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ACC 707 Auditing and Assurance Services Individual Assignment


Auditing and Assurance Services Individual Assignment



            This report will include the requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report. There are two case studies in the report based upon whom the report had been made. The case studies mention the name of two organizations, which are Computing Solutions Limited and Beautiful Hair Ltd.  The report will contain the key matters of the above-mentioned case studies and their disclosure in the case studies. The risk related to key auditing matters and the substantive audit procedure for minimizing the risk had been identified.  In addition, the rationale for selecting for auditing matters and its disclosures had been given.

Question 1

 (a)  Identify and explain the two key assertions at risk in relation to inventory

Two key assertions at risk in relation to inventory are existence and valuation. The first key assertion, which is existence deals with auditing assets like inventory (Knechel & Salterio, 2016). The Statement of Accountant Standard (SAS) No 31 define this assertion as an assertion that checks that whether assets like an inventory of an organization exist or the recorded transaction involving that asset had happened on a particular given date. For example, in this case, it will check whether the amounts of inventory are there in the six new regional warehouses of Computing Solutions Limited (Computing Solutions) on a given date. Another key assertion related to inventory is defined in the SAS 31 as the assertion, which checks that all aspects of financial statements like an asset, liabilities, equity, revenue, and expense are recorded with an accurate value of the each of them. For example, in this case, it will check that the value of the inventory on hand at end of the financial year 2018 is not either overvalued or undervalued in any way and truly represent 22 percent of sales in the financial year 2018.

(b)  Identify and describe two substantive audit procedures that you could perform in response to each risk identified above.

            The two substantive audit procedures that can be performed in the response of each risk identified above are observing the physical inventory count and matching purchasing record of inventory with inventory in the warehouse or sold (Mamo, 2016). The first substantive procedure is that auditor can personally check the physical count of inventory by visiting these six new regional warehouses of the organization, count of the amount of inventory present there, and ask for an explanation if any difference is seen with the recorded amount from the management. The second substantive procedure of audit is the crosschecking of the purchase record of Computing Solutions with its inventory present in a warehouse or sold.  The auditor can use check the purchase record of inventory with sales record and the physical count of inventory in the six regional warehouses of the Computing Solutions.

(c)  Explain the requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report and the rationale for this auditing standard. Determine if the above matters are key audit matters, providing a full rationale for the determination. If it is determined that they are Key Audit Matters, provide the disclosures which are required in Key Audit Matters Section of the Auditor’s report as required under ASA 701.

One of the key requirements of ASA701 communicating key audit reports is the opinion of the auditor should be based overall financial statement of the organization. A26 defines additional information of the key auditing matters should be emphasized for communication. A27 tells to include the description of the key auditing matters in the Illustrations 1 and 2 of the Appendix to proposed ISA 700 (Revised) in a situation where financial statement and auditor’s report show the same opinions. This requirement is made for providing a guideline for making the auditor report.

There are two key requirements of ASA701 communicating Key Audit Matters regarding placement of key matters in the Auditor’s report. The first key requirement of ASA701 is placing the auditor’s opinion and separate Key Matters section in close proximity to give importance to that information. These sections had been made for an easy understanding of the fact whether the auditing report disagrees with the financial statement of the company. The second requirement is that proper heading and subheading to be used to categorize and differentiate different key audit matters section in an audit report. This is done to show the relative importance of different information in the audit report.  This falls under auditing standard A28 and A29. A30 tells the auditors that description of the key auditing matters should be accurate and detailed form. This had been made for an easy understanding of the auditing report. 

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