ACC 707 Auditing Report: Evaluating Inventory & PPE Assertions

This report evaluates audit assertions related to inventory and property, plant, and equipment (PPE) for two companies, Advanced Computer Solutions Limited and Green Machine Limited. For Advanced Computer Solutions, the key risk assertions identified are valuation/accuracy and cut-off, stemming from issues such as inventory movement to multiple warehouses and software problems affecting stock counts. The recommended substantive audit procedures include thorough observation of physical stock counts and careful cut-off tests. For Green Machine Limited, the identified risk assertions include accuracy in differentiating revenue and capital expenditures, as well as accurate valuation of PPE due to incorrect depreciation rates. The suggested substantive audit process involves evaluating revenue and capital expenditures and analyzing the company's capital expenditure policies. The report also discusses the requirements of ASA 701 for determining and disclosing key audit matters, emphasizing the importance of communicating these matters effectively in the audit report. The analysis concludes that errors in inventory computation and PPE valuation could significantly impact the companies' financial performance and require careful auditor attention.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The objective of the report is to take into account the evaluation of the audit assertions associated
with inventory and property, plant and equipment for the two provided organisations. In order to
ascertain the key audit matters, the auditors have to bear the responsibility of taking into account
the evaluation of the assertions that the management has used at the time of developing the
financial statements. In accordance with the above discussion, the risk assertions identified for
Advanced Computer Solutions Limited include valuation or accuracy and cut off. For Green
Machine Limited, the identified risk assertions mainly constitute of accuracy in separating the
revenue and capital expenditures along with accurate valuation of property, plant and equipment.
It could be evaluated that choosing the substantive audit processes entirely rely on the kinds of
audit assertions, which are at risk. Finally, it is crucial for the auditors to take into account the
compliance with the guidelines laid down in ASA 701 when they ascertain the key audit matters.

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Table of Contents
Introduction:....................................................................................................................................3
Question 1: Advanced Computer Solutions Limited.......................................................................3
Requirement (a):..........................................................................................................................3
Requirement (b):..........................................................................................................................5
Requirement (c):..........................................................................................................................6
Requirements of ASA 701:..........................................................................................................6
Rationale for determination:........................................................................................................6
Disclosure of key audit matters as per ASA 701:........................................................................7
Question 2: Green Machine Limited...............................................................................................8
Requirement (a):..........................................................................................................................8
Requirement (b):..........................................................................................................................9
Requirement (c):........................................................................................................................10
Requirements of ASA 701:........................................................................................................10
Rationale for determination:......................................................................................................10
Disclosure of key audit matters as per ASA 701:......................................................................11
Conclusion:....................................................................................................................................12
References:....................................................................................................................................14

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Introduction:
Auditing is defined as the procedure of investigating the financial reports of the
organisations so that any type of material misstatements could be identified, as they could have
adverse impact on the decision-making process of the significant stakeholders (Baatwah, Salleh
and Ahmad 2015). When the financial reports are prepared, the management of the audit client
use various unambiguous and unspoken claims and such claims are deemed to be the audit
assertions. The auditors of the organisations are required to take into account the evaluation and
investigation of the audit assertions, since there are various situations where the auditors have
identified errors and other issues in audit assertions (Backof 2015). If the auditors detect any type
of issues related to assertions, they are required to declare the specific assertions at risk.
After this, with the objective of reducing the risk in audit assertions, appropriate
substantive audit procedures need to be performed by the auditors. Along with this, the auditors
have the liability of determining whether the issues could be identified as key audit matters. If
they are identified as key audit matters, the auditors require communicating the same effectively
along with explanation in the audit report for making the stakeholders aware of the situation
(Bédard et al. 2016). The objective of the report is to take into account the evaluation of the audit
assertions associated with inventory and property, plant and equipment for the two provided
organisations.
Question 1: Advanced Computer Solutions Limited
Requirement (a):
Valuation or accuracy:

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The objective of this assertion is to ensure that the inventory transactions do not contain
errors. In order to deal with the assertion, the auditor requires assuring the physical stock count
are accurate and appropriate inventory flow to the income statement in the form of cost of sales
from the balance sheet (Brasel et al. 2016). Advanced Computer Solutions has moved its
inventory to six different warehouses in March 2018. This creates the chance of inaccurate
physical stock count, as there could be errors in the stock counting procedure. Moreover, the
estimated issue in software could act as impediment in the accurate flow of inventory to the
income statement from the balance sheet of the organisation. All these reasons have resulted in
this specific assertion at risk.
Cut off:
When this assertion is used, it assures accurate reporting of stock values in the correct
books of accounts. Therefore, the auditors are required to undertake investigation of the shipping
of inventory as well as receiving documents to assure the accurate register of stock movement
(Chambers and Odar 2015). For instance, it is not possible for the organisations in recording the
goods obtained of the previous period in the stock of the current period. As per the provided
case, 18% of the sales in 2017 are included in the stock of 2018. When the cut off assertion is
applied, it could be stated that the failure of the organisation in effective inventory computation
has added towards the inclusion of sales in 2017 in the stock of 2018. Moreover, the failure
might have occurred owing to issues in software. Therefore, the auditors of the organisation
could take into account this assertion at risk.

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Requirement (b):
In relation to the initial assertion at risk, the auditor of Advanced Computer Solutions
needs to undertake thorough observation of the physical counting process of stock of the client.
In order to conduct the same, the auditor is required to discuss the methodical procedure of the
physical stock count with the responsible employees for maintaining familiarity with the
procedure. In addition, the auditor needs to scrutinise the process conducted, investigates
physical stock count for outlining the amount of inventory in the books of accounts along with
examining the inventory tags. Besides, the auditor is required undertaking the stock tests in all
the currently moved warehouses, while it is necessary to match the outcomes with the stock
confirmation from the main warehouse (Christ et al. 2015). Finally, the auditor of the concerned
organisation needs to verify the cost computation procedure of inventory for assuring the
compliance of the organisation with the needed accounting standards to compute inventory.
The cut off related tests need to be carried out carefully, since this risk could result in
significant issue in computing inventory for the organisation. The auditor needs to investigate
the notes of goods obtained in warehouses and those delivered to the suppliers (Christensen,
Glover and Wolfe 2014). There is need to carry out analytical procedures for identifying
unreasonable incidents in inventory-related transactions, which could lead to slow inventory
movement or abnormal increase or decrease in the warehouses. Moreover, since stock has been
shifted to six different locations, it is necessary for the auditor to examine if any stop is faced in
obtaining the inventory from the main warehouse during the counting process of physical stock.
This step is necessary so that the unnecessary items could be identified and accordingly, they
could be excluded from the counting process of stock (Czerney, Schmidt and Thompson 2014).

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Requirement (c):
Requirements of ASA 701:
In accordance with ASA 701, the auditors need to adhere to the below-stated
requirements:
 The key audit matters are to be ascertained at the time of taking into account the analysis
of the material misstatement areas, considerable judgements of the management of the
client and the impact of important incidents on audit (Auasb.gov.au 2019).
 The auditors have the responsibility of assuring effective communication of the key audit
matters in the report of the auditor
 The above information needs to be communicated with the employees responsible for
managing company governance.
 The identified key audit matters need to be documented effectively.
Rationale for determination:
In accordance with the ASA 701 ruling, if any error is found in computing inventory, the
impact would be unfavourable on efficiency and liquidity position of Advanced Computer
Solutions owing to the creation of material misstatements. Moreover, the valuation process of
inventory takes into account the assumptions and judgement of the management in the cost
computation areas and physical stock count and uncertainties might be associated with them.
Finally, stock movement to six different warehouses coupled with software problems could have
adverse impact on audit, as these are significant events. Due to all these reasons, the risk falls
under the key audit matter in compliance with ASA 701.

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Disclosure of key audit matters as per ASA 701:
Why significant? How the key audit matters are addressed in
audit?
Movement of inventory to new warehouses
in March 2018:
Since the organisation has shifted its stock to
six different locations, errors might take place
in physical count of stock and computation
method of inventory. This event is deemed to
be significant from the audit perspective.
The significant audit processes include the
following:
 Thorough observation of the physical
counting procedure of stock
 Discussion of the methodical physical
count process of stock
 Scrutiny of the process conducted
 Test of inventory in all currently shifted
warehouses
 Test of the cost computation procedure
of stock
Sales inclusion of 2017 in stock of 2018:
The 2018 stock value contains 26% of the sales
in 2018 and 18% of the sales amount in 2017.
However, it is not accurate to incorporate the
sales of the past year in the inventory of the
existing year. This event is deemed to be
significant for the audit of the organisation.
The significant audit processes include the
following:
 Investigating the notes of goods
obtained in warehouses and those
provided to the suppliers
 Analytical processes for identifying
irrational incidents
 Examination of whether any stop in
obtaining inventory from central

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warehouse during the physical counting
process of stock
Question 2: Green Machine Limited
Requirement (a):
Valuation:
By seeking the analysis of the assertion, the auditors are ensured regarding the fact
whether the clients have accurately recorded the values related to property, plant and equipment
in the books of accounts of the organisation (Ege 2014). Therefore, the client is required to report
property, plant and equipment at historical cost after deduction of accumulated depreciation, in
which depreciation plays a crucial role and the organisation is required using the effective rate of
depreciation. For Green Machine Limited, the depreciation rate charged is lower on property,
plant and equipment. Such incorrect application of the rate of depreciation has resulted in
minimised operating costs that have the potential of profit overstatement. Moreover, when the
rate of depreciation is wrongly applied, it results in inaccurate reporting of the property, plant
and equipment values in the accounting books of the organisation (Gaynor et al. 2016). By
combining all these aspects, the assertion is deemed to be at risk.
Accuracy:
By analysing this assertion, the auditors gain the ability of managing any error that might
occur during the transactions related to property, plant and equipment. Therefore, the auditors are
required to evaluate the processes where the organisation has categorised depreciation,

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impairment and repair costs (Gimbar, Hansen and Ozlanski 2015). For Green Machine Limited,
certain mistakes are found to be in the differentiation of revenue and capital expenditures. The
organisation has recorded some revenue expenditures in the form of capital expenditures and it
has included a portion of capital expenditures in repair costs. It denotes the failure of the
organisation in accurate classification of property, plant and equipment expenses and such
aspects could result in this specific assertion at risk (He and Yang 2014).
Requirement (b):
From the above assessment, it could be observed that Green Machine Limited has faced
issues in separating revenue expenditure and capital expenditure. In case of the auditor, the
substantive audit process is to assure the evaluation of revenue and capital expenditures of the
organisation (Kikhia 2014). Hence, this mandates the need for the auditors to conduct review of
revenue and capital expenditures associated with property, plant and equipment after the
acquisition of the property, plant and equipment list. Besides, the auditors are needed to analyse
the capital expenditure policies of the organisation. With the assistance of all these substantive
audit processes, the auditor of Green Machine Limited would realise the revenue expenditures,
which are capitalised inaccurately and the capital expenditures are included inaccurately in the
repair expenses of property, plant and equipment (Knechel and Salterio 2016).
For the next risk assertion in relation to property, plant and equipment, the auditor of
Green Machine Limited is needed to examine the position of property, plant and equipment
associated with depreciation expenses. Therefore, the auditor has to identify dismantled and
unessential property, plant and equipment that require removal from the list (Litjens, Van Buuren
and Vergoossen 2015). More significantly, it is necessary for the auditor in undertaking
recalculation of depreciation pertaining to property, plant and equipment. This needs deprecation

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test of the residual amounts of the property, plant and equipment along with the gain or loss from
the sale of property, plant and equipment. The depreciation rates need to be compared in this
phase. In addition, the auditor is required testing the conformance to Green Machine Limited
with the required guidelines and principles of depreciation. All such procedures would aid the
auditor in recomputing the actual depreciation rate so that it could be charged against property,
plant and equipment in order to arrive at the actual depreciation expenses (Sirois, Bédard and
Bera 2018).
Requirement (c):
Requirements of ASA 701:
Maintaining adherence to ASA 701 is mandatory for the auditors when they are working
on key audit matters:
 Firstly, the key audit matters are to be ascertained by taking into the material
misstatement risk, auditor judgement and important events.
 Secondly, the key audit matters need to be communicated in accordance with ASA 701,
in which the matters are to be published in the report of the auditor (Tysiac 2014).
 Thirdly, the key audit matters ate to be communicated to the governance department of
the organisation.
 Finally, ASA 701 needs assuring proper documentation of key audit matters.
Rationale for determination:
At the time of adhering to the guidelines mentioned in ASA 701, it could be witnessed
that applying the low depreciation rate and categorising expenditures wrongly could have impact
on expenses. This is because misstatement of business profit increases the chance of material