The auditing standard ASA 701 issued by AUASB reflects the level of assurance to compliance with the present improvements and modifications in audit reporting developed by the International Auditing and Assurance Standards Board. Essentially, the current study aids in comprehending that standards of auditing takes account of allowing the communication of key audit matters (KAM) in the audit reports of the auditor and facilitates assessors in deciding whether to consider KAM in their reports. Moreover, the current study also assists in gaining analytical understanding regarding different issues that orient around the collapse of the firm ABC Learning. In essence, the current segment carries out an extensive evaluation of the issues associated to the design of the novel accounting standard ASA 701 that deals with Communication of Significant Audit Matters in independent reports of auditors.
Evaluation of available reports on collapse of the corporation ABC Learning reflects the fact that the external auditors of the corporation that is the Pitcher Partners presented unqualified opinions ever since their appointment in the year 2003. Nonethless, after the appointed assessor left in the year 2007, new auditors Ernst & Young delivered a very different opinion as regards the profit figure of the corporation as previously mentioned by the administration of the business concern in the statements of accounts. Furthermore, the board of the firm also called another accounting firm KPMG as a third party assessor to settle the differences pointed by the two different auditors (Xu et al., 2013).
Extensive study of the functionalities of the business concern ABC Learning explicates the fact that ABC was introduced initially as a child care segment. Formerly, child care units in Australia used to be not for profit corporations that were supported by subsidies provided by the government. As such, in the year 1996, ABC administration operated nearly 18 child care units and succeeded to become a main player in the private child care sector in the nation. Ever so, during this period, the government of Australia decided to offer subsidies directly to all the families that subsequently created potential for higher growth rate. Subsequently, the business concern ABC apprehended the opportunity and decided to expand their operations by property acquirements in diverse prime locations and buying out day care centres with comparatively smaller childcare sections (William Jr et al., 2016). However, in the year 1999, ABC Corporation owned nearly 30 units. Thereafter, in the year 2001, the company got listed in the ASX (Australian Stock Exchange) that further provided the opportunity of acquirement of capital growth. Fundamentally, it can be said that the business concern attained exponential rate of growth after undergoing the procedure of listing, and the firm nearly doubled its entire functionalities. Basically, by the year 2005, the business concern ABC Learning acquired approximately 660 business units and started different overseas ventures in the year 2006. During the time, when ABC Learning was listed, MC market capitalization was recorded to be AUD 25 million. Subsequently, ABC turned to be pear shaped and was overwhelmed by reimbursement of debt and had to promote approximately 60% of US subsidiary together with diverse UK auxiliary sections. The company was lastly traded at A$0.54 and subsequently was delisted from the stock exchange. Primarily, the main criticisms were made as regards the model of the business, different accounting exercises, hostile acquisitions, capital expends, business leverage along with the weak operational cash flow (Simnett et al., 2016). In this regard, it can be hereby mentioned that all these can be regarded as the contributing factors that led to collapse of ABC Learning Centre.
Different issues of accounting and auditing can be recognized from the present case. Acquirements of the business concern ABC led to the acknowledgment of licences of firm’s operations of child care units together within goodwill. These two can be regarded as the intangible assets of the corporation recognized at the fair value in the statements of the firm. Examination of the financial assertions reflected the fact that the company’s goodwill escalated to nearly A $271 million and the licenses to around A$ 2.4 billion in the year 2007 and the year 2008. Nonetheless, impairment charges of these intangibles were about A $2 million for particularly goodwill and A$8.4 million for childcare licenses. In particular, it can be specified here that intangible resources of the firm become useless when a business concern runs into complexity (Nyland & Ng, 2016). According to Phillips Ross, who is the chief of the school of accounting of the University of Western Sydney, earnings and profits of the firm ABC escalated swiftly through acquisitions that again raised concerns regarding underlying valuation of assets that the firm obtained –mainly delivered around 70% of the intangible assets. Additionally, inherent risks associated to the asset valuation can be considered to be immense.
During the year 2006, anonymous criticism were raised and connected to the Australian Securities together with the Investment Commission as regards valuation of licenses of child care of the firm ABC. In addition to this, the complainant also asserted that majority of value created was established entirely on the cash flow (net) during the upcoming period (Marques et al., 2016). Essentially, this might or might not be comprehended and estimated that in between the years 2001 and 2005, the business concern ABC generated approximately A $390 million as profit by revaluation of licenses of the firm. In this case, it can be mentioned that failure of audit also added to the overall collapse of the corporation. However, the external auditor of the corporation ABC that is the Pitcher Partners delivered unqualified opinions to ABC since appointment of the auditor in the year 2003. Essentially, after the resignation of Pitcher Partners in the year 2007, the new auditors Ernst & Young delivered an entirely different viewpoint as regards the profits stated in company’s accounts (Louwers et al., 2015).
According to the reports declared by Sydney Morning Herald, the company appointed three diverse auditors among which two were the largest names in the business namely KPMG and Ernst & Young. These auditors assessed the account exercises of the corporation ABC Learning. However, the report mentioned that the auditor failed to identify the mistakes therein with two different materially diverse opinions delivered by two auditors of the corporation. Nevertheless, the outcomes of the study have not revealed publicly, while, the Grooves expressed it plainly that the auditor KPMG could not identify the faults. It can be hereby stated that three different audit firms counting among them two of the biggest names in auditing business assessed account exercises the account practices of the corporation ABC Learning. Even though KPMG failed to identify the faults within two different materially variant opinions presented by the two auditors, one of the auditing firms aptly detected the poor condition of the business (Knechel & Salterio, 2016). Additionally, the total firm’s liability remained rationally constant. However, during December 2007, nearly A $ 1.1 billion of borrowings was re-classified from particularly current to non-current liabilities due to re financing. In addition to this, ABC’s lenders also included different leading banks. Particularly during June 2007, the business concern ABC Learning made confirmations regarding syndicated multi-alternative capacity of bank for nearly A$1.48 billion of borrowings of the firm (Kinney Jr, 2015).
Analytical assessment of financial assertions of the firm ABC reveals that the firm ABC could generate sufficient flow of cash from operations in order to make interest payments, wages along with salaries together with dividend. However, although the profits of the corporation escalated progressively in the last few years, different cases can be cited where companies have failed on the backdrop of positive earnings and gains together with the negative flow of cash from operations (Junior et al., 2014). In addition to this, it came out that Grooves together with different other directors of the firm had ensures their shares to get money. As per analysis of the reports, it can be hereby mentioned that as the share prices augmented, they were forced to sell all the shares that is nearly equivalent to nearly 5.6% of the business concerns to gratify the whole margin call offered by the business concern. Furthermore, evaluation of the present business case on operations of corporation ABC Corporation reflects that compulsive selling of company’s shares had immense effect on prices of stock of the business concern. In addition to this, the study also assists in comprehending the fact that different kinds of collapses of businesses necessarily have certain similarities as well as dissimilarities (Gallagher, 2017). However, similarities from standpoint of different issues that directed towards the collapse of the corporation ABC can be regarded to be noteworthy.
The scope and reach of the auditing standard ASA 701 assists in the process of comprehending the base of development of the regulation. Nevertheless, comparison with different issues of auditing faced in the business concern ABC Learning also aids in gaining deep insight regarding the reason behind the design of the new accounting standard. Evaluation of the business case focussing on the operations of the firm ABC Learning reveals the fact that inappropriate communication by different partners of audit directed towards the collapse of the corporation. As rightly put forward by Eilifsen et al., (2013), the scope and purview of the accounting regulation ASA 701 aids in handling accountability of the auditor and this aids in appropriately communicating significant matters of audit in the reports presented by auditors.
Cohen & Simnett (2014) opines that the accounting regulation ASA 701 also enhances the overall communicative value of the declared assertions of the assessors. Subsequently, this can assist in delivering superior transparency regarding the assessment that was carried out. Clarke & Dean (2014) asserts that communication of specific significant audit matters in that way offers additional information to particular users. This information assists in the assessment of business concern together with diverse areas of significant commercial judgement in the reports of audit. Furthermore, the scope and purview of accounting regulation ASA 701 also describes in detail that the communication of key matters of audit in declarations of audit helps in developing opinion regarding financial assertions in general. Moreover, auditing standard can be implemented to different audit procedures. These procedures are followed for assessment of general purpose financial reports (GPFR) of different listed business concerns particularly at the time when the auditor decides to communicate different audit matters in the report. Therefore, it can be mentioned that the specific business study on ABC Learning also aids in understanding negative impacts of improper communication and ill impacts of diverse unqualified viewpoints (Clarke & Dean, 2014). The lessons learnt from the analysis of study on collapse of ABC Learning leads to the design and generation of the accounting regulation ASA 701 that subsequently can help in rectification of mistakes developed by improper communication.
There are several things that need to be revealed in the audit declarations to different members of the firm ABC Learning in case if novel auditing standard ASA 701 could have been applied before the crumple. Compliance to accounting regulation ASA 701 can help in the process of determination of significant matters of audit, especially those matters that required attention of the auditor in undertaking the assessment. According to the regulation stipulated under paragraph 9 under ASA 701, the accounting regulation takes into consideration different areas of superior amount of assessed risk of material misstatement else wise significant risk identified according to ASA 315 (Ball et al., 2015). Furthermore, (as per the paragraph A 23 to A 24) of this specific accounting regulation ASA 701, vital judgement of the auditor related to financial assertions that involved significant judgement of the administration counting accounting estimations can be recognized to have greater estimation uncertainty. In addition to this, impact of analysis of significant events or else business transactions that occurred during the stage is also considered according to the stipulations of the accounting regulation ASA 701 (mentioned in the paragraph A 25 to 26) (Arens et al., 2014). The auditor also has the requirement to determine different matters ascertained according to paragraph 9 of regulation ASA 701 that is important in the process of assessment of pecuniary assertions of the corporation and thereby significant audit matters (Arens et al., 2015).
In particular, evaluation of operations of ABC Learning reflects different issues related to inappropriate identification of material misstatements that directed towards inaccurate ascertainment of significant matters of audit. Therefore, adherence to accounting regulation ASA 701 can hereby aid in incorporation of important audit matters and also accurate communication of diverse professional judgements. As a consequence, this can aid the process of detection of material misstatement risk, inaccurate accounting estimations and apposite inclusion of significant events. Hence, the issues encountered by ABC Learning indicate towards the requirement for development of the accounting regulation (Arens et al., 2016).
The lessons learnt from the operations of the business of ABC Learning also replicate the requirement not only for the purpose of ascertainment of important matters of audit but also appropriate communication of qualified judgement. In this case, the unqualified opinion delivered by the assessors of ABC thereby replicates the necessity for both the design as well as development of the accounting regulation ASA 701. Referring to the regulation mentioned in paragraph 14 and 15, it can be mentioned that there are several key audit matters and professional judgement that is of utmost significance in the audit process of financial assertions (Arens et al., 2016).
Furthermore, ASA 705 also indicates towards the matters that lead to modified approximations or else material uncertainty related to different events else wise conditions. This might probably cast significant doubt on the overall potential of the business segments to continue operations as a going concern. However, these are not existent in the requirements of paragraph 13 to paragraph 14 of this particular auditing standard (Clarke & Dean, 2014). Therefore, audit reports on different matters can be presented according to Australian Auditing Standards and integrated as a reference to specific foundation for qualified viewpoints.
The above mentioned study reflects that the unqualified viewpoints by diverse accounting as well as auditing corporations can be challenged after collapse of ABC Learning. Additionally, this assists in comprehending specific failures of financial institutions during worldwide financial crisis that developed difficulties due to unqualified viewpoints of the accounting corporation. The current study also aids in understanding specific issues that led to the failure of firms and subsequent collapse of ABC Learning. Therefore, the lessons learnt from the provided cases of business helps in identifying the factors that led to the development of accounting regulation ASA 701.
Analytical evaluation of the case focussing on operations of ABC Learning reflects the significance for undertaking communication with particularly the ones charged with governance processes. Thus, administration of the entity might possibly have taken into account the requirement of the assessor to ascertain key matters of audit. Documentation of audit can be considered to be very important for determination of audit matters and communication of audit reports (according to para 15 of ASA 701).
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Clarke, F., & Dean, G. (2014). Corporate Collapse: Regulatory, Accounting and Ethical Failure. In Accounting and Regulation (pp. 9-29). Springer New York.
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Gallagher, A. (2017). Growing pains? Change in the New Zealand childcare market 2006–2016. New Zealand Geographer, 73(1), 15-24.
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Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.
Marques, R. P., Santos, H., & Santos, C. (2016). Evaluating Information Systems with Continuous Assurance Services. International Journal of Information Systems in the Service Sector (IJISSS), 8(3), 1-15.
Nyland, B., & Ng, J. (2016). International perspectives on early childhood curriculum changes in Singapore and Australia. European Early Childhood Education Research Journal, 24(3), 465-476.
Simnett, R., Carson, E., & Vanstraelen, A. (2016). International Archival Auditing and Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of Practice & Theory, 35(3), 1-32.
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Xu, Y., Carson, E., Fargher, N., & Jiang, L. (2013). Responses by Australian auditors to the global financial crisis. Accounting & Finance, 53(1), 301-338.
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