Centre And The Development Of New Auditing †Myassignmenthelp.Com

Question: Discuss About The Centre And The Development Of New Auditing? Answer: Introducation ABC Learning Centre was an Australian child care company founded in the year 1988. It was considered as the biggest child care corporation with around 800 centres in the year 2006 and proceeds more than $50 million in the fiscal year 2004-2005. Owners Eddy Groves and Le Neve started with this business expecting it to do well as during that time both the family members were working without any extra support from other family members. The business flourished with an added benefit from the government in the form of subsidies. Child care industry is bound to earn profits as the expenditure is less and there is hardly any restriction to start such business. The company started trading on the Australian Stock Exchange in the year 2001 and its shares did significantly well which was evident from the fact that its profits increased around 1100% from 2002 till 2006 with seven times rise in stock prices from the year 2002 till 2004(Sumsion, 2017 ). Because of such an exceptional performance, t he company became more famous through news in the media and fascinated numerous stakeholders towards the company. Within 4 year of entering the share market, 20 % of child day care centres of Australia were possessed by ABC Learning Centre. The company acquired several companies such as Future One, Kids Kampus etc. Further, with the possession of Learning Care group, it rose to become the biggest listed childcare supplier globally employing 16,000 workers and rendering services to around 100,000 kids. Abc Learning Centre Auditing Issues Responsible For Collapse Of The Company The above figure clearly shows rise in the number of ABC Learning centre from the year 2001 till 2007. Not only had the centres grown but also its share price from $2 to $13.94.This expansion was supported by the government with the help of child care benefit schemes as well as fee subsidies. The said industry was considered as downfall resistant. However, in the year 2008, in the wake of international economic catastrophe, dreadful reports were out, of the companys profit being dropped from over 40% from the last year. Market assumption increased concerning ABC Learnings monetary conditions. There was a dramatic decrease in the price of companys shares; it fell by over 65 % in a month. Soon, the companys securities were no longer trading. Lawful intimidation against the company intensified and both the owners Eddy Groves and Le Neve resigned from the company in the month of September, 2008. The collapse of the company is anticipated to have started way before the organization was aware of it. Controversy arose over the dubious practices embraced by then accounting firm Pitcher Partners related with auditing of corporations financial records. The company opted for deliberate receivership revealing its doubtful accounting practices in the month of November, 2008. There were several reasons that led to the collapse of ABC Learni ng including the growth in the competition, monetary disparities owing to huge acquisitions and debts. However, the major reason for its failure was disparities in the fiscal facts given by the management. The financial statement of the company gave misleading information wherein 72% to 81% of intangible assets majorly included numerous operating licences comprised the assets in the balance sheet (Baaqeel, 2008). These licences were insignificant but the company professed huge price on them. The appraisal of these licences fascinated shareholders and increased its value. However, in a statement by the Australian Securities and Investment Commission it is assured that the licences were of almost no value to the company. Goodwill of around $37.4 million and licences of around $647.6 were accounted in the commencement of the fiscal year 2006-07 (Teen, 2012). However, by the fiscal year ending 2007-08, goodwill increased to $271 million and licenses of around $2.4 billion whereas in the se 2 years $2 million and $8.4 million were the impairment charges for goodwill and licences .Also, a complaint was registered that the revaluation of licenses was the basis of profits of $390 million that the company made between the years 2001 and 2005. Also, potential cash flows of the company, of which the company was unsure of was the cause of its increased value. There were different views by different auditors on the practice adopted for auditing. Incompetent judgment was given by the companys auditors, Pitcher Partners from the time of their engagement with the company in the year 2003. The accounting practise followed showed exaggerated picture of the growth of the company. As a result, it was forecasted the company to make $200 million of profits in the month of January 2008. This profitable business ensnared shareholders which helped it to expand globally. However, the major auditing issue accounting for the downfall of the company were incompetence on the part of the auditors of the company. The company intended to disburse $70 million as per the proclamation from a share market in the year 2008. (Walsh, 2015). Another major issue with ABC Learning Centre was the existence of related party transactions. There was failure on the part of company in adhering to corporate governance measures. The auditors failed to provide substantial facts related to exact accounting of a number of fees and subsidies, categorization of items that generate revenue and for its judgement on the company for being a going concern. The auditor failed miserably in predicting threat and this all resulted in overvaluation of companys revenue which led to its collapse. Communicating Key Audit Matters in the Independent Auditors Report and ITS USEFULLNESS The Auditing Standard ASA701 Communicating Key Audit Matters in the Independent Auditors Report was issued by The Auditing and Assurance Standards Board (AUASB) in the month of December, 2015. It provides information to auditors in relation to new Key Audit Matters (KAMs) that are obligatory to be incorporated in their reports (Bullock, 2017). All the listed Australian corporations for fiscal year ending as of 15th December, 2016 are bound to adhere to the said accounting standard. The main intend for the development of the standard is to provide better understanding of the accounts of a company to its shareholders and to augment auditors reporting. It is pertinent in agreement with theCorporations Act2001; an audit of a financial report for a financial year, or an audit of a financial report for a half year and also an audit of a financial report, or a whole of financial statements, for any other purpose. For a better understanding of the said standard, it is important to be acquai nted with the meaning of Key Audit Matters (KAMs). All substantial matters as per auditors qualified perception, which is to be included in the audit of the fiscal report of the present year accounts for key audit matters. They are chosen from matters interfaced with those entrusted with authority. As per the said standard, the major purpose of the auditor is identification of such key audit matters, drawing judgment on the financial statement and conveying the detailed analysis in his report. Auditing Standard ASA701 explains auditors accountability in relation to key audit matters. It is the duty of the auditor to convey key audit matters in his report which will not only clearly explain auditors judgement for the matters he conveys but also the substance and structure of the statement. Disclosure of key audit matters provides better clarity and will further augment the significance of auditors report. Anticipated users will be benefited as they will gain extra knowledge of the fiscal report from key audit matters which will help in better understanding of those important matters. Further, it will help them in getting considerable perception of the entity and also in identifying major fields of administration prudence. Moving forward, such conveyance might offer projected users a foundation for getting involved with the administration and with those who are in authority in relation to the organization, the assessment and the assessed financial statement. These key audit matters are in agreement with the auditors viewpoint on the complete financial statement and not an alternative for revelations in the fiscal report that the relevant financial reporting structure requires administration to make, or that are otherwise essential to attain reasonable arrangement; an alternative for the auditor articulating a customized view when necessary by the situation of a definite audit appointment in accordance with ASA705; an alternative for reporting in agreement with ASA570when a material uncertainty exists relating to events or conditions that may cast noteworthy reservation on an entitys ability to continue as a going concern; or a detach view on individual matters. Assessment of general purpose fiscal statements of listed companies requires adherence to this said auditing standard. It is applicable in conditions wherein auditor determines to convey such matters in auditing report of the company. It is also pertinent when auditor is lawfully enforced to con vey such matters in the report. However, it is very important to ascertain key audit matters. Auditor should take into consideration greater projected risk area, considerable auditor discernment in areas which requires important administration prudence and the consequence of important dealings on the audit while deciding key audit matters (Pratt, 2014) Key Audit Matters To Be Disclosed In The Audit Report Of Abc Learning Centre The ABC Learning collapse has been considered a major one in the history of company failure. Since the purpose of accounting standard 701 is to provide more liberty in revealing vigorous and significant details on key audit matters to the intended users of the financial report, audit report of ABC Learning was lacking such information, its value was inflated and most of its intangible assets in the asset side of financial statement were goodwill and licences which are estimated to have no value. The said standard comprises of not much changes in the auditors judgement but the statistics and data which is revealed to its users. Now, the significant matters which were a part of the internal audit report will be affixed with the available fiscal reports. However, in the case of ABC Learning, its liabilities were almost invariable in between the months starting from June till December. Owing to financing again with new loans at a lower rate of interest, liabilities of around $1.1 billion were re-categorised as long term financial obligations. This matter accounts for significant importance and users were not aware of what was happening within the organization as auditing report had shown positive future prospects of the company. Australian Securities and Investments Commission suspended the ex- auditor of ABC Learning, Simon Andrew Peter Green for five years from performing his duties (Kruger, 2012). It is clear from the reports that former Pitching Partner was unsuccessful in performing his services as an auditor. He could not gather satisfactory audit substantiation associated with precise accounting handling for a variety of fees that lead to over valuation of the companys revenue. This particular matter was one of the major key auditing matters that were not revealed to its intended users. Hence, had ASA701 been released before the collapse of ABC Learning Centre, it could have been avoided. In the case of the said company, auditor did not perform efficiently and ignored the area of high projected risk which led to misstatement of financial report (ASIC, 2012). Further, he could not gain substantial proof to categorize the revenue items which once more resulted in misstatement of the financial reports as there were items which were inaccurately categorised as returns and these were mostly not a part of child care services offered by the company. Miscommunication of this particular key audit matter resulted in overvaluation of its income. Another flaw of the former auditor was that he could not gather considerable information to facilitate any rational auditor to establish that the said company was a going concern and will continue to operate in future. Hence, it proves that the auditing of the companys financial statement was not done efficiently and it lacked auditors competence. Hence, assessment of a company as a going concern again accounts for another key accounting matter. He did not work proficiently as he couldnt draw facts to sustain his stand in relation to wages and salaries, party transaction etc. However, an auditor is considered as the caretaker who is expected to guarantee efficiency when it comes to the value of financial statements. Moving forward, another fault on the part of the ex-auditor was that it couldnt provide substantiation in maintaining his judgement that there was no inaccuracy in the financial statement of the company. However, as per Accounting Standard 701, conveyance of key audit mat ter provides precision of the audit and auditor forms judgement on the complete financial report. The auditor could not effectively file trial that was taken to access the possibility of scam. He lacked the competence to gauge the possible financial threat. Lastly, there was a major fault that led to the fall of ABC Learning Centre as the auditor was inadequate in qualified perception and cynicism while conducting audit of the companys financial report for the year 2007.Hence, it is proven from the above issues faced by the company relating to the audit were majorly responsible for its collapse. Hence, if the company adhered to the provisions of ASA701, the scenario would have been entirely different and stakeholders would have got clear picture of the entity. Recommendation At the end, we recommend that the auditing standard ASA701 Communicating Key Audit Matters in the Independent Auditors Report was developed to provide its intended users to understand the company they are investing their money in. The said standard will be useful to get an insight of the profits of the company. By following ASA701, all the significant information that was a part of internal audit report will be affixed with financial statement which will in turn help the projected shareholders to get a better view of the company. Clear understanding of key audit matters and communication of the same in independent auditors report will surely involve greater participation amongst auditors, audit and managing committees. Further, it is also clear from the above report that the collapse of ABC Learning Centre is the correct example of auditing failure in the history. One of the major reasons for its collapse is to be blamed on the auditors. References Sumsion, J., (2017), ABC Learning and Australian early education and care: a retrospective ethical audit of a radical experiment Available at https://www.cela.org.au/wp-content/uploads/2017/06/AttachmentChildcareMarkets.pdf (Accessed 17th September 2017) Baaqeel, R., (2008), Case Study Of Learning Centres CollapseAvailable at https://rayanbaaqeel.blogspot.in/2011/06/case-study-of-abc-learning-centers.html / (Accessed 18th September 2017 ) Teen, Y.M., (2012), The ABC of a corporate collapse Available at https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/ (Accessed 18th September 2017) Walsh, L., (2015), Key corporate governance systems missing from ABC Available at https://www.couriermail.com.au/news/key-corporate-governance-systems-missing-from-abc/news-story/f601d3e4242f16efbc70610f9707de05?sv=96f188f44e8845619b7d48fa7cf73f91 (Accessed 17th September 2017) Bullock, L., (2017), Auditors reminded on crucial 2017 changes Available at https://www.accountantsdaily.com.au/tax-compliance/10014-auditors-reminded-on-crucial-2017-changes (Accessed 18th September 2017) Pratt, H., (2014), New auditing reporting requirements are imminent Available at file:///C:/Users/hp/Downloads/Dec14%20-%20AuditorReporting%20(2).pdf. (Accessed 18th September 2017) Kruger, C., (2012), Five year suspension for former ABC Learning Auditor Available at https://www.smh.com.au/business/fiveyear-suspension-for-former-abc-learning-auditor-20120808-23uj8.html (Accessed 18th September 2017) ASIC., (2012), 12-186MR Former ABC Learning Centres auditor prevented from auditing companies for five years Available at https://asic.gov.au/about-asic/media-centre/find-a-media-release/2012-releases/12-186mr-former-abc-learning-centres-auditor-prevented-from-auditing-companies-for-five-years/ (Accessed 18th September 2017)