Auditing and Assurance Services

The report is focussed on analysing the audit risk certification along with the assertions from the given two companies. It includes risk analysis in Advanced Computer Solutions Limited and case of Green Machine Limited.

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:
When financial reports are prepared, it is important to make certain important assertions.
Such audit assertions are included proclamations conducted by companies while preparing
the financial statements. The report is focussed on analysing the audit risk certification along
with the assertions from the given two companies. In this risk assertion, the auditor might
carry out review of the PPE based revenue expenditure and capital in order to realise the
same in an efficient way. Other than that, the rates of depreciation are calculated for the
effective PPE valuation. Realizing the techniques within companies along with the document
bases for suitable judgements and estimations is important along with analysing the PPE
based capital expenses as well as revenue.

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Table of Contents
Introduction:...............................................................................................................................3
Answer 1: Risk Analysis in Advanced Computer Solutions Limited........................................3
(a) Risk Assertion with Respect to Inventory:.......................................................................3
(b) The Audit Processes Related with Identified Risks:........................................................4
(c) ASA 701 Aligned with Key Audit Matters:.....................................................................5
Question 2: Case of Green Machine Limited.............................................................................7
(a) Risk Assertion related with property, plant and equipment:............................................7
(b) Audit procedures related with identified risks:................................................................8
(c) ASA 701 related with Key Audit Matters:.......................................................................9
Conclusion:..............................................................................................................................11
References:...............................................................................................................................13

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Introduction:
There is an increased obligation for the auditors for analysing and verifying the
company’s financial statements in order to make sure that the material misstatements are not
included within it in a way that the stakeholders can be offered with suitable information that
can support their decision making process (Auasb.gov.au. 2019). When such financial reports
are prepared, it is important to make certain important assertions. Such audit assertions are
included proclamations conducted by companies while preparing the financial statements.
The major causes for which these assertions are employed encompass making sure the
suitability along with suitable financial disclosure information with the support of the
financial statements (Baharud-din, Shokiyah and Ibrahim 2017). It is important for the
auditors to analyse the manner by which the companies employ such assertions as it can
result in audit risk related with improper audit assertion use. In case such assertions are
observed to be at risk, they require making sure that these can be segmented within the “Key
audit matters” in compliance with ASA 701. The report is focussed on analysing the audit
risk certification along with the assertions from the given two companies.
Answer 1: Risk Analysis in Advanced Computer Solutions Limited
As per the offered information, the Advanced Computer Solutions financial
statements include material misstatements within inventory that lead to audit risk (Boolaky
and Omoteso 2016). The two major assertions those are conducted with consideration to
inventory are indicated under:
(a) Risk Assertion with Respect to Inventory:
Accuracy and valuation: As per such assertion, this acts as statements within which
all the figures indicated within the financial statement are devoid of any errors and these are

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relied on suitable asset valuation, equity balances along with liabilities. In case of Advanced
Computer Solutions it is gathered that the company has agreed to supply items at a specific
price that is less than 10% of the cost price (Fernandez-Feijoo, Romero and Ruiz Blanco
2018). For this reason, it is important to carry out inventory valuation suitably within the net
realizable amount. In addition to that, the company’s computer presentation package is
dealing with suspected software concern. For this reason, it is important for the company to
recognise the net realizable amount for the selling goods within the annual inventory.
Existence: Based on such assertion, the inventory based transactions is required to be
suitably reported. The supply and recepts related with the product documents associated with
inventory support to the companies in carrying out the same. It is also not suitable to
encompass the previous year’s saes within stock of the recent year as this might lead to faulty
valuation of inventories. In the case of this organization, in the year 2017 18% of sales and in
2018 26% of sales were included within the current year’s stock (Fu, Carson and Simnett
2015). This can be because of the inward return due the software concerns. In addition, the
accounting judgements along with anticipations of the management are involved within the
inventory valuation that puts assertion at high risk.
(b) The Audit Processes Related with Identified Risks:
Audit procedure associated with accuracy and valuation:
In order to evaluate such audit assertion, the auditors require analysing the processes
within the physical stock count in a methodological manner. This might facilitate the auditors
in attaining an explained knowledge related with internal control system in the company with
respect to inventory count. In addition, the physical existence of the auditor is important
while carrying out the valuation process of the inventory (Jeacle 2017). In addition, the
auditors are required to ensure while carrying out certification of every tag that is related with

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stock count. Lastly, the auditor requires analysing the inventories transferred to new areas
through attaining count confirmation from the main area.
Audit procedure related with existence:
In accordance with existence assertion, it is important for auditors to evaluate the
monitor the inventory tags for thee receipts of attained goods and those attained rom the
suppliers. However, it is important to analyse whether an irrational events took place within
inventory count has led to certain specific concerns (Legislation.gov.au. 2019). Moreover, the
auditor can also evaluate the existence assertion through analysing the property, plant and
equipment register in the first year of audit client. Lastly, the management judgements are
required to be analysed along with accounting anticipations implemented by companies in
carrying out valuation of inventory.
(c) ASA 701 Aligned with Key Audit Matters:
ASA 701 Requirements: The key audit matters as per “Section 7 ASA 701” are
important to be ascertained with developing an audit opinion along with disclosing it within
the audit report. In alliance with “ASA 701 Section 8”, the key audit matters are explained to
be the issues for which the auditors are responsible to explain while auditing a company’s
financial statements (Lesage, Ratzinger-Sakel and Kettunen 2017). For the same, the
company’s governance authority is considered to be the discussion approach. “ASA 701
Section 9” necessitates the auditors to maintain alliance to some objectives in evaluating the
key audit matters. This encompass certain aspects within financial statements likely to give
increased material misstatement risk, existence of doubts in accounting judgements along
with impacts and estimates of the major events on the audit of financial statements. Lastly,
based on “Section 10 of ASA 701”, the responsibility of the auditor is to consider the
important events for audit of financial statements (Marques 2019).

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Importance of key audit matters: The recognised risk assertions encompass three
major rationales deemed necessary within key audit matters. Due to improper valuation of
inventory, the material effect likability can be present in the Advanced Computer Solution
Limited’s financial statements (Boolaky and Omoteso 2016). Moreover, there are several
uncetainities within the accounting judgements and estimations employed by the management
for valuation of inventory. In addition, inventory transfer within six locations might have a
drastic impact on the audit of the financial statements.
Key audit matters disclosure:
Key audit matters Response of audit scope
Transfer of Inventory: There has been inventory
transfer from one to six places that is the major
consideration in inventory valuation. Moreover,
this valuation encompasses the management
assumptions and estimations (Boolaky and
Omoteso 2016).
The processes those are needed to be carried out in
valuation of inventory includes:
 Recomputing the weighted average expense
along with those aspects needs to be aligned
with past purchase invoices for the
inventory goods sample.
 Monitoring by the management of ageing
report through considering an inventory
goods sample to previous recorded invoice
(Boolaky and Omoteso 2016).
Previous year sales consideration in inventory of
recent year: Due to consideration of sales of
previous year in the current year, it is evident that
it is a considerable audit matter.
In order to carry out the inventory valuation certain
processes are needed to be followed:
 Monitoring the net realizable value based
on inventory lines and current selling

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prices.
 Recompilation of the inventory
High return level resulting in software concerns:
Due to a complex software system as changing
integration level is identified that might have
effect on the integrity of the financial reporting
and is also important for audit (Boolaky and
Omoteso 2016).
To deal with such concern, the undermentioned
processes must be followed:
 Monitoring the IT control designs related
with the financial reporting systems
 Communication with the management
concerning IT environment along with
important financial processes (Boolaky and
Omoteso 2016).
Question 2: Case of Green Machine Limited
The Green Machine Limited Company’s case offers an overview within which there
is concern observed associated with plant, property and equipment with respect to
accumulated depreciation carried forward, cost, and additions along with disposals within the
depreciation expenses and within a specified period (Fu, Carson and Simnett 2015). The
below mentioned are within risk in consideration to the mentioned assets:
(a) Risk Assertion related with property, plant and equipment:
Categorization: As per the audit assertions, the company is committed in maintaining
suitable classifications related with their plant, property and equipment. In addition, with
support of such assertion the companies might make sure that suitable division of capital
expenditures and revenue with the PPE (Fu, Carson and Simnett 2015). For this reason, it is
important in sustaining the expense based information for suitable categorization. As per this

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case, the insufficient categorization of the revenue expenditure along with capital can be
recognised and this impacts the audit categorization assertion. For this reason, it might also
be stated that the employed estimates along with judgements can turn out to be improper that
can result in improper expense categorization that leaders such assertion at risk (Birkey,
Michelon, Patten, and Sankara 2016).
Valuation: In alliance with specific assertion, the companies are required to record all
the items within their balance sheet after suitable valuation. In addition, PPE is recorded at
cost after lessening the accumulated depreciation (Fu, Carson and Simnett 2015). The
calculation of accumulated depreciation is conducted by means of straight line method for the
Green Machine Limited. In addition, the company has implemented a depreciation rate that is
decreased than the actual rate. For this reason, the non-current asset’s valuation might not be
appropriate in such case. This improper valuation can result in high net profit and for this
reason the impact might be material within the financial statements. Lastly, the accounting
estimations along with management judgements are employed for computing depreciation
that might be highly inappropriate (Fu, Carson and Simnett 2015).
(b) Audit procedures related with identified risks:
Audit procedure related with categorization: In this risk assertion, the auditor might
carry out review of the PPE based revenue expenditure and capital in order to realise the
same in an efficient way. In addition, the policies related with the company’s expense
capitalization that needs re-investigation. Moreover, the source documents related with PPE
expenditures within another important step required to be implemented by auditors.
Audit procedure related with valuation: In this particular risk assertion, the
considerable audit procedure might be to review certain mechanism along with policies of the
company so that the rate of depreciation might be effectively ascertained (Fu, Carson and

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Simnett 2015). Other than that, the rates of depreciation are calculated for the effective PPE
valuation. Additionally, an increased investigation is needed that is based on the residual
amounts associated with PPE along with the profit and loss from a part of PPE sale. The
auditor also requires considering the accounting anticipations certification along with the
necessary management judgements within depreciation method.
(c) ASA 701 related with Key Audit Matters:
ASA 701 Requirements: The analysis of the key audit matters as per “ASA 701
Section 7” is important along with offering audit opinion through combining two aspects
based on which information must be communicated and disclosed within the auditor report
(Lesage, Ratzinger-Sakel and Kettunen 2017). It is explained within “ASA 701 Section 8”
that the key audit matters acts as issues those are deemed to be inevitable by the auditor while
they carry out any company’s financial statements auditing. So it is important to be involved
within a discussion with management of the mentioned companies.
“ASA 701 Section 9” explains that the auditors must follow some objectives in
analysing key audit matters. This is for the reason that this investigation might lead to
recognition of audit risk and material misstatements. Such objectives are explained below:
 Existence of issues within accounting judgements and estimations of the management
 Areas within financial statements encompassing high risk of material misstatements
 Impact of major events within the audit of financial statements
Based on “ASA 701 Section 10”, the auditors are liable to take into account certain major
events or concerns important at the time of auditing a company’s financial statements
(Lesage, Ratzinger-Sakel and Kettunen 2017).

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Key audit matters Importance: In accordance with ASA 701, the recognised risk
assertions might be adjudged as a part of key audit matters due to certain causes. The first
cause is the improper depreciation rates use along with improper segmentation of capital and
revenue expenditure. This can result in material impact in the form of operating expenses
understatement along with net income overstatement (Lesage, Ratzinger-Sakel and Kettunen
2017). In addition the aforementioned areas within the case of Green Machine Limited
consider considerable accounting estimations decided by management along with judgements
including uncertainties. Moreover, because of improper deprivation rate implementation
along with segregation of costs, important transactions or events took place that is considered
to have material impact at the time of audit the company’s financial reports.
Key audit matters disclosure:
Key audit matter Response of audit scope
Improper categorization of capital and revenue
expenses: With taking into account every vital
factor, there is a revenue expense capitalization
along with including capital expenses within the
consolidated profit and loss and such event is vital
in audit functions. In addition, this considers the
audit based anticipations and judgements
(Boolaky and Omoteso 2016).
The process below is to be followed in dealing with
the concerns:
 Realizing the techniques within companies
long with the document bases for suitable
judgements and estimations.
 Analysing the PPE based capital expenses
as well as revenue
 Source documents authorization associated
with PPE
 Expense capitalization based policies are to
be repeatedly reviewed

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Implementation of low depreciation rates
associated with plant, property and equipment:
The company has followed actual depreciation
rate in attaining net PPE. This rate implementation
might have certain material impact on the
company’s financial reports (Boolaky and
Omoteso 2016).
To address the concern the following processes
must be followed:
 Analysis of major anticipations employed to
attain a PPE based recoverable amount and
whether any leases are segmented in the
difficult lease agreements.
 Analysis is to be conducted relied on a
simple in revealing the mathematical
accuracy associated with cash flow models
along with ensuring data within current
forecasts along with approved budgets
(Boolaky and Omoteso 2016).
 Disclosure suitability evaluation
encompassed within financial reports
 Carrying out sensitivity analysis for major
assumptions such as focus on operating
product drivers, revenue growth rates along
with discount rate employed impairment
models.
Conclusion:
The report was focussed on analysing the audit risk certification along with the
assertions from the given two companies. It was gathered that in order to evaluate such audit
assertion, the auditors require to analyse the processes within the physical stock count in a
methodological manner. This might facilitate the auditors in attaining an explained

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knowledge related with internal control system in the company with respect to inventory
count. As per the audit assertions, the company is committed in maintaining suitable
classifications related with their plant, property and equipment. Due to consideration of sales
of previous year in the current year, it is evident that it is a considerable audit matter. In
addressing issues with key audit matters carrying out sensitivity analysis is important for
major assumptions such as focus on operating product drivers, revenue growth rates along
with discount rate employed impairment models. Analysis is to be conducted relied on a
sample in revealing the mathematical accuracy associated with cash flow models along with
ensuring data within current forecasts along with approved budgets.

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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 21 Jan.
2019].
Baharud-din, Z., Shokiyah, A., and Ibrahim, M. S. 2017. Effects of Strong Internal Audit
Departmental Setting in Assessing Practice and Evaluation of Organizational
Performance. ICOPS2017 eProceedings, 880.
Birkey, R., Michelon, G., Patten, D.M. and Sankara, J., 2016. Does assurance on CSR
reporting enhance environmental reputation? An examination in the US context.
Boolaky, P. and Omoteso, K., 2016. International standards on auditing in the international
financial services centres: What matters?. Managerial Auditing Journal, 31(6/7), pp.727-747.
Fernandez-Feijoo, B., Romero, S., and Ruiz Blanco, S. 2018. Regional differences in industry
specialization in the sustainability assurance market. Management Decision.
Fu, Y., Carson, E. and Simnett, R., 2015. Transparency report disclosure by Australian audit
firms and opportunities for research. Managerial Auditing Journal, 30(8/9), pp.870-910.
Jeacle, I., 2017. Constructing audit society in the virtual world: the case of the online
reviewer. Accounting, Auditing & Accountability Journal, 30(1), pp.18-37.
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].

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Lesage, C., Ratzinger-Sakel, N.V. and Kettunen, J., 2017. Consequences of the abandonment
of mandatory joint audit: An empirical study of audit costs and audit quality
effects. European Accounting Review, 26(2), pp.311-339.
Marques, R.P.F., 2019. Continuous Assurance and the Use of Technology for Business
Compliance. In Advanced Methodologies and Technologies in Business Operations and
Management (pp. 429-441). IGI Global.