Auditing and Assurance Services

This report analyses the audit assertions and substantive audit procedures for Advanced Computer Solutions and Green Machine Ltd. It also discusses the key audit matters as per ASA 701.

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
Audit Assertions.....................................................................................................................2
Substantive Audit Procedures................................................................................................3
Case of Green Machine Ltd.......................................................................................................5
Audit Assertions.....................................................................................................................5
Substantive Audit Procedures................................................................................................6
ASA 701 Key Audit Matters......................................................................................................7
Requirements..........................................................................................................................7
Reasons for the Selection of the Key Audit Matters..............................................................8
Disclosure of Key Audit Matters as per ASA 701 Key Audit Matters..................................9
Conclusion................................................................................................................................10
References................................................................................................................................11

2AUDITING AND ASSURANCE SERVICES
Introduction
At the time to conduct the audit operations, it is needed for the auditors to undertake
the analysis and evaluation of the clients’ accounting books and aspects related to them like
the intrinsic and extrinsic claims of their management in the preparation and presentation of
the financial reports (Knechel and Salterio 2016). These claims are considered as audit
assertions that is a crucial part for the auditors for developing the correct audit opinion. There
are many cases where the auditors have found the scope of material misstatements around the
used audit assertions. Hence, analysing the fact that whether any audit assertion is at risk or
not is considered as a prime responsibility of the auditors as they are needed to perform the
appropriate substantial audit procedures for minimising the audit assertion risks (Chou 2015).
The objective of this report is the analysis of the used assertions in the provided case studies
with the aim to find assertion risks so that appropriate audit procedures can be suggested.
Advanced Computer Solutions
Audit Assertions
It is needed for the auditor of Advanced Commute Solutions to test the management
assertions. These are discussed below:
Accuracy/Valuation: The testing of this assertion ensures whether the transactions related to
inventory are free from errors. The auditors face two major issue while testing this inventory.
First, they are needed to make it sure that the audit clients’ physical inventory figures are
correct. Second, they need to test whether the appropriate amount of inventory flows from the
balance sheet to the company’s income statement in the form of cost of goods sold (Wood,
Brown and Howe 2013). The auditors are needed to consider the testing of these aspects
related to the accuracy or valuation assertion. According to the provided information on
Advanced Computer Solutions, there is a suspected software problem. In addition, in March

3AUDITING AND ASSURANCE SERVICES
2018, the inventories of the company were moved to six new regional warehouses from one
central warehouse. This aspect indicates towards the scope of having error in the physical
inventory count process that led to incorrect mathematical inventory figures. In addition, due
to the problem in software, the correct inventory might not be flown from the balance sheet to
income statement as cost of goods sold (Green 2013). These reasons could reduce the
inventory turnover to 3.8 times in 2018 from 5.4 time in 2017. Thus, this assertion can be
consider at risk.
Cut off: The testing of this management assertion encompasses making sure that the
companies have reported all inventory related transactions in the proper financial period. For
doing this, the auditors are needed to ensure testing receiving and shipping documents for
providing the fact that the client has appropriately recorded into the inventory and out of the
inventory movements (Zuca 2013). For example, in a specific calendar year, an audit client
cannot record goods received on January 2 as inventory for December. It means that clients
are needed to ensure the correct calculation of the amount and value of inventory in the
financial statements. It can be seen from the given information about Advanced Computer
Solutions that the inventory in hand at the year-end embodied 26% sales of 2018 and 18%
sales in 2017. The inclusion of previous year’s inventory in the current year implies that the
company has failed in proper calculation of the amount and value of inventory. It can happen
due to the issue in the software (Bratten et al. 2013). Hence, this assertion can be considered
at risk.
Substantive Audit Procedures
It is the responsibility of the auditor of Advanced Computer Solution to perform the
appropriate audit procedures for the above-discussed assertions at risk.

4AUDITING AND ASSURANCE SERVICES
For the accuracy or valuation assertion, the substantial audit procedure will be the
methodical observation of the physical inventory count of Advanced Computer Solutions as
the auditor needs to be comfortable with the company’s procedures for counting the physical
inventory (Backof Bowlin and Goodson 2017). The auditor needs to discuss the process of
inventory counting with the client, observe count when they are being done, test the inventory
count for tracing the recorded amount in company’s account and verify all inventory count
tags. As Advanced Computer Solutions has recently added multiple storage locations for
inventory, the auditor needs to test the inventory in those locations. In addition, the auditor
needs to ask for confirmation of inventory from the central warehouse. After that, the auditor
needs to sample test the company’s cost calculations where the planned and expected costs
are needed to be tested for verifying the correct flow of inventory from balance sheet to
income statement as cost of goods sold (Backof Bowlin and Goodson 2017).
Cut off is very essential as any issue in cut off can create problem in total amount of
inventory at the reporting date. Hence, the auditor is needed to verify the goods received
noted at warehouses and goods delivery notes by suppliers. It is needed for the auditor to
perform analytical process for reviewing the inventory for the identification of irrational
events or transactions related to invent that may include the slow moving of inventory,
irrational high and low inventory amounts along with irrational adjustments. Lastly, the
auditor needs to examine the company’s procedure to halt any further acceptance into the
warehouses while counting the physical inventory with the aim to exclude the unnecessary
inventory items (Guénin-Paracini, Malsch and Paillé 2014).

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Case of Green Machine Ltd
Audit Assertions
The following discussion shows the analysis of certain key assertions in Green
Machine Ltd that re at risk.
Accuracy: The testing of accuracy assertion helps the auditors in addressing whether the
transactions related to property, plant and equipment (PPE) are from the errors. For example,
the audit client needs to conduct proper classification of depreciation, repair expenses, asset
movement and impairment (Yao, Percy and Hu 2015). It also implies that the audit clients
need to record all the data and information related to the PPE transactions. As per the given
scenario of Green Machine Ltd, the company had certain problem to make distinction
between capital and revenue expenditure as some expenses are capitalized and some capital
items are included in the repair and maintenance in the income statements. It means Green
Machine Ltd has failed to make proper classification of expenses related to PPE. For this
reason, this risk can be considered at risk (Xu et al. 2013).
Valuation: The testing of valuation assertion assists the auditors is examining whether all
assets, liabilities and equity balances have been recorded at their proper valuation. It indicates
towards the responsibility of the audit clients for reporting the correct value of PPE after the
deduction of correct amount of depreciation (Amiraslani, Iatridis and Pope 2013). In this
process, the clients are needed to use the appropriate rate of depreciation. The information
about the case of Green Machine Ltd indicates that the company has charged low rate of
depreciation on some assets. It needs to be mentioned that the use of incorrect rate of
depreciation can lead to the improper reporting of the value of PPE as there will be major
reduction in the depreciation expenses of the company. For this reason, this assertion can be
considered at risk (Singh et al. 2014).

6AUDITING AND ASSURANCE SERVICES
Substantive Audit Procedures
After identifying the key assertions at risk, the responsibility of the auditor of Green
Machine Ltd is to apply the correct substantive audit procedures for minimizing the risks.
As per the above discussion, Green Machine Ltd did wrong distinction between the
capital and revenue expenditures. For this reason, it is needed for the auditor to undertake
reviewing the major expenses of the company related to PPE. The auditor needs to review the
expenses of PPE by obtaining the list of PPE. This process will help the auditor in
determining the list of the expenses that have been wrongly capitalized. In addition, the
auditor will undertake the examination of the source documents of various expenses with the
aim to properly distinguish those (Chi et al. 2017).
For the next assertion risk, the auditor will determine will use the substantive audit
procedure that is the investigation of the status of PPE in relation to deprecation. The auditor
will investigate for PPE that are dismantled and unsuitable for operation so that they can be
excluded from PPE. Most importantly, the auditor will undertake the testing of the
computation of depreciation process by the client. For this reason, it is needed for the auditor
to test the depreciation computation process in respect to the residual value of PPE and gains
or losses from the disposal of PPE. In addition, the auditor is needed to compare the ratios of
depreciation of PPE. At the same time, the auditor is needed to review the fact that whether
the company has complied with the procedures and policies to charge depreciation. This will
help the auditor in obtaining the revised rate of depreciation (Crawford et al. 2014). The last
step for the auditor will be the recalculation of depreciation expenses with the aim to gain the
revised depreciation expenses.

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ASA 701 Key Audit Matters
Requirements
Objectives: According to Clause 7 of ASA 701, it is the objective of the auditor to ascertain
the key audit maters so that appropriate audit opinion can be developed on the financial
reports and to communicate these key audit matters in the presence of proper description
(auasb.gov.au 2019).
Definition: As per Clause 8 of ASA 701, Key Audit Matters are the issues having major
importance in the audit of the financial report as per the professional judgment of the
auditors. The auditors select the key audit matters from the issues communicated with the
personnel charged with governance (auasb.gov.au 2019).
Determining Key Audit Matters: As per Clause 9 of ASA 701, it is needed for the auditors to
determine the issues having major importance in the audit process of the current year. In this
particular aspect, the auditors are needed to consider the following aspects:
i. The auditors are needed to consider the higher risky portions for material
misstatements or major identified risks as per the standards of ASA 315.
ii. The auditors are needed to consider the substantial judgement of the auditors related
to specific areas in the financial statements that include major judgments as well as
accounting estimated of the management which are full of high uncertainty.
iii. It is needed for the auditors to take into account the impact of major events or
transitions happen during the auditing period on the audit procedures (auasb.gov.au
2019).
In addition, as per Clause 10 of ASA 701, it is needed for the auditors to take into
consideration the determination of the matters that have most significant impact on the

8AUDITING AND ASSURANCE SERVICES
financial reports of the audit client and therefore, they are considered as key audit matters
(auasb.gov.au 2019).
Benefits: The standards and principles of ASA 701 provides major assistance to the auditors
in the identification of key audit matters. It has certain other benefits. The standards of ASA
701 help the auditors to develop effective communication with the stakeholders along with
the governance committee related to description of key audit matters. It enhances the quality
of financial reporting and auditing while increasing the transparency of the same. In addition,
with the application of the standards of ASA 701, it becomes possible for the auditors to put
focus on the areas of financial reports that need the special attention of the auditors. In
addition, the preparers can get the required incentive to revise the financial reports while
following the principles and standards of ASA 701 (auasb.gov.au 2019).
Reasons for the Selection of the Key Audit Matters
The followings are the reasons for the selection of key audit matters for the two
companies.
Advanced Computer Solutions: The identified assertions at risk in this company are the key
audit matters as per ASA 701. This is because of the fact that the misstatements in the value
of inventory can affect the cost of goods sold of the company; and this situation can lead to
the understatement or overstatement of net profit in the financial statements. Apart from this,
the effects of wrong inventory count will also be there on both the costs of goods sold and net
profit of the company. All these aspects can lead to material misstatements (Sirois, Bédard
and Bera 2018).
Green Machine Ltd: As per the standards of ASA 701, the audit assertions at risk in this
company are the key audit matters due to some reasons. First, due to the application of low
rate of depreciation, there will be decrease in the operating expenses of the company and this

9AUDITING AND ASSURANCE SERVICES
will lead to the overstatement of the value of net profit. The same thing will happen due to
the incorrect distinction of capital and revenue expenses as this will affect the expenses along
with the profit of the company. This will lead to material misstatements (Bédard, Gonthier-
Besacier and Schatt 2014).
Disclosure of Key Audit Matters as per ASA 701 Key Audit Matters
Advanced Computer Solutions
Key Audit Matters
Why Significant How Audit Addressed the Key Audit
Mattes
Moving the inventory to new warehouses
on March 2018
The company moved their inventory in six
new regional warehouses from one central
warehouse. Due to the possibility of having
error in the inventory counting process and
issues in software, this is significant for the
audit.
The audit procedures include:
- Methodical observation of the physical
inventory count
- Discussion of inventory count process
- Testing of inventory in all the warehouses
- Review the cost calculation process of the
company (Kachelmeier, Schmidt and Valentine
2017)
The inventory in hand at the year-end
embodied 26% sales of 2018 and 18%
sales in 2017
It shows that the company has failed to
properly calculate the value of inventory in
the year and hence, it is significant for the
audit process.
The audit procedures include:
- Verification of goods received in the
warehouses from the central warehouse
- Application of analytical process to identify
slow moving inventory and irrational
transactions
- Examination of the procedure to halt the
further acceptance of inventory
Green Machine Ltd
Key Audit Matters

10AUDITING AND ASSURANCE SERVICES
Why Significant How Audit Addressed the Key Audit
Mattes
The company has done wrong distinction
between capital and revenue expenses
The used assumptions and judgments used by
the company is subject to uncertainty and
hence, significant for audit.
The audit procedures include:
- Reviewing the major expenses of the
company related to PPE
- The examination of the source documents
of various expenses
The company charged low rate of
depreciation
It indicates towards the uncertainty in the
assumption and judgement used by the
company for depreciation of PPE and hence,
it is significant for audit (Christensen, Glover
and Wolfe 2014).
The audit procedures include:
- Investigation of the status of PPE in relation
to deprecation
- The testing of the computation of
depreciation process
- Test the depreciation computation process
- Review of policies
Conclusion
The above discussion shows the importance of testing the management assertions as a
part of audit due to the fact that they can create material misstatements in the financial
statements. The auditors are needed to select and perform the required substantive audit
procedures for addressing the audit assertions at risk. As per the above discussion, the
auditors are needed to comply with the principles and standards of ASA 701 for the effective
communication and reporting of key audit matters in the auditor’s report. Lastly, it is needed
for the auditors to present the key audit matters in the presence of required information about
the audit tests.

11AUDITING AND ASSURANCE SERVICES
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2019].
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