Audit Assignment: Key Audit Assertions and Procedures for Inventories and Intellectual Property Rights
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This audit assignment discusses the key audit assertions and procedures for inventories and intellectual property rights. It covers topics such as valuation, rights and obligations, and substantive audit procedures. The assignment also mentions the importance of stating key audit matters in the audit report as per ASA 701.
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Audit Assignment
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3 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. 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. 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. 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. 3|Page
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4 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.There is 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 auditorfor the comprehensiveand substantive information that matters. It is useful from risk elements side of the auditor and helps in controlling the materiality element of the company(Knechel & Salterio, 2016). 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(Linden & Freeman, 2017). There are chances that the management can deflate the value of the goods that 4|Page
5 are in transitand hence 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(Saeidi, 2012). Thus, it is important that auditors need 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) According to ASA 701, “key audit matters are matters that require significant auditor attention in performing the audit”. It is an important auditing standard that helps the auditors to important that there are some matters that needs to be highlighted in the audit report given by the company and that helps in making the users aware and draw their attention. These are stated separately in the audit report in a separate section and the auditor also states the steps that they have taken for verification of these elements(Heminway, 2017). The auditor also states how the management has helped them in valuation of the inventories. Valuation of the inventory is a key matter because there is a lot of judgement involved in provisioning of the inventories. For valuation of the inventory, the management needs to take many steps and thus valuation of the same should be important for the auditor to check. The auditor needs to state the reason why valuation is important and why they have included the 5|Page
6 same under the headings of the key audit matters(Kangarluie & Aalizadeh, 2017). Key audit matters are highlighted and stated separately. In case the auditor feels that there are no key audit matter and he does not state the same in their audit report and highlight the reason why they feel that no matter is important. All this helps in making provisions with relation to the company and helps in improving the overall transparency of the audit report(Farmer, 2018). In case of inventories, they can state whether the valuation have been done in the correct manner, what are the ways by which the company has done the provisioning and whether there are any loopholes on part of the management in that regards.Itisimportantthatthereshouldbeanunderstandingbetweentheauditorand management to maintain clarity. 2a) Intellectual property rights and its valuation is an important topic for the auditors. Companies often face a lot of difficulty in managing these properties and valuing them correctly. Previously 80 % of the total assets inclusive of property plant and equipment were tangible assets and 20% were intangibles, but with changing times this has changed and now most of the properties are intangibles and hence their valuation and disclosure is a point of concern for the company and the organizations(Goldmann, 2016). Auditors also need to put more emphasis on how they are valuing these properties. Key assertions at Risk: Valuation – In case of valuation of the properties the main rule of valuation as per the market price applies. However, what we see is that, the valuation of the intellectual properties differs from entity to entity and different methods are altogether applied in their valuation(DeZoort & Harrison, 2016). In case of patents, trademarks and copyrights the valuation is not so difficult, 6|Page
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7 but when it comes to properties like technicalknow-how, property rights etc(Sithole, et al., 2017). It isdifficult to assign a value to these assets as it is difficult to relate them with the earnings that they are generating for the company directly. Rights and obligation Intellectual property rights are difficult to establish in term of ownership and the overall process is very difficult and thus it becomes important that proper terms and agreement must be there that would state the owners(Choy, 2018).These assets cannot be recognized in the books till the time their legal ownership is decided by the law. There are certain issues that causes a risk in establishing ownership inclusive of breach of property rights, law suits etc. It is thus important that companies should maintain proper terms and agreement before establishing their rights on any property and should double check. 2 b)Substantive audit procedures: Substantive procedures would include gaining background information about the property. It would also include knowing what are the areas in which the company has invested and established a brand value. Having a one on one conversation with the management can also help in establishing the nature of these assets(Sonu, et al., 2017). For assets that have been developed in-house research and development expenses should be studied properly and based on that they should take steps whether they are correctly valued or not. For properties that are established through other sources terms of agreement should be checked and established and companies should check them twice(Bromwich & Scapens, 2016). Information can be collected by taking questionnaires between people who are involvement in the establishment of these assets that the company is having.Inspection of ownership papers, 7|Page
8 policy documents, contracts with the government or with the patents issuing party shall be carried out. Workplace can also be checked by the auditors to check whether there are any loopholes in the internal control by the management. Legal rules and trade practices should be checked before making an opinion on these assets that are held by the company. It is important to check that there is no undervaluation or overvaluation of these assets held by the company (Trieu, 2017). 2c) As per ASA701, the auditor can state key audit matters that are there in the financials of the company and that require opinion of the auditor and special mention in the audit report. It is done to increase the overall transparency of the audit report of the company. It helps the users in understanding what are the important matters on which they should focus so that they can judge the performance of the company and take important decisions based on that regards. In case the auditor feels that he does not need to state any key matters he needs to give relevant disclosures with respect to that. Thus, we see that how beneficial it is to mention the key audit matters. They are mentioned separately in the audit report and the auditor also mentions the procedures that he can undertake in valuation of the same. Thus, the users can judge how the auditor has reached to a conclusion that he has stated in the audit report of the company(Alexander, 2016). Valuation of intellectual property right is an important key matter because there is lot of judgement involved in its valuation and there are chances that the management is not able to deal with it properly and hence it becomes difficult for the users also to understand. Thus, it is important that it should be shown separately as a key audit matter for the company and the auditor should give his opinion on that. 8|Page
9 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. 9|Page
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10 Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics,p. 145. DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud within organization.Journal of Business Ethics,pp. 1-18. Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations.Journal of Media Ethics,33(1), pp. 1-12. Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development,Volume 4, pp. 103-112. Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents.SSRN,pp. 1-35. Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing.Accounting,3(1), pp. 19-22. Knechel, W. & Salterio, S., 2016.Auditing:Assurance and Risk.fourth ed. New York: Routledge. Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making.Business Ethics Quarterly,27(3), pp. 353-379. Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran.African Journal of Business Management,6(23), pp. 7031-41. 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. Sonu, C., Ahn, H. & Choi, A., 2017. Audit fee pressure and audit risk: evidence from the financial crisis of 2008.Asia-Pacific Journal of Accounting & Economics ,24(1-2), pp. 127-144. Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems,93(1), pp. 111-124. 10|Page