Beach Energy Limited is a public company which is listed on ASX and operates in the energy sector dealing mainly with oil and gas, exploration as well as production. The head office of the company is located in Adelaide, South Australia (Moeller 2009, pp. 36). The company supplies its products mainly to the gas market in the east coast of Australia. The FY 2017 annual report of the company has been analyzed and reviewed (Beach Energy Ltd 2017, pp. 54-118). A summary of the research findings has been given in the various sections below.
Auditor’s Independence
Auditor’s independence mostly refers to the ability of an auditor to carry out the financial audit in a free and objective manner, without being subjective. According to the FY 2017 annual report, the lead auditor has made a declaration the audit has been carried out as per the provisions of Section 307C of the Corporations Act of 2001. This declaration has been made to the company’s directors (Messier, Glover and Prawitt 2008, pp. 58). The auditor has mentioned that to the best of his knowledge, relating to the FY 2017 financial audit, his independence requirements have not been contravened as required by the Corporations Act of 2001 relating to the audit, and that the code of professional conduct which are applicable have not been contravened in any way by the auditor (Singleton and Singleton 2010, pp. 45).
The Nature of the Non-Audit Services Provided
The company, Beach Energy limited, may choose to engage the auditor for services not related to its financial audit where it is considered that such business engagement between Beach and the auditor would be necessary and beneficial, due to the experience and expertise required in particular cases. The position of the non-audit services provided has been considered by the board and it has been confirmed that they are compatible with the general requirements of the independence of the auditor, as set out by the Corporations Act of 2001 (Knechel and Salterio 2016, pp. 46). By providing the non-audit services to the company, the independence of the auditor was not compromised at all (Beach Energy Ltd 2017, pp. 118). The non-audit services offered by the auditor to the audit client relate to legal matters such as:
Remuneration of the Auditor and the Reasons for the changes
The remuneration of the auditor for Beach Energy Limited has been summarized in the table below for the prior financial years.
|
FY 2016 |
FY 2017 |
Percentage Change |
|
|
Audit Services |
|||
|
Amounts that have been received or are due and receivable by Group’s external auditor for: |
|||
|
-Reviewing or auditing the Group’s financial statements |
$ 438,000 |
$ 488,000 |
11% |
|
-Audit of the subsidiaries’ financial statements |
$ 56,000 |
$ 119,000 |
113% |
|
-Audit of joint operation Financial statements |
$ 19,000 |
$ 18,000 |
-5% |
|
-Audit of royalty returns |
$ 33,000 |
$ 44,000 |
33% |
|
Sub-Total |
$ 546,000 |
$ 669,000 |
23% |
|
Amounts that have been received or are due and receivable by Group’s external auditor for: |
|||
|
-reviewing the overseas subsidiaries’ financial statements |
$ 8,000 |
$ 8,000 |
0% |
|
Total Auditing Services |
$ 554,000 |
$ 677,000 |
22% |
|
Other Non-Auditing Services Provided |
|||
|
Amounts that have been received or are due and receivable by Group’s external auditor for: |
|||
|
-IT services |
$ 20,000 |
$ – |
-100% |
|
-Tax services in Australia |
$ 83,000 |
$ 22,000 |
-73% |
|
-Tax and other services for subsidiaries in overseas |
$ 180,000 |
$ 88,000 |
-51% |
|
-Transaction services for Drillserach merger |
$ 189,000 |
$ – |
-100% |
|
Total amount of Other Non-Auditing Services Provided |
$ 472,000 |
$ 110,000 |
-77% |
As observed in the above analysis, the remuneration of the auditor for other non-audit services dropped significantly in the FY 2017 by a total of 77%. This decrease can be attributed to the lack of the need for Beach Energy Limited to acquire other non-audit professional services from the auditor, thus causing the fundamental reductions in the remuneration of the auditor (Beach Energy Ltd 2017, pp. 118).
With regard to the services related to the audit of the group and its subsidiaries both local and overseas, there was an overall increase of 22% in the remuneration paid to the auditor. This increase was most probably due to the additional mergers and acquisitions made by the firm during the financial year ended June 30, 2017. For instance, there was an increase of the remuneration paid to the auditor of 113% relating to audit and review of the subsidiaries’ financial statements (Hopwood, Leiner and Young 2011, pp. 98).
Key Matters of Audit and Procedures Performed
The key matters of audit which were identified in the financial audit were recoverable value of assets of oil and gas and provision for restoration (Hooks 2011, pp. 28). These summary of the two key matters of audit matters has been provided in the below table, together with the various procedures of audit that were performed by the auditor. In addition to this, each audit procedure has been classified as either tests of control, substantive tests of balance, substantive tests of detail or analytical procedure as illustrated below.
|
Key Matter of Audit |
Procedure of audit Performed |
How the Procedure is Classified |
|
Recoverable value of assets of oil and gas The recoverable value of the assets of oil and gas of the group is based on the model of net present value. This matter is considered key in the audit due to the following: i. The oil and gas assets are much sensitive to small changes in the assumptions, for instance, prices of commodities, rates of exchange and rates of discount. ii. There is a high judgment level in evaluation of the inputs to the model of net present value. |
The audit procedures performed were: i. Assessment of the methodology used in determining the value of assets. ii. Checking and confirmation of the reserve amounts to the statement of reserves. iii. Confirming accuracy of the previous forecasts of the group with regard to forecasts of evaluation that were incorporated into the model. iv. Evaluation of the documents of the group, including board’s minutes regarding exploration and evaluation of assets. v. Assessment of financial report disclosures of the group with regard to impairment of assets. |
These audit procedures are classified under substantive tests of detail and analytical tests. |
|
Provision for restoration There are significant obligations incurred by the group in closing, restoring and rehabilitating the affected areas after the reserves of petroleum have been depleted. Therefore, in relation to this audit, the provision for the activities of restoration is considered a key audit matter. |
Regarding this key matter of audit, there were various procedures of audit which were carried out by the auditor. These include: i. Gaining an understanding of the obligation process of the group. ii. Checking and ascertainment of the approval on key inputs in calculating cost estimates. iii. Checking samples of future cost estimates. |
These audit procedures are classified as substantive tests of detail and tests of control with regard to board approvals. |
Committee of Audit
Beach Energy Ltd has an established committee of audit that is made up of executive directors and non-executive directors as well. For instance, the company appointed Joycelyn Morton, a non-executive director, into its audit committee in order to comply with the requirements of the Listing rule 12.7. The audit committee of Beach Energy Ltd performs the following functions and responsibilities (Beach Energy Ltd 2017, pp. 121).
Type of Auditor’s Opinion Expressed
With regard to the audit of the financial reports of Beach Energy Limited for FY 2017, the auditor expressed an unqualified audit opinion (Beach Energy Ltd 2017, pp. 122). The auditor stated that, in their opinion, the financial statements of the company have been prepared according to the Corporations Act of 2001. The financial reports give a true and fair financial position of the company as at June 30, 20187 as well as its financial performance for the year then ended (Eilifsen, Messier, Glover and Prawitt 2013, pp. 49).
Directors’ and Management’s Responsibilities and Those of the Auditor
According to the FY2017 annual report, the management of Beach Energy Ltd had the following responsibilities regarding the financial reports (Elder, Beasley and Arens 2011, pp. 231).
However, the responsibilities of the auditor in the financial reports were:
Material Subsequent Events
According to the auditor’s report, it has been stated that there are no material subsequent events which have arisen in the time interval between June 3,, 2017 and June 30, 2017 (Beach Energy Ltd 2017, pp. 119).
Assessment of the Effectiveness of Material Information Reported by the Auditor
According to the report of the independent auditor regarding the financial audit of Beach energy Ltd, the auditor has considered almost all material information which is considered significant for use by external users of financial reports of the company. He has performed all necessary procedures for ascertaining that the financial statements are free from any material misstatement and that they are truly and fairly reflective of the financial position and financial performance of the company (Carson 2009, pp. 78).
Material Information Which Could Be Under-Reported or Missing
Although the independent auditor has given an unqualified opinion in the report of his audit, there are a few areas which have been under-reported. For instance, regarding business combinations, full details have not been adequately explained in the financial reports. The acquisition of 100% interests in the shares of Territory Oil and Gas by Beach Energy Ltd has not been explained adequately regarding the terms of the transaction, which according to the FY 2017 annual report, remain confidential and undisclosed (Arens, Elder and Beasley 2013, pp. 45). There is more that needs to be disclosed with regard to this acquisition since it is considered a key matter that may impact the financial decision made by intended users of the financial statement of the company.
Questions for Follow-Up during the Annual General Meeting of the Company
During the annual general meeting of Beach Energy ltd, as a key intended stakeholder, I would ask the auditor more clarifications with regard to the acquisition of Territory Oil and Gas Ltd (Beach Energy Ltd 2017, pp. 119). I would ask for reasons why the terms of the acquisition transaction have not been disclosed to the intended users of the company’s financial reports as well as whether the auditor has fully examined the acquisition transaction details himself for purposes of ascertaining the correctness of the amounts reported (Arens, Elder and Mark 2012, pp. 52).
Conclusion
As discussed in the various sections above, the financial audit of the financial reports of Beach energy Ltd was conducted in an appropriate manner, even there are some key matters that have not been fully disclosed (Arens, Best, Shailer and Fiedler 2013, pp. 14). As per the auditor’s opinion, the financial reports have been recommended for use by the company’s stakeholders and the general public, as they reflect a true and fair financial position as at June 30, 2017 and financial performance of the company for the financial period then ended (Beach Energy Ltd 2017, pp. 54-118).
References
Arens, A.A., Best, P., Shailer, G. and Fiedler, B., 2013. Auditing, Assurance Services and Ethics in Australia. Pearson Higher Education AU.
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Arens, A.A., Elder, R.J. and Beasley, M.S., 2013. Auditing and assurance services. Pearson Higher Ed.
Beach Energy Limited, 2017. Annual Report Beach Energy Limited 2017.
Carson, E., 2009. Industry specialization by global audit firm networks. The Accounting Review, 84(2), pp.355-382.
Cosserat, G.W. and Rodda, N., 2009. Modern auditing. Wiley.
Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson Higher Ed.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.
Hooks, K.L., 2011. Auditing and assurance services: Understanding the integrated audit. Wiley.
Hopwood, W.S., Leiner, J.J. and Young, G.R., 2011. Forensic accounting and fraud examination. McGraw-Hill.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
Messier, W.F., Glover, S.M. and Prawitt, D.F., 2008. Auditing & assurance services: A systematic approach. Boston, MA: McGraw-Hill Irwin.
Moeller, R.R., 2009. Brink’s modern internal auditing: A common body of knowledge. John Wiley & Sons.
Nigrini, M., 2012. Benford’s Law: Applications for forensic accounting, auditing, and fraud detection (Vol. 586). John Wiley & Sons.
Singleton, T.W. and Singleton, A.J., 2010. Fraud auditing and forensic accounting (Vol. 11). John Wiley & Sons.
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