Audit Planning For Healius Limited And Telstra Corporation Limited

Inherent Risk Factors in Healius and Telstra

Auditing can be regarded as the verification of the financial performance and position of a company as disclosed by its financial statements. It is an inspection of accounts to determine whether a true and fair view of the financial position and financial performance is given by the financial statements (Arens et al., 2016). It is important for the auditors to identify the inherent risk factors of an entity during audit planning so that the risk of material misstatement can be assessed. Analytical review also assists the auditor to identify the areas of concern or comfort in the client’s financial statements. The objective of this report is to formulate the strategies required in the audit planning stage of Healius Limited (Healius) and Telstra Corporation Limited (Telstra). First, this report identifies the inherent risk factors of these companies and discusses the required audit procedures or tasks. Second, it identifies the areas of concern or comfort of these companies and discusses the required audit procedures. Lastly, the ethical and legal liabilities of the auditor are discussed.

The following discussion identifies the inherent risk factors in Healius and Telstra that should be considered in the audit planning phase:

1. Sensitive and clinical and financial information is maintained by Healius and there can be severe consequence if there is failure in using and securing this data appropriately (healius.com.au, 2022). It is an inherent risk factor because of the risk that the ongoing data management program of the company may fail to record data accurately and reliably. This may contribute to the risk over accuracy and completeness of data in the underlying accounting records.
2. Healius is exposed to competition from new entrants and existing competitors. It may create stress on its senior management to maintain the expected level of profitability (healius.com.au, 2022). It is an inherent risk factor as the management may involve in fraudulent financial reporting to improve the profitability position (ASA 315, 2022).
3. The short-term and long-term incentives of the senior management of Healius are based on the growth of earnings per share (EPS) and earnings before interest and tax (EBIT) (healius.com.au, 2022). This is an inherent risk factor since the management might be motivated to overstate the value of EPS or EBIT.

1. Telstra acquired 100% of Epicon IT Solutions Pty Ltd and Epicon Software Pty Ltd on 30 November 2020 for $25 million (telstra.com.au, 2022). This is an inherent risk factor because business acquisitions are not routine transactions which do not occur regularly. It creates the risk that the transaction might be recorded incorrectly because of lack of recording experience (ASA 315, 2022).
2. The COVID-19 pandemic has affected the demand of Telstra’s products and the economy as a whole has been experiencing downturn (telstra.com.au, 2022). It is an inherent risk fact because it leads to the pressure on the management of the company to maintain the expected profit levels. As a result, they might involve in fraudulent financial reporting.
3. The management of Telstra has used significant accounting judgments and estimates in the accounting treatment of many aspects (telstra.com.au, 2022). It is a key inherent risk factor because of the possibility of misstatement is increased when considerable judgment is required (ASA 315, 2022).

It is needed to undertake the following audit procedures or tasks in response to the inherent risks identified above:

• In case of the first risk, the auditor would be required to document the data management system of Healius and undertake tests over the accuracy and completeness of the recorded clinical and financial data and information. It would further be required to review any management report on this data management system to identify any issue with the recording of clinical and financial data (Amalia, Sutrisno & Baridwan, 2019).
• For the second risk, the auditor would be required to maintain professional scepticism and be alert for any material misstatement. It would be needed to review the key accounts for possible misstatement. For example, sales account should be reviewed for possible overstatement and the key expense accounts should be reviewed for potential understatements.
• In case of the third risk, the auditor would be required to be alert to the risk of fraudulent financial reporting and maintain professional scepticism. It would be needed to undertake a detailed review and testing of the judgemental decisions made by the directors in the accounting treatments of EPA and EBIT. It would be needed to test any journal entry affecting EBIT in details (ASA 500, 2022).

• For the first risk, it would be required to review the transactions related to the acquisitions in details so that any misstatement can be identified. It would be required to review and test the transactions and documents associated with each level of the acquisition. Discussion should be made with the audit committee to identify any possible issue associated with the acquisition.
• In case of the second risk, the auditor would require to be alert for any mistsement because of the pressure on management and maintain professional scepticism. Accounts like sales revenue, key assets and liabilities and key expenses should be reviewed and tested for potential misstatements (ASA 500, 2022).
• In case of the third risk, it would be needed to thorough review and test the judgments and estimated used by the management of Telstra, and compare the treatments against previous years. In addition, it would be needed to obtain a written representation from the management to confirm the basis of any significant judgment. The auditor should obtain an understanding of Telstra and its environment and the applicable framework for financial reporting to understand the context in which those judgments have been used (ASA 540), 2022.

Various methods are there to the auditors to carry out analytical review of the financial statements of the clients. In this report, financial ratio analysis is considered. The areas of concern or comfort in the financial statements of Healius and Telstra are as below:

Table 1

1. As shown in the above table, a significant improvement in net profit ratio of Healius from negative to positive is an area of concern. Since the management was under pressure because of the aspects like increased competition, the COVID-19 pandemic and others, they might have overstated profit to show a positive financial performance of the company (Nguyen, Ngo & Le, 2020).
2. A substantial decline in the current ratio of Healius from 1.35 to 0.48 is an area of concern. A current ratio of less than 1 implies that the company is incapable of paying the creditors in time, and it is an indicator of a possible going concern problem.
3. Another key area of concern is the decline in the times interest earned ratio of the company. A decline in this ratio is inconsistent with a substantial increase in EBIT and a decline in the interests bearing liabilities (Dritsas & Petrakos, 2018). Hence, it should be investigated further.

1. A decline in the receivable turnover ratio is an area of concern because it indicates many negative aspects, such as weak credit and collection policies, potential uncollectability of some receivables, potential wrong cut-off or ficticuous sales, and a deliberate increase in the credit period granted to increase sales (Hussin et al., 2017).
2. Telstra has a high debt to equity ratio in both 2021 and 2020 which is an area of concern as the risk is increased that the company will not be able in making timely interest payments. It also increases the risk of a violation in the debt covenants by the company.
3. Table 1 shows an increase in Telstra’s times interest earned ratio in 2021 and it is an area of conform. This increase in consistent with the decrease in non-current borrowings which eventually led to the decrease in the company’s interest expenses.

• The management could overstate sales to increase profit. Therefore, it would be needed to verify prices, number of services provided and computation on sales invoices. Prices should be verified to the master price list and number of service provided should be verified to invoices.
• In case of the second area of concern, it would be needed to discuss the going concern issue with Healius’s management to understand how they intend to address the issue. It would be crucial to determine whether the management’s use of going concern basis of accounting is possibly to be an important issue. If needed, additional audit procedures would be performed to determine whether material uncertainty related to going concern is there (ASA 570, 2022).
• In case of the third risk, it would be required to consider how this ratio has changed over time. Since decline in this ratio is inconsistent with a substantial increase in EBIT and a decline in the interests bearing liabilities, it would be needed to test the interest amounts to assess their reasonableness (Joe, Vandervelde & Wu, 2017).

• For the first risk, it would be needed to undertake the debtor confirmation procedures and review the subsequent receipts. The listing of receivables would be reviewed and aspects like unusual balance, credit balances and accounts would be investigated.
• In case of the second risk, it would be needed to confirm the identified non-current borrowings with the lenders. It would be essential to read the minutes of meetings and review the debt agreements to assess whether there has been any violation in these agreements. It would be important to determine whether all borrowings have been properly classified as current and non-current borrowings (Mentz, Barac & Odendaal, 2018).
• Since the increase in the times interest earned ratio is consistent with the decrease in non-current borrowings, it would not be required to test the interest amounts for seeing whether they are reasonable.

As per APES 110, the auditors are needed to comply with the fundamental ethical principles when providing professional services. These principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour (apesb.org.au, 2022). Due to the inherent limitation of an audit, it is not always possible for the auditors to identify the fraud always as these are the sophisticated fraud conducted by the senior management. However, ethical violation takes place when an auditor deliberately issue an incorrect audit opinion by considering his/her own interest. As a result, this could lead to the violation of the fundamental ethical principles.

The auditors are also subject to legal liabilities if they provide an inappropriate audit opinion. The auditors cannot be liable for negligence for mere errors in judgment. However, if they fail to employ the duty of care with reasonable care and diligence and issue an inappropriate audit opinion, the clients can take legal actions against them. The auditors also have a legal liability to the third parties if those third parties depend on the audited financial statements to make decisions.

As a safeguard, the auditors can use the Limited Liability Agreements (LLAs) for reducing the threat of litigation from the audit clients. LLAs are clauses that are built into an engagement’s terms that levy a cap on the compensation’s amount that the client can demand from the auditor. The shareholders must approve them annually and the judges must uphold them as fair and reasonable when the cases arise (accaglobal.com, 2022).

Conclusion

The above discussion shows that the inherent risk factors can lead to the material misstatements in the financial statements, and they require the auditors to take necessary actions to address them in the audit planning stage. The areas of concern or comfort in the clients’ financial statements can be identified by applying the analytical procedures. It helps the auditors in applying the appropriate audit procedures to address those issues. It is also important for the auditors to consider both the ethical and legal liabilities when an inappropriate audit opinion is issued. LLAs can be used as safeguards against these liabilities.

References

Amalia, F. A., Sutrisno, S., & Baridwan, Z. (2019). Audit Quality: Does Time Pressure Influence Independence and Audit Procedure Compliance of Auditor?. Journal of Accounting and Investment, 20(1), 130-144.

APESB. (2022). APES 110 Code of Ethics for Professional Accountants (including Independence Standards). Retrieved 21 April 2022, from https://apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Code_Nov_2018.pdf

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2016). Auditing and assurance services. Auditing and Assurance Services.

Auditing and Assurance Standards Board. (2022). Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement. Retrieved 21 April 2022, from https://www.auasb.gov.au/admin/file/content102/c3/ASA315_03-20.pdf

Auditing and Assurance Standards Board. (2022). Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures. Retrieved 21 April 2022, from https://auasb.gov.au/media/ccvj4vf5/asa_540_12_21.pdf

Auditing and Assurance Standards Board. (2022). Auditing Standard ASA 500 Audit Evidence. Retrieved 21 April 2022, from https://auasb.gov.au/media/drwb11r1/asa_500_12_21.pdf

Auditing and Assurance Standards Board. (2022). Auditing Standard ASA 570 Going Concern. Retrieved 21 April 2022, from https://auasb.gov.au/media/jbwpiyr5/asa_570_12_21.pdf

Dritsas, S., & Petrakos, G. (2018). Risk of Material Misstatement in Fluctuated Economic Environments: The Case of Greece. International Business Research, 11(6), 243-248.

Healius Limited. (2022). ANNUAL REPORT 2021. Retrieved 21 April 2022, from https://www.healius.com.au/siteassets/healius-corporate/pdfs/annual-reports/2021/a_20211209_ar21.pdf

https://www.accaglobal.com, A. (2022). Auditor liability | ACCA Global. Retrieved 21 April 2022, from https://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/auditor-liability.html

Hussin, S. A. H. S., Iskandar, T. M., Saleh, N. M., & Jaffar, R. (2017). PROFESSIONAL SKEPTICISM AND AUDITORS’ASSESSMENT OF MISSTATEMENT RISKS: THE MODERATING EFFECT OF EXPERIENCE AND TIME BUDGET PRESSURE. Economics & Sociology, 10(4), 225-250.

Joe, J. R., Vandervelde, S. D., & Wu, Y. J. (2017). Use of high quantification evidence in fair value audits: Do auditors stay in their comfort zone?. The Accounting Review, 92(5), 89-116.

Mentz, M., Barac, K., & Odendaal, E. (2018). An audit evidence planning model for the public sector. Journal of Economic and Financial Sciences, 11(1), 1-14.

NGUYEN, H., NGO, T. K. T., & LE, T. T. (2020). Risk of material misstatement in the stage of audit planning: Empirical evidence from Vietnamese listed enterprises. The Journal of Asian Finance, Economics and Business, 7(3), 137-148.

Telstra Corporation Limited. (2022). Annual Report 2021. Retrieved 21 April 2022, from https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-g/0821-TEL-AR-2021-FINAL-Singles.pdf

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