It is the responsibility of the auditors to involve themselves in the inspection and examination of the financial statements of their audit client companies and the aim of this inspection of the financial statements is to ascertainment of material issue in those financial statements (Sigauke 2013). For this reason, the auditor’s report is considered as a major tool for the relevant stakeholders in order to get assurance of the fact that the financial statements of the companies are free from material misstatements. In the presence of these reasons, it is an utmost necessity for maintain and enhancing the quality of the auditor’s report. In the recent years, the major accounting bodies like CPA, IAASB, AUASB and others have been involved in the development of different initiatives that can lead to the enhancement of the report of the auditors (Meuwissen 2014). Due to the implementation of some of these initiatives, increase in responsibilities can be seen for both the companies and auditors in the auditing process as it has become mandatory for them to mention the major material issue in the financial statements of those companies that have been found while auditing them. More specifically, key audit matters are needed to be reported in the required section of the annual report. This report involves in the analysis of the latest annual report of Origin Energy, listed under Australian Stock Exchange (ASX), with the aim to analyze the relevant audit sections.
Auditor’s independence can be regarded as the independence of the internal as well as external auditor from the parties that can have financial interest in the audit clients; and thus, the auditors are needed to maintain integrity as well as honesty in the audit profession. One of the four big audit firms, KMPG, had the responsibility to conduct the audit of the financial statements of Origin Energy for the year 2018. According to the Lead Auditor’s Independence Declaration in the 2018 annual report of Origin Energy, the entire auditor’s independence related standards and guiding principles of 307C of the Corporations Act 2001 have been adhered to while providing the professional services in auditing (Originenergy.com.au 2018). This indicates towards the full compliance with the requirements of auditor’s independence by KPMG in the audit operation of Origin Energy. At the same time, the audit services did not include any violation of the professional code of conduct of the audit profession (Originenergy.com.au 2018).
Non-audit services are considered as those professional services that the qualified public auditors provide to the audit clients, but these services are not related to audit or the financial statements of the audit client. According to the Auditor’s Remuneration report in the latest annual report of Origin Energy, the company has mentioned about six types of non-audit services received from KPMG. They are accounting advice, taxation services, legal services, lattice relaxed services, advisory services and others (Originenergy.com.au 2018). The annual report stated that the company has not received any accounting services in the year 2018, but there is a mention of this service in the year 2017. At the same time, Origin Energy did not receive any advisory services in the year 2017 (Originenergy.com.au 2018). It is needed for the auditors to ensure the fact that there is not any negative impact on the integrity and objectivity of the audit profession at the time of providing the non-audit services. According to the declaration of the Audit Committee Chairman, there is not any negative impact on the integrity and honesty of the profession as Corporations Act 2001 is the standard that has been adhered to (Originenergy.com.au 2018).
The requirement for the business organizations is to provide the audit partners with the required fees for receiving both the audit and non-audit services. The details of the remuneration of the auditors in Origin Energy are show below in tabular form:
|
Particulars |
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% |
Table 1: Change in Auditor’s Remuneration in Origin Energy
(Source: Originenergy.com.au 2018)
The above table discloses the remuneration to KPMG by Origin Energy for the audit and non-audit services. As per the table, there is reduction in the total payment to KPMG for providing audit services related to the review of financial statements and this remuneration is decreased by 21.64 percent. However, as Origin Energy has received six types of non-audit services, there is increase in the payment to KPMG for the non- audit services. The above table shows that there is 60.45 percent increase in the payment for non-audit services. Thus, it can be seen that the payment for audit services decreases while increase in the payment for non-audit services is evident. Thus, in the presence of all these factors, there is a reduction in the total audit fees paid to KPMG by Origin Energy for the year 2018 from 2017; and the remuneration has decreased by 2.17 percent.
Key audit matters are considered as those matters that have major significance in the auditing of the financial statements and need significant judgment of the auditors. The four key audit matters of Origin Energy are discussed below:
Carrying Value of the Equity Accounted Investment of Australia Pacific LNG: KPMG has considered the recoverability of the ALPNG equity investment’s carrying value and the Ironbank exploration assets as the key audit matter in the presence of certain reasons. The first reason is the exposure of Origin Energy to the fluctuation in the commodity prices. The second reason is the presence of inherent complexity in the process to estimate the future cash flows. The last reason is the presence of adjustments in the historical carrying value (Originenergy.com.au 2018).
In order to address this issue, KPMG has assessed the accuracy of the forecast of the previous cash flow. After that, the auditors have compared the forecasted cash flows that include the model used by Origin Energy for the approval of the estimated and forecasted future production profile. At the same time, KPMG has conducted the comparison of the used assumptions by APLNG for the valuation of the assets and the verification of the assumptions. These are the analytical procedures (Ruhnke and Schmidt 2014).
Accounting for Derivative Financial Assets and Liabilities: Due to the presence of inherent complexity, the auditors of KPMG have considered this particular aspect as key audit matter. There are some factors that contribute towards this key audit matters. One factor is the requirement of the judgment by Origin Energy in order to estimate the fair value of certain financial instruments with the company’s portfolio. The next factor is Origin Energy’s application of the process of hedge accounting for specific risk exposures in the portfolio. The next factors are the use of detailed spreadsheet by the company under the disclosure requirement of AASB 7: Financial Instrument Disclosure. The last factor is the dependency of Origin Energy on the operating effectiveness of the third party software system (Originenergy.com.au 2018).
For addressing this matter, the used audit procedures are the evaluation of the methodology of internal model for valuation with the help of valuation specialist; the testing of the internally derived inputs with the help of valuation specialists; testing the valuation of the hedge accounting results by the valuations specialists; testing the control of management authorization and suggestions and others. These procedures are the examples of test of control procedures (Gerakos and Syverson 2015).
Unbilled Revenue: KPMG has considered the estimation of the unbilled revenues as the key audit matter in the presence of uncertainty in the estimation for the determination of the energy volume. This aspect also includes some key factors. These factors are the presence of different product offerings and customer rates in different markets; the complex nature of the process to estimate the demand of the customers and the loss of physical energy between the purchase and delivery of energy (Originenergy.com.au 2018).
The substantive audit procedures to address these issue are the assessment of the historical accuracy of the process to estimate subsequent billings; testing the wholesale energy volume purchased by Origin Energy to the AEMO sample; reconciliation of the purchase volumes to the recognition of revenue volumes and challenging the estimation of the current period by the comparison of the unbilled revenues and others. These can be considered as test of details and analytical procedures (Kilgore, Harrison and Radich 2014).
Unbilled Network Expenses: The auditors of KPMG have considered this as a key audit matter in the presence of the uncertainty to estimate the volume of energy purchased for catering to the demand of the customers of the company. The presence of two key factors can be seen in this issue. They are the customer demand and physical energy loss levels that are related to the issue of unbilled revenue and the amount of the volume of energy supplied to the customer between the dates of last invoice (Originenergy.com.au 2018).
For addressing this issue, the substantive audit procedures performed are the assessment of the historical accuracy by Origin Energy against the payments for the distributors; testing the wholesale purchase energy volume against the AEMO invoice; the reconciliation of the volume of purchase with the recognized revenue and challenging the current period estimation used by the comparison of unbilled network expenses and checking for the consistency of the correlation of the estimated volumes. These can be classified as substantive audit tests (Arruñada 2013).
The Board of Directors of Origin Energy has an Audit Committee and this audit committee comprises of four non-executive directors of the company. They are Maxine Benner, Gordon Cairns, Teresa Engelhard and Scott Perkins (Originenergy.com.au 2018). This audit committee looks into the matters related to the structures and systems of management designed for the protection of corporate reporting integrity. The responsibility of the audit committee is to review the half-yearly and full year financial reports of Origin Energy with the aim to provide recommendation of the financial statements. Moreover, there is not any audit committee charter in the board of the company (Brennan and Kirwan 2015).
Some specific facts can be noticed from the opinion of the auditors of Origin Energy. First, all the financial statements and reports of Origin Energy are in accordance with the Corporations Act 2001 that assist the company in providing the true and fair view of the financial position of them as at 30 June 2018. Second, the financial statements are in accordance with the Australian Accounting Standard and Corporate Regulations 2001. Third, the main components of the financial reports of Origin Energy consists of consolidated statement of financial position, income statement, comprehensive statement of comprehensive income, consolidated statement of change in equity and consolidated statement of cash flows (Originenergy.com.au 2018).
The responsibilities of the directors are management are to follow Australian Accounting Standard and Corporations Act 2001 for the preparation of financial statements, to implement the necessary internal control and to assess the ability of Origin Energy to continue as going concern (Skaife, Veenman and Wangerin 2013). The responsibilities of the auditors are to obtain reasonable assurance on the material misstatement factor in the financial statements and to promise the report of the auditors including the audit opinion (In’airat 2015).
As per the latest annual report of Origin Energy for the year 2018, the auditors have declared that there is not any event of material nature in the financial statements since 30 June 2018 (Originenergy.com.au 2018).
It is very easy for a third part stakeholder to gain understanding about the material information reported by KPMG in the latest annual report of Origin Energy. The auditors have reported the key audit maters in the tabular form that also includes the applied substantive audit procedures for addressing the key audit matters. The auditors have used simple English language for providing the information related to the key audit matters. The third party stakeholders can also asses all the relevant audit sections for determining the role and responsibilities of the auditors (Power and Gendron 2015).
It is evident from the analysis of all the audit related section of the annual report of Origin Energy that KPMG has clearly reported about four key audit matters from the financial statements of the company. Moreover, the auditors have also mentioned the fact that there is not any material subsequent event in the company. Lastly, KPMG has adhered to all the required standards and guiding principles of audit profession. It can be said based on the above that KPMG has not missed any material information of the company (Meuwissen 2014).
In the follow up questions, one can ask the auditor about the outcome of the discussion with the internal auditor of Origin Energy. Next, one can ask about the process for the determination of the materiality level in the audit of Origin Energy. After that, one can ask the auditors about any back-up plan as well as future plan of the audit process in Origin Energy. All these questions can easily be asked in the Annual General Meeting (Gaynor et al. 2016).
Conclusion
It is prominent from the above discussion that KPMG has maintained the independence of audit profession by adhering to the guiding principles of some of the standards like Corporations Act 2001, Australian Accounting Service and others. In addition, KPMG has maintained high level of ethics at the time to provide the non-audit services. As per table 1, Origin Energy has been benefitted from the reduced payment of the auditors of KPMG in the year 2018. Moreover, the above discussion also indicates that auditor of KPMG were prominent as well as efficient while dealing with the identified four key audit matters as they have taken the help of the application of the required substaive audit procedures to address these issue. Apart from this, KPMG has made the effective disclosure of all the material issue in order to avoid the situation of non-reporting of the material information. The report also includes some basic follow-up questions that can be asked to the auditor to gain better understanding.
References
Arruñada, B., 2013. The economics of audit quality: Private incentives and the regulation of audit and non-audit services. Springer Science & Business Media.
Brennan, N.M. and Kirwan, C.E., 2015. Audit committees: practices, practitioners and praxis of governance. Accounting, Auditing & Accountability Journal, 28(4), pp.466-493.
Gaynor, L.M., Kelton, A.S., Mercer, M. and Yohn, T.L., 2016. Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), pp.1-22.
Gerakos, J. and Syverson, C., 2015. Competition in the audit market: Policy implications. Journal of Accounting Research, 53(4), pp.725-775.
In’airat, M., 2015. The Role of Corporate Governance in Fraud Reduction-A Perception Study in the Saudi Arabia Business Environment. Journal of Accounting & Finance (2158-3625), 15(2).
Kilgore, A., Harrison, G. and Radich, R., 2014. Audit quality: what’s important to users of audit services. Managerial Auditing Journal, 29(9), pp.776-799.
Meuwissen, R., 2014. The auditing profession. In The Routledge Companion to Auditing (pp. 35-44). Routledge.
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].
Power, M.K. and Gendron, Y., 2015. Qualitative research in auditing: A methodological roadmap. Auditing: A Journal of Practice & Theory, 34(2), pp.147-165.
Ruhnke, K. and Schmidt, M., 2014. The audit expectation gap: existence, causes, and the impact of changes. Accounting and Business research, 44(5), pp.572-601.
Sigauke, N., 2013. Audit risk: an investigation into workload compression and materiality towards audit quality: case study of Deloitte Zimbabwe–Harare office.
Skaife, H.A., Veenman, D. and Wangerin, D., 2013. Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading. Journal of Accounting and Economics, 55(1), pp.91-110.
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