Auditing and Assurance Services

The current reports intends to investigate two different cases of Advanced Computer Solutions Limited and Green Machine Limited for detecting assertions at risk, applying substantive audit procedures along with disclosing the same.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student:
Name of the University:
Author’s Note:
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Executive Summary:
The current reports intends to investigate two different cases of Advanced Computer Solutions
Limited and Green Machine Limited for detecting assertions at risk, applying substantive audit
procedures along with disclosing the same. It has been analysed that the auditors need to identify
the assertions at risk along with disclosure of adequate information regarding the rationales by
taking into account the key audit matters. Moreover, it has been found that various assertions are
at risk for the provided organisations associated with PPE and inventory valuation like
completeness, valuation and accuracy. Finally, the auditors are required to comply with the
norms mentioned under ASA 701 so that they could explain their stand of choosing the key audit
matters by adhering to the required guidelines. Therefore, the key audit matters are considered as
a crucial aspect in the auditor’s report.

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Table of Contents
Introduction:....................................................................................................................................3
Question 1: Advanced Computer Solutions Limited.......................................................................3
Key assertions at risk:..................................................................................................................3
Substantive audit procedures:......................................................................................................5
ASA 701 Key Audit Matters:......................................................................................................5
Question 2: Green Machine Limited...............................................................................................7
Key assertions at risk:..................................................................................................................7
Substantive audit procedures:......................................................................................................8
ASA 701 Key Audit Matters:......................................................................................................9
Conclusion:....................................................................................................................................11
References:....................................................................................................................................12

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Introduction:
Audit is defined as the method where the auditors are liable in applying analytical
processes on the financial reports of the organisations so that there could be identification and
reporting of material misstatements. In this method, the auditors have to take into account
different aspects like assertions used by the management of an organisation for preparing and
depicting the financial statements (Arens et al. 2015). The management considers such assertions
as implicit or explicit claims. However, the auditors have found instances on certain occasions,
in which risks are detected in the assertions associated with material misstatements. Thus, the
auditors are required to investigate such assertions so that risks could be identified. Moreover,
for analysing the assertions, there are different standards and regulations to be followed by the
auditors; as such regulations provide the guidelines for identifying the assertions at risk along
with communicating the same (Brown-Liburd and Zamora 2014). The current reports intends to
investigate two different cases of Advanced Computer Solutions Limited and Green Machine
Limited for detecting assertions at risk, applying substantive audit procedures along with
disclosing the same.
Question 1: Advanced Computer Solutions Limited
Key assertions at risk:
By evaluating the situation of the organisation, the auditor could gather knowledge
regarding two assertions at risk, which include accuracy and completeness. The primary reasons
are listed as follows:
Accuracy:

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The management of any organisation needs to ensure accuracy for inventory valuation. It
is necessary to detect errors and inappropriateness in inventory valuation using this assertion
(Byrnes et al. 2018). As per this assertion, the management of an organisation is committed
towards accurate inventory computation and the physical inventory count in order to record the
same in financial reports. Based on the provided information of Advanced Computer Solutions,
the auditors could identify that the organisation has shifted its stocks from the main warehouse to
six regional warehouses in March 2018. The assertion of accuracy states that the liable personnel
might conduct error in physical count of inventory before or after shifting the inventory. This
specific error might be the reason behind the decline in inventory turnover from 5.4 in 2017 to
3.8 in 2018. By taking into account all these reasons, the auditor could take into account the
assertion at risk within the organisation (Chan and Vasarhelyi 2018).
Completeness:
All business organisations need to conduct complete inventory valuation. According to
the assertion requirements, the management of an organisation has to maintain all inventory-
related transactions in the accurate accounting books. If this is not followed, the inventories
could be understated (Chiu, Liu and Vasarhelyi 2018). Moreover, if the responsible staffs do not
update the information related to inventory timely after purchases, there might be material
misstatement risk. When the internal control of an organisation is not strong, this assertion might
be at risk. From the given information, it could be identified that the organisation has inventory
on hand amounting to 26% of revenue in 2018 compared to 18% in 2017. This indicates that
there might be a chance where inventory valuation is not conducted appropriately leading
towards the inclusion of sales in 2017 in inventory of 2018. Due to this reason, completeness is
deemed to be at risk for Advanced Computer Solutions (DeFond and Zhang 2014).

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Substantive audit procedures:
All auditors are needed to undertake accurate substantive audit procedures after
identifying the assertions at risk and the situation is deemed to be similar for Advanced
Computer Solutions. According to the auditor, the assertion of accuracy is at risk for the
organisation. In order to deal with this situation, the accurate substantive audit procedure would
be methodical observation of the overall procedures while carrying out the physical count of
inventory. More precisely, it is essential for the auditor to carry out various procedures, which
include communicating with the staffs responsible for inventory count regarding the loopholes in
the internal control system, methodical review of the counting procedure and sample testing of
inventory in order to detect any error (Cohen and Simnett 2014). In March 2018, the organisation
has shifted its inventories to six different locations rather than keeping the same in a single
location. Hence, it is necessary for the auditors to assure verification of the physical of count of
inventory processes of all the locations in order to align the outcomes with the count
confirmation of the main location (Farooq and De Villiers 2017).
Moreover, the assertion of completeness is at risk within the organisation. For controlling
the risk related to assertion, it is vital for the auditor to engage in a specific substantive audit
process, which is reconciling the results of the physical inventory count with the values in the
books of accounts (Kend, Houghton and Jubb 2014). In other words, it is the liability of the
auditor to identify the values of inventory obtained from physical count in order to discover any
error. When this substantive audit procedure is applied, the auditor gains knowledge on the fact
that accurate inventory valuation has been conducted (Knechel and Salterio 2016).
ASA 701 Key Audit Matters:
Requirement and rationale of ASA 701:

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With the help of the guidelines mentioned in ASA 701, it becomes easy for the auditors
in communicating with the major stakeholders and identifying key audit matters. This particular
standard has other benefits as well, which are considered to be useful in the auditing profession
(Lenz and Hahn 2015). This assists in developing transparency in financial reporting along with
improving its overall quality. Besides, the guidelines in ASA 701 has given the auditors with
enhanced scope of laying stress on the financial statement areas requiring special attention. This
is because it assists in enhancing the overall audit quality (Auasb.gov.au 2019). Finally, the
preparers could gather the needed motivation from ASA 701 in order to revise financial reporting
while taking into account the key audit matters. This has the ability of improving audit quality
along with the transparency in financial reporting.
Reasons behind choosing key audit matters:
In accordance with the guidelines mentioned in ASA 701, the assertions that are at risk in
Advanced Computer Solution could be taken into account in the form of key audit matters owing
to a number of reasons. The financial reports of the organisation could contain material
misstatements at the time these assertions are at risk owing to the fact that it has the ability of
manipulating the financial condition and efficiency of the organisation to the stakeholders.
Moreover, the management has used certain uncertainties and ineffective transparency in its
judgements for inventory valuation, which could lead to material misstatements in its financial
reports. Therefore, by combining all these rationales, the key audit matters could be developed in
the context of the concerned organisation (Liao, Lin and Zhang 2018).
Disclosures required under ASA 701:

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ASA 701 states that it is the obligation of the auditors to identify the key audit matters
along with disclosing the same. Therefore, the auditor associated with Advanced Computer
Solutions is required to reveal the explanation behind choosing the key audit matters (Lombardi,
Bloch and Vasarhelyi 2014). In addition, the pertinent information regarding substantive audit
processes are required to be revealed in the audit report from the end of the auditors.
Question 2: Green Machine Limited
Key assertions at risk:
After critical evaluation of the case scenario of Green Machine Limited, the auditor has
identified there are assertions at risk and they include valuation and accuracy. The primary
reasons are listed down as follows:
Valuation:
All business organisations have to bear the responsibility of conducting valuation related
to their property, plant and equipment (PPE). As per the guidelines of this specific assertion, the
management is committed towards a number of aspects. These aspects mainly include accurate
record of PPE at cost after subtraction of depreciation and impairment losses; disclose any
inclusion and sales of PPE and testing impairment of the same by reviewing the indicators of
impairment (Louwers et al. 2015). These factors have obliged the organisation in reporting its
PPE information accurately and fairly. When low rate of depreciation is applied, the operating
expenses of Green Machine Limited could be minimised owing to decline in operating expenses
and this could result in material effects on the financial statements of the organisation (Pizzini,
Lin and Ziegenfuss 2014). Hence, this assertion is at risk from the perspective of the auditor.

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Accuracy:
It is necessary to conduct accurate valuation of PPE for all business organisations. As per
this assertion, the management of an organisation has to ensure accurate recording of the
amounts and other transaction-related data as well events in relation to PPE accurately in the
books of accounts (Rahmina and Agoes 2014). Moreover, it needs accurate segregation of
revenue and capital expenditures. As per the case information of Green Machine Limited, the
segregation of revenue and capital expenditure has not been conducted appropriately due to the
fact that the management of the organisation has capitalised its revenue expenditure along with
maintaining few capital expenditures in the form of repairs and maintenance in its profit and loss
statement. Therefore, this assertion is deemed to be at risk.
Substantive audit procedures:
The auditors are liable for conducting the accurate substantive audit processes after
identifying the assertions at risk and the situation is deemed to be similar for Green Machine
Limited as well. The above discussion emphasises on inaccurate segregation of capital and
revenue expenditures on the part of the management of Green Machine Limited. From the
viewpoint of the auditor, the methodical review of the audit process of the organisation for
expense capitalisation is needed so that this assertion risk could be kept under control and this
would act as the accurate substantive audit procedure. Moreover, it is vital for the auditor to
review different expenditures of the organisation that take into account overheads, operating
costs, costs of labour and other expenses (Simnett and Huggins 2015). This would assist the
auditor in providing overview of the expenses, which are not capitalised correctly. Finally, it is
necessary for the auditor to assure that Green Machine Limited has adhered appropriately to the
doctrines related to revenue expenditure and reporting capital.

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Along with this, it has been identified from the case information of Green Machine
Limited that the organisation has not applied suitable depreciation rate on PPE. From the
perspective of the auditor, the suitable substantive audit procedure for control the assertion at
risk is analysing the rate of depreciation in various aspects. These aspects comprise of the
residual amount of PPE, losses or profits owing to sale of PPE, economic life of PPE, policy of
the organisation to substitute PPE along with maintaining PPE with the accurate standards of
accounting in order to depreciate the same (Simnett, Carson and Vanstraelen 2016). After this,
the auditor needs to contrast the depreciation ratios associated with PPE, since it would assist in
determining the accurate rate of depreciation. Finally, the auditor is required to engage in
recalculating the PPE depreciation along with the corrected rate of depreciation for obtaining the
actual expenses related to depreciation.
ASA 701 Key Audit Matters:
Requirement and rationale of ASA 701:
According to the principles of ASA 701, the auditors are needed to ascertain the key audit
matters with the aid of audit opinion on the financial statements of the clients. Moreover, they
need to undertake effective communication of key audit matters along with the essential
description. According to the guidelines of ASA 701, the definitions related to key audit matters
are provided, since the issues have considerable significance in the financial statements of the
organisation in accordance with the judgements of the auditor. It is necessary for the auditor to
engage in consultation with the governance team of the organisations along with ascertaining the
key audit matters.

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Moreover, ASA 701 states that the auditors need to take into consideration other
requirements at the time of determining the key audit matters. This standard ensures the
obligations on the auditor in evaluating the financial statement areas having greater material
misstatement risk, as per ASA 315 (Auasb.gov.au 2019). After the completion of this step, the
auditors need to take into account the evaluation of the crucial management judgements in order
to develop the financial statements along with projection of uncertainties. Furthermore, it is
crucial for the auditors to analyse the impact of such judgements as well as assumptions on the
results of the audit activities. Finally, the auditors are required to ascertain issues and events
having the potential of material effect on the financial reports of the audit clients.
Reasons behind choosing key audit matters:
The assertions identified at risk could be deemed as the key audit matters for Green
Machine Limited in accordance with ASA 701 owing to a variety of reasons. The operating
expenses of the organisation could experience significant minimisation owing to fall in
depreciation expense, since the rate of depreciation charged is low (Turley 2015). Such massive
reduction could overstate the profit margin of the organisation, which might result in material
misstatements in the financial reports of the organisation. When this procedure is over, the
similar aspect could occur owing to incorrect segregation of revenue and capital expenditures
and the impact would be adverse on the profit margin of the organisation from the perspectives
of the stakeholders. Therefore, it could be stated that the identified assertions at risk could lead to
material misstatements for the concerned organisation due to which they are taken into account
in the form of key audit matters (Arens et al. 2015).
Disclosures required under ASA 701:

11AUDITING AND ASSURANCE SERVICES
In accordance with the guidelines mentioned under ASA 701, the auditors are needed to
identify the key audit matters and this would assure disclosure of the same. In this method, the
concerned auditor of Green Machine Limited has to take into account two requirements
mentioned under ASA 701. The auditor needs to disclose information regarding significant
incidents and events contributing towards the formation of key audit matters. After this, the
auditor needs to assure the information disclosure regarding the substantive audit processes,
which are applied so that the assertions at risk could be controlled (Byrnes et al. 2018).
Conclusion:
It is identified from the above discussion that the key audit matters could result in
material misstatements in the financial reports and thus, they require utmost attention of the
auditors. The auditors need to identify the assertions at risk along with disclosure of adequate
information regarding the rationales by taking into account the key audit matters. Moreover, it
has been found that various assertions are at risk for the provided organisations associated with
PPE and inventory valuation like completeness, valuation and accuracy. Along with this, it is
necessary for the auditors to choose substantive audit processes depending on the nature of audit
assertions, which are at risk. For instance, the process for inventory valuation bears no
resemblance to that of PPE valuation. Finally, the auditors are required to comply with the norms
mentioned under ASA 701 so that they could explain their stand of choosing the key audit
matters by adhering to the required guidelines. Therefore, the key audit matters are considered as
a crucial aspect in the auditor’s report.

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Assurance Engagements. Pearson Canada.
Auasb.gov.au., 2019. [online] Available at:
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