Valuation
Assertion is the act of asserting something. In simple words it means a confident statement of fact or belief of something by someone. Audit assertions also known as management assertions are claims made by the members of the management regarding certain aspects of the business. The audit assertions are very vital as the auditor of the company relies upon a variety of assertions made by the management regarding the business. There are basically three classifications of assertions, these are, transaction level assertion involving accuracy, classification, completeness, cutoff and occurrence; account balance assertions involving completeness, existence, rights and obligations and valuation; presentation and disclosure assertions involving accuracy, completeness, occurrence, rights & obligations and understandability. Each assertion type is intended for a different aspect of the financial statements. In case the auditor is unable to obtain a letter containing management assertions from the senior management of the client company, then the auditor is unlikely to proceed with the audit activities (Alexander, 2016).
Valuation: In general a company has many current assets, but inventory possesses great importance to the business of a company. Inventory is crucial asset to carry on the day to day business, manipulation in which can affect the profits of a business drastically. As per the accounting standards the inventories are required to be valued at the lower of cost or net realizable value. It is also the requisite of the standards that it must be ensured that no abnormal wastage has been included in the inventory during the valuation. In the given, Computing Solutions Limited is the seller of computer presentation package, this involves higher chances of the inventories getting outdated(Arnott, et al., 2017). In a world which is growing constantly and the demand for new technologies are ever increasing, products might get obsolete in a very short period of time with new products filling up there places, this fast growing technology might bring about impairment in the value more quickly than planned.
Rights and Obligations:In general, this assertion is implied. The rights and obligation assertion simply states that the ownership rights and usage rights of all the recognized assets and liabilities of the company belongs to no one else but the company itself. This is one of the most important assertions, mainly to the investors. It would be prudent for the auditor to obtain supporting documents from the management on the rights and obligation assertion on the assets and liabilities especially where there is involvement of outside parties. Computing Solution in regard to the inventories follows the practice of moving the inventories from the chief warehouse to six regional warehouses. This involves high risk to rights and obligations assertion (Belton, 2017). As there is involvement of third parties such as consignee, as Computing Solutions provide goods on consignment basis, the insurance companies, Computing Solutions have done insurance, and also the transporters, while the goods are in transit. Thus, the risk involved in the rights and obligations assertion is high, so the requirement of clear cut understanding of this assertion by the auditor is highly important.
Rights and Obligations
Substantive Audit Procedures: Substantive audit procedures are the activities which the auditor of the company performs during the audit to detect any material misstatement or fraud at the assertion level (Choy, 2018). Substantive audit procedure is a step following which the auditor gathers audit evidences to support his audit opinion regarding the disclosure, existence and of assets and accounts as shown in the financial statements.
For valuation risk: Inventory is a large part of a company’s audit processes. It is a substantial portion of the total assets of companies. Therefore the companies have a temptation to overstate inventory. This requires the auditor to focus on verifying both the existence of the assets as well as the valuation of the assets. The auditor should question the company regarding its halting procedures for the inventory reception during the physical inventory count. The auditor should participate in the physical count of the inventory; it is the best way for the auditors to verify the existence of the assets, by observing the company’s inventory count if it is at all possible (Das, 2017). This is an excellent opportunity to understand the inventory count procedure and become aware of any possible errors in their method. In addition to observing the company’s inventory count procedures, the auditor should also perform independent own inventory count. Where there are multiple inventory storage locations, the locations where the amount of inventory is significant should be tested by the auditor and confirmation of the same must be obtained from the custodian of the warehouse. Reconciliation of the physical count of the inventory must be done with the general ledger. The valuation of inventory is done at the lower of cost or net realizable value. The auditor should verify the option stated on the financial statements is in fact being used in the accounting system (Erik & Jan, 2017). The same should be confirmed by comparing the supplier invoices with information input in the accounting system to ensure the accuracy.
For rights and obligations: The auditor must collect evidences to ensure that rights and obligations of the inventory lie with the company. There are various supporting documents which the auditor can rely upon. Where the inventory is purchased, the auditor should check the purchase record available with company (Farmer, 2018). In case where goods are purchased and sold through consignment, the auditor should review the consignment agreement. A company generally keeps its inventory insured, in such cases insurance papers and policies must also be reviewed. Wherever third parties are involved it would wise from the side of the auditor to verify all the related documents for rights and obligations as in such cases risk is generally high.
Substantive Audit Procedures
The Auditing Standard ASA 701, Communicating Key Audit Matters in the Independent Auditors Report, issued by AUSB, requires the auditor to disclose the key audit matters of the company in its enhanced audit report. The matters that requires significant attention of the auditor refers to as the Key audit (Goldmann, 2016). The disclosure of the key audit matters in the audit report brings more transparency and insight in the financial statements. The more transparent a financial statement, the more reliable it is. According to ASA 701, the key audit matters are required to be identified by the auditors and disclosed in the audit report under a separate head. The auditor is required to address the key audit matters in detail along with the audit procedures followed in simple language.
The inventory valuation may be considered as a key audit matter because of high amount complexities involved. The valuation of inventory is more vulnerable to manipulation (Grenier, 2017).
The disclosure required in relation to key audit matters, as per ASA 701 are:
The ASA 701 requires the auditor to disclose the key audit matters in the audit report under a separate head. The auditor should provide in brief, the reason for considering the mentioned matter as a key audit matter along with the significance it bears in the financial statements. The impact that these key audit matters will have on the financial statements. Also the level of risk involved in case there is any material misstatement in the key audit matters.
The auditor is also required to disclose the audit procedures followed in the assessment of the key audit matters. The opinion that auditor forms on such matters in the financial statement as a whole. It is essential that the auditor’s description in the auditor’s report of how the key audit matters were addressed in the audit correlates with the work performed and is supported by proper documentation in the working papers (Jefferson, 2017).
Intellectual Property is basically a category of property which the intangible creations of human intellect and idea and mainly includes patents, trademarks and copyrights. These are recorded under the head intangible assets in the financial statements. Intellectual property rights are therefore the rights given to a person for creation of new ideas and intellect (Jefferson, 2017). In recent times the importance and awareness of the intellectual property rights has increased as compared to years ago, because of growing need of new technologies new ideas and innovations are needed. And thus, for the protection of the intellectual rights of those who creates new ideas, intellectual property law has been formed.
For valuation risk
Valuation:The intellectual property rights are very important to a business and so is the valuation of such property. There are many methods that can be used for the valuation of intellectual property rights depending upon the need of the company. Mainly the intellectual property derives its value from a wide range of important factors such as market share, legal protection, barriers to entry, industrial and economic factors, IP’s profitability, remaining economic life, new technologies and growth projections. It is necessary to collect as much information and an in depth understanding of the economy, industry and specific business that affects directly the intellectual property for the valuation process. In case of Beautiful Hiar Ltd, it can be seen that only one Shimmer knows the formula for creation of its product and thus that is like a technical know-how on which Shimmer company is having a copyright, so in case Beautiful Ltd wants to buy it, they should buy that from the company and value them as per the provision of AASB 138.
Rights and Obligations:The ownership of the intellectual property rights belongs to the person who has created the intellectual property. A company cannot create an idea, an individual does. Verification of the ownership of the intellectual property rights demands great caution on the side of the auditor. Where the intellectual property is self created, the auditor is required to verify the legal documents of ownership, which should state that it actually belongs to the entity claiming to be the owner (Kim, et al., 2017). In case of purchased intellectual property the legal documents relating to the transferability is needed to be checked. The main requisite of an intellectual property right is that it should be registered with the law in the name of the owner. The intellectual property rights which are not registered in the name of the company claiming its ownership cannot be recognized in its books of accounts as an asset. The rights and obligation assertion risk in this case is particularly high. In case of Beautiful Ltd, the company needs to make sure that proper agreements are in place to see that the intangible assets can be disclosed in their own name.
Substantive audit procedures: Substantive audit procedure is the process of gathering information and data by the auditor during the audit process to act as audit evidences. These audit evidences are collected by the auditor to ensure that the audit assertion provided by the company are accurate, true and fair, non ambiguous and complete. It helps the auditor to confirm that the financial statement is free from any material misstatements and material discrepancies as far as the knowledge and judgement of the auditor is concerned and the disclosure provided by the company in the financial statement is proper (Sithole, et al., 2017).
For rights and obligations
The intangible assets differ from the other assets in matters that they do not have any physical presence and they are not financial instruments like cash. In case of intangible assets the auditor needs to obtain a schedule of all intangible assets and it amortization. The auditor should determine that the ownership of such assets is evidenced by legal documents and these are valued at fair values. Proper description and classification is given in the financial statements, along with required disclosures. The auditor should obtain a list of additions for all major additions and review whether the intangible assets are acquired or self generated.
According to the Auditing Standard ASA 701, Communicating Key Audit Matters in the Independent Auditor’s Report, it is mandatory for the auditor communicate the key audit matters in the auditor’s report of the listed entities. This standard of auditing was issued by the AUSB which became operative for the financial reporting periods ending on or after 15 December 2016. Key Audit Matters, (KAMs), are matters which require significant attention of the auditor in the audit process of a company and the disclosure of the same in the audit report is mandatory as per law. The communication of the key audit matters brings more transparency in the financial statements. This is a great need of the users of the financial statements (Trieu, 2017).
There are various factors that the auditor need to keep in mind while determining which factors are to be considered as key audit matters, Mainly those matters that bears great significance to the business of the company and are of high complexity are considered to be key audit matters, the non disclosure of which is considered as material misstatement.
After analyzing the significance of the key audit matters in the financial statements, the valuation of Intellectual Property must be considered as a key audit matter.
The auditor is required to disclose the key audit matters under a separate head which should include all details required to be disclosed. The auditor should explain using simple terms how the key audit matters are being determined by him/her, basically the determination is done on the basis of assessed risks, significant auditor judgement involving the effects of key audit matters on the financial statements (Werner, 2017). The auditor should also address the audit procedures followed in relation to the key audit matters and his judgment and opinion on such matters. Whether any material misstatement has been noticed by the auditor in regard to the key audit matters should also be reported.
Conclusion
Based on the overall analysis it can be said that key audit matters helps in improving the transparency of the audit report and thus auditors should spend time in checking in them. The aim should be to apply the best suited audit procedures and audit assertions in analysis of these matters and make necessary judgement based on that.
References
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Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations. Decision Support Systems, Volume 97, pp. 58-68.
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Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), pp. 712-735.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
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Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), pp. 23-40.
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.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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