Collapse of the ABC Learning Centre-Free-Samples for Students

Question: Critically assesses Issues of Auditing Surrounding the Collapse of the Business Concern ABC Learning. Answer: Executive Summary: The current study critically assesses issues of auditing surrounding the collapse of the business concern ABC Learning. This helps in comprehending the issues and helps in learning lessons that might help in identifying the gaps in auditing. Moving further, this leads to the development of new standard of auditing ASA 701 that if were applied before could have averted the collapse of the firm. In addition to this, this study also helps in gaining deep understanding regarding analysis as well as usefulness of the auditing standard ASA 701. Introduction The AUASB issued the auditing standard ASA 701 that shows the level of commitment to conformity with the current enhancements and modifications to audit reporting designed by the International Auditing and Assurance Standards Board. This study helps in understanding that auditing standard takes account of authorizing the communication of KAM in the reports of the assessor and enables auditors of other business units to decide whether to take in KAM in the report of the assessor. Furthermore, this study helps in analytically gaining understanding as regards auditing issues surrounding the collapse of the firm ABC Learning Centre. In addition to this, this study also carries out a detailed analysis of the issues related to the development of novel accounting standard ASA 701 Communicating Important Audit Matters in the Independent Auditors Report. Consequently, important audit materials are required in the audit report to different members of ABC Learning Centre. Moving further, the st udy helps in analysis of accounting standard ASA 701. Analysis of the collapse of the ABC Learning Centre Study of the background of the collapse Analysis of reports on collapse of the firm ABC Learning Centre reveals the fact that the external assessors of the firm ABC that is the Pitcher Partners delivered unqualified opinions since the appointment during the year 2003. Nevertheless, after the appointed auditor left during 2007, new assessors Ernst Young presented a very diverse opinion regarding the profits of the firm formerly mentioned by the management of the firm in the account statements. In addition to this, the board also called KPMG as a third party in a bid to settle the variances between the two different assessors. Detailed study of the operations of ABC Learning reveals that ABC was co-established as a childcare unit by Edmund Grooves and his wife. Previously, childcare units in Australia were primarily not-for-profit organizations backed by government subsidies. However, during 1996, management of ABC operated around 18 care units and became a chief player in private childcare segment in Australia. During this period, the Australian government arrived at the decision to provide the subsidy directly to the families that in turn generated potential for higher rate of growth. Consequently, ABC seized the golden opportunity and arrived at decisions of expansion by acquirement of properties in different prime locations and purchasing out individual daycare centre with smaller childcare units. During the year 1999, the company owned 30 units. Again, during the year 2001, ABC got listed in the Australian Stock Exchange, providing it the opportunity of attainment of further growth in capital. However , the company attained growth at an exponential rate after undergoing the process of listing, along with the corporation nearly doubling the entire operations every year (William Jr et al. 2016). As such, by the end of the year 2005, the company acquired around 660 units in Australia and initiated overseas ventures during 2006. However, at the time when the corporation was listed, the market capitalization of the firm was at about AUD 25 million. Consequently, ABC became pear shaped and the company ABC became overwhelmed by the repayments of debt and had to market around 60% of the US subsidiary along with the entire UK auxiliary segments. Thereafter, it was lastly traded at AUD 0.54 and thereafter was delisted from the A UX. Primarily; the primary criticisms were made regarding the business model, diverse accounting practices, hostile acquirement, capital expenditure, business leverage together with weak operational flow of cash (Simnett et al. 2016). Essentially, it can be said th at these can be considered as the contributing factors that led to the collapse of the firm ABC Learning. Accounting and Auditing Issues Recognized Several accounting and auditing issues can be recognized in this regard. Acquisitions of ABC led to the recognition of licenses of operations of childcare centers along with huge amounts of goodwill. All these two can be considered to be intangible assets presented at the fair value in the balance sheet. Assessment of financial reports revealed the fact that the goodwill of the company increased to around AUD 271 million and licenses to AUD 2.4 billion during the period 2007 and 2008. Nevertheless, charges of the impairment for the intangibles were roughly AUD 2 million for specifically goodwill and AUD 8.4 million for license for childcare. Particularly, it can be hereby mentioned that intangible assets mainly become worthless at the time when a corporation runs into difficulty (Messier et al. 2014). As per Phillips Ross, chief of the school of accounting at the University of Western Sydney it can be said that profits of ABC amplified swiftly by means of acquirements that again coul d have raised questions as regards underlying asset valuation that it obtained- particularly provided 70% of the assets were intangible. In addition to this, inherent risks related to valuation of asset were massive. During the period 2006, anonymous criticism was raised and concerns were associated to the Australia Securities along with the Investment Commission regarding the valuation of childcare licenses of ABC. Again, the complainant also mentioned that majority of the value generated was founded completely on the net cash flow during the future of the corporation (Knechel 2016). In essence, this might possibly or might not be realized and approximated that between the period 2001 and the year 2005, the company ABC generated more around AUD 390 million in gains by means of revaluation of the licenses. It can be said that audit failures also added to the collapse of the firm. The external assessor of the firm ABC Pitcher Partners provided ABC unqualified viewpoints since their appointment during the year 2003. Nevertheless, after the resignation of Pitcher Partners during the year 2007, the new assessor Ernst Young provided a totally diverse opinion regarding the profits mentioned in the acc ounts (Louwers et al. 2015). However, KPMG was also appointed by the board. Reports Presenting Audit Failures that surround the collapse of ABC Learning Centre As per report published by the Sydney Morning Herald, three different assessors counting two of the largest names in the business examined the account exercises of ABC Learning. Again, KPMG also could not locate mistakes with two materially different viewpoints provided by diverse auditors of the company (Knechel and Salterio 2016). However, the findings have not been divulged publicly, nevertheless, the Groves expressed it clearly that KPMG could not locate the mistakes. Thus, it can be said that three diverse audit corporations including even two of the biggest names in the business examined the account practices of the firm ABC Learning. Although KPMG could not locate mistakes within two materially divergent viewpoints presented by two different auditors, one of the audit corporations appropriately diagnosed the miserable condition of the firm. Furthermore, the total liabilities of the firm ABC almost remained reasonably constant. Nevertheless, during the period December 2007, app roximately AUD 1.1 billion of borrowings was re-categorized from specifically current to diverse non-current liabilities owing to refinancing. Again, the lenders of the firm ABC contained different leading banks (Elder et al. 2011). During the period June in the year 2007, the firms ABC confirmed a syndicated multi-alternative bank capacity for approximately AUD 1.48 billion of firms borrowings. Issues that led to the development of the new auditing standard ASA701 Analysis of financial assertions ABC could develop adequate operating cash flows in a bid to pay interest, wages as well as salaries along with dividends. Even though profits of the firm increased progressively over the past few years, there have been the several cases of corporations that have failed on the backdrop of specifically positive earnings and profit along with the negative operational flow of cash (Eilifsen et al. 2013). Again, it emerged that Grooves along with other directors of the company ABC had assured their shares to acquire money. According to the reports, it can be said that since the price of the share escalated, they were compelled to sell all the shares that is equivalent to roughly 5.6% of the corporation to satisfy the entire margin call provided by the corporation. In addition to this, analysis of the business case of ABC Learning shows that forced sell of shares had immense influence on the stock price of the corporation. The study thus helps in understand ing the fact that all kinds of corporate collapses have certain similarities as well as variances (Cohen and Simnett 2014). Nonetheless, similarities from the perspective of issues that led to the collapse of the firm ABC are considerably significant. The scope of the auditing standard ASA 701 helps in understanding the basis of development of the same. However, comparison to auditing issues encountered in the corporation ABC Learning also helps in understanding the reason for the development of the accounting standard. Analysis of business case on ABC Learning divulges the fact that improper communication by the audit partners of the firm led to the collapse of the firm. Arens et al. (2013) asserts that the scope of the accounting standard ASA 701 helps in dealing with the accountability of the assessor and this helps in communicating important audit matters in the report of the auditor. Again, it is intended to deal with the judgment of the assessor as to what can be communicated in the report of the assessor. Arens et al. (2016) also adds that the accounting standard ASA 701 also helps in enhancement of the entire communicative value of the assertion of the auditor. This in turn can help in delivering greater amount of transpar ency as regards the assessment that was undertaken. Communication of particularly key matters of audit thereby delivers supplementary information to specific users in assessing the business entity along with different areas of important corporate judgment in the specific audit reports of the corporation. In addition to this, the scope of this specific accounting standard ASA 701 also elucidates the fact that the communication of important audit matters in the assertions of the audit assists in forming an opinion regarding the financial reports on the whole. Again, communication of important audit matters in the assessors audit that the appropriate financial reporting structure. Furthermore, auditing standard is also applicable to the processes of audit of different general purpose financial reports of diverse listed business entities at the time when the assessor decides to communicate diverse important audit matters in the report of the auditor. Thus, it can be said that business c ase on ABC Learning also helps in comprehending the negative effects of improper communication and ill effects of unqualified opinions (Arens et al. 2012). This lesson learnt from the case on collapse of ABC Learning leads to the development of the accounting standard ASA 701 that can help in rectification of errors created by improper communication. Evaluation of the usefulness of ASA 701 There are things that need to be divulged in the audit account to members of ABC Learning Centre in case if the new auditing standard ASA 701 had been implemented before collapse. Adherence to accounting standard ASA 701 can thereby aid in determination of important audit matters, essentially those matters that necessitated attention of the assessor in carrying out the assessment. As per paragraph 9 of ASA 701, this accounting standard takes into account diverse areas of high amount of examined risk of material misstatement or else important risk detected as per the ASA 315 (Arens et al. 2017). In addition to this, this accounting standard ( according to paragraph A 23 to A24) of ASA 701 also considers important judgment of the assessor associated to financial declarations that involved important judgment of the management counting accounting approximations that have been recognized as having higher approximation uncertainty (Auasb.gov.au 2017). Furthermore, the influence of assessme nt of important events or else transaction that took place during the phase is also taken into account as per the directives of the accounting standard ASA 701 (presented in the paragraph A 25 to paragraph A 26). The assessor also need to determine diverse matters determined as per paragraph 9 of ASA 701 that is significant in the assessment in the process of assessment of financial reports of the firm and thereby the important audit matters (according to A 9 to A 11 along with A 27 to A 30) (Auasb.gov.au 2017). Particularly, analysis of business case on collapse of the ABC Learning reveals the issues associated to improper detection of material misstatements that led to inappropriate determination of important audit matters. Thus, compliance to the auditing standard ASA 701 can thereby help in incorporating key factors as stated above for determination of key matters of audit. Consequently this help in detection of risk of material misstatement, inappropriate accounting approximations and proper inclusion of important events. Thus, the business issues faced in case of ABC Learning points out towards the needs for the development of the accounting standard. In addition to this, lessons learnt from the business case on ABC Learning also reflects the need for not only determination of key audit matters and but also proper communication of professional judgments. The unqualified opinion by the auditors of ABC therefore reflects the need for the design as well as development of ASA 701. ASA 701 (referring to paragraph 14 and paragraph 15) mentions that there are audit matters along with necessity of professional judgement that is of huge importance in the process of audit of pecuniary assertions. Again, this standard also helps in properly addressing diverse matters in the specific context of audit of financial declarations and in developing an opinion of auditor (as per paragraph A 31 to A 33) (Auasb.gov.au 2017). In addition to this, ASA 705 also refers to matters that give rise to modified estimation or material uncertainty associated to diverse events or else conditions that might cast considerable doubt on the capability of the business unit to continue as a going concern. These are not present there in the requirements of paragraph 13 to 14 of this specific auditing standard. Thus, reports on these matters can be presented as per Australian Auditing Standards and incorporated as a reference to the (Basis for Qualified Opinion) (Auasb.gov.au 2017). Conclusion In conclusion, it can be said that unqualified opinions by different accounting and auditing firms can be challenged in the after different corporate scandals such as that of the collapse of ABC Learning. The study also helps in understanding Particular failures of financial institutions during the period of global financial crisis that led to difficulties owing to the unqualified opinions of the accounting firms. Additionally, the current study also assists in comprehending the issues that led to the failure of business and consequent collapse of the ABC Learning. Thus, the lessons learnt from the provided business cases helps in gaining understanding regarding factors that lead to the development of the ISA 701. This subsequently describes diverse important audit matters and explains significance of audit in the financial assertions of the present period as per the personal judgment of the assessor that can avert business failures. Recommendation Analysis of the business case on ABC Learning shows the importance for carrying on communication with the ones charged with processes of governance. Therefore, management of firm might have considered matters that auditors need for determination of important matters of audit. Audit documentation can also be regarded to be very significant for determination of Audit matters along with communication of reports of audit (paragraph 15 of ASA 701). 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