Auditing and assurance services are regarded as one of the important services, as with the help of these services the stakeholders of every business organization can trust on business organization. In this report of audit and assurance, an auditor is appointed by the organization to verify and check the accounts books of the organization. In addition to this, the job of an auditor is to represent the audit report to stakeholder and to the management of the organization, with the help of audit report the analysis can be done such as key findings during the audit, the opinion of the auditor, key audit matters and other important information. Shareholder and the investors of the organisation depend on the audit report while making the decision regarding further investments.
Besides this discussion is done on the findings presented in the auditing report, which leads to the insolvency of the center. In this report, the discussion is done on the ASA701 Communicating Key Audit Matters. Besides this report, an analysis is being done on failure or insolvency of ABC Learning center.
Introduction of New Auditing standard: ASA701 Communicating Key Audit Matters
In this report it has been noticed that there are several issues has been faced by the big Australian companies in the recent past as a result of this is failure or insolvency. In this failure there is a big company that has been fallen down and it concluded as execute like ABC Learning Centre, HIH Insurance, One Tel Phone Company, etc. there is the another reason for fallen down of these companies i.e. internal irregularities in business, financial issue is an another reason and the big reason is loop holes in audit and assurance services (Johnstone & Gramling, 2015). Due to this Australian auditing standard board has taken the few steps for alternation so that loopholes can be blocked in existing auditing standard. By this changes the new auditing standards ASA701 Communicating Key Audit Matters is introduced. Key Audit matters term defines the important matters which are recognized by the auditors from their high experience and with the way of judgment method. In addition, this these are the most important matters in which auditors have to pay more attention to this matters while performing the audit procedure (Knechel & Salterio, 2016). Some of the procedure have to follow for the results related to audit matters of the business organization:
Important to identify the risk by using the method of ASA 315 this method is used in those aspects or areas where the risks have been taken by the higher level of management of organization.
Important areas and factors where the management decision is required and also the accounting method is required for the Key audit matter (Knechel & Salterio, 2016). The matters where is involvement of auditors judgment is necessary is known as key audit matters.
As a result of this audit standard board has issued new auditing standards control and to get the real face of the company in the market. In addition to this, the confidence of the shareholder and the investors were at risk of the business and the government has given the order to protect and provide simplicity in the market. The government has introduced the new audit act ASA 701 (Obana, 2015). The main work of AUASB is to introduce the new act and raise the standard of auditing show that people can take the interest and focus on the business and can produce the high-quality business. With the help of ASA701 has eased the requirements and also help in providing the material and the applications for communicating on this key audit matters that can be used further in independent audit reports. The important factors of ASA701 are given below:
- The ASA107 has made it compulsory that the statement of key audit matters has to be involved in the auditor’s report of the audit has been done.
- The ASA 107 has given the authority to auditors to include the key audit matter of other entries in the audit book or not(Spencer , 2011).
- To find out the missed key audit matters and send message to auditor to maintain an accounts book in the audit report
- The ASA107 helps the auditors to mention the documentation required for the auditing and also helps in introducing the individual key audit matter.
- The ASA107 explain act in details and also explain the key audit matters for the auditing purpose.
Background of ABC Learning Centre
In this report of 1988, Australia has introduced the new concept of taking the care of preschool kids and also provide the proper training to the kids and old people this concept is introduced on a higher level by the ABC learning center. This concept is new and increasing rapidly and can become the largest learning center in Australia. In coming five years ABC Learning Centres climb to 800 learning center all over Australia and sharing the 20%share of the child care centers in the country. The progress of the center has increased and well noticeable in the stock market. The price of the share of child care has increased up to 300% in the period of five years of working. According to report 50 million of profit is earned by ABC Learning Centres.
In this report, it is an important to point that the growth of any company can easily rise but to maintain is at the top is very difficult as a result of this ABC Learning Centres has involved in the frauds activities. Due to this reason company face the downfall and there is many other reasons of falling down and most important reason is irregularities in audit and assurance services. Falling down of ABC Learning Centres shows their weak audit and assurance and auditing standards are cannot maintain by the company due to this they are not enabled to find out the frauds and cannot control the frauds activates.
There are a number of reasons which can be regarded as the cause of the collapse of ABC Learning, as making a huge profit was being considered as the objective of the center and the considerations for the interest of the public was being ignored. Some of the reasons behind collapse of the ABC Learning center are-
- Higher fee was charged by the center and rebate on tax was availed for providing child education.
- Weak management system and inefficient internal control
- Low salary to employees of the center.
- ASX also banned the center due to misconduct.
Key Audit Matters that shall be reported in the Auditors report of ABC Learning Centre
In this report of ABC Learning Centres fall down of centers is because of the various failure of the auditing and assurance services. These issues can be controlled if the auditor works without doing any fraud activities. Due to this reasons, the picture of ABC Learning Centres is falling down.
Impairment of loans and advances to the customers: It is considered as a key matter that shall be reported in the auditor`s report. As subjective and complex judgements were being made by the directors of the ABC Centre over both estimation as well as timing of recognition of such impairment.
Goodwill- As per the IFRS, ABC Centre was required to test the goodwill`s amount in annual basis for impairment.
Rise in Competition
In this report, it has been explaining that the success of one sector support in the success of another sector. In this, due to this the expense of the day care centers is increased day by day and the rest of the day care centers is also increased every year (Oringel , 2012). Due to this, there is an increment in the company cost. As a result of this parent of children who are not capable of paying the fee of the center, they have to bring the proof from the government and the result of this centers have to teach them free of cost. Therefore the no of students increased and the ratio of staff is less than student and quality of work is fallen down by the centers. As a result of this, many companies in the market became a computer for the ABC learning center ( Rachchh, et al., 2015). In addition to this small centers are providing the more profit to their staff in comparison to big company centers. The government is also introducing the new policy day to day for supporting the care center and due to this new centers are rise every day.
The auditor has to pay the more attention to this matters because this matter is very crucial. In this case study, it has been examining that due to higher competition in market management is not capable of managing the company. ASA 701 is introduced early then the auditor has to give the full information related to audit to the audit report.
Financial Discrepancies not reported to Management
The biggest reason of downfall of the company is not the higher competition the reason is that the misconduct is done by the financial management in the company is purchase of more assets. The company also did the fraud activates by providing the fake financial information. The result of this increase the share value in the market (Spencer , 2011). In 2008 there is distress due to this many issues of misconduct by the companies in their financial records have been found and the government is not paying the attention that time. As a result of this ABC Learning Centre assets are shown on the balance sheet, 82% of intangible assets were not covered by the linked so the government has to consider the issues. The result of this company has to pay the higher price for linked obtain (Whittington, 2012). As a result of this, the misconduct done by ABC Learning Centre is come out in the market as result of this economy of the company has been crushed. So that management of the company has understood the value of intangible assets.
In this case study report if new auditing standard were introduced early then the whole business operations of the company and financial system have been growing up.
Personal usage of company`s fund not reported
The stakeholder of the company such as investor lost their confidence on ABC Learning Centre. As the company`s director used the funds for some personal use such as self-enrichment and lending money to the relatives. The payment made to the companies that were owned by relatives of directors was being listed. ABC Learning Centre`s shares were majorly owned by the booking company in comparison to company`s director i.e. Mr. Grooves (Vona, 2012). A payment of $74 was being made to the firm i.e. Queensland whose owner was the brother-in –law of ABC company`s director. One of the other matter related to the personal use of fund was that the basketball team owned by the company`s director was being sponsored through company`s fund. In contrast to this, the company repudiated for such expenses ( Hoelzer, 2011). Usage of company`s fund shall not be done for the personal use as this can affect the firm`s reputation and confidence of investors as they may not prefer to invest in a company who is indulged in such practices.
Hence, the personal use of company`s fund is also one of the other reason that contributed to company`s liquidation. The auditor as well not reported such practices carried out within the company, as in the case, all these matters were reported in the auditor`s report then the company may get saved from liquidation ( Fernando, 2012). It is requisite to comply the auditing standard i.e. Key Audit Matters so that such practices could be detected and reported in the audit report.
New Government Policies that impacted Going Concern Concept
Financial support is used to be provided to the centers related to the child care. Alterations in the government policies have been made because of the upsurge in a number of child care centers. As one of the modifications in policy was related with drawing out financial support to child care centers. Private companies took advantage of this policy and opened child care centers (Gramling, et al., 2012). As a result, the competition in this sector has increased and the quality of services decreased. Not only the child care centers were opened but also the family care centers were opened by the private companies. The fee was determined by the income. In addition to this, the fees were associated to the rebate on tax, however, it made an adverse effect. As more fee tends to less tax benefit. It resulted as less concern of parents in these child care centers (Oringel , 2012). An enormous amount was spent by the centers in investigating the financial background of parents. Such activity escalated the center`s cost and slowly but surely augmented loss on the balance sheet.
ABC Learning Centre`s going concern concept was also influenced by the policies regulated by the government. Expenses of the center had increased and this resulted in less profit and befallen quality services.
Usefulness of ASA701
The breakdown of a child care or the biggest learning center led to the commencement of a new auditing standard. In context to the auditing, ASA 701 is very useful and essential and this standard has wide scope in auditing. This standard has also made the auditing transparent. The requisite information shall be gathered to produce preeminent outcomes from the auditing standard i.e. ASA 701.
To find the key audit matters
An auditor must have the capability to assess the key matters of audit as of several matters, such as- matters which requires auditor`s special attention; as well as the matters which have been charged by the government (Obana, 2015). However, a number of aspects shall be considered in course of determining the key matters of the audit, some of such aspects are discussed below:
- Auditing standards shall comply while identifying the areas that are related to the utmost risk of material misstatement. In context to ABC learning Centre misdeeds related to financial aspects was there; such misdeeds could be stated in independent auditors report( Moeller, 2016). Such consequence of ASA 701 is able to disseminate real financial situation.
- It is essential to account the consequence of every single transaction on the process of audit comprehensively at the time when the event has occurred. As per ASA 701, management`s act or transactions shall be stated in the report of audit and this information can be evaluated by stakeholders.
- In the financial report, the significant matters and auditor`s judgment shall be revealed.
Auditing standard`s scope has vast and wide aspects (Gramling, et al., 2012). ABC Learning Centre’s breakdown has improved the audit standard`s scope in context to reporting key audit matters in the independent auditor`s report so that stakeholders and management shall evaluate the financial information properly.
The whole report concludes that in the independent auditor`s report, the key audit matters are important to be stated. The auditing process which was not carried out in an effective manner led to the liquidation of several big companies in Australia; as the audit report was created by not following the audit standards. The issues related to the financial reporting and auditing report gave rise to the liquidation of the business. In case the new auditing standard had compiled during the auditing of ABC Learning Centre, then this could play a crucial role. Several occasions were there in context to ABC Learning Centre, which instigates to starting key audit matters in the audit report. In the auditor`s report, issues related with Going concern shall be reported as it might save the failure of the business.
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