Auditing Standards and Practice Guidance in Vietnam
Vietnamese Standards on Auditing (VSAs)

Although the first local auditing firms were established in 1991, the first set of Vietnamese Standards on Auditing (“VSA”) were not issued until 1999. It means that local auditing firms had conducted their audit in a free style approach for nearly 10 years.

Prior to 1999, there were only 2 official regulations on auditing, which were Decree 07 and Circular 60. These regulations just governed the industry at a macro level rather than at a firm's technical level.

At the date of issuance of the first set of VSA, no Vietnamese Accounting Standards had yet been issued. It seems that it was easier for Vietnam's standards setters to deal with auditing standards as they started from the scratch in auditing field, which did not hold for accounting where Vietnam had had a considerable experiences and regulations.

Up to 30 May 2005, there have been thirty three VSA issued in light of twenty two issued VAS. (Click here for the list of VSA todate)

Most VSA were adapted from ISA with little modifications. The only exception is one standard in construction project, VSA 1000 - Audit the finalized report of construction contract.

To fully adopt ISA, Vietnam still need to issue three more standards on auditing. Vietnam has no plan to issue the audit practice statement in the near future.

Regarding the issued standards, differences between VSAs and ISAs are very minor. Differences are mainly found in the form of more elaborations on a subject or different wordings of definitions. It can be inferred that the variance is the form rather than substance.

Clear differences are found in the format of the auditors' report and audit engagement letter. Auditors' report in Vietnam need more signatures and company stamps. Auditors' report on consolidated financial statements of general corporation and its subsidiaries are also specifically discussed in the related VSA.

The audit engagement letter is in the form of economic contract. This difference is influenced by related regulations and law.

Finally, Vietnam has issued VSA 1000-Audit of finalized report for construction completion, which has no equivalent in ISAs. However, in nature is not a standard but a practice statement to guide the auditors in a specialized areas. Corruption is perceived by the Government as common and it is believed that fair valuation of construction projects are vital. The Government believes that auditing services can help the finalization of such projects. The VSA 1000 has been drafted and issued to address this need.

Click here for an overall comparison of VSA and ISA

Audit Practice in Vietnam Compliance with professional standards

Degree of compliance with professional standards in general and VSAs in particular varies among the firms.

There have been no official report or survey on how audit firms in Vietnam comply with issued standards. However, it is confident to state that the extent of compliance is different between local and international audit firms.

It is safe to state that Big 4 have more opportunities and more compliance with the national standards. It is because VSAs are similar to ISAs and Big 4 have extensive experience and internal controls to follow ISAs. Obvious examples includes the obtain of client continuing and acceptance, communication with predecessor auditors, initial audit-opening balances, management representation letter, going-concern consideration, related party disclosure, communication of unadjusted audit difference to management, audit sampling, determination of audit materiality, presentation and filing of working papers and reviewing processes. These areas have been addressed and followed in accordance with ISAs in Big 4 before the issuance of related VSAs.

My experience in Big 4 shows that the issuance of VSAs have no significant influences on their audit practice in Vietnam. Most requirements in VSAs had been followed by Big 4 prior to the issuance of VSAs. Once Big 4 follows their internal regulations, they almost automatically follow VSAs. Big 4 in Vietnam also form local technical committee to reflect local requirements in the internal regulations, which are normally inherited from overseas head office.

In the case of Ernst & Young, internal regulations can be found in various documents and procedures such as Global Audit Methodology (GAM - updated worldwide via Lotus Notes Databases. This electronic database replaces conventional hard copy audit manuals), Reporting Manual, Audit/Tax Alerts (locally developed to address emerging audit/tax issues), Technical Templates (templates for financial statements, engagement letter, auditors' report) and Regular short training sessions.

Many statutory requirements resulted from regulations and laws other than VSAs are also incorporated in Big 4's internal forms, templates and standards such as: labor issues.

Staff in Big 4 ordinarily rely on their internal guidelines during working as VSAs are just a subset in their sophisticated technical control system.

Good resources from head quarters and effective internal control technically ensure Big 4 compliance with ISAs and therefore VSAs.

The main effects of VSA are observed in the format of the auditors' report and engagement letter. Most Big 4 had to revise the auditors' report to be in compliance with VSA 700. Additional signature of the auditor in charge on the auditors' report is also added. It is noted that these changes are applicable for only compulsory audit clients. For voluntary audit client, the ISAs is followed rather than VSAs.

Unlike Big 4, local firms normally do not have their own internal guidelines such as audit manual, and reporting manual. Audit staff in local firms normally have to refer directly to VASs and regulations in performing their work. Several big local firms also set up technical committees. However their technical committees' function is just limited to the simple updates and/or summary of regulations and standards. Changes in standards and regulations have not yet been systematically incorporated into the quality control procedures and system like the Big 4. In other words, practical guidance is not available in local audit firms. Some exceptions can be found in local firms which affiliates with international firms. For example, VACO currently uses audit manual of Deloittee Tohmatsu. Other than VACO, technical assistance from international firm to members in Vietnam are perhaps weak.

Furthermore, lack of financial and technological resources also prevent local auditors from fully following auditing standards. For example, most local auditors fails to meet the requirements by VSA for determining an appropriate audit sampling (as revealed in recent quality review result by MoF). Local firms do not have software or audit program to assist them in choosing audit sampling. Big Four have huge advantages of using imported software. In case of Ernst & Young, audit staff can use EY MicroSTART to choose audit sample size (based on combined factors of risk assessment, materiality level, significance of population, evidence from other procedures and analytical review) and use EY Random to randomly select items for testing. Without these softwares, local auditors may find difficult to comply with the standards.

The compliance of local firms with VASs therefore is of much lower degree in comparison with Big 4. More practical guidance should be issued by MoF to overcome these difficulties. Further recommendation is to encourage joint-audit between local and international audit firm to faciliate transfers of experience and audit techniques.

Another argument for non-compliance is the quality control, which is discussed below.

Appointment of Auditors

Auditors of FIEs are appointed by the directors in Vietnam or by the parent companies in foreign countries.

For ODA projects, auditors are appointed by donors. In some small ones, project management unit can appoint auditors. Large projects are normally audited by international audit firms.

The appointment of auditors in certain SOEs, listed companies, securities trading companies and credit institutions to some extent supervised by the government. MoF can influence the appointment in SOEs. SSC approves the list of auditors who can provide services to listed companies and securities trading companies. State Bank of Vietnam approves the auditors of credit institutions though in accordance with Decision 322, the Board of Management of Bank can appoint the auditors.

The MoF has been reported that the price war among small local audit firms have lead to poorer audit quality and control. Example includes audit of financial statements with the fee as low as VND 3 million (less than US$ 200) and audit of construction contract with a fee of VND 0.3 million (less than US$20)

In practice, low fee is also a challenge in small clients in FIEs sectors. Many small FIEs just collect the quotations from various local audit firms to choose the auditors with the least fee without consideration of quality and auditors' reputation. The audit fee accepted by local firm may fall as low as US$800 - US$1,000 for a manufacturing company (FIE). At Big Four, the minimum fee for a manufacturing client should start at US$3,500 - US$4,000.

Price war deteriorating the audit quality is a big concerns for small audit firm and MoF have recognized this issue in its recent report on the audit and accounting market.

Quality Control

Big Four in Vietnam admit that they have to be in compliance with both VSA and ISA as required by headquarters.

Audit quality review (“AQR”) within offices in Vietnam and regions of Big Four are annually conducted. Big Four in Vietnam believe that their internal AQR are comprehensive and effective.

As a part of quality control, Big Four also have better regular internal trainings for staff than local firms. Most of staff members of Big Four also have good opportunities to undertake external training course organized by ACCA or other internationally recognized accounting bodies such as AICPA and CPA Australia.

In relation to external AQR, since 1998, the MoF has examined audit services quality in selected local auditing firms and Big Four. Annually, 6-8 audit firms are selected for examination. There have been so far no firm disqualified by MoF as a result of their internal quality review. The MoF acknowledges that the quality control of audit activities are still in the discretion of audit firms because of MoF's lack of financial resource and expertise.

With the establishment of VACPA, the MoF expects that well organized and effective quality controls of audit firms will be possible in the future. It is the plan of MoF to set up an quality review programme in the period 2005 - 2006.

In 2004, the MoF examined 6 small and newly established audit firms namely VIA, VAE, Atic Vietnam, VinAudit, VAAC and Me Kong. The following weaknesses were reported [1] :

  • Lack of evidence of 3 level internal review (review of seniors, manager and partners);
  • Lack of permanent files;
  • Lack of dates in working papers;
  • Improper filing of working papers;
  • Work programs not customized for different clients;
  • Work programs not strictly followed;
  • Improper cross-references;
  • Lack of audit procedures such as assessment of internal control; going-concern, sampling, materiality planning; initial audit; and subsequent events;
  • Lack of conclusion on each working sections
  • Lack of management representation letter;
  • Improper dating of auditors' reports;
  • Improper filing of auditors' report in the audit firm;
  • Improper dating of engagement letter (subsequent to the date o auditors' report)

Despite these weaknesses, the MoF assessed that the quality control in examined audit firms were generally good.

Nevertheless, the above results shows a big gap between the quality control as well as training quality in local firms and Big Four in Vietnam.

My experience in joint-audit between Big Four and local firms really confirmed the big gaps between the experience of audit staff, methodologies and professionalism in international and local firms.

Followings are some examples that I found during my review of local firms' working papers in joint audits:

  • confidentiality commitment: staff of local firms did not have good training on keeping client's information obtained during the audit confidential.
  • presentation of working papers: poor referencing procedures and clear explanation.
  • work programs: work programs not customized for individual clients
  • internal control: no documentation of internal control and assessment of their effectiveness.
  • planning materiality (PM) assessment: no guidance for setting PM and application of PM in detailed section (for example Tolerable Error - TE and Summary of Audit Differences - SAD).
  • professional judgment: audit staff found difficult in areas need professional judgment;
  • Procedures: not familiar with analytical review procedures (ARP). They did not perform overall ARP on the financial statements and in each sections.
  • Review: review procedures were not clearly established and followed (who review what and how). Review was normally in the form of “verbal question and answers”.
  • and codes of ethics:

These are just only on-site observations. In fact, there are much more areas where local audit firm are far different from international firms such as independence assurance and check; acceptance of client; quality review and control; training programs and remunerations for staff.

In relation to these weaknesses, the MoF recognizes a need for a well-defined and designed continuous professional education (“CPE”) programs for professional accountants and auditors in Vietnam. A plan for CPE programme and training for trainers of such a programs has been considered by the MoF. It is expected that CPE programme and training for the trainers will involve also VACPA.

[1] Report on operation of auditing and accounting market in 2004, Ministry of Finance, dated 4 May 2005.