Auditor’s Independence Declaration

The purpose of the project is to review and analyse the impact of the new provisions of Enhanced Auditor Reporting that has been commenced in the year 2016. The auditors are now required to fulfill additional requirements to bring about greater transparency in the reporting system. This will be achieved by evaluating the annual report of a company, which also contains auditor’s report. The purpose of imposing these standards is to increase transparency in the reporting and bring clarity in the responsibilities of auditors. Embracing these standards by the management and auditors will help investors to get insights with respect to key audit matters. 

Scope of the Project

The report is divided into seven major headings namely, Auditor’s Independence Declaration; Independent Auditor’s Report; Non-audit services performed by the auditor; Auditor’s Remuneration; Audit Committee; Independent Auditor’s Report to the shareholders and; Review of Key Audit Matters. The compliance of new regulations on above mentioned points by the company and the auditor has been discussed in detail in the below section.

Discussion

Orica Limited is a multinational corporation based in Australia and, it deals in providing blasting systems for the purpose of mining and also commercial explosives. The company is chosen for this analysis because it is a company listed on ASX and operates in many countries. This means the company has to comply with the new guidelines pertaining to auditor’s reporting. Evaluating the annual report of Orica Limited will help in gaining an insight on various matters and, also help in finding out whether the company has complied with regulations or not.

Auditor’s Independence Declaration

Corporations Act, 2001, lays down major compliance requirements regarding reporting of auditors in Australia. One of the most important matters is related to the independence of the auditor. According to the act and other regulations by different authorities, an auditor must be cautious enough to act and work independently from the organization he is associated with (CAANZ (Chartered Accountants Australia & New Zealand), 2016). In Australia, there are many laws that govern the work of auditors. Regulations set out in various laws are as under:

• Section 307C of the Corporations Act, 2001, deals with the requirement of auditor to produce a declaration of independence. As per the provisions of this section, an auditor must declare his independence from the company in the Auditor’s Independence Declaration. This declaration forms a part of company’s annual report. In addition to this section, other provisions of this act include Divisions 3, 4 and 5 of Part 2M.4 (Wolters Kluwer, 2018).
• Apart from the Corporations Act 2001, there are certain ethical codes that have been formulated for the auditors and these are given in APES 110. The regulating authorities of Australia formulated a regulation requiring the auditors to give a declaration that, they are complying with the said provisions and are fulfilling their ethical responsibilities. This is in addition to provisions of Corporations Act, 2001(Chartered Accountants, 2018).

The annual report of Orica Limited contains Independence Declaration by the lead auditors. The declaration is as per the Corporation Act, 2001 requirements. The annual report also states the compliance of other provisions related to independence of auditor (APES 110). The auditors have declared that they have taken care of the provisions of APES 110 while undertaking non-audit services and fulfilled ethical responsibilities. The information regarding APES 110 formed the part of Independent auditors report (Orica Limited, 2017).

Independent auditor’s report

KPMG is the lead auditor of the company. Auditor of a company can issue four types of audit opinions namely, unqualified, qualified, adverse opinion and disclaimer of opinion (Leung, 2009). The auditors of Orica Limited have given an unqualified audit opinion for 2017. This is because they have stated that the provisions of Corporation Act and other Australian Accounting Standards have been followed by the company. There is no adverse opinion or disclaimer given by the auditor.

Independent auditor’s report

Non-Audit services performed by the Auditor

Non- audit services that are provided by an auditor might interfere with the independence of the auditor. These are the services that are provided by the auditor to the client company in addition to the audit services. Non-audit services are one of the most important aspects that have a huge impact on independence of an auditor. Therefore, it is essential for them to exercise careful judgment before agreeing to provide non-audit services (Frankel, 2018). As per Sarbanes Oxley Act, which is applicable in the United States of America and some other countries, an auditor performing audit of a company cannot agree upon providing other non- audit services such as assisting in preparation of accounts to the same client.

However, in Australia, providing such non- audit services is allowed even auditor is providing audit services to the same client (Mitchell, 2018). In Australia, the auditors are permitted to perform non- audit services provided they give a written declaration regarding the same in the annual report. In situations where there arises a conflict of interest, they must not agree to provide such services and inform it to the concerned authorities (ASIC, 2018).

The auditor of the company performed certain non-audit services as per the independent auditor’s report in the year 2017. Declaration regarding that has been provided by the auditors and all such services underwent procedures of corporate governance and were reviewed thoroughly for independence. However, while evaluating the amount paid for such services, it was found that despite declaring that non- audit services have been provided in the year 2017, no payment was made to them and also, the non- audit services are not mentioned in the audit report(Orica Limited, 2017).

Auditors’ remuneration

Remuneration is paid to the auditors of the company for the services they provide. The auditors in Australia can provide audit as well as non-audit services simultaneously (Caanz, 2015).

The auditors of the Orica Limited performed both audit and non- audit services as per the declaration, but the data in Note 23 does not reflect upon the same information as, which services are provided is not mentioned. Other assurance services have been provided by the auditors as per the information. The data of two years along with percentage change has been provided below:

Particulars	2017	2016	Percentage Change
Audit or review of the financial report	3,521	3,772	-7%
Other non-audit related services	25	42	-40%
Total Remuneration	3,546	3,814

(Orica Limited, 2017)

In the above table, remuneration of the auditors has been provided and also the percentage change in remuneration from 2016 to 2017 is mentioned. The audit fees have reduced by 7% and non-audit fees by 40%.

Role, functions and composition of the Audit Committee

The audit committee is formed by the companies in order to assist the board in discharging their responsibilities with due diligence, particularly related to reporting of financial information (CAANZ, 2016). The audit committee also overlooks whether the internal controls are in place or not. This is the main role of an audit committee. The formation of an audit committee is mandatory for all the companies listed on ASX (Arens, et al., 2016).

Non-Audit services performed by the Auditor

Orica Limited has also formulated an audit committee called “The Board Audit and Risk Committee”. The BARC comprises of three non-executive directors who have the requisite experience and are also financially literate. At least 4 meetings must be conducted by BARC annually (Orica Limited, 2017). The Company has an audit charter of BARC called the terms of reference, and it is hosted on the website of the company.

The above figure clearly gives the details of various committees. However, the audit and risk committee does not have all the directors as its members.

The main functions and responsibilities enumerated therein are:

• Integrity of reporting and financial statements;
• External and Internal audit;
• Performance of risk and audit functions of the group;
• Risk management and internal controls;
• Compliances (Orica Limited, 2017).
• Independent Auditors report to the members (shareholders)

The auditors of a company are required to report their findings in the form of a report to the shareholders and members of the company. It is the responsibility of the auditor of the company to express his opinion over the financial statements (Gay & Simnett, 2015). On the other hand, the preparation of financial statements is a responsibility of management. Appropriate choice of sound accounting policies and internal controls is a management’s responsibility (Media, 2015).

There was one subsequent event where the company declared dividend of 28 cents per share. Its effect was not included in current annual report, but will be reflected in the annual report of 2018.

Review all Key Audit Matters noted and the associated audit procedures

Enhanced Auditing Reporting requires the auditors to report on the key audit matters that were identified during the audit of financial statements (Gay & Simnett, 2018). KAM’s are those areas, which were most significant matters identified during audit and are therefore, essential to report. The auditor of Orica Limited identified three KAM’s which include:

• Carrying Value of Goodwill
• Accounting for uncertain tax positions
• Accounting for environmental and decommissioning provisions (Orica Limited, 2017)

Carrying value of Goodwill- As per the auditors, testing of goodwill was attributable to one of the segments called the Minova Segment. Significant judgment was applied in evaluating the available audit evidence. Reason behind this was the huge amount of balance and the recent performance of this segment. There were a number of external factors that were responsible for the weak performance of the segment, such as decline in demand of coal in global market as compared to previous trends, low prices and mandates for reduction in costs. The auditors checked for the assumptions applied by the management and their value in use models such as forecast operating costs, forecast terminal growth rates and discount rate model. The auditors applied tests of control for this matter.

Accounting for environmental and decommissioning provisions- Other KAM from the perspective auditors was estimating the decommissioning provisions as well as environmental remediation. Reason to include this as KAM was the inherent complexity associated in ascertaining such costs, which include costs of legal matters and ground disturbance costs. The auditors applied tests of control for this matter.

Accounting for uncertain tax positions – Company being a multinational company operates in an international tax environment and its structure is driven by mergers and acquisitions. The Company makes sales in many countries of the world. This matter is a KAM, because the Company operates in varied tax jurisdictions and the interpretation of tax laws requires making significant judgment by the management. Also, the tax provisions keep on changing in order to improve the transparency. The auditors applied tests of control and analytical procedures for this matter.

Conclusion

From the above analysis, it can be said that the auditors have taken care of mostly all the reporting requirements. However, matter related to non -audit services could have been clearer. In order to improve the quality of information in the report, it is suggested to remove all the unnecessary information as important information gets lost amidst irrelevant information. One such information was about the non- audit services. While at one place it was given that the auditors have performed certain non -audit services, in the remuneration section it was identified that there was no mention about the specific assurance services that have been performed.

This information is misleading and hence, must be avoided in future. Other point to be noted is regarding the roles and responsibilities and other details regarding audit committee are given on the official website of the company and are therefore not included in reports. I would like to ask following questions to auditors: What type of non-audit services have you performed in the company? and how do you justify that it has not affected you independence?

References

Arens, A., Arens, A. A., Best, P., Shailer, G., Fiedler, B., Elder, R., & Beasley, M. (2016). Auditing, Assurance Services and Ethics in Australia with ACL Access Code Card. Pearson Education Australia.

ASIC. (2018). Auditor independence and audit quality. Retrieved from Australian Securities & Investments Commision: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/auditor-independence-and-audit-quality/

CAANZ (Chartered Accountants Australia & New Zealand). (2016). Auditing, Assurance and Ethics Handbook 2016 Australia: Incorporating All the Standards as at 1 December 2015. John Wiley & Sons.

Caanz. (2015). Auditing and Assurance Handbook 2015 New Zealand+auditing and Assurance Handbook 2015 New Zealand Wiley E-Text Card. John Wiley & Sons Australia, Limited.

Chartered Accountants. (2018). Perspective. 

Frankel, R. M. (2018). The Relation Between Auditors’ Fees for Non-Audit Services and Earnings Quality (Classic Reprint). Fb&c Limited.

Gay, G. E., & Simnett, R. (2015). Auditing and Assurance Services in Australia. McGraw-Hill Education (Australia).

Gay, G., & Simnett, R. (2018). Auditing and Assurance Services in Australia, Seventh Edition. McGraw-Hill Education Australia.

Leung, P. (2009). Modern Auditing & Assurance Services. John Wiley & Sons Australia.

Media, B. L. (2015). CPA Australia Advanced Audit and Assurance: Passcards. BPP Learning Media.

Mitchell, K. (2018). Independence – Navigating the murky waters between Audit & Non-Audit services. Retrieved September 11, 2018, from rochford-group.com: https://rochford-group.com/independence-navigating-murky-waters-audit-non-audit-services/

Orica Limited. (2017). 2017 Corporate Governance Statement. 

Orica Limited. (2017). Annual Report. 

Orica Limited. (2017). Terms of Reference, BARC. ion. Retrieved September 9, 2018, from iknow.cch.com.au: https://iknow.cch.com.au/document/atagUio486340sl14508496/corporations-act-2001-section-307c-auditor-s-independence-declaration