Financial Audit Report: Inventory and Intellectual Property Assessment

This report analyzes two case scenarios: the first focuses on inventory compliance for Computing Solution Limited, including auditor responsibilities and relevant standards like ASA 315 and ASA 501. It identifies key assertions at risk, such as valuation accuracy and existence, and outlines substantive audit procedures like vouching and cut-off procedures. The report also addresses ASA 701 requirements for communicating key audit matters. The second scenario examines Beautiful Hair Limited's acquisition of Shimmer Pvt Ltd, focusing on intellectual property rights and intangible assets. It discusses key assertions like ownership and accuracy, and proposes substantive audit procedures. The report references AASB 3 and highlights the importance of proper classification and impairment assessment of intangible assets. The analysis aims to provide a comprehensive understanding of audit procedures and risk assessment in financial reporting, particularly concerning inventory and intellectual property.

Inventory

Table of Contents
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
QUESTION 2...................................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES .............................................................................................................................10

INTRODUCTION
Accounting and auditing standards are significant for corporation operating at
international level. In Australia corporation mainly follows standards issued by AASB. Standard
are also prescribed for auditors who are responsible for providing opinion on accounts reported
by different corporations (Brown, Preiato and Tarca, 2014). The whole study is based on two
case scenarios, first one is related to compliance of relevant standard for inventories in context of
Computing Solution Limited and auditor's role and responsibilities with regards to Auditing
standards. While second case scenario deals with norms and standards which deals with
business combination and intellectual property rights in context of Beautiful Hair Limited.
QUESTION 1
1. Identification and explanation about key assertions at risk related to inventory:
Under risk management in respect of Computing and software solutions with regards of
assessment process, of Key assertion related to stock and inventory, This requires auditors and
public accountants to become accustomed to corporations and environment in which they
functions or operates assessment. As per ASA 315, When there any material misstatement found
or exists and such misstatement involves any fraud and error, it can impact financials of
corporation. This standard provide a basis for determining perfect scope, timing, audit
procedures length which are considered salient in acquiring reasonable and adequate audit
evidence related to risks assessed (Wiedmann, Chen and Barrett, 2016).
Inventory's valuation is most susceptible audit area. According to AASB 102 Inventories
proper disclosure is required along with valuation method used compliance with norms
prescribed. Along with it also emphasises upon separate disclosure of inventories lost or
damaged and assessment of realisable value of inventories as the case may be. Here
consideration of two standards are required, first is ASA 501 “Existence and Valuation of
Inventory” and second is ASA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment”
As given in study that a package of best-selling computing presentation has been faced
and resulted high level return due to suspected issues in software. Here in this type of case
auditors requires some information and technology knowledge since most of the auditor relies
upon data provided by a well know or best selling software. But ignorance of this area can lead

to audit opinion on false representation. Based on given case study following are key assertions
at risk related to inventory:
1. Accuracy of valuation: This is most considerable assertion which emphasise on
accuracy of transactions recorded and figures reported in financials. Here in as per
provided fact it has been analysed that due to suspected software issue in computing
solution there is concern regarding accuracy of inventory amount (Camfferman and Zeff,
2015). Further a large gap in inventory turnover indicates that there is risk involved in
processes related to inventory. Also year end amount of inventory has been increased to
26% of sales in year 2019 which was 19% in year 2018. Such presented facts point out
towards lack of accuracy in inventory reported in year 2019. So auditor should focus on
this assertion and prepare audit plan accordingly.
2. Existence: This assertion require that Auditor should ascertain or confirm whether
inventories or items of stocks which are reported in corporation's balance sheet genuinely
exists. This assertion is significant as it assist in ensuring that whether any fraud involved
in reported figures of inventories (Ahmed and Ali, 2015). In as per given points in case
study Company has shifted its stock and inventories from company's central-warehouse
to different six regional warehouse, thus this act of company require consideration of
assertion related to existence of inventories.
2. Identification and explanation about substantive audit procedures to perform in
response of identified risks:
ASA 520: Analytical Procedures' goals is to obtain appropriate and trustworthy audit
related evidence while using SAP or substantive-analytical procedures. The main aim of SAP is
to acquire certainty regarding financial statement assertions for one or more audit areas in
conjunction with all other audit tests (like substantive detail tests and control tests). Usually, SAP
is suitable for performing audit for more risk and big amounts of transactions which appear to be
much more reliable over time. In lack of recognized circumstances to contrary, implementation
of substantive analytical procedures is based on assumption that relationships between figures
exist and proceed (Jesus and Jorge, 2015). The existence of such relationships offers audit
evidence that transactions are perfect, accurate and occurring. Because of their purpose,
substantive analytical procedures can sometimes offer additional evidence for various assertions,
recognize audit problems that might not be evident from more comprehensive work, and draw

the focus of auditor to fields that require more inquiry. In addition, auditor can establish internal
control for obstacles or deficiencies that hadn't been recognized earlier, which could lead auditor
to re-evaluate its scheduled audit strategy and allow the auditor to acquire more certainty through
other substantive tests than initially intended. Following are two key SAP which could be
applied in connection with assessed risk:
Vouching: In order to determine accuracy and validity of reported transactions, vouching
guarantees that almost all records in account and journals are accompanied by appropriate proof,
including receipts, original invoices, bills and many others. Vouching doesn't quite bring non-
business transactions and events into consideration, thus assisting auditors to guarantee that
almost all transactions in books of a corporation are business-related (Perera and Chand, 2015).
Auditors verify that the quantities specified in each transaction are true, revealing the
significance and authorization of a transaction. Here in this given case to analyse the accuracy of
valuation of figures of inventories and inventory turnover auditor should adopt vouching
procedure. By vouching of each proof related to recording of stock and issuance of stock auditor
can ensure that figures reported are accurate and company has followed appropriate accounting
procedures and standards.
Cut-off Procedure: Both perpetual as well as periodic procedures require effective cut-
off in record keeping while conducting physical count so that accounting records provide
outcomes of physical count, also it include all major transactions arise in an accounting period,
whereas excludes other period transactions. Inventory databases can be revised before
transaction information are posted to general ledger accounts for all inventory transactions (sales,
purchases and returns). For instance, whenever goods are collected, goods are usually managed
to enter in stock records, however accounts payable data will not record liability until all invoice
arrives since shipping documentation might not record details of the price. This procedure is
useful for examining existence of inventories. This is significant procedure which help in
analysing recording process of inventories within entity (Chen, Ding and Xu, 2014).
3. Requirements of ASA 701:
Under ASA 701 “Communicating Key Audit Matters”, aim of communicating vital
audit issues is to improve the audit report's attentive value by offering higher transparency on the
audit being conducted. Communicating important audit issues offers extra data to expected
financial report customers ("expected users") to help them understand issues that, in professional

judgement or auditor's opinion, were of the greatest importance in audit of present period's
financial statement. In audited annual report, communication of important audit issues may also
help expected users comprehend entity as well as areas of important management actions. In the
case of public statements and records already disclosed exception could be excluded. In applying
the mentioned companies, ASA 701 is crucial (Camfferman and Zeff, 2015).
Required Disclosure
The above discussed points are ascertained as important to the reality that best-selling
item on industry is subject to return because of alleged software problems are identified. Here, it
is climate-friendly, including all appropriate overheads and immediate inventory expenses.
Further due to suspected software issue, company has reported wrong amount of closing
inventory, which ultimately resulted as decrease in inventory turnover from 5.2 times in year
2018 to 3.8 times in year 2019. This decrease miss-guided that company's inventory holding
period is improved. Here as per ASA 315 and ASA 501 considering inventory as item which
require special consideration, should conduct additional audit procedure to find out whether it is
a fraud or error. Another fact should be disclosed that this software moved inventory from
central-warehouse to six new regional warehouse (Ahmad and McManus, 2014).
It is necessary to assure that standards for Inventories (AASB 102) which deals with
valuation of stock at value lower of cost and market value, is appropriately followed. Costs or
Expenses which are not related to production and indirect expenses should not be included in
inventory's cost. Disclosure about method of recording stock like FIFO, AVCO etc. is also
required and justification of amount recorded in accounts. Following procedure in context of
above discussed disclosure requirement and case study should be adopted, as follows:
 Inventory-ageing reports required to be used for estimating future demand and saleability
to identify slow moving goods.
 For Inventory Items having larger holding period, present data in percentage form.
 Line analysis is also required for items remain unsold to ensure proper compliances.
 Sample should be taken for different Inventory items examining valuation and also re-
perform by making comparison with last invoices and purchases.

QUESTION 2
1. Identification and explanation about key assertions at risk related to intellectual
property intangible assets:
The whole case study of Beautiful Hair Limited, is based on understanding of intellectual
property rights and intangible assets. Company has acquired company named Shimmer Pvt Ltd
which is a producer of high-quality hair-styling organic based products. But acquired company
Shimmer Ltd contented that only ownership has been transferred to Beautiful Hair limited so
company will not share any information about secret ingredients used in organic hair product.
Here first of all consideration of AASB 3 is required which deals with procedures and
compliances required to be followed by entities at the time of business combination. This
Standard aims at improving the pertinence, reliability and compatibility of data about business
combination as well as its impacts that a reporting corporation gives in financial reports. AASB
10 guidelines shall be applied in identifying the purchaser— the object in another organization,
that is to say the purchaser. In creating this determination, variables in para B14 –B18 are
included if a company mix has happened, but application of the AASB 10 guidelines did not
obviously specify which of merging companies is the combination.
Following are key assertions which is to be used by auditors to recognise risk associated
with intangible assets specially intellectual property rights, as discussed follows:
Ownership: Ownership became essential as Beautiful beauty management must see if a
legitimate assertion in aspects of intangible assets and its confidential formula exists to recognize
it on its financial statements. Intellectual Property is indeed a legitimate assertion.
Accuracy: It is significant in terms of accuracy, as Beautiful hair managers wants to
determine that balance sheet may recognize intellectual property which is an intangible asset that
contains secret formula. Adequate classification and assessment of impairment can take place
when the most important adjustments needed to carry amount on balance sheet are found to be
unable to generate revenue from the previous time. If the intangibles on the income statement are
figured to be generally outdated, a reduction in amount of sheet is needed (Albu, Albu and
Alexander, 2015).

2. Identification and explanation about substantive audit procedures to perform in
response of identified risks:
In order to maintain assertion that no material misstatements exist with respect to
completeness, legitimacy and accuracy of entity's fiscal record, substantial procedures are meant
to produce evidence for an audit. Therefore, an auditor performs substantial procedures to
capture whether material mistakes exist in accountability transactions. SAP is a system, phase or
measure that generates concrete evidence that financial statement acquisitions and accounts are
completed, existent, disclosed, valued or enjoyed by the audit. A sufficient documentation
require to be gathered to meet the criteria as substantive procedure in order for another qualified
auditor to perform same procedure with respect to same document and also to conclude the same
thing. In this context in respect of given case study following are substantive audit procedures
required to be performed in relation to identified risk, as discussed below:
Examination: This involve physical examination of documents related to any transaction
while conducting audit. In respect of ownership assertion this audit process is suitable as this
enable auditor to assess any risk related to transaction recorded with respect to business
combination. A testing of name of papers may be included in in the substantiation processes
needed in the affirmation with another paper validating evidence of property. An assessment of
contracts is also to be performed with a opinion to correcting the assets and the value that can be
covered here.
Verification: Document verification is suitable to the customer in necessary conditions
when obtaining and adapting the costs needed for suitable accounting strategy. Meanwhile, it
becomes essential to determine further application tests of customer accounting policies. The
identification and review of the intellectual property transfer registered so that it must be fixed
for the necessary duration of moment to be known that it has been registered properly and in the
appropriate income or other cost in respect of the assets assigned. It is also necessary to test the
continuous asset and its suitability (Merigó and Yang, 2017).
3. Requirements of ASA 701 with respect to case of Beautiful Hair Ltd:
Consideration of ASA 701 is important as it defines key audit matter and their reporting
within entity. The communication of main audit issues in the audit report can also provide
opportunity to further involve the managers and those responsible for governing in some matters
concerning the entity, audited final accounts or the audit conducted. An exception could also be

rendered when determining the main issues which can be addressed here. Impacts in this respect
can be negative to public interest as well as advantages of enterprise contracts with deemed
business rivalry (Aletkin, 2014).
Here in case of Beautiful Hair Limited, auditor should consider the effect of business
combination in consolidated accounts. One of main matter to communicate in audit report is
dispute on intellectual property right with Shimmer Pvt Ltd and accounting procedure or formula
used by entity in reporting goodwill or right related to acquisitions. Also if any other related
matter which comes to the knowledge of audit and consideration of which is necessary for audit
opinion.
CONCLUSION
From above study it has been articulated that effective compliance of reporting and
accounting standards is crucial as it enhance the creditability of financial reports. Management
and accountants are responsible for framing final accounts while complying with standards and
guidelines. To achieve meaningfulness in content reported in financial statements compliance
with standard required. Also auditor should follow standards issued and adopt substantive
procedures for achieving effectiveness in audit process.

REFERENCES
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