Auditing and Assurance: Analysis of ASA 701 and Key Audit Matters

This report provides a comprehensive analysis of auditing and assurance, specifically focusing on the Australian Auditing Standard (ASA) 701, which addresses communicating key audit matters in independent auditor's reports. It begins with an introduction to auditing, emphasizing the auditor's role in ensuring financial statement accuracy and adherence to regulations. The report then delves into the rationale behind ASA 701, highlighting the failures in the Lehman Brothers case and how the new standard aims to address these issues by improving the communication of audit findings. The report explains ASA 701's provisions, including the importance of identifying and reporting key audit matters. Furthermore, the report provides a case study of key audit matters in utility companies such as Carnegie Clean Energy Ltd, AGL Energy Ltd, Ausnet Services Ltd, and APA Group, detailing how auditors have addressed valuation of assets, revenue recognition, and other critical accounting issues. The conclusion summarizes the significance of ASA 701 in enhancing transparency and reliability in financial reporting and offers recommendations for future improvements in auditing practices.

Running head: Auditing and Assurance
Auditing and Assurance
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................3
ASA 701: Rationales..................................................................................................................4
ASA 701: Explanation...............................................................................................................5
Key Auditing Matter of the Company.......................................................................................6
Carnegie Clean Energy Ltd:...................................................................................................6
AGL Energy Ltd:...................................................................................................................7
Ausnet Services Ltd:..............................................................................................................7
APA Group:...........................................................................................................................8
Conclusion and Recommendation..............................................................................................9
Reference..................................................................................................................................11

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Introduction
Auditor carries audit procedure in the company. It is one who check whether the
company have followed all the norms and regulation while preparing the financial statement
of the company. It is the one who ensure that the company have used double bookkeeping
system while preparing the financial statement (Carson, Zhang and Fargher 2014). It check
that the financial statement are free from the material misstatement and materiality and there
is no fraud in the company. The auditor also check the financial performance of the company
and after completing all the analysis and by checking the information collected by the
auditor, the auditor gives opinion about the company financial statement. The auditor report
is also very vital for the financial user as they take their decision while taking the audit report
in mind so there decision is truly based upon the auditor report so it is very important for the
auditor to make sure it give proper opinion about the company as it involve much amount of
public interest in the opinion of the auditor (DeFond and Zhang 2014).
It is been found that the auditor is losing their position in the market and the public is
not able to built there confidence related to the audited financial statement so it was a big
problem as the audit process is been carried by the auditor so that it will able to save the
public money but if the same public is not giving confidence in the audited financial
statement than it is no option to do the audit of the company. So to solve this problem
Australian Accounting Standard Board came up with the new standard ASA 701 (Furnham,
and Gunter 2015). ASA 701 deals with the “Communicating Key Audit Matters in the
Independent Auditor’s Report” The result of the new auditing standard was that it removed
many old regulations and also it remove the ASA 501 which is of going concern so the new
standard remove all these provision from the accounting of the company. The report is been
based upon the Lehman Brother case and how the new standard arrive in the accounting and

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also it have details of the key audit matter related to the company in utility industry (Griffiths
2016).
ASA 701: Rationales
As per the auditing profession an auditor have to carry many process in the company
so that it able to know about the risk which is there in the financial statement of the company
but as per the case Lehman Brother is been seen still the auditor was unable to know about
the risk which the company has and it also become the primary reason for the collapse of the
Lehman Brothers. The management was involved in many suspicious activities but still no
one gave attention towards the management (Knechel, and Salterio, 2016).. Repo rate has
been used by the company in a very wrong way as with help of Repo rate the company have
done material misstatement as they have taken it in a way that it will able to increase the
financial position of the company as it also shown a false increase of $50 Billion. The
company auditor have followed all the norms of auditing and carry all the process of audit
properly and when they able to get that the company is using repo rate to increase the
financial statement of the company and the financial statement of the company is having
material misstatement than also the auditor have gave the company an Unqualified report so
this show that the company is giving all the formalities done and their is no mistake in the
financial statement so this also became one reason of the collapse of the Lehman Brothers
and also the auditor lost their position in the market (Peytcheva, Wright and Majoor 2014).
It can be seen that their was a big problem in the audit profession so to solve the
problem the standard came up ASA 701. The standard state that the auditor should carry audit
in regards for the company is it should have a reason and also there should be time and scope
of the audit. These norms were not there at the time of Lehman Brother case (Power and
Gendron 2015). The standard also state that the company auditor should carry its audit
procedure in the company so that kit able to gather the material information of the company

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and in the material information the portion which the auditor think is related to the risk of the
company so it should record such matters in the annual report of the company. It is to be done
so that it will help the auditor to take more correct decision in regards of the financial
position of the company. The auditor should also analysis the estimations and assumption
which the company have taken while making their financial statement of the company and
the auditor should disclose all these matter in the annual report (William Jr, Glover and
Prawitt 2016). This norm and reporting was not there in the time of Lehman brothers as that
time the auditor does not have to record such information and estimation in the annual report
of the company. This rules have been come so that the financial user will also able to know
the matter of risk in the company and can take their decision as per the risk of the company.
As these norms were not there in the Lehman Brothers case so this also become a reason for
the collapse of the firm as the auditor is not able to record the risk of the company (Xu et al .,
2013).
The company is always based upon the going concern but the new standard have
remove the assumption of going concern as it is not necessary for the company to have loss in
long run as the economy is changing so rapidly that the firm can have high amount of loss in
short term and as result the collapse of the firm can occur as it is been seen in the case of
Lehman Brothers and also the financial crisis which occur in 2008. So to avoid such big loss
of economy the new standard has stop the assumption of the going concern business (Zakari
2013).
ASA 701: Explanation
The new standard helps the auditor to carry the process more easily in the company
financial statement of the company. It show the auditor the area it should give its focus and
also how to record the transaction in the annual report of the company (Zhang, Yang and
Appelbaum 2015). Some regulation of ASA 701 is listed below:

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 Key audit matter should be explained properly by the auditor in the financial report of
the company
 Information of the company should be properly recorded and a document should be
made in regard of the information
 Auditing process should be followed by the auditor properly
 Key audit matter should be written related to which matter is also been suggested by
the standard.
Key Auditing Matter of the Company
The report has key audit matter of the companies in the utility industry and how the
audit has dealt with the same.
Carnegie Clean Energy Ltd:
Key audit matter of the company as per the auditor is related to the valuation of the
intangible asset and recognition of revenue of thee company. The intangible asset is been
consider of the company it is be seen by the auditor that the company have included the
goodwill and technology development in the asset as it hold the major part of the assets. As
the impairment of the company hold major part so the management have done some changes
in the value so it been considered as key audit matter by the auditor (Carnegiece.com 2019)..
There is uncertainty in the process of forecasting of the cash flow of the company as
they are using the valuation method for the forecasting of the cash flow so this also seen by
the auditor an risk matter so the company so it is been consider as a key audit matter. The
accounting of the revenue is been seem doubtful by the auditor as it is not using proper
accounting for the revenue from contracting activities. As per the company it record the
revenue in the completion stage so this likely not proper process by the company as per the
auditor. The process of valuation related to the completion of the contract is also not properly

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explained so the auditor take it as the risk of the company and record the same as key audit
matter in the company (Carnegiece.com 2019)..
AGL Energy Ltd:
Key audit matter of the company as per the auditor is related to the unbilled revenue,
unbilled distribution cost and revenue. The revenue of the company is been consider as key
audit matter by the auditor as it hold a very big amount of $938 million but the company is
not able to give the proper detail of the revenue and also they are unable to provide the
respected bill of the customer from which the company is able to earn the revenue so this is
why it is been consider as an key audit matter. The company is using unbilled distribution
method to value energy consumption cost so this is been not proper justified by the company
as they do not able to provide sufficient information in regards of the distribution cost as they
do not have a single bill so these is the reason the auditor have taken it as an key audit matter
of the company (Agl.com.au 2019).
There were proof that the company is entering into different contract related to
financial instrument as these are not the process of the company in their ordinary course of
business so this was found very unfair by the auditor as they should not do anything beyond
their business scope so to make it more important in the eyes of the shareholder the auditor
recorded the same in the key audit matters of the company (Agl.com.au 2019).
Ausnet Services Ltd:
Key audit matter of the company as per the auditor is valuation of the non-current
asset, revenue recognition, valuation and accounting of the derivatives. The company is been
following very complex method to record the revenue of the company so this the reason that
the auditor does not able to do the audit process properly in respect of the revenue so this was

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the primary reason of the auditor to put it under the key audit matter of the company
(Ausnetservices.com.au 2019).
The complex nature of the process of the accounting does not let the auditor to take
the expenses and the revenue which the company is earning by the non-current asset as it is
unable to carry process of audit in the non-current asset properly so this is the reason the
auditor have record the same as key audit matters of the company. So it can be conclude that
the auditor were not able to have proper audit process in the company so as a result it have to
record so many matter of the company in the key audit matter of the company and it is been
also found that the complexity is very high of the company in regards of the classification of
the capitalised expenses of the company.
APA Group:
Key audit matter of the company as per the auditor of the company is valuation of the
goodwill, other intangible asset and the carrying amount of PPE (Www.apa.com.au 2019).
Company is not able tio peroperly justify the valuation method of goodwill and the amount
the goodwill which is there in the financial statement of the company so due to these the
auditor have to record the goodwill valuation as one of the key audit matter of the company.
The company enter into many forward contract which was not in the course of it
business (Www.apa.com.au 2019).. As they are not able to justify the reason of entering into
such contract so the auditor have to consider it as a risk and as a result it have recorded the
same as a key audit matter of the company.
The above point is been concerned by the auditor in regards of the new standard ASA
701 as the auditor have done all the process to take correct information of the company and
record the same in the financial statement of the company and by carrying its audit process

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the auditor found the above mention points as risk to the company and so it recorded the
same as the key audit matter of the company.
Conclusion and Recommendation
It show about how the financial statement are important for the financial user as the
company have to maintained its financial statement in accordance of the standard and norms
while preparing the financial statement of the company. It also show the reason of auditing
the financial statement as it help the financial user to take correct decision. It is not necessary
that the company have followed all the standard so to check whether it have followed all the
standard or not the auditing process is been carried by the auditor. It check that the company
is maintaining all the norms and standard while preparing their financial statement of the
company. Its also ensure that the company financial statement are free from material
misstatement and also from materiality. But as the collapse of many big firm happen and due
to these the auditor lost their place in the public as now the public is not able to bring their
confidence upon the audited financial statement. So get back the audit profession value in the
society the standard board came up with ASA701 which help the company to do the audit
more precisely and also it remove all the problem which occur at the time of the Lehman
Brother and the financial crisis of 2008.
Some recommendation to the external auditor:
 It should properly record all the important information of the company in the annual
report of the company
 It will properly communicate with the management in regards of the risk of the
company
 It should carry its audit process properly in the organization

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 It should able to give independent auditor opinion upon the financial statement of the
company
 It should follow all the rules and regulation of the accounting standard and should
also do the audit as per the standard

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