Auditing and Assurance: Case Studies of Advanced Computing Solution Limited and Green Machine Ltd

Running head: AUDITING AND ASSURANCE
Auditing and assurance
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1AUDITING AND ASSURANCE
Table of Contents
Introduction................................................................................................................................2
Answer 1 – case study of Advanced Computing Solution Limited...........................................2
(a) Identification and explanation of key assertion with regard to inventory...................3
(b) Substantive audit procedure........................................................................................4
(c) Communicating key audit matters in the auditor’s report as per ASA 701.................5
Answer 2 – Case study of Green Machine Ltd..........................................................................7
(a) Identification and explanation of key assertion with regard to PP & E......................7
(b) Substantive audit procedure........................................................................................8
(c) Key audit matters.........................................................................................................9
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

2AUDITING AND ASSURANCE
Introduction
ASA 701 regarding Communicating Key Audit Matters in the Auditor’s Report deals
with responsibility of the auditor with regard to communication of the key audit matters
(KAM) in the report of the auditors. Main purpose of the standard is to address judgement of
the auditors regarding the matters required to be communicated and content and form for
communicating such communication. Objective of communicating the KAM is enhancing the
communicative value of auditor’s report through delivering greater transparency regarding
the performed audit. Communication of the KAM offers additional information to the
potential users of financial reports to help them to understand the matters regarded as most
significant as per the auditor’ report. However, communicating the KAM is not the substitute
for the disclosures of financial report applicable for the framework of financial reporting that
requires the management that must be made by the management for achieving the fair
representation. Further, it is not substitute for auditor expressing the modified opinion when
required by circumstances of particular audit engagement in accordance with ASA 705 rather
KAM is the separate opinion regarding individual matters (Auasb.gov.au 2019).
Answer 1 – case study of Advanced Computing Solution Limited
Advanced Computing Solution Limited is best selling computer presentation that is
experiencing high return level due to suspected problems in software. Other issues currently
faced by the entity are their inventory turnover ratio reduced to 3.8 times in 2018 as
compared to 5.4 times in 2017. Further, inventory hand has been increased to 26% of sales in
2018 as compared to 18% in 2017. Despite of all these issues the entity won a tender for
supplying large government department through agreeing to provide the item at 10% lower
than the cost price.

3AUDITING AND ASSURANCE
(a) Identification and explanation of key assertion with regard to inventory
Looking into the given scenario 2 key assertions associated with the inventory of the
entity are as follows –
 Completeness – assertion related to completeness is the assertion that financial
statement are not made thoroughly and does not include each item that shall be
included in the financial report for the particular period. Te completeness assertion
further states that the entire inventor including those under temporary possession of
3rd party is accounted for in the total figure of inventory recorded in the financial
statement. In context of the given case study it can be stated that there may be
different reasons behind reduction of company’s inventory turnover ratio to 3.8 times
from 5.4 times over the time period of one year. One of those reasons is the likelihood
that while moving the inventories from central warehouse to different regional
warehouses the recording of inventories were not made properly. For instance, while
despatching 100 units from central warehouse it is recorded as 120 (Carson, Fargher
and Zhang 2016). Eventually it will show 20 units more at hand. Chances are these
that these sales have still included under inventories on hand rather than including
under sales. Further, the understatement or overstatement of inventories will also be
considered as assertion related to completeness as the inventories in hand recorded by
the entity may not have been recorded at appropriate amount. Moreover, the
ineffective control and record maintenance of inventories will also lead to
completeness assertion.
 Valuation and accuracy – assertion associated with valuation and accuracy states that
all figures reported in the financial report are recorded accurately and valued on the
basis of proper valuation approach. Financial assertion regarding valuation and
accuracy determines that different components of financial statement like inventories