Auditing and Assurance Assignment

This assignment covers key assertions, substantive audit procedures, and requirements of ASA 701 for inventory valuation and intellectual property. It includes references and is written for a university course.

Auditing and
Assurance Assignment

1
By student name
Professor
University
Date: 25 April 2018.
1 | P a g e

2
Contents
1 a) Key Assertions......................................................................................................................................3
1 (b) Substantive audit procedures.............................................................................................................3
1(c) Requirements of ASA 701.....................................................................................................................4
2 (a) Key Assertions.....................................................................................................................................5
2 (b) Substantive audit procedures.............................................................................................................5
2 (c) Requirements of ASA 701....................................................................................................................6
References...................................................................................................................................................8
2 | P a g e

3
1 a) Key Assertions
The two key assertions at risk are as follows:
Valuation: As per the accounting standards, inventories are to be recognized at cost or net
realizable value whichever is lower of the two. However, normal wastages are included in the
valuation; abnormal wastages are to be specifically excluded from inventory valuation. Items
involving technological hardware or software usually bear high degrees of risk of obsolescence
as a lot of updating of it happens in the technology market all the time. Computing Solutions
Limited operates in such an industry and hence and thus, that should be kept in mind. Testing for
impairment could be a frequent phenomenon for the company to assess the true value to be
reported (Bizfluent, 2017).
Obligation and Rights: The rights and ownership are covered under this assertion. As the
company is in the practice of moving goods from a centrally located warehouse to regional
warehouses at six different locations this assertion bears a potential risk. In transit, goods or
goods held in consignment may be subjected to such risks. Since quite a few outside parties such
as insurance provider, transport agent and the consignee are involved, rights and ownerships
must be clearly understood (Alexander, 2016).
1 (b) Substantive audit procedures
Substantive audit procedures: In relation to matter concerning the audit, these procedures are
performed to gather conclusive evidences. These procedures are further divided into three
different categories, which are Test of control, Test of detail and Analytical procedures.
Depending upon the effectiveness and efficiency of the internal control system, the nature, extent
and timing of substantive audit procedure may vary (Goldmann, 2016).
For Risks pertaining to Valuation: The auditor needs to perform a reconciliation of inventory
by obtaining an item wise detailed list of inventories from the management and comparing that
with the general ledger. For getting information on net realizable value, information available in
the relevant market should be considered. Observation of physical inventory count is an
important step in collecting audit evidence. Testing of pricing for the inventory also needs to be
undertaken to gather additional audit evidence (Choy, 2018). The phenomenon should be
repeated at least twice a year. Valuation of closing inventory is an area prone to manipulation
and thus it requires dedicated attention of the auditor.
For Obligations and Rights: This question comes into picture in the event of involvement of
third parties. The agreements between the buyer and the seller would provide evidence of
substantive nature and would give a clearer picture of the title of ownership and the risks and
3 | P a g e

4
rewards associated with it. Another source of information on this regard would be the minutes of
the meetings of the board (Belton, 2017).
1(c) Requirements of ASA 701
As per ASA 701, the auditor is expected to describe each key matter in detail. Subheadings and
sections wise differentiation is made in the report. A specific disclosure regarding the use of
professional judgment must be given for the matters covered under key matters. The auditor
needs to make it clear through his report that the report on key matters is not a separate issue but
a part of the entire audit report (Farmer, 2018). This enhanced audit reporting positively affects
the transparency involved in the audit. The key audit matters draw the attention of the users of
financial statements and they know clearly at to which aspects were the most discussed matters
between the auditors and the management and those charged with the governance. They are
made aware of the matters, which had warranted most detailed responses from the management.
A decent flow of communication is also recorded between the auditors performing the audit and
the people who oversee the governance aspects of the entity (Chron, 2017).
Inventory valuation may or may not become a key audit matter. If it involves a certain level of
complexity, then it must become a key audit matter, as it is a significant part of the balance sheet
and income statement. Since there is substantial amount of judgements and estimates by the
management on valuing the inventory, the necessity for substantive evidence is felt more
(Werner, 2017).
As per ASA 801, following are the disclosures required:
 The auditor is supposed to disclose facts under a separate heading as a part of a separate
section. The paragraph should be positioned close to the audit opinion para. The
information is to be put in the order of their importance (most important of the key
matters to be written first).
 The auditor needs to provide reasoning and rationale for drawing attention to the matters
mentioned therein. To the extent possible, use of technical words should be avoided to
make it easier for the users of the report to understand what is being said (Trieu, 2017).
 Information should be given on the extent of disclosure and representation provided by
the management.
There may be situations where the auditor feels as per the best of his judgement that no such
key matters requiring special attention exists, a note regarding the same mist be given by the
auditor in such scenarios. Where something has already been separately disclosed for
meeting the compliance requirement of AS 701, then also such paragraph is not required. A
disclosure regarding these situations still need to be given under the heading “key audit
matters”.
4 | P a g e

5
The methods and procedure used by the auditor to collect audit evidences shall also be
disclosed. The observations made which were used for conclusions are also required to be
disclosed (Sithole, et al., 2017).
2 (a) Key Assertions
Intellectual property has enormous significance in modern day scenario. If a study by the
American Intellectual Property Law association are to be believed, Tangible assets stood at
80 percent of the total assets for a company in earlier times. That ratio has gone down
significantly today and roughly, 75 percent of the assets held by an entity are intangibles.
Two Key Assertions at risk:
Valuation: The valuations pertaining to intellectual property hinges on the nature and type of
entity as the use of the intangible asset would be different in each of the categories of entity.
If an intangible asset is covered under a trademark, copyright or a patent, its valuation turns
out to be rather simple but in situations where it is not so covered such as know-how
including knowledge level and expertise of employees, lists of customers, production
channels and distributions networks, the computation turns out to be very complex (Linden &
Freeman, 2017). Even for assets that seems equally valuable, assigning value to them
becomes a tough task as linking them directly to an activity of earning revenue is difficult at
times.
Obligations and Rights: Many issues pertaining to ownerships related to intellectual
property occur. Many legal battles take place about the claims on ownership of copyrights
and patents every year. For trademarks, the issues are comparatively less. Because of the
lawsuits which take place, the companies must show contingent assets/liabilities till the time
of the outcome of the legal ownership battle as until the proceeding of the court of law are
concluded, they can’t be recognized. The reasons for a greater risk on assertion is mainly
infringement of certain rights, deficiencies in title or license and joint ownership rights
(Saeidi, 2012).
2 (b) Substantive audit procedures
Substantive audit procedures: This is a systematic process. Gathering information about
the asset including its nature forms the first step. Time should be spent on studying the
legislations pertaining to the specific type of asset. Current and previous records should be
studied to analyse the product’s history. Documents related to the title or the auditor to give a
clear picture about the legal owner should examine ownership of the property. For assets that
have not been acquired rather they have been developed by the entity over a period, attention
needs to be paid to the research and developmental expenses (Defond & Lennox, 2017). It is
vouching and verification needs to be conducted.
5 | P a g e

6
Interview is another important tool in gathering audit evidences. Staff responsible or the
management should be interviewed to address any questions or doubts that may arise to the
auditor. Both the users of the intellectual property as well as the personnel involved in the
developmental aspect of it should be handed questionnaires and the responses obtained on
them could help in gathering substantial evidences (Raiborn, et al., 2016). To unearth any
potential for unauthorized access, surprise physical inspection should be made. Documents
pertaining to ownership, policy guidelines and contracts entered with the government or
other people should be examined. Industry relevant practices should be kept in mind in
assessing the value of the assets. There should be defined scope for permissible deviation.
2 (c) Requirements of ASA 701
According to the provisions contained in ASA 701, key audit matters can be defined as those
issues that require dedicated special attention of the auditor while discharging his duties of
performing the audit. Detailed description and information needs to be provided by an
auditor for the matters that have been categorized as key audit matter (Dichev, 2017). The
auditor should make sure that this piece of information is presented separately in different
section under an appropriate heading. The fact that the matters contained therein have been
presented by use of professional judgment and there exists proper rationale for it must be
clearly mentioned. It is to be clearly mentioned in the report by the auditor that the opinion
expressed on key audit matters is not aloof and it is a part of the opinion overall of the
financials. This is an enhanced form of audit reporting which was introduced in the year 2015
with an objective of increasing the level of transparency in financial reporting requirements.
The shareholders and other stakeholders have been inquisitive about matters that warranted
the maximum amount of discussions between the management and the auditors and those
that required additional detailed information to be presented to the auditors by the people
who have the governance responsibilities of the company (Jefferson, 2017). The key audit
matters also inadvertently augur well in terms of communication standards between the
auditors and the management. Because of the detailed discussions and additional importance
given to these matters by the auditor, the management also feels the necessity to devote more
time to focus on these issues knowing the fact that these matters would ultimately become a
significant part of a public document in the form of audit report. Thus, a dual purpose is
being served this way.
There is no hard and fast rule that intellectual property valuation must become a key audit
matter. It all depends on the level of complexity involved in determining the valuation of
these items. The items that are complex are mainly since their valuation involves certain
degrees of estimations and approximations as well as the provision would require some level
of prediction to be done by those responsible to present those figures (Knechel & Salterio,
2016). This makes it increasingly necessary for the auditor to accumulate audit evidences that
are conclusive and substantive in nature to back the valuation assertions. In some of the cases
6 | P a g e

7
where technical expertise or skill level or goodwill is involved, it becomes almost impossible
to give an accurate picture of the valuation.
Following are the disclosure requirements of ASA 701:
 The disclosures are to make using separate headings and sections wherever
applicable. Care should be taken to ensure that the paragraph is near the audit opinion
paragraph. The structuring is to be done by the auditor according to the level of
importance.
 The auditor needs to provide reasoning to support his claim for drawing attention to
the matter in question. Appropriate explanation regarding these needs to be included
in the report. To make sure that the users of the report understand clearly as to what is
being explained by the auditor, it is necessary that the auditor does not use jargons or
terms which are technical. There may be situations where the reader of the report or
the user of the financial statement does not possess an advanced level of accounting
and audit related knowledge. However, it is still necessary for them to be clear about
what is being said or highlighted.
 The report should contain information depicting the quantum of disclosures and
extensive representation the management has made related to the above-mentioned
matters in question.
 There could be instances in audit depending on the nature of business and operations
of the client being audited, that there the auditor believes there does not exists any
matters that would require additional attention for the shareholders or other users of
the financial statements. In such cases, he need not include matter in such paragraph.
However, this does not absolve the auditor from making a statement or declaration in
the audit report that no such matters of key nature exist for the period under audit.
This statement also needs to be made under the appropriate heading of “Key audit
matters”.
 The methods, tools and procedures used by the auditor in gathering audit evidences
also needs to be disclosed by him.
 Whatever observations are made by the auditor while going through the process must
disclosed and how these observations were incorporated in forming an overall
conclusion or audit opinion also needs to be stated.
7 | P a g e

8
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?.
Journal of Accounting Research, 55(3), pp. 591-627.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of
Media Ethics, 33(1), pp. 1-12.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
8 | P a g e

9
Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African
Journal of Business Management, 6(23), pp. 7031-41.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
9 | P a g e