Analyzing ASA 701's Influence: ABC Learning Centre's Auditing Issues

This report provides an in-depth analysis of the introduction of ASA 701, focusing on its role in communicating key audit matters, and its implications for financial reporting. The report uses the case of ABC Learning Centre, an Australian listed company, to illustrate the impact of auditing standards on corporate governance and financial fraud. It highlights the accounting issues, such as the overvaluation of acquisitions and the resulting goodwill, and the debt-related problems that led to the company's collapse. The report explains the reasons behind the development of ASA 701, including the need for enhanced reporting requirements and the prevention of financial misappropriation. It also discusses the matters that should be disclosed in an auditor's report, emphasizing the importance of addressing issues like going concern and intangible assets. The report concludes by underscoring the importance of auditors' adherence to the new standard and the engagement of investors and audit committees in the process. The analysis provides insights into how the implementation of ASA 701 could have potentially prevented the financial failures experienced by ABC Learning Centre.

Running Head: Auditing, assurance and services
Auditing , assurance and services

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Table of Contents
Introduction......................................................................................................................................1
Auditing issues in ABC Learning Centre........................................................................................2
Reasons for developing ASA 701....................................................................................................4
Matters to be disclosed in auditor report of ABC Learning Centre.................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
This report is regarding the introduction of new accounting standard ASA 701
“Communicating Key Audit matters in the Independent Auditors Report” and it clearly examines
the case of ABC learning center and if amendment to the ASA 701 has been put forward then the
financial fraud would have not been occurred and the stated company would not have collapsed.
It also states about the new reporting requirements introduced in the ASA 701 and its
implications in the industry due to which the way of financial and accounting misappropriation
has resolved up to an extent. It also contains the linking of the ABC learning center case with the
ASA 701, in which it contains about the matters occurred. The report clearly illustrates how the
frauds in an organization has paved the way for introduction of new accounting standard and has
led to various amendments in the existing standards. There are various loopholes in the law
drafted and the reporting of the auditors was not accurate so to discontinue this practice and
enhance globalization various efforts were taken to improve the reporting requirements. There
were various issues raised in ABC learning Centre such as the accounting issues and debt and
these issues occurred due to no proper disclosures by the auditor and the auditor gave an
unqualified opinion for the same. A linkage study has been established between the stated
company and the introduction and amendments in the auditing standard explaining the reasons of
amendments and if the same was present the stated company would not have been collapsed. It
also discussed about the successful implementation of the standard and the auditors are
encouraged to meet the requirements and the investors and audit committee being engaged and
supporting for the process illustrated above.

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Auditing issues in ABC Learning Centre
The stated company is an Australian listed company which runs a business of childcare
centers. The company expanded its business rapidly in other countries as well. It rapidly started
acquiring small and medium sized centers across the country (Blythe, 2017). In a short span of
time it made significant growth which led to increase in its stock prices to $8.60(Teen, 2012).
Since it acquired bulk centers but was unable to sustain the growth for the long time. It paid
excess value for centers than actual value affecting the growth. It took debts for acquiring the
company and was unable to pay the same as it does not pick the pace of growth which was
expected. The acquisitions made were criticized by economists all over the country. In no time
the profits and share prices of the company fell down and thus lead to the liquidation. There
were various issues of the failure of this company in which the significant one was fraudulent
financial reporting (Sumsion, 2006). Major ethical issues identified were Unethical accounting
practices followed. Auditors of the company’s financial statement breached the code of ethics.
For survival of the organization corporate governance principles should be followed, the same
was breached by the company.
ABC learning Centre has a remarkable financial fraud in its organization. Financial fraud
is defined as cheating in financial transactions for its personal benefit. Since there was
manipulation of financial statements it can be said as an accounting fraud in which it overstated
the assets and revenues of the company superficially and underreporting its liabilities. It is also
discovered that ABC has made considerable profits from subsidies it received from government
in the form of tax rebates. It also earned profits from paying low wages to staff and cost cutting
which was not a sustainable business model (Weaven and Grace, 2010). Controversies were
made due to its acquisitions of child care centers which created monopoly in the market. It was

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also seen that it has used all his financial resources in regulations governing childcare and thus
creating huge liability for the company. Auditors were unable to sign off its reports due to its
huge debt obligations which were not paid even after selling off its assets (Brasel, Doxey,
Grenier and Reffett, 2016). And after this incident the company was delisted from stock
exchange and creditors for winding up of the company and the same was taken over by
Goodstart, a consortium of mission Australia.
The issues in collapse of ABC learning center were:
 Accounting issues – It led to acquisitions of various childcare Centre’s which were paid
more than there acquisition values resulting in creation of intangible asset called as
goodwill. But when the company is running below profits the intangible assets becomes
worthless and this was what happened with learning Centre. Profits of ABC increased
extremely with acquisitions but out of those profits seventy percent was intangible assets
which would have been questioned, since the inherent risk associated with the same was
enormous. The external auditors of ABC learning Centre namely Pitcher Partners gave
unqualified opinion on the above stated issue. Whereas later on Earnest Young provided
a different view on the matter. Therefore after this incident took place lot of corporate
scandals was identified in which the report of auditors provided “unqualified opinion”.
 Debt -
The acquisitions were done after taking debt from financial institutions, but the company
was unable to pay the same so it reclassifies its debt as non-current liabilities from
current- liabilities. But in the end of year 2008 its profit fell down by forty two percent
and thus company tried to renegotiate the loan but the same was rejected by banks (Teen,
2012). Breach of debt has led to drastic effect.

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 Operating cash flow- The operating cash flow was not sufficient to pay the suppliers,
vendors, salaries and dividends even though their profits were increasing. The directors
of ABC pledged their shares to pay the dues and due to which market flooded with shares
and thrashed the share price (Hems, 2015).
ABC s failure was not due to lack of competition but was due to wrong business practices
and high level of debt and acquisitions as per the representation made by Australian
competition and consumer commission (ACCC).
Reasons for developing ASA 701
A new auditing standard namely ASA 701 – “Communicating Key Audit matters in the
Independent Auditors Report” deals with auditor’s responsibilities in reporting of key audit
matters is introduced. It is reportative standard which provides form and content of
communication to enhance the readability of intended users of financial statements. The report is
formed on the basis of auditor’s professional judgement and on the same basis significant areas
are defined which requires clear attention of management and in some cases those charged with
governance. But disclosing such matters in audit report is not a substitute of various disclosures
required by management to make in financial statements and the reporting requirements under
ASA 570 and modified opinion required to provide under ASA 705. ASA 570 is been replaced
from “Going concern assumption” to “going concern basis of accounting” and this standard
continues to report on an exception basis (Penn, 2011). This standard is applied only when
auditor is required to communicate key audit matters as per any law or regulation or is a
requirement for listed entities in which auditor audits general purpose financial reports. It was
amended by International Auditing and Assurance Standards Board (IAASB) due to various

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below mentioned reasons. The changes in ASA 701 has definitely lead audit procedure more
time consuming and costly but at the same time it is important to understand the need for such
changes , if these changes would not have introduces same scandals would have taken place.
After the insertion of new requirements it is important for early discussions of matters with client
and auditors for fulfilling the new reporting requirements relating to financial statements
disclosures and identification of appropriate and potential KAM (Reid, Carcello, Li and Neal,
2015).
 New ASA 701 has paved a way for disclosure of Key audit matters for all listed entities,
depending upon the nature and complexity of organizations. Those matters on which
auditor’s opinion is significant shall be disclosed (Sirois, Bedard and Bera, 2016). These
matters may include significant risk areas, uncertainty of estimate done by management
in preparation of financial statements and significant events affecting the current period.
Out of these matters the most significant shall be included in report and thus called as key
audit matters (Cordos, and Fulopa, 2015).
 Material uncertainty which was earlier disclosed in the financial statements was disclosed
as emphasis of matter paragraph in audit report but the same in the amended and shall be
included in a different Head as “Material Uncertainty Related to Going Conern”.
 As per the amendment there are some changes in the location of paragraphs and there is
no requirement of placing other matters paragraphs and auditor’s opinion to be placed
first in the auditor’s report and opinion paragraphs (Auditing and assurance standard
board, 2017).
 Management responsibilities and its reporting are increased as per the new standard
applicable. Management is required to disclose matters relating to going concern and

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further requirement of superintending financial reporting process by those charged with
governance (Logan, Press and Sumsion, 2012).
 The auditor is now supposed to make a positive statements relating to independence from
the entity and that he is fulfilling the ethical requirements required for conducting audit
and fulfilling other requirements relating to ethics (Gimbar, Hansen and Ozlanski, 2015).
 Important enhancement is required after amendment that auditor is required to report
when the event and conditions cast significant doubt on the entity going concern principle
even if no material uncertainty exists at that time (Carson, Fargher and Zhang, 2016).
However it can be said that a lot reporting requirements have been enhanced in the new ASA
701, thus the auditors are required to be keener and updated about the audit conducted.
Auditors are required to follow these requirements with effect from financial reporting period
commencing on or after 1 January 2016.
Matters to be disclosed in auditor report of ABC Learning Centre
The collapse of ABC learning Centre would not have been held if there were proper
disclosures by the auditors in the financial statements. Since at that time there was no such
awareness which led to the scandal and accounting frauds. ASA 570 is being amended with the
requirement that the auditor has to consider going concern accounting and even if no material
uncertainty occurs still if it casts in the mind of auditor that the assumption is not adhered with
he has to report over the same. If this requirement was before ABC learning Centre auditors
would have reported the same and it would have easily reflected the wrong practices done by the
stated company. If the requirements of ASA 702 would have been introduced the reporting
requirements would easily locate the discrepancies done by ABC learning Centre and its

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accounting fraud would have been easily figured out. A reduced disclosure regime was
implemented by department of finance in order to reduce the workload and make financial
statements easier to read. Key audit matters include the most common aspect of reporting that is
the carrying value or impairment value of goodwill and intangibles (Brigden, 2009). If we refer
to the case of stated company one of the most dangerous loopholes was the acquisition value of
centers as it was acquired at extravagant prices which lead to excess goodwill but actual value
was far lesser than what was quoted which lead to bookish profits but no real profits and this is
how it lead to misstatements which resulted in fraud. KAMs also includes the details of various
acquisitions made since the globalization and increasing consolidation has impact on the
organization, so these are required to be included with proper disclosures which was totally
missing in the case of stated company (Auditing and assurance standard board, 2015). It is very
important to understand that revenue recognition plays key role in deciding the real profits of the
entity. The case stated above clearly explains the fact that the revenue was wrongly stated and
the readers were referring to that position of financial statements even if the same was audited by
the auditors and auditors gave unqualified opinion (KPMG, 2015). The new standard has opened
the door for giving more transparency and giving more insights about the audit. There are
various features of key audit matters to meet various objectives such as fact based, concise and
free from technicalities, tailored to the company and sufficient detailed to understand the matter
addressed in the auditor’s report (Doxey et al, 2016).
Conclusion
The primary purpose of the financial statements is to provide entity’s financial position
and the auditors review the same to ensure that whether they show true and fair view or not. But

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due to some loopholes in the reporting requirements there were many violations and frauds
occurred, due to this it paved the way to insertion and updation of the new accounting standard
ASA 701. It can be concluded that ASA 701 reporting plays a very important role, it is
regulatory standard through which accounting fraud can be controlled. A case of ABC learning
Centre is taken as a base to explain the fraud which occurred in the organization. This report
includes the critical factors newly introduced in ASA 701 through which various reporting
requirements have taken place. The linkage study has been done to explain the fraud conducted
in the organization and if there would be these reporting requirements and a change which has
been made in ASA 570, how the fraud conducted would be controlled. A brief understanding is
being made of the case referred and the newly inserted ASA along with changes done in other
reporting standards for understanding the reasons as to why such changes occurred and what led
to such change. Thus to make disclosures less generalized and more meaningful it gave a global
push to improve the usefulness of the financial reporting.
References
Auditing and assurance standard board, 2015, Auditing Standard ASA 701 Communicating Key
Audit Matters in the Independent Auditor’s Report, retrieved on 29th august 2017 from
http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
Auditing and assurance standard board, 2015, Explanatory statement, retrieved on 29th august
2017 from https://www.legislation.gov.au/Details/F2015L02016/Explanatory%20Statement/Text
Blythe, S.G., 2017. Attention, balance and coordination: The ABC of learning success. John
Wiley & Sons.

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Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative
outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The
Accounting Review, 91(5), pp.1345-1362.
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Doxey, M.M., Fuller, S.H., Geiger, M.A., Gist, W.E., Hackenbrack, K.E., Janvrin, D.J., Pitman,
M.K. and Roush, P.B., 2016. Comments by the Auditing Standards Committee of the Auditing
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https://home.kpmg.com/au/en/home/insights/2015/12/enhanced-auditor-reporting-december-
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