Auditing and Assurance in Australia

This report analyzes the cases of Computing Solutions and Beautiful Hair to identify the assertions at risk and develop appropriate substantive audit procedures. It also discusses ASA 701 for determining key audit matters.

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and Assurance in Australia
Name of the Student
Name of the University
Author Note

1AUDITING AND ASSURANCE IN AUSTRALIA
Executive Summary
The main purpose of this report is the analysis of the cases of Computing Solutions and
Beautiful Hair with the aim to identify the assertions at risk so that appropriate substantive
audit procedures can be developed for them. This report also focuses on the discussion of
ASA 701 Communicating Key Audit Matters for the determination of the key audit matters.
Findings of the report show that both inventory and intangible assets have different assertions
that lead to the development of different substbtive audit procedures.

2AUDITING AND ASSURANCE IN AUSTRALIA
Table of Contents
Introduction................................................................................................................................3
Computing Solutions..................................................................................................................3
Requirement a: Audit Assertions...........................................................................................3
Requirement b: Substantive Audit Procedures......................................................................3
Requirement c: ASA 701.......................................................................................................4
Beautiful Hair.............................................................................................................................5
Requirement a: Audit Assertions...........................................................................................5
Requirement b: Substantive Audit Procedures......................................................................5
Requirement c: ASA 701.......................................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

3AUDITING AND ASSURANCE IN AUSTRALIA
Introduction
Auditing is the process to examine a company’s financial statements and records in
order to determine that whether they are accurate and as per the applicable accounting rules
and regulations. External auditors come from outside organizations for examining accounting
as well as financial records with the aim to provide independent opinion on these financial
statements. In this whole process, the auditors have to fulfill certain responsibilities to
consider all the necessary aspects in the whole auditing process (Johnstone, Gramling and
Rittenberg, 2013). Inspection and examination of the audit assertions is one of those
responsibilities of the auditors. Audit assertions are the explicit or implicit claims as well as
representations that the managements of the audit clients make related to the correctness of
different elements in order to prepare the financial statements. The auditors are required to
assess whether any of the audit assertions are at risk. In case the auditors conclude the one or
more than one audit assertions are at risk, they must undertake the required substantive audit
procedures to handle the audit assertions. Substantive audit procedures are the processes,
steps, or tests that create conclusive evidence regarding the presence of audit assertions in the
financial statements of the audit clients (Houqe, Ahmed and van Zijl, 2017). There are three
parts of the report. First part examines which audit assertions are at risk in the provided
companies; second part suggests the appropriate substantive audit procedures to minimize
those risks; and the last part sheds light on the responsibilities of the auditors regarding the
key audit matters.
Computing Solutions
Requirement a: Audit Assertions
Valuation and Allocation – This is a crucial assertion associated with inventory which helps
in confirming the value is appropriate in which the company has valued, recorded and
disclosed. It is visible in Computing Solutions that there is 26% of sales in 2019 and 19% of
sales in 2018 included in the inventory in hand. Moreover, inventory turnover ratio has
decreased to 3.8 from 5.2. All these aspects are the indicators of potential slow moving of
inventory or inventories are outdated. It is also observable that the commencement date of the
government contract is middle of July 2019. For this reason, it will be required to write down
any stock in hand in hand at the end of the year to net realizable value due to the requirement
of the contract (Hazlett and Honig, 2016).
Existence – This particular assertion is used to analyze the aspect that there is existence of
inventory at the end of the financial year that are recorded in different financial reports.
According to the provided case, Computing Solutions has recently moved all of their
inventories from the central warehouse to six regional warehouses. This incident indicates
towards the major potential that there has been lost of certain portion of the inventories in the
lost in transit while transferring to the new regional warehouses. In addition, it is also
possible that there have been certain errors in the physical inventory counting process in the
new warehouses. All these aspects put this assertion at risk (Tung and Deng, 2013).
Requirement b: Substantive Audit Procedures
Valuation and Allocation – For this risk, the first substantive audit procedure for the auditor
is to test the releasable value and lower of cost of the main inventory by comparing the cost
of the inventory with the latest price. After that, it is needed for the auditor checking the
inventories kept for selling to the government after the balance date whether their valuation
has been done in net realizable value or lower of cost. Moreover, it is also required for the
auditor to review the major product line of Computing Solution so that they can determine
whether the inventories have been moving slowly or they have become obsolete. In addition,

4AUDITING AND ASSURANCE IN AUSTRALIA
the level of sales for the main products of the company needs to be checked (Knechel and
Salterio, 2016).
Existence – For this risk, attending as well as observing the inventory transfer process from
one central warehouse to six new regional warehouse is one major substantive audit
procedure. In addition, the auditor of Computing Solution is required to carefully observe the
physical inventory process in the six new warehouses so that any error in the physical
inventory process can be identified. Moreover, checking the inventory record is another
major substantive audit procedure that the auditor needs to undertake for checking the
inventory in floor. After that, the auditor must enquire with the management that if any loss
of stock has been there in the process to transfer them to the new warehouses. The last audit
step is to accurately examine the stock in transit between the warehouses as well as end of the
year inventory adjustments with the aim to validate the transactions related to the inventories
(Groomer and Murthy, 2018).
Requirement c: ASA 701
ASA 701 Communicating Key Audit Matters puts the obligation on the auditor to
comply with certain requirement regarding the key audit matters. The auditors are required to
put specific attention to the areas of the financial statements that are sensitive to the risk of
material misstatement (auasb.gov.au, 2019). At the same time, the auditors are needed to
appropriately assess and examine the used accounting estimates and assumptions in the
financial statements with high level of uncertainty. Apart from this, it is needed for the
auditors to put special consideration to any kind of accounting events that are significant to
the audit of that year. In addition, the auditors are needed to undertake proper communication
of the identified key audit matters with the related parties. These factors are required to be
considered by the auditors of Computing Solutions for the determination of the key audit
matters (Carson, Fargher and Zhang, 2016).
It can be said on the basis of the above requirements that the presence of the risks in
assertions in Computing Solutions can crate material misstatement in the financial statements
of the company. The used assumptions and accounting judgments that the management of the
firm has used for inventory have the potential to be uncertain. At the same time, transferring
the inventories to six new regional warehouses from the central warehouse is the significant
event in the company that can affect the audit (Vik and Walter, 2017). All these aspects make
the assertion risks as the key audit matters of Computing Solutions. These key audit matters
need to be disclosed in the following manner.
Why Significant Substantive Audit Procedures
Valuation and Allocation
There can be slow moving of inventory in
2019 due to the inclusion of previous year’s
sales as well as reduction in the inventory
turnover ratio. For this reason, this is a
major event that needs to be considered in
the audit of the company.
The substantive audit procedures are as
follows:
- Testing the releasable value and lower of
cost of the main inventory by comparing the
cost of the inventory with the latest price
- Checking the inventories kept for selling
to the government to assess whether their
valuation has been done in net realizable
value or lower of cost
- Review the major product line
- Checking the level of sales (Cordoş 2015)
Existence
There can the possibility of theft of
inventory in the inventory transferring
The substantive audit procedures are as
follows:
- Attending and observing the inventory

5AUDITING AND ASSURANCE IN AUSTRALIA
process to new six regional warehouses. In
addition, there could be errors in the
physical inventory count process in the new
regional warehouses. These aspects make
this as a key matter that needs to be
considered in the audit.
transfer process from one central warehouse
to six new regional warehouse
- Carefully observation of the physical
inventory process in the six new warehouses
so that any error in the physical inventory
process can be identified
- Checking the inventory record
- Enquiring if any loss of stock has been
there in the process to transfer them to the
new warehouses
- Examination of the stock in transit
between the warehouses as well as end of
the year inventory adjustments (Brunelli,
2018)
Beautiful Hair
Requirement a: Audit Assertions
Rights and Obligations – This is a crucial assertion associated with the intangible assets that
assesses whether the audit client has the required possession of a particular intellectual asset.
It is visible from the case of Beautiful Hair that the formula has been developed by Shimmer
and it is held by Shimmer’s solicitors. In the presence of this reason, this become necessary to
attain the evidence required in order to ascertain the fact that there has been transfer of the
ownership of the formula to Shimmer and after that, the same has again been transferred to
Beautiful Hair. This aspect puts this assertion at risk in Beautiful Hair (Howieson 2013).
Valuation and Allocation – This is a major assertion that is associated with the intangible
assets that helps in assessing the appropriateness of the value or amount in which an
intangible asset is recorded as well as disclosed. It is visible from the case of Beautiful Hair
that the manufacturing procedures for the hair products of Beautiful Hair have large reliance
on the special ingredients referenced in the formula of Shimmer. It indicates that this
particular formula has major importance in Beautiful Hair and therefore, this is of high value
for the business operations of both Beautiful Hair and Shimmer. In Beautiful Hair, there has
been major difficulties in the assessment as well as examination of the audit assertion of
valuation and allocation of the intangible asset; and therefore, this assertion needs to be
considered at risk (Spradling and Lindsey, 2013).
Requirement b: Substantive Audit Procedures
Rights and Obligations – The requirement of the auditor of Beautiful Hair is required to
select appropriate substantive audit procedure for this risk. Inspection and examination of the
copies of all documents associated with the transfer of the formula to Beautiful Hair from
Shimmer is the key substantive audit procedure for the auditor of the company. The
documents that need to be inspected and examined are acquisition documents, title deed,
sales documents and others. Examination of all of these documents will make the auditor of
Beautiful Hair aware on the fact that whether the ownership has been transferred to Beautiful
Hair from Shimmer and whether Beautiful Hair has the required possession of the intellectual
property that is the formula (Jans, Alles and Vasarhelyi, 2014).
Valuation and Allocation – It is also required to undertake the necessary substantive audit
procedures for minimizing the risk related to this assertion. Checking and inspecting the cost

6AUDITING AND ASSURANCE IN AUSTRALIA
of the intellectual property of formula on the basis of the agreement of acquisition is the first
substantive audit procedure that the auditor of Beautiful Hair needs to undertake. After that,
the auditor of Beautiful Hair must appoint an intellectual property expert so that he/she can
do the appropriate valuation of the intangible asset in Beautiful Hair. It needs to be mentioned
that the main aim of this valuation by the intellectual property expert is the assessment of the
aspect that whether the intellectual property related to the formula has been impaired on not
(Appelbaum, Kogan and Vasarhelyi, 2017).
Requirement c: ASA 701
It is needed for the auditors in Australia to take into consideration of the requirements
of ASA 7 Communicating Key Audit Matters while determining the key audit matters and
these requirements are shown below:
1. For the ascertainment of the key audit matters, the need for the auditors is to put
emphasis on those areas of financial statements that are probe to material
misstatements (auasb.gov.au, 2019).
2. Effective communication of the determined key audit matters to the related parties is
the responsibility of the auditors.
3. Taking into account the significant issues and events having impact on the audit of the
company needs to be taken into consideration.
4. Documenting as well as disclosing the determined key audit matters with the related
parties is also the need for the auditors (Xu, et al., 2013).
It is needed for the auditor of Beautiful Hair to consider the above requirements in order
to ascertain the key audit matters. On the basis of the above requirements, the formula of
Shimmer has major role to play in the production process that makes it a crucial as well as
important asset in Beautiful Hair. After that, one major event that is crucial for the audit of
Beautiful Hair is the acquisition of Shimmer by Beautiful Hair (Andersen and Hansen, 2018).
All these aspects make this matters as the key audit matters of Beautiful Hair which needs to
be properly disclosed in the proper section of the audit report.
Why Significant Substantive Audit Procedures
Rights and Obligations
There has been certain major uncertainties
regarding the transfer of the formula from
the solicitors to Shimmer and Shimmer to
Beautiful Hair. This can create material
misstatements. For this reason, this is a
major aspect that needs key audit
consideration.
The substantive audit procedures are as
follows:
- Inspection and examination of the copies
of all documents associated with the transfer
of the formula which are acquisition
documents, title deed, sales documents and
others (Brunelli, 2018)
Valuation and Allocation
The formula of Beautiful Hair has a large
role to play in the development of the
products of the company and thus, wrong
valuation of this asset can create material
mistsement. In the presence of this, this
matter needs key audit consideration.
The substantive audit procedures are as
follows:
- Checking and inspecting the cost of the
intellectual property of formula based on the
agreement of acquisition
- Appoint of an intellectual property expert
so that he/she can do the appropriate
valuation of the intangible asset in Beautiful
Hair since this is important to assess the
accuracy of the valuation of intangible asset
in the company (Brunelli, 2018)

7AUDITING AND ASSURANCE IN AUSTRALIA
Conclusion
It can be seen from the above discussion that determination of the key assertions at
risk is considered as one of the major responsibilities of the auditors since it puts the
obligation on them to design the appropriate substantive audit procedures to minimize those
risks. The above discussion indicates that the assertions at risks are largely dependent on the
nature of the assets, liabilities and transactions. For example, the related assertions at risk in
case of inventories are valuation and allocation and existence; but the relevant assertions at
risk in case of intellectual assets are right and obligation and valuation and allocation. At the
same time, the above discussion also shows that the selection of the substbtive audit
procedures is dependent on the nature of the assertions at risk. For example, it is required to
test the valuation mechanism in case of inventories when the requirement is to test the selling
or transfer related documents in case of the intellectual assets. Another crucial aspect is that
the auditors are needed to comply with the principles and requirements of ASA 701
Communicating Key Audit Matters in order to ascertain the fact that whether the assertions at
risk are the key audit matters or not. Lastly, they are also needed to disclose these key audit
matters in the proper manner in the appropriate section of the audit report.

8AUDITING AND ASSURANCE IN AUSTRALIA
References
Andersen, J. and Hansen, N.B., 2018. Key Audit Matters: En undersøkelse av norske
foretak (Master's thesis, Handelshøyskolen BI).
Appelbaum, D., Kogan, A. and Vasarhelyi, M.A., 2017. Big Data and analytics in the modern
audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4), pp.1-27.
Auasb.gov.au. 2019. Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_Compiled_2019-FRL.pdf
[Accessed 15 Sep. 2019].
Brunelli, S., 2018. The Firm’Going Concern in the Contemporary Era. In Audit Reporting for
Going Concern Uncertainty (pp. 1-25). Springer, Cham.
Brunelli, S., 2018. Audit Reporting for Going Concern Uncertainty: Global Trends and the
Case Study of Italy. Springer.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a
synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Cordoş, G.S., 2015. Implications of the current exposure draft on audit
reporting. Management Intercultural, (33), pp.61-70.
Groomer, S.M. and Murthy, U.S., 2018. Continuous auditing of database applications: An
embedded audit module approach. In Continuous Auditing: Theory and Application (pp. 105-
124). Emerald Publishing Limited.
Hazlett, T.W. and Honig, M., 2016. Valuing spectrum allocations. Mich. Telecomm. & Tech.
L. Rev., 23, p.45.
Houqe, M.N., Ahmed, K. and van Zijl, T., 2017. Audit quality, earnings management, and
cost of equity capital: evidence from India. International Journal of Auditing, 21(2), pp.177-
189.
Howieson, B., 2013. Quis auditoret ipsos auditores? Can auditors be trusted?. Australian
Accounting Review, 23(4), pp.295-306.
Jans, M., Alles, M.G. and Vasarhelyi, M.A., 2014. A field study on the use of process mining
of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), pp.1751-
1773.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to
conducting a quality audit. Cengage learning.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Spradling, L.S. and Lindsey, S.W., Thomson Reuters Global Resources ULC, 2013. Method
and system for auditing internal controls. U.S. Patent 8,504,452.
Tung, C.T. and Deng, P.S., 2013. Improved solution for inventory model with defective
goods. Applied Mathematical Modelling, 37(7), pp.5574-5579.
Vik, C. and Walter, M.C., 2017. The reporting practices of key audit matters in the big five
audit firms in Norway (Master's thesis, BI Norwegian Business School).

9AUDITING AND ASSURANCE IN AUSTRALIA
Xu, Y., Carson, E., Fargher, N. and Jiang, L., 2013. Responses by Australian auditors to the
global financial crisis. Accounting & Finance, 53(1), pp.301-338.