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FINAL REPORT Auditing and Assurance Services

Vinamilk Class: AC2015E Program: Analyzing, accounting and auditing

Group members: Nguyễn Hà Trang Bùi Thị Thùy Linh Đặng Khánh Linh Hoàng Thị Phương Linh Nguyễn Hùng Sơn Trịnh Thị Sơn Hà

Table of content: 1. Understand the client 2. Analytical procedures 3. Risk assessment

I.

UNDERSTAND THE CLIENT:

1. Brief information about Vinamilk: - Company name: Vietnam dairy product joint stock company. - Vietnamese name : Công ty Cổ phần Sữa Việt Nam - Abbreviated name : Vinamilk - Stock code : VNM - Charter capital : VND 14,514,534,290 millions VND - Head office : 10 Tan Trao, Tan Phu Ward, District 7, Ho Chi Minh City - Business registration certificate and tax code: 0300588569 Business Operation and ProcessManagement and Governance 2. Industry and External Environment: - According to BMI reports, both manufactures and processes in milk manufacturing field, big corporations such as Vinamilk, TH and Hanoi milk quickly developed its milk farms so milk's yield is forecasted to grow at least 10% in 2017 and 2018. - Vinamilk is the largest dairy company in Vietnam. In 2010, it is the first company in Vietnam to be included in the Forbes Asia's 200 Best Under A Billion list that highlights 200 topperforming small- and mid-sized companies with annual revenue under US$1 billion. - Dairy enterprises in Vietnam still have to import technology, raw materials and equipment from abroad due to limited domestic technology. Hence, significant impact on the cost of products, turnover of enterprises. - Since the accession to the WTO, Vietnam's dairy enterprises have been under increasing pressure due to the reduction of tariffs on imported milk under the tariff reduction policy of Vietnam when implementing the commitments under the Agreement. Common Effective Preferential Tariffs in the ASEAN Free Trade Area (CEPT / AFTA commitments) and commitments with the World Trade Organization (WTO). The "foreign" psychology of the Vietnamese also negatively affect the consumption of dairy products in Vietnam. Currently, domestic dairy products account for only 30% of domestic market share. - In 2017,Vinamilk exceeded of its consolidated revenue target by 0.3% (of which domestic sales increased 13.6% and exports decreased 23%) and reached 105.6% of the consolidated posttax profit target, the market share of the whole dairy industry

3.

-

-

increased by 2% compared to the target of 1% increase and is continuing to maintain the leading position in the national dairy market. Managerment and govermence: a. Business Philosophy: Continuous development of production, trade and service in the areas of business activities in order to: maximize profit and enhance the Company’s value in harmony with the interests of the Shareholders; improve the living conditions, income and working environment of employees; also to ensure the interests of other stakeholders towards sustainable and responsible development. b. Vision: To become a world grade brand in food and beverage industry, where people put all their trust in nutrient and health products. c. Mission: To deliver the valuable nutrition to community with respect, love and responsibility. d. Core values: Integrity: Integrity and transparency in actions and transactions. Respect: To have self-respect, to respect colleagues. To respect the Company and partners. To cooperate with respect. Fairness: To be fair with employees, customers, suppliers and other parties. Ethics: To respect the established ethical standards and act accordingly. Compliance: To comply with legal regulations, the Company’s Code of Conduct, and the Company’s procedures and policies. e. Management structure: In order to operate the management, the cVinamilk builds the Company’s structure in a concentrated and unified manner from the top down. Duties and powers are assigned to each department, each level, clearly and thoroughly from the BOD to the Executive Committees, managers and staff.

Board of directors: - Mrs. Mai Kieu Lien – Chief Executive Officer - Mr. Mai Hoai Anh – Executive Director – Sales - Mr. Trinh Quoc Dung – Executive Director – Dairy Development - Mrs. Nguyen Thi Thanh Hoa – Executive Director – Supply Chain - Mrs. Bui Thi Huong – Executive Director – Human Resources Administration & PR - Mr. Nguyen Quoc Khanh – Executive Director – Research & Development - Mr. Le Thanh Liem - Executive Director – Finance Cum Chief Accountant - Mr. Phan Minh Tien - Executive Director – Marketing - Mr. Tran Minh Van - Executive Director – Production *Note: In the new model, the Audit Subcommittee is established and assumed the role instead of the former Risk Management Subcommittee and the Board of Supervisors, including

management of internal auditing and internal control systems and risk management. This risk management structure changes in accordance with the change of the Company’s management model from having the Board of Supervisors to the absence of Board of Supervisors, the main operational direction and control through the Board of Directors 4. Business Operation and Processes: Group Structure:

a. Main customer - Vinamilk product lines are developed for children and adult. This is because Vinamilk has the biggest demand for milk and consumer goods and dairy products. Vinamilk divides its target customers into two groups  Individual customer groups: This is a group of customers with diverse product needs (good quality, nutritional value of products, reasonable price, packaging design, ...) and accounted for a high proportion.

 Organized customer groups: distributors, wholesalers, retailers, stores, supermarkets, etc. This is a group that requires discount, sales bonus, order on schedule, ... related to product distribution.  In addition to the two main target groups, Vinamilk's other products also meet all age groups: yogurt, liquid milk, condensed milk, Vfresh, ... Vinamilk’s products are for all group of people, but they are more focusing on middle class. Meanwhile, overall qualities are improving, people’s demand is higher and higher. They are now not as suitable as they were. b. Main revenue 2017 ( VND) From Product’s sale

49.526.103.800.509

From good’s sale

1.446.258.338.101

From the services

provision

of 62.526.876.757

Rental income: From renting 17.187.652.809 properties

-

Serving this demand, on the one hand, the company has actively invested in industrial scale farms, on the other hand, constantly improving the purchasing and development of fresh milk from the households. Vinamilk strengthens localization of milk material. - Vinamilk invest in building dairy farms => self-control 17% raw milk input. Because of unstable raw milk input followed by cooperation with milk farm. This leads to several consequences such as unstable quality and quantity.

Vinamilk has excess supply of raw materials with 13 factories throughout the country

5. Client Objective and Strategy: a. Objective: - Products also meet all age groups: yogurt, liquid milk, condensed milk, Vfresh, ...

- 2017 marked 41 years of Vinamilk’s establishment and development with the bold mark in the production, business and branding reputation. So far, Vinamilk is proud to be Dairy Company No.1 in Vietnam, ranking 49th in the top 50 most profitable dairy companies in the world. b. Applicable tax rates: - The companies in the Group are required to pay income tax at rates ranging from 10% to 40%, depending on principle activities of its factories, on taxable profits. The Company and its subsidiaries incurred the income tax charges. * Reason: - Based on the Circular No. 18/2002 / TT-BTC, the company has two manufacturing plants while the industry is subject to state incentives. - In Clause 1, Article 26, Chapter IV of the Government's Decree No. 64/2002 / ND-CP of June 19, 2002 on the transformation of State enterprises into joint-stock companies, prescribing policies for equitized enterprises, VNM was established in 2003 on the basis of equitization of enterprises => "To enjoy tax incentives under the Law on Domestic Investment Promotion as for newly established enterprises without having to carry out the procedures for granting Certificate of investment incentives. " c. Value proposition

- The business offers customers appropriately healthy products with very affordable price. Its nutritional values – including calcium

value (110mg/100ml) and fat value (3.5g/100ml) – are just average in the market. Vinamilk’s target is middle-income population. Vinamilk’s positioning strategy is ‘the same for less’. - Meanwhile, the price (29,500VND/1 liter box since 1/2017) is cheaper than that of major competitors Dutch Lady, TH True Milk and obviously high-end foreign brands. d. Development strategy - The long-term development strategy of Vinamilk is to achieve the target revenue of USD 3 billion and become one of the 50 biggest dairy companies in the world in the period of 2012-2017.  Vinamilk achieve its mission: - Developing strategic human resource management - Maintaining and managing activities towards sustainable development - Planning and implementing Knowledge, Innovation, and Change management.  Vinamilk’s strategic priorities are: - Assets investment plan: - To achieve the target revenue of USD 3 billion in the period of 2012-2017. - To maintain dividend payments to shareholders with an annual dividend rate of at least 30% on par value. - Customers: - To be an enterprise with high customer satisfaction on product quality, affordable prices, and the leading distribution system in Vietnam - Corporate governance: - To be an enterprise with accredited professional management and structure - To be an enterprise where the working environment enables employees to make out their best capabilities and contribution to the common goals, thus being one of the best working places for employees. *Note: Prior to 11 November 2017 the Company held 15% shares in Asia Saigon Food Ingredients Joint Stock Company but had significant influence over this entity because a member of the Company’s Board of Directors is a Board of Management member of this entity; as at 11 November 2017, the Company had no longer significant influence over Asia Saigon Food Ingredients Joint Stock Company’s operating and financial policies, the

Company reclassified the investment from investment in associate to other investment accordingly. 6. Measurement and Performance a. Development strategy: The BOD has strictly followed the 5-year strategic plan of 20172021. The BOD has reviewed and approved some decisions, such as the expansion of the distribution network, the selective marketing activities, the product development to meet market needs (e.g. organic products), the development of the farm system, the enhancement of factory capacity, the execution of M&A transactions and the rise of equity in affiliates and subsidiaries in order to increase the sustainability of the value chain. Total investment reached over 5,800 billion (40% of the 5-year plan). b. Production and sales: - Revenue: VND 51,135 billion, reaching 100.3% of the plan. - After-tax profit: VND 10,278 billion, reaching 105.6% of the plan. - In terms of market share: Major product lines have grown dramatically compared to competitors. Vinamilk's total dairy market share increased by 2% at the end of 2017 compared to that of 2016, outperforming the target by 1%. c. Dividends: - Cash dividend paid to shareholders in 2017 was VND4,000/share (excluding the dividend of VND1,500/ share for closing date on 29th December 2017 that will be paid on 30th March 2018). - Major share: At least 50% of profit after tax d. Capital Investment: Vietnam's State Capital Investment Corporation (SCIC) holds 36% of the shares as of late 2017. 7.58% are owned by other Vietnamese investors, of which 0.28% are owned by CEO Mai Kieu Lien. Foreign investors hold over 53% of the shares. - F&N Dairy Investments Pte Ltd: 16.50% - Jardine Cycle & Carriage, via Platinum Victory Pte. Ltd. (PVPL): 10.03% - F&N BEV Manufacturing PTE.Ltd: 2.70% - Matthews Pacific Tiger Fund 2.02% - Arisaig Asia Consumer Fund, Ltd 1.65% - Deutsche Bank AG, London Branch: 1.09% - other foreign investors: 30% - F&N have been holding shares of Vinamilk for a long time and have two representatives in the Board of Directors.

e. Funds: - Appropriation to equity funds is made in accordance with the Company’s Charter as follows:  Bonus and welfare fund 10% of profit after tax  Investment and development fund 10% of profit after tax - Utilisation of the above reserve funds requires approval of the shareholders, the Board of Directors or the Chief Executive Officer, depending on the nature and magnitude of the transactions involved as stated in the Company’s Charter. When the fund is utilised for business expansion, the amount utilised is transferred to share capital. 7. Conclusion: Based on collectable information about Vinamilk, we found that Vinamilk is a leading Vietnamese company in manufacturing and trading dairy products.With a market share of over 40%, vinamilk's revenue and profit are growing steadily in recent years. Vinamilk is also expanding its overseas market. Vinamilk is doing well with its internal management and control system. However, there are still a lot of potential of risks, which we will discuss later II. Analytical procedures A. Objectives: 1. Preliminary analytical review – risk assessment Preliminary analytical reviews are performed to obtain an understanding of the business and its environment (eg financial performance relative to prior years and relevant industry and comparison groups), to help assess the risk of material misstatement in order to determine the nature, timing and extent of audit procedures, ie to help the auditor develop the audit strategy and program. 2. Substantive analytical procedures Analytical procedures are used as substantive procedures when the auditor considers that the use of analytical procedures can be more effective or efficient than tests of details in reducing the risk of material misstatements at the assertion level to an acceptably low level. 3. Final analytical review: Analytical procedures are performed as an overall review of the financial statements at the end of the audit to assess whether they are consistent with the auditor’s understanding of the entity. Final analytical procedures are not conducted to obtain additional substantive assurance. If irregularities are found, risk assessment should be performed again to consider any additional audit procedures are necessary.

B. Findings: 1.Income statement analysis Percentage change income statement analysis which is computed by taking the change in amount of money at the end of year and beginning of this year divide to the money at the beginning of year is the horizontal analysis. It presents the change of all items in income statement year to year from 31/12/2015 to 31/12/2017 to see the Vinamilk’s performance. 

Net revenue

Net revenue (billion VND) % change in net sales (%)

2015

2016

2017

40,081

46,795

51,041

16.8%

9.08%

The net revenue of Vinamilk increased significantly in 2016 compared to 2015 due to the price of Vinamilk products went up 6% and the productivity increase 30% compare to previous year, among them liquid milk, powder milk, yogurt and condense milk went up 53%, 59% ,58% and 30% in respectively. In 2017, the client has started to stabilize so the proportion change in net revenue is not as high as last year. As the consequence, the rate reduced with the ratio of 9.08% increase in revenue. The revenue of Vinamilk is divided into 2 geological segments: domestic and export. Although, the domestic is account for the large majority of Vinamilk total sales, the export’ revenue still covered about 10% to 15% each year. In export field, Vinamilk’s products has penetrated to more than 43 countries around the world in which there are some big countries such as: Philippine, Australia, Canada, Russia, Korea,…In particular, in 2016, Vinamilk exported milk to the Middle East market that gave the company significant profit. Market share increased in three main categories: liquid milk rose 1.5% to 54.5%, yoghurt rose 0.4% to 84.7% and drink yogurt increased by 1.9%. 33.9%. In 2016 and 2017, the ratio sale for export went up to 17 % and 12%, respectively. This trend is expected to go up in the future and Vinamilk commit to enhance the quality to satisfy the demand of both domestic and export. Moreover, Vinamilk had expanded the capacity to meet the goal 3 billion dollar in 2017. The Vietnam Dairy factory is upgrade to have the capacity 800 million ton per year, so the total capacity assumes to be nearly 2 million tons per year. Thus, with the significant increase in capacity and advanced in technology, it is hope that Vinamilk will have the high growth in revenue. 

Cost of goods sold

Cost of goods sold (billion VND)

2015

2016

2017

23,818

24,459

26,807

2.7%

9.6%

% change in cost of goods sold (%) 

Gross margin

Gross margin (billion VND)

2015

2016

2017

16,262

22,336

24,234

37.3%

8.5%

% change in gross margin (%)

The gross profit of Vinamilk increased throughout the year 2015 to 2017 with changing growth rate. The growth rate of gross margin in 2016 and 2017 was 37.3% and 8.5%, respectively. Because the strategy is to reduce of cost production, Vinamilk will get the increase in the growth of gross margin. 

Financial income 2015

2016

2017

649

723

817

% change in financial income

11.34%

12.97%

Financial income/net profit after tax

9,364

10,278

Financial income (billion VND)



Financial expenditures and selling, general and administrative expenses: 2015 2016

2017

Financial expenses (billion VND) 163

102

87

in which: interest expense

31

47

30

S, G & A expenses

7,490 11,812

12,804

% change in Financial expenses

-37.09% -15.04%

% change in interest expense

48.67%

-36.69%

% change in S,G & A expenses

57.7%

8.4%

The financial expenses for VNM reduced each year by decreasing the finance on debt. S,G and A expenses stand for selling expense and

administrative and general expense. In General, the S, G and A expense went up slightly with increased rate every year. That was the result of the rise in advertising expenses, the commission for agencies, the distribution channel, the salaries and so on. However, this increase was less than the increase of net sales, so as can be seen clearly, VNM tried to save the cost for all activities. In the future, the selling, general and administrative expense is predicted to go up because the expenditure for PR activities is assumed to go up and building the brand image is the way to maintain the market share and customers. 

Profit/ (loss) from other expenses:

Profit/(loss) in other expenses

2015

2016

2017

70

104

210

49.22%

100.55%

% change in profit/(loss) in other expense 

Profit: 2015 2016

Operating profit/ (loss)

2017

9,271 11,160 12,226

Net profit/(loss) before tax 9,367 11,238 12,229 Net profit/(loss) after tax

7,769 9,364

10,278

EPS (VND)

4,864 5,831

6,355

% change in

2015

2016

2017

Operating profit/ (loss) (%)

20.38%

9.55%

Net profit/(loss) before tax (%)

19.97%

8.8%

Net profit/(loss) after tax (%)

20.5%

9.7%

EPS (VND)

19.88%

8.98%

The operating profit of Vinamilk increased year by year with the growth rate higher than the growth rate of revenue that is the result of good control the expenditure in cost of goods sold and the selling, administrative and general expense and the gain from others income from financial activities. The earnings before interest and tax ( EBIT) and the growth rate in net income of vinamilk ( net profit after tax) moved the same way with operating profit. the net profit of vianmilk is promising to go follow up this trend in the future. This is the good

point for both dairy industry and Vinamilk’s investors. In addition, in 11/11/2017 11 member countries have agreed to change TPP to CPTTP is considered a new version of TPP. Thanks to this new agreement, dairy products will have more favorable tariffs as well as preferential policies in foreign markets. Earnings per share also move the same way with net income in this period that was the result of issuing more share of Vinamilk in these years. In general, the cost saving can help the company generate more profits. Therefore, with the strategy of Vinamilk is cost leadership, Vinamilk invest strongly on the sources of material such as associate to building the new factory in New Zealand, expanding the herd cow to save cost of goods sold. Besides, by divest some ineffective investment and focus on the core business, Vinamilk can building the strong brand name on milk and enhanced their market share.

2.Balance sheet analysis: Percentage change in balance sheet analysis gives the general view about the variation of each account on balance sheet over years so that can understand the client’s performances

Percentage change in :

2015

2016

2017

Current assets

8.24

11.6%

8.75%

Cash and cash equivalent

-11.07 -51.76% 46.8%

Short term - financial statement 16.05

20.6%

1.03%

Total account receivable

-3.23

6.75%

60.17%

Inventory

7.18

18.7%

-11.07%

Other current assets

61.98

-15.8%

-3.74%

As a whole, the current assets of Vinamilk increased every year, but the growth rate varied from 2015 to 2017. In 2017, the growth rate of cash and cash equivalent increased dramatically that was the result of the big amount of money deposit at bank with the maturity less than 3 months. In 2015 and 2016, cash and cash equivalent growth experienced the negative rate because in these years Vinamilk disbursed 5,245 billion VND for invest in 3 new factories. In

2017, Vinamilk invested in New Zealand and Poland so Vinamilk keep the big amount in cash and cash equivalent was used to disburse for those projects and also the account payable. The total account receivable fluctuated during this period. In particular, since 11/2017, the client changed its policy of debt to domestic customers. Accordingly, the customer's payment time is increased to support better sales. This change led to an increase remarkably in receivables in 2017 from customers at 60.17% .Although, high receivable turnover that mean company take competitive strategy from giving the customers more days to pay back the amount of money, Vinamilk should reduce the amount in account receivable because the growth rate is quite high to prevent the risk from some insolvent customers and receive quickly amount of money sell on account to invest in other production activities. As can be seen, in 2016, VNM has high growth rate on inventory because in that time the global milk price was forecasted continuing climb in 2017, VNM reserve more raw materials to deal with the increase in price of inputs. However, this is just the solution for short-time because milk is the material has the short usage time. Therefore, it can be seen that in 2017 the growth rate in inventory reduced to -11.07%

Percentage change in : 2015 2016 2017 Long - term assets

4.21

-0.38 34.14

Long - term receivable -4.86 4.57

146.05

Fixed assets

1.58

27.5

Investment properties

-3.63 -3.79 -30.44

1.3

Long-term assets increased with the changing growth rate. The growth rate in fixed asset went up each year because VNM has invested more on new factories and high technology equipment to raise the production capacity. Especially in 2017, the growth rate in fixed assets were very high that was the result of the big investment in building Vietnam dairy factory, Vietnam powder milk factory, Da Nang dairy factory and expanding Lam Son dairy one member LTC, Vietnam dairy cow One member LTC and other projects with the total capital investment is 10,275 billion VND up to 2018. In recent years, the real

estate market has had difficulty so the investment in properties of VNM reduced. Percentage change in:

2015

2016

2017

A.

Liabilities

9.78

6.38

54.8

I.Current liabilities

10.1

7.55

57.09

15.3

-96.71

-79.88

2. Accounts payable

15.54

16.79

54.79

3. Other short term liabilities

7.69

-8.13

370.16

II. Long term liabilities

6.45

-6.32

16.2

Long term borrowings

6.29

-11.19

-15.9

Other long term liabilities

-65.64

-78.74

2669.54

1. Short term loans

As a whole, the growth rate in Liabilities had the decreasing in 2016, then, in 2017 this growth rate got back to increase to 54.8% due to the considerable increase on others short-term liabilities. The short term loans decrease in the period 2016 and 2017. It means VNM borrowed and paid out all short term debt within a year, so Vinamilk is high solvency. The growth rate in account payable increased continuously during 2015 to 2017, but this ratio is quite high and moved the same trend with the growth rate in receivable which can be analyzed above, so it is implied that Vinamilk need to have the strategy to reduce the sale on credit to have more money paying back to supplier and invest more in others activities. Although in recent years VNM had the investment in New Zealand and Poland and improved many factories and farms with advanced technologies, it has low rate of the long term liabilities (-11.19% in 2016 and -15.9 in 2017) by vertual of having huge cash and cash equivalent in this period.

Percentage change in:

2015

2016

2017

B. Owners’ equity

5.67

7.08

6.55

Share capital

19.99

20.89

0.00

The share capital of Vianmilk increased every year that is the result of issuing more share of company. In 2016, along with issuing common stock for employees with 17,753,434 shares and 185,289,204 stocks with the rate 2:1 for

existing shareholder that push the share capital climbed 7.08%. In 2015 and 2016, with the high in owner’s equity, Vinamilk issued bonus share to stock holder with the rate 2:1 to raise the share capital. Therefore, with the high share capital, Vinamilk can strengthen their powerful in financial resources that helps Vianmilk create more competitiveness in the market. In contrast, the percentage change in 2017 is 0.00 due to the stop issuing shares in the market. 3. Financial ratios: a.Liquidity ratio: Liquidity ratio is the useful tool to measure the ability of Vinamilk to pay out their short-term obligation

2015

2016

2017

Current ratio

2.78

2.89

2.99

Quick ratio

2.15

2.19

1.59

Cash ratio

0.23

0.1

0.09

b.Asset management ratio: Assess management ratio measure how the company using its assets to create sales. By looking at these ratios, the efficiency of company operational management is determined.

Asset management ratio

2015

2016

2017

The inventory turnover

6.25

5.4

6.67

Days sale in inventory

58.4

67.6

54.7

Receivable turnover

19.1

16.32

11.12

Days sale in receivable

19.1

17.1

20.8

Payable turnover

10.86

9.55

6.76

Days sale in payable

33.6

35.5

44.4

Cash conversion cycle

43.9

49.2

31.1

c.Profitability ratio: The profitability ratio measures the earning to investors. The investors tend to prefer to invest in the company that generates more profitability ratios. This ratio is the useful to indicate how efficient the company’s performance.

Profitability ratio

2015

2016

2017

Profit margin (%)

19.38 20.01 20.14

Return on assets (ROA) (%)

29.0

32.9

32.1

Return on equity (ROE) (%)

51.5

43.2

44.4

Financial leverage

1.3

1.3

1.4

The profitability ratio measures the earning to investors. The investors tend to prefer to invest in the company that generates more profitability ratios. This ratio is the useful to indicate how efficient the company’s performance. The profit margin defines how well the firm generates the profit from net sale. This ratio went up considerably from 19.38 in 2015 to 20.01 and 20.14 in 2016 and 20107 respectively. It was the result of the profit that VNM convert from not only selling product and service but also the abnormal return in liquidation

SAB miller’s share and selling coffee factories. Thus, the increase in profit margin ratio make the impressive on financial performance of Vinamilk, it had good strategy to control all the expenditure to generate more profit. The return on assets (ROA) indicates how efficiency the company generates the profit from assets.As a whole, ROA of Vinamilk is an increased trend from 29 in 2015 to 32.1 in 2017. The relation between ROE and ROA: ROE = Profit margin * Asset turnover * Financial leverage = ROA * Financial leverage As can be seen, the financial leverage of Vinamilk almost stable during 2015 and 2017, so the ROE has the same movement with ROA. The upward trend in ROE presents that the return on resources that is contributed by owners went up. Financing on debt can help the company rise up their ROE, but the interest expense hurt company’s profit that push ROE down turn. Thus, Vinamilk manage efficiency on both operating and using assets.

Du point analysis: Vinamilk

2015

2016

2017

Profit margin

19.38

20.01

20.14

x Total assets turnover

1.51

1.59

1.47

x Financial leverage

131.32

131.12

145.21

= ROE

3842.92

4171.7

4299.06

3.Conclusion: In conclusion, the increase in profit margin leads to the significant rise in ROE. Therefore, Vinamilk need to have the high profit margin to push ROE high. Currently, the global milk material goes up; it will hurt the Vinamilk’s net income. However, depending on the expanding breeding activities, the associations with the Miraka Factory in New Zealand, the Vietnam CPI expected to decline, etc., Vinamilk expect to stay in high and stable in profit. In general, in the period 2015-2017 Vinamilk does not have abnormal fluctuations in indicators or only minor fluctuations (as analyzed above).

Audit risk assessment. Objective: Assess the risk of material misstatement in Vinamilk’s financial statement to support for the audit process. 1. Business environment : - In 2017, economic growth is 6.81%, GDP per capita in 2017 reached 53.5 million VND / year ($ 2,385), increase 170 USD over 2016. Inflation is controlled at 3.53%, lower than the ceiling of 4%. These are good signals for the economy that the company is operating. - According to Circular 08/2017 of the Ministry of Industry and Trade on registration for declaration of milk and functional foods for children under 6 years old, from 10/8/2017, Milk business can actively raise prices below 5% without having to ask for permission from the regulator. This regulation may increase the level of revenue for the business. - EU milk production slowed down last year while New Zealand and Australia yields fell by 4% and 7%, respectively. Dairy imports in the Asian market dropped to 5% => Facilitate domestic dairy market => Revenue can increase 2. Business lines: - Producing and trading in cakes, soy milk, beverages, canned milk, powdered milk, nutritional powder and other dairy products; - Trading in food technology, equipment, spare parts, materials, chemicals (except strong toxic chemicals), raw materials; - Real estate business, land use rights owned, leased or rented by the owner (as stipulated in Article 11.3 of the Real Estate Business Act 2014); - Trading in warehouses, yards, transportation; - Inland transportation of goods for the production and consumption of the company's products; - Production, sale and purchase of alcohol, beer, nonalcoholic beverages, mineral water, processed food, tea for tea, roasted coffee-phin-soluble (not produced at the head office); III.

- Producing and trading in plastic packaging (not working in the office); - Polyclinic (not working in the office); - Cultivation and farming; - Retail sugar, milk and dairy products, biscuits, confectionery and products made from cereals, flour, starch and other foodstuffs; - Retail alcoholic beverages, non-alcoholic beverages (soft drinks, sweeteners, whether or not carbonated), natural mineral waters, wines and spirits in low or no alcoholic content.  Diverse business lines, operating in the environment with high complexity 3. Legal Environment: Enterprises operating under the Enterprise Law, Tax incentives and CIT rates under Decree No. 218/2013 / ND-CP on corporate income tax reduce tax expenses for joint ventures 4. Main business lines: - Producing and trading in cakes, soy milk, beverages, canned milk, powdered milk, nutritional powder and other dairy products; - Trading in food technology, equipment, spare parts, materials, chemicals (except strong toxic chemicals), raw materials; - Real estate business, land use rights owned, leased or rented by the owner (as stipulated in Article 11.3 of the Real Estate Business Act 2014) Revenue structure in 2017: Sales of finished goods Sales of merchandise goods Other services Rental income from investment property Others

49.526.103.800.509 (96.85%) 1.446.258.338.101 (2.828%) 62.526.876.757 (0.12%) 17.187.652.809 (0.03%) 82.823.096.903

(0.172%) 51.134.899.765.079

Total revenue

5. Changes in scale of operation of the enterprise: - Share capital increased from 22,405,949,288,585 to 23,873,057,813,861 ,mainly from the appropriation of funds from equity and business combination in 2017 - 20 big projects to improve production capacity and expand warehouses and farms have been implemented in 2017, with a total investment of more than 5,000 billion VND. The projects are analyzed, planned, carefully assessed and allocated resources in an effective manner, ensuring that projects are implemented in a timely manner to meet the needs of the Company and the market. - The purchase is completed and improved through the application of good bidding and transparent bidding mechanisms with 100% domestic suppliers, which has brought the optimum in cost and durability. Firmly and diversify the supply of raw materials => Raw materials will decrease - The planning, restructure and improvement of the warehouse system has been upgraded according to the model of smart warehouse, applying the automation technology, optimizing the area, increasing the machinery and equipment and reducing manual labor. => Inventory number, inventory turnover index will decline, labor costs decrease. Based on the above analysis and comment, the group concludes that: - Risks related to the entire financial statement: yes - Account specific risk: yes Vinamilk has a diversified business model, involving a number of industries. However, the financial indicators have clear evidence , the financial statements of the enterprise have applied the Vietnamese Accounting Standards, the Vietnamese Business Accounting Standards and the related legal regulations which related to the preparation and presentation of financial statements.  Therefore, the potential risk assessment on the financial statements is average. (1,000,000 VND) 31/12/2016 599.923 Cash Cash

55.500

31/12/2017 834.435 128.900

Fluctuation 234,512 39.09 % 73.400

132.25%

equivalent Receivable

2.191.348

3.613.981

1.422.633

64.92%

Inventory

4.521.766

4.021.058

-500.707

-11.07%

Fixed Asset

14.815.629

19,386,985

4.571.355

30.86%

Payable

2.561.910

3.965.691

1.403.780

54.79%

Revenue

46.965.003

51.134.899

4.169.896

8.89%

Type of risk Inherit risk

Description

Inherit risk, control risk

The "Just in time" procurement strategy has been applied together with the optimization of inventory management and warehouse planning at the subordinate units that have brought about remarkable results in the Company’s inventory control and working capital turnover, compared to the previous year Since mid-November 2017, the Company has changed its credit policy for domestic customers, in which the credit period was increased to support sales better. This change led to an increase in receivables from customers

Inherit, Control risk

Related accounts -Acquisiton of two companies - Increase in Vietsugar and Angkor Dairy Cash and cash Products Co., Ltd in 2017 equivalents -Fixed assets

-Decrease in inventory and work in process

- Increase in account receivables

Suggested audit procedures - Checking balance of bank accounts -Checking calculation of depreciation expense - Checking or counting a tangible assets - Checking or counting inventory storage - Checking goods receipt and issue cycle

-Decribing the receipt of a direct written respone from Vinamilk’s customers to verify whether the information is accurate or not

Inherit risk

Inherit risk

and reduced receivables turnover ratio from 21.3 to 17.6 At the end of the year, the Company applied a new payment policy with some banks lending against the value of the Company's payables to some suppliers. This policy helped the Company reduce its payables turnover to 8.21 in 2017 from 10.29 in 2016. -launching nearly 20 new products of liquid milk, milk powder, yogurt, drinking yogurt, baby cereal, soya milk, ice cream and beverages, the innovation has offered consumers richer and more comfortable experiences with diversified choices of products. -Market share increased by 2%

- Increase in note payables

- Verifying the notes from thirdparty sources

- Increase in revenue

-Verifying the accuracy of the client’s record for the sales transaction. -Checking sale invoices and vendor’s invoices

Control risk: - The team evaluate the performance of Internal risk management of Vinamilk: + Vinamilk is the pioneering company in Vietnam applying advanced management model (without control board). Accordingly, the Audit Committee of the Board of Directors will be responsible for ensuring that the Company has an effective internal risk management and control system. This model is effective from 15/04/2017. + General standards for senior management are defined in the company's Charter and Management Regulations, including: • "Careful" Responsibilities. • Responsibility "Honest and avoid conflicts of interest". • Responsibility for "information security". • Caring and loyalty.

This assessment is conducted in two phases: personal self-assessment and direct assessment management. For executives, the board is also based on the results of the supervisory review of the CEO - The company has an ISO 31000 risk management system. In 2017, Vinamilk's subsidiaries have also set up a comprehensive risk management system based on ISO 9001: 2015, risk-based thinking: + Risk is always monitored and updated to take appropriate measures; Employees are aware and responsible for risk management. The internal selfassessment system actively contributes to staff awareness of risk management and internal control + Business processes are issued, updated and managed by the specialized department. The results of the internal audit show that compliance with current procedures is very good; + Has been deploying the management system for approval, storage of traditional processes (hardcopy) to online management system to optimize the time of implementation steps, convenient for documentation, review , approve, look up information while limiting errors. + Internal Audit Charter, Internal Audit Handbook as well as internal audit practice show that Vinamilk's internal audit has met the basic requirements of internal auditing when compared with The internal audit is co-issued by the Ministry of Finance and the World Bank ("WB"). + The Audit Subcommittee monitors the effectiveness of activities, measures to prevent frauds, violations of rules, regulations of the Company, professional ethics or law violations. At present, the Company has set up a mechanism to direct and implement fraud prevention measures.  From these, Vinamilk's internal control team is good and quite effective. The control risk is low Reasons for the setting up the materiality: We use three levels to set up the materiality for each account with: 0- not fluctuate or affect by other account 1- highly doubtful level 5- lowly doubtful level 3- between 1 and 5 + For Cash and cash equivalents, auditor can check balance of cash account with bank, so it’s difficult to happen the error so we set level 5 for these account. + For inventory, vinamilk has amount of invetory at high level, Vinamilk change early their method to calculate inventory, some external documents are related to third-party that can not verify them, so we set the highest level 1 for this account. +For Investment and development fund or Share capital,these account are not high fluctuation or stability in 2017 so we set level 0

6. Conclusion: In conclusion, due to the lack of experience and knowledge, our team only give some subjective comments. However, the group believes that the above information can support the initial stages of the audit. In addition, we commit that the data in the report is accurate and taken from the official report of Vinamilk.