Introduction: Standard board 2015) In order to complete the

Introduction:

In the wake of global financial crisis the  importance  of audit have reached its peak. Considering
the number of accounting scandals that the world of business has seen in recent
times the utility of auditing has been reaffirmed. However, the failure of
auditing in many cases such as in case of Enron, Satyam and other such
accounting scandals have compelled the stakeholders to question the auditing
standards governing the auditing principles and policies. With the objective of
improving the quality of auditing ,ASA 701 Communicating Key Audit Matters in
the independent Auditor’s report has been issued by the Australian Auditing and
Assurance Standards Board (AUSAB). An in-depth analysis on the auditing
standard and its practical implementation in an audit of an entity’s provided
to help the readers in understanding the importance of the standard (Segal
2017). There are some other  features that
include in ASA701 for example, Giving the right to take decision to the
auditors of other entities whether to include KAM in their audit reports , How
the auditor is to describe individual KAM, Circumstances in which a matters
determined to be a KAM is not comuunicated in the auditor’s report and the
documentation requirement relating to KAM, Mandating the communication of KAM
in the auditor’s report of audit of listed companies.(Auditing and Assurance
Standard board 2015)

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In order to complete the evaluation of ASA 701 and to
assess its importance in auditing of an company,  i have selected   BHP
Billiton Limited . BHP Billiton Limited is an Australian company which is involved
in the business of mining, petroleum products, gas and metals. This company was
a merged company of BHP and Billiton The  head office of the company is in Melbourne,
Australia.

Auditing and its objectives

The objectives of auditing is to provide an unbiased
and independent opinion on the financial statements of an entity to express
whether the financial performance reflected in the income statement of the
company is a fair reflection of the financial performance of the entity and
simultaneously whether the Balance sheet of the entity shows the true and fair
picture of the entity as on the date to which these statements relate
(Ratzinger-Sakel and Theis 2017). 
Detection  and prevention of
frauds an errors.  Checking the under and
over valuation of the stock. Checking the proper distinction of capital and
revenue  nature of transactions, and etc.

ASA
701:

AUSAB has issued number of auditing and assurance
standards to guide the auditors in discharging their duties efficiently as the
auditor of different entities. ASA 701 has been issued by the AUSAB to deal
with the matters which are recognized as key audit matters to make it
compulsory for the auditors of listed entities to communicate these matters in
the independent audit reports of such companies. (Köhleret al. 2016).Not only the standard is to be followed mandatorily by
the auditors of listed entities but it also recommended for the entities which
do not have their shares listed on a recognized stock exchange in the country.
However, it has been left to the discretion of the auditor to take final
decision whether to follow ASA 701 in auditing of unlisted entities. The
standard has described the Key Audit Matters, here in after to be referred to
as KAM in this document, which must be communicated to the stakeholders in the
independent reports of the auditors. Let us have a brief discussion on the KAM
to understand the matters which are to be communicated by the auditors in their
reports to attract the attention of the investors and other stakeholders of the
entities (Cordos and Fülöpa 2015).

Key Audit Matters to be communicated in the independent auditor’s report

ASA 701 has prescribed the matters to be communicated
in the independent auditor’s report to ensure that key matters are communicated
in the audit reports. In order to take cognizance of the investors and other
stakeholders of an entity to assess the actual financial performance and
position of an entity as on a particular date (McKee 2015). Following are the
KAM which have been mentioned in ASA 701 to be mandatorily disclosedby auditors
of listed entities and also recommended for the auditors of unlisted entities;

The matters and items in the financial statements of
an entity which require significant amount of personal judgment by the
accountants and sometimes even that of the management need to be reported as
KAM in the independent auditor’s report. These are the areas in financial
statements which are prone to manipulation. ASA 701 has prescribed these
matters to be reported in the independent auditor’s reportto ensure that the
investors and shareholders take note of these matters while evaluating the
financial statements of an entity (Afterman 2016).

Areas of financial statements which require auditors to make significant
judgment

The inventory valuation
method used by the entity:

There are few alternative methods which are allowed to
be used in valuing the inventories of an entity. The accountants have the
liberty to use any particular method to value inventories of an companies. The
auditor needs to assess the inventory valuation method used by an entity to
determine whether the same is in accordance with the relevant accounting
standard. In case there is any contravention in valuation of inventories by an
entity then the matter must be communicated in the report of the auditor in
accordance with ASA 701 (Bédardet al.
2015). The inventory valuation technique used by an entity must be in
accordance with the prescribed guidelines provided in the accounting standard
AASB 102 to ensure that there is no contravention in valuation of inventories.
This aspect must be evaluated by the auditor and accordingly, reported in his
report to comply with the requirements of ASA 701 (Livne 2016).