ASA 701 Communicating Key Audit Matters: Analysis and Recommendations

This assignment discusses the new standard ASA 701 Communicating Key Audit Matters and provides analysis of the standard. Extracts from the annual reports of two companies have been selected and analyzed to see how they have been reporting key matters in their audit reports. Special recommendations have been given in this assignment related to that.

Audit

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By student name
Professor
University
Date: 20 May 2018.
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Executive Summary
In this assignment ASA 701 Communicating Key Audit Matters, the new standard has been discussed and
along with proper analysis of the given standard has been stated in this assignment. Audit report is an
important document that the company needs to submit and therefore it is important all that is stated
and related to the company must be correct and there should not be any loophole in that. Important
matters that the auditor needs to communicate has been stated in this assignment with important
analysis and conclusion. Extracts from the annual reports of two companies have been selected and
analysed to see how they have been reporting key matters in their audit reports. Special
recommendations have been given in this assignment related to that.
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CONTENTS:
Introduction...........…………………………………………………………………..........…...4
Analysis.......................………………........................................................................................6
Conclusion.......................………………...................................................................................10
References......................……………….....................................................................................11
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Introduction
The Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report
deals with the key matters that the auditor needs to specify in his audit report. There are many
transactions affecting a company and it is important all that which effects the company on material basis
should be stated in detail in the audit report. This given standard provides the auditor with the basis
that they can follow in reporting such key matters and the areas in which they need to check in case
there are any issues (Kuhn & Morris, 2016). The audit report is very important for the investors of the
company as they depend on it to take important decisions related to the company. These standards
have been issued by the Auditing and Assurance Standards Board (AUASB), and has been prepared in
conformity with the IFRS. It has also been made as per the standards that deals with ethics and
compliance and in case the auditor follows this they can prepare an audit report that is completely
transparent and as per the needs of the members of the company. This standard aims at improving the
quality of the audit work that is done by the auditors. It will help in improving the overall skill set of the
auditor which they can apply in doing their work more effectively. In areas where the auditor faces
issues they can consult these standards and it also helps the auditor in deciding whether they need to
report certain matters or not and what are the implications of not reporting any substance in the audit
report (Heminway, 2017). The detailed analysis of the given standard is stated below. The key aspects of
this standard include the points given below-
 The auditor needs to communicate important matters that are present in the financial
statements of the company of all the listed companies. The auditor needs to take important
decisions and highlight all the key matters and see to it that there is no given mistake in the
statements of the company. This is a mandate that for all the listed companies and the auditors
needs to comply with the given standard when they are preparing their audit report for the
company.
 In case there are other companies which are not listed, the auditor gets to decide which are the
matters that are important and which they need to include in their annual reports. It is not a
mandate it totally depends on the discretion of the auditor whether they need to include or not.
If the auditors feel they can do that (Chron, 2017).
 Few important matters which the auditor needs to follow when they are determining the key
audit matters includes-
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There are various matters that are summoned to those charged with governance of the
company and in case the auditor finds any matter that is important he can report that in his
audit report of the company.
In case there are certain areas which are more prone to risk in the company, the auditor needs
to check whether there is any matter that might affect the decisions of the investors and are
material in nature. The auditor needs to state these matter in the audit report and highlight
them accordingly. This includes the judgement of the auditor (Goldmann, 2016).
The auditor needs to check those areas which are more prone to the decisions of the
management of the company in some way or the other. Thus, that is what the auditor needs to
decide when they are dealing with the company or not.
 This standard also states how the auditor will discuss the key matters that might affect the
company. Proper description needs to be given in the audit report. Also disclosure needs to be
given why that is considered as a key matter for the company.
 There might be some situations in which the key matters are not included in the audit report, in
that cases the auditor needs to state reasons why such matters are not included. The
management needs to be sure that the auditor is having knowledge and they are stating and
applying the same in their audit report (Farmer, 2018).
 It is also important that proper disclosure should be given in the audit report of the company so
that in case there are any changes required same can be applied. The crux is that auditor must
have knowledge which they can apply when preparing the audit report of the company (Das,
2017).
This standard provides all the necessary steps which the auditor might need to follow in applying
this standard and how helpful it would be in the long run is also stated. The investors can see those
key matters are decide whether they need to invest in the company or not. The key matters provide
an insight into the overall financials of the company and thus that is important that it should be
stated with proper care and there should not be any mistake from the end of the auditor.
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Importance of the new standard
This new standard has been proposed by the AASB in lieu of the standard ASA 570 (ISA 570) Going
Concern. It is a situation that states that the company will be running for time infinite and they have
no plans of shutting down their operations in times to come. This is known as the going concern
assumption. It is very important as investors depends on it to take important decisions whether they
want to invest in the company or not. So, this is how the management of the company works. Going
concern situation can be hampered by many changes that might occur in the financials of the
company on time to time basis (Bromwich & Scapens, 2016). The previous standard did not provide
proper disclosure with regards to that but with the new standard this problem is solved. If there is
any such change it would be reported in the key matters of auditing that will affect the decisions of
the investors of the company. The best aspect of this standard is that they have provided all the
steps in details which might affect the going concern ability of the company in some way or the
other. In case there is any discrepancies the auditor would be held liable. The auditor needs to
maintain professional scepticism in case there are any mistakes on part of the auditor it would lead
to disciplinary actions. So, this makes the auditor more responsible towards their work. The
company needs to see that the stakeholders gets their due from the company, they are dependent
on the company so all the actions should be charged towards them (Belton, 2017).
Analysis
The given standard can be analysed with the help of the annual reports of two companies, and seeing
how the auditors have complied with reporting these standards in their audit reports and what are the
key matters that they are dealing with in their annual reports. The two companies that have been
selected includes Telstra Corporation and TPG Telecom Limited. These companies are part of the
ASX100 List and they are the top companies of the telecom sector in Australia. The annual reports of the
company have been downloaded and analysed.
The TPG Telecom is an Australian company that deals in providing telecom sector based services, which
is very cost effective and reliable for the people. The revenue of the company runs into million since the
time it was founded in 2008. The annual reports of the company have been audited by the KPMG, and
they have highlighted key matters in their audit reports accordingly.
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The audit report of the company consists of the following key matters that have been highlighted below
by the auditors-
It can be seen in this audit report that the auditors have highlighted certain matters which they feel are
related to the company in some or the way and is affecting their overall profitability. The main matters
that the auditor has included deals with revenue recognition. In case of telecom sector, a very different
approach is followed which includes the valuation and disclosure. These companies deal with very high
usage of internet based services, they include a very high billing system and their overall revenue is
spread to different areas which means that they need to be sure when they are recording such income.
The auditor has stated the proper ways following which they have audited these aspects of the financial
statements of the company (Kangarluie & Aalizadeh, 2017). The auditor has also stated how they have
calculated the valuation of goodwill and in what ways is it important for the company. Thus, we see that
the auditors have provided necessary disclosure on all key matters that might affect the company and
have properly abided with the set standard. Now the investors can check and decide whether they want
to invest in the finances of the company or not based on these key matters which provides a snapshot of
the performance of the company.
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Telstra Corporation
It is also one of the leading sectors in this sector and their financial statements are audited by EY. This
company deals in mobile phones and tablets and provide other telecom based services to the people. It
was founded in 2015 and since then the company has made millions in terms of revenue. The key
matters have been stated by the auditor in his report and they have put more resilience to the fact of
going concern that is very important (Goldmann, 2016). As per the accounting standard the auditor
should look for all such areas that might affect the company and should provide proper disclosure
regarding the same in their annual report of audit. The key matters are stated in the audit reports with
proper reason on how they are hampering the company and is vital for the growth of the company. In
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case of Telstra the key matters that have been highlighted in the audit report would include important
points –
 In case of Telstra there is a high usage of internet, and thus its valuation becomes important.
The auditor has analysed the same and has stated how they have proceeded with that. It is an
important matter as it will affect the revenue of the company and affect its position and hence
the auditor has analysed and documented it in their report.
 Impairment of goodwill has been considered as an important matter by the auditor. Goodwill is
an important aspect that will help in judging whether the company is functioning better or not.
It is all about the market valuation of the company. Impairment of goodwill is thus important
and hence the auditor has provided his recommendations on the same.
 Capitalization of the assets is an important criterion that will judge how the company is doing.
There are various methods in which valuation can be done and thus it becomes important to see
whether the company is following the correct method or not. Thus, the auditor has included the
same in his report and has properly analysed the same and has given appropriate disclosure
with regards to that (Dichev, 2017).
 All that matters of key significance have been included in the audit report of the company. The
investors can see and judge whether the company is at any risk or not and how they can invest
in the company depends on them. Thus, these are the few areas in which the auditor feels
sceptic and has stated it in his audit report clearly (Alexander, 2016).
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Conclusion
Thus, based on the entire analysis it can be said that audit report is a mirror that provides a picture on
whether the company is performing to the best of their abilities or not. They have stated it clearly in the
standard that key matters need to be stated and this will be very helpful to the company. Audit is an
independent examination of the financial of the company to take important decisions whether the
company is performing to the best of their ability or not. This standard will help in improving the overall
transparency and viability of the financial standards which the investors can take advantage of in
deciding whether they are investing in the companies or not. It will also help in improving the
performance of the auditors and they can be more responsible towards their work and what they are
doing. In case there are any issues then the auditors can be held liable also (Sithole, et al., 2017). So, in
all ways the auditors are responsible for what is stated in the audit report and this standard will guide
the auditor to perform to the best of their abilities. The auditors can depend on it to decide how they
are going to conduct the audit and what areas they are going to put more focus. The investors can
decide by looking at those key matters whether the company is at any risk or not and what are the
possible areas in which the company can progress in future, based on that they can decide how much
money they want to invest. In case they see that there is some risk they can remove their money from
the company. Thus it would be very helpful for the investors and also for the management of the
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company as they check and see what are the areas which requires their attention the most. The
standards can be updated on time to time basis as and when required.
References
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Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of
Media Ethics, pp. 1-12.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
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