Background

Auditing play an integral role in an entity in considering all the strengths and weaknesses in an entity by applying various tools and techniques in auditing procedures. Auditing in an important approach used by all the business concern in overcoming all the issues currently faced by an entity (Simnett, Carson and Vanstraelen, 2016). ABC learning centre has selected for the current assignment whose financial and non-monetary performance has tested in this assignment by taking help of various auditing standards such as ASA 570. ASA 701 has comes into existence by replacing old standard of ASA 570 for the going concern concept applied in testing the efficiency of an entity. This assignment explains all kinds of auditing issues faced by an entity due to the collapse of their business enterprise. Various reasons for the existence of all auditing issues have explained in the current report. Auditing issues have explained by focusing on the three major kinds of financial statements such as income statement, balanced sheet and cash flow statements of the business entity.

Auditing is an examination of the financial statements of an entity which includes income statements, balance sheets, cash flow statements and statement of changes in equity (Brusca, Caperchione, Cohen and Rossi,eds., 2016). An auditor verifies all such documents by expressing the true and fair view by evaluating all the financial documents of an entity. These documents are analyzed by the statutory auditor in expressing unbiased decisions. Every entity is required to audit its business once in a financial year to identify all the issues faced by an entity (Brousseau, Bédard and Vanstraelen, 2016). Auditing is an independent examination of accounting books of accounts of an enterprise that includes all the business vouchers, financial statements, valuation reports of all the property held by the business, investment details (Knechel and Salterio, 2016). It is a process which has various steps such as knowing details about the client’s organization such as nature of the business, size of business, product details to plan the audit procedure according to the information generated from the enterprise owner (William Jr, Glover and Prawitt, 2016). After getting enough information from the client, next phase is to plan audit strategies to collect data from the business in identifying all the prospective frauds and errors (Boone and et. al., 2017). Field work covered after crafting strategies in which auditors and its staff will visit the business of an entity in reviewing the internal controls of the firm by checking the total of all the ledgers, verifying the accuracy of all the vouchers.

New Standards of Auditing

New standard of auditing has come into existence due to the severity of the global financial crisis takes places in the external business environment (Piscopo, 2016). The new auditing standard has come into bigger picture by making changes in the ASA 570 for going concern principle. ABC learning centre has not followed the principles of the going concern auditing principle. According to this principle, the survival of an entity is assumed as indefinite life of years. But due to violation of the principle, the consequences need to face by the business entity.

According to auditing standards of Australia 50, related to the concept of going concern, under which total survival of the firm is measured as this principles assumes the longer survival of the firm till its wound up (ASA 570, 2017). Violating this principle is not beneficial for the firm as collapsing ABC learning style before the stipulated time period creates complexities for all the internal as well external stakeholders of an enterprise. The current standard ASA 570 is apples to different entities which will be checked by an auditor during its auditing procedures (Thomé, Shar, Bianculli and Briand, 2017). It is applicable on the firm who is registered under corporation’s act 2001 whose financial audit is conducted by the business concern by generating financial reports of the firm and another requirement of this act is to audit the financial report of the business entity or analyzing all the financial statements. Under this standard, assumption used by an auditor that business operations will be conducted for the foreseeable future by taking all the accounting treatment of all the transactions takes places in an entity.

Standards acts a benchmarking concept in which the performance of the business is measured by an auditor that is related to the communicating key audit matters in the independent auditor’s Report (Zarr, Cottrell and Merrill, 2017). Australian auditing standards has applicable in reviewing the current matter. This committee is an independent committee that takes all the decisions separately by taking views and opinions of all the members takes places in an external entity. This approach cum standards comes into existence in 2015 (Risk based evaluation, 2014). The legislative provisions used by the authority according to this principle are reviewed as per legislative instruments act 2003 (Internal control, 2007). The auditing standards worked in accordance with the financial reporting council which arouses interests among all the users in complying with all the rules and the regulations of the current standard.

Importance of Key Audit Matters Communication

Important features of Australian auditing standard 701 states that compulsion on communication of key audit matters in each and every audit reports prepared by the auditors after evaluating the financial performance of an enterprise (ASA 701, 2017). It also enables auditors of various entities in taking decisions for inclusion of all the audit matters covered in a business concern. A procedure of determining audit matters has also covered in the current section, by communicating all the strategies with the external parties through corporate governance. With the help of corporate governance, the attention of the parties has attracted by the auditors in evaluating the financial performance as well as non-financial performance of the business entity (Church and Schneider, 2016). Various areas of risks ascertained by the firm by making significant judgements about the business concern as an auditor will comment on the significant business areas of the firm. Auditors will make judgements about the business concern whose effects will be measured by the firm at initial stage by maintaining the survival of an enterprise for a longer span of time (Albring, Elder and Xu, 2016). It is important to know the meaning of the term key audit matters which referred as areas of higher risks material misstatements indentified under ASA 315. It is important to communicate all the risky aspects in an entity with the management or those charged with governance who has taken charge of the business in the absence of the owner of an enterprise. All risky aspects of the business are ascertained by an auditor comes with the procedures of the auditing (Bentley-Goode, Newton and Thompson, 2017). For communicating all the necessary aspects of the business, an auditor will create various documentations in audit procedures. Audit documents such as working file prepared by auditor during their procedures is to be procure by the auditor for a specific period of time.

Particulars	Jan	Feb	March	April	May	June	July	Aug	Sept	Oct	Nov	Dec
Initial cash	60000
Bank loan	50000
Income from online sales	30000	31500	33075	34728.8	36465.2	38288.4	40202.9	42213	44323.7	46539.8	48866.8	51310.2
Income from in-store sales	22400	56400	56800	57100	58800	62000	66400	68700	65400	60000	60800	64400
Sales income from fashion clothing	10000	10000	10000	10000	10000	10000	10000	10000	10000	10000	10000	10000
Sales income from hair and beauty products	12000	12000	12000	12000	12000	12000	12000	12000	12000	12000	12000	12000
Receipts from disposal of old store building						300000
Total interest receivables						30000						30000
Total cash income	184400	109900	111875	113829	117265	452288	128603	132913	131724	128540	131667	167710
Cash disbursement
Store and warehouse building lease rental	130000
Purchase of office and fire Equipment	80000
Purchase of delivery van and cars	150000
Shelves and store furniture	50000
Purchase of fork lift for warehouse	70000
Store worker’s	11000	11000	11000	11000	11000	11000	11000	11000	14000	14000	14000	14000
wages
Heating and lighting	2000	2000	2000	2000	2000	2000	2000	2000	2700	2700	2700	2700
Council taxes	1500	1500	1500	1500	1500	1500	1500	1500	1500	1500	1500	1500
Purchase of cloths	40000		40000		40000		40000		55000		55000
Insurance		5000
Fuel and maintenance	1800	1800	1800	1800	1800	1800	1800	1800	1800	1800	1800	1800
Total cash outflow	536300	21300	56300	16300	56300	16300	56300	16300	75000	20000	75000	20000
Net cash balance	-351900	88600	55575	97528.8	60965.2	435988	72302.9	116613	56723.7	108540	56666.8	147710
Opening cash balance	0	-351900	-263300	-207725	-110196	-49231	386757	459060	575673	632397	740937	797604
Closing cash balance	-351900	-263300	-207725	-110196	-49231	386757	459060	575673	632397	740937	797604	945314

ABC Learning centre Income Statement
For the Years Ending [Dec 31, 2012 and Dec 31, 2011]
Revenue		2012	2011
	Sales revenue	200,000	300,000
	(Less sales returns and allowances)	50,000	10,000
	Service revenue	150,000	290,000
	Interest revenue	5,000	10,000
	Other revenue	12,000	15,000
Total Revenues		417,000	625,000
Expenses
	Advertising	5,000	10,000
	Bad debt	3,000	4,000
	Commissions	12,000	20,000
	Cost of goods sold	150,000	200,000
	Depreciation	50,000	60,000
	Employee benefits	12,000	15,000
	Furniture and equipment	50,000	80,000
	Insurance	12,000	25,000
	Interest expense	4,000	2,000
	Maintenance and repairs	2,000	5,000
	Office supplies	23,000	32,000
	Payroll taxes	20,000	12,000
	Rent	500,000	320,000
	Research and development	12,000	30,000
	Salaries and wages	300,000	500,000
	Software	50,000	70,000
	Travel	120,000	150,000
	Utilities	50,000	20,000
	Web hosting and domains	1,200	20,000
	Other	2,000	5,000
Total Expenses		1,378,200	1,580,000
	Net Income Before Taxes	(961,200)	(955,000)
	Income tax expense	15,000	20,000
Income from Continuing Operations		(976,200)	(975,000)
Below-the-Line Items
	Income from discontinued operations	2,000	5,000
	Effect of accounting changes	5,000	5,000
	Extraordinary items	40,000	50,000
Net Income		(929,200)	(915,000)

ABC Learning Centre	Balance Sheet
Assets	2012
Current Assets
Cash	20,000
Accounts receivable	50,000
Inventory	120,000
Prepaid expenses	5,000
Short-term investments	120,000
Total current assets	315,000
Fixed (Long-Term) Assets
Long-term investments	500,000
Property, plant, and equipment	1,200,000
(Less accumulated depreciation)	500,000
Intangible assets	200,000
Total fixed assets	2,400,000
Other Assets
Deferred income tax
Other
Total Other Assets
Total Assets	2,715,000
Liabilities and Owner’s Equity
Current Liabilities
Accounts payable	20,000
Short-term loans	120,000
Income taxes payable	12,000
Accrued salaries and wages	50,000
Unearned revenue	60,000
Current portion of long-term debt	120,000
Total current liabilities	382,000
Long-Term Liabilities
Long-term debt	120,000
Deferred income tax	60,000
Other	60,000
Total long-term liabilities	240,000
Owner’s Equity
Owner’s investment	1,293,000
Retained earnings	800,000
Other
Total owner’s equity	2,093,000
Total Liabilities and Owner’s Equity	2,715,000

There are various auditing issues ascertained by an auditor in reviewing the organizational performance of an enterprise owner is mention below:

The auditing issues identified by an auditor in the business of ABC learning centre by using different approach of finding errors (Asare, Majoor and Wright, 2017). Errors and problems identifies by the management by using financial statements as the major weapons. Auditing issues are categorized into three different categories such as cash flow statements issues, income statement issues ads last but not the least issues found in the positional statements of the business entity. All accounting treatment deficiency has reflected in these issues which lead to future consequences faced by an enterprise in the future.

Analysis

Segregating all the cash expenditures and the revenues from the total revenues and expenditures incurred in an entity (Chen, Knechel, Marisetty, Truong and Veeraraghavan, 2016). All the vouchers are to be evaluated by an entity as frauds in the vouchers is checked by the auditors by verifying the same with all the entries posted in the cash budget. Entries in the books of account does not matches with the cash budget is reviewed by taking consent of the top management. In absence of any information from the management disclaimer of opinion is filed by an auditor. Cash received by an entity is checked by authorized department as fake vouchers can be created to create fraud with an entity.  A petty cash book has also checked with the normal cash book prepared in an entity as fraud can be done by using various ways.

Violation of accounting principles by recording revenues in the expense account to show lower profit in front of the external authority in minimizing the tax obligations incurred in an enterprise (Barranger and et. al., 2016). Tax is evaded by the firm by false recording of the transactions as this will matches the trial balance of an entity but this can be ascertained by an auditor in deep checking conducted by them. Audit staff will verify all the vouchers against its entries in the books of account will ascertain the actual amount of revenues and expenditures to present the accurate financial performance of an entity in front of the external as well as internal parties.

Assets and liabilities are two important components for preparing the balance sheet that means both assets and liabilities needs to be balanced. Valuation of the property is checked properly as enterprise shows lower amount of property to eliminate its future tax obligations (Lennox and DeFond, 2017). Inventory is valued according to IAS according to which inventory is valued n lower value of costs or net realisable value but business owner defrauds the authority by showing less amount of inventory by deflating all the users of the external business environment.

It can be recommended to ABC learning centre to improve the internal control systems and financial reporting channel to overcome all these issues takes places in their entity. Issues in the financial statements are essential to resolve by them to showcase the better financial performance of an enterprise in attracting their entire regular as well as the potential users towards the services offered by the firm. The financial statements can be prepared as per relevant accounting standards of the Australia to deliver quality oriented services to all the users. With the help appropriate accounting standards, an entity will also improves its overall auditing procedures by emphasizing on all the factors that will be helpful in getting desired market advantages.

Conclusion

It can be summarized from the above assignment that auditing issues faced by ABC learning centre due to the collapse of its entity has identified by an auditors by taking help of new standards 701 and taking previous reference of ASA 570. The current problem faced by the firm has resolved by improving their financial reporting channel.

References

Books and journals

Albring, S. M., Elder, R. J. and Xu, X., 2016. Unexpected Fees and the Prediction of Material Weaknesses in Internal Control Over Financial Reporting. Journal of Accounting, Auditing & Finance, p.0148558X16662585.

Asare, S. K., Majoor, B. and Wright, A., 2017. The occurrence and awareness of a misstatement effect in auditors’ internal control severity judgments. International Journal of Auditing.

Barranger, C., and et.al., 2016. RNA internal control, a new tool for the rapid development of detection tools by real time PCR in outbreak situation. Application to the detection of Middle East Respiratory Syndrome human coronavirus. Journal of Clinical Virology. 82. pp.S25-S26.

Bentley-Goode, K. A., Newton, N. J. and Thompson, A. M., 2017. Business Strategy, Internal Control Over Financial Reporting, and Audit Reporting Quality. Auditing: A Journal of Practice and Theory.

Boone, J. P., and et.al., 2017. Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.

Brousseau, C., Bédard, J. and Vanstraelen, A., 2016. The Informative Value of Auditors’ Going Concern Emphasis of Matter: Evidence from a Natural Experiment.

Brusca, I., Caperchione, E., Cohen, S. and Rossi, F. M. eds., 2016. Public sector accounting and auditing in Europe: The challenge of harmonization. Springer.

Chen, Y., Knechel, W. R., Marisetty, V. B., Truong, C. and Veeraraghavan, M., 2016. Board Independence and Internal Control Weakness: Evidence from SOX 404 Disclosures. Auditing: A Journal of Practice & Theory. 36(2). pp.45-62.

Church, B. K. and Schneider, A., 2016. The Impact of Section 302 and 404 (b) Internal Control Disclosures on Prospective Investors’ Judgments and Decisions: An Experimental Study. International Journal of Auditing. 20(2). pp.175-185.

Knechel, W. R. and Salterio, S. E., 2016. Auditing: Assurance and risk. Taylor & Francis.

Lennox, C. S. and DeFond, M. L., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?.

Piscopo, S., 2016. Food and Physical Activity Environments: Quality Auditing for Quality Interventions and Recommendations. Journal of nutrition education and behavior. 48(4). p.233.

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.

Thomé, J., Shar, L. K., Bianculli, D. and Briand, L., 2017. JoanAudit: a tool for auditing common injection vulnerabilities. In 11th Joint Meeting of the European Software Engineering Conference and the ACM SIGSOFT Symposium on the Foundations of Software Engineering. ACM.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.

Zarr, R., Cottrell, L. and Merrill, C., 2017. Park Prescription (DC Park Rx): A New Strategy to Combat Chronic Disease in Children. Journal of Physical Activity and Health. 14(1).pp.1-2.

Online

ASA 570, 2017. Available through: < https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf> [Accessed on 7^th October 2017].

ASA 701, 2017. Available through: < https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf> [Accessed on 7^th October 2017].

Internal control, 2007. Available through: < https://www.asu.edu/fs/documents/standards_of_internal_controls.pdf> [Accessed on 7^th October 2017].

Risk based evaluation, 2014. Available through: < https://epub.lib.aalto.fi/en/ethesis/pdf/13612/hse_ethesis_13612.pdf> [Accessed on 7^th October 2017].