Auditing and Assurance: ASA 701 and Key Audit Matters

This report delves into the realm of auditing and assurance, examining the crucial role auditors play in providing reliable financial statements. It highlights the erosion of public trust in the auditing profession, particularly in the wake of events like the Lehman Brothers collapse and the 2008 financial crisis, attributing this to inadequate explanations in audit reports. To address these issues, the Australian Accounting Standard Board introduced ASA 701, mandating the communication of Key Audit Matters (KAMs) in auditor's reports. The report analyzes the rationales behind ASA 701, including the failures exposed by the Lehman Brothers case, and explains its key provisions. Furthermore, it presents KAMs of various companies within the utility industry, including Carnegie Clean Energy Ltd, AGL Energy Ltd, Ausnet Services Ltd, and APA Group, offering insights into revenue recognition, intangible assets, and other critical auditing considerations. The report concludes by emphasizing the significance of audited financial statements and the need for auditors to maintain public confidence by adhering to standards like ASA 701.

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

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Auditing and Assurance
Executive Summary
The report is having the details of how the auditor has lost their place in the society as
because of collapse of Lehman Brothers case. It shows the ASA 701 details and how it helps
the auditor in regards of it auditing process. It also has key audit matter of the companies
related to utility industries.

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Table of Contents
Introduction................................................................................................................................3
ASA 701: Rationales..................................................................................................................4
ASA 701: Explanation...............................................................................................................5
Key Auditing Matter of the Company.......................................................................................5
Carnegie Clean Energy Ltd:...................................................................................................5
AGL Energy Ltd:...................................................................................................................6
Ausnet Services Ltd:..............................................................................................................7
APA Group:...........................................................................................................................7
Conclusion and recommendations.............................................................................................8
Reference..................................................................................................................................10

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Introduction
Financial statement of the company are the base from which they able to get the
money from the investor and the other financial user. The company have follow all the rules
and regulation in regards of the financial statement so that it able to present its financial
statement to the user (Azim 2013). It may happen that the company is unable to follow all the
standard and yet report the financial statement to the financial user. So it is because the audit
process is been carried upon the company so that the auditor able to know whether the
company is have follow all the norms and regulation in regard of the preparation of their
financial statement (Carson, Zhang and Fargher 2014). Auditor is also able to get the
confidence of the financial user as it able to make they realise the mistake of the company
and also help them to take right decision in regards of the company financial statement. In the
recent year it have been found that the audit profession have lost all its position upon the
society as due to the events which happened like collapse of big firm and also the financial
crisis in 2008. So due to all these reason the audit is not able to satisfy the expectation of the
public as they are not able to give proper amount of explanation in the audit report of the
company (DeFond and Zhang 2014). So to avoid all the collapse in future and also to hold
back the position which the auditor the Australian Accounting Standard Board came up with
new accounting standard as ASA 701 this was related to “Communicating Key Audit
Matters in the Independent Auditor’s Report”. The standard was applicable to all the
company and the auditor have to follow the same. It also that the it remove many old
regulation and also able to minimize the use of ASA 501 which was regarding going concern.
This report show a glimpse of Lehman Brothers case and need of the new standard ASA 701
and it also show some key audit matter of the company under the utility Industry (Furnham
and Gunter 2015).

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ASA 701: Rationales
In the Lehman Brothers case it was found that the reason of the collapse of the firm
was due to failure of the audit process as the auditor did not able to judge the business risk
which the company had and as a result the collapse have been occur in the company. It was
found out that the company management is been following some fraud practice in the
company (Griffiths 2016). The misuse which the company did to show its good position of
the financial statement is they used Repo rate so that it able to increase their worth and they
able to show $50 billion. The external auditor have carry all its audit process in the company
and able to know the result that the company is not able to perform well and it has not
maintained the proper presentation of the standard still the auditor gave them a clear report
means an Unqualified Report to the company so these also was a reason of the downfall of
Lehman Brothers (Knechel and Salterio 2016).
The Board to overcome the problem which happens in time of Lehman Brother case
came up with ASA 701. It contain the provision of the procedure which the auditor have to
follow while carrying the audit process as it should record all the material information which
it found out in related to the company should be properly disclosed in the annual report of the
company as it will help the auditor to make more detailed about the audit process which is to
be carry by them (Kumar and Sharma 2015). This disclosure of the information was not there
when the Lehman Brother case happen as that time the auditor is not responsible to disclose
such matters in the audit report of the company. The auditor should disclose all the judgement
and the estimation which the company had made while preparing the financial statement of
the company (Peytcheva, Wright and Majoor 2014). This all the new norms were not there at
the time of Lehman Brother so it also become one reason for the auditor to lose their position
in the society. The main reason was this only for the downfall of the Lehman Brothers and
also the financial crisis in 2008.

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As per the auditor they were not able to know the future need required by the
company. As per ASA 701 it also remove the assumption of going concern as it was seen in
the recent decade the in short span all company can able to incur huge amount of loss so the
value of the going concern is not applicable as per the new standard (Power and Gendron
2015).
ASA 701: Explanation
ASA 701 helps the auditor to carry the audit process in the company. It should
consider all the fact and information of the company and should disclose the same. Some
regulation of ASA 701:
 Proper disclose in the annual report of the key audit matter of the company.
 Sufficient document related to the company
 Proper procedure of auditing to be followed
 It guide about what to record in audit matter and what to not.
Key Auditing Matter of the Company
The report contains an details information of the KAM of different company in the
utility industry.
Carnegie Clean Energy Ltd:
The auditor of the company have listed some points as key audit matter in the
company financial statement as the matter are related to the revenue recognition and
accounting of intangible asset. It was been found by the auditor that the company have
recorded its intangible asset as development in technology and goodwill which overall impact
the asset of the company. The company have done some changes in the valuation of
impairment asset which contain an important part of total asset (Carnegiece.com 2019).

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The method which the company use for forecasting the budgeted cashflow can have
much amount of uncertainty as the process is used is valuation model. Contracting activities
are also been recorded as in the revenue which does not seem appropriate by the auditor. The
auditor also found inappropriate as the company record it in the stage of completion (William
Jr, Glover and Prawitt 2016). The company also not able to take appropriate estimation in
regard of the contact completion cost.
AGL Energy Ltd:
The auditor have listed some matter as key audit matter in the company financial
statement. The matters are unbilled revenue, cost of unbilled distribution and financial
instruments. The company have shown revenue in the financial statement as $938 million but
the company is not able to provide sufficient amount so prove regarding the source of the
revenue as they does not have details of the bills of the customer in regards of the revenue
which is been generated (Agl.com.au 2019). The consumption policy in regard of the
customer is also unable to found out as the company does not able to give proper justification
and estimation regarding the same.
The auditor able to judge that the company is has recorded the energy consumption
cost by taking details from the unbilled distribution cost. As per the estimation taken by the
company in this regard is not be seen appropriate by the auditor so it is been consider as an
key audit matter to the company (Xu et al., 2013).
It was founded by the auditor that the company had undergone many contract related
to the financial instruments as they were entering in to contract which are been related
derivative and hedge fund which help them to do material misstatement in regards with the
interest and foreign exchange rate in the company. It was also been seen that the company is
not able to satisfy the accounting standard as the company is not able to follow fair value

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estimation related to the financial instrument which founded very inappropriate by the
auditor. Auditor was unable to know the proper estimation which the company have taken in
regards of the financial statement and also no disclosure were given in the notes section in the
financial report of company (Zakari 2013).
As per the annual report of the company is been consider in 2016 it can be seen that
the auditor have listed matters like Unbilled Revenue, Unbilled Distribution Cost, carrying
value of the natural gases and financial instruments.
Ausnet Services Ltd:
The auditors of the company have given some matters as the key audit matter of the
company. The key audit matter are recognition of the revenue, accounting related to the
expenses of the project, non-current asset valuation and derivatives valuation. Company have
used so much complex method in related to the revenue that the auditor faced many difficulty
while carrying the audit process so due to these reason the auditor consider it as a key audit
matter (Ausnetservices.com.au 2019). The company also have very difficult method in
regards of the customer billing so this also found out to be very difficult to the auditor and it
consider it as an key audit matter.
The auditor was unable to know the value of the expenses and the revenue related to
the non-current asset due to complex frame work of the company so the auditor took it as the
key audit matter of the company. Forward looking assumption also have a high amount of
complexity so it was very difficult for the auditor to carry its audit process so it consider it as
an key audit matter of the company. The auditor is not able to judge the capitalised expenses
as it also having high complexity so the auditor takes it as a key audit matter.

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APA Group:
The auditor of the company has listed some matters as key audit matter in the
company. The matter is related to other intangible asset, goodwill and carrying amount of
PPE. The company has not properly justified the value of the goodwill in the financial
statement so due to these the auditor takes it as key audit matter of the company
(Www.apa.com.au 2019).
Out of the business contract was been done by the company as they engaged in
forward exchange contract which was not their business needs and also they got indulge in
the exchange rate risk of hedging fund which was not been found in US Dollar Borrowings.
Conclusion and recommendations
The report has concluded about the importance of the audited financial statement as it
the last basis which help of this financial user have taken the decision about the financial
status of the company. Auditor checks every step of the management before coming up upon
their opinion as it will help it to give proper judgement of the financial statement of the
company. It was found that the auditor have lost all the confident of the public as due to the
collapse of the big firm and also the financial crisis. So to stop all these stuff the standard
come up with ASA 701 which remove some regulation and also ASA 501. These standards
help the auditor to know that it should able to record all the transaction which found risky by
the auditor and should able to record the same. Some recommendation to the external
auditors:
 Proper recording of the information should be done by the auditor and also it should
disclose the same in the financial report of the company.

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 Auditor should able to judge the material misstatement and the materiality which are
there in the financial statement and should record the same in the report of the
company
 It should gives its opinion independently and should be get affected by the company
as it may happen it able to give the decision as per the company need so this should
not be happen and it should give independent opinion in regards of the financial
statement
 The auditor should follow all the regulation and norms which are been present in the
ASA 701 and also should use it while carrying the audit process in the company.

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Reference
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https://www.2018annualreport.agl.com.au/ [Accessed 20 May 2019].
Ausnetservices.com.au. (2019). Company reports. [online] Available at:
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[Accessed 20 May 2019].
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Peytcheva, M., Wright, A.M. and Majoor, B., 2014. The impact of principles-based versus
rules-based accounting standards on auditors' motivations and evidence demands. Behavioral
Research in Accounting, 26(2), pp.51-72.
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global financial crisis. Accounting & Finance, 53(1), pp.301-338.
Zakari, M., 2013. Accounting and Auditing in Developing Countries-Arab Countries. Journal
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