Key Audit Matters and Auditors’ Opinion
In the recent past, various accounting standards have been introduced and many accounting reforms have also been introduced to improve the quality of reporting by the management of the company and also to improve the level and quality of auditing by the auditors so that the transparency of the financial statements can be improved. These include more stress on the corporate governance so that the users are well informed of the company practices, enhanced disclosure norms and better presentation techniques (Alexander, 2016). The same has been discussed in the analysis section of the assignment using the Annual report of one of the companies which was the early adopters of all these changes, Telstra Limited.
Telstra is one of the widely known telecommunication companies in Australia and deals in setting up and operating telecommunication networks, internets, mobile network, voice and other entertainment products and services. It is listed on the Australian Stock Exchange and is now fully privatised employing more than 36000 employees (Belton, 2017).
ASA 701: Key Audit Matters om auditors reports and its impact
Among the changes that were introduced post 15th December 2016, the most eminent were ASA 701 which discusses on communicating key audit matters in the independent auditors report. This further includes reporting of the crucial and material matters to those charged with governance and disclosing the material misstatements and significant risks , if any in accordance with ASA 315. Also, the ASA focuses on disclosing the significant management decisions, judgements and estiamtes, if any with respect to the accounting treatment and policies (Bizfluent, 2017). It also focuses on mentioning the significant events and transactions that occure between the period of financial year closure and the roll out of the annual report. This will help the investors to be informed of the latest details about the company and thereby help them in taking informed decisions. The committee has alos clarified the point that highlighting the key audit matters is not a substitute for expressing a modified opinion in case the financial statements are not being able to meet the minimum standards. However, few exceptions have been given where the auditor need not report the key audit matters in the auditor’s report, some of them include those prohibited by law or regulation or those which can be in adverse public interest. There is a great change in the scope of the audit which focuses on both the qualitative as well as quantitative aspect such a relative magnitude, nature and effect of the audit report on users (Chron, 2017). The definition of the key audit matters as mentioned in the standard has been shown below:
Impact of AASB 16 on Financial Reporting
Other new audit reporting rules
ASA 705 requires the auditor to mention the reason for giving out an adverse or qualified opinion on the financial statements and its brief description which will help the user to understand the intended users to understand and identify such circumstances when it may occur. Separating this communication in th auditors report from the key audit matter gives more prominence and importance to the audot report, thereby clarifying that both of these are separate issues and the auditor will be required to report key audit matters even if the auditor gives the adverse or qualified opinion (DeZoort & Harrison, 2016).
ASA 706 which has also been introduced during this period establishes additional mechanisms for the auditors to include in the audit report “emphasis on matter paragraph and Other relevant matters paragraph” whevever it considers the same necessary. The standard mentions this to be different from the key audit matters. The standard also gives a note and mentions the areas which require the specific attention of the auditors like the risk based areas and identifying the chances of the material misstatements in the financial reports. The planning and performance of the audit procedures should be done based on the assessed risk of material misstatement in a particular class of accounts or transactions and the same needs to be defined at the assesrtion level only (Dichev, 2017). The standard also requires the auditors to focus on the complex and areas where the management has applied some judgements and estimations.
The AASB has also brought about changes in the leasing standard AASB 16. Effective in the coming period, most of the companies would have to report the operating leases on the Balance Sheet. This has brought about a major change as earlier a lot of companies which were having all its working capital and assets/ property in the form of the operating leases did not show the liability in the balance sheet but ideally it is a part of the loan. Now the standard has done away with all the differences uin between the operating leases and the financial leases and now the company will have to report the opeartibg leases as well in the financial statements. This will bring a major change in the reporting for the different companies as now the companies which were being casted as debt free in the balance shetet will now be heavily loaded with the debt (Félix, 2017). This will not only ensure better transparency of the accounts but also will let the users of financial statements know about the company’s lease commitments, the true gearing ratio and the debt liability. The lessor accounting as per AASB 117 will largely be unchanged. Due to the above changes, a great deal of financial and operational challenges are expected to come in way besides the financial reporting and therefore auditors need to have a check on the internal controls of the companies, their leasing judgements, the basis, debt covenants, credit ratings, impairment testing, etc. The auditors will also get an opportunity to check the IT systems and whether or not they are efficient enough for the companies to capture the above changes.
Conclusion
Besides introduction of the new standard ASA 701, necessary amendments were also carried out in many accounting standards to ensure that all that is necessary are reported to those charged with governance like the directors, the key managements personnels and so on (Heminway, 2017). All this was aimed at increasing the communicating power of the auditor’s report and hence the changes were introduced to make the users well informed of most of the aspects and share as much infimration as it is possible and viable. This approach of AUASB is more in line with the approach of International Standards of Auditing Board which most of the companies are following. These changes have been termed as revolutionary as it will bring about a massive change in the investors point of view as well as other stakeholders (Jones, 2017).
Some of the other changes to the existing accounting standards include ASA 700 as per which the format of the audit report has been changed bringing the audit opinion to the front page to make it more concise and understandable and thereby enhancing the qualitative characteristics of the financial statements. ASA 570 which deals with the Going concern concept has now to be reported in the audit report wherever there is uncertainity over going concern of the company. It also states whaat are the changes in the work effort required to check on the going concern assumption of the client. Auditors can also now include in the audit report any work conducted on any other information of the company in one of the separate sections (Visinescu, et al., 2017). The Auditors responsibilities have also undergone some change mentioning which specific standards needs to be compulsorily followed and enhanced description of the responsibilities.
Key audit matters: Use and how to identify
Discussing on the key audit matters, the objective of the same is to ensure greater transparency of the audit performed and accounting standards which were being used in checking and mitigating the risks. It also aims to provide that information of the users of financial statements where the auditors independent professional judgement has been involved in the current period. The next question is how to identify the key audit issues? The same has also been mentioned as auditor will identify the key audit findungs and discuss the same with the Audit committee and those charged with governance out of which few topics or areas will be selected as those which require “significant auditor attention” (Kuhn & Morris, 2016). This are areas which pose a risk or for which the auditor has not been able to find the sufficient audit evidences or where the auditor is finding it difficult to form an opinion in absence of conlusive evidences. All these matters are generally rare situations where there is huge complexity involved and thereby complex auditor and management judgements. These are then to be reported in the auditors report.
Areas of KAM
Some of common areas of KAM and auditors focus include:
- Going concern
- Risks of Impairment
- Revenue Recognition
- Legal, regulatory and taxation affairs
- Weaknesses in the internal control having impact on the other areas
- Acquisition and disposal of investments
Early adopters of auditors’ reports
Some of the companies which were the early adopters in this regard include QBE, Cochlear Limited, ASX Limited, EDI Downer and Telstra. Few of the extracts of the annual report, 2016 of Telstra has been shown below to evidentiate the same.
From the above extract, it can be seen that the auditor E&Y has given a clear opinion on the financial statements of Telstra Corporation Limited as on 30th June 2016 but also included the basis of opinion paragraph in order to make it clear to the users of the financial statements and the stakeholders as to which new standards have been used while auditing, what are auditors responsibilities in regard to the financials, and they are independent and have followed the ethical code of conduct while auditing. They has also include a separate paragraph for key audit matters which was was the change introduced post 15th December 2016 (Knechel & Salterio, 2016). It says what were the key matters involved, how they were being identified and how they were being addressed in forming the audit opinion and giving a reasonable assurance to the users that the accounts are free fro material misstatements. Some examples of key audit matters include revenue recognition, reliance being placed by the management on the automated controls and processes, impairment of the goodwill and the intangibles, employee retirements and employee benefits, etc like shown below.
The auditor mentions that in order to overcome thses risks, test of control and test of designs of the internal control were being checked and operating effectiveness of the IT system was also being tested. Furthermore, to ensure that the calculations of the impairment was satisfactory, teh auditors also employed the use of EY valuation experts to check the reasonableness of the key assumptions. The team also made use of the actuarial experts to check where the external valuation of retirement benefits of the employees is satisfactory and good to go ahead (Sithole, et al., 2017).
Besides the above, the company also introduced one more change to its audit report in the form of “Other information” which states that apart from the financial information, other information has also been disclosed for which the directors are responsible and the auditors do not express any opinion thereof.
Conclusion
From the above discussion and analysis of the key changes brought in by IAASB including the introduction of the new standards and revision of the existing ones, it has made the reporting process and the audit more transparent and revealing. The annual report is no more a summary of just the financial information of the company but also a disclosure and the complete summary of what are the internal controls being practiced by company, what are the material misstatements and key audit matters that the auditor worked upon, etc. This in in line with international standards and helps the investors and other stakeholders to be more informed and thereby having clarity in thoughts and insights. This has also contributed towards enhancing the qualitative characteristics of the financial statements like understandability, comparability and timeliness.
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.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
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].
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud within organization. Journal of Business Ethics, pp. 1-18.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
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.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66
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