Inventory Risk Assessment

The two key assertions at risk are as follows:

Valuation: As per the accounting standards, inventories are to be recognized at cost or net realizable value whichever is lower of the two. However, normal wastages are included in the valuation; abnormal wastages are to be specifically excluded from inventory valuation. Items involving technological hardware or software usually bear high degrees of risk of obsolescence as a lot of updating of it happens in the technology market all the time. Computing Solutions Limited operates in such an industry and hence and thus, that should be kept in mind. Testing for impairment could be a frequent phenomenon for the company to assess the true value to be reported (Bizfluent, 2017).

Obligation and Rights: The rights and ownership are covered under this assertion. As the company is in the practice of moving goods from a centrally located warehouse to regional warehouses at six different locations this assertion bears a potential risk. In transit, goods or goods held in consignment may be subjected to such risks. Since quite a few outside parties such as insurance provider, transport agent and the consignee are involved, rights and ownerships must be clearly understood (Alexander, 2016).

Substantive audit procedures: In relation to matter concerning the audit, these procedures are performed to gather conclusive evidences. These procedures are further divided into three different categories, which are Test of control, Test of detail and Analytical procedures. Depending upon the effectiveness and efficiency of the internal control system, the nature, extent and timing of substantive audit procedure may vary (Goldmann, 2016).

For Risks pertaining to Valuation: The auditor needs to perform a reconciliation of inventory by obtaining an item wise detailed list of inventories from the management and comparing that with the general ledger. For getting information on net realizable value, information available in the relevant market should be considered. Observation of physical inventory count is an important step in collecting audit evidence. Testing of pricing for the inventory also needs to be undertaken to gather additional audit evidence (Choy, 2018). The phenomenon should be repeated at least twice a year. Valuation of closing inventory is an area prone to manipulation and thus it requires dedicated attention of the auditor. 

For Obligations and Rights: This question comes into picture in the event of involvement of third parties. The agreements between the buyer and the seller would provide evidence of substantive nature and would give a clearer picture of the title of ownership and the risks and rewards associated with it. Another source of information on this regard would be the minutes of the meetings of the board (Belton, 2017).

Substantive Audit Procedures for Inventory

As per ASA 701, the auditor is expected to describe each key matter in detail. Subheadings and sections wise differentiation is made in the report. A specific disclosure regarding the use of professional judgment must be given for the matters covered under key matters. The auditor needs to make it clear through his report that the report on key matters is not a separate issue but a part of the entire audit report (Farmer, 2018). This enhanced audit reporting positively affects the transparency involved in the audit. The key audit matters draw the attention of the users of financial statements and they know clearly at to which aspects were the most discussed matters between the auditors and the management and those charged with the governance. They are made aware of the matters, which had warranted most detailed responses from the management. A decent flow of communication is also recorded between the auditors performing the audit and the people who oversee the governance aspects of the entity (Chron, 2017).

Inventory valuation may or may not become a key audit matter. If it involves a certain level of complexity, then it must become a key audit matter, as it is a significant part of the balance sheet and income statement. Since there is substantial amount of judgements and estimates by the management on valuing the inventory, the necessity for substantive evidence is felt more (Werner, 2017).

As per ASA 801, following are the disclosures required:

• The auditor is supposed to disclose facts under a separate heading as a part of a separate section. The paragraph should be positioned close to the audit opinion para. The information is to be put in the order of their importance (most important of the key matters to be written first).
• The auditor needs to provide reasoning and rationale for drawing attention to the matters mentioned therein. To the extent possible, use of technical words should be avoided to make it easier for the users of the report to understand what is being said(Trieu, 2017).
• Information should be given on the extent of disclosure and representation provided by the management.

There may be situations where the auditor feels as per the best of his judgement that no such key matters requiring special attention exists, a note regarding the same mist be given by the auditor in such scenarios. Where something has already been separately disclosed for meeting the compliance requirement of AS 701, then also such paragraph is not required. A disclosure regarding these situations still need to be given under the heading “key audit matters”.

The methods and procedure used by the auditor to collect audit evidences shall also be disclosed. The observations made which were used for conclusions are also required to be disclosed (Sithole, et al., 2017). 

Intellectual property has enormous significance in modern day scenario. If a study by the American Intellectual Property Law association are to be believed, Tangible assets stood at 80 percent of the total assets for a company in earlier times. That ratio has gone down significantly today and roughly, 75 percent of the assets held by an entity are intangibles.

Intellectual Property Risk Assessment

Two Key Assertions at risk:

Valuation: The valuations pertaining to intellectual property hinges on the nature and type of entity as the use of the intangible asset would be different in each of the categories of entity. If an intangible asset is covered under a trademark, copyright or a patent, its valuation turns out to be rather simple but in situations where it is not so covered such as know-how including knowledge level and expertise of employees, lists of customers, production channels and distributions networks, the computation turns out to be very complex (Linden & Freeman, 2017). Even for assets that seems equally valuable, assigning value to them becomes a tough task as linking them directly to an activity of earning revenue is difficult at times.

Obligations and Rights: Many issues pertaining to ownerships related to intellectual property occur. Many legal battles take place about the claims on ownership of copyrights and patents every year. For trademarks, the issues are comparatively less. Because of the lawsuits which take place, the companies must show contingent assets/liabilities till the time of the outcome of the legal ownership battle as until the proceeding of the court of law are concluded, they can’t be recognized. The reasons for a greater risk on assertion is mainly infringement of certain rights, deficiencies in title or license and joint ownership rights (Saeidi, 2012).

Substantive audit procedures: This is a systematic process. Gathering information about the asset including its nature forms the first step. Time should be spent on studying the legislations pertaining to the specific type of asset. Current and previous records should be studied to analyse the product’s history. Documents related to the title or the auditor to give a clear picture about the legal owner should examine ownership of the property. For assets that have not been acquired rather they have been developed by the entity over a period, attention needs to be paid to the research and developmental expenses (Defond & Lennox, 2017). It is vouching and verification needs to be conducted.

Interview is another important tool in gathering audit evidences. Staff responsible or the management should be interviewed to address any questions or doubts that may arise to the auditor. Both the users of the intellectual property as well as the personnel involved in the developmental aspect of it should be handed questionnaires and the responses obtained on them could help in gathering substantial evidences (Raiborn, et al., 2016). To unearth any potential for unauthorized access, surprise physical inspection should be made. Documents pertaining to ownership, policy guidelines and contracts entered with the government or other people should be examined. Industry relevant practices should be kept in mind in assessing the value of the assets. There should be defined scope for permissible deviation. 

Substantive Audit Procedures for Intellectual Property

According to the provisions contained in ASA 701, key audit matters can be defined as those issues that require dedicated special attention of the auditor while discharging his duties of performing the audit. Detailed description and information needs to be provided by an auditor for the matters that have been categorized as key audit matter (Dichev, 2017). The auditor should make sure that this piece of information is presented separately in different section under an appropriate heading.  The fact that the matters contained therein have been presented by use of professional judgment and there exists proper rationale for it must be clearly mentioned. It is to be clearly mentioned in the report by the auditor that the opinion expressed on key audit matters is not aloof and it is a part of the opinion overall of the financials. This is an enhanced form of audit reporting which was introduced in the year 2015 with an objective of increasing the level of transparency in financial reporting requirements. The shareholders and other stakeholders have been inquisitive about matters that warranted the maximum amount of discussions between the management and the auditors and those that required additional detailed information to be presented to the auditors by the people who have the governance responsibilities of the company (Jefferson, 2017). The key audit matters also inadvertently augur well in terms of communication standards between the auditors and the management. Because of the detailed discussions and additional importance given to these matters by the auditor, the management also feels the necessity to devote more time to focus on these issues knowing the fact that these matters would ultimately become a significant part of a public document in the form of audit report. Thus, a dual purpose is being served this way.

There is no hard and fast rule that intellectual property valuation must become a key audit matter. It all depends on the level of complexity involved in determining the valuation of these items. The items that are complex are mainly since their valuation involves certain degrees of estimations and approximations as well as the provision would require some level of prediction to be done by those responsible to present those figures (Knechel & Salterio, 2016). This makes it increasingly necessary for the auditor to accumulate audit evidences that are conclusive and substantive in nature to back the valuation assertions. In some of the cases where technical expertise or skill level or goodwill is involved, it becomes almost impossible to give an accurate picture of the valuation. 

Following are the disclosure requirements of ASA 701:

• The disclosures are to make using separate headings and sections wherever applicable. Care should be taken to ensure that the paragraph is near the audit opinion paragraph. The structuring is to be done by the auditor according to the level of importance.
• The auditor needs to provide reasoning to support his claim for drawing attention to the matter in question. Appropriate explanation regarding these needs to be included in the report. To make sure that the users of the report understand clearly as to what is being explained by the auditor, it is necessary that the auditor does not use jargons or terms which are technical.  There may be situations where the reader of the report or the user of the financial statement does not possess an advanced level of accounting and audit related knowledge. However, it is still necessary for them to be clear about what is being said or highlighted.
• The report should contain information depicting the quantum of disclosures and extensive representation the management has made related to the above-mentioned matters in question.
• There could be instances in audit depending on the nature of business and operations of the client being audited, that there the auditor believes there does not exists any matters that would require additional attention for the shareholders or other users of the financial statements. In such cases, he need not include matter in such paragraph. However, this does not absolve the auditor from making a statement or declaration in the audit report that no such matters of key nature exist for the period under audit. This statement also needs to be made under the appropriate heading of “Key audit matters”.
• The methods, tools and procedures used by the auditor in gathering audit evidences also needs to be disclosed by him.
• Whatever observations are made by the auditor while going through the process must disclosed and how these observations were incorporated in forming an overall conclusion or audit opinion also needs to be stat 

References

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