Auditing Report: Two Case Studies with Audit Procedures

This report delves into the core concepts of auditing, focusing on the processes auditors employ to ensure organizations adhere to accounting standards. It presents two case studies, examining the audit procedures applied and the key assertions considered. The report highlights the procedures auditors use to manage risks associated with company accounts, including those related to inventory and intellectual property. Furthermore, it explores ASA 701, Communicating Key Audit Matters, explaining how this standard helps investors understand a company's business activities. The report covers audit procedures for prepayment assertions of inventory, valuation and right transfer, completeness, and ownership, providing insights into the practical application of auditing principles. It offers a comprehensive overview of auditing practices, providing valuable information for students and professionals in the field.

Running head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note

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Executive Summary
The report based upon the concept of auditing as how the auditor carries audit process to
ascertain whether the organization is following accounting standard or not. It shows the audit
process which carried upon two companies and the key assertions taken by the auditor for the
same. It also shows the procedure which auditor can carry in regards of the risk associated in
company accounts. Lastly, the report shows about ASA 701 Communicating Key Audit
Matter as how this standard helps the investors to know about company business activities.

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Table of Contents
Introduction................................................................................................................................3
Case 1.........................................................................................................................................3
Assertion related to Inventory................................................................................................3
Substantive Audit Procedure for above risk...........................................................................4
ASA 701, Communicating Key Audit Matter:......................................................................6
Case 2.........................................................................................................................................7
Key Assertion Risk in response to Intellectual Property.......................................................7
Substantive Procedure for the above-mentioned risk.............................................................8
ASA 701, Communicating Key Audit Matter........................................................................9
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

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Introduction
Auditing is the inspection and examination of company financial records which is
carried to know whether it has followed the norms in the preparation of its financial report
(Alzeban and Gwilliam 2014). Auditor has to perform different audit procedure in the entity
financial statement that helps to know the material misstatement in the organization financial
report. Auditor has to ensure that the organization is having proper internal control system in
the business as internal control system helps the entity to minimise the business risk
associated in the industry. The company not having proper internal control signifies that it
has some business risk which auditor has to ascertain by carrying different audit procedure.
The assignment is based upon the audit process which is carried upon two companies and
show the assertion and substantive procedure which the auditor has carry upon the company
financial statement (Chen et al., 2014). It also shows ASA 701 Communicating Key Audit
Matter which shows about the matter which the auditor found essential and able to disclose
the same in company auditor report.
Case 1
Assertion related to Inventory
 Prepayment Assertion of Inventory: The company has obtained government tender
by giving the price below cost. The company has accepted the order in loss that will
affect the profit of the business (De Simone, Ege and Stomberg 2014). As the order is
vast so the company must have paid advance to many suppliers related to the order.
Computing Solution may not able to complete the order and due to which it has to pay
back the amount which it has received in regards to the order. These will show a
difference in organization financial report. Company is not having appropriate
disclosure about the order which may affect the decision of company financial user.
Both buyer and supplier balance will be affected in organization financial report. To

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obtain proper understanding of the company financial report it should disclose all the
terms of the agreement properly in their financial report. Proper disclosure given by
the company will help them to minimise the risk of materiality in organization
business and help the investors to gain proper understanding of organization books of
account.
 Valuation and Right Transfer: Computing Solution has an excellent image in the
market which helps them to sale its product easily in the industry (DeFond and Zhang
2014). The company offer the best package in the industry. The case study shows that
the organization is facing huge problem in regards to software which can also affect
the overall brand value of the company. The management can make many marketing
strategies that can give a boost to the company business, but this strategy is useful for
a limited time and after that the company will not able to sell its product quickly in
the business (DeFond and Lennox 2017). AASB 102 should use for the valuation of
inventory in company statement. The company should give proper disclosure in
regards to the inventory which will help them to gain the confidence of the investors.
The other risk which is associated with inventory is transfer of ownership as the
organization should transfer the ownership accurately in the business. The assertion
that the auditor will take in regards to ownership is whether proper transfer is made or
not by the company.
Substantive Audit Procedure for the above risk
 Prepayment assertion to Inventory
A) Auditor has to examine the contract between the seller and buyer which will assist the
auditor the details of the agreement and help it to carry the audit procedure (Ege
2014). It has to check the term of contract and payment details as how the
organization is following the clause which are there in agreement. The company is not

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able to complete the government order; it should check the details of the payment
which entity has done in regards to the order. The company should give proper
disclosure in regards of the contract which help the user to understand the transaction
easily in the business. Auditor has to ascertain the organization is showing fair value
in their financial statement.
B) It has to check the method which the organization is using for the valuation of its
inventory as if the company is holding the inventory for extended period than the
company should give proper disclosure on the same (Furnham and Gunter 2015). The
company should maintain a proper detail of the obsolete inventory and should
disclose the same in its financial report. The entity is not having proper information
than it should justify the reason of not having proper information in the business.
External confirmation should also be carried by the auditor who will assist the auditor
to ascertain the materiality in organization accounts.
 For Valuation and Right Transfer
A) The company carries all its business transaction from its business bank account;
auditor should verify the bank statement to know the details of payment which
company has done regard of the failed order (Griffiths 2016). Proper balance has
forwarded in company financial statement or not should also checked by the
auditor. Agreement details will assist the auditor in knowing the risk associated in
organization financial report. Auditor has to ensure that the company has done a
proper valuation of inventory and it has followed AASB 102 for the valuation of
the inventory. It should ensure that both parties of contract has accepted the term
and condition mention in the contract and carried their business activities by
applying all the norms of the contract.

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B) The auditor should also analyse the return of goods detail and it can check it by
the inspection of the agreement made between both parties. Proper
communication was there for the terms and conditions between both parties
should also be examined by the auditor (Groomer and Murthy 2018). Company
has carried the transfer process properly from seller to buyer, which help it to
know the transfer of ownership is done correctly by the company. Auditor has to
ensure that the organization has given proper disclosure in regards to the valuation
and transfer of right in regards of inventories.
ASA 701, Communicating Key Audit Matter:
ASA 701 helps the investors to know the detail information regarding the business
operation of the company (Hall 2015). These provide a brief of company financial health and
how the organization is carrying their business operation in the industry. Auditor has to show
all the information which seems risky from the view point of the auditor in company financial
report, so these matters recorded as key audit matter in auditor report (Legislation.gov.au
2019). These help the user to know the level of risk associated in organization financial report
and how the organization can manage the same in their business activities. The purpose of
this standard is to build confidence in the financial user regarding the company financial
positions.
Key audit matter for Computing Solutions:
 The tender has been accepted by quoting below cost price which should be analysed
appropriately by the auditor, and this event will also affect the overall profit of the
company
 Software problem in company product is directly affecting the goodwill of the
company in the market.

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 Company has six warehouses which block much amount of capital and due to which
organization is not having proper circulation of working capital in their business
activities
Information related to key audit matter:
 Organization is not able to solve the software problem in their business
 The company has done the decentralisation of operation with the help of its six
warehouses
 Company is gaining its market position by providing its service below cost
 Auditor has to use ASA 570 while preparing the audit process in company financial
report
Case 2
The intangible asset does not have any physical existence in company financial
statement. It includes patents, goodwill and copyright (Khlif and Samaha 2014). The
company can make an intangible asset internally or can acquire the asset in the business.
Key Assertion Risk in response to Intellectual Property
 Completeness: Company should provide complete information for the valuation of an
intangible asset in the business. The transfer of ownership should properly be
disclosure by the company which helps the user to know the detailed information of
entity business activities (Knechel and Salterio 2016). Completeness helps the
company to minimise the misstatement and materiality in the financial report as
materiality happen when there is some error or omission by organization in
transferring the transaction in their financial statement. Proper Question has to be
asked by the auditor from company management as it will assist the auditor to gather
more amount of audit evidence in thier business activities.

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 Ownership: Beautiful Hair Ltd will face the issue of ownership in their business as
whether it can use the asset or not in their business activities (Lisic et al., 2016).
Company has acquired Shimmer’s Pty Ltd, and with that, the company got the
ownership of its secret product also. Auditor has to examine the ownership principle
properly and how the company can manage the same in their business activities. The
company had acquired a company; auditor should check the document of acquisition
properly in the business.
Substantive Procedure for the risk mentioned above
Completeness:
A) These are one of the essential assertions taken in auditing process by the auditor
related to company business. Auditor has to ensure that the organization has recorded
all the related information in their business activities and to make sure it has to carry
many different audit procedures in organization activities (Newton et al., 2016). The
auditor should do proper Verification of cash and bank balance. Disclosure given by
the company should also be checked by the auditor to make sure all the related
information is there in company disclosures.
B) Auditor has to examine the company books of accounts which assists it about the
materiality in the company business. Proper management is there, or the auditor
should also check not.
Ownership:
A) The auditor should check the proper transfer of ownership done by the company or
not. Auditor has to examine the agreement which will provide it proper detail of
information that required for carrying audit procedure in the business (Pizzini, Lin
and Ziegenfuss 2014). Company is using their product which should be examined by

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the auditor as proper right is there the company to use the product in the business or
not. The transfer has not been correctly or the seller has not passed the right of use
than the company should not able to use the product in their business activities. If the
company is still using the secret than it has to pay high amount of penalty as per the
rules and regulation listed by the regulator of companies (Power and Gendron 2015).
B) Company has to give detail disclosure in regards of the transfer of ownership in the
business. It should check that the organization has disclosed all the related document
which are related to the acquisition of business.
ASA 701, Communicating Key Audit Matter
This standard imposed upon the auditor to provide all the risk associated information
in their auditor report (Wang, Li and Li 2014). Auditor has to carry many procedures to know
the risk in organization financial report while carrying the audit procedure it will gain much
risky information so it should communicate those in its auditor report. These help the user to
get proper details of company financial health and based on those investors invest in
company business (Legislation.gov.au 2019). It also helps the user to gain confidence in
organization financial report as the important information should be shown in the company
auditor report.
Company has to show all the details in regards to the acquisitions of Shimmer Pty
Ltd. This information will assist the user to gain proper understanding of company business
as well as it will able to take necessary decision for the investment in company business
activities (Legislation.gov.au 2019). The company in its annual report, should disclose all the
information which are necessary for the financial user.
Key Audit Matter in regards of Beautiful Hair Ltd:
 The residual value of asset has to be disclosed by auditor in its auditor report

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 All the change which happen in the company should reported correctly in auditor
report
 Changes in company asset as prior of acquisition and after acquisition should also be
reported in company auditor reports
 Company has to follow all the norms and policies for the valuation of its asset in their
business activities.
Conclusion
On a final note, it shows the importance of auditing process in company financial
statement. Auditing helps the financial user to take proper decision related to their business
activities. It has to understand the business activities and internal control of the organization
as this assist auditor to perform the audit process quickly in the organization books of
account. The auditor should inspect the company accounts properly and able to know whether
the financial reports is free from materiality or not. Company is responsible for minimising
the risk associated in their business activities, and auditor only ensures that the entity can
have proper statement in the business. The assessment describes the audit process which has
carried upon two companies annual report and how the auditor can take assertion for the
same. It also shows the substantive procedure which the auditor has carried to know the
amount of risk in company. These helps the auditor to provide better report to the financial
user as well as it improves the audit quality carried by the auditor. Lastly the report shows
about ASA701, in regards to Communicating Key Audit Matters as this show the matter
which is found risky by the auditor while carrying its audit procedure in company business. It
is the duty of the auditor to check each aspects of company financial information and if it
found some important point about the company which should be record by the auditor in key
audit matter paragraph. Auditor should give independent opinion upon the company financial

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position that convey a proper information to different investors in the organization and assist
them to take investment decision in regards of company books of accounts.

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Reference
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