Auditing and Assurance (ACC707): ASA 701 and Key Audit Matters Report

This report examines the application of ASA 701, a key auditing standard, focusing on communication of key audit matters (KAMs). It begins with an executive summary, followed by an introduction that explains the need for ASA 701 due to financial misrepresentation and the importance of transparency. The report uses ABC Learning as a case study to illustrate the practical application of ASA 701, discussing the company's overview, accounting issues, and the impact of poor governance. It outlines the core features and scope of ASA 701, emphasizing the auditor's responsibilities in disclosing vital information and the process of determining KAMs. The report also highlights the importance of KAMs in addressing critical issues and ensuring stakeholders have access to relevant information for investment decisions, as well as the importance of transparency in audit reports.

Auditing, Assurance &
Services ACC707 Individual
project

EXECUTIVE SUMMRY
The provided report is prepared in order to get the learning of new auditing standard
which is ASA701 communication. Different sections which will be discussed in this study are
the key audit matters that are necessary to be considered while auditing firms for instance ABC
learning Centre. The given text will further discuss the recognised need behind implementation
of this auditing system. World wide finance issues will also be highlighted along with the crises
faced by the mentioned enterprise.

Table of Contents
EXECUTIVE SUMMRY................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Overview of the Company..........................................................................................................1
Different accounting issues related to concern...........................................................................2
Key audit matters .......................................................................................................................3
Core features of ASA 701...........................................................................................................3
Scope of ASA 701.......................................................................................................................5
RECOMMENDATION...................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
As per ASA701 is the accounting standard which was developed in order to provide more
transparency to the organisations operation and financial status. Due to misrepresentation's of
accounts it was realised that auditors need to give guideline regarding what all should be
included in the audit report and who all should be communicated the same. It helped various user
s of the financial reports to take their further decisions accordingly after going through the actual
performance level of different companies (Arens, Elder, and Mark, 2012). ABC learning is an
Australian company which once used to provide children with early education. It was established
in 1988. It was doing good at its initial stages but later became a part of great controversy as the
accounts of refereed enterprise showed excess of profits which wee not actually true. Following
report will discuss the need of developing new auditing standards ASA701 communicating key
audit matters in the interdependent auditors report.
TASK
Overview of the Company
ABC learning is a daycare school which provides training and development to students of
small age and also give services to the disabled. After it was founded it took very less time to
become the most popular brand in this field. It soon opened 800 branches in Australia which
resulted into increase in its total market share which further raised its share value to a great
extent. ABC learning started meteoric rise in the beginning which raise the situation of
controversies in this industry. Other firm dealing in same business type started questioning the
rate with which the refereed organisation was growing. It is due to the fact that other operation's
of childcare were facing difficulty to raise their margins and ABC was continuously presenting
great profit figures (Arens, and et. al., 2010). This resulted into various reasons which started
acting against the companies goodwill among which the macro factors were the most prominent.
Apart from this the negative performance of the same company was also a result mismanagement
which observed in its administration. During 2003-04 it was observed that the accounts of
refereed company were not authenticated. They were modified and miss presentation of figures
was done in order to attract more investors. Earlier auditing was done using standard of ASA 570
which was inefficient of providing a clear image of the companies present condition. It is
because much qualitative information is ignored in that statement which makes decision taking
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difficult. Therefore a need was recognised to revise these standards so that a document is
generated which can help user to get complete knowledge. This led to the development of ASA
701 according to which all the real facts must be considered while auditing. The auditor has to
ensure that he disclose all the facts to the user which has effect on the buying and investing
decision of user.
Different accounting issues related to concern
In the year 2008 company experienced a great downfall. It was noticed that the balances
which was given in the balance sheet was fake. The financial statements shows abnormal
acquisitions which shows that founders of ABC were involve in making discrepancies in their
accounts (William, Glover and Praw,2016). Company was unsuccessful in reaching to the level
of operating cash which is required to repay the creditors, investors suppliers etc. Apart from this
high risk was involved in the valuation of assets as most of the assets were intangible and it was
difficult estimate their actual value. In order to raise the total profit this concern gave less
importance to its employees and paid very low rate of wages to them which were not as per the
Australian standards. Apart from this staff members were forced to clean the utilities and
purchase their work dress which was not actually a part the companies law. This way the cited
company was trying to earn the competitive advantage for which high degree of manipulation
were done in the books of accounts specially the profit and loss account (Arens, and et. al.,
2010). Due to all this general public started losing faith in it which resulted into its collapse.
Hence, issues related to the given concern can be summarised into following heads:
 It was too fast and high-priced as it experienced growth at a very abnormal rate.
 The given company could not find an appropriate staff due to high staffing cost in
Australia.
 Terrible condition of their accounts which makes it difficult for the concern to attract a
particular buyer.
 The governance practices were also very pathetic which further acted as a barrier to win
the confidence of investor and maintain the goodwill of company.
This led to the development of ASA 701 communicating key audit matters in the
independent auditors report. With the help of this auditing procedure it became more effective
and provided a crystal clear image of the particular company. The implementation of this
standard is directly associated with the reason behind the collapse of given concern. If the given
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information were included in the reports of the concern company than it would have helped ABC
in managing its accounts which was important for maintaining the long term growth of the
organisation. It gives the outline to auditing that what all must be taken care of while conducting
the auditing and hence helped different users (Knechel and Salterio, 2016).
Key audit matters
The person conducting the audit has to ensure that issues which are important are
communicated in the re[port presented by him and these are known as the key audit matters. It is
done not because of the auditor wish to provide the comprehensive list but to bring attention
towards the core issues of the entity and the audit being done (Cohen and Simnett, 2014). Given
below is the list of different matters which would have been included in the audit report of given
entity if this standard was passed at the leading time of ABC learning collapse.
 All the relevant fresh sections in the investigator report
 Issues that are according to the auditor is of vital importance
 Reference of all the disclosed information
 reason behind an issue considered as important
 Solutions given by the auditor to the core matters
Other Information
 Result of the auditor as before presenting the same in front of other users
 Duties and obligations of the management and the person doing the audit
 Information regarding what section information is not included in the given audit report
 discloser of relevant personal safety danger (Junior, Best and Cotter, 2014).
Core features of ASA 701
It made it compulsory for the auditors to disclose KAM to all the stakeholders of the
company. It includes all the important information related to the business entity which is of value
to the stakeholders. It also enables auditors of other companies to take decision regarding
weather to include KAM in their report or not and the determination of matters to be included in
are determined in the below manner which should have been followed in the refereed
organisation:
a)Matters exchanged with authorities accused of administration - The presentation of KAM
is not planned to change the extent of the review. KAM are resolved from those issues that the
reviewer has exchanged with those accused of administration in the ordinary course of the
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review. ISA 260, Communication with those supercharged with Administration, and different
ISAs formulated prerequisites for the inspector to convey huge discoveries from the review with
TCWG, for instance noteworthy challenges experienced amid the review, correspondences in
regards to related gathering exchanges, restrictions on the gathering review and interviews on
troublesome or antagonistic issues (Kolk and Perego, 2010).
b) Matters that require crucial attention of the person auditing – It includes such issues that
act as a barrier in front of the auditor to acquire all the appropriate data. Also information that act
as a barrier for the investigator to reach at an opinion is included in this.
Region of higher evaluated danger of material error, or noteworthy dangers - The
evaluator recognizes and surveys dangers of material misquote of the money related
proclamations and designs and performs review methodology in light of surveyed hazards in the
typical course of a review. ISA 315 (Revised), recognising and assessing the danger of physical
false statement through knowing the entity and its environment, characterizes critical hazard as a
recognized and evaluated danger of material that, in the reviewer's opinion, requires
extraordinary review thought (Wang and et. al., 2010). Huge dangers or zones of high surveyed
dangers may regularly be regions that require noteworthy examiner consideration.
Areas in the money related articulations that included huge administration
judgement - The inspector considers ranges of huge administration judgement and in this way
critical evaluator opinion, including bookkeeping gauges having high estimation vulnerability for
instance contingent upon the conditions of a particular substance, debilitation of goodwill or the
reasonable estimation of a specific monetary instrument. Complex appraisals may require the
inclusion of both an administration's master and an inspector's master. The evaluator additionally
considers bookkeeping arrangements and practices that are not reliable with others in the
element's business (Xu and et. al., 2011).
Significant occasions or exchanges that takes place in a particular time frame - The
impact on the review of critical occasions and exchanges amid the period may require
noteworthy examiner consideration. Huge occasions and exchanges may incorporate noteworthy
exchanges with related gatherings, huge exchanges outside the typical course of business and
uncommon exchanges. Noteworthy monetary, bookkeeping, administrative, industry, or different
advancements that influenced administration's presumptions or judgements may likewise bring
about an issue requiring critical inspector consideration (Carson, Fargher and Zhang, 2016).
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Those issues of most criticality in the review of the monetary articulations of the
present time frame - The last stride in deciding KAM is choosing from above those present
period matters that were of most centrality in leading the review (Law, Kent and Routledge,
2012). This involves proficient judgement and might be influenced by the size and multifaceted
nature of the element, the nature of its business and condition, and the actualities and conditions
of the review engagement. ISA 701 gives direction on components that the inspector may
consider in deciding 'most noteworthiness', including:
 Weather the issue involves a different but associated accounting considerations
 The vitality of the issue to people associated with it
Scope of ASA 701
The ASA701 standard manages the investigator obligation to impart key review matters
in the examiner's report. It is necessary to address investigator legal opinion regarding what all
should be there in the reviewer's report and the frame and part of such correspondence. This way
different stakeholders can get more relevant information which can help them in taking their
investment decisions. More transparent audit has higher value and represent the fair state of an
enterprise. It also removes the drawbacks of ASA 570 in which situation may arise where the
accounts presentation of an entity can be questioned (Azim, 2013). The objective behind this
standard is to identify key audit matters that has significance in measuring companies
performance. There are different key audit matters which can be determined by identifying the
importance of issues that require more attention. It involves that section of the business which
has greater associated risks. Also the decisions related to areas which are sensitive in nature like
the section of an enterprise having greater amount of uncertainties in the total estimations.
RECOMMENDATION
It is suggested to the management of given company that proper should be given to its
administration so that the status can be improved. By using the given audit standard effective
financial reports can be prepared and users trust can be developed. To experience growth in the
share value the transactions of the company must be clear and should be free from any
intentional manipulations as it effects the brand image to a great extent. All the key matters given
in the ASA 701 must be included in the auditing so that the end report contains all the qualitative
information regarding the concern and accordingly the users can take help of same. Apart from
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this the given concern also needs to give importance to its staff members as in order to achieve
success it is very necessary that employees working with the institution are satisfied with their
working conditions. No forceful work should be get done by them as it effects an individual
morale to a great extent and also creates a negative image of the company.
CONCLUSION
From the above discussion it has been summarised that ABC rose impressively at its
initial stages as its branches all over the country covered 20% of whole centres of Australia. But,
soon the company experienced a very swift fall too which shows that the entity was not efficient
enough as it could not handle the fortune of the entity to a longer time period. The failure was
due to the miss presentation of accounts which led to the development of new auditing standard
ASA701 Communicating Key Audit Matters in the Independent Auditor’s Report. It was a
successful concept which shows that in order to continue business with same scale management
needs to take care of its accounts and has to ensure that accounting procedure is carried out
effectively. Important matters were made compulsory as per this standard so that transparency
can be ensured and long term growth can be observed.
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REFERENCES
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.
Arens, A.A and et. al., 2010. Auditing, assurance services and ethics in Australia: an integrated
approach.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A
Journal of Practice & Theory. 34(1). pp.59-74.
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical
analysis on a world-wide phenomenon. Journal of Business Ethics.120(1). pp.1-11.
Kolk, A. and Perego, P., 2010. Determinants of the adoption of sustainability assurance
statements: An international investigation. Business Strategy and the Environment.
19(3). pp.182-198.
Wang, C and et. al., 2010, March. Privacy-preserving public auditing for data storage security in
cloud computing. In Infocom, 2010 proceedings ieee (pp. 1-9). Ieee.
Xu, Y and et. al., 2011. Audit reports in Australia during the global financial crisis. Australian
Accounting Review. 21(1). pp.22-31.
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.
Law Chapple, L., Kent, P. and Routledge, J., 2012. Board Gender Diversity and Going Concern
Audit Opinions.
Azim, M.I., 2013. Independent Auditors Report: Australian Trends From 1996 to 2010. Journal
of Modern Accounting and Auditing. 9(3). p.356.
Online
ASA701 Communicating Key Audit Matters in the Independent Auditor’s Report. 2015. [Online].
Available through <https://www.legislation.gov.au/Details/F2015L02016/Explanatory
%20Statement/Text>. [Accessed on 19th September 2017].
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