Critical Assessment of ASA 701 in the Independent Auditor’s Report

The report critically assesses the auditing standard, “ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report”, from the perspective of Amcor Energy, Bluescope Limited and Newcrest Mining. It evaluates the annual reports and the disclosures made by the organisations, and recommends actions necessary for fair representation of financial statements. The report also discusses key audit matters, ways of identifying them, going concern, cash flow concept, and assessment of the mining industry. The report concludes that the organisations have complied with ASA 701 and 315, and have disclosed key audit matters in their annual reports.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current report would critically assess the auditing standard, “ASA 701
Communicating Key Audit Matters in the Independent Auditor’s Report”, from the
perspective of Amcor Energy, Bluescope Limited and Newcrest Mining. By evaluating the
annual reports, the disclosures that the organisation has made could be represented
significantly to the users of the financial statements. Since there is compliance with the ASA
701 norms on the part of the three organisations, their annual reports could be adjudged as
feasible. In addition, it denotes that there is presence of conformance to ASA 315, which is
followed on the parts of the auditors as well as the entities. Thus, the use of ASA 315 is
prevalent in the entity.

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Table of Contents
1. Introduction:...........................................................................................................................3
2. Key audit matters (KAM):.....................................................................................................3
3. Ways of identifying KAM:....................................................................................................3
4. Going concern:.......................................................................................................................3
5. Cash flow concept:.................................................................................................................4
6. Assessment of the mining industry:.......................................................................................4
7. Research extent and application:............................................................................................6
8. Conclusion and recommendations:........................................................................................6
References:.................................................................................................................................8

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1. Introduction:
The current report would critically assess the auditing standard, “ASA 701
Communicating Key Audit Matters in the Independent Auditor’s Report”, from the
perspective of Amcor Energy, Bluescope Limited and Newcrest Mining. Key audit matters
could be found in the annual report of the three above-stated organisations. The risks that
could arise out of material misstatements in accordance with ASA 315 are assessed from the
organisational perspective. In addition, the paper would lay significant emphasis on
recommending some actions, which is necessary for all the three stated organisations to adopt
while representing its financial statements so that the investors have a fair overview of any
material misstatement inherent in the same.
The global financial crisis has mandated the need for the business organisations to
incorporate key audit matters in their financial reports, as the needed information is not
disclosed adequately in the same (Adrian, 2014). After this standard is implemented, the
accounting authorities have made it mandatory for all types of business organisations in
Australia to adhere to the regulations for reducing the chance of any further financial crisis
that could occur in future. Moreover, it is the accountability of the organisations to reveal the
supporting materials in their independent audit reports. Such disclosure is conducted
primarily because of the standard mentioned in ASA 701 for representing the actual financial
condition to the shareholders.
2. Key audit matters (KAM):
KAM is introduced with the intent to add increased value to the audit report so that
the investors and other users could have a better overview of the reasons and ways of issuing
the audit opinion. However, the audit opinion could not be relied upon completely. This is
because it lacks information in identifying the significant events taking place in the
organisation that might change the directions of the organisation materially. Basically, four
types of audit opinion are deemed to be observed, which include qualified opinion,
unqualified opinion, disclaimer opinion and adverse opinion. Therefore, these categories
cover up all the organisations. However, the opinions are made from the industrial
perspective and not from the business perspective. However, the inclusion of KAM would
help in making the opinion specific towards the organisation.
3. Ways of identifying KAM:
If any particular event is to be acknowledged as KAM, it would depend on the
judgement of the auditor only. At the time of evaluating the financial statements, it is possible
that the auditor might identify several significant incidents. The auditor raises concern and it
would be discussed with the relevant authority for justifying and gauging the incident. If the
statement provided lacks justification, the incident would be considered as immaterial and it
would be included in KAM.
4. Going concern:
In accordance with ASA 570, the financial report is developed on the assumption that
an organisation is a going concern and it is expected to continue its operations in the
upcoming years. All the business organisations prepare general purpose financial reports in
accordance with the going concern method, the only exception is if the management decides

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of liquidation or ceases operations. If the financial information is not provided accordingly to
the shareholders, it leads to expectation gap among them. The shareholders often look for
published and qualified audit reports to verify the accuracy of the financial statements. ASA
570 lays stress on providing key audit matters in the annual reports, as they would help in
identifying the material misstatements related to conditions that might pose doubt on the
ability of the organisations to operate as going concern in future, as laid out in “Paragraph
A1 of ASA 570 Going Concern”. For the selected organisations, key audit matters are not
present in their annual reports and they are evaluated critically in the below-stated sections.
5. Cash flow concept:
In case, an event is probable to influence the future cash flow at a material level, it
would be included in the form of a KAM. For instance, if the auditor believes that a short
financial note related to a contingent liability has the ability of causing cash outflow in future;
it would be reported under KAM (Simnett and Huggins, 2014).
6. Assessment of the mining industry:
Evidences have been gathered regarding the material misstatements after careful
scrutiny of the latest annual reports of Amcor Energy, Bluescope Limited and Newcrest
Mining and these are likely to create issues for the organisations. After the financial crisis,
issues could be detected in the financial statements of the entities where the necessary
information was not disclosed adequately. For overcoming such issues, ASA 701 has been
developed for disclosure purpose and it is to be communicated in the financial reports. Hence,
the organisations are left with no other option rather than disclosing the key audit matters in
their published financial reports (Annualreports.com, 2018). After evaluating the annual
reports of the three organisations in 2017, significant risk is inherent in compliance with ASA
315 having effect on business operations. In the words of Bielby, et al., (2016), projections
and analyses of future issues could be carried out with the help of material misstatements.
Moreover, the evaluation of the annual report would help in estimating those issues that could
hamper the business activities. Such estimation paves the path for the investors to detect any
problem happening within the organisation.
However, it has been argued that non-disclosure of material misstatements, if any,
could help in raising the unethical practices of the organisation (Bunn, Pilcher and Gilchrist,
2018). With the help of critical dissection of the annual reports of the organisations, the risks
could be identified, if the material misstatements are disclosed in accordance with ASA 315.
Such analysis primarily includes the following:
Material misstatement areas having higher risk:
By evaluating the annual report, the disclosures that the organisation has made could
be represented significantly to the users of the financial statements. Since there is compliance
with the ASA 701 norms on the part of the three organisations, their annual reports could be
adjudged as feasible. In addition, it denotes that there is presence of conformance to ASA
315, which is followed on the parts of the auditors as well as the entities. Thus, the use of
ASA 315 has enabled the investors of Bluescope Limited and Newcrest Mining to detect
material misstatement risk prevalent in the entities (Carson, Fargher and Zhang, 2016).
However, in the three organisations, significant disclosures have been made in carrying value
of evaluation and exploration assets of Amcor Energy. Therefore, it analyses and identifies
impairment indicators for exploration and evaluation assets by testing the key control of the

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management. Accordingly, the budget for future expense is prepared to carry out the ongoing
exploration.
The three organisations have enforced certain accounting policies, which help in
depicting the actual financial condition. In addition, they have adhered to ASA 701 by
disclosing the key audit matter in its annual report. Along with this, incidents could be
identified regarding different corporate scandals that have taken place in the past where the
auditors have adopted unethical measures to represent strong financial health of the
organisations for their self-interest (Carson, Redmayne and Liao, 2014). As a result,
questions could be raised regarding the integrity of the independent auditor reports, if key
audit matter is not present. It is necessary for the auditors of the three organisations to
understand the business risk where the identification of material misstatement is essential. In
addition, it is necessary for the auditors in evaluating the risks associated with business
environment, business activities and others before the evaluation of the audit procedures.
Therefore, the firms are required to obtain overview of business risk, since it might take place
as audit risk in future. In this regard, Czerney, Schmidt and Thompson (2017) remarked that
the auditors are required to dissect all the business processes of the organisation to gain an
insight of actual risk leading to material misstatements.
After the financial crisis of 2007, ASA 701 is implemented, as the crisis has
compelled the audit assurance board to identify unethical measures that the independent
auditors and organisations carry out while preparing their financial statements. These
unethical practices have helped in representing sound financial health of the organisation for
raising share value. Hence, the three organisations are able to raise excess capital from the
market (Pandit, et al., 2017). When the financial crisis occurred, the entities that adopted
unscrupulous practices collapsed and the investors were not motivated to purchase their
shares. Due to this, the international economy and the financial solidity in the capital market
were taken aback. Hence, it is inherent that ASA 701 is implemented so that the audit
assurance board could minimise the unethical practices of the business entities. Moreover,
debts were used heavily as revenue in order to hide their positions of insolvency from the
potential investors (Duncan, 2014). ASA 701 intends to limit the organisations in taking up
unethical measures for preparing their financial reports so that transparency could be ensured
in financial information.
Risks identified in accordance with ASA:
Based on the independent audit report of Amcor Energy, Bluescope Limited and
Newcrest Mining, adequate disclosures are made like impairment of non-current assets and
for dealing with this issue, it has determined considerable change in recoverable amounts
along with identifying any discrepancy between budgeted cost and actual operating cost.
However, with adherence to ASA 315 carried out on the part of the audit assurance board,
material misstatement risk could be recognised in the books of accounts of the organisation
(Fleming, Hee and Romanus, 2014). Moreover, ASA 315 states that the auditors are needed
to follow the guidelines represented in the paragraphs A9 to A11 and A27 to A30. As a
result, material misstatements could be identified on the part of the auditors that raise the total
audit risk. Such relevant analysis would help the auditors to detect frauds, which the three
organisations might undertake in order to overstate its balance sheet statement. In this
context, Hardy (2014) advocated that frauds could be identified through ASA measures that
the organisations undertake in preparing their financial statements.

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Moreover, the auditors are needed to follow certain paragraphs in ASA 315 from
A105 to A108, since the risk related to material misstatement could be identified within the
business operations of the organisation. Furthermore, the evaluation could help to assert
different levels of transaction classes when the performance of the audit process is identified.
The auditors could detect the financial risks when the financial statements are assessed for
identifying the material misstatement, which limit the financial stability of the three
organisations. Hence, by implementing the process of audit, the auditors could evaluate the
viability of the annual reports of the entities (Harrison, 2015).
7. Research extent and application:
According to the annual report of the three organisations in 2017, Amcor Energy,
Newcrest Mining and Bluescope Limited have complied with ASA 701. Due to such
compliance, key audit matter is developed and this has minimised the overall audit risk of the
organisations. The audit risk could be identified with the help of the audit processes, which
are to be followed on the part of the auditors. In this context, special attention could be
provided to the railways processes in order to evaluate risk pertaining to the business
operations of the organisation (Knechel and Salterio, 2016). In the initial stage, risks are
required to be analysed in relation to the business goals, which could be found from the
annual reports of the three organisations. This enables in identifying the material
misstatements and as a result, it might lead to wrong depiction of the financial position and
performance of the organisations. Secondly, the approximation of risk significance is needed
for the auditors to the management of the entities, which should comply with the norms laid
down in the board of audit assurance. Moreover, it is vital for the auditors to detect those
risks that are likely to take place in future, as these could lead to material misstatements
(Pearson, 2014). Along with this, all the performed activities of the organisations should be
assessed in order to identify any kind of risk aroused due to such actions.
From the annual reports of the three organisations, it could be observed that PwC is
the auditor of Amcor Energy, while EY is the auditor of both Bluescope Limited and
Newcrest Mining. All of them have added a section of KAM in their annual reports, in which
the auditors provide explanation about the reasons behind significant events. Despite the fact
that they adhered to all the auditing standards, their unqualified audit opinion do not belong
to the same platform in contrast to their financial positions. Thus, there is limited scope of
understanding the financial compatibility and stability of these three organisations in the
absence of KAM. The reason is that the significant difference between these organisations
could be evaluated with the help of KAM (Ragothaman, Mock and Srivastava, 2014). For
instance, EY in its audit report of Bluescope Limited have included accounting for tax
positions in KAM (Assets.ctfassets.net, 2018). The recoverability related to deferred tax asset
is a KAM because of the financial importance of the asset, which is $85 million in the
consolidated tax group of Australia. PwC in its audit report of Amcor Energy has identified
impairment risk related to carrying amount of investment in AMVIG to detect whether share
price is reflected in the recoverable investment amount. Finally, EY in its audit report of
Newcrest Mining have included the taxation policy of its Indonesian subsidiaries from the tax
office of Indonesia with respect to the applicable rate of income tax (Annualreports.com,
2018). It seeks to recover the payment of additional tax amounting to $96 million. All the
amounts are considered to be material and thus, additional estimations are needed (Sanusi, et
al., 2014).

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8. Conclusion and recommendations:
After critical assessment of the relevant ASA standards such as ASA 701, ASA 315
and ISA 260, it is crucial for the organisations in representing their actual financial conditions
in the financial reports. Moreover, compliance with ASA 701 and ASA 315 is to be ensured
in its operations for conforming to the board of audit assurance. Along with this, Amcor
Energy, Bluescope Limited and Newcrest Mining are needed to gain an understanding of the
relevant standards and policies, which require being finished for representing the real
financial reports. The flow of information from the auditors to the investors could help in
obtaining an insight of the actual financial position of the organisations in order to undertake
relevant decisions related to investment. By evaluating the annual reports, the disclosures that
the organisations have made could be represented significantly to the users of the financial
statements.. In addition, it denotes that there is presence of conformance to ASA 315, which
is followed on the parts of the auditors as well as the entities. Thus, the use of ASA 315 has
enabled the investors of the organisations to detect material misstatement risk prevalent in the
entities.

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