Auditing and Assurance Services

This report discusses the key audit assertions at risk and the substantive audit procedures for Advanced Computer Solutions and Green Machine Ltd. It also explores the requirements and benefits of ASA 701 Key Audit Matters.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student
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Author’s Note

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Table of Contents
Introduction................................................................................................................................2
Advanced Computer Solutions..................................................................................................2
Key Assertions at Risk...........................................................................................................2
Substantive Audit Procedures................................................................................................4
Case of Green Machine Ltd.......................................................................................................5
Key Assertions at Risk...........................................................................................................5
Substantive Audit Procedures................................................................................................6
ASA 701 Key Audit Matters......................................................................................................7
Requirements..........................................................................................................................7
Causes for the Selection of the Key Audit Matters................................................................8
Disclosure of Key Audit Matters as per ASA 701 Key Audit Matters..................................9
Conclusion................................................................................................................................10
References................................................................................................................................11

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Introduction
Auditing requires the auditors to inspect and examine their clients’ financial
statements with the aim to discover material misstatements in them, if any (Louwers et al.
2015). In the whole audit process, the responsibility on the auditors is the verify the
truthfulness of the assertions used by the clients’ management team as these assertions play a
critical role in the preparation and presentation of the financial reports; and risks in these
audit assertions can lead to create material impact on the clients’ financial reports (Hay,
Knechel and Willekens 2014). It is the obligation on the Australian auditors to adhere to the
principles and standards of ASA 701 Communicating Key Audit Matters in the Independent
Auditor’s Report (ASA 701) at the time to analyze and examine the used assertions. This
report shows the analysis and examination of key audit assertions at risk while considering
the provide situations of Advanced Computer Solutions Limited (Advanced Computer
Solutions) and Green Machine Ltd. This report also considers the analysis of the
requirements and usefulness of ASA 701 for the reporting of Key Audit Matters.
Advanced Computer Solutions
Key Assertions at Risk
The presence of two assertions can be seen in Advanced Computer Solutions related
to inventory which are at the risk; and the discussion is shown below:
Completeness
While valuing the company’s inventories, the assertion of completeness is regarded as
a crucial one. This assertion states that the company’s management is accountable for
accurately maintaining the records of all inventory valuation related transactions in the proper
section of the financial statements. There can be risk of material misstatements when the
inventories are understated (Kharisova and Kozlova 2014). For instance, in case the staff of

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one company does not record the inventory after purchase takes place, it can lead to material
misstatements. According to the provided scenario in the case of Advanced Computer
Solutions, the inclusion of 26% sales in the year 2018 and 18% sales in the year 2017 can be
seen in the inventory in hand in the year 2018. It indicates towards the possibility of the
involvement of the responsible employees in incorrect inventory valuation for the year 2018
and thus, the sales of the previous year have been included in the current year. It shows
inappropriate accounting of inventory in Advanced Computer Solutions (Kharisova and
Kozlova 2014).
Accuracy
The managements of the audit clients use the assertion of accuracy while valuing their
business inventory. The important role of this particular assertion can be seen to spot the
incorrectness as well as errors in the processes of inventory management. According to the
rule of this assertion, the employees of the company are accountable for ensuring the proper
computation of business inventory along with ensuring the correct physical count of their
inventories with the aim to correct statement of inventory value in the financial reports
(Antonio 2014). According to the provided information about Advanced Computer Solutions,
the company moved their business inventory from a central warehouse to six different
warehouses in the month of March 2018. Hence, it might happen that the responsible
employee for inventory counting made some mistakes while counting the inventory in the
warehouses that led to the decrease in inventory turnover to 3.8 times in 2018 from 5.4 times
in 2017. In the presence of this reason, this particular assertion can be considered as risk in
the company (Antonio 2014).

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Substantive Audit Procedures
The responsibility of the auditors is to perform two suitable substantive audit
procedures after the detection of the key audit assertions at risk; and they are discussed
below:
Substantive Audit Procedure for Completeness Assertion
In Advanced Computer Solutions, completeness is one assertion that is one risk; and
with the aim to minimize this assertion risk, the auditor is needed to perform the substantive
audit procedure of the reconciliation of the physical inventory count with the relevant
financial reports. This particular audit procedure puts the obligation on the auditor for tracing
the inventory value that has been acquired from the physical inventory count. The application
of this specific substantive audit procedure provides the auditor with the knowledge on the
aspect that the staffs responsible for physical inventory count has carried forward the balance
of inventory correctly (Groomer and Murthy 2018).
Substantive Audit Procedure for Accuracy Assertion
The next audit assertion at risk in Advanced Computer Solutions is accuracy. In order
to counter this particular risk of assertion, it is needed for the auditor to apply the substantive
audit procedure of physical inventory counting. This particular substantive audit procedure
puts the obligation on the auditor to consult with the employees of inventory section about
the inventory counting process, methodically scrutinize the whole inventory counting process
and involve in the process to count inventory (Glover, Prawitt and Drake 2014). They can
also undertake the testing of sample inventory for the same purpose. The information related
to move the inventory to six different warehouses can be obtained from the case of Advanced
Computer Solutions and it is needed for the auditor to analyze the inventory count
mechanism in all those warehouses. Moreover, the auditor is needed to obtain the copy of

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confirmation of inventory count from the central warehouse (Glover, Prawitt and Drake
2014).
Case of Green Machine Ltd
Key Assertions at Risk
As per the scenario of Green Machine Ltd, two assertions can be considered at the
risk related to the valuation of property, plant and machinery; and the discussion is shown
below:
Valuation
Valuation is a key assertion for valuing property, plant and equipment. This particular
assertion puts certain obligation on the management of the companies; they are the correct
reporting of the value of non-current asset at cost less depreciation; correct reporting of any
addition as well as disposals and correctly review the indicators of impairment for
impairment testing (Hanlon, Navissi and Soepriyanto 2014). On the overall basis, they are
needed to ensure the correct disclosure of all the financial information related to non-current
assets. It can be seen from the scenario of Green Machine Ltd that there is risk due to the fact
that the property, plant and machinery of the company is depreciated at too low rate.
Operating expenses of the companies can majorly be decreased with this decrease in the
depreciation rate as depreciation expenses will be decreased; and it will increase the
profitability in unfair manner. For these reasons, this assertion can be considered at risk
(Hanlon, Navissi and Soepriyanto 2014).
Accuracy
Accuracy is regarded as another major assertion in the valuation of property, plant and
equipment. The rules of this assertion make the company’s management accountable for
correctly recording all the data related to their transactions along with various events related

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to property, plant and equipment. The management is also accountable for correct
differentiation between revenue and capital expenditures (Tsamis and Liapis 2014). As per
the given scenario of Green Machine Ltd, there is an error from the management’s side while
differentiating between capital and revenue expenditures. The management has done the
capitalization of some expenditure when they were the revenue expenses. In addition, the
management has done the inclusion of some capital items in repair and maintenance in the
income statement of the company. These aspects contribute towards the risk of this assertion
(Tsamis and Liapis 2014).
Substantive Audit Procedures
Followings are the relevant substantive audit procedures that the auditor of Green
Machine Ltd needs to apply to address the assertion risks.
Substantive Audit Procedure for Valuation Assertion
Property, plant and equipment of Green Machine Ltd have been depreciated with too
low rate and this can be found from the above discussion. In this particular situation, the
auditor of Green Machine Ltd is needed to apply the correct substantive audit procedure that
is the evaluation of the rate of depreciation based on certain aspects; such as property, plant
and equipment’s lifetime, their residual values, loss or gain from their disposal, policies for
replacing them and the level of adherence of the company with the required accounting
policies (Johnstone, Gramling and Rittenberg 2013). At the same time, the auditor needs to
consider comparing the depreciation ratios related to property, plant and equipment. Finally,
it is required for the auditor recalculating depreciation with the revised rate for gaining the
revised depreciation expenditure.
Substantive Audit Procedure for Accuracy Assertion

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Error from the side of the management of Green Machine Ltd in differentiating the
capital and revenue expenditures can be seen from the earlier discussion. For this reason, it is
needed for the auditor of the company reviewing the process of capitalization of the expenses
of the company as a part of the substantive audit procedure (Christensen, Glover and Wolfe
2014). At the same time, the auditor is needed to undertake reviewing the company’s
expenditures such as material expenses, labour costs, overhead costs and other operating
expenses due to the fact that this process will provide the auditor with the knowledge about
the incorrect differentiation of the expenses. In addition, it is needed for the auditor for
reviewing the compliance of Green Machine Ltd with the accounting standards and principles
of reporting expenditures (Christensen, Glover and Wolfe 2014).
ASA 701 Key Audit Matters
Requirements
Objectives: According to the principles of ASA 701, the auditors’ objective is the
determination of Key Audit Matters and to prepare the correct audit opinions on the
financial reports of their clients. Then, they are needed to ensure the communication of their
opinion and key audit matter with the stakeholders (auasb.gov.au 2019).
Definition: According to ASA 701, key audit matters can be regarded as issues which were
significant in the audit of the financial reports of the clients in the judgment of the auditors
(auasb.gov.au 2019).
Requirements to Determine KAM: As per the principles of ASA 701, it is needed for the
auditors to describe the issues require significant attention in audit process while discussing
with the employee accountable for governance. The considerations of the auditors are shown
below:

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As per the standard of ASA 315, it is needed for the auditors to take into
consideration the higher risky areas of material misstatements. Auditors are needed to take
into account the judgments of the managements related to essential accounting estimates due
to the presence of doubt. The auditors should take into consideration the impact of major
events on the audit procedures. The auditors need to consider the determination of issues or
events that can have major effects on the financial reports for the identification of key audit
matters (Vik and Walter 2017).
Benefits of ASA 701 Key Audit Matters: As per the earlier discussion, the auditors of the
companies can identify and communicate the key audit matters of the financial reports with
the use of the principles of ASA 701. The following discussion shows the major benefits of
the standards of ASA 701:
Effective communication of key audit matters can be established between the auditors
and the governance related employees with the standards of ASA 701; and this aspect
ultimately leads to creating transparency and effective governance in financial reporting (Xu
et al, 2013). With the assistance of the principles of ASA 701, the auditors can identify the
areas in audit require most watchful audit judgment and it helps in growing the audit quality.
With the help of the regulations and principles of ASA 701B, the preparers can get the
incentives to revise the financial reporting along with disclosures for the key audit matters.
Enhancement of audit quality can be ensured with this (Azim 2013).
Causes for the Selection of the Key Audit Matters
Advanced Computer Solutions: According to the standards of ASA 701, the assertion risks
of Advanced Computer Solutions are the key audit matters in the presence of two reasons.
1. The audit assertion risks in the inventory valuation of the company can lead to create
material impact on the financial statements due to the fact that the key stakeholders

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can incorrect misinterpret the company’s financial standings (Sirois, Bédard and Bera
2018).
2. There is the involvement of some judgments of the company’s management in the
process of inventory valuation and these judgments are uncertain and less transparent;
and hence, have the ability to create material misstatements in the financial reports
(Bédard, Gonthier-Besacier and Schatt 2014).
Case of Green Machine Ltd: The audit assertions at risk of Green Machine Ltd are the key
audit matters supported by the principles of ASA 701 in the presence of the following two
reasons.
1. There can be big reduction in the operating expenditures of Green Machine Ltd due to
the use of too low rate of depreciation which can increase the operating profit of the
company by huge margin. This can create material misstatements in the financial
statements of the company (Cordoş and Fülöp 2015).
2. The profitability of Green Machine Ltd can hugely be impacted due to the incorrect
differentiation of the capital as well as revenue expenses and it has the ability to
create material misstatements in the financial statements. For this reason, it can lead
to the misinterpretation of the overall financial position of the company (Czerney,
Schmidt and Thompson 2014).
Disclosure of Key Audit Matters as per ASA 701 Key Audit Matters
The standards of ASA 701 put the obligation on the auditors for the recognition of
key audit matters while disclosing the same in the relevant reports. For the purpose of
disclosure of these key audit matters, the auditors of these companies are needed to consider
the following:

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 According to ASA 701, the auditors of these companies need ensuring to disclose the
central reasons and events for considering the assertions as key audit matters. It
means the auditors are needed to provide the rationale behind their selection of key
audit matters (auasb.gov.au 2019).
 After this, as per ASA 701, it is the obligation on the auditors ensuring the necessary
disclosure of undertaken substantive audit procedures in order to tackle these key
audit matters. It means the auditors must provide the necessary information about
their undertaken substantial audit procedures (auasb.gov.au 2019).
Conclusion
To infer, key audit matters play a crucial role in the whole audit procedure in the
presence of their ability to create material impact on the audit clients’ financial statements.
According to the above discussion, completeness and accuracy are the audit assertions at risk
for Advanced Computer Solutions; where valuation and accuracy are the assertions at risk for
Green Machine Ltd. It can be seen from the above discussion that the selection of the
substantive audit procedures by the auditors largely depends on the nature of the assertions at
risk. In addition, while tacking these risks of audit assertions, it is needed for the auditors to
follow the regulations of ASA 701 as it provides them with the rationales for the selection of
these assertions risks as key audit matters. For this purpose, the auditors are needed to follow
the principles of ASA 701 for ensuring necessary disclosure of these key audit matters. It
implies that the auditors are needed to provide the rationales behind their selection of key
audit matters along with the information related to the undertaken substantial audit
procedures.

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References
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<https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf> [Accessed 12
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