Requirement A
The application of different techniques and processes of auditing helps the auditors in gaining knowledge about the presence of any kind of material missstements in the financial reports and statements of their client organizations. For this reason, the process of auditing involves the inspection of all the required financial statements and reports of the companies. More specifically, the need for the auditors is the examination of the assertions used by the management of the client companies while preparing the financial statements and reports (Louwers et al. 2015). The managements of the business organizations make some inherent and unambiguous claims at the time to prepare the financial statements and reports; and these claims are called the assertions. The responsibility of the auditors lies in expressing any risks in the used assertions as the key audit matters and conduct the required substantive audit procedures to minimize these assertion related risks. In Australia, the auditors have the obligation of following the principles and standards of ASA 701 Communicating Key Audit Matters while examining the used audit assertions.
As per the provide information of Computing Solutions Limited (Computing Solutions), Completeness and Accuracy are the two management assertions at risk and the following part shows the discussion:
This assertion puts the obligation on the company’s management to keep record of the information of the inventory transactions in the relevant financial statements and failure in doing so can lead to major material missstements in the financial statements. Not recording to the purchased inventory in the relevant inventory book is an example of the risk in this assertion (Kharisova and Kozlova 2014). The presence of ineffective internal control is the major reason for the occurrence of risk in this assertion. In case of the situation of Computing Solutions, there might be the presence of wrong accounting of inventory of the company that led to the inclusion of 18 percent sales of 2014 in the inventory of 2018. This sends the indication of wrongness in the inventory treatments in Computing Solutions.
Accuracy
This particular assertion helps the managements of the companies to identify the errors in the process of inventory management. According to the rule of this assertion, it is the responsibility of the managements of the companies to conduct effective physical count of the inventory with the aim to make sure the presence of correct number of inventory (AICPA 2018). According to the information of Computing Solutions, the business inventories of Computing Solutions have been moved to six diverse regional warehouses from the central warehouse in March 2017. This whole process to move the inventory might result to the incorrect mathematical count of the inventory by the responsible personnel. The presence of any mistake in the mathematical count of the inventories can lead to the reduction in the ration of inventory turnover to 3.8 in the year 2018 from 5.2 in the year 2017 (Bumgarner and Vasarhelyi 2018).
The auditors have the option to assess the assertion risk of completeness of the inventory with the help of a certain substantive procedure and it is the reconciliation of the whole inventory count to the general ledger. Under this process, the main responsibility of the auditors is to trace the valuation of the company inventory obtained from the values of the ledgers. With the help of this process, it will be possible for the auditors to spot any kind of mistake in the inventory management process of the company (van Buuren et al. 2014).
Completeness
Accuracy in inventory management is another assertion risk of inventory and the auditors have the option for the implementation of precise substantive audit procedure to minimize the risk; and the process is to observe the process of physical inventory count of the company. Under this process, it is needed for the auditors to take some major actions like detailed discussion about the inventory counting process, observation of the inventory counting process, testing the sample of the inventory of Computing Solutions in order to find any error in the inventory management process and others. In case of Computing Solutions, the requirement for the auditor is to observe the inventory counting process in all six regional warehouses so that mistakes can be spotted (Antonio 2014).
As per the regulations of ASA 701 Communicating Key Audit Matters, there are four requirements that the auditors are needed to consider in case of assertion risk assessment. Identify and determine the key audit matters by taking into account the material misstatement risks are the first requirement (auasb.gov.au 2018). Communicating the identified key audit matters that are to describe these key audit issues with the assistance of different subheadings is the second requirement. Commutation of all of these identified key audit matters with the staffs accountable for organizational governance is the third requirement. Documenting the information related to the identification of key audit matters is considered as the last requirements of ASA 701 (auasb.gov.au 2018).
The application of the principles of ASA 701 showst that the identified assertions risks of Computing Solutions can be regarded as the key audit matters in the presence of certain reasons. The first reason is the presence of material missstements in the financial statements of Computing Solutions due to the assertions risks that can lead to incorrect understanding of the financial position of the organization. The second reason is the presence of uncertain and risky judgments used by the management in the inventory management as it can also lead to material misstatements in the financial statements (Appelbaum and Nehmer 2017).
Thus, the auditors are responsible for disclosing the information of the identified key audit matters in the ‘Key Audit Matter’ section of the annual reports. There are two subsections under this section named ‘Key Audit Matters’. In one of the subsections, the responsibility of the auditors is to disclose the reasons that make them considering these factors as the key audit matters. Under the other subsection, the responsibility of the auditor is the disclosure of the applied audit techniques in order to minimize the assertion risks on the financial statements of Computing Solutions. These are the responsibilities of the auditors of Computing Solutions (Olsen 2017).
According to the provided information about Beautiful Hair Limited (Beautiful Hair), Ownership and Occurrence are the two management assertions at risk and the following is discussion about these assertions:
In relation to the intellectual property valuation of secret formula of Beautiful Hair, ownership possesses utmost impotence as a management assertion. With the assistance of this particular assertion, the managements of the companies get the chance to testify the fact that whether the company has the option to lawfully claim of an intellectual property in the company balance sheet. According to the provide information about Beautiful Hair, the company has all the reason to consider the secret ingredients related intellectual property as a valuable asset as it can have material impact on the financial statements. In this situation, the absence of ownership can pose the threat of audit assertion (Chan and Vasarhelyi 2018).
Accuracy
Occurrence is also a crucial assertion used by the managements of the companies for the valuation of intellectual property. The analysis of this assertion helps in finding out the originality of all the transactions related to the acquisition of the intellectual properties. According to the given information about Beautiful Hair, after consideration of all the relevant factors, secret formula intellectual property has been considered as an asset with major impact on the financial statements. For this reason, in case there is any error or mistake in the occurrence of the transaction of the intellectual property acquisition, there can be major threat of audit assertion (Kogan et al. 2014).
Determination as well as implementation of the relevant substantive audit procedures is the next process of the auditors after the identification of the assertion risks.
As a part of the substantive audit procedure for the assertion of ownership of the secret formula, the responsibility of the auditor of Beautiful Hair is to examine as well as inspect all the title related document of the secret formula and the main reason for this step is to acquire confirmation on the fact that all the title documents of the intellectual property are in the name of Beautiful Hair. The possession documents of the property can be considered as an alternative. These documents work as the required evidences of the acquisition of the intellectual property by the company. The company does not possess any legal right to use the property if they do not have the title documents in their name (Xu et al. 2013).
Occurrence of the necessary transactions for the acquisition of the intellectual property is the next assertion risk. With the aim to inspect this particular audit assertion in Beautiful Hair, the auditor of the company should adopt the substantive audit procedure of testing the occurrence of all the required transactions for the acquisition of the intellectual property. The main way to accomplish this job is the testing and inspecting all the documents of intellectual property acquisition (Titera 2013).
The regulations and standards of ASA 701 Communicating Key Audit Matters, it is the responsibility of the auditors to consider all the four requirements while analyzing the key audit matters of the audit clients (auasb.gov.au 2018). According to the first requirement of ASA 701, the auditors are responsible for the identification as well as determination of the key audit matters after examining and inspecting all the relevant aspects of the financial statements. According to the second requirement of ASA 701, the auditors of the companies are also responsible for communicating these key audit matters in the presence of the major audit judgments (auasb.gov.au 2018). As per the third requirement of ASA 701, it is the responsibility of the auditors to ensure the proper communication of these key audit matters with the organizations staffs who have the responsibility to ensure proper govern nave within the organization. As per the last requirement, the auditors are responsible for ensuring proper documentation of the identified key audit matters (auasb.gov.au 2018).
Requirement B
In the case of Beautiful Hair, the application of the principles and standards states that the auditor of the company has all the reasons to consider their key assertions risks as the key audit matters. The main reason that make these incidents as key audit matters is that the intellectual property is valuable in nature as it has crucial effect on the financial statements of the company. In addition, in case the company does not consider the reporting of this intellectual property in the balance sheet, there will be major material impact on the financial position of Beautiful Hair (Brasel et al. 2016).
According to ASA 701, after the identification of the key audit matters related to the assertion risks, the requirement for the auditor of Beautiful Hair is to disclose the rationales for considering these matters as the key audit matters. There are two other factors that the auditor is needed to consider. First, the auditor is needed to disclose the reasons for considering the facts as the key audit matters. After that, the auditor is needed to disclose the substantive audit procedures for minimizing these key audit matters (Carson, Fargher and Zhang 2016).
Conclusion
The above whole discussion shows that the risks in the assertions of the management can have major material impact on the financial statements of the companies. For this reason, the requirement for the auditors is to take into consideration the effects of audit assertion risks. According to the above discussion, the auditors have the certain requirements to follow. The responsibilities of the auditors are the identification as well as determination of the key audit maters, communication of these matters with the relevant parties and documentation of these matters in the annual reports of the companies. All these requirements for the auditors related to key audit matters can be seen in ASA 701 Communicating Key Audit Matters. For this reason, it is the obligation on the auditors to make compliance with the standards of ASA 701 Communicating Key Audit Matters.
References
AICPA, 2018. Assessing and Responding to Audit Risk in a Financial Statement Audit, October 2016. John Wiley & Sons.
Antonio, G.R., 2014. Continuous auditing: Developing automated audit systems for fraud and error detections. Journal of Economics, Business & Accountancy Ventura, 17(1), pp.127-144.
Appelbaum, D. and Nehmer, R.A., 2017. Using Drones in Internal and External Audits: An Exploratory Framework. Journal of Emerging Technologies in Accounting, 14(1), pp.99-113.
Auasb.gov.au., (2018). Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report. [online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 1 Nov. 2018].
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review, 91(5), pp.1345-1362.
Bumgarner, N. and Vasarhelyi, M.A., 2018. Continuous auditing—a new view. In Continuous Auditing: Theory and Application (pp. 7-51). Emerald Publishing Limited.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Kharisova, F.I. and Kozlova, N.N., 2014. Applying the category of «Assertions (or preconditions)» In audit of financial statement. Mediterranean Journal of Social Sciences, 5(24), p.180.
Kogan, A., Alles, M.G., Vasarhelyi, M.A. and Wu, J., 2014. Design and evaluation of a continuous data level auditing system. Auditing: A Journal of Practice & Theory, 33(4), pp.221-245.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
Olsen, C., 2017. The Experimental Instrument. In A Study of Professional Skepticism (pp. 47-54). Springer, Cham.
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of Information Systems, 27(1), pp.325-331.
van Buuren, J., Koch, C., van Nieuw Amerongen, N. and Wright, A.M., 2014. The use of business risk audit perspectives by non-Big 4 audit firms. Auditing: A Journal of Practice & Theory, 33(3), pp.105-128.
Xu, Y., Carson, E., Fargher, N. and Jiang, L., 2013. Responses by Australian auditors to the global financial crisis. Accounting & Finance, 53(1), pp.301-338.
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