Communicating key audit matters helps in providing extra information to the users of the financial reports so that they can assist them in understanding the matters. Through communication, the users can comprehend the nature of the entity and possible areas requiring significant managerial judgments in the audited financial statements. ASA 701 states that it is the responsibility of the auditors to converse the important audit matters in the auditor’s report. It is intended to analyse the judgment of the auditors regarding the communication in the auditor’s report and the format and type of such communication (Auditing and Assurance Standards Board, 2015).ASA 315 pertains to identification and assessment of the material misstatement through comprehending the entity and its environment. It deals with the responsibility of the auditors to identify and analyze the risk of material misstatement due to fraud or errors and their level of assertion through comprehending the nature and applicable internal controls of the entity by implementing the assessed risks of material misstatement. ASA 570 pertains to the going concern of the company. It is the accountability of the auditors to state the various aspects of going concern of the company and its implications on the report of the auditors (Auditing and Assurance Standards Board, 2013). ASA 200 deals with the independence of the auditors while conducting the audit of the financial reports of the company. It establishes the objects of the independent auditors and explains the scope and nature of the audit executed by them. So, in this assignment, the various standards of auditing would be applied to the financial reports of Coca-Cola Amatil along with implementing the various aspects of auditing on the company. Lastly, recommendations would also be given for improving the effectiveness of the material information as stated by the auditors (Auditing and Assurance Standards Board, 2015).
Coca-Cola Amatil (CCA) is amongst the greatset bottlers of non-alcoholic drinks in the region of Asia-Pacific. It is one of the five main Coca-Cola bottlers conducting its operations in six countries viz. Australia, New Zealand, Indonesia, Papua New Guinea, Fiji and Samoa.
It is listed on the ASX. It is headquartered at New South Wales, Australia. Its products include spring water, energy drinks, flavored milk and coffee, iced tea and fruit juices. Its revenue was A$5.12 Billion and a number of employees were 14,700 in 2014 (Coca-Cola Amatil, n.d.).
As per the Auditing and Assurance Standards Board (2015) ASA 200 applies to the financial reports of the financial year or half year as per Corporations Act 2001. It deals with the accountabilities of the auditors while executing the audit of the financial reports according with Australian Auditing Standards. The objective of the audit is to increase the confidence of the users in the financial reports. It is accomplished by expressing an opinion by the auditors that if the financial reports have been formulated according to the applied financial reporting framework.
As per Coca-Cola Amatil (2017) the auditors have communicated with the directors about the strategic scope and timings of the audit procedures and the findings which comprise of any substantial deficiencies recognized in the internal control mechanism during the audit.
They have followed the Divisions 3, 4 and 5 of Part 2M.4 which pertain to independence of the auditors and Section 307C of the Corporations Act, APES 110 Code of Ethics of Professional Accountants, Auditing Standard ASQC 1 which pertain to control of quality of firms which execute the audits and review its financial reports. They have also followed Auditing Standard ASA 220 which is associated with the management of quality for an audit of the other historical financial information and financial report (Johnstone, Gramling and Rittenberg, 2013).
Lastly, they have also expressed their opinion on the remuneration report prepared by the directors in accordance with Section 300A of the Corporations Act 2001. Their opinion is on the basis of an audit conducted as per the Australian Auditing Standards.SO, they have fulfilled the requirements of independence (Deloitte, 2017).
The auditor Ernst & Young (Australia) is due to receive or has received the amount of $0.045 Million for other assurance services and $0.587 Million for tax compliance related services (Coca-Cola Amatil, 2017).
|
Particulars |
2017(in $ Million) |
2016(in $ Million) |
% change |
|
Amount receivable or received by Ernst & Young and its member firms for audit or review of financial reports on half yearly basis |
3.47 |
2.63 |
31.93% |
|
Other Services |
0.63 |
0.34 |
85.29% |
As it is analyzed from the financial reports of the company that the remuneration paid for audit services have increased by 31.93% and the non-audit services have increased by 85.29% (Coca-Cola Amatil, 2017).
It has also been stated in the report that the directors are satisfied with the compatibility of the provisions for non-audit services with the independence standards for auditors as per. It pertains that the independence of the auditors is not compromised (Commonwealth Consolidated Acts, n.d.).
Key audit matters are those issues which are most crucial in the audit of financial reports during the current year. In this context, ASA 701 determines that it is essential for the auditors to communicate key audit matters in the independent auditor’s report of the company. It deals with the responsibility of the auditors to report the communication in the form of audit procedures addressed for the key audit matters. The purpose of these audit procedures is to enhance greater transparency and efficiency in the execution of the audit.
The key audit matters of Coca-Cola Amatil in the year 2017 were the indefinite life of intangible assets which comprised of investments in agreement with the bottlers amounting to $929.3 Million , goodwill amounted to $147.5 Million with other assets amounting to a total of $1093.1 Million representing 18% of the total assets of the group. As per Note 9 of the financial statements, the assessment of the impairment of intangible assets along with cash-generating units comprises of accounting estimates and suppositions about the future comprising of cash flows.
The audit processes include a test of controls which pertain to the execution of procedures which are directed towards evaluating the efficiency of designs and implementation of internal controls. The auditors evaluated to determine the cash generating units which were utilized in the impairment model. The appropriateness of the assets and liabilities were included in the carrying value of CGU. They have assessed the accuracy of cash flow models as well.
The second key audit matter pertains to accounting for rebates and promotional expenses. In this case, the revenue for the sale of products is recognized as and when the rewards and risks of their ownership have been passed on the consumers and the amount has been measured. The acknowledgment and evaluation of rebates and allowances comprise of accrual at the end of the year which involves prudent judgment and estimates. The applied audit procedures in this regard are the analytical procedures which consist of comparing the data from various sources in order to determine if the reported information is wrong or inadequate. For the application of analytical procedures, they have selected the sample of rebate and promotional allowances which comprise of the level of expected claims by examining the past trends of claims and correctness of accruals (Khlif and Samaha, 2014).
As per Coca-Cola Amatil (2015) the company has an Audit and Risk Committee (ARC). Its purpose is to supervise the risk management and internal controls with detailed oversight regarding the financial risks. It is accountable for financial reporting so that balance, transparency and integrity can be maintained. It comprises of two parts –internal and external audit. Its job is to evaluate the effectiveness of the internal control and risk assessment procedures. External audit pertains to assuring the process of independent audit and to recommend the performance of independent auditors.
Its function is to supervise the compliance of laws, procedures and policies of the company. It has the responsibility to exercise proper diligence in reviewing the financial statements of the company and to make recommendations regarding the appropriateness of the accounting policies and maintenance of adequacy of procedures. Its responsibility is to oversee the risk management and internal controls of the company along with an evaluation of its internal and external audit procedures. It also oversees the compliance with the relevant laws, policies and standards and the independence and membership. The membership of the ARC consists of three Non-executive Directors, who are independent directors (Sharma and Iselin, 2012). They include independent Chairman who is not chairman of the Board and also includes the Chairman of the Sustainability Committee. All the members including the Chairman are appointed by the Board.
The auditors expressed an unqualified opinion. It is an opinion as expressed by the independent auditors regarding the fairness and appropriate representation of financial statements. They have also stated that the company has complied with the accounting standards. They have audited the financial reports of the company and its subsidiaries including its consolidated balance sheet as at 31st December, 2017 along with a statement of changes in equity and cash flows for the year ending. So, in their opinion, the company has prepared its financial statements according to the Corporations Act 2001. The books of accounts reveal a fair and accurate view of the financial performance of the company as at 31st December 2017 . It has also complied with the Australian Accounting Standards and Corporate Regulations 2001. Sufficient audit evidence has been obtained which has provided a basis for the opinion (CPA Australia, 2014).
As per APES 110 Code of Ethics for Professional Accountants, it has been stated that the auditors should adopt the principle of integrity which enforces the obligation, to be honest, and straightforward in all the professional relationships. It also suggests that they should be fair and truthful along with adopting objectivity in all their dealings. They also have the responsibility to adopt the principles of due care, professional competence , professional behavior and confidentiality while dealing with the professional obligations (Schmidt, 2012).
The responsibilities of directors and managers pertain to accountability and reporting. The management has the responsibility to adhere to the Corporate Governance Principles and Recommendations of ASX. Its main purpose is to represent and serve the interests of investors by ensuring that appropriate human and financial resources are placed to assist the company in accomplishing its objectives (Coca-Cola Amatil, 2017).
As per ASA 570, the auditors are accountable for stating the various aspects of a going concern and should disclose its effects in the auditor’s report. ASA 315 states that the auditors should and assess and identify the risk of material misstatements by comprehending the environment of an entity.
The financial risk management of the company is executed by the treasury policy which is approved by the board. The company is confronted by various types of risks viz. market risk relating to foreign currency, interest rate and commodity prices. The other financial risks related to foreign currency transaction, credit and liquidity (Goh, Krishnan and Li, 2013).
Foreign currency risk pertains to the fluctuations in the cash flows due to transitions in the rates of foreign currency.The risk management policy allows the company to hedge the transactions related to the forecasted cost of goods sold in the future The capital expenditures are hedged upon the realization of the firm’s commitments. The interest rate risks pertain to exposing the company to interest rate risk associated with interest-bearing financial assets such as cash, loans, term deposits and bank overdrafts. The policy adopted for its mitigation is prudent management of these exposures. The average maturity of the hedging portfolio is between one and five years. It enters into cross-currency swap agreements and interest rate swap and option for managing these risks. Commodity prices risk is the risk which arises from volatility in the prices of commodities relating to raw materials utilized in the business. The company has entered into options , swaps and futures contracts in order to hedge the commodity price risk for obtaining lower prices and more stability in the outcomes of commodity prices (Mock and Turner, 2013) .
In order to mitigate the risk of liquidity , the company has adopted the liquidity policy which aims at the minimum level of facilities in relation to net debt. For manage the translation risk it pertains to converting the financial statements of the foreign transactions of the company. The volatility in the foreign exchange rates can influence the profit, net assets and income of the group. The company does not hedge the translation risk and when considered necessary , it is hedged periodically. The credit risk of the company is mitigated through adopting a policy for setting credit limits for the entities it is dealing with and might require collateral securities for the same (Hall, 2012).
The company cannot reveal the material information regarding its plan to merge one of its units or acquire any other company. If it does so, it would result in leakage of the price sensitive information and insider trading. Furthermore, it does not reveal the reason behind granting a certain amount as remuneration to the key managerial personnel. It also does not reveal the inherent risk confronted by the company.
It is the risk posed by a mistake or omission in the financial statements due to the factors other than failures to regulate them. It represents the scenario of the worst case as all the controls have been failed in this regard (Knechel and Salterio, 2016).
The follow-up questions to be asked by the auditors at the Annual General Meeting of the company would be what is the basis behind forming an opinion regarding the fair and accurate view of the accounts of the company? Another question can be what degree of assertions they have assumed while examining the books of accounts of the company?
For this, the auditors should receive the Management Representative letter which is to be signed by the senior management and denotes the precision of the financial statements which the company has presented to the auditors for analyzing (Deumes et al.,2012).
Hence to conclude, it can be recommended that in order to ascertain the effectiveness of material information by the auditors, the stakeholders should analyze the applicability of ASA 101 Presentation of Financial Statements of the company. The financial reports should provide the information about the assets, liability, equity, income and expenses, changes in equity and cash flows of the company. The auditors should review the financial statements of the company and its compliance with the Auditing and Accounting Standards and Corporations Act 2001.
References
Auditing and Assurance Standards Board (2015) Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards [online] Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_Compiled_2015.pdf [Accessed 14th September , 2018].
Auditing and Assurance Standards Board (2015) Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report [online] Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 14th September , 2018].
Auditing and Assurance Standards Board (2013) Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment[online] Available from: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_315.pdf [Accessed 14th September , 2018].
Auditing and Assurance Standards Board (2015) Auditing Standard ASA 570 Going Concern [online] Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 14th September , 2018].
Coca Cola Amatil (2015) Audit and Risk Committee Charter[online] Available from: https://www.ccamatil.com/-/media/cca/corporate/files/our-company/corporate-governance/cg-01-audit–risk-committee-charter8-december-2015.ashx?la=en [Accessed 14th September , 2018].
Coca Cola Amatil (2017) Annual Report 2017 [online] Available from: https://www.ccamatil.com/-/media/Cca/Corporate/Files/Annual-Reports/2018/Annual-Report-2017.ashx [Accessed 14th September , 2018].
Coca –Cola Amatil (2017) CCA Board Charter [online] Available from: https://www.ccamatil.com/-/media/Cca/Corporate/Files/Our-company/Corporate-Governance/Board-Charter-Dec-2017.ashx?la=en [Accessed 15th September , 2018].
Coca Cola Amatil (n.d.) Our Company [online] Available from: https://www.ccamatil.com/en/our-company [Accessed 15th September , 2018].
Commonwealth Consolidated Acts (n.d.) Corporations Act 2001 – Sect 307C [online] Available from: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s307c.html [Accessed 15th September , 2018].
CPA Australia (2014) A guide to understanding annual reports: Australian Listed Companies. CPA Australia Ltd.
Deloitte (2017) Australian financial reporting guide Financial reporting periods ending on or after 31 December 2016 . Deloitte Touche Tohmatsu.
Deumes, R., Schelleman, C., Vander Bauwhede, H. and Vanstraelen, A.( 2012) Audit firm governance: Do transparency reports reveal audit quality?. Auditing: A Journal of Practice & Theory, 31(4), pp.193-214.
Goh, B.W., Krishnan, J. and Li, D.(2013) Auditor reporting under Section 404: The association between the internal control and going concern audit opinions. Contemporary Accounting Research, 30(3), pp.970-995.
Hall, J.A.( 2012) Accounting information systems. USA: Cengage Learning. pp. 1-20.
Johnstone, K., Gramling, A. and Rittenberg, L.E.( 2013) Auditing: a risk-based approach to conducting a quality audit. USA : Cengage learning.
Khlif, H. and Samaha, K.(2014) Internal Control Quality, E gyptian Standards on Auditing and External Audit Delays: Evidence from the E gyptian Stock Exchange. International Journal of Auditing, 18(2), pp.139-154.
Knechel, W.R. and Salterio, S.E.(2016) Auditing: Assurance and risk. NY: Routledge. 1-20.
Mock, T.J. and Turner, J.L.( 2013) Internal Accounting Control Evaluation and Auditor Judgement: An Anthology. NY: Routledge. pp. 1-20.
Schmidt, J.J.(2012) Perceived auditor independence and audit litigation: The role of nonaudit services fees. The Accounting Review, 87(3), pp.1033-1065.
Sharma, V.D. and Iselin, E.R.(2012) The association between audit committee multiple-directorships, tenure, and financial misstatements. Auditing: A Journal of Practice & Theory, 31(3), pp.149-175.
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