ASA 701 and Auditing Procedures for Material Misstatement and Green Machine Ltd

Trimester 3, 2018
ACC 707 Auditing and Assurance Services Individual
Assignment
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Auditing and Assurance
Executive Summary
The main aim behind the introduction of ASA 701 is to provide the auditor assistance regarding
calculation of the primary audit matters. Hence, it is essential that the auditor should
communicate material information and build an independent audit report for proper
understanding. It is the management duty to stress upon the story as it is important to have
material disclosure and if there is an issue in the actual financial performance, then the users will
not put confidence and trust on the company. In this report, two cases are highlighted one being
the risk of material misstatement and determination of appropriate response about the Advanced
Computer Solution Ltd and the other being the identification and explanation of the two major
assertions of Green Machine Ltd in tune to PPE.
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Auditing and Assurance
Contents
Introduction.................................................................................................................................................3
Material Misstatement................................................................................................................................3
a. Two key assertion................................................................................................................................3
b. Two substantive audit procedures..........................................................................................................4
c. ASA 701 Communicating Key Audit Matters........................................................................................5
2. Green Machine Ltd..................................................................................................................................6
a. Two key assertion................................................................................................................................6
b. Two substantive audit procedures......................................................................................................7
c. ASA 701- Communicating Key Audit Matters.......................................................................................8
Conclusion...................................................................................................................................................9
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Auditing and Assurance
Introduction
ASA 701 is mainly introduced so that whole actual audit matter can be ascertained and
computation can be done. Moreover, after such procedure, communication on the auditor part is
needed to develop a report that is unbiased. Further, the management should have a direct focus
on the story because such disclosure can help in reflecting the genuine state of the company
(AUASB, 2015). About this, an investor can take investment decision that can be tagged as the
main purpose of communication strategy.
Material Misstatement
a. Two key assertion
Earlier on are claims made by management which has been entrusted with the preparation and
presentation of financial statements? These claims are assumed to be true and fair. Any false
assertion can put the management into trouble by making them answerable to the audit team. In
the given case, Advanced Computer Solutions Limited has been experiencing high returns due to
software issues. There is increasing returns, secondary sales and stocks piling up. The two key
assertions at risk, in this case, are as follows:
1. Correct Valuation Assertion- There is huge stockpiling up because of returns of the software
and the decreasing sales. Also, since the reputation is at a loss, the company would try to win the
tender by all means. If they report a cost which is lower than actual cost, which implies a false
way of getting the tender, the correct valuation of inventory won’t be done. Also, if the cost is
lower than the NRV (Net Realizable Value), the valuation needs to be done at NRV at not at
cost. The company or for this matter any company assets correct valuation of its stocks. And that
the valuation is done as per the applicable accounting principles. Here, care has to be taken that
all costs need to be correctly apportioned to inventory and if applicable, the valuation has to be
done at NRV or net realisable value in case the costs are lower. This is to ensure that the
inventory is valued at what can be realised from its sales and no unrealistic profit or loss is
booked. In the given case, since the package sold by the company was a best seller, its NRV
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