Issues from prior years’ audits
a. In the given case the two major key assertions which are at risk to be considered as present in relation to the audit carried out for the year ending 30thJune,2018 of the Advanced computer solution limited are Susceptibility of the Loss of the software products providing higher returns to the company and the second is the losses that may be caused due to the items in transit when it was decided by the company to shift its inventory from the central warehouse to the six different warehoused in march 2018.
The reason for the first is that it is being told that the software package of the company provides the higher returns due to its contribution in dealing with the suspected dealing problems. In other words, these packages are the most crucial sources of revenue for the entity, hence the probability of theft of these packages is too high.
Second one is loss to be caused during transit as from the single store it is going to be shifted to six different warehouses in case of which the products shall remain in transit towards different locations and at the care of the transporter. Not only this at the time of loading and unloading its products in different warehouses, the products may expose to loss because of loss of its value.
b. The Substantive audit procedures are performed by the auditor with the intention of detention of fraud or material misstatement that are made at the level of assertion. These assertions may either be of balances or of the transactions. The assertion of the balances is primarily relating to the existence, validity, completeness and rights and obligations, whereas in terms of the transactions it may be completeness, accuracy, cut-off, classification etc.
In terms of the substantive procedure to be performed for the first of the above, i.e., the probability of the theft of the software packages providing higher returns, he needs to confirm the existence of these inventory items in the respective warehouses. He should further inspect the level of accuracy that can be expected from the inventory counting system of the Advanced computer solutions in place. The verification of the clerical and mathematical accuracy of the listing of these high value inventories are required to be tested too. Reconciliation of the physical inventory amount with the perpetual records too is demanded as substantive procedure in the given case (Boghossian, 2017).
Substantive audit procedures
For the second thing that is loss that is expected to be caused because of the movement of the products from the central warehouse to the six different warehouses to ensure the completeness the reconciliation of the physical counts with the general ledger control is required. Verification of the propriety of the flow of inventory along with the satisfied level of assurance to be obtained by employing the specialists that the items that reached to the warehouses have again been valued at an accurate pricing or costing method to reflect the any deviation in value that could have been caused during the period of its transportation. Verification of the quality of the inventor items once they reach to the different warehouses is also to be considered in the second case (Charles H, et al., 2015).
c. The major requirements of the AAS 701 are determination of the key audit matters, then the next is communicating the key audit matters, communicating the same to those charged with the governance and finally the it is documentation for the same.
While determining the key audit matter the auditor is required to consider the higher assessed risk of material misstatement, significant managerial judgements relating to the estimation with which high degree of uncertainty may be associated with and the audit impact on the significant events and transactions.
While communicating this key matter he needs to consider that it is to be mentioned in a separate section with appropriate heading and sub heading. Again, this communication is not to be considered as a way of substituting the modified audit opinion and this is to be communicated to those charged with the governance and finally the auditor needs to maintain the sufficient documentation in respect of the key audit matters to justify why has he considered the same as key audit matter (Wellmer, 2018).
The major rationale behind the application or the implementation of the AAS 701 is keeping in mind the public interest and the report quality of the auditor as key audit matters play a significant role in making informed decisions by the public. Hence to maintain the high quality of the audit report it is separately to be presented.
In the case of the Advanced computer solutions the above two matters are to be considered as the key audit matters, the reason for the same is given as follows:
1.The first being associated with the high amount of risk as it is the highest source of return or revenue for the company, hence material misstatement relating to the same is highly expected.
- The second thing is that the movement of the inventory from the central warehouse to the six different warehouses is a significant event that took place during the year and it has its impact on the audit which is to be clearly disclosed.
- Again the company is planning to quote tender at a price that is lower than its cost which is going to be a major critical decision to be taken by the company, hence in this case it automatically becomes the key audit matter to be reported(Ruth, 2018)
Requirements of ASA701 in relation to communicating significant audit matters
Key Audit matters to be reported as-
We have audited the financial statement of the advanced computer solutions and has noticed that following things should be reported as a key audit matter
Probability of the theft of the High return item
There is a class of software package presently providing the highest return to the company, hence during the loading and unloading the same to different warehouses, the theft could not be denied (Kusolpalalert, 2018)
Probability of the loss of the value of the inventory during transit
As the items of the inventory were shifted to different locations and it remained in transit under the custody of the different transporters, hence the loss in their value cannot be denied. Because of which it can impose significant threat to the accurate estimation and their presentation in the profit and loss and the balance sheet of the company. There was no such system found in existence to get adequate assurance that these items have been adequately handled by the transporters or they were to be held accountable and damages to be recovered from them for these losses (Kaufmann, 2017).
a. In the given case of the Green Machine limited the two major key assertions at risk as identified are the first being as reflected from the management letter of the previous year audit that due to the problem that arose in past in making the significant distinction between the capital and revenue expenditure, few items of revenue expenditure has been capitalised and few of the capital expenditures has been treated as revenue expenditure by treating them as an expenditure on repairs and maintenance(Borit & Olsen, 2012).
The second key assertion at risk is that some of the rates of depreciation as applied for few of the assets of the Green machine limited are too low as there was a range established in terms of the rate of depreciation of the assets. At the same time, it is to be seen that while making the financial report it is the range of the rate of depreciation that has been prescribed instead of the actual rate that has been applied with respect to such asset category (Norberg, 2018).
b. The two-key substantive procedure that can be applied in the case of the audit of the Green machine limited for the year ending 30thJune,2018 in respect of the plant, property and equipment are as follows:
- Substantive procedure in respect of the valuation of the Plant property and equipment
While making the correct valuation of the Plant, Property and Equipment the
Vouchers and invoices to be properly checked to decide whether an item has been correctly capitalised, or a wrong revenue item has been capitalised to claim the depreciation on the same. In this regard the vouching of the entries in the fixed assets register can be of great help. In relation to the same it is further required to give a check to the repairs and maintenance accounts too, so that the wrong classification of any item can be reported to and finally it is the analysis of the accumulated depreciation account that is to be made to trace out the year to which the wrong calculation of the depreciation belongs to (Svahn, et al., 2017)
- To ensure the impact on the income statement of the Green machine limited the calculation of the depreciation is to be revised.
It is further to be noticed that the correct calculation of the depreciation is to be made for which the rate applicable as per the regulatory provision if any should be considered. It is because of the two reasons, the first being the effect of the depreciation shall be clearly indicated in the income statement, hence the result of the financial operation of the Green machine limited won’t be clearly reflected. The second being if the depreciation is charged at a wrong rate then it shall impact the compliance component of the presentation of the financial statement of the Green Machine Limited. (Wellmer, 2018)For this purpose the examination of the supporting documentation for the calculation of the depreciation of the company should be collected and it is to be ensured that the exact rate and methodology of charging the depreciation is to be clearly mentioned in the financial statement of the company for the concerned financial year .After making the correct calculation of the depreciation with the appropriate rate its impact on the concerned financial ears income statement is required to be disclosed too as a matter of prior period adjustment being reflected under the separate heading so that the users of the financial statement can easily make decision on the basis of the same.
c. The requirement of the ASA701 in relation to the communicating the significant audit matters has been drafted by the AASB keeping the thought of public interest to which it is committed to and at the same time the quality of the audit report to be maintained in order to provide the high degree of the assurance quality of the reports drafted by the audit professionals. Its requirements are in form of determination of the key audit matters, communication of the key audit matters, communication of the key audit matters to those charged with the governance and finally to justify the reason for the selection of the item as the key audit matter he is required to maintain adequate amount of documentation(Vieira, et al., 2017).
The identification of the key audit matter is the first crucial step to which he should be much aware about. It is because these are going to be finally the part and parcel of the financial statement. Though it is mandatory to disclose the key audit matters in the financial statements, but at times when there are legal hurdles of reporting the same or there may be the case when such disclosure shall negatively affect the public interest perspective only when it can be denied reporting (Abdullah & Said, 2017).
Secondly its communication is very crucial that too in front of the Board of governance of the entity as they are the final decision maker as to how to deal with these significant factors.
The last but not the least is that the auditor should prepare himself with the adequate documentation so that his decision to categories a specific matter as a key audit matter should not be questioned by any one or t should remain doubtful that whether it was at all a significant audit matter or not. It is the level of documentation maintained by the auditor that decided whether the auditor was right or wrong to decide this (Webster, 2017).
The rationale behind communicating the significant audit matter is that it is the auditor’s report which is considered as of the highest trustworthy document amongst the public as they are outsiders completely unaware about the operation and financial status of the entity. The key audit matter fulfils the expectation of the stakeholders in terms of the knowledge and information they are expecting (Ruth, 2018).
Yes, in the given case of the Green Machine Limited both events identified are to be considered as key audit matters. The justification for the same id s given hereunder:
- The categorisation of the capital item as revenue and the vice versa is a total violation of the basic accounting principles taking which a base the financial statements are prepared. Hence it may possess the significant threat into the presentation of the Balance sheet and income statement of the Green Machine Limited
- The wrong rate of depreciation without the actual rate applied is also a major violation of the legal provisions, hence those who are charged with the duty of governance for them t is a matter to be taken care of(Epstein, 2018).
Wrong classification of the capital item into revenue and vice versa
It has been noticed during the audit of the financial statement of the Green Machine Limited that few capital items have been categorized as revenue and the vice versa as a result of which three is high probability that the financial statement of the Green Machine limited may not be able to reflect a true and fair view of its operation and the statement of its affairs (White, et al., 2018).
Because of the charging of the depreciation at a much lower rate on few of the assets of the company, there is the prospect of the overstated income as reflected in the income statement of the Green Machine limited. Hence a careful consideration is to be made while rectifying the same and ensure the practice of not making the repetition of the same (Wendt, 2018).
References
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Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.
Borit, M. & Olsen, P., 2012. Evaluation framework for regulatory requirements related to data recording and traceability designed to prevent illegal, unreported and unregulated fishing. Marine Policy, 36(1), pp. 96-102.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.
Epstein, M., 2018. Making Sustainability Work. first ed. London: Routledge.
Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New York: Routledge.
Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery period and financial crisis. AU Journal of Management, 11(1).
Norberg, P., 2018. Bankers Bashing Back: Amoral CSR Justifications. Journal of Business Ethics, 147(2), pp. 401-418.
Ruth, W., 2018. ‘Worrying’: Companies’ reporting of climate risks goes ‘backwards’. The Sydney Morning hearld, 20 September, pp. 123-128.
Svahn, F., Mathiassen, L. & Lindgren, R., 2017. EMBRACING DIGITAL INNOVATION IN INCUMBENT FIRMS: HOW VOLVO CARS MANAGED COMPETING CONCERNS.. EBSCO Information Services, 41(1), pp. 239-254.
Truong, G., Partington, G. & Peat, M., 2008. Cost-of-Capital Estimation and Capital-Budgeting Practice in Australia. Australian Journal of Management, 33(1), pp. 95-121.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1), pp. 23-48.
Webster, T., 2017. Successful Ethical Decision-Making Practices from the Professional Accountants’ Perspective. ProQuest Dissertations Publishing, 3(1), pp. 142-156.
Wellmer, A., 2018. The Persistence of Modernity: Aesthetics, Ethics and Postmodernism. fourth ed. UK: Polity Press.
Wendt, K., 2018. Positive Impact Investing: A Sustainable Bridge between Strategy, Innovation, Change and Learning. first ed. Switzerland: Springer.
White, B. et al., 2018. The effect of the global financial crisis on preventable hospitalizations among the homeless in New York State. Journal of health services research & Policy, 7(3), pp. 121
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