Auditing: Risk Assertion and Audit Procedures for Inventory and Intangible Assets

This report discusses the key risk assertion related to inventory and intangible assets of two companies, along with the audit procedures to be followed. It also covers the communicating audit matters as per ASA 701.

Running head: AUDITING
Auditing
Name of the student
Name of the university
Author note

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Table of Contents
Introduction......................................................................................................................................4
Discussion........................................................................................................................................4
Answer to question 1:..................................................................................................................4
Part A.......................................................................................................................................4
Part B.......................................................................................................................................5
Part C.......................................................................................................................................7
Answer to question 2...................................................................................................................9
Part A.......................................................................................................................................9
Part B.......................................................................................................................................9
Part C.....................................................................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................13

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Executive summary
Computing solution and Beautiful hair limited are the name of the two companies given in the
question. The information about the transactions of these two companies have also been provided
in the question. The report has been prepared for the risk assertion associated to the inventory
and intangible assets of the entity. The procedure of audit that need to be followed have also
been discussed in the report. According to ASA 701 the key communicating audit key matters
and the reasons for disclosing them in the audit has also been mentioned in this report.

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Introduction
The risk assertion is a procedure of auditing. The auditor have to perform certain audit
procedure based on the ASA 701 for the identified risks. This is a most important component
that has various and significant changes in the field auditing of the financial statement that are
composed by the company. The auditor generally use audit declaration for performing the action
that are related with the policy, guidelines and manages the interior of the company. The analysis
of the facts provided in the report from the two company have been examined in detail in this
report. The purpose of this report is to discuss and examine the key risk assertion that are related
to the inventory and intangible assets of the two companies mentioned in the question. The audit
processes associated to the risk identified. According to ASA 701 the communicating audit
matters, determination and why the auditor need to mention in the audit report of an organization
(aasb.gov.au, 2019).
Discussion
The questions given in the report have been analyzed and discuss below.
Answer to question 1:
Part A
The assertion which are related to the inventory are such as existence of the particular
assets at the end of the year, completeness of the assets, liabilities and the balance of equity are
recorded in the accounts and have been identified in the financial records of the organization,
rights and obligation of the goods and valuation of the goods according to the suitable value of
the goods. The two key assertion of risk in this case will be existence of the Assets and liabilities
and Rights and obligations. The reason behind this is that the recognition of the inventory in the

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income statement exists at the end of the period. The products of the computing solution limited
has been recorded in the journal and leger accounts of the company. However if the products
were not have been recorded properly then the financial statements will be inaccurate and this is
against the accounting procedure. The Rights and obligations describes that the organization has
right and the ownership of the particular asset. The particular asset has been recognized in the
income statement of the company and represents the obligations of the organization. Attempts
are continuously being applied to remove the accounts and simply not place them in the income
statement of the company, while retaining the asset utilization. There are many income
statements that has often resulted in an entity’s collecting the use of an item without computing
or presenting the transactions in the accounts of the company.
Part B
The procedure in the inventory audit the auditor has to execute various analytical plan to
check the organization methods of inventory. Analytical procedure includes comparison of gross
margin value with values of the previous year and inventory turnover ratio with the ratio of the
previous year. The comparison of inventory’s unit cost with the previous year. The auditor have
to give a confirmation that the physical count of the goods and the financial accounts and
statements gets equal (Titera 2013). The company’s adopt internal control such as the inventory
superintendent or a duty segregation among the superintendent and the individual with the entry
to the documentation. The reason behind doing this by the companies is that the companies may
then reduce the risk of inventory fraud and misappropriation of statements.The audit procedures
that could be perform is that confirming the existence of inventories, reviewing the ownership,
value of inventory need to assessed, cut off reviewing, analytical review and some other
procedures. The accounting procedure that the auditor need to provide a confirmation on the

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existence of stock. However if the auditor has taken a decision to analyze company’s stock, then
the auditor need to confirm the existence of the stock on the income statements. The auditor have
to do verify the financial records as well as the physical verification of the inventories. This
helps the auditor to confirm the existence of inventories that had been reported in the income
statement of the organization. The auditor gets access for evaluating the condition of the goods,
and the process that the client use to perform at the end year counts. During the time of
evaluating the inventories of the company the auditor judge the accounting procedure that has
been executed by the auditor’s clients. The auditor should focus on the three prime areas of the
process that is before the count, after the count and during the count. The before count of the
inventory means that before the client execute count of inventory, the auditor will review the
proposed policies and procedures of the clients for the inventory count. During the count of the
inventory means that the auditor will observe the procedures that are being performed correctly
or not, any sign of impairment and the auditor also have to obtain important information of cut
off. This is to be make sure that the counting of goods inventory require to be counted and the
non-counting inventory products is no need to be counted. The after inventory count means that
the auditor have to match the quantities of the stock that are brought forwarded from the count if
recorded amounts in ledger accounts of the company. The auditor have to compute the unit cost
of inventory to confirm that the accurate price is determined. The audit procedure that need to
follow for the assertion of rights and obligation is that the auditor have to review ownership of
the goods. Inventories come in the current asset section of the balance sheet and the company
could recognize the inventories in the financial records of the company. However if the
inventories match the clarity supplied by the IFRS Conceptual framework. The auditor review

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the quotation, invoices contacts and delivery method of the inventories for the verification of the
ownership of the inventory.
Part C
Key audit matters are the affair which are the most notable in the audit of the income
statements of the current accounting period. The auditor need to disclose some key audit matters
(Adeosun and Ganiyu, 2013). The motive of communicating audit key matters is for increasing the
quality of the report of the auditor by contribution better clarity about the audit which was
accomplishment. This offers add additional data to the investors, stakeholders of the company
who use the report for the purpose of analysis (Auditing and Assurance Standards Board, 2015). This
also helps the users in understanding the key audit matters and the financial records of the
reports. The communicating audit matters are
Not a substitute for the announcement in financial records that is relevant with the financial
reporting structure required to make management. This are also crucial for attaining fair
presentation.
Not a substitute for an auditor communicating an altered opinion. This happens when the
situation of any specific audit contract required such declaration as per ASA 705.
As per ASA 570 it is not a substitute to report. The unpredictability of material occurs for the
state or events which may bring considerable doubt on the capacity of the organization.
The documentation of the key audit matter that an auditor should include in the report is that the
matters which required notable attention. The reason for the resolution of the auditor that no key
audit matters is there to discuss in the report (Knechel and Salterio, 2016). Sometimes a written
statement have to be provided in the audit report from the management to the public that why

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such a matter purposeful to be a key audit matter which is not appropriate for a public disclosure
(Auasb.gov.au, 2019). The auditor have to follow certain approach to determine the key audit
matter. The affairs that are commune to those charged with governance. The affairs in which
auditors attention is needed (Sirois, Bédard and Bera, 2018). The matters which are the most
notable in the audit. The potential key audit affairs that should be incorporate in the report is that
the most critical areas that are related with revenue generation, certain provisions and
contingencies, taxation aspects of the company, impairment assessment, It systems and controls
and many others. According to the given question, the following information provided by the
company computing solutions limited are some key audit and some are not. The first information
that is provided by the company that the bestselling computer package of presentation has been
undergoing high level of return of unpaid suspected software. This is because this give the
auditor a challenge in establishing an opinion of the financial statements. This type of unpaid
return transaction in which the audit partner needs to communicate with others. The second
information given in the question is that the closing inventory and the turnover inventory on an
average for the year 2018 is 5.2 times and for the year 2019 is 3.8. This have to be a key matter
in audit as because the inventory turnover get reduced in the recent year from the previous year.
These are the specialized areas where an accounting and an audit expert is needed. The next
information that was provided by the company is that the company computing solution limited
transfer its inventory form a main warehouse to new six regional warehouses in March 2019
(Johnstone, Gramling and Rittenberg, 2013). This type of situation in which the auditor evaluate
higher risk at audit planning stage, as because the some inventory may get, lost and damaged
during the transportation (Legislation.gov.au, 2019). This also results in impact on the auditors
overall audit strategy. The next information that is provided in the question is that the inventory

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on hand of year represented 26 per cent of the sales value in 2019 and 19 per cent of the sale
value for the year 2018 (Putnam et al. 2016). This is definitely a key audit matter as because the
percent of the inventory on hand changes at the end of the year (Hajrullina and Romadanova, 2014).
This areas includes complex transaction and for this significant event or transaction that occurs
during the year will impact the overall audit strategy. The last information is provided in the
question is that the company has currently earn a tender to supply different products to the
government. The company concur to provide the products at ten percent beneath the value price
to the government. The first shipment is due to be delivered. This is not assumed as a key audit
matter.
Answer to question 2
Part A
The intangible is a part of an asset, the risk assertion related to an intangible asset will be
same of the risk assertion related to an asset account balance (Gamayuni, 2015). The common
assumptions are existence, completeness, rights and obligations, valuation of the goods.
According to the given question the two key assertion of risk related to intangible assets is that
the rights and obligation of the goods and valuation of the goods (Kachelmeier, Schmidt and
Valentine, 2017). The right and obligations means that the entity have the rights to use and sell the
product. The valuation of the goods means that the company values the intangible asset in the
balance sheet is accurate or not (Carson, Redmayne and Liao, 2014). The auditor should control
and decide that the selected audit process are suitable for achieving the objective of audit related
to the assertion.

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Part B
The audit procedure that could be perform for the above identified risk is that the auditor
have to review ownership and assess the values of the inventories (Simnett and Huggins, 2014).
The audit procedure that need to be followed for reviewing the ownership is that the auditor have
to check the quotation of the contracts, invoices and delivery notes for the intangible assets
section of the entity. The financial records of the companies also have to meet the definition
given by the IFRS conceptual framework (corporatefinanceinstitute.com, 2019). The audit
procedure that could be performed for the valuation of the intangible asset is that examining of
invoices that are paid and compare the cost of products with the standard cost. The standard
overhead rates of the goods need to be calculated again. The auditor should examine and analyze
the manufacturing and the purchasing standard variances of cost. The auditor should analyze the
inventory turnover, experience of the industry and the trends, comparing the volume of sales
with the inventory, inspection of the products, inquiring of the production and the sales person.
Part C
The key matters in audit is needed to be communicate in the audit report. The annual
report of a company is used by the users to get the relevant information about the company. The
users get a better knowledge about the company and the investors get a clear of their investing.
The key communicating matters are the most significant matters of a company. These are the
matters which needed auditor’s attention (van Buuren et al. 2014). The matters that generally lead
to face the auditor a challenge and will affect the income statement these are related to key audit
matters. The areas where critical transaction occurs and leads to problem in forming a judgment
for the income statements of the company this areas also needs an auditor’s attention. According
to the information given in the question the beautiful hair Ltd, acquire small business that is a

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manufacturer company of high organic hair styling products (Bédard et al. 2016). The acquiring
company had recognized that the products of the subsidiary company will fit very well with the
business of the company. The acquiring company has managed the funding from a regional bank.
The formula that is used by the subsidiary company is for creating the products, this formula is
only known by the subsidiary company. These secret ingredients of the formula is documented
and held by the subsidiary company (Vitry and Roughead, 2014). The management of the acquiring
company has suggested that they can include the formula as an intangible asset on the company’s
balance sheet. This is also a key matter as because the company is planning to introduce a new
intangible asset for the firm as the asset will be valuable asset (Griffiths, 2016). The auditing and
accounting expert is needed for this situation. This leads to face challenges for the auditors when
forming a judgment of the income statements for the company. The auditor need to communicate
this details in the annual report. This will result in increasing the goodwill of the company, and
will provide additional information to the users of the annual report of the entity. The investors,
stakeholders and others who all invest in the company. This information will help them to get a
better understanding about the financial statement of the company.
Conclusion
This can be concluded from the above report, that the service of auditing and assurance
related to inventory and assets has been discussed in the report. The key assertion associated to
inventory and intangible assets for which the relevant audit procedure is needed to be followed
has been discussed in the report. The audit of each financial statement provided in the 1st
question and 2nd question has been performed and executed with proper explanation and
procedure. The material misstatement risk has been recognized after applying the suitable
process for the 1st question. This involves the existence of accounts balance of the all the assets

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and liabilities of the entity in the financial records. The transactions of the sales revenue that
includes actual shipments to the real customers along with the investment income. The rights and
obligation has been also identified from the information provided by the computing solutions
Ltd. The invoices, contracts have been analyzed of the company. The risk in material
misstatement has been recognized for the Beautiful hair ltd. The existence of the accounts, which
involves all the assets and liabilities that are related with the organization. As the company is
thinking to introduce the formula as an intangible asset in the income statement. The risk in
valuation of the asset is also recognized from the information provided by the beautiful hair Ltd.
The relevant audit procedure for the above identified risk that could be performed has also been
discussed. The discussion associated to the requirement of the key audit matters to be
communicated on an annual report has been also discussed. The key matters in audit related to
the information’s provided by the both the companies in the given question has also been
analyzed and appropriate details related to it have been provided in the report.

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