Importance of Reporting Key Audit Matters and Auditing Reports

This paper discusses the importance of reporting key audit matters and auditing reports in maintaining appropriate and fair annual reports. It also includes two case studies and identifies key assertions and risks related to inventory and intellectual property intangible assets. The paper explains the requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report and the rationale for this auditing standard. It determines that the matters identified are key audit matters and provides the required disclosures in Key Audit Matters Section of the Auditor’s report as required under ASA 701.

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In a financial year auditing plays important role in maintaining appropriate and fair annual report
that is created by any firm. Auditors are in charge for the act into stakeholders or public benefits.
This operation is basically performed to provide and deliver high quality information regarding
true and fair outlook of the accounts formed in the process of auditing. In this paper, importance
of reporting key audit matters and Auditing reports will be discussed and emphasized to make
sure that the importance of reporting key audit matter is obtained in this assessment. reporting
key audit matter is crucial to communicate and connect with the stakeholders to provide them
detailed knowledge and information about the uncertain accounting situations that have been
detected in the process of auditing. This report will help to develop understanding and
knowledge of the users about the several concepts and ideas of auditing and assurance services
that are provided by the employed auditors in a company. In this report there are two case studies
on the basis of which questions are to be answered. This paper will also discuss the key
assertions needed relative to any risk. The paper also discusses the procedures which can be
applied for identified risks.
Question 1
(a) Identify and explain the two key assertions at risk in relation to inventory
The risk in relations in inventory is as follows-
Existence and occurrence
As per the statement of accountant standard 31, the occurrence or existence in relation to
inventory ensures, whether the inventory of the entity exist at the mentioned date and
additionally it ensures whether the transactions have taken place during that period. The record
of all the transaction, purchases or invoices related to inventory supports the existence of the
inventory (Green, 2013). All the transaction related to the inventory must be verified and
reconciled with all the available records or documents. The verification should not be limited to
books and ledger but also other audit processes like substantive testing and confirmation of cash
account balances.
Completeness

Statement of accountant standard 31, states that the assertions in relation to completeness
ensures, whether all the data, information or transactions related to the inventory is included in
the financial statement of the company or not. In support of this assertion, the auditor ensures by
collecting evidences whether all the transaction which should have been recorded is recorded or
not. In relation to the concept of materiality which permits the auditor to support his statement
regarding all the transaction evidence in the financial statement of the entity. The existence of
inventory in the client’s possession can also be an evidence that the inventory has been acquired.
b. Two substantive audit procedures in response to each risk identified above
The closing inventory has significant increment of 4% in case of computing solutions. In the year
2018, the average inventory has also increased in comparison to the previous year of 2017.
The substantive testing process in regard to the existence or occurrence of inventory involves
confirmation from an outside or third party or frequent basis. For instance, instead of using long
standing procedure, a practical confirmation of receivable is preferred. This process may take
place in the presence of client but the auditor must not be influenced by the comments made by
the client to whether a receivable is confirmed or not. In order to determine the correctness of the
address where the inventory is sent, the auditor must exercise due cure. The secondary test for
existence can be done by the verification of cash account balances (Anon., 2009).
The substantive testing process in regards to completeness involves the physical verification of
the inventory at the site. The verification also includes the identification and reconciliation of the
closing amount of the inventory maintained by the entity (AICPA, 2017). As it is evident that the
inventory has risen in comparison to the previous years and to ensure the same, it requires
regular inspection at the warehouse. The vouchers of all the transaction is also significant for the
verification of this assertion. All the transaction in relation to the inventory must be reconciled
with the available invoices of supplies and purchases. The last step would be the verification of
purse amount to the inventory utilized during the process.

(c) Explain the requirement of ASA 701 Communicating Key Audit Matters in the
Auditor’s Report and the rationale for this auditing standard. Determine if the above
matters are key audit matters, providing full rationale for the determination. If it is
determined that they are Key Audit Matters, provide the disclosures which are required in
Key Audit Matters Section of the Auditor’s report as required under ASA 701.
In the Australian standard of audit, the norm of reporting vital matter is enormous and that is also
mentioned under the ASA 701 section. The vital audit material is significant to yield autonomous
assessments of the auditor on the subject of the matter acknowledged by the auditors recognized
during the audit procedure. The vital audit matters stated in the testament of the auditor’s
testimony gives detailed information concerning unclear occasion which the auditors
acknowledged in the course of audit. Where in this segment there are probable measure that the
auditors recognized during the course of audit. Also, under this segment there are potential
measure that the auditors took alleviate such insecurity stated (Carson, et. al., 2014). Therefore,
this specifies that in this method the auditors specify both matters along with the circumstances
making sure the issue has been addressed. It could be stated that the auditor by this appropriately
converses with the shareholder and other concerned to deliver thorough investigation with
reference to circumstances and to address the vital matter which the resulting addressed in the
process of audit. The reasoning after having complete vital audio matters to describe that
everything was fair and square, there were more or less unclear difficult circumstances that
auditor had to inspect. In this drive the auditor has to account such stuffs to remain fair to the
shareholder and deliver factual and fair audit testimony that gives intended perceptions of
fairness of account made by the company. It can also be said that through this auditor ensures
that the report quality is high and the information quality given, also shows correct and right
information in regards to the key matters detected by the auditor in the process of audit. The
given points in the questionnaire, resembles audit key matter that is detected by the auditor in the
process of auditing. It can also be said that with the help of appropriate identification of Audit
key Matter, several points have been reported by the auditor. It can be observed that as there are
several uncertain data and information in every point, resembles to key matter that has been
detected by auditor to be uncertain. It also identifies that the key points look like to how sales
and inventory in the company are indeterminate and uncertain. It can also be determined from
this that there are several uncertain things in the inventory accounts and sales returns are further

investigated and measured. Hence it can be said that all the mentioned points above are audit key
matter that are documented and reported by the auditor identified in the process of auditing.
2 (a) Identify and explain the two key assertions most at risk in relation to the intellectual
property intangible asset
T e t o e a ertion or omp tin ol tion ltd in relation to intellect al propert or t e orm lah w k y ss s f C u g S u s . u y f h f u
are a elos b w:
i t and o li ationR gh s b g s T e main ri lin ed it t e a ertion made i a ociated it t e act alit t at– h sk k w h h ss s ss w h h u y h
t e compan a t e ri t to o ner ip o e reco ni ed a et n t e ca e o ea ti l air td t eh y h s h gh w sh f us g z ss . I h s f B u fu H L ., h
entit a de eloped immer P t td and t e proprietor o t e mall compan onl no a ory h s v Sh v L h f h s y y k ws w ys
orm la to ma e t e prod ct T e ecret element or t e orm la ill i ni t e intan i le a et of u k h u s. h s s f h f u w s g fy h g b ss f
t e companh y (Knechel and Salterio, 2016) T o t e ac no led ement o t e ame in t e inancial. h ugh, h k w g f h s h f
tatement a intan i le a et ill i ni a ri concernin t e ri t related it in t e prod cts s g b ss w s g fy sk g h gh s w h us g h u .
T e ri ill e related it detectin t e al ation o t e a et or ea ti l air tdh sk w b w h g h v u f h ss f B u fu H L .
al ationV u –
T e ri t at are lin ed it c ind o a ertion related to ea ti l air td ill e a ociated ith sks h k w h su h k f ss B u fu H L . w b ss w h
al in propertie and a et t at are no n in t e orm o intellect al propert ri t n t i ca e t ev u g s ss h k w h f f u y gh . I h s s h
intellect al propert ri t ill i ni t e orm la or man act rin prod ct t at are prod ced au y gh w s g fy h f u f uf u g u s h u s
immer Pt td T e a ditor ill detect and e al ate t e ri lin ed it al ation o intan i le a etSh y L . h u w v u h sks k w h v u f g b ss
ile con iderin t e important r le and pro i ion t at are concerned it al ation o a etwh s g h u s v s s h w h v u f ss s.
T ere ore t e con ideration o AA ill e made in t i ca eh f , h s f SB 3 w b h s s ( o er et alL uw s, . ., 2015).
(b) Identify and describe a substantive audit procedure that you could perform in response
to each risk identified above

To subdue the risk identified above several fundamental audit process would consist of these
mentioned below:
1. The risk concerning the proclamation of rights and duties could be subdued by inspecting
the procurement contract and finding the conditions and terms related to the procurement.
The auditor must confirm the presence and satisfactory evaluation of the right to use and
of the intellectual property. The rights and duties related to the asset being contemplated
reside with Beautiful Hair Limited and similar has been accurately divulged in the
financial declaration of the enterprise (Louwers, et. al., 2015).
2. The risk concerning the market price assessment of the intellectual property could be
subdued with fundamental audit process like gaining the list of intangible assets held by
Beautiful Hair Limited. The paying off the whole intangible assets is appropriately
evaluated for their accuracy process (Hayes, Gortemaker and Wallage 2014). It is
essential for the auditor to employ foot and trace ending balances throughout the audit
work done in the intangible assets of the enterprise. The policy regarding the paying off
and capitalization ought to be deliberated with the client and the suitability should be
scrutinized according to several policies and techniques.
c. Explain the requirement of ASA 701 Communicating Key Audit Matters in the
Auditor’s Report and the rationale for this auditing standard. Determine if the above
matters are key audit matters, providing full rationale for the determination. If it is
determined that they are Key Audit Matters, provide the disclosures which are required in
Key Audit Matters Section of the Auditor’s report as required under ASA 701.
According to the Australian Standards on Auditing 701 related with the corresponding key audit
matters, the auditor needs to involve each significant and relevant info linked with the use of
making decisions to users of report of auditors. The basic requirements based on the standards
involves detecting substantial kind of information that should be included in the financial reports

and the auditor’s audit report (Krahel and Titera, 2015). It will be depending upon the judgement
of people concerning his/her perception in respect to the significance of the matter for making
decision. The reason behind reporting important matters are because it will assist users of
auditor’s report by providing information to evaluate situation of the company and make
decisions after considering each critical information. The use of reporting such important matters
will assist people in evaluating decision made under various conditions and hence effective and
competent decision can be made respectively.
The intellectual property according to AASB 3 right attained under the acquirement of Shimmer
Pvt Ltd will characterize the procurement of physical and treasured asset by the company
Beautiful Hair Ltd. The procurement of this asset will characterize the substantial change in
capital structure along with the asset and liability situation of the company. The other important
audit matter related to this type of procurement will be associated with valuing and amortising
the asset at the same time bearing in mind the essential necessities and guidelines as appropriate
to the company. As a result, the same will characterize a Vital Audit Matter for the company
which should be testified correctly in the audit testimony. The reporting of similar is essential in
context of the venture capitalist for the reason that the capital structure and asset situation will
alter after valuing the assets and the handlers will take the decision after bearing in mind the
same (Vik & Walter, 2017).
The disclosure condition related with same subject under contemplation requires bearing in mind
the ASA 315 associated with Recognizing and Weighing the material risk in which the
assessment on the subject of the evaluation and acknowledgement of intangible asset has been
defined properly (Mock & Fukukawa, 2015). The disclosures would comprise The Asking price
of procurement of the asset, Residual worth of the asset, paying off process essential to run down
the asset and Assessment technique.
The matter ought to be unveiled as under “Beautiful Hair Ltd has acquired Shimmer Pvt Ltd
which is a small manufacturing firm making the first-class biological hair-styling goods which
could be brought into use by the company in its commercial manoeuvres. The elements essential
for manufacturing the items would characterize a substantial asset for the company.
Consequently, the same have been acknowledged as an intangible asset in AASB 3 and has been
testified as intellectual property right in asset section. The evaluation and paying off of this asset

would be made after bearing in mind the several procedures and principles as appropriate to
the company.
Conclusion:
n t e a i o a o e report it can e e ta li ed t at t e a ditin proce e compri e t eO h b s s f b v , b s b sh h h u g ss s s s h
deli eration o t e ital a dit concept and proced re e ential or cond ctin a ita le a dit orb f h v u s u s ss f u g su b u w k.
T e a dit e material proclamation made in detail o a et and le al re pon i ilitie ot er itemh u k y s f ss s g s s b s, h s
related it t e enterpri e and it a een appropriatel in e ti ated or t e ri related it t emw h h s , h s b y v s g f h sk w h h .
T e ndamental a dit mea re ill e nece ar to e applied in order to e al ate t e peci ic rih fu u su s w b ss y b v u h s f sk
related it t e main proclamation made n t i report it a al o ac no led ed tantial i ew h h s . I h s , h s s k w g subs ssu s,
r eillance or t e d ration o t e proced re o ld e te ti ied and re ealed in t e a ditor reportsu v f h u f h u sh u b s f v h u ’s ,
and t e important matter o deci ion o ld e icientl te ti ied to t o e indicted it o ernanceh s f s sh u b suff y s f h s w h g v .
T i report al o t died t e main d t and lia ilit o t e a ditor nder deli eration A a re lt t eh s s s u h u y b y f h u u b . s su , h
a dit proce in re pect o t e a ditor moti ation con i t o earin in mind t e e eral act alitie andu ss s f h u v s s s s f b g h s v u s
circ m tance a ectin t e companu s s ff g h y.
Conclusion:
References
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