ACC 707: Auditing and Assurance Services Individual Assignment

This report provides a comprehensive analysis of auditing and assurance services, focusing on two case studies. The first case study examines Computing Solutions Limited's inventory, identifying key assertions such as existence, occurrence, and completeness, and detailing substantive audit procedures to address identified risks. It also explores the requirements of ASA 701 regarding the disclosure of audit findings, specifically concerning issues like software problems, inventory levels, and below-cost sales. The second case study delves into intellectual property, focusing on the rights and obligations, and valuation assertions related to Beautiful Hair Ltd's intangible assets. The report outlines appropriate audit procedures to mitigate risks associated with these assertions and emphasizes the need for communicating key findings in the audit report as per ASA 701. The report highlights key aspects of financial reporting, risk assessment, and the role of auditors in ensuring accuracy and transparency.

AAS 1
Auditing and Assurance Services

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Table of Contents
Introduction................................................................................................................................3
Question 1:.................................................................................................................................4
a. Risk in relation to Stock/Inventory: Two key Assertions..................................................4
b. Procedure of audit in context to identified risks:...............................................................5
c. Requirement of ASA 701 regarding disclosure of audit findings:.....................................6
Question 2..................................................................................................................................8
a. Key findings that are most connected to the intellectual property intangible asset...........8
b. The course of action to be adopted for Auditing................................................................9
c. Need of Communicating Key Finding in Reprot.............................................................10
Conclusion................................................................................................................................12
References................................................................................................................................13

AAS 3
Introduction
The following report has been prepared in order to develop the understanding of the users
regarding the various concepts of auditing and assurance services provided by the auditors
employed in a business. There are two case studies provided in the report in regard to which
various questions have been answered. The questions will include the description regarding
the key assertions required in relation to a risk. The report will also include the description
regarding the substantive procedures that can be applied in relation to the risk identified. The
applicability of ASA 701 will be analysed in relation to the situation and risk identified and
necessary recommendation will be made in this regard.

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Question 1:
a. Risk in relation to Stock/Inventory: Two key Assertions
The key risk assertions relating to inventory in case of Computing Solutions includes the
following:
Existence and occurrence– The key assertion in relation to inventory will help in ensuring
that the inventory as reported by the entity during the relevant year exists and it has been
correctly recorded at the given date. The key assertion will require existence of enough and
adequate amount of records and invoices in regard to purchases and other transactions
relating to inventory. The occurrence of each and every transaction relating to inventory must
be checked and reconciled with the type of documents and evidences available. The
substantive audit procedures will be applied in relation to these assertions (Mock and
Fukukawa, 2015).
Completeness–Completeness of accounts and records involves deals with whether the
information and data regarding the inventory which should have been included in the
financial statements of the company has been included or not? In order to support this
assertion auditor should have obtained all the necessary evidence regarding the record of all
the transactions relating to inventory. In this regard the concept of materiality will allow the
auditor to support this assertion as the material transaction relating with inventory must have
been included in the financial reports of an enterprise. Thus the completeness assertion will
be related with recording and presenting the complete records as against all the documents
and information regarding the inventory of Computing Solutions (Knechel and Salterio,
2016).

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b. Procedure of audit in context to identified risks:
In case of Computing Solutions it can be observed that the closing inventory has increased
with a significant percentage of increase by 4%. Average inventory has also increased in the
year2018 while comparing the same with the year 2017.
The substantive audit procedures in relation to inventory existence for Computing Solutions
will include taking frequent confirmations form the outside parties that can be a third party in
the transaction involved. For example the confirmation can be taken regarding the closing
inventory from the supplier of the company regarding the purchases are. In order to confirm
the existence of inventory the auditor should make effort for seeking the evidences outside
the books which have been presented and recorded by the company itself (Alles, et al., 2018).
The efforts regarding the confirmation of debits and credits will not be enough in order to
identify and reconcile the correct entry. The internal control must be tested in order to ensure
that the accounts are kept and maintained under careful supervision and there is no ambiguity
regarding maintenance of accounts (Knechel and Salterio, 2016).
The substantive audit procedure for Computing Solutions in relation to completeness will
involve inspecting the physical inventory available at the regional sites of computing
solutions and also identifying and reconciling the amount of closing inventory as recorded by
the entity. It can be observed that the inventory level has increased during the past few years
and in order to ensure the accuracy of the same there is required regularly inspecting the
inventory levels at warehouses. The vouching of transaction will be another substantive audit
procedure that can be applied for testing the accuracy of completeness. The transactions
recorded by the company in relation to inventory will be reconciled with the invoices of
purchases and supplies. The amount of purchases will then be conformed to the amount of
inventory utilized in production activities.

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c. Requirement of ASA 701 regarding disclosure of audit findings:
ASA 701 Communicating Key Audit Matters in the Auditor’s Report deals with the auditor’s
responsibility and accountability associated with reporting the main audit finding in the report
provided by him (Mock & Fukukawa, 2015). The scope of this auditing standard is extended
to the fact that the communication of key audit matters and items recognized during the
course of audit is necessary in order to assist the users in analysing the current situation. The
same will require considering the various requirements and rationale associated with
fulfilling those requirements by the auditor. The communication of critical issues identified in
the report will assist users in extracting the useful information for taking important decisions.
The requirements in relation to this standard include:
Determination of key Audit Matters –The requirement in this aspect will include
determining the matters which shall be corresponded to those charged with authority among
the company and in the process of sae consideration must be given to the identified and
significant amount of risk identified n the risk assessment process, difficulties encountered in
some of the matters associated and various types of circumstances which requires some
modifications (AICPA, 2018).
Communication of the key Audit Matters –It is the responsibility of the auditor to
communicate the significant audit matters to those charged with governance. Therefore the
audit report shall state the matters that are significant in his judgement and that require
appropriate disclosure in the reports presented by him
The rationale behind the application of this auditing standard involves the purpose of
implementing this standard which includes:
 The communication of the significant matters will help in enhancing the value of
communicating the report while offering a presenting the report with transparency
about the audit which was conducted.

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 The standard will ensure that the users are communicated with all the significant
matters that are significant and crucial for decision making in judgment of the auditor
and this will help the users in assessing the situation.
 The will help in understanding the enterprise and also the areas associated with
crucial management judgement.
In the above case of Computing Solutions Limited the ammeters identified represents the key
audit matters and these involves:
 The best-selling computer presentation package is suspected to have software
problems which will affect the future sales and revenues of the enterprise regarding
this product of the company.
 The inventory level maintained by the company has increased with a significant
percentage which reflects blockage of funds and this shall be corrected in order to
maintain adequate liquidity.
 The company has agreed to sell its products below 10% costs which is a significant
matter that will affect the profitability and sustainability aspect of the company. Thus
the auditors should ensure that the fact of obtaining the tender for supplying the
products at ten percent below cost has been accepted. The investors will assess this
particular situation and will take their decision accordingly.
The disclosures that will be needed in disclosure section of the description will include the
following:
 “In order to won the tender associated with supply of products to the government
department, the company has accepted the proposal of supplying the items at 10%
below cost (AICPA, 2018). This has been performed in order to prevent the other
competitors in gaining a foothold in the public sector market and ensuring long term

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sustainability. However this will affect the profitability of the company in a
significant matter”.
 “The package associated with best-selling computer presentation is suspected to some
software related problems however this has been experiencing high level of returns
during past few years”.
 “The inventory has been moved from central warehouse to the regional warehouse in
order to decentralise the operations related with inventory management”.
All of these disclosures will represent the adequate information as presented in the EOM Para
of the auditor’s report and the other disclosures related with the significant matters will also
be described appropriately.
Question 2
a. Key findings that are most connected to the intellectual property intangible asset.
The two key assertions for Computing Solutions limited in relation to intellectual property for
the formula are explained and identified below:
Rights and obligations– The major risk associated with the assertion made is related with
the fact that the entity has the right to ownership of use of the identified or recognized asset
(Quadackers, et. al., 2014). In the concerned case of Beautiful Hair Ltd the entity has
acquired Shimmer Pty Ltd and the owner of the small manufacturing firm only knows the
formulas to create the products. The secret ingredients for the formula will represent the
intangible asset for the company. However the recognition of the same in the financial
statement as intangible asset will represent a risk regarding the rights associated with using
the product. The risk will be associated with identifying the value of the asset for Beautiful
Hair Ltd.
Valuation – The risk associated with this type of assertion in relation to Beautiful Hair Ltd
will be concerned with valuing property the intangible asset recognized in the form of

AAS 9
intellectual property right as acquired by the assesse. The intellectual property right in this
case will represent the formula for making the products as manufactured by Shimmer Pty
Ltd. The auditor will identify and assess the risk associated with valuing the intangible asset
while considering the necessary provisions and rules concerned with valuing the assets. In
this case the consideration of AASB 3 will be made (Louwers, et. al., 2015).
b. The course of action to be adopted for Auditing
In relation to the risk identified above the various substantive audit procedures will include
the following:
 The risk regarding the rights and obligations assertion can be minimised by
investigating the acquisition agreement and identifying the terms and conditions
associated with the acquisition. The auditor must ensure that the right to use the
intellectual property is adequately with the assessed (Simnett, et al., 2016). The rights
and obligations concerned with the asset under consideration are with the Beautiful
Hair Ltd and the same has been appropriately disclosed in the financial statement of
the enterprise.
 The risk regarding the valuation of the intellectual property will be managed with the
substantive audit procedure like obtaining the schedule of the intangible assets held by
Beautiful Hair Ltd. The amortisation of all these intangibles assets is properly
assessed for their correctness. The auditor must apply foot and trace ending balances
during the audit work performed in the intangible assets of the company. The policies
regarding the capitalization and amortization should be discussed with the client and
the acceptability of the same should be critically analysed in relation to various
policies and procedures (Carson, et. al., 2014).

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c. Need of Communicating Key Finding in Reprot
As per Australian Standards on Auditing 701 associated with correspond the key audit
matters the auditor is required to include all the relevant and significant information
associated with use if decision making to the users of the auditor’s report. The requirements
associated with the standards incudes identifying the significant type of information that
should be exported in the financial reports and the audit reports of the auditor. This will be
dependent on the judgement of the person regarding his perception in regard to the
importance of the matter for decision making. The rationale behind reporting these significant
matters is associated with the fact that the users of the auditor’s report will be assisted by the
information to assess the company situation more reliably and the decision regarding the
various purposes can be taken after considering the critical sources of information. The
application of the reporting of significant matters will help the individual in assessing the
decision under different conditions and there for efficient and effective decision can be taken
accordingly (Carson, et. al., 2016).
As per AASB 3, the intellectual property right acquired under the acquisition of Shimmer Pty
Ltd will represent the acquisition of material and valuable asset by the company Beautiful
Hair Ltd. The acquisition of this asset will represent the significant change in capital structure
as well as the asset and liability position of the company. The other significant audit matter
associate with this type of acquisition will be related with valuing and amortising the asset
while considering the necessary provisions and rules as applicable to the company. Thus the
same will represent a “Key Audit Matter “for the company which should be reported
appropriately in the audit report. The reporting of same is necessary in context of the
investors because the capital structure and asset position will change after valuing the
property and the users will take the decision after considering the same (Vik & Walter, 2017).

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The disclosure requirement associated with same issue under consideration requires
considering the ASA 315 related with Identifying and Assessing the material risk in which
the assessment regarding the valuation and recognition of intangible asset has been described
appropriately. The disclosures will include:
 Cost of acquisition of the asset
 Residual value of the asset
 Amortization method required to depreciate the asset.
 Valuation method.
The matter should be disclosed as under “Beautiful Hair Ltd has acquired Shimmer Pvt Ltd
which is a small manufacturing firm producing the high-quality organic hair-styling products
which can be used by the company in its business operations. The ingredients required for
producing the items will represent a significant asset for the company (Louwers, et. al.,
2015). Thus the same have been recognized as an intangible asset under AASB 3 and has
been reported as intellectual property right under asset section. The valuation and
amortization of this asset will be made after considering the various rules and regulations as
applicable to the company”.

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Conclusion
On the basis of above report, it can be concluded that the auditing procedures includes the
consideration of the key audit concepts and processes required for conducting an appropriate
audit work. The audit key matter assertions made in respect of assets and liabilities and other
items concerned with the enterprise and it has been properly analysed for the risk associated
with them. The substantive audit procedures will be required to be implemented in order to
assess the particular risk associated with the key assertions made. In this report, it has also
identified significant issues and observation during the process should be reported and
disclosed in the auditor’s report and the significant matters of judgement should be
adequately reported to those charged with governance. This report also analyzed the key
responsibility and accountability of the auditor under consideration. Thus the audit procedure
in respect of the auditor wills involve considering the various facts and situations affecting
the company.