Impact of Key Audit Matters on Financial Performance and Position

The assignment content discusses the importance of ASA 701 'Communicating Key Audit Matters in the Independent Auditor's Report' in ensuring the accuracy and reliability of financial statements. The case study of ABC Learning Centers collapse highlights the need for auditors to document key audit matters, such as related party transactions, staffing and recruitment costs, and going concern issues. The new auditing standard provides additional powers to auditors to provide concrete information to stakeholders and shareholders, thereby protecting investors from fake financial statements.

ASA701

Executive Summary
In the below case, we have highlighted the importance of ASA 701 Communicating Key Audit
Matters in the Independent Auditor’s Report. We have tried to provide the core reasons which
were behind the development of ASA 701 in Australia. Further, we have tried through the help
of an example collapse of ABC learning limited, the impact of the new auditing standards that
could have been in case, it would have been developed in the early 2000. Auditors powers in the
key audit matters definition has been clearly highlighted and explained in the below study.

Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Application of ASA 701..................................................................................................................4
ABC Learning..................................................................................................................................6
Application of ASA 701 on ABS Learning.....................................................................................8
Conclusion & Recommendations..................................................................................................10
References......................................................................................................................................11

Introduction
ASA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report” was set up
in line with the international auditing standard ISA 701 Communicating Key Audit Matters in
the Independent Auditor’s Report. To bring ASA 701 in line with the Australian legislation there
were certain differences which were kept in ASA 701 with international auditing standard ISA
701. These difference the captain the auditing standard, to keep the same in line with the
prevailing Australian legislation. The ASA 701 has been introduced in the country with an
intention to meet out the requirement of the shareholders and stakeholders of the company. The
stakeholders and shareholders of the company are not only interested in knowing about the
financial health of the company but also about the internal strength and future prospects of the
company as well. In earlier years, the auditor of the companies lack sufficient powers that were
required to highlight key audit issues to the users of the financial statement. The ASA 701
provides these powers to the auditor along with proper guidelines which they can refer to at
times of determining the key audit issues. Auditing standard has been launched by the
government with an intention to provide sufficient information to the users about the company
and to make them aware about the audit matters which may impact their decision making in
relation to investment in the company. (AUASB, 2015)

Application of ASA 701
An individual or companies who are interested in making an investment in a company interested
knowingly internal health and financial viability of a company. This can help them in decision
making related to investment in the company. The ASA 701 auditing standard will provide
necessary information and explanation that are required by the auditor to put key audit matters in
the audit report that can be useful for the uses of the financial statement. The international
auditing board in the recent times has made certain changes in the auditing standards keeping in
mind the consistent changes in the global economy and the Global threat. All these changes and
amendments are incorporated in ASA 701. As per the guidelines provided in the new auditing
standard, it provides information about all the key audit matters that required to be reported in
the audit report that may draw the attention of the user of the assistant financial statement. The
new auditing standard has highlighted the importance of judgment that needs to be used by the
auditor in determining key audit matters. The new auditing standards have also highlights the
importance of corporate governance and the people that are being charged with the governance.
The key audit message can also be communicated to the auditor by these people as well. At times
of determining the key audit matters, the auditors of the company are required to keep them self
safe enough. In this scenario, they are required to keep all necessary documents in their files
which may help them in future if any enquiry or any question comes in their way either being
raised by the government or by any of the uses of the financial statement. The new auditing
standards has also highlighted the importance of documentation that are required to be kept by

the auditors in relation to the key audit matters that they have reported in the audit report.
(Legislation, 2015)
With the help of this information, the stakeholders and shareholders of the company can monitor
the financial performance of the company based on the judgment and decisions that has been
taken by the management. However it should be understood that ASA 701 is different from ASA
570. The former cannot be considered as a substitute for the latter. The ASA 570 provides
information about the events that may impact the Going Concern capability of a company on the
other hand the ASA 701 provide guidelines about the key audit matters, their communication and
on other related matters.
ABC Learning
ABC learning was an Australian based company. The company was majorly engaged in
providing childhood care services not only in Australia but also in other parts of the globe
including Britain, United States etc. At times when company was functioning, it was among the
largest childhood education care services in the world. Company in the early 2000 was listed in
the Australian Stock Exchange. The market capitalization of the company rose to $2.5 billion by
the year 2006. The company in the year 2008 because of certain reasons collapsed. There were a
number of reasons which all together who are responsible for the downfall and collapse of the
company. The auditors of the company are of the opinion that the company is required to restate
its profit for the previous year’s reach out more comfortable position in the current year. The
company was facing hugh debt issues mainly during the subprime crisis making it difficult for

the company to resist. Ultimately, all these lead to the liquidation of the company in the year
2008. In the year 2009, the company was brought by Good start Limited. (Baaqeel, 2011)
As per the experts, the internal health of the company was not good. The accounting measures
that have been adopted by the company during the past years were unable to reflect the correct
financial position and financial health of the company. As a result of which, the stakeholders and
shareholders of the company were unable to make out the actual and true position of the
company. Because of the uneven and questionable accounting measures that have been adopted
by the company the profits were inflated every year, making the financial statement for the new
investor. As a result of the accounting measures, even the valuation of the assets of the company
does not sound reasonable. As per the studies, it has been proved that the management of ABC
learning was growing too fast in the early 2000. Remind guest not only in acquiring childhood
education care services in Australia but also in other parts of United States and even in Britain.
The first phase of the management can be determined from the fact that the company acquired
more than 650 childhood care services in 4 years i.e. from 2001 to 2005. (Hultin, 2015)
Further, it has been proved that the management of ABC learning was interested only in
acquisitions and growing its business rather than streamlining the existing business. It was
evident from the fact that more than 200 child care education services centre’s which were
functioning in Australia where at operational losses. With the increase in the number of child
Care Centre’s the staffing cost of the company was increasing at a faster pace. In the initial
years, restarting was being done by the top management itself saving d recruitment cost of the
consultancies. But later on being the top management was concerned more towards growth, they
started outsourcing the job of hiring people for the child Care Centre’s. This has led to increase
in the staffing and recruitment cost which has put additional button on the profit and loss

statement of the company. Due to bad accounting measures, the revenue figures of the company
work at a terrible state. The accounts of the company were so complex that the auditors need to
spend more than the expected time. Because of the shady accounts, the shares of the company
were delisted from the stock exchange in the year 2008-09. The company was not able to attract
any buyers. At last the company was purchased by Good Start Limited. There has been multiple
instances in the accounts of the Company where it was proved that the manager of the company
has entered into related party transactions which were not been taken place at arm's length price.
The management of the company never agreed to these comments and stated that the transaction
that has taken place with the related party are always been taken place at arm's length price. The
transactions with has been taken place with an intention to provide indirect benefit to the top
management of the company. Because of all these transactions, the reputation of the company
was hampered; the investors who have already invested in the company and those who were
willing to invest in the company lost their trust in the company. (Keane, 2008)
The management of ABC Learning limited never focused on streamlining the existing process
and believed only in acquisition of new childcare education services centre irrespective of the
cost price although they were aware that the price which they were playing for acquiring the
child care services centre is too high and can be reduced with a certain amount of negotiations
with the other party. (Kruger, 2009)
Application of ASA 701 on ABS Learning
It has been stated that if ASA 701 would have been introduced in the earlier years i.e. in the year
2005, there might be a possibility that ABC learning Limited would not have collapsed and

investors would have not lost so much of amount by investing in the company. The help of the
new auditing standard the auditor's would have disclosed the key audit matters that could have
hampered the financial performance and position of the company. There were numerous
instances that would have arose the attention of the auditors and they would have treated the
same as key audit matters which would have attracted me investors and shareholder of the
company towards itself. It has been stated that the management of the company was not at all
concerned about the business operations in the later stage of 2001 -2 005 and the financial of the
company was maintained in a terrible state. That would have been treated as key audit matter for
the auditors. The auditors in this case is not even required to use their basic judgment to
determine the key audit matters as the same was clearly evident from its promise very nature.
There was sufficient proof which states that the management was more interested in acquiring
different child Care Centers across the globe rather than concentrating end streamlining the
business could have been a big business issue and key audit matter. (News, 2012)
It has been proved that the manager of the company was indulged in related party transactions in
order to provide indirect benefits to the top management of the company. The management have
stated that all these transactions have been taken place at arm's length price and were not been
taken place to provide any indirect benefit to the top management of the company. The auditors
in this case would have documented sufficient proofs and should have used this as a key audit
matter in the audit report and should have documented the same and their working files for future
reference.

Further, it has been proved that the staffing and recruitment cost of the company has been
increasing at a faster place due to fast acquisition of large number of childcare education services
centre. This has been alarming for the company being the major cost was being utilized in
bearing the staffing cost of the employees. The auditors in this case keeping in mind the
provision of ASA 701 should have used their basic judgment and consider this event as a key
audit matter and highlight this in the audit report for the shareholders and stakeholders of the
company. The major business operations of the company were coming from Australia. In the
later years, it was stated that more than 200 child care service centre’s are suffering from
operation losses. This was again alarming for the auditors of the company as it was going to
impact the Going Concern capacity of the company. They should have been treated as a key
audit matter for the auditors of the company.
In the current business scenario with the growing global economic crisis and other situations, the
need of new auditing standards like ASA 701 has increased. Management of the companies
nowadays tends to manipulate the numbers for their own good. They are likely to present fake
financial statements which may provide information related to death financial performance and
position which are charming for the investors and attract them to make a decision related to
investment in the company. Because of all these transactions and fake financial statements, the
investors who have made investment in these companies have lost numerous amounts. In earlier
years, the auditor of the companies lack sufficient powers that were required to highlight key
audit issues to the users of the financial statement. The ASA 701 provides these powers to the
auditor along with proper guidelines which they can refer to at times of determining the key audit
issues. Auditing standard has been launched by the government with an intention to provide

sufficient information to the users about the company and to make them aware about the audit
matters which may impact their decision making in relation to investment in the company
Conclusion & Recommendations
ASA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report” was set up
in line with the international auditing standard ISA 701 Communicating Key Audit Matters in
the Independent Auditor’s Report. The new auditing standards are a step that has been taken by
the Australian government for the betterment and for the protection of the investors who based
on a mere financial statement decides to make investment in the company. This will lead to the
protection shield for these people and even for the auditors who can use the provisions and
guidelines provided in the new auditing standard to provide better and more accurate information
to the investors and other uses of the financial statements.
The Global economic crisis that has been spreading all across the globe nowadays is majorly
because of fake and manipulating information that has been put in the financial statement by the
companies to attract the investors for investing there hard earned money in the company.
Through the help of these new auditing standards, the reporting authority can keep a track on the
financial health of the companies. The new auditing standards ASA 701, tends to provide the
judgment feature to the auditors which has open new gates for the auditors and has provided
additional powers to go beyond the line and provide concrete and relying information for the
stakeholders and shareholders of the company based on which we can take investment related
and another decisions for the company.

References
AUASB, 2015. Auditing Standard ASA 701. [Online] Available at:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 9 Set 2017].
Baaqeel, R., 2011. Case Study Of ABC Learning Centers Collapse. [Online] Available at:
http://rayanbaaqeel.blogspot.in/2011/06/case-study-of-abc-learning-centers.html [Accessed 9
Sept 2017].
Hultin, R., 2015. The Collapse of ABC Learning Centres. [Online] Available at:
https://prezi.com/xiirpxey5eu1/the-collapse-of-abc-learning-centres/ [Accessed 9 Sept 2017].
Keane, B., 2008. ABC learning collapse is a policy failure. [Online] Available at:
https://www.crikey.com.au/2008/11/07/abc-learning-collapse-is-a-policy-failure/ [Accessed 9
Sept 2017].
Kruger, C., 2009. Lessons to be learnt from ABC Learning's collapse. [Online] Available at:
http://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-
78f8.html [Accessed 9 Sept 2017].
Kruger, C., 2011. Numbers finally start to add up as operators go back to basics. [Online]
Available at: http://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-
back-to-basics-20110121-19zy6.html [Accessed 9 Sept 2017].
Kruger, C., 2012. Five-year suspension for former ABC Learning auditor. [Online] Available at:
http://www.smh.com.au/business/fiveyear-suspension-for-former-abc-learning-auditor-

20120808-23uj8.html [Accessed 9 Sept 2017].
Legislation, F.R.o., 2015. ASA 701. [Online] Available at:
https://www.legislation.gov.au/Details/F2015L02016/Explanatory%20Statement/Text [Accessed
9 Sept 2017].
News, A., 2012. Auditor suspended over ABC Learning report. [Online] Available at:
http://www.abc.net.au/news/2012-08-08/auditor-suspended-over-abc-learning-report/4185408
[Accessed 9 Sept 2017].