Importance of the new standard
Discuss about the Financial Reporting Practice As A Ritual.
The Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report deals with the requirements and provides the basis for the key matters of audit in the auditor’s report. Key audit matters refer to those matters that have significant effect on the financial statements of the company including areas like growing concerns and reliability. These can affect the action of the investors of the company and thus proper disclosure of the same is required. It has been issued by the Auditing and Assurance Standards Board (AUASB). As per the board, the standard has been made in conformity with the international standards of financial reporting and contains all the details about it. It is also as per the standards of auditing that deals with ethics and compliance and hence if the auditors have knowledge about that they can prepare their audit report that is fully transparent (Abbott & Kantor, 2017). This standard deal with maintaining the quality of audit in areas that are required. The main features of this standard include:
- The auditors need to maintain the communication of the key audit matters in their annual audit reports in case of listed companies. All the details should be properly highlighted and provided with. It is the duty of the auditor to see that there is no mistake in that.
- In case of audit of other than listed companies the auditor gets a chance to decide which are the matters that they want to include in their audit reports. It is not mandatory but if needed the auditors can do that.
- There are few steps that the auditors need to consider when they are determining the key audit matters which includes –
From all the matters that have been summoned to those charged with governance the auditor needs to look for those matters that needs attention of the auditor and requires to be included in the audit report.
For areas that are more prone to risk the auditor needs to apply their judgement and check whether they need significant judgement from the auditor or not. The auditor also needs to consider the significant events that has caused such problems to arise (Alexander, 2016).
The auditor needs to ascertain the key matters of high importance that needs to be included in the report of the auditor.
- The standard also deals with how the auditor will describe each of the key audit matters. For this the auditor needs to have proper knowledge about the financial statements. Proper disclosure needs to be given in the audit report so that the user of financial statements has proper details.
- There might be situations as per which the key matters are not included in the report of the auditor. The company needs to make sure that the auditor is having knowledge about the same and the auditor needs to state the same in their audit report (Boghossian, 2017).
- Proper disclosure and documentation with respect to audit report needs to be given. Thus, that makes it mandate for the auditors to have proper knowledge about the key audit matters and increases the value of the audit report as users can now use it effectively.
The new standard has been proposed in lieu to the amendments made to the standard ASA 570 (ISA 570) Going Concern. Going Concern refers to a situation where the operations of the company are not going to shut down in near future and would continue till forever. In case there is a threat to the going concern ability of the company then the investors will not invest in the company as they will have to suffer losses if the company liquidates. Thus, it is important that auditor needs to analyze the same and provide proper disclosures should be given in the audit report of the company. Previously there was ASA 570 that used to deal with the going concern liability of the company but that was very limited in terms of areas that the auditor had to covered. But with the new standard several changes had occurred and that has made it very much mandatory for the auditor to analyze any such situation that might affect the going concern ability of the company. The best part of the standard is that it has specifically provided all the steps that the auditor needs to follow in case of reporting of items that might hurt the going concern ability of the company (Chariri, 2017). Thus, we see that it also makes the auditor responsible for the disclosures with regarded to the key audit matters and thus there are no chances that the auditor can hurt the sentiments of the company. The auditor needs to maintain proper disclosures so they cannot indulge in any kind of fraud element and thus that will help in keeping the company secure and will also provide exact status to the users of the financial statements. The investors depend upon the financial statements and especially the audit report to take important decisions with respect to the company and whether they would invest in that or not. So, it is important that all the matters that might hurt the investors position in the company should be taken care of and thus it is important that the auditor must have thorough knowledge about the company and the various audit operations. Therefore, this standard is beneficial as it covers all the matters the management and the auditor needs to pay heed to. It deals with the ethics and compliance that the all the parties related to the financials of the company needs to take care of. It encompasses a wide zone in comparison to the previous standards that have been framed in that context (Chron, 2017). The importance lies in this context that both the management and the auditors are specifically been told what their responsibilities are and how they should function. The investors will have better transparency with relation to their audit reports and correct judgement would be framed on how they can invest in the company.
Analysis
The standard can be applied in the Telecommunication services industry, the top companies in the ASX 100 list in this sector includes Telstra Corporation and TPG Telecom Limited. Both the companies are the only companies in the Telecom Industry in Australia top 100 companies as per the ASX list. In case we apply the given standard in the annual report of the companies we see the following disclosures being made.
The TPG Telecom is an Australian Company that specializes in providing telecom based services along with internet services. It is a cost effective and reliable. The company was founded in 2008 and have been in operation since then and hence the overall revenue of the company runs into millions. The company financials are audited by KPMG and they have provided a proper audit report in that context. The audit report contains all the details about the key matters that might affect the company and has also provided required disclosures in their audit reports. The annual report of the company has been downloaded and analyzed in this financial statements of the company (Gray, 2018).
In case of TPG Telecom the audit reports consist of the following disclosures with respect to the key audit matters of the company. An extract from the same is attached below:
In this we see that the auditors of the company have stated how they have selected the key audit matters and what are the methods that they have followed to go through the same. The main matters that the auditors have included in their audit report is including matters relating to recognizing of revenue. In case of telecom sector, the companies follow a different approach. The auditor have stated that there are so many issues that the management needs to work for as the company involves high billing system with respect to charging and recording revenue and they have revenues that have been spread to different sectors and thus it becomes imperative that the company must record that properly. The auditor has also stated the ways that they have implemented to make sure that there are doing proper audit in respect of the key audit matters (Anon., 2017). For this the auditors have stated that they have used IT techniques that would help them in this regard. The auditors have also stated other disclosures in their audit report and have mentioned the steps that they have taken to reach to a conclusion. The auditors have also stated about the treatment of goodwill in their audit report with respect to the company and why that must be considered as a key audit matter has also been specified by the auditors. So, we see that the auditors have abided with the set standards and have provided all disclosures on key audit matters that might affect the going concern ability of the company and in what ways is it important for the overall growth of the company (Maynard, 2017). The investors can go through these disclosures and can form an opinion on how the company is functioning and whether they should invest in the company or not.
Telstra Corporation is a leading provider of mobile phones, tablets and other mobiles in the company. It builds and operates telecommunication network in the country. The company was built in 2015 and has millions in terms of revenue. The annual report of the company has been downloaded and important disclosures have been provided with respect to that in the financial statements. The key audit matters with respect to the given standard have been stated along with more resilience paid on those matters that might affect the going concern ability of the company.
The AS states that the auditors should focus on finding the key matters and providing proper recommendations in that regards. The financial statements have been audited by Earnest and Young and they have mentioned all the disclosures in their annual reports for the company. In case of Telstra the key audit matters will include:
- Dependence of the company on IT automated services and processes are taken into consideration in case of telecom industries, the auditor has analyzed the same and have provided proper reasons on how they have analyzed the key matter and documented it.
- Impairment of goodwill and its valuation have also been considered as an important key matter and the auditor have stated how they have valued and analyzed the same in their audit report for the company.
- The overall capitalization and the lives of the asset has also been considered based on the overall carrying amount of the assets of the company and proper disclosure have been given in the audit report of the company (Gray, 2018).
Thus we see that the auditors has followed the steps that are stated in the standard and have made proper disclosure with relation to all the key audit matters that might affect the decisions of the investors in the property of the company.
The auditors have analysed the financial reports of the company and have made proper disclosures in their financial statements with regard to it. The standard is excellent in making the auditor comply with the ethics and governance and is helpful to the investors in several ways.
Conclusion
Thus after analysing the entire standard and seeing the affect of it in the financial statements and the way the matters have been stated in the audit reports it can be said that it is best for the auditors and they should try to comply with it in all their audit reports. It helps in improving the overall transparency of the financial statements and the investors can rely on these sattements more and can form an opinion as and when required. The can take the key matters into cosndieration and decide whether the want to invest in the company or not (YUAN, 2018).
References
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Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
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Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.
Chariri, A., 2017. FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING WITHIN INSTITUTIONAL FRAMEWORK. Journal of Economics, Business and Accountancy, 14(1).
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Ghofiqi, M., 2018. FORMATION OF VIEWS AND INTERESTS TO THE ACCOUNTANTS PROFESSION IN MASTER OF ACCOUNTING STUDENTS OF JEMBER UNIVERSITY FORCE OF 2016 USING STRUCTURATION THEORY ANALYSIS. THE 3RD INTERNATIONAL CONFERENCE ON ECONOMICS, BUSINESS, AND ACCOUNTING STUDIES.
Gray, D., 2018. ‘Extraordinary turnaround’: Big miners pushing ASX towards 10-year high. The Sydney Morning Herald.
Maynard, J., 2017. Financial accounting reporting and analysis. second ed. United Kingdom: Oxford University Press.
YUAN, T., 2018. The Prospect for RMB Becoming One of the Two Center Currencies of the Dual-Center Global Financial System. The Dual-Center Global Financial System, Issue 1, pp. 83-91.
