Auditing and Assurance in Australia

This document provides an in-depth analysis of auditing and assurance in Australia. It discusses key assertions connected to inventory, important audit procedures, and the application of ASA 701 KAM in the auditor's report. The document also explores the main assertions at risk related to PPE and the corresponding audit procedures. The subject is relevant to auditing and assurance courses in Australia.

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

1AUDITING AND ASSURANCE IN AUSTRALIA
Introduction..........................................................................................................................2
Answer to Question 1..........................................................................................................2
a. Explanation of the two key assertions connected to inventory........................................2
b. Description of two important audit procedure which may be performed in response to
the risk identified.............................................................................................................................4
c. Considering the ASA 701 KAM in the auditor’s report and providing the rationale for
the adulting standard........................................................................................................................4
Answer to Question 2..........................................................................................................5
a. Identification and explanation of the two main assertions at risk related to PPE........5
b. Description of the of the two functional audit procedures which will be able to
achieve better in reply to each risk..............................................................................................6
c. Description of the prerequisite of ASA 701 Communicating Key Audit Matters in
the Auditor’s Report and the justification for this auditing standard..........................................7
Conclusion...........................................................................................................................8
References............................................................................................................................9

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Introduction
The application of the of the norms for AUASB is seen to be made in compliance with
the “Auditing Standard ASA 701” as per “section 227B of the Australian Securities and
Investments Commission Act 2001”. The equivalent consideration as per the independent
standard setting is inferred to be based on the standard of IFAC. Typically, an auditor depicts the
matters pertaining to audit. The areas of risk assessment may be inferred with material
misstatement and significant risk considered as per ASA 315. The inference of the study is based
on risk considered with “property, plant and equipment”. Secondly, the study will describe the
essential audit procedure which are referred with the individual risk. The report has enlightened
the requirements based on “ASA 701 Communicating Key Audit Matters”. This is considered
with the rationale of the auditing standard. The other aspects of the reporting can be inferred
based on providing a complete rationale of determining KAM. These indicators are used with
analytical procedures like inventory turnover ratio and associating the same with the auditing
procedures. The various aspects of the study relate to the explanation and identification of the
two important risk related assertions pertaining to PPE. Secondly, it can be also seen that
identification and description essential audit procedure are seen with performing response to the
individual risk (Stagg et al. 2018).
Answer to Question 1
a. Explanation of the two key assertions connected to inventory
The inventory turnover was seen to be reduced from 5.4 times in 2017 to 3.8 times in
2018. Moreover, the advanced computer solution was based on shifting the inventory from the
central warehouse to six regional warehouses. At the end of year, the inventory at hand was 26 %

3AUDITING AND ASSURANCE IN AUSTRALIA
of the sales in 2018 and 18% of the sales in 2017. It was also stated that company had recently
won a tender associated to supply several products in government department and at the same
time agreed to supply the items at 10% lower cost price. In this regard the two main types of the
audit risks are discussed with the inclusion of closing inventory and reducing value of inventory
at hand. Therefore, some of the main assertions associated to the study may be inferred in terms
of the computing solutions agreeing the terms of supplying the items lesser than 10% of the cost
price in spite of reducing inventory turnover (Rahim and Idowu 2015).
In this context the two risks of the inventory are listed as follows:
1. Decreasing value of the closing inventory- It needs to be seen that the computing
solutions was agreeing supplying the items 10% lesser than the inventory turnover. This
ratio was seen to be reducing from 5.4 times in 2017 to 3.8 times in 2018. Additionally, it
was also seen that there was an increasing scope of cost due to inventory. The serious risk
issues in the inventory was identified with going concern. The various types of the values
considered with the closing inventory may be understood with the plan of the company to
move the inventory to six new regional warehouses in the year March 2018. This is also
associated to pose additional risk of going concern for the company and risk of material
misstatement (Chevers et al. 2016).
2. Decreasing value of inventory at hand: The evaluation of the risk at hand have shown
that the total sales of the company was 26% and 18% in 2017. This reduction in the
inventory was considered to posing a threat of going concern. The overall problem of the
inventory was seen to be reduced from 5.4 times in 2017 to 3.8 times in 2018. Moreover,
the advanced computer solution was based on shifting the inventory from the central
warehouse to six regional warehouses. This is seen to pose a considerable threat
pertaining to the inventory on hand with the company (Lidbury et al. 2017).

4AUDITING AND ASSURANCE IN AUSTRALIA
b. Description of two important audit procedure which may be performed in response to
the risk identified
The general audit process considered for the applicable inventory is discerned with
different techniques. This is inclusive of observing physical count of inventory, testing of high
value items and testing of the inventory in transit. The other general procedures pertaining to the
inventory valuation system may be identified with FIFO and LIFO valuation of the inventory and
inventory allowances. In this case the response to the risk are listed as follows:
1. Work in process testing- Implementation of the techniques like WIP inventory will be
able to regulate percentage of completing the manufacturing items. This will be also
beneficial in addressing about improved tracking about the inventory and reducing the
inventory value to 5.4 times in 2017 to 3.8 times in 2018 (Skinner 2016).
2. Overhead analysis of inventory- The application of the techniques of inventory
valuation techniques will allow the auditors to verify consistent using the general ledger
cost for sourcing the overhead cost. This is considered to be conducive in determination
of the abnormal cost which shall be essential in testing the consistency and validity
procedures applicable for determining the inventory at hand. The process of audit
contributes towards appropriate technique towards reducing the inventory at hand (Eades
et al. 2016).
c. Considering the ASA 701 KAM in the auditor’s report and providing the rationale for
the adulting standard
The adoption of “ASA 701 Communicating KAM” is considered to be important for
providing a true and fair opinion on the effects on the adjustments associated to inventory. This
is important for the assessment of the desired level of the quantity of the inventory and financial
report in accordance with “Corporations Act 2001”. The features of the audit opinion as per

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ASA 701 is associated with representing true and fair view of identifying the financial position
of the company in the year ending. The other feature is further seen with the application of
providing true and fair view of the company which is based on the AAS compliance and
“Corporations Regulations 2001”. In other occasions the limitation and scope of the auditor’s
work can be considered with a particular entity. Despite of this, the limitation can be considered
with the scope of auditor’s work which may relevant to the entity. Despite of this, the limitation
for the auditors may be identified with observing the physical count of the inventories (Beiles,
Retegan and Maddern 2015).
Answer to Question 2
a. Identification and explanation of the two main assertions at risk related to PPE
The noteworthy assertions for the PPE can be identified with existence and valuation.
1. Inappropriate division of the revenue and capital expenditure- The case study shows
the problems which are related with the distinction among the capital and revenue
expenditure. Despite of this, while some items are capitalised others are included in the
repairs and maintenance in the IS. Moreover, the necessary segregation of the revenue
expenditure and capital is essential for the assets of the company which is needed to be
shown in the general ledger in the financial statements. In auditing theory this risk is
referred as risk of classification (Heenetigala and Armstrong 2017).
2. Calculation of depreciation- As per the policy of depreciation, the buildings were seen
with charged a depreciation of 2% to 4% a per straight line basis. Moreover, the plant and
machinery were seen to be charged with 5% to 10% depreciation on the fixtures,
equipment and fittings on a straight-line basis (Bunn, Pilcher and Gilchrist 2018). Despite
of this, the rate of depreciation in some categories are found to be considerably low. This

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is considered to be a major concern for the company in the reporting under fixed assets.
Henceforth, the organisation is considered to be on the verge of getting affected through
technology (Hansen et al. 2018).
b. Description of the of the two functional audit procedures which will be able to achieve
better in reply to each risk
1. Distinct classification of the capital revenue items and capital expenditure: It is the
responsibility of the auditors to ensure that the items are considered in the capital
expenditure such as consumables, raw material, interest on capital, selling and
distribution expenditure, wages, development expenditure, repairs and renewals. On the
contrary, the company desires to classify the items under revenue expenditure as per
purchases, interest on borrowings, wages, payment of royalty and loss pertaining to the
selling of the fixed assets (Louwers et al. 2015). The classification of the revenue
expenditure should be able to clearly identify repairs and maintenance and these shall not
be included as per capital items. In case the cost over spending on assets are extended,
then such costs are included in the repairs and maintenance. These are seen to be
capitalized in a appropriate manner (Brown, A., Santilli and Scott 2015).
2. Book value reconciliation as per the assets to GL and TB: The auditors are required to
maintain entity’s financial statement, trial balance and general ledger which are being
audited. Therefore, before the work on GL and TB, it is necessary for the auditor to cross
check whether there is a relevant link of such overheads with fixed assets book value and
accumulated depreciation which are essential for making the financial position strong
(Palmer 2015). It is necessary for the auditor to ensure that accountant is able to use the
depreciation schedule for the purpose of calculating and controlling the depreciation
expenses as well the depreciation values. There is also a need reviewing the working
paper for reconciling the fixed assets in a certain financial statement. It is also necessary

7AUDITING AND ASSURANCE IN AUSTRALIA
for the auditor to review the rates of depreciation and confirm whether they are allotted in
terms of the fixed assets. The process of reconciliation can be further maintained with
maintaining fixed asset register which is necessary for maintaining accuracy, existence
and completeness in the financial report. It is also necessary for the auditor for the
purpose of reviewing the depreciation rates which are allotted with the fixed assets.
Additionally, the reconciling process may be aided with maintaining a fixed asset which
would comply with “IAS 36 Impairment”. The application of this method is necessary
for impairment on an annual basis (Anbiah 2015).
c. Description of the prerequisite of ASA 701 Communicating Key Audit Matters in the
Auditor’s Report and the justification for this auditing standard
The implementation of the ASA 701 KAM provision is able to provide the depreciation
conditions with annual rate of 5% for building and 20% for equipment. Based on the
maintenance of the fixed asset the reduced rate of aggravated depreciation may amount to a loss
pertaining deficit in a certain year. The purpose of communicating the KAM is inferred with
announcing the value of it in the auditor’s report and making disclosures about the fixed assets in
a better way (Hoque 2015). The purpose of communicating the KAM may be considered with
the announcement of it’s value in the auditor’s report and disclosing the fixed assets in a better
manner. Henceforth, the appropriate treatment pertaining to such an audit risk may be considered
with the application of ASA 705 which is based on providing a modified audit opinion based on
the circumstances associated to going concern. The identification and treatment of such as
problem is concerned with addressing the issue of going concern. Therefore, it can be determined
that maintenance of the fixed asset the reduced rate of aggravated depreciation may amount to a
loss pertaining deficit in a certain year. The purpose of communicating the KAM is inferred with
announcing the value of it in the auditor’s report and making disclosures about the fixed assets in
an enhanced manner (Yee et al. 2017).

8AUDITING AND ASSURANCE IN AUSTRALIA
Conclusion
The findings of the study are able to reveal that two key assertions connected to inventory
can be discerned in form of decreasing value of inventory at hand and decreasing value of the
closing inventory. Moreover, in case of increasing scope of cost pertaining to inventory, the WIP
inventory will be able to be regulated with completion of the manufacturing items. This is seen
to be helpful in terms of better inventory tracking which will be conducive with reducing
problem of the inventory value reducing down from 5.4 times in 2017 to 3.8 times in 2018. In
addition to this, the overhead analysis shall be helpful in determining the abnormal cost which
will be chargeable with the expenses incurred for the purpose of testing consistency and validity
of the closing inventory. The risk considered with the depreciation is further evident with the
inappropriate division of the of the revenue and the capital components and this is further applied
with the computation of depreciation. The important objective for communicating the KAM are
associated with declaring the fixed assets in a better manner. Henceforth, the main treatment
applicable pertaining to such an audit risk may be inferred with application of ASA 705. This is
seen to be in relation with testing of consistency and validity pertaining to the closing inventory.
Additionally, the risk considered with depreciation can be determined with incorrect segregation
of the capital and revenue items related to expenditure. The treatment of audit risk may be
considered as per clear classification of the capital revenue and capital expenditure and
reconciliation of the book value related to the GL and TB assets.

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