ACC707: Auditing and Assurance - Individual Assignment Analysis

This assignment delves into the realm of auditing and assurance, focusing on risk assessment and audit procedures within the context of two case studies: Advanced Computer Solutions Limited and Green Machine Limited. The assignment begins by examining the key assertions at risk related to inventory valuation and cut-off rates for Advanced Computer Solutions, identifying potential material misstatements. It then outlines appropriate audit procedures to mitigate these risks, emphasizing the importance of physical inventory counts, supplier receipts, and adherence to accounting standards. Furthermore, it discusses the rationale for auditors regarding ASA 701, highlighting the need for transparent communication of key audit matters. The second part of the assignment shifts focus to Green Machine Limited, analyzing assertions at risk related to the valuation of depreciation and the accuracy of transactions. Substantive audit procedures, such as transaction analysis and segregation of revenue and capital expenditure, are proposed to address these risks. The assignment underscores the significance of accurate financial reporting and the role of auditors in ensuring the integrity of financial statements.

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and Assurance in Australia
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Introduction:....................................................................................................................................2
Question 1:.......................................................................................................................................2
a) Explaining the two key assertions at risk identified in relation to inventory:.............................2
b) Describing audit procedures identified in response to the each assertion risk:...........................4
c) Rationale for auditors regarding ASA 701, Communicating Key Audit Matters for the auditing
standard:...........................................................................................................................................5
Question 2:.......................................................................................................................................6
a) Explaining two key assertions at risk identified regarding equipment, property and plant:.......6
b) Describing two substantive audit procedures identified in response to the risk assertion:.........8
c) Rationale for auditors regarding ASA 701, Communicating Key Audit Matters for the auditing
standard:...........................................................................................................................................9
Conclusion:....................................................................................................................................10
References:....................................................................................................................................11

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Introduction:
Audit practice is considered to be one of the essential components that is used by the
organisation to identify their actual financial performance during the year. With the help of
adequate audit measures and procedures, the auditors are able to identify the material
misstatement that affect the financial report of an organisation. The assessment has used two
different cases to identify the risk procedures and risk assertions affecting the organisation’s
financial report. Assessment has identified adequate risk assertion and Audit procedures that can
be followed by the auditors for mitigating the identified risk of the organisation. The case study
directly highlights the problems of Advanced Computer Solutions Limited and Green Machine
Limited, which needs to be evaluated under adequate audit procedures. Further evaluation is
conducted on the ASA 701 communicating the key audit matters that needs to be conducted by
the auditors to the relevant organisation. Adequate audit assertion risk that is affecting the overall
financial report of the organisation is also mention, which can have negative influence and
increase material misstatement in their annual report. Therefore, the audit procedures and the
measures that can be used by the auditor for identifying the material misstatement are adequately
highlighted in the assessment.
Question 1:
a) Explaining the two key assertions at risk identified in relation to inventory:
The case study of Advanced Computer Solutions Limited directly highlights different
level of risk that is affecting the overall operation of the organization. The situation directly

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highlights that the current software that is used by the organization is faulty, which is reflecting
wrong financial statement. Moreover, certain risk regarding the current inventory valuation of
the organizations also selected as the company has moved the warehouse 6 times in a financial
year. There is specifically to risk assertion that is identified from the current case study, which is
highlighted as follows.
Inventory Valuation risk assertion:
The major discussion for advanced Computer Solution Limited is regarding the frequent
changes its warehouse, which direction chance of manipulations in the physical count of the
stocks. There is a possibility of inaccuracy in the valuation and counting of the stocks, which can
increase the risk assertion for the auditor. This can directly increase the level of material
misstatement in the financial report, which will project alternative financial position of the
organization. There is specific problem regarding this software of the organization, which is used
for identifying the overall inventory value. The problem is in the software that directly affects the
valuation of inventory and increase the material misstatement position of the organization.
Hence, the problematic condition of the current software that is used by the organization
increases the specific assertion at risk for its inventory valuation (Louwers et al. 2015).
Cut-off rate used for risk assertion:
The major risk that is identified for Advanced Computer Solution Limited is the cut off
method, which is used for identifying the stock and the sales that is conducted by the company.
The cut off assertion risk directly that the inventories computation in the annual report is
considered to be faulty due to the wrong information provided by the software. This is the main
reason where the annual report of the companies projecting high material misstatements. The
company has projected that 18% of the inventory is from 2017 sales which includes the 24%

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Inventory of 2018 sales. The segregation of the inventory value is not accurately conducted by
the software, which can directly affect the evaluation of the inventory in fiscal year.
b) Describing audit procedures identified in response to the each assertion risk:
The risk assertion that is identified in the operations of Advanced Computer Solution
directly portrays high material misstatement in the annual report. The high material misstatement
can be controlled with the help of adequate audit procedures, which is used by the auditor. Audit
procedure can eventually help the auditor to identify the actual valuation of the inventory, which
is being misrepresented in the financial report. The auditors can adequately mitigate the assertion
risk of wrong valuation of inventory by applying adequate audit procedures. The physical
accounting process can be used by the auditor for identifying and matching the actual inventory
that is present in the warehouse house of the organization. Furthermore, the auditor can also use
inventory tags and the receipts from suppliers to detect the actual inventory present in the
warehouse and compare it to the previous record. This would eventually help in providing the
actual valuation of the inventory that is being maintained by the organization. Moreover, the
auditor also needs to provide the entire relevant accounting standard to the organization, which
helps in computing the ending inventory value in the financial report (Junior, Best and Cotter
2014).
Advance computer Solutions also has second risk assertion, which needs to be controlled
by using adequate audit procedures. The audit procedures that is being used by the auditor needs
to have all the relevant information regarding the current inventory value of the company, as it
helps in supporting the cut-off method. Assertion risk is directly having negative impact on the
current valuation of inventory, which does not provide adequate stock levels that is being

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affected by the software. The auditor needs to evaluate the current notes of goods and the
supplies that are stored in the warehouse to identify the accurate level of inventory that is being
used by the company during the financial year. This measure would eventually help the auditor
to identify the adequate inventory level for each financial year, which in turn will reduce the
material misstatement in the financial report of the organization.
c) Rationale for auditors regarding ASA 701, Communicating Key Audit Matters for the
auditing standard:
There is certain requirement that needs to be fulfilled by the auditor in accordance with
ASA 701 Communicating Key Audit Matters (Auasb.gov.au 2019). The requirements directly
state that auditors need to provide all the relevant documentation of the Key Audit Matters that is
associated with the operations of the organization. Further information is relatively provided in
the auditor's report regarding the key audit matters factors associated with the operations of your
organization. The auditor also has to provide information to the management of the organization,
which can have a material misstatement and can increase audit risk. This declaration helps in
identifying the process and procedures that is used by the auditor to control the assertion risk
(Hardy 2014).
There is adequate rationale identified in the operations of Advanced Computer Solution,
which can allow the auditor to conduct adequate audit procedures to reduce the assertion risk.
Analysis of the case studies directly highlights the problems faced by the organization regarding
the computation of its inventory. Further evaluation also highlights that there is problem in the
accounting software of the organization, which is directly increase the material misstatement in
their financial report. The organization is not able to provide adequate information to the

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shareholders you to be in capability of a software program used for the accounting process. This
is the main reason why the inventory valuation is not been conducted, which in turn is increasing
the material misstatement in the financial report. This combined assertion risk directly supports
the rationale for key audit matters that needs to be conducted and developed by the auditor of the
organization.
The auditors need to provide adequate disclosure in accordance with ASA 701, where all
the relevant information regarding the key audit matters that is highlighted within the
organization needs to be disclosed. The auditor provides all the relevant information to the
organization regarding the risk and the audit procedures that used to be followed in preparing
audit report. The audit process, assertion of risk and control measures used by the auditor needs
to be disclosed in the auditor's report (Liao, Lin and Zhang 2018).
Question 2:
a) Explaining two key assertions at risk identified regarding equipment, property and
plant:
Analyzing the information of Green Machine Limited directly highlighted certain key
assertion at risk, which is negatively affecting the overall material statement of the organization.
The evaluation highlighted the problems in the current evaluation and accuracy method of the
organization, which is directly increasing the audit risk. The two key assertion at risk identified
from the case are valuation and accuracy, which are highlighted as follows.
Risk assertion from valuation of depreciation:

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The first risk that is identified from the operation of Green Machine Limited is the
problems in the valuation of depreciation. The organization has been using low depreciation
value in the annual report for fairly identifying the current value of plant, properties and
equipment. Problems identified by the auditor are regarding the valuation of assets, which is
considered a specific audit risk assertion. The auditor's identify the actual value of the assets my
subtracting the depreciation amount and the impairment loss with the actual cost of the asset.
This eventually helps the organization to identify the actual value of assets that is being used
during the fiscal year. However, the organization is conducting low level of depreciation in their
financial report, which increases the audit risk. Hence, the auditors consider the wrong valuation
of the depreciation method, the assertion of risk for the organization (Knechel and Salterio
2016).
Risk assertion from accuracy of transactions:
The operations of the organization has second risk, which is regarding the accuracy of the
record keeping that is conducted by the management. The organization has been putting wrong
information in their annual report by not segregating the revenues and capital expenditure in the
transaction book. The error in the transaction is considered to be a major risk for the organization
as it increases the material misstatement in the annual report. The management has relatively
capitalized revenue expenditures in their profit and loss statement, which projected wrong
information to the shareholders. Therefore, it could be identified that the wrong information
portrayed in the annual report due to the error in transaction directly highlights the assertion of
risk associated with the operations of the company.

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b) Describing two substantive audit procedures identified in response to the risk assertion:
The risk identified for green machine Limited can be mitigated help of adequate audit
procedures, which is also used in vindicating the material misstatement in their annual report.
The major risk that needs to be mitigated by the audit procedure is segregation of revenue and
capital expenditure that has been conducted by the organization. The segregation of the
transactions that is conducted by the company is essential, as it directly affects their income
statement, which is used for detecting its financial position. Therefore, for reducing the risk
associated with transaction the auditor needs to provide and analyze all the relevant transactions
that is being conducted by organization during the fiscal year. This would eventually help
segregating the overall revenue and capital expenditure of the company, which control could
help in protecting the actual financial position and reduce the material mistaken in their financial
report (Carson, Fargher and Zhang 2016).
The second audit procedure that needs to be followed by the auditor in regards with the
audit process is the correct valuation of depreciation. This correct valuation of the depreciation is
directly helpful in detecting the actual fair value of the essential that is being used by the
organization during the financial year. The audit procedure directly evaluates the economic life,
residual amount, accounting standards, and depreciation rate associated with each asset. This
valuation would eventually help in identifying the accurate value of the assets, which can be
detected in the annual report. This would eventually reduce the level of material misstatement
and provide authentic data to the shareholders. Both the audit procedures is an effective measure
that can be used by the organization to reduce the level of risk associated with it operations.
Moreover, the audit procedure also highlights the relevant changes in the current valuation that

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needs to be conducted by the company for detecting accurate income and expenditure in the
annual report (Green, Taylor and Wu 2017).
c) Rationale for auditors regarding ASA 701, Communicating Key Audit Matters for the
auditing standard:
The requirements that need to be followed by the auditors in accordance with the ASA
701, while preparing the audit report. The auditor's need to identify all the relevant key audit
matters that is affecting the operations of green machine Limited. After identifying the adequate
key audit matters relevant communication needs to be conducted to appropriate authorities and
management regarding the risk associated with its operations (Cooper and Owen 2014).
Auditors need to follow all the relevant information has entered in ASA 701 for
identifying the key audit matters affecting the operation of the organization. Moreover, the
auditor also needs to evaluate the material misstatement of the organization as per ASA 315
(Auasb.gov.au 2019). Further evaluation can be conducted on the management and its decision
that increases the uncertainty of the financial statement.
The key audit matter that is associated with the operations of the organization directly
highlights the problems that are affecting its current financial performance. The organization has
been using wrong valuation of the depreciation expense, which is increasing its overall material
misstatement in the annual report. The organization uses low depreciation rate for reducing the
expenses in the annual report, which in turn increases the financial performance of your
organization. There is specific problem in the financial reports of the organization where
transaction is not recorded in accordance with its nature. The capital expense and the revenues of
the organization are not segregated under different forms of activities. This has a relatively

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increase the accuracy of the financial information that is protected by the organization to its
shareholders (Simnett and Huggins 2015).
The auditor needs to provide all the relevant disclosures regarding the key audit matters
in accordance with ASA 701. The disclosure relatively allows the organization to identify the
key audit matter and the assertion risk associated with its operations.
Conclusion:
Audit procedures considered to be an adequate measure that is used by auditors to
mitigate different assertion of risk that is affecting the operations of the organization. From the
evaluation, it is also detected that both the companies listed in the above assessment directly
have different audit risk, which needs to be mitigated by using adequate audit procedures. After
analyzing the case studies, the adequate risk assertion that is affecting the operations of the
organization is adequately evaluated. Moreover, the audit procedures that can be used by the
auditors for mitigating the risk is adequately depicted which might help the management control
the occurrence of audit risk. The Advanced Computer Solutions limited has the relevant
problems with the software that is being used for accounting purposes. Therefore, this has
negatively affected the valuation of inventory, where the physical count would eventually help in
detecting the actual valuation of the organization. In the similar instance, Green Machine
Limited has not adequately transacted their expenses in the financial report, which is altered by
the auditor for depicting the accurate financial condition of the company. The identified audit
procedures relevantly provide all the information that is needed by the organization to mitigate
the audit risk in future and project accurate financial report to the shareholders.

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References:
Auasb.gov.au., 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 21 Jan.
2019].
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis
and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Cooper, S. and Owen, D., 2014. Independent assurance of sustainability reports. Sustainability
Accounting and Accountability, pp.72-85.
Green, W., Taylor, S. and Wu, J., 2017. Determinants of greenhouse gas assurance provider
choice. Meditari Accountancy Research, 25(1), pp.114-135.
Hardy, C.A., 2014. The messy matters of continuous assurance: Findings from exploratory
research in Australia. Journal of Information Systems, 28(2), pp.357-377.
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical
analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Liao, L., Lin, T.P. and Zhang, Y., 2018. Corporate board and corporate social responsibility
assurance: Evidence from China. Journal of Business Ethics, 150(1), pp.211-225.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing
& assurance services. McGraw-Hill Education.