Audit and assurance services - Assignment

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

AUDITING AND ASSURANCE1
Executive Summary
The collapse of Lehman Brothers along with the occurrence of world financial crisis has
largely contributed to the introduction of two specific auditing standards that are ASA 701
and ASA 570. ASA 701 requires the disclosure of the risk areas in the financial statements of
the audit client so that the investors can get more contextual information on the company’s
financial position. On the other hand, ASA 570 demands the calculation of the going concern
status of the companies by assessing that whether there is any material uncertainty that cast
major doubts on the business organizations’ capability to continue as a going concern.

AUDITING AND ASSURANCE2
Table of Contents
Introduction................................................................................................................................3
Failure of Lehman Brother.........................................................................................................3
About the Lehman Brother Case............................................................................................3
How Failure of Lehman Brothers Contribute to the Development of ASA 701...................3
What Happened in Lehman Brother Case..............................................................................3
ASA 701 and ASA 570..............................................................................................................4
ASA 701.................................................................................................................................4
ASA 570.................................................................................................................................4
Reasons for these Standards...................................................................................................4
Importance of ASA 701 and ASA 570 after the Failure of Lehman Brother........................5
Reasons for the Importance of Key Audit Matters................................................................5
What ASA 570 Tells about a Company’s Long-Term Existence..........................................5
Key Audit Matters......................................................................................................................5
Key Audit Matters of the Companies under Consumers Staples Sector................................5
Conclusion and Recommendations............................................................................................7
References..................................................................................................................................8
Appendix..................................................................................................................................10

AUDITING AND ASSURANCE3
Introduction
The occurrence of the world financial crisis has contributed to certain financial
accounting reforms in the form of the introduction of new accounting standards like ASA 701
and ASA 570. These standards put increased obligation of the firms to disclose more aspects
of financial reports. For example, due to the introduction of ASA 701, the firms have the
accountability to disclose information on the key audit matters in financial statements. One
prime cause of implementing these standards is to provide the investors and other users with
more precise and accurate information on the companies. There are three key parts of this
report. The first part provides detailed discussion on the collapse of Lehman Brothers and
how this collapse has contributed to the inception of ASA 701. The second part of the reports
provides discussion on two specific auditing standards named ASA 101 and ASA 570 along
with the key reasons why these standards have been introduced. The third part of the report
discusses about the key audit matters of five key business organizations in Australian
consumer staples sector along with the similarities and dissimilarities among the key audit
matters of these firms. The report also contains a concussion and suitable recommendations
on the reporting of key audit matters based on the whole analysis.
Failure of Lehman Brother
About the Lehman Brother Case
Lehman Brothers filed bankruptcy on 15 September, 2008. In the presence of $639
billion of assets and $619 billion of debts, the bankruptcy filing of Lehman Brothers is
considered as the largest bankruptcy in the history and the asset position of the company
exceeded the same of the large collapsed companies like Enron and WorldCom. At the time
of the collapse, Lehman Brothers was regarded as the fourth-largest investment banks in the
United States (US) with an employee base of 25000. It was also considered as the greatest
prey of the subprime-mortgage financial crisis of the country (Quax, Kandhai and Sloot,
2013).
How Failure of Lehman Brothers Contribute to the Development of ASA 701
The collapse of Lehman Brothers in 2008 helps in establishing the relationship
between Lehman Brothers collapse and introducing ASA 701. The Australian auditing
authority felt the necessity of introducing an auditing standard like ASA 701 because of
Lehman Brothers collapse and following financial crisis; and the auditing issued that were
largely unaddressed while Lehman Brothers was audited are now considered in ASA 701. It
was largely obligatory to address the gaps due to poor auditing of Lehman Brothers and this
contributed to the recommendation of ASA 701 (Lewis, 2015). Many key audit matters
would be identified and communicated to the management of Lehman Brothers in case ASA
701 was there while Lehman Brothers collapsed. This would enable the auditors of Lehman
Brothers in identifying and disclosing the areas with high risk in the audit report and this
could help in identifying the forthcoming collapse of the mortgage market. The fall of
Lehman Brothers would be possible to be avoided in case the auditors could assess the same.
At that time, ASA 701 would also help in recognizing specific transactions and events that
were not appropriate as per the accounting rules. This would understandably take into
consideration the use of repo rate by Lehman Brothers for covering high leverage position of
the business. In the presence of ASA 701, it would be possible for the management of
Lehman Brothers to make better strategic decision related investment at the time of housing
boom in US. This would also make it possible to properly communicate the areas where the
management and auditors made key judgments in order to comprehend the accounting
procedures of the company (Cordoş, 2015). All these aspects together contributed to the
development of ASA 701.