Transparency In Reporting By Auditors

Scope of the Project

Introduction

Background of the Report

One of the most essential aspects that an auditor is required to keep in mind is that the reporting of the audit matters must be done cautiously. There are several laws that have been framed by the regulatory authorities of different countries across the world. The auditors are required to conduct audit based on such laws and regulations. Thus, this report analyses transparency in reporting by the auditors.

Scope of the Project

This report discusses transparency in reporting through seven headings, which are, Independent Auditor’s Report; Audit Committee; Non-audit services given by the auditor; Auditor’s Remuneration; Auditor’s Independence Declaration; Independent Auditor’s Report to the members of the company and; Key Audit Matters Review.

Conclusion

All the compliances have been followed. However, more clarity can be given on non audit services performed and composition and role of audit committees

Discussion

1) Auditor’s Independence Declaration  

In Australia, the auditors of the companies are required to follow the provisions specified in the Corporations Act, 2001 (CCH Australia Limited, 2011). One of the major compliances that an auditor is required to comply with is related to the independence of an auditor. An auditor is supposed to act independently from the company in which he is performing the audit. This is necessary as per the rules specified in the act and regulations prescribed by the professional bodies. The auditing standards that have been issued also stress on independence of an auditor and further require the auditor to act vigilantly and keeping away all sorts of biasness while framing an audit opinion based on his audit (CAANZ, 2016). Opinion given by the auditors can be considered as reliable only when he has declared himself independent from the company and proved that there has been no personal interest while giving audit opinion.

In Australia, various laws have been framed for ensuring that the auditor remains independent throughout the audit phase and such regulations have to be adhered to by all auditors. Laws framed with respect to independence of an auditor include the following:

• The auditor is required to present a statement in the annual report of the company declaring his independence from the company in which he is appointed as the auditor. This requirement is to be fulfilled as per section 307C that of the Corporations Act, 2001.  . As per the provisions that have been framed in this section, an auditor of a company must declare compulsorily that he is performing the audit independently from the company. This particular information is required to be given in the Independence Declaration by the auditor of the company. In addition to thus, various other provisions have also been specified in this act. One of them is the Divisions 3, 4 and 5 of Part 2M.4 (Wolters Kluwer, 2018).
• Some other provisions have also been framed in addition to the Corporations Act, 2001, which must be followed while performing the audit. One such standard is APES 110 which includes some ethical codes of conduct which apply to the auditors of an organization. As per the standard, the auditor must declare his independence. In addition, they must also state that they have been following ethics through the audit procedures. A declaration of independence is required to inform shareholders and members of the company that audit has been completed by discharging duties with utmost care and all the ethical responsibilities have been fulfilled throughout the assignment (Australian Government, 2018).

The audit of TPG Telecom Limited has been carried out by KPMG and they served as the lead auditor of the company. The auditors have given a declaration of independence in the auditor’s report attached with annual report of the company. This statement by the auditor’s states that they have complied with the provisions of Corporation Act 2001 and also they have followed the ethical code of conduct as has been mentioned in APES 110. They have also stated that there have been no contraventions in both the requirements. As stated in the code of ethics, auditors have been careful to apply them throughout the audit. The requirement to give a statement of declaration is given under the Corporations Act, 2001. The declaration is given on page number 36 of the annual report (TPG Telecom Limited, 2017).

Conclusion

2) Independent auditor’s report

The main reason behind appointing an external auditor to audit the financial statements of a company is finding out the performance of the company and also that the dealings of the company are in line with the objectives of its formation. The auditors are required to express a true and fair view on the financial statements and express an opinion based on such an audit. Such an opinion is then read by members and shareholders of the company to evaluate whether they must continue their investments in the company or not (Porter et al., 2014). Hence, expression of opinion by the auditor is quite significant since all major decisions of members are based on such an opinion. There are four types of opinion which an auditor can express, such as:

• Unqualified Opinion;
• Adverse Opinion
• Qualified Opinion; and
• Disclaimer of Opinion (Leung, 2009)

On the basis of the audit of financial statements, KPMG opined that the financial report of TPG Telecom Limited is as per the provisions of the Corporations Act, 2001 and the financial statements reflect a true and fair view of various dealings of the company. In addition to this, the auditors have also opined that other compliance requirements such as Australian accounting standards and Corporations Regulations, 2001 have also been followed. In other words, KPMG has given an unqualified audit opinion on the financial statements of TPG Telecom Limited (TPG Telecom Limited, 2017). The opinion so expressed is given on page number 92 of the annual report.

3) Non-Audit services performed by the Auditor

Services which are accepted and performed by an auditor in addition to his acceptance of audit and assurance services in the same company are called as non-audit services. However, there are possibilities that the independence of an auditor might get affected because of such services. The auditor might gain personal interests while performing non audit services which might create some sort of biasness in his mind. Quality of audit might get negatively affected because of this. Thus, non audit services have become significant to be assessed while evaluating independence of an auditor (Frankel, 2018).

However, not all the countries across the world allow the auditors of the company to take up these two tasks simultaneously. In other words, in such countries an auditor will not be able to take up both audit work as well as non audit work. United States of America is an example of this. Sarbanes and Oxley Act that has been framed by the authorities in the US, has prohibited the auditors of the company to perform non audit services in the same company in which they are giving assurance and audit services (Mitchell, 2018). In Australia, however, there is no such provision that restricts the auditors, which means the auditors are permitted to perform as many types of services as they want, provided they do not affect his independence. Such declaration is required to be given in writing in the annual report of the company along with auditor’s report (Clarke et al., 2016). Wherever an auditor feels that there might be a conflict of interest, he must not accept such non audit services. This means onus to prove independence lies with auditor (ASIC, 2018).

Discussion

KPMG who are the auditors of TPG Telecom Limited have carried out some non-audit services along with their audit and assurance services. However, the directors in their report have specified that the audit and risk committee has personally been involved to evaluate that such services have not in any manner affected independence of the auditor. Furthermore, the non audit services have not in any way undermined principles set out in APES 110 has also been ensured. The non audit services performed by KPMG in addition to audit services include performance of certain taxation and other services. However, there is no mention of other services in detail in the report (TPG Telecom Limited, 2017).

4) Auditors’ Remuneration

Remuneration to auditors is the fees paid to them for various audit as well as non audit services performed by them (Caanz, 2015).

KPMG who were the lead auditors of TPG Telecom Limited have performed both services. In the table below, the remuneration charged by them for 2017 and 2016 has been given along with percentage increase or decrease.

			(in $ ‘000)
Particulars	2017	2016	Percentage Change
Audit or review of the financial report	925	1,059	-13%
Other regulatory audit services	8	8	0%
Taxation and other services	120	119	1%
Total Remuneration	1,053	1,186

From the above table, it can be seen that the fees of audit services has declined in 2017 by 13% whereas the fees of non audit services has increased by 1%.  

5) Role, functions and composition of the Audit Committee

The main purpose of forming an audit committee is to ensure that all the internal controls and the laws and regulations that are applicable on the company are being complied with effectively (CAANZ, 2016). All the listed companies in Australia are mandatorily required to frame audit committees (Arens et al., 2016).

TPG Telecom Limited also has Audit and Risk Committee comprising of three non executive directors. Not all the directors can be made a part of this committee.

                                                             

The above figure shows the number of audit and risk committee meetings held. The function and role of such committee is to ensure that the independence of auditors is not affected negatively due to performance of non audit services. However the role, function and composition of committee have not been given in the annual report clearly.

6) Independent Auditors report to the members (shareholders)

All the companies in Australia are required to address the report to the members of the company. Such a report consists of audit findings and auditor’s opinion on financial statements (Gay & Simnett, 2015). It is the responsibility of the auditors to express opinion on financial statements of the company while the responsibility to prepare the financial statements lies with the management (Knechel & Salterio, 2016). Furthermore, management is also responsible for selecting appropriate policies for accounting (BPP Learning Media, 2015).

1) Auditor’s Independence Declaration

In addition to the opinion, the auditors are also required to mention any subsequent events. In TPG Telecom Limited, two subsequent events have been reported which will have an impact in next year. One is that the group has revised its debt financing agreements to finance its spectrum commitments and also declared dividends as a subsequent event. This event occurred in September, 2017 (TPG Telecom Limited, 2017).  

7) Review all Key Audit Matters noted and the associated audit procedures

The major objective of all the auditors of the companies is to present the members as well as the shareholders of the company with true and fair view of all the financial statements. However, the authorities in the country felt the need for bringing about more transparency in the reporting methods that are adopted by the auditors. Some new regulations called the enhanced auditor reporting requirements are required to be followed by the auditors now (CPA Australia, 2018). This requires stating and reporting separately on some matters which the auditors consider as key matters for making decisions and evaluation purposes. All those matters which can have a significant impact on the financial performance of a company and ultimately affect the members are required to be brought to their notice. However, the auditors do not offer separate opinion on such matters.

KPMG, the audit firm of the company, in their audit report to members have stated two key audit areas, which include the following:

• Revenue Recognition
• Carrying Value of Goodwill

The auditors further have stated that it is as per their professional judgment that the above two mentioned matters have been addressed by them as key audit matters. Detailed explanation is as follows:

Revenue Recognition- The major revenue of the company comes from telecommunication services provided by them to the customers. Their customers include individuals, wholesale customers as well as corporate customers. The revenue from provision of telecommunication services is considered to be key audit matter because of the large scale operations. Various telecommunication services are offered to the customers that operate on various networks. Such services are billed using systems which are highly automated and they also use various sub systems in order to recognize revenue. All these factors required the auditors to appoint their own IT team for the task and this enhanced the complexity of the audit. Furthermore, due to pressure from competitors, the rates charged from customers are not consistent and thus, these frequent price changes increases the number of audit data points.

2) Independent Auditor’s Report

KPMG applied Test of Controls to test the control procedures adopted by the management of the company to bill revenue streams. The auditors also performed substantive test of details and analytical procedures which included confirmation of revenue from major corporations and also performing sample tests to check accuracy of bills generated.

Carrying value of Goodwill- The auditors have considered this as a key audit matter because of the size of its asset and is the largest asset of the company. The matter required the auditors to use a significant level of judgment to evaluate the estimates of carrying value of goodwill. Furthermore, the industry in which the company is operating in has a huge impact of change in technology. The forecasts are always at risk because of the constantly changing prices. The auditors focused upon assessing the carrying amount of company’s goodwill by evaluating the valuation models for specific cash generating unit. Discount rates and key assumptions taken by the company in relation to forecasts were assessed by the auditors while evaluating the market demand of the services. Several of the senior audit team members were involved in the process.

In order to test the key audit matter related to carrying value of goodwill, KPMG adopted analytical procedures to compare demand forecasts against industry reports and evaluate the data in various valuation models. The auditors also focused on evaluating methods of forecasting accuracy. These are called as substantive test of details (Knowledge Equity, 2018). The auditors also performed substantive tests as a part of substantive tests of details. This information is specified on page number 94 of the annual report.

Conclusion

The objective or reviewing the audit report of TPG Telecom Limited was to ensure that the auditors have keenly followed the provisions regarding audit or not. However, after reviewing it appears that the auditors have complied with all the major laws and regulations. However, information related to composition of audit and risk committee has not been provided in the annual report. Hence, it is advised that the relevant information is given in such a manner that it does not get lost amidst irrelevant information. However, a follow up question to the auditors is about the type of non audit services performed by them. What exactly is meant by taxation and ‘other services’?

References:

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