Auditing and Assurance

This document provides an overview of auditing and assurance, including key assertions, substantive audit procedures, and the requirement of ASA 701. It also includes case studies on Computing Solutions Ltd and Beautiful Hair Ltd.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
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Executive summary
Purpose of the report is to highlight the issues associated to inventories of Computing Solutions
Ltd and intellectual property recognition of Beautiful Hair Ltd. The task will also deal with the
key assertion involved with the said accounts and the substantive audit procedures that can be
performed against those key assertions. Based on the identified key assertion it will be concluded
whether all the matters will be identified as Key audit matter for both the entities.

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Table of Contents
Introduction......................................................................................................................................3
Case 1 – Computing Solutions Ltd..................................................................................................3
(a) Recognition and explanation of key assertion related to inventory..................................3
(b) Recognition and description of substantive audit procedure............................................4
(c) Explanation of requirement of ASA 701..........................................................................4
Case 2 – Beautiful Hair Ltd.............................................................................................................5
(a) Recognition and explanation of major assertion related to intellectual property.............5
(b) Identification and description of substantive audit procedure..........................................6
(c) Explanation of requirement of ASA 701..........................................................................6
Conclusion and recommendation....................................................................................................6
Reference.........................................................................................................................................8

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Introduction
Process for audit involves set of procedures for controlling the organization. It aims to
test as well as prove that processes are conducted in efficient manner and follow the due control
approaches. They also aim detecting the opportunities for improving the audit process. It assures
that annual statements for business are prepared in compliance with the required accounting
standards and are free from the material misstatements. To be more specific, it assures that the
numbers presented are authentic. Audit assertions are the unambiguous or inherent
representations and claims that are made by management those are accountable for preparation
of the annual statements in context of appropriateness of different items of annual statements as
well as disclosures. ASA 701 for communicating the key audit matters (KAM) helps to make the
financial report more interesting as well as transparent and will help is capturing reader’s
attention for financial statements towards the significant matters in accordance with the
professional judgments of the auditors (Auasb.gov.au, 2019).
Case 1 – Computing Solutions Ltd
At the time of evaluating the risk associated with misstatement those are material and
regulating suitable response in context of inventories of for the period closed on 30th June 2019,
the auditors came across different issues regarding its inventories. These issues are –(i)
presentation package of best-selling computer are experiencing sigh return level and the
suspected reason for the same is issues related to software (ii) inventory turnover on the basis of
the closing inventory has been dropped to 3.8 times in 2019 whereas the same for 2018 was 5.2
times (iii) inventory on hand increased to 26% on sales whereas the same was 19% in 2018 (iv)
to win a tender and curb the competition, it consented to deliver the items at a price of 10%
lower the cost.
(a) Recognition and explanation of key assertion related to inventory
Considering the above mentioned issues for inventories of Computing Solutions Ltd, key
assertions identified are as follows –
 Completeness – key assertion in relation with completeness is considered as the assertion
that annual statements prepared are thorough and it includes all the transaction related to
inventory for the given period under concern. For instance, completeness of the
transaction related to inventories included in the financial statements represents that all
the transactions included in the annual statement cover all the inventories, even those
may temporarily in possession of any 3rd party has been considered while reported the
inventory amount in financial statement (Jans, Alles and Vasarhelyi, 2014). It is
identified from the details that inventory turnover on the basis of the closing inventory
has been dropped to 3.8 times in 2019 whereas the same for 2018 was 5.2 times. As it is
mentioned that the inventories are transferred from central region to six regional
warehouses, possibility is there that while transferring the goods from central to regional
warehouse, the goods in transit has not been considered. Chances are also there that there
are error while recording the number of units dispatched and while the same is received.
Insufficient internal control generally leads to assertion risk related to completeness. In
addition undervaluation and overvaluation of inventories are also falls under assertion
risk related to completeness (Sultana, 2015).

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 Valuation and accuracy – major assertion in relation with valuation and accuracy is the
assertion that figure included in the financial report for inventories are properly based on
the valuation approach applied by the entity to value inventories and the values reported
are accurate. Major risk associated here is that the value of inventory related transactions
are not valued and reported correctly. It is accounted for as an important aspect as it is a
major component of current assets. It is identified that inventory on hand went up to 26%
on sales whereas the same was 19% in 2018. Likelihood is there that the person in duty of
managing and keeping track of the inventories has not removed any item from the
inventory record that is already sold and included the same in the closing inventory. This
will increase the closing level of inventories (Knechel and Salterio, 2016).
(b) Recognition and description of substantive audit procedure
Substantive procedure for audit involves the audit procedure that is performed for
detecting the material misstatements in context of the information presented and disclosed in the
annual statement of the entity. Substantive procedures are designed for generating evidence
regarding the assertions involved in the annual statements (Bédard, Gonthier-Besacier and
Schatt, 2014). Analysing the above notable assertions involved with management of inventory by
Computing Solutions Limited below mentioned substantive procedures of audit can be
performed –
 Completeness – the auditor shall go through the purchase orders that can be used to
assure that the inventories in control of the entity are actually owned by the entity and
are not held on account of any 3rd party. Further, the allowance on account of scraps or
obsolete items shall be verified to assure that the allowances are adequate in
accordance with the type of produce manufactured or dealt by the entity. If the entity
does not have any established policy for such allowance the same must be established
immediately. In addition, the policy , if any followed by the company for receiving the
order or halting the delivery or keeping 3rd party’s inventory in its warehouse the must
be taken into account while taking physical count of inventories. The auditor shall also
check the records related to transfer of high value items from central to regional
warehouse to assure that the value and units recorded by both the warehouses are
matched (Appelbaum, Kogan and Vasarhelyi, 2018).
 Valuation and accuracy – to check the valuation and ensure the accuracy the auditor
shall verify (i) established terms, conditions and authorization process of major
purchases (ii) inventories kept as pledge, if any with the 3rd party (iii) inventories I
possession of the entity which has already been sold but not delivered (iv) item prices
match with the price charged in the invoice (v) opening inventory in addition to
purchases after deducting the sales units matches with the closing inventory. Apart
from all these the auditor shall verify the authorised system of the entity for issuing the
inventories like LIFO, FIFO or average method. Further, it shall be verified that the
inventories are measured at cost or market value; whichever lower (Gaynor, et al.,
2016).
(c) Explanation of requirement of ASA 701
Major purpose of issuing ASA 701 for communicating the KAM is to ensure the
commitments towards conformity with recent improvements to the auditor’s reporting that is
developed by the IAASB. ASA 701 mandates report of KAM under the report of the auditors

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and t enable to auditors in deciding whether a particular matter to be specified as KAM in their
report. This in turn will enhance the quality of the financial report and will improve the
transparency of audited financial report (Auasb.gov.au, 2019). Looking into different issues
involved with inventories of Computing Solutions Ltd all the matters will not be considered as
KAM. However, the matter that to win a tender and curb the competition, the entity consented to
deliver the items at a price of 10% lower the cost will be considered as KAM as it will have
significant impact on the revenue as well as profit of the entity. Further, the same will not the
entity’s profitability position in true and fair manner. Disclosure for the said KAM will be –
The entity agreed to deliver items at a price which is below 10% of cost price
To win a tender and curb the competition, the entity consented to deliver the items at a
price of 10% lower the cost which will have significant impact on its revenue. 1st shipment for
the same is due in July 2019. Management has been asked for providing the justification for the
same and clarifying how the same will have positive impact on the entity (Kachelmeier, Schmidt
and Valentine, 2017).
Case 2 – Beautiful Hair Ltd
While carrying out the audit of Beautiful Hair Ltd by Howard & Associates it is found
that in early this year the entity acquired small manufacturing entity Shimmer Pty Ltd which is
engaged in manufacturing high quality hair styling products. It was identified by the
management of Beautiful Hair that Shimmer’s product will fit the product line of Beautiful Hair
extremely well and hence it accumulated funds from Regional bank for its acquisition. Shimmer
applies a special formula for its product and the secret formula is only known by its owners. As
Beautiful Hair acquired Shimmer, it now wants to recognise the secret formula used by Shimmer
as intellectual property that will be reported as intangible as in conformation with AASB 3
(Auasb.gov.au, 2019).
(a) Recognition and explanation of major assertion related to intellectual property
Considering the above mentioned issues for inventories of Computing Solutions Ltd, key
assertions identified are as follows –
 Accuracy and existence – notable assertion in relation wirh accuracy is the assertion that
figure included in the annual report for intellectual property are properly based on the
valuation approach applied by the entity for valuing intellectual property. Major risk
associated here is that the value of intellectual property related transactions are not valued
and reported accurately (Sirois, Bédard and Bera, 2018). To recognise any asset under
financial statement, the economic benefit associated with the items that will be generated
in the future period will be the earning for the entity and the value can be reliably
determined. As Beautiful Hair acquired Shimmer, it now wants to recognise the secret
formula used by Shimmer as intellectual property that will be reported as intangible as in
conformation with AASB 3. It is likely probable that at the time of reporting the
intangible assets, its value has been reported inaccurately or the same has been overstated
or understated.
 Occurrence – key assertion related to occurrence is the assertion that transactions in
relation with intellectual property have taken place and no significant issue is related to
the recognition of the same. As Shimmer applies a special formula for its product and the

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secret formula is only known by its owners, it is probable that the entity does not have
ownership for the same or the intellectual property is not able to meet the recognition
criteria (van Buuren, et al., 2014)
(b) Identification and description of substantive audit procedure
Analysing the above notable assertions for recognition of intellectual property as
intangible asset byBeautiful Hair Limited below mentioned substantive audit procedures can be
performed –
 Existence and accuracy – documents related to the ownership required to be verified the
auditor to ensure that the intellectual property is won by the entity. Further, it shall be
identified that the economic benefit associated with the items that will be generated in the
future period will be the earning for the entity and the value can be reliably determined.
Further, the value reported for intellectual property is in accordance with the authorized
valuation of the entity for valuing the intangible assets (Kharisova and Kozlova, 2014)
 Occurrence –auditors are required to verify that the recognition criteria of intangible asset
as per AASB 138 have been fulfilled by the intellectual property to be recognised by
Beautiful Hair Ltd. Further, the auditors shall verify the associated transactions to assure
that the acquisition criteria met in compliance with the requirement of AASB 3. AASB
10 states that if the entity is not considered as acquirer, the acquired entity’s asset shall
not be reported by acquirer. Hence, the same shall be verified (Mock and Fukukawa,
2015).
(c) Explanation of requirement of ASA 701
KAM as per the requirement of ASA 701 shall be reported under a separate head of
annual report issued by the entity. It will help to make the report more transparent and the user
will be aware of the issues involved with the entity. Further, the same will assist the preparers
revising the assumptions and judgments made by them and accounting treatments provided for
preparing financial statements (Cordoş and Fülöp, 2015). Looking into issues involved with
intellectual property recognition by Beautiful hair Ltd, the mater that will be considered as KAM
is that Shimmer Pty Ltd that is acquired by Beautiful Hair Ltd, uses a special formula for its
product and the secret formula is only known by its owners. It is probable that the entity does not
have ownership for the same or the intellectual property is not able to meet the recognition
criteria that are to be recognised. Disclosure for the said KAM will be –
Intangible asset recognition for intellectual property
For the year closed on 30th June 2019 Beautiful Hair Ltd reported intellectual property
under the head intangible asset amounting to $ 160 million. Disclosure for the same has been
provided in note number 12. Management has been asked for providing the justification
regarding the recognition criteria of intellectual property under the head intangible asset. Further,
the management has been asked for providing justification regarding its valuation (Demartini and
Trucco, 2016)
Conclusion and recommendation
After carrying out the analysis for Beautiful Hair Ltd and Computing Solutions Ltd it is
identified that notable assertion involved for the inventories of Computing Solutions Ltd is

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valuation and accuracy and completeness whereas in case of Beautiful Hair the major assertions
are occurrence and existence and accuracy. KAM identified in case of Computing Solutions Ltd
is the agreed to deliver items at a price which is 10% below cost price and in case of Beautiful
Hair is recognition of intellectual property as intangible asset. The auditors are hereby
recommended to report KAM with regard to these matters for both the entities.

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Reference
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