Recognition and the Essential Procedure of Audit

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Question

1- Write a note on auditing in approx 2500 words with references to APA.

Answer

Introduction:

The requirements and procedure for the application of AUASB have been observed to be performed with the compliance of the “Auditing Standard ASA 701” according to the “section 227B of the Australian Securities and Investments Commission Act 2001”. According to the independent standard, the equivalent consideration is inferred which is based over the standard of the IFAC. Naturally, the matter has been depicted by an author that is affecting during the audit. The assessment of the areas of the risks is to be inferred with the material misstatement as well as the vital risk which is to be regarded according to the section ASA315. The risk is the ground of the inference of the study which is to be regarded with the property, plant as well as the equipment. In the second phase, this is the study which will state the procedure of the essential audit which is being referred to with the individual risk. In this report, the needs which are grounded on the “ASA 701 Communicating Key Audit Matters”, has been enlightened. This has been regarded with the standard of the rationale about the standard of the auditing. The further aspects regarding the reporting are to be inferred which is to be grounded over the delivery of an entire rationale because of the determination of the KAM. The analytical procedures have been using these indicators such as the ratio of the inventory turnover as well as same is associated along the method of auditing. The two significant risks are being identified and are discussed in the numerous segments of the study where the assertions are pertaining to the PPE. Secondly, the recognition and the essential procedure of audit are observed to be performing towards the individual risk (Carson, Fargher & Zhang, 2016). 

The answer to question no: 1

A) Explanation of the assertion of the two keys which is linked with the inventory:

The turnover of the inventory is observed to be decreased in the year 2018 to about 3.8 times as compared with that for the year 2017. However, the relocation of the inventory is the basis of the Advanced Computer Solution from the central warehouse until the six regional warehouses. Of the year 2018, the inventory at hand was 26% of the sales while 18% was the sales for the year 2017. A tender is owned by the company that is being linked with the supply of numerous items within the department of the government. This has also agreed for the items to be supplied at 10% lower of the cost price. This has considered both the chief audit risks which are being described considering the inventory which is closed and the value reduction of the at hand inventory. Thus, certain chief assertions are being linked with the study which is to be inferred with the computing solutions. This has been agreeing with the means of the supply of items at a reduced cost price about 10%, despite the inventory turnover (Wild, 2017). 
Both the risks of the inventory are:

  • The closing inventory value is being decreased: Observation is required to agree with the items supply which is 10% lesser than that of the inventory turnover. This is the ratio which is observed to be lessening from 2017 which is 5.4 times till 2018 which is 3.8 times. Again, it is also being observed regarding the increasing cost scope because of the inventory. The inventory bears some serious risk issues which were recognized with the developing concern. The closing inventory has regarded numerous categories of values which are being regarded with the company plan for shifting the inventory towards new six regional warehouses in March of the year 2018. The additional risk is being posed with this connection regarding the growing concern of the company as well as the material misstatement risk (Wild, 2017). 

  • The reduced value of the inventory at hand: The risk at hand is required to be evaluated with the observation of the entire sales of the company from 26% as well as 18% in 2017. This inventory reduction is regarded towards a threat posing of the throwing concern. The entire issue of the inventory is being observed to be decreasing from 5.4 times of the year 2017 till 3.8 times of the year 2018. However, the relocation of the inventory from the central warehouse until the six-regional warehouse is the basis of the advanced computer solution. A considerable threat is being observed to be posed which is pertaining to the on-hand inventory with the company (Wild, 2017). 

B) Two significant audit methods are being described that is performed with the identification of the risk:

The applicable inventory has regarded two usual audit procedures which is discerned with numerous techniques. It has included the physical count of the inventory, value items testing as well as inventory testing in the transit. FIFO, as well as LIFO, is to be recognized as the inventory valuation system as well as inventory allowances which are pertaining to the usual further procedures (Chou, 2015). The risk response is listed as:

  • WIP testing: The WIP that is the Work in Process inventory is a technique which is required to be implemented for the regulation of the percentage of the completion of the techniques of manufacturing. This is also significant for addressing the advanced tracking regarding inventory as well as the inventory value is reduced from 5.4 times to 3.8 times within the year 2017 to 2018.  

  • Overhead analysis of inventory: The inventory valuation techniques are providing an allowance to the auditors for the verification of the consistent with the utilization of the general ledger cost regarding the sourcing of overhead cost. This has been regarded to be conducive for determining the inventory at hand. The audit procedure has been contributing towards the suitable technique of the reduction of inventory at hand. 

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C) ASA 701 KAM is being considered in the report of the auditor and rationale is provided regarding the standard of auditing:

The ASA 701 Communicating KAM has been adopted which is regarded as significant for providing a fair and true opinion over the effects of adjustments linked with the inventory. This has become significant for the desired quantity level assessment about the inventory as well as the financial report accordingly with the “Corporations Act 2001”. According to the ASA 701, the audit opinion features is linked with the representation of the truth as well as the fair view of the recognition of the financial position of the company at the year-end. Further features are to be observed with the application of the truth as well as the fair view of the company depending over the “Corporations Regulations 2001” and AAS compliance (Al-Sulttan & Holbrook, 2015). 

The answer to Question no 2:

A) Recognition as well as the explanation of both the chief assertions at risk linked to PPE:

The PPE assertions which are noteworthy can be recognised with the existence and valuation.

  • Unsuitable division regarding capital expenditure and revenue: The problems are being identified within the case study that is being linked with distinction within the capital expenditure and the revenue expenditure. Apart from this, when few items are to be capitalised, then others are comprised within the repairs and in the IS maintenance. However, regarding the assets of the company, the segregation of the revenue expenditure as well as the capital expenditure has become vital which is required to be visualised within the general ledger of the financial statements. This is the risk which is being identified as the classification risk (Lennox, Schmidt & Thompson, 2018). 

  • Depreciation calculation: According to the depreciation policy, the buildings are to be visualised along the depreciation which is being charged about 2% till 4% trailing the straight line. However, it is being observed that the plant as well as the machinery to be charging depreciation of about 5% to 10% over the fixtures, equipment as well as the fittings over the basis of straight line. Apart from this, the depreciation rate within a few of the categories is being observed to be low considerably. This is being regarded as the company's major concern while reporting beneath the fixed assets. Again, the organisation is being regarded over the approach of being affected by technology (Pittman, Stein & Valentine, 2019).

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B) Both operational procedures of auditing are described that can be achieved for replying each risk:

  • Capital revenue items and the capital expenditure is being classified distinctly:
    The auditors are made responsible for ensuring regarding the items which are to be considered within the capital expenditure like the repairs, consumables, interest on capital, raw material, wages, selling as well as distribution expenditure, development expenditure, and renewals. Consequently, the classification of the items beneath the revenue expenditure has been desired by the company according to the purchases, wages, and interest over the borrowing, payment of royalty as well as the loss which is pertaining to the fixed asset selling. The revenue expenditure is being classified for the recognition of the maintenance and the repairs clearly. Again, this is not to be considered as per the capital items. When in some instances, the spending cost over the assets is extended, and then these are the costs which are being combined within the repairs and the maintenance. It is being observed for capitalizing in a suitable manner (Alles et al., 2018). 

  • Value reconciliation according to the assets of the GL and the TB: 
    The financial statement of the entity is being required to be maintained by the auditor. General ledger and trial balance are also required to be maintained by the auditor that is to be audited. Thus, the auditor is required to cross check the regarding the relevant link before the work of the GL and the TB regarding such overheads along with the book value of the fixed assets and the depreciation which is being accumulated that is being essential for the construction of a strong financial position. The auditor is required to be ensuring regarding the depreciation schedule that is to be utilised by the auditor for the calculation, as well as the depreciation expenses, are required to be controlled and the controlling of the depreciation values. The working paper is also required to be reviewed for the reconciliation of the fixed assets within a certain financial statement. The depreciation rates are also being required to be reviewed, and the allocation is being performed over the fixed assets. The reconciliation procedure is required to be maintained further with the maintenance of the register regarding the fixed asset which has become necessary for the maintenance of the existence, accuracy, and completeness within the financial report. The depreciation rates are required to be reviewed by the auditor with the allocation of the fixed assets. Again, the reconciling procedure is required to be aided with the maintenance of a fixed asset for complying with the “IAS 36 Impairment”. This is the method which is required to be applied for the impairment over annual basis (Hall, 2015). 

C) Prerequisite description of the ASA 701 Communicating key audit matters in the report of the auditor and the justification for the standard of the auditing:

The ASA 701 KAM provision is required to be implemented for the delivery of the depreciation conditions along the annual rate of 5% regarding building and 20% regarding equipment. The aggravated depreciation rate which is being reduced is based on the fixed rate maintenance which has amounted towards the loss pertaining deficit within a certain year. The KAM communicating purpose is inferred with the value announcement within the report of the auditor. Disclosures are being made regarding the fixed assets within a better way. the KAM communication purpose is to be regarded with the value announcement within the report of the auditor as well as the fixed assets are to be disclosed in a better manner. While, the suitable treatment which is pertaining over the audit risk that is to be considered with the ASA 705 application that is to be based over the audit opinion which is being modified related with the circumstances which are linked with the growing concern (Brunelli, 2018). The recognition, as well as the treatment of this issue, is being performed with the addressing of the issue. Thus, it is required to determine regarding the fixed asset maintenance as well as the aggravated depreciation decreased rate has been amounting towards the loss pertaining deficit within a certain year. The KAM communication purpose is inferred with the value announcement regarding this in the report of the auditor and disclosures are performed regarding the fixed assets within an enhanced manner (Vik & Walter, 2017). 

Conclusion:

It is being observed from the study regarding the disclosure of both the chief assertions which is related towards the inventory which is discerned within the decreasing value form regarding the inventory at hand as well as the closing inventory disclosure. However, within the case of the scope which is increasing regarding the cost pertaining towards the inventory, then, in that case, the regulation of the WIP inventory is to be performed with the end of the items that are required to be manufactured. This is being observed to be helpful regarding the aspects of the tracking of better inventory that is to be conducive along with the decreasing value of the inventory which is being decreased from 5.4 times in the year 2017 till 3.8 times in the year 2018. Additionally, for the determination of the abnormal cost that is to be chargeable along with the expenses, the assistance of overhead analysis is required for the evaluation of the consistency as well as the validity of the closing inventory. The depreciation risk is to be evident further with the unsuitable division of the capital components as well as revenue and is applicable further with the depreciation computation. The KAM communication is being linked with the declaration of fixed assets in a suitable manner. However, the application of the ASA705 is to be inferred with the chief applicable pertaining treatment. This is being observed with the consistency testing and pertaining validity towards the closing inventory. Again, the risk is to be regarded with the depreciation which is to be determined with the unsuitable capital segregation as well as the items of the revenue which is being selected towards the expenditure. The audit risk treatment is to be regarded with the transparent classification of the capital expenditure, capital revenue as well as reconciliation of the book value which is being linked with the assets of the GL and the TB.

Reference:

  • Alles, M., Brennan, G., Kogan, A. & Vasarhelyi, M.A., (2018). Continuous monitoring of business process controls A pilot implementation of a continuous auditing system at Siemens. In Continuous Auditing: Theory and Application (pp. 219-246). Emerald Publishing Limited.

  • Al-Sulttan, S. & Holbrook, J., (2015). Audit of peri-operative management of diabetic patients undergoing surgery and elective procedures. Anaesthesia, 70(2), pp.5-44.

  • Brunelli, S., 2018. Audit Reporting for Going Concern Uncertainty: Global Trends and the Case Study of Italy. Springer.

  • Carson, E., Fargher, N. & Zhang, Y., (2016). Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.

  • Chou, D.C., (2015). Cloud computing risk and audit issues. Computer Standards & Interfaces, 42, pp.137-142.

  • Hall, J.A., (2015). Information technology auditing. Cengage Learning.

  • Lennox, C.S., Schmidt, J.J. & Thompson, A., (2018). Is the expanded model of audit reporting informative to investors? Evidence from the UK.

  • Pittman, J., Stein, S.E. & Valentine, D.F., (2019). Audit Partners’ Risk Tolerance and the Impact on Audit Quality. Available at SSRN 3311682.

  • Vik, C. & Walter, M.C., (2017). The reporting practices of key audit matters in the big five audit firms in Norway (Master's thesis, BI Norwegian Business School).

  • Wild, T., (2017). Best practice in inventory management. Routledge.

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