Auditor Independence Requirements

The Enhanced Audit Report is merely the enhancement of the conventional form of audit report which provides its users with more transparency, insight and relevance. The most essential change in the enhanced audit report is the introduction of “Key Audit Matters” (KAMs).

These are the matters which require great attention in the professional judgment of the auditor are required to be mandatorily disclosed by the auditor in the audit report of a listed company. These matters are discussed later in this assignment in context to the selected company listed on ASX, i.e., Telstra Corporation Limited in our case (Alexander, 2016). In Australia, the revised standards were approved and issued by the Australian Auditing and Assurance Standards Boards (AUASB) with an application date for years ending on or after 15 December, 2016. Thus mandating the disclosures of the key audit matters in case of all ASX listed companies. 

Independence Requirements

By the term independence, we mean freedom. Freedom from the influence of any person. In reference to Auditor Independence means freedom of the auditor from those parties who might have interest, whether financial or personal, in the business of the entity whose audit is being conducted audited (Antle & Smith, 1985). The main requirement for an auditor for being independence is his integrity, professional competence and an objective approach to the audit process.

The idea of independence requires the auditor to conduct his audit work in free and impartial manner, as there are people who depend on the auditor’s opinion for making decisions on various matters. Any prejudiced opinion from the auditor on the financial statements of a company may adversely affect the decision making process of many users. Hence, auditor’s independence is very crucial (Arnott, Lizama, & Song, 2017).

The independence declaration has been given by the partners of Ernest & Young Global Limited for the financial year ended 30 June, 2018, declaring that there have been no contraventions in respect of auditor independence requirements as per section 307C of the Corporations Act 2001 and also there has been no violation of any professional conduct which is required to be followed in relation to the audit process (Belton, 2017). 

Non –audit services provided

During the reporting period, the auditors have, other than the audit services which are required to be performed during the course of audit, provided some non- audit services to the Company. The details of the nature of the service and the amounts paid or payable in respect of each such service are clearly provided under the head ‘Auditors’. All these non audit services provided by the auditor based on the advice and directions as provided by the Audit & Risk Committee to the satisfaction of the directors (Coate & Mitschow, 2017).

Non-Audit Services Provided

The directors have assured that all the non audit services provided during the year by the company’s auditor, Ernest & Young Global Limited, are in approval of the company’s external audit service policy and the same are codicillary to the confirmation of the management and EY that the independence of the auditor is not compromised. Moreover, all the non audit services provided by the auditor are monitored by the company’s Audit & Risk Management Committee on a continuous basis. 

Analysis of the Auditors’ Remuneration

Particulars	Amount in $m	Percentage Change	Remarks
Year 2018	Year 2017	Difference
Audit fees – For audit & review of Financial Reports	9.011	8.011	+ 1.000	12.48%	Increase
Other Audit – related services	1.322	2.114	– 0.792	37.46%	Decrease
Other Non – Audit related services –
Tax services	0.065	0.164	– 0.099	60.37%	Decrease
Advisory Services	0.664	0.596	+ 0.068	11.41%	Increase

From the above tabular representation, we can observe that the audit fees related to the audit and review of the financial reports has gone up during the current year by 12.48% whereas the  audit fees for other audit related services has fallen considerably by 37.46%.

The reason behind such fall might be because the need of other audit related services by the company has reduced or such services are no longer required (Gullet, Kilgore, & Geddie, 2018). Also there is considerable fall in the fees for tax compliance services by 60.37%, this could be because of continuously developing technologies and the company might have adopted the latest advanced technologies. An increase in  the fees paid for advisory services reflected under the head of other non audit related services have been noticed, the rate of increase is 11.41%. This increase could be because of increase in the company’s legal matters.

Key audit matters and audit procedures performed

Key audit matters (KAMs) are those matters which are considered to be the most significant matters in the audit of financial statements. The auditor is required to discuss such matters in his audit report in the context of the audit of the financial statements (Kim, Schmidgall, & Damitio, 2017). These key audit matters as reported by the auditor of Telstra are discussed below:

• Impairment of Goodwill and Intangible assets: The impairment of Goodwill and Intangible Assets is considered as a key audit matter because of its materiality in the industry in which the company operates. The impairment of goodwill and intangible assets depends upon the availability of the future cash flows. In the current year Telstra has recorded in its books an amount of $ 242 million as impairment charge against the goodwill relating to the Ooyala, CGU(Sithole, Chandler, Abeysekera, & Paas, 2017).

The auditor has discussed the audit procedures followed by them which includes the evaluation and testing of the accuracy with which the company has calculated the impairment charge, the auditor has also evaluated the assessment of the company in regard to the indicators of impairment and is reversal. The auditor has assessed the management’s reasonableness of the projections of future cash flows. In the course of assessment, the auditor has involved certain specialists for the evaluation of the due process of key assumption in relation to the discount rate (Kusolpalalert, 2018).

• Capitalization & asset lives: The capitalization and asset lives are considered as a key audit matters because of the amount of judgment involved in such areas. Any change in the judgment will have huge impact on the carrying value of the assets and thus on the result of the Group as a whole.

In this case the auditor has assessed the Group’s effectiveness in the control over the acquisitions and disposal of the assets, the aptness of the policies adopted by the Group for capitalization of assets along with the reliability of the date from which an asset is depreciated (Trieu, 2017).

• Revenue recognition: Revenue recognition has been considered as a key audit matter due to exercise of significant amount of judgment in relation to recognition of revenue. The main areas where the Group exercises such judgment are accounting of new products and plans; accounting of large network application services contracts; accounting for NBN revenue under the revised Definitive Agreements(mejia, Tosi, & Hinkin, 2017). The main risk the Group poses in the inherent industry is in relation to the completeness and accuracy of the amount recorded in the books as revenue because of the complexity involved with the billing system, products and services and also the changes in price every year.

Analysis of the Auditors’ Remuneration

The auditor in the above case has assessed the efficacy with which the measurement and capture of revenue transactions is controlled by Group across all revenue streams which are material, how the new products are priced and the basis of their revenue recognition. The auditor has adopted sampling method. Moreover, the auditor has also done assessment of the future contracts of the Group along with the product life cycle.

• Revenue from contracts with customers: This is considered as a key audit matter as the AASB applies to the Group and the adoption of this standard is implicitly complex. The adoption of this standard will bring about changes in a number of accounting policies currently followed by the group and as a result also impact the retained earnings of the Group(Werner, 2017).

The auditor has assessed in the above case the process with which the Group estimates the impact that the new standard will have on the financial statements and analyzed the resultant impact on the financial statements along with the aptness of the method adopted by the Group to estimate such impact.

• Reliance on automated processes and controls: This is considered to be a key audit matter because of the Group’s heavy reliance over the automated processes and controls for an important part of capturing, controlling and recording of transactions. The improvement of the IT system is a continuous process for the Group and during the financial year new systems were implemented which were of great significance to the audit process.

The auditor in this case has assessed the controls, both manual and automated, that the Group has on the relevant IT system. Alternative audit procedures have also been applied by the auditor where the testing controls were not considered to be appropriate.

Audit Committee

An audit committee consists of at least three directors, majority of which should be independent. The Telstra Group has an Audit & Risk Committee which constitutes of four members namely, Nora L Sheinkestel who is the Chairman of Audit & Risk Committee, Craig W Dunn, Russell A Higgins AO who is also a member o Remuneration Committee and lastly Margaret L Seale.

Audit Opinion

The Auditors on the basis of the audit performed by them of the consolidated financial statements of the company along with its subsidiaries, opines that the same has been prepared and presented in accordance of the Australian Accounting Standards and the Corporations Regulations 2001 and gives a true and fair view of the entity’s affair. The auditor has not observed any material misstatement in the annual report of the Group.

Directors’ and Management’s Responsibilities

The responsibility of Directors of a company is vast. They are shouldered with the responsibility of the preparation and presentation of  the financial statements in a true and fair view and which should be in compliance with the provisions of Australian Accounting Standards and also of the Corporations Act 2001. The directors are responsible to ensure that adequate level of internal control operates within the organization. In addition to the above, Directors also need ensure that the company adheres to the relevant requirements of a going concern assumption and the annual report has been prepared on that basis (Arnott, Lizama, & Song, 2017).

Key Audit Matters Review

Material Subsequent Events

Material subsequent events are the events which occur after the reporting date and are material to the affairs of the company. During the financial year, the Directors of Telstra Group are not aware of any subsequent event, which in their opinion, has significantly affected or may significantly affect in future years, the company’s operations (Webster, 2017).

Follow – up questions to the Auditor at the Company’s Annual General Meeting

The auditor has discussed almost every information which is relevant for the audit and is required to be disclosed in the audit report and the same is considered complete in all aspects. All the requirements of the legislative body have also been met. However there are few questions I would like to raise before the auditor:

• “Was the auditor aware of any incident of fraud that involves the employees of the company? Or incidents of fraud involving the top management? If yes, what actions did he take? With whom the matter was discussed?”
• “Was the auditor aware of any complaint or grievances filed by any employee against any member of the management involving harassment? Was it resolved? If not, what was the action taken by the management?”

Conclusion

From the above in depth analysis of the enhanced audit report and annual report of the company, it can be concluded that the objective of the enhanced audit report has been met by the auditor. The auditor has prepared the audit report following all the standards as laid down by relevant legislative bodies. All the information which is relevant and requires disclosure on the part of the auditor has been properly disclosed and forms part of the notes and explanations as attached to the financial statements. The main purpose for which the enhance audit report was prepared, i.e., transparency and objectivity has been met without any doubt. However, improvements are always appreciated.

References

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Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Coate, C., & Mitschow, M. (2017). Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility.

Gullet, N., Kilgore, R., & Geddie, M. (2018). USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).

Kim, M., Schmidgall, R., & Damitio, J. (2017). Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), 23-40.

Kusolpalalert, A. (2018). The relationships of financial assets in financial markets during recovery period and financial crisis. AU Journal of Management, 11(1).

mejia, L., Tosi, H., & Hinkin, T. (2017). Managerial Control, Performance, and Executive Compensation. Academy of Management Journa, 30(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. 

Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93, 111-124.

Webster, T. (2017). Successful Ethical Decision-Making Practices from the Professional Accountants’ Perspective. ProQuest Dissertations Publishing.

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