Based in Sydney Cochlear Limited is a manufacturing entity that designs, manufactures and sales medical implants of different types. Since its inception the company has expanded its business rapidly to be a leading company in the industry. The work of the auditor of the company shall be verified on the basis of the information provided in annual report of the company.
As per the provision of section 366 of the Corporations Act, 2001, to be mentioned as the act only in this document, an auditor responsible for conducting audit of a company operating in Australia must comply with the requirements of Auditing and Assurance standards issued by the Auditing and Assurance Standards Board (AAUSB). ASA 200 requires an auditor to conduct an audit in accordance with the Australian Auditing Standards. Declaration of independence is one of the foremost conditions for conducting an independent audit (Appuhami, and Bhuyan, 2015).
One of the biggest accounting firm in the world, KPMG has been appointed as the auditor of Cochlear Limited. Following the provisions of section 307C of the act, the auditor has provided declaration of independence in accordance with the mandatory requirements for conducting the audit.
KPGM is neither has any financial interests with the company except obviously the audit fees and other fees for non-audit services rendered by the firm to the company. Also neither any member of the firm nor the firm itself has any financial interests in Cochlear Limited or with any of its key Managerial personnel (Bhasin, 2015). Taking into consideration this it can be said that the audit firm has complied with the independence requirements of auditing as per s307C of the act.
It is the responsibility of an auditor to issue an independent audit report after evaluating the findings during the course of an audit on the financial reports of the audited entity. ASA 700 provides guidance to the auditors in the country to form an opinion on the financial reports and reporting the same. KPMG has complied with the requirements of ASA 700 to issue an independent auditor’s report at the end of the audit. The detailed discussion on the matter shall be made later in the document (Carey, 2015).
The auditor has provided the following non-audit services to Cochlear Limited in the financial year 2017-18 (Carson, Fargher and Zhang, 2016).
Advisory services on taxation compliance matters: The audit firm has advised the company on taxation compliance matters to help the company to comply with the taxation matters as per the Income Tax Assessment Act, 1936 and 1997.
Advisory services on Information and technology matters: In order to improve the ability of the company to use information and technology the audit firm has provided advisory services to the client.
Due diligence services: The company before acquisition of any business uses the due diligence services provided by the audit firm. Thus, KPMG has also provided due diligence services to the client (Chan and Vasarhelyi, 2018).
Other advisory services: Apart from the above the audit firm has rendered other advisory services to the company without compromising the requirements of independence of the auditor.
Remuneration received by the auditor:
Auditor has received remuneration for both audit and non-audit services performed for the company. The table below contains the details about the remuneration received by the auditor in 2017-15 and 2016-17.
|
Nature of services by the auditor |
2017-18 ($) |
2016-17 ($) |
Change in 2018 |
% change |
|
Services rendered as auditor of the company: |
||||
|
Review and audit of financial reports |
1,780,268.00 |
1,539,847.00 |
240,421.00 |
15.61 |
|
Services for compliance with other regulatory requirements |
100,866.00 |
70,801.00 |
30,065.00 |
42.46 |
|
Remuneration for audit services |
1,881,134.00 |
1,610,648.00 |
270,486.00 |
16.79 |
|
Remuneration received for non-audit services: |
||||
|
Remuneration for taxation compliance and advice |
1,031,640.00 |
1,361,901.00 |
(330,261.00) |
(24.25) |
|
Advice of IT related matters |
673,000.00 |
– |
673,000.00 |
#DIV/0! |
|
Remuneration for due diligence services |
581,843.00 |
(581,843.00) |
(100.00) |
|
|
Other services |
147,973.00 |
202,001.00 |
(54,028.00) |
(26.75) |
|
Remuneration for non-audit services |
1,852,613.00 |
2,145,745.00 |
(293,132.00) |
(13.66) |
(Du Plessis, Hargovan and Harris, 2018)
The increase in audit remuneration for review and audit of financial reports is due to the increase in the remuneration fees for auditing. The quantity of services for regulatory compliance in 2017-18 was significantly higher hence, 42.46% increase in the same can be seen as per the table. In total the remuneration for audit services have increased from $1610648.00 to $1881134.00 in 2018.
The remuneration paid for non-audit services on the other hand however, has decreased. In 2016-17 the company paid a total of $2145745.00 as non-audit services. Compared to that in the current financial year 2017-18 the company has paid a non-audit service remuneration of $1852613.00 in total. Thus, it has reduced by 13.66% in the current financial year (Jones, 2017). This decrease is mainly due to the following reasons:
Thus, the overall remuneration paid to the auditor for non-audit services has decreased significantly in the year 2017-18 compared to a year back.
In case of Cochlear the following matter has been referred to as the key audit matters in the annual report of the company:
Recoverability of trade receivables of the company: The Auditor has mentioned that the ability of the company to recover its trade receivable is a key audit matter. This is because the quantum of trade receivables of the company is huge and the financial position and performance of the company is very much dependent on the ability of the company to recover its receivables (Knechel and Salterio, 2016).
The auditor has tested key controls in the credit processing agreements of the company including how credits applications are approved. The auditor has also checked the maximum limit to be given to the creditors and whether such limit has been exceeded in case of any particular creditor, if yes, the reason for such has to be given by the management to the auditor. The sample outstanding balances has been checked to evaluate the ability of the company to recover its trade receivables (Pedrosa, 2015).
Warranty provisions made by the company: Since the company is a designer, manufacturer and supplier of medical implants the company has to follow the standard guidelines of making provision for warranty expenses. The amount of warranty provisions is significantly higher for the company. The auditor knowing the importance of such provision and effects of it on the financial performance and position of the company has correctly identified the matter as key audit matter (Sharma, 2017).
The auditor has obtained an understanding of different products and their portfolios. Each product has different warrantable periods and amounts. The auditor has checked at-least one product from each classes of products to evaluate whether the amount of warranty provisions made for such product is in accordance with the portfolio of such product. The history of failure rates of the company in the past has been evaluated to determine whether the amount of warranty provisions have been made keeping in mind the history of the company. Sensitivity analysis have been performed by changing underlying variances that has been used to calculate the amount of warranty provisions in the books of accounts of the company (Simnett and Huggins, 2015).
The audit committee of the company is only consisted of non-executive directors. The minimum number of members for the audit committee of the company is three. The audit committee is responsible to coordinate with internal auditors for improving the internal controls and securities of the company. Apart from that the members of the audit committee is also responsible to coordinate with external auditors to provide them with all necessary information required for conducting the audit efficiently (Soliman and Ragab, 2014). Role of the audit committee also includes conducting periodical assessment of internal securities and controls of the company to recommend steps to improve the securities and controls within the company. The audit committee should also have discussion with the accountants and internal auditors to improve the quality of financial reporting.
In the independent audit report of the company the auditor has expressed an unqualified opinion on the financial reports of the company. According to the auditor the financial reports of the company are in accordance with the Corporations Act, 2001 and reflective of true and fair picture of the financial position and performance of the company for the period audited. The auditor has come to this conclusion after conducting the audit in accordance with the Australian Auditing and Assurance Standards (Stewart, Kent and Routledge, 2015).
The director and management are internal stakeholder of an organization whereas an auditor is not even a stakeholder of the organization. An auditor is only appointed to verify the financial reports and books of accounts of an organization to express an independent opinion on these reports. The auditor is to state whether the financial reports show the true and fair position of the organization as at the end of the period to which such statements relate. An auditor is to express whether the financial reports are in compliance with the Corporations Act, 2001 or not (Tsipouridou and Spathis, 2014).
However, the management and directors on the other hand are responsible for not only to manage the organization to the bets of their capability with the motive of earning revenue but also responsible for maintenance of books of accounts of the company. The directors and management must prepare financial reports of the company in accordance with the act by complying with the Australian Accounting Standards (AASBs). Thus, the duty of the auditor is kind of independent appraisal of the works performed by the directors and management (Williams, Bingham and Shimeld, 2015).
Subsequent events are those that occur after the end of the period of financial reports but before the issue of audit report that generally affects the financial information provided in these reports. As per the auditor of Cochlear there has been no subsequent event except for declaration of dividend after the date of financial statements, i.e. June 30, 2018.
Stakeholders of an entity generally depend on the financial reports and attached audit reports to assess the performance and position of an entity as on a particular date. Thus, the information reported by an auditor is of huge importance for the stakeholders. In case of audit report by KPMG on the financial statements of Cochlear Limited it can be said that all relevant details have been provided in the audit report to help external stakeholders to evaluate the position of the company. Since the auditor has expressed an unqualified opinion on the financial statements of the company this further enhance the confidence of the third party stakeholders on the company and its financial reporting (Pedrosa, 2015). Thus, the audit report is complete as per the auditing standards applicable in the country.
Conclusion:
Though the audit report is complete as per the as the regular audit matters are concerned but it would have been helpful for the investors and other stakeholders if appraisal report of future endeavour of the company would also have been included in the audit report of the company. A follow up question for the auditor of Cochlear Limited will be:
Does it necessary for the company to make provision for such huge amount of warranty expenses each year? Would it be wrong to provide for such expenses as and when incurred?
References:
Appuhami, R. and Bhuyan, M., 2015. Examining the influence of corporate governance on intellectual capital efficiency: Evidence from top service firms in Australia. Managerial Auditing Journal, 30(4/5), pp.347-372.
https://www.emeraldinsight.com/doi/abs/10.1108/MAJ-04-2014-1022
Bhasin, M.L., 2015. Audit committee mechanism to improve corporate governance: Evidence from a developing country.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2676489
Carey, P.J., 2015. External accountants’ business advice and SME performance. Pacific Accounting Review, 27(2), pp.166-188.
https://www.emeraldinsight.com/doi/abs/10.1108/PAR-04-2013-0020
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
https://onlinelibrary.wiley.com/doi/abs/10.1111/auar.12124
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
https://www.emeraldinsight.com/doi/abs/10.1108/978-1-78743-413-420181013
Du Plessis, J.J., Hargovan, A. and Harris, J., 2015. Principles of contemporary corporate governance. Cambridge University Press.
https://dro.deakin.edu.au/view/DU:30070943
Jones, P., 2017. Statistical sampling and risk analysis in auditing. Routledge.
https://www.taylorfrancis.com/books/9781351898010
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
9781315531724_googlepreview.pdf
Pedrosa, I.M.M., 2015. Computer-assisted audit tools and techniques use: determinants for individual acceptance.
https://repositorio.iscte-iul.pt/handle/10071/10017
Sharma, S.D., 2017. Necessity of reference dosimetry, periodic quality assurance, and dosimetry audit in preclinical and radiobiology research. Journal of Radiation and Cancer Research, 8(4), p.163.
https://www.journalrcr.org/article.asp?issn=0973-0168;year=2017;volume=8;issue=4;spage=163;epage=164;aulast=Sharma
Simnett, R. and Huggins, A.L., 2015. Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), pp.29-53.
https://www.emeraldinsight.com/doi/abs/10.1108/SAMPJ-09-2014-0053
Soliman, M.M. and Ragab, A.A., 2014. Audit committee effectiveness, audit quality and earnings management: an empirical study of the listed companies in Egypt. Research Journal of Finance and Accounting, 5(2), pp.155-166.
https://s3.amazonaws.com/academia.edu.documents/31769175/Audit_Committee_Effectiveness_1_.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1537201017&Signature=TMwPjBU4Uk2boROYG64x%2BDRH%2Fhs%3D&response-content-disposition=inline%3B%20filename%3DAudit_Committee_Effectiveness_1.pdf
Stewart, J., Kent, P. and Routledge, J., 2015. The association between audit partner rotation and audit fees: Empirical evidence from the Australian market. Auditing: A Journal of Practice & Theory, 35(1), pp.181-197.
https://www.aaajournals.org/doi/abs/10.2308/ajpt-51173
Tsipouridou, M. and Spathis, C., 2014, March. Audit opinion and earnings management: Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.
https://www.sciencedirect.com/science/article/pii/S0155998213000471
Williams, B.R., Bingham, S. and Shimeld, S., 2015. Corporate governance, the GFC and independent directors. Managerial Auditing Journal, 30(4/5), pp.324-346.
https://www.emeraldinsight.com/doi/abs/10.1108/MAJ-05-2014-1030
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