Audit of Inventory and Intellectual Property: Key Assertions, Substantive Audit Procedures, and ASA Key Audit Matter (701)

AUDIT
Module Number

Table of Contents
Introduction............................................................................................................... 2
Answer to question no- 1............................................................................................... 2
(a) Two Key (Assertion at identifed risk) in relation to inventory..........................................2
(b) Two substantive audit procedures for each of the above identified key assertion...................3
(c) Requirements and application of ASA Key audit matter (701) in the Auditor’s Report...........4
Answer to question no- 2............................................................................................... 6
(a) Two Key (Assertion at identifed risk) in relation to intellectual property.............................6
(b) One set Substantive Audit procedurefor each of the above identified key assertion................7
(c) Requirements and application of ASA Key audit matter (701) in the Auditor’s Report...........7
Conclusion............................................................................................................. 9
References.............................................................................................................. 10

Introduction
With the changes in the economic, various companies are facing the audit risk in their
financial statements. However, there is following risks found such as inherent risk, detention
risk and control risk in the business functioning of organization. In this report, main Key
(Assertion at identified risk) related to the inventory is being analysed. This report reveals the
key aspects of the items forming part of inventory and evaluating of the inventory stolen or
might have been lost in various movements or transits in the business process of organization.
After that in the second part of the assignment, two Key (Assertion at identified risk) in
relation to intellectual property have been made to assess the set Substantive Audit procedure
for each of the recorded items. It is analysed that the disclosure in relation to the inventory of
Computing Solutions is being made and application of the ASA Key audit matter (701) in
Audit Report was issued by AUASB on demise of the investment banker Lehman Brothers.
However, in this report, it is divulged that the purpose of inclusion of Key Audit Matter
paragraph to raise the understanding user gets while reading the audit report.
Answer to question no- 1
(a) Two Key (Assertion at identified risk) in relation to inventory
The main Key (Assertion at identified risk) related to the inventory are as follows:
 Valuation
Explanation: all the components of inventory present with organisation have been priced
using correct rates i.e. at the lower value among the inventory cost or its market price
(Knechel, and Salterio, 2016). This will be used to strengthen the transparency of recorded
inventory books.
Reason of application of assertion: The value of inventory in terms of sales has fallen by
7% in year 2019 as compared to year 2018. The sales return for the year has risen. This
implies the sales volume must have fallen, and the inventory at hand must have risen. Even
after this has happened, ironically in financial year 2019’s the inventory’s value in hand has
lowered down drastically. Also, the company on account of the fulfilment of tender order,

inventory ought to be high in amount. Further, the company’s sales turnover is way to lower
in year 2019 as compared to 2018. In presence of all these situations, the inventory’s value
must have been higher, as the stock is assumed to be high in 2019 as compared to 2018. This
will increase the overall transparency in the books of accounts.
 existence
Explanation: while computing the year-end inventory count, all the components as included
in inventory are present with Computing Solutions. None of the inventory items are
absconded (Brown-Liburd, and Vasarhelyi, 2015).
Reason of application of assertion: the fall in the inventory in 2019 over 2018 could be
possibly because some of the items forming part of inventory are actually stolen or might
have been lost in various movements or transits. This is possible because company has
recently encountered huge returns from customers on account of software problems. Also the
company has reported inventory shifting from central warehouse to regional warehouses of
the entity. The movement and shift witnessed in inventory is high, which could possibly
cause some of the inventory to be lost or be stolen.
(b) Two substantive audit procedures for each of the above identified key assertion
The substantive audit procedures to be performed by the auditor to obtain audit evidence
against the key audit assertions identified above are as follows:
S.
No.
Test of existence Valuation
1. Physical stock evidence
There is needs to undertake proper
inventory control system.
It will check the inventory inflow
and outflow form the warehouse.
Proper checklist would be
prepared.
Reconciliation of high value inventory
This inventory is recorded high value
inventory.
It is used to track the inventory details and link
up with the purchase system.
It is set up accuracy.