ACC 707 Auditing Assignment: Key Audit Matters & Procedures

This assignment provides a detailed analysis of audit assertions and substantive procedures related to inventory and intangible assets, focusing on two case studies. The first case examines Computing Solutions' inventory, highlighting key assertions like disclosure and valuation, particularly concernin...Read More

Audit Assignment

1
By student name
Professor
University
Date: 20 th Sep 2018.
Table of Contents
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Audit Assertions..........................................................................................................................................3
Question 1: Inventory..................................................................................................................................3
Key Assertions.........................................................................................................................................3
Substantive audit procedures..................................................................................................................4
Communicating Key Audit Matters in the Auditor’s Report....................................................................6
Question 2...................................................................................................................................................7
Key Assertions.........................................................................................................................................7
Substantive Audit Procedures.................................................................................................................9
Communicating Key Audit Matters in the Auditor’s Report....................................................................9
References.................................................................................................................................................12
Audit Assertions
Audit Assertions are the various claims that the management of any company make with
respect to the various elements of the financial statements making an opinion regarding various
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aspects that govern these elements. It is one of the best ways of making sure that books of the
company are free from all kind of misappropriates (Mock, et al., 2018). It also helps in making
claims whether there are any loopholes on part of the management in making sure that
appropriate controls are in place. It is the duty of the management to prepare the financial
statements and it is the duty of the auditor to comment on the viability of the same. The audit
assertions are mostly made on five characteristics that includes existence, valuation,
completeness, rights and obligations, disclosures made. In the given assignment, there are two
case studies that are related to two different companies to analyse the various assertions with
respect to specific elements of the balance sheet.
Question 1: Inventory
Key Assertions
In the given case the company named Computing Solutions deals in various inventories with
respect to computer related software goods. There are various aspects of their inventory that is
stated in the case study and two key assertions that can be identified with respect to that includes:
 Disclosure –AASB 102 deals with valuation and disclosure of inventory and it is
important that the management should comply with the same. It is important that all the
important elements with respect to the financial statements that affect the company and
its materiality level should be disclosed in the annual report of the company. This will
help the company and its management to maintain a transparent approach, in the given
case inventories are having an annual turnover of 5.2 times in 2017 and 3.8 times in
2018, this shows that there is a reduction in the overall movement of the inventory and
the company needs to state that. It can also be seen that the company is making change in
the accounting policy that deals with valuation of inventory, as the company has got a big
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tender and they are contemplating to value inventory at 10% less than the cost, but the
general principle is that inventory should be valued at cost or Net realizable value
whichever is lower (Lessambo, 2018). Thus, this is a change in the accounting policy and
hence disclosure with respect to that should be made.
 Valuation – Valuation is an important audit assertion that companies need to check.
Inventories should be valued at cost or net realizable value as per the respective
accounting standards. Also, the treatment of wastage should be seen, normal wastage
should not be included in cost valuation. But abnormal valuation should not be included.
In case of Computing Solution, the companies are valuing their inventories at cost or
NRV whichever is lower, but now they want to change the valuation made that would be
at 10 percent less than the NRV. Also, there are chances that inventory might become
obsolete as there are technological updates happening again and again, thus this makes
valuation a key assertion with respect to Computing Solutions. The management needs to
make sure that they are correct in this aspect (Fukukawa & Mock, 2011).
Substantive audit procedures
Substantive audit procedures are those procedures that helps the auditor is forming an opinion on
the elements of the financial statement and making judgement whether they are valued correctly
or not. In case of Computing Solutions, the substantive procedures can be used to make an
opinion on the audit assertions described above-
 Disclosures – In case of disclosures, the auditors can apply test of controls to see whether
the company has made relevant disclosures with respect to the respective accounting
standards and whether there are any loopholes in that. They should check the notes of
accounts to make an opinion with respect to disclosure of the inventory provision in the
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financial statements (Andiola, et al., 2018). Disclosures can also be checked by checking
how the company has been performing in years prior to the relevant year and whether
there are changes with respect to valuation or other key features. Like in this case the
company is changing the valuation policy so the management should state it clearly in the
annual report as it might be materially relevant.
 Valuation – With respect to valuation, the auditors can perform various substantive
procedures that would include test of controls that includes vouching and valuation that
means checking whether the value of the inventory ties to general ledger provided,
whether the parties have provided proper bills (Axelsen, et al., 2017). The auditors should
focus more on valuation of the closing inventory as there are chances that management
can do under or over valuation in that. The auditors can also check the prevalent market
rates and see whether the rate that the company has used for valuation is correct or not. In
case of computing solutions, the auditors should see that valuation is correct and the
inventories have not become obsolete, they must be updated. For the tender the company
wants to value the asset at 10 percent less than cost, so the auditor should see whether this
is allowed as per the relevant accounting policies and there are no misstatement involve
in the same (Bailey, et al., 2017).
Communicating Key Audit Matters in the Auditor’s Report
As per ASA701, the auditors should all such matters which they feel are detrimental to the
company and the stakeholders should be aware of that. They can ensure that such matters should
be highlighted in different sections, they should also state all the different audit procedures that
they have adopted in checking the appropriateness of the same. Key audit matters helps in
making the audit report more transparent and are very helpful to the shareholders. In case of the
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given company the computing solutions, the valuation of the inventories is a key audit matter as
inventories are a big part of the financial statements, in 2018 they were valued at 22 percent of
the total sales (Sirois, et al., 2018). Hence stating the same under key audit matter is very
relevant. The auditor needs to provide the respective disclosures in their audit report under the
KAM section-
 The overall valuation method adopted by the company, like in this case the company
is valuing at 10 percent less than cost so that should be stated.
 The overall rights and obligations with respect to the inventories and whether proper
agreements are there between all the related parties.
 The auditor should also state the various audit procedures that they have taken in
valuation of the inventory provisioning and whether that is correct or not (Heminway,
2017).
All these highlighted points will draw the attention of the shareholders and make them
aware whether the company is correct in their approach or not and if any change is needed then
that should also be highlighted accordingly. The KAM should be stated as per the principles of
ASA701. An extract from the annual report of JBH has been attached below highlighting the key
audit matter stated by the auditor (Knechel & Salterio, 2016).
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The auditor have stated the acquisition of the Good Buys as a key audit matter and that
includes the overall valuation of the assets and the liabilities and the fair value of that the
company has acquired. It also states the steps that the auditor has taken and that includes
reviewing the sale agreement, testing the fair value of the assets and liabilities, checking the
judgement made by the management etc.
Question 2
Key Assertions
The second case deals with Beautiful Hair Ltd. The company wants to acquire a small business
named Shimmer Pty Ltd, as the product of Shimmer goes very well with the business of
Beautiful Hair Ltd. The owner of Shimmer is the only person who has knowledge about how
these products are made, thus the company is contemplating purchasing the intellectual product
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that is in the form of technical know-how from Shimmer Pvt Ltd, and now the company is
contemplating recognition of the same as per AASB 3 (Bumgarner & Vasarhelyi, 2018). AASB
3 deals with valuation and recognition of intangible assets and the companies need to abide by it.
In the given case two key assertions with respect to intangible assets are –
Completeness – It is important that all the accounting transactions with respect to any asset must
be complete from part of the management and there should be closure to that. Completeness also
refers to the fact that the asset must be properly recorded and reflected in the financial
statements. In the given case there are intangible assets involved, and it is important that if
Beauty Limited is taking such property from any individual they need to reflect it in their
financials. This is since this property is of great value to the company now and it is drawing
revenue from the same. Thus, only if proper transactions are made and recorded in the financial
statements, the asset can be correct and complete. Thus, Beautiful Ltd needs to reflect the
technical know-how that it is acquiring from Shimmer Ltd and state the same in their annual
report. The auditors should also see that the management is complying with the provision of
AAS 3 when they are dealing with valuation of the assets and their disclosure (Rimmer, 2017).
Valuation – Valuation of the intangible asset is a very complex method and a lot of judgement is
involved on part of the management based on which such valuation is done. The main rules that
applies is with respect to the market value. It is important that companies can first identify the
type of intangible asset that they are dealing in. Different companies have different methods by
which they can value their assets, hence having a proactive approach is very important.
Calculation of few intangible assets like patent trademark is easy, as their value can be assign to
the revenue that they can generate, but in some cases like technical know-how it is very difficult.
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Like in the case of Beauty Ltd, it is important that they should take help from valuation experts
to make definite valuation of the property involved (Garon, 2018).
Substantive Audit Procedures
The auditors can adopt various substantive and analytical audit procedures to value the intangible
assets. Few of such procedures in the given case are stated below-
Completeness – First and foremost it is important to have proper knowledge with respect to the
asset and have proper background information related to that. The auditor also needs to have
proper knowledge about AAS 3 to judge whether the transactions of the company is correct or
not. The auditor can also take help from valuation experts and they can help in ascertaining the
completeness of the asset involved for the company (Appelbaum, et al., 2018).
Valuation – To determine whether the valuation of the asset is correct or not, the auditor should
check what are the terms based on which the asset is being recognized by the company. The
relevant areas based on which the company has valued the asset should be checked. There is a lot
of judgement involved on part of the management therefore they need to make sure that there is
no error (Mubako & O'Donnell, 2018). The auditor can also analyse the prevalent market rates
and then value the asset. It can also take help from valuation experts who can provide inputs on
how the asset can be best valued and what are the areas that auditors need to check accordingly
for their own satisfaction.
Communicating Key Audit Matters in the Auditor’s Report
ASA 701, deals with reporting of the key audit matters in the auditor’s report. All such matters
which the auditor feels are of utmost importance to the management of the company and for the
stakeholders and can influence their decision regarding the company needs to state in the audit
report. The auditor needs to highlight it differently and state the various audit procedures that
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they have adopted in valuation of the same. In case of Beautiful Ltd, there is a lot of judgement
involved on part of the management and it is overall a very complex process (Segal, 2017). Thus
the need is that auditor should properly check all aspects of this intellectual property and then
disclose the same in their audit report. It will help in making the shareholders aware about the
various steps that the auditor has taken from his end in asserting that the asset is reflected true to
its value. The various disclosures that the auditor should make-
 The method of valuation that Beautiful Ltd, has adopted and how relevant it is as per the
market standards (Kangarluie & Aalizadeh, 2017).
 The overall compliance that the company has done with the relevant accounting standard
AAS 3 and whether proper disclosures have been done as per that in the annual report.
 The overall procedures that the auditor has adopted should also be stated and it should
also highlight the various steps that have been taken by the valuation experts in the
opinion that they have shared (Kachelmeier, et al., 2018).
 The impairment with respect to the intangible asset should also be stated and highlighted
by the company.
An extract from the annual report of JB HiFi has been stated below and an analysis of the key
audit matter stated by the auditor is also given –
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In case of JBH the company has got cash generating units which are a form of intangible
assets and the auditor has stated the same in their key audit matter. As per the report, the group
was having impaired goodwill of $14.7 million and impaired plant and property of $1.1 million.
The company has used the discounted cash flow method to value the asset. The auditor has
adopted respective steps to check the management value-in-use model. The auditor has also
checked the latest approved forecasting and historical accuracy as stated by the management.
The auditor has also taken help from valuation experts.
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References
Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation,
and Closing Review Notes in the Audit of Accounts Receivable. Issues in Accounting Education, 33(2), pp.
43-55.
Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A
comprehensive literature survey and framework for external audit analytics.. Journal of Accounting
Literature, 40(1), pp. 83-101.
Axelsen, M., Green, P. & Ridley, G., 2017. Explaining the information systems auditor role in the public
sector financial audit. International Journal of Accounting Information Systems, 24(1), pp. 15-31.
Bailey, C., Collins, D. & Abbott, L., 2017. The Impact of Enterprise Risk Management on the Audit
Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), pp.
25-46.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory
and Application, 20(1), pp. 7-51.
Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability. Auditing: A
Journal of Practice & Theory, 30(1), pp. 75-99.
Garon, J., 2018. Ownership of University Intellectual Property. Cardozo Arts & Ent. LJ, 36(1), p. 635.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Kachelmeier, S., Schmidt, J. & Valentine, K., 2018. The disclaimer effect of disclosing critical audit
matters in the auditor’s report. SSRN, 2(1), pp. 1-39.
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.
Lessambo, F., 2018. Audit Risks: Identification and Procedures. Auditing, Assurance Services, and
Forensics, 3(1), pp. 183-202.
Mock, T. J., Ragothaman, S. C. & Srivastava, R. P., 2018. Using Evidential Reasoning Technology to
Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging Technologies in
Accounting, 15(1), pp. 29-43.
Mubako, G. & O'Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism: Unintended
consequences on evidence evaluation. International Journal of Auditing, 22(1), pp. 55-64.
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Rimmer, M., 2017. The Trans-Pacific Partnership: Intellectual property, public health, and access to
essential medicines.. Intellectual Property Journal, 29(2), p. 277.
Segal, M., 2017. ISA 701: Key Audit Matters-An exploration of the rationale and possible unintended
consequences in a South African. Journal of Economic and Financial Sciences, 10(2), pp. 376-391.
Sirois, L., Bédard, J. & Bera, P., 2018. The informational value of key audit matters in the auditor's report:
evidence from an Eye-tracking study.. Accounting Horizons., 32(2), pp. 141-162.
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