Audit Assertions, Key Assertions at Risk, Substantive Audit Procedures, and Key Audit Matters

This article discusses audit assertions, key assertions at risk, substantive audit procedures, and key audit matters related to valuation and rights and obligations. It also explains the disclosure requirements as per ASA 701.

Audit
Assignme
nt

1
By student name
Professor
University
Date: 11th Sep 2018.
1 | Page

2
Audit assertion:
Audit assertion are the declaration and assumptions made by the management with
respect to the disclosures and information reported in the financial statements. The
representation mainly includes the matter of recognition, measurement and fair
presentation of financial data (Bromwich & Scapens, 2016). These are known also known
as Management Assertions and Financial Statement Assertions. As per the presentation and
disclosure of financial data and after considering risk of misstatement the audit assertion
are divided into several groups namely, occurrence, completeness, accuracy, completeness,
existence, valuation, rights and obligation, valuation, and classification. Fundamentally the
main role of these assertions are to support the auditor in interpreting the audit issues and
provide the measure to resolve them. The major assertion related to balance sheet are
classified into four broad categories namely, completeness, accuracy, valuation and rights
and obligation (Dichev, 2017).
1 a) Key assertions at risk
Valuation: As per accounting standard principles inventories to be valued at cost or
net realizable value whichever is lower. At the time of valuation of inventories it is
necessary to deduct the any type of abnormal loss or wastage to get the fair valuation of
inventories. One of the major issue related to valuation is value the inventory when the
goods are at work in progress stage. And the another complexity is like here Computing
Solutions Limited, sell computer presentation package, but due of technology and many
other reasons the merchandise get obsolete within a very short period of time and hence
the value of goods gets depreciated drastically (Félix, 2017).
Rights & Obligation: This assertion talks about the ownership and rights of the
entity with respect to inventory. Here in the given case the company Computing Solutions
generally following a practice of moving its inventory from the central warehouse to the
regional warehouse, and the number of regional warehouses are six. So here is it difficult to
ascertain whether the goods are in transit or are held on consignment basis. Hence, due to
involvement of many parties like the insurance company, the transporter and the
consignee it become more important to understand the criteria relating to ownership and
rights in the given situation (Grenier, 2017).
2 | Page

3
1 b) Substantive Audit procedures Substantive Audit are steps or procedures which are
taken by the auditors to gather sufficient and appropriate audit evidence. The main reason
of performing these tests are to gather material and intensive information on significant
matters to reach a conclusion. For the simplicity of understanding the substantive
procedures are segregated into three parts namely, test of controls, test of details and
analytical review procedures (Werner, 2017). The nature timing and extent of these
procedure mainly depends upon the effectiveness of internal control of organisation
operating in those highlighted area.
For valuation risk: For the correct valuation of inventory the auditor should obtain
complete list of inventory from the management and reconcile with the balances of general
ledger to qualify the differences. Examine whether they ensured with the policies of
accounting standard that is valuation of inventory at cost or NRV whichever is lower, to get
the better result the auditor can also take the help of market value too (Raiborn, et al., 2016).
The physical verification of inventories and inventory count is considered as important
audit evidence. For the more relevant and reliable result the auditor should observe the
how frequently the inventory count taking place. In addition to all this procedure vouching
and inventory price fixation also need to be done. As closing stock valuation is done at year
end and value of inventory rise or fall eventually and incorrect valuation of stock also effect
the decision of stakeholder or other interested parties hence it is special area of
consideration. In respect of goods which are in transit or on consignment basis, check
whether any provision is made in respect of these type of goods or not?
For rights and obligations: This assertion of audit rights and obligation comes into play
when the external third parties are involved. Hence to get the proper result of substantive
audit procedure, first thing would be to determine the existence of agreements and
contracts, if the answer is yes than the extensive study of those agreements. The auditors
should also check other major area where the risk of default is high like consignment
agreement and the terms of the insurance policy. Minutes of the meeting of board is also
reviewed if board of director of the company discussed anything or taken any decision in
this regard (Heminway, 2017).
1 c) According to ASA 701, “key audit matters are matters that require significant auditor
attention in performing the audit”. Here, the auditor is required to report the key audit
matters and discuss them in details. These audit matter need to describe using a separate
subheading under the respective heading of audit report. According to this ASA the key
audit matters are ascertained as per the professional judgment and independence of the
auditor (Alexander, 2016). It is the responsibility of auditor to communicate that he has not
given a separate opinion on these matters, but in context of the overall audit report. With
the introduction of these concept the quality of audit report and transparency also
increased. Those matter on which the auditor had the most extensive and detailed
3 | Page

4
discussion are the highlighted area where the Users of the financial statements and audit
report have shown their interest in knowing about matters. This concept also improves the
communication of material information between the organisation and auditor. In many
entities valuation of inventory may be a key audit matter depending on the complexity
involved (Chron, 2017). Valuation of inventory requires expertise opinion, professional
judgement, estimates and forecasts from the management’s prospective. Hence the auditor
should perform substantive procedure to obtain appropriate result for the same.
The disclosure required in relation to key audit matters, as per ASA 701 are:
It is mandatory to disclose every key matter using a separate head, under a separate
section. The information must be in conformity with the auditor’s opinion. These
information must be arranged as per their significance and materiality (Dumay & Baard,
2017).
It is also necessary to give reason why auditor thinks that the matter require serious
attention. At the time of giving reason the auditor shall keep in mind that the word are easy
to understand by financial user and restrict himself from using technical terms. As it
increases the use of audit report because it also help to those user who do not have a high
level of knowledge but are interested to understand the financial performance of company
as well as financial position.
The management disclosure and representation, with respect to the different important
matter under consideration, shall also be informed.
Even after considering all the specific requirement relating to disclosure of the entity and
audit, if the auditor feels that there is no matter in complete financial statement that can be
considered as key audit matter in such a situation one notes is required where the auditor
should disclose these issue. These situation also can arise where the auditor disclosed all
significant audit matter as part of compliance with ASA 701. Hence it is cleared that
whatever be the situation is the auditor need to disclose all key audit matter under a
separate head in audit report (Fay & Negangard, 2017).
The auditor also responsible to disclose and explain in detail the process adopted by him to
gather all the information and evidence. And also need to mention his observation
regarding management performance and relevance of those observation to reach at
conclusions.
2 a) In recent day’s Intellectual property become huge matter of discussion. From the in
depth study of provision relating to intellectual property conducted by the American
Intellectual Property Law Association, A year ago, around 80 percent of companies assets
4 | Page

5
were tangible, like buildings, equipment, plants, vehicles and the like, whereas 20 % were
intangible. However with the technology advancement this ratio get changed within a very
short period of time which is really commendable. In current scenario most of the
developed company holds around 75 percent of their total assets as intangible assets.
Key assertions at Risk
Valuation: Once the concept of valuation of intellectual property comes into light, the
cardinal rule of assigning a commercial value comes into effect. As per general rule
valuation of the same intellectual property or intangible asset varies from entity to entity,
because the valuation criteria somewhere also depend upon the utility perceived from
asset which differ from entity to entity. In case officially protected tangible assets through
trademarks, patents or copyright it is easy to evaluate their value but in case of tangibles
such as know-how, (which can include the talents, skill and knowledge of the workforce),
technical processes, customer lists, distribution networks, etc. it is very complicated to
value them appropriately (Trieu, 2017). These assets are more difficult to be assigned a value
which require independent judgement expertise knowledge even if they are equally valued.
The main limitation is as the value of assets not directly associated with earnings or the
profit of the entity.
Rights and obligation: Without proper study of all agreement and contract it is very
difficult to identify the real owner of intellectual property. In comparison of intellectual
property trademark are less complex copyrights and patents see a lot of legal suits against
them. In most of the company the major portion of contingent assets and liabilities includes
lawsuits, with regard to these intellectual property rights. As per accounting standard these
assets cannot be shown as intangible assets till the time their legal ownership is decided by
the court. Some high risk assertion area that are necessary to disclose are deficiencies in
license rights, joint rights or ownership and infringement of property rights.
2 b) Substantive audit procedures: The primary step of substantive audit procedure is to
collect all relevant audit information about the nature of assets. To identify the real owner
of assets require to study ownership documents, all terms and condition. So there is no
space of confusion regarding the true ownership of the assets.
For rights and obligations In case the assets is developed at home verify whether
research and development expense charged accordingly (Sithole, et al., 2017). To gather more
and detailed information and to reach at better conclusion some Interview or face to face
conversation should be done with the management and other staff, so that no ambiguity
lies in the mind. The other way to collect information is developing a questionnaire and
distribute among all the people who are involved in the developing intellectual property
right or people who use it and after study various feedback from different group of people
5 | Page

6
it become easy to understand. To analyse the area of technology related risk physical
inspection of workplace is mandatory. Apart from all this Inspection of ownership
documents, other agreement, policy documents, contracts with the government or with the
patents issuing party shall be carried out.
For valuation: To check the appropriateness the price compare the value with the industry
of same product. For some more clarification background research shall also be done
relating to specific class of assets. The in depth study of history of product is also required
like current as well as archived files. Furthermore it needs to be compared with the
industry data and the method of valuation which has been used while valuation of
intangibles. The future cash flows and the discounting factor being used by the entity also
needs to be checked here.
2 C) As per the provisions of the ASA701, it is the primary responsibility of the auditor to
give significant degree of attention while performing the audit and the audit procedures,
which are key audit matters. For the identification of key audit matters, the auditor is
required to disclose all relevant matter in detail and which effect the decision of decision
maker. Each and every significant information shall be given in the form of separate
heading that would appear under a separate section. At the disclosure of those key
information the auditor should exercise their professional judgement and independent
which makes the information more reliable. While at the time of communication
information the auditor shall state that he is not giving a separate opinion on those matters,
but while expressing an opinion on the financial statements, he is also responsible to
express his own independent opinion on key audit matters (Jefferson, 2017). This concept
was come into play in the year 2005 to enhance the quality of audit report and
transparency of financial statement. The reader of audit report also show their interest to
know the matter discussed between management and auditor and in some case with TCWG
to get more clarification. It also improve the communication between the parties and
management try to shift the focus on those area where some remedial steps are required.
Valuation of intellectual property rights is itself a key audit matter because of the
complexity involved in their valuation and provisioning related matters. For which lots of
substantive evidence is required. At the same time the actual existence of the intangible
assets, like technical know-how, expertise and goodwill is difficult to interpret in fair terms.
The disclosure required in relation to key audit matters, as per ASA 701 are:
The auditor is required to disclose these matter under a separate head under different
category. It should be positioned in close vicinity with the auditor’s opinion.
6 | Page

7
Here the explanation is also required why the auditor consider that the identified audit
matter require significant attention. However at the time of giving reason the auditor
should restrict himself from using superfluous words or using purely technical terms. This
is require to facilitate for the clear understanding of those reader who do not inhale high
level technical knowledge to read financial implication but want to understand the basis of
decision (Linden & Freeman, 2017).
Whether the matter is key audit matter or not depends on the criticality and significance of
the issue.. If the auditor reported all those key matter under a specific head in audit report
than it is necessary to report and such information must be covered under the heading key
audit matters.
The auditor shall also disclose the procedure adopted to gather all significant matter as
well as whatever his observation at workplace and how they help in drawing conclusion.
7 | Page

8
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge
Companion to Qualitative Accounting Research Methods, p. 265.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), pp. 241-256.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
8 | Page

9
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, 93(1), pp. 111-124.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, 25(1), pp. 57-80
9 | Page