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

This report analyzes the case studies of Advanced Computer Solutions Limited and Green Machine Ltd for the identification of assertion risks, application of substantive audit procedures and disclosure of the same.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student
Name of the University
Author’s Note

1AUDITING AND ASSURANCE SERVICES
Table of Contents
Introduction................................................................................................................................2
Advanced Computer Solutions..................................................................................................2
Key Assertions at Risk...........................................................................................................2
Substantive Audit Procedures................................................................................................3
ASA 701 Key Audit Matters..................................................................................................4
Reasons for the Selection of the Key Audit Matters..............................................................5
Disclosure as per ASA 701....................................................................................................5
Green Machine Ltd....................................................................................................................6
Key Assertions at Risk...........................................................................................................6
Substantive Audit Procedures................................................................................................7
ASA 701 Key Audit Matters..................................................................................................8
Reasons for the Selection of the Key Audit Matters..............................................................8
Disclosure as per ASA 701....................................................................................................9
Conclusion..................................................................................................................................9
References................................................................................................................................11

2AUDITING AND ASSURANCE SERVICES
Introduction
Auditing can be considered as a set of process where the responsibility is on the
auditors to apply analytical procedures on the financial statements of the companies so that
any material misstatements can be identified and reported (Simnett, Carson & Vanstraelen,
2016). It is needed for the auditors to take into consideration certain aspects while inducting
audit like the assertions that the company’s management used for the preparation of financial
statements. These assertions can be regarded as explicit or implicit claims by the management
to prepare and present the financial statements. There are instances when the auditors have
found risks in these assertions related to material misstatements. Hence, it is needed for all
the auditors to examine these assertions for the identification of risk, if any. While analyzing
these audit assertions, certain regulations and standards are there that the auditors need to
adhere to as these regulations provide them with the necessary guidelines for the detection of
assertions risks and in the communication of the same (Burton et al., 2014). This report
analyzes the case studies of Advanced Computer Solutions Limited (Advanced Computer
Solutions) and Green Machine Ltd for the identification of assertion risks, application of
substantive audit procedures and disclosure of the same.
Advanced Computer Solutions
Key Assertions at Risk
Analysis of the situation of Advanced Computer Solutions provides the auditor with
the knowledge of two assertions that are at risk; they are Accuracy and Completeness; the
supporting reasons are shown in below:
Accuracy: Accuracy must be there from the side of the management in the valuation of
inventory. It is possible to identify any error and inappropriateness in inventory valuation
using this assertion (Alles, 2015). According to the obligation of this particular assertion, the

3AUDITING AND ASSURANCE SERVICES
managements of the firms are committed towards the correct calculation of their inventory
along with the correct physical count of inventory so that the same can be recorded in the
financial reports. The auditor can obtain the knowledge from the provided situation of
Advanced Computer Solutions that the company has recently been involved in moving all of
their inventories to six regional warehouses from their central warehouse in the month of
March, 2018. The accuracy assertion says that the responsible personnel might make error in
the physical counting process of inventory before or after moving the inventories. Hence, this
particular error can lead to the reduction of inventory turnover in 2018 that is 3.8 in 2018
from 5.4 in 2017 (Bowlin, Hobson & Piercey, 2015). Thus, in the presence of these reason,
the auditor can consider this assertion at risk in Advanced Computer Solutions.
Completeness: There must be complete valuation of the inventories in the companies. As per
the requirements of this assertion, the managements of the firms are committed towards
keeping all the records related to all the transaction of inventory in the correct accounting
books; otherwise, missing information can lead to the understatement of inventories
(Antonio, 2014). There can risk of material misstatements when the employees do not record
the information of inventory after the occurrence of purchase. This assertion can be at risk
when internal control is weak. It can be found from the provided information about Advanced
Computer Solutions that 18 percent of sale is included in the inventory of 2018 along with 26
per cent of the sales of 2018. This information indicates towards the possibility of any kind of
incorrect valuation of inventory by the company that contribute towards the inclusion of sales
of 2017 in the inventory of 2018 (Coppage & Shastri, 2014). For this reason, this assertion is
at risk in Advanced Computer Solutions.
Substantive Audit Procedures
It is the job of the auditors to perform the correct substantive audit procedures after
the identification of the assertions at risk and it is same for Advanced Computer Solutions.

4AUDITING AND ASSURANCE SERVICES
The auditor has found accuracy assertion at risk in the company. Now, the correct substantive
audit procedure in order to tackle this assertion at risk is the methodical observation of the
whole procedures undertaken while conducting the physical inventory count. More
specifically, the auditor needs to undertake certain procedures; he needs to discuss with the
responsible employees of inventory counting about the weakness of the process, methodical
surveillance of the counting process and inventory sample testing for finding any error (Goh,
Krishnan & Li, 2013). On March 2018, Advanced Computer Solutions moved their
inventories to six different warehouses from a single one. Hence, the auditor needs to ensure
testing the physical inventory count procedures of all these six warehouses so that they can
match the result with the count confirmation of the central warehouse (Pike, Curtis & Chui,
2013).
In addition, completeness assertion is also at risk in the company. In order to control
this assertion risk, the auditor needs to involve in a particular substantive audit process that is
the reconciliation of the results of physical count of inventory with the values in the
accounting books (Goh, Krishnan & Li, 2013). More specifically, the auditor will be
responsible for tracing the inventory values gained from physical count so that any error can
be discovered. The application of this substantive audit process provides the auditor with the
knowledge on the fact that the correct value of inventory has been carried forwarded (Pike,
Curtis & Chui, 2013).
ASA 701 Key Audit Matters
The auditors can identify the key audit matters and communicate the same
with the key stakeholders with the assistance of the standards of ASA 707. The standards of
ASA 707 have certain other benefits in auditing (auasb.gov.au, 2019). With the assistance of
the standards of ASA 707, the auditors become able in establishing better communication
channel with the key stakeholders and governance group about the key audit matters. It leads

5AUDITING AND ASSURANCE SERVICES
to develop transparency in financial reporting while enhancing the quality of the same. After
that, the standards of ASA 707 provide the auditors with increased scope for emphasizing on
the areas of financial statements that need special attention as it increases the quality of audit.
Lastly, the preparers can obtain the required motivation from ASA 707 for revising the
financial reporting while considering the key audit matters. It also enhances audit quality as
well as financial reporting’s transparency (auasb.gov.au, 2019).
Reasons for the Selection of the Key Audit Matters
As per the standards of ASA 707, the assertions at risk of Advanced Computer
Solutions can be considered as key audit matters as there are reasons. There can be material
misstatements in the financial reports of the company while these assertions are at risk due to
the fact that it can manipulate the financial position and efficiency of the company to the
stakeholders. In addition, there are major uncertainties along with inadequate transparency in
the judgments used by the management for the valuation of inventory as material
misstatements can be developed in the financial statements due to this. These are the
rationales behind the key audit matters (Sirois, Bédard & Bera, 2018).
Disclosure as per ASA 701
As per ASA 707, the auditors will identify the key audit matters and will disclose the
same. The auditor of Advanced Computer Solution needs to disclose the justification behind
the selection of the key audit matters (legislation.gov.au, 2019). After that, the relevant
information about the substantive audit procedures need to be disclosed in the audit report by
the auditors (home.kpmg.com, 2019).

6AUDITING AND ASSURANCE SERVICES
Green Machine Ltd
Key Assertions at Risk
Analysis of the situation of Green Machine Ltd provides the auditor with the
knowledge of two assertions that are at risk; they are Accuracy and Valuation; the supporting
reasons are shown in below:
Accuracy: Companies must conduct the valuation of property, plant and equipment (PPE)
accurately. This particular assertion demands the commitment from the company’s
management in correct recording of the amounts and other data of the transactions and events
related to PPE correctly in the accounting books (Archambeault, 2014). In addition, it also
demands the correct differentiation between the capital and revenge expenditures. The
provided case study of Green Machine Ltd shows that the differentiation of capital and
revenue expenditures has not been done properly as mistake is there due to the fact that the
company’s management has capitalized the revenue expenditures and has integrated some
capital expenditures as repair and maintenance in the income statement (Syazwan Karim et
al., 2015). Hence, this particular assertion can be considered as risk.
Valuation: It is the sole responsibility of the companies to do the valuation of PPE. The rule
of this particular assertion demands certain commitments from the management; they are to
appropriately record the cost value of PPE after deducting depreciation, to report the
additions and sales of PPE and to test impairment of PPE by reviewing the impairment
indicators (da Silva & Dantas, 2018). All these put the obligation on the company to report
the information of PPE in the correct and fair way. It can be seen from the case study of
Green Machine Ltd that low rates of depreciation has been charged on PPE and they are
inappropriate. The application of low depreciation rate decrease the operating expenses of
Green Machine Ltd by majorly decreases the depreciation expenses; and it can create

7AUDITING AND ASSURANCE SERVICES
material effects on the company’s financial statements (Conrod & Cumby, 2016). Hence, the
auditor can consider this assertion at risk.
Substantive Audit Procedures
It is the job of the auditors to perform the correct substantive audit procedures after
the identification of the assertions at risk and it is same for Green Machine Ltd. The above
discussion sheds light on the aspect of wrong differentiation of the capital and revenue
expenditures by the management of Green Machine Ltd. From the side of the auditor, the
correct substantive audit procedure to control this assertion risk is methodically reviewing the
process of the company to capitalize the expense. In addition, the auditor needs to undertake
reviewing certain expenses of the company such as operating expense, overheads, labour
costs and others (Kuenkaikaew & Vasarhelyi, 2013). This will provide the auditor with the
insight of the expenses wrongly capitalized. In addition, the auditor also needs to ensure
checking the adherence of Green Machine Ltd with the principles of reporting capital and
revenue expenditures (Byrnes et al., 2018).
It is also evident from the case of Green Machine Ltd that appropriate rate of
depreciation has not been applied on PPE. From the auditor’s side, the appropriate
substantive audit procedure to control this assertion risk is the assessment of depreciation rate
in certain aspects; like PPE’s residual values, gains or losses due to PPE sale, useful life of
PPE, company’s policy for replacing PPE and maintenance of adherence with the correct
accounting standards for depreciating PPE (Byrnes et al., 2018). The next step for the auditor
is to bring the comparison of the depreciation ratios related to PPE as it will provide him with
the correct depreciation rate. Lastly, the auditor needs to involve in the recalculation of
depreciation on PPE with the obtained new revised depreciation rate for getting the actual
depreciation expenses (Kuenkaikaew & Vasarhelyi, 2013).

8AUDITING AND ASSURANCE SERVICES
ASA 701 Key Audit Matters
The principles of ASA 701 demands the commitment of the auditors to determine the
key audit matters with the assistance of their audit opinion on the clients’ financial
statements; they also need to make proper communication of these key audit matters with
necessary description (auasb.gov.au, 2019). The principles of ASA 701 provided the
definition of key audit matters as the issues with significant importance in the company’s
financial statements as per the auditors’ judgments. The auditors must consult with the
governance team of the companies while deciding key audit matters (auasb.gov.au, 2019).
There are certain requirements as per ASA 701 that the auditors need to take into
consideration while deciding the key audit matters. ASA 707 puts the obligation on the
auditor to analyse the areas of financial statements having higher risk of material
misstatements in accordance with ASA 315 (auasb.gov.au, 2019). After that, they must
consider the analysis of the crucial judgments of the management for the preparation of
financial statements along with estimated as uncertainty can be there. In addition, the auditors
are also needed to analyse the effects of these judgments and assumptions on the outcome of
audit operations. Moreover, it is also needed for the auditors for the determination of events
and issues that can have material impact on the financial statements of the audit clients
(auasb.gov.au, 2019).
Reasons for the Selection of the Key Audit Matters
In Green Machine Ltd, the identified assertions at risk can be considered as key audit
matters as per ASA 707 as there are reasons for the same. There can be massive reduction in
the operating expenses of the company due to the reduction of depreciation expenses as low
depreciation rate has been charged (Bédard, Gonthier-Besacier & Schatt, 2014). This
incorrect situation can increase the profit of the company that can lead to material
misstatements in the financial statements of the company. After that, the same aspect can

9AUDITING AND ASSURANCE SERVICES
happen due to the wrong differentiation of the capital and revenue expenditures and it can
ultimately affect the company’s profit (Bédard, Gonthier-Besacier & Schatt, 2014). Thus, it
can be said that these assertions at risk can develop material misstatements for the company
and hence, the auditor has considered them as key audit matters.
Disclosure as per ASA 701
The principles of ASA 707 demand it from the auditor that he will identify the key
audit matters and will ensure the disclosure of the same. In this process, the auditor of Green
Machine Ltd needs to consider two requirements of ASA 707. He must provide the
information about the major events and incidents that contribute towards the development of
the key audit matters (legislation.gov.au, 2019). After that, the auditors of these two
companies are also needed to ensure the disclosure of the information about the substantive
audit procedures applied for controlling these assertion risks (home.kpmg.com, 2019).
Conclusion
The above discussion provides major assistance in reaching to the conclusion about
the fact that the key audit matters can create major material misstatements in the financial
statements and hence, they demand the utmost importance of the auditors. The requirement
for the auditors is the identification of the assertions at risk and ensuring disclosing sufficient
information about the rationales for considering the key audit matters. It can be observed
from the above discussion that different assertions are at risk for the mentioned companies
related to the valuation of inventory and PPE; such as accuracy, valuation and completeness.
The above discussion also sheds light on the fact that the auditors are needed to select the
appropriate substantive audit procedure based on the nature of the audit assertions at risk. For
example, the substantive audit procedures for inventory valuation are different from the same
of the PPE valuation. Another significant factor is the adherence of the auditors with the
principles and standards of ASA 707 as the auditors can justify their position of selecting the

10AUDITING AND ASSURANCE SERVICES
key audit matters with the principles and standards of ASA 707. Apart from this, the above
discussion also shows that the auditors are needed to ensure the disclosure of all the
information about the key audit matters in the auditor’s report.

11AUDITING AND ASSURANCE SERVICES
References
Alles, M. G. (2015). Drivers of the Use and Facilitators and Obstacles of the Evolution of Big
Data by the Audit Profession. Accounting Horizons, 29(2), 439-449.
Antonio, G. R. (2014). Continuous auditing: Developing automated audit systems for fraud
and error detections. Journal of Economics, Business & Accountancy Ventura, 17(1),
127-144.
Archambeault, D. S. (2014). Divergent and Evolving Auditing Standards: Teaching Guide
and Exercises. In Advances in Accounting Education: Teaching and Curriculum
Innovations(pp. 73-99). Emerald Group Publishing Limited.
ASA 701 - Communicating Key Audit Matters in the Independent Auditor’s Report -
December 2015 . (2019). Legislation.gov.au. Retrieved 12 January 2019, from
https://www.legislation.gov.au/Details/F2015L02016/Explanatory%20Statement/Text
ASA 701 . (2019). Auasb.gov.au. Retrieved 12 January 2019, from
https://www.auasb.gov.au/Pronouncements/Australian-Auditing-Standards/ASA-701-
2015.aspx
Auasb.gov.au. (2019). Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. Retrieved 12 January 2019, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
Bédard, J., Gonthier-Besacier, N., & Schatt, A. (2014, January). Costs and benefits of
reporting Key Audit Matters in the audit report: The French experience.
In International Symposium on Audit Research. Available at: http://documents.
escdijon.

12AUDITING AND ASSURANCE SERVICES
eu/pdf/cig2014/ACTESDUCOLLOQUE/BEDARD_GONTHIER_BESACIER_SCHAT
T. pdf.
Bowlin, K. O., Hobson, J. L., & Piercey, M. D. (2015). The effects of auditor rotation,
professional skepticism, and interactions with managers on audit quality. The
Accounting Review, 90(4), 1363-1393.
Burton, F. G., Starliper, M. W., Summers, S. L., & Wood, D. A. (2014). The effects of using
the internal audit function as a management training ground or as a consulting
services provider in enhancing the recruitment of internal auditors. Accounting
Horizons, 29(1), 115-140.
Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., &
Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the
Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297).
Emerald Publishing Limited.
Conrod, J. D., & Cumby, J. (2016). On-Line Gaming, Financial Reporting, and Audit:
Chester Games Corp. Issues in Accounting Education Teaching Notes, 31(4), 57-66.
Coppage, R., & Shastri, T. (2014). Effectively Applying Professional Skepticism to Improve
Audit Quality. The CPA Journal, 84(8), 24.
da Silva, T. C., & Dantas, J. A. (2018). Audit Assertions and Change of Auditors' Opinion in
the Brazilian Market. Revista de Educação e Pesquisa em Contabilidade, 12(1).
Goh, B. W., Krishnan, J., & Li, D. (2013). Auditor reporting under Section 404: The
association between the internal control and going concern audit
opinions. Contemporary Accounting Research, 30(3), 970-995.
Kuenkaikaew, S., & Vasarhelyi, M. A. (2013). The predictive audit framework.

13AUDITING AND ASSURANCE SERVICES
Pike, B. J., Curtis, M. B., & Chui, L. (2013). How does an initial expectation bias influence
auditors' application and performance of analytical procedures?. The Accounting
Review, 88(4), 1413-1431.
Ralph, C. (2019). KAM: Auditor’s report snapshot – March 2017. KPMG. Retrieved 12
January 2019, from https://home.kpmg/au/en/home/insights/2017/03/key-audit-
matters-auditor-report-28-march-2017.html
Simnett, R., Carson, E., & Vanstraelen, A. (2016). International archival auditing and
assurance research: Trends, methodological issues, and opportunities. Auditing: A
Journal of Practice & Theory, 35(3), 1-32.
Sirois, L. P., Bédard, J., & Bera, P. (2018). The informational value of key audit matters in
the auditor's report: evidence from an Eye-tracking study. Accounting Horizons.
Syazwan Karim, M., Paino, H., Abd Jabar, F., Pauzi, M., Farahah, N., & Abu Bakar, S. A. N.
(2015). Factors Contributing to Premature Sign-Off of Audit Procedure: Evidence
from Malaysia. Advanced Science Letters, 21(5), 1243-1246.