Auditing and Assurance Services Individual Assignment

Question 1

While assessing the risk of material misstatement and determining the appropriate response

with regard to the inventory of Advanced Computer Solutions Limited (Advanced Computer

Solutions) for the 30 June 2018 audit, you become aware of the following information:

(i) The best-selling computer presentation package has been experiencing a high level of

returns owing to suspected software problems

(ii) Based on closing inventory, inventory turned over an average of 5.4 times in 2017 and 3.8

times in 2018

(iii) Advanced Computer Solutions moved its inventory from a central warehouse to six new

regional warehouses in March 2018

(iv) Inventory on hand at end of year represented 26 per cent of sales in 2018 and 18 per cent

of sales in 2017

(v) Advanced Computer Solutions has recently won a tender to supply a large government

department with various products. In order to win the tender and prevent competitors

from gaining a foothold in the public sector market, Computing Solutions agreed to supply

the items at 10 per cent below their cost price. The first shipment is due to be delivered to

the government department in the middle of July 2018.

Answer 1

A In the risk management of Computing solutions in terms of assessment, for the Key assertion relating to inventory, It requires auditors for accustoming themselves to company and environment where it functions in the assessment it is fond that the there is material misstatement that can be traced to reasons that involve fraud and error mainly or, as a whole it affects financials of company related to it. (ISA 315.3) It forms basis in determining the exact scope, audit timing procedures, length intensity which are contemplated prominent in obtaining the reasonable with adequate audit in the form of evidence in curbing the risks assessed. (ISA 200.A36)

Valuation: Value of inventory is susceptible in impairment in the case here.  As per the AASB 102 for Inventories, Inventories ought to be valued by disclosing it to the tune with AASB. AT the end of year and thereafter, realizable value and their assessment becomes able to be detectable to look into the damaged items and the scrap goes possible in the case here.

As per the given fact, In the package of Computing Solutions, the best selling product is vulnerable to be retuned on account of suspected issues related to software. It sometimes, may become important to gather evidence where the valuation of the inventory is correctly done by disclosing and recording it. Here; incorporation of the relevant costs taken directly with overheads to inventory accurately and correctly is climacteric. The drop seen in inventory hich was 5.2 time in 2017 and almost 3.8 times in the year of 2018 implies conversion of inventory in slowed down sales. It may have impacted on the ground of return of afore mentioned package of inventory that need introspection. It raises the assertion of existence of inventory when the movement is done from main store house to the new six tore house in March 2018 of the year with closely valuation of inventory. Closing of Inventory seen at the end of year 2018 was 22% of total sales which was just 18% in 2017. By Implication: quotation is asserted with risk. Computing Solutions became agree in order to supply the items which would be 10% lower than cost price involved to government agency. In return, it helped in raising the assertion of quotation valuation. There may have valid case reason in providing impairment of the inventory that has made management resort in Selling below cost price. It becomes essential that costs involved are properly accounted to make it able in the ascertain of lost suffered due to contract (Wong. and Millington, 2014).

Existence of assertion arises as asset of inventory may or, may not exist with shifting of the warehouse. It may become also a fact that overstatement made on the inventory through inclusion of transactions that were found fictitious. It may relate it in the assertion of occurrence for further transactions. The inventory purchases are ensured by the cut-off procedures with sales for recording it to the correct side of the year. Departure and arrival of goods is susceptible  in the procedure of recording it incorrectly (Cohen and Simnett, 2014). 

B  Procedures of Substantive Audit with respect to risk as identified above  may help in ruling out the issues relate to material. At the time of assessment of the material misstatement and audit plan that do not include test control, procedures of Substantive Audit aid in to carry out testing in detail that may or, may not collaborate with procedures of substantive analytical in order to obtain adequate and reasonable evidence on Audit for inventory assertion with risk issues significantly at balance level and transaction level (Soh and Martinov-Bennie, 2015).

The two Audit procedures discussed above can be performed to connect it with risk as discussed.

 Regarding Valuation;  Vouching cost of the assets related to purchase invoices and in impairment calculation, help in substantiating the assertion. It becomes essential to ensure AASB 102 on inventories with their valuation at lower costs or, market of value is followed.  Costs not related to the production on account of the nature to be in indirect costs that are sought have not been involved in inventory cost. The quotation technique in valuing the inventory and cost related to it, is close to FIFO, AVCO etc. These had to be followed  in justifying the costs as such. Consistent treatment done over the freight and overall overheads costs with the comparison of the market prices in recording the costs where the samples of records, inventory testing allowance with inventory testing layers for FIFO, LIFO etc. is warranted  less in the case here.

For existence and cut off; it may be important in tracing the received goods and the note on it with despatch notes for the invoices which the inventory received earlier as to reword it correctly.  Another procedures where the auditors should resort in the examination on company and the related procedures on it halt for the receipt of items move into the ware house at the time of physical inventory count, which then helps in ensuring inventory items included in it.  Test of sampling on the few receipts and the shipping transactions done before physical count and after that will help in substantiation of assertion which are at risk for the cut off procedures (Peters and Romi, 2014).

C Rational and requirement needed for inclusion of Key Audit matters for ISA 701, which is partly on account of specified framework decision for auditors  in the report of material that matters. It has a motive to strengthen governance of the company with a proper communication on these matters. Determination and examination on the matter of warranting significant attention on the audit and selection of the most significant items needed are important in the auditing of the financials of company s required here.  It can also be provided with an exception in the determination of key matters that can be made here. Consequences on these matter may negate public interest and the benefits related to it through company’s contracts’ with competition considered commercial. The exception can be ruled out in the matter where public statements are already disclosed. ASA 701 is essential in the application of listed entities.

As per Fulop and Cordos (2015), key auditing matters is taken as the subjective decision in the auditing of entities.  They found and recommended that changes can be made in the standard as per the requirement of regulations that require confidentiality to be maintained in auditing in respect of matters of client.

Required Disclosure

 Matters mentioned above are determined as a key for given fact that product which are best selling in the market are susceptible to be returned as the issues of suspected software found. Here; including all the relevant overheads and direct costs related to inventory accurately and correctly is climacteric. It was seen that the drop in turnover of inventory was 5.2 times in financial year 2017 was decreased comparing it to 3.8 times fond in 2018. It implies that inventory conversion remained slow in the sales r, it slowed down.  It may have impacted on account of returns of afore mentioned package of inventory which needed introspection. Inventory movement from main store house to the new six store house in year 2018 in March, helped in raising the assertion for existence of inventory. Closing inventory observed at the end of year 2018 in March was total 22% of all sales and decreased by 18% in year 2017 in March in the same sales level. By implication; Quotation and valuation was asserted with risk on it. Company agreement for supply of all products with 10% below all the cost on it to government agency helps in raising assertion of valuation again on it.

It becomes essential to ensure that AASB 102 for Inventories with their valuation at lower cost and the market cost, market cost is followed for it. Costs which are not linked to production cost on account of them in being nature for indirect cost sought have not been involved in inventory cost.  Basis for valuing inventory cost which are close like FIFO, AVCO etc. have been followed to justify the costs of it as such. Consistent treatment on overall overheads and freight cost, by comparing it ot market price that can be recorded for sample with inventory tests allowance and other testing layers linked to FIFO, LIFO etc is deemed warranted in the case here (Hay, 2015). 

Review done on the management at year end may require a reduction on the cost related to inventory where it is sold below the prescribed cost. Determination linked required by the, management in judging and getting the application for assumptions. Following procedures are suggested for write down-

  •  Inventory ageing reports should be used for estimation of future saleability  in terms of slow moving product line which are new.
  • Items that are greater than one year,  Percentage Application based write down.
  • Line analysis is essential for remaining inventory in ensuring it above the conditions met.

Following procedures that were performed are mentioned here-

  • Sample on Inventory items were taken for valuation and then re-performed by comparing it to last purchase and invoices;
  • Ageing report and the sample testing on it with last invoices recorded; 
  •  Value of Net realizable and sample testing on it with selling prices done recently;
  • Management and enquiries on it  with other staff in the determination of specific write downs
  • It was found , nothing to be reported from the procedures done as such.

Question 2

  • You are the auditor of Green Machine Ltd, a manufacturer. You have obtained a summary of
  • the property, plant and equipment for the year ended 30 June 2018, which identifies cost and
  • accumulated depreciation brought forward, additions and disposals in the year and
  • depreciation charges.
  • A review of the management letter from the previous year’s audit shows that there were some
  • problems in relation to making a distinction between capital and revenue expenditure; some
  • items were capitalized when they should have been expensed and other capital items were
  • included in repairs and maintenance in the income statement.
  • Another risk identified from prior years relates to depreciation calculations: there is a range of
  • depreciation rates within categories and there has been concern that the rates applied to some
  • assets have been too low. The depreciation policy disclosed in the financial report shows:
  • • Building: 2 – 4% straight line
  • • Plant and machinery: 5 – 10% straight line
  • • Fixtures fittings and equipment: 5 – 20% straight line

Answer 2

A Two key assertion with risk by reacting it to intellectual property that re intangible asest at the time of audit of Beautiful hair Ltd., where they acquired the Shimmer Ltd. Insted of that they come forward to possess the intangible asset which arises from acquisition  according to accounting standard AASB3 was found accurate and with ownership (Brown-Liburd and Zamora, 2014).  

Ownership: Possession of ownership becomes important here as Beautiful hair Management have to ascertain whether there is a lawful claim related to intellectual property in terms of intangible asset and its secret formula to recognise it on the balance sheet. 

Accuracy:  It is important in term of accuracy assertion as Beautiful hair Management wants to ascertain that whether intellectual property that are intangible asset with secret formula can be recognised in the balance sheet with error free. Proper classification and ascertainment in terms of impairment may take place if found that it is no longer able in generating revenue which is did in the past that mostly required adjustment to carry amount on the balance sheet. When found that intangible asset on balance sheet is tend to be obsolete, a reduction in the sheet amount is required (Jans et al., 2014). 

B  Scenario found in discussion, has no details of plan that can be included for Test of Control (TOC’s) for assessment of operating performance on the control at specific and the overall level provided.  It is required to get details on performed test. It helps in the validation of auditors expectation of operating performance for the control. It may or, may not rely upon the performance done. It is essential to mention at this juncture where a result on these audit test and the related procedures  will be provided for an adequate and reasonable auditing evidence. For this, a reserved or, qualified opinion on the auditing should be issued. (ISA 330.8)

Ownership: Substantiation procedures required in the  assertion may involve examination of the title of documents with the other document that validates the proof for ownership. Review is to be done on agreements in order to correct asset and related to valuation that can be included here is also important.

Accuracy: Testing of Substantiation in the assertion involve at first the verification of acquisition transaction that take place during the year.  Documents inspection at the time of acquiring and adjusting the cost needed for appropriate policy of accounting is suited for client in required circumstances.  Meanwhile, determination, applications testing of clients accounting policy become necessary further. Determination of recorded transaction in terms of intellectual property  and their verification so that to know that this has been recorded correctly and in relevant revenue or other expense on the asset allocated needs to be corrected during the required period of time. Testing of continued asset and their suitability is also required (Junior et al., 2014). 

C Important audit matters are the key matters that area per the wisdom of auditor and that are most significant to audit of financial tat are audited on account of significant assessment with various audit risks observed that underlie among them. The matters here may get affected to great extent in the overall strategy with resources used in auditing here; also the duties are performed and assigned by the team of audit.

Rational and Requirement for inclusion of Key Audit Matters as per the ISA 701 can be partly on account of specified decision framework for auditors in  reporting matters that was done with a view to strengthen company with its governance through required communication on these matters. Determination and examination on matters that is warranting and significant in audit attention along with selection of significant items in the audit of financials of company s required here.

Required Disclosures

Matters described above  are determined as per the Key that gave fact on best selling Package for products of Computing Solutions is susceptible in being returned to suspected issue of software.  Here; Inclusion of all required direct costs with overheads to the inventory is accurately or, correctly becomes crucial. It was seen that the drop in inventory turnover was 5.2 times in year 2017 in the month of March which was more as per the decreased turn over seen in year 2018 that was approximately 3.8 times. It implies the conversion of the inventory into sales that slowed down here. It may have impacted on account of returns of aforementioned package on the inventory which needed introspection.  Inventory movement from main store house to the new six store house in year 2018 in the mo nth of march raises assertion of existence of these inventory. Closing inventory in the year 2018 was 22% of total sales and while it was just 18% of total sales in year 2017. By implication: quotation is asserted with the risks. The company agreement in supplying the products at the rate of 10% which is below the cost to government agency offered raises the asserting in the valuation again (Khlif and Samaha, 2014).

It is essential to ensure that AASB102 on the Inventories and the valuation dobe over it was lower to the cost of inventory or, the market cost s followed.  Cost which are not related to the production cost on account of tem in nature of the sought indirect cost that have been included in inventory cost. The valuation basis is done for valuing inventory Cost that are close to FIFO, AVCO etc; they have been followed in justifying cost s such. Consistent treatment done on freight and overhead costs by comparing it to market prices where sample of records along with inventory testing allowance and testing of inventory layers for FIFO, LIFO is warranted here in te case.

Management Review is needed at the end of the year that require the reduction on the cost of inventory where it was sold below the cost price.  The determination require from management in judgment and the application and assumption on it. Following are the procedures for the write down that can be suggested (Earley, 2015). 

  • Ageing reports on use of inventory which is needed in the estimation of future saleability and increase in it which has slow moving and new product line. 
  • Items that are greater than one year, percentage application is needed based on write down.
  • Analysis on Line of remaining inventory is important to ensure conditions are met above the line.

Following are the procedures that were performed here-

  • Items of Inventory with their sample were selected and the valuation was one again by comparing it to the last purchase invoices;
  •  Ageing Report on sample testing  with recorded last invoice;
  • Value on net realizable with sample testing with recent selling prices;
  • Management inquires and the other staff for determining any specific write downs;
  • During performance, no such report was found from the procedures (Alles et al., 2018).

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