Compliance with the independence requirement of the auditor
Auditing could be explained as an aim related examination and evaluation of the operating statement of a company in order to assure the honest and appropriate recording of the transactions claimed. Therefore, it is the liability for the auditors to enhance the quality of the audit report by disclosing all vital data related to the material characteristics of the financial statements (Kush et al. 2017). Such information requires to be presented to the stakeholders of the company in a clarified and simple language. In the modern era, various actions are attempted by the audit committees in order to assure that the quality of the audit reports gets improved. The current study would try to evaluate the latest annual report of CSR Limited based on the various auditing features of the operating statements. CSR Limited is a famous Australian industrial company engaged in manufacturing building products (Csr.com.au 2018). In this regard, it requires to be mentioned that Deloitte is the audit partner of the organisation for the year 2018.
According to the annual report of CSR Limited in 2018, no members of Deloitte were engaged with the business activities of the company. Besides, no specific staff of the audit group of Deloitte played a significant role in the group audit of CSR Limited for the year, which is made under a declaration in accordance with “Section 342A of the Corporations Act 2001”. On the other hand, Deloitte has complied with all the requirements mentioned under “Section 307C of the Corporations Act 2001” covering the following points:
- No violations have been there related to the independence needs of the auditor with respect to audit.
- All relevant codes of professional conduct have been performed regarding the audit and other related activities of CSR Limited.
As stated in the annual report of CSR Limited in 2018, it could be noticed that Deloitte has performed two types of non-audit services to the company. These services involve sustainability and carbon related ensuring services and other assurance and advisory services. For these two non-audit services, CSR Limited has paid $77,108 and $9,000 respectively to Deloitte. This has sum is equal to 10.40% of the overall remuneration of the auditor (Csr.com.au 2018). On the other hand, sufficient compliance is ensured by both the auditor and the company while performing and receiving the non-audit services.
As per the written advice of the Risk and Audit Committee, the directors have been contented that the non-audit services performed by Deloitte have been satisfying to the general independence status for the auditors implied on the part of the Corporations Act 2001. However, such services are performed by not incorporating with the independent needs of the auditor of the above-stated standard regarding to materiality of the sum, service features and the methods invented for supervising auditor independence (Duncan, and Whittington 2014). Thus, the board of Directors of CSR Limited has assured that the non-audit services do not include re-assessment of the self-work of the auditor for undertaking management decisions (Yang et al. 2017). Moreover, the company has taken into consideration all the rules and regulations regarding the corporate governance for the non-audit services. Therefore, by taking into consideration all these characteristics, the independence of the auditor could not be questioned (Marques 2018).
Non-audit services
From the above table, it could be observed that the audit service payables relevant to re-assessment of operating statements, which has been taken into consideration in case of the Australian business of CSR Limited. The non-audit services involve sustainability and carbon-related ensuring services and other assurance and advisory services. It could be noticed that CSR Limited has reduced its payables for audit or re- assessment of operating statements to Deloitte by 5.89% in 2018, in comparison to the past year. On the other hand, a rise could be noticed in sustainability and carbon-related ensuring services by 32.94% in 2018, whereas notable decrease could be noticed in other assurance and advisory services by 77.83% in 2018. This has contributed to the declining of the total auditor’s remuneration of CSR Limited by 6.64% in 2018.
The key audit factors have been taken into consideration as the notable features, while auditing the financial reports of a company (Nalewaik and Mills 2016). As cited in the annual report of CSR Limited in 2018, two key audit factors could be noticed and their elaborated audit process for reduction and classification have been represented in the following:
A liability catering to a sum of $289 million has been identified by CSR Limited at 31st March 2018. The provision is regarding the declaration and forecasting of the future claims related to asbestos. This has been assured after considering the suggestion of an external specialist appointed by the management in Australia and USA. The provision needs substantial acumen for settling the sums and the possibilities of the future claims. However, the predictions regarding the foreign exchange rate shifts and rates of discount have substantial effect on the estimated provision (Paterson et al. 2016). Furthermore, after all the predictions vary in size and complex in nature, Deloitte has taken into consideration product liability catering to the form a key audit factor (Pedersen et al. 2016).
For handling with this problem, Deloitte has evaluated the experience as well as independence of the external specialist and the appropriateness of the predictions and processes used in the study. This involves analysing the impactful nature of the utilised process for calculating the provision, standard of the rates of discount and comparison of the expertise of historical claims to predictions used for projecting future claims (Schmidt, Wood and Grabski 2016). However, Deloitte has utilised sample testing for accurate examination and elimination of claims regarding the asbestos in the liability database of the management. This is vital for the audit processes, after all the provision is constructed on the basis of the reports. Thus, the auditor has inspected about the external specialist and the internal and external legal counsel of the company. Lastly, Deloitte has evaluated the appropriateness of the relevant declarations in the financial reports.
As per the annual report of CSR Limited in 2018, it has been noticed that the company has goodwill amount of $98.1 million, other intangible assets of $45.8 million and property, plant and equipment of $834 million that take into account a number of money producing units. In order to carry out the evaluation of the dissimilarities of these asset balances, considerable judgement is required. Such acumen involves notable predictions like inflation, discount tasks, estimation of building cycle changes, growth rates and assumptions of future cash flows (Shafii, Abidin and Salleh 2015). The management of CSR Limited has constructed a dissimilarity triggering evaluation for indicating those money producing units to be taken into consideration for further dissimilarities. It has been recognised that the Viridian money producing unit requires more dissimilarity assessment. This is because it has earned diminished return on capital employed (Stafford, Deitz and 2018). This has been taken into consideration as a key audit factor because of the acumen incorporated with the assumption of future cash flows and chosen estimations.
Analysis of the Auditor’s remuneration
In order to manage this matter, the auditor has evaluated the management process of CSR Limited for identifying the cash generating units (CGUs), in which further impairment evaluation is required. Hence, it has assisted in developing an understanding of the consistency in segmental reporting, outside market situations, financial health of the year and apportionment of goodwill to all CGUs for testing impairment. In addition, the methodology associated with the impairment model as well as assumptions are evaluated appropriately while bearing in mind various influential dynamics. Furthermore, Deloitte is observed to use sample testing so that the cash flow models could be checked for accuracy (Kend 2015). Therefore, the auditor has considered all the accounting related impairment disclosures from the annual report of CSR Limited in 2018.
As apparent from the latest annual report of CSR Limited, a risk and audit committee is established that would govern the various internal control guidelines in order to shield company liabilities and assets. Moreover, the committee would be responsible to assure that the financial reporting guidelines are maintained with integrity. The committee consists of four non-executive directors and they are listed as follows:
- Mike Ihlein
- John Gillam
- Penny Winn
- Matthew Quinn
These personnel along with the other members of the committee look after the evaluation of the different processes to ensure that integrity is maintained within financial reporting. Moreover, they also assess the factors needed to recognise commercial incomes and framework evaluation of audit risk management (Kend, Houghton and Jubb 2014). The organisation does not have any audit committee charter, as no evidences could be gathered about the same in its financial reports.
CSR Limited has the independent auditor’s report, in which it has been clearly mentioned that it has followed the Corporations Act 2001 to develop its remuneration report by adhering to the guidelines mentioned in “Section 300A of the Act”. In addition, the other accounting standards laid down in AASB, IFRS and IASB are followed as well. The auditor has stated that no material misstatements are apparent in the financial reports of CSR Limited and hence, no distortions are made in representing the financial condition of the organisation that would affect the users of the financial statements in undertaking decisions. This implies unqualified audit opinion was expressed by Deloitte after it has audited its financial statements accompanied by supporting notes so that their appropriateness could be tested.
As observed from the latest annual report of the organisation, the roles of the management and directors vary greatly from those of the auditors at the time of financial report presentation and preparation. Both management and directors are needed to bear into mind the accounting rules and guidelines of the nation at the time of preparing financial statements and they need to assess whether the organisation is capable enough of continuing as going concern by applying the appropriate accounting bases.
Conversely, the auditors do not carry out the same roles as those of the management and directors (Kend, Houghton and Jubb 2014). The primary responsibility of the auditors is to check whether any material misstatements prevail in the financial reports because of illicit practices, errors or others based on which they would issue their opinion. Deloitte has carried out the following accountabilities while the auditing the financial reports of CSR Limited:
- Discovering and dissecting material misstatement risks
- Knowledge about the procedures of internal control
- Checking the effectiveness of accounting processes
- Judging whether CSR Limited has applied appropriate recognition bases for operating as a going concern
- Reviewing whether the financial statements are prepared and depicted accurately
- Accumulation of considerable evidence for audit functions (Knechel and Salterio 2016)
Key audit matters
Two material subsequent events are deemed to be identified from the annual report of CSR Limited. One of them is sale of a surplus asset and another is associated with declaration of dividend. The organisation has announced that it would dispose-off its Hosley Park excess land, which is situated in New South Wales on April 3, 2018. From sales agreement, it is estimated that recognition of $30 million profit would be realised in profit and loss statement before tax deduction in the next year’s annual report. This is because the sale would be conducted in April, 2019. In 2018, it has declared a dividend of $0.135 per share, which is fully-franked and the total dividend payment is expected at $68.1 million, which should be settled on July 3, 2018. However, the dividend amount is not distributed yet among the shareholders of the organisation.
When this situation is analysed by positioning as a third party stakeholder, the members of Deloitte involved in audit work of CSR Limited have made thorough analysis of material information of the organisation in the most responsible manner. They have conformed to the necessary standards mentioned in APES 110, Australian standards for auditing, IFRS, IASB, Corporations Act 2001 and others. Along with this, the auditors have identified two events, which are treated as key audit matters and hence, the risks expected to arise from these events are to be mitigated supported by relevant recommendations. Hence, all these aspects together clearly state that Deloitte has performed all the necessary audit-related work to identify and analyse material information laid out in the financial reports of the organisation (Knechel 2016).
As per the latest annual report of CSR Limited, Deloitte has performed all the necessary functions needed to analyse the material aspects as well other information that have the possibility of developing material misstatement risk in terms of financial reporting. Moreover, it has provided explanation of the reasons behind why certain events are considered to have material factors. Hence, it could be said that no material information is excluded or missing materiality aspects (Louwers et al. 2015).
Certain questions could be raised for the auditor at the annual general meeting. In this case, it would be Deloitte, since it has audited the financial statements of CSR Limited in 2018. Some of the important follow-up questions that could be put forth in front of Deloitte include the following:
- Are you engaged in discussion of any accounting issues with management before discussion?
- How have you planned the scope of your audit work?
- Is your audit scope effective enough to detect material errors and unethical practices?
- Has the management encountered any problem to control important business processes?
Conclusion:
The above discussion clearly makes it evident that no members of Deloitte were engaged with the business activities of the company. Besides, no specific staff of the audit group of Deloitte played a significant role in the group audit of CSR Limited for the year. As per the written advice of the Risk and Audit Committee, the directors have been contented that the non-audit services performed by Deloitte have been satisfying to the general independence status for the auditors implied on the part of the Corporations Act 2001. Moreover, the auditors have detected two key audit matters from the annual report of CSR Limited in 2018 and accordingly, they have provided suggestions to manage these matters.
Two material subsequent events are deemed to be identified from the annual report of CSR Limited. One of them is sale of a surplus asset and another is associated with declaration of dividend. As per the latest annual report of CSR Limited, Deloitte has performed all the necessary functions needed to analyse the material aspects as well other information that have the possibility of developing material misstatement risk in terms of financial reporting. Moreover, it has provided explanation of the reasons behind why certain events are considered to have material factors.
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