ASA 701: Communicating Key Audit Matters in the Independent Auditor’s Report

This report discusses the significance of ASA 701 in enhancing the audit report’s quality through increasing the needs of disclosures as per the auditor’s part. It also evaluates the audit reports of Bank of Queensland, National Australia Bank, Commonwealth Bank of Australia, and Medibank Pvt Ltd. in terms of their key audit matters.

Running head: REPORT 0
ASA 701: Communicating
Key Audit Matters in the
Independent Auditor’s Report

REPORT 1
Executive Summary:
In the following parts, the reasons of GFC have recognised. The main elements, which
contributed to the financial crisis that occurred in 2007, were the carelessness of auditor to
the professional obligations in relation to the reporting of important accounting scams made
through the big companies particularly the financial organisations as well as mortgage
lending bank. For resolving these issues, scams and corporate frauds, the Australian
administrative authorities have addressed as ASA 701- Communication of key audit matters
by an independent auditor. The incorporation of the matters would enhance the complete
audit quantity. Furthermore in this report, the annual report of 4 corporations, which are from
among leading hundred ASX corporations have assessed to know the concept of KAMs
reported by the auditor.

REPORT 2
Table of Contents
Executive Summary...............................................................................................................................1
Introduction...........................................................................................................................................3
Global Financial Crisis (GFC)..................................................................................................................3
Auditor’s Role........................................................................................................................................4
ASA 701: Communicating Key Audit Matters in Independent Auditor’s Report....................................5
Evaluation of audit report of Bank of Queensland:...........................................................................8
Evaluation of audit report of National Australia Bank.......................................................................9
Evaluation of the audit report of Commonwealth Bank of Australia:..............................................10
Evaluation of audit report of Medibank Pvt Ltd...............................................................................11
Conclusion:..........................................................................................................................................11
References:..........................................................................................................................................12

REPORT 3
Introduction
The main reason of insolvency of various corporations everywhere in the world was the
scandal related to accounting commenced by them, with a purpose of manipulation of the
accounting books, to disclose anticipated financial outcomes to the corporation’s
stakeholders. The profit was overstated and loss was concealed in financial statements of
these corporations, the main objective behind this was to get the positive financial functions.
The accounting scandals may result in insolvency of these big corporations. As the
consequence of that greatest problem of international financial disaster took place in the year
2007-2008. The international economies had to suffer vastly from the negative influences of
the financial disaster. The auditors of the corporations were accused as the important reasons
for the insolvency problem. The reason is that the auditors were not careful at the time of
reporting the irregularities, in dealing the important accounting matters by the companies
(McKibbin & Stoeckel, 2010).
The auditors of corporations are appointed with a duty of establishing communication, with a
user of Auditor’s report in respect of the fair and true view of financial report of the client
organisations, and to report over the matters that in the opinions need substantial attention of
financial report’s users. In respect of the global financial crisis, new audit standards are
introduced. ASA 701: Communicating Key Audit Matters in Independent Auditor’s Report is
new significant standard. AASB has used the ASA 701 after taking the place of big financial
disaster at the international level. In the following report, significance of ASA 701:
Communicating Key Audit Matters in Independent Auditor’s Report, is discussed and
critically examined.
Global Financial Crisis (GFC)

REPORT 4
GFC is considered as big financial event, which affects the economy of various nation by the
strictly adverse impacts. The crisis became effective from the middle of year 2007 while the
investors of USA start losing the belief in the sub-prime advancing mortgage. It resulted into
the liquidity crisis. Further, it adversely turned in year 2008, while the international stock
marketplaces began hitting and became intensely instable. Subsequently, the global financial
crisis took entry in the new stage, while in year 2008 Lehman Brothers distorted due to the
insolvency in a marketplace. There are various financial institutions, which faced the problem
of liquidity crisis and not succeed to fulfil the financial requirements of the huge companies.
The crisis was mainly market through extensive financial deceptions conducted in a sector
related to mortgage securitisation. In this way, this financial institutions as well as
securitisation corporations made various white- collar offences (Shiller, 2012).
Additionally, the auditor of institutions or corporations has neglected the professional duties
to the commitments of these Scams (Helleiner, 2011). In a case, when the auditors do not
disclose the fraudulent activities because of the big negligence to the professional obligations,
was counted as main element, which made contribution to the adverse financial disaster, for
an example GFC (Azim, 2013).
Auditor’s Role
The auditors of company are appointed for the purpose of giving the independent opinions in
relation to the integrity as well as objectivity of company’s financial report. According to the
professional obligations of the auditors, it is required by them to report over the matter, which
needs consideration of user of financial report (San, 2009). These matters are considered as
the matters, which are normally not usual or impose the risks of the material misstatement in
financial reports of the company (Gul, Fung & Jaggi, 2009).

REPORT 5
As the organisation has the wider series of the shareholders, who relates to the sector
indirectly or directly. Normally, the stakeholders are characterised into 2 types (Fan & Wong,
2005). These two types are external stakeholders and internal stakeholders. The corporation’s
internal stakeholders are considered as the manager and workers, who get involvement in the
internal functions of the corporation in a direct way. However, the external stakeholders like
the government, shareholders, finance providers (financial institution or bank), as well as
administrative authorities. These external stakeholders do not take involvement in internal
activities and significant functions like presentation as well as preparation of financial report
of company. They are apprehended in respect of the financial performance and the data
regarding the corporation as they are connected with these corporations in indirect way.
Finance providers like existing shareholders as well as prospective shareholders need
financial data in respect of the status of related corporations to evaluate investment’s value or
value of offered investment in an organisation. In a case, when the corporation has
comprehensive financial performances, in this way it will be able to attract and keep investor
of company (Benkel, Mather & Ramsay, 2006).
In addition, the financial institution and bank, which advance big amount of money to the
corporation needs the company’s financial report to get financial data regarding the
company’s financial condition and past track credit record to evaluate the credit value of the
client entities. As the company’s financial reports are made and represented through internal
management of an organisation, there are continuously modifications of management of
financial outcomes, to mislead the shareholders of corporation in respect of the unreliable
financial performances (Crotty, 2009).
ASA 701: Communicating Key Audit Matters in Independent Auditor’s
Report

REPORT 6
After a main occurrence of GFC, the corporation’s shareholders have begun requiring
additional data disclosure in Auditor’s report of the investment corporations to make the
relevant decisions in respect of the investment. According to its result, a requirement of
increasing and advancing needs of audit reporting has realised by numerous administrative
authorities. ASA 701 has issued by the Australian board of auditing standard. This
accounting standard states the key matters, which attract the readers, to be reported through
independent auditor of an organisation by the audit report. ASA 701 is introduced to enhance
the audit report’s quality through increasing the needs of disclosures as per the auditor’s part.
ASA 701 has authorised the statement of key audit matters through auditors for listed
corporation (Davies, 2017). This makes able the auditors of the corporation to take decision
whether to disclose the specific audit matters in the auditor’s report.
Besides, it is also stated by the standard that fields where there are high-level risks of material
misstatement and the fields, which are important according to auditor’s professional
judgement, positive dealings, as well as events that are not usual, should be reported as key
audit matters. The key audit matters would affect the decision of the user of company’s
annual report. This standard also renders the guidelines as to how all the key audit matters are
to be defined in audit report of company (Vik & Walter, 2017).
In addition, ASA 701 states the situations while the matter are recognised as the key audit
matters, however this should be addressed to the audit report’s users. The provisions related
to the documentation regarding the matters that are to be included in the report by an
independent auditor are also specified in standard manner. The method and content of the
communication is required to be conducted through the auditors. A main objective of
including the additional key audit matters in a report is to enhance the expansive values of the
report of independent auditors by proposing the high level of limpidity related to the audit
engagement, which is executed by the company’s auditor. The key audit matter’s report

REPORT 7
makes able the desired user of a report for developing the better understanding in respect of
the matters and the influence over the corporation’s financial statements. The key audit
matters are not helpful only for the readers in assessing and evaluating present financial
condition of an organisation, but also helpful through serving the non-financial data, which
may utilised as the basis over that they may consider decision regarding keeping or
developing connection with organisation in course of businesses (Obstfeld & Rogoff, 2009).
Though, the communication of key audit matters is not the substitute for disclosure of
financial report that are to be created according to provisions of significant accounting
standards, which are applicable on corporation according to related financial reporting
context. The key audit matters are not alternative of the issuance of modified audit report by
the independent audit report in compliance with ASA 705 ‘Modification to opinion in
Independent Auditor’s Report.’ Furthermore, ASA 701 is not considered to replace
provisions related to ASA 570 ‘Going Concern’ that needs reporting of the events while there
presents the material improbability by the situation and event, which casts substantial
uncertainty over the capacity of the corporation to continue the businesses for the predictable
upcoming period. This is also implied in the situation, while the auditors are needed to
address KAMs according to rule and law. But, ASA 701 imposes a exclusion over
independent auditors of an organisation to state the KAMs while disclaimer of opinion is
addressed through them in auditor’s report up to, reporting of KAMs is the need of rules and
laws. Likewise, while there are chances of negative significances of reporting these matters,
which balance the common public’s interest, then KAMs should not be addressed by auditors
(Scott, 2010).
In banking sector, the organisations are engaged in a business related to advancing and
depositing of fund and other functions related to banking. In respect of these banking
organisations, the reporting requirements on part of auditor, must be more specific and

REPORT 8
stringent. The banking sector is an important sector for developing the economy of country.
This includes the disposition of fund of common people and henceforth functions related to
banking are to be performed clearly to keep the public’s faith as well as belief. For achieving
the desired transparency level in respect of the banking functions, they should hire the
external people to render the views in respect of the fair and true view of the financial
performances. The objecting of hiring these professionals from out of the banking
organisations is to provide due regards to independence principle (Cordoş and Fülöp, 2015).
Additionally, only the independent auditor may create the audit view, which is appropriate to
the bank’s financial performance and the manner in which the financial reports are prepared
and presented (Brasel, et. al, 2016). For the banking industry in general, there are certain
matters to be reported as key audit matters in the audit report of an independent auditor.
These matters include the revenue recognition bank standards, the managerial needs
applicable to bank, the transaction and event, which render evidence in respect of the plan of
organisation to not to run as the going concern corporation, the recoverability of the
receivable and loan.
Besides, there are about twenty corporations in the list of top 100 organisations, which are
ASX listed that runs in a banking sector. From this list, they have chosen to assess the
company’s annual reports, which also covers Audit report. The evaluation of KAMs that have
disclosed in audit report of related organisation for the purpose of communication with
desired user, would be done below-
Evaluation of audit report of Bank of Queensland:
The auditors of bank issued clean report in relation to true and fair view of financial
statement of the bank. The key audit matters reported through auditor are mentioned below:

REPORT 9
1. Provisions related impairment regarding loan and advance of bank:
As an evaluation of impairment provisions includes high level of difficulties and verdict to
decide the competence, it is reported as Key Audit Matters.
2. Computer software’s valuation, which has intangible nature:
A method, which is utilised to measure computer software’s value that is being within
produced is difficult and includes creating of some rules. In this way, they are reported as the
key audit matters.
3. Fair valuation of the financial instruments
For the valuation of financial instruments, the high management judgement is necessarily
required. Therefore, they are reported as the key audit matters (Annual Report, 2017).
4. Goodwill’s valuation
The goodwill is an intangible asset. The valuation of goodwill has reported as key audit
matters due to the involvement of partisanship of the assumption, which are forward looking
in nature and because of the importance of goodwill for bank’s financial position.
Evaluation of audit report of National Australia Bank
The auditor has issued the clear report for National Australia bank and has reported following
matters as KAMs:
1. Assessment of intangible asset
The methodology is used to assess the value of intangible asset that is being within produced
is complex and involve producing of some rules. In this way, it is reported as the key audit
matters (Annual report, 2017).

REPORT 10
2. Valuation of goodwill
Goodwill arises on the acquisition of the company and shows the excess of an aggregate of
fair value of purchase consideration and the amount of non-controlling interest in company
over the net asset’s fair value at purchase date. The valuation of goodwill is considered as
KAM because of the importance of goodwill for banks.
3. Valuation of intangible software as well as deferred expenditure assets:
The higher administrative judgement is necessary for valuation of the financial instruments.
Considering the significance for financial reports, the auditors have reported them as key
audit matter.
Evaluation of the audit report of Commonwealth Bank of Australia:
The auditors have reported KAMs as follow-
1. Provision of impairment for advancing asset-
This includes the subjective judgement over the manager’s part to measure amount of the
provision of impairment. They are reported as KAMs.
2. IT system as well as control-
The IT system has the significant impacts on the financial reporting of main transactions
conducted by bank and the protection is greatly significant for the survival of bank and
henceforth it is reported as key audit matter.
3. The fair valuation of financial instruments

REPORT 11
Bank’s financial instruments are not very difficult in the nature; however, the valuation
included expert’s help. Taking into consideration the importance of bank’s financial
instruments, they are reported as the key audit matter (Annual Report, 2017).
Evaluation of audit report of Medibank Pvt Ltd.
1. Assessment of impairment on goodwill: For the assessment of the chances of
impairment of goodwill, numerous evidence have taken and sensitivity analysis has
undertaken to evaluation of major prompts of impairment. Thus, they are reported as
key audit matters (Annual report, 2017).
2. Provision for bad as well as doubtful debts: The estimation of provisions of the
banks over particular basis and collective basis includes consideration of numerous
elements, which are not certain in the nature so this needs exercise of substantial
judgements. Hence, this is reported as the key audit matter (Sirois, Bedard and Bera,
2018).
Conclusion:
In conclusion, the key audit matters are required to be communicated according to the
provisions of ASA 701 as it targets as increasing the reporting requirements of auditor so that
improved levels of transparency in the audit report of the client organisation may be attained.

REPORT 12
References
Azim, M.I., 2013. Independent Auditors Report: Australian Trends From 1996 to
2010. Journal of Modern Accounting and Auditing, 9(3), p.356.
Bank of Queensland, 2017. Annual Report. Available form:
https://www.boq.com.au/content/dam/boq/files/reports/annual-report/annual-report-2017.pdf
Accessed on 24.05.2019
Benkel, M., Mather, P. and Ramsay, A., 2006. The association between corporate governance
and earnings management: The role of independent directors. Corporate Ownership &
Control, 3(4), pp.65-75.
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding
negative outcomes: The effects of reporting critical audit matters on judgments of auditor
liability. The Accounting Review, 91(5), pp.1345-1362.
Commonwealth Bank, 2017. Annual report. Available form:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/annual_report_2017_14_aug_2017.pdf Accessed 24.05.2019
Cordoş, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting & Management Information Systems/Contabilitate si
Informatica de Gestiune, 14(1).
Crotty, J., 2009. Structural causes of the global financial crisis: a critical assessment of the
‘new financial architecture’. Cambridge journal of economics, 33(4), pp.563-580.

REPORT 13
Davies, J., 2017. Global Financial Crisis – What caused it and how the world responded.
Available on < https://www.canstar.com.au/home-loans/global-financial-crisis/> Accessed
on: 09.06.2018
Fan, J.P. and Wong, T.J., 2005. Do external auditors perform a corporate governance role in
emerging markets? Evidence from East Asia. Journal of accounting research, 43(1), pp.35-
72.
Gul, F.A., Fung, S.Y.K. and Jaggi, B., 2009. Earnings quality: Some evidence on the role of
auditor tenure and auditors’ industry expertise. Journal of Accounting and Economics, 47(3),
pp.265-287.
Helleiner, E., 2011. Understanding the 2007–2008 global financial crisis: Lessons for
scholars of international political economy. Annual Review of Political Science, 14, pp.67-87.
McKibbin, W.J. and Stoeckel, A., 2010. The global financial crisis: Causes and
consequences. Asian Economic Papers, 9(1), pp.54-86.
Medibank private ltd., 2018. Annual Report. Available from:
https://www.asx.com.au/asxpdf/20170825/pdf/43lqp3ksytd3zh.pdf Accessed on 24/05/2019
National Australia Bank, 2017. Annual report. Available form:
https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2018-annual-
financial-report.pdf Accessed 24.05.2019
Obstfeld, M. and Rogoff, K., 2009. Global imbalances and the financial crisis: products of
common causes.
San, M.S., 2009. Global financial crisis. Plastic Rainbow Book Publication.
Scott, H.J., 2010. Global Financial Crisis. Nova Science Publishers.

REPORT 14
Shiller, R.J., 2012. The subprime solution: how today's global financial crisis happened, and
what to do about it. Princeton University Press.
Sirois, L.P., Bédard, J. and Bera, P., 2018. The informational value of key audit matters in the
auditor's report: Evidence from an eye-tracking study. Accounting Horizons, 32(2), pp.141-
162.
Vik, C. and Walter, M.C., 2017. The reporting practices of key audit matters in the big five
audit firms in Norway (Master's thesis, BI Norwegian Business School).