The main purpose of audit reporting is to enhance transparency. The audit report targeted the annual report of Altium limited so as to ascertain the conformance of that annual report to the set standards. The audit report will be of use to all the stakeholders, both internal and external, with regards to making prudent decisions going forward
This report is mainly aimed at analyzing various aspects as pertaining to audit reporting. The report will mainly touch on seven key issues namely; Auditor’s Independence Declaration; Independent Auditor’s Report; The report will also highlight the Non-audit services which are performed by the auditor; Auditor’s Remuneration as per the financial statement; Audit Committee, its makeup, roles and functions; Independent Auditor’s Report to the shareholders and lastly the analysis of Key Audit issues. The report will focus on Altium Limited which is an American based software company
As earlier indicated, Altium Limited is an American based company, listed in the Australia stock exchange (ASX). The company is a renowned software producer mainly specialized in PC-based electronic design software (Altium Limited, 2018). By virtue of the organization being listed in the ASX, it has to adhere to strict guidelines and conformance to quality standard auditing reporting system it is through the evaluation of the financial annual report that one can be able to ascertain whether the guidelines and standards of auditing have been followed.
The primary law that stipulates and governs the compliance of audit processes and reporting is the Corporations Act, 2001(CCH Australia Limited, 2011). The conduct, rules and procedures of how an auditor carries out his mandate is described in that act. The act also stipulates the responsibilities of the management in facilitating the auditor when performing his tasks. The law actually prohibits the interference of the management in the auditing process.
The issue of ethical considerations which governs the auditor has also been captured in the act, where it stipulates that an auditor or the auditing committee for that matter is supposed to produce an unbiased, professional and independent report. At times, there is a high likely hood that external interference might bar the auditor from achieving that which he is mandated to and that’s which they ought to be vigilant and incorruptible in order to give a credible and reliable audit report (CAANZ (Chartered Accountants Australia & New Zealand), 2016). From the provisions of Corporations Act, 2001 mainly APES 110, indicate the ethical considerations which are supposed to govern how an auditor performs his tasks that section of the Corporations act stipulate that an auditor is required to declare that he/she acted in an ethical manner while performing their roles and duties. This declaration by the auditor is supposed to be captured in the declaration of independence which is a standalone section in the annual report of an organization (Chartered Accountants (Australia-Newzealand), 2018).
It is paramount for the auditor to be independent preferably not working within the organization in order to avoid such internal interference. One of the regulations which govern the independence of an auditor is Section 307C of the Corporations Act, 2001, which in a nut shell indicates that an auditor needs to state the declaration of independence and capture the same as part of the organization’s annual report. This particular section of the law clearly states that an auditor is supposed to display the highest level of independence from the organization (Wolters Kluwer, 2018).
From the annual report of Altium LTD, it can be noted that the auditor has clearly declared their independence from both internal and external influence and that they have carried out their mandate with in an ethical manner. All this was captured in the auditor’s statement of declaration of independence as stipulated in the Corporations Act of 2001 and also the code of ethics (Altium Limited, 2017).
As indicated by (Porter et al., 2014), an audit processes is aimed at providing an honest unbiased opinion with regards to the financial statement of an organization which are prepared initially by the management. The reason for the auditor’s report is to provide the relevant stakeholders with a reliable document which they can use to make key decisions, financial or otherwise with regards to the organization (Basu, 2010). From the auditor’s report, the most essential information to be obtained is the auditor’s opinion. An auditor’s opinion can be described as a written statement which indicates the qualified, unbiased and independent analysis made by the auditor with regards to the accuracy and completeness of an organizations financial statement. There are mainly four types of opinions that can be expressed by the auditor namely; unqualified opinion, qualified opinion, disclaimer and lastly adverse opinion.
As indicated in the annual report of Altium LTD, the auditor gave an unqualified opinion indicating that the organization conformed to the required accounting standards and practices and that they have prepared their financial statements in a clear and transparent manner.
Non-audit services can be referred to as those services which are carried out by the auditor outside of the prescribed audit services. Without proper judgment and a high ethical standing, such services can elicit personal interest of the auditor to the business and in turn affect the independence of the auditor (Frankel, 2018). In some countries, auditors are barred from taking up such services in those companies which they are auditing. Some scholars argue that this is indeed best practice in order to prevent cases of breech of independence. For example in the United States of America, Sarbanes and Oxley act prohibit auditors from undertaking such non-auditing services for the companies they are auditing (Mitchell, 2018). Currently there are no such restrictions in Australia that prohibit auditors from undertaking the non-audit services in companies they are auditing. The auditors are however required to declare their independence in writing and in the instance of a possible conflict of interest, then the auditor must absolve themselves from undertaking the task.
From the annual report, it can be seen that the auditors in Altium LTD carried out non-auditing services such as tax consulting in the year 2016 however similar services were not done in 2017 It is assumed that since the auditors declared their independence statement in the report, they carried out those services with regards to ethical considerations and high levels of objectivity and independence (Altium Limited, 2017).
Just like any other expense, the auditor’s remuneration needs to be captured in the organizations expenses. An auditor’s remuneration can be termed as the fee payable to the auditor for carrying out his tasks for the organization. The remuneration is for both the audit and non-audit services provided by the auditor (Caanz , 2015).
From the information given in Altium LTD annual report, it was seen that the auditors of the organization carried out both audit and non audit services. The remunerations for both the audit and non audit services are as captured below.
From the above information, we can depict the total remuneration for the auditors for both 2016 and 2017. From that information, it can be seen that there was a decline of about 16% in the auditing fees in the year 2017. This is mainly attributed to the lack of non-audit related activities and other expenses which were incurred in 2016, while the same was not incurred in 2017.
The audit committee is a vital operating committee in charge of oversight on matters pertaining to financial disclosure and reporting. The audit committee is formed in order to assist the board in the scrutiny of financial compliance and any other task within their mandate accorded to by the board. All this is to ensure the organizations internal checks and balances operate as they should and to help cushion the organization from any liability which might originate from non-compliance of standards (CAANZ (Chartered Accountants Australia & New Zealand), 2016). It is a mandatory requirement by the Australian Stock Exchange that all listed companies are expected to have a functional audit committee (Arens et al., 2016).
From the annual report of Altium LTD, it is indicated that there is an existing Audit and Risk Management Committee which is composed of 3 non-executive directors which is a positive feature as it depicts independence of the audit committee from the main board. The report however does not indicate whether there is an audit committee chatter which is supposed to indicate the role functions and duties of the audit committee members.
As stipulated by the Australian Accounting Standards, it is the responsibility of the auditor to submit their report and express their professional view on the financial statements provided by the organization. It is from the auditor’s report and opinion for that matter that various users of the report are going to base their decisions on (Gay & Simnett, 2015).
On the other hand, it is the responsibility of the management through their accounting policies, to prepare their financial statements. This is by no means the task of auditors as occasionally mistaken (Knechel & Salterio, 2016). The management is supposed to ensure that they formulate their reports in conformance to the set standards and avoidance of misstatements (Media, 2015).
Subsequent events are any identified activities which may occur after the completion of a financial reporting period of an organization. Reporting of any subsequent events to the stakeholders should also be done. This is done so as to ascertain their overall impact on the financial statement for that particular period. One example can be obtained from the annual report of Altium LTD where the organization undertook an acquisition of Upverter Inc in August 2017. The implications of that takeover were huge and the company was supposed to give an issuance of ordinary shares. .
For the purposes of promoting transparency in audit reporting, compliance of new regulations are required to be undertaken by the auditors. These requirements are known as the Enhanced Audit Reporting Requirements. These requirements mandate the auditors contracted by the company to report any other significant matter on a separate report.
At times there are key issues which might have a major impact on the financial statements of a company and as such it is important to highlight such matters to the stakeholders. In the annual report f Altium LTD, two such key matters were noted;
The first issue was recoverability of deferred tax assets- This actually pertains to the identification of deferred tax assets n accordance to the Australian Accounting Standards. As described in the standards, the level to which tax assets deferred can be known is by ascertaining the future probability of the company, and by so doing calculating the taxable future profits. Of key importance therefore is to ensure that the company remains on a profitable trajectory so that the benefits of the tax deferred can be seen. The purpose of deferred tax assets is to lessen the tax liability by providing tax benefits on future income, since those tax liabilities can be deducted from future profits.
The amount of money involved in the deferred tax assets is what makes this to be a key audit matter. It will be up to the prudence of the auditor to ascertain whether the profits to be generated will be sufficient enough in future in order to avail the tax benefit later. It was therefore noted that the auditors of Altium had to carry out test in order to ascertain the profits of the company on the years to come before making their recommendation.
The second matter was Carrying value of goodwill and other definite lived intangible assets whereby it is necessary for the assets of the organization to be taken through an annual impairment assessment as stipulated by the Australian Accounting Standards. This is inclusive of intangible assets like goodwill. At the end of the financial year, these assets are checked for the impairment. Certain financial models like estimation of cash flows and discount rates were put in place by the management in order to perform the impairment test. This prompted the auditors to view this as a substantial audit matter.
Conclusion:
This report aims at establishing whether the organization and the contracted auditor played their role in ensuring that the accounting standards set were adhered to. The report was also aimed at establishing the role played by audit reporting in ensuring there is transparency and accountability within the organization. Various key issues were noted from the annual and auditor’s report. despite the unqualified opinion by the auditor, which is a positive for Altium LTD, it s important for the organization to consider displaying their audit committee chatter or the key details pertaining to that committee to further strengthen the notion of auditors independence to the stakeholders.
References:
Altium Limited, 2017. Annual Report. Altium Limited.
Altium Limited, 2018. About Us. [Online] Available at: https://www.altium.com/ [Accessed 17 September 2018].
Arens, A. et al., 2016. Auditing, Assurance Services and Ethics in Australia with ACL Access Code Card. Pearson Education Australia.
ASIC, 2018. Auditor independence and audit quality. [Online] Available at: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/auditor-independence-and-audit-quality/ [Accessed 16 September 2018].
Basu, S.K., 2010. Fundamentals of Auditing. Pearson Education.
CAANZ (Chartered Accountants Australia & New Zealand), 2016. Auditing, Assurance and Ethics Handbook 2016 Australia: Incorporating All the Standards as at 1 December 2015. John Wiley & Sons.
CAANZ (Chartered Accountants Australia & New Zealand), 2016. Auditing, Assurance and Ethics Handbook 2016 Australia: Incorporating All the Standards as at 1 December 2015. John Wiley & Sons.
Caanz , 2015. Auditing and Assurance Handbook 2015 New Zealand+auditing and Assurance Handbook 2015 New Zealand Wiley E-Text Card. John Wiley & Sons Australia, Limited.
CCH Australia Limited, 2011. Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. CCH Australia Limited.
Chartered Accountants (Australia-Newzealand), 2018. Perspective.
Frankel, R.M., 2018. The Relation Between Auditors’ Fees for Non-Audit Services and Earnings Quality (Classic Reprint). Fb&c Limited.
Gay, G.E. & Simnett, R., 2015. Auditing and Assurance Services in Australia. McGraw-Hill Education (Australia).
Knechel, W.R. & Salterio, S.E., 2016. Auditing: Assurance and Risk. Routledge.
Leung, P., 2009. Modern Auditing & Assurance Services. John Wiley & Sons Australia.
Media, B.L., 2015. CPA Australia Advanced Audit and Assurance: Passcards. BPP Learning Media.
Mitchell, K., 2018. Independence – Navigating the murky waters between Audit & Non-Audit services. [Online] Available at: https://rochford-group.com/independence-navigating-murky-waters-audit-non-audit-services/ [Accessed 11 September 2018].
Porter, B., Simon, J. & Hatherly, D., 2014. Principles of External Auditing. Wiley.
Wolters Kluwer, 2018. Corporations Act 2001, Section 307c Auditor’s Independence Declaration. [Online] Available at: https://iknow.cch.com.au/document/atagUio486340sl14508496/corporations-act-2001-section-307c-auditor-s-independence-declaration [Accessed 9 September 2018].
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