Auditing Theory and Practice Report: ASA 701 and Key Audit Matters

This report delves into the realm of auditing, focusing on the application of Auditing Standard ASA 701 and its significance in the evaluation of financial statements. It provides a rationale and explanation of ASA 701, emphasizing its role in enhancing communication between auditors and stakeholders. The report then analyzes Key Audit Matters (KAM) within the context of the utilities industry, examining specific examples from companies like Carnegie Clean Energy Ltd, AGL Energy Ltd, Ausnet Services Ltd, and APA Group. It highlights the key auditing issues faced by these companies, such as revenue recognition, valuation of intangible and non-current assets, and the accounting for financial instruments and derivatives. The analysis underscores the importance of auditor judgment and the potential impact of these matters on financial reporting. The report concludes by summarizing the key findings and offering recommendations for best practices in auditing within the utilities sector.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
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Author’s Note

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Table of Contents
Introduction:....................................................................................................................................2
ASA 701: Rationale.........................................................................................................................3
ASA 701: Explanation.....................................................................................................................4
Key Audit Matters of Companies engaged in Utilities Industry.....................................................5
Carnegie Clean Energy Ltd:........................................................................................................6
AGL Energy Ltd..........................................................................................................................6
Ausnet Services Ltd.....................................................................................................................7
APA Group..................................................................................................................................8
Conclusion and Recommendation...................................................................................................9
Reference.......................................................................................................................................10

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Introduction:
Auditing is a profession which deals with the examination of the financial statement of
the company. Auditing process also includes the evaluation of the financial statement of any
organization. The auditing is done by the auditor to validate and authenticate the fair and
accurate representation of the transactions which are claimed by the company by producing the
financial statement of the company. From the last decade it can be seen that the auditing as a
whole profession and auditor face a huge amount of criticism due to alteration of transactions
and also omit the misstatement made by the company in their financial statement of the
company. Due to this fact a new standard has been implemented in respect to reduce the audit
gap between the auditor and the auditing report of the company. The standard which have been
introduced in the system is Communicating Key Audit Matters in the Independent Auditor’s
Report (ASA 701) .This standard was introduced as a replacement of the existing guidelines of
ASA 570 Going Concern and many other regulation which deals with the auditing profession.
This report states about the implementation of the new standard ASA 701 and also the logical
view of the ASA 701 and also the related particular accounting standard. This report also states
about the Key Audit Matters (KAM) in the auditor’s report which is provided by the auditor in
the mining companies who are listed with Australian Stock Exchange (ASX).
ASA 701: Rationale
As in the case of Lehman Brothers, the business failure can be seen and auditors of the
company have taken into consideration for the downfall of the company. The management of the
Lehman Brothers are involved in many acts which can be termed as unethical and
unprofessional. The management of the company states to use the Repo rate in such a manner

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that the balance sheet of the company in the financial statement of the company shows a false
statement. The balance sheet of the company was showing $50 billion. While conducting audit of
the company the auditor of the company was well aware of the fact of tampering of the balance
sheet of the financial statement of the company (William Jr, Glover and Prawitt 2016). In spite of
having all the knowledge of the fraudulency the auditor of the company provided unqualified
report in the annual report of the company. This report became of the major reason for the
demise of Lehman Brothers and also it became one of the vital reasons for the financial crisis of
2008.
There are vital reasons for introduction of ASA 701 among them two of them are more
vital. The standard force the auditor of the company to follow the rules and regulations
mentioned in the standard while conducting audit irrespective of time and any time period.
While conducting audit of Lehman Brothers there was absence of such rules and regulations and
hence it was possible for the auditor to overlook such matter (Peytcheva, Wright and Majoor
2014). To reduce the audit gap the standard has been imposed and hence no such problem will
occur. In accordance of the rules and regulations mentioned in ASA 701 the auditor has to reveal
the information about the risk which is of the utmost importance. The mention of the highest risk
which can threat the company and the investors should be mention in the auditor’s report of the
annual report of the company. This will force the auditor to their work with full might and
analyze the financial information of the company correctly. As in the case of Lehman Brothers, it
is seen that the auditor has failed to provide the measurement of risk which was associated with
the company at that point of time (Sirois, Bédard and Bera 2018). The auditor report also failed
to find the misstatement of the financial statement made by the management of the company.

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This failure of the auditor turns out to have great repercussion in the form of the downfall of the
whole company and also the downfall of the reputation holds by the auditor of the company.
The second main reason behind the downfall of Lehman Brothers is the failure of the
auditor to understand the capability of the firm to continue their business in future. This not only
became the reason for the demise of the company but also became one of the major reason for
the financial crisis for 2008. From the financial crisis it is evident that the company falls down in
full succession (Kumar and Sharma 2015). In simple words it can be said that the going concern
of the company will be highly affected. As per stated in the revised ASA 570 Going Concern it
can be state the fact that the auditor should need to provide concrete evidence in accordance with
the misstatement in the financial statement of the company. This may stop the going concern
basis of accounting. The presence of such standard will resolve the issues in the case of Lehman
Brothers.
ASA 701: Explanation
The application of auditing standard is done by the auditor in order to ensure that the
process of audit is fluently conducted and appropriate audit evidences are collected by the
auditor of the business. The introduction of ASA 701 is to reflect the commitment of AUASB to
comply with the reporting framework for the auditor and effectively disclose information which
are relevant to a business. The main reason due to which ASA 701 was introduced in the auditing
framework was to ensure that effective communication can be conducted in a business
environment. The auditor of the business needs to comply with the relevant requirements of the
auditing standards. The following requirement of the new auditing standards are listed below:

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 The auditing standards requires the auditor to ensure that effective communication takes
place regarding the key audit matters of the business and the same needs to be
implemented in the financial statements of the annual report.
 The standard also allows the auditor to assess whether major changes has taken place in
the explanatory material which is shown in the auditor’s report of the business.
 The auditor of the business relies on the provisions of ASA 701 for ascertaining the key
audit matters of the business.
 The standard helps in formulating appropriate auditing assertions for the auditor of the
business.
Key Audit Matters of Companies engaged in Utilities Industry
The application of key audit matters of the business can be effectively analysed by considering
Australian utility industry and the business which are considered are among the top 100 ASX
listed companies which are operating in Utility Industry. The discussion regarding different
businesses are shown in the discussion provided below:
Carnegie Clean Energy Ltd:
The auditor of the business has identified two key auditing issues which are covered in
key audit matters of the business. The key audit matters of the business which can be identified
are revenue recognition procedure of the business and intangible assets of the business (Asbahr
and Ruhnke 2017). The auditor of the business has effectively stated the carrying value of the
intangible assets. The carrying value of the intangible assets of the includes technological
development and goodwill amount which are shown in the valuation of the total assets of the
business (Carnegiece.com 2019). The valuation of intangible assets of the business holds a

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significance on the total value which is shown for the asset. There are other aspects such as
impairments charges on the assets which also has an impact of the valuation of the asset. There is
a risk which arises mainly due to significant judgement regarding the indicators of impairments
of the assets of the business.
The auditor has also reported regarding the uncertainty which arises in forecasting of the
cash flow that is use in the valuation model. The company recognizes revenue on the basis of
when the contracts are completed. The completion stage is based on the portion of the total costs
that occurs at a reporting date in estimation of the management total costs of contract. The
auditor of the business has listed these items in key audit matters of the business because there is
a degree of estimation required on the part of the management for ascertaining the cost of
completion.
AGL Energy Ltd
As per the auditor of AGL Energy ltd, the financial statement of the business shows three
key audit matters which are unbilled revenue, unbilled distribution costs and the financial
instruments. The management of the company has disclosed an amount of $ 938 million for gas
and electricity supplied to the customers. The management of the company has not issued any
bills from the date of last meter reading till the last meter reporting. It is to be noted that the
process of estimating the consumption of the resources by the consumers is a complex process.
This process is followed for ascertaining the unbilled amount of gas and electricity at the end
date of the reporting period. In the case of unbilled distribution costs, the management has
estimated energy consumption from the last date of invoice to the date of ending of the reporting
period. In case of financial instruments, the management of the company has taken up significant
numbers of financial instruments which also includes hedge and derivative instruments. The

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auditor has listed the same in Key audit matters as there is a variability in the rate of interest,
foreign exchange movements and energy prices (Christensen, Glover and Wolfe 2014). In
addition to this, the financial liabilities of derivatives are also of material amount which is shown
to be $ 615 million. The auditor has listed the item in the key audit matters section because the
same requires significant judgements and also requires appropriate understanding of the
important factors such as term of contract, future forecasting of prices and the discount rates
which are applicable.
Ausnet Services Ltd
The auditor of the business has effectively identified certain items which are covered
under Key audit matters of the business and the same are revenue, valuation of non-current
assets, accounting for project related expenses, valuation and accounting for derivatives. The
revenue generated is covered under Key audit matters because the process of estimation of
revenue is complex due to regulatory and billing procedure which is applied by the business.
This can be regarded as an inherent risk towards estimating the revenue through customer’s
billing procedures and considering the tariff rates which is applicable on a business.
The non-current assets of the business are associated with the regulatory framework
which is followed by businesses and therefore there is a bit complexity in valuing the same. In
addition to this, there is significant number of assumption involved in terms of impairments and
estimating the CGU which is associated with each of the assets (Ausnetservices.com.au. 2019).
The auditor of the company has also experienced difficulty in valuing the figures for projects
related expenses. The classification of expenses as capitalized or operational expenses is also a
matter of concern for the business.

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The valuation of derivatives is included in the key audit matters of the business due to the
overall size of investments which is made by the business in the derivatives. It is also included in
the Key Audit matters due to the complexity of the derivative portfolio (Christensen et al. 2016).
The valuation of derivatives and treatment of hedge funds are very complex in nature and
therefore requires adequate judgements on the part of the auditor of the business.
APA Group
The auditor of the company has identified two key audit matters and the same includes
carrying amount of the PPE, Goodwill and other Intangible assets. The auditor has stated that the
fixed and intangible assets of the business requires significant judgement in terms of discount
rate, economic assumptions in form of inflation. The auditor of the business has recognised
hedge accounts balances and derivative transactions as Key audit matters of the business. The
company has been actively involved in making investments in different contracts for hedging,
forward contracts as well as Swap contracts (Apa.com.au. 2019). On the basis of identified key
audit matters, the auditor of the business has effectively disclosed the steps which needs to be
taken by the management of the company for managing the risks of the business.
The key audit matters of utilities companies are understood from the auditors of the
business and the same can be used for effective communication of key audit matters in
association with ASA 701. The auditor of the business has been successful in effectively
identifying the key audit matters (Ghafran and O'Sullivan 2013). In addition to this, the analysis
of the Utilities companies shows that all of the business is adhering to the standard of ASA 701.
This effectively ensures that the users of the financial statements are able to have access to all
information of the business which is related to recent financial events or transactions that is
important for the purpose of taking important decisions of the business.

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Conclusion and Recommendation
The above discussion shows that the main reason for advent of ASA 701 is due to the
corporate failure of Lehman Brothers and Global Financial Crisis of 2008. The discussion made
above makes it clear that the key audit matters of the business needs to be presented in the annual
reports considering full disclosure of the financial performance of the business. The key audit
matters of the business are based on professional judgement of the auditor. The recommendation
which can be provided for improvement of business structure are:
 The provisions of ASA 701 require the auditor to report key audit matters of the business
and also those material items which can cause a material misstatement in the financial
statement of the business.
 The auditor of the business also needs to check going concern principle as per ASA 570
in order to ensure that there are no indicators that the going concern principle of the
business might be affected. The auditors are recommended to maintain the
professionalism and their integrity so that quality of audit can be maintained.
 The auditor of the business should also maintain professional scepticism while
conducting audit of the business.

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Reference
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Ausnetservices.com.au. (2019). Company reports. [online] Available at:
https://www.ausnetservices.com.au/Misc-Pages/Links/Investor-Centre/Company-reports
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