In the year 2008 Australia face tremendous economic crises. In which a major company of day care of children collapsed. A child care and old and disable training center was introduced by a company name ABC Learning Center. It was not one of its kinds but still rose with a tremendous speed. The speed was so much that even the management could not control the success of the company. Within five years of working the ABC Learning Center owned 20% of the market share of the child day care centers in the whole of the Australia. The ABC learning center had almost 800 centers. The growth of the center was very well visible on the stock market. The price of the share rose up to 300% in the span of five years of working in Australia. Approx. 50 million profit was earned by ABC Learning Center in the year 2004-2005 financial Year. To rise is easy but to maintain the same height is very tough. Same happened with the ABC Leaning Center. As the management could not control the rise of the company they could not even hold the fall down of the company. There were various reasons.
Competition Increasing
The management had no idea of the growing competition in the market. With the time pass the company raised, but the cost of everything related increased. The child care center was in the rented premises the rent of the property increased every year. There were many centers and many students, but the child care center could not the teachers, supporting staff in the same ration. The drawback of which was the quality of the training was sinking. The quality was the USP of the child care center which was now not to the same mark. The government facilities the children’s of the under privileged parents. They can study free in these child care centers. This gave a great financial loss to the ABC learning center. Many children studied for free. The expense on these children was equal to the paid students. The cost increased and the profit margin decreased. The government policies keep on updating and to support such care centers, which facilitated in the opening of new children care centers (Hecimovic and Martinov, 2011). The fees, the quality of training, and the pay to the staff everything was better than ABC learning center. The management did not change their policies and fought with the completion. Thus the company collapsed.
The ABC Learning Center had practiced malfunction in the accounting statements. The government came to know about this practice in the financial crisis of the year 2008when many such issues were highlighted. One of the main reasons of the collapse of the ABC learning center was its faulty accounting. The shareholders were very upset as they have invested in the company shares but the value to the shares was not as in the market. The balance sheet showed approx. 82% of intangible assets which were not licensed and the government had the rights to issue the licenses. The cost to obtain the license was too high and even some were related to the business and were useless (Adamidis, 2011). The management had to pay a high cost to obtain the licenses. This malpractice by the ABC Learning Center was out in the market and hit the share market; this shattered the economy of the company. The current management resigned. Than the importance of the intangible assets as understood.
The investors were very offended and lost the confidence in the company. The reason was that the director who use the funds of the company to self-enrich and the relatives. Many payments were listed which were paid to such companies which were owned by the directors relatives. A broking company was introduced to ABC Leaning Center which had the major shares of the than director Mr. Grooves. A firm name Queensland maintenance that as paid $74 million by ABC Learning Center this firm was under the ownership brother-in-law of the director. Another matter of related party transaction was that the ABC Learning Center sponsored a basketball team which was owned by Mr. Grooves. On adding butter to bread the company denied that these expenses were not related to their company. Such personal benefit transactions should not be done in a company as it ruins the reputation of the firm and the shareholder’s confidence decline as their money is safe or not.
This policy gave an entrance of private companies profit making or non-profit making to have child care centers. Government initially provided financial aid to the child care centers which facilitated the working of the centers. With the time change and increase of the no. of the child care centers in the country the government made changes in the policies. The most important was the withdrawal of the financial help to the child care centers. This increased the competition and reduced the quality of the services. Now not only the child care was done in fact a family care and development came in existence. The fee was based on the income of the fee. This fee was directly connected to the tax rebate, but unfortunately it was reverse effect (Akmal, et. al, 2012). More the fee less the tax benefit. This reduced the interest of the parents in such child care centers. Even the centers have to spend a huge amount in the investigation of the parent’s background and their financial were about. All this increased the cost to the centers and gradually increased loss in the balance sheet.
The investors were very afraid after the collapse of the ABC learning center. The investors demanded a government some law which can be helpful to know the future stability of the company. The audit authorities introduced the ASA 570 audit law. This law brought the future picture of the companies working. This accounting standard helped the auditors to prepare the financial report on the assumption that the company is going and will continue to operate as per the foreseeable future. The reports prepared on the going concern are valid until the management liquidate the company or the operations are cease or the financial reporting are not in accordance of the rules of the accounting parameter (Hecimovic, et. al, 2009). The going concern has limitation to the reports prepared for taxations. The taxation was the parameter where the going concern. The auditors could not predict the future in the case of the tax liabilities. In the case, of tax liabilities the company may close with the government instruction or may be restricted to practice certain function of it. Thus the investors and shareholders were at comfort with this accounting standard.
The Australian economy has seen such a big economic crisis that the government wants to take all the possible measures to control the future of its economy. The shareholders were at the peak of terror the investor denied investing in any project. To protect such shareholders and investors the government introduced the ASA701 audit standards. This audit standard is based on the key audit matters. The reason of the economic crisis was lack of proper financial statements and accounting. Keeping this in mind the audit key matters were designed. With the proper analyze of all the key audit matter the auditor prepares the audit reports. Such reports are trust worthy and are transparent (Ciesielski and Weirich, 2012). The investors have the actual picture of the company. With the actual picture of the company the market was considered safe and the rotation of economy started. Some matter was highlighted with collapse of the ABC Learning center.
The auditor has to be very careful with the key audit matters. More the important the matter more attention was to be paid to the key audit matter. These matters could be the matters which are charged by the government. The matters which were charged by the government were considered to be most important. The auditor took the key matters at the top importance which were charged by the government. Auditor has problems in the implementation of certain standards oh auditing to make auditing more powerful in the matters which were either charged by the government or management judgment (Marks, 2012).
It’s the auditors have the right to select the key audit matters. It’s their duty to determine and communicate it. They can involve the matters in their judgment and what’s the use the matter in context to the others can also be considered.
What is the nature of the business, the volume of the business these mattered are the base of determining the numbers of key audit matters. The bigger the volume the number of the matters increases. The auditor has to keep in mind that the list of key audit matters should not be too long. The longer the matters list more divination from the important matters (Saratiel & Daan, 2011). The most important matter in a short list is more affective. This strengthens the financial reports also.
Proper accounting and proper auditing is required for any business or firm to run and to last in the market. The government of Australia announced new auditing standards after it has seen the fall of the biggest learning center or child care. The ASA 701 is very important and useful to the auditing sector. It also has a wide scope in the field of auditing. It has made the auditing much more clear and transparent. To make the auditing more efficient some important information are to be collected and the final financial reports are prepared.
The auditor has all the rights to judge the key matter for audit. The selection can be done on the basic of quantitative or qualitative facts. This could further be analysis in the matters like the interest of the recipient, relative magnitude, the effect and the nature on the subject matter. It also involves the matters of those which the government charged an analysis of the objective and the circumstances the nature and communication extend are also included.
The matters which are charged by the government and the auditors had a very aggressive conversation on the matters where the matters of interest of the users. The matters which had significant judgment of the auditors informing in the opinion of the financial report as these were the matters are helpful to the management in making judgments.
The key audit matter in the audit report enhances the communication between the auditor and the matters charged by the government. The relationships also improve between the management and government charged matters. A better communication is set in the financial reports.
The auditor who prepares the audit report assume that the uses understands the following that the user is aware of the business and economic activities and understands the accounting and auditing reports. Secondly the user understands that the audit reports are prepared and presented at the level of materiality. Thirdly the key audit matters are used to understand the future conditions and plan and maintain the amount required in the lieu of the requirement in future. Lastly when the audit reports are prepared with transparency then the future decisions are taken with all trust and confidence (Gintaras, 2012).
The above were the key audit matters which were lacking in the accounting of the ABC Learning Center. The lack of proper financial statement was the reason that the balance sheet of the child care center was not prepared truly the effect of which the shareholders lost the confidence in the company and the company collapsed. Proper transparency is very important in any company cause of which the actually state of the company in the market is known. The 200 % raise in the share of the child care center was not ground reality, as the basic value was not correct. The company has incurred such expenses which were not related to his business. When the government policies changes the child care center could not hide the poor financial condition.
Conclusion
The Australian government has faced an economic crisis in which many companies collapsed. The reasons were not only the crisis but the companies were not having proper financial records. The companies lacked in the proper financial statements, the management also use the companies’ funds for the personal use on such heads which were of no use to the company. The government then introduced some auditing standards which were in lieu of the investors and shareholders. These audit standards gave a clear picture to the market. The fake share rates were brought to actual rates. Many key auditing matters were determined to make the reports transparent and full proof from the flaws. Certain standards are set to give the assurance to the investors that in future the company will not collapse. These standards gave a new phase to the market and security to the investors and shareholders.
References
Adamidis, A. (2011). What’s new in audit? Charter, 82(7), 56-57.
Akmal, M., Syed, A., & Shaikh, F. (2012). Decision Usefulness, Truth and Accounting: A Philosophical Approach. Journal of Business Strategies, 6(1), 40-56.
Ciesielski, J., & Weirich, T. (2012). A New Audit Report. The CPA Journal, 82(2), 11-14.
Gintaras ?ernius. (2012). The new role of the going concern concept in corporate finance management. Perspectives of Innovations, 12(3), 76-85.
Hecimovic, A., & Martinov-Bennie, N. (2011). The Differential Impact 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 processes: Internal auditors should strongly consider a risk-based approach to audits of 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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