Read the extract below, which relates to the ABC Learning case, and then answer the questions that follow Lessons to be learned from ABC Learnings collapse

The last detailed financial statements from the field childcare operator was delivered on February 19 last year when ABC learning meat available it's accounts for half year ending December 31st 2007.

Statements from ABC learning just before it finally collapsed in November indicated losses for the year ending June 30 would easily wipe out any profits the company ever made.

In simple terms, ABC learning has wiped out its dubious claim to have ever made a profit.

When it came to the treatment of revenues and earnings in those fateful half-year accounts. Ernest and Youngs Brain Long took a very different view from ABC's previous auditor from pitch partners-who were happy to endorse the interpretation provided by the company's management.

Payments from developers that subsidized loss-making centers- and hid the fact that ultimately a gutter of them was losing hand over fist- what included as normal revenue, hiding the fact that the governments child care largesse was no El Dorado for ABC learning shareholders.

Doctor Philip Rose, the head of the school of accounting at the University of Western Sydney, describes it as a failure of regulatory and accounting processes and since that despite the changes of corporations law and accounting standards ABC learning situation is not that different to the One Tell and HH collapses.

All three sought rapid expansion of market share which carrot significant risk clearly not reflected in [their] financial statements, he says.

He notes that ABC learnings profits increased rapidly through acquisitions, which should have raised questions about the underlining valuation of asset it acquired- especially given that 70% of the assets were intangible.

The inherent risk associated with the valuation of the asset was enormous and should have been a red flag, doctor Ross says.

Embarrassingly for the Australian Securities and Investment Commission, this issue was pointed out to it in 2006, but the regulator couldn't find any fault with ABC learnings massive intangible assets, we should go on to play a crucial role in the expansion that bought the company undone.

The ASIC complainant said: it's suggested that the methods of financial reporting being employed here are designed to artificially create apparent shareholder value, when in fact the shareholder value associated with the childcare licenses (90% of net assets) is based entirely on the future net cash flows of the company, which may or may not be realized. It also suggested that this may be misleading to potential investors in the company.

.. Experts interviewed by Herald point to the or did expectation gap- the miss perception that bean counters go through the accounts with a fine-tooth comb and check every detail. Auditors are required to do only enough checking to assure themselves that the accounts are OK. It is only if enough red flags pop up that they are forced to review the accounts, as Ernest and Youngs four- month slog demonstrates.

Sourced from the Sydney Morning Herald 2009 listen to be learned from ABC learning collapse.

Required:

1. discuss the ethical issue that would have been confronted by pitcher partners, the previous external auditors for ABC learning. why would this ethical issue be relevant to an audit of ABC learning?
2. What were the key areas of misstatement in ABC learning? discuss reasons why auditors usually focus a lot of attention on these key areas of misstatements. in each of the key areas specified, consider the type of misstatement possible.

in the above extract, the comment is made on the audit expectation gap. explain this and discuss the implementations of this for auditors.