Key Audit Matters in Organizations: Analysis of Telecommunication Industry

This report analyzes the importance of Key Audit Matters (KAMs) in organizations and their impact on financial statements. It focuses on the telecommunication industry and discusses KAMs in Telstra, NBN Co Group, and Linet. The report also highlights the downfall of Lehman Brothers due to the nonpresence of KAMs. The report is based on the concept of ASA 701 and the presence of KAMs.

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Executive Summary
The company must ensure that it release the financial statements together with the notes and
disclosures. This means that the financial statements should be explanatory in nature so that a
clear cut understanding of the company can be done. Further, the presence of the auditor
report and director report must be present that helps in knowing the authenticity of the
company. In the current scenario, it is essential that the report must have clarity in terms of
key audit matters. The report is based upon the concept of ASA 701 and the presence of key
audit matters. The downfall of Lehman Brothers has been projected in the report that
happened owing to the nonpresence of KAM. Further, the key audit matter of the telecom
industry is discussed in an elaborated manner where it comes to the forefront that disclosure
of information was accurate however the auditor role in addressing the same was absent.
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Contents
Introduction...........................................................................................................................................3
Key Audit Matter in organization..........................................................................................................3
Collapse of Lehman brothers.................................................................................................................5
Telecommunication...............................................................................................................................5
TELSTRA.................................................................................................................................................5
NBN Co Group.......................................................................................................................................7
Linet.......................................................................................................................................................7
Analysis.................................................................................................................................................8
Conclusion.............................................................................................................................................8
References...........................................................................................................................................11
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Introduction
The auditors were negligent enough in providing adequate disclosures concerned with the key
audit matters of an organization in their audit reports prior to the implementation of the new
standard ASA 701. Things took a u-turn soon after the incorporation of ASA 701 as the
standard puts a compulsion on the auditors to represent all the KAMs of the audited firm in
their audit report. The auditors are now required to remove the veil from the key audit matters
of the company and bring the same into the notice of the readers of the financial statements.
Unlike earlier disclosures pertaining to KAMs are not dependent on the will and decisions of
the auditor for it is now mandatory to project the same in the auditors’ report of the company.
The key audit matters of an organization can no longer be concealed in darkness by the
auditors since the implementation of ASA 701. The incorporation of ASA 701 has been
initiated so as to preserve the wellness of investors. The investors are fully entitled to have an
idea of the company’s financial performance. The investors can initiate decisions only on the
basis of information provided by the company and therefore, this calls for the need to project
the actual state of the company’s wellbeing in the financial statements. The implementation
of ASA 701 has now ensured the efficacy and realness of the information present in the
financials of the company. ASA 701 has aided in the presentation of all the necessary
disclosures pertaining to identified key audit matters of an audit firm in the audit reports
prepared by an auditor. Therefore, ASA 701 initiates the presence of utmost transparency in
the auditors’ reports which serves in the best interests of the investors.
Key Audit Matter in organization
The audit functions executed by an auditor must be delegated in an appropriate manner. An
auditor must be highly professional while serving an organization by means of performing
audit procedures. An auditor must incorporate appropriate methods and processes in order to
assess even the slightest presence of KAMs in the financial statements of an organization.
Matters that pose a threat to the activities of the company or are vulnerable enough to harm
the goodwill and operations of the company must be regarded as KAMs. Matters that have
the potential to suffocate the operations of an organization must necessarily be labeled as key
audit matters (Parker, Guthrie & Linacre, 2011). An auditor must assess the segments
that possess KAMs in the initial stage of his audit function itself. The segment that signifies
the presence of material misstatements must be identified by an auditor in the audit planning
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stage itself. The areas that indicate the presence of related party transactions should always be
prioritized by an auditor for assessment purpose (Henry & Hicks, 2015).
The operational activities of an organization can be impacted if the key audit matters are not
detected and dealt on time. The financial activities of an organization can suffer to a larger
extent and if key audit matters are ignored or their rectification is delayed then the company
might also go bankrupt like in the case of Lehman Brothers Limited. Auditors find key audit
matters really unfavorable for the wellness of an organization.
Reporting of key audit matters is as important as the identification of the same is. It is
pointless to detect such matters if the same is not shared with the management of the
company (Murphy, 2015). Conveying key audit matters is useless too if the management
doesn’t act upon the same on time. Therefore, the impact of KAMs can only be minimized or
eliminated if these matters are traced, communicated and rightly dealt on time. The key audit
matters detected must be reported to the management of an organization and the auditors’
must also provide necessary professional judgment pertaining to the treatment of the same.
The management must also make necessary research with respect to KAMs so as to affirm
the presence of the same and evaluate appropriate measures that can be implemented in order
to minimize or eradicate the impact that can arise out of these vulnerable matters.
The matters identified as key audit matters by the auditors must not only be conveyed to the
management of an entity but the same must also be disclosed in the audit reports. This will
allow the investors to have an insight into the actual wellness of the entity and gain trust in
the same. The users of the financial statements upon receiving all the necessary information
are most likely to benefit as they can construct appropriate decisions relying on such
disclosures.
If an organization portrays itself wrongly or exaggerates its wellness in its financial
statements then the investors are most likely to face deception and the consequences of such
wrong practices shall only be dealt by the latter in terms of monetary losses (Matthew, 2015).
In this regards, ASA 701 was introduced with an intention to safeguard the interests of the
investors. ASA 701 aims at facilitating-
• The auditors to be aware of their responsibilities pertaining to provide adequate
disclosures with respect to KAMs and,
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• Providing an understanding of the KAMs and the mannerism in which the same is dealt
with by the auditors.
Therefore, the ultimate aim of ASA 701 is to safeguard the interests of the investors from
getting deceived.
Collapse of Lehman brothers
The sudden failure of Lehman Brothers was a huge shock for the industry. The bank
collapsed due to various reasons. The main reason was on the part of the management of the
company as it failed to assess the underlying risks which seemed more intentional and less
unintentional (Geoffrey, Joleen, Kelli & David, 2016). Another reason could be attributed to
the unprofessional attitude of the auditors of the company who instead of alerting the
management of their actions kept encouraging them by keeping silent on the matters.
Following are a few examples of non-assessment of underlying risks that attributed to the
company’s failure-
The leverage ratio of Lehman Brothers in 2008 was comparatively lower than what it was in
2007. The drop in the leverage ratio was however not permanent in nature but still, the
management of the company chose to cover it up by means of opting for Repurchase 105
transactions. This led to the rise in the level of securities as the company had to repay its
debts arising out of Repo 105 transactions. All and all this impacted the leverage ratios of the
company to a significant extent which needed to be projected in the audit reports of the same.
However, the audit reports of the company had no disclosures attributed to this segment
(Suphatsorn & Phapruke, 2011).
The company indulged into buying back its own securities that were later transferred to the
third parties on a temporary basis. The auditors chose not to represent disclosures pertaining
to this matter as well in their auditors’ report as well.
Telecommunication
To conduct the application of Key audit matter in an industry of ASX, we have selected the
telecommunication industry and the entire companies listed in the industry will be dealt with
for the purpose of key audit matter projection.
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TELSTRA
Revenue recognition
An auditor must conduct his audit function in a manner so as to evaluate three substantial
areas of revenue recognition. These areas are NBN revenue under the revised Definitive
Agreements (DAs) with NBN Co Group and the Commonwealth Government; Network
Application Services (NAS) and latest products and plans that are inclusive of various
element arrangements.
Accuracy and completeness of amounts recorded as revenue recognition
The auditors evaluated the internal systems of the telecom company in order to calculate and
document the timing and sum of revenue recognition. The controls and processes
incorporated by Telstra were assessed in order to calculate the timing and sum of revenue
recognition by the auditors on the basis of sample work. Major NAS contracts were also
assessed by the auditors on the basis of sampling. Few contracts were taken in a sample so as
to analyze the behavior of all the contracts (Telstra, 2018). The contracts taken up for
sampling were alike in terms of size, nature, amount of related assets and stage of
completion.
The effectiveness of the internal mechanisms that are incorporated for the entire life of major
contracts is determined by the auditors so as to assess the rightness and completeness of
amounts that are reported as revenue recognition (Albert, Stice & Stice, 2011). The contracts
that were chosen for sample work were of great utility for the auditors in assessing the
contracted revenues. It helped the auditors to dig into the obligations with respect to a
contract such as a penalty, etc.
Impairment of goodwill and other intangible assets
As Telstra is operating into the telecom industry, therefore, it faces a lot of risks pertaining to
impairment of its goodwill and other intangible assets. It is the responsibility of an auditor to
ensure that the intangibles of the company are annually impaired. The auditors must also
check the performance of the cash generating units. The goodwill of Telstra was impaired on
31 December 2017 for $242 million. The auditors also evaluated the rightness of the amount
reported as CGUs and the manner in which the goodwill and other intangibles of the
company were impaired. The accuracy of the impairment of the Telstra’s goodwill and other
intangibles was assessed by the auditors by means of recalculating the amount of CGUs
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reported by the company and the fairness of the cash flow depicted by the Board. The
historical cash flows of Telstra were also tested for confirming its rightness. Hence, in this the
auditor played the role in an effective manner (Telstra, 2018).
Revenue from Contracts with Customers - AASB 15
AASB 15 is applicable to Telstra from 1st July 2018 onwards. The auditors pre-determined
the financial impact arising out of AASB 15 and also assessed the associated accounting
policies. The auditors also evaluated the appropriateness of the internal systems and
mechanisms pertaining to AASB 15 in order to pre-determine the financial impacts arising
out of the same (Telstra, 2018).
NBN Co Group
Valuation of property, plant, and equipment and intangible assets
The intangibles of NBN Co Group are currently a work in progress. This makes it essential
for NBN Co Group impair its intangibles year after year. The valuation of property, plant, and
equipment and intangible assets of NBN Co Group was stated as $25,043 million as
confirmed from its balance sheet (NBN Group, 2018). Representing such a big amount
indicates the presence of key audit matter. An auditor must necessarily assess this area in
order to locate the key audit matters.
The auditors evaluated the amount reported as a cash generating from units along with the
methodologies adopted by the organization. The accuracy of the amount reported as
impairment of intangible assets was also assessed by the auditors. The auditors collected the
reports of similar organizations operating in the same industry and made valuable
comparisons so as to assess the rightness of the impairment of intangible assets. The entities
were chosen on various standards. The entities chosen for comparison were on the basis of
being a participant of the same industry, employment of similar methods and are yet to be
fully established (NBN Group, 2018). The auditors assessed the accuracy of the calculation
of the present replacement cost and recoverable values which could easily be ascertained
from the data sources
Linet
Rationalization of ERP
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Linet is a strong player when it comes to the telecom industry and is engaged in the process
of ERP software and other related software. It needs to be noted that the installation will
depend entirely upon the internal control function and the integration of different software.
Further, the installation of the software, as well as the system depends on the interlinkage
between the two (Linet, 2018) The total IT infrastructure will be influenced if failure happens
in the system. The need for IT development is highly imperative as it is directly concerned
with the development of the business. However, the same has been neglected by the auditors
because the audit firm failed to conduct the audit in this area that is the rationalization of
ERP.
Stock price fluctuation
Another important event of this company is that the stocks are prone to immense volatility.
The regular fluctuation in the price of the stock might be a case of guidelines alterations, a
recommendation from the analyst or the conduct of different studies. Further, the alterations
in the actual and budgeted operations of the company can even lead to fluctuations in the
prices (Linet, 2018). Further, this factor was even neglected by the auditors and there was no
undertaking of audit in this area. Hence, the key audit matter was correctly stated in the
annual report but the audit procedure in relation to the same was not undertaken.
Analysis
From the overall discussion that is the companies that are contained in the telecommunication
industry, we can provide a remark that the key audit matter was highlighted by the company.
The audit report comprises of the key audit matter and can be referred by the users of the
financial statements. This factor will aid the process of decision making and will help the
users in making a prediction or judgment. However, the disclosures of KAM is not enough,
the role played by the auditors in addressing the same is an important consideration which
was lacking.
Conclusion
Audit procedure has a significant part to play in deciding the journey of an organization. The
role of an auditor is enormous as learned from the telecommunication industry. Overall, it can
be said that the audit process was conducted in an efficient manner. The audit report provided
the users with all the relevant information that would have been required by them for
constructing investment related decisions. Therefore, from the above report, it can be said
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that the auditors have a significant role to play in deciding the fate of the company and the
audit report is essential too as it offers material information to the investors. However, the
auditors should address the key audit matter because it reflects the intensity of the matter. If
left to operate on its own can lead to potential issues.
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Albrecht, W., Stice, E. & Stice, J. (2011) Financial accounting. Mason, OH:
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their skills up to date, management accountants can enhance their careers and their
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References
NBN Group. (2018) NBN 2018 annual reports 2018. Available from
https://www.nbnco.com.au/content/dam/nbnco2/2018/documents/media-centre/nbn-co-
annual-report-2018.pdf [Accessed 22 May 2019]
Parker, L, Guthrie, J & Linacre, S. (2011) The relationship between academic
accounting research and professional practice, Accounting , Auditing &
Accountability Journal, 24(1),5-14. Available from:
http://media.accountingeducation.com/1304/Parkeraaaj24(1).pdf [Accessed 22 May 2019]
Suphatsorn, T., & Phapruke, U. (2011) Internal audit planning strategy of Thai- firms: an
empirical investigation of antecedents and consequences. International listed. Academy of
Business and Economics, 11 (2). Available from:
https://pcaobus.org/Standards/Auditing/Pages/AS2101.aspx [Accessed 22 May 2019]
Telstra. (2018) Telstra 2018 annual reports 2018. Available from
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/2018-Annual-
Report.pdf [Accessed 22 May 2019]
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