ACC707 Trimester 3: Auditing and Assurance Services Report

This report provides an analysis of auditing and assurance services, focusing on risk and material misstatement, and key audit matters. The report examines the case of Advanced Computer Solutions Limited, addressing inventory-related risks such as cut-off and valuation, and outlines substantive audit procedures. It also explores key audit matters related to ASA 701, including inventory shifts and errors in valuation. The report further analyzes the case of Green Machine Limited, identifying key assertions at risk, such as valuation and accuracy, and proposes substantive audit processes. The report emphasizes the importance of accurate depreciation rates and proper classification of expenses. The content is contributed by a student and available on Desklib, a platform offering AI-based study tools for students.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the University:
Name of the Student:
Authors Note:

1AUDITING AND ASSURANCE SERVICES
Executive Summary
At the time such financial statements are developed, the auditors often make some sort of
assertions for their audit customers. The current report focused on certain assertions employed
for the given companies from the auditor’s perception in a way that the key audit matters are
ascertained. It was gathered that as per the requirement of this specific assertion, the audit clients
are anticipated to record each of their equity, assets along with liabilities at cost after subtraction
of accumulated depreciations and for this reason, accurate depreciation rate application is
conducted. Moreover, in addressing key audit matters ensuring conformation of the fact that
suitable compliance must be maintained by the organization with all the necessary accounting
guidelines and policies

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Table of Contents
Introduction......................................................................................................................................2
Answer 1: Risk and Material Misstatement of Advnced Computer Solutions Limited..................3
i. Major Risk Assertions with Respct to Inventory.....................................................................3
ii. Substansive Processes of Audit................................................................................................4
iii. Key Audit Matters Related with ASA 701...............................................................................5
Answer 2: Case of Green Machine Limited....................................................................................7
i. Two Key Assertions at Risk.....................................................................................................7
ii. Two Substansive Audir Processes............................................................................................8
iii. ASA 701 Requirement for Communicating Key Audit Matters..............................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
Almost all auditors are deemed to be some obligations that are evident in investigating
and evaluating the financial statements of companies so that it might be made certain that they do
not encompass any type of material misstatements due to any error or frauds. The stakeholders
related with these companies in order to analyses the fairness and honesty within companies
financial statements. At the time such financial statements are developed, the auditors often
make some sort of assertions for their audit customers. Such assertions signify implicit or
explicit depictions along with claims that are used by the management for developing financial
reports concerned with suitability of several elements along with financial statements
disclosures.
Several auditing assertions are employed in consideration to property, plant and
equipment, inventory and others which encompass cut off, valuation, occurrence, accuracy,
existence along with completeness. At the time consumers financial statements are audited, the
auditors must consider to investigate the audit assertions in a way that fairness of used judgments
and assumptions used by management to develop financial statements might be verified. Relied
on these investigations, the key audit matters must be determined in case the risks have
significance for taking audit measures. The current report might focus on certain assertions
employed for the given companies from the auditor’s perception in a way that the key audit
matters are ascertained.

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Answer 1: Risk and Material Misstatement of Advanced Computer Solutions Limited
i. Major Risk Assertions with Respect to Inventory
Cut Off Risk Assentation
An audit client management has the responsibility to make sure that the inventory values
are suitably recoded at the time they take place within an accounting period. For this reason,
consideration must be provided in order to analyses shipping and receiving documents associated
with inventory as it results in cut off of inventory. This restricts the business companies to record
the previous year’s inventory value within the accounting statement of present year. Conversely,
Advanced Commuter Solutions Limited has not abided by this aspect because of consideration of
2018 inventory record in sales for 2017 and 2018. Such event also validates that there are certain
errors within recording of inventory in a desired accounting period. Another major cause behind
this inclusion can be the software concern or certain deliberate misconduct conducted by any
employee. For this reason, the cut off is observed to be at risk.
Accuracy/ Valuation Risk Assentation
For testing this particular assertion, the auditors are observed to deal with two important
audit matters. These encompass the accuracy of the figures in consideration to the physical count
f inventory along with making sure that the inventory amount is considered as sales count within
income statement from the financial position statement of a company. Due to such reasons, it is
important to carry out inventory valuation from the behalf of auditors. Based on the case
information, Advanced Computer Solutions Limited as considered inventory transfer from
central warehouse to six warehouses regionally. This type of transfer has the possibility of wrong
physical inventory count and for this reason; there might be a downfall in the year 2018

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regarding inventory turnover. In addition, the organization has been dealing with software issues
that might result in concerns related with procedure of inventory valuation. For such reasons, the
valuation based assertions or accuracy is observed to be at risk.
ii. Substantive Processes of Audit
First Substantive Audit Procedure
For dealing with accuracy or valuation risk, the considerable audit procedure serves as
methodological surveillance of every aspect related with inventory physical count associated
with Advanced Computer Solutions Limited. The initiatives those are to be taken by the auditor
must encompass recognizing the strengths long with weaknesses within internal control related
with checking tags of inventory counts, internal control related with inventory along with
existing in person at the time of inventory physical count. Moreover, it is also important to
analyses the inventory count within all the six major warehouses. Finally, the management has
also some major assumptions along with judgments which the auditor requires to test in
accordance with the required accounting standards.
Second Substantive Audit Procedure
For conducting the cut off examination, the substantive audit procedure can encompass
verifying the notes for goods attained as well as delivered which can support in recognizing the
reporting date. Moreover, it is important to check whether there is a slow movement of the
management or the inventory has made certain irrational adjustments within the same. Finally,
certain verifications must be made on the behalf of the auditor to recognize some stop command
along with attaining inventories within warehouses. This is for the reason that the combination of
all such factors might place at risk the inventory cut off assertion.

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iii. Key Audit Matters Related with ASA 701
ASA 701 Requirements
It is stated by “ASA 701Section 7” that the auditors are obliged to make sure the key
audit matters and the establishment of same relied on them and these are to be included and
disclosed within audit report. Other than that, it is revealed in “ASA 701 section 8” the definition
of key audit matters those encompass concerns important for the auditors while auditing the
selected companies financial reports. Moreover, selection is to be conducted after
communicating with government committees. In alignment with “ASA 701 Section 9” three
specific requirements needs to be considered by auditors in a way that key audit matters are
entertained. This includes certain areas within financial reports that have the likability of high
material misstatement uncertainty in accordance to ASA 315, the uncertain judgments along with
accounting anticipations conducted by companies and impact of important audit events that took
place in the accounting year. As per “ASA 701 section 10”, the auditors are accountable for
recognizing the key audit matters after considering certain important concerns and their impact
on audit. The rationales those are needed for determination are indicated below:
 As inventories are shifted from central warehouse to six regional warehouses, it might be
adjusted as an important event that has great impact on valuation process and inventory
count.
 In case errors are identified within inventory valuation process, it might be considered as
a vital part within financial reports that has high material misstatements possibility.
 For the reason that errors are important for inventory valuation, certain uncetainities can
be included within accounting anticipations along with judgments conducted by
Advanced Computer Solutions management.

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Key Audit Matters Disclosures
Significance Audit in Dealing with Key Audit Matters
Inventory Shift in March of 2018
There might be an impact on physical
inventory count procedure because of recent
inventory shift from a central location for six
distinct locations. Moreover, for valuation of
inventory, management accounting estimates
along with adequate judgments are conducted
those are considered to be important for audit.
For dealing with such concern, the audit
processes employed are explained under:
 Inventories verification in six locations
 Observation of the work-in-progress
count of inventory
 Tags authentication employed for
counting inventory
 Assumptions along with judgments
evaluation undertaken by management
long with compliance with vital
accounting standards
 Explanation of limitation and strengths
of internal control having connection
with inventory
 Methodological supervision of all
aspects of the process associated with
inventory physical count
Previous Year Sales Included with Current
Year Inventory
For the reason that the recent year’s inventory
includes a fraction of sales value of the current
For addressing such concerns, the used audit
processes are explained in the following:
 Exploration of whether there is slow
stock movement or existence of

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and last year, error is most likely to happen. In
addition, there might be material impact
because of vital accounting estimates
involvement along with management
judgments.
irrational adjustments within them.
 Each note certification for goods
attained and delivered for recognizing
the date of reporting.
 Verification of whether any stop
command is issued in attaining stocks
within warehouses
Answer 2: Case of Green Machine Limited
i. Two Key Assertions at Risk
 Valuation: As per the requirement of this specific assertion, the audit clients are
anticipated to record each of their equity, assets along with liabilities at cost after
subtraction of accumulated depreciations and for this reason, accurate depreciation
rate application is conducted. This is one of the important primary needs for the
business organizations. From the offered information of Green Information Limited,
the organization has charged a low rate of depreciation owner than the actual rate that
can lead to wrong property, plant and equipment valuation. Along with the use of
such rate can decrease the company’s operating expenses considerably that can
increase its net income. For this reason, such misstatement might take place within
profit. There are the major causes that such assertion is observed to be at risk.
 Accuracy: Based on the demand of such assertion, the companies are required to be
committed towards suitable transactions recording in accordance with property, plant

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and equipment. For this reason, it is important for companies to make sure that
categorization of expenses are made accordingly that is associated with plant,
property and equipment. Considering the same, in consideration to the case of Green
Machine Limited, it has been gathered that the capital and revenue expenditures are
not accurately separated by the company. Rather than that, there has been
capitalization of a fraction of revenue expenditures while an aspect of capital
expenditures is represented in revenue expenditures form within the statement of
profit and loss. For this reason, it is also evident from such aspect that certain vital
expenses associated with plant, property and equipment is not suitably segmented.
This generates material misstatement chances in the financial reports of the company
and such ascertain includes risk.
ii. Two Substantive Audit Processes
As an aspect of such procedure, the auditor f Green Machine Limited requires evaluating the
processes and guidelines of the companies so that the revenue and capital expenses related with
plant, property and equipment might be entertained. In order to make sure the same, a list of
explained asset is attained by the auditor that is important to confirm that the company has
abided by the necessary accounting standards along with guidelines related with property, plant
and equipment expenditure.
As an aspect of the process, the depreciation policy of the company is required to be
monitored by the auditor, accounting estimates along with the management judgments. After that
computation of the depreciation rate by the auditor through taking into consideration certain
residual amounts along with gains or losses from selling part of plant, property and equipment.

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For this reason, it is important to calculate depreciation rates in this step. This might support the
auditor in calculating the revised rate of depreciation and along with that the suitable
depreciation expenses can be ascertained.
iii. ASA 701 Requirement for Communicating Key Audit Matters
Based on “ASA 701 section 7”, the aim of the auditor is to make sure that key audit matters,
offering accurate audit opinion and the similar needs to be published in the auditor report. In
addition, the exploitation of the key audit matters explained within “ASA 701 Section 8”
indicates that such matters are concerns those are considered to be important for the auditors
within auditing process of the financial statements and these are to be selected after conversing
with the governance group of the selected company. In addition, “ASA 701 Section 9” indicated
that there are three needs for auditors while ascertaining the key audit matters. These encompass
certain aspects of financial statements that include high risk in conformance with ASA 315,
accounting judgments and anticipations that were used by the audit consumers doubtfully long
with the impact of vital concerns or transactions on auditing which took place during the
accounting period. In addition “ASA 701 Section 10” needs the auditors in making sure that key
audit matters after taking into account certain vital events having certain potential of affecting
audit. The determination rationale is explained under:
 The involvement of considerable judgments of the management along with accounting
anticipations might be observed in doubtful or some areas.
 There is existence of two major errors along with transactions that includes improper
segregation of expenses along with use of low depreciation rates and along with that such
events are likely to have impact on the company’s audit.

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 The uncertainties associated with material misstatements are increased that results in
errors made in separation of capital and revenue expenditures along with wrong
depreciation computation.
Significance Audit in Dealing with Key Audit Matters
Improper Segregation of Revenue and
Capital Expense
Improper segregation is carried out by the
company for the capital and revenue
expenditure. This can have certain material
effect on the financial reports that encompass
accounting anticipations along with judgments
conducted by the management and are
important for the audit process.
For addressing such concerns, the implemented
audit processes are explained below:
 Monitoring the guidelines along with
the processes of the company in order
to make sure that capital expenditures
and revenue are aligned with property,
plant and equipment.
 Attaining the list of the aforementioned
assets in order to carry out the process
of verification
 Ensuring conformation of the fact that
suitable compliance is maintained by
the organization with all the necessary
accounting guidelines and policies
Depreciation Rate Use Below Real Property,
Plant and Equipment Rate
The company has employed decreased rate of
depreciation in order to value its property,
plant and equipment. This can result in the
In order to address such highlighted concern,
the employed audit processes must encompass
the following:
 Calculating the depreciation rate again
after analyzing the residual property,