AUDITING Assignment: Inventory, PPE, Audit Procedures and ASA 701

This auditing assignment delves into the key assertions and risks associated with inventory and property, plant, and equipment (PPE). It identifies and explains potential risks, such as inventory turnover and valuation concerns for inventory and material misstatement and existence issues for PPE. The solution outlines substantive audit procedures, like inquiry and observation, to address these risks, providing practical steps for auditors to gather evidence and form opinions. Furthermore, the assignment explores the requirements of ASA 701 regarding the communication of key audit matters in the audit report, detailing how to determine and disclose these matters, and explaining the rationale behind the standard's application. The assignment emphasizes the importance of audit evidence, documentation, and the application of accounting standards in assessing financial statements. It provides a comprehensive overview of the auditing process, linking theoretical concepts to practical application.

AUDITING

Table of Contents
INTRODUCTION...........................................................................................................................3
Question 1:.......................................................................................................................................4
(a). Identify and explain two key assertions at risk in relation to inventory................................4
(b). Identify and describe two substantive audit procedures that you could perform in response
to each risk identified above........................................................................................................5
(c). Explain the requirements of ASA 701 for communicating key audit matters in audit report
and the rationale for using this Auditing Standard. ....................................................................6
Question 2: ......................................................................................................................................7
(a). Identify and explain two key assertions at risk in relation to property, plant and equipment.
......................................................................................................................................................7
(b). Identify and describe two substantive audit procedures that could be performed in
response to each risk identified above. .......................................................................................8
(c). Explain the requirement of ASA 701 for communicating key audit matters in the audit
report and the rationale for this auditing standard.......................................................................9
CONCLUSION................................................................................................................................9
REFERENCES .............................................................................................................................10

INTRODUCTION
Audit refers to the inspection of financial records of an organization with an objective to
determine the financial position of the company. The examination is conducted by an auditor to
form an opinion on the financial matters of the company by considering the rules along with
accepted accounting standards, regulations and laws applicable on the entity. Assurance services
means the independent professional services provided by Chartered or Certified Public
Accountants or Chartered Certified Accountants with a view to provide useful information so
that various investors can take better decisions. These services are taken in order to reduce the
information risks (Asare and Wright, 2012). This report exhibits the risks associated with
inventory, audit procedure for identified risk and requirements of applicable ASA for reporting
the matter in audit report.
Question 1:
Audit Evidence: As per ASA 501, auditor must include the following:
 he must obtain adequate amount of audit evidence regarding the existence of the
inventory.
 Should check the stock physically.
 Must check the documents related to the possession of third party.
 To prove his opinion, he must have evidence as per the requirement while preparing
report.
(a). Identify and explain two key assertions at risk in relation to inventory.
Audit assertions are the important factors which are responsible for preparing the
financial statements. The auditor use audit assertions and procedures to conduct the tests on the
policies, internal controls etc. for the purpose of reporting the matter. There are two kind of audit
assertions: Management Assertions and Financial Statement Assertions. In financial statement,
assertions about the recognition, presentation, measurement and disclosure of financial
information are included. Whereas, management assertions are about each account and its related
notes disclosures (Barrett, 2012). Under this, auditor use these assertions for the balances of
accounts, various categories of transactions, and its presentation and disclosures while assessing
the risk associated with the material misstatement and designing the audit procedure. In both the

cases, assertions are related to GAAP. The two key assertions at risk relating to inventory of
Advanced Computer Solutions are as follow:
1. Inventory turnover: Advanced Computer Solutions is experiencing a high level of
returns owning to suspected software problems. This problem may give rise to the
floating of inventory, problems of embezzlement in amount or non-disclosure of amount
in credit and debit notes, the management can do window dressing to attract the investors,
etc. The return shows that company is failing to provide effective and accurate solution to
its customers and losing its proper control thereby, the there is increase in the returns.
2. Valuation of inventory: The company has won a tender to supply a large government
department with various products. It has agreed to supply the items at 10% below the cost
price. The risk of generation of revenue in future arise also whether the company will
survive in future on not. Further, there could be a change in the items demanded by the
government department due to the obsolescence of the product etc. According to ASA
570, the financial report is prepared on the assumption that entity is a going concern and
will continue its operations for future. So, in future, if the company suffers loss due to
selling the products at 10% below the price and such loss can be recovered, then the
company will be wound up (Causholli and et. al., 2013).
The other risks in the company have occurred due to the transferring of its inventory from
a central warehouse to 6 different warehouses, as there will be high chance of mismanagement in
maintaining the accounting records and rest of the cases, the company show profits which have
not actually earned by the company.
(b). Identify and describe two substantive audit procedures that you could perform in response to
each risk identified above.
Substantive audit procedure is a test consisting various steps for creating conclusive
evidence relating to completeness, existence, disclosure etc. of assets or accounts or both on the
financial statements. For carrying out substantive procedure, proper documentation must be done
in order to provide the relevant and complete information so that another qualified auditor could
conduct the same procedure on the same documents and make the same opinion/conclusion. The
audit procedures are designed by auditor to identify all types of risks and to obtain the relevant
evidence for proving the risks in the audit report (Cohen and Leventis, 2013).

The two substantive audit procedures that could be performed to the risks mentioned
above are as follows:
1. Inquiry: The root cause of high level of return in the best selling computer package can
be ascertained by inquiry into the existing efficiency of the solutions provided by the
company. It will help in assessing the impact of the risk of such high level of return on
the organization. The information regarding the return could be gathered by inquiring the
accountant and related management. Further, it can help to inquire the business process to
obtain an understanding the existing process so that appropriate evidence can be gathered
for the reason of such return.
2. Observation: It is use to obtain the information, understanding and evidence of the real
business process or how it carries it business. Observation can be used in the second risk
identified above. The information gathered from observation can be used to compare the
situation of the company with an existing company working under the same policy and
strategy. This will give an idea about the future viability of the company also an
estimation of the revenue that can be generated by giving products at 10% below its
price. Under this, the observation is performed for a certain but short period of time to
assess the risk, collect the evidence and provide solution to reduce the risk.
There are various other methods that could also be used in respect of the risk identified.
The other audit procedures such as re-calculation can be used for identifying the reason behind
the increase in the sales from 18% in 2017 to 26% in 2018 which represented inventory on hand
and analytical review can be used to the risk that has emerged from transferring its inventory
from central warehouse to 6 regional warehouse (Gramling and et. al., 2012).
(c). Explain the requirements of ASA 701 for communicating key audit matters in audit report
and the rationale for using this Auditing Standard.
Key Audit Matters are the matters, which the auditor as per his professional judgement
consider the most significant matter in the audit of the financial statements for current period.
Auditor communicate these key audit matters which with those charged with governance.
The key matters should be described under the heading “Key Audit Matters” in audit
report.
Determining Key Audit Matters:

The Key Audit Matters that have been identified by the auditor of Computer Solutions
Limited are as follows:
 There is a risk of company earning less revenue because of non-disclosure procedure.
 High inventory turnover risk due to high level of return of the packages.
Communicating Key Audit Matters:
Key Audit Matters are to be disclosed by the auditor in his report. Further, an auditor
shall provide his opinion on such KAM. The matters that are required to be communicated are as
follows:
 The overall business operations shall be communicated and the reason for increase in the
high turnover ratio.
 The opinion of the auditor on the Key Audit Matters must be communicated together
with proofs.
All the above matters which have been assessed with regard to the inventory of Advanced
Computer Solutions Limited are key audit matters as they will bear a significant impact on the
financial position of the company.
Disclosure under ASA 701:
 The audit was conducted for the available information to ascertain the risk of material
misstatement by gathering the appropriate and sufficient evidence for forming an opinion
by the auditor.
 It was risk audit and for the purpose of collecting evidence and to look into the matter,
inquiry and observation audit procedure was used.
 Interviews from the company's personnel were taken, accounts, stock count, inefficiency
in the existing solution to get to know about the reasons for high inventory turnover.
 The contract executed with the government was checked to see the terms and conditions
for supplying the products at 10% below the price of the item and to check whether it will
be beneficial for the company in future.
 There is not proper record of the cost that has been incurred by the company for
providing software solution. Audit was conducted with difficulty because of insufficient
information.

Question 2:
Audit Evidence: According to ASA 501, an auditor shall produce enough audit evidence to
prove his opinion. It may include the registration of fixed assets, its valuation documents,
physical verification of its existence and lease documents, if any. The auditor shall disclose the
misstatement and materiality regarding the property and plant in the disclosure part while
preparing the financial statement.
(a). Identify and explain two key assertions at risk in relation to property, plant and equipment.
During the audit of Green Machine Ltd., it has been identified that company has cost,
accumulated depreciation, brought forward, additions and disposals in the year and depreciation
charges. The two key assertions at risk in this case are as follows:
1. Material misstatement- This risk in these transactions is that it affects the expenditure,
assets and depreciation accounts (Havelka and Merhout, 2013). The basic journal entries
are wrongly recoded as expenses are overstated and assets are understated. As per
International Accounting Standard (IAS)18, the accounting requirements is that company
should measured the revenue at the fair value of the consideration received or receivable
in future also it should analyse the future economic benefit that will be earned by the
company and the amount of revenue should be measured with reliability. Further the
revenue from sale of goods, by providing services, interest, royalties and dividends
should be counted as revenue.
2. Existence- The company has charged its building, plant and machinery and fixtures,
fittings and equipment depreciation lower than the prescribed rates on these assets. There
is risk of manipulation of profits due to charging of lower depreciation (Hope and et. al.,
2012). IAS 16 provides the accounting treatment for property, plant and equipment, and
the method applied for depreciation so that depreciation amount is allocated over its
useful life and the losses regarding these assets should also be determined. Further, this
provides that the fixed assets are required to be replaced at fixed intervals. The property
and plant will have a bearing on the expenses of the company in terms of anticipated
benefits .

(b). Identify and describe two substantive audit procedures that could be performed in response
to each risk identified above.
The substantive audit procedures for the risks are mentioned below:
1. Procedure for expenditure and revenue: Under this procedure, the expenses are
required to be checked and see if they are according to the standards and policies of the
company. Further, it helps the company to distinguish between capital expenditure and
revenue so that these can be recorded under appropriately. The transactions must be
recorded timely so that they can be checked for forming an opinion on the risk as
disclosed above. Further, there accuracy will be seen by checking the invoices with the
accounting records to check the mistakes done by the company. Also, internal controls of
the company related to expenses and revenue should be look into and assess the changes
and the reasons for such changes (ohnstone and et. al., 2013).
2. Procedure for fixed assets: For overcoming the risk associated with charging the
depreciation rate lower than the prescribed rate, the auditor should check the method
used by the company for charging the depreciation on the fixed assets. Further, it should
be checked that the methods are in line with the policies of the company. The details of
the methods used should be ascertained, its scope, and how correctly and appropriately
the methods have been used in charging the depreciation. It should be checked that
depreciation is being charged in accordance with the applicable accounting standards.
Further, the existence, completeness and valuation should also be checked, along with
this, proper classification between various assets should be made so that their respective
rates can be applied for depreciating the fixed assets (Kim and et. al., 2016). All these
will help in knowing the how the management manipulated the depreciation rate. It will
also help whether the fixed assets are overstated or not, it will be checked by looking that
whether the book value of fixed assets are lower than the reported amount. All these will
be analysed by reasonableness of depreciation rate, useful life, calculation of
depreciation as well as accumulated depreciation calculation.
(c). Explain the requirement of ASA 701 for communicating key audit matters in the audit report
and the rationale for this auditing standard.
The audit report must report and disclose the key risks under a separate heading “Key
Audit Matters”.

Determination of Key Audit Matters:
1. The auditor must describe the key audit matters of the company under the proper
heading.
2. No audit report will be considered without proper disclosure of key audit matters.
Communication of Key Audit Matters:
1. The auditor shall communicate the matter of how the company made a mistake in the
recording of the company and how it capitalized its revenue expenditure and vice
versa.
2. Also, the matter of charging depreciation lower than the rate specified and its impact
shall also be communicated.
Disclosures under ASA 701:
 Risk audit was conducted by the auditor to determine the risk that has been identified
regarding the depreciation of the property, plant and equipment of Green Machine Ltd.
 For gathering evidence to find out the risk and provide the opinion, the assets were
verified to know about their existence to find out the differences in the depreciation
amount.
 The company policies were evaluated to know the basis of depreciation and how the
company charged revenue and expenditure.
 There was insufficient information regarding the classification of revenues and
expenditure which were necessary to the audit.
CONCLUSION
From the above report, it has been concluded that auditing is very important for know the
risks involved with the company's financial statement. The audit is conducted to provide a fair
view of the financial position of the company. Further, the assurance services provided by the
professional person i.e. auditor form a basis for the investors to make informed decision whether
to invest in the company or not. Along with this, the company shall identify its key matters that
possess risks to the financial stability of the company. Along with this, such key matters should
be communicated with the parties. Lastly, the auditor should give qualification and modification
in the information of the company.

REFERENCES
Books and Journals:
Asare, S.K. and Wright, A.M., 2012. Investors', auditors', and lenders' understanding of the
message conveyed by the standard audit report on the financial statements. Accounting
Horizons, 26(2), pp.193-217.
Barrett, P., 2012. Performance auditing—addressing real or perceived expectation gaps in the
public sector. Public Money & Management, 32(2), pp.129-136.
Causholli, M., Knechel, W.R., Lin, H. and Sappington, D.E., 2013. Competitive procurement of
auditing services with limited information. European Accounting Review, 22(3),
pp.573-605.\
Cohen, S. and Leventis, S., 2013, March. Effects of municipal, auditing and political factors on
audit delay. In Accounting Forum (Vol. 37, No. 1, pp. 40-53). Elsevier.
Gramling, A.A., Johnstone, K.M. and Rittenberg, L.E., 2012. Auditing. Cengage Learning.
Havelka, D. and Merhout, J.W., 2013. Internal information technology audit process quality:
Theory development using structured group processes. International Journal of
Accounting Information Systems. 14(3). pp.165-192.
Hope, O.K., Langli, J.C. and Thomas, W.B., 2012. Agency conflicts and auditing in private
firms. Accounting, Organizations and Society, 37(7), pp.500-517.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to
conducting a quality audit. Cengage learning.
Khalil, S., Saffar, W. and Trabelsi, S., 2015. Disclosure standards, auditing infrastructure, and
bribery mitigation. Journal of business ethics, 132(2), pp.379-399.

Kim, D. J. and et. al., 2016. Web assurance seal services, trust and consumers’ concerns: an
investigation of e-commerce transaction intentions across two nations. European
Journal of Information Systems, 25(3), pp.252-273.
Shin, I.H., Lee, M. G. and Park, W., 2013. Implementation of the continuous auditing system in
the ERP-based environment. Managerial Auditing Journal, 28(7), pp.592-627.
Wu, C.Y. H., Hsu, H. H. and Haslam, J., 2016. Audit committees, non-audit services, and auditor
reporting decisions prior to failure. The British Accounting Review. 48(2), pp.240-256.
Online
Audit and assurance services, 2018. [Online]. Available through:
<https://www.pwc.com/gx/en/services/audit-assurance.html>