Audit Assignment: Key Assertions and Substantive Audit Procedures for Inventories and Intellectual Property Assets

This audit assignment discusses the key assertions and substantive audit procedures for inventories and intellectual property assets. It covers topics such as valuation, rights and obligations, and requirements of auditing standard ASA 701.

Audit Assignment

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By student name
Professor
University
Date: 7th Sep 2018.
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Contents
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................5
References.................................................................................................................................................10
Audit assertion:
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It is the responsibility of the management of the company to take it upon himself to make sure
that all the important matters that are detrimental success of the company are properly
highlighted and checked by the auditor. These are known as audit assertions and the aim of these
assertions is to solve issues and put emphasis on the valuation, representation of the data in the
financial statements (Alexander, 2016). There are various categories based on which these
assertions have been divided which includes points like occurrence, completeness, relevance and
obligations. The auditor depends on these assertions to help him in conducting his audit and
identifying those areas in which the chances of risk occurrence is predominantly high. In this
assignment the key audit assertions regarding inventories are stated below and analysed and
presented.
1 a) Key assertions at risk.
AASB 102 deal with disclosure and reporting of inventory for the companies. They need to abide
with this auditing standard .Valuation is a key concept in case of inventories and it is also the key
assertion that should be taken into consideration. In most of the cases inventories are valued by
the companies at cost or net realisable value whichever is lower. It is important to treat wastage
correctly that is associated with inventories. Wastage should not be included in case it is
abnormal wastage while valuation. For goods that are work-in-progress valuation is difficult but
that also becomes easy if proper methods are followed (Arnott, et al., 2017). There are also
chances that the inventory might become redundant and obsolete in the long run if not used at the
right time. In case of Computing Solutions, they are dealing with computer appliances and there
are chances that the inventories might become obsolete because the upgradation in technology is
happening every now and then. Hence it is important to clear the stock as soon as possible. There
are also chances of impairment due to timing involved.
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Rights and Obligations
The assertions over rights and obligations over the inventories also happens normally. In this
case we see that most of the inventories are in transit and hence it becomes difficult to ascertain
ownership at some point. In case of Computing Solutions, the company is having a main
warehouse from which they are distributing to eight different locations, hence most of the goods
are in-transit and are held on consignment basis (Belton, 2017). There are also involvement of
different parties like insurance business and consignees and hence it is important that proper
ownership should be established at all stages.
1 b) Substantive Audit procedures.
Substantive audit matters help in gathering audit matters and there is a lot of substantial standing
and they are very useful to the auditor for the comprehensive and substantive information that
matters. It is useful from risk elements side of the auditor and helps in controlling the materiality
element of the company (Choy, 2018). They are divided into substantive audit procedures under
following head which includes: test of control, test of details, analytical procedures etc.
For valuation risk:
For valuation of inventories the auditor needs to understand few things which includes valuation
of the closing inventory, as it is done at the end of the year and only once it is done. There are
high chances that the management can mismanage the fund in this case. Inventory count should
be observed as much as possible and the auditor should closely monitor that in all regards.
Vouching and Verification of inventories is also important for the inventories (Das, 2017). There
are chances that the management can deflate the value of the goods that are in transit and hence
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care should be taken to ensure that their valuation is correct. Valuation experts can also be hired
to check the value of inventories.
For rights and obligations
For establishing the rights and ownership it is important that proper agreements should be there
among the company. There should also be agreement with the insurance company on how they
can handle the inventories. It is also important that they must read the consignment letter. The
minutes of the management also needs to be studied as per the management. Thus it is important
that auditors needs to understand the terms of the agreement and should verify it again and again
on timely basis so that the management can be informed in case there are no issues.
1c) As per ASA701, it is important that auditor should state all that matters which they feel are
detrimental for the company and should be stated in the auditors report. Proper matters should be
highlighted so that shareholders should become aware so that management should understand
which are the areas in which they should take charge of (Erik & Jan, 2017). The stakeholders
should also should take notice of which are the areas in which they are highlighted.
In the given case, the annual report of the Woolworths company has been completed and
important steps that has been taken by the company in the valuation and provisioning of the
inventory has been stated in details. An extract from the audit report is given below:
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In case of Telstra , it can be seen that the auditor has highlighted the key matters with respect to
inventory provisioning and has stated the steps that they have taken to value the same. As per the
auditors, the total inventories that have been stated is $4,080.4 million. The inventories are measured
at cost or NRV whichever is lower. The management also provides for obsolenece and shrinkage on basis
of estimates and historical trends. For general merchandise inventory consideration is given to seasonal
lines and slower moving products. The steps that the auditors have taken to analyse the same includes-
 Testing the various internal controls that are in place,
 Checking the steps that the management has taken for inventory provisioning and making
different assumptions. Testing of inventories is done on sample basis, also historical
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accuracy is checked through trend analysis, and checking the market rates. Shrinkage and
obsolence is also checked to check mathematical accuracy of the provisioning done.
Question 2
Intellectual property assets may be defined as those assets and right of an entity which
preserves the same and protects it from being copied or illegally altered. IT can be in the form of
an idea, a formula, and an innovation of any product or service by a person or a given company.
These are generally called copyright, trademarks, patents, etc. In the 21st century, there has been
a number of development and innovative ideas keep on coming and thereby companies keep on
coming up with new products and services. To protect these new technologies, it is necessary
that all these assets needs to be protected (Goldmann, 2016). These intellectual rights are being
governed and taken care off by the intellectual property laws which was formed with the
objective of encouraging creation of intellectual property rights.
2a)Key assertions at risk
1. Valuation: AASB 138, states the auditing provisions and disclosure requirements that
companies should follow with respect to intellectual property.The intellectual property
can be valued based on the 3 methods, which are historical cost method or the
replacement cost (cost of creating the intangible asset), the market value method (this is
based on compatibility of the market rates or the comparable royal rates of intangibles)
and thirdly based on economic value added method (this quantifies the future cash flows
or royalty income from the intellectual property and then capitalization of same post
discounting the cash flows) (Farmer, 2018). Economic value method is the most preferred
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method out of all but it is completely upon the companies to use based on their
requirements.
2. Rights and Obligations: There are different categories and types of intellectual property
that is available for use and ownership and the right provided by each one of them differs
in one or the other way like the right which is being provided in the case of patents is not
similar to that provided in case of copyright or trademark. Copyright is generally in case
of books and journals, patent is in case of formulas and belongs to the person who has
created it (Grenier, 2017). This right becomes a right and ownership on the same is only
established once it is registered with the law. Unless this legal ownership is established,
the same cannot be recognised in books as an asset of the company. These complexities
altogether create the risks as well as assertions.
2b)Substantive Audit procedures
Substantive audit procedure may be defined as the collection of the primary and secondary data
from the database of the company in order to audit the client. This generally includes vouching
of incomes and expenses and verification of assets and liabilities and based on the differences
and issues found in the checking, the nature, extent and timing of the other audit procedures to be
employed is being determined (Jefferson, 2017). These are intended to justify the management
audit assertions that the financial statements as a whole are free from error and misstatement and
there are not material discrepancies with respect to the accuracy, validity and the completeness
of the financial statements.
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Some of the other substantive procedures in addition to the ones mentioned above are testing the
opening balances, disclosures and nature of transactions, journal entries and other material
adjustments done in the financial statements and the verification of the notes and financials with
the underlying records.
In case substantive procedures needs to be applied for the intangible assets, then the steps to be
applied include reviewing and checking the appropriateness of documentation w.r.t to ownership
or creation of the intangible asset, determining if the company has the ownership rights and if
yes, where is the legal documentation or the purchase agreement. The auditor should also be
checking the useful life of the intangible asset, the amortization policy which the company has
chosen, the amortization expenses booked in the P&L and whether or not any impairment is
required for the given carrying value of the asset. The auditor should also go through all the
management estimates and judgements with regards to the intangible assets (Kim, et al., 2017).
2c)Requirements of Auditing Standard ASA 701
As per ASA 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”, the
auditor is supposed to report the key audit matters in the independent Auditors’ report of the
company. Key audit matter may be defined as the those issues which are most significant and
critical form the perspective of the audit based on the professional judgement applied by the
auditor and therefore the auditor generally undertakes additional steps to verify these items.
These are separately disclosed in the financial statements and are reported to ensure more
transparency and throw more stress on these issues.
There are various aspects which the auditor uses in determining what key audit matters, some of
which are are:
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1. Issues that will be most important from user perspective,
2. Issues which involve complexities
3. Issues where the chances of misstatements is high
4. Issues where there are judgement and estimates involved.
5. Valuation issues requiring support of experts (Werner, 2017)
6. In terms of intangible assets, there can be doubts of existence of same and their useful
lives.
7. Valuation of the intangible property as it involves high level of complexities and the
chances of misstatements is quite high. Also, the method of amortization and the
impairment assumption of the entity also needs to be checked thoroughly.
The disclosure with respect to ASA 701 has been mentioned below:
While reporting the key audit matters in the independent audit report, the auditor should give a
brief description of the matter considered to be significant along with the reasons for the same.
This needs to be reported under a separate head in the Auditors report and besides that it needs to
be mentioned as to what all audit steps were being considered or taken to remove or resolve the
issue or the ambiguity (Trieu, 2017). The auditor should also justify how the key audit matter
affects the entity as a whole and its financials altogether. In case the auditor used the services of
the expert while approaching the issue, the same also needs to highlight along with the audit
procedures undertaken and the final outcome and key observations with regard to each of the key
audit matter.
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In the given case, the annual report of Telstra company has been downloaded and key points of
the annual report has been discussed with respect to disclosure of intangible assets has been
given.
In the given case that the auditor has stated there could be a risk of the material impairment of
goodwill. Significant judgement is involved in making an assumption about the impairment that
is related to future cash flows and plan for assets. The auditor has stated that the impairment has
been calculated by testing the recoverable value of CGU. Valuation Specialists has also been
involved and various impairment models has been accessed. Sensitivity analysis around the pool
has also been done to check whether the management is correct in their opinion or not.
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References
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Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations.
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Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
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Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
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Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
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Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and
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Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of
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Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
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Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), pp. 241-256.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry
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Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
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