Part a

1. Identify and explain three key or significant audit matters that were raised in the audit report
that may lead to the risk of material misstatement in the financial report of your allocated
company.

The key audit matter

Key audit matters
The valuation of inventory is a key audit matter as
inventory is a significant asset in the financial report
and the net realisable value is impacted by the
building industry cycles and changes in consumer
preferences. This necessitated an additional focus
on excess and discontinued inventory SKU’s (stock
keeping unit) and judgemental valuation
assumptions.
•Criteria for categorisation of inventory SKU’s by
risk, such as discontinued, excess or current range,
as they attribute different values;
• Evaluation of volume of inventory, as this may
influence categorisation and therefore attribute
different values. This included excess inventory
volumes, determined by the
Group with reference to inventory with volumes
greater than the last 12 months’ sales;
• Expected forecast demand, and assumptions
associated to the forward-looking estimation;
• Assessing the impact of inventory sold in the
current year below cost.
How the scope of the audit responded to the Key Audit
Matter
Our procedures included:
•• We assessed the accuracy of previous Group forecasts by
inventory
SKU by comparing forecast demand to actual sales in the prior
period.
This informed our evaluation of forecasts incorporated in the
inventory
provision calculation in the current year.
•• We tested the completeness of inventory identified as excess or
discontinued as follows:
»» We assessed the Group’s calculation for identifying excess
inventory.
We did this by performing our own calculation based on sales data
for the last 12 months and comparing the results. We considered the
impact on our audit of any exceptions. Where relevant, we obtained
underlying documentation from the Group to evaluate exceptions;
and
»» We compared inventory SKU’s to be discontinued to the approved
discontinued inventory report used by the Group in assessing the
recoverable value of inventory.
•• We independently developed an expected inventory valuation
range by
considering the following:
»» Inventory turnover rate by inventory SKU;
»» Recovery rates achieved historically when selling discontinued
inventory. We considered the historical quantum recovered
compared to the original cost; and
»» Overall recoveries achieved for sales recorded below original cost.
•• We compared our estimated inventory valuation range to the
inventory
value recorded by the Group.

The key audit matter discussed in the auditor’s report in 2018 was the valuation of inventory. In my view the matter identified
is a key issue because inventory accounts for significant amount of asset for the client. This valuation inventory is
dependent on judgement such as building industry cycle and changes in customer preference. Reviewing of the audit
prodecure proves auditor undertook sufficient audit procedure in evualting and examining the amount of inventory for the
client. Incorrect assessment of this given key audit (valuation of inventory) would have a significant effect on sku’s total
asset and the dependent users of the financials to appropriately assess these in their decision.
During the year, the Group acquired Methven
Limited for consideration of NZ$117.5M on 10 April
2019. The acquisition was considered a key audit
matter due to the:
•• Size of the acquisition having a pervasive impact
on the financial statements;
•• Extent of judgement and complexity relating to
the valuation and preliminary purchase price
allocation (PPA). The Group engaged an
independent valuation expert to advise on the
identification and measurement of acquired assets
and liabilities in particular determining the allocation
of purchase consideration to goodwill and
separately identifiable intangible assets; and
•• The preliminary acquisition accounting, which
remains provisional at year end. This increases the
possible range of outcomes for the auditor to
consider and is impacted by the reduced precision
of audit evidence. These conditions and associated
complex acquisition accounting required significant
audit effort and greater involvement by senior team
members.
The valuation of inventory is a key audit matter as
inventory is a significant asset in the financial report
and the net realisable value is impacted by the
building industry cycles and changes in consumer
preferences.
This necessitated an additional focus on excess
and discontinued inventory SKU’s (stock keeping
unit) and judgemental valuation assumptions.
These conditions gave rise to additional audit effort,
including greater involvement by our senior team
members, to gather evidence over the estimation
of the valuation of inventory.
We focused on the following elements of the
Group’s estimation of the valuation of inventory:
Our procedures included:
•• Reading the transaction documents related to the acquisition to
understand the structure, key terms and conditions;
•• Evaluating the methodology used for the acquisition accounting
against accounting standard requirements;
•• Working with our valuation specialists to assess and challenge key
assumptions used in the PPA to identify and value separate assets.
This involved:
»» Assessing the objectivity, competence, experience and scope
of the Group’s independent valuation expert;
»» Comparing inputs used by the Group’s independent valuation
expert to the Group’s strategic plans and approved business
forecasts; and
»» Challenging the Group’s significant judgmental assumptions such
as identification of separate identifiable intangible assets and the
Group’s independent expert’s approach and methodology to valuing
their assets by comparing to the requirements of the accounting
standards;
•• Assessing the Group’s accounting treatment of post-acquisition
payments against the transaction documents and relevant accounting
standards; and
•• Assessing the adequacy of the Group’s disclosures of the
quantitative and qualitative considerations in relation to the business
acquisition, by comparing these disclosures to our understanding of
the acquisition and the requirements of the accounting standards.
Our procedures included:
•• We assessed the accuracy of previous Group forecasts by
inventory SKU by comparing forecast demand to actual sales in the
prior period.
This informed our evaluation of forecasts incorporated in the
inventory provision calculation in the current year;
•• We tested the completeness of inventory identified as excess or
fast moving and discontinued as follows:
»» We assessed the Group’s calculation for identifying excess
inventory. We did this by performing our own calculation based on
sales data for the last 12 months and comparing the results. We
considered the impact on our audit of any exceptions. Where
relevant, we obtained underlying documentation from the Group to
evaluate exceptions; and
•• Criteria for categorisation of inventory SKU’s by
risk, such as discontinued, new products, excess or
fast-moving range, as they attribute different values
due to the differing provision policy rates;
•• Expected forecast demand which is based on the
last 12 months’ sales, as this determines the
categorisation of inventory SKU’s as excess or fast
moving; and
•• Assessing the impact of inventory sold in the
current year below cost.
»» We compared inventory SKU’s to be discontinued to the approved
discontinued inventory report used by the Group in assessing the
recoverable value of inventory.
•• We independently developed an expected inventory valuation
range by considering the following:
»» Inventory turnover rate by inventory SKU;
»» Recovery rates achieved historically when selling discontinued
inventory. We considered the historical quantum recovered compared
to the original cost; and
»» Overall recoveries achieved for sales recorded below original cost.
•• We compared our estimated inventory valuation range to the
inventory value recorded by the Group;
•• We tested a sample of inventory items to purchase invoices and
sales invoices to determine the recoverability and valuation of
inventory in line with accounting standards; and
•• We assessed the write off history for the last 3 years against the
provision to determine the adequacy of the inventory provision.
2) Apply analytical procedures to the financial report information of your allocated company for at
least two years. For this purpose, restrict your procedures to ratio analysis (use at least two ratios
each for profitability, solvency, and liquidity).

Ratio Ratio and formulae Year 1 Calculation 2018 Year 2 Calculation 2019
Profitability Profit Margin =
Profit (after income tax)
Revenues

Return on Total Assets= 69,517 + 5,187 $85,112 +$3,734

(Profit before income tax + [(533,001 + 515,606) /2] [(993,768 + 892,611)/2]
Finance costs) _______
Average total assets 74704____ 88846____
524303.50 943189.50

0.142 0.094

Solvency Debt Ratio =

Total liabilities 239,737
Total assets 993,768

0.24:1
Equity Ratio =
Total equity
Total assets

liquidity Current Ratio =

Current assets
Current liabilities

Inventory Turnover =
Cost of sales Average
inventory balance
3) Explain how the results of your analytical procedures in 2) influence your planning
decisions for the audit of the company.
Calculate the 3 given ratio and see if its increasing or decreasing
Compare over two years compare with thump rules.
Planning [Access the control environment of the audit client and effectiveness internal
controls

Revenue
Sales revenue
Occurrence- revenue recorded actually occurred and related to client
Procedures- vouch these selected transactions to sales invoice to ensure transaction
recorded are based on sales invoice.
Completeness- all revenues had been actually recorded
Procedures- scan the sequential number of sale invoice in the sales journal and ensuring
that missing numbers are not unrecorded sales. All missing numbers to be enquired with
management for appropriate explanation

Foreign currency gain

Accuracy- test to see whether the foreign currency gains recorded are free from error and
calculations are mathematically correct and there is no misstated amount are recorded.
Procedures- trace the journals and supporting documents to make sure they recorded in the
correct amount.
Occurrence – test whether foreign currency transaction that have been recorded that has been
recorded actually exist.
Procedures- select a sample of foreign gain transaction and vouch the selected transaction to
calculation of foreign currency documentation to ensure that transaction recorded are based on
supporting document.

Expense
Administrative expense
Completeness – to verify whether all administrative have recorded.
Procedure- trace all administrative expense invoices to general ledger.
Occurrence- verify whether as administrative expense that have been recorded actually
occurred during the period
Procedures- vouch the selected administrative expense to supply invoices to ensure that
transaction recorded are based on invoices.
Financial expense
Accuracy-to verify financial expense to recorded are mathematically correct
Procedure- calculating the financial expense transactions in general ledgers to supporting
documents such as loan statement.
Calcification – to examine whether finance expense transaction recorded are properly classified.
Procedures- by examining finance expense addition to verify whether additions indeed are
financial cost.

Assets
Net trade receivables
Existence- accounts receivables shown in financial at the reporting date really exist
Procedures- confirmations is made by sending letter to clients account receivables asking them
to confirm whether they owe the given amount to your audit client.
Rights and obligation –test whether the audit client of control on account receivables shown on
its financial report
Procedures- reviewing the contracts and agreements
Reviewing board minutes that receivables have been stated.

Inventory – finished good

Existence – test whether inventory on balance sheet actually exist and inventory transaction
actually took place.
Procedures- observe the annual inventory counting. Count the actual finished goods on hand to
make sure that they match with the records.

Valuation – test whether the inventory in clients record are correct and valuation method is
appropriate that is value of inventory is measured at lower of cost and net realizable value
Procedure- recalculate the clients inventory valuation. Inquire with warehouse personnel of
absolute or damage inventory and they are properly labeled and separate from inventory count

Liabilities
Trade payables-
Valuation- to ensure the account payable balance are mathematically correct (accurate).
Procedures- select a sample of accounts payable and compare/ reconcile them to their
supporting documents such as supplier invoice/statement.
Existence -to ensure that accounts payable balance shown on balance sheet really exist at the
reporting date
Procedures- select a sample of accounts payable and vouch them to supporting document that
is supplier invoice. Perform accounts payable confirmation for selected suppliers.

Bank guarantees
Existence- -to ensure that bank guarantee balance shown on notes really exist at the reporting
date.
Procedures- perform confirmation of bank guarantees with the audit client’s bank.
Presentation – bank guarantees are properly classified and sufficiently disclosed on the notes of
financial statement.
Procedures- enquiry with management and reviewing the board meeting papers.

Equity
Share capital fully paid-
Existence--to ensure that share capital fully paid balance shown on balance sheet really exist at
the reporting date.
Procedure- review the share capital register. Enquiry with management for documentation/
board papers for confirm for the recorded amount.

Completeness- all equities supposed to be disclosed have been fully disclosed.

Procedures- review the share capital register.