Auditing Report: Risk Assessment of Company Financial Statements

This report provides an in-depth analysis of auditing processes within the context of company financial statements. It examines the role of auditors in assessing risks associated with business operations, particularly focusing on Computing Solution and Beautiful Hair Pvt Ltd. The report delves into key assertions made by auditors regarding financial statements, outlining substantive procedures employed to mitigate identified risks. It also highlights the application of ASA 701, emphasizing the communication of key audit matters. Case studies explore risk areas like inventory valuation, intellectual property, and prepayment assertions, detailing corresponding audit procedures. The report emphasizes the importance of transparency and adherence to regulations in financial reporting, providing insights into how auditors ensure the accuracy and fairness of financial statements, ultimately aiming to provide a true and fair view of the company's financial position.

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

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Executive Summary
The report based on how the auditing process carried in company financial statement. Auditor
has to carry many audit processes in the company financial statement which helps it to know
the risk associated in company business. The report deals upon the risk assessment in
Computing Solution and Beautiful Hair Pvt Ltd. It shows the assertion which is taken by the
auditor in regards to both company’s financial statement and also the substantive procedure
carried by the auditor on the same. It also shows the information which are being stated in
ASA 701 Communicating Key Audit Matter in the company financial statement.

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Table of Contents
Introduction................................................................................................................................3
Case Study – 1............................................................................................................................3
Key assertion at risk about inventory:....................................................................................3
Substantive audit procedure in response to each risk:...........................................................4
Auditing Standard ASA, 701 Communicating Key Audit Matter:........................................5
Case Study 2:..............................................................................................................................7
Key Assertion Risk related to Intellectual Property...............................................................7
Substantive audit procedure regarding each risk:..................................................................7
ASA 701 Communicating Key Audit Matters.......................................................................8
Conclusion..................................................................................................................................9

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Introduction
Companies should have a proper image amongst the public to gain a proper position
in the competitive market. To show a transparent and fair report it should follow all the rules
and regulations in the preparation of financial statement (Alzeban and Gwilliam 2014). The
report is based on company computer solutions ltd and Shimmer PVY Ltd and shows the
auditing and assurance service carried by the auditor. Auditing is the examination and
inspection of company financial report and checks whether the company is showing true and
fair view. It has to carry different audit procedures to ensure the company financial statement
is free from material misstatement in the business (Chen et al., 2014). Company has to make
sure that its internal control is working correctly which help them to reduce the business risk.
Auditor also provides assuring services to the company business which help them to present
financial statement accurately in front of the shareholders. Risk factor always lies in the
business, and that should be minimised by company management. The management able to
identify some risk and not able to identify some risk in business. The purpose of this report to
analyze the company financial statement and identify the problem which is being faced by the
company. Auditor carries different audit process which can help to find the assertions of risk
in related both companies (De Simone, Ege and Stomberg 2014). It also states the
requirement which is there in ASA 701. Each company have different kind of risk which
should be properly analysis by auditor while carrying the audit process. The report show risk
related to each company account and what are the assertions taken by the auditor. It also
emphasises the key audit matter in company annual report. The report has to analysis whether
the company is having true and fair or not and based on information auditor give its opinion
upon company financial statement.

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Case Study – 1
Key assertion at risk about inventory:
 Valuation and Right transfer: Computing Solution sells its product by providing the
best package in the market. Company is facing many problems in regards to the
software which can also affect the overall position of the company in the market. As
per AASB 102 one assertion related to inventory is valuation (DeFond and Zhang
2014). Company has proper marketing strategies, but those strategies will work for a
limited period and then company will not be able to gain more revenue in the
business. The company should value the inventory as per AASB 102 (Auasb.gov.au
2019). The company should appropriately disclose all the items recorded in inventory
in its financial statement. Another risk associated with inventory is the transfer of
ownership. The assertion related to transfer of ownership is whether the company
have transferred the ownership properly or not.
 Prepayment assertion of Inventory: Computer solution has obtained a government
tender by keeping their price below cost. The company must have paid huge amount
of advance in regards to the order. The risk of failure of order is also very high. It
means that the order may not completed and company have to return all the money
received which show a big difference in company ledger account (DeFond and
Lennox 2017). Company may not able to provide proper disclosure in regards to
failing order to opposite party. These will affect both the suppliers and buyers balance
in company financial statement (Auasb.gov.au 2019). Therefore, the company should
disclose all the terms and conditions of the contract adequately. These disclosure
helps the company to reduce the risk of material misstatement in company business.
Substantive audit procedure in response to each risk:
 For valuation and right transfer

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A) An auditor needs to check the bank details which will clarify whether the
transaction carried by company or not (Ege 2014). It can happen that company
had recorded wrong information in their financial statement. The auditor
should also check the balance of both parties as company recorded similar
value or not. It can minimise the business risk by checking all the details of the
agreement between the seller and buyer (Auasb.gov.au 2019). The auditor
should carry more procedure to ensure company is having proper value of
inventory. The acceptance of both parties should be there in regards to the
conditions imposed in the agreement; this will help to avoid the fraudulent
situation in business.
B) An auditor can determine the provision of return of goods by checking the
terms and conditions of contract. It should verify that parties are aware of all
the conditions or not. The transfer of right from seller to buyer appropriately
carried in business. Company should provide proper disclosure in regards of
the transfer of right which help the user to get proper information in regards of
the transfer of ownership.
 Prepayment assertion to Inventory:
A) Auditor has to inspect the details of inventory as if company is holding the
inventory for an extended period than it should know the reason for holding
such inventory in business (Wang, Li and Li 2014). The company has
maintained proper details of obsolete inventory and if it is not having proper
details than company should provide proper justification for the same. The
auditor should do external confirmation in regards to old due to debtor and
creditors.

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B) Inspection of contract helps the auditor to know the prepayment amount and
the clause of the agreement (Furnham and Gunter 2015). The company is not
able to fulfil the order it should check all the return of payment is carried
effectively by company. Company has to disclose all the details in the
company notes of account (Auasb.gov.au 2019). The auditor should ensure
that all the balance of company accounting are stating true and fair value and
there is no material misstatement in company business.
Auditing Standard ASA, 701 Communicating Key Audit Matter:
These new standards are developed to meet the need and expectations of the investors.
It helps the financial user to know better about the company performance in the industry. The
matters which seems to be risky in company business are recorded in key audit matter as it
requires immediate attention of financial user of company (Griffiths 2016). These standards
also focus upon the risk associated in company business and the assertion which been taken
by auditor for the same. The goal of the audit process is to fill all the requirement of the
standard. The report related to ASA701 implemented in company annual report and financial
user will able to find the paragraph in the company financial statement (Groomer and Murthy
2018). The reason behind implementing this standard is to build confidence of company
financial user upon the financial report.
The key matters related to Computer Solution are listed below:
 The company has quoted below cost price which should be adequately checked by the
auditor. These orders can affect the overall profitability of the company business.
 Computer Solution has proper brand value but having problem in their software can
affect the goodwill of the firm.

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 Company has blocked its capital by opening sex new warehouse which also affects its
liquidity position in the business.
Key audit matter section in auditor report shows the following information:
 It is expecting a huge return but having software related issues.
 Company has owned six warehouses which help them to be decentralised its operation
and distribution unit in business
 Company to receive the tender is carrying its business process 10% below cost which
helps them to eliminate the competitors in business
 The auditor should include ASA570 in regards to the responsibility of auditor and
management time and payment terms of audit. Proper disclosure helps in fruitful
decision and should include ASA260 in auditor report.
Case Study 2:
An intangible asset is that asset which does not have any physical existence. The
intangible asset includes goodwill, patents, copyright and brand recognition. It can acquire an
intangible asset (Auasb.gov.au 2019).
Key Assertion Risk related to Intellectual Property
 Ownership Issues: The assertion which is to be faced by beautiful hair is the right of
ownership that whether the company can use the recognised asset (Hall 2015). As per
the second case company has acquired Shimmer’s Pty Ltd. The asset value can be
recognised as risk factor. The case study shows that only the shimmer’s owner knows
the formula of making the product as the details of ingredients required for the same.
These show an intangible asset in company business (Power and Gendron 2015). The
auditor should also verify the ownership and usage of the asset. Company is showing

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details of the acquirer of other business, so the auditor must check each document
properly and effectively.
 Completeness: Another risk is to gain proper details of information. A company
should have proper details of the transfer of ownership and also able to protect the
same against infringements. Completeness state that the company has recorded all the
transaction properly in its company financial statement (Khlif and Samaha 2014). The
concept of materiality occurs and due to which auditor can ask the specific question
from the management which can help auditor to minimise the risk associated in
company financial statement.
Substantive audit procedure regarding each risk:
Ownership Issue
1. The auditor can minimise the risk of wrong ship transfer by examining the agreement
between both the parties. The right regarding the use of the property is mutual
understanding between both the parties. Company has its product secret which can
only acquire by acquiring the right of transfer of the company (Knechel and Salterio
2016). Auditor has to ensure that the right of ownership has been appropriately
transferred or not. If the transfer is not done correctly than Beautiful Hairs cannot use
the secret of the product (Auasb.gov.au 2019). The company uses the secret without
acquiring right can raise penalty to the company.
2. Proper disclosure regarding the ownership shown by the company or not should be
check by the auditor. Auditor has to ensure that all the document which the companies
are having are free from material misstatement.
Completeness:

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1. Completeness is one of the key assertions which should be checked by the auditor.
Auditor has to perform different procedure to get evidence that the company has
completed each transaction properly in the financial statement (Lisic et al., 2016). It
has to check the bank statement to ensure that the amount shown in financial
statement is correct or not. The company should provide proper amount of
justification in regards to the balances kept in the financial statement.
2. The auditor should ensure that the deposit and receipt book of company are showing
fair value of business (Newton et al.,2015). The auditor should check the details of
each document. The auditor should also check the existence of all information.
ASA 701 Communicating Key Audit Matters
ASA 701 state that the auditor should provide all the detailed information of company
financial statement. It should show all the information which are gathered by proper
examination of company financial statement and should not manipulate while transferring
that information in auditor’s report (Legislation.gov.au 2019). The purpose of reporting such
information in auditor report is to provide a better understanding of company position to its
financial users. These will help the users to take proper decision in regards to investment in
the company business (Auasb.gov.au 2019).
Beautiful Hair Pvt Ltd should show all the details of the acquisition of Shimmer Pty
Ltd as per AASB 3. This information will report as key audit matter of company and thus
investors will able to know the same from the auditor’s report (Pizzini, Lin and Ziegenfuss
2014). The auditor should make sure that company has given proper disclosure regarding the
acquisition and usage of intellectual property right in the business.
Key Audit Matter section includes the following information:
 The auditor should disclose the value of company residual asset in the auditor’s report

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 The changes in company structure and relevant changes should also mention in
auditor’s report
 The company cost of the asset before and after acquisition should be verified and
updated in auditor’s report
 Proper rules should be followed regarding the valuation of the asset
Conclusion
On a final note, the report concludes as the auditing process is carried by the auditor
to know whether the company financial report is showing true and fair or not. Auditor carries
many audit procedures upon the company financial statement to obtain proper audit evidence
of materiality and misstatement in company business. Auditor has to ensure that the company
financial statement is free from material misstatement and it is showing a true and fair view.
It emphasis more on the key audit matter as this help the user to get proper amount of
information related to the company financial statement. The key assertion related to both
companies has adequately analysed in the report.
Furthermore, the case study shows the substantive audit procedure which should be
carried by auditor in regards to the assertion take by him. Auditor has to disclose all the
related information in the key audit matter paragraph in the auditor’s report. It also provides
the detail of ASA 701 communicating key audit matter as this should be followed by the
auditor while preparing the auditor’s report of companies. Auditor after finding proper
evidence has recorded some points in the key audit matter of the company. The report
emphasis upon the responsibility which the auditor has regarding the audit process carried in
the company. Auditor responsibility is to make sure that the actual company image has been
laid down in the auditor’s report which helps the financial user to take proper decision upon
the company financial statement. Thus it concluded upon the ability of auditors in regards to