Audit and Assurance: Key Assertions and Substantive Procedures

The article covers the audit process, key assertions, and substantive procedures for Computer Solutions Ltd and Beautiful Hair Ltd. It also discusses the reporting requirements of ASA 701.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
Name of the Student:
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Executive Summary
The audit process requires an auditor to independently examine the financial statements of a
business for ascertaining if there are any risks of material misstatement. The discussion would be
covering the business of Computer solutions ltd and Beautiful Hairs ltd which are engaged in
separate activities. The discussion would be including key assertions which can be identified for
the material accounts which are at risks and also substantive procedures which can be taken by
the auditor for collecting necessary audit evidences for forming an opinion regarding the fairness
of the financial statements of the business. The assessment would also include a discussion on
ASA 701 and the responsibilities of the auditors associated with this standard in terms of
disclosures.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Computer Solutions Ltd...............................................................................................................4
Key Assertions in Relations to Inventory....................................................................................4
Application of Substantive audit procedure................................................................................5
Auditing Standard 701, Communicating Key Audit Matter........................................................6
Beautiful Hair Ltd........................................................................................................................8
Key Assertions of Intellectual property.......................................................................................8
Application of Substantive audit procedure................................................................................8
ASA 701, Communicating Key Audit Matters............................................................................9
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................12

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Introduction
The purpose of conducting an audit is to check the accurateness of the financial position
of the business in terms of the reporting framework which is used by the business. The reporting
framework is used by the business for the purpose generating financial report for the business
which effectively displays the financial performance of the business. The auditing process makes
it possible to analyze the financial reports prepared by the business and identify if there are any
material misstatements in the same. The company which is considered for analysis, are
Computer Solutions ltd and Beautiful hairs ltd. The discussion would be including the key audit
risks which is faced by both the companies and the assertions which are related to the same. The
audit procedures which is applied by the auditor would be discussed in details for the purpose of
confirming the presence of risk in the financial statements (Groomer and Murthy 2018). The
auditor would be applying substantive procedures for collecting initial audit evidences which
would be helping the auditor to effectively form an opinion on the annual reports which is
prepared by the management. The audit opinion is important from both the perspective of the
shareholders and management as they provide feedback to both regarding what improvements
are necessary in the business structure (Glover, Taylor and Wu 2016). The discussion would also
be covering aspects which needs to be reported under Auditing standard (ASA) 701,
communicating key audit matters. The key audit matters are included in the annual reports which
is prepared by the business so that there a level of transparency maintained in the operations and
reporting framework of the business.
Discussion

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Computer Solutions Ltd
Key Assertions in Relations to Inventory
1. Right of Transfer and Valuation: The business of computers solution ltd is considered
which is engaged in the business of providing computer products and software and one of
the recent products which is offered by the business is related to best presentation
package. However, the product is facing high return due to a software problem which
have come to surface. The main assertion which can be identified for inventory of the
business is the right of ownership of the asset and appropriate valuation of the same. If
proper valuation technique is not applied by the business, then the amount which is
represented in the financial statements would not be appropriate. Further if the rights to
use the inventory is not transferred than the reporting of the sane would be inappropriate
(Johnstone, Gramling and Rittenberg 2013). The auditor therefore needs to apply proper
auditing steps so that the right to use the inventory of the business can be determined and
also it can be established that the value of inventory is appropriate.
2. Assertion to Accuracy: The amount which is shown in the financial statement of a
business should be accurate and thereby should represent fair representation of the
business. The business has just acquired a contract from government for supply of
computer systems. In this case, the business has received advanced payments and in such
a case, it needs to be ensured that the financial statements are showing accurate view of
the financial position of the business (Pinho 2014). The accuracy of the figures is a must
as if any omission or misstatement is present than the same would affect the financial
position of the business. The auditor of the business needs to apply substantive audit

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procedures so that it can be established that accuracy is maintained in the financial
statements of the business.
Application of Substantive audit procedure
Right of Transfer and Valuation
1. The auditor of the business needs to establish the ownership claims or right to use the
inventory of the business. In the case of computer solutions ltd, the right to use of the
computers might also belong to the customers as the business also offers it products on
credit basis or advance basis. The auditor needs to check all transactions relating to credit
sales or sale through a large contract so that it can be established which goods are sold
and whether the ownership is transferred to customers or not. On the basis of the same, it
also needs to be considered if appropriate disclosures are provided in the financial reports
of the business.
2. The auditor of the business also needs to check the returns which the business is getting
and whether the same is being recorded in the financial statements (Kokina and
Davenport 2017). In addition to this, the auditor of the business also needs to ensure that
proper valuation technique is applied by the management for valuing the inventory of the
business and whether the same is consistent with the provisions which is stated in AASB
102. Further, it also needs to ensured if the business has been consistent in following the
method of valuation or there is a change in accounting policy of the business.
Assertion to Accuracy
1. The auditor must confirm from different ledgers accounts and purchase accounts for
ensuring that the inventory value represented in the balance sheet is accurate. All

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inventory records including invoices, receipts, notes need to be checked by the auditor
(Christensen, Elder and Glover 2015). The auditor needs to apply vouching practices so
that appropriate audit evidences can be collected.
2. In addition to this, some of the inventory of the business have been kept for a long period
of time which would have affected the products and thereby there is always a chance that
the same might have become obsolete. The auditor also needs to check proper audit
evidences and ledger books for ascertaining the value which is shown in the financial
statement are of appropriate quality (Fortvingler 2016).
Auditing Standard 701, Communicating Key Audit Matter
The auditing standards are introduced for the purpose of ensuring that the process of audit
can be conducted in an efficient manner. The auditing standards focuses on certain areas and the
auditor should follow the same while conducting the process of audit. The provisions which is
stated in AASB 701, Communicating key audit matters of the business requires the auditor to
take an active role in reporting key audit matters of the business which are considered to be
significant in terms of the business (Glover and Prawitt 2014). The key audit matters are
important items which generally have a complex transaction and are capable of affecting the
entire financial position if the same are misstated in any manner. One other requirement of ASA
701 is that, the key audit matters needs to be included in the published financial statements.
The audit procedures which are applied on the business if Computer solutions ltd is able
to identify the following key audit matters after analyzing the financial statements of the
business:
 The auditor needs to review the strategy which is formulated by the business for
enhancing the sales of the business and thereby earn more profits from the operations of

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the business. The new policy which has been formulated by the management deals with
reduction of sales by 10% to costs of business.
 The management of the company has experienced an increase in the returns of the
business which is due to a software problem which the product of the company is facing.
 The business has also faced problems relating to liquidity of the business and therefore
proper steps needs to be taken for ensuring that liquidity is not compromised for
maintaining an efficient distribution system.
The information which the auditor will be including in the key audit matters are listed below
in details:
 The main product of the business is experiencing software problems and yet the business
is expecting higher profits even thought return inwards of the goods has increased.
 In order to bring about efficiency in distribution process and also for saving costs, the
management has opened 6 warehouses for storing the product but the business has not
been able to maintain its costs.
 The policy of the business to offers goods to customers at 10% less than the costs is a
tactics for increasing the sales but the management also needs to consider that the same
affects the profitability of the business.
 The key audit matter would also include a section on going concern principle and the
same seems to be fine for the business which is an important matter (Titera 2013).
Further the auditor also needs to include whether all disclosures and treatments are
properly shown in the financial statements.

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Beautiful Hair Ltd
The business of Beautiful hairs ltd has acquired the business of Skimmer Pty ltd for
further expanding the operations of the business. The business of Skimmer Pty ltd had a secret
formula which formed a part of the intangible assets of the business. The audit process for
Beautiful hairs ltd would identify if there are any material misstatements and especially focus on
intellectual properties and it treatment in the financial statements (Graham 2015).
Key Assertions of Intellectual property
1. Assertion of Completeness: The information relating to intellectual property of a
business must be complete and the same should have proper disclosures accompanied
with the same so that the users of the financial statements are able to understand. If the
auditor discovers an infringement of rights of third parties or partners, the appropriate
steps needs to be taken for amending the situation. The auditor needs to check all records
and also review impairment and amortization related charges and if the same is disclosed
in a proper manner in the annual report of the business (Bumgarner and Vasarhelyi
2018).
2. Assertion of Right and Obligation: The auditor of the business needs to be sure that the
right to use the asset effectively lies with the business of beautiful hairs and if the
management has maintained proper records relating to the same. The formula which is
used by the management of Shimmer Ltd would be under the control of the management
of Beautiful hairs ltd if proper the asset is actually acquired by the business (Alles 2015).
The auditor needs to check if proper documents and consent is taken or not.
Application of Substantive audit procedure
Assertion of Completeness

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1. The auditor in case of considering the acquisition of the intangible asset was taken by the
business, must go through all records relating to the intangible asset and check if the
same are genuine or not. The auditor can communicate with the directors of Skimmers ltd
for ensuring that the ownership and right to use intangible asset was actually passed or
not.
2. The auditor would be ascertaining whether proper treatment and disclosures is provided
in respect of impairment and amortization of the intellectual property (Ali and Lesage
2013). In addition to this, the auditor also needs to verify if the valuation of the intangible
asset is properly done considering the provisions of AASB 138.
Assertion of Right and Obligation
1. The auditor of the business needs to check if the management of the beautiful hairs
actually have the right to use the intellectual property for the purpose of generating
revenue for the business (Cannon and Bedard 2016). In addition to this, the auditor can
also confirm the ownership status from the directors of Skimmer ltd for confirming or
deny any breaches. The auditor needs to verify which assets were actually acquired and
the purchase consideration which was paid against the same and also check is intellectual
property was acquired or not.
2. The auditor of beautiful hairs ltd also must check if there is any breach of infringement
rights of third parties or any partners of the business as this would be affect the financial
position of the business and also affect the right to use the asset. The auditor would also
be ensuring if proper disclosures are provided in the financial statement of the business.

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ASA 701, Communicating Key Audit Matters
The responsibility of the auditor is to form an opinion on the fairness of the reporting
framework which is utilized by a business. In such a process, the auditors are guided by auditing
standards which helps the auditor in forming an audit opinion on the financial statement of the
business. ASA 701, communicating key audit matters, reflect the responsibility of the auditor to
include certain information in the audit report which are not materially misstatement at present
but are complex matters and the auditor is not sure regarding the treatment of the same. These
matters are known as key audit matters and the same helps the business to provide full
disclosures regarding all matters to the users (Griffiths 2016). The key audit matters help the
shareholders to take major decisions and helps the management to maintain transparency in the
business process.
The intellectual property rights of Shimmer ltd is the main matter of concern and the
auditor would be including different details associated with the same in the audit report of the
business. The management of Beautiful hairs ltd has acquired the asset and therefore the
transaction is already complex in nature and must be included in the key audit matters of the
business. The relevant information relating to intangible assets of the business which must be
included in the key audit matters are listed below:
 The process which is used by the management for valuing the intangible assets of the
business.
 The capital structure of the business and charges to intangible asset after post acquisition
period.
 Some of the charges associated with the asset such as amortization and impairment needs
to be checked.

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Conclusion
The importance of auditing process and the key procedures which is applied in the same
by the auditor is discussed in the assessment. Further an important part of the discussion is the
assertions which are associated with audit risks faced by the two different businesses which are
considered in the assessment. The companies of Computer solutions ltd and Beautiful Hairs ltd
are considered on which audit procedures are being applied and important steps are taken
accordingly for ensuring that if the assertions are applicable or not. The discussion also includes
application of substantive audit procedures which can help the auditor for collecting necessary
evidences for the business. In addition to this, the discussion also shows the reporting
requirements of ASA 701 which needs to followed by the auditor for preparing the auditor’s
report of the business.

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