Assurance of Audit: Key Audit Matters & ASA Standards Analysis

This report provides an analysis of audit assurance, focusing on key audit matters and the application of Australian Auditing Standards (ASA) 570 and 701. It discusses the rationale behind ASA 701, particularly in light of the 2008 financial crisis and the Lehman Brothers case, highlighting the importance of auditors identifying and reporting risks. The report examines key audit matters in several companies, including Spark Infrastructure Stapled Limited, AGL Energy Ltd, Ausnet Services Ltd, and APA Group, detailing specific issues such as revenue recognition, valuation of assets, and financial instruments. The conclusion emphasizes the role of ASA 701 in helping auditors conduct thorough audits and enabling companies to address financial risks effectively. Desklib provides access to this document and a wealth of other study resources.

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ASSURANCE OF AUDIT
Name of Student
Name of University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
ASA 570: Going Concern................................................................................................................2
ASA 701: Rationale.........................................................................................................................3
ASA 701: Explanation.....................................................................................................................4
Key Audit Matters...........................................................................................................................5
Spark Infrastructure Stapled Limited...........................................................................................5
AGL Energy Ltd..........................................................................................................................6
Ausnet Services Ltd.....................................................................................................................6
APA Group..................................................................................................................................7
Conclusion and Recommendation...................................................................................................8
References........................................................................................................................................9

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Introduction
Audit is the process of conducting the investigation process on the financial statement of
the company and also providing the advice to the management of the company for dealing with
the problem which exist in the financial statement of the company.Auditor also investigates
about the authentication of the financial statement of the company(Cordoş and Fülöp 2015).
Auditor report shows the risks prevails with the company in terms of the financial statement of
the company. Auditor report also pinpoints any kind of misstatement which is present in the
financial statement of the company. It is observed that the reason for the financial crisis in 2008
happened because of the over; look of the problem associated with the financial statement of the
company by the auditor and also interference of the auditor into the malicious act of tampering
the financial statement of the company(Carson, Fargher and Zhang 2016). Due to the above case,
whole auditing profession loses faith. To bring back the faith some alterations are made in some
standards. The standard 701 explains “Communicating Key Audit Matters in the Independent
Auditor’s Report. This above mentioned standard are replaced the going concern which is ASA
570. ASA 701 mainly focuses on the development of the standard which provides emphasis on
the key audit matters.
ASA 570: Going Concern
Auditor should also focuses on the going concern of the company after analyzing the
financial statement of the company and also the authentication of the financial statement. ASA
570 demands the auditor to check the going concern of the company so that it can be analyzed
that the company can continue their business in near future. The misstatement made in the
financial statement by the management of the company may affect the overall health of the

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companyand also the going concern for the company. This standard will help the auditor to go
for the checking of the financial statement and find out the leak in it. Auditor report should
mention the negative indicator of the financial statement of the company such as negative profits,
high employee turnover and also the negative cash flow(George-Silviu and Melinda-Timea
2015).
ASA 701: Rationale
In the case of Lehman Brothers the auditor has carried the audit but was unsuccessful in
searching the risks which was lurking behind the financial statement of the company. The
management of the company presents the misstatement in the financial statement of the company
which was totally overlooked by the auditor and in return there is a demise of the company. It is
seen that the management of the company has misuse the repo rate and provide a misstatement in
the financial statement of the company and showed increase in the financial position by $50
billion(Gimbar, Hansen and Ozlanski 2015). After analyzing the financial statement of the
company the auditor has provided an unqualified report which states there was no problem found
in the financial statement of the company. The report provides by the auditor shows there is no
trace of discrepancies and the company has formed the financial statement with utmost
authentication. This was also the reason for the financial crisis in 2008.
To overcome the matters Australian Standard Board have come up the new standard
which replaces the previous standard of ASA 570 to handle such kind of problems. The new
standard introduced by AASB in the system is the ASA 701 (Heinrichs, et al., 2017).The
standard has provided rules and regulations for the auditor which guide while conducting the
audit. This was absence in the case of Lehman Brothers. The auditor need to identify the risks

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and also mentioned the risks in the financial report of the annual report of the company. This will
help the company to minimize the gap between the auditor’s report and the financial report of the
company. The auditor should also disclose all the matters relating to the judgement and
estimation made by the auditor after analyzing the financial statement of the company(Huggins,
Simnett and Hargovan 2015). In the case of the Lehman Brothers it can be seen that the
company’s auditor did not disclose the estimation which is made by the company in their
financial statement. It can be clearly seen that the reason behind the demise of the company is the
auditing process. This downfall leads to the financial crisis of 2008. This standard will make sure
that the auditor will do their work with full authentication and hence can save the company from
such downfall.
In case of Lehman Brothers it can be seen that the auditor of the company failed to
identify the capabilities of the company to do their business in near future which became the
reason for the downfall of the company(Köhler, Ratzinger-Sakel and Theis 2016). This standard
helps to remove the going concern concept as the downfall of Lehman Brothers.The going
concern states that whether the company is able to put up gain and reduce the risks of incurring
loss. This was not considered by the auditor of the company while conducting the audit of
Lehman Brothers and hence the company seen the downfall(Sødal 2016). As a whole the
financial crisis occurred in 2008.
ASA 701: Explanation
The above mentioned standard explains the where the auditor should look into the
financial stamen of the company and it also help the company to provide in the financial report
of the company. The standard wants the auditor to authenticate all the data provided by the

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company and provide the risks associated with the company(Lennox, Schmidt and Thompson
2018).This helps the company to identify the problem and hence the management of the
company to take firm decision. This will help the company to decrease the communication gap
between the management of the company and the financial report of the company. The
regulation in accordance with ASA 701 is provided below:
o Proper explanation of the key audit matter of the company
o Detailed documentation of the company information
o Detailed proper procedure of the auditing process
o It shows the detail to be written in the key audit matter and what it should not record
Key Audit Matters
It is the matter the auditor of the company which stop the audit to complete the auditing
process and hence increases the risks of the company in return (Sirois, Bédard and Bera 2018).
The auditor mentions about the key audit matters in the audit report of the financial statement of
the company. Simply, saying it is the missing of information in accordance with the financial
part of the company which become barrier for the auditor to proceeds with the audit of that
company(Sánchez-Medina, Blázquez-Santana and Alonso 2019). The key audit matters of the
company can be comes in different variants in respect to the industry and time period in which
the company is working in.
Spark Infrastructure Stapled Limited
In the annual report of 2018 of the company the auditor of the company has included the
key audit matter of the business. It can be observed that the auditor has included investments and
revenue recognition in the key audit matter section in the financial report of the company. The

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investments which has included in the key audit matter of the business can be termed as material
in nature and it is measured by using the formula of equity method of the company. The reason
for the inclusion of the investment in the key audit matter is the exercise of the significant
judgemnent in the case of the recoverable value of the investment made by the company. It can
be mentioned that the company has included in the key audit matters can be termed to be
complex and at the same time material so it can be state that the items should be included in the
key audit matter.
AGL Energy Ltd.
After analyzing the financial report it can be said that the company have some key audit
matters. The key ausit matters of this company include financial instruments, unbilled revenue
and unbilled distribution costs. It is found that the company recorded the revenue of $938 million
in the financial statement of the company but there was absence of the bill against the revenue
made. There was also absence of the proper judgement made by the management of the company
for the revenue recorded(Agl.com.au 2019). It also seen that the management of the company
estimates the consumption made in the energy from the unbilled distribution cost. Due to this
reason the auditor has put this matter in the key audit matter of the auditor report of the
company.It can be observed that the company has embittered into the financial contract of
financial instrument which helped the company has entered into the interest rate, movement in
foreign exchange and also the energy prices. It is observed that the company is not following the
right process of the financial accounting because it is not estimated by the fair value of the
company. The auditor needs the authentication of the financial statement of the company.

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Ausnet Services Ltd.
It can be seen that the auditor flagged some of the variance of the financial statement of
the company into the key audit matters. The key audit matters include revenue recognition
expenses which are made in projects not clear in the accounting book valuation of the non-
current asset and also valuation of the derivatives of the company. Due to the nature of the
framework the auditor send the revenue recognition in the key audit matters. After analyzing the
financial statement of the company the auditor has found that the company has found that there is
a missing of customer billing coming from energy which is consumed in accordance with the
tariff rates(Ausnetservices.com.au 2019). The non-current asset matter is considered as the audit
matter because of the complexity of the framework which makes it difficult for the valuation of
the revenue. It also seen that the auditor has faced problem while conducting the audit process
which makes it to move to the key audit matter. It also seen that there is a presence of high
complexity in the operational and capitalized expenses. This is also transferred to the key audit
matter of the company as it helps the company to provide future benefits from the capital
projects of the company.
APA Group
After the analysis of the financial statement of the company it can be seen that the
company has some issues which was flagged by the auditor in his key audit matter. The key audit
matter is included in the form of intangible assets, valuation of goodwill and also carrying
amount of the PPE. It can be seen that the company has valued goodwill without maintain proper
financial accounting. This is the reason the company has included this in the key audit matter of
the company. It also seen that the company has went into many contracts that they should not in
the normal course of the business(Www.apa.com.au 2019). The forward exchange contract in

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regards of the hedging portion of the exchange rate risk which is not been there in the US Dollar
Borrowings. So it is seen that the key audit matters included.
The key audit matter is considered in accordance with the ASA 701. It helps the auditor
to conduct the key audit matter and helped the company to identify the risks associated with he
company so that the management of the company can take serious action for resolving such
issue. This also helps the auditor to complete its process of audit without any kind of hindrance.
Conclusion and Recommendation
It can be concluded that the auditor helped the user of the financial statement of the
company for enquiring the financial performance of the company by providing the audit report.
It is seen that the due to the overlook of the auditor of the misstatement made by the management
of the company’s financial statement all faith has been lost. The new implemented standard,
ASA 701 help the auditor to carry the audit process more efficiently in the company and pinpoint
every mistake which are associated with the financial statement of the company. Due to this
standard the auditor needs to identify the risks and flagged it in the report after authenticating the
financial statement which prevents the company to enter into serious problem.

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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
[Accessed 24 May 2019].
Bédard, J., Coram, P., Espahbodi, R. and Mock, T.J., 2016. Does recent academic research
support changes to audit reporting standards?. Accounting Horizons, 30(2), pp.255-275.
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative
outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The
Accounting Review, 91(5), pp.1345-1362.
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.
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Heinrichs, W., De Hert, S.G., HemmingsJr, H.C., Herold, K.F., Hughes, C.G., Johnson, K.B.,
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