Importance of Key Audit Matter ASA 701 in Annual Reports

AUDITING &
ASSURANCE
HP
[Pick the date]

Audit ASA 701
Executive Summary
The auditing standards and the audit procedure underwent a huge change with the downfall of
Lehman Brothers. It is observed from the case of Lehman that major information was
concealed as ASA 701 was not present at that point of the item. The report further states the
importance of Key audit matter ASA 701 in the annual report. From the Lehman brother case
report it can be commented that it is highly important for the auditors to ensure that the audit
processes are conducted in a manner that makes it impossible for the board and senior
managers to hide key audit matters of an organization. It is the duty of the auditors to
implement auditing standards in a manner that it becomes easier to detect key audit matters of
an organization and the same must be later used in the preparation and representation of audit
reports. The failure of audit in respect of Lehman Brothers led to the case of KAM and the
same is discussed in the initial part of the report. The second part of the report deals about
the KAM of the mining industry.

Audit ASA 701
Contents
Introduction...........................................................................................................................................2
Case of Lehman Brothers & Relevance of ASA 701 in the case..............................................................2
Auditing Issues surrounding the Lehman Collapse:...............................................................................3
MINING Industry....................................................................................................................................5
1. BHP BILLITON.................................................................................................................................5
2. RIO TINTO......................................................................................................................................6
3. Alumina Limited.............................................................................................................................7
4. Evolution Mining............................................................................................................................7
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10

Audit ASA 701
Introduction
ASA 701 is a new accounting standard formulated so as to make it mandatory for an auditor
to address the key audit matters based on his findings in the auditors’ report. The matters
detected by an auditor must be identified as key audit matter based on their probable impact
on the well being of the company. An auditor must prioritize areas that are prone to material
misstatements and reflects the presence of a related party transaction. KAM are such issues
that are crucial in the judgment of an auditor. Key audit matters are matters that hold an
utmost significance in the eyes of an auditor. These matters are detected by the auditors from
the financial statements of an organization and are highlighted as the key on the basis of their
significance. If key audit matters are not adequately dealt on time then these can have an
adverse impact on the financial well being of the company. The auditors are required to
report KAMs to the management of the company in the audit committee meetings and must
also offer a professional judgment on how to deal with the same. The audit report looks more
desirable to the users of the same when it is supported by necessary KAMs.
There are various matters that the auditor must prioritize in his audit function with respect to
KAMs. An auditor must necessarily label such matters as KAMs that makes it difficult for
him to construe a judgment on the financials of the company. An auditor must identify areas
that are prone to a higher level of material risks and also where the presence of management
and auditors’ judgment is involved. An auditor must necessarily dig into areas where there
are probabilities of the presence of a significant matter on account of internal quality control
team and also areas that reflect even the slightest of related party transactions and other
complicated transactions. The auditor must also assess such transactions that have seemingly
affected the audit procedure in general.
The auditor must communicate identified KAM to the management of the company and must
also provide a professional judgment on the same.
Case study of Lehman Brothers & Rise of ASA 701
The auditors failed to disclose key audit matters in the case of Lehman Brothers. Concealing
these matters was one of the main reason that attributed to the disintegration of the company.
The investors of the Lehman Brothers suffered huge losses on account of non-disclosure of
KAM which is ultimately why the company collapsed all of sudden.