Audit: Key Assertions and Substantive Procedures for Inventory and Intellectual Property

Running head: AUDIT
Audit
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Introduction................................................................................................................................2
Question 1..................................................................................................................................2
Answer (a)..............................................................................................................................2
Answer (b)..............................................................................................................................4
Answer (c)..............................................................................................................................5
Question 2..................................................................................................................................6
Answer (a)..............................................................................................................................6
Answer (b)..............................................................................................................................7
Answer (c)..............................................................................................................................8
Conclusion..................................................................................................................................9
Reference..................................................................................................................................11

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Introduction
Material misstatement risk is the risk that financial statement of the organization had
been misstated to the material level. The risk of material misstatement is analysed by the
auditors at 2 levels – assertion level and financial statement level. Risk at the assertion level
is segregated into control risk and inherent risk. Inherent risk is the risk that the susceptibility
of assertion to misstatement owing to fraud or error. On the other hand, control risk is the risk
that the misstatement cannot be prevented by the internal control level of the entity. Risk at
the financial level determines the possibility of fraud (Kharisova & Kozlova, 2014).
Auditors in Australia are obliged to follow the regulations and guidelines presented in
“ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report. It
provides the procedures those must be followed by the auditors while carrying out the audit.
It further deals with the responsibilities of the auditors for communicating the key audit
matters under the auditor’s report. Main purpose of communicating the key audit matters is
improving communicative value of auditor’s report through delivering more transparency
regarding the performed audit (Auasb.gov.au, 2019).
Question 1
Answer (a)
From the given scenario of Computing Solutions Limited it is identified that 2 key
assertions related to inventory are as follows –
 Accuracy – this assertion states that the amounts and other associated data with the
recorded events and transactions have been inappropriately recorded and the
associated disclosures have been described and measured inappropriately. While

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valuing the inventories the management shall take proper measures to value it
accurately as accurate valuation of the inventories plays important role in business.
Persons involved with valuation of inventories are responsible to ensure that the
business inventories have been valued properly and the accurate figures have been
recorded in the financial statement based on the valuation (Köhler, Ratzinger-Sakel &
Theis, 2016). As in the given scenario, the entity moves its inventory from its central
warehouse to 6 new regional warehouses. Hence, likelihood is there mathematical
error is there when dispatching the inventory from central warehouse and receiving
the same in the regional warehouse. Further, likelihood is there owing to error the
inventory turnover of the entity has been reduced from 5.8 times to 3.8 times over the
time period from 2017 to 2018 (Vik & Walter, 2017).
 Completeness – it refers that all events and transactions associated with inventory
those shall have been recognized have not been recorded and all the associated
disclosures those shall have been recorded under the financial statement have not been
included. As per the completeness assertion, understatement of the inventory will also
be considered as a key assertion associated with completeness. As per the given
scenario the inventory on hand for the entity has been increased from 18% to 22%
over the years from 2017 to 2018. Hence, likelihood is there the person in charge with
maintenance of records have not recorded the sales transaction for inventory which in
turn will show the inventories still in hand. Hence, risk assertion increases of
understatement or overstatement of the inventories as compared to actual inventories
available on hand. Further, the insufficient and ineffective control of the inventories
will lead to assertion associated with completeness.