Auditing and Assurance Services

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student
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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 701 Communicating 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
Australian consumer discretionary industry. The report ends with a conclusion and
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
Lehman Bros. was well aware of these accounting manipulations and still provided
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
is not possible to communicate KAMs and providing the necessary requirements for
documentation (auasb.gov.au, 2019). According to ASA 701, the auditors can determine