Auditor Independence

The prime responsibility of the auditors lies in the inspection of the financial reports of the business entities in the presence of the required compliance with all the needed audit standards and principles for the ascertainment of the fact that there is not any material missstements in the financial statements of the business entities (Schmidt, Wood and Grabski 2016). At the same time, the audit report is regarded as a major mechanism for the investors and other users for understanding the truthfulness of the financial health of the business entities. As audit report help the inventors, it has become the prime necessity for the accountable audit committees to implement the required system for the enhancement of the quality of the audit report. In the presence of the implemented initiatives by some of the audit authorities like CPA, IAASB and AUASB, it has become a major necessity for the auditors and the companies to publish the details about the  major material issues in the financial statements; and these issue can be called as Key Audit Matters (Wright 2016). Moreover, the increased responsibility of the auditors is the effective communication of the assessed key audit matters in the annual report in simple English language. The below discussion takes an attempt to analyze these aspects related to the audit in the annual report of Origin Energy.

Both the internal and external auditors of the business entities must maintain the aspect of independence from the parties that may have financial other interest in the audit client. For this reason, the auditors should be honest in the audit profession to maintain the integrity. KPMG, one of the top four audit firms, was the audit partner of Origin Energy in 2018. The declaration of independence of the lead auditors states that the gilding principles of the standard of 307C of the Corporations Act 2001 are the main aspect to which the auditors had compliance in the auditing process. The compliance with this standard is enough to assure the maintenance of auditor’s independence in the audit profession (Originenergy.com.au 2018). The lead auditor of KPMG also declared that the provided audit services did not breach the audit code of conduct.

There are some specific services that the auditors use to provide to their audit clients and these services do not have any connection with the financial statements review; these types of services are considered as the Non-audit services. There is mention about some specific non-audit services in the annual report of Origin Energy that they have received from KPMG. These services are legal services, taxation services, advisory services, lattice related services, advisory services and others (Originenergy.com.au 2018). While providing the non-audit services, it is expected that there will not be any negative effect on the integrity and honesty of audit independence. The Chairman of the Audit Committee of Origin Energy has announced that KPMG has adhered to Corporations Act 2001 that eliminates the possibility to affect the negative impact on audit independence (Collings 2014).

Non-Audit Services

It is needed for the business organizations to pay the auditors for receiving the audit as well as non-audit services. The remuneration to KPMG by Origin Energy can be seen in below:

Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2018 $	2017 $	Change in %
Audit Services
KPMG Auditors	2,360,000	3,042,000	-22.42%
Other Auditors	88,000	82,000	7.32%
Total	2,448,000	3,124,000	-21.64%
Non-Audit Services by KPMG
Advise for Accounting	–	45,000	-100.00%
Services for Taxation	97,000	65,000	49.23%
Legal Services	37,000	211,000	-82.46%
Services related to Lattice	1,184,000	632,000	87.34%
Advisory Services	61,000	–
Other	179,000	18,000	894.44%
Total	1,558,000	971,000	60.45%
Total Audit Fees	4,006,000	4,095,000	-2.17%

The above table makes the disclosure of the payment to KPMG by Origin Energy for the both audit and non-audit services. According to the above table, Origin Energy had to make reduced payment for the services related to the audit services for the review of the financial statements and the decreased percentage is 21.64 (Originenergy.com.au 2018). On the other hand, Origin Energy had to make increased payment to KPMG for receiving six types of non-audit services in 2018; and the increased percentage is 60.45. On the overall basis, Origin Energy had to make the decreased payment of the total audit fees to Origin Energy and the decreased percentage is 2.17 (Originenergy.com.au 2018).

Unbilled Revenues: Major uncertainty for determining the energy volume makes this aspect a key audit matter. Some major factors n this aspect are variation in product offering and customer rate in different markets, complexity in the process of demand estimation, physical energy loss between the processes of purchase and delivery and others (Originenergy.com.au 2018).

The substantive audit procedures for this key audit matter are to assess the historical accuracy of the estimation process; to test the aspect of purchased wholesale energy; to reconcile the volumes of purchase in order to recognize the volumes of revenues and others as the auditors have applied these procedures. The classification of these processes can be done as analytical procedures and test of details (Velte 2018).

Unbilled Network Expenses: The presence of ambiguity in the volume energy estimation to cater to the needs of the customers is the main reason for determining this aspect the key audit matters. The crucial factors in this situation are the level of customer energy loss and demand of the customers relevant to the unbilled revenue issue; and the volume of supplied energy to the customers between the date of purchase and the date of last invoice in the business activities (Originenergy.com.au 2018).

In order to address this key audit matter, the auditor has undertaken some major substantive audit procedures. They are to assess the historical accuracy in the company with the fees of the distributors; to test the volume of the wholesale energy against the AEMO invoice; to reconcile the purchase volume with the unbilled revenue of the company and others. The classification of these procedures can be considered as substantive test of control (Sirois, Bedard and Bera 2018).  

Remuneration of Auditors

Derivative Financial Assets and Liabilities Accounting: The major reasons for considering this aspect as key audit matter are the presence of inherent difficulty in the valuation process. The key aspects in this situation are the required judgment for the estimation of fair value of some of the major financial institutes, the performed process related to hedge accounting related to the exposure of risk;  amendment of the company with the disclosure requirement of AASB 7: Financial Instrument Disclosure and others (Originenergy.com.au 2018).

In order to address this issue, the auditors have performed some specific audit procedures like to evaluate the methodology used for the valuation of financial instruments by the valuation specialists; to test the inputs that have been derived on internal basis with the help of valuation specialists; to test the results of hedge accounting with the help of valuation specialist and others. These procedures can be considered as the test of control (Boolaky and Quick 2016).    

Equity Accounted Investment’s Carrying Value: The presence of certain reasons has contributed towards this development of this key audit matter. They are the exposure of the operations of the company with the ups and downs in the prices of the commodities; the inclusion of some major intrinsic complex aspects in the process for the estimation of the future cash flows and the inclusion of historical carrying value in the used adjustments (Originenergy.com.au 2018).

With the aim to address this key audit matter, the major performed audit procedures are assessment of the future cash flows of the company; comparison of the forecasted cash flow including the used model by the company in order to approve the future production profile; comparison the used assumptions for the valuation of assets along with the verification of the assumptions. These can be considered as the analytical procedures (Botez 2017).   

The inclusion of an Audit Committee can be seen in the Board of Directors of Origin Energy and the inclusion of four non-executive directors can be seen in the committee. They are Scott Perkins, Maxine Benner, Teresa Engelhard and Gordon Cairns. The major function of this committee is to consider the issues related to the system and structure of the management in order to protect the integrity of corporate reporting. In addition, this committee involves in the review of the full year as well as the half-year result of Origin Energy so that they can provide the recommendation in the financial statements. However, the Board of Directors of Origin Energy does not have any audit committee charter.

Key Audit Matters in Origin Energy’s Annual Report

The audit opinion from the auditor’s report in Origin Energy helps in ascertaining certain facts. The first crucial factor in the presence of adherence with the Corporations Act 2001 with the aim to provide the true and fair view of the financial statement of Origin Energy as at 30 June 2018. The second aspect shows the presence of adherence with Corporations Regulations 2001 and Australian Auditing Standard (Originenergy.com.au 2018). The third aspect is the presence of the major components of financial reports like balance sheet, income statement, and statement of comprehensive income, statements of change in equity and the statement of cash flows (Originenergy.com.au 2018).

The prime responsibility of the management and directors of Origin Energy lies in the preparation of all the components of financial reports in accordance with Corporations Act and Australian Accounting Standard; implementation of effective internal control and the assessment of the company’s ability to continue as a going concern. On the contrary, the prime responsibilities of the auditors lie in gaining enough evidence and assurance so the ascertainment of the material issue in the financial statements can be done. In addition, they are needed to publish the audit report including the audit opinion (Davis and Hay 2012).

It can be seen from the 2018 Annual Report of Origin Energy that the auditors have ascertained the fact that there is an absence of any material subsequent event in the financial operations and reports of the company after the period of 30 June 2018 (Originenergy.com.au 2018).

The auditors of Origin Energy, KPMG, have made it easier for the third party stakeholders to obtain information and understanding about the material issues present in the financial reports of Origin Energy in the year 2018. With the help of a specific table, KMG has provide the information about the key audit matters of the company along with the information about the performed substantive audit procedures. This indicates towards the efficiency of the auditors in the effective communication of the material information to the third part stakeholders. All these aspects are majorly helpful for the third party stakeholders in the assessment of the roles and responsibilities of the auditors in the auditing process (Legoria, Melendrez and Reynolds 2013).

The assessment of the audit section in the 2018 Annual Report of Origin Energy states that the auditors of KPMG has been successful in the effective identification of the major key audit matters from the financial reports of the company. The absence of any material subsequent event can also be seen from the auditor’s report in Origin Energy. Most importantly, the auditors of KPMG have assessed all the material information of Origin Energy in accordance with all the required standards (Sutanto 2014).  

Audit Committee in Origin Energy

In the Annual General Meeting of Origin Energy, the stakeholders can ask the question about the process for the determination of the materiality level in Origin Energy by KPMG. After that, they can ask the question that whether there is any major loophole in the internal control of the company or not. Lastly, they can ask the question related to the future plans of KPMG for the auditing of Origin Energy (Murphy and Yetmar 2015).

Conclusion:

It can be prominently observed from the above discussion that the main way by which Origin Energy has maintained the auditor’s independence by complying with Corporations Act 2001 and Australian Accounting Standard. The adherence of high-level of ethics can be seen by Origin Energy at the time to provide the non-audit services. The reduction in the overall payment for the auditors has provided the company with major benefit. High compliance with all the requirements can be seen from the side of the auditors of KPMG while dealing the material information of the financial statements of the company. For this reason, they have been able in the detection of the key audit matters and the application of the required substantive audit procedures. The report has also provided the details of the follow-up questions that can be asked to the auditors in the Annual General Meeting.

References:

Boolaky, P.K. and Quick, R., 2016. Bank Directors’ Perceptions of Expanded Auditor’s Reports. International Journal of Auditing, 20(2), pp.158–174.

Collings, S., 2014. Frequently asked questions in international standards on auditing,

Daniel Botez, 2017. UPDATES REGARDING AUDIT REPORTING. Studies and Scientific Researches: Economics Edition, (25), pp.Studies and Scientific Researches: Economics Edition, 01 July 2017, Issue 25.

David S Murphy and Scott Yetmar, 2015. Student Perceptions of Auditor Responses to Evidence of Suspicious Activities: An Experimental Assessment. International Journal of Business and Social Research, 5(11), pp.48–59.

Davis, M. and Hay, D., 2012. An Analysis of Submissions on Proposed Regulations for Audit and Assurance in New Zealand. Australian Accounting Review, 22(3), pp.303–316.

Eko Madyo Sutanto, 2014. HUBUNGAN ANTARA JUDGMENT AUDIT DENGAN RESIKO DAN MATERIALITAS. Jurnal Dinamika Akuntansi, 6(2), pp.142–152.

Legoria, J., Melendrez, K. and Reynolds, D., 2013. Qualitative audit materiality and earnings management. Review of Accounting Studies, 18(2), pp.414–442.

Originenergy.com.au. 2018. 2018 Annual Report [online] Available at: https://www.originenergy.com.au/content/dam/origin/about/investors-media/documents/Origin_2018_Annual_Report.pdf [Accessed 19 Sep. 2018].

Schmidt, P.J., Wood, J.T. and Grabski, S.V., 2016. Business in the cloud: research questions on governance, audit, and assurance. Journal of Information Systems, 30(3), pp.173–189.

Sirois, L.-P., Bedard, J. and 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.

Velte, P., 2018. Does gender diversity in the audit committee influence key audit matters’ readability in the audit report? UK evidence. Corporate Social Responsibility and Environmental Management, pp.Corporate Social Responsibility and Environmental Management, 03/23/2018

Wright, C., 2016. Fundamentals of information risk management auditing : an introduction for managers and auditors,