Q During an audit, while assessing risk of material misstatement over the inventory for the period 2018. Home, - Audit Report INVENTORY SYSTEMDuring an audit, while assessing risk of material misstatement over the inventory for the period 2018. The auditor conducted an audit on advanced computer solutions limited, inventory system and make a comparison from the previous year 2017 with 2018. Through applying analytical procedures, the auditor identifies the following key points: § The inventory turnover is decreased in 2018 from the last year 2017. Previous year shows that inventory cycle takes 5.4 average time to convert their inventory into cash. In 2018, the inventory cycle reduced as now it takes only 3.5 average times. It means company is efficiently manages their inventory in 2017. The change in inventory time is reduced by 16 days. § One of the major reasons of reducing in inventory days occur due that advanced solutions limited acquire six new warehouses. For holding relevant inventory into warehouses reduces the risk of damage of theft of inventory. On another hand, the company hold only finished goods, whichwill sufficiently meet the orders from customers. § In 2018, the sales increased as compare t0 2017, which means the inventory-holding ratio increased by 8 % from the previous year. Due to increase in sales, the company increased their inventory raw material for meeting sales orders (Cristina IOVU, 2017). A. Assertions related to InventoryFor conducting an audit on inventory, the auditor identifies some risk after applying analytical procedures. Either the inventory increased exist or it may only be defined in the books of accounts. Another risk was identified as the inventory is measured on correct valuation basis 1. Occurrence ? Advanced computer solutions limited inventory system shows that in 2018 the company growth in their operations. The sales increased as the inventory consumption is also increased. For this purpose, increase in inventory, holding for the relevant warehouses into different regions also increased the cost of handling. In different regions of warehouses increased the chances of damage or theft of inventory because if proper resource is not available for check and balance on inventory. ? The company shows at year-end 26 % of inventory of their sales as compare to 2017, which was only 18 % of sales. The huge inventory holding results in obsolete. There is need to identify that company what method use to record and evaluate the inventory. The FIFO or AVCO method is used. The auditor should have to observe the inventory control system. On various warehouses system, the inventory is received and issued for manufacturing. The procedure needs to be identified that appropriate check and balance is reliable on inventory. 2. Valuation ? The auditor needs to identify that what method used by company in order to calculate the turnover ratio and inventory times. The company takes either average inventory of previous year or net yearend inventory. The company how estimates the inventory turnover cycle through using 365 days for the whole year. ? The risk involved for recording and calculating the inventory. The auditor needs to be identified that company uses either cost or NRV method. There is any subsequent change occur in policy and for recording the inventory. Either the cost is measured reliable or NRV is calculated net of selling expenses. Because this may directly affect the inventory consumption prices. ? The major risk is also involved that company makes a contract with government to supply goods, which was, win through lower costing. The auditor should need to be identify how the lower of actual 10 % cost reducing the contract affect the sales prices and overall prices of company sales. This may also affect the inventory turnover ratio and resulting in increased cost of inventory holding cost. B. Substantive Procedure Advanced computer solution limited during an audit identified with various risks involved in inventory system. The major risks involved with existence or accurate valuation of inventory that the financial statements do include any material misstatement related to inventory system (SitraselviChandren, January 2015). 1. Physical Verification ? The auditor should need to physically verify the inventory. In all warehouses, the inventory should be cross-matched with management inventory counts. ? The inventory count of previous year opening balances should be recalculated with purchases and inventory consumed. ? The auditor should evaluate the monthly statements with yearend inventory count. ? The inventory list should be prepared in accordance with most saleable and frequently used inventory. ? The obsolete and damaged inventory should be written off from the warehouses. ? The auditor needs to identify that how inventory reserves into warehouses. 2. Price calculation and evaluation ? The auditor should verify that how management record its inventory either through using cost model or NRV model. ? Inventory purchased on recent market prices should be cross-matched with master file of client to cross verify with the purchase order. ? The increase in priceseffects the increase in sales prices. The company either uses sale their products on margin basis or using mark-up. ? The inventory as at year-end should be cross-verified with the method of recording inventory as using FIFO or AVCO. ? The auditor needs to identify that sale made to government on 10 % less price how it affects their profit margins. C. Key Audit MattersOn getting reasonable knowledge of entity and their environment, the auditor may able to draw a conclusion. For the period of 2018, of audit of advanced solutions limited, the auditor from their due diligence and application of analytical procedures on inventory system. The auditor identifies some risks which directly affect the financial statements are materially misstated on some basis. The auditor should apply substantive procedures on identified risks to get the audit evidence that may have disclose audit report or management should modified the changes in their books of accounts. The auditor should accomplish the following procedures during an audit: (Auditing standard and assurance standards board, 2017) ü Financial statements should be understanding in order to make the disclosures that should be disclose according to materiality levels decided by the auditor after analysing inventory system. ü Identifies the inherent risks involved in inventory system that should be addressed to management and procedures should be applied to reduce the risk. For multiple warehouses, the management should maintain the record of issuance of inventory purchased and stock out for manufacturing. The monthly inventory should be count for reducing the risk of theft or damage. ü Substantive measurements and controls must be applied on asuitable judgement and on accounting approximations in order to decrease the detection risk. The management should identify at which amount inventory should be recorded. At lower of cost of NRV inventory is recorded. ü Make reasonable economic decisions based on the information in the financial statements and if there is any need for change required of the audit report. The management have to define duties as per segregation according to each level of authority that reduced the chances of controlling an inventory (Wendy J. Green, 2013). ü There should be consistency between the cost models used by the company. The advanced computer system either use FIFO or AVCO method. Because the inventory should be capitalized and expensed out to the extent of consumption. For matching concept, the revenue and expenses must be consistent. Consider the separate Key Audit Matters related to inventory control systemproximity to the auditor's opinion may give distinction to such information and acknowledge the supposed value of engagement-specific information to intended users. FIXED ASSET SYSTEMThe Green machine Ltd, is a manufacturing company, the auditor is appointed for the audit on fixed asset. The audit was conducted for the year 30 June 2018. The auditor receives the management letter from the previous year audit. The auditor found there is some flaws exist in managing and recording the fixed assets. Through applying analytical procedures, the auditor identifies the following key points: § The fixed asset schedule was not properly maintained because some of the financial figures shows that assets should be capitalized either some are expenses out. § The incorrect recording of transactions results in higher or lessor profit margins. § The management not able to record transactions through following the financial statements assertions, which shows that financial statements are materially misstated. § As per accounting standards green machine ltd not accurately apply the financial reporting standards, some of the assets are depreciated on lessor rates, which results that profits are over stated. § The financial statements are prepared on accounting standards which might results in auditor opinion may be modified. § The lastyear's audit report provides significant evidence for applying analytical and test of details(Kalegele and bukazachachage, 2016). A. Assertions related to Fixed AssetsFor conducting an audit of green machine Ltd, on fixed assets the auditor identifies some risk after applying analytical procedures. Either the fixed assets scheduleverified with current available assets or it may only be defined in books of accounts. Another risk was identified as fixed assets is measured on correct valuation basis (J, Timothy Beirness, 2014). 1. Accuracy ? The risks involved with that fixed asset schedule does not show some of new asset are purchased or either disposed of. ? The company have proper rights relates to ownership of holding assets. ? Company may run their operations through taking assets on rent or on lease. ? Management uses lessor rates of depreciation, which means company overstates their profits. ? Through using lessor rates of depreciation, company increased the economic life of asset. ? The reduction in carrying amount with lower amount overstated the assets. 2. Cost and Valuation ? The risks involved on which cost the asset is recorded in financial statements. ? The company either uses cost model of revaluation model for subsequent measurement. ? Company either revalue their assets through using fair value model. ? The management determines accurate useful life of asset or not. ? In terms of assets, if are leased or rented out at what cost it should be recorded in company books of accounts. ? The expenses incurred in terms of asset may recorded as expenses but should be capitalized in order to increase the efficiency of assets. ? For performing analytical procedures, at what ratio company acquire new assets and how it'saffecting to increase in operations of company and helps to increase in sales. B. Substantive Procedure Green Machine limited during an audit identified with various risks involved in fixed assets system. The major risks involved with rights and obligations or accurate valuation of fixed assets that the financial statements does include any material misstatement related to inventory system (Sorin, Domnisoru, 2008). 1. Verify fixed Asset schedule ? For conducting an evidence, the auditor, need to physically verify the fixed asset. ? The auditor should obtain the fixed asset schedule from management and must cross verify with the actual existence of fixed assets. ? The all fixed assets should be verified with purchase documents of assets for their ownership. ? All assets economic life must be identified either they are useful or should be disposed of. ? The auditor needs to make the fixed asset schedule and should be cross verified with the management report. ? Determine as per accounting standards application of depreciation rate. ? Identify the policy of management using straight line or reducing balance method are consistent through the years. 2. Cost and valuation ? The auditor should calculate the cost of assets and it's carrying value in order to determine the accurate value for recording the assets in books of accounts. ? The management should be addressed about using the accurate depreciation rates. ? The auditor should calculate each asset carrying value. ? The auditor must identify the fair value of asset that assets need to be revalued or charge if any impairment loss occurs. ? Auditor identifies all the cost that management recorded as expenses if that increased the asset efficiency it must be capitalized. C. Key Audit MattersAs ASA 701 determines the key audit matters that auditor should states the results conducting during an audit. After getting reasonable knowledge of entity and their environment, the auditor may able to draw a conclusion. For the period of 30 June2018, of audit of green machine limited, the auditor from their due diligence and application of analytical procedures on fixed asset system. The auditor identifies some risks which directly affect the financial statements are materially misstated on some basis. The auditor should apply substantive procedures on identified risks in order to get the audit evidence that results to made disclose in the audit report or management should modified the changes in their books of accounts. During an audit, the auditor should perform the following procedures: (Auditing standard and assurance standards board, 2017) ü After obtaining the understanding of entity and its internal control system the auditor should identifies the risk associated exist in fixed asset system. With association with management the auditor should verified the control system for purchasing and valuating the assets. ü For identification of risk associated with assets, the auditor should need to recognize, and management should take steps in order to protect against losses. ü In order to reduce the detection risk, substantive measurements and controls should be used on an appropriate judgement and on accounting estimates. The management should identify at which amount inventory should be recorded. The fixed assets either to be record on cost model or thorough revaluation model. ü The depreciation method should be consistent with company policy. Because using the different depreciation methods over the year the profits can be understated or overstated. Company need to identify that to what extent the expenditures capitalized and expensed out in income statement. (Wendy J. Green, 2013). Consider the separate Key Audit Matters related to fixed assets and if any differences occur, present to management and disclose in financial statements as supposed value of engagement-specific information to intended users.