Analyzing Audit Risks: A Case Study of Green Machine Ltd Auditing

This case study analyzes the auditing issues at Green Machine Ltd, a manufacturing company, for the year ended June 30, 2018. The audit revealed observations related to property, plant, and equipment, particularly concerning the classification of capital and revenue items and lower depreciation rates for various asset classes. Key audit assertions, including existence and valuation/classification, are examined, alongside substantive audit procedures like vouching fixed asset registers and verifying asset valuations. The study emphasizes the importance of ASA 701 in communicating key audit matters, such as the classification of expenditures and depreciation rates, to improve the communicative value of the audit report and enable informed decision-making. The conclusion underscores deficiencies in internal control and the necessity of highlighting key audit matters for transparency and user awareness. Desklib offers similar solved assignments and study resources for students.

[Date]
AUDITING ASSIGNMENT
An examination into the auditing issues in Green Machine Ltd.
Student’s Name
University’s Name

1
By student name
Professor
University
Date: 15 January 2019.
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Contents
Abstract of the case study...........................................................................................................................3
Introduction.................................................................................................................................................3
Discussion on the case.................................................................................................................................3
a. Key audit assertions.........................................................................................................................3
b. Substantive Audit procedures..........................................................................................................4
c. Requirement of ASA 701 while preparing audit report...................................................................4
Conclusion...................................................................................................................................................5
References...................................................................................................................................................5
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Abstract of the case study
A summary of the audit findings has been made below for the company Green Machine Ltd., which
deals in manufacturing. The auditors have found conducted the audit of the company for the year ended
30th June 2018 and several observations have been found for property, plant and equipment. The report
highlights the key assertions w.r.t. property, plant and equipment, the substantive procedures applied
by the auditors and the key audit matters that should be reported by the auditors in the audit report as
per ASA 701 and what is the logic behind the same (Bizfluent, 2017).
Introduction
The summary of property, plant and equipment has been given as on 30 th June 2018 to the auditors and
it shows the cost, the accumulated depreciation balance, the addition, deletion and depreciation for the
year. The review of the last year’s management letter shows the observations like there were issues in
classification of the capital and the revenue line items and that the items to be capitalised were charged
to P&L and those to be expensed off were capitalised (Bromwich & Scapens, 2016). Furthermore, it has
also been observed that the rates of depreciation differ for various assets classes and is on the lower
side. The same has been shown below:
1. Building : 2 – 4% straight line
2. Plant and machinery : 5 – 10% straight line
3. Fixtures fittings and equipment : 5 – 20% straight line
Discussion on the case
a. Key audit assertions
The key assertions may be defined as the policies, guidelines, procedures and frameworks coupled with
the estimates and judgement employed by the management in the organization so as to identify the
issues in the internal control environment or any other material misstatement (Vieira, et al., 2017). The
same becomes the key audit assertions in case the auditors considers it to be sufficient and appropriate
in the circumstance of the case. 2 major audit assertions in the given case are shown below:
1. Existence: It is assumed that the management is charging depreciation for all the asset
components in the company and that the completeness in recording of the assets in the balance
sheet and the charging of depreciation in the profit and loss account is being ensured. The
company’s policy and judgements also needs to be examined in this regard as to what all line
items are being capitalized and what all are being charged to profit and loss account as expenses
(Kangarluie & Aalizadeh, 2017).
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2. Valuation and classification: The valuation of the assets must be done at cost less accumulated
depreciation and impairment of assets till date, if any. It also needs to be checked if the
classification is done correctly by the management and that no capital items are charged to
revenue and similarly, no expense nature line item has been capitalised as fixed assets in the
books.
b. Substantive Audit procedures
Substantive audit procedures may be defined as the audit procedures being employed by the auditor to
examine and test the key assertions by the management such that there are no material misstatements
in the financial statements. The key assertions which are being checked includes completeness,
accuracy, existence, classification, valuation and disclosure. It is done with the intention to find the audit
evidences or the supporting documentation. Two substantive procedures which can be applied here are:
1. Going through the fixed assets register and vouching of bills and verification of assets to identify
what all assets have been recorded and what have been missed out. This will also help the
auditors in knowing if any item of expense has not been charged off to P&L account. Due
inspection and physical verification would be required to evidentiate the existence of assets
(Knechel & Salterio, 2016).
2. The company can check upon the valuation aspect by checking if all the assets are supported by
due invoices and that all of them have been originally recorded at cost. The depreciation
calculation, rates and the life of the assets also needs to be reviewed with the help of the
experts to check and comment if the company is not undercharging the depreciation and
thereby reducing the expenses in the books. The auditors should also be checking if the
management is reviewing the useful life, rates of depreciation and the impairment requirement
annually as required by the accounting standards (Sithole, et al., 2017).
c. Requirement of ASA 701 while preparing audit report
The standard deals with highlighting and communicating the key audit matters in the audit report while
reviewing the financial statements of the entity. Key audit matters are those matters which the auditor
assumed to be critical and significant during the course of the audit and which took significant audit
attention. He also states why the same was being considered significant and what all steps did the
auditor applied in order to overcome the same (Raiborn, et al., 2016). One of the major reasons or
rationale of this accounting standard is to increase and improve the communicative value of audit report
such that the users are well informed and decision making can be enabled. It also improves the
transparency of the audit as the issue is first communicated to those charged with governance. The key
audit matter in case of Green Machine Ltd. is the classification of the expenditure into capital and
revenue line items and substantially lower rates of depreciation for the assets in the company. The same
has been chosen as KAM as this might have a direct impact on the profitability of the company and it
may rise unnecessarily due to lower depreciation rates (Fay & Negangard, 2017). The disclosure
requirements in this case would be the management justification w.r.t. lower depreciation rates, the
steps or the audit procedures employed by auditors to collect audit evidences here and the suggestion
and recommendation by the auditor to the client.
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Conclusion
From the above discussion and analysis, it is quite clear that the company is having deficiencies in the
internal control w.r.t. to the property, plant and equipment and it has several key assertions at risk
which has been highlighted above along with the substantive audit procedures to be applied by the
auditor. It also emphasizes on the point that it is very important and critical to highlight the key audit
matters to the client and the management and in the audit report as a whole as it gives the intended
users additional information to enable decision making.
References
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems.
SAGE Journals, 30(1).
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