Audit Assertions for Inventory Valuation
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:
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 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.
Key risks related to inventory valuation
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.
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).
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 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.
Audit procedures for inventory valuation
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 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.
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.
Audit Assertions for Intellectual Property Rights
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 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.
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 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.
Key risks related to intellectual property rights
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.
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.
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.
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.
Substantive audit procedures:
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