1AUDITING AND ASSURANCE SERVICES Executive Summary: The present study aims at evaluating risk assertion of two different organisation with the application of substantial audit process. The interpretation of facts gathered from Advanced Computer Solutions, shows that the auditor is able to identify the two important risk assertions such as accuracy and completeness. The overall findings of the study have also found that it is a responsibility of the auditors to carry out substantive audit process in order to ascertain the materialrisksassociatedtothecompany.Theriskassessmentpertainingtomaterial misstatement for both the corporations is done as per the guidelines of ASA 701. It is the responsibility of the auditor for fetching key information for significant incidents which will contribute to KAM.
2AUDITING AND ASSURANCE SERVICES Table of Contents Introduction:....................................................................................................................................3 Answer to Question 1: Advanced Computer Solutions...................................................................3 1.1 Significant declarations at risk associated to inventory:........................................................3 1.2 Practical audit procedures for each identified risk:...............................................................5 1.3 Necessity of ASA 701 Communicating Key Audit Matters:.................................................6 1.4 Rationale for selection of key audit matters:.........................................................................6 1.5 Documentations relevant with ASA 701:..............................................................................7 Answer to Question 2: Green Machine Limited..............................................................................7 2.1 Significant declarations at risk associated to PPE:................................................................7 2.2 Practical audit procedures for each identified risk:...............................................................8 2.3 Necessity of ASA 701 Communicating Key Audit Matters:.................................................9 2.4 Rationale for selection of key audit matters:.......................................................................10 1.5 Documentations relevant with ASA 701:............................................................................10 Conclusion:....................................................................................................................................11 References......................................................................................................................................12
3AUDITING AND ASSURANCE SERVICES Introduction: In general, audit comprises of a group of procedures through which accountability is relied on auditors pertaining to application of analytical methods on the financial statements for the purpose of identifying material misstatements. It is the responsibility of the auditors for taking note of the time taken for conducting audit operation such as organisations using only assertions for developing financial reports. These assertions may be further regarded in form of explicit or implicit claims for the management in order to develop and represent financial statements. In some instances, auditors have responded to the risk assertions as per material misstatements. Therefore, the auditors are required to investigate such assertions for checking whether they are having any significant risk. At the time of audit assertion, specific standards and guidelines are necessary for auditors as they are able to provide a systematic guideline in ordertodepicttheriskinvolvedinmanagerialmisstatementalongwithappropriate communication of the same. The present report aims at evaluating the detecting the risks involved in audit assertion and apply necessary audit process along with disclosure(Simunic and Zhang 2017). Answer to Question 1: Advanced Computer Solutions 1.1 Significant declarations at risk associated to inventory: As per the depiction of given scenario, the auditor can identify two main assertions at risk which are seen with completed nose and accuracy. The rationale for such risk is stated below as follows:
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4AUDITING AND ASSURANCE SERVICES Completeness: It is essential for the business entities to appropriately conduct valuation of inventory. Based on the requirements of audit assertion, it is the responsibility of the management to identify commitments in maintaining financial records related to inventory transactions. On the contrary, incomplete information may result in understatement of the inventory value. The risk assessment of managerial misstatement may be evident in the given case if the staffs are not seen to record inventory link information post purchase. This might relate to risk of going for internal control technique. The case study also shows thatAdvanced Computer Solutions documented 18% of sales and inventory 26% sale in 2018. The situation clearly represents chances of inputting wrong inventory value contributing to the sales in 2017. Based on this assertion there is a significant risk associated for the company(Nisbetet al.2018). Accuracy: The process of conducting inventory valuation is important for the management of any business entity for maintaining accuracy in financial statement. Due to such a consideration, the business entities are able to detect any instance of unsuitable technique or mistake made during valuation of inventory. Based on the compulsion of specific assertion, the management of any organisation is committed towards accurately valuing physical count of inventory and recording the same in the financial reports. This makes the process easier for the auditor in procuring the required knowledge due to shifting of its main warehouse to 6 additional regional warehouse in March 2018. The assertion pertaining to accuracy, is able to identify that reliable personal may be responsible for conducting errors during the process of physical counting of inventory turnover rate declined from 5.4 in 2017 to 3.18 2018. Henceforth, it can be seen that combination
5AUDITING AND ASSURANCE SERVICES of all the different rationale will allow the auditor consider specific assertions which are at risk for the given company(Al-Akra, Abdel-Qader and Billah 2016). 1.2 Practical audit procedures for each identified risk: Typically, auditors are in authority for carrying out significant audit process post- assessment of risk. A similar situation can be understood in case ofAdvanced Computer Solutions Limited. It can be clearly inferred that based on the given case auditor has recognised assertions of accuracy at risk. The present evaluation shows that the accurate substantive audit process will allow a business entity to manage the risk at the time of carrying out physical inventory count. This will also act as a methodical scrutiny for the entire process. It also allows auditorforadaptationofdifferentprocessesfordiscussingtheresponsiblestaffwhois responsible for counting inventory and also identify the weakness in the procedure after close observation of sample testing of the stock for detecting errors. As per the data published on March 2018, the company shifted its central warehouse to 6 different regional warehouses. It is necessary to assure that the testing of physical inventory count in all the six locations tally with the inventory count of the main warehouse(Cannon and Bedard 2016). Secondly, a similar assertion at risk can be depicted with completeness. The appropriate procedure for controlling such a risk should be done by auditor with engaging in substance of audit process which will reconcile the outcomes of inventory count against the values in the accounting books. The auditor is accountable for identifying the values of stock gathered from physical inventory count and investigate against any possible error. After the application of such a process, the auditor will be able to obtain an information which will provide accurate inventory valuation(Khlif and Achek 2016).
6AUDITING AND ASSURANCE SERVICES 1.3 Necessity of ASA 701 Communicating Key Audit Matters: It is essential that the auditors are able to point out the significant audit matters which are to be communicated to the stakeholders as per the guidelines stated in ASA 701. These standards will be helpful to the auditors in several ways. The adoption of such a guideline we allow the auditors in maintaining an effective channel of communication which is to be formed among the major stakeholders and governance group in relation to declaration of the KAM. This will ensure transparency in financial reporting and quality of reporting. The guidelines which are in accordance with ASA 701 will also allow the auditors in enhancing the overall scope put importance on the financial statement in those areas which require special attention pertaining to audit quality. Lastly, it is also essential to collect the motivational morale from ASA 701 in order to revise financial reporting and at the same time considering that Key audit matters. This will be able to significantly contribute in improving the overall quality of auditing thereby bringing better understanding of the financial reports(Mihret and Grant 2017). 1.4 Rationale for selection of key audit matters: Based on the compliance of ASA 701, the important assertion at risk for the organisation may be understood with KAM pertaining to different reasons. Firstly, any instance of material misstatement while the key audit matters are at risk can hamper the overall financial condition and efficiency of the organisation(Tuczek, Castka and Wakolbinger 2018). This will further haveadetrimentalimpactonthestakeholders.Additionally,theremaybeuncertainties associated with innovative transparency owing to judgements made by the management for valuation of inventory which may cause material misstatement. Therefore, the key audit matters may be supported in the report by following the above stated reasons(Barret al.2017).
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7AUDITING AND ASSURANCE SERVICES 1.5 Documentations relevant with ASA 701: As stated under ASA 701, the auditor may identify key audit matter which should be disclosed in an appropriate manner. In the given situation forAdvanced Computer Solutions appropriate justification is our needed to be provided in order to choose the KAM which will allow the company in proceeding with substance of auditing and publish the findings in the audit report(Hains, Turner and Strand 2017). Answer to Question 2: Green Machine Limited 2.1Significant declarations at risk associated to PPE: As per the given case ofGreen Machine Limited, the auditor can assert two areas of risk pertaining to accuracy and valuation. The rationale for such an explanation is stated as follows: Accuracy: It is essential for the business entities to carry out appropriate valuation of fixed assets such as PPE. This will require the management for correctly recording the amounts as well as transactionswhichareconsideredwithPPEinthebooksofaccountsofthecompany. Additionally, it is also important for maintaining a distinct record for both capital expenditure and revenue expenditure. As per the analysis based on the information in the case it can be discernedthatGreenMachineLimitedhasmaintainedseparaterecordsfor abovestated expenditures (Auasb.gov 2019). This is due to the fact that management of organisation is at fault by capitalising revenue expenditure and integrating this as repairs and maintenance under the income statement. Some of the main assertions at risk due to this are stated as follows:
8AUDITING AND ASSURANCE SERVICES Valuation: The organisations are obliged to carry out the valuation of PPE precisely. Based on the guidelines of this assertion, the management at Green machine Limited should record the cost value of PPE after charging depreciation deduction and disclosure of sales and impairment of PPE. The constellation of these factors has made it mandatory for the organisations to disclose their PPE standings in a fair and precise manner. It can be also certain that in the given case a low depreciation is charged on PPE which is inappropriate. As the depreciation rate is low, the operating expense of Green Machine Limited will significantly reduce pertaining to material impact on the financial report of the business entities. Therefore, the auditor can adjudge such an assertion at risk (Bumgarnerand Vasarhelyi 2018). 2.2Practical audit procedures for each identified risk: It is the responsibility of the auditor for conducting an accurate and substantive audit procedure for each of the risk areas identified for Green Machine Limited. Based on the previous assessment it can be discerned that organisation have not been capable in maintaining a separate record for either capital expenditure nor revenue expenditure. Henceforth, it is the role of the auditor to proceed with methodical in reviewing the organisations for capitalisation of the expenses. Furthermore, it is also important for the auditor in reviewing different expenses associated to the organisations such as operating cost, labour among various types of other expenses. Therefore, this will allow the auditor in better understanding of the expenses which were previously capitalised in an inaccurate manner. Lastly, a review needs to be conducted by verifying if green machine Limited had substantially maintained compliance with the norms of reporting revenue and capital expenditures(Cohen and Simnett 2014).
9AUDITING AND ASSURANCE SERVICES In addition to this, it can be also stated that organisations have not implemented the correct appreciation rate on PPE. As per the perspective of auditor, is substantive audit process will allow analysing the rate of depreciation in different aspects of residual values pertaining to PPE(Al-Matari, Hassan and Alaaraj 2016). This will also include losses or profits pertaining to PPE along with policy of the organisation to replace such assets and assessment of economic life. The auditor needs to also ensure whether the PPE items have maintained compliance with the accurate standard of accounting pertaining to depreciation. After the aforementioned activities, it is necessary for the auditor in comparing the rates of depreciation finally assess an accurate depreciation rate. It is also essential to recompute the depreciation rate for arriving at correct depreciation expense(Issa, Sun and Vasarhelyi 2016). 2.3 Necessity of ASA 701 Communicating Key Audit Matters: The guidelines prescribed under ASA 701 stated that the auditors are committed to assess the different types of KAM which will be conducive in forming an audit opinion on the financial statements thereby ensuring effective communication of such matters in the financial report. The rule of ASA 701 also defines issues which are needed to be considered important in the financial statement of an organisation to form a judgement of the auditor. This makes it essential to communicate the key audit matters which are to be considered by the governance team (Kharisova and Kozlova 2014). Based on the understanding of ASA 701 guidelines, specific aspects are to be taken into account before ascertaining KAM. This standard makes it mandatory for the auditors to assess such areas which have higher scope of risk in material misstatement as prescribed under ASA 315. In addition to this, the auditors are also able to review critical judgements which had to be madebythemanagementindevelopingsuchfinancialstatementtherebyanticipating
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10AUDITING AND ASSURANCE SERVICES contingencies. Additionally, the impacts of such judgements are required to be evaluated by the auditor as the main outcome of relying on audit activity. In addition to this, the auditors are needed to ensure the specific issues and events which may have a material impact on the financial statements of their clients(Pizzini, Lin and Ziegenfuss 2014). 2.4 Rationale for selection of key audit matters: As per the given case ofGreen Machine Limited, the detection of risk assertions for the important matters in audit are in compliance with ASA 701 due to different reasons. Firstly, the operating expenses of green machine have massively reduced due to lowering depreciation expense. This inaccurate situation may increase the profitability of the organisation thereby increasing the risk scope of material misstatement in the financial report. The situation has further deteriorated as a result of inaccurate differentiation of capital and revenue expenditures which may have a negative effect on profit margin for Green Machin’s e Limited. Therefore, such as assertion have a risk owing to the ability of material misstatement in organisation which leads to the necessity for the auditor in preparing a report of key audit matters (Van Buurenet al. 2014). 1.5 Documentations relevant with ASA 701: The statements given under ASA 701, have prescribed that the auditors have the liability for detecting the key audit matters which will be able to ensure adequate disclosure in the financial statements. In addition to this, the adoption of this process will account for two guidelines as mentioned under ASA 701. The auditor is accountable for providing necessary information on significant incidents and at the same time creating opinion on KAM. Henceforth, it is crucial for ensuring that disclosure of information follows a substantive audit process to keep the risk assertions under control(Chiu, Liu and Vasarhelyi 2018).
11AUDITING AND ASSURANCE SERVICES Conclusion: The key assertions from the above discussion have shown that at the time of carrying audit opinion organisation may use developing the financial statements. Furthermore, the analysis of such a situation for advanced computer solution will allow the auditor in identifying to assertions that risk which are seen with accuracy and completeness. Additionally, the responsibility of the auditors is seen with carrying out transparent and systematic audit process followed by identifying the key assertions at risk. This is applicable for the given case of Advanced Computer Solutions Ltd. Additionally, the given information in the case allows the auditor in identifying two men assertions that risk which comprises of valuation and accuracy. As per the guidelines of ASA 701, the auditors are responsible for ascertaining KAM with the assistance of audit opinion on the financial report of the client and at the same time ensuring effective communication of such information with appropriate description. The auditor of Green Machine Limited needs to consider two main guidelines referring to ASA 701. Furthermore, it is the role of the auditor for providing any information related to important incidents and events which will contribute to KAM. Henceforth, it is essential for ensuring that information disclosure pertaining to substantive audit process is made with appropriate risk assertion in the financial report.
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13AUDITING AND ASSURANCE SERVICES Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda.Auditing: A Journal of Practice & Theory,34(1), pp.59-74. Hains, T., Turner, C. and Strand, H., 2017. The non-medical surgical assistant in Australia: who should contribute to governance?.Australian Journal of Advanced Nursing, The,35(2), p.51. Issa, H., Sun, T. and Vasarhelyi, M.A., 2016. Research ideas for artificial intelligence in auditing: The formalization of audit and workforce supplementation.Journal of Emerging Technologies in Accounting,13(2), pp.1-20. Kharisova,F.I.andKozlova,N.N.,2014.Applyingthecategoryof«Assertions(or preconditions)» In audit of financial statement.Mediterranean Journal of Social Sciences,5(24), p.180. Khlif,H.andAchek,I.,2016.IFRSadoptionandauditing:areview.AsianReviewof Accounting,24(3), pp.338-361. Mihret, D.G. and Grant, B., 2017. The role of internal auditing in corporate governance: a Foucauldian analysis.Accounting, Auditing & Accountability Journal,30(3), pp.699-719. Nisbet,D.,Robertson,A.,Mannil,B.,Pincham,V.andMclennan,A.,2018.Quality management of nuchal translucency ultrasound measurement in Australia.Australian and New Zealand Journal of Obstetrics and Gynaecology. Pizzini, M., Lin, S. and Ziegenfuss, D.E., 2014. The impact of internal audit function quality and contribution on audit delay.Auditing: A Journal of Practice & Theory,34(1), pp.25-58.
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