and investors are becoming more concern to the companies they invested in, this
report has studied the implications of the new auditing standard as how the
standard enhances and applies to the audit reporting. TPG Telecom Limited was
selected because the company has not adopted ASA 701 and communicated KAM (Key
Audit Matters) in the auditor’s report in 2016. Additionally, TPG is one of the
ASX Top 100 listed companies. For communicating KAM, the assessments on three
aspects such as significant risk of material misstatement, significant auditor
judgements and the effect on significant events were conducted to analyse the
potential issues or areas that required more attention. First of all, the
requirements of the new auditing standard as well as the purposes of the KAM
will be elaborating to allow users and readers to get familiar with the
standard to increase the efficiency of this newly adoption. In terms of
assessing risk of material misstatement and implementing professional
judgement, the importance of audit reporting that affecting various aspects of
different users is elaborated. Furthermore, according to the ASA 701, the newly
enhanced contents of auditor’s report were stated as well as two KAMs of the
company were identified (revenue recognition and carrying value of goodwill) to
indicate the transparency of the audited reports to increase the confidence of
users. Therefore, it is suggested that the regulating bodies should pay more
efforts to assist auditors on this new proposed KAM section which strengthens
the Theory of Inspired Confidence in order to bring more benefits to the users.
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adopted a new accounting standard which requires including a section “key audit
matters” in the auditor’s report. This standard is applied to listed companies.
This significant change of audit reporting has been implemented for many years
in other countries such as UK, however there is only introduced about two years
in Australia as ASX Limited is known one of the early adopters for this measure.
audit quality and audit reporting, various researches on this key topic have
been conducted for many years because audit quality is the fundamental and core
element in the audit market. If people lose confidence for the audited
materials, it means that the value of audit mission has gone. In the
perspective of regulating bodies, the trustworthy of financial reporting is
important to prove the reliability of the stock market’s operations. In order to restore the public perception of
audit quality, the transparency is critical when professionals are providing
their audit services to the public. Therefore, the report studies how new
accounting standard would help and modify the audit reporting of TPG Telecom
3.0 Company Profile
Limited (ASX: TPM) is providing a various range of communication services such
as nationwide ADSL2+, NBN, Fibre Optic and Ethernet broadband access, telephony
services, Internet Protocol Television (IPTV), SIM Only Mobile plans and
various business networking solutions to users (TPG, 2016). According to TPG
Annual Report 2016, there was a significant event which the Group completed its
acquisition of iiNet Limited (new subsidiary). This acquisition caused a
significant growth for both group consumer broadband and group mobile subscribers
(refer to figure 1) which also means that the revenue of the company has
significant increase after integrating of a new subsidiary, and thus the
complexity of revenue recognition might become higher. Besides that, the Group
was the winning bidder in the auction for spectrum in the 1800 MHz band (TPG, 2016).
This investment in spectrum is complimentary to the expansion of Group’s fibre
network in which can lead to the long-term benefits for the Group (TPG, 2016).
Significant Growth for both Group Consumer Broadband (left) and Group Mobile
4.0 New Auditing Standard ASA 701
According to ASA
701, key audit matters (KAM) were addressed in the auditor’s report based on
the professional judgement through the enhanced way of communication. The
enhancement of the communicative value for auditor’s report is the main purpose
to deal with in order to provide more transparent audit results (ASA 701, 2015).
Moreover, through the effective communication of KAM, users manage to understand
the significant matters and significant management judgement which resulted by professional
judgements with regards to the company in the current period (ASA 701, 2015).
When auditor is regulated or decides to communicate KAMs in the auditor’s
report, this new auditing standard is applied (ASA 701, 2015). However, according
to ASA 705, the communication of KAM is prohibited if an opinion is disclaimed by
auditor on the financial report except when the law or regulations requesting
to do so.
4.1 Determining Key Audit Matters
While determining KAM, those significant areas that
needed high attention should be included as the auditor should figure out the significant
risks or material misstatement, significant professional judgements that
involve high level of estimating uncertainty, and the effect on significant
events (ASA 701, 2015).
4.2 Communicating Key Audit Matters
Each identified key audit matter should be elaborated
clearly by the auditor under the heading “Key Audit Matters” (ASA 701, 2015).
Besides that, the definition of KAM, which is also known as introductory
language, should be stated in the beginning of this section as well (ASA 701, 2015).
According to ASA 315, significant risks are areas
that requiring special audit consideration and attention based on the professional
judgement. For instance, areas of significant management judgement and unusual
transactions may often be identified as significant risks (ASA 701, 2015).
5.0 Literature Reviews
5.1 Identifying and Assessing Risks of Material
As Georgiades (2016) stated that the risks of
material misstatement should be identified and assessed in the aspects of the classes
of transactions, account balances, and disclosures based on the financial
statement level and the relevant assertion level. It is necessary to consider
the relevant controls that relates to the risks as well as the level of likelihood
which can lead to a material misstatement (Georgiades, 2016). If there are
significant risks determined through risk assessment, special audit
consideration is required (Georgiades, 2016). Furthermore, significant risks
are likely to be occurred in the areas or unusual transactions that involve
accounting estimates (Georgiades, 2016).
Timothy and Joseph (2000) demonstrated several
significant risk factors that causing fraudulent financial reporting. In order
to deal with the weak internal control environment, more experienced personnel
should be utilised, the appropriateness to adopt significant accounting standards
should be investigated, as well as some adjustments for the audit procedures
should be made (Timothy and Joseph, 2000).
with Professional Judgements
Wedemeyer (2010) stated that auditor judgment is the
critical component in audit quality because the quality of auditor judgments directly
affecting the quality of audit. Moreover, it is also stated that the most
important judgment required to be made is the decision of whether to report the
specific audit on the financial statements being audited (Wedemeyer, 2010).
Since sufficient evidence is required to perform opinions, the decision above
involves a judgment as this might affect the opinions given by auditors (Wedemeyer,
Chis and Manoiu (2015) highlighted that professional
judgement is made based on the knowledge, skills and experience of auditors
when performing audit in all levels. And, professional judgement is vital to
provide reliable financial statements which are free of material misstatements (Chis
and Manoiu, 2015).
6.0 Application of New Auditing Standard
According to ASA
701, the structure of the TPG Telecom Limited’s auditor’s report should be modified
and expanded as below. And, two significant matters were identified based on
the company’s annual report and literature reviews.
Key audit matter
is defined as “those matters that, in the
auditor’s professional judgement, were of most significance in the audit of the
financial report for the current period. Key audit matters are selected from
matters communicated with those charged with governance” (ASA 701, 2015).
6.1 Structure of the Auditor’s Report
A comparison of contents and sequence after adopting
the new standard:
Auditor’s Report (2016)
Auditor’s Report (2017 and onwards)
on the financial report
on the audit of the Financial Report
Basis for opinion
responsibility for the financial report
of the Directors for the Financial Report
Report on the remuneration report
responsibilities for the audit of the Financial Report
on the Remuneration Report
6.2 Identify Key Audit Matters
Recognition (Refer to Note 4 Revenue)
As we can see from the annual report (Figure 2), the
major part of the revenue is relating to the various telecommunication service
plans provided, and therefore telecommunication services revenue should be
treated as a key audit matter (TPG, 2016). Moreover, the recognition of revenue
relying on the automated billing systems and multi-level sub systems as this is
increasing the complexity of audit. Furthermore, due to the frequent changes to
the pricing of plans in order to fit in the competitive conditions, audit data
points and the complexity for revenue recognition are rising to deal with
multiple price points as well as terms and conditions. Additionally, after the
integration with a new subsidiary, the revenue (figure 3) of the group has a
significant growth (from $1,270.6millions to $2,387.8millions) and thus it
becomes more complicated for the revenue recognition (TPG, 2016).
Figure 3: Total Revenue
for the Group – extracted from Annual Report 2016
(Refer to Note 12 Intangible Assets)
The carrying value of goodwill should be treated as
a key audit matter due to its largest size of asset which was $1,911.0million
(figure 4) (TPG, 2016). Besides that, the process to obtain the carrying value
is complicated and thus it requires high level of judgement. For recoverability
assessment, it involves the evaluation for each cash-generating-unit (CGU). CGU
is the allocation base for impairment tests (TPG, 2016). After the acquisition
of subsidiary, three CGU structure were formed for the Group (figure 5) (TPG,
2016). Significant judgements are required after the full integration of iiNet in
order to determine the CGU.
Figure 5: Three CGU
structure for the Group – extracted from Annual report 2016
According to the
Theory of Inspired Confidence (Limperg Institute, 1985), it is about the
auditors’ social responsibility as it has been treated as basic theory for
audit function. In some circumstances, information supplied from management
might have bias and thus an audit is required to process the information (Limperg
Institute, 1985). Besides that, this basic theory associates the social need of
reliable assessment over financial reports to the ability of audit functions (Limperg
Institute, 1985). When the demands of community change, there is a change
required for audit function as well (Limperg Institute, 1985). So, the new
proposed KAM section is considered as a result to the change of audit reporting
because it strengthens the Theory of Inspired Confidence (Limperg Institute,
1985). In term of restoring public confidence, it provides the relevant
information for users to analyse or evaluate whether there is bias existing for
the disclosed reports (Limperg Institute, 1985).
Based on the
research conducted by George and Melinda (2015),
the introduction of this new proposed KAM section is favourable, with more than
87% being in agreement (figure 6). However, there is still a small concern (21%)
whether the auditor judgement is appropriate enough to determine KAMs (George and Melinda, 2015). Moreover, this new section is
mainly applied in listed companies and yet it is recommended to become a
mandatory requirement for all audited companies to provide more relevant
information for intended users (George and Melinda, 2015).
Figure 6: This
table is showing those who agreed with the new proposed KAM section are greater
the adoption of this new auditing standard is beneficial to shareholders,
investors, public and other relevant users. The communication and linkage
between management and auditors would be enhanced and thus the internal control
would be improved to reduce the risks of material misstatement. Besides that,
more in-depth understanding about the company status such as Going Concern
would be achieved through the expanded and more detailed audit reporting. The
key implication of this newly developed standard is to improve the perceptions
of the auditor mission to the public to show that the audited financial
statement is reliable. In addition, the standardised language which used by the
auditors who have more knowledge about the company is not understandable for
the users, and therefore the need to change the audit report is not a new
necessity in order to increase the audit quality.