Background of the Report
The report is prepared to review and analyze the manner in which the companies listed on ASX (Australian Stock Exchange) are complying with the Enhanced Auditor Reporting commenced in the year 2016. For the purposes of this report, Ainsworth Game Technology Limited has been selected, as it is listed on the stock exchange in Australia. It is a gaming solutions company.
The report is prepared with an objective to evaluate the implications of Enhanced Auditor Reporting on the auditors, by going through the annual report of the selected company. By incorporating these reporting standards, the company has ensured a greater amount of transparency in responsibilities of auditors related to reporting. It will also help in getting insights about the audit’s key areas and performance of the company in those areas.
The matter of enhanced audit reporting is discussed in this report in seven major headings. Those matters include independence of auditor’s, independent auditor report, other services by auditor, auditor’s remuneration, key audit matters, audit committee and reporting to shareholders. Whether these matters have been mentioned in the audit report of the company or not, have been discussed in detail. These all are required to be reported as per the new guidelines and audit standards.
Ainsworth Game Technology was founded in the year 1995 with an objective to provide people across the world with innovative and quality gaming solutions. It has its headquarters in Australia and is listed on ASX. This company is most suitable to study the impact of the changed auditor reporting requirements and the manner in which such changes in reporting have been embraced by the auditors of the company. Following are the major points of discussion:
In Australia, the auditors of the company are governed by the Corporations Act, 2001 (Moroney et al., 2012). As per the regulations of the act and other regulations, an auditor is required to work independently from a company in which they are doing the audit (CAANZ (Chartered Accountants Australia & New Zealand), 2016). There are many requirements that an auditor is supposed to follow under many laws and regulations. Requirements are detailed as under:
The auditors of Ainsworth Game Technology Limited have provided the declaration as per the requirements of Corporations Act, 2001. The auditor’s report also specifies that they have followed the ethical code of conduct as issued by the Accounting Professional & Ethical Standards Board and, fulfilled all their ethical responsibilities (Ainsworth Game Technology Limited, 2017). However, this information did not form the part of the declaration of independence by auditor. Instead, it was mentioned in Independent auditor’s report.
An auditor is required to express his opinion on the financial statements of a company which has appointed him as the auditor. There are different types of opinions that an auditor can express. These opinions are unqualified opinion, qualified opinion, adverse opinion and giving a disclaimer of opinion (Leung, 2009). The auditors of Ainsworth Game Technology Limited have evaluated the financial statements of the year 2017 and opined that the company has diligently followed the regulations and provisions of Corporations Act 2001 and hence, it is an unqualified opinion.
One of the major causes that can hamper an auditor’s independence is the non- audit (or non-assurance) services provided by him in addition to the statutory audits. There are a number of aspects of independence of an auditor, one of which is the relationship between the client and auditor (Houghton et al., 2010). Hence, it is essential for him to exercise significant judgment prior to taking up any non-audit services in addition to the audit and determine in advance whether such service is a threat to independence or not (Frankel, 2018). In the United States of America, the provision of providing non-audit services by the same firm which is performing the audit for that client has been restricted by the Sarbanes Oxley Act. However, in Australia, these services can still be provided along with audit services (Mitchell, 2018).
Various regulations have been brought in place regarding the provision of non- audit services by the auditors of the company which involves, giving a written declaration in the audit report that non -audit services have also been provided (Malaysian Accountancy Research and Education Foundation, 2007). In case any situation arises which leads to conflict of interest, the auditors must inform the authorities within the time specified.
As per the annual report of the company, the auditors have undertaken certain other services for it, apart from the audit services. However, they have given the declaration that such services did not impact the independence of the auditor. They also stated in the report that they have followed the code of ethics issued by the relevant authority. In a separate section by the name Non- Audit Services, they have mentioned the type of services they have performed as non- audit services. The services provided by them include transaction support services and other regulatory audit services (Ainsworth Game Technology Limited, 2017). Nature of such services is transaction advisory and compliance services. Such services might have an impact on auditor’s independence but a declaration has been provided by the auditors.
The auditors of the company are given remuneration for the audit services provided by them to the company. However, in Australia, the auditors are also permitted to perform non- audit services such as assistance in accounting and investigation services related to due diligence (Caanz (Chartered Accountants Australia & New Zealand), 2015).
The auditors of the Ainsworth Game Technology Limited performed both audit as well as non- audit services for the company. Their remuneration is given in the table below:
|
Particulars |
2018 |
2017 |
Percentage Change |
|
Audit or review of the financial report |
260,000 |
255,000 |
2% |
|
Other regulatory audit services |
22500 |
35000 |
-36% |
|
Other non- audit related services (In relation other assurance, due diligence and taxation) |
35451 |
36077 |
-2% |
|
Total Remuneration |
317,951 |
326,077 |
(Ainsworth Game Technology Limited, 2017)
The above table depicts the percentage change in remuneration of the auditor from the year 2016 to the year 2017. There can be seen an increase of 2% in the audit fees or review of financial report fees. However, the fees of regulatory and compliance related matters have been reduced by 36%. The non- audit fees have also reduced to almost 2%. This shows that in the year 2017, the remuneration of the auditors from both audit as well as non- audit fees has declined significantly.
One of the requirements as per the regulations framed with respect to ensuring quality of financial statements is that, it must establish an audit committee (CAANZ (Chartered Accountants Australia & New Zealand), 2016). This committee so framed plays the role of assisting the board and its members in discharging their responsibilities with utmost care and due diligence (Australian Institute of Company Directors, 2008). This due diligence is specifically essential for the matters related to reporting and presentation of financial information (Arens et al., 2016).
Ainsworth Game Technology Limited also has framed an audit committee as per the requirements of the Corporate Act, 2001 and other regulations. The committee consists of three non-executive directors who are having the required knowledge and are also financially literate. The audit committee is responsible for matters related to non-audit services and preparation and evaluation of risk management framework (Ainsworth Game Technology Limited, 2017). However, detailed information about audit committee could not be found in report and also was not available on website.
All the companies are required to appoint an auditor so that they express their opinion on the financial statements prepared by the management (Marks, 2016). Such opinion is framed based on the findings during the audit. Such findings are reported in a report format to the shareholders (Gay & Simnett, 2015). The auditors are responsible for the evaluation of the financial statements and expressing their opinion thereon. On the contrary, management of the company has the responsibility to prepare the financial statements by choosing sound accounting policies (Media, 2015).
No subsequent event arose in the company that was having any significant impact on the company.
There are some new regulations that have been framed for the purpose of providing assistance to auditors in reporting. These are termed as Enhanced Auditor Reporting Requirements. This regulation requires that the auditors must report to the members of the company, regarding the key audit matters that came to their notice during the audit of the financial statements (Gay & Simnett, 2018). The key audit matters can be explained as those matters which according to the auditors were the most significant matters that must be reported in a separate section. Such matters warrant separate and focused attention by the shareholders before they reach any conclusion based on audited financial statements. As per the provisions, now, the auditors are required to report on key audit matters and state the manner in which they approached and evaluated such matters during the audit.
The auditors of Ainsworth Game Technology Limited reviewed the financial statements and identified three significant key audit matters. These are as follows:
These matters are summarized as under:
Revenue Recognition – The auditors of the company considered this as the key audit matter because the company operates globally and has many revenue streams. This required the auditors to put in a lot of effort to identify the main revenue streams that came from different geographic locations and such difference in location came with difference in criteria of recognizing revenues. Also, the auditors had to evaluate such global transactions that include revenues from gaming royalties, sales of machine parts, revenue from rentals and other revenue streams. This complexity and difference in revenue recognition criteria required involvement of several senior members of the audit team to understand the complex transactions.
The auditors of the company applied test of control to evaluate the internal control system regarding revenue recognition from various streams and test of details of balances to evaluate the correctness of accounts.
Recoverability of trade receivables – Another matter which was considered a key audit matter by the auditors was related to recovery of trade receivables. Reason behind this is that owing to the difference in geographical conditions of operations, the industry practices that are prevailing in the market differ significantly from place to place. Furthermore, market conditions also differ. Both of these conditions give rise to increased credit risk exposure and therefore, warranted more audit focus. The major issue was that there was a difference in the terms of payment across locations. This required the auditors to exercise a significant amount of judgment and also scrutinize such transactions closely.
For this key audit matter, the auditors applied test of controls for evaluating the internal control system applied by the management in such transactions. Also, they assessed the credit risk by applying test of details of balances. To some extent, substantive procedures were also applied to understand the pattern of credit risk.
Carrying value of goodwill and intangible assets – This is also considered as a key audit matter by the auditors of the company, as the matter requires a great deal of judgment while evaluating the assumptions taken by the management in this regard. The auditors developed a model of their own to test the effectiveness of the assumptions taken. The models used by the company are complex in nature and thus, this is a key audit matter.
The auditors applied analytical procedures and test of details of balances to verify the procedures adopted by the management in this regard.
Conclusion
From the above analysis, it is clear that the auditors have taken utmost care about the regulations specified in various laws regarding audit quality, independence of auditors and reporting of key audit matters. However, the information regarding the audit committee formation, roles and functions is not clearly given by the company. It is not available in the report, neither it is available on the website. Hence, it is suggested that the company must provide such information to the members of the company.
References
Ainsworth Game Technology Limited, 2017. Annual Report. Ainsworth Game Technology Limited.
Arens, A. et al., 2016. Auditing, Assurance Services and Ethics in Australia with ACL Access Code Card. Pearson Education Australia.
Australian Government, 2001. Corporations Act 2001.
Australian Institute of Company Directors, 2008. Audit Committees: A Guide to Good Practice. AICD.
Caanz (Chartered Accountants Australia & New Zealand), 2015. Auditing and Assurance Handbook 2015 New Zealand+auditing and Assurance Handbook 2015 New Zealand Wiley E-Text Card. John Wiley & Sons Australia, Limited.
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.
Campbell, T. & Houghton, K.A., 2005. Ethics and Auditing. ANU E Press.
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).
Gay, G. & Simnett, R., 2018. Auditing and Assurance Services in Australia, Seventh Edition. McGraw-Hill Education Australia.
Houghton, K.A., Jubb, C., Kend, M. & Ng, J., 2010. The Future of Audit: Keeping Capital Markets Efficient. ANU E Press.
Leung, P., 2009. Modern Auditing & Assurance Services. John Wiley & Sons Australia.
Malaysian Accountancy Research and Education Foundation, 2007. Impact of non-audit services on auditor independence: an empiraical analysis. Malaysian Institute of Integrity.
Marks, N.D., 2016. Auditing That Matters. CreateSpace Independent Publishing Platform.
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].
Moroney, R., Campbell, F. & Hamilton, J., 2012. Auditing, Google eBook: A Practical Approach. John Wiley & Sons.
Tomasic, R., Bottomley, S. & McQueen, R., 2002. Corporations Law in Australia. Federation Press.
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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