ACCT1059 Auditing 1 Final Assessment Answer

QUESTION 1

PART A: Company Analysis 

Identify and explain TWO accounts that you believe would warrant additional audit effort in the year 2022. Identify and explain TWO relevant assertions at risk for each account.

The "Inventories" and "Revenue" accounts are very important to thoroughly audit during the 2022 audit of Myer. There are a number of potential dangers and misstatements that might affect these accounts, which are crucial to the company's financial stability.

Inventories:

• Myer has a significant amount of its assets devoted to its inventory, which plays a crucial role in the success of the company. Therefore, it is crucial to check this report for correctness. Several major claims about stock levels need to be checked:
• Auditors are tasked with verifying the stock physically exists and is really Myer's to sell. This is crucial in order to forestall any possible misrepresentation or fraud resulting from theft or unapproved disposals.
• Integrity: All of Myer's stock must be accounted for in the financial accounts. Incomplete financial reporting may be avoided if auditors make sure nothing important has been overlooked.
• The market potential of a product is a key factor to consider when determining an inventory's worth. Inflating assets and giving a false picture of the financial situation is a risk of any overvaluation. Reliable financial reporting relies heavily on precise valuations.
• Auditors must show that Myer is the sole owner of all inventory and bears full responsibility for all associated costs and obligations. This safeguards the integrity of the company's inventory-related financial statements.

Revenue:

• Profits are essential to the success of Myer's business. Auditors need to pay close attention to crucial statements to defend against any fraudulent acts or mistakes.
• Occurrence: Auditors must verify the authenticity of the documented monetary dealings. This prevents the possibility of the firm recording false or counterfeit income.
• Accuracy: All transactions related to sales that occurred during the reporting period should be documented in the books correctly. Any omission may cause revenue estimates to be inaccurately low.
• The sales transactions must be recorded precisely, both quantitatively and chronologically. Inaccuracies in revenue recognition, such as duplicate counting or incorrectly dated transactions, are avoided.
• Revenue manipulation across reporting periods may be avoided if all sales activity is documented in the correct accounting period.

In conclusion, 2022 is a pivotal year for ensuring the continued accuracy of Myer's financial statements by conducting a comprehensive audit of Inventories and Revenue. By responding to these claims, fraud, misrepresentation, and inaccurate financial reporting risks may be reduced.

QUESTION 1

PART B 

Identify ONE audit procedure to test each assertion listed for each account in Question 1 Part (a) above. You should have 4 separate audit procedures to test the previously identified 4 assertions.

Assertion testing and auditing processes

Inventory Account

• Existence

Physically counting inventory and comparing the findings to the books is a standard auditing process.

•  Completeness

Procedure for auditing inventory control systems to guarantee that every stock is counted and accounted for.

•  Valuation

Checking the accuracy and consistency of the company's inventory valuation techniques is a standard auditing practise.

•  Rights and Duties

Procedure for auditing: Check the company's contracts and other paperwork to make sure it has full ownership of the inventory and is liable for all associated expenses and responsibilities.

Revenue Account

• Existence or occurrence

To ensure all claimed sales were made, auditors must check supporting documents including invoices and shipping receipts.

•  Indefectibility

Procedure during an audit: Verify that all sales transactions have been properly reported in the financial statements by testing the company's sales recording methods.

•  Accuracy

Procedure for auditing: Reconcile a subset of sales transactions to verify accurate amounts and time periods were recorded.

• Cutoff

Procedure for auditing: Check sales transactions in the last days of the reporting period to make sure they were reported in the right period.

These are only some of the audit techniques that might be used to verify the specified claims. The auditor's risk assessment and the unique circumstances at Myer will determine whether audit methods are carried out.

QUESTION 2

PART A: Key audit matters and analysis

Compare and contrast the KAMS disclosed by each firm in 2019 and 2022 (i.e., What are the common KAMs disclosed? Which KAMs are unique to each company?

Myer:

Year Key Adit Matters

2019 Revenue Recognition

2022 Revenue recognition, Property, plant and equipment

Competitor:

Year Key Audit Matters

2019 Revenue recognition, Inventory valuation

2022 Revenue recognition, Inventory valuation, Trade receivables

Common KAMs:

Both Myer and their opponent revealed revenue recognition as a KAM in both 2019 and 2022. This is probable because revenue recognition is a complicated and subjective accounting procedure, and it is consequently open to fraud and mistakes.

Unique KAMs:

Myer reported inventory value as a KAM in 2022, while its rival did not. This may be because Myer has a big volume of inventory, and inventory valuation is a difficult and crucial procedure for the organisation.

The competition reported trade receivables as a KAM in 2022, while Myer did not. This may be because the competition has a considerable quantity of trade receivables, and trade receivables are subject to impairment losses.

Informativeness of KAM disclosures:

Overall, the KAM disclosure provided by Myer and its competition are useful. They give consumers of the audit report with insights into the precise areas of the financial statements that the auditor has determined to be the most important. However, there are several places where the disclosures may be enhanced. For example,

both firms might disclose additional data regarding the particular risks and processes that the auditor has reviewed in respect to each KAM.

PART B

Based on these answers, do you think the audit expectation gap has been tackled by the KAM disclosures?

If you believe that the audit expectation gap could be improved by changing the current presentation/ content of KAMs, provide a recommendation for audit regulators and audit practitioners regarding changes to KAMs disclosure you would like to see as an investor. Explain your analysis with reference to academic research.

• The audit expectation gap, or the chasm between what auditors promise and what they deliver in audit reports, has been an issue for a long time in the auditing profession. There has been a need to better inform readers of financial statements about the auditor's position and duties, and Key Audit Matter (KAM) disclosures have evolved as a method to do just that. While KAM disclosures are an improvement over the status quo, they still have potential to grow in terms of their ability to close the audit expectation gap.
• If you want to know where the auditors have focused their time and energy, you may learn a lot from the KAM disclosures they make. By showing the process's inner workings in more detail, users may better prepare for the audit and lower their expectations. To close the audit expectation gap, however, studies have shown that KAM disclosures might be improved. (KAM Liao et al, 2023).

Suggestions for Auditors and Auditors Regulators:

• One major suggestion for both audit authorities and practitioners is to require firms to provide more comprehensive KAM disclosures. Each KAM's related risks and auditing processes should be included in these disclosures. These disclosures would provide a fuller view of the audit process by diving deeper into the underlying complexity (Rousseau, 2022). The auditor's strategy for high-risk areas and the reasons for additional attention would be more transparent to users of financial statements. In addition to increasing openness, comprehensive KAM disclosures would aid users in determining the financial statements' credibility.
• In addition, requiring organisations to disclose KAM changes from one year to the next is a helpful start towards closing the audit expectation gap. By comparing two different points in time, users may see how a company's risk profile has changed and where auditors are putting their attention. Stakeholders might then evaluate the auditor's responsiveness to changing issues and management's capacity to deal with a changing risk picture. A deeper comprehension of a company's financial stability and the audit process' capacity to keep it stable might result from this historical viewpoint.

In conclusion, KAM disclosures are a step in the right direction towards reducing the audit expectation gap by providing customers with a fuller picture of how audits are conducted. These disclosures might be more helpful and informative if they were improved upon. Audit regulators and practitioners can help create a more transparent, accountable, and user-friendly auditing environment by requiring detailed disclosures and making year-over-year comparisons easier. This will help close the expectation gap and boost confidence in financial reporting.

Question 3: Reflection and Professional

IdentityProvide a self-reflection relating to your professional identify based on your performance and advancement through the course. When writing your self-reflection and your professional identity, focus on how it relates to your experiences, perceptions, and professional life.
Use the following list for ideas of what to include in your self-reflection:
• Your perceptions of the course and the content.
Experiences, ideas, and observations you have, and how they relate to what you have learned during the
semester.
• Alternative interpretations or different perspectives you have on what you have read or done in your course. • How new ideas have challenged what you already
knew.
• What you need to explore next in terms of thoughts and actions.

This training programme has been essential in expanding my knowledge of accounting and my confidence in my place within the industry. This opportunity has broadened my perspectives by teaching me the value of accurate and timely financial reporting, the complexity of accounting, and the need of adhering to professional ethical standards.

The realisation that accounting involves more than just numbers is one of the most eye-opening discoveries. Accountants act as gatekeepers of financial data, ensuring that all parties have access to reliable information upon which to base decisions. This function is essential to the development and prosperity of both people and organisations. Understanding the strategic role that accounting plays in fostering financial openness and responsibility has broadened my perspective.

In accounting, there is always something new to learn. The environment is always changing as new laws, tools, and standards are implemented. Therefore, being flexible and open to new ideas is essential in this field. My experience has taught me that success in the dynamic field of accounting requires a willingness to learn and embrace change.

This education has also caused me to reconsider some of my prior assumptions about the accounting field. Understanding the need of honesty and clear communication in accounting has been eye-opening for me. Maintaining trust and credibility inside organisations and the larger financial ecosystem requires engaging in honest and ethical behaviour.

Looking forward, my dedication to accounting is greater than ever. I can't wait to further my knowledge and career in this area. My ambition is to use the knowledge I have gained to help the company achieve its goals and provide the necessary data for the people who depend on financial statements to make important decisions.

Here are some specific ways in which my professional identity has been altered as a result of this training:

• I now understand the importance of accountants in maintaining trustworthiness and responsibility in commercial enterprises. Because of this, I now feel more dedicated to my work and proud of my career. In light of this insight, I have renewed enthusiasm for my work, and I take satisfaction in being a part of the movement for more financial disclosure.
• Improved my ability to articulate ideas clearly and concisely by learning the value of breaking down seemingly incomprehensible financial concepts. Because of this ability, I feel more comfortable interacting with a wide variety of stakeholders, which has improved our ability to communicate and gain mutual understanding.

In conclusion, I can say that this training has confirmed my belief that accounting is a dynamic and complex discipline. Accounting is a field that is always evolving, so it pays to be flexible, willing to learn, and devoted to ethical behaviour.

References:

Rousseau, L. M. (2022). Why it Matters: The Key Role of the Audit Committee in Expanded Audit Reporting Quality. The University of Wisconsin-Madison.

Liao, L., Sharma, D., Yang, Y. J., & Zhao, R. (2023). Adoption and content of key audit matters and stock price crash risk. International Review of Financial Analysis, 88, 102706.\

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