Audit and Assurance Case Study: Financial Statement Analysis and Audit

This case study analyzes two audit scenarios. The first involves Computing Solutions Limited, focusing on inventory valuation and occurrence risks. It examines key assertions at risk, including valuation and occurrence, and describes substantive audit procedures like analytical procedures and recalculation. It also addresses the requirements of ASA 701 for communicating key audit matters, such as the valuation of inventory and the occurrence of transactions. The second scenario focuses on Howard & Associates auditing Beautiful Hair Ltd, which has acquired a company with intellectual property. The case study identifies key assertions at risk for intellectual property, namely rights and existence, and proposes substantive audit procedures like enquiry and inspection. It also explains the application of ASA 701 for communicating key audit matters related to the intellectual property, discussing the auditor's opinion and required disclosures.

Audit and Assurance
Case Study

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
a. Identification and explanation of two key assertions at risk in relation to inventory..............1
b. Identification and description of two substantive procedures that could be performed in
response to each risk....................................................................................................................2
c. Requirement of ASA 701 communicating key audit matters in the auditor's report...............2
QUESTION 2...................................................................................................................................4
a. Identification and explanation of two key assertions most at risk in relation to the
intellectual property intangible asset...........................................................................................4
b. Identification and description of a substantive audit procedure that could be performed in
response to each risk identified....................................................................................................4
c. Explanation of requirement of ASA 701 communicating key audit matters in the Auditor's
report............................................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Audit can be defined as the process which is conducted by an auditor for the purpose of
evaluating, monitoring and analysing financial statements of an organisation so that its actual
position could be determined. Assurance is an independent service which is provided by charted
accountant of a company regarding the finance related information recorded in final accounts
(Chiu, Liu and Vasarhelyi, 2014). This report is segregated in two parts in which different
organisations are taken. First one is based upon Computing Solutions Limited which covers
information regarding key assertions at risk, substantive audit procedures and requirement of
ASA 701 in relation to key risks of stock. Second part is based upon Howard & Associates
which is auditing the accounts of Beautiful Hair Ltd and two key assertions in relation to
intellectual property, audit procedure for same and requirement of ASA 701 for communication
of such matters are also covered under this part.
QUESTION 1
a. Identification and explanation of two key assertions at risk in relation to inventory
The auditor of Computing Solutions Limited analysed different information while
assessing risk of material misstatement and determining the appropriate response with regards to
the inventory of the organisation. By analysing all the information following risks at the
assertions are analysed by the auditor:
Valuation: This assertion states that the amount for the assets or the liabilities which is
recorded in the financial statements of the company are listed at appropriate amount or not.
There is a risk at this assertion of Computing Solutions Limited because the information which is
being analysed by the auditor is showing that inventory turnover ratio is decreased in 2019 as
compare to 2018. On the other hand percentage of stock on sales in being increased in current
years. Both the information are contradictory which are creating the risk at the assertion of
valuation. It shows that the accounting professionals may have made mistakes in the evaluation
of the inventory while recording it in the final accounts (Cohen and Simnett, 2014).
Occurrence: This assertion is related with the occurrence of different transactions which
are recorded in the financial statements. It states that all the figures which are listed in balance
sheet or income statements should actually took place. The risk at this assertion is very high for
Computing Solutions Limited because the moving expenses which may have taken place due to
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movement of inventory may have not recorded in the final accounts. According to the stock
turnover ratio and percentage of stock on sales states that there is a high possibility of recording
such transaction in the books of the organisation which have not been occurred.
There is high possibility of both the above described risks at assertions of Computing
Solutions Limited. Due to them organisation may have to face materiality in its final accounts.
b. Identification and description of two substantive procedures that could be performed in
response to each risk
There are various types of substantive procedures which could be used for the purpose of
responding the risks at assertions of valuation and occurrence. In Computing Solutions Limited
following two processes are used to deal with both the hazards:
Analytical procedure (Valuation): It is a type of evidence based process which is used
in audit by the auditors to identify possible problems which are related to financial statements.
With the help of this process the auditor at Computing Solutions Limited will be able to find the
errors which are made in the valuation of the inventory by accounting professional of the
organisation. With the help of it existence of unusual transactions could be determined which can
guide to deal with all the errors made in final accounts (Griffiths, 2016).
Recalculation and re-performance procedure (Occurrence): Under this process of
auditing mathematical accuracy of the figures which are recorded in the books of accounting is
checked which helps to determine that transactions have taken place actually or not. In order to
respond the risk at assertion of occurrence it could be used by Computing Solutions Limited as it
can help to figure out that all the transactions which are related to inventory have really take
place or not.
With the help of both the above described procedures auditors at Computing Solutions
Limited will be able to respond the risk at the assertions of occurrence and valuation of
inventory. It can also guide the top level executives to determine the mistakes which were made
by them previously while recording transaction in final accounts (Knechel and Salterio, 2016).
c. Requirement of ASA 701 communicating key audit matters in the auditor's report
ASA 701 is an accounting standard which is required to be followed by all the business
entities which are executing operational activities in Australia. It covers all the key audit matters
that are considered as such elements that are doubted by auditors due to materiality and risk of
assertions. While assessing financial statements of Computing Solutions Limited auditor has
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determined two main risks at the assertions of valuation and occurrence which are related to
inventory. ASA 701 is highly required while communicating key audit matters in auditor's report
because it guides them to consider the identified risks as key audit matters. Rational of this
standard is that it helps to analyse the hazard which requires high level of focus (Hay, Knechel
and Willekens, 2014). Determination of identified risks as KAM is as follows:
Valuation: According to ASA 701 valuation of inventory is considered as key audit
matter because of size of its balance. Rational behind its determination as a KAM is that
according to the accounting principles goods are measured at net realizable value or lower cost.
As there is a possibility of wrong valuation of it so it will be treated as key audit matter for
Computing Solutions Limited (ASA 701, 2018).
Occurrence: The risk of assertion in occurrence of transaction will also be considered as
key audit matter because it may create a huge difference in the final accounts of the organisation
due to enhancement in the expenses which are recorded in books but never happened. According
to section A12 of ASA 701 it is the main responsibility of the auditor to determine all the errors
in the financial report of organisation so that accurate performance of entity could be determined.
Rational behind its determination as a key audit matter is that if the management of an
organisation is recording a such transaction in the book which is not being occurred then it will
be considered as a fraud and all of them are treated as KAM.
Both the risks which were identified by the auditor of Computing Solutions Limited will
be treated as key audit matters according to the rules and regulations of ASA 701. The
disclosures which are required in key audit matters section of the auditor's report under the ASA
701 section are as follows:
For Valuation: The auditor will pass a qualified disclosure for the risk of assertion in
valuation of inventory because it is a big key audit matter which require attention of stakeholders
to gather appropriate information regarding the organisation. Reason behind this opinion is that
the records which were formed by Computing Solutions Limited were not according to the law
and accounting standards (William Jr, Glover and Prawitt, 2016).
For occurrence: In the auditor's report of Computing Solutions Limited occurrence of
inventory will be disclosed as the qualified opinion of auditor. Reason behind this opinion is that
if an organisation is recording a transaction which is fake then it is a fraud which may misguide
stakeholders to make a decision.
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QUESTION 2
a. Identification and explanation of two key assertions most at risk in relation to the intellectual
property intangible asset
Audit Senior of Howard & Associates has been assigned a project of auditing of
Beautiful Hair Ltd who have acquired a small manufacturer of high quality organic hair styling
products. The formula which is used to prepare the products is a secret of owner. The main key
assertions for this type of asset are as follows:
Rights: This assertion states that the business entity holds the control or right to the asset
or liability. It is in the risk for Beautiful hair Limited because the organisation have acquired
Shimmer Pty Ltd which is a manufacturer of organic hair styling products. All the items were
made by special formulas and only the owner knows about them. Main reason for the risk of this
assertion is that, as Shimmer is being acquired by Beautiful Hair so it is the right of the company
to get the formula which is used to manufacture the products. If the owner denies to provide it
then enterprise will be at the risk of this assertion (Liao, Lin and Zhang, 2018).
Existence: This assertion demonstrates that whether the asset or liability of the
organisation actually exist or not. For Beauty Hair Limited it is at risk because the formula which
is used by Shimmer Pty Ltd to manufacture the organic hair products is documented and Held by
its solicitors. There is no existence of it in the final accounts of the company which will create
the risk at this assertion of the entity.
Both the above described assertion are at the risk for Beautiful Hair Limited because the
formula which is used by Shimmer Pty Ltd to manufacture the organic hair products is known by
owner only. If it is not provided by owner to the organisation then it may affect business
negatively because main purpose behind the acquisition was to use the products which are
produced by Shimmer.
b. Identification and description of a substantive audit procedure that could be performed in
response to each risk identified
There are various types of audit procedures which are used to response each risk which is
identified by the auditor. In order to resolve the risk of rights and existence following procedures
will be used (Simnett and Huggins, 2015).
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Enquiry and confirmation directly from a third party (Right): It is a auditing process
which is could be used by Beautiful Hair Limited in order to resolve the risk at the assertion of
right. By focusing on this process the organisation will be able to inspect all the documents of
Shimmer Pty Ltd and analyse that Beautiful Hair has the right to get the formula or not as it has
acquired the another company. With the help of this procedure the organisation can hire an
auditor and ask to enquire and confirm that the company have right to get the formula or not
(Simnett, Carson and Vanstraelen, 2016).
Inspection of records and assets process (Existence): In order to respond the risk at the
assertion of existence Beautiful Hair Limited can check all the records and documents of
Shimmer Pty Ltd in order to analyse that the formula is recorded in it or not. In this process all
the internal as well as external records are inspected so that the risk could be dealt properly. It is
mainly used to conduct physical assessment of the asset which is done by auditor itself in order
to check that there is an asset or not which is required to be showed in final accounts.
By following both the above described procedures Beautiful hair Limited will be able to
deal with risk at the assertions of right and existence. With the help of them the organisation can
also reduce the possibility of risks at other assertions.
c. Explanation of requirement of ASA 701 communicating key audit matters in the Auditor's
report
It is essential to consider ASA 701 as it specifies the main audit issue and its accounting
within the organization. Also, communicating the primary audit problems in the audit report may
provide an chance to further engage the executives and those accountable for managing the
company, audited initial reports or the audit carried in certain matters (Wong and Millington,
2014). It includes all the main audit issues that are regarded as components that accountants
suspect owing to intersubjectivity and assertion danger. While evaluating the financial reports of
beautiful hair, two primary risks have been identified that are right and existence that are as
follows:
Rights: The rationale behind its identification as a key audit matter is that intellectual
property, that are assessed at net value in accordance with the accounting rules. Since it may be
miscalculated, it will be handled as a main inspection issue.
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Existence: The risk of belief in business incidence will also be regarded as a main audit
issue as it may generate a enormous gap in the organization's initial accounts owing to
expenditure improvement documented in books but never occurred.
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For Right: Here key first key-assertion is right as in the given case study here Beautiful
Hair Limited has right to get the the secret along with ownership. This assertion is that an
enterprise possesses and is bound by its reporting liabilities the privileges to its property. The
enforcement of freedoms and duties is a fundamental assertion of the fact that the reporting firm
is responsible for all assets and liabilities in a financial statement. According to statement of
freedoms and responsibilities, the business possesses and operates and has the privileges to own
or use any accepted property. With respect to liabilities, this is a declaration that the obligations
of corporation, but not third parties, are all mentioned in a financial statements.
For Existence: The assertion existence is that, as mentioned in end of the financial
reporting period covered by the statement, resources, liabilities and capital balances are actually
effective in the financial reports of an enterprise.
CONCLUSION
It has been concluded from the above research that efficient compliance to reporting and
financial reporting norms that is essential as it improves financial report credibility. It is the
responsibility of management and auditors to frame final reports in accordance with norms and
instructions. Compliance with the necessary level is needed to attain significance in the material
recorded in financial statements. The accountant must also adopt the norms that have been
obtained and implement substantive procedures to achieve audit efficiency.
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REFERENCES
Books and Journals:
Chiu, V., Liu, Q. and Vasarhelyi, M. A., 2014. The development and intellectual structure of
continuous auditing research. Journal of accounting literature. 33(1-2). pp.37-57.
Cohen, J. R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A
Journal of Practice & Theory. 34(1). pp.59-74.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hay, D., Knechel, W. R. and Willekens, M. eds., 2014. The Routledge companion to auditing.
Routledge.
Knechel, W. R. and Salterio, S. E., 2016. Auditing: Assurance and risk. Routledge.
Liao, L., Lin, T. P. and Zhang, Y., 2018. Corporate board and corporate social responsibility
assurance: Evidence from China. Journal of Business Ethics. 150(1). pp.211-225.
Simnett, R. and Huggins, A. L., 2015. Integrated reporting and assurance: where can research
add value?. Sustainability Accounting, Management and Policy Journal. 6(1). pp.29-53.
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance
research: Trends, methodological issues, and opportunities. Auditing: A Journal of
Practice & Theory. 35(3). pp.1-32.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.
Wong, R. and Millington, A., 2014. Corporate social disclosures: a user perspective on
assurance. Accounting, Auditing & Accountability Journal. 27(5). pp.863-887.
Online
ASA 701. 2018. [Online]. Available through:
<https://www.legislation.gov.au/Details/F2019C00099>
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