ACC707 Auditing and Assurance Report: Inventory and IP Analysis

This report examines auditing and assurance principles through the analysis of two case studies: Computing Solutions Ltd. and Shimmers Pty Ltd. The report identifies and assesses key assertions at risk related to inventory (prepayment and valuation) for Computing Solutions and intellectual property (completeness and right to ownership) for Shimmers. It outlines substantive audit procedures for each identified risk, including inventory allowances, ownership verification, and testing of high-value items. The report also discusses the application of ASA 701, emphasizing the communication of key audit matters to enhance transparency and investor confidence. The analysis covers the auditor's responsibilities, the importance of fair reporting, and the impact of these factors on decision-making. The report highlights the significance of maintaining complete and accurate records, as well as the auditor's role in ensuring compliance and providing unbiased assessments.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author Note

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Executive Summary
The purpose of this report is to examine as well as analyze the case of two different
companies. In the research, work to find the key assertions at risk that is associated with
inventory and intellectual property. Further, the study states the processes that the auditor
follows for each risk ascertained and ASA 701 is mentioned as communicating key audit
matters for auditor in their report. At last, the study on both cases reflects a fair analyzing of
the company's position as well as the auditor's responsibility. This reflects an authentic and
transparent view of the company. Hence, it creates confidence in the investors for the auditors
and their finalized reports.

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Table of Contents
Introduction....................................................................................................................3
Answer to Question 1.....................................................................................................4
(a) The assertion at risk related to the Company’s Inventory................................4
(b) Substantive Audit procedures for both the risk identified................................5
(c) The requirement of ASA 701 Communicating key audit matters....................6
Answer to Question 2.....................................................................................................7
(a) The assertion at risk related to the company's intellectual property intangible
asset ……………………………………………………………………………….7
(b) Substantive Audit procedures for both the risk identified................................8
(c) Communicating Key Audit Matters in the Auditor's Report..........................10
Conclusion....................................................................................................................11
References....................................................................................................................12

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Introduction
For every business enterprises, it becomes a necessity to maintain their position more
positively. So that this can help the businesses to build up trust and creates an understanding
in the minds of the consumers. For keeping that kind of image of their company in the
market, the business must make some effort in respect to the information they disclose in the
required reports so that they can create transparency (Carson, Fargher and Zhang, 2016).
Auditing and Assurance services assist those companies so that they can find the risk
associated with them or any misconduct by the company so that they can rectify it.
The report based on two case studies and the company mentioned there that is
Computing Solutions Ltd. and Shimmers Pvy Ltd. The purpose of this report making is to
consider, evaluate and find the risks assertion or problems for each of the company through
proper auditing. The evaluation is done for making this report, ascertain the risk assertion that
each company faces in respect to inventory along with the other case relates to intellectual
property intangible asset. Along with that describes the substantive audit practice for both the
risk identified (Legislation.gov.au, 2019). Further, the study discusses the ASA 701
communicating key audit matters that confirms the authentication of the auditor’s report with
the recent changes and development by the IAASB. It reflects the responsibilities of an
auditor with better transparency and all the important audit matters necessary to conduct for
an accurate and fair report. (Hochman, Ayal and Ariely, 2014) The unbiased report will help
the company as well as the investors to overcome the problems and take a proper decision
concerning the growth of the organization and to earn a profit.

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Answer to Question 1
(a) The assertion at risk related to the Company’s Inventory
Two key assertions at risk with respect to the inventory of the given case, Computing
Solutions are identified as follows:
I. Prepayment Assertion with respect to inventory
It has found that Computing Solutions has taken a tender from a large department of
the government to supply at low cost price for them. It may have the possibility with this
circumstance that the company has taken a tremendous amount as deposits in advance at the
time of making this order. Here occurs a risk factor that the order of supply may fail. If it
happens means the order fails, then there will be a direct occurrence of the reverse condition
in respect to an amount. This can create a big difference in payment that has paid and yet to
pay (Hochman, Ayal and Ariely, 2014).
Further, the possibility of full disclosure by the company can be missed out. If they
will not disclose certain failure of order in their report, then it will show an inappropriate
figure of their amount and can misguide others like the purchaser records as well as the
supplier. Thus, the company make sure to disclose all their terms and conditions before the
huge payment receiving or paying as well as transparency must be maintained.
II. Valuation
As it can see that the Computing Solution is considered as the best-selling computer-
packaging inventory, and the company earns a high level of returns after a software problem.
One of the key assertion that is found valuation related to the inventory (Kharisova and
Kozlova, 2014). As it is having the chance of some time limit in the case of their special
branding and packaging offer. After the end of a specified time limit, it probably is difficult
to sell those as more accessible than before. Further, the recording of the amount considering

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both the parties are same or not, whether that is matching or any necessary amount that has to
be disclosed that hidden by them (Appelbaum, Deniz, and Robert, 2017). Proper valuation of
those figures must be done, and the company before such an offer make a specific declaration
about their times and must be stated in the required agreement that signed.
(b) Substantive Audit procedures for both the risk identified
I. For Prepayment Assertion with respect to inventory
 Inventory allowances: Must go through proper scrutiny over the inventory as an
obsolete. Both parties must know the present conditions of their inventory if it is held
for a long time. If the company or the parties have the allowances over the obsolete,
then they have to show authentic proof or evidence (Tleubayeva, Daribayeva and
Seitzhanova, 2015). A verification process for their stated amounts and figures must
have conducted by the auditor through the records of past and current payment made
or received by them.
 Inventory Ownership: Examining the contract made between the parties regarding
their prepayment conditions and terms of the payment at the completion of the
contract. Along with that, the auditors also check the purchase records. If the
company fails in supplying the order the payment made earlier or in advance will be
refundable, or any other condition is mentioned and has to be disclosed among both
the parties. The auditor must have to check the books of accounts thoroughly.
II. For Valuation
 Test high-value: In both, the conditions the confirmation of the bank requires that
declares whether the amount and information are genuine and transparent. Whether
the company has kept, the price of the inventory as it has shown by proper counting of
the inventory, as well as the valued, has been correctly stated must be ensured by the
auditor.

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 Reconcile the count as per the ledger: The auditor will examine the manual
inventory count and the ledger differences or similarity (Joe, Vandervelde, and Wu,
2017). This is to see that the counted value is similar to the recorded in the statements.
Additionally, to create transparency to both the parties as well as with the certain
rules.
(c) The requirement of ASA 701 Communicating key audit matters
ASA 701 is having an important impact on financial reports presented by the
companies. This facilitates an investor by creating a much better fair and true view of the
company and increases trust with the better result that auditors declares. In the company’s
financial report, there are certain matters that need to be clarified. Such matters need to be
added as communicating key matter after the auditing. It shows that the matter has
undertaken as giving more attention and more assessment be done to that in respect to risk
(Fu, Carson and Simnett, 2015). The Communicating key audit matters that have mentioned
by the auditors in their auditor's report is to bring more clarity. It considers the aspect of both
the sides that improves the investors’ confidence in the report's declaration by the auditor
about the company position and benefit them to take a proper decision.
After the audit of Computing Solutions Ltd., the following are the key audit
matters that has identified:
 Acceptance from both parties with proper consent is to be checked as there cost price
lower than the actual one the company has offered to them.
 After offering, certain discounts more clarity on their making profit or loss is ensured
by the auditor.

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 As the company has the best presentation packaging and having software issue, then
the condition after the end period of special packaging can reduce the auditor must
clarify the profit about the terms.
 After the opening of six new Warehouses by the company, it can lead to the blockage
of funds. The auditor must check the liquidity position of the company.
Along with the above points, certain relevant points have added to key audit
matter section in the reports of the auditor:
 Even the company is having an issue of software problem then also resulting in profit
at a higher level.
 The company has purchased six new warehouses so that they expand and decentralize
its distribution system.
 Further, they are offering a 10% discount so that they can avail this opportunity of
tender and remove their competitors.
 ASA 570 and ASA 260 also be properly scrutinized to get a clear view about the
agreement time period, payments conditions and full disclosure so that any fruitful
decisions can be made.
Answer to Question 2
(a) The assertion at risk related to the company's intellectual property intangible
asset
An Intangible asset of business includes an element like goodwill, brand recognition
and intellectual property includes elements such as trademark, copyrights, and patent. Two
main assertions at risk of Beautiful Hairs with respect to the Intellectual property intangible
assets are discussed below:
I. Completeness

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The risk of complete information available with the company may occur here. During
the process of audit, it is necessary to verify all the required documents and information. The
company must have all the required documents and complete information about their
business so that any contravention or violation of the rule may not take place (Frankel, 2016).
The availability of the complete record of the business states the authentication to their
financial statements. In the case of Beautiful Hairs Ltd., materiality concept has taken place;
therefore, the auditor with proper right can ask for all the necessary information and
documents with the company. During the process of audit, if the auditor finds and reflects
any contravention with some proper evidence to the partner’s rights or the third party and any
patent issue or product's trade secret, then the stated business must have to eliminate such or
have to renovate it. Therefore, a certain compulsion may be imposed on the Beautiful Hairs
to have all the document and information present with them. This will helps the company to
present the required evidence that supports the auditor's requirement.
II. Right to Ownership
One of the key assertion that the company has to carry is the ownership issue to their
required product. The company must have the assurance to right to ownership to use and
make changes with the product they use. The value of the asset here seems at risk to the
company after acquiring the Shimmers. The Shimmer’s owner and not the Beautiful Hairs
only know the formula and the contents in the product (Lennox, Schmidt and Thompson,
2018). This, it seemed like the company's intangible asset. The auditor has to go through all
the necessary documents of the acquiring of the other company as well as the transfer of
ownership right for the product in the agreement with the consent of the parties need to be
verified.

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(b) Substantive Audit procedures for both the risk identified
I. Completeness
 In the initial stage, the auditor goes through all the bank statements as well as the
verification about the bank confirmation. The company must have required
maintaining all the records about their transactions and the elements that they have
put in the financial statement so that accuracy in the record can be maintained.
 Secondly, the auditor has to check all the deposit as well as the receipts of the
company so that any misstatement or omission they can show with proper evidence
and reason (Scople, 2016). The details and valid agreement or document about
acquiring the other business verify by the auditor. Whatever the information or the
materials has provided by the company, the auditor must cross-check their real
existence, as shown in the report.
II. For Right to Ownership
 A proper verification through the auditor about the agreement amongst both the
parties: the auditor will ensure both the companies to have consent and mutual
understanding for the right to use the property. The trade secret is either transferable
to the acquiring company or any agreement with respect to that (Bunjaku, 2019). The
transferring of the ownership rights to either company while acquiring will be
verified. If it finds the right has not transferred, then the company cannot work with
the same product. If the company caught to do such, then the penalty will be, impose
upon the company.
 The auditor will check the deeds and the supporting documents from the company so
that they can ensure their actual rights than the stated one. The company must have all
the records with them that they have stated in their reports so that the auditor can have

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the assurance of each elements authenticity and proof for their existence whether that
is in real or not for what they have presented in their maintained records and reports.
(c) Communicating Key Audit Matters in the Auditor's Report
The communicating main audit matter in the report made by the auditor reflects the
unique effect that it reflects all the relevant information that is necessary to be focus about the
company without manipulating the figures and shows transparent status about the company.
The underlying principle of showing that information is to provide the reader with all the
necessary information so that a proper decision they can take. This matter in the auditor's
report creates a transparent view of the company instead of reflecting only those statements
and position that has revealed by the company.
In accordance with AASB 3, Shimmetr's Intellectual property right will declare about
the product details and the acquisition with the Beautiful Hairs. The company’s acquisition
has no doubt that there will be changes in comparison to their current and previous stage. The
company will reflect the changes in their capital structure, their liabilities position, as well as
their position in the present that is after the acquisition, made and to the past that is before the
acquisition takes place. These all are the key audit matter that has presented in the auditor’s
report, and the result based on the same will be declared amongst all that will be beneficial to
the investors as well.
Specific relevant points have added in the key audit matter section of the
auditor's report in respect with the Beautiful Hairs Pvy Ltd.
 The residual asset or the asset value is to be considered important and hence to be
reported in the report of the auditor

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 All the changes about the company position, it's capital restructuring as well as assets
and liabilities position is to be reported in the reports of auditor under the key audit
matter.
 Crosschecking for all the relevant cost of the company prior to and after the
acquisition, as stated in the reports of the company.
 Assets valuation must be rule-based that does not hamper any specified rules and
regulations consider this.
Conclusion
In this report, the assessment has made upon two case studies of different companies,
Computing Solutions Limited and Beautiful Hairs Pvy Ltd. In both, the case studies, each
have provided with findings of two key risk assertion linked to the inventory and another
relates with their intellectual property intangible assets. The substantive processes or
procedures that have to be followed for each risk have also stated. Further, the report deals
with ASA 701 communicating key audit matters for each company that needs to be mention
in the auditor's report. The process of auditing reveals company’s position stands as real, and
that is stated in their statement and the risk that has related to them.
Based on appropriate research on each case studies and proper analysis on the
different situation and position about the company it can be concluded that auditor’s reports
play an essential role in reflecting the authentic position about the company. Along with that,
the requirement of ASA 701 Communicating key audit matters in the auditor's report
provides with all the relevant information and put all the disclosures that are necessary to
analyze properly and to be informed or disclose about the company. The report made after an
unbiased audit helps in maintaining transparency in their work. Proper auditing increases the
trust and confidence amongst the investors on the stated report of the company and provides
them with a lot of information that is relevant to them for making their decisions.