Trimester 2, 2018 ACC 707 Auditing and Assurance Services Individual Assignment Question 1 While assessing the risk of material misstatement and determining the appropriate response with regard to the...

Title: ACC 707 Auditing and Assurance Services Individual Assignment
Executive Summary
In all the cases given in the assignment the major portion of the analysis is based on the finding assertions of the items of the financial statement and the separate disclosure of key audit matters in the auditors independent audit report. The first case is based on the assertions at the risk related to the inventory and the substantive procedures to be performed for the assertion identified. And In the second case the assertions at the risk which are related to the intellectual property right and the substantive procedures to be performed for the assertion identified.
Table of content
· Analysis of report
· Discussion of the case of computing solution Ltd
· Discussion of the case of Beautiful Hair Ltd
· Recommendation
· References
Analysis of report
Solution 1: Discussion of the case of computing solution Ltd
Part a)
Assertions of the audit of financial statement means the representation of the management related to the elements of the financial statement of the company. The audit assertions are also known as management assertion and it includes the occurrence, completeness, accuracy, cut off and the classification of the items of the financial statement of the company for the period ended.
In our case of the computing solution limited the inventory of the company’s best-selling product is showing the high level of return due to the suspected software problem. Due to the higher return of the product the inventory turnover ratio of the company is increases from the previous year. The inventory moved from the central warehouse to the six new regional warehouses and it will affect the valuation of the closing inventory of the company for the year ended. The sales return of the best-selling product of the company increase the value of the closing inventory as compare to the previous year.
There are two major assertions at the risk in the inventory which hare as follows:
1) Accuracy: The accuracy of the valuation of the inventory on the balance sheet is affected if the company shifts its inventory from the central warehouse to the regional warehouses this is because the physical valuation of the inventory is not possible at the same time it will also increase the risk of material misstatement in the physical verification as well as the mathematical valuation of the inventory. The another reason of the risk related to the accuracy of the valuation of the inventory is the higher sales return of the best-selling product of the computing solution limited due to the method of valuation adopted by the company. When involving the sales return to the closing inventory of the company it will affect the whole calculation due to the method of valuation adopted by the company. The inventory‘s Cost at the time of sale at the different value but at the time of sale return the value is changed.
2) Valuation and existence: The valuation of the inventory of the company is also affected by the higher sales return and the major portion of sales return exist in the closing stock of the company. The valuation of the company becomes the more complex and the chances of the material misstatement increases due to the lack of proper calculation in the sales return of the company in the closing stock of the company. The value of the inventory send at the time of sales having the different cost of goods sold due to the valuation method adopted by the company and at the time of sales return the valuation of the inventory in the closing inventories having the different cost of goods sold. The changes in the valuation are due to the one of the different method adopted by the company out of FIFO, LIFO or WAM. The existence of the inventory is also a major assertion of the inventory due to the decentralized system of the inventories warehouses of the company and it will also affect the physical verification of the inventories of the company.
Part b)
The following are the substantive audit procedures which is need to be followed for the above assertions:
a) Cut off analysis to determine the any further receiving of the inventory in the warehouse after the physical inventory count.
b) Fully observation of the total physical inventory counted in all the warehouses.
c) Reconciliation of the physical inventory count with the general ledgers of the company.
d) Follow the ABC inventory analysis system to ensure the more focus on the high value items.
e) Follow the necessary steps to determine the amount of inventory in transit at the time of valuation of inventory for the year end.
f) Valuation of the finished goods received as sales return to the company.
g) Ensure the working for the valuation of the closing inventories especially for incorporating the sales return in the valuation.
h) Analysis of the work in progress as on the balance sheet date
i) Physical existence of the inventory and check if any mortgage or charge creating on them.
Part c)
According to the ASA 701 ‘Communicating the key audit matters in the independent audit report ‘ this is required to disclosed the key audit matters in the independent audit report provided that the discussion has been done from those charge with governance and in then the key significant matters are disclosed in the audit report.
The key audit matters are the matters which are in the judgment of the auditor are the most significant in the audit of the financial statement of the company. But the auditor’s declaration of the key audit matters does not relieve him from his liability of forming the opinion on the financial of the company. An auditor has to provide reason why the matter is considered as the key audit matter and the how these matters were addressed by the auditor.
An auditor determines the key audit matters on the basis of the following:
a) Certain areas where the risk of material misstatement is higher as identified in accordance of the ASA 315.
b) On which the Judgment of the auditors and management are different such as accounting estimates or provisions for the items of the financial statements.
c) Effect of the significant event which are affecting the financials of the company.
d) The significance of the key audit matters are determined by the auditor by including the both quantitative and the qualitative factors.
e) The auditors have to decide the selection of the matter to be reported as the key audit matter in the independent audit report.
f) The matters to...