ASA 701 and Key Audit Matters: A Comparative Analysis Report

This report provides an analysis of ASA 701, Communicating Key Audit Matters in the Independent Auditor Report, examining its significance and application within the energy industry. The report begins with an executive summary and table of contents, followed by an introduction to ASA 701, emphasizing its role in enhancing audit report transparency and informing stakeholders about crucial financial aspects. The analysis section focuses on two key companies in the Australian energy industry: AGL Energy Limited and Origin Energy. For each company, the report details key audit matters identified in their audit reports, such as unbilled revenue, unbilled distribution costs, and financial instruments for AGL Energy, and carrying value of financial assets, accounting of derivatives, unbilled revenue, and unbilled network expense for Origin Energy. The analysis includes the audit methods employed by the auditors to address these matters, highlighting the importance of these issues for stakeholders. The report concludes with recommendations, referencing relevant literature, and providing a comprehensive overview of the practical application of ASA 701 in the context of the selected industry and companies.

Accounting
Assignment

By student name
Professor
University
Date: 30TH April 2019.
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Executive Summary
In this assignment we discuss a very important auditing standard, ASA 701
Communicating Key Audit Matters in the Independent Auditor Report. It states those
matters that are of significance to the company and shows how they affect the
financial position, about which the stakeholders must be informed. It is the
responsibility of the auditors to analyze the books of the company and give their
opinion on the key matters affecting the company. In this assignment a brief
analysis of the standard with relation to few companies have been given.
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Table of Contents
Executive Summary................................................................................................... 2
Introduction................................................................................................................ 4
Analysis...................................................................................................................... 4
AGL Energy Limited................................................................................................. 5
Origin Energy.......................................................................................................... 6
Conclusion and Recommendation..............................................................................8
References................................................................................................................. 9
1.
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Introduction
ASA 701, Communicating Key Audit Matters in the Independent Auditor Report is a
very important auditing standard that has been effective since January 2015. It aims
to make the audit report more transparent and requires the auditors to make their
comments on any key matters that they think are significant to the company. It
makes it mandatory for the auditors to state the key matters in the audit of listed
companies and it depends upon the auditors if they think any matter is significant
or not (Boghossian, 2017). The auditor needs to take into consideration the high-risk
areas, and include significant judgement based on those areas and consider the
effect of any significant event or transaction and in case they find anything of that
significance they need to show the same in their overall audit report. They need to
show what steps have they taken to analyze these key matters and how have the
management dealt with the same in their financial statements. It is important that
proper documentation with relation to the key audit matters is done in the audit
report. It is done to increase the awareness among the stakeholders and draw their
attention to any such matter that might be important for them to know to take any
key decision with respect to the company. It helps in increasing audit report
transparency, it is also important since so many people are not having very good
knowledge about accounting and thus having some key matters stated separately
helps to draw their attention and make them aware about the issues that they
might have to go through if they invest in the company. In the given assignment we
shall further review the overall application of the stated auditing standard with
respect to the selected industry and the companies in that industry (Borit & Olsen,
2012). The overall audit report of those companies shall be reviewed to find if the
auditors have stated the key audit matters that they found of significant importance
and what steps have they taken to review those key audit matters and how have
they shown the same in their audit report. The industry that has been selected for
further analysis is the Energy Industry in Australia and the key companies of the
given industry includes AGL Energy Limited and Origin Energy Limited.
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Analysis
The energy industry has been selected for this assignment analysis. The following
companies and the key matters stated in the audit report are stated here under.
AGL Energy Limited
AGL Energy Limited is an Australian listed public company and in involved in various
process that includes both generation and retailing of electricity and gas for
commercial and residential use. The company generates energy from power
stations that makes use of thermal power, natural gas, solar energy, gas storage
and coal etc. The company has many commercial and business customers across
the globe and it is having large investment of gas and electricity and it is Australia’s
largest private owner and developer of renewable energy assets. In the given case
we shall analyze the audit report of the company to see the key audit matters that
are reported by the auditors (Freeman, et al., 2004).
The financial statements of the stated company have been analyzed by Deloitte and
have presented the same in their audit report
1.Unbilled Revenue – It is seen that $938million unbilled revenue was disclosed by
the company in notes and it was seen that this was the value of the gas and
electricity that was supplied by the company between the date of the last bill
reading and the current date. Thus, we see that this is an important material that is
having significant effect on the overall revenue of the company. The auditor has
thus included the same in their key audit matters. The auditor has also mentioned
that the company has used significant methods to ascertain the unearned revenue
and that has been checked by the auditor. The audit methods that has been applied
includes understanding the overall controls applied, understanding and challenging
the management assumption by comparing the current data to historical data and
applying the necessary judgement as and when required through samples check
(Iggers, 2018). The auditor also took help from data analytics expert to understand
how the amount related to unearned revenue has been calculated and comparing
the independent calculation to the entities estimates.
Unbilled Distribution Cost
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As seen in the above case of revenue, the company also calculates the cost of
distribution of energy and electricity between the bill date and the last date of
reading the meter. Different financial models are used by the company to
determine these amounts and in the process the company applies their own
judgement. In the current year the company is having, unbilled distribution cost
totaling to $412 million. The auditor has verified the same and applied their own
audit methods that includes obtaining understanding of the overall flow of controls,
understanding the nature of assumption that has been applied by the management,
and then checking the overall unbilled cost through sample checks and doing their
own independent estimation of the cost by taking help from the experts. These
checks help us in understanding that the management estimates are correct or not
and in case there is significant difference then that is also verified by the company.
The auditor also compared the calculated individual distributor cost with that of the
historical cost of the company (Johan, 2018). The appropriateness of the notes of
account given by the company are also verified by the auditors. Thus, we see that
this is an important matter for the stakeholder, as such high cost will affect the
overall profit that the company will earn and thus this is an important matter and
the auditor did a good job by stating the same in their audit report (Truong, et al.,
2008).
Financial Instruments – The company has entered various financial instruments and
that are inclusive of the derivative financial instruments. The total derivative
financial assets in this year totaled $640 million and the total derivative financial
liability was $615 million, thus we see that these are very high amounts and thus it
was important for the auditor to access in case there are any risks are associated in
their overall valuation. The management has put significant judgement in the
overall valuation of these assets and the overall accounting for these financial
instruments includes understanding the terms of the contract, forecasting the future
pay prices and the overall application of the discount rates. The auditor applied
audit methods like obtaining knowledge of the various internal controls, obtaining
knowledge about the terms of the overall contract, evaluating the integrity of the
derivative models, assessing the incorporation of the contract terms (Kaufmann,
2017). Thus, we see that the auditors have applied significant judgement in
understanding the overall terms of the contract and they also reviewed the notes to
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account that has been provided by the company in their annual financial
statements.
Origin Energy
Origin Energy came into operation in 2000. The company is an Australia Listed
Company that has been in operation since two decades. The overall operations of
the company are headquartered in Australia. The company has a very diverse
exploration process, which includes exploration of the gas reserves. The auditor of
the company is KPMG, and the auditor have stated key significant matters in the
auditor report (Vieira, et al., 2017). The auditor has taken into consideration the
various key audit matters and have also stated the various steps that they have
taken to verify these key audit matters and have given their recommendation based
on that. Various KAM have been identified by the auditors in case of the given
company-
1. Carrying value of the financial assets - The recoverability of the carrying
value of the APLNG equity accounted investment and exploration asset has
been considered as the key audit matter in case of the given company. There
are various reasons that has been identified behind the same as the overall
fluctuations in the commodity prices, historical cost adjustments, estimating
forecasts etc. The auditor has verified the correctness of the assumptions of
the management in this matter through various audit methods that includes
accessing the accuracy of the previous cash flow statement of the company,
taking help from the valuation specialists to check the measure of the oil and
gas price assumption, future exchange rate assumption, the CGUs exchange
rates etc (Kusnadi & Wei, 2017). Checking the overall correctness of the
controls that have been applied by the management of the company. The
overall evaluation of the internal actions and estimates done by the company
has also been taken into consideration.
2. Accounting of derivative - It is a very important accounting matter for the
assessment of the derivative financial assets, the company has applied its
own judgement for the overall valuation of the financial instruments that it
has applied. The company has also provided the required disclosures in the
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notes to accounts of the company, these disclosures are more prone to errors
then system generated calculations. The auditor has also verified the
authenticity of the same and provided necessary audit methods that they
have taken to check whether the books of the company are showing the
correct financial position or not. It involves understanding the controls that
have been applied by the management of the company, understanding the
key areas in which there might be any chances of risk, taking help from
valuation specialist to do their own independent calculation and then
comparing their results with that of the company (Norberg, 2018).
3. Unbilled revenue- This is an important measure, as unbilled revenue has a
major effect on the overall financial position of the company. These occur as
there is the difference between the date when the revenue is recorded to the
date when the meter is read. The management has its own set of procedures
that they apply to determine the overall unbilled revenue. The overall
process is very complex, and thus it is a key audit matter for the company
and the auditor have applied their own audit methods to check the
correctness of the same. The key audit methods include, understanding the
controls applied by the management, understanding the methods applied by
the management of the company, understanding what are the areas in which
there are chances the company might fail to take part. Thus, we see that
there is a lot of complexity that is involved with the calculation of the unbilled
revenue and determination of the same has a very heavy effect on the
overall financial position and thus it is a key audit matter.
4. Unbilled network expense- There is a lot of estimation uncertainty that is
involved in calculation of the unbilled network expense. It is an important
item as the overall impact on the financial position of the company is huge as
the cost involved is mostly a lot and so the companies need to see that the
cost is properly accounted for. They key factors affecting the valuation of the
same will include understanding the overall demand of the customer, the
level of demand. The auditor verifies the authenticity of the same by verifying
the overall accuracy of the historical estimates made by the company with
the current estimates (Stacey, 2018). The auditor also tests the volume of
wholesale energy that has been purchased by the group, along with that it
also verifies the unbilled network bill accruals. Thus, we see that there is a lot
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of methods that the auditor adopts to form their opinion on the key audit
matters that has been stated by them (Wellmer, 2018).
Conclusion and Recommendation
Based on the overall study that has been given hereunder, the auditor has done its
work very effectively, all the matters that has been stated is of key importance
somewhere and affects the overall financial position of the company in some way or
the other. If the company does not have mention of the same in their annual
reports, then the stakeholders will not have knowledge about the company. Thus,
the reference to key audit matters in the audit reports helps in providing accurate
information to the investors and helps them in understanding what are the areas in
which they need to put more focus. In case they fail to present these key audit
matters then the auditors will be held guilty for their overall actions, they will be
penalized for not following a key auditing principle, thus we see that how important
this auditing standard is as it helps the stakeholder and along with that it helps the
management also in effective decision making (Wendt, 2018). The auditors
presented all the information in the best ways possible and have included all the
key audit matters that they thought were significant to the company in some way or
the other. They also remarked on the overall going concern aspect of the company
and commented on the correctness of the same. Thus, we see that they did follow
the auditing standard properly.
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References
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Freeman, R., Wicks, A. & Parmar, B., 2004. Stakeholder Theory and “The Corporate
Objective Revisited”. Organization Science, 15(3), pp. 22-28.
Iggers, J., 2018. Good News, Bad News: Journalism Ethics And The Public Interest.
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Added And Return On Cost Of Capital In Measuring Corporate Performance. Jurnal
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Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New
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Kusnadi, Y. & Wei, K., 2017. The equity-financing channel, the catering channel, and
corporate investment: International evidence. Journal of Corporate Finance, Volume
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Norberg, P., 2018. Bankers Bashing Back: Amoral CSR Justifications. Journal of
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Stacey, T., 2018. Myth and Solidarity in the Modern World: Beyond Religious and
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Truong, G., Partington, G. & Peat, M., 2008. Cost-of-Capital Estimation and Capital-
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Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance
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Wellmer, A., 2018. The Persistence of Modernity: Aesthetics, Ethics and
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Wendt, K., 2018. Positive Impact Investing: A Sustainable Bridge between Strategy,
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