Audit Theory and Practice

This document discusses the audit theory and practice for two businesses, Computer Solutions Ltd and Beautiful Hairs Ltd. It covers key assertions, substantive audit procedures, reporting requirements, and more.

Running head: AUDIT THEORY AND PRACTICE
Audit Theory and Practice
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Author’s Note

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AUDIT THEORY AND PRACTICE
Executive Summary
The main purpose of the assessment is to conduct an audit for the two businesses which are
covered in the assessment. The companies which are considered are Computer Solutions Ltd and
Beautiful Hairs ltd for which appropriate audit procedures which are followed by the business.
The discussion would also be showing key assertions which can be identified for both the
companies and how the auditor confirms or denies the presence of the assertions by applying
substantive audit procedures for the business. In addition to this, the discussion would also be
covering the reporting requirements of ASA 701, communicating key audit matters and how the
key audit matters for the business should be represented in the auditor’s report.
Table of Contents

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Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Computer Solutions Ltd...............................................................................................................4
Key Assertions in Relations to Inventory....................................................................................4
Substantive audit procedure that could perform..........................................................................4
Auditing Standard 701, Communicating Key Audit Matter........................................................6
Beautiful Hair Ltd........................................................................................................................7
Key Assertions at risk with regards to Intellectual property.......................................................7
Substantive audit procedure that could perform..........................................................................8
ASA 701, Communicating Key Audit Matters............................................................................9
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11

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AUDIT THEORY AND PRACTICE
Introduction
In today’s market, most of the companies are very much concerned about their image
among the public and the companies take all the necessary steps for the purpose of protecting
such an image in the market. The process of audit therefore can be considered to be important as
the same allows the business to verify whether the financial statements are showing true and fair
view of the business or not. The company which is considered for the assessment are computing
solutions ltd. and Shimmer pty ltd. Audit procedures can be defined as the process in which
independent examination of the books of accounts are conducted to verify whether the financial
statements are showing a correct presentation of the financial position of the business. The audit
process also provides assurance to the business as well as the shareholders that the business I
transparent in their reporting framework (Titera 2013). The management of such companies also
adhere to auditor’s review and try to improve their reporting framework so that the business is
consistent with the accounting regulations and standards. The assessment would be identifying
the key audit risks and the risks assertions for both the companies. The assessment would be
going into details which are stated under ASA 701. Further, the assessment would be dealing
with the concept of material misstatement in the inventory and intangible assets of the business.
The report would also be covering matters which needs to be communicated by the auditor and
this can provide a transparent view of the financial position of the business.
Discussion

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Computer Solutions Ltd
Key Assertions in Relations to Inventory
 Valuation and Rights Transfer: The business of Computers solutions is able to sell off its
products through the best presentation package. The product is being returned by the
customers in high percentage due to a software problem which has affected the product
which is offered by the business (Knechel and Salterio 2016). The key assertion which can be
identified for the inventory is the valuation of the inventory as the auditor needs to check if
proper valuation techniques is applied considering all factors. One other assertion is right
transfer which relates to the risks of transferring of rights of the inventory. The auditor needs
to check if the inventory is actually in the possession of the actual owner or not.
 Assertion relating to Accuracy: The business of computer solutions has undertaken a tender
for supplying bulk products in a large government department. The business needs to supply
such products and amount which is received from the same needs to be disclosed in the
financial statements of the business (Kharisova and Kozlova 2014). The payment which is
received by the business needs to be shown accurately and it is often the case that the figures
of inventory are overstated or understated which causes significant risks for the business The
auditor of the business needs to apply substantive audit procedures so that it can either be
confirmed or denied regarding the risks which is faced by the business.
Substantive audit procedure that could perform
 For Valuation and Right Transfer
1. The auditor needs to obtain confirmation of the inventory transactions from the bank so
that the auditor can establish that the transaction actually took place. This would also
provide an opportunity to the auditor to check is there is a misstatement between the bn

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records and the records of transactions which is maintained by the business (Brandas,
Stirbu and Didraga 2013). The auditor needs to take appropriate steps for measuring the
risks in case of omission or misstatement. The auditor in such a case also needs to review
the terms and conditions of the agreement or contract which is made with the customers
so that the auditor can be sure that there is not incidence of fraud in the business.
2. Besides the contract itself, the auditor also needs to check if there are any return inwards
for the goods which were received by the business. The auditor also needs to ascertain the
terms of contract regarding when rights relating to the inventory is transferred. The
inventory rights and obligations of buyers and sellers needs to be verified by the auditor.
 Accuracy Assertion to Inventory
1. The auditor needs to check whether the inventory is in appropriate conditions as there is a
high chance that the same might get obsolete. The auditor of the business needs to check
and ensure that the obsolete inventory amount is removed from the financial statements
(Christensen, Elder and Glover 2014). The auditor also needs to check the accuracy of the
closing stock, work in progress and finished goods of inventory and ensure that the same
are properly shown in the financial statements
2. The auditor needs to check the inventory records relating to the sales which is made, the
inventory which is returned by customers, the computer products which are in transit
(Hay, Knechel and Willekens 2014). The auditor needs to apply vouching practices and
check all receipts and invoices so that the amount which is shown in the financial
statement are appropriate and accurate.

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Auditing Standard 701, Communicating Key Audit Matter
The auditing standard 701, communicating key audit matters have been introduced so
that the business is able to provide proper explanation regarding accounting treatments which are
disclosed in the financial statements of the business (Carson, Fargher and Zhang 2016). The
standard states that the auditor should report matters which he deems to be crucial and which can
have an impact on the decisions which is taken by the investors. The auditing standards 701 was
introduced to bring about more transparency in the auditing process. The key audit matters of a
business are key areas where the auditor needs to determine whether the same are showing
accurate view of the financial position of the business (Groomer and Murthy 2018). The key
audit matters must be accompanied with the annual reports of the business as per the provisions
which is stated under ASA 701.
The audit procedures which is applied in the business of Computing Solutions Pvt. Ltd.
has been able to identify the following key audit matters of the business:
 The auditor needs to consider the strategy of the business to sell its goods at 10% lower
amount than the costs of the business as this directly impacts the profits and revenue which is
generated by the business (Jans, Alles and Vasarhelyi 2014).
 The business of Computing Solutions Pvt. Ltd. is known to be one of the best in its products
but the recent software problem can impact the sales of the business.
 The company has problems in maintaining liquid cash due to the 6 new warehouses which is
opened by the business.
The relevant information which would be included in the key audit matter section of the
annual report are listed below:

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 The business is expecting an increase in revenue and overall returns of the business even
though the product which the business has sold is experiencing software problems.
 The management of the company has opened 6 warehouses for bringing about efficiency
in distribution and supply chain and the same is done to minimize the costs of the
business.
 The company has decided to offer its products at 10% lower than the costs of the business
with the intention to enhance the sales of the business.
 The auditor would also be commenting on the going concern principle of the business
which is intact for Computing Solutions Pvt. Ltd. as per the regulations of ASA 570. In
addition to this, all disclosures regarding evidences collected by the auditor would be
provided in the report.
Beautiful Hair Ltd
Intangible assets are those assets which do not have a physical form but the same can be
used by businesses for the purpose of generating profits from the operations of the business.
Some examples of intangible assets of a business are goodwill, patents, copyrights and other
intellectual properties are also included.
Key Assertions at risk with regards to Intellectual property
 Issues Relating to Rights and Obligations: The key assertion which would be applicable to
the case of Beautiful hairs ltd is the rights and obligations of the company on the assets and
whether the company has the right to use the asset. The case shows that the management of
Beautiful hairs ltd acquired the business of Shimmer Pty Ltd. The formula for making the
product is only known to Shimmer Pty Ltd and therefore the same can be considered to be an
intangible asset of the company. The auditor needs to conform the ownership status of the

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company after acquisition and should also verify all documents in relation to such an
acquisition.
 Completeness: The information which is available to the auditor needs to complete
otherwise there is a risk to the assertion of completeness. The information relating to
intangible assets of a business needs to be protected and complete (Popova 2013). The
financial statements of the business should contain proper treatments and disclosures of the
intangibles assets of the business. If the auditor of the business discovers an infringement of
rights of any partner or third party then the same needs to be addressed in an appropriate
manner. The auditor would apply audit procedures for ascertaining whether the assertion is
actual or not. Thus, for meeting the completeness assertion, the company needs to maintain
all records regarding transactions and treatment of impairments.
Substantive audit procedure that could perform
 For Issues of Right and Obligations
1. The auditor needs to assess the documents and the agreement which was made between
two parties and the auditor needs to ensure that there was a mutual agreement between
the two parties regarding the ownership of the intangible asset of the business. In the case
of Shimmer Pty Ltd which is being acquired has its own trade secret and the same can be
acquired by Beautiful hairs ltd by taking proper consent from the owner. The auditor
needs to be make assessment whether the owner of Shimmer Pty Ltd has transferred the
intellectual property to the management of Beautiful hairs ltd or not.
2. The auditor of the business needs to check the financial statements whether the same
records the intangible assets with full disclosures. The management of the company also

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needs to verify other aspects such as impairment and amortization of the intangible assets
of the business.
 For Completeness
1. In such an assessment, the auditor would go through all details starting from the initiation
and ensure that every relevant disclosure is provided in the financial statement of the
business. The company needs to maintain all records for the business in an appropriate
manner.
2. The auditor would be going through all the records and also check whether the business
has applied for impairment and amortization charges on the intangible assets and whether
the same are reflected in the financial statements of the business. These procedures would
help the auditor to understand whether the intangible asset actually exist or not.
ASA 701, Communicating Key Audit Matters
The auditing standard of 701 states that it is the responsibility of the auditor to provide
full disclosures in the audit report regarding matters which may be significant from the point of
view of the business. The key audit matters are reported in the audit report so that the
shareholders have a perfect picture of the financial position of the company and also for
promoting the confidence of the shareholders (Xu et al. 2013). It is anticipated that the key audit
matters of a business help the shareholders to take a better decision relating to investments.
The intellectual property rights under Shimmer Pty ltd will represent the products and the
asset which is acquired by the business of Beautiful Hairs ltd. There will be changes in the
capital structure of the business as the acquisition would also bring in more asset, liabilities of
the Shimmer Pty ltd. The key audit matters of Beautiful Hairs Pvt ltd would be including this

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acquisition as the same is complex and the investors needs to know every detail regarding the
assets which are acquired (Azim 2013).
The relevant information which would be included in Key Audit matter of a business are
listed below:
 The valuation of the assets which is shown in the annual report of the company.
 The capital structure of the company and changes made to the same post-acquisition.
 The costs of the assets which are shown need to be crossed checked and charges relating to
the assets such as impairments and depreciation also needs to be checked.
Conclusion
The above discussion appropriately shows the audit of two different companies and
requirement of key audit matters which needs to be identified by the auditor while conducting
the audit for the business. The companies which are considered for the purpose audit are
Computer solutions ltd and Beautiful Hairs ltd. The audit assertions which have been identified
for computer solutions ltd is related to inventory while the audit assertions for Beautiful hair ltd
is related to intangible assets. The discussion above also shows the substantive audit procedures
which can be applied by the auditor in order to confirm or deny the assertions relating to both the
companies. In addition to this, the discussion also covers reporting requirements for ASA 701,
701 communicating key audit matters of the company and how the same is presented in the audit
report of the business.

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Reference
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