ACC80003 - Company Auditing: Impact of ASA on Auditor Reporting

This report examines the changes to auditor reporting introduced in Australia from December 15, 2016, by the International Auditing and Assurance Standards Board (IAASB), focusing on standards like ASA 701, ASA 705, ASA 706, and AASB 16. It discusses the impact of these changes on listed companies, emphasizing increased transparency and clarity for investors and stakeholders. The report also covers key audit matters (KAM), their identification, and areas of focus, such as going concern, impairment risks, and revenue recognition, referencing early adopters like Telstra. The analysis highlights how these standards enhance the qualitative characteristics of financial statements and improve communication between auditors and stakeholders, ensuring better-informed decision-making.

COMPANY AUDITING
ASSIGNMENT

1
By student name
Professor
University
Date: 07 January 2018.
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Executive Summary
In the given assignment, a report needs to be prepared on the changes that have been introduced by
the accounting boards and committees all over the world to improve the quality of reporting and
thereby auditing of the financials. The report specifically discusses on the changes in auditor reporting
brought upon by IFRS Board post 15th December 2016. These also include introduction of a couple of
accounting standards which have been discussed along with the benefits like how they contribute to the
better reporting and its transparency. Its impact on the listed companies and how the same is being
used by the different auditors has also been discussed.
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Contents
Introduction.................................................................................................................................................4
Analysis........................................................................................................................................................4
ASA 701: Key Audit Matters om auditors reports and its impact............................................................4
Other new audit reporting rules..............................................................................................................5
Key audit matters: Use and how to identify............................................................................................8
Areas of KAM...........................................................................................................................................8
Early adopters of auditors' reports..........................................................................................................9
Conclusion.................................................................................................................................................13
References.................................................................................................................................................14
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Introduction
In the recent past, various accounting standards have been introduced and many accounting reforms
have also been introduced to improve the quality of reporting by the management of the company and
also to improve the level and quality of auditing by the auditors so that the transparency of the financial
statements can be improved. These include more stress on the corporate governance so that the users
are well informed of the company practices, enhanced disclosure norms and better presentation
techniques (Alexander, 2016). The same has been discussed in the analysis section of the assignment
using the Annual report of one of the companies which was the early adopters of all these changes,
Telstra Limited.
Telstra is one of the widely known telecommunication companies in Australia and deals in setting up and
operating telecommunication networks, internets, mobile network, voice and other entertainment
products and services. It is listed on the Australian Stock Exchange and is now fully privatised employing
more than 36000 employees (Belton, 2017).
Analysis
ASA 701: Key Audit Matters om auditors reports and its impact
Among the changes that were introduced post 15th December 2016, the most eminent were ASA 701
which discusses on communicating key audit matters in the independent auditors report. This further
includes reporting of the crucial and material matters to those charged with governance and disclosing
the material misstatements and significant risks , if any in accordance with ASA 315. Also, the ASA
focuses on disclosing the significant management decisions, judgements and estiamtes, if any with
respect to the accounting treatment and policies (Bizfluent, 2017). It also focuses on mentioning the
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significant events and transactions that occure between the period of financial year closure and the roll
out of the annual report. This will help the investors to be informed of the latest details about the
company and thereby help them in taking informed decisions. The committee has alos clarified the
point that highlighting the key audit matters is not a substitute for expressing a modified opinion in case
the financial statements are not being able to meet the minimum standards. However, few exceptions
have been given where the auditor need not report the key audit matters in the auditor’s report, some
of them include those prohibited by law or regulation or those which can be in adverse public interest.
There is a great change in the scope of the audit which focuses on both the qualitative as well as
quantitative aspect such a relative magnitude, nature and effect of the audit report on users (Chron,
2017). The definition of the key audit matters as mentioned in the standard has been shown below:
Other new audit reporting rules
ASA 705 requires the auditor to mention the reason for giving out an adverse or qualified opinion on the
financial statements and its brief description which will help the user to understand the intended users
to understand and identify such circumstances when it may occur. Separating this communication in th
auditors report from the key audit matter gives more prominence and importance to the audot report,
thereby clarifying that both of these are separate issues and the auditor will be required to report key
audit matters even if the auditor gives the adverse or qualified opinion (DeZoort & Harrison, 2016).
ASA 706 which has also been introduced during this period establishes additional mechanisms for the
auditors to include in the audit report “emphasis on matter paragraph and Other relevant matters
paragraph” whevever it considers the same necessary. The standard mentions this to be different from
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the key audit matters. The standard also gives a note and mentions the areas which require the specific
attention of the auditors like the risk based areas and identifying the chances of the material
misstatements in the financial reports. The planning and performance of the audit procedures should be
done based on the assessed risk of material misstatement in a particular class of accounts or
transactions and the same needs to be defined at the assesrtion level only (Dichev, 2017). The standard
also requires the auditors to focus on the complex and areas where the management has applied some
judgements and estimations.
The AASB has also brought about changes in the leasing standard AASB 16. Effective in the coming
period, most of the companies would have to report the operating leases on the Balance Sheet. This has
brought about a major change as earlier a lot of companies which were having all its working capital and
assets/ property in the form of the operating leases did not show the liability in the balance sheet but
ideally it is a part of the loan. Now the standard has done away with all the differences uin between the
operating leases and the financial leases and now the company will have to report the opeartibg leases
as well in the financial statements. This will bring a major change in the reporting for the different
companies as now the companies which were being casted as debt free in the balance shetet will now
be heavily loaded with the debt (Félix, 2017). This will not only ensure better transparency of the
accounts but also will let the users of financial statements know about the company’s lease
commitments, the true gearing ratio and the debt liability. The lessor accounting as per AASB 117 will
largely be unchanged. Due to the above changes, a great deal of financial and operational challenges are
expected to come in way besides the financial reporting and therefore auditors need to have a check on
the internal controls of the companies, their leasing judgements, the basis, debt covenants, credit
ratings, impairment testing, etc. The auditors will also get an opportunity to check the IT systems and
whether or not they are efficient enough for the companies to capture the above changes.
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Besides introduction of the new standard ASA 701, necessary amendments were also carried out in
many accounting standards to ensure that all that is necessary are reported to those charged with
governance like the directors, the key managements personnels and so on (Heminway, 2017). All this
was aimed at increasing the communicating power of the auditor’s report and hence the changes were
introduced to make the users well informed of most of the aspects and share as much infimration as it is
possible and viable. This approach of AUASB is more in line with the approach of International Standards
of Auditing Board which most of the companies are following. These changes have been termed as
revolutionary as it will bring about a massive change in the investors point of view as well as other
stakeholders (Jones, 2017).
Some of the other changes to the existing accounting standards include ASA 700 as per which the
format of the audit report has been changed bringing the audit opinion to the front page to make it
more concise and understandable and thereby enhancing the qualitative characteristics of the financial
statements. ASA 570 which deals with the Going concern concept has now to be reported in the audit
report wherever there is uncertainity over going concern of the company. It also states whaat are the
changes in the work effort required to check on the going concern assumption of the client. Auditors can
also now include in the audit report any work conducted on any other information of the company in
one of the separate sections (Visinescu, et al., 2017). The Auditors responsibilities have also undergone
some change mentioning which specific standards needs to be compulsorily followed and enhanced
description of the responsibilities.
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Key audit matters: Use and how to identify
Discussing on the key audit matters, the objective of the same is to ensure greater transparency of the
audit performed and accounting standards which were being used in checking and mitigating the risks. It
also aims to provide that information of the users of financial statements where the auditors
independent professional judgement has been involved in the current period. The next question is how
to identify the key audit issues? The same has also been mentioned as auditor will identify the key audit
findungs and discuss the same with the Audit committee and those charged with governance out of
which few topics or areas will be selected as those which require “significant auditor attention” (Kuhn &
Morris, 2016). This are areas which pose a risk or for which the auditor has not been able to find the
sufficient audit evidences or where the auditor is finding it difficult to form an opinion in absence of
conlusive evidences. All these matters are generally rare situations where there is huge complexity
involved and thereby complex auditor and management judgements. These are then to be reported in
the auditors report.
Areas of KAM
Some of common areas of KAM and auditors focus include:
1. Going concern
2. Risks of Impairment
3. Revenue Recognition
4. Legal, regulatory and taxation affairs
5. Weaknesses in the internal control having impact on the other areas
6. Acquisition and disposal of investments
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Early adopters of auditors' reports
Some of the companies which were the early adopters in this regard include QBE, Cochlear Limited, ASX
Limited, EDI Downer and Telstra. Few of the extracts of the annual report, 2016 of Telstra has been
shown below to evidentiate the same.
From the above extract, it can be seen that the auditor E&Y has given a clear opinion on the financial
statements of Telstra Corporation Limited as on 30th June 2016 but also included the basis of opinion
paragraph in order to make it clear to the users of the financial statements and the stakeholders as to
which new standards have been used while auditing, what are auditors responsibilities in regard to the
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financials, and they are independent and have followed the ethical code of conduct while auditing. They
has also include a separate paragraph for key audit matters which was was the change introduced post
15th December 2016 (Knechel & Salterio, 2016). It says what were the key matters involved, how they
were being identified and how they were being addressed in forming the audit opinion and giving a
reasonable assurance to the users that the accounts are free fro material misstatements. Some
examples of key audit matters include revenue recognition, reliance being placed by the management
on the automated controls and processes, impairment of the goodwill and the intangibles, employee
retirements and employee benefits, etc like shown below.
The auditor mentions that in order to overcome thses risks, test of control and test of designs of the
internal control were being checked and operating effectiveness of the IT system was also being tested.
Furthermore, to ensure that the calculations of the impairment was satisfactory, teh auditors also
employed the use of EY valuation experts to check the reasonableness of the key assumptions. The team
also made use of the actuarial experts to check where the external valuation of retirement benefits of
the employees is satisfactory and good to go ahead (Sithole, et al., 2017).
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Besides the above, the company also introduced one more change to its audit report in the form of
“Other information” which states that apart from the financial information, other information has also
been disclosed for which the directors are responsible and the auditors do not express any opinion
thereof.
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Conclusion
From the above discussion and analysis of the key changes brought in by IAASB including the
introduction of the new standards and revision of the existing ones, it has made the reporting process
and the audit more transparent and revealing. The annual report is no more a summary of just the
financial information of the company but also a disclosure and the complete summary of what are the
internal controls being practiced by company, what are the material misstatements and key audit
matters that the auditor worked upon, etc. This in in line with international standards and helps the
investors and other stakeholders to be more informed and thereby having clarity in thoughts and
insights. This has also contributed towards enhancing the qualitative characteristics of the financial
statements like understandability, comparability and timeliness.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud
within organization. Journal of Business Ethics, pp. 1-18.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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