Auditing and Assurance Services

This report examines the audit assertions and substantive audit procedures for Advanced Computer Solutions and Green Machine Ltd. It also discusses the requirements of ASA 701 and the rationales for key audit matters.

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

1AUDITING AND ASSURANCE SERVICES
Table of Contents
Introduction................................................................................................................................2
Advanced Computer Solutions..................................................................................................2
Assertions at Risk...................................................................................................................2
Substantive Audit Procedures................................................................................................3
Requirements of ASA 701.....................................................................................................4
Rationales for Key Audit Matters..........................................................................................5
Disclosure of Key Audit Matters...........................................................................................5
Green Machine Ltd....................................................................................................................6
Assertions at Risk...................................................................................................................6
Substantive Audit Procedures................................................................................................7
ASA 701.................................................................................................................................7
Rationales for Key Audit Matters..........................................................................................8
Disclosure of Key Audit Matters...........................................................................................8
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
At the time of providing the audit clients with the auditing and assurance services, the
primary responsibility that the auditors have is scrutinizing the accounting books and
accounting records of the audit clients in order to make sure that there is not any material
misstatements in them that can affect the decision-making process of the company’s key
stakeholders like shareholders, suppliers and others (Byrnes et al. 2018). In the process of
auditing, the auditors have the responsibility to undertake the testing of many aspects related
to the clients’ financial statements and one of them is audit assertions that the management
team of the clients use for the preparation and presentation of the financial statements. As per
the description of the audit assertions, they are the open or inherent declarations made by the
clients’ managements for the preparation and presentation of the financial statements. The
main reason behind the use of assertions is to ensure the appropriateness and correct
disclosure of the financial information through the financial statements (Green and Zhou
2013). It is required for the auditors of the companies to test that whether the assertions are
correctly used by the management team as there is a chance of the creation of audit risks due
to the inappropriate use of the audit assertions (Hay, Knechel and Willekens 2014). In case
the audit assertions are at risk, the auditors are needed to determine whether they are the key
audit matters as per ASA 701. The objective of this report is the examination of the audit risk
assertion from the given scenarios.
Advanced Computer Solutions
Assertions at Risk
Accuracy and Valuation: As per this assertion, inventory transactions are free from error
when they are accurately valued. For this reason, the companies are needed to take two major
initiatives (Knechel and Salterio 2016). First, they are needed to accurately value the physical

3AUDITING AND ASSURANCE SERVICES
inventory figure; second, they must ensure that correct amount of inventory flows from the
balance sheet to income statements in the form of cost of goods sold. Hence, the accurate
valuation needs to be ensured. Physical inventory count process can be troubled when the
whole inventory base is moved to one place to another place or places and the same aspect
can be seen in Advanced Computer Solutions (Wood, Brown and Howe 2013). The reduction
in the inventory turnover can be due to the fact that there was some errors in the physical
inventory count process. Hence, this assertion can be regarded at the risk.
Cut off: According to this assertion, the companies are needed to ensure the correct reporting
of the inventory transactions; it means the transactions are needed to be recorded at the
proper dates (Titera 2013). The receiving as well as suppliers documents of inventory assist
the companies in doing this. It states that it is wrong when the inventory of current year
includes the inventory of previous year as this aspect indicates towards incorrect valuation of
inventory. The given scenario of Advanced Computer Solutions states that the inventory in
hand of 2018 includes 26 percent sales of 2018 and 18 percent sales of 2017. The main
reason for this can be the return of the best-selling computers of the company due to the
presence of software problems (AICPA 2017). At the same time, the inventory valuation
process of the company includes significant judgements and estimated from the management.
Thus, this assertion can be considered at risk.
Substantive Audit Procedures
As a part of this particular audit assertion, it is needed for the auditor to observe the
processes under the physical inventory count in the methodical manner (Cannon and Bedard
2016). In this process, the auditor needs to obtain full understanding of the strengths and
weaknesses of the internal control for inventory count process. The auditor is needed to
observe the inventory counting process when it is being carrying out. After that, it is needed
for the auditor to ensure the verification of the all inventory count tags in. Lastly, the auditor

4AUDITING AND ASSURANCE SERVICES
is needed to test the inventory in all the six warehouses and ask for the conformation of the
count from the central warehouse (Cannon and Bedard 2016).
For the audit assertion of cut off, it is needed for the auditor to undertake the analysis
and examination of the inventory vouchers for goods received at warehouses and goods
delivered to the suppliers (Ralph 2019). After that, the auditor is needed to verify whether
there was any occurrence of unreasonable transactions in the inventory that caused the
specific issues. After that, it is needed for the auditor to undertake the examination of the
judgements and accounting assumptions that the management of the company used for the
valuation of their business inventory (Ralph 2019).
Requirements of ASA 701
Section 7 of ASA 701 states that the auditors need to determine the key audit matters,
prepare the audit opinion based on this and communicate and disclose the same in the
auditor’s report. Section 8 of ASA 701 states that key audit matters are the issues or
substances that the auditor declare as essential for the audit of the company’s financial reports
(auasb.gov.au 2019). Discussion with the governance authority of the companies is needed
for the determination of the same. Section 9 of ASA 701 states that the auditors are needed to
maintain compliance with three basic objectives in the analysis of key audit matters
(auasb.gov.au 2019). They are the consideration of the areas in the financial statements that
have high risk of material misstatements; consideration of the presence of uncertainties in the
judgments as well as accounting estimated and consideration of the impact of crucial
incidents and events on the audit of the financial statements (auasb.gov.au 2019). Apart from
this, Section 10 of ASA 701 puts the obligation on the auditors to take into consideration the
significant events or transactions that are crucial for the audit of the financial statements
(auasb.gov.au 2019).

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Rationales for Key Audit Matters
There are three rationales that support that these assertions at risks are key audit
matters. First, there can be material impact in the financial statements of Advanced Computer
Solution due to the inaccurate valuation of the company’s inventory (Cordoş and Fülöp
2015). Second, uncertainties can be seen in the judgements and accounting estimates as the
management has used them for the valuation of inventory. Third, the transfer of the inventory
from one central warehouse to six regional warehouses is the significant event as per the
auditors as it can have major impact on the audit of the financial statements of Advanced
Computer Solutions (Cordoş and Fülöp 2015).
Disclosure of Key Audit Matters
Why important How Audit Resolved the Key Audit Mattes
Relocation of Inventory
On March 2018, the company has relocated
their inventories to six new warehouses from
a central warehouse which is a significant
event for the valuation of inventory. In
addition, inventory valuation of this company
involves essential estimates and judgments
that are crucial to audit.
The audit procedures are:
- Observe the processes under the physical
inventory count in the methodical manner
- Obtain full understanding of the strengths
and weaknesses of the internal control for
inventory count process
- Observe the inventory counting process
when it is being carrying out
- Verification of the all inventory count tags
- Test the inventory in all the six warehouses
and ask for the conformation of the count
from the central warehouse
Inventory of 2018 consists of the sales of
2017 and 2018
Sales of 2017 are included in the inventory in
hand of 2018 and it is a significant
transaction from the audit perspective. In
addition, it includes accounting estimates and
judgements.
The audit procedures are:
- Analysis and examination of the inventory
vouchers for goods received at warehouses
and goods delivered to the suppliers
- Verify whether there was any occurrence of
unreasonable transactions in the inventory

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that caused the specific issues
- Examination of the judgements and
accounting assumptions
Green Machine Ltd
Assertions at Risk
Accuracy: As per this audit assertion, business organizations have the commitment towards
accurate valuation of their property, plant and equipment (Warren Jr, Moffitt and Byrnes
2015). The use of this assertion also demands that the companies ensure the proper division
of the capital and revenue expenses related to property, plant and equipment. In addition, all
the data and information relates to the expenses need to be maintained. The provided case
study shows the incorrect division of the revenue and capital expenditure by the company and
it affects the accuracy assertion of audit. In addition, it indicates that the used judgements and
estimates may be at risk due to this improper division of the expenses. For this reason, this
assertion can be considered at the risk (Lessambo 2018).
Valuation: As per this assertion, the need for the companies is to record all the assets,
liabilities and equity after accurate valuation. In addition, companies are needed to record the
property, plant and equipment at cost after deducting accumulated depreciation (da Silva and
Dantas 2018). Accumulated depreciation can be obtained with the application of fare rates of
depreciation. However, as per the given information of Green Machine Ltd, low rates of
depreciation have been applied on the property, plant and equipment that contributed towards
the incorrect valuation of these non-current assets. It can misstate the net profit and create
material impact on the financial statements. At the same time, depreciation process of the
company includes management’s judgements and estimates that can be hampered with this
aspect (Alali 2018). For these reason, this assertion can be considered at risk.

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Substantive Audit Procedures
In case of the first assertion at risk, the substantive audit procedure for the auditor is
reviewing both the capital as well as revenue expenditures associated with the property, plant
and equipment with the aim to obtain proper understanding (Feng et al. 2014). After that, the
auditor needs to re-examine the policies to capitalize the expenses of the company. The next
step for the auditor is to re-examine the used judgements and accounting estimates for the
determination of the capital as well as revenue expenditures associated with property, plant
and equipment. Moreover, verifying the source documents related to property, plant and
equipment expenditures is another major step for the auditors as substantive audit procedures
(Feng et al. 2014).
In case of the second assertion at risk in Green Machine Ltd, the most crucial
substantive audit process will be reviewing the company’s policies and mechanism for the
determination of rate of depreciation (Hall 2015). After that, it is needed for the auditor is
recalculating the rates of depreciation while observing the depreciation ratios. In addition, the
auditor needs to ensure re-examination of the residual value of property, plant and equipment
along with any loss or gain from the sales of the same. Lastly, the auditor needs to undertake
the verification of the use judgements and accounting estimates in the depreciation process
(Goncharov, Riedl and Sellhorn 2014).
ASA 701
Clause 7 of ASA 701 dictates that the auditors require determining the key audit
matters, preparing the audit opinion based on this and communicating and disclosing the
same in the auditor’s report (cpaaustralia.com.au 2019). Clause 8 of ASA 701 shows that key
audit matters are the issues or substances that the auditor consider as indispensable for the
audit of the company’s financial reports. Conversation with the governance authority of the
companies is compulsory for the determination of the same (auasb.gov.au 2019).

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Clause 9 of ASA 701 tells that the auditors are needed to continue conformity with
three basic objectives in the examination of key audit matters (home.kpmg 2019). They are
the consideration of the areas in the financial statements that have high risk of material
misstatements; consideration of the presence of doubts in the judgments as well as accounting
approximates and consideration of the effects of crucial incidents and events on the audit of
the financial statements (home.kpmg 2019). Apart from this, Clause 10 of ASA 701 puts the
obligation on the auditors to take into consideration the noteworthy events or transactions that
are essential for the audit of the financial statements of companies (auasb.gov.au 2019).
Rationales for Key Audit Matters
As per ASA 701, these assertions at risk are considered as key audit matters in the
presence of three reasons. First, the inaccurate consideration of the depreciation rates along
with the inaccurate distinction between the revenue and capital expenditures can create major
material effects by overstating the expenses and misstating the net profit (Sirois, Bédard and
Bera 2018). Second, the above-mentioned aspects in Green Machine Ltd include the crucial
accounting estimates of the management along with certain judgments which can include
major uncertainties. Third, wrong application of depreciation rate and wrong distinction of
expenses can be considered as significant events or transactions that have major impact on
the audit of the financial statements of Green Machine Ltd (Sirois, Bédard and Bera 2018).
Disclosure of Key Audit Matters
Why important How Audit Resolved the Key Audit Mattes
Incorrect distinction of capital and
revenue expenses
It can be seen from the given scenario that
the company has capitalized certain revenue
expenses and certain capital expenditures
have been included in the income statement;
The audit procedures are:
- Reviewing both the capital as well as
revenue expenditures associated with the
property, plant and equipment
- Re-examine the policies to capitalize the
expenses

9AUDITING AND ASSURANCE SERVICES
and this incident is crucial for the audit of the
company. In addition, it includes judgements
and estimates that are crucial for the audit.
- Re-examine the used judgements and
accounting estimates for the determination of
the capital as well as revenue expenditures
- Verifying the source documents related to
property, plant and equipment expenditures
Application of low rates of depreciation in
property, plant and equipment
Too low rates of depreciation have been
applied on the property, plant and equipment
and it can lead to material impact on the
company’s financial statements. Moreover,
the management has used accounting
estimates and judgements that are crucial for
auditing.
The audit procedures are:
- Reviewing the company’s policies and
mechanism for the determination of rate of
depreciation
- Recalculating the rates of depreciation
while observing the depreciation ratios
- Re-examination of the residual value of
property, plant and equipment along with any
loss or gain from their sales
- Verification of the use judgements and
accounting estimates
Conclusion
It can be concluded from the above discussion that the audit assertions form a crucial
part in the whole audit process due to the fact that it assists in the determination of key audit
matter. The managements of both Advanced Computer Solutions and Green Machine Ltd
used certain assertions like accuracy, valuation and cut off. The above discussion also shows
that the auditors can obtain the required guiding principles to derive the key audit matters
from the standards of ASA 701 Key Audit Matters where the auditors are needed to consider
certain requirements. In addition, the auditors are needed to develop the substantive audit
procedures after the detection of the key assertions at risk.

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References
AICPA, 2017. Audit guide: Audit sampling. John Wiley & Sons.
Alali, F., 2018. Teaching Students Financial Statements’ Assertions: Crisp-Drinks
Case. Journal of Forensic & Investigative Accounting, 10(3).
Auasb.gov.au. 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 19 Jan.
2019].
Byrnes, P.E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J.D. and
Vasarhelyi, M., 2018. Evolution of Auditing: From the Traditional Approach to the Future
Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297). Emerald Publishing
Limited.
Cannon, N.H. and Bedard, J.C., 2016. Auditing challenging fair value measurements:
Evidence from the field. The Accounting Review, 92(4), pp.81-114.
Cordoş, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting & Management Information Systems/Contabilitate si
Informatica de Gestiune, 14(1).
Cpaaustralia.com.au. 2019. [online] Available at:
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/auditing-assurance/submission-auasb-exposure-draft-on-auditor-reporting-
issues.pdf?la=en [Accessed 19 Jan. 2019].
da Silva, T.C. and Dantas, J.A., 2018. Audit Assertions and Change of Auditors' Opinion in
the Brazilian Market. Revista de Educação e Pesquisa em Contabilidade, 12(1).

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Feng, M., Li, C., McVay, S.E. and Skaife, H., 2014. Does ineffective internal control over
financial reporting affect a firm's operations? Evidence from firms' inventory
management. The Accounting Review, 90(2), pp.529-557.
Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review of
Accounting Studies, 19(1), pp.210-241.
Green, W. and Zhou, S., 2013. An international examination of assurance practices on carbon
emissions disclosures. Australian Accounting Review, 23(1), pp.54-66.
Hall, J.A., 2015. Information technology auditing. Cengage Learning.
Hay, D., Knechel, W.R. and Willekens, M. eds., 2014. The Routledge companion to auditing.
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Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Lessambo, F.I., 2018. Financial Statements’ Audit. In Auditing, Assurance Services, and
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Ralph, C. 2019. KAM: Auditor’s report snapshot – March 2017. [online] KPMG. Available
at: https://home.kpmg/au/en/home/insights/2017/03/key-audit-matters-auditor-report-28-
march-2017.html [Accessed 19 Jan. 2019].
Sirois, L.P., Bédard, J. and Bera, P., 2018. The informational value of key audit matters in the
auditor's report: evidence from an Eye-tracking study. Accounting Horizons.
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of
Information Systems, 27(1), pp.325-331.
Warren Jr, J.D., Moffitt, K.C. and Byrnes, P., 2015. How Big Data will change
accounting. Accounting Horizons, 29(2), pp.397-407.

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Wood, J., Brown, W. and Howe, H., 2013. IT Auditing and Application Controls for Small
and Mid-Sized Enterprises: Revenue, Expenditure, Inventory, Payroll, and More (Vol. 573).
John Wiley & Sons.