Auditing and Assurance: ASA 701 and Key Audit Matters Report

This report provides an in-depth analysis of auditing and assurance practices, particularly focusing on the impact of the new auditing standard ASA 701, developed in response to the global financial crisis and the collapse of Lehman Brothers. The report explains the rationale behind ASA 701 and its implications for auditors, including the communication of Key Audit Matters (KAMs) in independent auditor's reports. It examines the importance of ASA 570 regarding going concern assumptions. The report includes a case study of Lehman Brothers, highlighting the failures in the auditing process that contributed to its downfall. Furthermore, the report analyzes key audit matters for several companies within the utilities industry, including Carnegie Clean Energy Ltd, AGL Energy Ltd, and Ausnet Services Ltd, and APA Group, offering insights into their specific audit challenges and the application of ASA 701. The report also discusses revenue recognition, intangible assets, unbilled revenue, and project-related expenses. The report concludes with recommendations for improving auditing practices and ensuring greater transparency and accountability in financial reporting.

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

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Executive Summary
The report is been based upon the Lehman Brothers case and also show the need of the new
standard in the accounting process. It also shows the details of the new accounting standard
and how it helps the auditor to carry audit process in the company. It also show about the
company key audit matter in the report.

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Table of Contents
Introduction................................................................................................................................4
ASA 570 Going Concern...........................................................................................................5
ASA 701: Rationales..................................................................................................................5
ASA 701: Explanation...............................................................................................................6
Key Auditing Matter of the Company.......................................................................................7
Carnegies Clean Energy Ltd:.................................................................................................7
AGL Energy Ltd:...................................................................................................................7
Ausnet Services Ltd:..............................................................................................................8
APA Group:...........................................................................................................................9
Conclusion and Recommendation..............................................................................................9
References................................................................................................................................11

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Introduction
Accounting standard is the standard and principles for the preparation of the financial
statement of the company. It helps the company to make their financial statement proper and
also help them to report them to another entity (Power and Gendron 2015). It helps the
company to show transparency in the financial statement so the user can able to know the
financial statement more properly and can take decision accordingly. Accounting standard
state how the company should managed the account and how they should deal with the
account. It show the aspects of the account as it contain all the details regarding the account
and show the company how to record the same in the financial statement of the company and
what are the disclosure it should give in the notes of account (William Jr, Glover and Prawitt
2016). It states all the process from which the company is able to maintain the account. The
company should follow the entire accounting standard while preparing the financial
statement. The auditor is a person who see whether the company have followed all the rules
or not while preparing the financial statement of the company. It is the auditor who gives its
opinion whether the financial statement are showing true and fair view in the company. But it
can be seen that the auditor is not able to meet the need of the public and it have lost all the
respect in regards of the respect which it use to get from the public (Xu et al., 2013). These
happen due to collapse of big firm in the economy and also the financial crisis which happen
in 2008. So it was a big problem as the public is not having their confidence in the audited
financial statement. The Australian Accounting Standard Board came up with new standard
ASA 701. The standard ASA 701 is related to ““Communicating Key Audit Matters in the
Independent Auditor’s Report”. The new standards have remove many new section and also
the ASA 570 Going concern (Zakari 2013). The report show the brief about Lehman Brother
Case how it make for the emerge of new standard and also contain details of the new
standard. It even consists of key audit matter of the company in regards with utility industry.

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ASA 570 Going Concern
It contain about the detail of the going concern assumption which each company have
to follow. Going concern means that the company should be running for perpetual life. It
means it is not going to be over in near event and it will carry its business for many years. If
the auditor find that there is a risk in regards of the going concern principle than it should
report it in the auditor report as it is a very big risk for the financial user (Knechel and
Salterio 2016). The auditor should carry some procedure so that it able to judge the
assumption of going concern in the company and able to know any indicator about the effect
upon going concern principle or not.
ASA 701: Rationales
The primary duty of the auditor is to carry process in the financial statement so that it
able to know the risk which is been associated in the company but in the Lehman Brother
case the auditor were unable to assertion the risk in the business so it was a big reason in the
collapse of the Lehman Brothers case (Junior, Best and Cotter 2014). The management of the
company was involve in some fraud practices still no action is been taken upon the company
management. Repo rate was the item which the company have misuse as it was that the
management of the company have use it to increase their financial position as a result in able
to do overvaluation in the financial statement by $50 billion. It was the duty of the auditor to
carry process in the company and to know the fault in the financial statement (Griffiths
2016). It was founded that the auditor were able to know the fraud which was happening in
the company and still they gave the company an unqualified report. This report show that the
company is having everything fair and no fraud or any misstatement is been occur in the
company financial statement so this was also a reason for the collapse of the Lehman
Brothers (Cohen and Simnett 2014).

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The Board came up with new accounting standard as to avoid this type of collapse in
the future of the economy. The standard contains a paragraph which state that the auditor
should carry its audit process for a timely basis and for a reason. The norms were not there at
in the Lehman Brother case (Krahel and Titera 2015). These help the standard to reduce the
gap which happen in the auditing process after the Lehman Brother case. The standard also
state that the auditor should carry its audit process and able to collect the information related
to the financial statement and it should record the same in the annual report so it can able to
know in which matter it have to invest more amount of time and also it will help it in regards
of the decision making in regards of the financial statement of the company. These norms
was not meant in the Lehman Brother case. It should also disclose in the annual report about
the estimation which the company have made in regards of the accounting policy of the
company (Mihret 2014). As the above mention rules were not available in the time of
Lehman Brother case so the auditor were not able to record any matter in the financial
statement and also there are not able to do any risk related research and also they are also not
able to do the judgement of the estimation which the company have made in regards of the
accounting policy so these became all the reason for the collapse of the Lehman Brothers and
the financial crisis in 2008 (Gomes, Eugénio and Branco 2015).
This standard also does not take consideration about ASA 570 which is related going
concern. It says that as the company can even fall in short term loss and which can result in to
the collapse of the company. So as it can be seen that the company have fallen as the short
term can fall as the loss can be high in the company so it can result in the collapse of the
company Lehman Brothers (Dai and Vasarhelyi 2017).
ASA 701: Explanation
It help the individual to know the responsibility of the fact the auditor should give
upon the annual report. Regulation as per ASA 701:

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 It should show all the important information in the annual report of the company.
 It should collect all the important document of the company
 It should follow all required procedure in the company (Messier Jr, 2014).
 It should show all the necessary information in related to key audit matters of the
company.
Key Auditing Matter of the Company
This report show about the different company and the key audit matter of the
company and it related to the utilities industry.
Carnegies Clean Energy Ltd:
As per the company auditor it can be seen that the company have got some key audit
matter which should be properly checked by the auditor. The matters which are been termed
as key audit matter is revenue recognition and accounting related to intangible asset. The
auditor have not able to know the reason that the company maximum amount is been
recognised in the intangible asset and it can also be seen that the company have recorded the
goodwill and technology development as in intangible asset (Carnegiece.com 2019). So it is
been consider any risky matter so it should be record as a key audit matter in the company.
The auditor also find it a problem upon the process which the company have used in
regards of the forecasting of the budgeted cashflow as it can have uncertainty upon the flow
as they are using valuation model for the same. It is been consider an error in the process so it
is been recorded in the report as key audit matters of the company (Carnegiece.com 2019).
The method which the company use in regard of the revenue recognition is not been consider
proper by the company as a result it is been record as an key audit matter.

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AGL Energy Ltd:
As per the company auditor they have found some matter as important and so they
have recorded it as key audit matter in the company. The matter which is been recorded as
key audit matter are unbilled revenue, cost regard of the unbilled distribution and also the
financial instruments (Agl.com.au 2019). As per the audit process which is been carried by
the auditor it can find that the company is showing a very high revenue in the financial
statement but they are not able to provide sufficient information in regards of the revenue
which they have generated through the customer as they are able to show any bills from
which the vouching of the revenue can be done by the auditor. As it does not able to get any
information about the clarity of revenue so it recorded the same as key audit matter in the
company (Agl.com.au 2019).
It is been found that the company is doing the cost calculation of the energy
consumption with the help of the unbilled distribution cost (Agl.com.au 2019). It can be
found by the auditor that it is not a fair way of doing the cost computation as the company
does not able to provide evidence in regards of the distribution cost as they are not having
sufficient bills in regards of the distribution cost so it is been consider an weakness and the
auditor have recorded the same as key audit matter in the company.
The auditor is not able to know the reason why the company is entering in the contract
in regards of the hedging and derivative fund as it is not into the normal course business so it
is been consider an material misstatement by the company and the auditor as termed it as an
risk management and so it have been recorded as in key audit matter in the company.
Ausnet Services Ltd:
As per the auditor of the company it can be seen that the auditor have recorded some
information in the company annual report as key audit matter. The key audit matter of the

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company which is been recorded as key matter is revenue recognition, expense related to the
project cost and also the valuation of the non-current asset (Agl.com.au 2019). As per the
auditor the company is having much complex accounting process so this is been consider as a
weakness as it stop the auditor to get the sufficient information so the auditor was unable to
judge it and as a result it recorded it in the key audit matter of the company.
It is been seen that company is having very complex in regards of the non-current
asset so the auditor is not able to recognised as the expenses and income so the auditor is not
able to judge the value of the account properly so as a result it able to not carry proper audit
process in the company and due to this it recorded it as a key audit matter in the company
(Agl.com.au 2019).
APA Group:
As per the auditor of the company it can be seen that it recorded some amount of
information in the annual report as key audit matter. The matter which the company have
recorded in the annual report is Valuation of intangible asset, goodwill and also the carrying
amount of the PPE (Www.apa.com.au 2019). As per the auditor it has carried auditing
process in the company financial statement so it not able to know the estimation which the
company have taken in regards of the valuation of goodwill so it is been consider an error
which carrying the audit process so it recorded it in the annual report as a key audit matter of
the company.
Conclusion and Recommendation
On a conclusive note, it can be seen by the above discussion that it show about the
value of accounting standard as it help the company to know about the principles so that it
can able to make their financial statement properly. It also help them to make the financial
user understand the report more easily as it help the company to get more return from the

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investors. It also shows a brief of about the Lehman Brother case and how it was important
for the standard to come up with the new accounting standard. This also contains a brief
introduction of the standard and how it helps the auditor to carry more effectively the
accounting process in the company. The recommendation in regard of the external auditor:
 It should record all the necessary information of the company in the annual report and
should also disclose the reason in regards of those matters.
 It should carry audit process and should able to know about tge materiality which is
there in the financial statement of the company
 It should check the business risk properly and also should not relay upon the going
concern as it lead to collapse of the big firms
 It should do the auditing as per the ASA 701 so that it will be able to do proper
amount of audit and also help it to get more information in regards of the financial
statement.

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References
2018annualreport.agl.com.au. (2019). Annual Report 2018. [online] Available at:
https://www.2018annualreport.agl.com.au/ [Accessed 24 May 2019].
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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Messier Jr, W.F., 2014. An approach to learning risk-based auditing. Journal of Accounting
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