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The new auditing standard ASA701 Communicating Key Audit Mattersin the Independent 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.

Methods of Identifying KAM

The present report has exhibited critical assessment for the application of “ASA 701 Communicating Key Audit Matters (KAM) in the Independent Auditor’s Report”. The main consideration has been considered in the mining industry with including the perspective of companies such as “Boral Limited, Amcor Limited, Bluescope Steel Limited and Newcrest Mining”. Based on the assessment of annual report of all the four companies the disclosure on the “key audit matters in the independent audit report of the organisation” can be clearly found. The several types of risk related to the material misstatement is directly considered in accordance with “ASA 315”. Moreover, the various excerpts of the study have emphasised on the actions which are necessary for the investors in having an overview of material misstatement (Schaltegger et al. 2015).

Significant mandates of the global financial crisis have stated on the KAM extrapolations included in the financial statement which are not disclose adequately. Post-implementation of this standard, several accounting authorities in Australia has made it compulsory for businesses to adhere to the regulations for reducing any scope of financial crisis which can take place in the future. In addition to this, the accountability has revealed the secondary materials supporting the independent audit reports. The nature of such disclosure is mentioned as per the ASA 701, which has been conducive in holding real financial conditions to the shareholders (Sneller, Bode and Klerkx 2017).

The main intention of the introduction of KAM is seen with increasing value of the audit report which will allow the investors and other users in having a better overview for rational and audit opinions. Despite of this, several audit opinions cannot be blindly relied upon. This is due to the fact that, in many ways it lacks the information which is needed to identify the considerable events happening in the organisation which might change the materiality of the enterprise. Typically, there are four audit opinions which are identified with “qualified opinion, unqualified opinion, disclaimer opinion and adverse opinion”. Henceforth, the aforementioned categories are applicable to all the entities. It needs to be also ensured that the audit opinions are delivered from the industrial perspective rather than business. The inclusion of KAM is beneficial in making specific nature of audit opinion for an organisation (Abhayawansa and Guthrie 2014).

In course of any event which is acknowledged as KAM, it is seen to be dependent on the judgement of auditors. During the evaluation of financial reports, it is probable that the auditor may trace several significant incidents. In case the statements lack justification, the various types of incidents will be deemed as the material misstatements and the same will be included in KAM.

As per the rulings of ASA 570, the financial reports are prepared as further as assumptions related to going concern and the same is estimated to continue in the upcoming years with the operations of the company. The relevant business organisations are seen to prepare general purpose financial reports which are in compliance with going concern. However, the only exception is in case the management decides to liquidate or cease operations. In case the financial information is not provided as for the shareholders, it may lead to significant nature of gap among the same. In several situations, the shareholders are seen to look forward to the qualified audit reports and published data for verification of the accuracy among the financial statements. It needs to be also discerned that ASA 570 emphasises on providing the KAM in the annual report which is beneficial in identifying the material misstatements and the significant conditions which may pose doubt to the ability of the organisation for operating as a going concern as stated in “Paragraph A1 of ASA 570 Going Concern”. The selected for organisations are not seem to include the KAM and therefore critically evaluated as per the aforementioned sections (Muhammad and Scrimgeour 2014).

Conceptualisation of Going Concern

In case of any possibility of influencing the FCF at material level, it will be also considered under the norms of KAM. For example, in case auditor believes that a short note for contingent liability is capable of causing cash outflows, the same will be conveyed under KAM.

The evidence is of the excerpts associated to material misstatements have been carefully scrutinised as per the latest annual report published by “Boral Limited, Amcor Limited, Bluescope Steel Limited and Newcrest Mining”. The issues associated to financial crisis can be clearly depicted in the financial statement however the companies did not make the KAM disclosure in an adequate manner. In order to overcome the several types of the issues, ASA 701 was introduced and it needs to be communicated in the relevant financial statements of the company. Therefore, it is mandatory for the organisations to make the relevant disclosures about the KAM in the annual report. Post-investigation of annual report of the four companies in 2017, the risk factors which are inherent are in compliance with ASA 315. The analysis of the future issues could be carried in such a manner that should be conducive for material misstatements disclosure. Furthermore, the annual report will be conducive in estimation of the issues which may interfere with the business activities. This type of estimation will lead the investors for detection of any problem is taking place within the organisation from beforehand (Taylor, Richardson and Taplin 2015).

The nondisclosure of material misstatement in several cases are argued to be raising several questions on the unethical practices adopted by the companies. The critical assertions of annual report have identified the risk factor which can be directly related to disclosure of material misstatement and are in agreement with ASA 315 (Chiavacci et al. 2017). The primary analysis consists of the following discourse:

Material misstatement areas having higher risk:

The evaluation of financial statement about the disclosure shows that the disclosures made by the organisations could be presented to the financial statement users. As it can be seen that there is compliance with the ASA 701 rulings, the annual report can be depicted as feasible in nature. Moreover, it shows the adherence to the ASA 315 which has been duly followed by the auditors and the companies. Therefore, the use of ASA 315 has enabled all the entities to detect key material misstatements. Despite of this, the four organisations have made difficult disclosure on carrying value and exploration of energy. Henceforth, it has been able to identify the impairment indicators for evaluating assets thereby testing the key control of management. The budget associated to the future expenses is depicted with the ongoing exploration (Schäffer, Mahlendorf and Rehring 2014).

 The four entities are for the discern to enforce certain accounting principles which have been conducive in depiction of actual financial situation. Moreover, the entities have been compliance with the ASA 701 by the disclosure of KAM in the audit report. In addition to this, there can be several incidents can be clearly identified with the corporate scandals that the auditors in the past have taken on ethical measures for representing a strong financial health for their self-interest. Due to these factors there may be several questions raised associated to the integrity of the audit report. It is important for the four business concerns to understand the different types of business risks which are identified with material misstatement. Moreover, it is also essential to evaluate the risk factors with the business activities and business environment related to audit procedure. Post-critical analysis of the statements based on top-down process, the four organisations are likely to suffer with absence of participation from the staff for making necessary decisions. Henceforth, the forms are needed to obtain the overview of business risk which might pose audit risk in future. Based on this depiction is, auditors need to assimilate all the business procedures for gaining an insight of actual risks leading to material misstatement (BoardMatters Quarterly 2014).

Assessment Related to the Mining Industry

ASA 701 was implemented after the financial crisis which took place in 2007, which further compiled the audit and assurance board in identifying non-ethical measures which were carried out by the organisations by depiction of the financial statement. These unethical measures have been represented with the inclusion of sound financial health of the organisation in order to raise the value of share price. Therefore, the companies were able to raise excess capital by misleading information. At the time of financial crisis, the business corporations were identified to adopt several unscrupulous methods which finally led to the collapse and the investors were not interested in investing in their portfolio. After this incident, “the international economy and the financial solidity in the capital market were taken aback”. Henceforth, it is evident that implementation of ASA 701 was mainly focused to minimise the overall unethical practices and increase the transparency in financial information (IAASB 2015).

Risks identified in accordance with ASA:

As per the statement of independent audit report of “Boral Limited, Amcor Limited, BlueScope Steel Limited and Newcrest Mining”, the disclosures such as “impairment of non-current assets” and treatments for this issue is depicted with considerable amendments in the recoverable amounts along with differences among the actual operating cost and budgeted cost. The main nature of the risk factors associated to auditing of “Boral Limited, Amcor Limited, Bluescope Steel Limited and Newcrest Mining” have been taken into account with the compliance of ASA 315 which is carried out by the audit and assurance board in recognition of relevant audit risk. Additionally, ASA 315 states about the need to follow the guidelines as per stated in “paragraphs A9 to A11 and A27 to A30”. Due to this, several material misstatements can be identified on part of the auditors which can decrease the overall risk of audit. Such a relevant interpretation will be conducive for the auditors in predicting frauds which the four organisations might use to overstate their financial statements. The depictions as per this context, clearly shows that frauds can be duly identified with ASA measures while the preparation of financial statements (Sirois, BBdard and Bera 2014).

It is to be for the discerned that financial statements of all the four organisations were not in compliance with ASA 315, as the auditor had been inefficient in interpreting any material misstatement inherited within the items. Moreover, the auditors are required to follow “paragraphs in ASA 315 from A105 to A108”, which will be conducive in identifying the material misstatement which will limit the overall financial stability among the companies. Due to this, the auditors will have the scope of evaluating the overall viability of entities by annual reports (Cordo and Fülöp 2015).

The various types of considerations based on annual report of as “Boral Limited, Amcor Limited, BlueScope Steel Limited and Newcrest Mining” can be clearly stated that the companies have complied with ASA 701. Due to these factors, the KAM has reduced the overall audit risk among the organisations. The various extents of the audit risk can be duly identified with the audit process which we are followed on part of the auditors. In this particular consideration, special attention can be provided to the process of evaluating risk involved in the operations of the business (Purcell, Francis and Clark 2014). During the initial stage, the business risk is required to be analysed as per the business goal which are inherent in the annual report of all the selected organisations. This has allowed in determining the material misstatement which can lead to wrong interpretation of financial position and performance of the organisations. Secondly, the approximations based on risk significance have implied on the norms which needs to be complied on the part of auditors of the company. Additionally, it is essential for the auditors in detecting the risks which may take place in future leading to material misstatement. The companies need to also identify the risk which may take place from such actions (Pop-Vasileva, Baird and Blair 2014).

Material Misstatement Areas Having Higher Risk

The extracts taken from annual report of the entities, it can be clearly observed that EY is the auditor for both Newcrest Mining and BlueScope Steel Ltd. On the other hand, PwC is auditor for Amcor Ltd. The other entities have also added relevant section of KAM in their annual report which has been conducive in providing the rationale for significant events associated to the business matters. Despite of complying with the auditing standards, there has been an unqualified audit opinion related to the financial stability and compatibility. The rationale for this is due to the very nature of differences among the entities which can be evaluated with the audit matters. For example, EY in its audit report for BlueScope Steel Ltd has considered accounting for tax positions in the KAM (Durand, Limkriangkrai and Chai 2016). The significant recoverability items associated to the DTA is also a KAM due to its financial significance which is $85 million among the consolidated tax group of Australia. The audit report published by PwC for Amcor is identified with the impairment risk consideration associated to the carrying value of the investments made in AMVIG for the detection of the factors such as whether share prices are recoverable investment amount. Finally, the audit report published by EY for the Newcrest Mining have shown several disclosures for taxation policies related to the Indonesian subsidiaries taken from the tax office of Indonesia with the applicable rate of income tax. It is for the seen to recover the additional tax payment amounting to $ 96 million. All the significant amounts are taken into consideration based on the additional estimations (Guthrie, Evans and Burritt 2014).

Conclusion

The important assessment associated to ASA standards like “ASA 701, ASA 315 and ISA 260” is depicted with significant importance for the organisations in terms of presenting the relevant financial information. In addition to this, the compliance with ASA 701 and ASA 315 needs to be ensured for the operations which will be able to conform to the board about audit assurance. In addition to this, companies like “Boral Limited, Amcor Limited, BlueScope Steel Limited and Newcrest Mining” are needed to have an additional understanding of appropriate standards and policies for presenting true and fair financial reports. The information flow in terms of investors and auditors is depicted to be conducive for obtaining insight of definite financial position of the entities which is crucial for undertaking significant decisions about investment. Moreover, the annual report evaluations have made several disclosures to the users of the financial statement. Furthermore, it signifies the adherence to ASA 315 which is also followed with the parts on behalf of auditors and entities. Therefore, ASA 315 have allowed the investors of the companies in tracing of material misstatement risks which are prevalent in nature.

References

Abhayawansa, S. and Guthrie, J. (2014) ‘Importance of intellectual capital information: A study of australian analyst reports’, Australian Accounting Review, 24(1), pp. 66–83. doi: 10.1111/auar.12012.

Australian Academy of Business Leadership, S. (2017) ‘Australian Academy of Accounting and Finance review.’, Australian Academy of Accounting and Finance Review, 1(1), pp. 44–68. Available at: https://www.aaafr.com.au/index.php/AAAFR/article/view/3.

BoardMatters Quarterly (2014) ‘Insights for boards and audit committees’, Board Matters Forum, 2, p. 12.

Chiavacci, E., Kirchgeorg, L., Felker, A., Burger, A. and Mosimann, C. (2017) ‘Early frameshift alleles of zebrafish <em>tbx5a</em> that fail to develop the heartstrings phenotype’, Matters. doi: 10.19185/matters.201703000011.

Cordo, G.-S. and Fülöp, M.-T. (2015) ‘Understanding audit reporting changes?: introduction of Key Audit Matters’, Accounting and Management Information Systems, 14(1), pp. 128–152.

Durand, R. B., Limkriangkrai, M. and Chai, D. (2016) ‘The Australian asset-pricing debate’, Accounting and Finance, 56(2), pp. 393–421. doi: 10.1111/acfi.12097.

Guthrie, J., Evans, E. and Burritt, R. (2014) ‘Australian accounting academics: challenges and possibilities’, Meditari Accountancy Research, 22(1), pp. 20–37. doi: 10.1108/MEDAR-09-2013-0038.

IAASB (2015) International Standards on Auditing 701: Communicating Key Audit Matters in the Independent Auditor’s Report, IFAC.

Muhammad, N. and Scrimgeour, F. (2014) ‘Stock Returns and Fundamentals in the Australian Market’, Asian Journal of Finance & Accounting, 6(1), p. 271. doi: 10.5296/ajfa.v6i1.5486.

Pop-Vasileva, A., Baird, K. and Blair, B. (2014) ‘The Work-related Attitudes of Australian Accounting Academics’, Accounting Education, 23(1), pp. 1–21. doi: 10.1080/09639284.2013.824689.

Purcell, A. J., Francis, R. D. and Clark, C. (2014) ‘Audit committee effectiveness in victorian local government’, Australian Accounting Review, 24(4), pp. 339–369. doi: 10.1111/auar.12070.

Schäffer, U., Mahlendorf, M. D. and Rehring, J. (2014) ‘Does the interactive use of headquarter performance measurement systems in foreign subsidiaries endanger the potential to profit from local relationships?’, Australian Accounting Review, 24(1), pp. 21–38. doi: 10.1111/auar.12019.

Schaltegger, S., Burritt, R., Zvezdov, D., Hörisch, J. and Tingey-Holyoak, J. (2015) ‘Management Roles and Sustainability Information. Exploring Corporate Practice’, Australian Accounting Review, 25(4), pp. 328–345. doi: 10.1111/auar.12102.

Sirois, L.-P., BBdard, J. and Bera, P. (2014) ‘The Informational Value of Key Audit Matters in the Auditor’s Report: Evidence from an Eye-Tracking Study’, SSRN Electronic Journal. doi: 10.2139/ssrn.2469905.

Sneller, L., Bode, R. and Klerkx, A. (2017) ‘Do IT matters matter? IT-related key audit matters in Dutch annual reports’, International Journal of Disclosure and Governance, pp. 139–151. doi: 10.1057/s41310-016-0017-0.

Taylor, G., Richardson, G. and Taplin, R. (2015) ‘Determinants of tax haven utilization: Evidence from Australian firms’, Accounting and Finance, 55(2), pp. 545–574. doi: 10.1111/acfi.12064.

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