Reference no: EM132201999 , Length: word count:2500

Assignment

Question 1

While assessing the risk of material misstatement and determining the appropriate response with regard to the inventory of Advanced Computer Solutions Limited (Advanced Computer Solutions) for the 30 June 2018 audit, you become aware of the following information:

(i) The best-selling computer presentation package has been experiencing a high level of returns owing to suspected software problems
(ii) Based on closing inventory, inventory turned over an average of 5.4 times in 2017 and 3.8 times in 2018
(iii) Advanced Computer Solutions moved its inventory from a central warehouse to six new regional warehouses in March 2018
(iv) Inventory on hand at end of year represented 26 per cent of sales in 2018 and 18 per cent of sales in 2017
(v) Advanced Computer Solutions has recently won a tender to supply a large government department with various products. In order to win the tender and prevent competitors from gaining a foothold in the public sector market, Computing Solutions agreed to supply the items at 10 per cent below their cost price. The first shipment is due to be delivered to the government department in the middle of July 2018.

REQUIRED

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

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

(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 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.

Question 2

You are the auditor of Green Machine Ltd, a manufacturer. You have obtained a summary of the property, plant and equipment for the year ended 30 June 2018, which identifies cost and accumulated depreciation brought forward, additions and disposals in the year and depreciation charges.

A review of the management letter from the previous year's audit shows that there were some problems in relation to making a distinction between capital and revenue expenditure; some items were capitalized when they should have been expensed and other capital items were included in repairs and maintenance in the income statement.

Another risk identified from prior years relates to depreciation calculations: there is a range of depreciation rates within categories and there has been concern that the rates applied to some assets have been too low. The depreciation policy disclosed in the financial report shows:
• Building: 2 - 4% straight line
• Plant and machinery: 5 - 10% straight line
• Fixtures fittings and equipment: 5 - 20% straight line

REQUIRED

(a) Identify and explain the two key assertions at risk in relation to property, plant and equipment
(b) Identify and describe two substantive audit procedures that you could perform in response to each risk identified above
(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 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.