Importance of the new standard
Discuss about the Decision Making and Reputation Management in Public Relations.
In the Independent Auditor’s Report, the Auditing Standard ASA 701 which discusses on Communicating Key Audit Matters explains important issues that the auditor is required to mention in his audit report. Some transactions have a material impact on company and it is important all such aspects needs to be clearly disclosed in the audit report. This standard asks the auditor to check and verify the important, significant and critical areas which might have a material impact on the entity and therefore, might pose a problem if not properly audited (Kuhn & Morris, 2016). For the investors of the company, the audit report is essential as they rely on it to take appropriate resolutions associated with the business. All these standards have been prepared on the basis of IFRS and comply with the same and are generally released by the Auditing and Assurance Standards Board (AUASB). The auditor needs to abode with the given standards and prepare the audit report on the basis of the same, only then it meets the requirements of the interested stakeholders. This standard is also aimed at enhancing the qualitative characteristics of the audit. These standards are framed in such a manner as to assist the auditor in the given circumstances and to discuss the key issues with those charged in governance post which the audit report is being prepared (Heminway, 2017). The detailed description and contents of the given standard has been mentioned below. The important characteristics of this standard comprise the points given below-
- The auditor is required to list down all the essential topics that are to be disclosed in the financials of the listed company. They are also required to take important resolution and reflect all the important topics and look upon it such that there are no material misstatements in the financials of the organisation. This is a mandatory requirement that while auditing the listed companies, the auditors need to comply with the given standard while preparation of the respective audit report.
- In cases where the unlisted company is being involved, the auditor by himself decides what all topics are essential and are they required to be incorporated in the annual reports. It is not a mandatory requirement as it completely depends upon the auditor if they want to incorporate the same or not(Chron, 2017).
- Some necessary topics which the auditors are required to abide by and comply at the time when they are assuming the inclusion of key audit matters in the report are listed below-
In case there are such domains and areas which are very vulnerable to pose a risk on the company, the auditor is required to look into the same if they would significantly have an influence on the decisions of the stakeholders and are significant by nature. The auditor is required to include these matters in the audit report and along with the individual judgement of the auditor so that the users of the financial statements are also aware of the views of the auditor (Goldmann, 2016).
There are different matters that are cited to those charged with governance of the organisation and in case the auditor realises any matter that is necessary he can report that in his audit report of the company.
The auditor should specifically check those areas in which the management’s estimation and decisions along with the assumptions are being involved as these areas may be quite vulnerable. Hence, this is what should be determined by the auditor when they are dealing with the company.
- This standard further shows the way and the procedure in which the auditor shall explain the important matters that may have an impact on the company. Appropriate analysis is required before the same is reported in the audit report. Also disclosure needs to be made as to why that has been presumed to be important enough to be shown in the audit report.
- It is also necessary that appropriate and sufficient disclosures are being made in the audit report of the company so that in case any modifications are required, then the same could be applied immediately. The logic is that auditor should have appropriate skill and professional competence which they can apply while preparing the audit report(Das, 2017).
- There may be few cases, where the important and critical matters may still not be considered and reported in the audit report, then in such a scenario, the auditor is should also disclose the grounds and basis on which such item has not been recorded. The management of the company needs to ensure that the auditor is having adequate experience and they are stating and applying the same while preparing the audit report (Farmer, 2018).
Analysis
This standard gives all the required steps which the auditor should abide by and adhere to so that the long term perspective of the company can be built through the study of the audit report. The investors can look into those important matters and determine if they should be investing in the company or not. The key matters which are enlisted shows an insight into the complete business of the company and hence it is essential that it should be shown with utmost accuracy and appropriateness so that the end user does not suffers on account of the company or the auditor.
This new standard has been introduced by the AASB in place of the standard ASA 570 (ISA 570) Going Concern. It is a case that shows that the company will be operating for infinite time and they have no intention of shutting down their business in future to come. This is termed as the going concern assumption. It is very essential as investors rely on it to make important decisions if they want to invest in the company or not. So, this is the manner, the management of the company operates. Going concern assumption can be at stake by many modifications that may happen in the financials of the company on time to time basis (Bromwich & Scapens, 2016). The earlier standard did not give appropriate disclosure relating to that but with the new standard this issue is resolved. In case there is any such modifications, it would be stated in the key matters of auditing that will influence the decisions of the investors of the company. The best part of this standard is that they have given all the measures in details that may influence the going concern assumption of the company in a way or the other. In case there is any problem, the auditor would be held responsible. The auditor is required to continue professional scepticism in case there are any error on part of the auditor it would result in disciplinary actions. So, this draws the auditor more accountable with their work. The company wants to see that the stakeholders achieve their due from the company, they are reliable on the company so all the measures should be charged towards them (Belton, 2017).
The given standard has been discussed with the help of the annual reports of two companies, and observing how the respective auditors have abided with the same while reporting these standards in their respective audit reports. Important and critical matters that were shown in their annual report has also been briefly discussed. The two companies that have been chosen here for analysis is TPG Telecom Limited and Telstra Corporation. Both these companies are listed on Australian Stock Exchange and they are pioneer companies in the telecom sector working out of Australia. The annual reports of both these companies have been studied and examined.
The TPG Telecom is one of the Australian company that is involved in trading and delivering telecom sector based services. It is known widely for its cost effectiveness and genuineness and therefore popular among the individuals. The profit of the organisation scales up to millions since inception in 2008. KPMG are the annual statutory auditors of the company, and they have shown several key matters which has been shown below.
The audit report has taken into account the following important matters highlighted underneath below-
It can be seen in the above audit report that the auditors have called in attention for certain critical matters which in their sense may be having material impact on the company and thereby it’s overall profitability. The main aspects that the auditor has focused upon is revenue recognition. In case of telecom sector, a very unique method of revenue recognition is being followed which is inclusive of the valuation aspects and a number of disclosure requirements. Since these companies mainly operate with high usage of internet based services, they possess a high billing system and the entire gain is distributed to separate domains. The auditor has also mentioned the appropriate methods which should have been taken care off and basis which the audit has been done (Kangarluie & Aalizadeh, 2017). The auditor has also stated the way and disclosed the method the valuation of goodwill which will be helpful for the company. Therefore, we find that the auditors have given all the necessary disclosures on all important and significant aspects and topics that may have a material impact on the company’s financials and have adhered to the set standard. At present, the investors can verify and analyse as to whether they should invest in the company or not, depending on the key audit matters being disclosed as this gives a comprehensive snapshot of the company’s performance.
It is the leader in the telecommunication sector in Australia and their financial statements are being audited by EY. This company trades in mobile phones and tablets, internet and broadband services, sets and constructs and maintains the telecom towers for the customers. It was setup in 2015 and from then the company has been growing in terms of revenue. The important aspects have been mentioned in the auditor’s report and emphasis has been given on the fact of going concern status of the company (Goldmann, 2016). According to the accounting standard, the auditor shall check for all such domains and areas that may have a material impact on the company’s financial position and status and will make appropriate disclosures with regards to the same in the annual report. The necessary matters that were mentioned in the audit report with respect to the above issues is how they are affect the company and its growth. In case of Telstra, the key points that have been included in the audit report and on which proper attention has been given have been listed below –
- On the part of Telstra the usage of internet is quite high, and hence its valuation becomes equally necessary. The auditor has examined the same and has disclosed how they have dealt with the same.
- Goodwill Impairment has been shown as one of another necessary matter by the auditor in his report. Goodwill is one of the important part that will assist to conclude if the company is operating better or not. It is all about the market valuation of the company.
- Assets capitalization is another critical category that examines how the company is operating and increasing the revenue. There are other methods in which valuation can be done and thus it becomes essential to check if the company is following the correct method or not.
- All that matters of key considerations have been clearly mentioned in the audit report of the company. The auditors have also disclosed what the key issue was and how they have dealt with the same during the course of the audit. From the above analysis, the investors can clearly analyse and decide whether the company is doing good or not and whether or not to invest in the company. Thus, these are some of the areas in which the auditor feels suspicious and thus has covered them specifically in the audit report (Alexander, 2016).
Conclusion
On the basis of the above scrutiny, analysis and assessment of the annual reports of the companies, it can be seen that audit report is a reflector that gives a true picture, if the company is carrying on to the best of its potential or not. The standard simply mentions that all the important and significant key audit matters are required to be stated in the audit report as it shall be of great help to the organisation as well as its stakeholders but in true sense, audit report is more than that. Audit is generally defined as the independent examination of the financial statement of an entity, to see if the financial statements are reflecting true and fair view or not. Also, to take essential resolutions if the organisation is operating to the best of their capacity or not. This standard will assist in enhancing the general clarity of the stakeholders and implication of the auditing standards on the reports issued by auditor’s basis which the investors can determine whether they should be investing in the organisations or not. The standard will also help in improving the quality of the audit report and will make the auditors more accountable for the work being done by them as they cannot report anything and everything. It should be supported by proper supporting documentations. If there arises any problems, then the auditors would be held equally responsible as in the case of Enron and WorldCom like global scandals (Sithole, et al., 2017). Therefore, in all the ways they are equally liable for what they are reporting in the audit report and this standard thereby assists the auditor to give to the best as per their efficiency. The investors can plan by looking at some of the important points and key audit matters as to if it poses any risk on the organisation and thereby what is the future of the organization. This certainly helps them as the early warning signal so that they can withdraw their investment as soon as they foresee the risk. Hence, it will be very important for the stakeholders as well as the management of the company to look for and study the areas which needs their awareness.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html
[Accessed 07 december 2017].
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Kangarluie, S. & Aalizadeh, A., 2017. ‘The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
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