AUDITING CASE STUDY

Introduction

In this assignment, a case study will be discussed upon two questions that are based on service provided to customers. Different case scenarios of both cases analysis have been done and based on that relevant justifications have been provided. So, it can be said that two questions have different ways to define but it is clear to understand that some are about auditing basis and some of those are IT computer basis (Knechel & Salterio, 2016 p.78). Here for the first question, a computer manufacturing company and its inventory issues related problems that should have been analysed regarding auditing standards and their applications. On the other hand, the second case scenario deals with the analysis of two company’s collaboration to make positive increase their productivity. Both the case scenarios have been analysed based on audit procedures that need to be taken to control any sort of future risks to their projects.

Question 1

Two key assertions of risk concerning inventory

Before starting the discussion about two key assertions of risk concerning inventory, there a need to discuss what is Risk at first. The risk is an organisation’s financial statement that has been misstated of material misstatement to a material degree(Kemshall, 2019 p.45). These all risks are followed by every auditor of each different companies. This observation of auditors regarding an organisation’s risks has been followed through two types of levels. These types of observations are as follows as written below -

Before starting the discussion about two assertions about relation to inventory risks, there are also some assertions of an audit. First of these assertions are Accuracy in what records according to organisation’s financial statement all records should have recorded accurately (Buckley & Casson, 2016 p.98). Others are completeness in statements, cut off proper entries, existence, obligations and rights, understandability of every entry, correct valuation. Key assertions at risk concerning inventory are as follows -

Nature of store - For any type of retail store, inventory means materials. With the changes of every season of nature value of goods or materials got decreased if it stored for more times than its validation.

Special promotion - It is difficult to sell any type of goods or product when it got special branding. Also, it is so difficult to return any unsold product to the supplier because it has crossed its promotional period.

In relation to the case it has been witnessed that different forms of risk has been witnessed into Computing Solutions Limited there has been issues which have been witnessed into the best selling presentation package. There has been inventory return which has been witnessed and the amount carriage inward is seen witnessing a high level of issue. In the audit conducted on 30th June 2019 inventory turnover ratio has shown a percentage of 3.8 times which is less than the one witnessed in 2018 of 5.2 times. The incorporation of the decentralized location is another key change which has been witnessed into the organization leading to issue of shipping to multiple distribution location for Computing Solutions Limited leading to effect into the bargaining power with suppliers. Control of operation and cultural aspect of the organization is also being affected with this particular aspect. There is a form of dilution which takes place and hands over a risk for Computing Solutions Limited in relation to their decentralized approach. Working to win over competition with the use of price cut is not an activity which is going to bring in best possible profit for the organization. They need to work with a proper plan of action which is going to help them sustain into the market even after the issue which has been witnessed in relation to the software product issues which has been witnessed.

2. Two substantive audit procedures in response to each risk identified

The auditors apply a method to calculate to see that the inventory cost and financial statement is balanced or they are the same. This method calls an inventory audit. It always follows a general way procedure of auditing(Graham, 2015 p.21). It is been followed always by the auditors that the figure mentioned to them as inventory price will get respectively correct to them self. Until they recognise the figure as a correct amount they will not believe in a given figure. Here are four procedures of inventory auditing discussed briefly below -

Cut off - Auditors always follows that how efficiently a warehouse keeper keeps his countings for every item even at the time of physical count of inventory.

Observe physical count of inventory - Auditors always wants to make sure that the figures and accounts related to inventories are counted properly by the storekeeper or warehouse keeper. Even they discuss all the matters and processes with that person but they always want satisfaction to count of inventory as warehouse holder.

Reconcile with general ledger - They always follow company’s general ledgers to define all the inventory costs are the same as mentioned and they are posted or carried forward to accounting statement properly.

High-value test - They spend more time when they saw a high-value material or product in the inventory and tried to fill accurate cost and checked that this amount is transferred to the company's general ledger properly.

Classification testing is a key auditing procedure which can be incorporated into Computing Solutions Limited leading to understanding of each produce into the development of software has been taken into account in a correct sequence or not. The introduction of completeness testing is also a key inclusion which can be introduced into Computing Solution Limited for the carried inwards of software issue which has been witnessed into their accounting report. This helps in understanding if proper audit has been carried or not in relation to the product which is made available into the organization or not. This will help in understanding the amount of products which has returned and how much loss it has generated for Computing Solutions Limited.

The issue pertaining to inventory turnover ratio which has been witnessed could be well understood and rectified with the help of valuation testing which helps in determining whether the value at which the assets and liabilities are being recorded are correct or not. The use of cutoff testing which will help the inventory turnover ratio issue by checking whether transactions recorded are within the report period which is correct or not.

3. Explanation of ASA 701 communicating audit matter in auditor’s report

In ASA 701 Communicating Key Audit matter, the main aim is to represent Australian equivalent in auditing standards in independent auditing report. Auditing standard ASA 701 communicating key audit matter to every independent auditor had been made by The Auditing and Assurance Standards Board (AUASB). There has been situated in section 227B and section 336 in the Australian Securities and Investments Commission Act 2001 and Corporations act, 2001 respectively(Hall, 2015 p.65). Applications as this act followed by auditors are applicable in such situations -

An audit for any of such half-year or financial full-year report in a financial year according to the Corporations Act, 2001.

A fully completed set of a financial report or any of the audit of a financial statement for any type of purpose in the assessment year.

This standard of auditing applied appropriately to audit any type of historical information relating to the financial statement.

This accounting standard on auditing standards deal with the responsibility of an auditor for communication relates with audit report's key matters that are significantly shown by an auditor. The auditor's communication about a report that is independent and reflects all the communication to an organisation even about their governance to understand all matters that are entity related (Flood, 2015 p.42). A special report also needs a clear clarification of financial report to an auditor for better result.

3.1 Explanation of key audit matters

Audit of a statement of financial report of a certain or current period is the most significant for those matters that have been taken a type of personal judgement for any of auditing report. This type of auditing reports has been always related to some key audit matters that have occurred during a certain period or the current period(Jabri, 2017 p.68). This key audit matter standard allows reflecting the communication related to the auditing report even with its form to communicate with such content and auditors judgement to an organisation. A performance about the audit to perform better transparency by the auditor's report communicative value has been for the enhancement of the purpose of communicating a key matter of audit (Griffiths, 2016 p.98). One can say the definition of Key Audit Matter is the way of an auditor’s judgement related to that financial report during assessment year's correct or significant records taken from an organisation’s books. Key Audit Matter can relate with communicated matters selected by an auditor from an organisation’s governance. This can indicate the relation of communication between governance reports and auditor's independent judgment report (Lusk & Halperin, 2016). Regarding this, it can also be an important report for that organisation that communicates and gives their all recorded entries from their books of journals or ledgers or anything else.

3.2 Disclosures required under key audit matter

Key Audit Matter has been more effective when an independent audit report reveals every minimum important point to this report. This effectiveness gets a manner of increase as the auditor's independent report included of all internal or external matters related to the organisation make a result analysing the financial report (Blouch et al, 2016). These types of reports are collaborated with the given information from governance of company and given financial records. Though a company's governance gives wrong information to any auditor then that auditor has to check all given information properly as per instructions are given by the government (Abuaddous et al, 2015). First auditor's independent report that includes all the content about key audit matters has been revealed as per 31st of a march of any year ending. After these reports, a new assessment year has starts to make or arrive a new opportunity to both auditor and governance for communication to give again related reports regarding their financial statement. Though previous report had been better for company then a new report will make more effect on the financial statement of governance. It is also better for an auditor to analyse a well informed financial statement instead of a false report to analyse. The Key Audit Matter defines limited matter to its significance in current or previous year, where the auditor's reference has been an audit opinion in a financial statement as a presentation of comparative numbers.

Question 2

1. Two key assertions at risk to intellectual property

Parents, trademarks, copyright, trade secrets and other types of designs have been defined as intellectual property. Intellectual property may be included in both tangible assets and intangible assets and is wrapped with a huge range of protected rights as per legal way. In spite of these modes, intangible forms of such assets as goodwill, the rights of any contract, and human capital(Lee, 2017). In this time of economy, for every human being or an individual has an unbelievable increase in knowledge. Though real estate and inventory products are tangible but today some of intangible assets are most important to every organisation as per economic and strategic way of vision. There is a silent war where intangible assets play a dynamic role against tangible assets(Carlstedt & Jacobsson, 2017). Despite a hard competition, it can be said that intangible assets are winner of this war. A first-party and a third-party risk is a proper intellectual property risk as per the risk management of traditional perspective. There is no way to fix this properly but if it used as a way of disciplined manner, it can minimize risk of intellectual property also with integrated use of intellectual risk management (Francis & Gunn, 2015). It requires an approach that is coordinated with some of departments such as management of risk, financial development, legal development, product development and marketing development to find out their risk. Then after analysing it, try to solve it and manage the risk properly.

Availability risk: This is a substantial form of risk which is associated with any form of intellectual property. In relation to Shimmer Pty Ltd it is quite significant to bring in best possible information in relation to their products but certain aspects needs to be well protected so that duplicity can be prevented. The case works with the aspect of organization of Beautiful Hair Ltd and Shimmer Pty Ltd who have formed an acquisition. This acquisition would incorporate products of Shimmer Pty Ltd into the services being provided by Beautiful Hair Ltd. The aspect of intellectual property comes into the aspect of Shimmer Pty Ltd with the formula they have introduced into their products making them special.

Business Value: It is quite significant to bring in the understanding of what value is being posted by the intellectual property into the business. This aspect is needs to be well understood by Beautiful Hair Ltd to understand how fruitful it will be to create an acquisition with the organization. This will be a pivotal aspect for both the organization to bring in better results in relation to the acquisition which is taking place (Yan, Z et al 2017). IP can be a key aspect which can be incorporated towards better mitigation of competition and understand associated business value.

2. Substantive audit procedure in response to each risk identified

A process of substantive audit process or procedure is a step that creates evidence of conclusion regarding the five assertions of asset that includes completeness, rights, disclosure, existence, and valuation of assets and financial statement’s accounts. As a substantive process qualifies enough documentation to competent with another auditor who can continue with those documents with the same process and make the same conclusion as per those legal papers(Greitzer et al, 2016). Substantial performance has always been performed by an auditor because he only can detect the faults done by own or from another auditor (Glazer, 2016). Though an auditor makes some misstatements into annual financial report then it can be checked out by an auditor because it is common to him to detect a little significant problem from a huge statement of annual financial report to analyse (Carlstedt & Jacobsson, 2017). An auditor, who is observing all the assertion of validity according to company's fixed assets that can be conducted an observation of physical assets or tangible than a test to evaluate all tangible assets to see that all records are accurate and after investing is there an impairment of assets.

In relation to the risk which has been witnessed pertaining to intellectual property there are several methods that can be incorporated to mitigate these risks. It is quite significant for the legal advisor present in Shimmer Pty Ltd to bring in substantial understanding of the IP aspect to different individuals present in both the organization. The risk which is introduced into the organization needs to be understood and given significance. The incorporation of substantive procedure for managing the risk will relate to valuing the IP as an intangible asset which is set by Australian accounting standard (Glazer, M., 2016). Different organization mentions their tangible assets into their IP but in the case of Shimmer it has been witnessed as a key introduction of their secret formula as an intangible asset which leads to less risk pertaining to business.

It is quite important for Shimmer Pty Ltd and Beautiful Hair Ltd to work with an auditing procedure towards mitigating the risk which is related to identification of business value. The risk needs to follow the procedure to first underpin the significance which the risk is going to post on the functioning of the organization. The second step would introduce that the likelihood towards the occurrence of material mismanagement needs to be well defined. The class of the transaction needs to be understood by the organization so that it can be separated from other transactions. The next step introduces the control measure pre-used by the concern towards mitigation of risk and understanding whether it is manual or automatic. The introduction of audit evidence is a key which helps in understanding the way this risk can be well mitigated in relation to the intellectual property issue which takes place in the acquisition between Shimmer Pty Ltd and Beautiful Hair Ltd. As opined by Kyle (2016), the method which is being incorporated by the auditor is related to the nature of the risk which has been witnessed into the organization. The auditor towards this case needs to undermine certain aspects which include introduction of a control environment, availability of relevant information with the auditor related to both Shimmer and Beautiful Hairs transactions and most importantly the nature of the risk.

3. Explanation of ASA 701 communicating audit matter in auditor’s report

Communicating with key audit matters in the auditing report from these accounting standards, it always deals with the responsibility of an auditor. It indicates to the communications done by an auditor and contents of communication in the auditor’s report and it is intended to auditor’s personal judgement report. The communicative value of auditor's report has been tried to enhance the communicative way to key audit matters performing a provision of better delivery of annual audit report and annual financial report. Communicating key audit matters are been intended to the users who provide an annual financial report. It also helps in summarizing additional information for a report to fulfil necessary requirements of various auditors regarding their professional judgement. Financial strength of a business organization can be easily determined that can help in taking necessary decisions regarding investing activities in a business. Profit generation and its application for various associated members of the organization can be easily estimated based on an analysis of audit reports prepared by external and internal auditors.

3.1 Explanation of key audit matters

New International Standard on auditing (ISA) ISA 701, is a big change in standard of Auditor Reporting. The decision of auditor to communicate on key audit matter in report of auditor is applied by ISA and also to financial statements of an entity (Yan, Moffitt, and Vasarhelyi, 2017, p. 320). ISA is also responsible when auditor tries to frame laws and regulation for counting on key audit matters. So it is relevant to different practitioners who also include small and medium sized practitioners (SMPs) (Omolaye. and Jacob, 2017). Auditor’s judgments are taken into account so as what should be communicated to auditor’s report and what should be the content and pattern of such communication (Nwaobia, Luke, and Theophilus, 2016 p. 230). Key audit matters are communicated to increase value of communication of report of auditor by giving transparency on performance of audit. Key audit matters refers to judgment which is professional in nature, were important for getting audit’s financial report of current period (Lusk and Halperin, 2016 p.113).

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