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Audit and assurance of a2 Milk Company: Assignment B Answer

Individual Assignment B (weighting 10%)

Part 1

Distinguish between analytical procedures required by ASA315 and ASA520

You have learned that ASA 315 stipulates analytical procedures be used as risk assessment procedures, while ASA 520 stipulates their use as substantive procedures. The standards also discuss the nature and purpose, extent of reliance on analytical procedures and subsequent investigation of unusual items identified.

Using the financial report/statements of the company that your Group Assignment and Presentation has chosen:

  1. identify and briefly explain one way you could use analytical procedures as risk assessment procedures, and
  2. identify and briefly explain one way you could use analytical procedures as substantive procedures during the audit.

This requires you to use the material from your chosen company to illustrate the application of ASA 315 and ASA 520, using Analytical Procedures to the audit process. You are asked to provide examples from the financial statements to support your explanation.

Use the following templates for your answers.

Analytical procedures as risk assessment procedures (ASA315)
(a)
Analytical Procedure
Explanation




Analytical procedures as substantive procedures during audit (ASA520)
(b)
Analytical Procedure
Explanation



Part 2

Assess audit risk, list key assertions and audit evidence of the chosen company

From the information available in relation to your chosen company in your Group Assignment:

  1. Assuming that going concern is not an issue, identify one key asset accounts at risk. This will be from the Statement of Financial Position (Balance Sheet).
  2. For the asset account identified above:
    1. Provide a brief explanation as to why the asset account is at risk;
    2. List ONE key assertion (as per ASA315.A128) where the audit effort should be concentrated; and
    3. Describe one substantive test of detail you would perform to gather sufficient appropriate evidence in relation to the assertion identified in ii. above.
  3. Identify one Statement of Comprehensive Income (Income Statement) expense account at risk, which is unrelated to the asset accounts identified in a) above. Provide a brief explanation of why it is at risk and list ONE key assertion (as per ASA315.A128) at risk.

Use the following template for Parts a) & b):

a. Asset
Account
b(i). Explanation why a risk
b(ii).
Key Assertion
(Identify ONE assertion audit should be concentrated)
b(iii).
Substantive test of detail (Describe ONE)





Use the following template for Part c):

Expense account
Explanation why a risk
Key Assertion (Identify ONE assertion for expense account)




Note:

  • ASA315 and ASA520 can be viewed online from the AUASB website. Copies of these are made available on Blackboard Course website>Resources.

Assessment criteria

The accuracy, relevance and correctness of your answer or analysis for each of the questions will be the primary criteria for grade differentials in this assignment. Please refer to the marking criteria below.

Part 1 will be marked out of 4 marks. Part 2 will be marked out of 6 marks each.

No marks will be awarded if the examples given in your answers do not come from your Group Assignment.

Submit this assignment through the Blackboard link.

The maximum word count is 1000 words. There is no minimum.

Part 1 - Assessment Marking Criteria (4 marks)

Requirement
Content
Marks
Analytical procedures as risk assessment
An example from your Group chosen company
0.5 mark for the example + 1.5 marks for an explanation in context
to the given example.
Analytical procedures as substantive procedure
An example from your Group chosen company
0.5 mark for the example + 1.5 marks for an explanation in context to the given example.
Presentation and clarity

Deduct up to 1


Part 2 - Assessment Marking Criteria (6 marks)

Requirement
Content
Marks
An asset account.
(This account must be from your Group chosen company)
You must explain why you think the particular account is at risk.
0.5 mark for identifying asset account at risk


1.5 marks for explanation of why account is at risk.

Only one assertion needs to be identified.


1 mark for identifying key assertion as per ASA315.A128(b) (2017)

No mark if more than one relevant assertion provided.


Substantive test must be relevant to the account chosen and not from the textbook.

An expense account. (This account must be from your Group chosen company)
Youshouldidentify relevantkeyassertion fromclassesof transactions only in this sectionsuchas occurrence, completeness,accuracy, cut-off, classification and presentation (less likely).
0.5 mark for identifying expense account


1.5 marks for explanation of why account is at risk.


1 mark for identifying key assertion as per ASA315.A128(a) (2017)

No mark if more than one relevant assertion provided.

Presentation and clarity

Deduct up to 1


Answer

Audit and assurance 

About the company

The a2 Milk Company has been selected to undertake the current assignment. The a2 Milk Company is listed on Australian Stock Exchange and New Zealand Stock Exchange. The company deals in provision of supply of milk and milk powder which is free from A1 protein and only consists of A2 protein. For doing the same, the company undertakes performance of genetic tests to distinguish the cows that produces milk free from A2 protein (Nystrom, & Winston, 2016). 

Part 1: Distinguish between analytical procedures required by ASA 315 and ASA 520

a) Identify and briefly explain one way you could use analytical procedures as risk assessment procedures

To assess the risk of material misstatements in the financial statements of an organisation, the risk assessment procedures are performed by the auditors. This step is marked most important as the purpose of audit is to check whether the information presented by the financial statements is correct materially or not. For the assessment of risk, several possible ways are available one important one is the use of analytical procedures as per ASA 315. An example where the analytical procedure can be used in the company A2 Milk Limited as a risk assessment procedure is as follows:

Analytical procedures as risk assessment procedures (ASA315)
(a)Analytical ProcedureExplanation

Ratio analysis
The ratio analysis technique can be used to compare the ratios under several categories like profitability, liquidity, solvency, and efficiency. The comparison shall be done by reviewing every ratio’s result over several reporting period to analyse the trend reflected by them (Appelbaum, Kogan, & Vasarhelyi, 2018).

E.g. the current ratio reported by organisation had been 2.38 for financial year 2016, 2.52 for financial year 2017 and 3.03 for financial year 2018. A rising trend could be observed suggesting the continuous rise in company’s current assets in comparison to current liabilities. The exceptional rise in this ratio is now able to be discussed with the management to gather the reason behind the same. The response provided by management is documented and could be used as audit evidence.

Current Ration of a2 milk company

current assets and liabilities of a2 milk company

b) Identify and briefly explain one way you could use analytical procedures as substantive procedures during the audit.

As per ASA 520, the analytical procedure can also be used as substantive procedures. Using analytical procedures as substantive procedures allows the auditor to refrain to complex and detailed manner of test of details. One such example is as follows:

Analytical procedures as risk assessment procedures (ASA315)
(b)Analytical ProcedureExplanation

Reasonableness test
The reasonableness test when used as a substantive analytical procedure determines the validity of the financial information presented through comparison of information (Stewart, 2015).

E.g. the administrative expenses of $47,262,000 in financial year 2018 can be applied for reasonableness test. Predicted expenses for year 2018 can be computed based upon the trend shown by these expenses in past. This predicted amount can be compared with the actual administrative expenses of $47,262,000. This shall help in analysing the extreme or unusual fluctuations in the account. The variance between the actual and predicted expense shall be then investigated. Evidences shall be gathered for the same.  


Part 2: Assess audit risk, list key assertions and audit evidence of the chosen company

a) and b)

a. Asset Accountb (i). Explanation why a riskb (ii). Key Assertionb (iii). Substantive test of detail
Other financial assets: Listed investment at fair value The asset account is considered to be at risk because of the drastic increase in the value attributed to the account. The account value rose from $ 62,049,000 in financial year 2017 to $ 186,862,000. The investment relates to investment in Synlait Milk Limited (Synlait), which is an ASX and NZX listed company. the rise is not normal. the company is in ongoing manufacturing and supply agreement for nutritional powders making the balance of this account more significant. The purchase price of 0.949% of the share capital is very high. Chances exist that the account balance of these investments is overvalued. Valuation: the management has asserted that the value attributable to the “listed investment at fair value” in financial statements is correct (Murphy,2015).Examination of the journal entries that have been entered into at the time of purchase of investments and the manner in which they have been accounted for in the accounts. The purchase transaction of shares and the manner of computation of the value of purchase price is required to be focused upon mainly to test the class of transactions and the account balance dealing with the investment made in 0.949% of the share capital of Synlait. The market price of shares of Synlait as on the purchase date must be checked by the auditor. It must be checked whether the acquisition of investment had been on arm length’s price i.e. not unreasonable (Johnstone, Rittenberg, & Gramling, 2019). 


c) Identify one Statement of Comprehensive Income (Income Statement) expense account at risk, which is unrelated to the asset accounts identified in a) above. Provide a brief explanation of why it is at risk and list ONE key assertion at risk.

Expense accountExplanation why a riskKey Assertion
Administrative expenseThe administrative expenses rose from $32,446,000 in 2017 to $ 47,262,000 in year 2018. The rise of around 46% is very unusual and at the same time highly significant. Chances are there that the personal expenses of management and directors have been charged to the business account under the name of administrative expenses. Also chances are there that certain cash which would have been absconded from business shall be veiled under the name of administrative expense.Occurrence: this assertion relate to charging of only business expenses relating to an organisation in its financial statements which have actually occurred during the year (Maksymov, Nelson, & Kinney Jr, 2018). 


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