Auditing and Assurance Report: ASA 701, ASA 570 and Key Audit Matters

This report provides a comprehensive analysis of auditing and assurance, specifically focusing on the impact of the Lehman Brothers collapse and the subsequent introduction of auditing standards ASA 701 and ASA 570. It explores how the financial crisis and the failure of Lehman Brothers led to the development of these standards, which aim to improve financial reporting and provide investors with more contextual information. The report delves into the key features of ASA 701, which mandates the disclosure of key audit matters, and ASA 570, which addresses the going concern status of companies. It also examines the importance of these standards in the aftermath of the collapse, emphasizing the role of key audit matters in enhancing audit quality and improving financial reporting. Additionally, the report discusses the application of these standards within the Australian consumer staples sector, comparing and contrasting key audit matters across various companies. The report concludes with recommendations for improving the reporting of key audit matters.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The collapse of Lehman Brothers along with the occurrence of world financial crisis has
largely contributed to the introduction of two specific auditing standards that are ASA 701
and ASA 570. ASA 701 requires the disclosure of the risk areas in the financial statements of
the audit client so that the investors can get more contextual information on the company’s
financial position. On the other hand, ASA 570 demands the calculation of the going concern
status of the companies by assessing that whether there is any material uncertainty that cast
major doubts on the business organizations’ capability to continue as a going concern.

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Table of Contents
Introduction................................................................................................................................3
Failure of Lehman Brother.........................................................................................................3
About the Lehman Brother Case............................................................................................3
How Failure of Lehman Brothers Contribute to the Development of ASA 701...................3
What Happened in Lehman Brother Case..............................................................................3
ASA 701 and ASA 570..............................................................................................................4
ASA 701.................................................................................................................................4
ASA 570.................................................................................................................................4
Reasons for these Standards...................................................................................................4
Importance of ASA 701 and ASA 570 after the Failure of Lehman Brother........................5
Reasons for the Importance of Key Audit Matters................................................................5
What ASA 570 Tells about a Company’s Long-Term Existence..........................................5
Key Audit Matters......................................................................................................................5
Key Audit Matters of the Companies under Consumers Staples Sector................................5
Conclusion and Recommendations............................................................................................7
References..................................................................................................................................8
Appendix..................................................................................................................................10

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Introduction
The occurrence of the world financial crisis has contributed to certain financial
accounting reforms in the form of the introduction of new accounting standards like ASA 701
and ASA 570. These standards put increased obligation of the firms to disclose more aspects
of financial reports. For example, due to the introduction of ASA 701, the firms have the
accountability to disclose information on the key audit matters in financial statements. One
prime cause of implementing these standards is to provide the investors and other users with
more precise and accurate information on the companies. There are three key parts of this
report. The first part provides detailed discussion on the collapse of Lehman Brothers and
how this collapse has contributed to the inception of ASA 701. The second part of the reports
provides discussion on two specific auditing standards named ASA 101 and ASA 570 along
with the key reasons why these standards have been introduced. The third part of the report
discusses about the key audit matters of five key business organizations in Australian
consumer staples sector along with the similarities and dissimilarities among the key audit
matters of these firms. The report also contains a concussion and suitable recommendations
on the reporting of key audit matters based on the whole analysis.
Failure of Lehman Brother
About the Lehman Brother Case
Lehman Brothers filed bankruptcy on 15 September, 2008. In the presence of $639
billion of assets and $619 billion of debts, the bankruptcy filing of Lehman Brothers is
considered as the largest bankruptcy in the history and the asset position of the company
exceeded the same of the large collapsed companies like Enron and WorldCom. At the time
of the collapse, Lehman Brothers was regarded as the fourth-largest investment banks in the
United States (US) with an employee base of 25000. It was also considered as the greatest
prey of the subprime-mortgage financial crisis of the country (Quax, Kandhai and Sloot,
2013).
How Failure of Lehman Brothers Contribute to the Development of ASA 701
The collapse of Lehman Brothers in 2008 helps in establishing the relationship
between Lehman Brothers collapse and introducing ASA 701. The Australian auditing
authority felt the necessity of introducing an auditing standard like ASA 701 because of
Lehman Brothers collapse and following financial crisis; and the auditing issued that were
largely unaddressed while Lehman Brothers was audited are now considered in ASA 701. It
was largely obligatory to address the gaps due to poor auditing of Lehman Brothers and this
contributed to the recommendation of ASA 701 (Lewis, 2015). Many key audit matters
would be identified and communicated to the management of Lehman Brothers in case ASA
701 was there while Lehman Brothers collapsed. This would enable the auditors of Lehman
Brothers in identifying and disclosing the areas with high risk in the audit report and this
could help in identifying the forthcoming collapse of the mortgage market. The fall of
Lehman Brothers would be possible to be avoided in case the auditors could assess the same.
At that time, ASA 701 would also help in recognizing specific transactions and events that
were not appropriate as per the accounting rules. This would understandably take into
consideration the use of repo rate by Lehman Brothers for covering high leverage position of
the business. In the presence of ASA 701, it would be possible for the management of
Lehman Brothers to make better strategic decision related investment at the time of housing
boom in US. This would also make it possible to properly communicate the areas where the
management and auditors made key judgments in order to comprehend the accounting
procedures of the company (Cordoş, 2015). All these aspects together contributed to the
development of ASA 701.

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What Happened in Lehman Brother Case
At the time of housing boom in mid-2000s, Lehman Brothers and other investment
firms were hugely involved in mortgage-backed securities and collateral debt obligation. In
mid-2006, the housing prices started to fall quickly that made many subprime borrowers
defaulters in making the payments that showed the risky nature of these debts. Even in the
presence of these red flags, Lehman Brothers continued originating subprime mortgages. In
the presence of weakening real estate market and the absence of adequate market liquidity,
investors and other parties started to lose confidence on Lehman Brothers and firms. Like
Bear Srearns and other investment banks, the use of repurchase agreement known as ‘repo’
by Lehman Brothers for raising billions of dollars to run the business operations made the
company more exposed to any crisis in the market. The federal government refused to bail
out Lehman Brothers even after known the consequences of its collapse. Other financial
institutions like Bank of America and Barclays refuse to buy the company. Running of
options, Lehman Brothers declared its bankruptcy on 15 September, 2008 which made the
largest bankruptcy in the history of US (Azadinamin, 2013).
ASA 701 and ASA 570
ASA 701
ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report
provides the requirements to maintain the audit quality (auasb.gov.au, 2020). This standard
contains the following features:
i. This mandates communicating the key audit matters in the audit report;
ii. This permits auditors to decide on whether key audit matters need to include in the
auditor’s report;
iii. This prescribes how the auditors need to determine the key audit matters;
iv. This shows how the audit matters need to be described;
v. This assesses the circumstances when the key audit matters are not communicated;
and,
vi. This provides the documentations required for key audit matters (legislation.gov.au,
2020).
ASA 570
ASA 570 Going Concern handles the responsibility of the auditors regarding the
going concern along with its implications for the auditor’s report (auasb.gov.au, 2020). This
standard contains the following features:
i. This provides the procedures to assess the risks along with the related activities to the
auditors;
ii. This helps in evaluating the assessment of the managements regarding going concern;
iii. This needs the auditors to assess the period beyond the assessment of the
management;
iv. This prescribes the additional audit procedures when going concern issues are
identified; and,
v. This helps the auditors in concluding on the going concern issues (auasb.gov.au,
2020).
Reasons for these Standards
ASA 701 – The main purpose for having ASA 701 is to avoid the collapses like Lehman
Brothers in Australia and this also works as an alarm for the companies in the situations like
2008 global financial crisis. One main reason for the collapse of Lehman Brothers is the
disappointment of the auditors in identifying the major issue in the company’s financial

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reports and the effects of the global financial crisis on the company’s financial statements.
Reviving this situation is the main reason for ASA 701 as this enables the auditors in
communicating the areas of risks in the auditor’s report so that the company’s management
and investors can know about this. Knowing these risk areas helps in formulating effective
strategies (Azim, 2013). All these aspects together help in increasing the quality of overall
audit.
ASA 570 – The occurrence of the global financial crisis and the fall of Lehman Brothers has
put major doubts on the ability of the firms to continue as a going concern in coming future.
For the collapse of Lehman Brothers, no one had the idea that the fourth largest investment
bank of US was going to be bankrupt due to major issue inside it. This is the main reason of
having ASA 570 in Australia so that the presence of any material uncertainty in the
companies that cast major doubts on their capability for continuing as going concerns can be
identified. Identification of the presence of any material uncertainty in the companies help the
managements in taking corrective measures to revive the situation; and communication of the
same helps the investors in knowing the actual going concern position of the businesses.
These are the main reasons of having ASA 570 (Brunelli, 2018).
Importance of ASA 701 and ASA 570 after the Failure of Lehman Brother
Both ASA 701 and ASA 570 have key importance while considering the collapse of
Lehman Brothers. The company collapsed as poor auditing failed in the identification as well
as communication of major financial issues within the organization. At the same time, the
auditors also failed in assessing the impact of the subprime mortgage crisis on the business of
Lehman Brothers. The inception of these two accounting standards could be seen after the
collapse of Lehman Brothers in order to strengthen auditing with the aim to identify and
communicate the major areas of risks and material uncertainties on the going concern status
of the firms. All these make these standards of key significance (Mawutor, 2014).
Reasons for the Importance of Key Audit Matters
The concept of key audit matters came into the picture out of the investors’ demand
for more details and contextual information for helping them in determining the clean audit
report. Three main causes for the increased importance of key audit matters are discussed
below:
1. Better conversations between the auditors and those who are charged with governance
have become possible because of the key audit matters. Sequentially, this has
contributed to better governance (Cordoş and Fülöp, 2015).
2. Key audit matters assist the auditor in focusing on the parts of the audit that require
the most cautious audit judgment. Sequentially, this has contributes to better audit
judgment.
3. Key audit matters deliver the preparers of the financial reports with the motivations
for revisiting the financial reporting as well as disclosures in the areas associated with
key audit matters. This in turn has led to high quality of financial reporting (Sirois,
Bédard and Bera, 2018).
What ASA 570 Tells about a Company’s Long-Term Existence
ASA 570 discusses about the going concern issues within the organizations that is
most relevant at the time of economic difficulty and in certain circumstances where the
management may determine that the business may not be able in continuing as a going
concern because of certain issues. As per ASA 570, three aspects need to be considered by
the management of the companies for the going concern; they are the amount of
improbability associated with the outcome of an even casting major doubts on the company’s

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ability of continuing the business operations as a going concern; the entity’s size and
complexity and any judgment about the future. It implies that ASA 570 helps in assessing the
fact that whether a company has the sufficient cash inflows and other resources to continue
its business operations for long-term (Xu, et al., 2013).
Key Audit Matters
Key Audit Matters of the Companies under Consumers Staples Sector
The following table shows the key audit matters of the top five ASX listed companies
operating in the Australian consumer staples sector.
Company Name Key Audit Matters
Woolworths Group Limited The auditors have reported three key audit matters; they
are Onerous lease provision and impairment of asset in the
BIG W business; IT system and Disclosure of AASB 16
Leases. The auditor’s responses include evaluation of
major assumptions, evaluation of historical accuracy,
sensitivity analysis and others (woolworthsgroup.com.au,
2020).
Treasury Wine Estate There are two key audit matters. They are inventory
valuation that includes total finished goods and work-in-
progress inventory worth $2032.2 million; and Discounts
and debates recognition that include net sales revenue that
is the net sales of trade discount and volume rebates worth
$2831.6 million. The audit procedures include testing of
control, yean-end inventory test and others
(tweglobal.com, 2020).
The A2 Milk Company The auditors have reported only one key audit matters that
is Discounts and rebates provided to the customers. The
audit procedures include consideration of the
appropriateness of revenue recognition, evaluation of the
company’s processes, sample testing and others
(thea2milkcompany.com, 2020).
Coles Group Seven key audit matters have been reported by the
auditors. They are commercial income; non-current asset
impairment that includes intangible assets; IT
environment, AASB 16 Leases, existence of inventory,
Accounting for the department of the Group from
Wesfarmers Limited; and Accounting related to major
contracts. The audit procedures are gaining understanding
of the company’s material commercial incomes, taking the
assistance of valuation experts, testing of significant
agreements and others (colesgroup.com.au, 2020).
Coca-Cola Amatil Three key audit matters have been reported by the
auditors. They are Carrying value of the cash generating
units of Indonesia; Accounting related to rebates and
promotional allowance; and SPC asset held for sale. The
audit procedures include valuation of the appropriateness
of the used methodology, testing the mathematical
accuracy of cash flows model, consideration of the
application of Australian Accounting Standards and others

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(asx.com.au, 2020).
The above table shows that there are certain similarities among the reported key audit
matters in these five companies. Most of these companies have certain key audit matters in
common. For example, accounting for rebate is a common key audit matter in this industry
that can be seen in Treasury Wine Estate, The A2 Mil Company and Coca Cola Amatil as the
companies have to provide discount to the customers in the industry. Impairment of assets is
another common key audit matter that can be seen Woolworths Group Limited and Coles
Group. Another common key audit matter in these companies are accounting under AASB 16
Lease due to the adoption of this lease standards. Inventory is another key audit matter in
most of these companies because of the nature of goods and huge amount of sales. Lastly,
another common key audit matter in most of these companies are IT system because of the
dependence of these companies on advanced technology for daily business operations. All
these facets indicate towards the auditors’ effectiveness to report the key audit matters by
taking into consideration all the required factors in the company and the industry.
Conclusion and Recommendations
The above analysis displays the importance of ASA 701 and ASA 570 in the auditing
profession which help in increasing the audit quality by ensuring the disclosure of additional
contextual information about the companies’ financial aspects. Since there were major faults
from the auditors’ side in the collapse of Lehman Brothers, these two auditing standards have
been introduced to ensure that the same errors do not repeat. ASA 701 ensures the disclosure
of risk factors in the company’s financial aspects and ASA 570 ensures the disclosure of
additional information on the going concern position of the businesses. The auditors of the
selected five companies operating in the Australian consumer staples industry have correctly
disclosed the key audit matters along with the audit steps taken.
Based on the above discussion, the recommendation to the Australian auditors is to
ensure taking into consideration the auditing standards of ASA 701 and ASA 570 while
carrying out the audit works. This will help them in identifying the risk areas in the audit
clients’ financial statements and they will be able in assessing whether there is any material
doubt that casts key doubts on their capability to continue as going concerns. All these
together would help in enhancing the overall audit quality in Australia.

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References
Asx.com.au. 2020. Annual Report 2018. [online] Available at:
https://www.asx.com.au/asxpdf/20190410/pdf/4446672z94vgfh.pdf [Accessed 20 Jan. 2020].
Auasb.gov.au. 2020. Auditing Standard ASA 570 Going Concern. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 20 Jan.
2020].
Auasb.gov.au. 2020. Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_Compiled_2019-FRL.pdf
[Accessed 20 Jan. 2020].
Azadinamin, A., 2013. The bankruptcy of Lehman brothers: causes of failure &
recommendations going forward. Swiss Management Center (SMC) University.
Azim, M.I., 2013. Independent Auditors Report: Australian Trends From 1996 to
2010. Journal of Modern Accounting and Auditing, 9(3), p.356.
Brunelli, S., 2018. The Firm’Going Concern in the Contemporary Era. In Audit Reporting for
Going Concern Uncertainty (pp. 1-25). Springer, Cham.
Colesgroup.com.au. 2020. 2019 Annual Report. [online] Available at:
https://www.colesgroup.com.au/FormBuilder/_Resource/_module/ir5sKeTxxEOndzdh00hW
Jw/file/Coles_Annual_Report_2019.pdf [Accessed 20 Jan. 2020].
Cordoş, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting & Management Information Systems/Contabilitate si
Informatica de Gestiune, 14(1).
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reporting. Management Intercultural, (33), pp.61-70.
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Auditor’s Report - December 2015 . [online] Available at:
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[Accessed 20 Jan. 2020].
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at SSRN 2572716.
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recommendations. Research Journal of Finance and Accounting, 5(4).
Quax, R., Kandhai, D. and Sloot, P.M., 2013. Information dissipation as an early-warning
signal for the Lehman Brothers collapse in financial time series. Scientific reports, 3, p.1898.
Sirois, L.P., Bédard, J. and Bera, P., 2018. The informational value of key audit matters in the
auditor's report: Evidence from an eye-tracking study. Accounting Horizons, 32(2), pp.141-
162.
Thea2milkcompany.com. 2020. 2019 Annual Report. [online] Available at:
https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-Company_FY19-Annual-
Report_double-pages-1.pdf [Accessed 20 Jan. 2020].

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Tweglobal.com. 2020. ANNUAL REPORT 2019. [online] Available at:
https://www.tweglobal.com/-/media/Files/Global/Annual-Reports/2019-Annual-Report.ashx
[Accessed 20 Jan. 2020].
Woolworthsgroup.com.au. 2020. 2019 ANNUAL REPORT. [online] Available at:
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Xu, Y., Carson, E., Fargher, N. and Jiang, L., 2013. Responses by Australian auditors to the
global financial crisis. Accounting & Finance, 53(1), pp.301-338.

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Appendix
Key Audit Matters of Woolworths Group Limited

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Key Audit Matters of Treasury Wine Estate

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Key Audit Matters of The A2 Milk Company

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Key Audit Matters of Coles Group

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Key Audit Matters of Coca-Cola Amatil

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