Audit assertion are the declaration and assumptions made by the management with respect to the disclosures and information reported in the financial statements. The representation mainly includes the matter of recognition, measurement and fair presentation of financial data (Bromwich & Scapens, 2016). These are known also known as Management Assertions and Financial Statement Assertions. As per the presentation and disclosure of financial data and after considering risk of misstatement the audit assertion are divided into several groups namely, occurrence, completeness, accuracy, completeness, existence, valuation, rights and obligation, valuation, and classification. Fundamentally the main role of these assertions are to support the auditor in interpreting the audit issues and provide the measure to resolve them. The major assertion related to balance sheet are classified into four broad categories namely, completeness, accuracy, valuation and rights and obligation (Dichev, 2017).
1 a) Key assertions at risk
Valuation: As per accounting standard principles inventories to be valued at cost or net realizable value whichever is lower. At the time of valuation of inventories it is necessary to deduct the any type of abnormal loss or wastage to get the fair valuation of inventories. One of the major issue related to valuation is value the inventory when the goods are at work in progress stage. And the another complexity is like here Computing Solutions Limited, sell computer presentation package, but due of technology and many other reasons the merchandise get obsolete within a very short period of time and hence the value of goods gets depreciated drastically (Félix, 2017).
Rights & Obligation: This assertion talks about the ownership and rights of the entity with respect to inventory. Here in the given case the company Computing Solutions generally following a practice of moving its inventory from the central warehouse to the regional warehouse, and the number of regional warehouses are six. So here is it difficult to ascertain whether the goods are in transit or are held on consignment basis. Hence, due to involvement of many parties like the insurance company, the transporter and the consignee it become more important to understand the criteria relating to ownership and rights in the given situation (Grenier, 2017).
1 b) Substantive Audit procedures Substantive Audit are steps or procedures which are taken by the auditors to gather sufficient and appropriate audit evidence. The main reason of performing these tests are to gather material and intensive information on significant matters to reach a conclusion. For the simplicity of understanding the substantive procedures are segregated into three parts namely, test of controls, test of details and analytical review procedures (Werner, 2017). The nature timing and extent of these procedure mainly depends upon the effectiveness of internal control of organisation operating in those highlighted area.
For valuation risk: For the correct valuation of inventory the auditor should obtain complete list of inventory from the management and reconcile with the balances of general ledger to qualify the differences. Examine whether they ensured with the policies of accounting standard that is valuation of inventory at cost or NRV whichever is lower, to get the better result the auditor can also take the help of market value too (Raiborn, et al., 2016). The physical verification of inventories and inventory count is considered as important audit evidence. For the more relevant and reliable result the auditor should observe the how frequently the inventory count taking place. In addition to all this procedure vouching and inventory price fixation also need to be done. As closing stock valuation is done at year end and value of inventory rise or fall eventually and incorrect valuation of stock also effect the decision of stakeholder or other interested parties hence it is special area of consideration. In respect of goods which are in transit or on consignment basis, check whether any provision is made in respect of these type of goods or not?
For rights and obligations: This assertion of audit rights and obligation comes into play when the external third parties are involved. Hence to get the proper result of substantive audit procedure, first thing would be to determine the existence of agreements and contracts, if the answer is yes than the extensive study of those agreements. The auditors should also check other major area where the risk of default is high like consignment agreement and the terms of the insurance policy. Minutes of the meeting of board is also reviewed if board of director of the company discussed anything or taken any decision in this regard (Heminway, 2017).
1 c) According to ASA 701, “key audit matters are matters that require significant auditor attention in performing the audit”. Here, the auditor is required to report the key audit matters and discuss them in details. These audit matter need to describe using a separate subheading under the respective heading of audit report. According to this ASA the key audit matters are ascertained as per the professional judgment and independence of the auditor (Alexander, 2016). It is the responsibility of auditor to communicate that he has not given a separate opinion on these matters, but in context of the overall audit report. With the introduction of these concept the quality of audit report and transparency also increased. Those matter on which the auditor had the most extensive and detailed discussion are the highlighted area where the Users of the financial statements and audit report have shown their interest in knowing about matters. This concept also improves the communication of material information between the organisation and auditor. In many entities valuation of inventory may be a key audit matter depending on the complexity involved (Chron, 2017). Valuation of inventory requires expertise opinion, professional judgement, estimates and forecasts from the management’s prospective. Hence the auditor should perform substantive procedure to obtain appropriate result for the same.
The disclosure required in relation to key audit matters, as per ASA 701 are:
It is mandatory to disclose every key matter using a separate head, under a separate section. The information must be in conformity with the auditor’s opinion. These information must be arranged as per their significance and materiality (Dumay & Baard, 2017).
It is also necessary to give reason why auditor thinks that the matter require serious attention. At the time of giving reason the auditor shall keep in mind that the word are easy to understand by financial user and restrict himself from using technical terms. As it increases the use of audit report because it also help to those user who do not have a high level of knowledge but are interested to understand the financial performance of company as well as financial position.
The management disclosure and representation, with respect to the different important matter under consideration, shall also be informed.
Even after considering all the specific requirement relating to disclosure of the entity and audit, if the auditor feels that there is no matter in complete financial statement that can be considered as key audit matter in such a situation one notes is required where the auditor should disclose these issue. These situation also can arise where the auditor disclosed all significant audit matter as part of compliance with ASA 701. Hence it is cleared that whatever be the situation is the auditor need to disclose all key audit matter under a separate head in audit report (Fay & Negangard, 2017).
The auditor also responsible to disclose and explain in detail the process adopted by him to gather all the information and evidence. And also need to mention his observation regarding management performance and relevance of those observation to reach at conclusions.
2 a) In recent day’s Intellectual property become huge matter of discussion. From the in depth study of provision relating to intellectual property conducted by the American Intellectual Property Law Association, A year ago, around 80 percent of companies assets were tangible, like buildings, equipment, plants, vehicles and the like, whereas 20 % were intangible. However with the technology advancement this ratio get changed within a very short period of time which is really commendable. In current scenario most of the developed company holds around 75 percent of their total assets as intangible assets.
Key assertions at Risk
Valuation: Once the concept of valuation of intellectual property comes into light, the cardinal rule of assigning a commercial value comes into effect. As per general rule valuation of the same intellectual property or intangible asset varies from entity to entity, because the valuation criteria somewhere also depend upon the utility perceived from asset which differ from entity to entity. In case officially protected tangible assets through trademarks, patents or copyright it is easy to evaluate their value but in case of tangibles such as know-how, (which can include the talents, skill and knowledge of the workforce), technical processes, customer lists, distribution networks, etc. it is very complicated to value them appropriately (Trieu, 2017). These assets are more difficult to be assigned a value which require independent judgement expertise knowledge even if they are equally valued. The main limitation is as the value of assets not directly associated with earnings or the profit of the entity.
Rights and obligation: Without proper study of all agreement and contract it is very difficult to identify the real owner of intellectual property. In comparison of intellectual property trademark are less complex copyrights and patents see a lot of legal suits against them. In most of the company the major portion of contingent assets and liabilities includes lawsuits, with regard to these intellectual property rights. As per accounting standard these assets cannot be shown as intangible assets till the time their legal ownership is decided by the court. Some high risk assertion area that are necessary to disclose are deficiencies in license rights, joint rights or ownership and infringement of property rights.
2 b) Substantive audit procedures: The primary step of substantive audit procedure is to collect all relevant audit information about the nature of assets. To identify the real owner of assets require to study ownership documents, all terms and condition. So there is no space of confusion regarding the true ownership of the assets.
For rights and obligations In case the assets is developed at home verify whether research and development expense charged accordingly (Sithole, et al., 2017). To gather more and detailed information and to reach at better conclusion some Interview or face to face conversation should be done with the management and other staff, so that no ambiguity lies in the mind. The other way to collect information is developing a questionnaire and distribute among all the people who are involved in the developing intellectual property right or people who use it and after study various feedback from different group of people it become easy to understand. To analyse the area of technology related risk physical inspection of workplace is mandatory. Apart from all this Inspection of ownership documents, other agreement, policy documents, contracts with the government or with the patents issuing party shall be carried out.
For valuation: To check the appropriateness the price compare the value with the industry of same product. For some more clarification background research shall also be done relating to specific class of assets. The in depth study of history of product is also required like current as well as archived files. Furthermore it needs to be compared with the industry data and the method of valuation which has been used while valuation of intangibles. The future cash flows and the discounting factor being used by the entity also needs to be checked here.
2 C) As per the provisions of the ASA701, it is the primary responsibility of the auditor to give significant degree of attention while performing the audit and the audit procedures, which are key audit matters. For the identification of key audit matters, the auditor is required to disclose all relevant matter in detail and which effect the decision of decision maker. Each and every significant information shall be given in the form of separate heading that would appear under a separate section. At the disclosure of those key information the auditor should exercise their professional judgement and independent which makes the information more reliable. While at the time of communication information the auditor shall state that he is not giving a separate opinion on those matters, but while expressing an opinion on the financial statements, he is also responsible to express his own independent opinion on key audit matters (Jefferson, 2017). This concept was come into play in the year 2005 to enhance the quality of audit report and transparency of financial statement. The reader of audit report also show their interest to know the matter discussed between management and auditor and in some case with TCWG to get more clarification. It also improve the communication between the parties and management try to shift the focus on those area where some remedial steps are required.
Valuation of intellectual property rights is itself a key audit matter because of the complexity involved in their valuation and provisioning related matters. For which lots of substantive evidence is required. At the same time the actual existence of the intangible assets, like technical know-how, expertise and goodwill is difficult to interpret in fair terms.
The disclosure required in relation to key audit matters, as per ASA 701 are:
The auditor is required to disclose these matter under a separate head under different category. It should be positioned in close vicinity with the auditor’s opinion.
Here the explanation is also required why the auditor consider that the identified audit matter require significant attention. However at the time of giving reason the auditor should restrict himself from using superfluous words or using purely technical terms. This is require to facilitate for the clear understanding of those reader who do not inhale high level technical knowledge to read financial implication but want to understand the basis of decision (Linden & Freeman, 2017).
Whether the matter is key audit matter or not depends on the criticality and significance of the issue.. If the auditor reported all those key matter under a specific head in audit report than it is necessary to report and such information must be covered under the heading key audit matters.
The auditor shall also disclose the procedure adopted to gather all significant matter as well as whatever his observation at workplace and how they help in drawing conclusion.
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