Auditing is considered as the systematic and methodical process of inspecting as well as examining the financial statements of the companies in order to make sure that there is not any material misstatements in them (Louwers et al. 2015). Before commencing the audit works, it is needed for the auditors to chalk out the audit strategy in detailed manner. An Audit Strategy sets the direction, timing as well as scope of the audit work and the auditors use the audit strategy as a parameter for the development of audit plan (Knechel and Salterio 2016). For this reason, the auditors are needed to include the key decision required in the audit strategy document for effective planning of auditing. At the time to develop the audit strategy, an auditor is needed to consider the methodical analysis of the audit client that includes the analysis and evaluation of business, industry, external factors, nature, accounting policies, change in accounting policies, objectives, strategies and business risks of the audit client. Information about all these aspects provides the auditor with the necessary direction to plan the audit procedures (Byrnes et al. 2018). The main aim of this report is to gain understanding about the audit client that is Telstra Corporation Limited (Telstra) so that effective audit strategy can be developed for the company for the 2017 to 2018 financial year.
Information about the Client
Name: Telstra Corporation Limited
Address: 242 Exhibition Street, Level 41, Melbourne, VIC 3000, Australia
Year of Establishment: 1901
Field of Operations: Telstra Corporation Limited is the provider is the provider of telecommunication services to businesses, governments, communities and individuals in Australia as well as internationally. The company has operations in four segments; they are Telstra Consumer and Small Businesses, Telstra Operations, Telstra Enterprise and Telstra Wholesale. Telstra provides their customers with telecommunication products, services as well as solutions through mobiles, telephones, broadband services and others.
Period of Financial Report Period under Consideration: 1st July 2017 to 30th June 2018
Types of Financial Report: Consolidated
The Australian economy has taken an upturn on in the fourth quarter of the last year after an unsatisfactory third quarter and it is expected that this robust growth is expected to continue in the coming year. After that, the Australian telecommunication industry is expected to grow in the next five years. Other key developments are decline in fixed-line DSL broadband, growth in second tier market, slow growth in mobile subscriptions and others (focus-economics.com 2019).
The laws and regulations applicable to Telstra are industry specific competition regulation, consumer protection regulation and industry codes and standards under a self-regulatory regime. Telstra is needed to comply with all the regulations introduced by The Communication Minister and the Communication Minister’s Department.
Increase in competition can be seen in the Australian telecommunication industry due to the deregulation of the industry in 1997, but Telstra has been able in maintaining their dominant position in the industry. The major competitors of Telstra are Optus, AAPT, Primus, Orange and Vodafone.
The Australian government provides funding support to the Australian telecommunication industry for their overall growth. At the same time, the Australian government also supports the telecommunication industry in the policy making process (communications.gov.au 2019).
Increase in revenue from wireless services can be seen in the Australian telecommunication industry due to the rise in consumption volume of mobile data along with improved mobile connectivity. However, decrease in demand can be seen in fixed line services (ibisworld.com.au 2019).
Even after the deregulation of the Australian telecommunication industry, there are certain entry barriers for the new companies. The new entrants need to bear huge set-up cost for the new business in this industry that need huge capital. After that, new companies are needed to invest hugely for the adoption of new technologies for their business (Fontagné and Mitaritonna 2013).
Telstra Corporation Limited is the provider is the provider of telecommunication services to businesses, governments, communities and individuals in Australia as well as internationally. The company has operations in four segments; they are Telstra Consumer and Small Businesses, Telstra Operations, Telstra Enterprise and Telstra Wholesale. Telstra provides their customers with telecommunication products, services as well as solutions through mobiles, telephones, broadband services and others (telstra.com.au 2019).
It needs to be mentioned that Telstra has a large customer base and the company has segregated their customer base in a well manner. In Australia, Telstra has 17.7 million customers for the retail mobile service, 4.9 million customers for retail fixed voice services and 3.6 million customers for retail fixed broadband services (telstra.com.au 2019).
It can be seen from the above that Telstra has certain increased dependency on the customers for the retail mobile services as it consists of the majority portion of the customer base.
Telstra has certain major suppliers who supply the company with many things like office equipment to uniform, coffee to stationary, cables of buildings along with servers to satellite capacity. For this reason, the major suppliers of Telstra are businesses across Australia and overseas that includes small companies, companies from remote areas and large corporations (telstra.com.au 2019).
As per the ownership structure, Telstra falls under Corporation. Telstra adheres to the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Recommendations) for the purpose of corporate governance. The board size of Telstra is 11. The company has four committees; they are Board Charter, Audit and Risk Committee Charter, Remuneration Committee Charter and Nomination Committee Charter (telstra.com.au 2019).
Telstra has a total of 360 retail stores across the regions of Australia. In addition, the company has retail stores in many other countries like United States, United Kingdom, Indonesia, Singapore, Malaysia, Philippines, India, China, Taiwan, Hong Kong and others (telstra.com.au 2019).
Property, Plant and Equipment: As per the accounting policies of Telstra, the company has reported and recorded the property, plant and equipment at cost less accumulated depreciation. Hence, the company has adopted the cost model (telstra.com.au 2019).
Inventory: As per the 2018 Annual Report of Telstra, the company has valued their inventory at the lower of cost and net realizable value. For the majority items of the inventory, Telstra assigns cost by using the weighted average cost basis. Hence, the company has adopted average basis for inventory (telstra.com.au 2019).
Accounts Receivable: Telstra considers accounts receivable as financial assets. As per the accounting policies, the company measures them on the basis of fair value and they are subsequently measures at amortized costs with the use of effective interest method. Hence, the company used fair value method for the measurement of accounts receivable (telstra.com.au 2019).
Financial Instrument: As per the 2018 Annual Report of Telstra, the company has complied with the principles and regulations of AASB 9 Financial Instrument. Hence, Telstra recognizes a financial asset or financial liability in the balance sheet when the company becomes party to the promised provision of the instrument (aasb.gov.au 2019).
Intangible Assets: Telstra measures their goodwill at the cost basis. After that, the company amortizes their internally generated intangible assets on the basis of straight-line over their useful life. After that, Telstra records their acquired intangible assets on the basis of fair value at the date of acquisition (telstra.com.au 2019).
Revenue Recognition: The main sources of revenue in Telstra are revenue from rendering of services, sales of goods, construction contracts, lease income, grants from government and interest income. In Telstra, revenue characterises the fair value of the received consideration or receivable. The company records the revenue net of sales return, trade allowance, sales incentives, discounts, taxes and duties (telstra.com.au 2019).
It can be seen from the 2018 Annual Report of Telstra that the company has certain controlled entities with certain percentage of financial benefits; it can be seen in below:
(Source: telstra.com.au 2019)
(Source: telstra.com.au 2019)
It can be seen from the above tables that Telstra has many controlled entities in Australia as well as in outside Australia; for example, Asia Global Crossing Finance Co. Ltd, Ooyala AB, Pacnet Limited and others. In most of the cases, the percentage of financial benefits is 100, but less than 100% can be seen like 66.9%, 49% and others (telstra.com.au 2019).
According to the 2018 Annual Report of Telstra, the company owns 100% of the equity of Telstra Super Pty Ltd, but does not control it. Telstra Super Pty Ltd is a trustee for the superannuation scheme of Telstra. For this reason, its voting power is 44% that is equivalent to the representation on the board (telstra.com.au 2019).
As per the 2018 Annual Report of Telstra, the company paid a dividend of $10 million to Telstra Super Pty Ltd. During the year 2018 and 2017, aside from translation trivia and domestic in nature as well as commercial terms and conditions, Telstra did not have any other transaction with the related parties (telstra.com.au 2019).
Changes in Accounting Policies and the Impact of Changes
According to the 2018 Annual Report of Telstra, there are certain changes in the accounting policies that can have impact on the financial reporting. AASB has issued the final version of AASB 9 Financial Instruments (AASB 9 (2014)) (telstra.com.au 2019). Telstra early adopted the old version of this standards that is AASB 9 (2013), but now they are needed to adopt AASB 9 (2014). The absence of impairment section can be seen in the new version that replaces the model of incurred loss impairment with an expected credit loss (telstra.com.au 2019). As an impact, Telstra will need to record expected credit loss on the financial assets. After that, Telstra will have to apply the new revenue recognition standard of AASB 15 Revenue from Contracts with Customers (telstra.com.au 2019). As an impact of this, Telstra will be needed to recognize the revenue in such a way that portrays the promised goods transfer to a customer and an amount reflecting the expected consideration to be received. After that, Telstra will be needed to adopt AASB 16 Leases in the place of AASB 117 Leases; and as the effect, Telstra will be needed to recognize the lease liabilities and right-to-use assets in the financial statements (telstra.com.au 2019). Lastly, Telstra will be needed to adopt the revised Conceptual Framework for Financial Reporting issued by the International Accounting Standards Board as the old one did not cover some of the crucial areas of financial reporting.
The main aim of AASB and IASB behind bringing these changes in the above-mentioned accounting standards is to cover the areas that were uncovered by the previous accounting standards. For this reason, these changes in accounting policies will strengthen the accounting standards in future by improving the crucial areas of financial reporting. For this, the users will be able in gaining more accurate financial information of the companies (Henderson et al. 2015).
These changes in the accounting policies will increase the work of the auditors due to the fact that the auditors will be needed to analyse certain more elements of financial reporting. For example, for the introduction of AASB 16, it will be needed for the auditors to analyse whether the companies have recognized their lease liabilities and right-to-use assets in the balance sheet. After that, with the adoption of AASB 9 (2014), the auditors will be needed to analyse whether the companies have reported expected credit loss for their assets. Hence, these will affect the future audit work (Okolie 2014).
It can be seen from the above that current ratio of Telstra has increased in 2018 from 2017. Moreover, it is also much lower than the standard that is 2 (Delen, Kuzey and Uyar 2013). It implies that Telstra does not have the needed current assets to pay off their current liabilities. Like current ratio, quick asset ratio has decreased in 2018 and is lower than 1. It means Telstra lacks the required liquid assets to pay off their current liabilities (Enekwe, Agu and Eziedo 2014). When considered debt to equity ratio, it can be seen that this ratio has decreased in 2018; and it also implies that Telstra uses high level of debts instead of equity that makes their business highly risky and leveraged. After that, decrease in net profit ratio can be seen in 2018 due to the decrease in net profit and sales. In addition, 2018 witnessed decrease in return on shareholders’ equity (Waworuntu, Wantah and Rusmanto 2014).
It can be seen that all these ratios of Telstra are showing decreasing financial performance of the company in 2018. Since these ratios are not in accordance with the expectation of the auditors, the auditors will be needed to put significant audit attention to these aspects as there could be the presence of material misstatements in the financial statements of Telstra. At the same time, the auditors will be needed to compare the outcome of these ratios with average ratios in the industries listed in ASX and internal data of previous year, budget and segment data. Hence, these will increase the future audit work (Newton 2013).
As per the outcome of the ratio analysis, Telstra has a weak liquidity position that shown the inability of the company to pay off their current liabilities. In addition, there is decrease in profitability and return on shareholder’s equity (Provasi and Riva 2015). In addition, the business of Telstra is highly risky as well as highly leveraged in the presence of huge amount of debts. All these negative aspects raise the question about the ability of Telstra to continue as going concern. Thus, there are certain major doubts about the going concern status of Telstra (Shvyreva and Kruglyak 2016).
According to the 2018 Annual Report of Telstra, the company has employed certain mechanism to measure the performance of their directors with the aim to provide them with the correct amount of remuneration (telstra.com.au 2019). The directors of Telstra are provided with Fixed Remuneration and Executive Variable Remuneration Plan (EVP). Fixed remuneration is paid in cash as basic salary plus superannuation; and EVP is provided with both cash and equity. The performance is measured based on financial aspect, customer aspect and individual aspect. The weightage is 10% of total income, 20% of EBITDA, 20% of FCF, 20% of Episode NPS, 20% of Strategic NPS and 10% of Individual Performance (telstra.com.au 2019). As per the financial performance of Telstra, total income has increased in 2018 from 2017 and the same aspect can be seen in case of EBITDA. However, decrease in net profit can be seen in 2018 from 2017. Share price decreased in 2018 from 2017; and the company paid less amount of dividend per share in 2018 due to the decrease in net profit. In addition, it can be seen that Telstra maintain a gearing ratio of 50 to 70% for the non-current borrowings (telstra.com.au 2019).
Hence, the auditor of Telstra is needed to consider all these above aspects in their auditing works. For example, the auditor needs to ascertain the fact that whether the remuneration is paid to the directors as per the remuneration structure while considering the achievements and non-achievement of financial goals. After that, the auditor is also needed to ensure that whether Telstra has maintained a gearing ratio of 50% to 70% for raising capital through non-current borrowings. In case the auditor is not satisfied with the outcomes, they need to put special audit consideration to these aspects (Bing et al. 2014).
The main strategy of Telstra is to expand their business in Australia and internationally. The company is considering implementation of program for efficiently use assets, to improve distribution capabilities and improve productivity in delivering the products and services. For this, the focus of Telstra is on the sales and marketing activities so that costs can be controlled and services to the customers can be improved (telstra.com.au 2019).
As per the 2018 Annual Report, the business activities of Telstra are exposed to certain risks; they are interest rate risk, foreign currency risk, credit risk and liquidity risk. It needs to be mentioned that these risks include both internal as well as external forces creating difficulties for the company to attain the strategic objectives and business goals (Belás et al. 2014).
It is the responsibility of the auditor of Telstra to take into consideration these business risks for ascertaining whether these risks can create material misstatements in the financial statements of Telstra or not. For this reason, the audit works will include the analysis and examination of the relevant financial statements and figures related to these risks with the aim to measure their impact on the financial statements and financial outcomes of Telstra (Kilgore, Harrison and Radich 2014).
Conclusion
It can be seen from the above discussion that the auditors are needed to take into account many aspects at the time of the development of audit strategies. In case of Telstra, the auditor of the company must acquire understanding about various aspects of the client’s business such as nature of the industry, accounting policies and others; and this acquired understanding provides the auditor with the directors in developing the audit strategy. In this process, the auditor is needed to examine employed accounting policies by Telstra for the major financial aspects so that any significant audit matters can be found. At the same time, the auditors must analyse the financial performance of the clients with the aim to find any kind of discrepancies in the financial outcome. In each of the cases, the auditor needs to assess the impact of these identified aspects on the future audit work of the company as the appropriate audit plan should be developed after taking into consideration all these aspects. At the same time, the auditor needs to assess the ability of the company to continue as a going concern for a long-term.
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