Audit and Assurance Report: Analysis of Two Companies' Financials

This report provides a comprehensive analysis of audit procedures and key assertions in the context of two businesses: Computer Solutions Ltd and Beautiful Hairs Ltd. It examines the key assertions related to inventory valuation and accuracy for Computer Solutions Ltd, outlining substantive procedures to address identified risks. The report also addresses the requirements of ASA 701, discussing the communication of key audit matters and the disclosures necessary in the audit report. For Beautiful Hairs Ltd, the report focuses on assertions related to intellectual property, specifically rights and obligations and completeness, and details corresponding substantive audit procedures. The report concludes by emphasizing the importance of adhering to auditing standards and providing transparent and accurate financial information. The report also covers the key audit matters, the software problems, and the company's decision to operate from 6 warehouses. It also covers the key assertion, right and obligations, and completeness.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
Name of the Student:
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Executive Summary
The auditing processes is guided by a framework which is the auditing standards so that a level
of efficiency is maintained in the process of audit. The audit assertions are the focal point which
is the basis on which the auditor conducts audit procedures for collecting evidences and
identifying risks of a business. In this assessment two different businesses are considered which
are Computer solutions ltd and Beautiful hairs ltd on which process of audit would be conducted
so that the risks and key assertions can be identified. Once the key assertions are identified, the
discussion would be showing substantive procedures which the auditor would be applying. The
discussion also would be showing requirements of ASA 701, communicating key audit matters
and the disclosures which the auditor needs to provide in his report.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Computer Solutions Ltd...............................................................................................................4
Key Assertions in Relations to Inventory....................................................................................4
Substantive Procedures................................................................................................................4
Auditing Standard 701, Communicating Key Audit Matter........................................................6
Beautiful Hair Ltd........................................................................................................................7
Key Assertions at risk with regards to Intellectual property.......................................................7
Substantive audit procedure.........................................................................................................8
ASA 701, Communicating Key Audit Matters............................................................................9
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................12

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Introduction
The process of audit is an independent examination of the financial statements which is
conducted so that it can be established that the information is fairly represented and the same
show an accurate picture of the financial position of the business (Knechel and Salterio 2016).
Therefore, it can be said that the process of audit helps businesses to restore its image in public
and to some extent also helps the business by increasing the values of its shares. This is due to
the fact that investors rely on audit report to ascertain the accurateness of the financial position
and if proper audit report is issued, then the investments in the shares of the company would rise.
This assessment would be focusing on audit procedures and assertions which are involved while
conducting an audit for a business. The companies which are considered are computing solutions
ltd. and Shimmer Pty ltd for analysis whether the financial statements are free from any material
misstatement.
The auditor’s report is also reviewed by the management of the company so that they can
make some changes in the operating structure of the business and ensure that transparency and
accountability is maintained. The assessment would be identifying audit risks associated with
both the companies and the assertions which are involved in each case. Furthermore, the
assessment would also be disclosing the reporting requirements which are stated in ASA 701 and
what the auditor needs to report regarding material misstatements.
Discussion

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Computer Solutions Ltd
Key Assertions in Relations to Inventory
1. Assertion of Valuation: The management of computer solutions depends on its
presentation package for selling the products which has been experiencing returns due toa
software problem. The key assertion which can be identified in such a case is valuation of
the inventory (Hay, Knechel and Willekens 2014). The auditor needs to ensure that the
management of the company has been consistent in valuing the inventory of the business
and if the valuation technique which is used by the business is accurate or not. It is often
the case that some of the inventories which are kept for a long time gets obsolete and the
auditor needs to make sure that the same are considered in valuation process of the
business.
2. Accuracy Assertions: Another major assertion which can be identified is accuracy of
the value of inventory which is shown in the financial statements of the business. The
business has a policy of maintaining a 26% of sales as inventory. The auditor needs to
check if proper records are maintained by the business (Ward et al. 2013). The inventory
of the business might be overstated or understated and this posses a serious risk to the
business. The auditor in such a case needs to apply verification procedures in order to
ensure that the amounts which are represented in the financial statements are accurate.
Substantive Procedures
Assertion of Valuation:
1. The inventory value of a business is subjected to risks of over or under valuation if proper
valuation technique is not applied by a business. The auditor needs to apply verification
procedures for ascertaining if the value of inventory which is shown in the financial

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statements are showing accurate view (Spradling and Lindsey 2013). Th auditor would be
checking the valuation process for the inventory and ensure that the same are consistent
with the provisions which is stated in AASB 102. The auditor of the business also needs
to check inventory which have become obsolete and ensure that the same are not
considered in the valuation process due to the fact they cannot be sold and have literally
no value.
2. The auditor also needs to consider the goods which are being returned to the business for
software problems and check whether the same are being considered in the valuation
process for the inventory. The auditor also needs to confirm whether the inventory are
owned by the business in consideration of the rights of the inventory.
Assertions of Accuracy
1. The auditor of the business needs to check the inventory balances and all related ledger
accounts so that the auditor can check if the figures which is represented in the financial
statements are accurate or not. The inventory figure is closely associated with the figures
of sales and therefore any misstatement in inventory account would affect the entire
financial statement of the business (Huang, Lin and Raghunandan 2015). There might be
certain items in the inventory stock which might have become obsolete and the auditor
needs to consider if the same have been removed from the figure which is shown in the
balance sheet of the business.
2. The auditor of the business needs to check the inventory ledger and purchase and sales
day book which would reveal to the auditor the different purchases and sales relating to
inventory of the business. Vouching procedures needs to be applied by the auditor for
appropriately collecting necessary audit evidences (Cordoş and Fülöp 2015). The auditor

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can also resort to external confirmation procedures in order to collect corroborative audit
evidences for ensuring that the figure of inventory is accurately represented in the
financial statements of the business.
Auditing Standard 701, Communicating Key Audit Matter
The auditing standards are guides which assists the auditor to follow a set of audit
procedures for formulating an audit opinion on the financial statements. The auditing standard
701, communicating key audit matters deals with the explanations which needs to be provided by
the auditor regarding the key accounting treatment of the business as shown in the annual reports
of the business. As per the requirement of the standard, the auditor needs to report on matters
which are crucial and which he feels might impact the decisions which re taken by the
shareholders of the business (Sirois, Bédard and Bera 2018). The key audit matters generally
reflect transactions which are of complex nature and the auditor consider such as material items
which can impact the financial position of the business. The standard 701 requires auditors to
report on the same in order to bring about transparency in the operations of the business. Further,
it is a mandatory requirement that key audit matters of a business should be incorporated in the
annual reports of the business when the same is published.
In the case of Computer solutions ltd, the following key audit matters are identified
which are done after applying audit procedures.
 The strategy of the business to sell its products at 10% lower of the costs to maximize
sale is a key audit matter as the same directly impacts the profits which is generated by
the business and thereby affecting the overall revenue of the business.

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 The business of Computer Solutions have faced numerous returns of their products due to
a software problem which can cause a threat to the operations of the business and also
impact the sales of the business.
 The company has made a decision to operate from 6 different warehouses for the purpose
of supporting its distribution system but for the same purpose, the company has been
facing liquidity issue which is a major concern for the business.
The relevant information which needs to be disclosed in the key audit matter section of the
annual report are listed below:
 The expectation of the management is to generate higher returns and profits but the main
product of the company is facing software problems.
 The management of the company has decided to operate from 6 different warehouses to
support their distribution system and also with a view to reduce the costs.
 The company wants to maximize the sales of the business by offering its products at 10%
lower value than its costs.
 The going concern principle for the business would also be considered by the auditor
which is intact considering the principles of ASA 570.
Beautiful Hair Ltd
In a business organization, assets are considered to be very important for the purpose of
generating revenue for the business. There are also intangible assets which along with tangible
assets help in generation of appropriate revenue for the business. One of the most common
example of intangible asset is goodwill which is shown in the balance sheet of a business. The
key assertions related to intangible assets would be covered in the discussion below.

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Key Assertions at risk with regards to Intellectual property
1. Issues of Rights and Obligations: The key assertion which can be applied in the case of
Beautiful hairs ltd for the intangible asset is assertion of rights and obligations. The
auditor needs to establish whether the intellectual property belongs to the company or not
and whether the business has the right to use the asset (Christensen, Glover and Wolfe
2014). The management of Beautiful hairs acquired the business of Shimmer Pty Ltd and
the intellectual property actually belonged to Shimmer Pty Ltd. The auditor needs to
confirm whether the management of Beautiful hairs ltd have acquired the intangible asset
or not.
2. Completeness: The information which is provided in the financial statement needs to be
complete otherwise there would be serious risk to the assertion of completeness. The
annual reports of a business should contain detailed disclosures and information relating
to treatment of intangible assets of a business (Gimbar, Hansen and Ozlanski 2016).
There might also be a case of infringement of rights of any partners or third parties and
the same needs to be considered by the auditor. The auditor of the business would be
applying verification procedures for ascertaining whether the risks actually exists or not.
In order to fulfill the assertion of completeness, the auditor needs to maintain all records
and provide proper notes and disclosures in the books of accounts.
Substantive audit procedure
Assertion of Right and Obligations
1. The auditor would be going through the agreement for acquisition between Beautiful
hairs ltd and Shimmer Pty Ltd so that the terms of acquisition can be established. This
also helps the auditor to establish that there was a mutual agreement in the transaction

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and also regarding the right to use the intangible asset of the business (Carson, Fargher
and Zhang 2016). The business of Shimmer Pty Ltd is offering its trade secrets and
therefore the auditor needs to confirm from the management of Shimmer Pty Ltd that
proper consent was given or not. In addition to this, any period of use for the trade secret
if establish also needs to be checked by the auditor.
2. The auditor of the business needs to check if the intangible asset is being used currently
or not and whether the same is included in the annual reports of the business. The auditor
can also use external confirmation from third parties for ensuring that there is
infringement of intellectual property.
Assertion for Completeness
1. The auditor would go through the financial statement and check the amount at which the
intangible asset is valued and also trace the same with the records maintained by
Shimmer Pty Ltd. The auditor would be looking for all documents relating to intangible
asset starting from the acquisition of the same.
2. The auditor would be applying verification procedures and would also be checking if
impairment charges, amortization charges are properly charged and disclosed in the
financial statement of the business or not. This is also one of the key aspects which is
considered while checking assertion of completeness.
ASA 701, Communicating Key Audit Matters
The auditing standard 701. Communicating key audit matters ensures that full disclosure
is provided in the financial statement and also requires the auditor to especially report on matters
which are of significance (Cordoş 2015). The key audit matters help shareholders to take major
decisions relating to the operations of the business and thereby the same are considered to be

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important. Further, the key audit matters provide a clear picture regarding the performance of the
business and also about long term sustainability of the business.
In this case, when the business of Beautiful hairs ltd acquired the business of Shimmer
Pty ltd, it also acquired the intellectual property of the business. The key audit matters of the
business would be showing the intellectual property as the same is regarded to be a transaction
which is complex in nature (Xu et al. 2013). The business also needs to provide appropriate
disclosures relating to the transactions.
The relevant information which would be included in the key audit matters of the
business as per the judgement of the auditor are listed below:
 The valuation process for the intangible asset as reported in the financial statement.
 The changes which has occurred in the capital structure of the business post-acquisition
 The charges in relation to the intangible assets such as impairments and amortization also
needs to be shown in the notes to accounts and the figures for the same needs to be cross
checked in order to maintain accuracy in the disclosures.
Conclusion
The discussion which is covered above is mainly related to the process which is followed
while conducting an audit. The audit of Computer solutions ltd and Beautiful hairs ltd is
conducted for which major risks which is faced by the businesses is identified and the related
assertions which are at risk is also explained. The discussion above shows the substantive audit
procedures which the auditor in case of both the companies would undertake for confirming or
denying the risks and also for the purpose of accumulating necessary audit evidences. The
discussion also deals with requirements of ASA 701, communicating key audit matters which the

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auditor needs to follow and reflect in the auditor’s report which is formulated. The key audit
matter makes the financial statements more transparent and provides the shareholders the
opportunity to takes decisions after considering all factors.

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