ASA 701: Impact of Auditing Standards on Financial Reporting

This report provides an executive summary of ASA 701, which focuses on communicating Key Audit Matters in the Independent Auditor’s Report. It explains the purpose of ASA 701, highlighting the auditor's role in defining key audit matters, and discusses the standard's application. The report uses the collapse of ABC Learning as a case study to illustrate the impact of ASA 701, demonstrating how the standard could have potentially mitigated the company's downfall by increasing transparency and informing stakeholders about critical financial issues, such as questionable accounting practices, rapid expansion, and poor corporate governance. The analysis covers the potential impact of the standard in the early 2000s, emphasizing its role in providing greater transparency and making audit reports more communicative for financial statement users, ultimately enhancing their engagement with management and governance.

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ASA 701

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Executive Summary
The importance of ASA 701 Communicating Key Audit Matters in the Independent Auditor’s
Report has been highlighted below. Through the help of ABC Learning limited we have tried to
explain the purpose of ASA 701. Auditors powers in the key audit matters definition has been
clearly highlighted and explained in the below study. We have tried to identify the impact of the
new auditing standards that could have been in case, it would have been developed in the early
2000.
Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................3
Application of ASA 701..............................................................................................................................4
Collapse of ABC Learning.............................................................................................................................5
Application of ASA 701 on ABS Learning.....................................................................................................7
Conclusion & Recommendations..............................................................................................................10
References.................................................................................................................................................10

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Introduction
In the wake of global financial crisis, the Auditing and Assurance Standard Board (AUASB)
need accounting standard ASA 701 "Communicating Key Audit Matters in the Independent
Auditor’s Report". The provision of ASA 701 is in line with section 227B of the Australian
Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001.
The shareholders of the company are interested in knowing more about the internal health of the
company. The introduction of ASA701 is majorly because of the growing need of these
shareholders. The development of ASA 701 has been made by the Australian Accounting
standard board with an intention to bring the same in par with the ISA 701 Communicating Key
Audit Matters in the Independent Auditor’s Report. There are certain differences as well in the
new standard when the same has been compared with the ISA 701; this is majorly made to

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accord with the Australian legislative environment. The ASA 701 auditing standard applies to
the financial report that has prepared for a financial year or half year in accordance with the
corporation act 2001. (AUASB, 2015)
Application of ASA 701
The standard provides information about the requirements and the explanations that required to
be placed in the audit report in relation to providing key information to the users of the financial
statements. The international auditing and assurance standard board has enhanced the reporting
requirements for the auditors. The ASA 701 incorporates all these changes that have recently
been incorporated by the international board. The new auditing standard provides information
about the key audit matters that’s needs to be reported in the audit report which may arose the
attention of the users of the financial statements. In this case, the auditor of the company is
required to use their judgment to determine the matter that need to be reported in audit report as
key audit matters. In this case, the matters that have been communicated through the persons that
have been charged by governance can be treated as key audit matters. The auditors while
determining the key audit matters should also consider the key events that have taken place
during the year which directly or indirectly may impact the investment decision making of the
investors. The auditors through the help of illustrations provided in the auditing standard can
determine the circumstances where they can treat an event as an exception and can decide not to
communicate the same as a key audit matter. The documentations that the auditors are required
to be kept for the key audit matters and the period for which the same needs to be maintained is

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also discussed briefly in the auditing standard. The main reason behind issuing these standards is
to provide greater transparency in the audit report and make the same more communicative for
the users of the financial statements. The additional information that is required in the financial
audit report will help the users to get more and better understanding of the key matters which
may impact the going concern of the entity. They can even get better understanding of the nature
of the entity and information about various management judgments that has impacted the
financial numbers significantly. (Kruger, 2012)
The users of the financial statements once get informed about the key matters can get better
engaged with the management and persons charged with governance. The opinion that has been
formed by the auditors can also be tested by the users. The information that has been provided in
the key audit matters cannot be considered as a substitute for the information that the auditors are
required to be disclosed in ASA 570 relating to the events and scenarios that may impact the
going concern of the entity. (Hultin, 2015)
Collapse of ABC Learning
ABC learning was an Australian company which was majorly engaged in providing childhood
education services. The company was one of the largest providers of childhood education
services in the world. The company was listed in Australian stock exchange and has a market
capitalization of around $2.5 billion in the year 2006. There have been some issues which led to
the fall out of the company. After the subprime crisis it became difficult for the management of
the company to repay its debt. The auditors of the company but unable to sign the balance sheet
stating that the previous year profit numbers of the company needs to be restated. In the year

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2008, the company went into liquidation. In the year 2009, the company was bought by
Goodstart Limited. (Baaqeel, 2011)
There were certain reasons which were responsible for the liquidation of the company. As per
experts, the management of the company, during the extension phase has adopted certain
questionable accounting measures the charge inflated the profits of the company. Further the
methods that have been adopted for valuation of assets were questionable. (Kruger, 2012)
ABC leaning was growing too fast. The management of the company was not only engaged in
acquiring childcares in Australia but also in United states. The management’s fast pace can be
noted down from the statement that the number of child care owned by the company has
increased from 43 to 697 between the years 2001 to 2005. The management of the company
believes in growing of the company without having any further discussion on the cost factor.
Between the years 2001-2005, the management of the company was more interested in making
acquisition rather than on streamlining the business. They were not at all interested in managing
the business. There has been a tremendous increase in the staffing cost of the company which
was making the things more difficult for the management. In the initial years, the CEO of the
company was involved in making all the major hiring for the company and thus saved lot of
recruitment related cost but after he was travelling in the process of acquisition, the hiring cost
stood up. More than 200 Australian childcare centers were in unprofitable state. The revenue and
the profit numbers of the company was accounted in a terrible manner. The auditor of the
company spends too much time to understand the complexity of the accounts. At last in the
2008-09 the shares of the company was suspended from the stock exchange pending from the
release of financial statement for the year. The accounts of the company were in such a shoddy
state that they were unable to attract any buyer for their company. The corporate governance of

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the company was poor. The top management of the company was engaged in many related party
transactions. These transactions provided indirect benefit to the top management of the company
and increased cost of the company. The company always argued stating the fact that the
transactions that has been entered with the related party are being carried out at arm’s length
price which was actually never the case. All these transactions have hampered the reputation of
the company and the investors of the company lost their trust for the management. The top
management of the company was engaged in acquisition of childcares in Britain and in United
States at any cost. It does not matter to them whether the price that they were offering for the
acquisition is overpriced. The main reason for the set back of the company was the ignorance
which the management has for its operations and concentrated majorly on its growth strategy.
Application of ASA 701 on ABS Learning
As highlighted above ASA 701, requires the companies to disclose any key specific audit matters
that may arose the attention of the uses of the financial statements. If ASA 701 would have been
applicable in the year 2005 and afterwards that would might have saved ABC learning company
from getting collapsed. In this case, the shareholders and stakeholders of the company would not
have lost that much amount that they have originally lost in collapse of the company. As
highlighted, the management of ABC learning company was majorly involved in a position
without taking much care about me business operations would definitely arouse the attention of
the auditors of the company considering it as a key audit matter that require attention of the uses
the financial statement. There was sufficient proof which states that the management was more
interested in acquiring different child Care Centers across the globe rather than concentrating end
streamlining the business could have been a big business issue and key audit matter. The

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auditor's have stated that the revenue and profit numbers of the company were terribly stated in
the books of the company. They have question the Going Concern capability of the company as
well. Through the help of ASA 701, the auditor's would have communicated the key audit
matters through the help of the audit report to the users. In this scenario, As per ASA 701 being
auditors are required to use a judgment in determining whether an event is a key audit matter or
not. The different scenarios which were available in case of ABC Learning would have definitely
been regarded as key audit matter and the auditors today's judgment analysis would have
categorized then useful for the users. It has been clearly highlighted that an ABC learning the
corporate governance of the company was poor. The company was engaged in number of related
party transactions which were proved to have been taken place at an arm's length price making it
difficult for the auditors to digest. The staffing cost of the company was increasing at a fast pace.
Being the top management of the company was involved in acquisitions they were not
concentrating on managing it staffing and recruitment cost. This was alarming for the company
but the management oversight it and focused on growth. In this scenario, As per ASA 701 being
auditors are required to use a judgment in determining whether an event is a key audit matter or
not. The different scenarios which were available in case of ABC Learning would have definitely
been regarded as key audit matter and the auditors today's judgment analysis would have
categorized then useful for the users. It has been clearly highlighted that an ABC learning the
corporate governance of the company was poor. The company was engaged in number of related
party transactions which were proved to have been taken place at an arm's length price making it
difficult for the auditors to digest. The staffing cost of the company was increasing at a fast pace.
Being the top management of the company was involved in acquisitions they were not
concentrating on managing it staffing and recruitment cost. This was alarming for the company

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but the management oversight it and focused only on growth. Further, during the latter years
more than 200 child cares functioning in Australia were suffering from operational loss. In spite
of these facts, the management of the company was not bothered. The auditors of the company
did not highlight this fact to the stakeholders and shoulders of the company. This was an
alarming issue especially for the new investors and for the existing ones as well. The ASA 701
auditing standard, if would have been there in those years, would have guided the auditors and
provided provisions and rules that need to be followed in the circumstances which are in the
interest of the company as well as for the uses of the financial statements. (Keane, 2008)
The ASA 701,"Communicating Key Audit Matters in the Independent Auditor’s Report", tends
to be very useful for the users of the financial statements of a company. The auditing standard
has highlighted the definition of key audit matters that may arose the attention of the
stakeholders and shareholders of the company. At the same time, the auditing standard has
highlighted importance of judgment that the auditors are required to make at times of auditing
the financial statements of a company which may help them in identifying the key audit matters
which needs to be reported in the auditor's report. The standard provides information about the
requirements and the explanations that required to be placed in the audit report in relation to
providing key information to the users of the financial statements. The international auditing and
assurance standard board has enhanced the reporting requirements for the auditors. The ASA 701
incorporates all these changes that have recently been incorporated by the international board.
This auditing standard will not only help the users to improve their trust on the company but at
the same time will also help in improving the reputation of the company in the eyes of the users.
This auditing standard will provide more powers to the auditors which are in the interest of the
users.

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In the current scenario and with the growing Global economic crisis, the need of ASA 701
related auditing standards has increased. The management of the companies nowadays tends to
manipulate the things for their own good. This has in the recent past has proved to be very
harmful for the users of the financial statements specially for those people who are lying on the
financial statements for taking decisions related to the investment. The financial health of the
company is very much vigilant from the financial statements that are being audited by the
auditors. Considering the fact that the auditors if does not have enough power will not solve the
purpose and will not help them in fulfilling their responsibilities that has been levied on them by
the government. These new auditing standards will provide additional powers to the auditors and
will help them in using their judgment based on the current scenario of the company and
replicate the same in their audit report which may or may not be in the interest of the company.
(Legislation, 2015)
Conclusion & Recommendations
Thus, consultant the current scenario and with increasing Global financial crisis, it is evident that
the application of new auditing standard ASA 701,"Communicating Key Audit Matters in the
Independent Auditor’s Report" will help in improving the current state. However, it is not correct
to state that the introduction of ASA 701 is a substitute for ASA 570.
References

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AUASB, 2015. Auditing Standard ASA 701. [Online] Available at:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 9 Set 2017].
Baaqeel, R., 2011. Case Study Of ABC Learning Centers Collapse. [Online] Available at:
http://rayanbaaqeel.blogspot.in/2011/06/case-study-of-abc-learning-centers.html [Accessed 9
Sept 2017].
Hultin, R., 2015. The Collapse of ABC Learning Centres. [Online] Available at:
https://prezi.com/xiirpxey5eu1/the-collapse-of-abc-learning-centres/ [Accessed 9 Sept 2017].
Keane, B., 2008. ABC learning collapse is a policy failure. [Online] Available at:
https://www.crikey.com.au/2008/11/07/abc-learning-collapse-is-a-policy-failure/ [Accessed 9
Sept 2017].
Kruger, C., 2009. Lessons to be learnt from ABC Learning's collapse. [Online] Available at:
http://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-
78f8.html [Accessed 9 Sept 2017].
Kruger, C., 2011. Numbers finally start to add up as operators go back to basics. [Online]
Available at: http://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-
back-to-basics-20110121-19zy6.html [Accessed 9 Sept 2017].
Kruger, C., 2012. Five-year suspension for former ABC Learning auditor. [Online] Available at:
http://www.smh.com.au/business/fiveyear-suspension-for-former-abc-learning-auditor-
20120808-23uj8.html [Accessed 9 Sept 2017].
Legislation, F.R.o., 2015. ASA 701. [Online] Available at:
https://www.legislation.gov.au/Details/F2015L02016/Explanatory%20Statement/Text [Accessed

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9 Sept 2017].
News, A., 2012. Auditor suspended over ABC Learning report. [Online] Available at:
http://www.abc.net.au/news/2012-08-08/auditor-suspended-over-abc-learning-report/4185408
[Accessed 9 Sept 2017].