Question 1
While assessing the risk of material misstatement and determining the appropriate response with regard to the inventory of Computing Solutions Limited (Computing 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 5.2 times in 2017 and 3.8 times in 2018
(iii) Computing Solutions moved its inventory from a central warehouse to six new regional warehouses in March 2017
(iv) Inventory on hand at end of year represented 22 per cent of sales in 2018 and 18 per cent of sales in 2014
(v) Computing 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 audit senior with Howard & Associates and have been assigned to the audit of Beautiful Hair Ltd (Beautiful Hair).
In early 2018, Beautiful Hair acquired a small manufacturer of high-quality organic hair-styling
products, Shimmer Pty Ltd (Shimmer). Beautiful Hair's management had identified that Shimmer's line of products would fit extremely well with the Beautiful Hair business, and organized funding for the acquisition from Regional Bank.
Shimmer uses special formulas to create its product. Only the owner of Shimmer knows the secret ingredients for the formulas. These secret ingredients are apparently documented and held by Shimmer's solicitors.
Beautiful Hair's management has been advised that the intellectual property related to the formulas has the potential to be both a material and valuable asset and has been recognized as an intangible asset arising from the acquisition in accordance with accounting standard AASB 3.
REQUIRED
(a) Identify and explain the two key assertions most at risk in relation to the intellectual property intangible asset
(b) Identify and describe a substantive audit procedure 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.
Requirement: Using reference materials available on the internet, research the topic and prepare a report, fully referenced and up to 2,500 words (assignment in excess of 2,500 words will be penalized). Minimum of 8 academic references is required.