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Matters needing Attention in the Audit Implementation Phase of Joint Ventures

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1. In the audit, it is necessary to pay attention to whether the operation of the joint venture has carried out the principle of equality and mutual benefit in accordance with the provisions of the contract and articles of association. If there is a serious violation of the interests of the other party, the director of the company violates the intention of the investor and infringes on the interests of the investor, etc. Such cases should be fully disclosed in the audit report. Such matters are common in the following forms:

1) The contribution of foreign capital is not real. The capital contribution of the joint venture should be the focus of the audit in the early stage. For example, whether the joint venture capital contribution is timely and fully in place, the equipment of capital contribution is overpriced, and the technology of contribution is advanced and applicable. In order to ensure the real and legitimate capital of the joint venture. In the audit process of Sino foreign joint ventures, it is found that most of the foreign invested capital is invested in the form of physical objects, mainly various equipment, only a small fraction or not of the cash contribution, some of the contracts stipulate that both parties pay for cash, and the foreign parties use it as an excuse to reduce the import and export formalities. When buying equipment abroad, it is difficult for us to master its true and accurate price, and there is a considerable amount of rebates for the hands. When we have the capital verification, we have to determine the paid-in capital according to the price provided by the invoice. The actual amount paid by the foreign party is not to be inspected, which is equivalent to damaging the interests of domestic investors.

2) The joint venture shall not be joint venture, and the purpose of the joint venture shall be lost. Some foreign investors are motivated by selling equipment or raw materials. They have invested in equipment to sell equipment for high profits and to make a lot of money. Some people, in order to buy cheap raw materials, in the name of the export of products sold, try to make the price as high as possible. Others sell raw materials to joint ventures at high prices, making it too expensive to make profits. They don't want to get a dividend from the joint venture, but they are profit-making, regardless of the interests of Chinese investors.

3) Foreign shareholders shall take up the capital of joint venture capital and the term of operation of the joint venture without compensation. In the joint venture between the supplier and the foreign shareholders, the joint venture will often require the joint venture to purchase raw materials in advance. In some joint ventures that sell customers mainly to foreign shareholders, accounts receivable are large and long-term, and cannot be recovered in time. The daily operation capital of the joint venture is to be maintained by short-term borrowing, which increases the cost of enterprises. Some foreign shareholders have also withdrawn cash from the joint venture through the form of borrowing, and have long been registered, which is essentially an escape of registered capital.

2. The audit focus of internal control of the joint venture company.

1) In the audit, it is necessary to understand the leadership system of the joint venture, whether its board of directors can be held on a regular basis, whether it can make decisions on major issues and play its due role. And we should examine whether a party or business manager is above the board of directors and directly imposes its own will on the enterprise.

2) The internal control system of the joint venture is generally determined by the research of the board of directors, and the internal audit should give priority attention. Article 33 of the provisions on financial management of foreign-invested enterprises, the standards and management methods for the expenses of foreign investment enterprises, such as travel expenses, meal subsidies and board dues, etc. They shall make reasonable provision by the board of directors, and report to the competent financial authority or the competent authority of the central enterprise for the record. This kind of practice is actually a kind of restriction to the managers, which requires the operator to maximize the interests of the shareholders in the process of operation, and can not arbitrarily charge expenses. In the actual audit, it is often met with some reimbursement regulations, expenses and payment system, salary bonus distribution system, etc., they have not been reported to the board or approved by the board. External auditing generally pays less attention to the internal control system, and the board lacks an effective way to understand this aspect. Internal audit should be the focus of attention.

3. The moral hazard and adverse selection risk of operators are one of the objectives of the internal audit of the joint venture. The moral hazard of the operator is mainly reflected in the fact that the operator does nothing wrong, but they do not work very hard to increase his leisure time. They do so without constituting legal or administrative responsibility, only moral issues, and internal audit cannot give an accurate assessment. The adverse selection of the operator refers to the objective of the operator to turn his back on the shareholders for his own purposes. In the joint venture, it is mainly embodied in the following two aspects: to organize a sino-foreign joint venture, it is not only the introduction of capital, but also the introduction of advanced technology and advanced management methods. Some managers often make use of the joint venture to introduce advanced technology and management measures, in the name of themselves or family registered company engaged in commercial competition with the joint venture enterprise, in order to achieve the purpose of profit; The operator may secretly transfer the advanced technology or management methods in a paid way, and profit from it.

4. The cost expense is not real, there are many of the phenomena which are less or more empty columns. The joint venture lacks a strong supervision mechanism. In order to achieve the assessment target of the board of directors, the joint venture enterprises are becoming more and more covert in the cost expenditure. Certified Public Accountants is the statutory audit of foreign investment enterprise supervisors, but for the Chinese or other related enterprises, they cannot audit, which leads to joint ventures to adjust the cost by credit; The tax supervision is divided into internal and foreign-related categories, and generally few joint operations are common, which can make a great deal of the enterprise's multi-column and virtual column cost.

5. The foreign-related business of the joint venture company fails to perform its withholding obligations according to the provisions, thereby bringing the risk of tax inspection. Article 19 of the income tax law of the People's Republic of China on foreign-invested enterprises, where a foreign enterprise does not set up an institution or a place within the territory of China, it has obtained the profits, interest, rent, royalty and other income derived from the Chinese territory, or although they have established an institution, place, but afore-mentioned income has no actual connection with the institution, place, they should pay 20 % income tax. The income tax payable in this paragraph shall be paid by the actual beneficiary as the taxpayer and the payer shall be the withholding agent. The tax payable shall be withheld from the amount paid by the payer and shall be reported to the local tax authorities for the withholding of income tax.

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