Impact of ASA 701 on Auditing: ABC Learning Case Analysis

This report delves into the auditing standard ASA 701, focusing on its principles for communicating key audit matters within independent auditor reports. It examines the standard's development in response to the global financial crisis, aiming to enhance shareholder understanding and address pot...Read More

Running head: AUDITING, ASSURANCE AND SERVICES
Auditing, Assurance and Services
Name of the Student:
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Table of Contents
Introduction......................................................................................................................................2
ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report......................2
Collapse of ABC Learning..............................................................................................................4
Five year ban slapped on ABC learning auditor..............................................................................5
Issues................................................................................................................................................6
Consideration regarding going concern...........................................................................................7
Communication with the management and other governing units..................................................7
Recommendations and Conclusion..................................................................................................8
Reference List................................................................................................................................10

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Introduction
This study deals with researching on topic and preparing a report on new auditing
standards ASA 701 (Allen and Ramanna 2013). This auditing standard is prepared for getting
better understanding of concepts on Communicating Key audit matters in the Independent
Auditor Report. The new auditing standard was developed in the wake of global financial crisis.
This was developed so that shareholders should have better and full understanding of the
companies where they plan to invest in. Even, investors had requested for earlier warnings of
potential issues that takes place with respect to an entity skill to maintain as going concern that
results in the revision of ASA 570 (Zadek, Evans and Pruzan 2013). The current segment
research on auditing issues that led to the expansion of new Auditing standard ASA 701
Communicating key audit matters in the Independent Auditor Report. The study briefly explain
about the key audit matters that need to be revealed in the audit report to the members of ABC
Learning Centres if the new auditing standards ASA 701 has practical in the period that led to
collapse of ABC Learning Centres as well as evaluating the usefulness of ASA 701. ABC
Learning Centres is one of the Australian companies that were once a principal provider of early
childhood education services. This company was listed in Australian Stock Exchange and based
in and across Australia (Eilifsen et al. 2013). The company went into voluntarily liquidation in
the year 2008 and purchased by Goodstart Limited by the year 2009.
ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report
The Auditing Standard ASA 701 explains matters relating to Communicating key audit
matters in the Independent Auditor Report. In this section, it explain with the compulsion as well

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as accountability of the auditors to correspond effectively regarding audit matters that are of
main significance in the report of auditors (Fontaine, Letaifa and Herda 2013). The Auditing
Standards mainly addresses verdict of the auditors in regard to the nature of dealings that should
be communicated in the audit report and compiled in the final report as well. The main purpose
of communication procedure is to improve in the valuation of report that is prepared by the
auditors in order to provide clarity about the performance of audit activities (William, Glover
and Prawitt 2016). It is important to communicate the matter to the shareholders as they had
invested money in the company and they should be communicated additional information so that
they have proper understanding of the important matters in relation to financial report of any
company. It is important to communicate important matters to the users so that they can properly
engage with the managerial actions as well as charged by Governance in order to build relation
with entity and management as a whole (Zadek, Evans and Pruzan 2013).
It is the accountability of the auditor to issue an opinion on the financial statement of
trade enterprise and carry out audit performance where the auditor has the responsibly with the
engagement terms of the audit (William, Glover and Prawitt 2016). It is the liability of the
auditor to meet the terms of the audit engagements while signing the engagement letter where
they agree that they will carry on the mission and compliance with the audit standard. The main
mission objectives should be taken into contemplation in order to decide variety of financial
reports for assessing the structure of any business enterprise (Koh, Rajgopal, and Srinivasan
2013).

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Collapse of ABC Learning
ABC Learning Centres is one of the companies that were founded in the year 1988 by
Eddy Groves and Le Neve Groves (William, Glover and Prawitt 2016). This company was the
first private owned childcare centres. In addition, the Australian Government paid subsidy direct
to the concerned families. ABC Learning Centres expanded by acquiring properties as well as
purchasing out childcare centres (Zadek, Evans and Pruzan 2013). Furthermore, ABC Learning
Centres was listed in Australian Stock Exchange. The company had 43 centres in and across
Australia by the year 2001. The company stared to expand their operations outside Australia by
the year 2005. ABC Learning Centres opened centres in US, New Zealand and UK. The
company owned 2238 centres by the year 2007.
The main reason behind the collapse was ABC Learning Centres could not repay its debt
on time. ABC Learning Centres entire UK subsidiary as well as 60% of US subsidiary. The stock
price of ABC Learning Centres fell down from $8.62 to $0.54. Finally, ABC Learning Centres
got delisted from Australian Stock Exchange and went into receivership (Kumar and Mohan
2016).
Successful Government has failed to think of long-term about the stipulation of childcare
centre in Australia. The failure of ABC Learning Centres was considered as a policy failure. This
failure was not only a business failure but also a government policy collapse of the highest order.
Here, the real blame was put on the successive government’s child care policies (William,
Glover and Prawitt 2016). It is noted that Australian had moved from a society conquered
childcare model to a private-dominated model without coming into real debate on matters
relating to industry type structure where the Government plays major role. ABC Learning

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Centres had initially tried the Macquarie Bank for leveraging a reliable income stream for getting
fund acquisitions as well as hoping an ever-increasing share price that would fund boundless
growth at the same time. ABC Learning Centres does not own much to the land on which the
centre was sited. The competitors of ABC Learning Centres were leaving a low-profit or
unprofitable centres (Louwers et al. 2013).
Five year ban slapped on ABC learning auditor
From the news article taken from “The Australian”, it was mentioned that the corporate
regulator had taken its first scalp over the collapse of biggest childcare chain in Australia named
as ABC Learning Centres by slapping its auditor with a 5-year work ban. Eddy Groves, Founder
of ABC Learning Centres had taken action against the long-time auditor of ABC Learning
Centres after Australian Securities and Investments Commission withdrew a criminal charge
against the company (Zadek, Evans and Pruzan 2013). ABC Learning Centres collapsed into
receivership in the year 2008 that owed creditors a sum of $1.6 million as well as forced a fire
sake of 1200 childcare centers that cured 1,20,000 children. The auditor of ABC Learning
Centres failed to carry out or perform their duties adequately as well as properly. Mr. Green was
working as a long-time auditor at ABC Learning Centres and he was banned from practicing as a
registered auditor for time span of 5 years. The auditor showed $143 million profit in the last
financial statement (William, Glover and Prawitt 2016). The auditor should have noticed that
ABC Learning Centres had overstated its revenue by incorrectly including centre development
fees as income. In addition, there was inadequate appropriate audit proof on the audit file that
reveals that the auditor of ABC Learning Centres had applied an adequate level of professional
judgment as well as professional skepticism and attained a sensible assurance that the 1997

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financial report was free from material misstatement figures as well as meet the terms with all
the relevant ASA (Australian Auditing Standards requirements (Messier 2016).
There was inadequate evidence that the auditor of ABC Learning Centres had properly
documented all the applicable investigations and completed all relevant assessment and analyzes
and communicated with the management on matters relating to significant issues as well as took
all relevant and necessary enquiries, testing and checking in relation to the risk of fraud. The
auditor had not neither identified nor disclosed related parties as well as related-party disclosures
(Schmidt 2012).
Issues
ABC Learning Centres had boarded on some of the serious questionable measures at the
development phase where the most important factor is the use of asset assessment methods
(William, Glover and Prawitt 2016). Mainly, there are two asset assessment methods in
accounting. The first is historical cost that is the amount paid for the assets when acquired by the
business. The second is the fair value that is the predictable current market value of the
possessions. Company can use any of the method where value cannot surpass the receivables
amount of the asset (Tarr and Mack 2013)
The failure of ABC Learning Centres took place because of over complexity of
operations as well as poor decision-making process. It gives rise to ineffective corporate
governance as well as questionable accounting practices that were the reason behind ABC
Learning Centres failure. The other reason is revelation of related party transactions as well as

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individuals abusing their power and destructive expansion approach (William, Glover and
Prawitt 2016).
Consideration regarding going concern
ASA 570 is the auditing standard that explains about going concern aspect. It is important
for an auditor to take into consideration the suitability as well as aptness of the employment in
different propositions of going concern at the time of preparation of course by conducting
financial announcements (Ye and Simunic 2013). It is important for an auditor to consider
material as well as considerable suspicion that connects to the aptitude of business unit that goes
on with the idea of going concern. In condition such as Global Financial emergency, there is
need for strong convenience of credit that gets along with the illiquidity throughout restricted of
period (William, Glover and Prawitt 2016). There is wide range of potential issues or problems
that has the capability to influence the process of continuance or perseverance of the trade
entities going concern
Communication with the management and other governing units
It is the responsibility of the auditor to act more cautiously and aware of the need of
communication with the administration who has the charge with Governance (Ye and Simunic
2013). If there was proper and transparent communication between Mr. Green (auditor of ABC
Learning Centres) and Founder of ABC Learning Centres, then there would be clear
understanding of situation and no malpractices could have been noticed. There was lack of
communication present between the management and auditors of ABC Learning Centres that had
led to collapse of the company. Weakness identified by auditor at the time of auditing should be

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highlighted to the management without making strategies to hide it in the audit report.
Highlighting the weakness will help any company to get that issue checked and minimized as far
as possible (William, Glover and Prawitt 2016). These issues should be properly communicated
by the auditor to the management of any organization. The auditors should be responsible to
communicate each of the audit matters to the management that can relate to nature of business
entities, environment and other factors. To that, the auditor need to evaluate the process that
should be strong and effective by identifying the risks and show in the financial reports and other
material misstated figures that lead to fraud. The auditor needs to provide professional and fair
judgment to the company with proper audit evidence and strategies to reduce it as far as possible
(Zadek, Evans and Pruzan 2013).
Recommendations and Conclusion
It is recommended to the auditors for planning and creating strategies and policies that
help them at the time of gathering proofs and evidences. The auditor has full responsibility to
carry out their audit work with full diligence and help shareholders by providing correct
information about the company. The auditor should not engage in malpractices as in case of
ABC Learning Centres where the auditor had shown profits for the company but in real it was
not the case. The auditor had shown in the financial report that the report is free from material
misstatement. As per ASA 701, it is important to communicate key audit matters in the
Independent Auditor Report. It is recommended recognizing revenue in proper ways. It is
important to focus mainly on the core trade activities even after when an project is going through
a enormous expansion stage. It is essential to give central importance regarding financial
accounts of the company that shows financial health. It is essential to realize the importance or

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significance of sound corporate governance practices in trade activities. Therefore, financial
structure of business as well as business transactions should not be overly complex by nature.
From the ethical or legal perspective, the illegal perspective are the accounting irregularities and
not ethical activities are when public was given false information about the business. The penalty
were non principled behavior as it is not good for the public as they had put trust in the business
who was not ready to disclose the information and give rise to lost trust for childcare providers
as well as loss on education and care. Therefore, shareholders lost a lot of money at that
particular period time.
At the end of the study, it is concluded that ABC Learning Centres faced social, political
and financial disaster. To that, there was failure of regulatory and accounting process at ABC
Learning Centres. There was issue with ethical behavior at ABC Learning Centres. There was lot
of issue found at ABC Learning Centres where Chris Honey was given the receivership, Federal
Government injected sum of $22 million. The company was purchased by Goodstart by the year
2009 and become one of the non-profit organizations. ABC Learning Centres appeared to be
failed in exercising the fundamental level of control over the management. It was needed for the
administration to oblige considerably higher responsibility requirements especially on the public
sector worker and establishing a sort of price regulations as the private health insurance.

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Reference List
Allen, A. and Ramanna, K., 2013. Towards an understanding of the role of standard setters in
standard setting. Journal of Accounting and Economics,55(1), pp.66-90.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance
services. McGraw-Hill.
Fontaine, R., Letaifa, S.B. and Herda, D., 2013. An interview study to understand the reasons
clients change audit firms and the client's perceived value of the audit service. Current Issues in
Auditing, 7(1), pp.A1-A14.
Koh, K., Rajgopal, S. and Srinivasan, S., 2013. Non-audit services and financial reporting
quality: evidence from 1978 to 1980. Review of Accounting Studies, 18(1), pp.1-33.
Kumar, E.P. and Mohan, B., 2016. Origin And Development of Auditing.PARIPEX-Indian
Journal of Research, 4(9).
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2013. Auditing
and assurance services. New York, NY: McGraw-Hill/Irwin.
Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill
Higher Education.
Schmidt, J.J., 2012. Perceived auditor independence and audit litigation: The role of nonaudit
services fees. The Accounting Review, 87(3), pp.1033-1065.

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Tarr, J.A. and Mack, J., 2013. Auditor obligations in an evolving legal landscape. Accounting,
Auditing & Accountability Journal, 26(6), pp.1009-1026.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and Assurance Services: A Systematic
Approach. Auditing and Assurance Services: A Systematic Approach.
Ye, M. and Simunic, D.A., 2013. The economics of setting auditing standards. Contemporary
Accounting Research, 30(3), pp.1191-1215.
Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice
in social and ethical accounting and auditing. Routledge.