Key Audit Matters in Auditing

This document discusses the concept of Key Audit Matters in auditing and their significance in communication and determination. It provides an overview of ASA 701 and its role in addressing key audit matters. The document also includes examples of key audit matters in the case of Aristocrat Leisure, a gambling industry company. Topics covered include revenue recognition, income taxes, and accounting for acquisitions.

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AUDITING

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Contents
ASA 701:....................................................................................................................................3
Determination of the key audit matters:.....................................................................................4
Communication of the key audit matters:..................................................................................4
Aristocrat Leisure-Key audit matters:........................................................................................4
References..................................................................................................................................8

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ASA 701:
In light of the recent cases that have occurred, many new audit regulations have been added
into the system that would help an auditor to consider the key areas wherein his intervention
is required. These regulations have been introduced since the collapses of the companies have
led to the loss of confidence of the investors and they are afraid to trust the companies for
making their investments (IFAC, 2019).
Hence, an auditing standard with the name of Key Audit Matters has been introduced that
helps in the determination of the matters that have to be communicated to the management or
to the people that are responsible for that. The following are the matters in respect of which
an auditor requires to pay some attention:
 Determination of the main matters that have to be communicated to the management
and to the ones that are responsible
 Considering the various areas wherein a higher risk has been reported and that require
major auditor judgments and this involves the use of the major management
judgements and the effects of those significant events and the transactions. This
further includes the determination of the main matters for the purposes of including
them in the auditor’s report.
These audit matters are the important areas the basis of which an auditor has expressed his
opinion but it has to be considered that these matters do not in any serve as a substitute of the
disclosures in the financial report in the context of the audit of having expressed an opinion
on the financial report. In case, the auditor fails to report on such risks, then that would be
deemed to be unfair presentation of the professional skills and judgements. The audit opinion
that he has expressed should be in line with the specific audit engagement and also, in
accordance with the ASA 705. This shall be substituted by the requirements of ASA 570 (2)
when there is a material uncertainty that exists in relation with the events and the conditions
that is able to affect some significant issues on the ability of the company to continue as a
going concern. There shall be a separate section on the opinion of the auditor on some of the
specific matters, as he may deem necessary and the basis of the facts and the circumstances
of each case.

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The SA 701 deals with the addressing of the judgement of the audit which is required to be
exercised while expression his opinion on the annual report of the company. The main aim of
the communication of these key audit matters include the following:
 Enhancement of the value of communication of the auditor by the way of offering a
better transparency about the auditor that has been executed
 It would help the company in gaining some additional amount of information on the
facts contained in the financial statements that would help the auditor in
understanding the matters that are of an importance for the company and also, that are
important to be reported in the financial statements of the company.
 These matters would also help the company and of the users of its financial statements
to understand the company and also that are important to be understood by the
management of the company (AUASB, 2015).
The communication of these matters forms the basis of the opinion of the auditor on the
financial statements.
Determination of the key audit matters:
In respect of the matters that require some communication, these require some special
attention of the auditor when being executed. These must include the consideration of the
following:
 The areas wherein the management or the auditor has determined that there exists
some higher risk of the material misstatement or there are some main risks as per the
requirements of SA 315 (Jade, 2019).
 When there is there is a requirement of judgment to be exercised by the auditor with
regard to the areas of the annual reports wherein the management considers it
necessary to invite the judgement of the auditor. This include the accounting estimates
that are identified with a high amount of an uncertainty.
 An effect of such of the auditor is the fact that they have an impact over the
substantial transactions or the events that have taken place in the year (Clear tax,
2019).
An auditor is duty bound to consider such matters and these must be in line with the relevant
areas and hence, these are termed as the key audit matters.

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Communication of the key audit matters:
An auditor should be able to describe the main audit matters that require some judgment
under the sub heading of “Key Audit Matters”.
All of these audit matters must be reported by an auditor and should form the basis of his
audit opinion. All these disclosures form the part of his audit report. The description of each
audit matter which is being considered to be important should be accompanied with the
relevant examples and the description and the disclosures of the matters that are important for
an audit and that are considered to be the key audit matter and the way in which such matter
has to be addressed while undertaking the audit of that company of that year (KPMG, 2017).
An auditor is duty bound to report the key audit matter unless and until, there is any rule or
there is an existence of any regulation that prohibits the disclosure of the same or wherein an
auditor deems fie or wherein he is of the view that there is no existence of such of the audit
key matters. And also, where he feels that the disclosure of the same would not be of any
importance to the users of the financial statements.
In case, the auditor deems fit, then he shall provide his report under the heading of “Key
Audit Matters”. An auditor shall communicate the above stated matters with the people
charged with governance.
In respect of the documentation which is required for the above, an auditor would include the
matters that are included in the audit report when he considers the purpose of the
communication of the stated matter. Also, the documentation would include the fact or the
reason behind the non-inclusion of the key audit matter to the management (CPA Australia,
2019).
Aristocrat Leisure-Key audit matters:
The key audit matters are the ones that are included by the management in the Annual report
and hence, these have been addressed keeping in mind the entire year. An audit opinion has
been formed on it and there is no separate audit opinion on it. All of the audit procedures and
the steps undertaken have been included therein in this section by the auditors of the
company.
The following were the key audit matters of the company under taken review, which is
Aristocrat Leisure (Gambling industry):

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Recognition of revenue which were reported at $3549.8 million. A majority portion of
the total revenue that has been reported in the financial statements of the company
comprise of the multiple arrangements made by the company in respect of the sales of
machinery and the contracts for the system. These contract for arrangement for the
system contracts and the sale of machinery is complex due to the presence of delayed
settlement by the customers accompanied with a delayed delivery and bundling of the
various products. When the sales are to be made to the distributors, then there is a
chance that the same would not involve the inclusion of the risk of transfer of
inventory and the sale would not be reported in the revenue of the financial year. This
would lead to a material misstatement in the revenue that would be reported in the
annual report of the company. Hence, due to these reason, the auditor has
concentrated on the recognition of the revenue that has been reported. Further, the
auditor has developed an understanding of these systems, controls and the processes
that form the basis of the revenue. He identified the transactions and then tested them
and assessed them for a higher risk of sales. This was done so that the sales could be
reported in the correct accounting period. The present value of the consideration was
recalculated by the group in respect of the delayed settlements during the time of the
testing and they were found to be accurate. Wherein the company has reported
delayed deliveries, the risk connected with the inventory have been transferred into
the customer before the date of the finalisation of the balance and the, auditor has
tested them in sample basis. Wherein there was a bundling of some different products,
the company has compared the allocation of the revenue to the products that have
been sold. This was again tested on sample basis. All of the implied discounts were
allocated using some pro rate basis amongst the products and the same have been
recognised in the correct period of accounting.
In respect of the income taxes, the company has branches all over the world and
hence, it is governed by various different tax regimes and tax legislations and these
are administrated by different taxation authorities. There are various different transfer
pricing arrangements between the different countries which is quiet complex. The
company has assessed the uncertain taxation provision with respect of the accounting
transactions that have not been assessed by the taxation authorities as on the date of
the balance sheet. The company has also recognised some of the provisions that were
connected with the various different taxation provisions. But still, there is an existence
of some of the assessments that remain to be open for challenge. Still, there is a risk

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exposure for the company from the taxation authorities which could affect the
changes in the accounting estimates of the company. The auditors have though
worked with the internal taxation experts that are able to assess the accounting of the
company for some tax provisions that are not certain and that exists as on the date of
the balance sheet. There are many matters that require some consideration which
include the relevant correspondences from the taxation authorities, relevant
communication from the taxation advisors of the company, the consistency of these
assumptions that have been undertaken by the management with regard to the
business transactions undertaken during the year, the relevant taxation legislations and
the assessment of the appropriateness of the various disclosures in the company’s
annual report.
Accounting for acquisitions made by the company: the company has made 2
acquisitions during the year. The first being of Plarium Global Limited on October 19,
2017 wherein the company has acquired its 100% shares with the amount of $700.3
million and the second being that of Big fish Games Inc on January 10, 2018 with the
amount of consideration of $1257.9 million. the accounting for these acquisitions
formed a major key audit matter which was to be considered and reported due to the
presence of the amount of consideration which was involved and there was a need of
judgment to be involved due to the allocation of the total amount of the consideration
which was to be applied along with the assets and the liabilities that were acquired for
these 2 acquisitions. Also, these were important since there was a need of estimation
of the purchase consideration with regard to the contingent consideration arrangement
for Plarium. The auditor did its work and he evaluated the accounting policy of the
company as against the rules and requirements that have been laid down under the
Australian Accounting Standards, he read all of the purchase contracts that were
involved between both the parties, assessed the basis and the composition of the
purchase consideration in the execution of these contracts that were in line with the
accounting of the acquisitions of the group. Also, the assessment of the calculation
involved in the contingent consideration was determined and whether the same was in
line with the various contractual agreements and the requirements of the Australian
Accounting standards also. There was an assessment of the fair values of all of the
assets and the liabilities that have been recognised was also considered. The use of the
various models and the fair values of all of the assets and the liabilities that were
acquired have been considered and the various assumptions with regard to the

AUDITING 8
discount rates along with the sensitivity analysis with regard to the models of
valuation and the capability of the experts of the management that helps in the
estimation of the fair values of the various assets and the liabilities was considered.
The adequacy of the various different disclosures of the business combination were
also considered.
With regard to the estimated recoverable value of the goodwill: there are 3 companies
involved, the first being Video Gaming, the second being Plarium and the third being
Big Fish. These has the total amount of goodwill of $2731.5 million. This amount is
much high than what is considered to be material. The goodwill recognised in the
financial statements are mainly connected with these 3 companies. There was a focus
on the recoverable amount testing since the judgement of the auditors included the
involvement of the recoverable amounts as on the date of the balance sheet. The
recoverable amount of the goodwill was assessed using the various different
assumptions about the future results of the forecasts of the business growth, the
forecast of the revenue, the discount rates that apply and the terminal growth rates that
apply. This is done for the purposes of assessing the recoverable amount of the
goodwill. The auditors of the company evaluated and challenges the forecasts of the
amounts estimated by the company and the process with which the same were
forecasted. The auditors compared these amounts with the estimates that were
prepared by the Board or the group and were as per the plan approved by the group
and found them to be in line with them. The auditors also, compared the estimates
made by the group with the external estimates and the information. They further
analysed the 3 companies with regard to the actual results for the purposes of
assessing the performance of the companies and also considered the historical results
of these companies. The cash flow estimates were also considered for all of these 3
companies and the assessment of the reasonableness for any change was also made.
the auditors of the company challenges the terminal growth rate adopted by the
company by the way of comparing the economic and the industry forecasts and the
discount rates that were applied to the company accompanied with the comparable
organisations along with some of the specific factors pertaining to territory.
Sensitivity analysis was done in respect of these 3 companies by the way of
considering the key assumptions. The various recoverable amounts were also
considered for the purposes of assessing the growth rates and the discount rates. The
auditor’s then checked the calculations of the various valuation that were used for the

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purposes of calculating the recoverable amounts. The adequacy and the relevance of
all of the disclosures that were connected with the recoverable amount of the goodwill
was also considered (Annual report Aristocrat Leisure, 2018).

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References:
Aristocratleisurelimited.gcs-web.com. (2019). Annual report 2018. [online] Available at:
https://aristocratleisurelimited.gcs-web.com/static-files/9527b2df-e411-4c49-8067-
d2f391a0fbe0 [Accessed 15 May 2019].
Assets.kpmg. (2019). Key Audit Matters Auditor’s report snapshot 20 September 2017.
[online] Available at: https://assets.kpmg/content/dam/kpmg/au/pdf/2017/key-audit-matters-
auditor-report-20-september-2017.pdf [Accessed 15 May 2019].
Auasb.gov.au. (2019). Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 15 May
2019].
Cleartax.in. (2019). SA 701 Communicating Key Audit Matters in the Independent Auditor’s
Report. [online] Available at: https://cleartax.in/s/sa-701-communicating-key-audit-matters
[Accessed 15 May 2019].
Cpaaustralia.com.au. (2019). Auditor reporting. [online] Available at:
https://www.cpaaustralia.com.au/professional-resources/audit-and-assurance/auditor-
reporting [Accessed 15 May 2019].
Ifac.org. (2019). Auditor Reporting Standards Implementation: Key Audit Matters | IFAC.
[online] Available at:
https://www.ifac.org/global-knowledge-gateway/audit-assurance/discussion/auditor-
reporting-standards-implementation-key [Accessed 15 May 2019].
Jade.io. (2019). Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. [online] Available at: https://jade.io/j/?a=outline&id=541922
[Accessed 15 May 2019].