Improve Quality Of Internal Control Audits: Telstra Corporation Case Study

Independence Requirements for Auditors

The Primary aim of the assignment is to shed light on the growing significance and importance of enhanced auditor reporting. Telstra Corporation Ltd, an ASX listed company has been taken as an illustration to understand the concept in a productive manner. After a complete analysis of the audit report, it seems that the auditor has done a pretty reasonable job for inculcating the enhanced reporting requirements in the report (Belton, 2017). If we look at the report from the perspective of the shareholder, the quantum of information of provided is good enough for a complete understanding. As far as omitting of any material information is concerned, the probability of it happening seems highly unlikely as most of the key areas have been covered.

One of the core set of fundamental laid down for independence pf the auditor is that none of the duties and roles performed by the auditor shall face any sort of undue influence from neither the part getting audited nor anyone related to the client (Alexander, 2016). To form a conclusion on the quality and authenticity of the facts stated in the financial statements, the auditor needs to utilize his own professional judgement and se of skills. The conclusion arrived through this use will ultimately result in the formation of audit opinion and the report must remain objective and unbiased. A simple reading of the annual report takes us to a paragraph called as declaration of independence as per Sec307C. The paragraph declares on that there has not been any contravention of the statutes relating to the independence requirements of the auditor. Also, there is no deviation from the code of ethics laid down under the act (DeZoort & Harrison, 2016).

In addition to the usual audit services provided by the auditor, few non- audit services have also been rendered by them for the client. A wide spectrum of services under the umbrella of non-audit services such as due diligence of financial activities, advising the client on matters relating to compliance with various laws and regulations and consultancy on specific accounting matters (Chron, 2017). In the report, there exist a section which has provided a detailed breakup along with the total fee paid to the auditors. Service wise detail of fee chart presented in the above-mentioned section. The auditors Ernst & Young have rendered audit and non-audit services to other entities of the group as well.

The table portrays a picture of increase in the remuneration from audit services to the extent of 12.5 %. For the non-audit services, it’s a mix of both increase and decrease. There is clear visibility that the there is a significant of non-audit services that has been provided over the last two years. This can be confirmed by the magnitude of the absolute figures mentioned therein (Choy, 2018).

Non-Audit Services Provided by Auditor

The Issues or areas that attract the highest degree of attention and significance from the viewpoint of the auditor are covered in this section of the annual report. Both the management as well as the auditor provide their opinion and representation on key audit matters and hence the users of the annual report pay attention to the things covered under this paragraph (Bromwich & Scapens, 2016). In this case, following are the key audit matters:

• Revenue Recognition: The accounting methods used for NBN revenue is a bit complex. Its accuracy and compliments are at risk given the nature of operation of the billing systems.

For analysis, the life cycle of the contract, the forecasted revenues and any changes made into the contract was considered. Expert advice was taken to verify the assumptions and estimated taken by the management (Defond & Lennox, 2017).

• Dependence on IT processes:The identification, recording and authorization are the key components in computerized work environment and should be evaluated since there is composite mix of humans and machines in operations. The updating requirements in accordance with the changing regulatory and business dynamics need to be inculcated in the system. All these aspects were verified.
• Capitalization of Assets and their useful lives:The internal control framework related to authorization of purchase, its classifications were considered. The reasonableness of use of estimates and judgements was verified particularly in verifying the useful lives (Dichev, 2017).

Telstra Group adheres to the guidelines provided in the act related to Audit committee. The committee has onboard a total of five members and the proceedings of the committee are chaired by Nora L Scheinkestel as its chairperson. All the members on board the committee are independent directors.

The committee operates under a charter and the major issues taken up during the year are as under:

• Objectives of the committee: On of the critical objectives of the committee is to providing advice to the organization on how to function within the framework for governance. The audit committee plays a significant role in the monitoring the risk management practices of the company and suggests way to effectively and efficient manage the internal control environment of the company, since internal controls has a very significant impact in the financial reporting of the entity and has always been one of the areas of key focus for both internal as well as statutory auditors of the company(Gooley, 2016). In addition to these areas, there are other crucial areas as well that are covered by the committee including providing recommendation on abiding by the regulatory and compliance framework of the industry in which the company operates, oversight of the applications of accounting having regards to the laid accounting standards and reporting framework.
• Authority of the committee related to certain aspects: The audit committee enjoys certain powers conferred to it by the charter. The committee is authorized to discuss in details aspects related to financial reporting both with internal auditors as well as statutory auditors. A member of the management or those charged with governance need not have to be present while the discussions happen(Jefferson, 2017). The charter gives the committee the freedom to access any financial or non-financial matters of the company and that of the senior management. If there exist any matter or matters which the committee needs to analyze and examine but it lacks the technical expertise to can do it, it is free to engage with any external agency for specialized technical help.
• Composition of the Committee: The committee can be formed by having a minimum of three directors on board. The can be any number of independent directors as its members, unlike executive directors on whom there is a restriction. However, a clear majority of the directors should be independent members. It is expected of the members to possess some level of knowledge pertaining to accounting and financial related matters which puts them able to analyze and understand a given set of financial statements and its implications. Knowledge about the ways a business is conducted, pertinent knowledge about the industry in which it operates are among the other things required by the committee members to aid the company in all the above-mentioned matters(Knechel & Salterio, 2016). The charter makes it mandatory for the chairperson of the committee to be a non-executive director who is ultimately appointed by the board from amongst the elected members of the audit committee. The current members on the committee are eligible as per the rules to be re-appointed (Fulfilling certain criteria) as per board’s discretion. However, the thing to be noted in here is that an executive director cannot be appointed as the chairman under any circumstances. The secretary to the committee is the company secretary appointed by the company. The composition of the committee will be reviewed each year to ensure that an apt balance of skills and expertise remains on the committee.
• Responsibilities of the Committee

1. The appointment and re-appointment recommendation is made by the committee to the board based on the reputation and performance of the auditor(Werner, 2017).
2. The policies and procedures followed related to financial reporting are evaluated by the committee about governance framework and the regulatory environment.
3. The work of the internal auditors as well as statutory auditors are reviewed by the committee and the observations made by them are resolved. Considerations related to payments made to them and enhancement of scope are also discussed by the committee

The overall audit opinion the financial statements concludes a true and fair view of the related to the financial position. The treatments are in sync with the applicable financial reporting framework. The Corporation regulation 2001 and the relevant accounting standards have been duly complied with. As per the declaration given by the auditors and the management, the requirements related to independence and code of ethics have been adhered to (Visinescu, Jones, & Sidorova, 2017).

The responsibility for the preparation and presentation of financial statements and compliance with the relevant statutes and standards on accounting are the responsibilities of the management. They must meet the regulatory requirements so that a true and fair view of the financial position is represented. The statements must be prepared in a manner that material miss-statements do not plague the financials. It is the responsibility of the management to ensure that the system of internal control in the organization is effective and operating efficiently. The concept of going concern has been considered in preparing the financial statements (Sithole, Chandler, Abeysekera, & Paas, 2017).

The primary responsibility of the auditor is to express his opinion on the financial statements. The requirement from him is to provide a reasonable assurance that the statement of financials is free from any material misstatement either due to omission or fraud. Sufficient and appropriate audit evidences have been obtained in forming the basis of the conclusion. The primary intended audience for the audit report are the shareholders of the organization. The words “reasonable assurance” shall never be mistaken as a guarantee. It should be construed as opinion which is the outcome of the application of professional judgement (Linden & Freeman, 2017). The representation of the directors related to key matters of audit as well as going concern assumption needs to be vetted by the auditor. All the disclosures that are either required under the prevalent law or are necessary under the circumstances are made. The reasonableness of the any accounting estimate or assumption made by the management is also to be considered by the auditor.

Auditor’s Remuneration Analysis

These events are basically the events that occur after the balance sheet date and are material in nature. The law requires these events to be reported as the shareholders need to be aware of a possible good outcome or miss happening that might significantly impact their investment in the company even if such a thing is not there in the financial statements merely due to the date of its occurrence. As per the disclosure made, no such event has taken place after the balance sheet date, which in the opinion of the directors could have a significant impact the future business operation or profitability of the company or the group. Hence, nothing of such nature was reported on the annual report (Grenier, 2017).

From the viewpoint of a third party, I have reasons to be believe that effective and complete information has been provided by the auditors including the matters covered as key audit matter. The segment reporting gives a descriptive and comparable picture of the performance of all segments. The differentiation ensures that somebody going through the statements would be able to make a judgement as to which segment is performing well and who all are the laggards. The way information related to financial risk management has been segregated makes it easier to understand and interpret. The auditor has not used technical language or jargons that would make it difficult to user to understand.

Following two scenarios could possibly be a threat to the reasonableness and true and fair view of the financial statements:

• In computing the carrying value of the fixed assets namely plant, property and equipment, certain estimates, assumptions and forecast are required to be made by the management. Since, this involves a great level of judgment and manual intervention by the employees, more clarifications and details are requiring to be provided to back the assertions in question. This could become a potential grey area if over looked by the auditor(Heminway, 2017).
• During the year there were provisions made on the inventory. However, no basis was provided that derives the value of the provision made. For example, previous trend or industry practices or store reports, etc. Without an appropriate disclosure regarding these things, the veracity of the figure arrived cannot be truly ascertained. This attains significance as inventory forms a crucial part both in the computation of gross profit and working capital requirements.

The audit report contains answers most of the questions that could possibly be raised upon reviewing the financial statements under the prevailing regulatory framework. However, few additional questions can be raised which would be in line with the professional skepticism of the auditor. Following could be possible questions raised:

• Did any incident of fraudulent nature involving the role of employees with or without the connivance of the senior management were unearthed or reported during the period under review.
• Did any whistle blower reported any such incident? If the answer to the question is yes, then please mention what steps were taken to safeguard the interest of the whistleblower and what result came out of the proceeding against the perpetrators(Kew & Stredwick, 2017).
• Was there any case of employee harassment reported during the period?
• Were any minor potential deficiencies or vulnerabilities observed in the internal control system of the company and if they were taken up for a discussion with the people who have the responsibility of governance of the enterprise.

Conclusion

 The overall assessment of the audit report would concur that the newly introduced enhanced reporting requirement for the auditors have been adhered to in its true letter and spirit by the auditors Ernst and Young. They have ensured that the reporting is done as per the applicable financial reporting framework and within the purview of the statute and regulations in place.
The independence requirements have also been taken care of. The shareholders and other stakeholders such as creditor and lenders would be well informed using the audit report. All material information has been included and transparency standards have been catered to. Being a company of good repute, the annual report is of good quality and matches the globally accepted standards.

References

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 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, 31(1), 1-9.

Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 145. Retrieved from https://doi.org/10.1016/j.ecolecon.2017.08.005

Chron. (2017). five-common-features-internal-control-system-business. Retrieved december 07, 2017, from https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html

Defond, M., & Lennox, C. (2017). Do PCAOB Inspections Improve the Quality of Internal Control Audits? Journal of Accounting Research, 55(3), 591-627.

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Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), 617-632. doi:https://doi.org/10.1080/00014788.2017.1299620

Gooley, J. (2016). Principles of Australian Contract Law. Australia: Lexis Nexis.

Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), 241-256.

Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, 1-35.

Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland . Technological Forecasting and Social Change, 353-354.

Kew, J., & Stredwick, J. (2017). Business Environment: Managing in a Strategic Context (second ed.). London: Chartered Institute of Personnel and Development.

Knechel, W., & Salterio, S. (2016). Auditing:Assurance and Risk (fourth ed.). New York: Routledge.

Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1

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), 220. Retrieved from https://psycnet.apa.org/buy/2016-21263-001

Visinescu, L., Jones, M., & Sidorova, A. (2017). Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), 58-66.

Werner, M. (2017). Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, 25(1), 57-80.

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