Audit & Assurance

This article discusses the key risks and audit procedures for inventory and intellectual property assets in the context of Computing Solutions Limited and Beautiful Hair Ltd respectively. It also explains the requirements of ASA 701 Communicating Key Audit Matters in the Auditor’s Report. The article covers topics such as inventory valuation, material misstatements, IP documentation, and IP acquisition.

Audit & Assurance

Table of Contents
Question 1........................................................................................................................................3
a) Identification and explanation of the two key assertions at risk in relation to inventory in the
context of Computing Solutions Limited........................................................................................3
(b) Description of two substantive audit procedures that should be performed for the
minimization of identified risks.......................................................................................................4
(c).....................................................................................................................................................6
Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report................6
The rationale for this auditing standard ASA 701...........................................................................6
Key audit matters and rationale for the determination of those matters as key matters:.................6
Question 2........................................................................................................................................7
(a)Two key assertions most at risk in relation to the intellectual property intangible asset............7
Risk related to the improper documentation of Intellectual Property:............................................7
(b) Substantive audit procedure that could be used in response to each risk identified above........8
Limited purpose focused audit Procedure:......................................................................................8
(c) Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report...........8
The rationale for this auditing standard ASA 701...........................................................................9
Key audit matters and rationale for the determination of those matters as key matters:.................9
Reference:......................................................................................................................................10

Question 1
a) Identification and explanation of the two key assertions at risk in relation to inventory
in the context of Computing Solutions Limited
The two key risks that can be identified in relation to the inventory procedures:
“Complicated year-end inventory valuation method”
There is some crucial information that is being acquired by the external auditor regarding the
audit procedure of the Computing Solutions Limited. Among the several crucial information the
information regarding the change in average inventory turnover from 5.2 times in 2017 to 3.8
times in 2018 points to the risk of “Complexity of the year-end inventory procedure”
Inventory turnover ratio demonstrates that how many times a company has sold and replaced
inventory during a period under consideration. The inventory turnover is calculated by dividing
the average sales by average inventory (Azim, 2013). The number of days that the business
organization is taking to sale those inventories is calculated by dividing the days of the period
under consideration by the inventory turnover of that period. Generally a high inventory turnover
ratio is preferred as it indicates that the business is highly efficient in selling the finished goods
inventories. But if the inventory turnover ratio of the business is extremely high then the ratio
indicates that the Company has making a very strong sales by offering the discounted prices to
the customers and therefore sales based on discounted pricing is not a demonstration of
efficiency of the company (Lubatkin, 2013).
Thus the whole process of assessing that how the business is managing the inventory is based on
the proper valuation of the inventory. If due to the complexity of the inventory valuation
procedure that arise due faulty mis-statement of materials the bushiness makes a wrong valuation
of the year end inventories then there is every possibility that the management will get a wrong
idea regarding the inventory management capability of the organization and on the basis of

wrong information there is possibility that the business is going to form wrong business
strategies.
Material misstatements of the previous period:
The scope of the risk of “Material misstatements of the previous period” arise as the business has
moved its inventory from a central warehouse to six new regional warehouses in March
2017.Besides the business more or less operates with an objective to keep the level of year
ending inventory at least at the same level in case the volume of year ending inventory holding is
not declining.
(b) Description of two substantive audit procedures that should be performed for the
minimization of identified risks
The main objective of choosing an appropriate inventory valuation procedure is to attain the
following goals in the context of an organization.
To confirm that the year-end reported inventories really exists and are really in hand of the
organization
To confirm that the business entity is having the real right over the reported closing inventories
of the balance sheet
To confirm that the reported yearend inventory is accounting all the items of material product
and supplies
To confirm that the reported yearend inventory has been stated at the lower of cost and at net
realizable value as per the applicable accounting standard (Knechel and Salterio, 2016)
The reason for which the above goals must be fulfilled is that fulfilment of the risks led to the
minimization of the above identified risks.
Reported inventory stock checking procedure:

The process of “reported inventory stock checking “must be undertaken for minimizing the risk
of “Complicated year-end inventory valuation method” that may lead to wrong valuation of
inventory
Under this procedure the auditor must cross check the adequacy and efficacy of the inventory
valuation method used by the organization for reporting the value of the yearend inventory. The
accounting of the physical inventory must be done along with the cross checking of the required
compliance that must be followed. A note should be taken regarding the reason (damaged or
obsolete) behind the slow movement of some of the identified inventory items of the
organization. A cross checking should be done for all the inventory items related tags and count
sheets that are being used for the physical valuation of the inventory. The recorded cut –off data
must be cross checked for confirming the accuracy the valuation of the inventories.
Reported inventory cost checking procedure:
The above procedure must be followed for minimizing the risk that arise due to the “material
misstatement of the previous period” as the process entails the checking of the cost or price at
which the inventories are being valued at the time of reporting. The process also enables the
auditor to check that whether the inventories are being valued at the net realizable values or not.
The procedure also enables the auditor to written down the values of the inventories that are
being wrongfully valued at a cost lower than the net realizable value(Xu et al.,2011). Thus the
whole process is relates to the cross checking g the costing procedure of the reported yearend
inventory and the advantage of following this procedure is the removal of any error in the
valuation of the inventory that may take place out of the risk of “material misstatement of the
previous period”.
In addition to the above mentioned procedure the auditor should perform cut off analysis for
checking the accuracy of the procedures that involves the stopping of reception of new stocks to
the warehouse and also stopping of releasing any new shipment from ware house for isolating
the volume of inventory holding of the period under consideration. Once the volume of inventory
holding is identified then the auditor must check the valuation process of the inventory(Brandon,
2010.).

(c)
Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report
Key audit matter can be defined as those matters that as per the judgement of the professional
auditor is being considered as the most significant issues in the auditing process of the financial
reports relates to the period under consideration. Key audit matters are being chosen by the
auditor from the matters that are being communicated to those persons who are engaged in
regulating the corporate governance of the organization(Carson et al.,2016).
The rationale for this auditing standard ASA 701
The rationale behind the application of this Auditing Standard is to deals with the auditor’s
responsibility regarding communication of the key audit matters that are to be presented in the
auditor’s report following the pro-forma described in the accounting standard. The accounting
standards provides the necessary guideline to the auditor regarding what to communicated in the
auditor’s report and what should be the form and content of such communication.
The other rational of using the accounting standard is to enhance the communicative value of the
auditor’s report that are communicating the key audit matters adding greater transparency to the
audit procedure(Arens et al.,2007).
The application of this accounting standard in Communicating key audit matters deliver
additional information to intended users of the financial report and thus help them to understand
the judgmental procedures of the auditor(auasb.gov, 2015)
Key audit matters and rationale for the determination of those matters as key matters:
The auditor should determine those audit matters as the key audit matters (out the matters that
are being communicated to those who are in charge of governance) that require significant
attention from the auditor while performing the audit. In determining the key audit matters the
auditor shall take into account the following documents:
•Areas of financial reporting related to significant risks identified as per the accounting standard

•Areas in the financial report that involves significant management judgement which involves
uncertain accounting estimates with respect to certain areas or items
•The documents that describe the impact of audit on significant events or transactions that
occurred during the period of auditing(auasb.gov, 2015)
Question 2
(a)Two key assertions most at risk in relation to the intellectual property intangible asset
Risk related to the improper documentation of Intellectual Property:
The acquiring company (Beautiful Hair Ltd) needs to check that the seller Shimmer Pty Ltd has
properly prepared all the relevant documentations regarding the said intellectual
properties(secret ingredients for the formulas for hair products of Shimmer Pty Ltd) that are
being related to the followings
Documents related to Patents and patent applications that must contain patent numbers,
jurisdictions covered, filing, registration and issue dates
Documents related to secret formula in relation to the papers on agreements made with
employees and consultants related to invention
Documents related to trademarks and service marks if any
Documents related to Key trade secrets and proprietary information (Wipo.int, 2016)
Risk of acquiring complete right of IP through acquisition:
The acquiring company Beautiful Hair Ltd must ensure that the value it places on the Shimmer
Pty Ltd cover the whole right of its IP that is critical to the current and anticipated business of
Beautiful Hair Ltd and the Beautiful Hair Ltd will get the whole right of using the IP for the
growth of its business(Lands and Posner, 2009).

(b) Substantive audit procedure that could be used in response to each risk identified above
Event driven IP Audit Procedure:
Event driven IP Audit must be carried out at the time of acquiring the Shimmer Pty Ltd for
conducting an “IP due diligence” in order to assess the possible value and risk that the
acquiring company is going to get for all or a part of a target company’s(Shimmer Pty Ltd ) IP
assets(Leung et al.,2007). The IP due diligence can be defined as a part of a comprehensive due
diligence audit procedure that is being done to assess the financial, commercial and legal
benefits and risks that the acquiring company is going to acquire from the acquisition IP
portfolio of the target company. This audit procedure should be carried out typically before it is
going to acquire and invested in Shimmer Pty Ltd in order to check the documentation process of
IP of Shimmer Pty Ltd (Wipo.int, 2016).
Limited purpose focused audit Procedure:
The limited purpose audit is much narrower in scope in comparison to Event driven IP Audit
Procedure and can be carried out with in limited time and limited resources. These audit
procedure is situational in nature and is typically applied to justify a certain legal position or the
valuation of a particular IP. So this IP auditing procedure can be applied for mitigating the risk
associated with the complete acquisition of the right of IP of the Shimmer Pty Ltd which is
going to be acquired.
(c) Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report
Key audit matter can be defined as those matters that as per the judgement of the professional
auditor is being considered as the most significant issues in the auditing process of the financial
reports relates to the period under consideration. Key audit matters are being chosen by the
auditor from the matters that are being communicated to those persons who are engaged in
regulating the corporate governance of the organization(auasb.gov, 2015).

The rationale for this auditing standard ASA 701
The rationale behind the application of this Auditing Standard is to deals with the auditor’s
responsibility regarding communication of the key audit matters that are to be presented in the
auditor’s report following the pro-forma described in the accounting standard. The accounting
standards provides the necessary guideline to the auditor regarding what to communicated in the
auditor’s report and what should be the form and content of such communication.
The other rational of using the accounting standard is to enhance the communicative value of the
auditor’s report that are communicating the key audit matters adding greater transparency to the
audit procedure.
The application of this accounting standard in communicating key audit matters deliver
additional information to intended users of the financial report and thus help them to understand
the judgmental procedures of the auditor
Key audit matters and rationale for the determination of those matters as key matters:
The auditor should determine those audit matters as the key audit matters (out the matters that
are being communicated to those who are in charge of governance) that require significant
attention from the auditor while performing the audit. In determining the key audit matters the
auditor shall take into account the following documents:
•Areas of financial reporting related to significant risks identified as per the accounting standard
•Areas in the financial report that involves significant management judgement which involves
uncertain accounting estimates with respect to certain areas or items
•The documents that describe the impact of audit on significant events or transactions that
occurred during the period of auditing(auasb.gov, 2015)

Reference:
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and opportunities for research. Australian Accounting Review, 26(3), pp.226-242
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Landes, W.M. and Posner, R.A., 2009. The economic structure of intellectual property law.
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Leung, P., Coram, P. and Cooper, B., 2007. Modern auditing & assurance services. John Wiley
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Lubatkin, M., 2013. Merger strategies and stockholder value. In Mergers & Acquisitions (pp. 43-
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Wipo.int. (2016). [online] Available at:
http://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_10_learning_points.
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