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(a) Identify and explain the two key assertions at risk in relation to inventory


(b) Identify and describe two substantive audit procedures that you could perform in response to each risk identified above


(c) Explain the requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report and the rationale for this auditing standard. Determine if the above matters are key audit matters, providing full rationale for the determination. If it is determined that they are Key Audit Matters, provide the disclosures which are required in Key Audit Matters Section of the Auditor’s report as required under ASA 701.

Cut Off Risk Assertion

Almost all auditors are deemed to be some obligations that are evident in investigating and evaluating the financial statements of companies so that it might be made certain that they do not encompass any type of material misstatements due to any error or frauds. The stakeholders related with these companies in order to analyses the fairness and honesty within companies financial statements. At the time such financial statements are developed, the auditors often make some sort of assertions for their audit customers. Such assertions signify implicit or explicit depictions along with claims that are used by the management for developing financial reports concerned with suitability of several elements along with financial statements disclosures.

Several auditing assertions are employed in consideration to property, plant and equipment, inventory and others which encompass cut off, valuation, occurrence, accuracy, existence along with completeness. At the time consumers financial statements are audited, the auditors must consider to investigate the audit assertions in a way that fairness of used judgments and assumptions used by management to develop financial statements might be verified. Relied on these investigations, the key audit matters must be determined in case the risks have significance for taking audit measures. The current report might focus on certain assertions employed for the given companies from the auditor’s perception in a way that the key audit matters are ascertained.

Cut Off Risk Assentation

An audit client management has the responsibility to make sure that the inventory values are suitably recoded at the time they take place within an accounting period. For this reason, consideration must be provided in order to analyses shipping and receiving documents associated with inventory as it results in cut off of inventory. This restricts the business companies to record the previous year’s inventory value within the accounting statement of present year. Conversely, Advanced Commuter Solutions Limited has not abided by this aspect because of consideration of 2018 inventory record in sales for 2017 and 2018. Such event also validates that there are certain errors within recording of inventory in a desired accounting period. Another major cause behind this inclusion can be the software concern or certain deliberate misconduct conducted by any employee. For this reason, the cut off is observed to be at risk.

Accuracy/ Valuation Risk Assentation

For testing this particular assertion, the auditors are observed to deal with two important audit matters. These encompass the accuracy of the figures in consideration to the physical count f inventory along with making sure that the inventory amount is considered as sales count within income statement from the financial position statement of a company. Due to such reasons, it is important to carry out inventory valuation from the behalf of auditors. Based on the case information, Advanced Computer Solutions Limited as considered inventory transfer from central warehouse to six warehouses regionally. This type of transfer has the possibility of wrong physical inventory count and for this reason; there might be a downfall in the year 2018 regarding inventory turnover. In addition, the organization has been dealing with software issues that might result in concerns related with procedure of inventory valuation. For such reasons, the valuation based assertions or accuracy is observed to be at risk.

Accuracy/ Valuation Risk Assertion

First Substantive Audit Procedure

For dealing with accuracy or valuation risk, the considerable audit procedure serves as methodological surveillance of every aspect related with inventory physical count associated with Advanced Computer Solutions Limited. The initiatives those are to be taken by the auditor must encompass recognizing the strengths long with weaknesses within internal control related with checking tags of inventory counts, internal control related with inventory along with existing in person at the time of inventory physical count. Moreover, it is also important to analyses the inventory count within all the six major warehouses. Finally, the management has also some major assumptions along with judgments which the auditor requires to test in accordance with the required accounting standards.

Second Substantive Audit Procedure

For conducting the cut off examination, the substantive audit procedure can encompass verifying the notes for goods attained as well as delivered which can support in recognizing the reporting date. Moreover, it is important to check whether there is a slow movement of the management or the inventory has made certain irrational adjustments within the same. Finally, certain verifications must be made on the behalf of the auditor to recognize some stop command along with attaining inventories within warehouses. This is for the reason that the combination of all such factors might place at risk the inventory cut off assertion.

ASA 701 Requirements

It is stated by “ASA 701Section 7” that the auditors are obliged to make sure the key audit matters and the establishment of same relied on them and these are to be included and disclosed within audit report. Other than that, it is revealed in “ASA 701 section 8” the definition of key audit matters those encompass concerns important for the auditors while auditing the selected companies financial reports. Moreover, selection is to be conducted after communicating with government committees. In alignment with “ASA 701 Section 9” three specific requirements needs to be considered by auditors in a way that key audit matters are entertained. This includes certain areas within financial reports that have the likability of high material misstatement uncertainty in accordance to ASA 315, the uncertain judgments along with accounting anticipations conducted by companies and impact of important audit events that took place in the accounting year. As per “ASA 701 section 10”, the auditors are accountable for recognizing the key audit matters after considering certain important concerns and their impact on audit. The rationales those are needed for determination are indicated below:

  • As inventories are shifted from central warehouse to six regional warehouses, it might be adjusted as an important event that has great impact on valuation process and inventory count.
  • In case errors are identified within inventory valuation process, it might be considered as a vital part within financial reports that has high material misstatements possibility.
  • For the reason that errors are important for inventory valuation, certain uncetainities can be included within accounting anticipations along with judgments conducted by Advanced Computer Solutions management.

Significance

Audit in Dealing with Key Audit Matters

Inventory Shift in March of 2018

There might be an impact on physical inventory count procedure because of recent inventory shift from a central location for six distinct locations. Moreover, for valuation of inventory, management accounting estimates along with adequate judgments are conducted those are considered to be important for audit.

For dealing with such concern, the audit processes employed are explained under:

· Inventories verification in six locations

· Observation of the work-in-progress count of inventory

· Tags authentication employed for counting inventory

· Assumptions along with judgments evaluation undertaken by management long with compliance with vital accounting standards

· Explanation of limitation and strengths of internal control having connection with inventory

· Methodological supervision of all aspects of the process associated with inventory physical count

Previous Year Sales Included with Current Year Inventory

For the reason that the recent year’s inventory includes a fraction of sales value of the current and last year, error is most likely to happen. In addition, there might be material impact because of vital accounting estimates involvement along with management judgments.

For addressing such concerns, the used audit processes are explained in the following:

· Exploration of whether there is slow stock movement or existence of irrational adjustments within them.

· Each note certification for goods attained and delivered for recognizing the date of reporting.

· Verification of whether any stop command is issued in attaining stocks within warehouses

  • Valuation: As per the requirement of this specific assertion, the audit clients are anticipated to record each of their equity, assets along with liabilities at cost after subtraction of accumulated depreciations and for this reason, accurate depreciation rate application is conducted. This is one of the important primary needs for the business organizations. From the offered information of Green Information Limited, the organization has charged a low rate of depreciation owner than the actual rate that can lead to wrong property, plant and equipment valuation. Along with the use of such rate can decrease the company’s operating expenses considerably that can increase its net income. For this reason, such misstatement might take place within profit. There are the major causes that such assertion is observed to be at risk.
  • Accuracy:Based on the demand of such assertion, the companies are required to be committed towards suitable transactions recording in accordance with property, plant and equipment. For this reason, it is important for companies to make sure that categorization of expenses are made accordingly that is associated with plant, property and equipment. Considering the same, in consideration to the case of Green Machine Limited, it has been gathered that the capital and revenue expenditures are not accurately separated by the company. Rather than that, there has been capitalization of a fraction of revenue expenditures while an aspect of capital expenditures is represented in revenue expenditures form within the statement of profit and loss. For this reason, it is also evident from such aspect that certain vital expenses associated with plant, property and equipment is not suitably segmented. This generates material misstatement chances in the financial reports of the company and such ascertain includes risk.

First Substantive Audit Procedure

As an aspect of such procedure, the auditor f Green Machine Limited requires evaluating the processes and guidelines of the companies so that the revenue and capital expenses related with plant, property and equipment might be entertained. In order to make sure the same, a list of explained asset is attained by the auditor that is important to confirm that the company has abided by the necessary accounting standards along with guidelines related with property, plant and equipment expenditure.

As an aspect of the process, the depreciation policy of the company is required to be monitored by the auditor, accounting estimates along with the management judgments. After that computation of the depreciation rate by the auditor through taking into consideration certain residual amounts along with gains or losses from selling part of plant, property and equipment. For this reason, it is important to calculate depreciation rates in this step. This might support the auditor in calculating the revised rate of depreciation and along with that the suitable depreciation expenses can be ascertained.

Based on “ASA 701 section 7”, the aim of the auditor is to make sure that key audit matters, offering accurate audit opinion and the similar needs to be published in the auditor report. In addition, the exploitation of the key audit matters explained within “ASA 701 Section 8” indicates that such matters are concerns those are considered to be important for the auditors within auditing process of the financial statements and these are to be selected after conversing with the governance group of the selected company. In addition, “ASA 701 Section 9” indicated that there are three needs for auditors while ascertaining the key audit matters. These encompass certain aspects of financial statements that include high risk in conformance with ASA 315, accounting judgments and anticipations that were used by the audit consumers doubtfully long with the impact of vital concerns or transactions on auditing which took place during the accounting period. In addition “ASA  701 Section 10” needs the auditors in making sure that key audit matters after taking into account certain vital events having certain potential of affecting audit. The determination rationale is explained under:

  • The involvement of considerable judgments of the management along with accounting anticipations might be observed in doubtful or some areas.
  • There is existence of two major errors along with transactions that includes improper segregation of expenses along with use of low depreciation rates and along with that such events are likely to have impact on the company’s audit.
  • The uncertainties associated with material misstatements are increased that results in errors made in separation of capital and revenue expenditures along with wrong depreciation computation.

Significance

Audit in Dealing with Key Audit Matters

Improper Segregation of Revenue and Capital Expense

Improper segregation is carried out by the company for the capital and revenue expenditure. This can have certain material effect on the financial reports that encompass accounting anticipations along with judgments conducted by the management and are important for the audit process.

For addressing such concerns, the implemented audit processes are explained below:

· Monitoring the guidelines along with the processes of the company in order to make sure that capital expenditures and revenue are aligned with property, plant and equipment.

· Attaining the list of the aforementioned assets in order to carry out the process of verification

· Ensuring conformation of the fact that suitable compliance is maintained by the organization with all the necessary accounting guidelines and policies

Depreciation Rate Use Below Real Property, Plant and Equipment Rate

The company has employed decreased rate of depreciation in order to value its property, plant and equipment. This can result in the material impact within financial statements. In addition, the accounting anticipations along with the management judgments are considered to be important for the audit conducts of the companies.

In order to address such highlighted concern, the employed audit processes must encompass the following:

· Calculating the depreciation rate again after analyzing the residual property, plant and equipment amount along with loss or gain attained from any asset

· Monitoring the depreciation policy employed by the company along with its accounting anticipations and management reviews

 

Conclusion

The current report focused on certain assertions employed for the given companies from the auditor’s perception in a way that the key audit matters are ascertained. It was gathered from the paper that for testing valuation risk assertion, the auditors are observed to deal with two important audit matters. These encompass the accuracy of the figures in consideration to the physical count f inventory along with making sure that the inventory amount is considered as sales count within income statement from the financial position statement of a company. Moreover, the involvement of considerable judgments of the management along with accounting anticipations might be observed in doubtful or some areas. In dealing with key audit matters monitoring the guidelines along with the processes of the company is necessary in order to make sure that capital expenditures and revenue are aligned with property, plant and equipment.

Second Substantive Audit Procedure

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