Auditing: Key Assertions, Substantive Audit Procedures, and ASA 701

This article discusses key assertions at risk in auditing, substantive audit procedures, and the importance of ASA 701 in communicating key audit matters.

Running head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................3
Question No 1............................................................................................................................4
Key Assertion at Risk in relation to Inventory.......................................................................4
Substantive Audit Procedure for above mentioned risk.........................................................4
Auditing Standard ASA 701, Communicating Key Audit Matter.........................................6
Question No 2............................................................................................................................7
Key assertions at risk in relation to the intellectual property intangible asset.......................7
Substantive audit procedure could perform in response to each risk.....................................8
ASA 701 Communicating Key Audit Matters in the Auditor’s Report.................................9
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

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Introduction
Auditing is the process from which the auditor able to check the company financial
statement and able to give its opinion whether the company financial report has true and fair
view or not. Each company should have auditor report in their annual report as it helps them
to gain confidence of company financial user (Alzeban and Gwilliam 2014). Auditor carries
many audit processes in the business which help it to gain proper amount of audit evidence in
the company business. Companies are working in a competitive world, so it has to show good
position of company financial statement, and for that it can have some material misstatement
in the balance sheet, so the auditor checks this materiality. The report shows the company
name Computer Solution and Shimmer pvy Ltd. Auditor has to ascertain the risk which is
associated with the company’s financial statement and able to base its opinion upon the audit
evidence (Chen et al., 2014). This report aims to know the amount of risk associated with the
company financial statement and how they can deal with the same in their business. Auditor
also provides assuring service to a different company after the completion of the audit
process in the company. Risk is a kind of situation which is faced by each kind of
organization so it is the auditor who checks how the company can manage the risk associated
in the business. The report also shows some aspects of ASA701, the risk in which the report
based is on the Inventory and Intellectual Property Intangible Asset. It also shows the
different audit procedure which is carried by the auditor on the company financial statements.
It also shows how the auditor can show and communicate essential audit matter in the
company annual report (De Simone, Ege and Stomberg 2014). It shows how the auditor can
give independent opinion on company financial statement.

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Question No 1
Key Assertion at Risk about Inventory
 Existence in Financial Statement – Auditor, has to check that the company is having
proper amount of inventory in their business. It should ensure that the amount which
is reflecting as inventory is existing in the company business. As per AASB 102
company should give proper disclosure about the inventory in company financial
report. These will help the auditor to know the materiality in regards to the inventory
of company and help it to minimize the risk of fraud in the same.
 Right and Valuation Transfer – The company is offering an excellent and
affordable package for its customers. These help them to gain proper business in the
market, so how the company value their inventory is also a significant factor in
business (Ege 2014). The company strategies in regards to branding and promotional
package are for a minimum period. As the period end, the company will not able to
sell its product quickly in the market, so it will also put a question upon the valuation
of company inventory. This show that the item which listed in company report may
have some materiality in the same and the critical assertion which can make towards
the inventory is that whether it has transferred to the original owner or not.
Substantive Audit Procedure for the above mentioned risk
A) Existence in Company Financial Statement
 It should check the position of the inventory as if the company is holding the
inventory for a long time; then it should take detail about the inventory from
both parties (Furnham and Gunter 2015). The company should record the
allowance for obsolete inventory, but is unable to record the same; then
proper justification should be given by the company. The external

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confirmation should be done by the auditor in regards to old due and paid off
amount. It helps the auditor to proper evidence of the same.
 The company should show all the details of inventory which will help the
auditor to know about how the company is carrying the inventory in their
business. The auditor should ensure that the company has provided all the
details in regards to the valuation of its inventory in the financial statement.
B) Valuation and Right Transfer
 The auditor should check the bank transaction to get the clarity of company
transaction in their business activities. It should check whether the company
has transferred all the information correctly in company accounts, it should
verify the account properly of both side in the financial statement (Groomer
and Murthy 2018). It can reduce the risk by analysis the term of condition of
the company. The auditor should check that both parties have accepted the
term and condition duly so that the no fraud in regards to the agreement.
 It should analysis the term of a contract that can help the auditor to know the
details of the provision of return of goods (Hall 2015). It should verify that
the parties are aware of all the conditions in the contract, the transfer which
has taken place is legal, and all the rules followed by company.
Auditing Standard ASA 701, Communicating Key Audit Matter
This new standard help the user to know the company in a better way that can help
them to take proper decision in regards to investment in a business. Auditor has to carry
many audit process in the company so after completing the same it reports the vital matter in
key audit matter in the report (Khlif and Samaha 2014). These are the matter which should be
checked by the auditor properly; this standard also includes the assessment of risk which
associated in company financial statement. These help the auditor to carry its audit process

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correctly in the business. This standard help the company to gain more confidence of
financial user as it shows all the essential matter related to the company information in the
key audit matter section in annual report (Knechel and Salterio 2016).
The key audit matter in company Computer Solutions shown below:
 The company has accepted the tender on a loss of 10%, so this can serve as negativity
as it will decrease the profit of the company.
 The company is having a software problem so this can affect the brand value in the
market and can affect the overall revenue of the company
 The liquidity of the company is decreasing as it has invested the money in 6 different
warehouses.
The information in regards to key audit matters
 The software issue is there in the company, but still, it is asking for high return in
business
 The company has its own six different branches which will help them to cut the cost
of its operation
 It chooses to sell its product at a loss of 10% in the business.
 It should check the term of payment and delivery of the good to the business as well
as proper disclosure should be there in the annual report, so it will help them to gain
clarity of information in company business
Question No 2
There is no physical existence of the intangible asset, which also serves as a part of
the company annual report (Lisic et al.,2016). It includes brand recognition, patents,
goodwill, and trademark. The business can able to acquire intangible assets.

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Key assertions at risk about the intellectual property intangible asset
 Completeness – The risk of the company can provide complete information in their
financial statement. The company should readily available with all the information
which are there in the company annual report and should protect from infringement. It
shows that the company has shown all the information correctly in the business
(Newton et al.,2015). If there is some chance that the company is having any
infringement in company business so the auditor should restructure it. Auditor has to
provide proper assertion with audit evidence in company financial report. The
company Beautiful hair should show all the information of product in their financial
report (Pizzini, Lin and Ziegenfuss 2014). As this rises the concept of materiality, so
to make sure that the company is not having any materiality it should gather proper
information from company management.
 Accuracy – Company should record all the transaction accurately in their financial
statement. The auditor should check the balance, which will help it to know how the
company can value the asset in their business. As per AASB 138 company should be
accurate while transferring the information in their financial statement.
Substantive audit procedure could perform in response to each risk
Accuracy
 The disclosure should be checked by the auditor so that it can know whether the
company has disclosed all the related information or not. The management should
have a proper record so the auditor can verify that in order to obtain proper audit
evidence in the company.
 The verification of contract can minimize the risk of ownership. There should be
mutual understanding in regards to the use of intellectual property in business, so it
can also get the access of secret of product as there having mutual communication in

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business. It should verify that there is proper transfer of the right between the parties
of the contract (Wang, Li and Li 2014). There is no such evidence than Beautiful hair
cannot use the product in their company business activities. The company does that
with getting the permission then it has to serve for the penalty for the same.
For Completeness
 The main assertion which is checked by the auditor is completeness, so to confirm
that the auditor has to confirm from the company bank details and should confirm
with the bank. The auditor should check all the transaction; it should happen that the
company can show all the required information in their financial statement of the
company.
 The company should give proper evidence in regards to the deposit and receipt book
in the company financial statement. It should acquire all the related document in the
company financial statement. It should verify all the details of the company so that it
knows the existence in company financial statement.
ASA 701 Communicating Key Audit Matters in the Auditor’s Report
This standard show about the key audit matter in the company, as the auditor has to
carry different audit process in the business, so it should record the same all the detail
information on the company financial report, it should not manipulate information in
company business. These done so that all the company financial user can gain knowledge in
the company financial statement and able to take a proper amount of information in the
business. These will provide better decision option to the company used to carry its activities
properly in the business.
AASB 3 show about the intellectual Property under Shimmer Pty Ltd as it will able to
show the details of Beautiful Hair Pvt Ltd in regards to product and asset in business. The

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changes which are done by the company in their capital structure as before and after of
current company position in the business. These are the factor which should be reported in
the key audit matter of company Beautiful Hair Pvt Ltd and also should help the user to know
about the information and can take proper decision for the same.
Key Audit Matter includes some information:
 Change in the composition of capital and some other related aspects.
 The auditor report should show the detail of the value of an asset or residual asset
 The company should record the valuation of the asset after the application of proper
rules in business
 It should cross-check the cost of an asset in regards of before and after of the
acquisition and should record the same in financial report
Conclusion
The report concludes about the auditing process as to how the auditor can carry its
audit process in the company financial statement; it shows the process which is carried by the
auditor to gain audit evidence in the company financial statement. The report concludes the
audit process in two companies which given in the case study, as how the audit process
carried upon both company business. The report concludes the proper analysis of risk
assertion in both companies as it shows the assertion which made for Computer Solutions in
regards to inventory and intellectual property of Beautiful hairs. It also shows the two
substantive audit process which is carried by the auditor in regards to the risk associated in
company financial statement. It also shows the key audit matter which is there in regards to
the company and how the auditor can communicate those in the financial statement. These
also show about the ASA 701 which is related to the communication of key audit matter,
which is to be mentioned by the auditor in company financial statement. It shows many

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finding which should be disclosed by the auditor in their auditor report. This report also
shows the responsibility which is there in the audit profession and how the auditor can
perform its responsibility in company business. Lastly it concludes about the auditor
procedure which is to be followed to gain the audit evidence in company financial statement,
as how the auditor is capable of carrying its activities in the business.

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