ASA 701 Auditing and Assurance Services Individual Assignment

The prime reason for the introduction of ASA 701 is to support the assistance of auditor concerning the computation of the primary audit matters. Two cases have been discussed in the case study that is the Advanced Computer Solution Ltd and Green Machine Ltd. The key assertions are presented along with the substantive audit procedure.

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ACC 707 Auditing and Assurance Services Individual Assignment

ASA 701
Executive Summary
The prime reason for the introduction of ASA 701 is to support the assistance of auditor
concerning the computation of the primary audit matters. Therefore, it is vital that the auditor
should do communication and to provide an independent audit report that helps in proper
understanding. It is the primary function of the management to provide material disclosure and
whether there is an issue concerning financial performance. Two cases have been discussed in
the case study that is the Advanced Computer Solution Ltd and Green Machine Ltd. The key
assertions are presented along with the substantive audit procedure.
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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
Green Machine Limited...............................................................................................................................6
a. Two key assertion................................................................................................................................6
b. Two substantive audit procedures......................................................................................................7
c. ASA 701-communicating key audit matters.........................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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ASA 701
Introduction
It has been observed that after the introduction of ASA 701, all the matters about the audit
process asserted and computed perfectly. Also, the decisions that are taken by the auditor should
be unbiased because the reports are taken into consideration by various parties and acted upon. In
the case of any discrepancy, it will impact the smooth flow of decision. Further, it is also noticed
that the management is having a proper disclosure of all the financial information of the
organisation in front of its shareholders. Disclosure should be done correctly as it has a strong
influence on the decision making capacity of the shareholders (Gay & Simnet, 2015). This has
not only helped the users of the financial documents to make their investment decision easily but
also has contributed to fulfilling the primary purpose of the communication strategy.
Material misstatement
a. Two key assertion
There are various types of claims made by the management for interesting the preparation and
presentation of the financial statements of the organization. All these claims are observed to be
true and fair. If any of these claims will be unfair or false in nature then the management will
face problems and will be answerable to the audit team. For this particular case, the advanced
computer solutions Limited are observed to have high returns because of the software issues.
This has not only led to an increase the returns but also the secondary sales and stocks are
increasing. Hence, the two key assertions at a risk for this particular case are as follows:
1. Correct valuation assertion:
The Increase returns of the software and the decreasing cells have led to stockpiling because of
which the company is losing its reputation and not getting tenders by any means. If any of the
illegal techniques like valuing the report at the cost lower than the actual cost will be used, then
the valuation of the inventory will not be done. It should also be noticed that if the cost is lower
than the net realizable value then the valuation will be done at NRV and not at the cost (Gay &
Simnet, 2015). Hence, it is very important for all the organizations to maintain the correct
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ASA 701
valuation of a stock and also validate them according to the accounting principles that are
accepted by the organization. In this particular case, it has been noted that the costs are needed to
be appointed to inventory and all the costs are needed to be realized at the net realizable value in
case the costs are lower (Geoffrey et. al, 2016). It has been observed that the package sold by the
company was a bestseller and the net realizable value would be high. Howsoever, the low sales
and increasing returns made the task of proper computation to be must otherwise correct
valuation registration will be at a risk.
2. Completeness recitation-
The total inventory stock of the advanced computer simulations Limited has been observed to
move, centralize location to 6 different new regional warehouses which are differently located in
various locations. Hands while carrying out the process of evaluation of heaven inventories, it is
very important for the organization to take care of all the locations and compute the data of
inventory thoroughly. Also, the organization may face use losses because of the rent that is
needed to be paid for the warehouses if they are not self-owned. Hence, it is very important to
take care of both the scenarios and make a proper valuation of inventory that is belonging to the
company (Matthew, 2015). The proper valuation of the stock will not only help to find out all the
true costs. Further, completeness and ownership are the two assertions that are complementary to
each other.
b. Two substantive audit procedures
Any evidence that can be helpful to support the other ones are called substantive audit shreds of
evidence, and all the activities that are carried out for obtaining these pieces of evidence are
known as substantive audit procedures. For the confirmation of assertions, substantive audit
procedures are a must. Various substances procedures are undertaken for identifying the risks
mentioned earlier in the report:
• Against the risk of incorrect valuation- multiple systems can be used to eliminate the risk of
erroneous judgment. The first method is to check all the overheads, cost allocation to rents, the
nature of expenses, the pricing of raw materials, the human resource wages and salaries and all
other costs that are being rendered by the organisation as wastage. Further in the market is
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ASA 701
analysed to ensure the fair market value and market surveys are used to provide the net realisable
value (Viney, 2010).
• Against risks related to completeness assertion: there is a much different type of methods that
can be used to mitigate risks. A cutoff analysis can be used, and further and the audit team can be
selected for a particular period in which no business is done from the warehouses. During this
period, the stock count should be performed so that no further confusion is created. Secondly, the
organisation can try and observe the physical number of the inventory that is present on the
location by supervising and counting processes. Thirdly, the real account can be merged with the
minds of the book for finding out any misinterpretations or discrepancies to validate that there
are no risks present in the organisational framework (Coram et. al, 2011). It is also essential for
an organisation to review the normal and abnormal wastages, but for the cases of software, there
are very few chances for these.
c. ASA 701 communicating key audit matters
This report has been issued by the AUASB and has requirements mainly for the listed companies
but are also having few non-listed companies. The standard is beneficial to extend the relies on
the advertisement that comprises a different kind of essential audit matters and too many
discussions that can be avoided from being communicated. All the factors that can affect the
financial position of the organisation in any way possible should be recorded in the audit report
of the organisation so that this information can be used by the financial supporters of the
organisation to make correct decisions. For the particular scenario, it can be noticed that an
increase in inventory cost is not only factual matter but also deserves various elaboration in the
report because of the analytical tools that are used for suggesting the increase in the closing stock
that may have been observed because of the low sales and increasing returns. This situation can
be perilous and can impact the large government tenders (Livne, 2015). Hence, the audit report
should mention the necessary information so that future analysis can be made depending on the
actions of the organisation. The auditor should also try and report the organisation about its
financial health so that the company can try and regain its stability as soon as possible. For this
particular case, the preparatory money is involved, and hence the auditor should pay more
questions while reporting. The method that has been used for the calculation of inventory may
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ASA 701
have also increased the reasons for decreasing sales, determination of the net realisable value and
estimation of costs as a part of the disclosure.
Green Machine Limited
a. Two key assertion
In the above report, it has been clearly stated that the observations and the claims are made by
the management and interested in the preparations and presentations of the financial statements
of the organisation. All these claims are assumed to be accurate and fair because any false
statement can lead to the management to answer the audit team which further increases the
trouble (Blay, Geiger & North, 2011). The biggest asset for a manufacturing company is the
property plant and equipment. Hence it is essential to value it correctly and adequately classify
all these assets. Classification is necessary as it helps in the proper evaluation and provides
critical information to the end users. If any problem arises, it may lead to fabrication of the
reports of the country because of which the organisation may face loss in future (Kaplan, 2011).
There are two risks to the assertion that are related to Green Machine Limited as per the case:
1. The chance to the classification of claim- it is essential for the classification of assets and
expenses to be done correctly. Hence any kind of maintenance expense or charges of revenue
should be present in the block of assets. It is also essential for the organisation to prepare the
statements by the generally accepted Accounting Principles. For this particular case, the green
machine Limited is having all the expenses in the last year to be mixed up (Kaplan, 2011). All
the capital revenue expenses have been misinterpreted because of which it has been charged to
the wrong accounts and also false information is being provided about the property, plant, and
equipment. The total value of profit or loss will also be misinterpreted because of which the
charge of capital expenditure to the revenue increase.
2. The risk to accuracy assertion- Various risks prevail in the calculation, and hence a qualified
audit report is not presented. An adequate statement is one when the story is free from the
problem, and there are no issues present in the case. The theory mentioned in the management
report of the last year that depreciation rate on various assets was shallow (Rezaee & Kedia,
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2012). This has not only led to the incorrect value of assets. If the lower depreciation is charged
on the assets, there may be following consequences like inflated financial results and creation of
deferred tax liability because of which the company may face problems in future.
b. Two substantive audit procedures
Any evidence that is present to support these assertions is mentioned as substantive audit
evidence. To confirm these assertions, there are various audit procedures that are needed to be
undertaken. The given case of Green Machine Limited will also have procedures that are adapted
for mitigation of risks to the assertion:
1. Mitigation of risk to classification assertion- in the particular case, there has been many
errors in the computation of various figures in the past. Hence it is very important for the audit
team to review the current information in accumulative effect so that correct values can be
obtained. The audit committee should also try to check the last year computation so that the
current year's figure is not affected. Classifications of all the assets and assertions should be
checked so that correct values can be classified into the reviews and capital expenses. A different
team should be allotted for physically checking the capital assets and verifying the additional
changes to check for the expense report and supporting purchase document that is related to the
property plant and equipment (Lapsley, 2012). Financial personals responsible for the
computation of values should be well educated so that they can avoid any mistakes in the future.
This will help in attaining a favorable position because mistake will be avoided at the earliest and
removed whenever some problem accrue (Hoffelder, 2012). The organization should also try to
adopt internal control mechanisms which can help them to maintain the transactions of capital
nature and check them timely.
2. Mitigation of risk to accuracy assertion: one of the most important decisions is the accuracy
assertions because of the great mistakes that are being made in the ascertainment of the estimates
and values. It is very important to check all the assets and then decide the depreciation rate
according to the factors. The incorrect depreciation rates as discussed before can hamper the
business of the organization and long run and affect the financial health at large (Fazal, 2013). If
the depreciation rate has problem it impacts the business in an adverse manner. Hence it is very
important to perform a clear analysis and computation of all the substantive measures.
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c. ASA 701-communicating key audit matters
This has been issued by the AUASB and is having requirements mainly the listed companies.
However, there have been made on listed companies who also work by this standard. The
standard is having a lot of knowledge for the judgment of auditor to comprise of all the key audit
matters and also what will happen if they will be avoided from being communicated. All the
factors and issues that are related to the prudence of the audit reports and the independence of the
auditor's qualification that is needed to be in the organisation while preparing the story is
mentioned in this particular standard. It was observed that the major portion of the organisation
green machine Limited was being considered as a fixed asset because of which the computation
of depreciation, accumulated depreciation, the casting amount of the assets for the property plant
and equipment was significant and necessary (Baldwin, 2010). There are various mistakes in the
key matters that are required for being reported to qualify as an independent auditor report.
Multiple areas are not to be overlooked because of their low impacts. They will not only affect
the financial decisions of the stakeholders but also May make variations in the business of the
organisation. Hence, it is essential for the auditor to mention them in the report. Disclosure about
the different periods and errors and the reasons for the same should be listed correctly in the
independent auditor's report so that it can be used for the for the computation processes (Blay,
Geiger & North, 2011).
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ASA 701
Conclusion
After the clear analysis of all the organizational activities and standards, it can be stated that the
relevant accounting standards are very necessary for proper functioning of the company. Hence,
it can be commented further after the discussion that the main responsibility of the auditor of the
company is to project the true financial position of the organization and product it from any kind
of legal issues that it can face in the future. Further, this will not only help to increase the
reputation of the company in long run but also may increase the profit margin. In all probability
it can be noted that the procedure of audit should be efficient that will help the users with
material information. Further, the company should ensure that remedial measures are taken into
consideration so that issues are eliminated at the earliest. This can ensure a better scenario for the
company and will lead to effectiveness.
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References
Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.
Blay, A. D., Geiger, M. A. & North, D. S. (2011). The Auditor's Going-Concern Opinion as a
Communication of Risk. Auditing: A Journal of Practice & Theory, 30 (2): 77- 102. Doi:
https://doi.org/10.2308/ajpt-50002 [Accessed 22 January 2019]
Coram, P., Mock, T. J., Turner, J. & Gray, G. (2011). The communicative value of the
auditor’s report. Australian Accounting Review 21(3): 235-252. Doi:
https://doi.org/10.1111/j.1835-2561.2011.00140.x [Accessed 22 January 2019]
Fazal, H. (2013) What is Intimidation threat in auditing?.[online]. Available from:
http://pakaccountants.com/what-is-intimidation-threat-in-auditing/ [Accessed 22 January 2019]
Gay, G. & Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S. & David A. W. (2016) Attracting Applicants for In-House
and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons.
30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309 [Accessed 22 January
2019]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and practice.
The Accounting Review. 86(2), pp. 367–383. Available from
https://doi.org/10.2308/accr.00000031 [Accessed 22 January 2019]
Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative Research
in Accounting & Management. 9(3), pp. 291-292. Available from https://doi.org/10.1111/1468-
0408.00081 [Accessed 22 January 2019]
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies. [online] Available
from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-
and-possible-remedies?full [Accessed 22 January 2019]
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Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct?.
The Accounting Review. [online]. 90(2), pp. 495-527. Available from
https://doi.org/10.2308/accr-50871 [Accessed 22 January 2019]
Rezaee, Z & Kedia, B. L. (2012) Role of Corporate Governance Participants in Preventing and
Detecting Financial Statement Fraud. Journal of Forensic & Investigative Accounting. 4(2), pp.
176-205. Available from: doi: 10.1016/j.sbspro.2014.06.041 [Accessed 22 January 2019]
Viney, C. (2010) McGrath’s Financial Institutions, Instruments and Markets, Sydney
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