Audit and Assurance: Risk Assessment, Procedures and Key Audit Matters

This report provides an in-depth analysis of audit and assurance services, focusing on the identification of key assertions at risk and the development of substantive procedures to address those risks. The report examines two case studies: one involving inventory valuation at Computing Solutions Limited and the other concerning intellectual property valuation following an acquisition by Beautiful Hair Limited. For each case, the student identifies potential risks of material misstatement related to key assertions such as valuation, authorization, understandability, classification, and accuracy. The report also addresses the requirements of Auditing Standard ASA 701, discussing how key audit matters are communicated in the auditor's report, and determines which identified risks qualify as key audit matters. The student explains the rationale behind ASA 701 and the importance of transparency in financial reporting, providing detailed explanations of each key audit matter and its significance. The report concludes with recommendations based on the analysis and a comprehensive list of references.

Running head: AUDIT AND ASSURANCE
Audit and assurance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

AUDIT AND ASSURANCE
Executive summary:
The paper is developed to demonstrate the understanding of the issues identified in the auditing
and assurance services by critically analyzing the trend and conducting an in depth research.
Such analysis is also done to identify the problems faced by the modern organizations in
conducting the auditing work. Discussion has been made by providing an adequate explanation
of the requirement of the auditing standard. The issues concerning the audit has been ascertained
by analyzing the two case study and the problems faced in accounting for the assets. The first
case study requires assessing the assertion at risk faced by the inventory account and the second
case study focuses on identifying the assertion at risk relating to intellectual property relating to
the acquisition of one firm by other. For the identified risk relating to the inventory and
intellectual property account, the suitable substantive procedures have been developed to address
such risk and whether there exist any risk of material misstatement. The later section of this
paper addresses the requirements of the auditing standard “ASA 701 communicating key audit
matters”. The identified key audit matters has been explained in reference to the disclosures and
requirement of this particular auditing standard.

AUDIT AND ASSURANCE
Table of Contents
Introduction:....................................................................................................................................4
Discussion:.......................................................................................................................................4
Question 1:.......................................................................................................................................4
Explaining and identifying two key assertions at risk relating inventory:......................................4
Identifying two substantive procedures for assessing the risk identified:.......................................4
Explaining the rationale and requirements of ASA 701 Communicating Key Audit Matters in the
auditor report:..................................................................................................................................5
Question 2:.......................................................................................................................................6
Explaining and identifying two key assertions at risk concerning intellectual property intangible
asset:................................................................................................................................................6
Identifying two substantive procedures for assessing the audit risk identified:..............................7
Explaining the rationale and requirements of ASA 701 Communicating Key Audit Matters in the
Auditor’s report:..............................................................................................................................7
Recommendations:..........................................................................................................................8
Conclusion:......................................................................................................................................9
References list:.................................................................................................................................9

AUDIT AND ASSURANCE
Introduction:
The paper identifies the trend and issues that is encountered in the auditing and
assurances services of the organizations. The requirements of identifying and explaining the key
assertion at risk is addressed by evaluating the given two cases of Computing Solutions Limited
and Beautiful Hair Limited. The first section of the report addressed the key assertion at risk in
relation to then inventory account of Computing Solutions Limited. In addition to this, in
response to each of the identified risks, the substantive audit procedure has been identified and
described. In the next section, the key assertion at risk in relation to then inventory account of
Beautiful hair Limited is addressed along with the description of substantive audit procedure for
evaluating each of the identified risk. In addition to these, report also incorporates the
explanation of requirement of auditing standard 701 and determining whether each of the
identified risk can be regarded as key audit matter or not in accordance with the standard. For the
items relating to the inventory and intellectual property that are regarded as key audit, matters
have discussed in accordance with the requirement of the auditing standard ASA 701.
Discussion:
Question 1:
Explaining and identifying two key assertions at risk relating inventory:
It has been ascertained while assessing the material misstatement of Computing Solutions
limited that the turnover of inventory has reduced and there is a decreasing percentage of
inventory representing sales. The two key assertion at risks in relation to inventory is listed
below:
Valuation- It is observed that the contribution of inventory to the sales is declining and
this is resulted because of falling turnover of inventory. It is required to value the inventory for
adequately recognizing and disclosing the value of inventory (Bepari and Mollik 2016). Hence,
the value assertion seems to be at risk as there is no proper method of recognizing the inventory.
Authorization- The agreement of supplying the items at 10% below their cost price put
the assertion of authorization at risk. This is so because whether such agreement has been done
as per the decision of higher-level management or not. It is required to ensure that the inventory
transactions of the company is handled by the authorization procedures of company (Farooq and
De Villiers 2017).

AUDIT AND ASSURANCE
Identifying two substantive procedures for assessing the risk identified:
The substantive audit procedures that should be performed by the auditors for each of the
relevant assertion at risk associated with the inventory account are as follows:
Valuation verification- One of the effective procedures for verifying the completeness
and valuation of inventory is to reconcile the sample of balances of inventory account. Monthly
statements provided by the suppliers for the goods received can be evaluated in the examination
process. Auditors are able to gain documentary evidences, which forms the basis of their opinion
(Abou and Abdel 2017).
Allowance for inventory- Auditors under this procedure take measures for determining
whether there is adequate recording of the level of inventory balances. Such balances can be
evaluated by identifying the patterns that is recorded historically.
Counting the inventory- The proposed policy of counting the inventory should be
typically reviewed by the auditor before the company is performing their inventory count. Some
of the policies that could be adopted by the auditor include proper sequencing, pre numbering the
tags, counting by two person team, segregating the goods based on the assignment and master
counting of the sheets which the supervisor controls. The auditor would select a sample of items
that is specific and representative item. In addition to this, it is also observed by the auditor that
the procedures and policies for counting the inventory complies with the policies that is adopted.
Auditors for ensuring that the goods, which are supposed to be counted, is involved in the
counting goods should obtain the cut off information. For instance, the last receiving reports and
the last shipping documents should be reviewed.
The auditors can examine the documents indicating that the particular procedure relating
to inventory transaction was performed and this forms the substantive procedure to test the
transaction concerning the particular account. The agreement of supplying the items by
Computing Solutions at lower price should be sought for the documentary evidences and cross-
verified.
Analytics should be performed on the cost of goods sold along with performing
procedures to test the turnover of inventory. In order to test for the overstatement and
understatement, the procedures to test the gross margin and turnover of inventory should be
adopted. Adhering to this standard implies that the auditors are responsible in the verification
and evaluation of the financial statements for determining the existence of material uncertainty.
Explaining the rationale and requirements of ASA 701 Communicating Key Audit Matters
in the auditor report:
Auditors in accordance with this particular auditing standard should communicate all the
key audit matters that are identified from the financial statements of the company. The auditors
should account for the areas where the management has made significant judgment concerning
any particular account and which has higher assessed material misstatement risk (Rezaee et al.,
2018). Moreover, any transactions that is considerably impacted by the audit should be disclosed

AUDIT AND ASSURANCE
in the prepared audit report. Determining the significant items that are considered risky is the
rationale of ASA 701.
The matters that are considered to be significant as per the professional judgment in the
auditing procedure of the financial statements of the company are said to be the key audit
matters. The auditors in their report enhance the transparency of the information presented in the
financial report of the company due to the communication of key audit matters.
Description of each of the key audit matters identified is done according to the relevant
disclosures that explains why the matter is considered significant and accordingly designing the
steps for addressing such risks.
The key audit matters in the given case study can be found to associate with the inventory
valuation, as it is required to verify the percentage of inventory that contributes to sales. The
trend of percentage of inventory in the total sales made by Computing Solutions limited should
be evaluated. Auditors is required to evaluate such trend for the verification. It is required to
depict a detailed disclosure of why the chosen item is considered as the key audit matter in
accordance with the paragraph A-43 of ASA 701. In addition to this, all the reasonable factors
for making the conclusion that the matter is regarded as key audit matters should be presented in
the report.
Question 2:
Explaining and identifying two key assertions at risk concerning intellectual property
intangible asset:
In the second case study, the assets such as intellectual property that has been recognized
as intangible asset in the event of acquisition of Shimmer Pty limited by Beautiful Hair limited.
It has been found that the intellectual property that has been acquired by Beautiful Hair limited
possess the potential to be regarded as material and valuable asset. Therefore, in this
requirement, the assertions at risk in relation to the intellectual property of the company has been
ascertained by identifying the facts from the case study.
Understandability and classification- The disclosure and presentation of the intangible
assets such and the components of intellectual property are properly described, classified and
disclosed with understandability might be at risk. The risk of this assertion of the intangible
assets implies that the disclosure of the related party transactions is not appropriately disclosed.
In addition to this, the events and balances related to the assets might not be recorded properly.
In addition to this, there might not be appropriate presentation and classification
understandability of the information related to the intangible assets such as intellectual property.
In the event of inadequate disclosure of the information related to intellectual property, there
would be difficulty in the determination of the captions related to the financial statement of the
company after acquisition (Accaglobal.com, 2019).
Accuracy and valuation- Under this assertion, the valuation and the accuracy of whether
the intellectual property acquired by the Beautiful Hair limited has been correctly recorded or
not. This implies that the intellectual property is not appropriate recorded in the book of account

AUDIT AND ASSURANCE
and do not depicts the correct figures of the asset’s value. Therefore, it can be inferred that the
intangible assets of intellectual property might not be valued properly that depicts the true figures
in the consolidated financial statements of the company. Hence, the assertion about the valuation
of the intellectual property have been recorded at the appropriate amounts in the financial
statement is at risk (Petherbridge and Messier, 2016).
Identifying two substantive procedures for assessing the audit risk identified:
Evaluation of the assertion of the material financial statement can be done by the auditors
using the substantive procedures such as verifying the accounts for the balances and records and
examination of documents.
The description, classification, categorization of the accounts and balances in the books
of accounts of intangible assets in the vent of acquisition is governed by the accounting standard
and disclosure requirements. For testing this, auditor uses a checklist for comparing the
disclosure and presentation of client is aligning with the disclosure requirement. Any deviation
or error in recording of the balancing and valuation of intellectual property is measured for
materiality and its impact on the recoded balance and financial statement (Kb.icai.org, 2019).
Verification of the formation of the initial value of the intangible assets and
determination of the asset’s useful lives. In this substantive procedure, sufficient evidence should
be obtained by the auditors that the intangible assets has been received by Beautiful hair at the
initial value and the valuation has been evaluated by the adoption of appropriate accounting
policy. In this procedure, the auditors can evaluate the auditing procedure of the previous years.
One of the important sources of information for the client is the external source of information
relating to the acquisition of the intellectual property by the acquire. The auditors should re
perform the valuation of the intellectual property and this is done by conducting the reevaluation
of the charges that is imposed. Such recalculation can be done by selecting a representative
sample of the total population. Such approach would assist the auditors in detecting the
possibility of existence of material misstatement in the valuated value of intangible assets
(Houqe et al., 2017). The figures presented in the financial statements of the assets can be
evaluated for determining the risk assertion using the substantive test.
Explaining the rationale and requirements of ASA 701 Communicating Key Audit Matters
in the Auditor’s report:
The objective of the auditing standard ASA 701 is to ensure that the auditor’s report
provided helps in increasing the confidence of the public concerning both the financial
statements and the process of auditing itself. Such reporting would help enhancing the
communication transparency between the users of the financial statement such as creditors,
investors and the companies issuing financial report. The decision making process in
determining the key audit matters is designed by the auditors by choosing a small number of
matters that should be communicated with the people charged with governance (Ey.com, 2019).
However, determination of such matters is limited to the maters that are regarded to be most
significant in the audit of the financial statement. Communicating the key audit matters does not
as act the substitute for the disclosures made in the financial statements.

AUDIT AND ASSURANCE
Every annual report of the company should have a separate section depicting the key
audit matters using an appropriate heading. In addition to this, the description relating to such
matters should be entity specific, clear and concise. There should be adequate explanation with
the proper justification about why the particular matter is regarded as significant. This helps the
auditors in explicitly considering all such areas that has higher risk of material misstatement and
required judgment of auditors and significant management (Auasb.gov.au, 2019).
The case of acquisition cannot be necessarily regarded as key audit matter; however,
considerable auditing effort might be required for this. In the given case, it might seem that the
acquisition of the business of Shimmer by Beautiful Hair limited and the treatment of intellectual
property is regarded as matter of significant judgment. However, in the given case of Beautiful
Hair limited, the intellectual property has been recognized as intangible assets and it has the
potential to be valuable and material asset in accordance with the accounting standard AASB 3.
The auditing standard also requires that the each of the key audit matters and its
description should include a reference to the related disclosures in the financial statement.
Disclosures of the items found to be of key audit matters helps the users in proving robust
information concerning the information sensitivity that is used in the estimates of accounting and
providing rational of the particular accounting practice (Donelson et al., 2016). The related
disclosures can be referenced that enable users in understanding how the matters has been
addressed by the management in preparing the financial statement.
In the given case of acquisition of Shimmers Pty Ltd by Beautiful Hair limited, the
accounting treatment of the acquisition of the intellectual property is considered the area
requiring significant judgment. That is the accounting treatment and valuation of the intellectual
property and recognizing it as intangible assets by the acquirer is regarded as a key audit matter.
 The allocation of the acquisition amount concerning the acquired liabilities and assets to
the fair value is considered as the area requiring significant judgment and hence forms the
part of key audit matter (Wilkinson and Coetzee, 2015). In addition to this, the
identification and valuation of fair value of the intangible assets also requires the auditors
to frame significant judgment and forming the basis of their opinion suing such judgment.
 It can be found that the materiality of impairment of the intellectual property is complex
and thereby requirement significant judgment (Boiral et al., 2018). This is so because
assessing the impairment of the intellectual property is complex as it has the potential to
be valuable and material asset.
Recommendations:
The evaluation of the inventory account should be done by adopting the appropriately
substantive procedures of auditing. In addition to the test of control, the existence of material
uncertainty that would lead to material misstatement should be done by developing the suitable
analytical procedures. There should be preliminary and analytical review for evaluating the
intangible assets. Auditors should disclose and present the area of significant judgment that
forms the key audit matter using suitable heading and sub heading. It is essential to make such
presentation as it enhances the transparency of information communicated to the users.

AUDIT AND ASSURANCE
Conclusion:
From the analysis of the first case, it is identified that the assertion at risk in relation to
inventory of computing solutions is related to valuation and existence. In addition to this, the
assertion at risk related to intellectual property presented in the second case of Beautiful Hair
limited is understandability and classification along with the valuation and accuracy. By
performing substantive test, auditor is able to make some conclusion on the adequate
presentation, recording and valuation of the intellectual property as well as inventory. Therefore,
from the analysis of the given two case, it has been ascertained that auditing issues have been
addressed by developing the substantive procedure and in accordance with the requirement of the
auditing standard.

AUDIT AND ASSURANCE
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