Enhanced Auditor’s Reporting: Evaluating Key Audit Matters
Auditor Independence
The idea behind emphasizing the need of an enhanced Auditor’s reporting came to IAASB in the year 2016, though many other countries across the globe had adopted the same long back before its recommendation by the IAASB. Like the UK have had similar requirements in place since 2013, but after its recommendation by the IAASB it attracted the attention of various other countries which committed to adopt the same in future and this process of adoption is still going on(Alexander, 2016). Our research work is primarily focused on the evaluation of the fact whether the annual report of the company being chosen meet the purpose of enhanced auditor’s report by incorporating the key audit matters or not.
An Auditor is said to be independent when his or her expressed opinion is free from any influence from any party directly or indirectly having vested financial interest in the affairs of the entity for which the audit opinion is given. The principle of integrity along with the objectivity to make the correct professional judgment is needed to express an independent view by the auditor.
In our case the statutory Auditor of Adelaide Brighton limited is PWC clearly acknowledged that to the best of their knowledge and belief that there has not been any breach of the Section 307C of the Corporation Act, 2001 in relation to Auditor independence requirement found and non contravention of professional code of conduct has been observed to ensure the Auditor independence requirement(Arnott, et al., 2017).
The Company has availed the non audit services of other assurance activities from the PWC, an Australian Firm in a way to be compatible with the general standard of independence of auditor’s as imposed by corporation act,2001.(Belton, 2017). The remuneration paid/payable to the PWC for the non-audit services provided to them has been separately disclosed under the head remuneration to Auditor in (Refer note no 31, Page no. 114 of the Annual report of the company).
|
Particulars |
2016 $ |
2017 $ |
Increase (+)/Decrease (_) |
Percentage (+/-) |
|
(a) Audit services Review of financial statements by PricewaterhouseCoopers Australian firm Audit and |
748359 |
855313 |
+ 106954 |
14.29% |
|
b) Non-audit services PricewaterhouseCoopers Australian firm Other assurance services |
40949 |
20550 |
-20399 |
-49.81% |
|
Total |
789308 |
875863 |
86555 |
+10.96% |
The above table clearly reflects that though there has been an increase of 14.29% in the remuneration for the Audit services provided, but at the same time there has been a sharp decline of 49.81% in the amount of remuneration received by PWC for the non audit services they have provided and the group resulting into an overall increase of only 10.96% in the amount of remuneration paid/payable to the Audit Firm(Choy, 2018). Again the reduction in the amount of remuneration received against the non-audit services by the Audit firm is the reflection of the fact that auditor’s independence has not been impaired.
International Standards on Auditing (ISA 701) prescribes the incorporation of key audit matters (KAM) in an independent auditor’s report. KAM are the matters based on the auditor’s professional judgment to be informed to those charged with the governance of the entity, which are summarized hereunder.
During the year the group identified the discrepancies in form of being underpaid for the products supplied by it which accounts for impaired amount of accounts receivable of $17.1 million being subsequently included in the category of bad debts in the aforesaid period through the process of an external expert engagement reflecting the higher risk of material misstatement(Das, 2017).
Evaluation of Key Audit Matters
The procedure adopted to deal with the matter included to get satisfied with the fact that expert’s opinion can be used for the purpose of audit by evaluating his Competency, objectives and the results of the work done by the expert involving the test of control. The procedure further performed to directly obtain the confirmation of outstanding balances from certain selected customers and those from whom no communication in response to the request for confirmation received, the proof of product delivery along with the subsequent cash received against such delivery involving the procedure of testing of balances(Farmer, 2018).
The group formulated a model to assess the certainty of the realisation of the goodwill and plant and equipment so that the correct carrying amount of these assets being represented by the financial statement(Goldmann, 2016). Considering the significance of the recorded values of goodwill and plant and equipment together with the judgments and assumptions used to prepare a discounted cash flow model by the group make it a key audit matter.
The issue is dealt with by performing the analytical procedure to evaluate the process of developing the model of discounted cash flows by comparing the the Board approved budget with the 2018 forecast figures in the models and for the the discounted rates and growth rate assumptions performed the sensitivity analysis of along with the substantive tests of detail by checking that previous year’s budgets were materially consistent with the actual performance to ensure the reliability of the forecasts made by the group(Grenier, 2017).
The key to the estimation of the rehabilitation provision demands significant judgment to assess the correct future costs along with the rehabilitation requirements. The rehabilitation provisions were made for two types of sites, first category being those which were actively remediated and second being those were not actively remediated(Jefferson, 2017) .The provisions for the first was represented by costs for completion of the current stage rehabilitation and estimated cost for future stages of rehabilitation, while second figure of provision involved the process of cost estimation annualy by operational staff. Future estimation costs require the use of cost inflation and discounted rates.
For dealing the above matter the detailed analytical procedure was adopted by checking that based on our knowledge of group’s operation provision which is in respect to the sites which are in need of rehabilation,reviewing agreements of new lease contracts, reviewing minutes of meeting, and engaging in discussion with management . Again the substantive tests of detail were performed where material change to normal costs was noticed from the previous period.
The fair value of assets and liabilities acquired by the group to be ascertained as per the Australian Accounting Standards that demanded the significant judgment for which independent valuation experts were engaged by the firm(Jefferson, 2017).
For this the Audit firm applied the substantive tests of detail by where the individual valuation experts have been recognised group experts and the evaluation for the for each individual expert valuer’s method, competency and objectivity was done.
As the raw material and work in progress were kept in the inventory for quite a long period, hence ensuring the correct measurement of their quantity became a key audit factor for which independent surveyor’s were appointed by the group to perform the volumetric surveys in order to serve the above purpose(Sithole, et al., 2017).
For this the Audit firm applied the substantive tests of detail by treating the individual valuation experts as group experts and the evaluation of each individual expert value’s method, competency and objectivity was done,performing detailed substantive tests through obtaining and inspecting results ofthe survey results for material stockpiled in various inventory locations reperforming conversion of the quantities of the group.
Yes Adelaide Brighton Limited has had an Audit, Risk and Compliance Committee in place. Graeme Pettigrew is the Chairman of the Audit, Risk and compliance committee that consists of four non-executive directors naming Mr. Graeme Pettigrew (Chairman), Mr. Les Hosking, Ms. Arlene Tansey and Mr. Zlatko Todorcevski. Yes there is an Audit Committee charter for the Company(Trieu, 2017).
The Audit opinion given in the instant case is an unqualified one, which clearly states that the financial statement for the year ending 31st December, 2018 provides a true and fair view of the financial position of the group complying with the provisions of the corporation Act, 2001, Australian Accounting standard and corporation regulations, 2001.
Director’s responsibility to the financial report includes preparation of financial statement as per the Corporations Act 2001 and Australian Accounting Standards and implementation of an effective system of internal control so as to provide assurance about the true and fair view of the financial position of the entity by eliminating the probability of fraud, error or material misstatement in such financial statement together with the determination of ability of the entity to continue as a going concern with the assistance of a realistic assumption(Werner, 2017).
Auditor’s responsibility is confined to express his opinion with a reasonable assurance on the financial statement prepared by the management of the organization whether it is free from fraud, error or material misstatement, but his opinion on such financial statement cannot be guaranteed to the fact that the audit performed as per the Australian Accounting standards will be able to indicate all of the significant material misstatement found if any.
None of the events or matter or circumstance were noticed since 31 December 2017 that has significantly affected, or may significantly affect the operations of the Group, those (Erik & Jan, 2017) .
As an interested third party stakeholder, make an assessment of the effectiveness of the material information reported by the Auditor in your conclusion.
In case of the Annual report of the Adelaide Brighton Limited certain other important relevant material information like, Sustainability Report , Managing Director and CEO Report, Chairman’s Report Finance Report, Financial History, and Corporate Governance Statement, Performance Summary, Information for Shareholders,Map and Review of Operations other than the Director’s Report and Diversity Report were not made available to the Audit firm PWC and this was clearly mentioned in the auditor’s report that somewhere provided a wide area of thought to the prospective stakeholders to make an effective decision making. Hence effectiveness of this report has somewhere been distorted to a great extent.
Material information which could be missing, under-reported and/or not fully explained or disclosed in an effective way for the intended users.
The material information which were found absolutely missing in this Annual report were like, Sustainability Report , Managing Director and CEO Report, Chairman’s Report Finance Report, Financial History, and Corporate Governance Statement, Performance Summary, Information for Shareholders,Map and Review of Operations and missing of the above referred reports may have significant effect on the disclosure of the significant material information or providing audit assurance without sufficient documentary additional evidence supporting the same(Kim, et al., 2017).
The following set of follow-up questions may be asked to the auditor’s at the Annual general meeting.
- Whether sufficient appropriate efforts were made by the Audit firm to ensure the receipt of other information that may have significant contribution to disclose any material misstatement hidden in the financial affairs of the Adelaide Brighton Limited. If not, then what were the factors that prevented them from taking such steps?
- Has the Group disclosed the information about the transactions with other parties who enjoy transaction terms that are not available to independent third parties? Has the significance of these types of transaction, if any, been clearly reported and explained?
Conclusion:
The above study and analysis of the Annual report of the Adelaide Brighton limited that the dedication and commitment of the Audit firm, PWC towards meeting the reporting requirements in relation the Audit Report as per the Corporation Act and Australian Accounting standards has been clearly reflected so that to serve the decision making of the direct and indirect stakeholders associated with the above referred company and the group with the tool of enhanced Auditor’s reporting.
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