ASA 701 - Communicating Key Audit Matters

COMMUNICATING KEY
AUDIT MATTERS – ASA 701
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SYNOPSIS
Contents
EXECUTIVE SUMMARY................................................................................................................................ 3
INTRODUCTION............................................................................................................................................. 4
COMPANY AND RELATED INDUSTRY DETAILS...................................................................................................... 4
COMPANY CHOSEN.......................................................................................................................................................4
INDUSTRY DETAIL AND ITS NATURE..................................................................................................................................5
ASA 701 – AN ANLAYSIS...................................................................................................................................... 5
CAUSES...................................................................................................................................................................... 5
DEFINITION................................................................................................................................................................. 6
ANALYSIS OF ANNUAL REPORT............................................................................................................................ 6
HOME IMPROVEMENT BUSINESS.....................................................................................................................................6
BIG W SEGMENT......................................................................................................................................................... 6
STOCK........................................................................................................................................................................7
DISCOUNTS................................................................................................................................................................. 7
IT ENVIRONMENT.........................................................................................................................................................7
CONCERNED RISKS.............................................................................................................................................. 7
EVENTS HAVING IMPACT ON AUDIT.................................................................................................................... 8
CONCLUSION AND RECOMMENDATION............................................................................................................ 10
REFERENCES...................................................................................................................................................... 10
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EXECUTIVE SUMMARY
As the title suggests the report has been revolved around the analysis of newly developed
auditing standard namely – communicating the key audit matters in the independent auditors
report. The report has been framed with the four major aims. Whether the auditors have reported
the key audit matters in the audit report of the chosen company or not is the foremost major aim
of this report. The second objective deals with the checking of the key audit matters so reported
to judge whether there has been any risk of having the financial statements of the company as
materially misstated. The third objective deals with the analysis and the identification of any of
the significant event which have taken place in course of the audit period and its relative impact
on the audit if any. The fourth objective deals with the identification of the fact whether the risk
or significant event so identified have the material effect on the assumption of going concern. All
these aims have formed the foundation of the report and accordingly the report has been
presented with proper headings, sub headings and the references thereon.
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INTRODUCTION
Auditing is that part of the finance subject which helps in identifying the risks and the
discrepancies to which the management of the company is not aware and whose attention is
attained through the means of the independent auditors report. Therefore, the audit plays a very
important role and the auditor’s report serve the means for the investors and the stakeholders to
give the true and fair view of the position and performance of the company. For the purpose of
furtherance of this report, the company that has been selected for the purpose is Woolworths
Limited and the annual report for the period ending for two thousand and seventeen has been
considered. The report has been started with the details of the company that has been chosen and
the details of the nature of the industry in which it operates along with the nature of business of
the company. Then the detailed analysis has been made of the new auditing standard number
701. The heading of this standard is communicating the key audit matters in the auditor’s report.
The analysis includes the reason as to why the same has been developed and as to what is the
meaning of the key matters. Thereafter, the detailed analysis of the annual report has been made
with reference to the key audit matters if any listed in the annual report and in what manner the
same can put the material risk on the part of the company and also how it can have the impact on
the audit. Then the report has ended with the proper conclusion and recommendation.
COMPANY AND RELATED INDUSTRY DETAILS
Company Chosen
For the purpose of the furtherance of this report, the company that has been selected Woolworths
Limited. Being the company listed in the Australia Stock Exchange and is one of the ASX lists
of top hundred listed companies. The company has been into the existence from the last hundred
years and since then the company has been into the retail sector.
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Industry Detail and Its Nature
The industry in which the company is operating is the retail sector. As per the latest index, the
company is the number two company in the retail industry which has the more income. The
company is operating across Australia and New Zealand. The company has its headquarters in
Sydney, Australia. The industry under which the company is operating provides all the products
for the home at one place and the store commonly known as the departmental store (Woolworths
Limited official website, 2017). The major emphasis under which the company is operating as
listed in financial report of the company is – to identify the customer preferences, to generate the
higher revenues from the drinks, and then from the business of hotels and to become the best
retailer of the country having the adequate systems and objectives.
ASA 701 – AN ANLAYSIS
Causes
The global financial crisis have been started from the mid of the year of two thousand and seven
and has been persisting till the end of the year two thousand and nine ((Bajada and Trayler,
2010). These crises have been started from the collapse of the largest companies namely Lehman
Brothers, One Tel and HIH Insurance. The collapses have been occurred due to the accounting
fraud committed by the company and also the improper functioning of the management of the
company. In case of the Lehman Brothers the accounting fraud is the adoption of the reverse
repo method due to which their reported profits keep going on higher value and when the
saturation point is reached then the company has been forced to provide the actual figures of the
net loss which has created a wave of the shock in the industry (Xu, 2011). These collapses have
provoked the standard setting bodies tom develop an auditing standard through which the
stakeholders can have the idea as to what is happening in the company or any material
misstatement reported by the auditor, etc (Cordos and Fülöpa, 2015). To overcome these types of
crises and collapses, the new auditing standard has come into place.
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Definition
The auditor is the person who acts as an agent of the company as well as the stakeholders to
represent the true and fair view of the financial statements of the company (AASB, 2015). He
holds the fiduciary position and is required to maintain this position forever. It is his obligation
to conduct the audit in the best possible manner and to provide all the details as he seems to be
sufficient and necessary for the different stakeholders of the company (Thomson, 2008). The
new auditing standard has come up with the more disclosures and framework of operation. This
new standard has helped in providing then information which is in addition to the general
financial reporting framework and which in the view of auditor is of high significance in audit
and also of the high significance for the management to have the judgment (Masytoh O, 2010).
Thus, the audit matters which are of high significance shall be reported as key audit matters in
the auditor report.
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ANALYSIS OF ANNUAL REPORT
The auditor of the company has disclosed the key audit matters in the financial report of the
company for the year ending the month of June two thousand and seventeen. The key audit
matters are mentioned below:
Home Improvement Business
During the period under review, it has been observed by the auditor that due to the closure of the
operations of one of the segment of the company namely Home Improvement Business many
components of the same are required to be checked in detail as it involves the complex
accounting treatment of each and every component. Each and every component of it has different
accounting as well as valuation treatment. Due to this complexity, the auditor has specified the
same in the audit report.
Big W Segment
Under this segment, the company has charged the high value of impairment amounting to thirty
five million dollar which has resulted in the immediate downfall of the carrying amount of the
asset so concerned. Impairment has been charged because of the fact that the carrying amount
has exceeded the recoverable amount. In this the company has calculated the recoverable amount
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on the basis of the cash flows which the company has determined using their own estimate
clubbed with the discount rate adopted by the company. Due to the management discretion of
estimating the cash flows and which in turn have led to the immediate downfall of the carrying
amount, the event shall be reported as the key audit matter.
Stock
In the financial statements of the company, the amount has been provided on account of the
damaged inventory and that too on the premise of the estimates of the future cash flows that the
company will generate out of the available stock. The company has emphasized on the provision
also on account of the goods which are slow moving and the seasonal one. Thus, it is of key
matter because of the fact that the forecast has been made by the management at its own
discretion.
Discounts
In the normal course of business, the company is in receipt of discounts from the parties who
supplies the goods and accordingly the accounting of the same is required to be done effectively.
The same has to be done for the rebates. The company has been receiving the rebates and
discounts from the suppliers but the accounting for the same needs to be checked with the
contracts if any with those parties.
IT Environment
It has been mentioned by the auditor that the system that the company has installed in the
organization is very complex and it shall be checked in detail and due to this complexity, the
item has been reported as the key audit matter.
CONCERNED RISKS
On reading the annual report of the company along with the independent auditors report and also
specifically the key audit matters as communicated by the auditors, following are the two risks
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that have been noticed and have the material effect on the financial position and financial
performance of the company.
 Big W – The segment of Big W has been considered as the high risky area. It is because
of the fact that the segment is not able to generate the higher amount of revenue and
moreover value of the assets coming under the head of Big W has been impaired with the
heavy amount Further the company has not even decided to close this segment of
business rather mentioned in the report as to continue the same with low value and low
revenue. Thus, this segment is at high risk.
 Information technology system is the major risky area. It is because through this system
only the management of the company gets the various forms of reports along with the
exception reports. As the system installed in the company is complex in nature therefore
it has been very difficult for the auditors to conduct the audit in such a complex
environment and therefore, it has been considered as second major risky area in
accordance with the ASA 701.
EVENTS HAVING IMPACT ON AUDIT
The new auditing standard number 701 has specified the matters which are regarded as the
significant event or the transaction. In accordance with the paragraph number nine of the
auditing standard 701, the auditor is required to determine the matters or the events which
requires the urgent attention of the auditor while conducting the audit. These matters so
identified shall be from the matters as communicated with the persons which are charged with
the governance. While determining such matters, the auditor is required to consider the
following:
 Areas which are classified as the higher risk of providing the material misstatement or
any other significant risk which are duly determined using the provisions of the auditing
standard number three hundred and fifteen.
 Areas which requires the significant auditor judgment and also the significant judgment
of the management of the company. These areas include the estimates of accounting
which involves the high estimates of uncertainty.
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 The effect that the significant transaction or event will have on audit for that particular
period (AASB, 2015)
Following are the events or the transaction which have the material impact and effect on the
audit for the financial year ending two thousand and seventeen:
 One of the significant events which have affected the audit for the concerned year is the
accounting treatment of the assets reported under the Big W segment. It is because the
company has impaired all the assets to then value equivalent to its recoverable amount as
at the end of the accounting period. The auditor as per the provisions of the new auditing
standard has conducted the audit like has discussed with the management regarding the
valuations of the future cash flows, the discount rate adopted by them, methods adopted
for the valuation of the future cash flows and analyzing the sensitivity of the segment if
there has been change in discount rate by some percentage, etc (Kachelmeier, Schmidt
and Valentine, 2016). Still the auditor thinks that it has some sort of complexity and has
material impact on the financial health of the company and therefore the same shall be
reported to the users of the financial statements also including the stakeholders of the
company. Therefore, it has been reported in the auditor report of the company (Xu,
2013).
 Second of the significant event has been observed is the closure of the segment – home
improvement business. The event alone has been regarded as the most significant event
and has mentioned as the key audit matters in the auditor report. It is because of the fact
that the event has led to beginning of so many events which have made the accounting as
well as treatment of the event more complex in nature. The simultaneous events that have
happened are the immediate sale of Hydrox holdings Limited and then for the clearance
of the stock the agent has been appointed – GA Australia Limited for the defined amount
of four hundred and ninety two million dollars, then contracting through the sale deed of
shares, giving the call option to the company – Home Investment Consortium and then
the accounting for the impairment of the assets of this segment – Home Improvement.
There are other related events to which ate necessary and have led the exit of the business
of Home Improvement from the company. As there is the list of many events and due to
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this complexity, the auditor has considered the event and transaction are of significance
and therefore, the same has been reported and have posed material effect on the audit.
(McKee, 2015).
CONCLUSION AND RECOMMENDATION
There has been collapses which have occurred in the past decade and which have further led to
the financial crisis on the global basis. By following the global financial crisis the government
has sought to have such standard which ensures the high transparency in the financial statements
of the company so as to cater the needs of the stakeholders of the company as well as the
management of the company. Due to this, the standard setting bodies has come up with the new
auditing standard number 701 on communicating the key audit matters in the audit report. It has
provided as to which transaction or event is required to be reported in the audit report. In this
report, the analysis of the annual report of the company for the financial year ending June 2017
has been selected and the company – Woolworths Limited has been chosen. The detailed
analysis have been made with respect to the key audit matters and in regard to the different type
of risks mentioned. In order to conclude the report, the new auditing standard has given the path
for the auditor so as to disclose all the significant transaction or event which will be helpful to
the users of the financial statements.
The recommendation on high degree for the company will be to have the adoption of the clear
and precise accounting policies and estimates and the procedures to enable the auditor to conduct
the audit in best manner.
REFERENCES
AASB, (2015), “ASA 701, Communicating Key Audit Matters in the Independents Auditors
report”, available on http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
accessed at 08/05/2018.
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Bajada, C. and Trayler, R., 2010. How Australia Survived the Global Financial Crisis. The
Financial and Economic Crises: An International Perspective, Edward Elgar: Cheltenham, UK
and Northampton, USA, pp.139-154.
Cordos, G.S. and Fülöpa, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting and Management Information Systems, 14(1), p.128.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.
Masytoh O, (2010), “The analysis of determinants of Going Concern Audit Report”, Journal of
Modern Accounting and Auditing, Vol 6(4), pp 27-36.
McKee, D., (2015). New external audit report standards are game changing. Governance
Directions, 67(4), p.222.
Thomson, J., (2008), “Five lessons from the Spectacular fall of Eddy Grooves”, available at
http://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-
grroves.html accessed on 08/05/2018.
Woolworths Limited official website, 2017, “Annual Report 2017” available on
http://www.woolworthslimited.com.au accessed on 08/05/2018.
Xu, Y., 2011. Audit reports in Australia during the global financial crisis. Australian Accounting
Review, 21(1), pp.22-31
Xu, Y., 2013. Responses by Australian auditors to the global financial crisis. Accounting &
Finance, 53(1), pp.301-338.
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