Auditing and Assurance Services

The report focuses on the assertions used for the provided organisations from the viewpoint of the auditor so that key audit matters could be ascertained. It covers Advanced Computer Solutions Limited and Green Machine Limited. The report discusses the key assertions at risk, substantive audit procedures, and obligations of the auditors for undertaking effective communication with the organisations.

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

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Executive Summary:
The current report would emphasise on the assertions used for the provided organisations
from the viewpoint of the auditor so that key audit matters could be ascertained. It has been
found that Advanced Computer Solutions Limited has two key assertions at risk, which are
valuation or accuracy and existence, while the major risk assertions for Green Machine
Limited comprise of valuation and classification. It has been analysed that the auditors are
needed to consider the risk assertions for planning the substantive audit procedures so that the
overall risks could be minimised. Adequate discussion has been made regarding the
obligations of the auditors for undertaking effective communication with the organisations
and accordingly, key audit matters are to be disclosed in the audit report section. Therefore,
the auditors are liable to comply with the guidelines mentioned in ASA 701, as it would assist
them in ascertaining the key audit matters.

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Table of Contents
Introduction:...............................................................................................................................3
Question 1: Advanced Computer Solutions Limited.................................................................3
(a) Two key assertions at risk in relation to inventory:..........................................................3
(b) Two substantive audit procedures:...................................................................................4
(c) ASA 701 Communicating Key Audit Matters:................................................................5
Question 2: Green Machine Limited..........................................................................................8
(a) Two key assertions at risk in relation to property, plant and equipment:.........................8
(b) Two substantive audit procedures:...................................................................................9
(c) ASA 701 Communicating Key Audit Matters:..............................................................10
Conclusion:..............................................................................................................................12
References:...............................................................................................................................13

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Introduction:
All auditors have certain obligations, which could be observed in investigating and
analysing the financial statements of the organisations so that it could be ensured that they do
not contain material misstatements because of frauds and errors. The stakeholders associated
with the organisations utilise the audit reports in order to check honesty and fairness in the
financial statements of the organisations (Bepari and Mollik 2015). Various auditing
assertions are used in relation to inventory, property, plant and equipment and others that
include valuation, cut off, accuracy, occurrence, completeness and existence (Chambers and
Odar 2015). The current report would emphasise on the assertions used for the provided
organisations from the viewpoint of the auditor so that key audit matters could be ascertained.
Question 1: Advanced Computer Solutions Limited
Based on the provided scenario, some issues are evident in inventory valuation of
Advanced Computer Solutions Limited, which could have unfavourable impact on the
decision-making process of the stakeholders. Thus, it is necessary to conduct appropriate
inventory valuation and for the concerned organisation, the key assertions at risk include the
following:
(a) Two key assertions at risk in relation to inventory:
Valuation/Accuracy:
In order to test this specific assertion, the auditors have experienced two significant
audit matters. They include the accuracy of the figures in relation to physical count of
inventory and ensure that accurate inventory amount has been included as cost of sales in the
income statement from the statement of financial position. Owing to all these reasons, it is
necessary to conduct inventory valuation by the auditors. As per the case information,

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Advanced Computer Solutions Limited has transferred its inventories from the central
warehouse to six regional warehouses. Such transfer has the possibility of wrong physical
count of inventory and as a result, there could be a downfall in inventory turnover in 2018.
Moreover, the organisation has been encountering software problems, which could lead to
errors in inventory valuation procedure (Cohen and Simnett 2014). Due to these reasons, the
assertion of valuation or accuracy is at risk.
Existence:
The management of an audit client has to assure that inventory values are recorded
appropriately in the correct accounting period in order to ensure the existence of all account
balances. Therefore, consideration needs to be provided to investigate receiving and shipping
documents related to inventory, since it would assist in determining the existence of
inventory. As a result, the actual inventory count might not be the same, which might put the
assertion of existence at risk. In this case, the organisation has included the past year sales in
the current year inventory, which places the existence assertion at risk. Thus, Advanced
Computer Solutions Limited has not followed this aspect due to the inclusion of inventory
record of 2018 in sales of both 2017 and 2018. This event validates the fact that there are
errors in inventory recording in the correct accounting period. Another probable reason
behind such inclusion might be the software issue or deliberate misconduct by any staff
(Decaux and Sarens 2015). As a result, there is chance of deletion of some inventory-related
transactions. Thus, the existence assertion is found to be at risk.
(b) Two substantive audit procedures:
Substantive audit procedure 1:
In order to address the valuation or accuracy risk, the significant audit procedure is
the methodical surveillance of all aspects of the physical count of inventory of Advanced

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Computer Solutions Limited. The initiatives to be undertaken by the auditor might include
identifying the strengths and loopholes in internal control associated with inventory, checking
the inventory count tags and being in person at the time of physical count of inventory. In
addition, it is necessary to examine the inventory count in all the six warehouses. Finally, the
management has used certain assumptions and judgements that the auditor needs to test and
conformance to the needed standards of accounting (Griffiths 2016).
Substantive audit procedure 2:
In order to carry out existence examination, the substantive audit procedure might
include verifying the notes for goods obtained and goods delivered that would aid in
identifying the date of reporting. Besides, it is necessary to check whether there has been
slow movement of inventory or the management has made some irrational adjustments in the
same (Bepari and Mollik 2015). Finally, verification needs to be made by the auditor to
identify any stop command while obtaining inventories in the warehouses. This is because all
these factors in combination could place the existence assertion at risk.
(c) ASA 701 Communicating Key Audit Matters:
Requirement of ASA 701:
“Section 7 of ASA 701” states that the auditors are obliged to ascertain key audit
matters, establishment of the same based on them and they are to be included and disclosed in
the audit report (Auasb.gov.au 2019). On the other hand, “Section 8 of ASA 701” reveals the
definition of key audit matters, which includes issues significant to the auditors while
auditing the financial reports of the organisations and selection is to be made after conversing
with the governance committees.

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In accordance with “Section 9 of ASA 701”, three particular requirements are to be
considered by the auditors so that the key audit matters could be ascertained. These constitute
of the areas in the financial reports having the possibility of increased material misstatement
risk in compliance with ASA 315, the uncertain judgements and accounting estimates made
by the organisation and influence of significant events on audit that happened during the
accounting year (Griffiths 2016).
According to “Section 10 of ASA 701”, the auditors have the responsibility of finding
out the key audit matters after taking into account the significant issues and their influence on
audit (Auasb.gov.au 2019).
Rationale for determination:
If errors are detected in valuation process of inventory, it could be considered as an
important part in the financial reports having increased possibility of material
misstatements.
As errors are evident in inventory valuation, few uncertainties might be inherent in the
accounting estimates and judgements made by the management of Advanced
Computer Solutions.
As inventories are transferred from the central warehouse to six regional warehouses,
it could be adjudged as a significant event having effect on the inventory count and
valuation process.
Disclosures required in the section of key audit matters:
Why significant? How audit addressed the key audit matters?
Shift of inventory in March 2018:
There could be effect on the physical
inventory count procedure due to the recent
In order to deal with this matter, the audit
procedures used include the following:
1. Methodical supervision of all aspects of the

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shift of inventory from a central location to
six different locations. Moreover, for
inventory valuation, adequate judgements
and accounting estimates by the management
are made that are deemed to be significant to
audit.
procedure related to physical count of inventory
2. Discussion of the strengths and drawbacks of
internal control having association with
inventory
3. Authentication of the tags used for counting
inventory
4. Observation of the work-in-process inventory
count
5. Assessment of the assumptions and
judgements undertaken by the management and
adherence to the necessary accounting
guidelines
6. Verification of inventories in six locations
Sales of the last year included in the
inventory of the current year:
As the current year inventory contains a
portion of the sales value of both current year
and last year, error is bound to take place.
Moreover, there could be material impact
owing to the engagement of important
accounting estimates and judgements of the
management.
In order to deal with this matter, the audit
procedures used include the following:
1. Certification of each note for goods obtained
and goods delivered in order to identify the
reporting date
2. Exploration of whether there has been slow
stock movement or presence of irrational
adjustments in them
3. Verification of whether any stop command
has been issued in obtaining stocks in the
warehouses

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Question 2: Green Machine Limited
After evaluating the provided scenario, issues are inherent in the valuation method of
property, plant and equipment of Green Machine Limited along with improper segregation of
revenue and capital expenditure, which could lead to overstatement of profit. This leads to the
creation of two assertions, which include classification and valuation. Therefore, the
following assertions are at risk for the organisation:
(a) Two key assertions at risk in relation to property, plant and equipment:
Classification:
As per the demand of this assertion, the firms have to be committed towards correct
classification of transactions in relation to their property, plant and equipment in its general
ledger accounts. Thus, it requires the firms to assure that expenses are categorised and
recorded appropriately in general ledger accounts, which are associated with property, plant
and equipment (Pitt 2014). However, after going through the case information of Green
Machine Limited, it has been observed that revenue and capital expenditures are not
separated accurately by the organisation. Instead, there has been capitalisation of a portion of
revenue expenditures, while a portion of capital expenditures is represented in the form of
revenue expenditures in the profit and loss statement. This implies that the general ledger
accounts of capital and revenue expenditures are not correct. This creates the chance of
material misstatements in the financial reports of the entity and hence, this assertion contains
risk.
Valuation:
According to the requirement of this particular assertion, the audit clients are expected
to record all their assets, equity and liabilities at cost after subtraction of accumulated
depreciation and hence, application of the accurate depreciation rate is made. This is one of

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the primary requirements for the business entities (Decaux and Sarens 2015). From the
provided information of Green Machine Limited, the entity has charged depreciation rate
much lower than the actual rate, which might result in wrong valuation of property, plant and
equipment. Besides, the use of this rate could minimise the operating expenses of the entity
significantly, which would inflate its net income and hence, misstatement could take place in
profit. These are the main reasons that this assertion is found to be at risk.
(b) Two substantive audit procedures:
Substantive audit procedure 1:
As a part of the procedure, the auditor of Green Machine Limited is needed to analyse
the guidelines and processes of the entity so that capital and revenue expenditures associated
with property, plant and equipment could be ascertained. For ensuring the same, the auditor is
required to check the general ledger accounts of revenue and capital expenditures for
detecting the errors and necessary actions need to be undertaken (Griffiths 2016).
Substantive audit procedure 2:
As a part of the procedure, the depreciation policy of the concerned entity needs to be
checked by the auditor as well as the accounting estimates and management judgements
(Chambers and Odar 2015). After this, the depreciation rate is to be computed again by the
auditor by taking into account the residual amounts along with losses or gains from selling a
portion of property, plant and equipment. Thus, it is crucial to compare the depreciation rates
at this stage (Bepari and Mollik 2015). This would aid the auditor in computing the revised
depreciation rate again and accordingly, the correct depreciation expenses could be
ascertained.

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(c) ASA 701 Communicating Key Audit Matters:
Requirement of ASA 701:
As per “Section 7 of ASA 701”, the objective of an auditor is ascertaining the key
audit matters, providing accurate audit opinion and the same needs to published in the form
of auditor’s report (Legislation.gov.au 2019). Moreover, the definition of key audit matters
mentioned in “Section 8 of ASA 701” cites that these matters are issues deemed to be
important for the auditors for auditing the financial statements and they are to be chosen after
conversing with the governance group of the concerned entity.
At the same time, “Section 9 of ASA 701” states that there are three requirements for
the auditors at the time of ascertaining key audit matters. These include those portions of the
financial statements containing greater risk in accordance with ASA 315, accounting
estimates and judgements that the audit clients have used doubtfully and the effect of the
important issues or transactions on auditing that occurred during the accounting year.
Moreover, “Section 10 of ASA 701” requires the auditors in ascertaining the key audit
matters after taking into consideration the major events having the potential of impacting
audit (Legislation.gov.au 2019).
Rationale for determination:
The risks related to material misstatements are higher owing to the errors made in
separation of revenue and capital expenditures and wrong depreciation calculation.
The engagement of the significant judgements of the management as well as
accounting estimates could be witnessed in the doubtful or uncertain areas.
There is presence of two significant errors and transactions, which constitute of
incorrect segregation of expenditures and use of low rate of depreciation and these
events are bound to have effect on the audit of the entity.

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Disclosure of key audit matters:
Why significant? How audit addressed the key audit matters?
Wrong segregation of capital and revenue
expenditures:
Incorrect segregation has been made by the
organisation for revenue expenditure and
capital expenditure, which could have
material impact on the financial reports and
they include accounting projections and
judgements made by the management and
this is critical to audit.
In order to deal with this matter, the audit
procedures used include the following:
1. Checking the procedures and guidelines of
the entity for ascertaining revenue and capital
expenditures in relation to property, plant and
equipment
2. Accumulating the list of the above-
mentioned asset so that verification could be
conducted
3. Assuring confirmation of the fact that
adequate compliance has been maintained by
the entity with the required accounting policies
and guidelines
Use of depreciation rate below the actual
rate for property, plant and equipment:
The entity has used low depreciation rate for
valuing its property, plant and equipment and
this might lead to material effect on its
financial statements. Along with this, the
management judgements and accounting
projections are deemed to be essential for
audit operations.
In order to deal with this matter, the audit
procedures used include the following:
1. Checking the policy of depreciation used by
the entity as well as its management reviews
and accounting estimates
2. Computing the depreciation rate again after
evaluating the residual amount of property,
plant and equipment and any loss or gain from
sale of such asset

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Conclusion:
After considering all the above-discussed aspects, Advanced Computer Solutions
Limited has two key assertions at risk, which are valuation or accuracy and existence, while
the major risk assertions for Green Machine Limited comprise of valuation and classification.
It has been analysed that the auditors are needed to consider the risk assertions for planning
the substantive audit procedures so that the overall risks could be minimised. ASA 701 assists
the auditors by providing essential principles and guidelines so that they could ascertain the
key audit matters. Adequate discussion has been made regarding the obligations of the
auditors for undertaking effective communication with the organisations and accordingly, key
audit matters are to be disclosed in the audit report section.

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References:
Auasb.gov.au., 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 18 Jan.
2019].
Bepari, M.K. and Mollik, A.T., 2015. Effect of audit quality and accounting and finance
backgrounds of audit committee members on firms’ compliance with IFRS for goodwill
impairment testing. Journal of Applied Accounting Research, 16(2), pp.196-220.
Chambers, A.D. and Odar, M., 2015. A new vision for internal audit. Managerial Auditing
Journal, 30(1), pp.34-55.
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.
Decaux, L. and Sarens, G., 2015. Implementing combined assurance: insights from multiple
case studies. Managerial Auditing Journal, 30(1), pp.56-79.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Legislation.gov.au., 2019. ASA 701 - Communicating Key Audit Matters in the Independent
Auditor’s Report - December 2015 . [online] Available at:
https://www.legislation.gov.au/Details/F2015L02016/Explanatory%20Statement/Text
[Accessed 18 Jan. 2019].
Pitt, S.A., 2014. Internal audit quality: Developing a quality assurance and improvement
program. John Wiley & Sons.

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