Audit of Advanced Computer Solutions Ltd and Green Machine Ltd

This article discusses the audit of Advanced Computer Solutions Ltd and Green Machine Ltd, including key assertions of risks, substantive audit procedures, and key audit matters under ASA 701. It also covers the benefits of ASA 701 and reasons for selecting the key audit matters.

Running head: AUDIT
Audit
Name of the Student:
Name of the University:
Author’s Note

1
AUDIT
Table of Contents
Introduction......................................................................................................................................2
Case Facts of Advanced Computer Solutions Ltd...........................................................................2
Key Assertions of Risks...............................................................................................................2
Substantive Audit Procedure.......................................................................................................4
Cost of Green Machine Ltd.............................................................................................................5
Key Assertions at Risks...............................................................................................................5
Substantive Audit Procedure.......................................................................................................6
Key Audit Matters (KAM) under ASA 701 Key Audit Matters.....................................................7
Objectives....................................................................................................................................7
Requirement of Determining Key Audit Matter..........................................................................8
Benefits of ASA 701 Key Audit Matters.........................................................................................8
Reasons for Selecting the Key Audit Matters..................................................................................9
The situation for Advanced Computer Solutions Ltd..................................................................9
The situation of Green Machines Ltd..........................................................................................9
Disclosure of Key Audit Matters under ASA 701 Key Audit Matters..........................................10
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11

2
AUDIT
Introduction
Auditing can be defined as independent examination of the financial records which is
prepared by the management of the company for establishing whether the reporting framework
which is used by the management of the company is appropriate and showing true and fair view.
Auditing is mandatorily required to be done by public ltd companies as per the regulations which
is applicable in the country. The management needs to support the process of audit by providing
all the relevant information in front of the auditor of the business (Bédard, Gonthier-Besacier and
Schatt 2014). The role of auditor is is ensure that the financial statements are showing true and
fair view and also to assess the risks which are faced by the business.
The auditor needs to follow the rules and provisions which are included in “ASA 701
Communicating Key Audit Matters in the Independent Auditor’s Report” while conducting a
audit of a business. The standard states the techniques which can be used by the auditor to deal
with the risks of assertions which are associated with the business and the auditor needs to report
the same in the annual report of the business (Brasel et al. 2014). The assessment also aims to
understand the key risk assertions and the key audit matters.
Case Facts of Advanced Computer Solutions Ltd
Key Assertions of Risks
The management assertions of risks which can be identified from Advanced Computer
Solutions ltd are listed below: Completeness: As per this assertion, the management of an organization needs to
consider the valuation of inventory of the business appropriately and it is the
responsibility of the management of the company to manage the inventory. In case the
inventory, the understatement of the same can result in risk of assertion. A risk assertion

3
AUDIT
generally arise when a person fails to keep records of the inventory even though
purchase of stokc has been made by the business. The reason for such risk assertion
arises mainly due to the weakness of internal control of the business. As per the records
of advanced computer solutions, the inventory in hand balance which is shown for the
business is shown to be 26% of sales in 2018 while the same is shown to be 18% of
sales in 2017. The accounting professional should include the incorrect valuation of
inventory and the same resulted in the inclusion of previous year sales figure in the
current year. Therefore, it can be said that the same resulted in ineffective handlings of
the inventories of the business. Accuracy: The accuracy in the process of valuation is considered to be an important
assertion and the management of the company needs to consider the same. The accuracy
of the accounting process is considered to be important as errors in reporting framework
can be prevented with a certain level of accuracy. The assertion which is on the
management is to ensure that the correct count of inventory is available and correct
computation of the same. As per the information which is available for Advanced
Computer Solutions, the management of the company had separately transported
inventories of the business to six regional warehouses and the same was transported
from the main office during the month of March 2018. There is possibility that some
errors in counting of inventory might have taken place during the period or while the
inventory was being moved from one warehouse to the other. This is the reason due to
which the count of inventory had reduced and the same is shown to be 3.8 million in
2018 while the figure was 5.4 million in 2017. The risks which are associated with
Advanced Computer Solutions is quite genuine.

4
AUDIT
Substantive Audit Procedure
The above discussion shows that the risks which is associated with the business is actual
in nature and the auditor needs to take appropriate steps in minimizing such risks. The auditor of
the business needs to apply substantive audit procedures to reduce the risks of the business. The
substantive audit procedures which can be undertaken by the auditor are listed below:
 Substantive Audit Process for First Risk: In the business of Advanced Computer
Solutions, the assertion of completeness is considered to be a significant assertion and
should be considered by the auditor. The auditor needs to carry out substantive audit
procedures which includes physical verification of the inventory of the business and keep
track of the inventory of the business (Kachelmeier, Schmidt and Valentine 2017). The
accounting professional who is responsible for inventory management needs to
appropriately maintain ledger accounts and ensure that the balances of inventory are
properly maintained by the business.
 Substantive Audit Process for Second Risk: Accuracy can be determined as the
effectiveness in the reporting process of the business. The auditor needs to apply
substantive audit procedure which involves physical verification of the stocks of the
business. The physical verification of inventory and also close scrutiny of the annual
report of the business would enable the auditor to appropriately find the error of the
business. The company has transported its inventory to six new locations which are
warehouses of the business (Christensen, Glover and Wolfe 2014). The auditor needs to
verify the inventory balances which is shown in the ledger accounts and also check
confirmation the balances by adopting appropriate test of the business. The auditor would

5
AUDIT
be required to separately test the balances of the inventory from the central warehouse
and also separately from 6 warehouses of the business.
Cost of Green Machine Ltd
The information which can be obtained from the business of Green Machine Ltd shows
that there are certain key assertions which is related to valuation of Property, plant and
equipment. The Property, plant and equipment valuation can materially affect the financial
reports of the business and the same are discussed below:
Key Assertions at Risks
Valuation: The major assertion which can be identified from the reporting of Property, plant and
Equipment is the valuation of the asset. The management of the company needs to appropriate
value the non-current assets of the business considering the costs of the assets and also the
depreciation which is chargeable on the assets of the business. The principles states that all
disposals and additions which are made to the asset should be taken into account by the
management (Czerney, Schmidt and Thompson 2014). In addition to this, the impairment
indicators and even test need to be conducted in order to ensure that no impairment charges are
applicable on the asset. The assertion further requires the disclosures to be appropriately
represented.
The information which is available for Green Machine Ltd shows that there are
significant risks which is associated with the valuation of Property, Plant and Equipment as the
rates which is charged for the purpose of depreciation is not appropriate and the same is
considered to be lower than the standard rate. The lower depreciations charges which are made
by the management of the company directly affect the profit and loss statement and reduces the
capital expenditure of the business. This would overstate the profitability of the business and

6
AUDIT
thereby brining in material changes in the financial statements. Therefore, the presence of all
these aspects affect the business and makes the same risky in nature.
Accuracy: The overall accuracy of the valuation process of Property, Plant and Equipment is
important. There is a responsibility on the management of the company to appropriate shows and
disclose the asset in the financial statement of the business. In addition to this, the management
needs to appropriate identify the revenue and capital expenditure of the business and ensure that
the same are appropriately treated in the financial statement of the business. The management of
Green Machine Ltd has made a mistake in identifying the revenue and capital expenditure of the
business. This mistake has affected the financial statement of the business and thereby also
appropriately represent the financial information of the business. The management of Green
Machine Ltd has wrongly capitalized certain revenue expenditure of the business and on the
other hand, certain capital expenses are included under the head of repair and maintenance in the
profit and loss statement.
Substantive Audit Procedure
The substantive audit procedures which needs to be followed by the management of the
company are necessary for maintaining the risks of the business (Duff et al. 2014). The risk
minimization process which needs to be followed by the management of the company are listed
below:
 Substantive Audit Process for First Risk: The information which is available for the
business of Green Machine Ltd shows that the management of the company has charged
lower rate of depreciation of the asset which has affected the financial statement of the
business (Azim 2013). The auditor needs to consider the appropriate rate at which
depreciation is to be charged by the management of the company and also the residual value

7
AUDIT
of the asset of the business. In addition to this, the auditor also needs to check whether the
any disposal or addition is made to the asset and whether appropriate accounting policies
are followed by the management for measuring the asset and also the policy of replacing the
asset. The auditor therefore needs to appropriately value the asset and then charge
depreciation on the same which will then be recalculated for assessing the actual value of
the asset of the business.
 Substantive Audit Process for Second Risk: The information which is available from the
business, the company has made significant errors in identifying and treating the capital and
revenue expenses of the business. This has significantly affected the financial statements of
the business. The auditor needs to review the capitalization of expenses and also the
expenses which are treated in profit and loss account. This is to be done by the auditor on
order to ensure that the management has made correct treatment of expenses of the business
and the same is appropriately shown in annual reports of the business. The auditor needs to
ensure that the treatment of capital and revenue expenditure of the business are
appropriately done by the management.
Key Audit Matters (KAM) under ASA 701 Key Audit Matters
Objectives
As per the provisions which is stated under ASA 701, Key Audit Matters are items which
are represented in the financial reports which as per the judgment of the auditor is highly
substantial. The auditor identifies the key audit matters of a business from the analysis of the
financial statement of a business and the same is considered after appropriate audit procedure is
followed.

8
AUDIT
Requirement of Determining Key Audit Matter
As stated under ASA 701, the auditor needs to discuss the matters that requires special
focus of the auditor of the business and the same is to be identified after having a discussion with
those charged with governance of the business. The following matters are to be considered by the
auditor of the business:
 The areas which are susceptible to higher risks of having material misstatement under
ASA 315 needs to be considered by the auditor.
 The auditor is required to assess the financial statement and especially areas which
require vital management decisions and estimation of accounting principles.
 The auditor needs to consider any event which can bring about uncertainty in the business
and can impact the decision making process of the business (Vik and Walter 2017).
In addition to this, the auditor must also consider the events under paragraph 9 of the
standard which can have influence on the financial statements of the business and such aspects
can be considered as Key Audit Matter.
Benefits of ASA 701 Key Audit Matters
The discussion above shows the application of ASA 701 assist the auditor in identifying
the key audit matters of the business from the financial statements of the business. However,
there are some benefits which are associated with ASA 701 and the benefits of the same is listed
below:
 The identification of KAM are done as per the principles stated in ASA 701 and the same
helps in communication of between the auditors and those charged with governance
(Carson, Fargher and Zhang 2016). This aspect would help in creating better governance
and transparency in financial reporting.

9
AUDIT
 The principles which are covered under ASA 701 helps the auditor to identify the key
areas of reporting. This can be help in contributing the overall quality of audit.
 The provisions which are covered in ASA 701 helps the auditor to determine the financial
reporting framework and disclosing the key audit matters of the business. This can also
help in improving the overall quality of audit of the business.
Reasons for Selecting the Key Audit Matters
There are certain factors which affect the key audit matters of the business for both the
companies which are Advanced Computer Solutions Ltd and Green Machine Ltd is stated below:
The situation for Advanced Computer Solutions Ltd
The key audit matters which are identified for Advanced Computer Solutions Ltd and the
same is covered in ASA 701 due to the existence of certain reason. The primary reasons for risks
is the inappropriate valuation of inventory which is shown in the financial reports. In addition to
this there are also certain judgments from the management in the valuation of inventory which
contribute to les transparency in the business (Knechel and Salterio 2016). Therefore, there is
material misstatement in the financial reports of the business.
The situation of Green Machines Ltd
The information which is present about the company shows that the key audit matters of
the business of Green Machine Ltd are associated with ASA 701 due to certain reasons. The
main reason for the risks is the lower rate of depreciation which is charged by the business which
results in difference in depreciation in the income statement and thereby lead to
misrepresentation of financial position of the business (Huggins, Simnett and Hargovan 2015).
The net profit of the business is also affected due to such reason and can show inappropriate
value.

10
AUDIT
Another major fault which is identified from the reporting of the business is from wrong
classification of revenue and capital expenditure of the business and this also affect the true and
fair view of the financial statement. Thus it can be said that ineffective charging of depreciation
and wrong classification of revenue and capital expenditure can create material misstatement.
Therefore the primary reason is area of concern for the business.
Disclosure of Key Audit Matters under ASA 701 Key Audit Matters
According to ASA 701, the audit must mandatorily must recognize the key audit matters
of the business as per the standard. The auditor is also required to consider the major disclosures
of the business and also the reasons for key audit matters of the business. The auditor is also
required to make disclosures relating to the substantive process of the audit and also addrss the
key audit matters of the business.
Conclusion
The discussion above shows that key audit matters of the business and the same is
covered in ASA 701 and the same is considered for the business of Advanced Computer Solution
and Green Machine Ltd. The above discussion shows that the risks which are faced by the
business are related to the key assertions of the business. The auditor needs to follow ASA 701
Key Audit Matters for identify the substantial matters of both the companies.

11
AUDIT
Reference
Azim, M.I., 2013. Independent Auditors Report: Australian Trends From 1996 to 2010. Journal
of Modern Accounting and Auditing, 9(3), p.356.
Bédard, J., Gonthier-Besacier, N. and Schatt, A., 2014, January. Costs and benefits of reporting
Key Audit Matters in the audit report: The French experience. InInternational Symposium on
Audit Research. Available at: http://documents. escdijon.
eu/pdf/cig2014/ACTESDUCOLLOQUE/BEDARD_GONTHIER_BESACIER_SCHATT. pdf.
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative
outcomes: The effects of reporting critical audit matters on judgments of auditor liability.The
Accounting Review, 91(5), pp.1345-1362.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis
and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter paragraphs in the
audit report change nonprofessional investors' decision to invest?. Auditing: A Journal of
Practice & Theory, 33(4), pp.71-93.
Czerney, K., Schmidt, J.J. and Thompson, A.M., 2014. Does auditor explanatory language in
unqualified audit reports indicate increased financial misstatement risk?. The Accounting
Review, 89(6), pp.2115-2149.
Duff, J., Walker, K., Edward, K.L., Williams, R. and Sutherland-Fraser, S., 2014. Incidence of
perioperative inadvertent hypothermia and compliance with evidence-based recommendations at
four Australian hospitals: A retrospective chart audit. ACORN: The Journal of Perioperative
Nursing in Australia, 27(3), p.16.

12
AUDIT
Huggins, A., Simnett, R. and Hargovan, A., 2015. Integrated reporting and directors’ concerns
about personal liability exposure: Law reform options. Company and Securities Law Journal, 33,
pp.176-195.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2017. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Vik, C. and Walter, M.C., 2017. The reporting practices of key audit matters in the big five audit
firms in Norway (Master's thesis, BI Norwegian Business School).