TPG Telecom Limited: Company Overview
Auditing is an essential process for the organizations to analyze the financial performance and effective business decisions. The successful organizations are using auditing as an exclusive process of identifying the issues and misstatement in the financial records. The aim of this report is to outline the role of auditing in an organization. In this concern, the report is describing different audit steps and key business risks for an organization. TPG telecom limited is considering to make understanding the about the concept of auditing in practical manner. TPG telecom limited is a listed in ASX and forcing the telecommunication industry of Australia. In addition, the report is also determining substantial tests of balances of different assets and liabilities of the company with use of substantive approach of auditing. The report is also analyzing the materiality items and carrying out the analytical procedures of TPG telecom limited with considering different ratios and metrics. Auditing process is also plays and essential role in attaining the outcomes of auditing in professional manner so that the report is also discussing auditing process for TPG telecom limited in effective manner. Finally, the report is describing a sampling plan to complete the audit process in successful manner.
In Australian telecommunication industry, TPG is a well known company. The company is providing communication services in the country. TPG (Total Peripherals Group) was found in 1986 with a reserve conquest of SP Telemedia Limited by TPG. The products, services, people, innovation and network assets enabled the company to provide reliable, cost effective and fast telecommunication services. The company provides a wide range of communication products and services to government, residential users, enterprises and wholesale consumers (TPG, 2018). The company provides countrywide NBN, ADSL2+, Ethernet broadband, Fiber Optics, IPTV, telephony services and different business network solutions. TPG has its own network infrastructure in the country.
In an organization, the business risks are considered as factors that can influence to the ability of the organization to attain the goals and objectives in desired manner. From last decade, unexpected changes have been seen in political, economic and business environment, which are influencing the communication organizations in different ways. These risks may be cause of business failure if not managed on time (Smith, 2018). In this concern, it is essential for the management to identify these business risks and take immediate actions to overcome them in professional manner. The key business risks for TPG telecom limited are discussed as below:
Key Business Risks for TPG Telecom Limited
Development risks:
The changing political and economic environment is generating the issues in the developing the telecommunication operations across the world. In the changing circumstances and unpredictable environment, the organizations cannot make proper planning for further development. As well as, the management can also face the financial risks in developing its business operations in the fluctuated economic environment (Sohal, 2013). In this concern, it is analyzed that there are several development risks for TPG telecom limited that can hamper its development activities in big manner.
Risks related to regulatory burden:
Over last year the telecommunication organizations are facing the issue of regulatory burden in big manner. The government is changing the regulatory rules and regulations and making stricter for the telecommunication to follow these rules and regulations. The instability in political and economical in certain global markets increased the regulatory burden for the company in operating the telecommunication services in the country (BDO, 2017). Thus, there are several regulatory risks for TPG telecom limited that can generate business risks and hinder the operational activities in big manner.
Risk of competition:
There are different global telecommunication organizations that are increasing their business operations across the world and providing competitive services to attract the customers. It is a big risk for TPG telecom limited as Australia is a better place for the telecommunication companies to expand their business in effective manner (Smith, 2018). In this concern, TPG is also facing the risk of high competition in Australia.
Risk of cyber attack:
It is analyzed that the technology is continuously increasing and generating different cyber attack risks for the telecommunication services. There are several hackers that can steal authentic information, financial data and customer data of the telecommunication (BDO, 2017). Therefore, TPG telecom limited may also face the risk of cyber attack.
Importance of identifying the business risks in audit process:
The International Accounting Standard (ISA) 315 determines that the auditors have need to gain proper understanding about the internal and external environment that are influencing to operational activities to complete the audit process in effective manner. The auditors can identify misstatement in the financial records in better manner through analyzing the possible business risks. In this concern, the determination of business risks has importance for TPG to make successful the audit procedure.
In audit process, the audit risk model is used to determine overall risks associated to audit and explain that how these risks can be managed. In other words, audit model is a process of identifying total risks associated to audit. As per this model, the audit risk contains three components that are used to calculate the audit risk (Botez, 2015). These components are inherent risk, control risk and detection risk.
Importance of Identifying Business Risks in the Audit Process
Audit risk = Control risk * Inherent risk * Detection risk
Control risk: In financial statements, the control risk is considered as a risk in material misstatement, which arises due to failure or nonappearance in operation of significant control of the individual. It is essential for an organization to have enough internal control to avert occurrence of error and fraud in the financial records (Contessotto and Moroney, 2014). For instance, if an organization has not experienced accounting staff, than there may be probability of misstatement. The inexperienced employees cannot prevent or detect the misstatements from the financial records. The unskilled staff thinks that they can eliminate the potential misstatements, which is not possible in critical transactions. I
Inherent risk: In financial statements, the inherent risks generate due to omission or error in financial records. The inherent risks will be higher highly complex financial transactions. For instance, a recently formed financial institution which contains significant exposures and trades in multifaceted derivative mechanism may be measured highly critical as compared to audit of manufacturing organizations in a stable environment.
Detection risk: The auditors use audit risk model to manage entire risks that are engaged with audit. The auditors continue by inspecting the control and inherent risks related to audit engagement while understanding the environment of an entity. Detection risk indicates to inability of an auditor of identifying the errors in the financial statements that are not still detained by the internal control.
If, the inherent risk is .80, control risk is .60 and audit risk is .05 that the detection risk will be calculated as below:
Audit risk = Control risk * Inherent risk * Detection risk
.05 = .60 * .80 * Detection risk
Detection risk = 0.5/ (.60*.80)
Detection risk = 0.10
Analysis: After the calculation of audit risk model with considering the inherent risk and control risks, the obtained value of detection risk is 0.10. The equation is determining that detection risk in audit is at minimum level while the inherent risk at maximum level and control risk is at medium level for TPG telecom limited. Higher rate of inherent risk in determining that the accounting transactions might be exposed both by internal and external environmental factors. The external factors are economic, legal and political factors. The changes in these factors have influenced on the operational activities of the organization. As well as, the areas of deception are as below which are arisen due to weak control on internal activities of the organization:
- Payroll fraud
- Third party fraud
- Cash & other valuable assets
- Banking transactions
Audit Risk Model
In this concern, it is essential for the auditor to review these risks while carrying out the audit process. The analysis of these risks identifies the areas which are influencing the financial and operational activities of the organization. Auditors require an appropriate policy and approach to analyze the impact of errors and fraud on financial statements of the organization. Thus, the analysis of different audit risks is essential for the auditors to accomplish the audit process in more professional and reliable manner.
According the International Accounting Standards, it is required for the auditors to perform an analytical procedure while auditing. The analytical procedure will be helpful in analyzing the financial performance of the associated organization in professional manner (Jans et al., 2014). In order to accomplish the analytical procedure of TPG telecom limited different ratios and metrics of last three years are used from financial statements of the company.
|
Ratios |
Year 2015 |
Year 2016 |
Year 2017 |
|
Return on assets (%) |
14.17 |
14.00 |
10.77 |
|
Return on equity (%) |
24.42 |
27.34 |
19.85 |
|
Earnings per share (%) |
34.85 |
34.06 |
31.17 |
|
Current ratio |
0.98 |
0.70 |
0.37 |
(Source: Morning star, 2018)
Return on assets (ROA): Return on assets ratio is also called as return on total assets. It is a profitability ratio, which is used to analyze the total earned income from the entire assets during the business operations in a specific period. This ratio is helpful for both investors and management in taking investment decision (Vinci et al., 2013). From the above table it is analyzed that the return on assets was 14.17% in year 2015. The return on assets decreased in 2016 and 2017 from 14% to 10.77% respectively. The decreasing value of return on assets is determining that the efficiency of the company of earning from investment in assets is decreasing. The decreasing value of return is not favorable for the company as it presents that the company is has less efficiency of generating money from its assets. Due to decreasing value of ROA the investors will have no interest to invest in the company as there is less possibility of gaining profits from the invested amount on company’s assets.
Return on equity (ROE): It is also a profitability ratio, which is used to analyze the efficiency of an organization of gaining return on the invested amount of the potential share holders. ROE measures the efficiency of the company of using the amount of investors in growing the company (Al Karim and Alam, 2013). The investors have intention to gain high return on their investment from the company. Return on equity of TPG was 24.42 in 2015, 27.34 in 2016 and 19.85 in 2017. There is not stability on in return on equity of the company. In this concern, there may be confusion among the investors to invest in the company as they have intention to gain constant return on their investment.
Analytical Procedure at TPG Telecom Limited
Earnings per share (EPS): EPS is also known as net income on per share. Higher earnings per share remain better for the company to attract the investors and improve the market image of the company. As well as, higher EPS determined that the company has good profits to issue its shareholders on outstanding shares (Omar et al., 2014). The EPS of TPG was 34.58 in 2015, 34.06 in 2016 and 31.17 in 2017. The decreasing EPS of the company is indicating that the company has lower profits to distribute its share holders, which is not good for the company. Due to the decreasing EPS the investors will have less intention to invest in equity of the company.
Current ratio: The term current ratio is used to analyze the capability of an organization of using its current to pay current liabilities. Current ratio is helpful for the creditors and investors to analyze the liquidity position of an organization and the ability of paying current liabilities with use of current assets. Higher current ratio remains favorable for the company as it indicates that the organization has good ability to pay its short-term liabilities or current debts. The current ration of TPG telecom limited was 0.98, 0.70 and 0.37 in 2015, 2016 and 2017 respectively. The decreasing current ratio is determining that the company has lower ability of paying debts from its current assets, which is not favorable for the company.
From the analysis of different ratios it is analyzed that the financial position and performance of TPG telecom limited is decreasing from last three years. There is a need for the auditor to analyze the causes of decreasing financial performance and suggest the management to take an effective action to improve the financial performance.
|
Account balance |
Amount AU ($m) |
Assertions |
Audit procedures |
|
Cash in bank |
4.3 |
Valuation and Allocation, Accuracy, Rights and Obligations |
1.Demand for bank verifications 2. Take an analysis of bank reconciliations |
|
Receivables |
131.6 |
Subsistence, Recording, Accuracy, Classification |
1. Mark out general ledgers 2. Compute and settle the balances |
|
Current assets |
33.3 |
Existence, Completeness, Valuation, Disclosure |
1. Monitor physical accumulations 2. evaluation of coastline of entire items |
|
Plant and equipments |
1055.5 |
Correctness, Occurrence, Disclosure and Presentation |
1. Inspect the inventory 2. Settle with the associated statements |
|
Intangible assets |
2632.5 |
Occurrence, Valuation, Completeness, Disclosure |
1. Verified the balances 2. Ledger accounts verified |
|
Loans and borrowings |
872.4 |
Recording, Rights and Obligations, Valuation, Disclosure and presentation |
1. The loan documents are reviewed 2. A test is conducted to reconcile procedure |
|
Non-current liabilities |
71.7 |
Recording, Valuation Disclosure and Presentation |
1. Confirmation attain from the responsible officer 2. Look into nominal accounts |
|
Accrued payroll |
28 |
Disclosure and presentation |
These are cross checked and analyzed in well manner |
|
Long-term debts |
1,350 |
Valuation, recording and occurrence |
Look into the balance sheet in proper manner |
|
Other liabilities |
26 |
Valuation, recording and occurrence |
Cross checked with evaluation of different financial statements |
Substantive approach is used in auditing to present the evidences for accuracy and validity of financial statements. In substantive approach, different account balances and testing transactions are included to improve the accuracy of auditing procedure (Glover et al., 2014). There are different steps in audit procedure that improves the reliability and validity of the collected information from the financial statements of TPG telecom limited. These steps are discussed in the below table:
|
Steps |
Description |
|
Planning |
In process of auditing, planning is first and essential step to obtain the relevant financial information from the financial statements of the organization. The auditors initiate audit procedure with understanding operational activities, discovering potential business risks and ascertaining the audit objectives. In order to gain better understanding the auditor communicates with the management and discusses about the purpose and scope of the audit. At planning stage the auditor meets to entire departments of the organization and establishes an effective planning for further audit process (Glover et al., 2014). It is analyzed that the management of TPG telecom took interest in audit process as there is better scope for the organization to improve the financial and operational performance of the organization. |
|
Entrance meeting |
It is the second step of audit process in which the auditor meets to different departments of the organization and discusses about the generating issues in the organization. For this, the auditor arranges a meeting and converse the risk assessments of the organization. The auditor gains essential information about the current issues in the organization that are influencing the financial performance of the organization. The auditor also demands different financial data to evaluate and identify the misstatements from these financial data. |
|
Fieldwork |
The auditor reviews evaluates and tests the internal control of the organization in professional manner. In TPG telecom, the auditor considers different audit tests to identify the weakness of the organization in managing the operational activities and errors in financial statements in effective manner (Knechel and Salterio, 2016). The auditor summarizes the collected data and communicates with the management about the existing issues in financial records and operational activities. |
|
Draft report |
At this step, the collected data are analyzed by the auditor and prepared a draft report with describing the scope and termination of the audit procedure. Based on the analyzed data possible recommendations are provided to the management to improve the financial and operational activities in productive manner. As well as, the issues in financial statements are discussed with the management for further improvement. |
|
Exit meeting |
In this step, the management of the organization and audit staff meets to communicate on the drafted audit report and make final conclusion of the audit process. In this meeting, the participants evaluate the draft report and argue to implement possible and favorable changes. In addition, they decide a date to give response on the audit report exit the meeting. |
|
Response of management |
The management of TPG telecom provides recommendations based on the audit report in written form with discussing about the corrective actions to improve eliminate the misstatements from the financial records and deficiencies in operational activities. |
|
Final report and follow up |
It is the final step of the audit in which the concluding report is prepared and distributed to the management and state office of audit department. As well as, the management is recommended to have proper focus on the provided suggestions for further improvements. |
In auditing, sampling plan refers to the appliance by the auditor to analyze the some basic characteristic of the financial statements. In context of TPG telecom, the auditor should follow the below steps:
- Attributes of the population
It is critical to repair and maintain the expanse accounts for the auditors. Therefore, the auditors must investigate the accuracy level of the financial statements in a systematic manner. The accuracy of the financial statements can be verified in reliable manner through recording the transactions in accurate account (Jones, 2017). The financial statements of last three years are analyzed and identified that there is no misstatement in financial records.
- Identifying the sample size
It is essential for the auditor to determine the required sample size to reflect the risk of tolerable errors, expected fraud and wrong acceptance. The sample size depends on tolerance level, confidence level of auditor and level of materiality towards a specific head.
- Choosing the sample items
The auditors must divide the big records by a sample size into proper intervals to analyze the data in better and reliable way. There was a large size of financial entries so that the transactions are above the amount of $1300 are checked with 100% accuracy.
- Carrying out audit procedures
After the selection of a sample size from the whole records, the auditor should make efforts to carry out apposite audit process. As well as, the balances of each material accounts are checked with considering different accounting standards.
- Deriving at valid conclusions
At last step, the auditor should analyze that the account balances are significantly appropriate. If the misstatements are not going beyond the assessed level of acceptance than the auditor has the authority to conclude that there is no misstatement in financial records (Wang et al., 2015).
Conclusion
From the above discussion, it can be concluded that auditing has been played an essential role in identifying the internal and external issues in business operations which are influencing the financial performance of the organization. It is also analyzed that the management should provide entire information about the internal and external factors that are influencing the business performance. The auditors can provide better suggestions to improve the reliability of financial statements and operational performance of the organization.
References
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BDO (2017) A SECTOR UNDER PRESSURE DURING A YEAR OF DRAMATIC CHANGE. [Online]. Available at: https://www.bdo.com.au/getattachment/Insights/Publications/TMT/2017-Telecommunications-Risk-Factor-Survey/BDO-2017-Telco-Risk-FactorSurvey.pdf.aspx?lang=en-AU (Accessed: 20 September 2018).
Botez, D. (2015) Study Regarding the Need to Develop an Audit Risk Model, Audit financiar, 13(125).
Contessotto, C., and Moroney, R. (2014) The association between audit committee effectiveness and audit risk, Accounting & Finance, 54(2), pp. 393-418.
Glover, S. M., Prawitt, D. F., and Drake, M. S. (2014) Between a rock and a hard place: A path forward for using substantive analytical procedures in auditing large P&L accounts: Commentary and analysis, Auditing: A Journal of Practice & Theory, 34(3), pp. 161-179.
Jans, M., Alles, M. G., and Vasarhelyi, M. A. (2014) A field study on the use of process mining of event logs as an analytical procedure in auditing, The Accounting Review, 89(5), pp. 1751-1773.
Jones, P. (2017) Statistical sampling and risk analysis in auditing. USA: Routledge.
Knechel, W. R., and Salterio, S. E. (2016) Auditing: Assurance and risk. USA: Routledge.
Morning star (2018) TPG Telecom Ltd. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=TPM (Accessed: 20 September 2018).
Omar, N., Koya, R. K., Sanusi, Z. M., and Shafie, N. A. (2014) Financial statement fraud: A case examination using Beneish Model and ratio analysis, International Journal of Trade, Economics and Finance, 5(2), pp. 184.
Smith, R. (2018) Crime in the digital age: Controlling telecommunications and cyberspace illegalities. USA: Routledge.
Sohal, A. S. (2013) Developing competencies of supply chain professionals in Australia: collaboration between businesses, universities and industry associations, Supply Chain Management: An International Journal, 18(4), pp. 429-439.
TPG (2018) FAST, RELIABLE AND COST EFFECTIVE COMMUNICATIONS. [Online]. Available at: https://www.tpg.com.au/about/investorrelations.php (Accessed: 20 September 2018).
Vinci, G., Preti, R., Tieri, A., and Vieri, S. (2013) Authenticity and quality of animal origin food investigated by stable?isotope ratio analysis, Journal of the Science of Food and Agriculture, 93(3), pp. 439-448.
Wang, N., Yu, P., and Hailey, D. (2015) The quality of paper-based versus electronic nursing care plan in Australian aged care homes: A documentation audit study, International journal of medical informatics, 84(8), pp. 561-569.
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