Auditing and Assurance for Advanced Computer Solutions and Green Machine Ltd
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This report discusses the auditing and assurance procedures for Advanced Computer Solutions and Green Machine Ltd. It covers key assertions of risks, substantive audit procedures, and key audit matters under ASA 701.
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Running head: AUDITING AND ASSURANCE Auditing and Assurance Name of the Student Name of the University Authors Note Course ID
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1AUDITING AND ASSURANCE Table of Contents Introduction:...............................................................................................................................2 Case facts of Advanced Computer Solutions Ltd:.....................................................................2 Key Assertions of Risks:........................................................................................................2 Substantive Audit Procedure:.................................................................................................4 Cost of Green Machine Ltd:.......................................................................................................5 Key Assertions at Risks:........................................................................................................6 Substantive Audit Procedure:.................................................................................................7 Key Audit Matters (KAM) under ASA 701 Key Audit Matters................................................8 Objectives:..................................................................................................................................8 Definition:..................................................................................................................................8 Requirements of Determining Key Audit Matters:....................................................................9 Benefits of the ASA 701 Key audit matters:..............................................................................9 Reasons for Selecting the Key Audit Matters:.........................................................................10 The situation for Advanced Computer Solutions Ltd:.........................................................10 The situation of Green Machines Ltd:.................................................................................11 Disclosure of Key Audit Matters under ASA 701 Key Audit Matters:...............................12 Conclusion:..............................................................................................................................12 References:...............................................................................................................................13
2AUDITING AND ASSURANCE Introduction: Auditing is referred as the procedure of assessing and inspecting the financial reports and books of records of an organization with the objective of assuring that transactions are free from any material misstatements. While performing audit, the auditors should review the assertionusedbythemanagementinpreparationandpresentationofthefinancial statements1. The assertion of audit is regarded as the undeclared or observable statements that the management assertion can be very severe to form a material effect on the financial reports. For this purpose, the auditor’s responsibility remains in assessing the assertions to locate any presence of risks. In Australia, the auditors are required to follow the guidelines and regulations stated under“ASA 701Communicating Key Audit Matters in the Independent Auditor’s Report” as it represents the process for the auditors to deal with the risks of assertion in order to account in the auditor’s report2. The purpose of this report is to assess the diverse dimensions of risks assertion and key matters of audit from the provided situations. Case facts of Advanced Computer Solutions Ltd: Key Assertions of Risks: As evident from the situation of Advanced Computer Solutions Ltd there are two management assertions of risks which are as follows; 1Hayes, Rick Stephan, Hans Gortemaker, and Philip Wallage.Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times, 2014. 2Whittington, Ray, and Kurt Pany. "Principles of auditing and other assurance services." (2014)
3AUDITING AND ASSURANCE Completeness:Completeness is referred as the noteworthy assertion so that a business can value its inventories. According to this assertions, the managements of organizations are under obligation of reporting the records of the transaction in order to value the inventory of financial reporting. Therefore, understatement of inventory can result in risk assertion. For instance, risk assertion arises when the accountable person fails to keep record of the inventories in spite of the purchase3. Ineffective or weak internal control can contribute to the risk of assertion. The information provided by the advanced computer solutions defines that the inventory in hand for the business in 2018 accounted for 26% of sales during 2018 and 18% in 2017. The accountable personnel should include the incorrect inventory valuation which resulted in inclusion of previous year sales in the present year. This aspect adds considerably to the imperfect handling of inventory for Advanced Computer Solutions. Accuracy:For valuing business inventory, accuracy forms the vital assertion which an organization management may make. Accuracy helps in playing vital role in recognizing the appropriateness and in any involvement of errors in the management of inventory4. The obligation of assertion assigns responsibility on the concerned personnel to make sure that the correct computation and physical count of inventory in order to accurately value the inventory flow to the important financial reports. As evident from the information provided by the Advanced Computer Solutions the company transported the inventory to six new regional warehouses from its central warehouse during March 2018. 3De Paula, Frederic Rudolf Mackley.The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919), 2016. 4Louwers, Timothy J., et al.Auditing & assurance services. McGraw-Hill Education, 2015.
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4AUDITING AND ASSURANCE Understandably there is a chance of mathematical errors in the physical counting of inventory while moving the inventory to the new regional warehouse5. As a result of this, the occurrence of such error in the inventory counting procedure can result in reduction of inventory turnover to 3.8 in 2018 from 5.4 in 2017. Therefore, these reasons should be considered vital in determining the risk for the Advanced Computer Solutions. Substantive Audit Procedure: As understood from the discussions made both the completeness and the accuracy are regarded as the assertions that is risked in the advanced computer solutions. Now it becomes necessary for the auditor to implement the noteworthy substantive audit process to reduce the risks. These are as follows; Substantive Process for Audit for Risks:Completeness is regarded as the primary assertion of risks for Advanced Computer Solutions. In order to address this risks, the necessary substantive audit process that which the auditor is required to carry-out is reconciling the physical count of inventory with the ledger accounts6. In this procedure, the auditor’s main responsibility is to keep tract of the inventory value obtained from the physical count of inventory. The primary reason for using the substantive process of audit is to verify the fact that the accountable personal must carry forward the balance of inventory in the appropriate manner. 5Kumar, Ravinder, and Virender Sharma.Auditing: Principles and practice. PHI Learning Pvt. Ltd., 2015. 6Jacoby, Julian, and Howard B. Levy. "The materiality mystery."The CPA Journal86.7 (2016): 14.
5AUDITING AND ASSURANCE Substantive Process of Audit for Second Risks:Accuracy is viewed as the next assertion in determining the risk for the Advanced Computer Solutions. With the objective of addressing the assertion risks, the auditors are required to carry-out the substantive audit procedure to detect the process of physical inventory counting7. Under the procedure of substantive audit technique, the auditor would discuss regarding the process of counting the inventory with the accountable personnel. By observing the count of inventory process and sample testing of inventory it would help in finding any error that is present in the audit procedure. AsevidentfromtheinformationprovidedregardingtheAdvancedComputer Solutions, the company has transported its inventory to new six locations and the auditors are accountable for testing the inventory in all the six transported locations8. Besides this, the auditor is required to provide the confirmation of the inventory test from the central warehouse in order to determine any existence of errors for the Advanced Computer Solutions. Cost of Green Machine Ltd: As evident from the information provided for Green Machine Ltd there are certain assertion associated to the valuation of Property, Plant and Equipment which can result in material effect on the financial report. These are as discussed; 7Zeff, Stephen A.Forging accounting principles in five countries: A history and an analysis of trends. Routledge, 2016. 8Sin, Fang Yun, Robyn Moroney, and Maria Strydom. "Principles‐based versus rules‐based auditing standards: The effect of the transition from AS2 to AS5."International Journal of Auditing19.3 (2015): 282-294.
6AUDITING AND ASSURANCE Key Assertions at Risks: Valuation: One of the major assertions related to the property plant and equipment. The principles under this valuation defines that the company management are required to properly state non-current assets based on their costs after deducting the depreciation9. The principle states that the any addition or disposals should be recorded correctly and they need to take into the account the review of impairment indicators, impairment or test. It states that the financial information must be disclosed in a fair manner and should reflect a true value. As per the information provided regarding the Green Machine Ltd, there are major concerns regarding the facts that some of the rates that is applied for depreciation is not correct as they are considered very low10. The lower depreciation of property, plant and equipment reduces the large scale operating expenditure for the company which may result in material misstatement of the financial reports. Therefore, with the presence of all these aspects, the assertion is under risk. Accuracy: While valuating the PPE, accuracy forms the major assertion. Based on the principle of accuracy, the management are under the obligation of recording the amounts and other information related to PPE transaction should be precise. Apart from this, the administration 9Cook,William,SeverinevanBommel,andEstherTurnhout."Insideenvironmental auditing: effectiveness, objectivity, and transparency."Current Opinion in Environmental Sustainability18 (2016): 33-39. 10Levy, Howard B. "Unsolved Problems in Auditing."The CPA Journal86.2 (2016): 24.
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7AUDITING AND ASSURANCE ofthecompaniesmustmakeappropriatedistinguishamongthecapitalandrevenue expenses11. As understood from the information provided by the Green Machine Ltd the management has made an error in distinguishing between the capital and revenue expenses. Theymanagementhavecapitalizeddefiniteitemsthatshouldbetreatedasrevenue expenditure and they have also included certain items of capital nature under repair and maintenance in the income statement. As a result of this, this assertion of Green Machine Ltd is under risks. Substantive Audit Procedure: Following the recognition of audit assertion risks, the auditors are required to implement the necessary substantive audit process to reduce the risk. The certain risks minimization process is stated below; Substantive Audit Process for First Risk: As evident from the above stated discussion that the management of the Green Machine Ltd has implemented the low rate of depreciation on the property plant and equipment. Therefore, as the substantive process, the auditor is under obligation of considering the depreciation rates in relation to the lifetime of the property, plant and equipment such as the residual amount of the assets, profit or losses on the disposal, consistencyofthecompanywiththenecessaryaccountingpoliciesforapplyingthe depreciation along with the policy of replacement12. Following this, it is necessary for the 11Gustavson, Maria, and Aksel Sundström. "Organizing the audit society: Does good auditing generate less public sector corruption?."Administration & Society50.10 (2018): 1508-1532. 12Carla,Yohana,andAuditingAccounting."Auditstyleandfinancialstatement comparability." (2017).
8AUDITING AND ASSURANCE auditors to perform comparative analysis of the ratios for depreciation of property, plant and equipment. Similarly, the auditors are required to recalculate the depreciation value with the reviewed depreciation rate for obtaining the value of asset. Substantive Audit Process for Second Risk:As evident from the above stated analysis, the management of Green Machine Ltd has made significant error in classifying the capital and revenue expenses. As the part of the required substantive audit process, the auditor of Green Machine Ltd is under the obligation of performing the audit review relating the process of capitalization of expenses. To be more precise, it is necessary for the auditors to review the expenses such as labour expenses, material expenses, cost of overhead, operating expenses and others as it would help in recognizing those expenses that has been classified based on the incorrect basis. Beside this, the auditors must review the fact that whether the company has obeyed with the principles of reviewing the expenses. Key Audit Matters (KAM) under ASA 701 Key Audit Matters Objectives: As defined under the ASA 701, the auditor’s objectives are to ascertain the key mattersofauditbydevelopinganopinionregardingthefinancialstatementsand communicating the matters in the audit report with appropriate descriptions13. Definition: As stated under ASA 701, Key Audit Matters can be defined as the matters which in the judgement of auditors forms the highly substantial in auditing the financial statements of the current period. The auditors select the key audit matters from the subject communicated with the governance personnel. 13Gustavson, Maria. "Does good auditing generate quality of government?." (2015).
9AUDITING AND ASSURANCE Requirements of Determining Key Audit Matters: As stated under the ASA 701, the auditors should define the matters that requires the significant consideration in the audit procedure following the discussion with the personnel accountable for the governance14. Under this procedure, the auditors are required to take account of the following aspects; a.The auditors must take into the account the areas that has higher risks of material misstatement under standard ASA 315. b.An important judgement is required by the auditors in relation to the financial statement that involves vital management decision relating to the vital accounting estimations which the auditors have recognized relating to uncertainty15. c.The auditors are under the obligation of considering the impacts of significant events and decision during the audit process. Besides this, it is necessary for the auditors to ascertain the events or the necessary aspects under paragraph 9 of the auditing standards that has the influence on the financial statements of the companies and these aspects can be considered in the key audit matters. Benefits of the ASA 701 Key audit matters: As noticed from the above stated conversation the standards of ASA 701 assists the auditors in recognizing and communicating the key audit maters in the financial reports of a firm16. However, it is noteworthy to denote that there are certain benefits of the ASA 701 and the same is discussed below; 14Adelopo, Ismail.Auditor Independence: Auditing, Corporate Governance and Market Confidence. Routledge, 2016. 15Dennis, Ian.Auditing theory. Routledge, 2015.
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10AUDITING AND ASSURANCE a.AsperthePrinciplesandStandardsofASA701itencouragesinbetter communication of the key audit matters between the auditors and the persons that are charged with governance17. This aspect helps in creating the transparency together with the better governance in preparing the financial reports. b.The standards and the principles stated under the ASA 701 helps the auditors in placing their emphasis on the auditing areas that needs significant judgements. This auditing aspects helps in contributing in the direction of increased quality of audit. c.According to the Principles and Standards of ASA 701 it helps the preparers with the incentive of revising the financial reporting and disclosing the same in the key audit matters areas. This auditing aspects significantly helps in contributing in the direction of improved quality of financial reporting. Reasons for Selecting the Key Audit Matters: There are certain reasons that result in choosing of key audit matters in both the Advanced Computer Solutions Ltd and Green Machine Ltd is stated below; The situation for Advanced Computer Solutions Ltd: As evident in the situation of Advanced Computer Solutions Ltd, the assertions identified is the key audit matters based on the ASA 701 due to the existence of certain reasons. The primary reason for this is that, the risks associated to the valuation of inventory 16Antipova, Tatiana. "Auditing for financial reporting."Global Encyclopedia of Public Administration, Public Policy, and Governance. Springer, 2016. 17Knechel, W. Robert, and Steven E. Salterio.Auditing: Assurance and risk. Routledge, 2016.
11AUDITING AND ASSURANCE can significantly contribute in material misstatements in financial reports as it has the ability of incorrectly misinterpreting the financial situations of the business18. In addition, there is an involvement of certain management judgement that can be witnessed in the valuation of inventory which comprises of higher uncertainty together with the lesser transparency. This can result in material misstatement of the financial reports. The situation of Green Machines Ltd: The case facts obtained for the Green Machines Ltd suggest the assertions relating to the key audit matters based on the ASA 701 due to the existence of certain reasons. Primarily, charging the lower rate of deprecation on the property, plant and equipment can result in bigger differences in the depreciation expenditure of an organization for the particular time period19. Charging of lower rate of depreciation can result an effect on the profitability of the company which can result in material misstatement in the financial reports. Another reason identified in case of Green Machine Ltd is the faulty classification of revenue and capital expenses that can result in main differences in profitability of the business during that particular year. Consequently, faulty classification would also add up to the material misstatement of Green Machines Ltd. As a general rule, charging of lower depreciation and incorrect classification of capital and revenue expenditure can result in material misstatement of the financial statements for Green Machine Ltd. Therefore, this forms the primary reason for considering the area of concerns into the key audit matters. 18Becker, Lana L., Jean Garner Stead, and W. Edward Stead. "Sustainability assurance: a strategic opportunity for CPA firms."Management Accounting Quarterly17.3 (2016): 29. 19Bradbury, Michael E., Adrian Raftery, and Tom Scott. "Knowledge spillover from other assurance services."Journal of Contemporary Accounting & Economics14.1 (2018): 52-64.
12AUDITING AND ASSURANCE Disclosure of Key Audit Matters under ASA 701 Key Audit Matters: According to the ASA 701, the auditors are under the obligation of recognizing the key audit matters and are also required to disclose the key audit matters based on the regulations of ASA 70120. The auditors are first required to take into the account the disclosure of the major events or the reasons that are made under the key audit matters. In the husk, the rationale for selecting these key audit matters is mainly for the disclosure purpose. Secondly,theauditorsarerequiredtomaketheobligatorydisclosurerelatingtothe substantive process of audit that is applied by them for addressing the key audit matters. As a general rule, the auditors should disclose the information regarding the substantive audit procedure for the key audit matters. Conclusion: On a conclusive note, the discussion conducted above highlights that the key audit matters form the major parts in the process of audit because they create a material effect on the financial reports for both the companies. The main risk for Advanced Computer Solution is the accuracy and completeness while for Green Machine Ltd the main risks is valuation and accuracy. The auditors here should adhere with the regulations and principles of ASA 701 Key Audit Matters for recognizing and disclosing the key audit matters. 20Boiral,Olivier,etal."EthicalIssuesintheAssuranceofSustainabilityReports: Perspectives from Assurance Providers."Journal of Business Ethics(2018): 1-15.
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13AUDITING AND ASSURANCE References: Adelopo,Ismail.AuditorIndependence:Auditing,CorporateGovernanceandMarket Confidence. Routledge, 2016. Antipova,Tatiana."Auditingforfinancialreporting."GlobalEncyclopediaofPublic Administration, Public Policy, and Governance. Springer, 2016. Becker, Lana L., Jean Garner Stead, and W. Edward Stead. "Sustainability assurance: a strategic opportunity for CPA firms."Management Accounting Quarterly17.3 (2016): 29. Boiral, Olivier, et al. "Ethical Issues in the Assurance of Sustainability Reports: Perspectives from Assurance Providers."Journal of Business Ethics(2018): 1-15. Bradbury, Michael E., Adrian Raftery, and Tom Scott. "Knowledge spillover from other assurance services."Journal of Contemporary Accounting & Economics14.1 (2018): 52-64. Carla,Yohana,andAuditingAccounting."Auditstyleandfinancialstatement comparability." (2017). Cook, William, Severine van Bommel, and Esther Turnhout. "Inside environmental auditing: effectiveness,objectivity,andtransparency."CurrentOpinioninEnvironmental Sustainability18 (2016): 33-39. De Paula, Frederic Rudolf Mackley.The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919), 2016. Dennis, Ian.Auditing theory. Routledge, 2015. Gustavson, Maria, and Aksel Sundström. "Organizing the audit society: Does good auditing generate less public sector corruption?."Administration & Society50.10 (2018): 1508-1532. Gustavson, Maria. "Does good auditing generate quality of government?." (2015).
14AUDITING AND ASSURANCE Hayes, Rick Stephan, Hans Gortemaker, and Philip Wallage.Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times, 2014. Jacoby, Julian, and Howard B. Levy. "The materiality mystery."The CPA Journal86.7 (2016): 14. Knechel, W. Robert, and Steven E. Salterio.Auditing: Assurance and risk. Routledge, 2016. Kumar, Ravinder, and Virender Sharma.Auditing: Principles and practice. PHI Learning Pvt. Ltd., 2015. Levy, Howard B. "Unsolved Problems in Auditing."The CPA Journal86.2 (2016): 24. Louwers, Timothy J., et al.Auditing & assurance services. McGraw-Hill Education, 2015. Sin, Fang Yun, Robyn Moroney, and Maria Strydom. "Principles‐based versus rules‐based auditing standards: The effect of the transition from AS2 to AS5."International Journal of Auditing19.3 (2015): 282-294. Whittington, Ray, and Kurt Pany. "Principles of auditing and other assurance services." (2014) Zeff, Stephen A.Forging accounting principles in five countries: A history and an analysis of trends. Routledge, 2016.