Audit of Green Machine Ltd: Significant Assertions and Substantive Audit Procedures

This article discusses the significant assertions and substantive audit procedures for Green Machine Ltd. It also covers the communication of crucial audit matters as per ASA 701.

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AUDITING & ASSURANCE

Audit
Green Machine Ltd
i. Two significant assertions
The claims made by the management about its financial statements are referred to as
assertions that are generally presumed to be accurate and fair. Thus, the audit team may
generate significant enquiries upon the management if their assertions come out to be
fraudulent or untrue. Moreover, for manufacturing companies like Green Machine Ltd, fixed
assets like PPE (property, plant, and equipment) serves as the most crucial asset that
necessitates efficient classification and valuation on the part of the management team. Hence,
if proper cost and rating are not done, many financial complications may arise.
a. Classification assertion
The first risk is the classification assertion wherein all the assets must be classified
appropriately to their respective heads. Also, expenses must also be grouped into their leaders
to determine which category of spending the company has incurred. For example, costs
associated with repair and maintenance must be grouped under revenue expenses, etc.
Nevertheless, in the case of Green Machine, such requirement has not been duly fulfilled as
all capital and revenue expenses are admixed together, thereby creating complications to
ascertain the correct values of the company’s PPE. Besides, the amount of profit or loss has
also depicted a wrong figure owing to such admixture of expenses (Matthew, 2015).
b. Accuracy assertion
The second risk is the accuracy assertion which sheds light on the fact that all the
computations must be appropriately conducted so that the auditor does not offer a qualified
opinion on the financials. Nonetheless, the rate of depreciated calculated by the company has
been remarkably less in nature that has played a role in hampering the real figures of the
company’s assets (Matthew, 2015). Besides, such consideration of less depreciation can
inflate the financial statistics of the company, incur further liabilities like a deferred tax, etc
(Dauber,, 2009). Therefore, the overall economic scenario of the company is at risk because
of such error in the computation of depreciation.
ii. Two substantive audit procedures
All the previously mentioned assertions can be proved only with the assistance of functional
audit processes that plays a significant role in gathering relevant evidence in support of the
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Audit
same. Thus, if the management falsely asserts any matter, the same can be recognised
through the adoption of such procedures. In other words, all false assertions can be easily
identified through the implementation of such processes. The following substantive audit
procedures can be adopted in Green Machine Ltd:
a. To encounter the risk of classification assertion, the audit team can re-verify the
calculation of the past year and after that, assess the values of the present year to arrive at
accurate values. If the previous year’s flaws are not corrected, then the current year values
might also tamper on the whole. Further, the classification must be duly monitored, so that
accurate values are assigned to both revenue and capital expenses (Cooper & Coram, 2015).
Moreover, adoption of internal control mechanisms can also assist in preventing such issue in
future. Lastly, advocation of the finance department of the company regarding the matter can
allow them to be more cautious in the future.
b. To deal with the risk of accuracy assertion, the entire list of company’s assets must be
properly checked and understood. After that, the rate of depreciation applicable on these
assets must be interpreted and assigned accordingly while recording the same in financial
statements (Ruhnke & Schmidt, 2014). The reason behind this can be attributed to the fact
that incorrect values of depreciation can result in severe consequences that can hamper the
smooth flow of functioning in the long-run.
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Audit
ASA 701- Communication of crucial audit matters
The AUASB (Auditing and Assurance Standards Board) has framed the ASA 701 standard
for the benefit of auditors wherein they can exercise their judgement to determine what
matters must form part of the audit report as essential audit matters. Moreover, to determine
which case is material for disclosure, the auditors must evaluate whether such a thing has a
significant influence on the decision-making ability of users (AUASB, 2015).
About Green Machine Ltd, since the major part of the assets group of the company is fixed
assets, the same must be regarded as crucial audit matters and formed part of the audit report.
This is because matters like PPE, calculation of depreciation, accumulated depreciation, etc.
are also directly associated with the same (AUASB, 2015). Besides, these matters have a
significant influence on the decision-making ability of users and the same cannot be
disregarded by the auditors. Hence, disclosing information about the past errors, main reasons
that caused such errors, steps adopted to get rid of such errors, and a comparative analysis
betwixt the recent flawed figures and present accurate figures must be done in the audit
report. In addition to these disclosures, the auditor must also pave a path for disclosing the
method of computation utilised for determining the values of depreciation.
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Audit
References
AUASB. (2015) Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report.
Available at: http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
[Accessed 23 January 2019].
Cooper , B. & Coram, P. (2015) Modern Auditing & Assurance Services. 6th ed. Australia:
Wiley.
Dauber, N. (2009) Wiley The Complete Guide to Auditing Standards, and Other Professional
Standards for Accountants. NY: John Wiley & Sons.
Matthew, S. E. (2015). Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review [online]. 90(2), p. 495-527. Available from:
https://doi.org/10.2308/accr-50871 [Accessed 23 January 2019].
Ruhnke, K. & Schmidt, M. (2014) Misstatements in financial statements: The relationship
between inherent and control risk factors and audit adjustments. Auditing: A Journal of
Practice & Theory. [online]. 33(4), p.247-269. Available from: https://doi.org/10.2308/ajpt-
50784 [Accessed 23 January 2019]
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