Enhanced Reporting of the Auditor in Australia: A Critical Review of Beach Energy Limited's Annual Report

This paper critically reviews Beach Energy Limited's annual report and examines the adoption of enhanced reporting of the auditor in Australia. The report analyzes the auditor's independence, non-audit services provided, remuneration, key audit matters, audit committee, type of audit opinion expressed, and material subsequent events.

AUDITING THEORY AND PRACTICE 1
AUDITING THEORY AND PRACTICE
By (Name)
Name of the Course
Professor
Name of University
City and State
Date
Word Count: 2600

AUDITING THEORY AND PRACTICE 2
Executive Summary
This main purpose of this paper is to give research findings on how enhanced reporting of
the auditor has been adopted in Australia. In order to make improvements in the quality of audit
reporting, public companies which are listed have been required to disclose or report on the key
audit matters as a way of improving the material information that is communicated to the users
of financial statements. Plain English must be used in disclosing these matters. These new
disclosure requirements of the auditor started in December 2016. The main aim of this paper is to
review an annual report of a company listed on ASX that is in the S&P/ASX 300 list. For the
purpose of this assignment, Beach Energy Limited is chosen. The annual report of Beach Energy
Limited has been critically reviewed and examined. As per the auditor’s opinion, the financial
reports have been recommended for use by the company’s stakeholders and the general public
(Nigrini 2012, pp. 48). This is because the reports 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).

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TABLE OF CONTENTS
CONTENT PAGE
Introduction.................................................................................................................................................4
Auditor’s independence...............................................................................................................................4
Nature of Non-audit services provided...................................................................................................…...5
Remuneration of the Auditor and the Reasons for the changes…………………………………………….7
Key audit matters and procedures performed...............................................................................................7
Audit committee........................................................................................................................................10
Type of audit opinion expressed.........................................................................................................….....10
Director’s and managements’ responsibilities and those of the auditor…..................................................11
Material subsequent events………………………………………………………………………………..11
Evaluation of the Effectiveness of Material Information Reported by the Auditor……………………...12
Material Information Which Could Be Missing..............................................................................…........12
Questions for Follow-up during the AGM…………………………………...……………………………13
Conclusion.................................................................................................................................................13
References.................................................................................................................................................14

AUDITING THEORY AND PRACTICE 4
Introduction
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

AUDITING THEORY AND PRACTICE 5
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:
a. IT services
b. Tax services in Australia
c. Tax and other services for subsidiaries in overseas
d. Transaction services for Drillserach merger
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.

AUDITING THEORY AND PRACTICE 6
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%

AUDITING THEORY AND PRACTICE 7
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
The audit procedures
performed were:
i. Assessment of the
These audit procedures are
classified under substantive
tests of detail and analytical

AUDITING THEORY AND PRACTICE 8
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.
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
tests.

AUDITING THEORY AND PRACTICE 9
evaluation of
assets.
v. Assessment of
financial report
disclosures of the
group with regard
to impairment of
assets.
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
These audit procedures are
classified as substantive tests
of detail and tests of control
with regard to board
approvals.

AUDITING THEORY AND PRACTICE 10
estimates.
iii. Checking samples
of future cost
estimates.
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).
i. Reviewing annually the adequacy of the policies and obtaining approval of the board
on any necessary revisions on the policies.
ii. Reviewing the significant accounting policies of the organization as well as its
principles of financial reporting
iii. Reviewing the extent and scope of the general audit of the external auditor.
iv. Reviewing the annual engagement letter of the external auditor.
v. Facilitating a link of communication between directors and the external auditor.
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

AUDITING THEORY AND PRACTICE 11
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).
a. Preparing and presenting the financial reports which give a true and fair presentation
of the financial position and performance of the entire group.
b. Implementation of internal controls necessary for enhancing and enabling preparation
of financial reports of the company that gives a true and fair view.
c. Assessment of the ability of the group to continue as a going concern entity. This
involves disclosure of applicable matters which relate to the going concern of the
company (Louwers, Ramsay, Sinason, Strawser and Thibodeau 2015, pp. 27).
However, the responsibilities of the auditor in the financial reports were:
a. Obtaining a reasonable and verifiable assurance regarding the whole financial report of
the company and analyzing if it is free from material financial information misstatements.
b. Issuing an auditor’s report expressing their opinion with regard to the company’s
financial reports (Cosserat and Rodda 2009, pp. 23).
Material Subsequent Events

AUDITING THEORY AND PRACTICE 12
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

AUDITING THEORY AND PRACTICE 13
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

AUDITING THEORY AND PRACTICE 14
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.

AUDITING THEORY AND PRACTICE 15
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.