Key Assertions at Risk in Relation to Inventory
Assertions refer to the statement of the management regarding the inventory. The assertions at risk are completeness and existence. The assertion of completeness requires the recording of all inventories that were moved during the period. The financial statements of Computing Solutions Limited show that inventory was moved to six locations during in March 2017. This puts the company at high risk of misstating movement of all inventories implying that the inventories movement may not be recorded. The company moved its inventory to six different warehouses in one month. The financial statements may not account for these movements since they may not be recorded well or the accountant may ignore them (Lescourret 2017, p. 780).
Existence is another assertion that is at risk in Computing Solutions Limited. This assertion requires that inventories recorded should be a representation of items on hand at the end of the reporting period. Therefore, the inventory recorded at the end of the accounting period should represent items that the company has on hand at the end of the period. This assertion is at risk since its inventory is a representation of the percentage of sales. In the year 2017, the inventory represented 22% of sales while in 2014 it represented 18% of sales. The firm is at risk of misstating the inventory at the period end as it does not represent the items that the organization has on hand (Sharma and Muhammad 2018, p. 6).
In response to the assertion of completeness, the auditor carries out the audit procedures of checking the accuracy of inventory listing and recording and obtaining evidence of the existence of inventories in the warehouses. The auditor tests the accuracy of inventory listing to ensure that all the inventory moved during the period were captured in the recordings. Checking the accuracy of the recordings will require the auditor to compare the physical count of inventory movements and compare it with the recorded counts. This will help in determining if all the movements were recorded. The auditor also traces test counts of inventory movement and compares these movements with stock-take listings (?????? and Loseva 2015, p. 14).
Another audit procedure that the auditor could perform is verifying the existence of the inventory in the warehouses. Since inventory was moved to six new regional warehouses in March 2017, the auditor can choose to communicate with these warehouses to obtain evidence of the existence of stock. The evidence will show the amount of inventory and their price. The auditor then compares this with recordings of the company.
The auditor could perform substantive audit procedures of attending entity stock take and cut off procedures as a response to the risk of existence. The auditor can attend the stock take exercise of the entity to ascertain that prescribed procedures are followed in the recording of inventory. Attending the stock taking of the firm will also help the auditor identify if the inventory recorded represents the items on hand that the entity has at the end of the accounting period. The stocktaking exercise involves physically counting the stock and recording their amount. The exercise determines the value of inventory at a given time Habib, (2014). Auditor-Provided Tax Services and Stock Price Crash Risk SSRN Electronic Journal.
Substantive Audit Procedures for Inventory
The cut-off procedures can also be performed in response to the assertion of existence. The procedures ascertain whether inventories have been recorded in their correct periods (Blay & Geiger 2012 p. 600). Cut off procedures will assist the auditor in determining if there are any instances of double counting of stock. Double counting stock will put the company at risk since inventory will not represent the items on hand at the end of the period
The auditor is required to determine among the matters provided, the most significant issues in the period in which the auditing is conducted and therefore, term them as the key matters in the auditing of the financial statement. They are required to describe every matter identified as key in a separate part of the audit report, with the title “Key Audit Matters” unless provided and the introductory part as the matters which were made by a professional auditor with a professional judgment and it has been stated in the context of the current professional audit of the financial statements (Gimbar et al 2016 p. A25).
The auditor should not report any information described as the key audit matter which still requires the auditor to make an amendment required in the Section &05 of the communication of the auditors’ key standards. The description made by the auditor should, therefore, be provided with the disclosure of the part which the key audit standards are provided where the key auditor describes why the matter is termed as significant and why the matter was addressed by the auditor was addressed in the audit (Albring et al 2014).
The auditor is required to explain the matters which are significant to the audit. However, they are not required to disclose the matters under the circumstances that; the law precludes the disclosure of the matter or the adverse implication of disclosing the matter will outweigh the resultant benefits unless if the entity has publics disclosed the matter (Ratzinger-Sakel and Theis, 2017 p. 34). The auditor’s report on the key significant matters should, therefore, take into considerations the matters which may affect the business entity in case the information gets into the public. In the above case, the auditors should not disclose the key matters of the company’s formula for manufacturing quality hair because it will have adverse implications for the public.
It is an assertion that the information provided in the financial statements pertaining to the company’s property, plant, and equipment which were acquired by the company within the period under audit. The intellectual property of the formula of creating the product at Shimmers is not applied under this assertion because the product was not acquired within the period by the Shimmers. It is recorded by Beautiful Hairs Company because the company acquires Shimmers intellectual products and other assets acquired in the period under audit. The auditor will not recognize the intellectual property because the company did not acquire the product, therefore; it is difficult to audit the cost of the intellectual property. The auditor is obligated to advise the management to provide the information necessary for the management to use in acquiring the new company (Johnson 2008).
Key Assertions at Risk in Relation to Intellectual Property
This ensures that the information of the plant, assets, and equipment within the period under audit. On an auditor should ensure that all the disposals which occurred during the period have been recorded. The property, plant, and equipment of the Shimmer Company should be recorded because they were disposed of during the period in which the audit was done. The acquisition of the intellectual prospers, and the assets of Shimmers should be recorded by the management of Beautiful Hairs Company. The auditor should report to the management the truthfulness of the information of the plant, property, and equipment for Shimmer Company which occurred during the period.
- The procedure starts with reviewing the management’s procedures established which allow the audit team to identify the various subsequent events.
- The audit team reviews the meetings of all management of Shimmers Company for the period after the last reporting.
- The auditing teams review the Shimmer’s S latest financial reporting.
- The auditing team will also seek to review the budgets; cash flows records and the minutes of reports of the management.
- The team should also seek to interrogate the company’s lawyers to understand the laws covering the intellectual property.
- The auditing team needs to hold a discussion with the management to discuss the current and future issues about the organization.
- The team should inquire whether the issue of new shares or any other investment decisions has been made.
Key audit matters refer to those factual representations that according to the auditor’s opinion can have a significant impact on the audit of the company’s financial statements for the period under audit. Key performance matters are communicated by the management of the client firm. In determining key audit matters, the auditor should use the information provided by the management to determine the matters that require the auditor’s significant attention in performing the audit. In attaining these requirements, the auditor is required to take into account; Areas which are deemed to have a higher risk of misstatement, financial statements areas that with significant judgment on management accounting procedures with high uncertain approximations and the effect of the significant events when the audit is conducted (Boone et al 2012 p. 1180)
The auditor is required to determine among the matters provided, the most significant matters in the period in which the auditing is conducted and therefore, term them as the key matters in the auditing of the financial statement. They are required to describe every matter identified as key in a separate part of the audit report, with the title “Key Audit Matters” unless provided others and the introductory part as the matters which were made by a professional auditor with a professional judgment and it has been stated in the context of the current professional audit of the financial statements (Gorodilov 2013 p. 57).
The auditor should not report any information described as the key audit matter which still requires the auditor to make an amendment required in the Section &05 of the communication of the auditor’s key standards. The description made by the auditor should, therefore, be provided with the disclosure of the part (Lescourret, 2017, p. 790) which the key audit standards are provided where the key auditor describes why the matter is termed as significant and why the matter was addressed by the auditor was addressed in the audit.
The auditor is required to explain the matters which are significant to the audit. However, they are not required to disclose the matters under the circumstances that; the law precludes the disclosure of the matter or the adverse implication of disclosing the matter will outweigh the resultant benefits unless if the entity has publics disclosed the matter. The auditor’s report on the key significant matters should, therefore, take into considerations the matters which may affect the business entity in case the information gets into the public. In the above case, the auditors should not disclose the key matters of the company’s formula for manufacturing quality hair because it will have adverse implications for the public. (MIAO, 2018, np.).
Substantive Audit Procedures for Intellectual Property
The matters described as key audit matters which give rise to modified opinion or uncertainties which will possibly affect the company’s going concern are required to be termed as the key audit matters basing on their nature(Sneller et al 2016, np.).. Instead of reporting this circumstance in the significant key matters or under the Auditing Standards (Paragraph’s 13 and 14) the auditor is required to; report the matter in accordance to the Australian Auditing Standards and include the qualified opinion about the uncertain matters and the matters reported as the key significant matters. If the auditor does not find the key significant matters, he is required to disclose a report under, “Key significant matters” in the report.
The special formula for creating the product is a key matter in the case. The company’s going concern will be affected by the disclosure of the formula since the competitors may copy and affect the company’s going concern (Aobdia 2017, np.). The Shimmer Company needs to protect the information about product creation because it could affect the acquisition since the company it is the company’s intangible asset. The owner of the Shimmers Company should, therefore, protect the formula of the product. The auditor should treat this as significant matter and provide it in the Key matter in the auditor’s report.
An audit report to the management of the Beautiful Hair’s management should include the indication that the intellectual is important for the operation of the Shimmer product. The valuation of the company should, therefore, include the intellectual property as the main asset for the company and ensure that it’s including when they are acquiring the assets of the company (Zahedi et al 2016 p. 760). The audit report on the Key significant part should indicate the importance of the intellectual property on the value of the Shimmers Company. The documentation by the Shimmers solicitors should explain the significance of the matter in the financial statements.
References
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