Enhanced Auditor Reporting And Audit Services: A Case Study Of Telstra Corporation Limited

Background

The Enhanced Auditor report is an upgradation of the traditional auditor report which is intended to give more transparency and relevant information to the user group. The most important change as per the enhanced auditor reporting has been the inclusion of the Key Audit matters (KAMs) in the independent Auditor Report and how the auditors have gone about resolving the same. These revised standards and norms of reporting got approved and implemented in Australia by AUASB post 15^th December 2016 (Sirois, et al., 2018).

Telstra Corporation Limited, one of the telecommunication companies in Australia has been chosen for review and discussion. It is listed on the Australian Stock exchange and employs over 32000 people. Off late, it has been facing immense competition in the market from the new entrants and it basically deals in the construction, building and operation of the telecommunication towers, television and media rights, voice mobile, internet and broadband services and also provides several other products and services. The annual report of 2018 has been taken into consideration for the study and analysis such that it represents the changes and improved reporting as per enhanced audit report requirements.

Independence of the auditor refers to independence to be maintained by auditor while conducting the audit of the entity. The basic requirement here is the auditor should not be biased in his approach and should maintain the highest levels of integrity and objectivity while conducting the auditing the financial statements. In case the opinion is biased, the very purpose of audit fails as the auditor is one who gives the reasonable assurance that the financial statements are true and fair and are free from errors and frauds and based on which the relevant stakeholders take the financial and investment decisions (Bailey, et al., 2017).

This independence while auditing has been declared by E&Y, Ernst and Young, the statutory auditor for the given company. They have clearly mentioned that they have followed Professional Ethics and have not contravened the requirements of Independence as mentioned in Section 307C, Corporation Act and in APES 110.

The company Telstra Corporation Limited has used the other services from the auditor EY, which were not related to audit. The complete details of these non-audit services provided to the company and the remuneration paid by the company on that account has been shown below in the table. The company which provided the non-audit services here is Ernst & Young which is also the statutory auditor for the company. The services were taken post advice and discussion with the Audit and Risk Committee of the company and it was also ensured that they were governed with the General Standards of Independence (Bumgarner & Vasarhelyi, 2018). For all these non-audit services, the company signed and approved for the engagements with the audit team and it was agreed and signed that this work would not affect the overall independence of the auditors. The Risk and Audit committee of the company looks after the non-audit services provided by auditors and meets the requirements to improve efficiency in company.

Auditor’s Independence

Below mentioned is the remuneration details of the auditors of Telstra corporation for the year 2017 and 2018.

From the above mentioned table, it can be seen that the audit consultancy fees for the audit services by $ 1Mn (12.48%) as compared to the last year. On the other hand, the non-audit fees as a whole has declined by 37.46% as compared to the last year which just goes on to show the improved technologies being used by the company post the adoption of the enhanced reporting requirements. The tax services fees has decreased by a staggering 60.37% whereas the advisory services fees has increased by marginally 11.41% on top of last year’s fees which is evident of the fact that the company is complying with rules and regulations (Deegan & Shelly, 2014).

 Key audit matters can be defined as those issues or matters which hold special significance from the perspective of the information seeker which in the given case is the shareholders, investors and other stakeholders. It is those issues which can have a significant impact on the financial statements of the company, and thus are approached by the auditors in a separate manner. Some of these are mentioned below:

1. Revenue Recognition: For Telstra, since it is a telecommunication provider company, the recognition of revenue is a critical matter as there are usually bundled contract which has both the services as well as the products element. Thus, it becomes critical to evaluate the point at which the revenue needs to be recognized. Besides integrated contracts, the company also needs to account for revenue from NBM, the much talked about acquisition by Telstra. The accuracy and completeness with respect to revenue recognition poses a business risk as the system is complex for billing and there have been many price changes during the year(Fay & Negangard, 2017).

Some of the steps taken by the auditor in this regard have been checking of the effectiveness of the IT system and internal controls with respect to revenue. The auditor also checked the processes & controls of company and timing at which the revenue is recognized in books. They also had a check on the contract cycle, revenue recognition clauses, termination clauses and other complex clauses w.r.t. the transactions. The auditor also employed steps to check if there were changes and amendments in the clauses, the future revenue forecast and the customer acceptance of the goods. Along with all this, the auditors did evaluate the reasonableness of the estimates and judgements, if any, with respect to revenue.

1. Capitalization of the assets and their useful lives evaluation: There are many areas in fixed assets where the management assertion and the judgements can have significant impact on the financials, some of which are useful lives, amortization value, the carrying value of assets, the rate of depreciation, the method of depreciation. The auditor checked on all these aspects and besides this it all checked if the physical verification was carried out, the annual review of life was carried out and what was the logic or rationale used by the company while charging the expense the P&L and capitalizing the same. Changes in all these assumptions and judgements can have significant impact on the financials and thus was included in KAMs list(Fukukawa & Mock, 2011).

The auditor checked the effectiveness of internal control with respect to capitalizations and disposals of the assets, the capitalization policies, and the date from which the assets have been capitalized in the books and how the depreciation is being calculated in the books. The auditor also did a sample check on the appropriateness of the useful lives being considered for the assets and which of the incidental costs were being capitalized in assets values.

The company Telstra Corporation Limited is having an Audit and Risk committee which has total of 4 members as of now. The following is the constitution of the Audit committee of the company:

Non-audit Fees

The composition criteria of audit and risk committee for company states that there should be at least 3 independent directors. They should also be non-executive directors and must be having the knowledge of the financial and accounting matters. They are expected to discharge their duty of dealing with the management, the internal and the external auditors. The Chairman of the Audit and the Risk Committee is an independent Director and he is also not the Chairman of Board in Telstra BOD committee. This is the requirement which has been stated in law and has been followed here (Segal, 2017).

For every existing committee in the company, there is a written Charter which has been laid down in the company which mentions the roles, functions and responsibilities of all the operating committees. This charter can be found on governance website of the company. The Audit Committee of a company has a number of roles to play in company. Some of them are:

1. Assisting the Board of Directors in financial reporting,
2. Dealing and discussion with internal and external auditors
3. Looking that the company is complying with rules and regulations
4. Giving inputs on risk related issues (Guragai, et al., 2017)
5. Appointment and fixation of remuneration of the external auditors of the company

The Audit committee also takes care of the corporate governance engagement of the company and guides the company in what steps to be taken for being socially and environmentally compliant. The audit and risk committee in Telstra is also responsible for setting up a forum amongst the management, auditors and the Board.

In the Independent Auditors Report, the auditor EY has mentioned that the financial statements of the company has been prepared and presented in a manner which gives true and fair view of company, and it has followed the Australian Accounting Standards and the Corporation Act, 2001 while preparation of the same. Thus, the report is clear report and they have also mentioned that they have followed compliance with APES 110 on Auditors independence while auditing the client (Mun, 2018).

Responsibility of the Directors: The directors of the company are responsible for preparation of the financial statements in a true, fair and unbiased manner as it forms the basis of information for many stakeholders and is being audited. They are also responsible for adhering to the Code of Conduct, the Accounting Standards and the Corporation Act, 2001 while reporting. They are the one who implement the internal control within the company and comment on the going concern assumption of the company with reasonable basis. They should also ensure that the financial statement have been prepared free from errors and frauds.

Responsibility of the Auditors: They are responsible for auditing the financial statements and providing a reasonable assurance to the stakeholders that the same is free of errors, misstatements and frauds. This should not be assumed as guarantee for any decision making. The auditor is expected to check if the financials adhere to the Accounting Standards, the local GAAP and they should maintain and apply professional judgement and professional skepticism during the audit. They need to comment on the reasonableness of the going concern assumption given by Directors and comment on the internal control weaknesses within the company (Carlin, 2011). Once all these are checked and disclosures are verified, and sufficient and appropriate audit evidences are found, then the auditor is expected to give the final opinion.

Key Audit Matters

Material subsequent events may be defined as one which is happening after the reporting date and is material. The directors of the company has not reported any such subsequent material events in the Directors Report and are not aware of any such event which will have significant impact on the operations of Telstra and thus has not been reported (Kachelmeier, et al., 2018).

The annual report and the disclosures and notes are complete in all the respects in terms of regulatory requirement and reporting requirements, however, there are few question which I would like to ask to the auditors:

1. Was there any incidence of fraud in the company during the year? Whom did it involve – employees or top management or both? Was the financial impact material?
2. Was there any instance of insider trading found in the company? What was the impact and how big was the materiality? Was anybody involved in whistle blowing with respect to this?

Conclusion

From the above analysis and discussion, it is quite evident that the company has met the standards of enhanced auditor reporting more or less. It has disclosed all the material information with the help of notes and disclosures and has met all the regulatory norms. The auditor independence has been established and the transparency and objectivity in reporting has been met. Though there is always a room for improvement, but Telstra with all its structural changes has been stand out in terms of global reporting norms.

References

Axelsen, M., Green, P. & Ridley, G., 2017. Explaining the information systems auditor role in the public sector financial audit. International Journal of Accounting Information Systems, 24(1), pp. 15-31.

Bailey, C., Collins, D. & Abbott, L., 2017. The Impact of Enterprise Risk Management on the Audit Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), pp. 25-46.

Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory and Application, 20(1), pp. 7-51.

Carlin, T. a. F. N., 2011. Goodwill impairment testing under IFRS: a false impossible shore. Pacific Accounting Review, 23(3), pp. 368-392.

Deegan, C. & Shelly, M., 2014. Corporate Social Responsibilities: Alternative Perspectives About the Need to Legislate. Springer, 121(1), pp. 499-526.

Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.

Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability. Auditing: A Journal of Practice & Theory, 30(1), pp. 75-99.

Guragai, B., Hunt, N., Neri, M. & Taylor, E., 2017. Accounting Information Systems and Ethics Research: Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017, 31(2), pp. 65-81.

Kachelmeier, S., Schmidt, J. & Valentine, K., 2018. The disclaimer effect of disclosing critical audit matters in the auditor’s report. SSRN, 2(1), pp. 1-39.

Mun, K. a. S. I., 2018. A close look at the role of regulatory fit in consumers’ responses to unethical firms.. s.l.:s.n.

Segal, M., 2017. ISA 701: Key Audit Matters-An exploration of the rationale and possible unintended consequences in a South African. Journal of Economic and Financial Sciences, 10(2), pp. 376-391.

Sirois, L., Bédard, J. & Bera, P., 2018. The informational value of key audit matters in the auditor’s report: evidence from an Eye-tracking study.. Accounting Horizons., 32(2), pp. 141-162.

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