Industry Detail and Its Nature

As the title recommends the current report orients around evaluation of the newly developed auditing standard that is to say, communicating key audit matters in particularly independent assessors’ report. The current report explains in detail regarding the auditing rule ASA 701 that proposes about regulations as regards communication of various key audit matters principally in independent announcements of the assessors. The auditing directive under consideration is the ASA 701 that specifies about “Communicating Key Audit Matters” in the Independent Audit Report is primarily designed at the setting of international financial crisis.

The current study takes into account operations of firms operating in the retail segment. The firms include Wesfarmers, Woolworths, Jb hifi, Bapcor ltd, Speciality fashion group, Webjet ltd, Whitehawk, Myer holding ltd, OROTONGROUP LIMITED and TEMPLE & WEBSTER GROUP LTD.

Background

The present section accomplishes elaborate analysis of financial crisis and the associated liability of the evaluators. The period of different monetary instability can necessarily aid in understanding varied notions associated to crisis. Fundamentally, there is manifestation of different challenges specifically from economic, political together with social environment. Alzeban and Sawan (2015) suggests that worldwide economic crisis talks about tension, disorder together with critical assessment that necessarily gets manifested in the entire community. Therefore, financial crisis discusses about demonstration of diverse financial crisis that again replicates distrusts in financial framework, considerable decline in dealings of stock exchange along with disorders of the market transactions.

The government as well as transnational institutions that operate in the retail segment of Australia include Wesfarmers, Woolworths,  Jb hifi,  Bapcor ltd, Speciality fashion group, Webjet ltd, Whitehawk, Myer holding ltd, Orotongroup Limited And Temple & Webster Group Ltd. These firms endeavour to overcome adverse influence of worldwide crisis by carrying out the mechanism of financial restructuring.  Directives stipulated under the rule ASA 701 mentions about auditing standard that necessarily talks about different requirements and present applications, different explanatory materials concerning communication of key matters of audit prepared as well as presented by evaluators in their independent report.

ASA 701 is a specific auditing standard that can be employed for entire procedure of assessment of financial announcement of the firm Woolworths limited for the specified time period. Financial statements of the firms take into replicates exhaustive set of pecuniary announcements that employ ASA 701. Financial statements of these firms consider monetary reporting of business entities on and after the period of December 15 of the year 2016.

Essentially, this specified directive can aid auditors in handling different responsibilities of the auditors of the firms to properly convey key audit matters. In a bid to undertake the procedure, assessors can take into consideration a variety of areas of material misstatement in the financial statements of the firms. Risks are detected in the financial announcements of the retail firms are as per regulation stipulated under ASA 315 (indicating towards paragraph A19-A22).

Intrinsically, this mechanism of ascertainment also contains extensive judgement and decision of auditors in specific areas that include administrator’s judgement, including different approximations of accounting detected as high approximation uncertainty. Influence of audit of various important events or else business transactions occurred during particular period of time. In essence, the assessor also has the necessity to determine specific matters that were mentioned as per paragraph 9 of auditing standard in the evaluation report of the financial assertion of current period. Therefore, this can be referred to as the key audit matters as presented in the paragraph A19 to A 11 as well as A 27 to A30).

ASA 701 – AN ANALYSIS Causes

Financial statement of retailing corporations indicate towards consolidated and individual financial assertions on an annual basis that are presented according to International Financial Reporting Standards (also referred to as IFRS), regulations of International Accounting Standards Board (indicated as IASB). Also, financial assertions are stated by Financial Reporting Standards Council, as per different necessities under Companies Act of mainly South Africa, South African Institute of Chartered Accountants also simply indicated as SAICA, requirements of the Companies Act mentioned under South Africa along with JSE Limited Listing Rules.

In particular, these are essentially the matters that can aid financiers on observing maintenance of adherence to rules as regards financial arrangement, auditing as well as assurance. For example, the annual report of Temple & Webster Group reflects the audit as per Australian Auditing Standards.

The financial reports of the firms are presented as per Corporations Act of the year 2001. The standards are illustrated in the Auditor’s Responsibilities for the Audit of the financial report. The yearly report of firms presents key audit matters that were of considerable importance in audit report of the current year.

The key audit matters that are disclosed in the annual report include the following:

• Assessment of going concern: Audit procedures of the chosen firms analysed suppositions presented in the budget and forecasts presented in the cash flow validated by the board. The corporation considered historical accurateness of cash flow forecasting and takes into account influence of a wide range of different sensitivities to the model of cash flow to evaluate breakeven position (Messier Jr 2014). The selected companies taken into account evaluated overall consistency of the suppositions counted in the going concern model of cash flow with assertions associated to upcoming plans as well as commitments contained in the yearly report.
• Corporations taken into consideration assessed consistency of forecasts utilized by the entire group in specifically the going concerns model of cash flow with assertions associated to upcoming plans as well as commitments contained in the information presented in the yearly assertions (Hay 2015). The assessors of these selected firms also reviewed overall consistency of the forecasts utilized by the entire group in the going concern forecast and in the impairment testing models and evaluated adequacy of going concern disclosures.

Impairment of particularly goodwill and other intangible assets: Audit procedures

Audit procedures of the selected firms operating in the retail segment of Australia included assessment of impairment of goodwill as well as other intangible assets as a key audit matter. The entire selected set of firms operating in the retailing segment evaluated whether the methodology utilized by the group satisfied the necessities of Australian Accounting Standard (referring to AASB 136 for Impairment of Assets), counting appropriateness of identified cash generating unit (CGU) (Trotman et al. 2015). The auditors also examined whether the models utilized were mathematically fitting.

The auditors of the firms also consider processes of valuations that specialists carry out for assisting in the work carried out. Again, the auditors also analysed consistency of the forecasts utilized by the entire group in the going concern cash flow forecasts and in the testing models for impairment testing. The company analysed the adequacy of overall disclosures counted in financial reports with respect to carrying value of intangible assets as well as impairment testing.

-Revenue Recognition: Analysis of financial statements reveals the fact that revenue transactions was registered appropriately in appropriate period counting examination of whether the sales dealings were counted as deferred revenue. Audit processes consist of sample revenue transactions during the specified period of time (Hay et al. 2014). The auditors examined whether revenue was registered in the appropriate period counting testing whether sale transactions were counted as deferred revenue. The auditors examined whether revenue recognition are implemented to the terms as well as conditions of the sale was according to Australian Accounting Standard (also referred to as AASB 118 for revenue) (Wong and Millington 2014). The auditors take into consideration adequacy of particularly revenue recognition strategy disclosures contained in note.

Research on accounting strategies as well as policies:

The yearly report of retailing corporations elaborately illustrate about accounting policies that in turn can be utilized by financiers for understanding financial condition of the business. As mentioned in the annual report of the firm, the basis of preparation of consolidated along with individual statements is the usage of historical cost along with bases of going concern. Therefore, this can help in gaining insight regarding different modified opinion according to rules of ASA 570 and material uncertainty linked to incidents/circumstances that might possibly cast doubt on potential of the business concern to continue operations as a going concern according to rules mentioned in ASA 570. Thus, this can be referred to as “key audit matters” as this requires proper communication in the statement of the auditor. This can assist them in comprehending potential of the corporation to operate as a going concern.

Analysis of Annual Report

Evaluation of financial announcement of selected corporations

Report prepared and presented by auditors of the business concerns per the viewpoints of the assessors, both consolidated and individual financial pronouncements necessarily reflects fair view.

Significance of assessment of audit risk

The causes behind issuance of auditing standard ASA 315 by particularly Auditing and Assurance Standards Board (also referred to as AUASB) is to help in identifying and evaluating risks associated to material misstatements. This is undertaken by appropriate comprehension of particular business entity and environment of the business. As mentioned in the regulation stipulated under ASA 315, assessors of the firms have the necessity to comprehend risks of business that necessarily points out towards risk ensuing from significant conditions, specific incidents, circumstances, operational inactions that can unfavourably influence potential of the entity to achieve objectives and employ strategies.

In essence, it is vital to analyse associated risks of procedures of audit for gaining distinct understanding of the reporting entity together with the environment, including internal control. This can help in identifying and evaluating risks linked to material misstatement stemming from fraudulent actions, scams or errors (deliberate or else accidental) at the financial account of the firm.

The process in which it can be linked with the financial statement of the chosen Companies under the ASX limited

                        As the regulations stipulated by the ASA 315 (As Referred to Paragraph A 105 – A108) it has been identified about the assessment and identification of the risk of material misstatement in the levels of financial report. This is collaborated with the material risk misstatement also at the assertion level for diverse transaction classes, balances of account and the disclosures of the corporation to deliver a foundation for primarily performing and designing the processes of audit (Titman, Keown and Martin 2017). The auditor can make the analysis, detect the risks, and find out whether they associate more to financial report.

 The importance of business risk in the Audit Plan

In terms of accounting scandals at present the accountability and role of the auditor can be examined. In the chosen retail companies, the auditors must have a sound knowledge of the organisation on the basis of risks together with exposures of the company makes them ignore the impacts of aggressive accounting practice. Most importantly, in the context of the type of collapses that acceptance of top down approach can be stressed in which the auditor advances to gain knowledge of the business organisation, environment of the business in which the firm operates, important business risks and the way this kind of risks translate into risks of audit.

Processes that can be performed by an assessor in order to analyse the risk

The mechanisms that can be followed by an assessor in order to make the risk assessment involves the following steps:

• To Identify the business risks related to  the financial reporting objectives of the business
• Risks importance approximation
• Evaluation of the overall occurrence possibility
• Decision regarding the activities to address the risks identified

According to AUS A24.1 of ASA 315, governance arrangement and ownership must be present. The ones charged with liabilities of governance and the board of directors can make the determination of the risk level ascertainment policies. Implementation and monitoring of the effectual risk management systems can be designed by the senior management in order to execute the policies as recommended by the board of directors. In addition to it, the non-executive directors present on the board as well as independent compensation commission can review the discretionary bonuses diverse incentive plans, counting commissions, profit sharing service and contracts of directors (Jones et al. 2017). Specifically internal audit operation and audit committee and their role can enable in the independent appraisal function.  

Concerned Risks

Significant rise of internal control to a specific organisation and to the independent auditors

The auditor can obtain knowledge regarding  the relevant industry divisions, regulatory and other external surfaces with the framework financial reporting which are applicable as per the (Ref: paragraph A 36 to A41). The auditor can also acquire a comprehensive understanding as regarded to the internal control related to the audit process. Although majority of the controls applicable to the process of audit can probably be related to the financial reporting process.

However, all controls types that relate to financial reporting are not applicable to audit. Basically, as per the regulation as stipulated as per (ASA 315, ref paragraph, A42 to A65), this is a matter of professional judgement of the auditor whether a specific control, singly or in combination with different others is related to the process of audit (Green, Taylor and Wu 2017). Primarily, the auditor can may comprehend the environment control by obtaining a proper knowledge by evaluating whether administration with the oversight of the ones charged with governance has maintained and generated an environment of ethical behaviour and honesty.

Material misstatement risk:

Material misstatement risk can be referred to as risk that corporations the financial assertions of a have been stated inappropriately to a certain material degree. However, the risk can be assessed by the auditors at two different levels that includes control risk and inherent risk at the assertion level. According to Knechel and Salterio (2016), the inherent risk is the of company’s weakness of the financial misstatement statement owing to fault or else fraud before considering the diverse controls. Similarly, the control risk can be considered as the material misstatement risk that cannot be evaded or else identified by internal control of a particular reporting concern (Lisic et al.2016).

Standard of Auditing must comply with the International Standard on Auditing Standard ISA 260 that includes the need for the communication of the ones charged with the governance practices issued by the Assurance Standards Board and the International Auditing. As specified by Gay and Simnett (2014), the board is entirely responsible for the mechanism of the internal control for the entire group. It is vital to declare the result of the risk management practices, along with the actions of the autonomous provider of assurance. This helps in the process of financial control and can be considered to be vital audit matters.

The chosen ASX based companies’ annual report represents the fact that the directors have audited the group’s budget and prediction of cash flow during 2017 and insurance arrangements details of the whole group (Arens, et al., 2016). However, on the basis of the review and the present financial condition backdrop and along with the current borrowing facilities, directors of the organisation stay satisfied that the particular group is an appropriate going concern and have sustained to presuppose going concern based on the course of preparation and presentation of the Annual Financial Statements. This communication technique of key audit matters therefore helps the management to come at appropriate preparation and judgements as well financial statements preparation (Leung et al.2014).

Events Having Impact on Audit

Going concern Considerations

As per the directions of the  Auditing Standard ASA 570  that indicates towards going concern, there is requirement for the mentioning procedure for assessment of risk and the activities that are related, assessment of the administration, phase beyond management assessment, processes for supplementary inspection during detections of  when events  and the conditions (Knechel and Salterio 2016). The requirement of the standard ASA 570 also includes communication with the ones charged with accountabilities of governance.

However, analysis of financial assertion of the firms shows that the fact that group treasury committee was established in the firm that necessarily can oversee specific treasury actions of the entire group (Alzeban and Sawan 2015). This group was responsible to make it certain that there is appropriate governance of diverse significant function/operation. The audit committee delivers diverse oversight duties from the standpoint of the entire board and from the perspective of mainly Companies Act of particularly South Africa (Simnett, Carson and Vanstraelen, 2016).

This mainly can be associated to auditors, internal controls as well as financial assertions of the company and the limit up to to which it complies with the pertinent legislation, directives as well as governance exercises. On a yearly basis the committee regulated properly all the affairs as instituted in terms of reference that are audited and approved by the board, aligned to the regulatory committee necessities. This helps users of financial information to understand whether the company is fulfilling the going concern necessities (Khelil, Hussainey, and Noubbigh 2016).

The working group has made the analysis regarding the appraisal of entire going concern position of the whole group and recommended to board that the total group can turn into a going concern for the predicted future (Junior, Best and Cotter 2014). This report also suggests that it is solvent and can give out projected dividend. This declaration can also be considered to be an important audit matter that essentially has the need to be communicated for comprehension of the actual financial condition of the chosen companies.

Analysing business entities as well as business environment

Auditors have the necessity to have proper understanding regarding business concerns and atmosphere in which the business operates. Furthermore, evaluators of financial statements of the firms have the necessity to concentrate on specific areas of financial reporting for proper recognition of material misstatement of the corporation. In essence, the auditor also has the prerequisite for exceptional considerations for different areas of financial reporting. There are adjustment and alteration in accounting, impairment of diverse documented asset worth, modifications in share capital plus debt arrangement among many others.

The above mentioned study helps in gaining deep insight regarding strategies and acquires validation to uphold diverse types of administration. Numerous financial accounts are accurate within limitations of materiality. Consequently, for conveying this type of viewpoints, the auditor has the necessity to evaluate different subsisting substantiation to cover different material information that can be preserved. In particular, professional cynicism in mainly financial reporting of the firms can restrict judgement of the auditors concerning process of validation that are essential to attain the status.

Further, principles of accounting are necessarily rigid, directorial and obligatory in nature. Contrarily, the directives for primarily regulations are essentially descriptive in nature and this depends to large extent on auditors’ perceptions as well as judgements. In essence, the auditors are anticipated to be independent and govern different clients both in practice as well as appearance. Essentially, this has the requirement to be extremely objective in nature and auditors need to monitor audit validation.

References

Ahmed Haji, A. and Anifowose, M., 2016. Audit committee and integrated reporting practice: does internal assurance matter?. Managerial Auditing Journal, 31(8/9), pp.915-948.

Alzeban, A. and Sawan, N., 2015. The impact of audit committee characteristics on the implementation of internal audit recommendations. Journal of International Accounting, Auditing and Taxation, 24, pp.61-71.

Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.

Engelbrecht, L., 2017. The role of the Internal Audit Function (IAF) in integrated reporting and possible challenges and barriers to internal audit’s involvement (Doctoral dissertation).

Green, W., Taylor, S. and Wu, J., 2017. Determinants of greenhouse gas assurance provider choice. Meditari Accountancy Research, 25(1), pp.114-135.

Hay, D., 2015. The frontiers of auditing research. Meditari Accountancy Research, 23(2), pp.158-174.

Hay, D., Knechel, W.R. and Willekens, M. eds., 2014. The Routledge companion to auditing. Routledge.

Jones, K.K., Baskerville, R.L., Sriram, R.S. and Ramesh, B., 2017. The impact of legislation on the internal audit function. Journal of Accounting & Organizational Change, 13(4), pp.450-470.

Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.

Khelil, I., Hussainey, K. and Noubbigh, H., 2016. Audit committee–internal audit interaction and moral courage. Managerial Auditing Journal, 31(4/5), pp.403-433.

Lisic, L.L., Neal, T.L., Zhang, I.X. and Zhang, Y., 2016. CEO power, internal control quality, and audit committee effectiveness in substance versus in form. Contemporary Accounting Research, 33(3), pp.1199-1237.

McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-CLIO.

Messier Jr, W.F., 2014. An approach to learning risk-based auditing. Journal of Accounting Education, 32(3), pp.276-287.

Nisbet, D., Robertson, A., Mannil, B., Pincham, V. and Mclennan, A., 2018. Quality management of nuchal translucency ultrasound measurement in Australia. Australian and New Zealand Journal of Obstetrics and Gynaecology.

Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32

Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting. Managerial Auditing Journal, 30(1), pp.80-111.

Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.F

Trotman, K.T., Bauer, T.D. and Humphreys, K.A., 2015. Group judgment and decision making in auditing: Past and future research. Accounting, Organizations and Society, 47, pp.56-72.

Wong, R. and Millington, A., 2014. Corporate social disclosures: a user perspective on assurance. Accounting, Auditing & Accountability Journal, 27(5), pp.863-887.