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The new auditing standard ASA701 Communicating Key Audit Mattersin the Independen Auditor’s Report is developed in the wake of the global financial crisis. This development is in response to calls from shareholdersto know more about the companiesthey invest in. Further, investors have also requested earlier warnings of potential issues that may exist with respect to an entity’s ability to continue as a Going Concern which resulted in the revision of ASA 570 (ISA 570) Going Concern.

Students are required to research into the rationale for the new auditing standard ASA 701, explain clearly what it is and select an industry, eg. banking, mining, etc and analyse Key Audit Matters in the Independent Auditor’s reports of all companies in that industry in ASX Top 100 listed companies as part of your evaluation of this new standard.

Introduction to Auditing Standard ASA 701

The Auditing Standard ASA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report” issued by Australian university Auditing and Assurance standards Board (AUASB) deals with the key Audit matters that the auditor needs to consider in his audit report. Key audit matter means those matter that, as per the auditor’s professional judgment were of most significant in the audit of financial statement of current period. These matters were address in the context of our audit of the financial statement, and in forming our opinion thereon and we do not provide a separate opinion on these matters. There are following item which materially affected the financial statement of the company that item are the Key matter which is necessary to the auditor consider in their audit report (Alsagoff, 2010). This standard is considering whether financial statement is prepared as per the applicable reporting framework or not, such financial statement shall consider the Key point which are materially affected on financial statement of the company, auditor shall consider such key audit matter of the company. Auditor shall communicate the key audit matter to the share holder of the company. Further auditor shall check whether management provide the proper disclosure in the financial statement that is required by management to achieve the fair presentation of financial statement.  It is to be checked that management has properly provide the details of going concern Assumption or any other individual matters which are necessary. This standard is applying to audits of complete sets of general purpose of financial statement of listed entity and circumstances when the auditor otherwise decides to communicate key audit matters in auditor’s report.

This standard is very important for the investors of the company. Based on Audit report investor take important decisions related to the company and also invest in the company. Purpose of communicating the key audit matters to the shareholder is to enhance the communicative value of the auditor’s report by providing the grater transparency about the audit that was performed. Another purpose of communication with the management to provide the additional information to the intended users of financial statements to assist them in understanding those matter that, in the auditor’s professional judgment, were of most significance in the audit of the financial statement of current period. Further it is communicated to provide the assistant to the intended user in understanding the entity and area of significant management judgment in the audited financial statement or to provide a basis to further engage with the management and those charge with governance about certain matters relating to the entity, the audited financial statement or the audited that was performed.

Auditing Standard ASA 701 Requirements

The detailed analysis of the given standard is stated below. The key aspects of this standard include the points given below

  • As per this standard ASA 701 auditor of a listed company are communicate Key matters that are present in the financial statements of the company. The auditor is required to take important decisions and highlight all the key matters and check whether any mistake in the financial statements are arise or not. This standard is mandatory to follow for all the listed companies and the auditors needs to follow this standard when they are preparing their audit report for the company(Boghossian, 2017).
  • For the other than listed company Auditor needs to decide which matters are important and materially effect for the company. Such important matters are considered by the auditor in their audit report. Basically it’s a discretion of auditor to decide the materiality of the item
  • There are Few important matters which the auditor needs to follow when they are determining the key audit matter for preparations of their audit report;-

The auditor shall determine, from the matter communicated with those charge with governance, those matters that required significant auditor attention in performing the audit. In making the determination auditor shall consider the following:

  1. Auditor shall assess higher risk of material misstatement or significant risks are identified as the manner given in another standard.
  2. Significant auditor judgment relating to area in the financial statement that involved significant management judgment including accounting estimates that have been identified as having high estimation uncertainty.
  • The effect on the audit of significant event or transactions that occurred during the period.
  • The auditor shall determine which of the matters so determined above were of most significant in the audit of the financial statement of the current period and therefore are the key audit matters.
  • This audit standard considered the description of each key audit matter. In the section of Key audit matters auditor report shall include the why the matter was considered to be one of the most significance in the audit and therefore determining to be key audit matter and how the matter was addressed in the audit report.
  • The are some circumstances in which a matter determined to be a key audit matter is not communicated in the auditor’s report. The auditor shall describe each key audit matter in the auditor’s report  unless;

The Law or regulation prescribe the such disclosure which are  for  public, and In the extremely circumstances, the auditor determines that the matter should not be communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefit of such communication. This shall not apply if the entity has publicly disclosed information about the matter (Cayon, Thorp, & Wu, 2017)

  • This standard provides all the necessary steps which the auditor need to follow for providing the audit opinion in the financial statement of the company. Further benefit of mentioning the key audit matter in the audit report is stakeholder of the company can see those key matters and then decide the performance of the company. And investor can invest on the basis of such audit report.

The auditing standard ASA 570 “Going concern” issued by the by Australian university Auditing and Assurance standards Board (AUASB). This standard deal with the auditor’s responsibilities in the audit of financial statement relating to going concern and considers the implications of the same in their audit report. Management of the company are responsible to make going concern assumption in the company.

Under the going concern entity’s financial statement are prepared on the assumption that the entity is going concern in foreseeable future. An auditor of a company check going concern basis of accounting is appropriate or not assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liability in the normal course of business. Management responsibility to assess the entity can continue as a going concern or not. Further as per this standard responsibility of the auditor to obtain sufficient appropriate audit evidence regarding the going concern assumption made by the management. Based on such Audit evidence auditor needs to conclude whether a material uncertainty exist about the entity’s ability to continue as a going concern. Further auditor needs to identify the risk involve in the entity, auditor shall find any indicator regarding going concern assumption and auditor is unable to obtain sufficient appropriate audit evidences regarding such indicator than auditor shall consider such indicator in their audit report (Cayon, Thorp, & Wu, 2017).

The above standard are analysed with the help of audit report of two companies, and see how the auditors had complied these reporting requirement in their audit report. Auditor needs to disclose the key matter of company and any indicator regarding the going concern assumption of the company. The two companies that have been selected for comparison Telstra Corporation and TPG Telecom Limited. These companies are part of the ASX100 List and they are the top companies of the telecom sector in Australia. The annual reports of the company have been downloaded and analysed (Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial crisis, 2017).

Importance of Key Audit Matters for Investors

The TPG Telecom is an Australian company that deals in providing telecom sector based services, which is very cost effective and reliable for the people. The revenue of the company runs into million since the time it was founded in 2008. The annual reports of the company have been audited by the KPMG, and they have highlighted key matters in their audit reports accordingly.

The audit report of the TPG Telecom consists of the following key matters that have been highlighted below by the auditors-

As we can see in above audited audit report that the auditors have highlighted certain matters which they feel are related to the company, such matter are affecting the company’s financial position. The most important matters that auditor has included in their audit report is treatment of revenue recognition. Basically, these companies deal to provide the services of high speed usage of internet, which include a very high billing system in the company and the revenue of the company is spread to different areas. In case of telecom sector different approaches are followed for valuation of their services. Here the auditor has stated the proper ways of following which they have audited these aspects of the financial statements of the company. Further auditor shall also consider the valuation of goodwill and the method of valuation of goodwill are reported by the auditor. So, we see that the auditors have provided necessary disclosure on all key matters that might affect the company as the manner prescribe by the standards. Now the investors can do the analysis of audit report and then decide whether to invest in this company or not (Eisemann, Parker, & Alstyne, 2017).

The audit report of the Telstra Corporation consists of the following key matters that have been highlighted below by the auditors-

This is also one of the leading companies in the telecom sector which deals in mobile phones and tablets and provides other telecom based services to the people. Financial statements of Telstra Corporation are audited by EY. The company was started in 2015 and since then the company has made millions in terms of revenue. The key matters have been stated by the auditor in his report and they have put more resilience to the fact of going concern that is very important aspect of company. As per the applicable accounting standard the auditor should check whether management are prepared the financial statement of the company as per the applicable accounting standard or not and auditor shall check that all key areas that might affect the company and should provide proper disclosure regarding the same in their annual report of audit.

The key matter of Telstra corporation has been highlighted in the audit report would include following important points: -

  • Since the Telstra Corporation provide the high usage of internet service, and valuation of the same are becomes important matter for this company. The auditor has analysed the same and has stated how they have proceeded with that. It is an important matter as it will materially affect the revenue of the company and financial position of the company. Hence the auditor needs to report the same in their audit report(Wang, Chiu, li, & Hsiao, 2018).
  • Impairment of goodwill is another key matter which needs to be disclosed by the auditor in their audit report
  • Amortisation of goodwill is also the key aspect which needs to be disclosed
  • All Key Significant matters have been included in the audit report of the company by the auditor. The investors can check and decide whether the company involves the risk or not(Coate & Mitschow, 2017). Thus, these are the few areas in which the auditor feels sceptic and has stated it in his audit report clearly; -

Conclusion

Based on the entire analysis of the company auditor comment that in auditor’s opinion the above financial statement is free from all the material miss statement prepared as per the applicable financial reporting frame work and followed all the accounting standards. Since Audit report is mirror of any company which shows the financial activity in the company. Based on auditor’s report investor can do the analysis and take an investment decision because Audit is an independent examination of the financial statement of the company to take important decisions.

References

Alsagoff, N. (2010). Microsoft Excel as a tool for digital forensic accounting.

Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), 244-253.

Cayon, E., Thorp, S., & Wu, E. (2017). Immunity and infection: Emerging and developed market sovereign spreads over the Global Financial Crisis. Emerging Markets Review.

Coate, C., & Mitschow, M. (2017). Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. 

Eisemann, T., Parker, G., & Alstyne, M. (2017). STRATEGIES FOR TWO SIDED MARKETS. 

Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial crisis. (2017). Accunting and Finance, Carson,E;Fargher,N;Zhang,Y;.

Wang, Z., Chiu, Y., li, Y., & Hsiao, L. (2018). Performance appraisal for the operation and management of listed and OTC Taiwanese companies with DEA benchmarking models

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"Key Audit Matters And Going Concern In Financial Statement Audit Essay.." My Assignment Help, 2020, https://myassignmenthelp.com/free-samples/acc707-auditing-and-assurance-services/the-auditing-standard.html.

My Assignment Help (2020) Key Audit Matters And Going Concern In Financial Statement Audit Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/acc707-auditing-and-assurance-services/the-auditing-standard.html
[Accessed 23 July 2024].

My Assignment Help. 'Key Audit Matters And Going Concern In Financial Statement Audit Essay.' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/acc707-auditing-and-assurance-services/the-auditing-standard.html> accessed 23 July 2024.

My Assignment Help. Key Audit Matters And Going Concern In Financial Statement Audit Essay. [Internet]. My Assignment Help. 2020 [cited 23 July 2024]. Available from: https://myassignmenthelp.com/free-samples/acc707-auditing-and-assurance-services/the-auditing-standard.html.

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