ASA 701 Key Audit Matters

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
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1AUDITING AND ASSURANCE
Table of Contents
Introduction:...............................................................................................................................2
Case of Advanced Computer Solutions Ltd:..............................................................................2
Key Assertions of Risks:........................................................................................................2
Substantive Audit Process:.....................................................................................................3
Cost of Green Machine Ltd:.......................................................................................................5
Key Assertions at Risks:........................................................................................................5
Substantive Audit Procedure:.................................................................................................6
Key Audit Matters (KAM) under ASA 701 Key Audit Matters................................................7
Objectives:..............................................................................................................................7
Definition:..............................................................................................................................7
Requirements of Determining Key Audit Matters:....................................................................7
Benefits of the ASA 701 Key audit matters:..............................................................................8
Reasons for Selecting the Key Audit Matters:...........................................................................8
The situation for Advanced Computer Solutions Ltd:...........................................................8
The situation of Green Machines Ltd:...................................................................................9
Disclosure of Key Audit Matters under ASA 701 Key Audit Matters:.................................9
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

2AUDITING AND ASSURANCE
Introduction:
Auditing can be defined as the process of assessment and inspection of the financial
reports of an organization to assure that the transactions does not contain any material
misstatements (Beasley et al. 2018). The auditors must review the management assertion
while carrying out audit. Audit assertion is viewed as assumed and observed statements
where the assertion of management can result in severe material impact on the fiscal reports.
This requires the auditors to determine any existence of material risks.
The guidelines and regulations that is made by the “ASA 701 Communicating Key
Audit Matters in the Independent Auditor’s Report” should be followed by the auditors
(Mališ and Novak 2016). This guidelines forms the element for auditors to carry out the
auditing process or to locate any risks of assertion and accounting the same in the auditor’s
report. The report would assess the different types of risks assertion and key audit matters
from the given case facts.
Case of Advanced Computer Solutions Ltd:
Key Assertions of Risks:
The situation of Advanced Computer Solution Ltd states two management risks
assertion that are as follows;
Completeness: Completeness is regarded as important assertion where a business can value
its inventories. As per this assertions, the administrations for an organization is required to
report and record the transactions so that it can value its inventory. Understating of
inventories give rise to risk assertion (Bhattacharjee, Maletta and Moreno 2015). For
example, when a responsible person is assigned to keep record of inventories even after the
purchase fails to keep to account of it results in risks assertion.

3AUDITING AND ASSURANCE
Weaker internal control system can give risk to risks assertion. As per the information
furnished by advanced computer solution the inventory in hand during 2018 stood 26% of the
sales while 18% accounted for 2017. The responsible person here must account for the
inappropriate inventory values that led to the enclosure of previous year sales in the current
year. This significantly adds up to the incorrect handling of inventories for Advanced
Computer Solutions.
Accuracy: In order to value inventories, accuracy is necessary assertion that the management
of an organization may make (Wright 2016). Accuracy acts as the vital element in identifying
the correctness and any involvement of errors in inventory management. Assertion helps in
allocating responsibilities to the responsible person so that it can assure the appropriateness
of the calculation and physical count of inventory to correctly the record the flow of
inventory in the financial statements. Accordingly, Advanced Computer Solutions
transported its inventories to six new original regions of warehouse from the central
warehousing in March 2018.
There is a probability of mathematical errors in conducting the physical inventory
count at the time of moving the inventory to the new regional warehouse (Huo and Zhang
2017). For that reason, the probability of error in physical count of inventory can lead to
reduction in inventory turnover from 5.4 in 2017 to 3.8 in 2018. Consequently, this must be
treated as an important element in ascertaining the risk for Advanced Computer Solutions.
Substantive Audit Process:
In the event of above discussion, accuracy and completeness is viewed as necessary
assertion which is under risks for Advanced Computer Solutions. Therefore, it is necessary
for the auditors to apply necessary substantive audit procedure to eliminate the risks. These
are as follows;