Audit Report: ASA 701: Key Audit Matters and ABC Learning Centre, 2017

This report provides an in-depth analysis of the new auditing standards, specifically ASA 701, focusing on the communication of Key Audit Matters (KAMs) in the independent auditor's report. It examines the context of these standards, emphasizing their role in enhancing transparency and accountability in financial reporting, particularly in response to financial crises and shareholder demands. The report details the characteristics of KAMs, the process of their determination, and their inclusion in audit reports. Furthermore, it explores the auditing issues surrounding the collapse of ABC Learning Centre, highlighting the financial malpractices and discrepancies that contributed to its downfall. The report also discusses the issues that prompted the amendment of auditing standards from ISA 507 to ISA 701 and offers recommendations for improving auditing practices, including the importance of accurate financial record-keeping and the continued amendment of auditing standards. This report aims to provide a comprehensive understanding of the evolving landscape of auditing standards and their implications for financial reporting and corporate governance.

AUDITOR’S REPORT
COURSE TITLE: AUDIT
TRIMESTER 2, 2017
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EXECUTIVE SUMMARY
This report explains the new auditing standards ASA 701 which is about communicating KIMs
(key audit matters) is the independent Auditor’s report which aims to governing financial crisis
in the whole world. The amendment from ISA 570 is to give feedback of requests by
shareholders who needed additional information about the firms they invest in. Also investors
requested awareness of the potential issues that may exist to an entity’s ability to continue in the
future (Xu, et al., 2013). The report also explains the auditing issues that contributed to the down
fall of ABC Learning Centre. The AUASB has adopted new auditing standard in order to change
the way the auditor’s report which is the ISAAB project. The project is aimed to enhancing the
communicative power and the importance of the auditor’s report through the changes made in its
structure and what it contains. The introduction of the new project will reflect the transparency,
accountability, and willingness of the AUASB to conform to the Australian Security and
Investment Committee. The report then relates the issues that contributed to the amendment of
new auditing standards ISA701 which is about Communicating key audit matters in the
independent auditor’s report. The report found that the ASA 701 Australia is moving to a more
meaningful audit report for investors.
The report also provides the KAMs that require being included in the audit report to the members
of ABC learning Centre when the new auditing standards ISA 701 are applied in the period up to
the collapse of ABC learning Centre. With the ASA 701 Australia is moving to a more
meaningful audit report for investors.
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Table of Contents
INTRODUCTION.....................................................................................................................................4
COMMUNICATING KAMs IN AUDITOR’S REPORT......................................................................4
KEY AUDIT MATTERS (KIMs)............................................................................................................5
AUDITING ISSUES SORROUNDING THE COLLAPSE OF ABC LEARNING CENTRE............6
ISSUES THAT CONTRIBUTED TO THE AMENDMENT OF AUDITING STANDARDS FROM
ISA 507 TO ISA 701..................................................................................................................................8
RECOMMENDATIONS..........................................................................................................................8
CONCLUSION..........................................................................................................................................9
REFERENCES........................................................................................................................................10
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INTRODUCTION
The Auditing and Assurance Board (AUASB) is an independent, statutory agency of the
Australian Government, that monitors develops, issues and maintains auditing and assurance
standards. AUASB standards are enforced by the law for audit or reviews from financial reports
required under the corporations’ act 2001.AUASB has a plan that adopts a number changes to
the Australian Auditing Standards resulting from the ISAAB project. Of these ISAAB projects,
changes to the way auditor’s report are the most significant, mostly with the introduction of a
new standard ASA701 (Christopher, Sarens, and Leung, 2009).
The auditing standards makes use of the an auditor’s responsibility to communicate Key Audit
Matters (KAMs) as reported in the auditor’s report and also involves an address of the auditor’s
decision as to what to communicate in the auditors’ report and the composition of such
communications.
COMMUNICATING KAMs IN AUDITOR’S REPORT
The main aim of auditors is to investigate the KAMs and having drawn a professional judgment
on financial statements reported. This is communicated through describing what in the auditor’s
report (Cosserat, and Rodda, 2009). New auditing standards ISA701 regulates auditor’s ability to
determine and speak out the KAMs in the auditor’s report and applies to audits of full sets of
general purpose of financial statement (Ifac.org, 2017). It also applies when it is a requirement
by the law that the Auditor must communicate the KAMs for other organizations or
communicates on personal will. The reason to communicate KAMs is to encourage the value of
communication of the auditors’ report that helps to provide greater accountability of the audit
that was done.
The major characteristics of the new standards are:
 Enables auditors of separate organization to make decisions on if to include KAM in their
audit report.
 Rules communication of the KAMs in auditors’ report of the entities listed.
 The documentation of the audit relating to the KAM
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 The process through which the auditor determines the KAM by considering areas of high
assessed risk.
Communication of KAMs also provides more information to stakeholders of financial report to
help them understand the matters that were most significance in the auditor’s decision.
Communicating KAMs also helps the appropriate users to understand the most of the
significance issues area of judgment in the results of the financial report audit.
Communicating KAMs in the auditor’s report also assists the stakeholders to further engage with
the advisory committee.
When determining KAMs the significant judgments relating to the areas in the financial report
that involved important management decision.
KAMs are not supposed to be described where the law or regulation includes public disclosure
about the issue or in rare circumstances, the auditor determines that the issue should not be
communicated in the auditor’s report because there are adverse effects of doing so which would
outweigh the public interests benefits.
The ASA701 applies to audits of general purpose reports of the listed entities when the auditor
decides to communicate key audit matters in the auditor’s report.
KEY AUDIT MATTERS (KIMs)
KAMs refer to issues that are most significance to an auditor’s professional decision when
auditing an entity financial statement. KAM is selected with those issues that are charged with
governance.
KAMs are determined by an auditor’s perspective. ”through the auditor’s eyes” (Arens et al.,
2010).The judgment –based decision-making framework in the new ASA 701 is designed for the
auditor to select a small amount of issues from what to communication.
KAM may be determined in the following ways:
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 Professional decision of the auditor is applied in determining which issues to include in
the audit report. The issues are drawn from the audit committee discussion and those
matters communicated through the audit findings.
 The important auditor’s attention shows that an audit is risk-based. Issues that cause
challenge to the auditor in obtaining enough evidence.
Auditor’s report snapshot 28 March 2017
This provides insights and observations on Key Audit Matters.
This shows the KAMs topics that were communicated:
 Goodwill and intangibles: the most common KAM relates to the carrying value
assessment or impairment of goodwill and intangibles.
 Acquisition: over half of the acquisition KAMs arise in the TMT sector and 54% of all
TMT audit reviewed.
 Revenue:42% of entities in the FS sector reported a KAM on revenue, resulting from the
audit efforts applied in assessing the stage of completion. Expectations are that KAM
arising from revenue should increase.
 Taxation: half of the taxation KAMs features in the energy and natural resources sector.
Auditors focus in assessing the recognition and recoverability of deferred assets,
featuring in 42% of taxation KAMs.
AUDITING ISSUES SORROUNDING THE COLLAPSE OF ABC LEARNING CENTRE
The ABC learning center aimed at providing additional skill and supervision for little children in
the pre-school age, also for the aged and disabled.
The concept of the childcare centers picked up in a large way in Australia when the ABC
learning centers were started in 1998. ABC centers then became the largest of the daycare
centers in Australia since it operated in the as a company and the corporate management gave a
hand in its accelerated growth in short period of time.
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The downfall of the ABC learning centers began long before the management of the company
came to realize.
There was a described way of for the children to staff ratio and it was not possible to generate
huge profits margins like others centers in those days by observing the terms of the rules. There
was certainly a degradation of the level of education offered by the ABC learning centers since
there was never sufficient staff to attend to the children. Some of the learners were disabled and
others had others which required attention of a large group of staff which was not possible
(Carey,Knechel, and Tanewski, 2013).
Interviewees said that the ABC learning centers have no specialists cleaning staff hence the staffs
at these centers are required to perform all the duties such as cleaning as well as care for the
learners. The results of this are that the staff has less time to teach and care for the learners.
A number of interviewees raised concerns on how the staffs were treated at some of the ABC
learning centers. A number said that they used to complete tasks at home while others said that
they did not receive their payments for set up time, clean up time or for evening staff meetings
In the year 2003-04 the financial statements of ABC learning center provided a negative image.
Only 56.7 percent of the incomes earned by the firm were to pay the staff dues. The expansion of
ABC learning center into such a big participator in the Australian market had been triggered by
the policies of the government. The economic and financial problems arose in the wake of the
global financial crisis of 2008 which led to the fall of the company (Sánchez-Medina, Blázquez-
Santana, and Alonso, 2014).
ABC learning centers’ acquisition led to the recognition of the licenses of operating the daycare
centers and large amount of goodwill. In 2006, an unknown complaint came up in concerns with
the Australian securities and investment commission about the valuation of the ABC’s daycare
licenses.
One of the major things that have contributed to the fall of the ABC learning center is that of
financial allegations. According to a representatives in the ACCC, the fall of the ABC learning
center has not been the result of increasing competition but it has been due to financial
malpractices such as high debts and more than normal acquisition (Azim, 2013). Also the
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downfall can be attributed by the discrepancies of the financial information provided by the ABC
learning centers.
It was known well enough that the ABC learning centers was operating under malpractices in the
course of maintaining its accounts. The value of the assets decreased as the question of the
malpractice increased. The founders of the ABC learning center, Mr Eddy Groves and Dr. Le
Never Groves did not appear in the institution in September, 2008. The new management took
over and they aimed at restoring the order in the company. This was by accepting the fact that
the firm was operating under the malpractice that have been followed since then.
ISSUES THAT CONTRIBUTED TO THE AMENDMENT OF AUDITING STANDARDS
FROM ISA 507 TO ISA 701
The AUASB matters in auditing standards ASA 701 which deals commonly with communicating
KAM in auditor’s report about the requirement of the law and regulations provisions.
Under section 336 of the laws and regulation of the Australian Government, the AUASB may
amend Auditing Standards to handle certain corporation legislation. The Auditing standards
contrast from the ASA 701, which have been accorded with the Australian Legislative
environment and to keep audit quality where the AUASB has seen the importance of doing so.
The Auditing standards provide application and other material involving the communication of
KAM in the independent auditor’s report.
The enactment of ASA 701 shows that the AUASB is fully committed to conform with the
amendments to auditor reporting developed by the IAASB.
RECOMMENDATIONS
The Australian Legislative Committee should continue amending the auditing standard
frequently to avoid fraud in businesses. This will show the effectiveness and the transparency of
the audits made.
The auditors should consider giving the correct judgment which is seen to be professional so that
businesses and investors may have the overview of the financial statements of the company.
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Business and other institutions are supposed to keep good records of their important information
including licenses and financial statements. This will help in getting the correct judgment from
the auditor’s report. ABC learning center collapsed due to lack of keeping good financial records
hence providing wrong information to the auditors which led to exposure of their malpractices.
This shows the importance of the audit (Houghton, and Campbell, 2013).
The new auditing standards ASA 701 communicating KAMs about the independent auditor’s
report was developed as a result of global financial crises. This should be adopted and brought to
the notice of the public in order to maintain the objective and purpose of the Australian
Legislative Committee
CONCLUSION
In conclusion, the new audit standard ASA 701 communicating key matters in independent
auditor’s report shows how the Australian Legislative Committee is committed to enhancing
transparency in auditing. Communicating KAMs helps the investors to have an overview of the
companies they are investing in. The new auditing standards ASA 701 regulates the auditor’s
ability to communicate on key audit matters that is contained in the audit report. The Auditing
Standards conforms to the international standards ISA 701 and communicates key audit matter in
auditor reports which is independent as issued by IAASB and IFAC. The downfall of the ABC
learning center was not attributed by competition, but the discrepancies of the financial
information provided and the tendency of keeping books of accounts.
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REFERENCES
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Auditing, assurance services and ethics in Australia: an integrated approach.
Azim, M.I., (2013). Independent Auditors Report: Australian Trends From 1996 to 2010.
Journal of Modern Accounting and Auditing, 9(3), p.356.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: A
synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Carey, P., Knechel, W.R. and Tanewski, G., (2013). Costs and Benefits of Mandatory Auditing
of For‐profit Private and Not‐for‐profit Companies in Australia. Australian Accounting Review,
23(1), pp.43-53.
Christopher, J., Sarens, G. and Leung, P., (2009). A critical analysis of the independence of the
internal audit function: evidence from Australia. Accounting, Auditing & Accountability Journal,
22(2), pp.200-220.
Cosserat, G.W. and Rodda, N., (2009). Modern auditing. Wiley.
Houghton, K. and Campbell, T., (2013). Ethics and auditing (p. 354). ANU Press.
Ifac.org. (2017). Accounting Standards | Governance | Publications and Resources | IFAC.
[online] Available at: https://www.ifac.org/publications-resources [Accessed 18 Sep. 2017].
Sánchez-Medina, A.J., Blázquez-Santana, F. and Alonso, J.B (2014). Do Auditors Reflect the
True Image of the Company Contrary to the Clients’ Interests? An Artificial Intelligence
Approach. Journal of Business Ethics, pp.1-17.
Xu, Y., Carson, E., Fargher, N. and Jiang, L., (2013). Responses by Australian auditors to the
global financial crisis. Accounting & Finance, 53(1), pp.301-338.
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