deficient.

2. Audit Compliance to Fleet and Corporate Policies

Compliance with both fleet and corporate policies and procedures is another important audit target. The company no doubt has an accounts payable policy requiring documentation and authorization for payment. The same holds true for vehicle purchase policy, and we should audit for both.

For example, most companies have various levels of authority for capital expenditures. A department head might have authority up to $1,000, a director between $1,000 and $5,000, and a vice president in excess of $5,000. Various forms of audit should be completed, and sometimes, if the requirement is large .The audit should again take a representative sample of such transactions and determine first if the proper party has authorized it and, if so, that the request was properly documented.

3. Records Audits Ensures Proper Legal Documentation

As previously stated, operating a vehicle is a highly documented process in which critical records must be kept. Each vehicle, whether leased or owned, begins its service with a vehicle order (either a lease or a purchase requisition). That document requires authorization at various levels: the driver, a supervisor, and the fleet manager.

4. Adequate oversight, and appropriate controls are critical in safeguarding inventory

Conducted physical observations and inventories

Review FASTER manuals, system data and relevant reports

Review and analyzed Fleet FASTER transactions and parts inventory records

Review established policies and procedures

Review and analyzed County fuel and Wright Express fuel transactions

Review and analyzed take-home vehicle lists, supporting documentation, and related fuel transactions

Utilized questionnaires to evaluate vehicle usage controls at the departmental/division level Interviewed Fleet Management staff Interviewed other County management Researched best practices, to include benchmarking with other agencies

AUDIT EVIDENCES:

1. Vehicle Cost Information

Following records must contain the following data:

· Vehicle number.

· Driver name.

· Odometer reading.

· Transaction date.

· Year/make/model.

· Total expense cost.

· Sales tax.

· Proper authorization.

· Level III data, including parts and labor breakdown, and type of expense (i.e., PM, brakes, tires, engine, etc.).

Audit Compliance to Fleet and Corporate Policies

Information must be there for the authority level maintained by the company for vehicle and corporate policies.

Records Audits Ensures Proper Legal Documentation

· Following the order, several documents must be furnished :

· Manufacturer’s certificate of origin or CO (sometimes called the manufacturer’s statement of origin, or MSO), the “birth certificate” of the vehicle required to obtain the title.

· Vehicle title, the document of ownership.

· Bill of sale.

· Schedule A, a document provided by a fleet lessor outlining the vehicle lease terms under the master lease agreement.

· Vehicle registration, a permit that allows the vehicle to be driven.

· Federal odometer statement for vehicles that have been sold.

These and other documents are critical records without which legal ownership, operation, and sale of the vehicle can be jeopardized.

Adequate oversight, and appropriate controls are critical in safeguarding inventory

Utilized questionnaires to evaluate vehicle usage controls at the departmental/division level Interviewed Fleet Management staff Interviewed other County management Researched best practices, to include benchmarking with other agencies

List and describe two (2) audit work you should perform on the 10 vehicles which are leased from the lessor in town.

1. While conducting an audit of lease transaction, the auditor shall take notes of the following principal objectives :

· Determine that all finance leases are recorded in the balance sheet with appropriate classification of the leased asset and the obligation

· Ascertain that depreciation expenses and interest expense relating to finance leases and rent expense on operating leases have been calculated and reported properly in the income statement

· Ascertain that footnote disclosure of finance lease and operating lease obligations are adequate and are in compliance with the disclosure requirements of IAS 17

The auditing procedures related to lessee obligations consist principally of a careful examination and study of the lease documents to determine the substance of the transaction and the proper accounting treatment. During the examination of the lease agreements, the auditor normally prepares a summary of the terms and provisions of each lease for his or her permanent file working papers documentation.

An audit program for lease obligations would include the following steps :

· Examine lease agreements and prepare a summary of key terms and pertinent data for the permanent file

· Determine that leases have been properly classified as either finance leases or operating leases using the criteria of IAS 17

· For capitalized leases, check the present value computations and determine the appropriateness of the discount rate used

· Determine that lease payments and expenses included in the accounts are in agreement with the provisions of the lease contracts

· Determine that executory costs to be paid by the lessee (property taxes, insurance, etc.) have been properly accrued and included in expenses

· Determine that any additional contingent rents payable have been accrued (such contingent rents may result from escalation clauses, gross receipts, provisions, etc.)

· Ascertain that footnote and balance sheet disclosures are in accordance with IAS 17