Inventory Assertions at Risk
Inventory assertions most at risks are as follows –
- Valuation and allocation – assertion of allocation or valuation deal with the issue that revenue, expenses, asset or liability has been recorded at appropriate amounts.
- Existence – assertion of occurrence or existence deal with the issue that liabilities or assets actually exist on the given date. Further, it is related to whether the recorded transactions have taken place during the particular period (Brandas, Stirbu and Didraga 2013).
Answer b
Substantive audit procedure
For allocation or valuation risk the auditor shall carry out the following procedure –
- The auditor shall confirm the balance of account receivable with the supporting documents. It can further be confirmed through ageing analysis.
- Inspect the condition of asset to confirm that the purchaser will not be delivered with defective items as the goods will e provided with reduced prices (Kharisova and Kozlova 2014).
- Further, the auditor shall check whether the goods to be provided are moved on the basis of FIFO basis otherwise the goods may become obsolete.
For existence risk the auditor shall carry out the following procedure –
- Auditor shall inspect the contract terms with the debtor to check the amount of account receivable and date of transaction
- Inspecting the items as per inventory records to determine if items are held for long time as it may lead to obsolete.
- Physically inspect the items to find any item with out of date that shall be discarded or removed from the inventory register
- The auditor shall also check whether any item is there in consignment as the unsold consigned items shall be returned to the supplier. Further, as the items are not purchased it shall not be included in inventories (Knechel and Salterio 2016).
Answer c
Requirement of ASA 701 regarding communication of key audit matters
As per Para 9 of ASA 701, the auditor must determine the matters required significant attention from the auditor with those who are charged with the governance, while performing the audit. Auditor must describe each of the key audit matters through appropriate subheading, under separate section of auditor’s report. It shall be included under the head “Key audit matters”. Introductory language of this section shall state –
- Key audit maters are the matters those are as per auditor’s professional judgement are of most importance under audit of the annual financial report for present period and
- Matters are notified in context of financial report audit as whole. Further, while forming the opinion on that by the auditor, the auditor does not form any distinct opinion regarding these matters (Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report 2018).
Client’s return risk shall be communicated as key audit matter while providing audit. Disclosures will be as follows –
Return rate of inventories were significantly high
As at 31st March 2018 the consolidated financial statement included an amount of $ 60 million towards inventory return. Refer to note 9 “Inventory” for summary of the balance as at 31st March 2018.
Question 2
Answer a
Intellectual property intangible asset assertions most at risks are as follows –
- Ownership – to check whether Beautiful Hair Ltd actually have the ownership of Shimmer Pty Ltd’s secret formula (Mock and Fukukawa 2015).
- Occurrence – occurrence is the assertion that the transaction related to intellectual property intangible asset has been taken place.
Answer b
- Substantive procedure required to check the assertion related to ownership is to examine the documents related to title or the deed for the ownership proof. Further, the auditors shall verify the ownership of Shimmer Pty Ltd regarding the secret ingredients for special formula. Further the auditor shall determine that the intangible asset fulfil the recognition criteria as per AASB 138 to be recognized by Beautiful Hair Ltd as intangible asset in its balance sheet. Further, the transaction shall fulfil the acquisition criteria as per AASB 3 to be recorded as asset acquisition in the books of Beautiful Hair Ltd (Johnstone, Gramling and Rittenberg 2013).
- Substantive procedure required to check the assertion related to occurrence is to examine the documents related to addition to intangible asset of the company. Further, as per AASB 10 the company shall be established as an acquirer that is the company has obtained the control on Shimmer Pty Ltd. If as per AASB 10 the company cannot be regarded as the acquirer, it cannot recognize the intangible asset in its balance sheet. Further, the intangible asset must be capable of being divided or separated from the acquiree and transferred, sold, rented or licensed with identifiable liability or asset for related contract (Sultana et al. 2015).
Answer c
Requirement of ASA 701 regarding communication of the key audit matters
Key audit matters provide the users with additional information regarding financial statements that assists them to understand the matter in better way. However, the auditor must state each of the key audit matters through proper subheading, under separate section of auditor’s report (Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report 2018). It shall be included under the head “Key audit matters”. Introductory language of this section shall state –
- Matters are notified in context of financial report audit as whole. Further, while forming the opinion on that by the auditor, the auditor does not form any separate opinion regarding these matters (Cordo? and Fülöp 2015) and
- Key audit maters are the matters those are as per the auditor’s professional judgement are of most importance under audit of the financial report for recent period
Client’s return risk shall be communicated as key audit matter while providing audit. Disclosures will be as follows –
Intellectual property intangible asset has been recognized
As at 31st March 2018 the consolidated financial statement included an amount of $ 125 million towards intangible asset. Refer to note 12 “Intangible asset” for summary of the balance as at 31st March 2018.
However, the auditor must not communicate any matter under key audit matter under auditor’s report if audit report requires that the opinion is to be modified as per ASA 705.
Reference
Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report., 2018.
Brandas, C., Stirbu, D. and Didraga, O., 2013. Integrated approach model of risk, control and auditing of accounting information systems. Informatica Economica, 17(4), pp.87-95.
Cordo?, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of Key Audit Matters. Accounting & Management Information Systems/Contabilitate si Informatica de Gestiune, 14(1).
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to conducting a quality audit. Cengage learning.
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.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Mock, T.J. and Fukukawa, H., 2015. Auditors’ risk assessments: The effects of elicitation approach and assertion framing. Behavioral Research in Accounting, 28(2), pp.75-84.
Sultana, N., Singh, H. and Van der Zahn, J.L.M., 2015. Audit committee characteristics and audit report lag. International Journal of Auditing, 19(2), pp.72-87.
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