Auditing and Assurance: ASA 701 Compliance in IT Sector Reports

This report provides a comprehensive analysis of the auditing standard ASA 701, focusing on its rationale and objectives. It evaluates the key audit matters disclosed in the financial reports of several information technology companies listed on the ASX 100, including Afterpay Limited, Altium Limited...Read More

Running head: AUDITING AND ASSURANCE
Auditing and assurance
Name of the Student
Name of the University
Author Note

AUDITING AND ASSURANCE
Executive summary:
The study evaluates the rationale of the new auditing standard ASA 701 by explaining the
objectives of introduction of the standard. The objective of the paper to evaluate the key audit
matters disclosed in the reports of the listed entities from the information technology sector.
For this purpose, data and information has been retrieved from the published financial report
of the respective companies. The analysis of the financial report of all the companies leads to
conclude the fact that they complying requirements of new auditing standard ASA 701. Such
compliance is clearly observable from the disclosure of the matters and its importance in
forming the basis of audit opinion.

AUDITING AND ASSURANCE
Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Evaluating the rationale of the new auditing standard ASA 701:..............................................3
Evaluating the revision of ASA 570 Going concern:.................................................................5
Analyzing the key audit matters of all the companies of information technology sector:.........5
Conclusion:..............................................................................................................................10
References list:.........................................................................................................................10

AUDITING AND ASSURANCE
Introduction:
The paper presents a critical presentation of the key audit matters outlined in the
auditor’s report of all the companies of any particular industry listed on ASX. In this regard,
the rationale for the adoption of ASA 701 which calls for sharing the matters of significance
importance in audit has been critically evaluated. The revision of ASA 570 has also been
evaluated with such revision being resulted from the concerns of the investors regarding the
ability of entity to continue as going concern (Vanstraelen and Schelleman 2017). The chosen
sector or industry for analysis is information technology and the companies operative in this
particular sector listed on ASX 100 have been analyzed for the communication of the key
audit matters in their auditor report. All the companies that are analyzed for the disclosure of
their matters significance to audit comprise of Afterpay limited, Altium limited, Carsales.com
limited, Computershare limited, Link Admin HLDG, REA group, Xero limited and Wisetech
global limited.
Discussion:
Evaluating the rationale of the new auditing standard ASA 701:
The adoption of the auditing standard ASA 701 have been due to the particular
interest of the users to understand the judgment which the auditors use to make view about
financial in formation of the reporting entities. They have called for enhanced and additional
transparency about the communication of the matters about which the auditors has vigorous
conversation with the people charged with governance (Brown et al. 2019).
In this section, a detailed elaboration of the standard ASA 701 has been provided and
the rationale for the introduction of this standard has been researched. ISA 701 is represented
in this auditing standard and it outlines the differences of this standard which has been done

AUDITING AND ASSURANCE
to enhance the audit quality and also they agree to the regulatory conditions. Concerning the
disclosure of the matters of significance in the audit issued by the auditor, the applications,
establishment of requirement and other explanatory material is provided by this auditing
standard. The commitment of AUASB (Auditing and assurance standard board) is reflected
by the introduction of the standard ASA 701 that confirms with the recent enhancement made
in the auditor report (Auasb.gov.au 2020).
The intention to introduce the standard was to communicate the key audit matters by
disclosing it in the financial report of the listed entities so that the users are provided with
transparent information. This in turn assists in enhancing the auditor report communicative
value so that greater transparency is provided about the performance of audit. It also helps
users in understanding the matters that are of significance in the auditing of the financial
report as per the professional judgment of the auditors (Carson et al. 2016). Moreover, user
are assisted in having an understanding of the entity and the areas where management is
required to make significant judgment.
The intended users would be provided a basis to engage themselves with the
governance and that with the management about the matters that is related to the auditing of
the reporting entity. It is required by the entity to adhere with the requirements of ASA 701 in
the event of the auditing of the financial disclosures made by entities and it is required to
divulge such significant matters (Groomer and Murthy 2018). However, in the event of
auditors disclaiming any judgment on the financial information, auditors are restricted from
disclosing the key audit matters as per ASA 705, unless the regulation or law requires it.
From the discussion on the rationale of the introduction of ASA 701, it is inferred that this
has been lured by increased demand for transparency of report and the judgment which the
auditor makes.

AUDITING AND ASSURANCE
Evaluating the revision of ASA 570 Going concern:
Auditing standard ASA 570 deals with the responsibilities of the auditors in verifying
the financial information divulged by the company regarding the continuity of business and
what implication it has financial report verification. It is the auditor’s responsibility to
evaluate the existence of substantial doubt about the ability of entity to continue as going
concern. Evaluation is done on the basis of occurrence of any events that has occurred in the
past or the basis of his knowledge of relevant conditions (Earley et al. 2016). Auditing
standard 570 has been revised to determine the objective of auditors concerning the
evaluation of the continuity and sustainability of the entities. It is of concern to the auditor to
have an understanding of the evidence supporting his judgment and accounting basis of going
concern by the management and concluding on the appropriateness of the same in generating
financial statements. Moreover, auditors are also required to make conclusion on the
existence of any material uncertainty based on the obtained audit evidence (Brunelli 2018).
Such materiality is determined regarding the existence of any conditions or event that would
cast any considerable doubt concerning the sustaining capacity of entity. The observations
regarding all the facts ranging from the use of accounting basis of the management to the
conclusions made by the auditors should be repeated.
Analyzing the key audit matters of all the companies of information technology sector:
The evaluation of key audit matters disclosed by all the companies operating in
information technology sector for identifying the compliance with standard ASA 701 has
been discussed in this section.
Afterpay Touch Limited has made an elaborated disclosure of the significant matters
separately which implies that the company adheres to the requirement of ASA 701. Audit
opinion has been formed by gauging the significant matters using the appropriate audit

AUDITING AND ASSURANCE
procedures that is outlined elaborately in the financial report. Merger transaction is
considered as the key matter because the transaction price, date of acquisition and fair value
of the assets acquired was determined using the judgment. The magnitude of goodwill and
the significance of this transaction marked it as key audit matter. In addition to this, provision
made by the company on their doubtful debts is also considered significant because there is a
manual performance of the model computing such provisions. Capitalization of intangible
assets generated internally is also considered material because the determination of
development cost of capital required judgment. Furthermore, the valuation of Afterpay US
and share based payments is also considered significant because the convertible notes
incorporated in the share based payment was determined using judgment (Afterpaytouch.com
2020). The reasons why the matter is considered to be material and holds significance is
discussed elaborately by making reference to the relevant notes to the accounts concerned. In
addition to this, audit procedures has been implemented to address the significant matters to
audit.
Altium limited has made a communication of the significant matters to audit that are
described elaborately separately in the annual report. Such matters auditors reported include
carrying value of goodwill and recoverability of deferred tax assets. A deferred tax assets of $
84.9 has been recognized by the group that resulted in a temporary difference relating to the
intellectual property amortization. It has been ascertained by the auditors that significant
judgment has been made by the management for assessing the adequacy of future taxable
profits to utilize the tax benefits and existence of quantum of deferred tax assets. All these
makes the deferred tax assets a key audit matter. In addition to this, carrying value of
goodwill has also been assessed about the recoverability value by preparing the financial
models. The impairment assessment is considered a matter of importance due to the
application of assumptions and finding in estimating the growth rates, forecasting cash flows

AUDITING AND ASSURANCE
and discount rates along with the quantum of balance of goodwill (Altium.com 2020).
Furthermore, auditors have implemented analytical procures to test the matters that are
significant to audit that involves some analytical and technical process. Audit judgment is
made by addressing the key audit matters and no separate opinion has been provided on such
matters.
On investigating the financial information released by carsales.com limited has
identified the disclosure of some key audit matters which has been separately presented. The
carrying value of SK Encar goodwill has been identified as matter of significance importance
because of the impacts and assumptions and judgments in assessing the fair value of the cash
generating unit deducting the cost to sell including the growth rates, cash flow forecast and
discount rates. Another matter of importance in audit identified by the auditor is the carrying
value of investment in Stratton finance group. Due to the significance of the recoverability of
the cash generating unit of Stratton financial group, the matter is considered to be important
in the auditor. Some other factors making the recoverability a key audit matter is the
assumption and judgment in assessing the cash generating unit and recognition of impairment
charge (Shareholder.carsales.com.au 2020). Matters of significance to audit is tested by
adopting the suitable audit procedures for which a detailed explanation has been provided.
The financial report of Computershare limited reveals an enhanced disclosure of
significant matters such as revenue recognition, assessment of goodwill impairment, Equatex
acquisition and uncertain tax positions. Such significant matters disclosed by the companies
are communicated to their respective risk and audit committee. The fixed fee revenue in
recognizing computer share mortgage limited is considered crucial due to the judgment
involved in determining total related amount costs. Assessment of impairment of goodwill on
other hand is considered to be crucial due to significance of balance and ruling used to guess
the future cash flows. Moreover, the financial significance pertaining to contingent liability

AUDITING AND ASSURANCE
makes uncertain tax positions a key matter. In addition to this, the judgment required in
assessing the appropriateness of accounting treatment makes this item material. Equatex
acquisition is regarded as crucial matter because of the complexity of the judgment and
significant financial impact of this transaction (Computershare.com 2020). Adoption of
appropriate procedures is used to evaluate the significant matters that forms the basis of
judgment made by the auditors relating to such matters.
Looking at the report published by Link Administration holding limited, it has been
observed that the en enhanced disclosure of significant matters such as revenue, goodwill
valuation, equity accounted investments and profit on subsidiary disposal. The reason why
goodwill valuation is considered key matter because of the forward looking assumptions and
size of balance of goodwill (Sánchez et al. 2019). In addition to this, the discount rates used
in the model is subjective and vary depending upon the circumstances and environment. On
other hand, significance of revenue to the result of the group makes it a significant matter and
requirement of significant audit efforts due to the derivation of several revenue streams from
the diversified services and products. Furthermore, profits generated from disposing
subsidiary is also considered material because of the requirement of significant audit in
testing the accounting and significance of sale gain on the financials of the group. Investment
in equity account is also considered a matter of key importance in audit because of complex
transitioning of the recognition and measurement requirement and equity accounted
investment size (Linkgroup.com 2020). Significant matters to audit have been assessed by
involving the valuation specialist to supplement the team members of senior audit.
Significant matters to audit is recognized by REA group limited is the recognition of
online advertising and property revenue and assessment of goodwill impairment. Recognition
of online advertising and property revenue is considered significant due to the audit efforts
required and revenue importance and its impact on the financial report of the audit.

AUDITING AND ASSURANCE
Impairment of goodwill is a significant matter in audit because of the judgment required for
determining the recoverable amount of the asset and size of asset. Appropriate analytical and
technical procedures is implemented to test the significant matters identified. The audit
opinion has been based on the results of such procedures in addressing such matters.
Wisetech Global limited has made a disclosure of the key audit matters such as
revenue recognition, acquisition accounting and capitalization of development cost of
software. The justification of the matter of significant judgment has been made by referring
to the notes. Auditors have pointed several reasons why revenue recognition is considered a
key matter such as multiple elements involved in the transactions, accounting policies
alignment, significance of this item on the financial statements and high volume of data
relating to customer transaction. Factors attributable to the materiality of capitalization of
development cost of software includes the calculation involved, adoption of iterative
methodology of development that requires use of more judgment and significant development
hours of software (Ir.wisetechglobal.com 2020). The identified significant matters to audit
been justified by testing all the accounting using the appropriate procedures.
Xero limited revealed the key matters in the audit in a separate section along with the
methods and procedures adopted to determine its materiality. Key audit matters of the
company involves derivatives and convertible notes, testing of goodwill impairment and
hubdoc business combination, impairment of the development cost of capitalized software
and software development cost capitalization. For determining the value of conversion,
auditors are required to make significant judgment and judgment is also required in assessing
the fair value of liabilities and assets in the business combination. The software development
cost capitalization on is considered crucial matter in audit because of the engrossment of
decision in determining the value attributable and estimating the time spend by staffs in
software development. In addition to this, impairment relating to the capitalization of

AUDITING AND ASSURANCE
software development cost is considered significant because of the assumptions made and the
extent of disclosure relating to the intangible assets (Xero 2020). Analytical methods helps in
testing the accounts for its materiality that has been implemented in verifying the accounts.
Conclusion:
The detailed evaluation of significant matters of the companies of information
technology industry has disclosed the same facts about the identification of such matters.
Audit of all the companies have included designing of the procedures for measuring material
misstatement risks. Moreover, the audit opinion is determined using the evidence obtained
from the audit procedures that assisted in addressing the identified crucial matters. Therefore,
from the analysis of the facts presented about the key matter in the audit, it is inferred that the
companies adheres to the requirement of ASA 701.

AUDITING AND ASSURANCE
References list:
Afterpaytouch.com., 2020. [online] Available at:
https://www.afterpaytouch.com/images/APT_2018_Annual-Report.pdf [Accessed 21 Jan.
2020].
Altium.com., 2020. [online] Available at: https://www.altium.com/resources/investor-
announcement/report_2019_3.pdf [Accessed 21 Jan. 2020].
Auasb.gov.au., 2020. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 21 Jan.
2020].
Brown, V.L., Dennis, S., Dickins, D., Higgs, J.L. and Schaefer, T.J., 2019. Comments of the
Auditing Standards Committee of the Auditing Section of the American Accounting
Association on International Auditing and Assurance Standards Board Exposure Draft,
Proposed International Standard on Auditing 220 (Revised): Quality Management for an
Audit of Financial Statements. Current Issues in Auditing, 13(2), pp.C10-C19.
Brunelli, S., 2018. The Firm’Going Concern in the Contemporary Era. In Audit Reporting for
Going Concern Uncertainty (pp. 1-25). Springer, Cham.
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.
Computershare.com., 2020. [online] Available at:
https://www.computershare.com/News/Annual%20Report%202019.pdf?1 [Accessed 21 Jan.
2020].

AUDITING AND ASSURANCE
Earley, C.E., Hooks, K.L., Joe, J.R., Polinski, P.W., Rezaee, Z., Roush, P.B., Sanderson,
K.A. and Wu, Y.J., 2016. The Auditing Standards Committee of the Auditing Section of the
American Accounting Association's Response to the International Auditing and Assurance
Standard's Board's Invitation to Comment: Enhancing Audit Quality in the Public
Interest. Current Issues in Auditing, 11(1), pp.C1-C25.
Groomer, S.M. and Murthy, U.S., 2018. Continuous auditing of database applications: An
embedded audit module approach. Continuous Auditing, pp.105-124.
Ir.wisetechglobal.com., 2020. [online] Available at:
https://ir.wisetechglobal.com/FormBuilder/_Resource/_module/aQGWYiQKCEe9gcmOsTiU
KA/file/WiseTech_AR19_v2.pdf [Accessed 21 Jan. 2020].
Lemos, K., Serra, S. and Barros, A., 2019. The Auditor as a Determining Factor on
Derivative Financial Instrument Disclosures. In Organizational Auditing and Assurance in
the Digital Age (pp. 70-93). IGI Global.
Linkgroup.com., 2020. [online] Available at:
https://www.linkgroup.com/annualreport2019/files/LNK-2019-Annual-Report.pdf [Accessed
21 Jan. 2020].
Ltd, R., 2020. Reports | REA Group Ltd. [online] REA Group Ltd. Available at:
https://www.rea-group.com/company/investor-centre/annual-reports/ [Accessed 21 Jan.
2020].
Özçelik, H. and Öztürk, M.S., 2019. The assurance and advisory roles of internal auditing in
integrated reporting. Hitit University Journal of Social Sciences Institute, 12(1), pp.125-140.

AUDITING AND ASSURANCE
Sánchez-Medina, A.J., Blázquez-Santana, F. and Alonso, J.B., 2019. Do Auditors Reflect the
True Image of the Company Contrary to the Clients’ Interests? An Artificial Intelligence
Approach. Journal of Business Ethics, 155(2), pp.529-545.
Shareholder.carsales.com.au., 2020. [online] Available at:
http://shareholder.carsales.com.au/FormBuilder/_Resource/_module/NwbnH0pKFk-
uPGxM7cmTrw/docs/reports/annual/Annual_Report_2019.pdf [Accessed 21 Jan. 2020].
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and
assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of
Practice & Theory, 35(3), pp.1-32.
Simnett, R., Zhou, S. and Hoang, H., 2016. Assurance and other credibility enhancing
mechanisms for integrated reporting. In Integrated Reporting (pp. 269-286). Palgrave
Macmillan, London.
Vanstraelen, A. and Schelleman, C., 2017. Auditing private companies: what do we
know?. Accounting and Business Research, 47(5), pp.565-584.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.
Xero., 2020. Annual Report 2018 | Xero. [online] Available at:
https://www.xero.com/us/about/investors/financial-info/annual-report-2018/ [Accessed 21
Jan. 2020].