Auditing Theory and Practice

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
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1AUDITING THEORY AND PRACTICE
Table of Contents
Introduction......................................................................................................................................2
Rationales for ASA 701, Lehman Brothers and Going Concern Issue...........................................2
Analysis of the Key Audit Matters and Auditor’s Efficiency in Banking Industry........................5
Conclusion and Recommendation...................................................................................................8
References......................................................................................................................................10

2AUDITING THEORY AND PRACTICE
Introduction
Auditing is considered as the process of the official inspection of the financial accounts,
financial information and financial statements of the companies in order to ascertain whether
they have been developed in true and fair manner in the absence of any material misstatements in
them (Chui and Pike, 2013). There are certain responsibilities of the auditors that need to be
discharged while auditing the financial statements of the client. There are many instances all
over the world where the auditors failed in discharging their duties in proper manner in the
presence of some reasons and the companies collapsed due to that. For this reason, there has
been major criticism of the audit profession due to its involvement with so many corporate
collapses (Kassem and Higson, 2016). The new auditing standard of “ASA 701 communicates
key audit matters in the independent auditor’s report” was introduced after the demise of
Lehman Brothers and the occurrence of the world financial crisis and it aims to provide the users
of the financial statements with some additional information about the companies. Major
emphasis also has been given to the assessment of the going concern status of the companies.
This report analyzes the major rationale for ASA 701 and the discussion on the key audit matters
of the Australian major banks under ASX top 100 listed companies.
Rationales for ASA 701, Lehman Brothers and Going Concern Issue
It needs to be mentioned that the main purpose of ASA 701 is to ensure the
improvements in the communicative value of the auditor’s report through the implementation of
clear and transparent audit procedures of the financial accounts and statements of the firms
(auasb.gov.au, 2019). Another crucial purpose of ASA 701 that needs to be mentioned in this
case is to ensure that the identified key audit matters are effectively communicated to the users of

3AUDITING THEORY AND PRACTICE
the financial statements so that they can ascertain the level of risk related to the material
misstatement in the financial statements of the firms. In addition, one significant purpose of this
new standard is to make the users aware of the assumptions, judgments and accounting estimates
used by the managements of the companies for the preparation and presentation of the financial
statements. Along with the purpose, ASA 701 has some crucial objectives that are required to be
taken into consideration (Cordoş and Fülöp, 2015). The primary objective of this new standard is
to ensure that the auditors properly identify the key audit matters. Along with the identification
of the key audit matters, another major objective of ASA 701 is to ensure providing the
appropriate audit opinion in line with the identified key audit matters. Correctly communicating
the identified key audit matters is another key objective of the new standard of ASA 701.
The above discussion on the purposes and objectives of ASA 701 indicates towards the
crucial fact that the new standard of ASA 701 has major importance in the audit profession. It is
considered as significant because of the fact that it helps to identify as well as ascertain the key
audit matters and ensures proper communication of the same with the users of the auditor’s
report (Bédard, Gonthier-Besacier and Schatt, 2014). This new standard is important because of
the fact that it puts the obligation on the auditor to determine the transactions as well as events
that have significant doubt on the fact that they can materially misstate the financial statements.
This is considered as a crucial aspect for the application of this auditing standard. At the time of
the application of ASA 701, the auditors are needed to discharge the responsibility of examining
the doubtful transactions and events that can materially affect the financial statements. For the
determination of the areas of material misstatement, the auditors are required to apply the
standard of ASA 315 because this will helps the auditor in determining the extent of material