Critical Analysis of Audit Matters in Telstra and TPG

This paper provides a critical analysis of the critical audit matters presented during the audit of Telstra and TPG, drawing from the guidelines established in ASA 701. It focuses on revenue recognition, internal control, revenue IT systems and controls, and carrying value of Goodwill.

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AUDIT THEORY AND PRACTICE
By (Name)
Name of the Class
Professor/tutor
Name of the school (University)
The City and state
Date

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Executive summary
This paper has its focus on providing a critical analysis of the critical audit matters
presented during the audit of two Australian telecommunications companies including Telstra
and TPG. The analysis in this paper draws from the guidelines established in the ASA 701 which
is the Australian revision of the ISA 701. In response to the collapse of several large American
banks and the devastating effects of the global financial crisis, the international auditing and
assurance standards board published a new and revised version of the international standards on
auditing. The revised version specifically focused the reporting of audited financial statements.

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Table of Contents
Executive summary............................................................................................................................2
Introduction.......................................................................................................................................3
Background........................................................................................................................................3
ASA 701 2015 and ASA 701 2017........................................................................................................4
Telstra................................................................................................................................................4
Internal control..................................................................................................................................6
TPG.....................................................................................................................................................8
Revenue IT systems and controls........................................................................................................8
Carrying value of Goodwill.................................................................................................................9
Conclusion........................................................................................................................................10
Recommendation.............................................................................................................................11
References........................................................................................................................................12

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Introduction
The IAASB announced the ISA 720, which contained conforming modifications to certain
aspects of the reporting auditing standards. This paper seeks to critically analyze the critical audit
matters presented in the audits of two Australian telecommunications companies; Telstra and
TPG. This analysis will draw from the guidelines given in the ASA 701 which is the Australian
revision of the ISA 701.
Background
The Lehman brothers filed for protection from bankruptcy in 2008. This development came as a
surprise to many since the Lehman brothers were the fourth largest bank in the United States at
the time (Wiggins et al., 2019 p.5). This occurrence was partially due to the belief that people
used dysfunctional auditing procedures applicable at the time. Inconsistent and ineffective
auditing was the primary cause of the investment firm’s unexpected demise. The purpose of
auditing is to assess the financial standing of the enterprise at the time of audit and to make
projections for the foreseeable future. Predicting economic outcomes for the audited company
helps guarantee that the subsequent investment choices made are accurate and useful. These
decisions are made based on financial projections made by the company's auditor. The auditing
that was done on behalf of the Lehman brothers did not identify the factors pointing to the firm's
future financial difficulties (Christopher, 2018). The relationship between the Lehman Brothers
and the establishment of the ASA 701 is observable in the collapse of the firm in 2008. The
company's demise and subsequent economic downturn hastened the development of the ASA
701 auditing standard. This new framework dealt with the auditing failures observed within the
audit of the Lehman brothers (Wiggins et al., 2019 p.5). The mistakes made during the
examination of the firm had to be addressed to prevent reoccurrence. This led to the
establishment of the new standard. The significant aspects of the new standard are, authorization

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of the communication of critical audit matters of listed entities. It also allows the auditing
agencies for the listed enterprises to choose whether they should include essential audit matters
in their reports or not. It also outlines guidance on how the auditing body should identify and
describe crucial audit matters and provide ground-rules for the scenarios in which crucial audit
matters should not be communicated.
ASA 701 2015 and ASA 701 2017
The ASA 701, published in 2015 establishes pre-requisites and provides usage and other
instructive material concerning the statement of key auditor matters in the independent auditor's
report. The 2017 revision of the ASA 701 accounts for modifications made up to the 30th of May
2017. The revision is not an independent auditing standard. Rather, it is an iteration of the ASA
701 published in 2015 as modified by a separate auditing standard
Telstra
Revenue recognition is mentioned first in the audit matters section of the company’s audit report
(Telstra Corporation limited, 2018). The guidance for various arrangements that is present within
the ASC 605-2 applies to all engagements that require a vendor to provide more than a single
service or product that is not bound to the coverage of other particular accounting standards.
Arrangements in this context may be described as contractually binding arrangements, whether
oral, implied, or written. In some cases, one agreement may consist of several contractual
arrangements established with the same counterparty or within the same period. The ASC 605-25
presents guidance concerning the separability of deliverables submitted within an agreement into
separate accounting units and the attribution of an agreement's deliberation to those units of
accounting. It does not, however, guide on when revenue should be considered for deliverables
found to be a distinct accounting unit. Companies are required to apply other guidelines to

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ascertain when arrangement deliberation applied to a separate group of accounting should be
considered revenue. However, adherence to these guidelines may influence the group of
accounting to which particular revenue recognition guidelines are applied. Consequently, the
guidance may affect the company's revenue recognition principles. ASC 605-25 states the
following requirements, both of which must be fulfilled;
 For a deliverable to be considered a distinct accounting unit, the item or service delivered
must possess value to the consumer in a standalone setting.
 If a general right of return is in place concerning the given item, performance or delivery
of the undelivered item is considered likely and mainly in the hands of the vendor.
The question of when income and should be considered is one of the most significant in
accounting practice and is essential for the determination of financial performance.
Unsurprisingly, it has stirred debate for many years. Many accounting approaches have been
presented, and accounting guidelines developed, providing direction to practice. Accounting
standards did not uniformly adapt to these developments in their approach towards revenue.
They did not adjust, and even in the situations where they did, they were late and typically dealt
only with a specific circumstance that had not yet been addressed.
The conceptual framework defines the provision of meaningful information to capital providers
as the primary goal of financial reporting and presents accountability and stewardship only as
secondary objectives. It does not see a disagreement between the two purposes but proposes that
financial data that is important for stewardship is also useful for the decision making the process.
The absence of a separation between the two has been the source of contentious debate in the
standard context. Nevertheless, revenue is significantly important in the following ways;

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 Revenue is one of the most significant benchmarks for the measurement of financial
performance.
 It provides essential financial data such as the realized gross earnings from business
operations, which is used to evaluate how well a company performs within a specific
time.
 Most companies use revenue as a critical summary performance benchmark in the
discussion of financial results.
 Income provides essential information on a company's gross performance and perhaps
more importantly, it serves as the basis for the determination of gross profit and other
vital figures such as revenue before tax and interest, and net income.
 Revenue is essential for users of financial statements to comprehend the drivers of
profitability and value generation within a company in a specific period.
 It presents achieved milestones since it also captures gross earnings from transactions that
occur towards the conclusion of the company's earnings cycle.
Internal control
Internal control is a mechanism created by management, and it is also comprised of the
management information system that is designed to facilitate the organization's accomplishment
of particular objectives or goals as indicated below;
 It is an avenue by which an organization's resources are monitored, allocated, and
evaluated.
 At the organizational level, internal control objectives are concerned with the
dependability of financial reporting, timely feedback on the attainment of strategic or
operational goals, and adherence to regulations and laws.

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 At the level of a specific transaction, internal control describes the measures taken to
attain a particular objective, and this cuts back on process variation, resulting in increased
outcome predictability.
 It provides essential analytical tools such as a summary of financial activity, the internal
asset authorization, investment, and acquisition of inventory for proper managerial
decisions.
 It is the basis for the entire statuary audit and determines how the examination is
conducted.
The management may identify and prevent inconsistency through consistent and stringent
supervision and monitoring of operations. Failures in internal control may be identified
through inspection, inquiry, observation, and review. The effectiveness of internal control is
mainly dependent on the level of competence, honesty, and integrity of employees and their
comprehension of recommended procedures and policies. The forms of internal control may
be grouped into the following categories;
 Segregation of duties,
 Organization,
 Authorization,
 Supervision,
 Personnel.
Physical control entails physical control of assets and involves methods and security
protocols that are meant to guarantee secure access by authorized persons. Accounting and
arithmetic controls are implemented to ensure that no viable transactions are left out of the

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accounting records and to ascertain that al sustainable transactions are consistent and
accurate with regards to the original documents and also that record is made at the required
time without unnecessary delays.
TPG
Revenue IT systems and controls
A revenue audit is a two-part procedure that compares the figures and information on an
organization's tax returns to those stated in its business records. Generally, auditors evaluate the
performances of income for over one year. However, they may also assess records for previous
years in case irregularities are found. The process is meant to monitor and ensure compliance
with tax regulations. It also facilitates the identification of possible tax evasion and other
liabilities. The auditors also gather tax, interest, or penalties where necessary. The two crucial
stages of revenue auditing include evaluation of the revenue accounts on income statements
followed by an analysis of accounts receivable on the balance sheet (Zhang et al., 2007 p300-
327).
Substantive tests are grouped into two categories; criteria of details, applied in the testing phase
and analytical procedures, which may be implemented at various stages of the audit. The latter,
however, produce less reliable information. If the tests identify misstatements and errors, further
audit testing is required (Zhang et al., 2007 p300-327). It is for this reason that substantive
internal testing is needed before an external audit to remove possible complications. In a digital
environment, there are two significant categories of internal control; general, and application
control (Cangemi, 2016 p1-9). These are automated or manual mechanisms typically operating at
a business process level that apply to the handling of transactions by individual applications.
Application controls can be detective or preventative by design and are meant to ensure the

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integrity of the accounting records. Consequently, application controls are concerned with the
mechanisms used to record, initiate, process, and report transactions or other financial
information. These controls help ascertain that sales took place, were authorized and adequately
documented.
Carrying value of Goodwill
Section A32 of the ASA 701 provides that the auditor's knowledge, acquired in the audit may
also include future issues. Such matters may include, for instance; business prospects and
projected cash flows that the auditing body considered during the assessment of assumptions
utilized by management in the performance of impairment tests on intangible assets such as
Goodwill, or during the analysis of management's evaluation of the enterprise's ability to
continue as a going issue (Schatt et al, 2016 p307-327).
In accounting practice, Goodwill is an intangible asset that occurs after the acquisition of an
existing business. Goodwill pertains to assets that are not distinctly identifiable. It does not
include identifiable assets that can be separated or divided from the enterprise and sold, licensed,
transferred, or exchanged, either on their own or a part of a related contract. Goodwill also
doesn't pertain to contractual or other legal rights irrespective of whether those rights are
separable or transferable from the entity or other obligations and rights. Goodwill is, in essence,
the excess of the purchase consideration over the combined value of liabilities and assets (TPG
telecom limited, 2018). It is described as an intangible asset on the balance sheet because it can't
be seen or touched. Under the United States IFRS or GAAP, Goodwill is never amortized.
Instead, management takes responsibility for the valuation of Goodwill each year and the
determination of whether an impairment is necessary. If the fair market value drops to a level
below actual cost, an impairment must be registered to correct its fair value on the market. An

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increase in fair market value is rarely considered in financial records. Some companies, however,
may choose to amortize Goodwill over ten years under an accounting alternative from the private
company council of the FASB. The conventional approach to the determination of Goodwill
upon the acquisition of a subsidiary is the excess of the fair amount of the consideration stated by
the parent over the parent's dividend of the appropriate valuation of the net assets obtained. This
method may be described as the proportionate approach. It states only the Goodwill is
attributable to the parent enterprise
Conclusion
The prime justification for crucial audit matters was that; the inclusion of a summary on these
would present vital information for investors. This objective has been attained, with research
showing that the information presented is considered crucial by investors. The inclusion of
necessary audit measures offers several primary benefits. The publication of critical audit
measures has introduced a new focus for deliberation between the audit committee and auditor.
As observed in the analyses of Telstra and TPG, the disclosure of necessary audit measures
results in increased transparency for the most significant audit issues discussed between the audit
committee and engagement partner. Consequently, disclosure of Key audit matters results in
improved corporate governance (Kelly & Tan 2017 p1-20). Research shows that it has been a
tradition for the audit partner and audit committee to focus on similar risks or material
misstatement. Critical audit matters are a reflection of the areas that need improvement. The
procedure of reporting results from the auditor's export to the audit committee seems to have a
positive effect on audit quality. Analysis of the audit reports does not show evidence for the
defensive use of crucial audit matter to reduce auditor liability. Critical audit matters have

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generally improved quality. Once issues are selected as necessary audit measures, audit
supervisors expect appropriate responses within the audit file.
Recommendation
It is recommended that Auditors place proper emphasis on the topics listed as critical audit
matters. It is also recommended that Auditors pay more attention to the disclosure of issues
listed under the Key audit matter section results with more emphasis it was in the past.
It is also recommended that audit partners become more apprehensive of key audit issues during
their evaluations.

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References
Cangemi, M.P., 2016. Views on internal audit, internal controls, and internal audit’s use of
technology. EDPACS, 53(1), pp.1-9.
Christopher, J., 2018. The Failure of Internal Audit: Monitoring Gaps and a Case for a New
Focus. Journal of Management Inquiry, p.1056492618774852.
Cordoş, G.S., Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of Key
Audit Matters. Accounting & Management Information Systems/Contabilitate si Informatica de
Gestiune, 14(1).
Kelly, K., Tan, H.T., 2017. Mandatory management disclosure and independent compulsory
audit of internal controls: Evidence of configural information processing by investors.
Accounting, Organizations and Society, 56, pp.1-20.
Schatt, A., Doukakis, L., Bessieux-Ollier, C., and Walliser, E., 2016. Do goodwill impairments
by European firms provide useful information to investors?. Accounting in Europe, 13(3),
pp.307-327.
Telstra Corporation limited, 2018. Telstra annual report. telstra.com.au
TPG telecom limited, 2018. Annual report. tpg.com.au
Turner, L., and Weickgenannt, A.B., 2008. Accounting information systems: controls and
processes. John Wiley & Sons.
Wiggins, R.Z., Bennett, R.L., and Metrick, A., 2019. The Lehman Brothers Bankruptcy D: The
Role of Ernst & Young. Journal of Financial Crises, 1(1), p.5.

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Zhang, Y., Zhou, J., and Zhou, N., 2007. Audit committee quality, auditor independence, and
internal control weaknesses. Journal of accounting and public policy, 26(3), pp.300-327.