Special audits are in-depth operations conducted when it is necessary to clarify a specific issue beyond the annual financial statement audit. According to the VSA and relevant laws, the objective is not to provide a comprehensive opinion, but rather to focus on urgent suspicions such as fraud, embezzlement, or compliance with regulations, for example, Law No. 38/2019/QH14 on Tax Administration. This activity typically arises when there are signs of irregularities and requires timely, independent investigation to protect the interests of all stakeholders.
In a complex business environment, particularly in related-party transactions and transfer pricing, specialized audits become an indispensable tool. This focused examination helps management quickly identify serious errors, signs of fraud, and their root causes. Based on the evidence obtained, businesses can promptly rectify problems, strengthen internal controls, and avoid legal risks or tax penalties. To understand the implementation and practical value of this service, please see the detailed content below.
Definition and core role of special audit
A special audit is a type of audit designed to serve a specific purpose, usually investigating, verifying, or assessing a particular financial or accounting issue at the request of a related party. This activity is entirely different from a regular financial statement audit, which has a broad scope and aims to provide an opinion on the fairness and reasonableness of the entire financial statement. The main purpose is to provide reliable and objective evidence to address a specific concern or information request.
The nature and legal characteristics of special audits
Special purpose audits are focused and ad hoc, and can be performed at any time when the need arises. While there are no specific standards, this activity typically applies the principles of VSA 800 on special purpose reporting or VSA 4400 on pre-agreed procedures, depending on the scope of work.
Specialized audits are always narrow in scope and clearly defined from the outset, for example, only examining fixed asset purchases and sales over a six-month period, or only investigating advertising and marketing expenses. This allows auditors to focus their resources and expertise on providing accurate and timely answers to the issues of concern.
A crucial role in governance and compliance.
Special audits play a crucial role in strengthening corporate governance and legal compliance. They help management identify gaps in internal controls that regular audits might overlook due to their lower materiality compared to the overall assessment. Particularly in cases involving suspected fraud (such as embezzlement or misappropriation), conducting a special audit provides the necessary special audit evidence to initiate disciplinary action or legal proceedings.
Regarding tax accounting issues, a special tax compliance audit may be required to assess risks before the tax authorities conduct an inspection. This helps businesses proactively correct errors, minimizing the risk of tax arrears and administrative penalties. Decree 125/2020/ND-CP Regarding administrative penalties for tax violations.
Cases and legal grounds for conducting special audits.
The need for special audits arises from a variety of reasons, but can primarily be categorized into internal requirements from management/owners and requirements from government regulatory agencies.
Special audits are conducted at the request of internal management and owners.
These are the most common scenarios, when there is an internal crisis or a need for strategic assessment. The goal is to obtain objective, neutral evidence.
Investigating serious fraud and errors.
When significant discrepancies, anomalies, or whistleblowing information are detected, special audits are a tool for detailed investigation.
- Suspected Embezzlement/Corruption: Conduct a thorough examination of cash accounts, inventory, or accounts receivable/payable.
- Financial statement manipulation: Investigating unusual year-end adjusting entries or the improper timing of revenue and expense recognition.
- Special audit evidence: Focuses on original documents (contracts, input/output invoices, inventory receipts/deliveries) and internal authorization documents.
Due diligence in M&A transactions
During mergers and acquisitions, the acquiring party often requests a special audit to verify certain core issues of the selling party:
- Verify Contingent Liabilities: Examine warranties, pending litigation, or underreported tax liabilities.
- Quality of Earnings (QoE): Analyzing the sustainability of earnings and excluding unusual income/expenses from core operating income.
Shareholder disputes or legal proceedings
When disputes arise regarding profit sharing, share valuation, or when a business is involved in litigation, the results of a special audit serve as objective, specialized audit evidence.
Special audits are conducted at the request of government agencies.
These are mandatory or directed inspections, typically from the Tax Authority and the Government Inspectorate.
In-depth tax inspection
The Tax Authority may request special audits of businesses with high tax risks, particularly regarding transfer pricing issues between related parties, based on Decree 132/2020/ND-CP.
- Scope: Focuses on transactions involving foreign elements, large expenses, or losses that have persisted for many years.
- Objective: To identify specific audit evidence regarding compliance with the arm's-length principle, thereby recovering corporate income tax and imposing penalties for violations.
Request from the investigative agency or government inspectorate.
In serious economic cases, investigative agencies may request a special audit to clarify violations of the law, corruption, or the misappropriation of state assets.
The process of conducting a professional special audit.
A specialized audit requires a rigorous process, flexibly adapted to specific objectives, but still adhering to the fundamental principles of auditing.
Plan and define a narrow scope.
The first and most important step is to accurately define the objectives and scope of the special audit.
Agreement and objectives
Auditors and clients need to reach a clear agreement on the objectives of the investigation (e.g., determining whether or not embezzlement occurred, calculating actual losses, or simply assessing tax risk). This written agreement forms the legal basis for the special audit.
Assessing specific risks and materiality
Due to its narrow scope, auditors need to assess risk at a much more detailed level than in a financial statement audit. Materiality is determined based on the client's specific concerns, not the overall materiality of the financial statements. For example, if the objective is to investigate fraud of VND 100 million, this figure would be material for that particular audit, even if it is not material to the financial statements.
Special audit evidence gathering techniques
Highly reliable audit evidence is a key factor in the success of an audit. The reliability of audit evidence depends on its source (external evidence is more reliable than internal evidence) and its nature (direct rather than indirect).
Interviewing and information gathering
This is a key technique in special audits, particularly when investigating fraud. Auditors need to carefully interview relevant individuals to gather special audit evidence in the form of testimony, while also looking for inconsistencies in that testimony.
Data analysis and forensic examination
Instead of sampling, special audits often apply the 100% testing method to transactions within a narrow scope. Forensic analysis techniques are used to trace money flows, identify related parties, and analyze electronic data.
- Relationship analysis: Using specialized software to identify unusual relationships between suppliers, employees, or other stakeholders.
- Document tracing: Verify the signature, date, and legality of each document.
Special audit report and recommendations
The results of a special audit are presented in a Special Audit Report. This report is typically detailed and highly investigative.
| Purpose | Contents of the Special Audit Report |
| Fraud/Embezzlement | Provide a detailed description of the fraudulent activity, the individuals involved, the methods used, and an estimate of the actual damages. |
| Foreclosure (M&A) | Assess the quality of assets/liabilities, potential risks, and necessary adjustments to the purchase price. |
| Tax Compliance | List the tax errors, calculate the potential back taxes and penalties as stipulated by law (e.g., Article 142 of the Tax Administration Law). |
Auditors need to provide specific, practical recommendations, not only focusing on remediation but also suggesting improvements to internal control systems and risk management processes to prevent similar incidents in the future.
Distinguishing special audits from other types of inspections.
In a general audit test, differentiating between types of audits is a fundamental question. Specialized audits are often confused with financial statement audits and inspections.
| Criteria | Special Audit | Auditing financial statements |
| Target | Draw conclusions about a specific issue (fraud, compliance, transaction). | Provide an opinion on the fairness and accuracy of the entire financial statement. |
| Scope | Very narrow, clearly defined (e.g., Cost X, Contract Y). | Broad, covering all material items on the financial statements. |
| Time | On an ad hoc basis, when a request or event arises. | Periodically (usually annually). |
| Proof | Focus on specialized audit evidence, particularly forensic evidence. | Sufficient and Appropriate Evidence according to VSA 500. |
Comparing special audits with inspections
Inspection is the activity of checking and evaluating by state management agencies (e.g., Government Inspectorate, Tax Inspectorate, Labor Inspectorate) with the power to enforce and impose penalties.
- Legal aspects: Inspections are acts of state power, resulting in binding administrative decisions. Auditing, on the other hand, is a professional service, resulting in advisory reports.
- Initiation: Inspections are initiated by government agencies. Special audits can be requested by any party (internal or external).
- Purpose: Inspection aims to detect and address violations of the law. Special audits aim to provide information for decision-making or investigation purposes.
The quality and reliability of audit evidence are particularly important.
Which of the following pieces of evidence is exceptional evidence? The answer lies in the investigative and prototyping nature of the evidence. For example, a forensic analysis report on unusual cash withdrawal transactions is a typical example of exceptional audit evidence, carrying significant legal weight and value.
Principles of Reliability of Audit Evidence
The reliability of audit evidence depends on several core factors outlined in the VSA 500 (Audit Evidence):
- Source: Evidence gathered from independent external sources is more reliable than evidence gathered from within the company.
- Effectiveness of controls: When an entity's internal control system is assessed as effective, audit evidence, particularly that gathered internally, will have a higher degree of reliability.
- Directness: Audit evidence directly collected by the auditor (observation, inventory, calculations) is more reliable than indirect evidence.
When audit evidence from two different sources yields materially different results, auditors should perform additional audit procedures to resolve the discrepancies, such as re-interviewing the parties involved or examining additional independent original documents.
Challenges in gathering audit evidence are particularly challenging.
Gathering evidence for special audits presents numerous challenges, especially in complex fraud cases. Fraud often involves deliberate collusion and concealment, resulting in documents that appear valid but are actually misleading.
| Challenge | Solutions for Special Audits |
| Conceal | Use in-depth data analysis techniques to look for unusual trading patterns (Benford's Law). |
| Legality | Ensure that special audit evidence is legally obtained so that it can be used before a court or regulatory agency. |
| Electronic information | Collect and preserve electronic data (emails, system logs) in accordance with legal standards (Digital Forensics). |
The importance of specialized professional audit services.
For management and investors, using specialized professional auditing services is a strategic investment that helps protect the value of the business.
Protect assets and strengthen internal controls.
A specialized audit goes beyond simply identifying irregularities; it also analyzes why those irregularities occurred. Through detailed recommendations, businesses can address vulnerabilities, such as strengthening expense approval processes, separating duties, or establishing system access control mechanisms. This is particularly important for preventing penalties under accounting and tax laws.
Enhancing credibility and transparency
Proactively conducting special audits when suspicion arises, rather than waiting for external intervention, demonstrates the management's commitment to transparency and good governance. In M&A transactions, a special audit report from a reputable independent firm enhances the credibility of disclosed financial information, facilitating negotiations and valuation.
Providing a legal basis and dealing with inspections.
When businesses are subject to tax audits or face litigation, special audit reports provide a foundation of data verified and analyzed by experts. For example, in the case of a dispute over an expense item excluded by the Tax Authority, a special audit report can offer expert arguments based on accounting standards and specific guidance documents from the General Department of Taxation.
Conclude
Specialized auditing is a crucial tool for organizations to enhance transparency, strengthen internal controls, and manage legal risks. It supports fraud investigations, M&A due diligence, and self-audits of tax compliance, transforming risks into opportunities for action. For complex financial and accounting issues, in-depth and objective auditing from a professional firm is the optimal solution.
MAN – Master Accountant Network provides auditing services Specifically, we focus on addressing the specific concerns of businesses. Our team of experienced experts gathers reliable evidence, conducts in-depth analysis, and provides practical recommendations to help businesses overcome challenges and protect themselves from serious financial and legal risks.
Service contact information at MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Mobile/Zalo: 0903 963 163 – 0903 428 622
- Email: man@man.net.vn
Content production by: Mr. Le Hoang Tuyen – Founder & CEO MAN – Master Accountant Network, Vietnamese CPA Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
