Auditing and Assurance

This study material provides an in-depth analysis of auditing and assurance. It discusses the rationale for ASA 701, explains the standard, and explores the key auditing matters of top ASX 100 companies in the utilities industry. The material also includes recommendations for auditors.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
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Table of Contents
Introduction................................................................................................................................2
Rationale for ASA 701:..............................................................................................................2
ASA 701: Explanation...............................................................................................................4
Key auditing matters of top ASX 100 Companies of Utilities Industry:...................................4
Carnegie Clean Energy Ltd:...................................................................................................5
AGL Energy Ltd:...................................................................................................................5
Ausnet Services Ltd:..............................................................................................................6
APA Group:...........................................................................................................................8
Conclusion and recommendations:............................................................................................9
References:...............................................................................................................................11

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Introduction
Auditing is better regarded as the procedure of implementing check and assessing
books of accounts of an organization. Auditing is performed following the check on
inventory for all the departments of company and to examine all the documents of accounts.
Recently, the profession of audit has faced wide criticism for contributing to the downfall of
numerous large companies all across the world (Quick and Henrizi 2018). Because of the
rising criticism and concerns, the profession has also seen the adoption of newer standard for
accounting such as ASA 701 Communicating Key Audit Matters in the Independent Auditor’s
Report. However, there is also a revision made in current auditing standard namely ASA 570
Going Concern and other relevant standards.
The report aims to make an attempt to discuss regarding the main rationales regarding
the introduction of ASA 701. The report would also discuss the components of the standards
in the current report. The report would also make an attempt of determining the efficiency of
auditors in regard to the Key auditing matter (KAM) that are reported in the utilities
companies of the top 100 ASX listed mining company.
Rationale for ASA 701:
The decline of Lehman Brothers is viewed as the largest corporate downfall where the
auditors were mainly held responsible. In the event of Lehman Brothers failure, the
company’s management deliberately used the Repo instrument to strengthen their balance
sheet artificially to $50 billion (Raiborn et al. 2017). Even though the auditors of the
company knew about the ill-practice adopted by the management and they simply overlooked
as the noteworthy audit matte. The auditors provided the Lehman Brothers management with
the unqualified report. This is regarded as the main reason for the decline of the company and
contributed to the 2008 financial crisis.

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The above stated two activities were accountable for the introduction of newer
auditing standard that was known as ASA 701. The new auditing standard was bought with
the purpose of imposing responsibilities and obligations on the auditors regarding important
matters such as transactions that lacked in the event of Lehman Brothers (Mat Zain, Zaman
and Mohamed 2015). Eliminating the gaps in auditing is the primary reason behind the
adoption of new auditing standards. Following the collapse of the Lehman Brothers under the
new auditing standard of ASA 701, the auditors are required to make disclosure of the
auditing matters that contains highest risks in the auditor’s report where the users of financial
statement can understand regarding the presence of risks (Farkas and Hirsch 2015).
In the event of Lehman Brothers, the auditors simply failed in assessing and analysing
the accounting judgements that were used by the management which eventually contributed
to audit failure (Knechel 2016). The introduction new auditing standard was mainly aimed at
placing the responsibilities on auditors to take into the account the assessment of
managements judgement, assumption and estimation under different features of the financial
reporting.
In addition to this, the Lehman Brothers auditors were failure in determining the
ability of the company to continue as the going concern and this was regarded as the main
error in audit of the business (Kassem and Higson 2016). The financial crisis of 2008 made it
evident that any small changes in the financial market can significantly contribute to the
going concern ability of the company. The changes in the financial market also contributed to
the downfall of Lehman Brothers and required appropriate measures to address the issue with
sufficient industry reformations. This led to the introduction of ASA 570 going concern and
the auditors are required to obtain better understanding of the audit evidences to examine the
material misstatements in financial reports because of the inadequate use of going concern

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accounting basis (Roussy and Brivot 2016). It is noteworthy to denote that the availability of
the new accounting standard would avoid another Lehman Brothers.
ASA 701: Explanation
The application of ASA 701 repeats the commitment stated by AUASB to comply
with the recent auditor’s reporting that is enhanced by the IAASB. The main purpose of
introducing the ASA 701 is to facilitate adequate communication of the key audit matters of
the business with the help of auditor’s report (Desai et al. 2017). It is worth mentioning that
there some important features of the ASA 701 where the auditors are required to comply with
the standards. These are as follows;
a. The standard requires the auditors to effectively and adequately communicate the key
auditing matters in the audit report for the listed companies.
b. The standard is helpful in forming a major change in the reporting standards with
other explanatory materials associated to the effective communications of the
important audit matters in the auditor’s report (Appelbaum and Nehmer 2017).
c. It acts as the basis for ascertaining the key auditing matters.
d. It lay down the process for the auditors to effectively explain the key audit matters
e. The standard is helpful in explaining the situations where the auditors are not required
to communicate the ascertained KAM in the auditor report; and
f. The standard is helpful in documenting the key audit matters.
Key auditing matters of top ASX 100 Companies of Utilities Industry:
In order to ascertain the efficiency of the auditors regarding the reporting of the key
audit matters, Australia’s utility industry has been considered and based on which top 100
ASX listed companies under the utility industry is taken into the consideration (Heenetigala

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et al. 2015). The below listed are the details regarding the discussion of the key audit matters
for the selected companies.
Carnegie Clean Energy Ltd:
The auditors have identified two key matters of auditing. This includes the revenue
recognition procedure and intangible assets. For the intangible assets the auditors have stated
that the carrying value of the intangible assets that comprises of the technology development
and goodwill was treated as the significant component of the company’s total asset
(Carnegiece.com 2019). The valuation of intangible assets by the auditors holds key
significance due to its implication on the company’s total asset and impairment charges to the
company’s result. The management have applied significant amount of judgement of whether
there were any indicators of impairment and ascertaining the recoverable value.
The auditors have considered that the segment in which the company operates
increase the uncertainty in forecasting of cashflows that is used in the valuation model. While
the auditors have also stated that recognition of revenue is associated to the revenue produced
from the activities of contracting (Yee et al. 2017). The auditors have found that company
measures the revenue upon the stage of completion of contracts. The completion stage is
computed based on the portion of total costs that is occurred on the reporting date in
comparison to the estimation of the management’s total cost of contract. The auditors have
placed their focus on the key audit risks because of the degree of management estimation
involved in ascertaining the costs to completion.
AGL Energy Ltd:
The auditors of AGL Energy have identified three key audit matters namely the
unbilled revenue, unbilled distribution costs and the financial instruments. The auditors have
noticed that company has disclosed a revenue of $938 million in the annual report which

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represents the amount of gas supplied and value of electricity to customers from the date of
last meter reading till the date of last meter reporting where no bills has been issued by AGL
to customers following the conclusion of reporting period (Agl.com.au 2019). Significant
amount of management judgement is needed to project the customer consumption from the
last invoice till the date of ending reporting period to ascertain the unbilled amount of gas and
electricity at the reporting date.
For the unbilled distribution costs, the management has estimated the energy
consumption from the date of last invoice from distributors to the date of end reporting
period. The auditor’s states that a significant amount of management judgement is needed
from the last invoice date till the end of the reporting period to ascertain the distribution cost
that are payable till the reporting date.
For the financial instruments the auditors have noticed that AGL has entered into
numerous financial instruments that also includes the derivative financial instrument to hedge
the company’s exposure towards variability in the rate of interest, foreign exchange
movements and energy prices (Knechel and Salterio 2016). The company has reported
financial assets of $640 million and the total of derivative financial liabilities comprised of
$615 million. The auditors in their KAM have stated that the financial instruments are
recognized based on the fair value as needed by the relevant accounting standard. The
auditors have stated that the significant amount of judgement is necessary to value and
account for the above stated financial instruments and also includes the understanding as well
as applying the terms of contracts, future forecasting of prices and implementing the discount
rates.

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Ausnet Services Ltd:
The auditors have identified the key audit matters that are relevant in the auditing
process. This includes the recognition of revenue, valuation of non-current assets, accounting
for project related expenses, valuation and accounting for derivatives (Ausnetservices.com.au
2019). The recognition of the revenue is regarded as the key audit matters because of the
nature of regulatory framework and billing procedure for the distributing the electricity and
gas, and transmitting the electricity in Victoria that adds to the difficult of the audit approach.
The KAM of the auditor’s states that there is an inherent complexity in the company’s
customer billings procedure to project the energy that is consumed and to ascertain relevant
tariffs rates.
For the non-current assets, the auditors have recognized the key audit matters because
of the complexity of regulatory framework to ascertain the revenue and expenses that are
applicable to each of the company’s cash generating unit. The auditors have also recognized
the complexity in auditing the forward looking assumption that are applicable to the
company’s discounted cash flow models for every CGU provided that there is a significant
amount of assumption is involved (Ausnetservices.com.au 2019). The auditors have faced the
challenges that were related with the auditing of the company’s long-term cash flow
forecasting model. While for the PPE the KAM is associated to the audit is the project related
outgoings because it holds significance on capital and operational expenses in relation to
building and maintaining the reliable network for both the financial position statement and
income statement. The auditors have identified the complexity in their audit judgement that
were related to the classification between the capitalised and operational expense. The
complexity in judgement also includes whether the capital projects constitute future benefit
for the company.

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For the valuation and accounting for derivatives the KAM includes the size as well as
complexity of the company’s derivative portfolio. It includes the company’s undertaking
capital management activities during the year that effects the company’s derivative portfolio
and forming a new hedge relationship (Hay, Stewart and Botica Redmayne 2017). The
valuation and accounting for the derivatives is regarded as the key audit because of the
inherent complexity and judgements in imposing the accounting principles for the valuation
as well as disclosure of the derivatives and associated activities of hedging.
APA Group:
For the APA Group the auditors have recognized two key audit matters. This includes
the carrying amount of the PPE, Goodwill and other Intangible assets. The auditors have
stated that the assessment of the recoverable value of the company’s PPE, Goodwill and other
balances of the intangible assets needs the use of significant judgement in relation to the
factors namely the discount rates of spare capacity along with the economic assumptions in
the form of inflation.
The auditors have recognized the derivative transaction and its balances including the
hedging of accounting as the KAM (Www.apa.com.au 2019). As a result, the company is
exposed to the interest rate as well as financial exchange rate movements and enters in
derivative financial instruments to administer the exposure of interest rate swaps to mitigate
the risk of increasing rates and cross currency risk that are related with the denominated
borrowings of the foreign currency (Ganesan et al. 2019). The company has made us of
forward exchange contracts for hedging the portion of exchange rate risks that is not covered
by the US dollar borrowings.
With respect to the above stated analysis of the KAM for the utilities companies it is
understood that the auditors are efficiently communicating the key audit matters with respect

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to the ASA 701. At first the auditors have been successful in ascertaining the key audit
matters by taking into the account the necessary aspects such as judgement, assumptions and
estimations (Becker, Stead and Stead 2016). Following that, the auditor has also developed
the sufficient audit process that can be implemented for lowering the risks. Such kind of
effective reporting of the KAM by the auditors in the report makes sure that the financial
statement users are able to obtain the needed information relating to recent financial events
and transactions that important in their decision making procedure.
Conclusion and recommendations:
On a conclusive note it is understood from the above stated analysis that corporate
downfall of the Lehman Brothers and the simultaneous occurrence of the 2008 financial crisis
is regarded as the main reason for introducing the new auditing standard (Hoque and Pearson
2018). The discussion made above explains that the auditors are important in reporting the
key audit matters for an organization. In the profession of auditing the key audit matters is
regarded as the professional judgement that are highly significant in the audit of the financial
report. Below listed are some of the vital recommendations;
a. The ASA 701 requires the auditors to take account of the effective reporting of the
key audit matters. To recognize the KAM, a recommendation can be made to auditors
to adopt adequate auditing strategies for the smooth audit process that is helpful for
the auditors in recognizing the significant auditing transaction and events that may
result in material misstatement in financial reports.
b. The auditors are recommended that they must adequately communicate the key audit
matters with the help of relative parties by reporting them in auditor’s report. This
should include the significant transactions and events which may result in material
misstatement in the financial reports.

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c. While conducting the audit of financial report of a business in agreement with the
ASA 701, the auditors are recommended to maintain the professionalism and their
integrity principle because it is considered helpful in ascertaining the suspicious
events and transactions that holds significance in audit of the customers.
d. The auditor is also recommended to maintain their professional scepticism at the time
of dealing with KAM in the financial statements of the audit clients.
e. Finally, an important recommendation can be made to the auditors is the necessity of
maintaining the audit compliance in accordance with the principle and policies of
ASA 701 for the effective determination as well as the recognition of the key audit
matters. This will be helpful in maintaining sufficient communication of the key audit
matters. Therefore, on following the above stated recommendations will help in
eliminating the errors in auditing and would strengthen compliance.

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2018annualreport.agl.com.au. (2019). Annual Report 2018. [online] Available at:
https://www.2018annualreport.agl.com.au/ [Accessed 20 May 2019].
Appelbaum, D. and Nehmer, R.A., 2017. Using drones in internal and external audits: An
exploratory framework. Journal of Emerging Technologies in Accounting, 14(1), pp.99-113.
Ausnetservices.com.au. (2019). Company reports. [online] Available at:
https://www.ausnetservices.com.au/Misc-Pages/Links/Investor-Centre/Company-reports
[Accessed 20 May 2019].
Becker, L.L., Stead, J.G. and Stead, W.E., 2016. Sustainability assurance: a strategic
opportunity for CPA firms. Management Accounting Quarterly, 17(3), pp.29-29.
Desai, R., Desai, V., Libby, T. and Srivastava, R.P., 2017. External auditors' evaluation of the
internal audit function: An empirical investigation. International Journal of Accounting
Information Systems, 24, pp.1-14.
Farkas, M.J. and Hirsch, R.M., 2015. The effect of frequency and automation of internal
control testing on external auditor reliance on the internal audit function. Journal of
Information Systems, 30(1), pp.21-40.
Ganesan, Y., Haron, H., Amran, A. and Ooi, S.K., 2019. Corporate Social Responsibility in
SMEs: The Role of Non-Audit Services. In Corporate Social Responsibility: Concepts,
Methodologies, Tools, and Applications (pp. 1594-1609). IGI Global.
Hay, D., Stewart, J. and Botica Redmayne, N., 2017. The role of auditing in corporate
governance in Australia and New Zealand: a research synthesis. Australian Accounting
Review, 27(4), pp.457-479.

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Heenetigala, K., De Silva Lokuwaduge, C.S., Armstrong, A.F. and Ediriweera, A., 2015.
Independent Assurance of Sustainability Reports of Utility Sector Companies in Australia.
Hoque, Z. and Pearson, D., 2018. Accountability reform, parliamentary oversight and the role
of performance audit in Australia. VALUE FOR MONEY, p.175.
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https://www.apa.com.au/globalassets [Accessed 20 May 2019].
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Raiborn, C., Butler, J.B., Martin, K. and Pizzini, M., 2017. The internal audit function: A
prerequisite for Good Governance. Journal of Corporate Accounting & Finance, 28(2),
pp.10-21.

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Roussy, M. and Brivot, M., 2016. Internal audit quality: a polysemous notion?. Accounting,
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