Audit of Green Machine Ltd: Significant Assertions and Substantive Audit Procedures
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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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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 2
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. 3
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. 4
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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] 5