The New Standard of Auditing ASA701

Running Head: AUDITING & ASSUARNCE
AUDITING & ASSURANCE
Name of the Student
Name of the University
Author Note

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Executive Summary
The audits of financial statement give assurance over the information used by capital markets
and investors. Both audit and assurance are hand to hand process that is used for the
evaluation of company’s financial record. Auditing is consisting of making sure that whether
financial reports are according to the standard of account and principle of accounting. The
assurance checks that there is no such misrepresentation done in the financial records. Hence,
this report includes discussion about the new standard of auditing ASA701 and the issues that
resulted in the revision of ASA570. Further, analysis will be done on the KAM in
independent report of auditor. Hence, this report concludes that auditors of all the ASX listed
companies of “Food and staples retailing” industry is reporting key audit matters in their
independent report of audit. It can be recommended that KAM should be disclosed and
reported, as it is quite useful to the company and its users.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Analysis of ASA701..............................................................................................................3
Analysis of ASA701 in respect of ASX Companies..............................................................6
Conclusion & Recommendations.............................................................................................13
Reference..................................................................................................................................14

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Introduction
Audit and assurance are the processes that are used for evaluating company’s
financial record. It is the process of verifying available records in firm’s accounting record as
per the accounting principle and standard and it also helps in verifying that whether record of
accounting is accurate or not. Audit evaluates the entries of accounting presents in company’s
financial statement and assurance is analyzing process that are used in assessing financial
records and entries of accounting. Usually, assurance is followed by the audit. Further, with
the change in trends, issues in assurance and auditing services has aroused. These issues and
trends create problem in the modern organization (Carson, Zhang and Fargher 2014).
In wake of global financial crisis, new auditing standard “ASA701-Communicating of
the key audit matters” in independent report of the auditor is developed. Development of this
standard is in the response of calls from the shareholders for knowing more about firms they
are going to invest. There was the request of investors regarding prior warnings of the
potential issues, which exists with the respect of entity’s ability for continuing as the going
concern that resulted in revision of “ASA 570/ISA 570-Going Concern” (Auasb.gov.au.
2020). Hence, this particular report includes the discussion of new auditing standard
ASA701. Further, analysis will be on the factors that resulted into ASA 570 revision. Lastly,
analysis will be on KAM in individual report of ASX listed entities in “Food and Staples
Retailing” industry.
Discussion
Analysis of ASA701
The auditing standard ASA 701 has come into effect after the collapse of Lehman
Brothers. In the investment banking field, Lehman Brothers was one of the biggest firms in
US, before it has collapses in 2008 because of bankruptcy. The major causes behind Lehman

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Brother collapse was distributed between auditors and management. The management of
company has not analyzed risky decisions, which they were making and auditors has paid
them full support, who should have warned firm regarding the consequences. There was great
amount of negligence and absence of fact that concerns, while drafting financial statements.
It was because of this fraud, the company collapsed. Hence, issues of auditing were
responsible for Lehman collapse. Under presence of ASA 701, important figure and facts
about firms’ condition would have been revealed. In absence of ASA 701 and the other
standards of auditing, it has paved the way for collapse of firm and this particular path was
infused with the non-communication and the concealment of major figures and facts
describing worth of entity. All of these loopholes have completely drained Lehman Brothers
(Cordoş 2015).
The new standard of the auditing “ASA 701- Communicating the key audit matters in
report of independent auditor” has been issued by AUASB, pursuant to requirements of
strategic direction as well as legislative provisions. “ASA 701” represents Australian
equivalent to ISA 701. This particular standard of accounting is consisting of differences
from standard ISA 701 that have been made for according with legislative environment of
Australia and for maintaining quality of the audit. This auditing standard has established the
requirements and it helps in providing the application and other explanatory material relating
to KAM communication in independent report of auditors. ASA 701 introduction helps in
reflecting commitment of the AUASB towards conformity with the recent improvement to
reporting of auditor that is developed by the International Auditing and Assurance board
(Auasb.gov.au. 2020). The major features of the new standard include following points:
 The communication of KAM is made mandatory in reports of auditor of the listed
companies audits.

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 The auditors of other organizations are enabled for deciding whether KAM is required
to be included in the reports of auditor or not.
 The third feature includes determination of KAM by the auditor. This includes
determining communicated matters with those that are charged up with the
governance and matters that required key auditor’s attention. It takes into account
higher risk assessed areas, important judgement of the auditor, which involves
significant judgement of management and effect of vital transactions or the events. It
also includes key matters for including it in the auditor’s report.
 The way auditor describes individual KAM.
 The requirement of audit documentation relating to KAM.
The standard of auditing applies to financial report audit for financial report audit or audit of
half-yearly financial report according with “Corporation Act 2001” and financial report audit
also appropriately applies to other purposes. The application of this particular auditing
standard is also for the historical financial information audit. In professional judgement of
auditors, KAM are matters, which requires significant attention of auditor in performance of
audit (Lento, Bujaki and Yeung 2018). It is selected from the matters communicated with
those who are charged up with the governance and it is ascertained by taking into the account
of higher areas of risk, effect on significant transactions or events audit and significant
judgement of the auditors. In describing KAM in report of the auditor, it is required for
including reason of matter by auditor and the way matter is dealt by auditor. It is required to
be taken care by auditor that in KAM, the description should not comprise of the original
information regarding entity that has not been made otherwise publicly and does not imply or
contain discrete views on the separate financial report elements or KAM (Vik and Walter
2017). Further, the auditors should describe each matter of audit, using appropriate
subheadings in separate section of the report of the auditor in “Key Audit Matters”. The

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report of auditors is required to state KAM. It is matters in auditor’s professional judgement
that were most significant in financial report audit. These matters were addressed in the
financial report audit context as whole and thereon forming opinion of audit and auditors
does not provide separate matters on these particular matters (Carson, Fargher and Zhang
2016).
Analysis of ASA701 in respect of ASX Companies
Woolworths Group
Woolworths Group operates in industry of “Food and Staples retailing” industry. It
operates general merchandise consumer supermarkets and stores and it is engaged in the
procurement of products, liquor and food. It also operates hotels that includes gaming, food,
pubs and accommodations. The company serves its customers in New Zealand and Australia.
The market cap of company is $48.78b. As it can be seen in annual report 2019 of company
that it has communicated KAM in their independent report of auditor. The auditor defines
KAM are the matters in the professional judgement that is most vital in the audit of the
financial report for the current period. The auditors have addressed matters in repect of the
audit of financial report as whole as well as in the formation of opinion thereon. It does not
make separate kind of opinion on these particular opinions (Woolworthsgroup.com.au. 2020).
Woolworths Group has listed following KAM in their independent report of the auditor:
 Onerous provisions of lease and impairment of asset in the business of Big W. The
audit procedures adopted includes updating the understanding of process and controls
of Group, ensuring the consistency of applied methodologies with relevant standard of
accounting, evaluation of key assumptions used in derived future cash flow forecast
and historical accuracy, involving internal specialist, performing sensitivity analysis,
testing mathematical accuracy and evaluation of onerous lease.

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 The systems of IT across Group are the complex and there include various integration
levels. Further, these systems are important for ongoing operations and towards
integrity of process of financial reporting and as the outcome of which Information
Technology system assessment forms the vital component of the external audit. The
audit procedures adopted includes understanding regarding IT system, testing design
of key IT controls and responding to identified deficiencies.
 The impact of AASB 16 adoption on Group is dependent upon number of the key
estimates and the judgements, lease term determination, appropriate rate of discount
for each of the lease and components of non-lease. The key procedures adopted
includes understanding key controls and processes, accounting policy requirements
checking, key assumptions used, recalculations of expected lease assets and liabilities,
testing completeness of calculation of the management and assessment of disclosures
appropriateness (Huttenhuis and ter Hoeven 2018).
Hence, there are no information gap founded in analysis of communicating the KAM.
Information gap is difference between information that corporate financial information users
believes is required for meeting investment as well as fiduciary decisions and what is being
available to them by audited financial statements of entity or the other available publicly
information. Further, in order to detect or prevent any kind of the material misstatement,
auditor has obtained reasonable assurances and performed test of control. The test of control
is the procedure of audit for testing effectiveness of control used by the client’s entity for
preventing or detecting material misstatements (Caroline 2017). Depending upon the tests
results, auditors may make the choices for relying upon system of control of client as part of
their activities of auditing. Lastly, substantive test of balances and transactions is performed
by the auditor. The test of auditors of accuracy of the monetary transaction amounts and
account balances are termed as substantive testing. The substantive tests help in verifying that

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whether the information provided by them is correct, whereas control tests helps in
determining whether there is management of information under system that promotes the
correctness (Brunelli 2018).
Coles Group Limited
Coles Group Limited is the Australian retailer of products, for instance fresh food,
household goods, fuel, liquor, financial services through online and stores. It operates in the
industry of “food & staples retailing”. It operates and owns departmental and supermarket
chain. The company serves the customers all through New Zealand and Australia. The market
cap of company is $21.17b. The auditor has fulfilled responsibilities described in
responsibilities of auditor for financial report audit section of report, consisting of relation to
these particular matters (Huggins, Simnett and Hargovan 2015). According to this, the audit
included performance of the designed procedures for responding to risk assessment of the
material misstatement of financial report. The outcome of the audit procedures is consisting
of procedures performed for addressing key matters. It provides basis for the opinion of audit
on associated financial report (Santana et al. 2019). Further, there was no information gap,
substantive test and test of control was performed. Coles Group Limited has listed following
KAM in their independent report of the auditor:
 The commercial income includes rebates and discount received by the company from
the suppliers. The timing and value of the commercial income that are recognized by
Consolidated statement of P/L require considering of various factors and judgement.
The audit procedures include understanding regarding its nature and assessment of
significant agreements, assessment of relevant control effectiveness, performing
comparison of different arrangement, selection of supplier agreements sample and
inquiry with the company regarding existence of any side arrangements.

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 The recoverable amounts determination of goodwill, plant, property and equipment
and the other intangible assets needs key judgement by Group. The audit procedures
include evaluating assumptions utilized in assessment of Group and involves
specialist evaluation for evaluating appropriateness of key inputs.
 The vital part of financial processes of Group are reliant heavily on system of IT with
the automated controls and processes over valuing, capturing and recording of the
transactions. The audit procedures included performing procedures for understanding
environment of IT and testing controls of Group (Veiga, Ribeiro and Inácio 2017).
 The AASB 16 leases adoption is inherent complex because of requirement of existing
commitments, operating lease volume and judgements applied by the management.
The audit procedures include assessment of process of Group, assessment of expected
financial impact of new standard, evaluation of effectiveness of processes and
controls of Group, testing calculation of adjustment to the retained earnings and
evaluation of disclosures adequacy.
 The group held inventories of $1,964.7m, hence, being most important balances on
consolidated statement of financial statement, the inventory verification process is
quite extensive and occurs at routine basis all through the year. The audit procedures
adopted includes selection of sample for observing and assessing stock take processes
of Group, assessment of required adjustment, daily stock take process and validating
its occurrences.
 The accounting for demerger of Group from the Wesfarmers Limited, as demerger
has given rise to the consequential events with the complex accounting as well as
implications of the financial reporting. The audit procedures adopted includes
examination of important agreement of demerger, deconsolidation appropriateness,

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involving of tax specialists, examination of new agreement of debt facility and
evaluation of disclosure and presentation of these matters.
 The last KAM is accounting for major contracts. The group has entered into major
contracts of capital expenditure, which have or will be having significant impact on
business relationships and operations of Group. The audit procedures adopted
includes conducting of sensitivity analysis and examination of major contracts
(Colesgroup.com.au. 2020).
Metcash
Metcash is leading wholesale distributor and the marketing entity with the diversified
business all across liquor, hardware, grocery and food sectors. The company is headquartered
in Sydney. The company supports around 100,000 businesses all across independent retailers’
network and businesses across Australia as well as New Zealand. Market cap of company is
$2.38b. The auditor has fulfilled its responsibilities described in responsibilities of auditor for
audit of section of the financial report. Further, audit includes performance of designed
procedures for responding to assessment of material misstatement risks of financial report
(Caroline 2017). As outcome of the audit procedures, comprising of procedures performed
for addressing following matters, which forms basis for the opinion of audit on associated
financial report:
 Impairment assessment of the goodwill and other intangible assets of group has
incorporated significant estimates and judgement, particularly concerning the factors,
for instance terminal growth rates, discount rates and forecast cashflows. These
assumptions and estimates are impacted by the economic and market conditions as
well as future performances. The slight changes in the certain assumptions can lead
towards important changes in the recoverable amount of these particular assets.

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Hence, it is considered as KAM. The auditor procedures used by auditor includes
assessment of CGUs and cash flow forecasts, evaluation of appropriateness of
discount and the terminal growth rates, testing of mathematical accuracy of
impairment testing models, performing of sensitivity analysis on the key assumptions
and assessment of financial reporting disclosures adequacy (Brunelli 2018).
 The auditor considered accounting for supplier rebates as KAM as the rebates of
supplier has significantly contributed to results of Group. There include various
specific agreements in the place and sone arrangement requires applying judgement
in determination of rebate recognition timing and suitable classification within
income statement based on agreement terms. The procedures of audit adopted
includes evaluation of controls and processes of Group to recognition and recognized
valuation amounts, assessment of operating effectiveness of the relevant controls in
the place that relates to measurement and recognition of purchase and volumetric
value and the value of sales related supplier’s rebates. Further, it also includes
consideration of supplier’s claims impact during and subsequent to the year end on
the recognized amount. Lastly, this includes inquiry of directors and management
regarding any existence of any kind of side arrangement (Cordoş 2015).
 The assessment of onerous contracts requires provisions recognition, comprising of
making estimates and significant judgements concerning the factors such as
profitability of retail. The key audit matters were that whether assessment of Group
includes suitable consideration of these particular factors. The audit procedures
adopted by auditor includes evaluation of processes of Group for identifying onerous
contracts that required recognition of provision and testing of valuations of onerous
contract provisions (Annual Reports - Metcash 2020).
Candy Club Holdings Limited

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Candy Club Holdings Limited is the Australian listed company in industry of food
and staples sector. This company operates business selling online and candy distribution of
business to business to the consumers by the plans of monthly subscription and to the
retailers of specialty market. The company offers chocolates and candy in the various forms.
It serves the company in Australia and United States. The market cap of company is $9.13b.
The auditors have described the matters in “Material Uncertainty Related” to the section of
“Going Concern” (Santana et al. 2019). Further, there was no information gap, substantive
test and test of control was performed. Moreover, they have determined following matters to
be KAM for communicating in the report:
 The auditors have reported acquisition of the controlled entities as their key audit
matters. During period ending December 31st, 2018, company has acquired the Candy
Club Holdings Inc and its controlled entity as the part of planned listing on ASX. The
consideration of AASB 3- Business Combination requirements has been done by the
directors for assessing if transaction met “business combination” definition as per
standard requirements. There was the conclusion given by the directors that
transactions have not meet “business combination” definition but this has represented
transactions in between companies under the common control that is outlined in the
standard AASB 3. Hence, because of requirement of significant judgements for
determining if transaction met common control transaction definition, there was
assessment of acquisition of acquired entities to be the key audit matter. The audit
procedures adopted includes reviewing SPA terms and conditions and controlling
entities details, testing of value of acquired identifiable assets and assumed liabilities
at the date of acquisition and reviewing of adopted disclosures made in financial
statements (Candyclub.com. 2020).

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The auditor describes the key matters in the report of auditor unless regulation or law
precludes the public disclosures regarding the matter or when there are extremely rare
situations. They determine that the matter need not to be communicated in the report due to
adverse consequences of it, as it would be expected to outweigh benefits of public interest of
such kind of communication.
Conclusion & Recommendations
Therefore, this report concludes that the KAM as defined by new standard of auditing
ASA701 of AUASB committee are the matters that are as per auditor’s personal judgement,
which were of crucial importance in financial report audit of entity in that particular period.
Further, it can be said that all the ASX listed companies of “Food & Staples Retailing”
industry is disclosing KAM in independent report of auditor. Lastly, recommendation that
can be given is that company should try to disclose every important matters to the auditors
and auditors should audit KAM that has the impact on the company and users, as
communicating the KAM helps in providing added information to financial statement user’s
that ultimately helps in understanding the matters and taking decisions accordingly.

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Reference
Annual Reports - Metcash 2020. Metcash | Australia’s leading wholesale distribution and
marketing company. | Australia’s leading wholesale distribution and marketing company.
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Jan. 2020].
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