Question

You work in a chartered accounting firm and your partner, Sally Smith, has asked you to do some research and write a report to update her about the potential liability that auditors face as a result of the global financial crisis. The issue arose when a neighbour mentioned to Sally at the weekend that a global accounting firm has had a class action lodged against it over the collapse of Lehman Brothers. In your report talk about ASA701 Key Audit Matters and how this has changed the way auditors report.

Using the reference materials available on the internet, research the topic and prepare a report for Sally, fully referenced up to 500 words.

Answer 1

The AUASB issues Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report pursuant to the requirements of the legislative provisions and the Strategic Direction explained below.

The AUASB is an independent statutory committee of the Australian Government established under Section 227A of the Australian Securities and Investments Commission Act 2001, as amended (ASIC Act). Under Section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislative Instruments Act 2003.

Key Audit Matters (KAM) are defined as “those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.”

The main features of this new standard include:

(a) Mandating the communication of KAM in the auditor’s reports of audits of listed entities;

(b) Enabling auditors of other entities to decides whether to include KAM in their auditor’s reports;

(c) How the auditor determines KAM: (i) Determining from the matters communicated with those charged with governance, those matters that required significant auditor attention; (ii) Taking into account areas of higher assessed risk, significant auditor judgements, involving significant management judgements and the effects of significant events or transactions; and (iii) Determining the most significant matters for inclusion in the auditor’s report;

(d) How the auditor is to describe individual KAM;

(e) Circumstances in which a matter determined to be a KAM is not communicated in the auditor’s report; and

(f) The audit documentation requirements relatingh to KAM.

Scope

(1.) This Auditing Standard deals with the auditor’s responsibility to communicate key audit matters in the auditor’s report. It is intended to address both the auditor’s judgement as to what to communicate in the auditor’s report and the form and content of such communication.

(2.) The purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed. Communicating key audit matters provides additional information to intended users of the financial report (“intended users”) to assist them in understanding those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial report of the current period. Communicating key audit matters may also assist intended users in understanding the entity and areas of significant management judgement in the audited financial report. (Ref: Para. A1–A4)

(3.) The communication of key audit matters in the auditor’s report may also provide intended users a basis to further engage with management and those charged with governance about certain matters relating to the entity, the audited financial report, or the audit that was performed.

(4.) Communicating key audit matters in the auditor’s report is in the context of the auditor having formed an opinion on the financial report as a whole. Communicating key audit matters in the auditor’s report is not:

(a) A substitute for disclosures in the financial report that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation;

(b) A substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with ASA 705;

(c) A substitute for reporting in accordance with ASA 5702 when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern; or

(d) A separate opinion on individual matters. (Ref: Para. A5–A8)

(5.) This Auditing Standard applies to audits of general purpose financial reports of listed entities and circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report. This Auditing Standard also applies when the auditor is required by law or regulation to communicate key audit matters in the auditor’s report.3 However, ASA 705 prohibits the auditor from communicating key audit matters when the auditor disclaims an opinion on the financial report, unless such reporting is required by law or regulation.

The objectives of the auditor is to determine key audit matters and, having formed an opinion on the financial report, communicate those matters by describing them in the auditor’s report.

The auditors have stated some of the key audit matters which they believe had the greatest effect on the audit conducted by them:

The below table shows the points in which it effect the Audiotos Report:-

S.No.
1.	Asset Valuation
2.	Taxation
3.	Samarco
4.	Rehabilitation prohibitions and closures

• ASSET VALUATION

They valued the assets and this was done as this constituted to about 72% of the assets of the Group. Even the Group reported of having some kind of material weaknesses in relation to the processes and the controls involved in the impairment of the assets (Bhp.com, 2018). This also increased the focus of threadworms on such valuation. They did this by following a detailed process in which they tested the key controls in the valuation of the assets, evaluated the commodity prices which could be forecasted, exalted the objectivity and competency of the experts and considered many other factors which affected the valuation of the assets of the company.

• TAXATION

This is another key audit matter as the company has its operations in many parts of the world which have different tax structures. Then the company also engages in doing cross border sales. So the auditors were cautious in relation to the estimation of the associated provision of tax, expenses and the contingent liabilities. They used procedures like tested key controls, worked with tax specialists of the countries in which the company had its major operations. They also tried to study the consistency among different countries and assesses that whether Group has made significant discourses to the interest of the investors.

• SAMARCO

BHP Billiton has reported losses due to failure of dam project in the company. So many accounting judgement actions of the company needed to be judged which included the determination of the legal status of claims, legal obligation of BHP Billiton, contingent liabilities disclosures and many more. There was high degree of uncertainty involved in this case so this became part of key audit matter the company. They followed a comprehensive policy to check about all the things which went in this Samarco case. They assessed the key assumptions which were made by the company, checked the completeness of the disclosures made by both the companies in the process. They after the process found out that level of disclosures and the provision to be acceptable.

• REHABILITATION PROVISIONS AND CLOSURES

The Group is also involved in the restoring, rehabilitation and closing the sites. As the volume of such transaction was very high and this was expected to have huge effect on the result of the company so this needed to be considered as a key audit matter as this is bound to affect the future cash flows of the company. They worked with specialists to ascertain about the life of the reserves and mines and assessed the work of the specialists of mine closures to assess the likely and timing cost. They even checked the time value of money and foreign exchange rates for checking the effects and after this they found that the rehabilitation provisioning was acceptable.