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ACC707 Discussion on a Bankruptcy Case: Key Audit Matter According to ASA 701 Assessment 2 Answer

ACC707

Task Details: Students will be expected to answer short and/or long answer questions applying the subject theory and models to given situations, analysing the issues, identifying the problems and developing supported solutions/recommendations.

Assessment 2 

Assessment Type: Auditing case study — 2500 + 10% word report - individual assessment. 

Purpose: To allow students to demonstrate their ability to research, critically analyse trends and issues in auditing and assurance services, identifying problems as would arise in a modern organisation. This assessment relates to learning outcomes a, b and c. Value: 30, 

Submission: Upload soft copy of Word .doc or .docx to Turnitin and Moodie via KOI's Moodie subject homepage. Topic: Research, critically analyse and evaluate key audit matters in independent auditor's report Auditor's report

The new auditing standard ASA 701 communkating key audit matters in the Mdependent auditor's report was developed in the wake of the global financial crisis (note: following the demise of Lehman Brothers shortly after it received an unqualified audit report, ire. no prior warning of its demise). This development is in response to calls from shareholders to know more about the companies they invest in (students would need to explain what happened in Lehman Brothers which would evidently be a key audit matter if such an auditing standard had existed then). 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 concm (to include a going concern uncertainty paragraph. Note: during the global financial crisis there was an increase in emphasis of matter paragraph mainly relating to going concern uncertainty now replaced by a "material uncertainty related to going concern" paragraph).

Required: Students are required to research into the rationale for the new auditing standard ASA 701 and explain clearly what it is. Each student is to 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 so as to evaluate the efficiency of reporting key audit matters in the independent auditor's report (i.e. does key audit matters disclosure provide more information to users).

The report is to be fully referenced (including the annual reports of companies selected for your assignment) and up to 2,500 words (assignment in excess of 2,500 words will be penalised 10% of the marks). Them should be a minimum of 8 academic references.

The report should include title page, executive summary, table of contents, appropriate headings and sub headings, recommendations, reference list (Harvard- Anglia style), attachments if relevant, single spaced, font Times New Roman 12pt.

The marking guide will be as follows: Research — extent and application 30, Analysis Recommendations/conclusions 30, 30./0 Presentation 10,

Answer

Audit and assurance

 Executive summary 

This report brings out an examination of key audit matters that have to be reported according to the newly introduced ASA 701 which intends to communicate regarding the key audit matters in independent auditor`s report in relation to the top 100 ASX organisation. These accounting standards were formed during the global crisis. In addition to this, the report is about the collapse of an international reputed organisation the “Lehman brothers.” Financial crisis lead to review of new accounting standards (Auditing and Assurance Standards Board, 2013). This report reveals the key understanding on the compliance of company to meet the accounting standards and keeping the transparency in the books of account. 

Introduction

This report brings out a discussion on a bankruptcy case, which is filed by the Lehman Brothers in US. This scandal was shocking as it was one of the biggest investment bank of that time. The action of scandal was due to inadequate complying of the procedure of auditing. This report will discuss the rationale that lead to the development of accounting standards during financial crisis. While filing this case of bankruptcy liquation occurred on September 15th. The collapse of the company includes the economic breakdown in 1930 when the conditions started getting worse. The report will be surrounded by economic crisis in 2008 and the collapse of the Lehman Brothers. These situations are evaluated on the basis of accounting standards (Manoel, & Quel, 2017). This has introduced ASA 701 for communicating the key audit standards and matters in the auditor’s report and the ASA 570 viable for going concern. According to AUASB (auditing and assurance standards board). 701 ASA is used to establish several regulations which directly pertain to auditing and communicating the crucial audit matters in the auditor`s report. The main feature of AASB standard is to check the authenticity of the key auditing matters of listed ASX (Zéman, & Lentner, 2018)

Apart from this, ASA for going concern deals with accountability and authority of auditors in order to obtain the appropriate proof of the audit in regards to pertain to the going concern and at the same time, it is important to see the effect of the auditors. It is the obligation of the auditors so that it can obtain appropriate proof of the audit in regards to use of the basic concept by the management while preparing the financial statements of the organisation. This report examines the rationale while considering both the standards in relation to ASX 100 companies, which are among the large mining companies at the international level. It will examine the efficiency of reporting so that auditing matters are measured (Zéman, & Lentner, 2018).       

Research and application 

It is considered that ASA 701 reports and communicates the key audit matters in the Auditor`s report which make sure that the review of financial statements of the organisation are properly examined. In addition to this, ASA 570 indicates the concept of going concern, which was introduced so that it can deal with the audit of the financial position and ensuring whether it is complying with the going concern implications in the report. This content will analyse the application of two accounting standards such as ASA 570 and ASA 701 in relation to 100 top mining organisations.  It is important to understand that there is a relation between Lehman relations and the accounting standards, who are drawn by the collapse of the organisation in 2008. With the breakdown and following economic crisis, ASA 701 includes communication of the key audit matters in the Auditor’s report. This standard addressed those key matters, which were not addressed before during the collapse of the Lehman brothers. Therefore, some of the loopholes that had created the inadequate auditing will be addressed. This lead to the emergence of ASA 701. This auditing standard applied to all the financial reporting in the period ending till 15 December. 

In relation to the mining sector, key audit matters of the Newcrest Mining Corporation comprises of the recognition of high-risk area. High-risk matters should be disclosed by the auditors in the independent auditor`s report. According to the annual report of the Alumina limited where the audit key matters are to be considered with this standard, which is a significant transactions and the dealing of the organisation. There is a scope of significant judgement, which will be communicated in order to provide assistance for all the accounting estimates that finally pertain to these organisations. It is quite visible in regards to the functioning of AASB standards that is used to record the data while relating it to the fiscal deposits and other main details of the BHP Billiton group (Newcrest Mining Limited, 2018).

The management tries to report to the auditors directly and at the earliest. ASA 701 shows a positive initiative for all stakeholders especially for those who look for the financial reports of the organisation while evaluating the current profitability position of the organisation. It will help the stakeholders in taking the decision in order to take into consideration the investment decision for the company. Lehman Brothers will have to save ASA 701, which existed and was applied at that time. According to ASA 701, the main figures and data regarding the situations of the organisation that can be exposed (Read, & Yezegel, 2018)

Lack of presence of ASA 701 cause collapse of the Lehman Brothers. The case disclosed that there was no communication and suppression level of the crucial facts, which was not less than the financial worth of the organization. Dodges have led to severe failure and the collapse of the organisation completely. It has become the obligation of the auditors to pay proper attention to the main issues of the blue steel limited, as these matter uses to help them in filing the financial statements (Pries, & Scott, 2018)

Analyzing the  pre and post key audit matters and also the concept of going concern in 100 listed ASX organization

Company nameKey audit matterPre key audit matter Post Key audit matter 
Fortescue metal group limited 
Carrying value of the assets  and its disclosure requirementAs far as Fortescue metal group limited has been considered, the efficiency of all the reporting key audit matters in the reports of the auditor has to be evaluated. It gives answer to the question where the audit matters disclosure assist them to provide reliable information to the users. The main aim of the communicating the key audit matters is to increase the unrestrained worth of the report of the auditors (KPMG, 2018). 
This will lead to greater transparency with the help of audit and also promoting the communicative value of the auditor`s report which will lead to maintaining the transparency about the KAMs. Further, ASA 701 motivates the transparency by elaborating why these matters are important (International Federation of Accountants, 2019a). 
lluka resources Company
Material misstatement in hedge funding It is evident from the independent reports of the lluka resources where the auditors are encouraged to proclaim the specific aspects of the organisation. There can be such situations that can be affected by the critical judgement driven out from the financial statements of the current period.In the post key audit matter, The auditors can avail an indication of the outcomes of the procedures of the auditing complying with the main observations concerning to the matter (International Federation of Accountants, 2019b). While determining the key audit matters in the Incitec Pivot where the auditors take consideration the highly assessed risk, which pertains to material misstatements. Apart from this, significant judgement of the auditors which pertain to areas in financial statements which must include crucial judgements of the management (Silviu, & Timea, 2015)
Orica Limited 
Unbilled revenues and invoices Orica Limited has also needs to assess audit matters disclosure which is required to be made by the auditors of the company to its stakeholders. However, auditors of the Orica company works under the fiduciary position to the stakeholders and assist them to provide reliable information to the users. All the unbilled orders are assessed by the auditros as per the AASB rules and regulation.In the post key audit matter, due to the high risk in the books of account of company, auditors of company has considered high-risk matters and the same have been disclosed by the auditors in the independent auditor`s report of company.
Incitec Pivot Company
Recording of the financial instrumentsIncitec Pivot has also complied with the applicable laws and regulation of the AASB 701 accounting and audit standards and set up strong internal control system in its business process. However, the undertaken audit program leads to greater transparency with the help of audit and also promoting the communicative value of the auditor`s report in the books of account of company
In the post key audit matter, It also lead to maintaining the transparency about the KAMs. Further, ASA 701 also strengthen the transparency in the books of account of company. There is a sustainable doubt whether the company is not able to meet the financial obligations where it has become within the issuance of the financial statements. Apart from this, the company is obliged to miss the payment regarding its debt services in the next coming years as far as the sustainable doubt has been created (Zheng, & Mirshekary, 2015).
. OZ minerals Company
Recoverable amount of recorded minerals and machines
The elaboration of every KAM in the reporting of the auditors have a reference that is associated with the disclosure in the final statements. It will address the reasons behind the consideration of its importance in the audit along with the manner so that the KAMs can be addressed (Fülöp, & Pintea, 2014). The main example of KAMs in the OZ minerals includes main transactions that are related to the parties and the response of auditors towards it. There is an assessment of greater risk in the transactions by the auditors. The management as well the auditors often face difficulty in the judgements, which are related to identification, finding, disclosure, presentation and the valuation of the transactions (Fülöp, & Pintea, 2014). 
However, in the post key audit matter, the mining companies indulged in this industries needs to align their domestic and international reporting frameworks if they want to make the true and fair view of its recorded books of accounts to its stakeholders.  However, auditors of the all the listed companies works in the fiduciary position and helps company to comply with the accounting standards and lower down the discrepancies found in the financial statement of company. It includes accounting estimates, which is identified as it have greater uncertainty with the influence occurring on audit of the important transaction and the events in the particular period (Fülöp, & Pintea, 2014 )


Recommendation 

It is completely the auditor’s responsibility to signify the actual condition of organisation with the help of its financial reports considering autonomous auditor report of RIO Tinto Limited. One of the main objectives of auditor is to make benefit the stakeholders from all perspectives (Auditing and Assurance Standards Board, 2015b). This will help them to attain necessary understanding so as to make their investment plan accordingly, however, it is necessary for the auditor to work in relation to set standards in auditing. For instance, in the breakdown of Lehman Brothers, the role of auditors was significant. Therefore, it is the accountability of the auditor to inform the organisation management about the firm capability to sustain as a going concern (Auditing and Assurance Standards Board, 2015a). It is used to strengthen the audit reporting program and also reduce the audit risk such as inherent, detention and control risk associated with the audit model of the auditors. 

Considering the autonomous auditor report of South32 limited that they are required to share main audit information and measure their influence on the firm competency to release its liabilities and realize the assets in the continuous progress of corporate (South 32, 2018). Therefore, Lehman Brother's downfall implies the requirement of strict standards and compliances. The guidelines and standards stated in ‘AS 701 Collaborating Key of Audit Matter in the Auditor Report’ and ‘ASA 570 Going Concern’ states the requirement of strong risk controlling practices and tactics in these mining establishments (Auditing and Assurance Standards Board, 2015a). This helps in strengthening the transparency of the company in its books of account. 

Conclusion

In last, necessary resources needs to be provided to the regulatory bodies and auditors to encourage efficient monitoring and management of the financial practices of the organisation. There is also a need to be proper coordination between the management and regulations of preparation and it need be ensure by the auditors. With regards to this, written signs and exemplifications must be gathered by the auditors in association with the managerial plans considering the future practices of the firm. All these must be in association with the plans feasibility and standard valuation. This will help in the completion of plan effectively and efficiently. In the end, it could be inferred that if company meet the ASA 70 in its reporting compliance then it will help company to strengthen its going concern capacity and also assist in strengthen the overall outcomes in effective manner. The crux of this report is that all the listed companies in the mining sector needs to strengthen the legal compliance program by complying with the AS 701 in its books of account. However, it is found that cause collapse of the Lehman Brothers disclosed that there was no communication and suppression level of the crucial facts company should keep its financial information properly disclosed to tis stakeholders if it wants to sustain in long run.

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