Auditing and Assurance Services: Advanced Computer Solutions Analysis

This report provides a comprehensive analysis of auditing and assurance principles, focusing on risk assessment and key audit matters within the context of two case studies: Advanced Computer Solutions Ltd and Green Machine Ltd. The report examines management assertions, identifies key assertions at risk (completeness, accuracy, and valuation), and details substantive audit procedures to mitigate these risks. It delves into the requirements and benefits of ASA 701, explaining how auditors determine and communicate key audit matters, with specific examples from the case studies. The analysis includes a discussion of inventory valuation, property, plant, and equipment valuation, and the importance of accurate financial reporting. The report emphasizes the application of audit standards and procedures to ensure the reliability and accuracy of financial statements, providing a valuable resource for students studying auditing and assurance.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
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Table of Contents
Introduction:...............................................................................................................................2
Case of Advanced Computer Solutions Ltd:..............................................................................2
Key Assertions of Risks:........................................................................................................2
Substantive Audit Process:.....................................................................................................3
Cost of Green Machine Ltd:.......................................................................................................5
Key Assertions at Risks:........................................................................................................5
Substantive Audit Procedure:.................................................................................................6
Key Audit Matters (KAM) under ASA 701 Key Audit Matters................................................7
Objectives:..............................................................................................................................7
Definition:..............................................................................................................................7
Requirements of Determining Key Audit Matters:....................................................................7
Benefits of the ASA 701 Key audit matters:..............................................................................8
Reasons for Selecting the Key Audit Matters:...........................................................................8
The situation for Advanced Computer Solutions Ltd:...........................................................8
The situation of Green Machines Ltd:...................................................................................9
Disclosure of Key Audit Matters under ASA 701 Key Audit Matters:.................................9
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

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Introduction:
Auditing can be defined as the process of assessment and inspection of the financial
reports of an organization to assure that the transactions does not contain any material
misstatements (Beasley et al. 2018). The auditors must review the management assertion
while carrying out audit. Audit assertion is viewed as assumed and observed statements
where the assertion of management can result in severe material impact on the fiscal reports.
This requires the auditors to determine any existence of material risks.
The guidelines and regulations that is made by the “ASA 701 Communicating Key
Audit Matters in the Independent Auditor’s Report” should be followed by the auditors
(Mališ and Novak 2016). This guidelines forms the element for auditors to carry out the
auditing process or to locate any risks of assertion and accounting the same in the auditor’s
report. The report would assess the different types of risks assertion and key audit matters
from the given case facts.
Case of Advanced Computer Solutions Ltd:
Key Assertions of Risks:
The situation of Advanced Computer Solution Ltd states two management risks
assertion that are as follows;
Completeness: Completeness is regarded as important assertion where a business can value
its inventories. As per this assertions, the administrations for an organization is required to
report and record the transactions so that it can value its inventory. Understating of
inventories give rise to risk assertion (Bhattacharjee, Maletta and Moreno 2015). For
example, when a responsible person is assigned to keep record of inventories even after the
purchase fails to keep to account of it results in risks assertion.

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Weaker internal control system can give risk to risks assertion. As per the information
furnished by advanced computer solution the inventory in hand during 2018 stood 26% of the
sales while 18% accounted for 2017. The responsible person here must account for the
inappropriate inventory values that led to the enclosure of previous year sales in the current
year. This significantly adds up to the incorrect handling of inventories for Advanced
Computer Solutions.
Accuracy: In order to value inventories, accuracy is necessary assertion that the management
of an organization may make (Wright 2016). Accuracy acts as the vital element in identifying
the correctness and any involvement of errors in inventory management. Assertion helps in
allocating responsibilities to the responsible person so that it can assure the appropriateness
of the calculation and physical count of inventory to correctly the record the flow of
inventory in the financial statements. Accordingly, Advanced Computer Solutions
transported its inventories to six new original regions of warehouse from the central
warehousing in March 2018.
There is a probability of mathematical errors in conducting the physical inventory
count at the time of moving the inventory to the new regional warehouse (Huo and Zhang
2017). For that reason, the probability of error in physical count of inventory can lead to
reduction in inventory turnover from 5.4 in 2017 to 3.8 in 2018. Consequently, this must be
treated as an important element in ascertaining the risk for Advanced Computer Solutions.
Substantive Audit Process:
In the event of above discussion, accuracy and completeness is viewed as necessary
assertion which is under risks for Advanced Computer Solutions. Therefore, it is necessary
for the auditors to apply necessary substantive audit procedure to eliminate the risks. These
are as follows;

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Substantive Process of Audit Risks: As stated earlier completeness is viewed as main
assertion of risks for the Advanced Computer Solutions. To address the risk of completeness,
the substantive audit procedure needed by the auditor is performing the physical count for
reconciling the inventory with the ledger accounts (Arens et al., 2015). The auditors under
this process is mainly accountable for keeping the record of inventory values that is attained
from the physical count of inventory. The main objective behind using the substantive audit
procedure is to authenticate the circumstance that responsible person should carry forward the
inventory balance in the right way.
Substantive Process of Audit for Second Risks: Accuracy is another subsequent assertion
in ascertaining the risks for the Advanced Computer Solutions. For the purpose of addressing
the risk assertion, it is the duty of the auditors to perform the substantive auditing process to
keep records of the physical inventory count (Mubako and O'Donnell 2018). In the
substantive audit process, appropriate discussion must be carried out by the auditor to the
responsible person that would perform the physical count of inventory. By keeping record of
inventory procedure and sample test of inventories the auditors would be easily able to locate
any existence of error in the audit process.
The case facts from the Advanced Computer Solutions provides that the company has
transported its inventories to six new locations where the auditors are responsible for
performing the inventory test in all the six transported areas. Apart from this, the auditors
should offer validation of inventory test from central warehouse to ascertain any incidence of
errors for Advanced Computer Solutions.

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Cost of Green Machine Ltd:
According to the case facts of Green Machine Ltd there are specific audit assertion
relating to the valuation of the property, plant and equipment that can lead to material impact
on the financial report. This is discussed below;
Key Assertions at Risks:
Valuation:
The major assertion for Green Machine Ltd is associated to the property plant and
equipment. The principles under this system of valuation helps defining the company
management which is necessary to sufficiently state in the non-current assets depending upon
the following the depreciation of the asset (LópezPuertas‐Lamy et al. 2017). According to
this principle, any kind of addition or disposal must be recorded appropriately and should be
keep track of the account relating to the review of the impairment indicators, impairment or
tests. The principle states that the financial information should be stated based on their fair
value and must provide a true reflection of the asset values.
According to the financial information obtained for Green Machine Ltd, there are
certain main concerns relating to the facts that some of the rates applied to depreciate the
asset is not appropriate since the rate charged is very low (Knechel and Salterio 2016). Lower
amount of depreciation of property, plant and equipment lowers the large scale operational
expenses for the business that might give rise to material misstatement in the fiscal reports.
Consequently, due to the existence of lower depreciation the assertion is under risk.
Accuracy:
Accuracy is the main assertion in the valuation of property, plant and equipment.
Depending upon the accuracy principle, the management is required to record the appropriate
value and other related information to the property, plant and equipment (Simon, Smith and

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Zimbelman 2018). Beside this, the management of the business is also required to
differentiate between the capital and revenue expenditure.
The information furnished by the Green Machine Ltd the management has made a
mistake in differentiating between the revenue and capital expenses. The management have
capitalized certain items which must be classified as the revenue expenses and have also
included certain items of capital nature under the heads of repair and maintenance in the
income statement. Because of this, the assertion of Green Machine Ltd is under risk.
Substantive Audit Procedure:
After identifying the audit risks, the auditors are under obligation of applying the
necessary substantive audit procedure to minimize the risk. Below listed are the risk
minimization procedure in audit;
Substantive Audit Process for First Risk: The discussion made above signifies that the
management of Green Machine Ltd has applied the lower rate of depreciation on the property
plant and equipment. Under the substantive audit procedure, the auditor must account the rate
of depreciation relating to the lifetime of the property, plant and equipment namely the
residual amount of the assets, gain or loss upon the sale of assets that are consistent with the
necessary accounting principles of the company (Iskandar et al. 2015). After this the auditors
must carry out a comparative analysis of ratios for the depreciation of the property, plant and
equipment. The auditors are also required to re-compute the depreciation amount with the
reviewed rate of depreciation to obtain the actual value of the asset.
Substantive Audit Procedure for Second Risk: As understood the analysis provides that
the management of Green Machine Ltd has made an error in judgement in classifying the
capital and revenue expenditure. Under the substantive audit process, Green Machine Ltd
auditors should carry out the audit review for the process used in capitalization of expenses

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(Brasel et al. 2016). To make matters simple, the auditors must review the material
expenditure, labour expenditure, overhead costs, operational expenditure and other necessary
costs that would assist in identifying the expenses which has been classified under incorrect
basis.
Key Audit Matters (KAM) under ASA 701 Key Audit Matters
Objectives:
According to ASA 701, the objective of auditors is to determine key audit matters by
forming an opinion about the financial statements and communicating the matters with
necessary explanations (Krishnan, Patatoukas and Wang 2018).
Definition:
As per ASA 701, key audit matters refers to matters where the auditor’s judgement
becomes highly substantial in the audit of financial statements for the present period
(Awadallah and El Said 2018). The auditors should determine the key audit matters with the
governance persons.
Requirements of Determining Key Audit Matters:
According to ASA 701, the auditors must define the matters which needs noteworthy
considerations in audit process after discussing with the person responsible for governance
(Hussin et al. 2017). The auditors under this process should follow certain aspects;
a. The auditors should consider the areas containing higher risks of material
misstatement under the ASA 315.
b. The auditors must make necessary judgements in respect of the financial statements
involving necessary management decision about the accounting estimates that is
recognized by the auditors in respect of uncertainty (Cassell et al. 2016).

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c. The auditors are required to consider the effects of significant events and decision in
the audit procedure.
The auditors must determine the events of noteworthy aspects stated under paragraph
9 of the auditing which creates an influence on the fiscal statements of companies and the
same should be accounted under key audit matters.
Benefits of the ASA 701 Key audit matters:
As per the above defined explanation the auditing standard of ASA 701 helps the
auditors in identifying as well as communicating the key audit matters in the fiscal report of
the business (Mayes, Landes and Hasty 2018). Nevertheless, there are certain benefits that is
given under ASA 701;
a. According to Principle and Standards of ASA 701 it promotes communication of key
audit matters among the auditors and persons that are assigned with governance
responsibilities (Barr-Pulliam and Bowlin 2016). Such aspects are helpful in creating
transparency along with better governance in preparing financial reports.
b. According to ASA 701 the auditors can place emphasis on those areas of auditing that
requires significance judgements. This assist in contributing towards increased quality
audit.
c. The standard of ASA 701 is helpful for the preparers in providing incentives by
revising the financial reporting and disclosure of key audit matter areas. The aspects
of auditing helps in directing and improving the quality of financial reporting.
Reasons for Selecting the Key Audit Matters:
The reasons for selecting the key audit matters for both the Advanced Computer
Solutions Ltd and Green Machine Ltd is stated below;

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The situation for Advanced Computer Solutions Ltd:
The assertions identified for the Advanced Computer Solutions Ltd is based on the
key audit matters under ASA 701 because of certain existent reasons. The main reasons of
risk is related with the inventory valuation which can considerably contribute to the material
misstatement in the financial reports having the ability of wrongly interpreting the financial
situations of the business (Elsayed 2017). There is also the existence of management
judgement that is noticed in inventory valuation comprising of greater uncertainty and
reduced transparency causing material misstatement.
The situation of Green Machines Ltd:
The evidence of Green Machines Ltd explains the assertion of key audit matters
depending on the ASA 701. This includes the charging of lower rate of depreciation on the
property, plant and equipment may lead to higher difference in the expenses of the business
with wider differences in depreciation expenses (Beck, Glendening and Hogan 2016).
Charging of lower depreciation can lead to an impact on the profitability of the business that
can lead to material misstatement of financial statements.
Apart from this, Green Machines Ltd management are wrongly classifying the capital
and revenue expenses which may result in main differences in the profit obtained during the
year. Wrongly classification may give rise to material misstatement for Green Machines Ltd.
Therefore, this is held as the main reason in considering the areas of concern in key audit
matters.
Disclosure of Key Audit Matters under ASA 701 Key Audit Matters:
As per ASA 701, the auditors should recognize the key audit matters and must
disclose the same in terms of the regulation stated under ASA 701. The auditors should first
consider the disclosure of main events stated under key audit matters (Barr-Pulliam and

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Bowlin 2016). The rationale for choosing the key audit matters is mainly for the disclosure
purpose. Secondly, the auditors should make the obligatory disclosure relating to substantive
audit process which is implemented in addressing key audit matters.
Conclusion:
Conclusively, the discussion stated above reflects that the key audit matters is vital
concern in the auditing procedure since they result in material impact on the financial reports
for both the business. The main risk involved for Advanced Computer Solution is the
accuracy while for Green Machine Ltd completeness is held as the main risks in valuation
and accuracy. The auditors are required to follow the regulations and principles given under
the ASA 701 relating to the Key Audit Matters in identifying and disclosing the auditing
matters.

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References:
Arens, A.A., Elder, R.J., Beasley, M.S. and Jones, J., 2015. Auditing: The Art and Science of
Assurance Engagements. Pearson Canada.
Awadallah, A. and El Said, H.M., 2018. Auditors’ Usage of Non-Financial Data and
Information during the Assessment of the Risk of Material Misstatement for an Audit
Engagement: A Field Study. Accounting and Finance Research, 7(1).
Barr-Pulliam, D. and Bowlin, K., 2016. The Effect of Non-Strategic Risk of Error on Auditor
Sensitivity to Managers’ Reporting Incentives in a Multi-Account Setting.
Beasley, M.S., Blay, A.D., Lewellen, C. and McAllister, M., 2018. The Association Between
Board Risk Oversight and the Risk of Material Misstatement.
Beck, M.J., Glendening, M. and Hogan, C.E., 2016. Financial Statement Disaggregation,
Auditor Effort and Financial Reporting Quality. working paper, Michigan State University.
Bhattacharjee, S., Maletta, M.J. and Moreno, K.K., 2015. The role of account subjectivity and
risk of material misstatement on auditors' internal audit reliance judgments. Accounting
Horizons, 30(2), pp.225-238.
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding
negative outcomes: The effects of reporting critical audit matters on judgments of auditor
liability. The Accounting Review, 91(5), pp.1345-1362.
Cassell, C., Myers, J., Myers, L. and Seidel, T., 2016. Does Auditor Tenure Impact the
Effectiveness of Auditors’ Response to Fraud Risk?.
Elsayed, A.A., 2017. The Audit Risk Model, the Signal Detection Theory, and the
Information Manipulation Theory.