HI6026 Audit Assurance And Compliance

Introduction: 

Manufacturer and designer of hearing implants, Cochlear Limited is the leader in manufacturing and supplying hearing implants all across the planet. In fact more than two third of the hearing implant market is under the control of the company. Based in Sydney, Australia the company has its shares listed in the ASX. The latest annual report available of the company shall be used to conduct an independent verification of the audit work performed by the auditors in respect to the company.

Declaration of independence by the auditor: 

Firstly it is essential to know that KPMG is the external auditor of Cochlear Limited responsible to conduct an independent verification of the financial information of the company. As per the provision of section 366 of the Corporation Act, 2001 an auditor must make a declaration of independence at the beginning of the independent audit report. An auditor must be independent in order to conduct an audit as per the requirements of the act (Nicoll, 2016).

KPMG, the audit firm of the company, has made a declaration of independence at the beginning of the audit report as per the requirements section 307C of the Corporations Act, 2001. In the declaration, the firm has claimed that it has not contravened any of the requirements of independence during, before or after auditing (Stewart, Kent & Routledge, 2015).

Independent Auditor’s Report: 

Australian Standards on Auditing (ASAs) are the premier standards that must be followed by an auditor whenever conducting an audit of an entity operating in the country. As per ASA 700 an auditor must issue an independent audit report to express his opinion on the financial information audited by him. The independent auditor’s report must contain opinion on the financial information, key audit matter, the basis of such opinion, the audit procedures conducted by the auditor to collect necessary evidence to come to a particular conclusion about the financial information (Ferguson, Pinnuck & Skinner, 2016).

KPMG has expressed an unqualified opinion on the financial reports of Cochlear Limited after verifying this information during the course of the audit. The key audit matters as per the audit report are enumerated below.

Key Audit Matters (KAM): 

As per the auditor of the company the following matters have been the KAM in the audit of the company.

Ability of the company to recover trade receivables: The Company has huge amount of business and since most of the customers of the company are institutional customers thus, the company has to supply its implants on credit terms. The huge amount of trade receivables obviously is a hugely important factor to the determination of financial performance as well as the position. Thus, the ability of the company to recover trade receivables on time is of huge significance as per the professional judgment of the auditor (LAMBEKOVA, NURGALIEVA, SYZDYKOVA, ZHANIBEKOVA & Josef, 2018). The company as per the latest annual report has $299.1 million in trade receivables. Hence, rightfully the auditor has used substantive audit procedures on the item to verify the correctness of trade receivables and the recoverability of the balance.      

In order to verify recoverability of trade receivables the auditor has used substantive audit procedures as following on the item:

1. Key controls within the credit processing department have been tested to evaluate the effectiveness of these controls.
2. Sample outstanding balance from receivable accounts have been tested to assess the recoverability of these balances.

Warranty provision:

The company has made a warranty provisions of $39.8 million in the year ending on June 30, 2018. Considering the significance of the amount the auditor has correctly identified the item as KAM and accordingly, has conducted substantive testing on the amount (Bell, Causholli & nechel, 2015).

The substantive audit procedures for the above KAM include the following:

1. The products manufactured and designed by the company are all different from each other. The auditor has evaluated the portfolio of different products to identify different terms and conditions associated for warranty provisions for such product.  
2. The history of failure rates have been assessed to determine the possibility of failure in the latest financial year.

• The calculation model used by the entity has been tested for integrity (Wahab, Gist & Majid, 2014).

1. The assumptions used by entity have been challenged to assess whether these are practical or not.

Services performed by the auditor which are not in the nature of audit services:       

The Corporations Act, 2001 allows an auditor to provide non-audit services of certain nature without compromising with the requirements of independence of the auditor. Except book keeping services, management services, services in relation to internal controls and securities, and other services that are the subject matter of an independent audit all other services are allowed to be performed by an auditor (DeFond & Zhang, 2014).    

KMPG has provided non-audit services of following in nature to Cochlear Limited:

Consultancy services on matters related to general tax and GST: In order to help the company to comply with the provisions of Income Tax Assessment Act, 1997 KPMG has advised the company (Klassen, Lisowsky & Mescall, 2015).

Consultancy services on matters related to information and technology: KPMG has also helped the company to improve its ability to deal with information technology matters.

Due diligence: The audit firm has conducted due diligence on behalf of the company to help the company to decide whether to acquire a business or not.

Service in nature of advice: Apart from that the audit firm has also provided other advisory service to the company (De Simone, Ege & Stomberg, 2014).

Auditor’s remuneration:

The auditor’s remuneration as per the annual report 2018 of the company is provided in the table below. The difference in auditor’s remuneration in 2018 from 2017 can be seen in the table below, both in actual change in monetary value as well as change in percentage.   

The auditor’s remuneration in total has decreased in 2018 from 2017. In 2018 the auditor’s remuneration in total is $3,733,747 whereas the company paid in total of $3,756,393 as auditor’s remuneration in 2017. The reason for the decrease in overall audit report as that the extent of non-audit services performed by KMPG in 2018 has reduced from the extent of such services in 2017. The major two components in non-audit services that the company has used significantly less are taxation compliance matters and due diligence services (Louwers, Ramsay, Sinason, Strawser & Thibodeau, 2015).

Audit Committee: 

As per Audit Committee Charter of the company, Cochlear Limited has an audit committee that consisted of 4 non-executive directors. As per the charter the audit committee has the following roles and responsibilities:

It is the responsibility of the audit committee to held regular meetings of the committee to discuss the methods and steps to be taken to improve the quality of financial reporting of the company (Kowaleski, Mayhew & Tegeler, 2018).

To hold meetings and discussions with internal auditors to find new and better internal controls and securities for the company.

To recommend the Board of directors of the company new and better ways to improve the operating efficiencies of the company (Choong & Leung, 2015).

To ensure that the books of accounts are prepared in accordance with the AASBs.

To help the external auditors in conducting independent audit of the financial information. Providing all necessary support to the independent auditor to help the auditor to conduct an effectively.

As already mentioned that the whole audit committee of the company is only consisted of non-executive directors. Thus, not even a single member of the audit committee is executive director (Dogui, Boiral & Heras?Saizarbitoria, 2014).

Audit opinion:

As per the independent auditor’s report of the company the financial statements of the company have been prepared in accordance with the requirements of Corporations Act, 2001 and accounting standards issued by the Australian Accounting Standards Board (AASBs). Thus, the auditor has expressed unqualified opinion on the financial reports of the company. According to the auditor the financial reports reflect the true and fair picture of the company as at the end of June 30, 2018. An unqualified opinion enhances the confidence of the users of financial statements on the financial reports of the company (Eze, 2016).

Differences between responsibilities of management, Board of directors and auditors:

An organization has two human agencies to conduct the affairs of the organization on regular basis. One of the human agencies is Board of directors and management of the company whereas the other human agency is its shareholders. The Board of directors and management have the huge responsibility of running the affairs of the organization on a day to day basis with the objective of achieving better financial performance (Inaam & Khamoussi, 2016). Apart from that the Board of directors and management is also responsible to prepare the books of accounts and financial statements of an organization.

An independent auditor on the other hand is not a stakeholder of an entity. It is the auditor who has the responsibility to verify the financial reports of the company as well as books of accounts of the company prepared under the supervision and leadership of Board of directors and the management. Hence, there is a contrasting difference between the responsibilities of Board and Auditors. The auditor is an independent appraiser of the work performed by the Board and management in regards to the organization (Abbott, Daugherty, Parker & Peters, 2016).

Subsequent events:

AASBs mentions the importance of reporting subsequent events in the financial statements since these event provides additional information to the users of financial statements. Such information is helpful to the users of financial information. In case of Cochlear Limited, the only subsequent event that has occurred between the date of financial statements and the date of the auditor’s report is the declaration and payment of dividend. The company has declared dividend for the year ended on 30^th June, 2018 and paid the same during the period between June 30^th, 2018 and the date of annual report on the financial statements of the company (Dennis, Dickins, Earley, Nolder & Schaefer, 2018).  

Assessment of information provided in the audit report from the perspective of third part stakeholder:

An independent auditor’s report help the uses of financial statements to understand whether these have been prepared in accordance with the applicable accounting standards and accounting principles. The expression of opinion of the auditor on financial information helps the stakeholders of an organization to determine the extent of reliance that they can place on such financial information. External stakeholders mostly have no other sources of information apart from financial statements accompanies by annual report of the company to evaluate the financial state and performance of an entity. Thus, auditor’s report provides an independent verification of these statements is extremely important to the uses of these statements. Hence, it is important that audit report contains all material information to help the users of financial statements to take important decisions in relation to the company (Chen, He, Ma & Stice, 2016).

The independent audit report of Cochlear Limited by KPMG contains all material information as required by ASA 700 and s307C of the Corporations Act, 2001. There is no information that has not been provided in the audit report of the company as required by the act. However, this from the perspective of ASA 700 and requirements of s307C but taking futuristic approach there can be number of things that can still be included in the independent audit report of the company.

Considering that the users of financial reports are mainly looking to take important decisions affecting their interests in the future thus, inclusion of future assessment report as part of the audit report would help the users of financial information to take correct decision in the future. Since, no such information is provided in audit report of Cochlear as it is still not required as per the Corporations Act, 2001. However, a serious consideration should be given on including future assessment report for the users of financial information (Abad, Sánchez?Ballesta & Yagüe, 2017).

Follow up question: 

Why not the auditor considers including assessment of future expected performance and growth of the company as reported in the annual report of the company?

Conclusion: 

A clear distinction has been made on the responsibilities of auditors and management and Board of directors of an organization. An independent appraisal of audit of Cochlear Limited makes it clear that the KPMG has conducted the audit in accordance with the requirements of Corporations Act, 2001 and auditing standards applicable in the country. The auditor has complied with the requirements of independence clause as provided in the act. The auditor has expressed an unqualified opinion on the financial reports after conducting the audit in accordance with applicable auditing standards.  

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