HI6026 - AGL Energy Limited: Audit Risk & ASX Governance Report

This report provides an overview of AGL Energy Limited's adherence to the Australian Securities Exchange (ASX) corporate governance principles and its risk assessment procedures. It examines how AGL Energy implements these principles, focusing on management oversight, board structure, et...Read More

Audit Assurance Compliance

Executive Summary
The report has been developed for providing an understanding of the corporate
governance principles developed by Australian Securities Exchange (ASX). Also, it provides an
analysis of the risk assessment procedures that should be used by the entities listed on ASX to
identify and mitigate the audit risk. The ASX listed entity selected for the purpose is AGL
Energy Limited, an Australian listed public entity involved in development and retailing of
electricity and gas for residential and commercial use. It has been assessed from the overall
report that AGL Energy Limited has developed and established corporate governance statement
in accordance with ASX principle and recommendations. Also, it has implemented effective
strategies for reducing the audit risk to ensure that materialistic information presented to the end-
users is reliable and accurate.

Contents
ASX Corporate Governance Principles.........................................................................................................4
Development of a Solid Framework for Management & Oversight.........................................................4
Maintaining an Effective Board Structuring to Add Value.......................................................................4
Ethical and Responsible Way of Acting....................................................................................................5
Presence of Integrity in Corporate Reporting..........................................................................................5
Timely & Balanced Disclosure..................................................................................................................5
Respect the Rights of Security Holders....................................................................................................6
Recognition and Management of Risk.....................................................................................................6
Fair & Responsible Remuneration...........................................................................................................6
Risk Assessment..........................................................................................................................................7
Nature of Entity.......................................................................................................................................7
Market Overview & Business Strategy.....................................................................................................7
Computation of Income Statement and Balance Sheet ratio..................................................................7
Audit Risk & Potential Steps Taken for Its Reduction..............................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

ASX Corporate Governance Principles
ASX has developed the corporate governance principles and recommendations that the
business entities listed on ASX need to comply for developing their corporate governance
statement. The analysis of the corporate governance statement of AGL Energy in accordance
with ASX rules is carried out as follows:
Development of a Solid Framework for Management & Oversight
As per ASX Corporate Governance Statement (CGS), the business corporations of
Australia listed on ASX need to develop the respective roles and responsibilities of the board and
management. AGL Energy Limited has established a solid framework for management and
Board as analyzed from its corporate governance statement. The role of Board is to be
responsible for the governance of the company and protecting the interests of the shareholders.
The major responsibility of Board is to develop and continually review the strategic direction,
business plan and budget of the long-term goals and objectives of the company. The Board has
assigned the role of the key management personnel (KMP) to monitor and regulate the daily
operational activities of the company. The performance of the Board is continually reviewed and
monitors through assessing the performance of its individual directors by the board itself in
support of an independent consultant. The review process sis carried out in support of the
director’s and members of the executive team of the Board. Board has also developed a
remuneration committee to asses the performance of the management people during the tie of
making decisions over their incentives and rewards (Fleckner and Hopt, 2013).
Maintaining an Effective Board Structuring to Add Value
The business entities listed on ASX need to develop an effective board structure having
diverse skills and competencies by appointing and recruiting a team of qualified personnel’s.
This is required so that Bard members possess high expertise to ensure that its roles and
responsibilities are carried out adequately. AGL Energy Limited has also maintained an adequate
board structure comprising eight non-executive directors, managing director and Chief Executive
Officer (CEO). The Board Skill Matrix provided in the corporate governance statement has
provided a detailed description of the necessary skills and expertise possessed by the Board

members to carry out its roles and responsibilities (2017 Corporate Governance Statement,
2017).
Ethical and Responsible Way of Acting
AGL has developed and established its sound and effective corporate governance policies
for ensuring that it carries out its business operations in an ethical and responsible way. Its code
of conduct has stated the responsibility of its directors, employees and contractors as per the
ethical standards of confidentiality, integrity and honesty. The company has developed an ethical
panel for overseeing the application of the Code of Conduct and ensures whether the operations
are carried out as per ethical guidelines. The employees are provided training as per the rules and
policies of Code of Conduct in their induction program. The company has also developed a
compliance management policy for ensuring that it carries out all its operations activities as per
the standard rules and regulations (2017 Corporate Governance Statement, 2017).
Presence of Integrity in Corporate Reporting
The business entities as per ASX rules also need to have a presence of rigorous process
for verifying and safeguarding the integrity in the corporate reporting. AGL Energy Limited
board holds the responsibility of approving the financial statements accuracy to the Board before
these are disclosed to the end-users. Board also provides assurance that the financial statements
are developed as per the accounting standards and the opinions are developed on the basis of
effective system of risk management and internal control (2017 Corporate Governance
Statement, 2017).
Timely & Balanced Disclosure
As per ASX principle, the company also places strong emphasis on providing timely and
relevant information to the stakeholders impacting the prices of its securities. The company has
established a Market Disclosure Committee who holds the responsibility for providing market
sensitive information to the ASX. In addition to this, it also makes disclosures about its financial
performance in the financial statements and non-financial information in the sustainability report
on an annual basis (2017 Corporate Governance Statement, 2017). Therefore, the company has
maintained appropriate procedures and policies to provide timely and balanced disclosure of
relevant information to the end-users for facilitating in decision-making (Bazley, Hancock and
Robinson, 2014).

Respect the Rights of Security Holders
ASX listed entities also need to protect the rights of security holders through providing
them all the appropriate information and authority to exercise there rights (ASX Corporate
Governance Council, 2014). The company has also developed Securities Dealing Policy
outlining the rights of the employees who may deal in the company securities. The policy has
implemented rules against the use of derivatives by directors, executives and employees to any
unvested securities. Also, it has developed an investor relation program for improving the
communication flow between the investors. The program is developed to provide information to
the shareholders about all the relevant information related to their issues or concerns. It conducts
investor briefings, asset tours and webcaster all the events that can impact the materialistic
information. It also regular conducts meeting with the shareholder representative bodies for
developing an understanding of the expectations of the market on important topics such as ESG
and remuneration (2017 Corporate Governance Statement, 2017).
Recognition and Management of Risk
The corporate governance statement developed by AGL also has described the nature of
its risk management. It faces wide variety of risks due to nature of its operations such as
economic, environmental, sustainability and financial risks. As such, the company has developed
and implemented an effective risk management framework that determines the role of different
personnel in regard to monitoring and controlling the risks. It has implemented risk management
principles in its strategy development process so that daily risk can be successfully managed and
controlled. The framework has also established risk management standard to provide guidelines
to the employees about the ways of conducting risk assessment so that the identified risk can be
mitigated properly (O'Donnell & Perkins, 2011).
Fair & Responsible Remuneration
ASX listed entities also need to maintain an adequate remuneration structure for
attracting, retaining and motivating high quality senior executives to align their interests with
value creation for security holders. The Board has developed and appointed a remuneration
committee working actively to provide fair remuneration to its senior executives (2017 Corporate
Governance Statement, 2017). The remuneration structure comprises of fixed and variable
remuneration part comprising of short term and long-term incentive plans (Plessis, McConvill
and Bagaric, 2005).

Risk Assessment
Auditors adopt the use of risk assessment procedures for analyzing the reliability of
financial information presented to them. This is important because the overall results from audit
of an entity depends whether the information provided is materialistic correct or not
(International Standard On Auditing 315, 2009). The Auditing and Assurance Standard Board
(AUSAB) has issued Auditing Standard ASA 520 to develop the analytical procedures for
improving the auditor efficiency through evaluating the nature of its operations, business
strategy, reliability of financial statements and the risk assessment process used by an entity to
identify and mitigate the financial risk (Putra, 2010). The risk assessment procedure that can be
used for identifying and controlling the audit risk in AGL Energy Limited can be described as
follows:
Nature of Entity
AGL is an Australian listed public company having ownership of large number of
shareholders who are mainly Australian investment companies. The company is listed on ASX
and has developed its corporate governance statement as per the standards and recommendations
of ASX. The financial transactions are carried out as per AASB and Corporations principles and
standards (AGL Energy Limited: Annual Report, 2017). It adopts AASB 124 in related party
disclosures such as KMP related party for defining the transactions involving transfer of
resources or services between the company and its related party (Auditing and Assurance
Standards Board, 2009).
Market Overview & Business Strategy
The company provides its gas and electricity services to about 3.6 million customers
across Australia. The strategic aim of the company is to meet the energy needs of people across
Australia through development of the country’s largest electricity generation portfolio (AGL
Energy Limited: Our Company. 2017).
Computation of Income Statement and Balance Sheet ratio
The company develops its common-size financial statement as per AASB and
Corporations Act 2001 accounting standards and regulations. The financial growth and condition
of the company can be assed through calculation of key income statement and balance sheet ratio
as follows:

Financial Data on AGL Energy
Particulars 2016 2017
Net profit -$ 407.00
$
539.00
Gross Profit $ 3,034.00 $ 3,167.00
Revenue $ 11,150.00 $ 12,359.00
Total Assets $ 14,604.00 $ 14,458.00
Long term Debts $ 3,067.00 $ 3,143.00
Shareholder's Equity $ 7,915.00 $ 7,574.00
Income Statement Ratios Formula
Net Profit Ratio Net Profit/Revenue -3.65% 4.36%
Gross Profit Ratio Gross Profit/ Revenue 27.21% 25.63%
Return on Assets Net Profit/Assets -2.79% 3.73%
Balance Sheet Ratios
Debt Equity Ratio Debt/Equity 0.39 0.41
Fixed Assets Turnover Revenue/Total Assets 0.76 0.85
Audit Risk & Potential Steps Taken for Its Reduction
The company ahs adopted a wide risk program as per the principles and requirements of
ISO 31000, providing international standards for risk management. The key risk factors that can
have a materialistic impact on the information presented and the mitigation actions taken for
them are described as follows:
 Asset Safety & Reliability: The Company need to effective manage its operational assets
so that they are bale to provide estimate future economic benefit. This can be ascertained
through implementation of health and safety plans to reduce the occurrence of any
emergency conditions that can destroy the assets.
 Optimization of Wholesale Energy Markets: It is necessary for the company to maintain
its competitive advantage in the energy sector and involves assessing the alternative

opportunities of obtaining gas supply such as LNG. It also involves advanced
management techniques in order to comply with the government regulations. The
company is placing continued focus on its gas contracting and transportation strategy to
meet the energy requirements of its customers continually (AGL Energy Limited: Annual
Report, 2017).
 Reputational Risk: The company operations can be largely impacted by the political and
economic uncertainty in the market that can have an impact on energy price to a large
extent. The company has to mange reputation risk by identification of the diverse
requirements of its stakeholders and promoting positive engagement with them. The
company as such has developed a public policy leadership for placing focus on the
engagement of stakeholders and meeting their requirements appropriately.
 Technical risk: The Company also needs to implement proper policies for data and IT
security management for protecting the data integrity. This is necessary so that
information presented to the auditors is confidential and protected through he use of
appropriate private polices. The company in this context has adopted a Data &
Information Governance policy for collection, management, storage and protection of
data integrity (AGL Energy Limited: Annual Report, 2017).
Conclusion
It can be said from the overall discussion held in the report that ASX listed entities need
to maintain an effective corporate governance and risk management structure for complying
effectively with the laws ad regulations of ASX. AGL Energy Limited has developed its
corporate governance statement as per the principle of ASX to ensure its sustainable growth and
development. It has also adopted an effective risk management procedure to identify the material
risk and development of consecutive mitigation plans for risk reduction.

References
2017 Corporate Governance Statement. (2017). AGL Energy Limited. Retrieved 26 April, 2018,
from https://www.agl.com.au/-/media/AGL/About-AGL/Documents/Who-We-Are/AGL-
2017-Corporate-Governance-Statement.PDF?
la=en&hash=7905AAC3A15D638CF7EF500483F9CDE3C8B2D7AC
AGL Energy Limited. (2017). Annual Report. Retrieved 26 April, 2018, from
https://www.agl.com.au/-/media/AGL/About-AGL/Documents/Media-Center/ASX-and-
Media-Releases/2017/170825-AGL-207-Annual-Report-ASX.pdf?
la=en&hash=013E1C115D580D678CA009DF3D256C8C511F655C
AGL Energy Limited. (2017). Our Company. Retrieved 26 April, 2018, from
https://www.agl.com.au/about-agl/who-we-are/our-company
ASX Corporate Governance Council. (2014). Retrieved 26 April, 2018, from
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf
Auditing and Assurance Standards Board. (2009). Auditing Standard ASA 520 Analytical
Procedures. Retrieved 26 April, 2018, from
http://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf
Bazley, M., Hancock, P. and Robinson, P. (2014). Contemporary Accounting PDF. Cengage
Learning Australia.
Fleckner, A. and Hopt, K. (2013). Comparative Corporate Governance: A Functional and
International Analysis. Cambridge University Press.
International Standard On Auditing 315. (2009). Retrieved 26 April, 2018, from
http://www.ifac.org/system/files/downloads/a017-2010-iaasb-handbook-isa-315.pdf
O'Donnell, Ed & Perkins, D. (2011). Assessing Risk with Analytical Procedures: Do
Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns? Auditing;
Sarasota 30 (4), pp. 273-283.
Plessis, J., McConvill, J. and Bagaric, M. (2005). Principles of Contemporary Corporate
Governance. Cambridge University Press.
Putra, L. (2010). The Use Of Analytical Procedures In Auditing. Retrieved 26 April, 2018, from
http://accounting-financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/