Identifying And Mitigating Inventory Risks In The Audit Of Advanced Computer Solutions Limited

Key Assertions at Risk in Relation to Inventory

As per the given study it can be inferred that best-selling computer presentation package of “Advanced Computer Solutions Limited (Advanced Computer Solutions)” for the 30 June 2018 has been facing major problem owing to the returns which suspected as a major software problem. It can be also inferred that as per the closing inventory, inventory turned over an average of 5.4 times in 2017 and 3.8 times during 2018. The company is further seen to move its inventory from a fundamental storerooms to six new regional warehouses in March 2018. In addition to this it can be also seen that “Inventory on hand” at end of year is being represented with 26 per cent of sales in 2018 and 18 per cent of sales in 2017. Some of the substantial evidences show that “Advanced Computer Solutions Limited” had recently won the tender for the supply of the large government department pertaining to different types of the products. For the purpose of winning the tender, the competitors were able to gain a considerable position in the market characterized as public-sector. However, the company decided to supply the items at 10 per cent below their cost price. It is also given that the first shipment was distributed to the administration in the middle of July 2018. As per the discourse mentioned the two key assertions at risk in relation to inventory are stated as follows:

1. Additional cost for transfer of inventory- It is clearly evident that not only Advanced Computer Solutions Limited’s closing inventory reduced from 5.4 times in 2017 and 3.8 times during 2018, company is further seen to move its inventory from a chief warehouse to six new zonal warehouses in March 2018. This activity is subject to add to additional operational cost for the company associated to the inventory.
2. Risk of bearing loss for selling the items below cost price- It can be clearly depicted that Advanced Computer Solutions Limited” has approved to supply the matters at 10 per cent lower than their cost price after making an attempt to win the tender for the supply of the large government department pertaining to different types of the products. This is also seen to be subject to future losses in case the company is not able to win the tender.

The inventory audit is considered to go through different types of analytical procedures for checking the inventory methods applied by the company and also confirming the financial records and actual physical count of the goods. In addition to this, it needs to be also seen that inventory acts as the key to the company’s financial statements being used as the collateral for the future financial needs. Therefore, it is essential for “Advanced Computer Solutions Limited”. It is typically seen that companies apply the internal controls such as a custodian of inventory for accessing the partial records and reducing the risks of the inventory. The main audit procedure as per the given scenario needs to be dealt with issues associated to the additional cost for transfer of inventory and risk of bearing loss for selling the items below cost price. Henceforth, the two inventory audit procedure for eliminating such problem are listed as follows:

1. Comparison of gross margin and inventory turnover ratio with previous years with previous years – It needs to be seen that as per the comparison of the gross margin with previous year “Advanced Computer Solutions Limited” has the scope of identifying the area of maximum weakness which has led to closing inventory reduced from 5.4 times in 2017 and 3.8 times during 2018. This decision will allow the company to know about the tracking the cost for moving its register from a central warehouse to six new regional warehouses in March 2018.
2. A comparison of the inventory unit cost with previous years- The company needs to consider the count of inventory before and after for knowing about the scope of risk that the company can afford to take for maintaining a stable inventory.  The inventory count in the before method will involve allocating appropriate representative to test the samples in advance. The inventory count during method will involve the observing the count of the inventory which is presently available in hand and allow the company to identify the specific cost for winning the tender.

 The given matter is depicted to related to “Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report” and is pursuant with the necessities of the judicial requirements and the strategic direction. The AUASB issues such a standard for mandating the various types of communication related to the auditor’s reports of audits of listed entities (Carson, Zhang and Fargher 2014). This has further enabled the auditors in deciding what to include in the KAM in their auditor’s reports. Some of the other disclosure of the study has suggested on determining the matters which are communicated with governance and matters with required significant auditor attention. In addition to this, this standard has also stated on the accounting areas with higher risk assessment which is significant with events or transactions. This is directly associated with identifying the exiting problems related to additional cost for transfer of inventory (Carson, Zhang and Fargher 2014).

Substantive Audit Procedures to Address Identified Risks

The revelations which are essential in KAM Section of the Auditor’s report as obligatory under ASA 70 is often depicted with how an auditor describe the individual KAM. Some of the other relevant disclosure as per the case study needs to be considered with circumstances which matter for determining the KAM as disclosures to be communicated auditor’s report (Vik and Walter 2017). The KAM has further stated about the about the audit documentation requirements associated with KAM. It needs to be further discerned that the Auditing standard conforms to the IS  of auditing ISA 701 which is seen to be based on the independence of the auditors concerning the over conduct in the audit which is set with the intentions of the AUASB (Huggins, Simnett and Hargovan 2015). The equivalent requirements are further seen to be set with the various types of the relevant standards which are seen to be based on the requirements and related other explanatory material which are seen to be inclusive of the appropriate ethical requirements are per the Auditing standard. This is further seen with the compliance of the Auditing Standard of ISA 701. The aforementioned audit Standards are seen to be addressed with number of issues which are depicted to be discerned with enhancing the overall value of the auditors and adding to the transparency of the audit matters. Communication of the KAM is also seen to be relevant to the various types of the other factors which are directly associated to the number of factors related to the understanding the key audit risks. This is further considered with comparison of the inventory unit cost with previous years (Siriwardane et al. 2014).

As per the given study it needs to be seen that Green Machine Ltd attained a summary of the PPE which is identified with cost and accumulated depreciation. It is further seen that evaluation of the management letter has shown the preceding year’s audit which has shown some of the problems based on the inferring the distinction between capital and revenue expenditure. The main items are further seen to be considered with the number of other factors which are capitalized and included under the repairs and maintenance in the income statement. The company has been also able to discern the risks which are seen to be based on the rates applied to some assets have been too low. The company has further informed about the depreciation policy of 4% straight line on the buildings, 10% straight line on the Plant and machinery and 20% on the Fixtures fittings and equipment (Zuca 2015). The two main risk assertions for PPE are stated below as follows:

1. Making distinction between expenditure of capital and revenue nature- It has been discerned from the earlier year’s audit that there were some problems associated to making out the dissimilarity among capital and revenue expenditure. Moreover, some items were also seen to be capitalized whereas they should have been expensed and other CI were encompassed in repairs and maintenance in the IS. This may be considered as a material misstatement which may be having detrimental impact in the financial statement of the company (Lee 2017).
2. Risk Related to the depreciation calculation- This risk is particularly evident with depreciation rates among the various types of the categories which are determined with concerns that rates applied to some assets have been too low. This is directly seen to be violating the predetermined PPE rates such as 4% straight line on the buildings, 10% straight line on the Plant and machinery and 20% on the Fixtures fittings and equipment (Neovius and Duncan 2017).

ASA 701 Communicating Key Audit Matters in the Auditor’s Report and its Requirements

PPE is identified as an influential contributor for the asset side of the balance sheet which gets considerable emphasis while computing the materiality and as the depreciation amount is charged on the gross margin. Some of the most noted problems of the present case are evident with making out the distinction between capital and revenue expenditure (Louwers et al. 2015). Moreover, some items were also seen to be capitalized whereas they needed to be expensed and other CI were comprised in repairs and maintenance in the IS. In addition to this, the other problems are seen with depreciation rates among the various types of the categories which are determined with concerns that rates applied to some assets have been not in compliance with the predetermined depreciation rates (Ghanbari and Sarfia 2016). The two main treatments for such a cse are stated below as follows:

1. Freehold Property-The company needs to ensure that it is agreeing on the opening balances to the previous years working papers/financial statement. In addition to this, it needs to also make sure that the aforementioned risk is able to be mitigated with the adoption of the range of techniques which are seen to be directly related to the inspecting the areas such as title deeds of the properties, valuations been carried out in the present year, inspection of the property and confirming the form the bank pertaining to any charges associated to the property. This will helpful in getting a clear picture of the fixed assets such as PPE and making a clear distinction between capital and revenue expenditure (Kellenberg and Levinson 2016).
2. Revaluing PPE from beforehand- The company needs to ensure that rates allotted to all the assets are done appropriately. This needs to ensure with revising the rates for the depreciation and ensure that depreciation policy of 4% straight line on the buildings, 10% straight line on the Plant and machinery and 20% on the Fixtures fittings and equipment is being followed. This needs to be also implemented with reviewing the list of items which are capital in nature. The plant and machinery need to compared with the appropriate depreciation charges based on category. There should be re-perform depreciation calculations by referring to the asset register of the company. This will be able t ensure that the company has been able to apply the depreciation policy of 4% straight line on the buildings, 10% straight line on the Plant and machinery and 20% on the Fixtures fittings and equipment (Abernathy et al.2015).

As per the application of “Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report” it needs to be discerned that there has been no depreciation on the financial statements. Moreover, as per the given case study the company has followed depreciation policy of 4% straight line on the buildings, 10% straight line on the Plant and machinery and 20% on the Fixtures fittings and equipment. This matter not seen to be complying with the provision for depreciation made on a straight-line basis (Dennis et al. 2018). As per “Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report” the provision for the depreciation as per straight line should be formed with 5% for the building and 20% for the equipment (Mügge 2014).  in a similar manner the fixed assets are needed to be reduced as per the accumulated depreciation incurred in the year. The communication of the KAM pertaining to depreciation policies are further seen to be based on number of issues which are directly associated to the accounting areas with higher risk assessment which is significant with events or transactions. In the given assertion there remained some problems associated to making out the distinction between capital and revenue outflow. This is in directly relation to the problem of going concern as per the explanatory guidance for the mandatory requirements (Dennis et al. 2018).

In addition to this, the various types of the other factors such as concerns that rates applied to some assets have been too low are associated to the uncertainty for the outcomes dependent on the future events. This is also clearly mentioned in the “Auditing Standard ASA 701”. There has been significant number of other issues which are seen to be directly associated to meet uncertainties in extreme cases. Moreover, in such an event of the charging of the different depreciation rates the company should state the same in the additional disclosure which will specify about the application of the particular Accounting Standard and prevent any instance of material misstatement or other uncertainties associated to the problem of going concern (Gaynor et al. 2014).  

Determining Key Audit Matters for Advanced Computer Solutions Limited and their Disclosure

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