Auditor’s reports

In the aftermath of the global financial crises, the new auditing standards ASA701 Communicating Critical Audit Matters within the Independent Auditor’s Report were developed.

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This was in response of shareholder demands to be more informed about the companies they are investing in.

Investors requested earlier warnings on potential issues that could impact an entity’s ability to remain a Going Concern. This led the revision of ASA 570, ISA 570, Going Concern.


The auditing issues that led the collapse ABC Learning Centre are subject to your investigation.

Additionally, you will need to describe the issues that led up to the development and implementation of the new auditing system ASA701 Communication Key Audit Matters in an Independent Auditor’s Report.

You must then identify and describe the key audit matter (it is essential that you are specific about what key audit matter) that would have to be reported to ABC Learning Centre members if ASA701 was used in the period before the collapse of ABC Learning Centre.

Answer to Question: ACC707 Auditing And Assurance


Australia faced severe economic difficulties in 2008

A large company that provided day care for children collapsed.

ABC Learning Center, a company that specializes in child care and elderly and disable training centers, was founded.

Although not the most popular of its kind it rose rapidly.

The company was so successful that even its management couldn’t keep up with it.

In just five years, 20% of Australia’s child-care centers had been owned by the ABC Learning Center.

There were almost 800 centres in the ABC learning center.

The stock exchange was clearly able to see the growth of ABC Learning Center.

In five years of Australian work, the share’s price rose to 300%. Approx.

ABC Learning Center generated approximately.

Although it is easy to reach new heights, it is not as easy to keep the same height.

The ABC Leaning Center experienced the same thing.

Because the management couldn’t control the company’s growth, they were unable to stop its fall.

There were many factors.

ABC Learning Center collapses for several reasons

The competition is increasing

The growing market competition was something that the management did not anticipate.

As the years passed, the company grew and the cost of everything related to it rose.

The rent on the property that housed the child-care center increased each year was due to the increasing cost of renting it.

There were many centers with many students. However, the child center was not able to accommodate teachers and other support staff.

The problem was that the training was becoming less quality.

The USP of the child center’s child care centre was the quality. However, it wasn’t up to the same standard.

The government supports the children of those with low income parents.

These children are able to attend child care centers free of charge.

This caused a significant financial loss for the ABC learning centre.

Many children studied free of charge.

These children were not charged as much as paid students.

The profit margin declined and the cost of these children increased.

Hecimovic and Martinov (2011) found that the government continues to update and support these care centers. This allowed them to open new centers.

The fees, the training quality and the salaries of the staff were all better than ABC learning centers.

The management didn’t change their policies, and they fought for the completion.

The company fell apart.Lack Of Proper Financial Auditing

The ABC Learning Center had used accounting statements to cause malfunctions.

This was revealed to the government by the financial crisis in 2008. Many of these issues were also highlighted.

Its faulty accounting was the primary reason for the collapse at the ABC learning centre.

As shareholders had invested in the shares of the company, the value of those shares was less than in the market. This upset the shareholders.

The balance sheet revealed that there were approximately.

The balance sheet revealed that approximately 82% of intangible asset were unlicensed and the government was entitled to issue licenses.

The cost of obtaining a license was prohibitive. Even if some were business-related, they were unusable (Adamidis (2011)).

Management was required to pay high fees to obtain licenses.

This was a malpractice committed by the ABC Learning Center and it reached the share market. It shattered the company’s economy.

The current management was forced to resign.

Because of the importance of intangible assets.

Personal Transfer of funds

The investors were very upset and lost all confidence in company.

The reason was that the director used company funds to support himself and his family.

There were numerous payments made to directors’ relatives that were not listed.

ABC Leaning Center presented a broking business which owned the majority of the shares of the former director, Mr. Grooves.

Queensland Maintenance, a firm that was purchased $74 Million by ABC Learning Center. The director’s brother-in law owned the firm.

Another related party transaction was the sponsorship by ABC Learning Center of a basketball club owned by Mr. Grooves.


Personal benefit transactions such as these should never be conducted in a business because they can damage the reputation of the company.Government Policies Updates

This policy allowed private companies, regardless of their profit, to establish child care centers.

Initial financial assistance was provided by the government to child-care centers in order to facilitate their operation.

With the passage of time and an increase in the number.

The policies were changed by the government in response to the increased number of child care centers in the country.

The biggest change was the removal of financial aid to child-care centers.

This increased competition, and decreased the quality service.

It was no longer just about child care. There was also family care and developmental.

The fee was calculated based on income.

This fee was directly tied to the tax reduction, but it unfortunately had reverse effect (Akmal and et. al, 2012).

Less is more in tax benefits.

This decreased parents’ interest in child care centers.

Even child care centers have to spend significant amounts on the investigation of the parents’ background and financial circumstances.

This led to an increase in costs and a decrease in the balance sheets.

Audit Standards For The Public Demand

After the ABC learning centre collapse, investors were afraid.

Investors demanded a government to create a law that would help determine the future stability of their company.

Audit authorities introduced the ASA 570 auditor law.

This law gave a picture of how the companies will be working in the future.

This accounting standard enabled auditors prepare the financial report assuming that the company is continuing to operate in the foreseeable.

The reports prepared for the going concern are valid till the company is liquidated or operations cease. al, 2009).

The taxation reports prepared for taxations are limited to the going concern.

The parameter where the going worry was found was taxation.

In the case where tax liabilities were concerned, the auditors could not forecast the future.

The tax liabilities could lead to the company being required to comply with a government directive or being restricted from using certain functions.

This accounting standard was acceptable to shareholders and investors.

Audit Standards and Key Audit Matters

The Australian economy is in such serious economic trouble that the government has decided to take all measures necessary to protect its future.

Investors were so scared that they refused to invest any money in projects.

To protect investors as well as shareholders, the government created the ASA701 audit guidelines.

This audit standard is built on the following key audit areas.

The main reason for the economic crisis was poor financial statements and accounting.

The audit key matters were developed keeping this in mind.

Audit reports are prepared after an audit team has completed a thorough analysis of the key audit issues.

These reports are trustworthy and transparent (Ciesielski und Weirich, 2012).

Investors can see the actual image of the company.

The market was considered safe once the actual picture of company was known.

A problem was highlighted by the collapse of ABC Learning.

Importance of The Key Audit Matter

Auditors must be vigilant about key audit matters.

The key audit matter was more important than ever.

These are the charges that the government might bring against you.

The government charged the most important matters.

The auditor identified the most critical matters of highest importance that were charged to the government.

Auditor has difficulties with implementation of certain standards of auditing in order to make auditing powerful in matters that were either charged the government or by management (Marks (2012)).

Concert Of The Key Audit

Auditors have the right and authority to select key audit issues.

It is their responsibility determine the key audit matters and to communicate them.

They can use their judgment to determine the appropriate use of the matter.

Spot The Key Audit Matter

These mattered determine the number and nature of key audit issues.

The greater the volume, the more important the audit matters.

The auditor should keep in mind that the list must not exceed 20 pages.

The shorter the list of key audit matters, the more difficult it is to divinate the important issues (Saratiel & Daan 2011).

A shorter list will have more effective matters.

This improves the financial reports.

Usefulness of ASA701

To be able to operate a business or firm and last on the market, you need to do your accounting right.

Australia’s government announced new auditing guidelines after the closing of Australia’s largest learning centre or child care.

The ASA 701 auditing standard is essential and very useful for the sector.

It also offers a broad scope of practice in auditing.

It has made auditing clearer and easier.

Important information must be collected in order to improve the efficiency of auditing.

Significance Of The Important Audit Matter

Auditors have the authority to determine the audit’s key matters.

The key matter can be selected based on quantitative or qualitative factors.

It could also include matters like the recipient’s interest, relative importance, the effect, and the nature of subject matter.

These include the issues of those that the government has charged to analyse the objective.

Special Interest Matters

Both the auditors and the government have had an intense conversation about the matters that are of interest to users.

These were the matters that the auditors had a significant opinion on and which the management could use to make judgments.

Communication Enhancement

The communication between the auditors, the government and the key audit matter of the audit report improves.

This improves the relationship between management and the government charged matters.

Financial reports provide a platform for improved communication.

General Assumption

The audit report is prepared by an auditor who assumes that users understand the following.

Secondly, the user knows that audit reports should be presented at the level required.

The key audit matters can be used to plan and keep the amount needed in the future.

Final, when audit reports are transparently prepared, future decisions are made with complete trust and confidence (Gintaras 2012.

The ABC Learning Center had a number of key audit points that were not met.

The ABC Learning Center’s financial statement did not reflect the true state of the business. As a result, shareholders lost confidence in the company.

In any company, transparency is crucial. It allows for the public to know the real state of the company’s market position.

The 200% increase in share of the childcare center was not true, because the basic value wasn’t correct.

This was not related to the business of the company.

The child care center could not conceal the financial problems caused by changes in government policies.


Many Australian businesses have fallen on hard times, including the Australian government.

Companies did not have adequate financial records, which was not the only reason for the crisis.

The financial statements of the companies were inadequate. Additionally, the management used the funds of the companies for personal purposes on heads that were not relevant to the company.

In lieu of shareholders and investors, the government established auditing standards.

These audit standards were able to give a clear picture of what was happening in the market.

The fake share rates were changed to the real rate.

A number of key auditing areas were chosen to ensure transparency and complete proof of flaws in the reports.

To provide investors with assurance that the company will not fail in the future, there are certain standards.

These standards have given a new phase to market and provided security to investors and shareholders.

Refer toAdamidis, A. (2011).

What’s New in Audit? Charter, 82(7), 56-57.Akmal, M., Syed, A., & Shaikh, F. (2012).

A Philosophical Approach to Decision Usability, Truth and Accounting.

Journal of Business Strategies 6, 1: 40-56Ciesielski, J., & Weirich, T. (2012).

A New Audit Report.

The CPA Journal 82(2): 11-14.Gintaras ?ernius. (2012).

The new role and importance of the going concern concept for corporate finance management.

Perspectives of Innovations (12(3)), 76-85.Hecimovic, A., & Martinov-Bennie, N. (2011).

The Differential Influence of the Force of Law Australian Auditing Standards.

Australian Accounting Review, 21(2). 183-192.Hecimovic, A., Martinov?Bennie, N., & Roebuck, P. (2009).

The Force of Law – Australian Auditing Standards and their Impact on the Auditing Profession.

Australian Accounting Review, 19(1). 1-10.Marks, Norman. (2012).

Auditing governance: Internal auditors should consider a risk-based approach when auditing governance.

Internal Auditor. 69(1), 39.Saratiel Wedzerai Musvoto, & Daan G Gouws. (2011).

Rethinking the Going concern assumption as a pre-condition for accounting measurement.

International Business & Economics Research Journal. 10(4): 31-44.

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