Question

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.

Answer 1

(a) Two key assertions at risk w.r.t. inventory:

1. Accuracy & Valuation: Transactions are recorded at the correct amount, in the appropriate account, on a timely basis in the proper period & all the figures presented in the financial statement are accurate & based on proper valuations. In this case, Advanced computer solutions limited has agreed to provide items at Cost price less 10%. Therefore, Inventory needs to be correctly valued at Net realisable value. Further, their best selling computer presentation package is owing some suspected software problems. Therefore, Entity needs to identify the Net Realisable value of those selling products in closing inventory.

2. Presentation & Disclosure: All information and disclosures regarding the company's financial statement are included in the statement, and that all the information presented in the statement is presented in a fair & understanding manner. In this case, Entity should disclose the software problems in their flagship product which might impact the sales of flagship product. Further, should also disclose the tender that they have won on price which is Cost price less 10%.

(b) two substantive audit procedures should be perform in response to each risk identified in part (a)

As per ASA 501,

1. Physical counting of Inventory: Auditor should perform sample physical count of inventory in their 6 regional warehosue based on materiality as on financial reporting date. This will provide some assurance to auditors that inventory presented in financial statement is fair & correct value.

2. Verify the fair value of inventory held by company as on financial reporting date. As they have government tender with Cost price less 10%. Therefore, audit check should be performed on fair valuation of inventory.

(c) Requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s Report and the rationale for this auditing standard:

The auditor shall describe each key audit matter, using "inventory valuation" as heading, in a separate section of the auditor’s report under the heading “Key Audit Matters,”

(a) Need to assess inventory valuation due to software issues in flagship product of company.

(b) Auditor needs to provide opinion based on significant impact of inventory valuation in the financial statement.

(c)