Importance of ASA701 in Communicating Key Audit Matters in Independent Auditor's Report

This article explains the importance of ASA701 in communicating key audit matters in the independent auditor's report. It also analyzes the audit reports of companies in the retail industry in Australia to see if the standard has been followed. The article highlights the role of auditors in making the overall audit more transparent and helpful for investors. It also emphasizes the need for auditors to follow their code of ethics and professionalism. The article concludes that the auditor of the company has done their work to the best of their abilities and have given their own opinion on the financial position of the company.

By student name
Professor
University
Date: 14th May, 2019.
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Executive Summary
The following article is based on an extremely important auditing standard that is
known as the ASA701 communicating key audit matters in the independent
auditor’s report. This auditing standard is highlighting the importance of stating
important matters and events which the auditor feels should be communicated to
the investors separately in the audit report under the key audit matter section. This
article states how this standard came into operation and why is it important for
companies to follow the same. This assignment states the same with respect to few
companies from a specific industry in Australia.
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Table of Contents
Introduction................................................................................................................ 5
Lehman Brother Case................................................................................................. 5
Analysis...................................................................................................................... 6
Woolworths Group................................................................................................... 7
References................................................................................................................. 8
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Introduction
“ASA701 communicating key audit matters in the independent auditor’s report” is
an important auditing standard that auditor needs to track when they are making
their audit report. This standard states on the facts that the stakeholders are not so
much knowledgeable when it comes to accounting and they need to be made aware
about the key events that can affect the monetary position of the company in some
method or the other and thus making it necessary for them to state this matters
separately in their audit report. It also depends upon the judgement of the auditors
to understand which matters are important and which matters do they need to
focus more on. The standard does not make it mandatory for them to state the key
matters, it depends upon the auditors that in case they find any such matter which
they think possess a risk to the affairs of the company, to the security of the people
investing, or in which the overall risk involved is very high, then the administration
of the company need to make the auditor aware that and the auditor of the
company should apply their own audit methods and based on that decide whether
they want to spend in the company or not (Boghossian, 2017). This standard aims
to get better the overall quality of the audit and makes the auditor more
responsible towards the work done by them so that they can include all such
important matters in their audit report and their financial statements are at no cost
from errors and mistakes. The auditor should follow the code of ethics when they
are working professionally and this involves getting an understanding on the key
affairs of the company along with an understanding that they need to highly
independent and protective in their stand and do their work without any mistakes
(Borit & Olsen, 2012).
Lehman Brother Case
The main reason behind the formation of this standard was the Lehman Brother
case, the Lehman Brother collapsed due to bankruptcy in 2008. It was a financial
services bank and the main reason for its collapse was the downfall of the auditor to
find the risky areas in which the management was functioning. From 2001-2008 the
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company was making enormous amount of profit and they made some wrong
investing decisions that included investing in subprime mortgage when the
mortgage industry was fully destroyed and it also led to the downfall of the business
and the persons who invest in the company also suffered because of that (Freeman,
et al., 2004). The ASA701 was formed post this incident that highlighted how
important it was for companies and the auditors to be aware about the risk prone
transactions and make the investors aware about the same. If this standard was
present during the collapse of the company then the situation would have been
different as key matters that are related to the investment decisions of the
company, including the important facts and figures would have been revealed and
its absence paved a path for the collapse of the company. This was due to non-
communication and concealment of major facts that described the overall position
of the company (Iggers, 2018). This loophole made the company obsolete and
raised an alarm on how important the position of the auditor was and how
necessary it was to conduct a risk assessment as and when required so that
companies around the world can focus on the same when it comes to taking smart
investing decisions. It helps in spreading awareness among the investor also in a
large number of places. They become aware about all those points which they
might never be aware of like in the case of Lehman Brother the investors would not
be aware that the company is making such huge investment in null mortgages, so
we see how important it was that key audit matters those which are very much
prone to risk should be stated separately in the financial statements of the company
in the audit report separately. It also affects the going concern capability of the
company which is imperative that the business shall be in operation and they are
not thinking of any liquidation in the years to come (Johan, 2018). So the investors
invest in such companies in which there is no risk to the going concern ability of the
company. That is stated as per the auditing standard ASA501 and it highlights how
important it is for the auditors and the companies need to access this and take
decisions whether the company is operating as per their going concern capability of
the company. This is what the company needs to focus on when they are taking
important decisions based on what the status of the company is. In case the
management fails to highlight the key matters then the auditors and both will be
held liable for their overall actions (Kaufmann, 2017). This is what is highlighted in
the KAM section by the auditor. In this project we shall further talk about the
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importance of key audit matters and the given auditing standard with respect to the
given industry in the Australian market. The audit reports of the company is
analyzed and the key audit matters that has been mentioned in the reports of the
company has been taken into consideration while stating whether the auditor have
applied their own judgement in deciding which matters are important and which
matters deserves to be significantly mentioned in the annual reports of the
company (Kusnadi & Wei, 2017).
Analysis
The industry that has been selected for this assignment is the retail industry in
Australia and the important companies and their key audit matters as stated in their
audit report have been analyzed to form an opinion whether the standard has been
followed or not.
Woolworths Group
The Woolworths group is among the largest retail companies that are based in
Australia. The total revenue of the company runs into millions and the company is
there on the Australian stock exchange and is headquartered in New South Wales.
The audit report of the business has been downloaded to make a comment on the
significant matters that are stated by the auditors.
The auditor of the company is Deloitte and they have stated the following matters
in their audit report as their KAM.
Valuation of the Big W property, plant and equipment – The property value sums up
to $502 million that sums up to the total sum of the plant and property and their
related carrying value. The Big W has losses that equals to 193 leases with the
overall group operating leasing commitments that are estimated to $2.8 billion at
the end of the year. Thus the overall amount included is huge and the management
of the company depends on the auditor report to determine whether their valuation
is correct or not (Norberg, 2018). The auditor has applied their audit methods that
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include obtaining an understanding of the precautions that are designed by the
management, understanding the methodologies of the group, testing the items on
sample basis and performing sensitivity analysis that is related to the key
assumptions. The appropriateness of the notes to account of the company is also
analyzed to test whether the company has given proper disclosure (Ruth, 2018).
Accounting for rebates
The company receives a lot of discounts and rebates from the suppliers and the
company recognizes the same as a decrease in the amount of the inventory and
decrease in the cost of sales that is dependent on the nature of rebate or discount.
It is important to analyze that the rebates are genuine and there is over or under
statement of the discount. The procedures applied by the auditors include
understanding of the precautions that are given by the management, testing of the
non-standard rebates and finding the overall appropriateness of the accounting of
non-standard processed rebates and discounts. The notes are also given in the
books of the accounts and that is also analyzed.
The auditor have also given their opinion on other key matters like the IT system
and have stated the steps that they have undertaken to decide whether the stand
of the management is correct or not and have based their overall opinion on that.
JB Hi-Fi
It is an Australian company that specializes in consumer goods and products. The
company is based in Melbourne and is mentioned on the Australian Stock Exchange.
The company began its operation in 1974. The company is the 7th largest consumer
electronics and home appliance retailer in the world.
The auditor of the company is Deloitte and they have stated these matters-
1. Carrying value of the Cash generating units – In the groups consolidated
balance sheet there is goodwill that is related to the group’s acquisition of the Good
Guys of$712.2 million. The management has applied their own judgement to
decipher the recoverable value of the Good Guy CGU by applying the value-in –
approach model. The management has applied their own judgement and the key
methods followed by the auditor includes obtaining an understanding of these key
judgement applied by the management, checking the controls applied by the
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management, taking help from valuation specialist to understand whether the
valuation done by the company is correct or not and in case there is any difference
than that is compared with the management results to know the reason behind
that. The management has also checked the overall mathematical accuracy and
evaluated the overall discount rates that are used for knowing the cost of capital for
the CGU in assessment to the market information and the industry analysis.
The other key audit matter that has been mentioned by the auditor in their report
includes Acquisition of the Good Buys. It can be seen that the management of the
company has applied their own assumptions and the auditors have analyzed the
same to give their honest opinion as a whole on the financial statements that is not
related to those key audit matters separately.
Wesfarmers
Wesfarmers is an Australian Company that is headquartered in West Australia. The
business retail in variety of commodities that includes chemicals, retails, fertilisers,
coal-mining and industry and various safety products. In terms of revenue the
company is the largest in the Australia and employs more than 220,000 employees.
The company is there on the Australian Stock Exchange and came into operation in
1984. The audit report of the company has been analyzed to comment on the
important matters that the auditor has mentioned in their audit report. The auditor
has followed the ASA 701 in the audit report issued by the auditor and stated these
matter-
Rebates received by the Supplier
The supplier rebates that are received by the company and there are various
assumption that goes into the recognition of the same by the management of the
company, assumptions are undertaken by the management whether these amounts
should be applied against the carrying value of these assets. The auditor applies
their own audit methods that includes obtaining an understanding whether proper
precautions have been taken by the company, comparing the current year rebates
with the prior year budgets and then checking the overall trends whether there is
any difference or not.
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The auditor has also stated other audit matters that include discontinued operations
of Curragh, Impairment of the non-current assets including intangible assets in
target, discontinued operations of Burnings UK and Ireland. The auditors have
applied their own judgement in understanding whether the items are operating
actively or not, and given their opinion based on that.
Coles
Coles is an Australian Supermarket chain that indulges in various consumer
products and is based through Melbourne. The income of the company as of the
last year was in billions. The audit report of the company has been studied to see
whether the auditor have applied their judgement or not.
The audit report of the company shows that the auditor have stated items like
disclosure of the retail profit and losses that constitutes the non-IFRS information
and the auditor have applied their own audit methods that includes checking the
internal controls, and doing sample checks and the checking the disclosures that
have been given in the books of the company among others.
Conclusion
Audit is an important part of the overall accounting process and the role of the
auditor is very important for the investors of the company. The investors depend
upon the audit report in order to understand how much return they will earn if they
invest in the company. It can be said that the auditor of the company has done their
work to the best of their abilities and have given their own opinion on the financial
position of the company. Overall this standard has helped in making the overall
audit more transparent and those of the financial statements and that is also very
helpful for the investors as they can take decisions on what basis do they want to
invest in the company or not and what are the key matters that is affecting the
company and the stand that they are getting appropriate returns from the
management or not. It also helps in making the auditors more responsible towards
their work and helps them in following their code of ethics and applying
professionalism that would facilitate the auditors in the extended run. In case the
auditor fails to do their part then they would be penalised for that. The
management needs to make sure that they are providing all the necessary
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information that the auditor might need. The auditor also needs to follow the code
of ethics, keep a professional stand and then take a decision based on their
instincts which matters are important and which matters requires their special
attention and accordingly give their judgement in the audit report. In this project we
see that with respect to all the companies the auditor has applied their judgement
and given their opinion on the key audit matter which they think is important and
hence they have followed the auditing standard to the best of their ability.
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