This assignment involves understanding audit procedures, including inventory valuation and other analysis to make financial changes and variations for providing auditor's opinion. It also covers the structure of disclosure provided by auditors and practical based scenarios summarizing audit formation subject to disclosure.
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AUDITING
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Table of Contents INTRODUCTION...........................................................................................................................1 QUESTION 1...................................................................................................................................1 a) Key assertion at risk in relation to property land and equipment...........................................1 b) Substantive audit procedure in response to risk identified.....................................................2 c) Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report.......3 QUESTION 2...................................................................................................................................5 a) Key assertion at risk in relation to property land and equipment...........................................5 b) Substantive audit procedure in response to risk identified.....................................................5 c) Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report.......6 CONCLUSION................................................................................................................................7 REFERENCES................................................................................................................................8
INTRODUCTION Auditing is a process of evaluating the financial records of the organisation to assess the authenticity of records. This process is performed by auditors to evaluate the financial records if these records are maintained as per Accepted Accounting standards, provisions and accurate legislations (Barrett, 2012). This report discuss the legal and professional issues appointing in independent auditors report. Duties and responsibilities of independent auditor, current auditing standards and the major concepts are illustrated in practical based scenario. There are key audit matter and treatments regarding the material misstatement and identified risk also addressed in this report. QUESTION 1 ASA501–Auditevidence-Specificconsiderationforinventoryandsegment information contains the rules related to application and other explanatory matters subject to specific inventory and segment data in an audit of financial report. This standards mainly centralised around the following areas such as; a) Procedure to be performed by the auditor while preparing financial report to attain the adequate audit evidence for the existence and state of stock (Carey, Monroe and Shailer, 2014). b) Responsibilities of auditor in terms of appearance of at physical inventory counting. c) Responsibilities of auditor while undertaking the control of third party if it is material to the financial reports. d) Requirements to attain adequate presentation and disclosure of section data with the relevant financial reporting. a) Key assertion at risk in relation to property land and equipment Audit assertion:It is considered as a procedure that refers to the assessment of financial statements according to company's policies, guidelines, financial reporting and internal controls. A declaration upon measurement, presentation and disclosure of financial and non financial data of business are considered in audit assertion (Carson, Simnett and Wright, 2012). Advanced Computer Solutions is a computer software solution providing company. There is an audit program organised and performed by independent auditors. While assessing the risk of material misstatement and evaluating the proper response to the inventory of company at 30thJune 2018 following Key assertions come across; 1
1. Assertion in terms of high level of returns owing to suspected software problem that may result less returns and high inventory turnover ratio 2. Threat of breaching of going concern accounting concept b) Substantive audit procedure in response to risk identified Audit procedure An Audit procedure is a formation of analysing the quality and standards of financial information of organisation provided by the clients (Carey and Tanewski, 2013). Auditors use audit procedures to clarify and prove their audit assertions. It remain based upon the audit assertions through which auditors analyse that whether the accounting standard are divided in properly in accounting records or not. Risk 1 In first assessed risk, scenario indicates towards the problem of managing the inventory levels and management in near future. The produced regarding the assessment of identifying the risk of having less returns and high turnover ration and evaluation process regarding the changes in different forms. As the return may lead organisation to entertain hight inventory level that will indirectly increase the inventory level. Physical inventory count audit procedure The above case is mainly associated with inventory retention and management. By considering this the nature of the scenario is covered in inventory auditing procedure of observe the physical inventory count (Chalmers, Godfrey and Lynch, 2012). This inventory procedure mainly associated with physical verification of inventories that are counted in normal business flow. Auditors analyse the level of inventory in physical form. All the related documents and assessments are and counted according to proper accounting procedures and rules. It will help to analyse the inventory account of organisation that fluctuates during a particular time span. As per the above case of Advanced Computer Solutions the auditing standard would be centralised around physical verification of returns owing to suspected software problems. Auditors have to analyse the books of accounts of Advanced Computer Solutions of last financial year (from 1stJuly 2017 to 30thJune 2018). the physical verification will be done one the basis of physical check of inventories retained by company for the current financial year. This will also considered in key audit matters in independent auditors report. Risk 2 2
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Second assessed risk violates two major auditing standards which is ISA 570 related Going Concern and 501 which is related to existence and valuation of inventories (Goos, Dole, and Geiger, 2012). After evaluating the risk of material misstatement of inventory of Advanced ComputerSolutionLimitedAuditorsfindoutthatOrganisationgetalargegovernment department with various products. To get competitive advantage company started supplying the items at 10 percent less their cost price. This is one of the important information was required to disclose by the company to stakeholders of organisation. Substantive audit procedure for revenues ISA 315 Covers the rules and standards to produce auditing standards for recognition of interim and financial audit tests. As per the above material misstatement element it is evaluated that company started to supply the material 10% less on cost which will directly impact upon the revenues of organisation. Apart form it, this will impact the consistency and existence of new business in near future. Following steps are required to taken up by auditors such as; Evaluatingtheoverallrevenueagainstpriorperiodandevaluatethesignificant fluctuation due to reduction in cost by 10%. Ana lying the impact upon gross profit and net profit margin Audit of credit and debit notes while disclosing and determining the accounting for ledger accounts and completeness of the revenues. Analysing the trade customers orders required and orders place in sales to ensure the completeness of revenues. Preparing the notes to both the pre and post period of sales which are recognised in accounting to ensure the cut-off applied accurately upon business operations. c) Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report AS per the International Standard on Auditing 701 Communicating Key Audit matters in the auditor's report indicates towards the statements that remain avoided while preparing and disclosing the final reports of organisation (Lodhia and Jacobs, 2013). Key Audit Matters:- it is those matters, which is selected by government assigned person. which is written or mention in the auditors report by the auditors. It is auditor's judgement which is important for making financial report as well as for current period, these judgements are risky for auditors. This include the difficult areas of audit, which become barrier for the auditors and it's also include the sufficient audit evidence that remain essential while making the audit procedure. Auditors has to 3
change it's approach according to circumstances and modified it. Auditor has to mention all key audit matters in the auditors report. Therearesomekeyriskareasidentifiedbyauditorswhileauditingofmaterial misstatement of organisational accounts. It is analysed that organisation following risk areas are identified as key audit matters defined as follows; High level of returns owing to suspected software problems in Advanced Computer Solutions Bifurcation of central warehouses in six different regional sections and warehouse in March 2018 Consideration of 10% below cost in price supplying the items and for the first tome to be delivered to the government department in the middle of July 2018. Determining key Audit matters There key audit matters are those elements which are disclosed by the auditors subject to different section (Martinov-Bennie, 2012). These are defined as per categorised form. There are two main identified risk are ascertained in audit report such as; Risk of having high inventory turnover ratio due to high level of return inwards Risk of having less revenues related and threat of breaching of disclosure procedure. Communicating key audit Matters The auditor shall communicate the key audit matters determined in accordance with paragraph 8 in a separate section of the auditor’s report under the heading “Key Audit Matters.” The auditor’s opinion which is manly associated with analysing the more identified and comprehensive manner. Main key audit matters are required to address which are as follows: a)itisrequiretocommunicatethemajorformationofbusinessintermsof communicating the key audit matters for getting increased turnover ratio. b) It is required to communicate the key audit matter that accrued in organisation to consolidate the variations. Disclosure Requirement ASA 701 Itis assessed that the information provided under the audit is formed around risk based scenarios and it is identified that assessed risk also exists with classified material misstatement. 4
It is observed that the supervision of the financial statements and the figures are undertaken with intangible assets. The policies and amendments made by advanced computer solutions are not defined clearly and computing the solutions with respect of July 2018. QUESTION 2 a) Key assertion at risk in relation to property land and equipment ASA315IdentifyingandAssessingtheRisksofMaterialMisstatementthrough Understanding the Entity and Its Environment covers the rules related to find out any material misstatement.TheAUASBrecognizesthatIFACistheproprietorofcopyrightinthe International Standard on Auditing consolidated in this Auditing Standard all through the world (Nicoll, 2016). This Auditing Standard replicates generous parts of the comparing International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and distributed by the International Federation of Accountants (IFAC), in the way depicted in the announcement on Conformity with International Standards on Auditing. 1. Assertion in term of distinction between capital and revenue expenditure Find out in Auditors analysed that there is a separate procedure and plan is required to considered in auditor's opinion while communicating the expenditure audit of company. 2. Key assertion in terms of charging the depreciation on fixed assets The conveying measure of a thing of property, plant, and hardware will incorporate the expense of supplanting the piece of such a thing when, to the point that cost is acquired if the acknowledgement criteria (future advantages and estimation dependability) are met. IAS 16 perceives that parts of a few things of property, plant, and gear may require substitution at normal interims (Shah and Nair, 2013).The conveying measure of those parts that are supplanted is de-recognised as per the non-recognition arrangements of IAS 16.67-72. [IAS 16.13] b) Substantive audit procedure in response to risk identified Audit procedure of Revenue and capital expenses A financial audit is a chance for business to find out reliability and proper documentation of revenue expenses. The revenue expenses can be paid by the company according to income statement and invoiced expenses (Stewart, Kent and Routledge, 2015). In given case study 5
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management shows previous year's audit and there is mark some problems regrading to difference between capital and revenue expenditure. But there is revenue expenses were capitalized and capital items are including in repair and maintenance. So solving this problem there is need to follow proper procedure of audit related to revenue and capital expenditure. The audit procedure of capital and revenue expenditure provided by financial statements and reports. These are analysed by auditors to monitor trends and variances audit of revenue and capital budgets. These budgets are post implementing of reviews related to expenditures. In auditing procedure audit and review of small to medium sized Australia companies and in this consist of those companies are overseas owned. There is prepare to solicitor accounts and provide advice for risk management policies. After this assessment of specific risk and outsourced internal audit assignments. For follow the procedure need to internal controls of expense and reasonable check of expenditure. Audit procedure of fixed assets Audit of financial statements are performed to provide reasonable assurance that all transactions related to company are perform financial statement according to generally accepted accounting principle. The balance of fixed assets, deals with those assets that can easily convert into cash. It is shows as common material account balance in financial statements. The audit procedure of fixed assets are as follows - Depreciation of fixed assets The business have many assets and on these assets charged appropriate depreciation according to schedules. The only common fixed assets is not depreciated that is land. In given case study identify risk regarding to depreciation calculations because they are charged different depreciation rate on assets. Some assets have been too much low and too much high so there is create differentiation (Xu and wet. al., 2013.). So business owner should attach a depreciation schedule to real estate because in Australia markets has a long history of commercial buildings appreciating in value. There is necessary for company to apply common way of accounting. All depreciable assets therefore are depreciated are using a straight line method or an expedited depreciation method. Straight line depreciation method applies on all fixed assets and fixed amountreductionfromtheassetstoeveryyear.Expediteddepreciationfrontloadsthe depreciation in the early years that is owned. There is need to establishing the appropriateness 6
and correctness of the depreciation schedule for fixed assets is another essential fixed assets auditing task. c) Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report The most common KAM related to carry value of assessment of different expenses that are used to control by the manager of company.Revenue is consider to key driver of an organisation performance and stakeholder values. Almost half of the acquisition KAM's cited complexities with measuring circumstance and possible consideration from the current and past expenses done by the company in order to complete the performance of different function of company. Determining Key Audit Matters a) it is recognised with proper procedure of treatment of capital expenditure and revenue expenditure. b) It is required to communicate the methods of valuation of fixed assets. Communicating Key Audit Matters The reviewer will depict each key review matter in the Key Audit Matters segment utilising an proper subheading, aside from in the conditions clarified in passage 11. The portrayal of each key review matter will include the main function. Disclosure Requirement of ASA 701 While assessing the information provided it was recognised that audit is risk-based and focuses in identifying and assessing risk related with existence and the classification and material misstatement of assets and obtaining Audit evidence that is appropriate and sufficient in providing basis for the audit opinion. Business combination was evaluated and basis was established about the potentiality of the intellectual property. Detailed observation, complete review of the financial statements, and interviews were taken in identifying the existence of the assets and the type of intangible assets. Insufficient information about the management policy and the basis of classification of assets posed problems in the audit process (AASB 701, 2015). 7
CONCLUSION The above report summarise the structure of report in terms of determining the stages while making the key audit matters. It is summarised that dinting standards and valuation are essential aspects in terms of making the financial changes and variations for providing auditor's opinion. The audit procedure subject to inventory valuation and other analysis in terms of making the structure of disclosure. Practical based scenario summarise the audit formation subject to disclosure provided by auditors. 8
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