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Auditing Assignment Evaluating New Audit Standard of ASA 701

Question

Task: Auditing Assignment Task Details: The new auditing standard ASA701 Communicating Key Audit Matters in the independent Auditor’s Report is developed in the wake of the global financial crisis. This development is in response to calls from shareholders to know more about the companies they 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 (IAS 570) Going Concern.

Students are required to select an compare two industries in the Australia ASX Top 100 listed corporation and assess the “areas of higher assessed risk of material misstatement, or significant risks identifies in accordance with ASA 315”, significant auditor judgement relating to areas in the financial report that involved significant management judgement” as well as “the effect on the audit of significant events or transactions that occurred during the period” (Para 9 ASA 701). The summary report should include data extracted from the General-Purpose Financial Report relevant to the material analysed.

Answer

Introduction
It has been found from the last few years financial crisis is rising in various issues in the industry. The whole corporate sector was profoundly impacted, and the situation took a dreadful form. The financial crisis will also affect the company's accounts receivable and liquidity issues that affect the supply chain to consumers and businesses.For example, the case of Lehman Brothers saw a significant drop as it contained an inadvisable report. This led to an enormous rise to the new auditing standard ASA 701, which is informing the major audit case of the auditor's statement. The main objective is to give stockholders sufficient data about the firm in which they want to invest. In addition, a result of ASA 570 should include paragraphs of uncertainty (Gay and Simnett, 2018). ASA 570 considers a place of particular significance because shareholders are more concerned about the business that has one principle of concern and should be commented on by the auditor in the statement. Furthermore, it is because Audit reports are openly visible evidence of an audit. The current report will evaluate the new audit standard of ASA 701 and follows mining companies listed in the ASX.

Evolution of Auditing and its challenges
Auditing existed principally as a method for keeping accounting, and record-sense was the backbone. An audit is significant because it lends credibility to financial statements and assures stakeholders that the accounts are correct and authentic (Gay and Simnett, 2018). It can also help progress the business's internal controls and operations.The primary purpose of auditing is to seek expert judgment. The history of auditing is closely related to the history of accounting that rises from the division of accountability from principals to agents.In the absence of the business owners, management is hired to do its functions and maintain their finances, and keeping records. So it is because shareholders who have financed their funds would certainly be interested in knowing the company’s financial position. So, auditing needs to monitor their economic activities, both for accuracy and con prevention.

In addition, auditing is currently experiencing some new challenges, including computer competence, communication, presentation skills, and business morals. In this way, one such aspect includes costs affecting the recruitment, training, and retention of the firm's employees, which affects audit fees (Setiany et al, 2017). Further, it also contains insufficient staffing, lack of facilities to finish the audit function, inadequate funding, and so on.

Further, the auditor and management are equally responsible if a deceptive fraud is not ignored unless proven otherwise. A management nullification of internal controls may cause this. The auditor must set sideways all expectations and apply professional skepticism when conducting the audit report (Parker, 2019). Moreover, the suitability of journal entries will certify that there are fewchances of a crash. Any inappropriate or unusual activity should be marked. Therefore, retrospective review of auditor decisions and conventions connected to critical accounting estimates is significant.

ASA 701 related to the Lehman brothers’ case
ASA 701 contains significantactualities and figures that an accountant must take into account while sustaining a company's financial statement. The standard application will aid the companyin progress the superiority of financial reports but will also help enhance goodwill in the marketplace (Oussii and Boulila, 2018). However, suppose any firm doesn’t follow the principles of the standard. In that case, it can lead to many glitches such as misinformation, concealing facts and figures, and demolishing the restricted information due to the organization. It has been found that various flaws in accounting accounts were impacting the Lehman brothers' business prominently.

Following are the negligent recording of facts and matters of concern while enrolling the firm's financial statements:

  • The organization aimed to improve its business and make an enormous sum of Revenue from 2001 to 2008. In addition, there-established capital structure for large debt could help upsurge revenue-creating capacity (Traistaru, 2016).
  • The uniformity of the market made it difficult for the firm to perform the functions of mortgage deals and other investments.
  • The organization's management work was conceded, which required private financing, real estate, and other loans (Traistaru, 2016).

Reasoning Behind Changing Auditing Standards
The IAASB introduced the new auditing standard of ASA 701 to avert such activities and deliver transparency after the financial crisis. Major audit matters have a significant impact on the company's functioning (Cernusca and Balaciu, 2015). The standards were issued so that auditors and directors would focus on the case being presented to KAM and highlight matters that are important to auditors that would help maintain consistency in annual reports. The occurrence of ASA 701 will claim the firm's assurance to current growth and design audit reporting by the IAASB (Hay, Stewart and Botica, 2017). The standard will include various features such as.

  • Determination of how to find the auditor KAM
  • Scenarios in which matter involving KAM should be disclosed and included
  • Directing the use of KAM communication in the financial report.

For the purpose of the report, mining and energy sector of Australia has been selected and two companies from each industry are studied in the light of KAM. Secondly for the purpose of the report assessment has been done concerning the area of higher risk of material misstatement or risk that is in accordance with the provision of ASA 315.

Mining sector
Hawkstone Mining: In the area of exploitation of natural sources, Hawkstone Mining is on the edge of creating new opportunities. In relation to the valuation and exploration function, the business relies primarilyon capital raising and other operations such as debt instruments. The firm's directors play a critical role in determining the obtainability of adequate resources so that all debt instruments are simply repaid without any liability. Consequently, it may let the business counter all its responsibilities when they are accrued.

The company's concept of concern included the existence of a director's valuation of the business's cash flow requirements and projected expenditures for more than twelve months.

To bear the assessment expenditure and value of mineral exploration

In connection with mineral exploration and assessment expenses, Hawkstone Mining has incurred numerous prices for the Kangwane South Anthracite Project located in South Africa. Therefore, it is likely that the competence of the accounting facet with respect to valuation expenditures and capitalization of mineral examination is lost in a specific time period, and the capitalized amount may also exceed the value in use. In addition, the processes of an audit can also be explored depending on the nature of the industry. Such audit measures, principally for the mining industries, include estimates of the feasibility of the project and the comprehensiveness of aspects of losses in all capital expenditures over the period (Hawkstone mining, 2020).

Moreover, it also contains the valuation of the director in relation to the capitalization of mineral exploration and evaluation expenses, which helps check the impairment aspects for such capitalization expenditures. Therefore, all pointers of weakening can be easily identified by such measures.

BHP Billiton
A number of essential audit cases had a significant impact on the audit procedure performed by the auditors for the specified firm:

Asset valuation
The firm must be worth the assets properly to properly prepare the financial statement. Also, it would aid in detecting the occurrence of KAM in the financial reports if the assets are being evaluated correctly. In the case of BHP Billiton, the organization specified the presence of misuse of material present in the balance sheet in relation to the loss of value of the asset. A comprehensive analysis was being carried out by the firm to classifyseveral accidents, thereby ascerta

ining the actual loss values of the assets (BHP Billiton, 2020). The series of product prices was also done to determine the features by which accountants could evaluate the true value of support without any problems.

Taxation
It has been noticed that the company operates worldwide and therefore faces a wide variety of challenges while preparing taxation structures. The firm is also tangled in numerous types of cross-border deals, which has led to many variations in taxation guidelines. The organization should determine the provision of all taxes, expenditures, and reliant liabilities to be correctly disclosed in the financial reports and subsequently evaluated by the auditors (BHP Billiton, 2020). Auditors were persuaded to work with various tax experts to assess the actual value of taxes. Tax experts directed multiple tests to make the company's proper disclosures present in the balance sheet. Auditors faced many difficulties in determining taxation policies due to the trade being carried out in different nations.

Energy Sector KAM
AGL Energy
Unbilled Revenue

Unbilled Revenue disclosed by the company in Note 11 was $ 938 million. Unbilled Revenue was created as an outcome of electricity and gas provided to patrons for the period between the last invoice date and the reporting date. AGL did not make any bills to its customers on the reporting period’s completion (AGL energy, 2020). Unbilled Revenue estimates are calculated through the financial model, with appraisals and prices applicable to AGL consumers' gas and electricity consumption. Further, the estimation of customer consumption between the last meter reading and the end of the reporting period is essential so as to constrain unbilled Revenue concerning gas and electricity consumption at the reporting date, which is conceivable through proper management.

Unbilled distribution costs
Unbilled Distribution costs accrue $ 412 million as stated by the company (AGL energy, 2020). These costs were created as an outcome of energy consumption from the distributor to AGL for the period between the date of the last invoice and the completion of the reporting period for the fiscal year. Moreover, estimated distribution costs are determined based on a comprehensive financial model that evaluates AGL's consumers' energy consumption with applicable tariff rates of further distribution.

These financial instruments require significant decisions in valuation and accounting –

  • Understanding and implementing the rapports of the contract
  • Prediction of future energy values in the short and long term
  • Forecast upcoming emissions trading outcomes and values
  • Implementing discount rates

Financial instruments
Variations in overseas currencies, interest rates, and energy prices have a propensity to affect the monetary well-being of the business. Therefore, it has opted for financial instruments, including derivative financial instruments. As stated in Note 22, the company's derivative financial liabilities count as $ 615 million, of which $ 256 million was in non-current penalties, and the remaining were statistics for present liabilities (AGL energy, 2020). According to Note 13, the company's derivative financial assets were $ 640 million, of which the non-current assets were $ 384 million, and the number for the remaining current assets.

Ausnet Services Limited
Recognition of Revenue (AUD $ 1,909.8 billion)

The compound nature of the regulatory framework aims to determine the Revenue and spending that each CGU needs to attach and the trouble of auditing its subsequent assumptions for discounted cash flows for each CGU (Ausnet, 2020). Hence, the valuation of non-current assets is a critical audit matter. These assumptions are grounded on inflation, discount price, growth rate, and more.

Accounting for project-related expenditure (totaling AUD 702.6 billion)
The overall number of continuing projects, the trouble faced in defining whether a business'supcomingincomes are illustrated as connected to capital projects and the separation of operating and capital outlays, and the development of using and capital expenses. Further, better network maintenance is one of the reasons why project-related costs are considered a significant audit issue.

Valuation and accounting for derivatives (AUD 502.5million assets; AUD 270.7million liabilities)
Price and accounting for derivatives is a significant audit case -

  • The size and complexity of the firm's derivative portfolio
  • Fixed and floating rate loans in foreign currency and Australian dollars with hedging in cross-currency and interest rate, in particular, are denoted
  • Group management capital activities during the year, affecting derivative departments of the firm and forging new hedge associations (Ausnet, 2020)
  • The complexity and judgment are inherent in implementing accounting principles in the evaluation and revelation of derivatives and linked hedging actions.

Recommendation
Below is given some important recommendation for the company which will benefit in maintaining their financial records-

  • An audit report should be prepared after determining all major audit cases. The methods used for preparing financial statements should also be measured so that stockholders and other stakeholders can rely on the same to make relevant decisions.
  • Auditors should take efficient steps to ascertain whether a company’s financial position mirrors a realistic view.
  • The determination of communicating critical audit matters was to deliver greater transparency about the audit. Hence, ASA 701 should be implemented in the audit report.

Conclusions
The above report has concluded that the financial crisis has raised numerous fields in the market. The entire corporate sector was affected by the economic crisis. In this report, the new standard named; ASA 701 is deeply described. The amalgamation of ASA 701 into auditing standards plays a significant role in certifying proper defense of the welfares of all investors and other shareholders. In addition, such a standard helps in issuing major audit cases in the firm's financial affairs, allowing operators to count on them to make operative decisions.

It is the accountability of the auditor to plot and perform the audit to get sensible assurance about the balance sheet without any misstatements. Therefore, the application of ASA 701 will be very generous while preparing the firm's accounts as it will maintain transparency and help in carrying out the audit process very quickly. Moreover, the prime focus of the standard should be to deliver appropriate disclosure of dealings in accounting reports to avert recent scandals in the corporate world. This standard also applies in circumstances where legislation or regulation needs communication of significant audit matters in audit information. ?

References
AGL energy., 2020. AGL energy 2020 annual report & accounts. Available at: https://www.agl.com.au/-/media/aglmedia/documents/about-agl/investors/annual-reports/agl_annual_report_090819.pdf?la=en&hash=2890C67A39531E9197467BBC1F87B463 [Accessed 11 May 2021]

Anderson, A.W., 2010. A practical approach to understanding audit risk, Account-Ability Plus, [online] Available at: [Accessed 11 May 2021] Ausnet., 2020. Ausnet energy 2020 annual report & accounts. Available at: https://www.agl.com.au/about-agl/media-centre/asx-and-media-releases/2020/august/appendix-4e-and-2020-annual-report [Accessed 11 May 2021]

BHP Billiton., 2020. BHP Billiton 2020 annual report & accounts. Available at: https://www.bhp.com/investor-centre/annual-report-2020/ [Accessed 11 May 2021] Cernusca, L. and Balaciu, D.E., 2015, The Perception of the Accounting Students on the Image of the Accountant and the Accounting Profession. Journal of Economics and Business Research, 21(1), 7-24.

Gay, G. and Simnett, R., 2018. Auditing and Assurance Service in Australia, McGraw-Hill Education (Australia)

Hawkstonemining., 2020. Hawkstone 2020 annual report & accounts. Available at: https://sec.report/otc/financial-report/277084 [Accessed 11 May 2021] Hay, D., Stewart, J. and Botica R, N. (2017). The role of auditing in corporate governance in aAustralia and New zealand: a research synthesis. Australian Accounting Review, 27(4), 457–479.

Oussii, A.A. and Boulila., T.N. 2018, Audit committee effectiveness and financial reporting timeliness, African Journal of Economic and Management Studies, vol. 9, no. 1, pp. 34-55.

Parker, D., 2019.Seeing audit quality in Australia in a new light. Available at: [Accessed 11 May 2021]

Setiany, E., Hartoko, S., Suhardjanto, D. and Honggowati, S., 2017. Audit Committee Characteristics and Voluntary Financial Disclosure, Review of Integrative Business and Economics Research, vol. 6, no. 3, pp. 239-253.

Traistaru, D.A., 2016. Perceptions concerning professional judgement and ethics in the evolution of the accounting profession.European Journal of Business and Social Sciences, 4(10), pp.126-135.

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