Assurance Services: Audit Risk Assessment of Inventory & Intangibles

This report provides an analysis of audit assertions and risks associated with inventory and intangible asset valuation, specifically focusing on Computing Solutions Limited. It identifies key assertions at risk, such as valuation and rights & obligations related to inventory, and valuation of intellectual property rights. Substantive audit procedures are outlined to address these risks, including inventory counts, vouching, verification, and reviews of agreements and contracts. The report also discusses the importance of key audit matters according to ASA 701, emphasizing the auditor's responsibility to assess and report on matters that could be materially misstated. It highlights the complexities involved in valuing inventory and intellectual property, including the need for professional judgment and the involvement of valuation specialists. The analysis covers procedures for verifying research and development expenses, scrutinizing ownership papers, and assessing potential threats to unsanctioned access. The report concludes by emphasizing the importance of auditor independence and the need for clear communication between auditors and management to ensure accurate financial reporting.

Audit Assignment

1
By student name
Professor
University
Date: 14th Sep 2018.
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CONTENTS:
Analysis…........................……………….....................................................................................3
References......................……………….......................................................................................14
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Audit assertion:
While conducting an audit the management takes it upon himself to make assertion about
certain matters which they feel are detrimental to the success of the company and maintaining an
overall fairness. These assertions and representations that are made by the management of the
company are known as audit assertions. The main aim of these assertions is to solve any issues
and put emphasis on matters that are related to the recognition valuation and presentation of
financial data for the company (Alexander, 2016). These are also known as financial statement
assertion and assertion of the management. Based on all these and several other factors the
assertions are divided into other categories that include – accuracy, completeness, valuation,
occurrence, materiality, obligations etc. The auditor depends upon these assertions to solve major
issues that might be affecting his audit in general and can also help him in solving large issues
related to audit. In case of balance sheet, the assertions are divided into four main categories
known as completeness, accuracy and rights and obligations. In this assignment the inventories
are valued and key assertions related to the same are stated below in detail (Bromwich &
Scapens, 2016). And the overall risks that are related to the audit assertions related to the
inventories and their valuation has been highlighted below:
1 a) Key assertions at risk.
Valuation is a key audit assertion that companies need to take care of in case of inventories.
Mostly the inventories are valued at cost or net realisable value whichever is lower. It is also
important to see how the treatment of wastage is being done in this case. The rule is that no kind
of abnormal wastage should be included while valuing inventory. In case of goods that are in
work in progress valuation of them is difficult (Choy, 2018). In this case, Computing Solutions is
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selling inventories that are related to computer appliances and hence the overall chances that the
inventory will be obsolete and not usable is very high. This is because there is a lot of
technological updates that is happening all over the time and thus it becomes imperative that in
such cases the companies should move of the stock as fast as they could. The overall value also
gets impaired due to the timing.
Rights and Obligations – In this case the assertion is over the ownership of the inventories that
are in progress and in which there are chances that there might be a risk in establishing that. Like
we see in case of Computing Solutions the company is having a chief warehouse from which the
inventories are distributed to several other locations. Hence there can be a chance that the
company losses its ownership over products that are in-transit or may be held in consignment
basis (DeZoort & Harrison, 2016). Hence it is important that ownership should be established
easily as there is involvement of other parties that would include insurance business, transporters
etc. The company should establish a legal right over the ownership of the inventory at all stages
possible.
1 b) Substantive Audit procedures.
These procedures help in gathering audit evidences on matters that have substantial standing and
can help in gathering comprehensive and substantive information about matters. They are very
useful to the auditor to check the materiality of various items of the financial statements. They
are divided into various heads that includes test of control, test of details, analytical procedures
etc.
For valuation risk:
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In this case the auditor should obtain a list of inventories from the management and compare the
same with the general ledger. Inventory count should be observed as much as possible and
should be carried on a full fledged basis twice a year. Extra care should be given while valuation
of the closing stock of the inventories, as there are high chances that management can deflate the
amount them as the valuation of the closing stock happens only at the end of the year. Vouching
and verification is also a techniques to check whether proper valuation has been done or not.
There is also a chance that the management can deflate the value of the goods that are in transit
and the terms of the consignment basis should also be reviewed by the auditor (Farmer, 2018).
For rights and obligations
In this case the auditor should see that proper agreements and contracts are in place as there are
outside parties involved in question. There must be also agreements with regards to the insurance
policies that companies should take care of. They should also read the consignment agreement.
For all the decisions that have been taken by the management for the inventories, the minutes can
be studied.
1c) According to ASA 701, “key audit matters are matters that require significant auditor
attention in performing the audit”. As per the given auditing standard it is the responsibility of
the auditor to make their opinion on any such matters which they feel can be materially misstated
by the company. The audit procedures that they have undertaken to value these matters correctly
should also be stated along with that (Goldmann, 2016). This is done to draw the attention on
these critical items. This disclosures regarding the key audit matters are stated at the end of the
audit report , it overall helps in improving the quality of the audit report and also helps in
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improving the transparency involved. The auditor can also state how the management and those
charged with governance has helped him in valuation and making an opinion on such matters.
Valuation of inventory is a key audit matter, is an important key audit matter because there are
complexities involved. For valuation of inventory and creating provision a lot of professional
judgement is involved on part of the management. Hence, valuation of the same is important and
thus the auditor needs to check that (Heminway, 2017).
AS per the ASA701, the disclosures that has been provided in case of inventory valuation are
stated below:
All such key matters should be stated separately under different head and there should be
different section for it with proper highlights. On the matter of significance they should be stated
on part of significance (Kangarluie & Aalizadeh, 2017).
The auditor needs to give explanation why this matter is important, and should also use proper
explanation and clear terms in making an assurance that the inventory is valued correctly. It is
important to understand that there is a high level of knowledge and understanding between the
management and the auditors to make ease.
The overall internal controls that the management that has ensured should also be analysed by
the management by the company and they should keep that informed to the company.
In case the auditor feels there is a situation where the auditor feels that there is no need for the
explanation of any key audit matter then they should have stated that in briefly and then make it
clear. In case there are any matters that are not stated disclosures with respect to the same has
also been stated by the company. The users can always analyse these key matters and then decide
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whether they want to take that in consideration or not, these matters are important from the user
stand as there are chances that they might be materially misstated and risk is also involved
(Knechel & Salterio, 2016).
2a) The overall importance of the Intellectual Property Rights is a great matter of discussion in
today’s time and audit of the same is also important. According to a study, American Intellectual
Property Law Association, 80% of the assets are tangible in the form of property, plant and
equipment and rest 20% are intangibles. But now in today’s time 75% of the property are
intangible properties and the rest are now tangibles. Thus we see that how important it is in
today’s time to make sure that proper valuation of these intangibles should be carried on.
Key assertions at Risk:
Valuation – In case of valuation of the intellectual property rights, the cardinal rule of assigning
the market supplies would apply. The overall types of intellectual property differs from entity to
entity and its usefulness should differ from property and property. In case the intangibles are
secured by the terms of trademarks, patents and copyright so that in case the valuation is not that
difficult. In case the intangibles such as know-how, processes, customer list etc, the valuation
also includes a very complicated process for the companies (Linden & Freeman, 2017). The
valuation is difficult because it is highly difficult to assign the earnings that they generate for the
company and thus there valuation will also difficult.
Rights and obligation
Intellectual Properties are characterised based on possession matters. Some of the trademarks are
very complex and in case of copyrights, legal suits there are chances of more complexity. There
are lots of lawsuits, involved with respect to intellectual property rights and they form the major
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portion of the total assets and liabilities. In case the company is not able to establish their legal
ownership on such assets they cannot state the same in their financial statements (Saeidi, 2012).
Most of these legal issues are decided by court of law and most of the time it takes a lot of time
to manage that. Greater risk on assertions includes insufficiencies in license, rights and joint
rights etc.
2 b) Substantive audit procedures:
It is important that preliminary data related to the assets should be taken into consideration. It is
important that matters related to the rules and regulations relevant to the specific class of assets.
It is important that history of the assets should be studied. Proper agreements should be there
with the entity should be there is no thoughts in the mind of the readers. In case these assets are
developed in the house, there is a need that end to end accounting and research and development
expenses shall be verified and vouched by the company. Substantive audit procedures will also
involve taking help from the valuation specialist that can help them in accessing the correct value
of the property.
Proper conversation with the management is important so that any matters related to any
misconception and query should be stated in correctly. It is important that questionnaires should
be developed for all the people who are there in valuation of the property rights and also the
people who are using it. It is also important that physical scrutiny should be checked so that
probable threat to unsanctioned access should be checked (Sithole, et al., 2017). It is important
that ownership paper should be there and policy documents and government contracts should
also be there and the total value of the allocated assets should be reviewed with respect to the
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trade practices. Thus, in case there is any nonconformities and that should also be stated in detail.
Experts can also be hired to value these properties and provide their opinion with regards to that.
2c) As per the provisions of ASA701, the auditors require to state some matters which they think
are important for the company with relation to the risk element involved in it and it is important
that users can draw from that and take decisions whether they want to invest in the company or
not. They can check the conformity of the elements of the financial statements should also be
stated there. The information should be stated separately and should be stated all the procedures
that they have taken for valuation of these key audit matters and framing an opinion on that. It is
the duty of the auditors to form an opinion on the audit report but not they have no duty to state
the key audit matters. This is they are doing for the betterment of the audit report and making it
more transparent for the users. The auditors should also check whether there are exercising
professional judgement on part of the entity. The auditor can give a disclosure that he is stating
the key matter out of his will and there is no mandate and he feels that these are important for the
users to draw their opinion on (Sonu, et al., 2017). The users can then analyse these key audit
matters and then decide whether the company is correct or not and whether they have valued the
property calculated or not. It is important that the management should support the entity and
provide them necessary information which they need for conducting the audit.
Valuation of the intellectual property is a very complex method and thus there are lot of issues
involved in its valuation and there is a lot of justification and provisioning involved in its
valuation and hence it is important that the auditor should put more focus on these matters. The
auditor needs to obtain substantive proof for the companies. Also, the overall existence of the
technical know-how, expertise and goodwill and that can never be complete and accurate for the
company.
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The main disclosures that the auditor needs to provide as per ASA 701 are-
The auditor needs to disclose the same under different head and proper section and the steps that
they have stated for their valuation is also stated in the audit report. The information should be
structured based on matter of significance.
The auditor also needs to provide reasons why these matters are identified and there should be
substantial matters involved. The auditor should restrict himself from using difficult technical
terms and using unessential words. It is important that users need to understand and there is high
level of familiarity that the user needs to take into consideration for the company. Information
related to the steps taken by the management and the overall help that they have provided to the
auditor and the steps that they have taken for the valuation of the properties involved should be
stated in brief (Trieu, 2017).
In case the auditor feels that there is no key audit matters which they need to specify then they
should take that into consideration and state that with relevant disclosures in their audit report.
He should also state that their observations should also be stated in details and that would be
great help to the user of the financial statement and their audit reports are correct and no
information is falsified.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education,
71(4), pp. 411-431.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on.
Management Accounting Research, Volume 31, pp. 1-9.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous
Worldview Analysis. Ecological Economics, p. 145.
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting
fraud within organization. Journal of Business Ethics, pp. 1-18.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations.
Journal of Media Ethics, 33(1), pp. 1-12.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish
Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional
Law, and Organic Documents. SSRN, pp. 1-35.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-
22.
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Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York:
Routledge.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making.
Business Ethics Quarterly, 27(3), pp. 353-379.
Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran.
African Journal of Business Management, 6(23), pp. 7031-41.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of
attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Sonu, C., Ahn, H. & Choi, A., 2017. Audit fee pressure and audit risk: evidence from the
financial crisis of 2008. Asia-Pacific Journal of Accounting & Economics , 24(1-2), pp. 127-144.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research
agenda. Decision Support Systems, 93(1), pp. 111-124.
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