This document provides an overview of auditing and assurance services, with a focus on the introduction of ASA 701 and its rationale. It also analyzes the Key Audit Matters (KAMs) of companies in the Australian consumer discretionary industry. The report concludes with recommendations for auditors and users of financial statements.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Running head: AUDITING AND ASSURANCE SERVICES Auditing and Assurance Services Name of the Student Name of the University Author’s Note
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
1AUDITING AND ASSURANCE SERVICES Table of Contents Introduction................................................................................................................................2 Rationale for ASA 701...............................................................................................................2 Explanation on ASA 701...........................................................................................................2 Analysis of KAMs of the Companies under Australian Consumer Discretionary Industry......3 Conclusion and Recommendations............................................................................................5 References..................................................................................................................................6
2AUDITING AND ASSURANCE SERVICES Introduction Auditing is refereed to process to systematically analyse and inspect the financial statements of the audit clients in order to make sure that they are free from material misstatements due to fraud and errors (William Jr, Glover and Prawitt, 2016). Certain major changes have been brought in the audit process in the recent years and the introduction of ASA 701Communicating Key Audit Matters in the Independent Auditor’s Report(ASA 701)can be considered as one of those significant changes (Carson, Fargher and Zhang 2016). There are two parts of the report. The aim of the first part of the report is the analysis of rationale behind the introduction of ASA 701 and to discuss about it through considering the related aspects. The aim of the next part of the report is the analysis is the effective in the reporting of the Key Audit Matters (KAM) in all the ASX top 100 listed companies under the Australianconsumerdiscretionaryindustry.Thereportendswithaconclusionand appropriate recommendation. This report is important for gaining understanding in different aspects of KAM along with their proper auditing treatment. Rationale for ASA 701 In the recent years, massive increase can be seen in the numbers of corporate collapses where the auditing failure has played a crucial role. One of such cases is the collapse of Lehman Bros. where the auditor provided unqualified audit report in spite of the presence of certain issue in their financial statements. The management of Lehman Bros. used Repos in order to hire the high leverage position at the time of auditing which boosted the balance sheet of the company by $50 billion (theguardian.com, 2019). The auditor of LehmanBros.waswellawareoftheseaccountingmanipulationsandstillprovided unqualified audit opinion by ignoring these aspects which led to the collapse of the company (theguardian.com, 2019). The collapse of Lehman Bros. and the financial crisis of 2008 led to the development of the new auditing standard of ASA 701 in the independent’s auditor’s report. The main motive behind the development of this new auditing standard was to address the auditing issues that the auditors did not adders in the case of Lehman Bros (Xu, et al., 2013). It was needed to address the loopholes existed as a result of poor auditing and the new standard was recommended for this. It would be possible to note as well as communicate several key audit matters in case this new standard was applicable at the time of the collapse of Lehman Bros (Xu, et al., 2013). The new standard puts the obligation on the auditors to disclose the areas with high-audit risk. Basically, this new auditing standard takes into consideration the areas with significant management judgments along with the effects of crucial events and transactions of the companies on auditing. At the same time, there was a need for providing description on the basis of the processes for determining the most crucial maters that the auditor’s report should include (Andersen and Hansen, 2018). All these reasons together majorly contributed towards the development of the new auditing standard of ASA 701. Explanation on ASA 701 ASA 701 is the new audit standard that is concerned with the auditing as well as communicating the significant audit matters in the auditor’s report (auasb.gov.au, 2019). Some of the main feature of ASA 701 are the approval of the KAM communication in the listed companies in which the auditors get the scope to decide whether to include KAM in the audit report or not, providing guidelines to the auditors on how to determine as well as describe the KAMs, providing the basis for the determination of circumstances under which it isnotpossibletocommunicateKAMsand providingthenecessaryrequirementsfor documentation (auasb.gov.au, 2019). According to ASA 701, the auditors can determine
3AUDITING AND ASSURANCE SERVICES these key audit matters through the determination of the communicated matters and from the matters charged with governance, accounting treatment of the high risk areas, judgments of the auditors and the impact of significant events and transactions that need to be included in the auditor’s report (Vik and Walter, 2017). In the present days, it has become the obligation on the auditors of Australia to comply with the principles and auditing policies of ASA 701 at the time of auditing the financial statements of the ASX listed firms (Tarr and Mack 2013). AnalysisofKAMsoftheCompaniesunderAustralianConsumerDiscretionary Industry Consumer discretionary industry is taken into consideration for the purpose of the analysis of the KAMs of these companies under this industry. This industry is selected since it is a major Australian industry with the presence of some of the major companies in it like Wesfarmers, JB Hi-Fi Limited, Nine entertainment and others. The following discussion analyses the efficiency of the auditors in addressing the KAMs of the companies under this industry. Aristocrat Leisure –PwC has reported four KAMs in revenue recognition, income taxes, accounting for Plarium and Big Fish acquisition and estimated recoverable amount of goodwill. Efficiency of the auditors can be seen in referring the notes regarding these issues for better understandability. The auditors have focused the crucial areas that can lead to material misstatements such as contractual arrangements for revenue, provision for uncertain tax position for taxation, applied judgment regarding the acquisitions and assumption about the forecasted future amounts growth rates for goodwill. After that, they have developed the audit procedures by undertaking the internal systems related to these issues (ir.aristocrat.com, 2019). The users can gain more information about these issues from this KAM section. Crown Resorts Limited –EY has considered significant audit matters in two areas; that are carrying value of trade receivables and impairment testing of indefinite lived intangible assets. The auditors have mentioned the note numbers related to these aspects. Efficiency of the auditors can be seen in disclosing the reasons for considering these matters as KAM which are the presence of complex judgment in these aspects. In addition, the auditors have disclosed information on the steps taken to handle these KAMs such as test of trade receivableageing,group’sassessmentof individualcustomers, assessment of relevant controls,assessmentoftheadequacyofdisclosure,evaluationofcashflowforecast, assessment of applied methodology and others (crownresorts.com.au, 2019). Domino PIZZA Enterprise –Deloitte has considered three matters of significant audit interest; they are carrying value of goodwill and indefinite life intangible assets in the CGUs of Japan and Germany, valuation of put option related to future exit of German non- controlling interest and business acquisition of Hallo Pizza. The auditors have efficiently examined the management’s judgments for the determination of the expected present value of CGU, judgements related to valuation in the fair value hierarchy and other judgments like identification of fair value attributes and useful lives determination of the intangible assets. After that, they have developed the appropriate audit steps through the consideration of the output of testing the judgments (annualreport2018.dominos.com.au, 2019). Flight Centre Travel –EY has considered three matters as the KAMs which are impairment testing of goodwill and other intangible assets, business acquisitions and recoverability of override receivables. In order to come to conclusion of the KAMs, the auditors have examined the group’s estimations and assumption for impairment testing, acquisition under the business combination for business acquisitions and nature of judgments in recoverability of override receivables (fctgl.com, 2019). The adopted audit procedures by the auditors are
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
4AUDITING AND ASSURANCE SERVICES the outcome of these examinations; some of the crucial audit steps are assessment of the mathematical accuracy of the cash flow model, assessment of cash flow forecast, assessment of impairment sensitivities, assessment of existence of the transactions related to business combination and others. JB Hi-Fi Limited –There are two KAMs considered by Deloitte which are carrying value of the Good Guys CGU and the acquisition of Good Guy. The auditors have assessed the used value-in-use approach by the company for examining the relevant judgments regarding goodwill worth $12.2 million (investors.jbhifi.com.au, 2019). In addition, the auditors have also assessed the complex management’s judgements related to the acquisition of The Good Guy worth $860 million. The audit procedures are the reflection of these assessments which are understanding management’s processes over the use of model to determine the carrying value, assessment of the application of value-in-use methodology, performing tests on the fair value of assets and liabilities, testing goodwill calculation and others. Nine Entertainment –EY has considered three issues with significant audit interest in the areas of carrying value of intangible assets, valuation of property rights and recoverability and classification of Stan loan. The auditors have considered these as KAMs because of the presence of complex estimates and assumptions of intangible asset of 49% of total assets, involvementofforecastingrelatedjudgmentsbythedirectorsforrecognisingfuture judgments and involved judgements related to the recoverability of consideration received from Stan loan (prod.static9.net.au, 2019). The effective audit procedures adopted for these matters include assessment of valuation model, evaluation of the process for determining the cash flows, test of mathematical accuracy of the adopted valuation models, testing the compliance of the recognition, valuation and amortization model as per the Australian Accounting Standards and others. Tabcorp Holdings Limited –EY has considered five matters as the KAMs which are Tatts combination transaction, impairment assessment of licenced intangible assets and goodwill, reliance on automated process and control, interest bearing liabilities and significant items. The auditors have considered these as the KAMs due to the presence of complex level of significant assumptions and judgments and in the presence of questionable accounting policies (tabcorp.com.au, 2019). The adopted audit procedures include effectiveness of control assessment, assessment of the completenessassertionsof assets and liabilities recognized from business combination, evaluation of the company’s future cash flows and others. The Star Ent Group –There are two significant audit matters that EY has considered as KAM which are trade receivable recoverability and assessment of goodwill impairment. The auditors have effectively assessed the used judgments by the Directors for the recoverability of trade receivable and the critical accounting estimates as well as assumptions used by the Directors for the purpose of impairment assessment of goodwill (static1.squarespace.com, 2019). The adopted audit procedures include reviewing the company’s data regarding historicalcollection,assessingtheexistenceoflargetradereceivables,assessingthe receivable disclosure, assessing the used methodology for goodwill impairment, testing the mathematicalaccuracyofdiscountedcashflowmodel,evaluationoftheperformed sensitivity analysis and others. Wesfarmers Limited –EY has reported four KAMs which are impairment of non-current assetsincludingTarget’sintangibleassets,supplierrebate,discontinuedoperationsof Curragh and discontinued operations of Bunning UK and Ireland. The auditors have assessed the key assumptions, judgements and estimates used for the impairment of non-current assets
5AUDITING AND ASSURANCE SERVICES worth$306million(wesfarmers.com.au,2019).Thecompanyhasexaminedkey assumptions, estimated and judgments related to the impairment charge worth $306 million, disclosures related to the measurement as well as recognition of rebates, measurement of the agreement related to sell Curragh worth $700 million and others and others. The adopted audit procedures include evaluation of the assumptions and methodologies, assessing the calculation of post-tax gain on disposal and others. It can be seen from the above discussion that the auditors of these companies have followed the standards of ASA 701 for the purpose of reporting the KAMs where they have ensured the determination of the KAMs in the presence of concrete reasons, communication of KAMs through the auditor’s report and appropriate documentation. In the presence of these aspects, the users of the financial statements can gain the relevant information about these KAMs in this section such as value of the assets or liabilities, significant judgments and assumptions used for this and others. At the same time, the users become able in gaining information about the undertaken audit procedure for the reduction of these audit risks to minimized level. This information is essential for different decision-making process of the users. All these aspects indicates towards the efficiency of the auditors towards reporting the KAMs (Andersen and Hansen, 2018). Conclusion and Recommendations The above discussion states that the collapse of Lehman Bros. and 2008 financial crisis led to the introduction of the new auditing standard of ASA 701. This new standard requires the auditors in considering the crucial matters in audit as KAMs. It can also be seen from the above discussion that the auditors of the companies under the selected industry have shown great efficiency in handling the KAMs which is helpful for the users of the financial statements to get more information on the matters related to KAMs. Some recommendations are provided based on the whole discussion. The guidelines as well as regulations of ASA 701 states that there needs to be strong risk management strategies and policies and the recommendation for the auditors is ensure the proper communication of the audit matters involving potential risky transactions and events. It is needed for the auditing professionals to be more responsible and ethical. They are needed to eradicate the excessive use of instruments like repos as well as misinterpretation of the financial statements. It is recommended to the auditors to be more alert so that they can identify these kinds of mischievous financial transactions in the accounting books of the audit clients. Most important recommendation for the auditors is that they are needed to ensure complying with the principles and standards of ASA 701 while conducting the audit operations. Compliance with these recommendation will help the auditors in detecting, communicating and documenting the KAMs in the most appropriate manner.
6AUDITING AND ASSURANCE SERVICES References Andersen, J. and Hansen, N.B., 2018.Key Audit Matters: En undersøkelse av norske foretak(Master's thesis, Handelshøyskolen BI). Annualreport2018.dominos.com.au. 2019.2018ANNUAL REPORT.[online] Available at: https://annualreport2018.dominos.com.au/wp-content/uploads/2018/09/ DPE_AR18_Book_FA_Digital.pdf [Accessed 11 May 2019]. Auasb.gov.au. 2019.Auditing Standard ASA 701 Communicating Key Audit Matters in the IndependentAuditor’sReport.[online]Availableat: https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 11 May 2019]. Auasb.gov.au. 2019.Explanatory Statement ASA 701 Communicating Key Audit Matters in theIndependentAuditor’sReport.[online]Availableat: https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_Explanatory_Statement_2015 .pdf [Accessed 11 May 2019]. Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis and opportunities for research.Australian Accounting Review,26(3), pp.226-242. Crownresorts.com.au.2019.ANNUALREPORT2018.[online]Availableat: https://www.crownresorts.com.au/CrownResorts/files/81/817f60e1-b1ef-46e4-b687- 7b60140c0578.pdf [Accessed 11 May 2019]. Fctgl.com. 2019.2018ANNUAL REPORT.[online] Available at: http://www.fctgl.com/wp- content/uploads/2018/09/Computershare-FLT-Final-Annual-Report.pdf[Accessed11May 2019]. Inman, P. 2010.Auditors' role in Lehmans collapse unites opposition in calls for reform. [online]theGuardian.Availableat: https://www.theguardian.com/business/2010/mar/15/auditors-role-lehman-collapse-critics [Accessed 11 May 2019]. Investors.jbhifi.com.au.2019.ANNUALREPORT2018.[online]Availableat: https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with- Chairmans-CEOs-Report.pdf [Accessed 11 May 2019]. Ir.aristocrat.com.2019.ANNUALREPORT2018.[online]Availableat: http://ir.aristocrat.com/static-files/0c55bb41-d146-4ed9-9bb7-e0aee747dd28[Accessed11 May 2019]. Prod.static9.net.au.2019.ANNUALREPORT2018.[online]Availableat: http://prod.static9.net.au/_/media/Network/NineEntertainmentCo/PDF-Downloads/Annual- Report-FY-2018-Final.pdf [Accessed 11 May 2019]. Static1.squarespace.com.2019.ANNUALREPORT2018.[online]Availableat: https://static1.squarespace.com/static/55f76728e4b0799db9586a8d/t/ 5ba87d05eef1a16551b7bb12/1537768809954/2018.09.24_2018+Annual+Report.pdf [Accessed 11 May 2019]. Tabcorp.com.au.2019.ANNUALREPORT2018.[online]Availableat: https://www.tabcorp.com.au/TabCorp/media/TabCorp/Investors/Annual%20Report/Tabcorp- Annual-Report-2018_1.pdf [Accessed 11 May 2019].
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
7AUDITING AND ASSURANCE SERVICES Tarr,J.A.andMack,J.,2013.Auditorobligationsinanevolvinglegal landscape.Accounting, Auditing & Accountability Journal,26(6), pp.1009-1026. Vik, C. and Walter, M.C., 2017.The reporting practices of key audit matters in the big five audit firms in Norway(Master's thesis, BI Norwegian Business School). Wesfarmers.com.au.2019.ANNUALREPORT2018.[online]Availableat: https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-annual- report.pdf?sfvrsn=0 [Accessed 11 May 2019]. William Jr, M., Glover, S. and Prawitt, D., 2016.Auditing and assurance services: A systematic approach. McGraw-Hill Education. Xu, Y., Carson, E., Fargher, N. and Jiang, L., 2013. Responses by Australian auditors to the global financial crisis.Accounting & Finance,53(1), pp.301-338.