Audit Planning Memorandum TCL and WGL | Key Risk Areas and Primary Audit Procedures
Executive Summary
This report is presented as a means to obtain an initial understanding of two renowned clients of our firm, namely Telstra Corporation Ltd and Woolworths Group Ltd. The audit of financial statements for the period ended June 30, 2019 is due to begin early next month, and as a part of auditors responsibility to obtain an understanding of the audit client’s business, environment and internal controls surrounding it, this report seeks to identify areas that should be major concern or comfort for the engagement teams of both the audits. The report briefly presents inherent risks identified in both the clients, presents a brief analytical review procedure performed at planning stage and suggests audit procedures to overcome or reduce to an appropriate level the identified audit risk. The report ends with discussing the legal and ethical issues surrounding the expression of opinion on the financial statements.
TO: The Engagement Partner
FROM: Mr. XYZ – Audit team lead of TCL and WGL
DATE: July 15, 2019
SUBJECT: Audit Planning Memorandum – Key Risk Areas and Primary Audit Procedures
Dear Sir,
Audit deliverables of Telstra Corporation Ltd (“TCL”) and Woolworths Group Ltd (“WGL”) are due for submission before the Board of Directors of the Companies on August 31, 2019. Recognizing that we have limited time available to conduct the audit of financial statements for the year ended June 30, 2019, the audit team under my supervision has drafted this report to highlight the key risk areas in both of these clients, as well as identified the controls that are most relevant and the audit procedures that would enable the engagement to be executed, performed and finalized in the most efficient manner. The purpose is to achieve effectiveness and efficiency of reporting in both engagements while making sure Australian Standards on Auditing (ASAs) are correctly followed.
Inherent risk identification
TCL
Telstra Corporation Limited is a telecom company that provides various types of telephone and internet services. TCL is one of the Australia’s leading telecommunications and technology company and has vast telecommunication network and presence in over 20 companies globally. Following risks are inherent in its operations (Telstra, 2019).
- (i) During the year the company implemented the first-time adoption of the new revenue recognition standard AASB 15 Revenue from Contracts with Customers. Revenue for the period under audit is estimated at $25.259 million. The new standard requires estimation of standalone price for each performance obligation, which would make its adoption somewhat tricky for TCL as it offers various bundles to its customer which contain various services offered as a single package. Adoption of new standard is a one-off event and poses risk that company’s control may not be adequately recording the revenue transactions.
- (ii) Goodwill and other intangible assets amounting to $7.2 million are recorded in the accounts. Since telecom companies operate through licenses and other arrangements, it would be necessary to identify the recoverable amount of these assets by estimating future revenues. High estimation uncertainty makes this head prone to misstatement due to errors (IAS 38, 2018).
- The group includes various subsidiaries and the preparation of consolidated accounts of the group requires elimination of intercompany transactions and other inherently risky and complex adjustments as per AASB 10 – Consolidated Financial Statements (AASB, 2018). There is an inherent risk in these adjustments.
WGL
Operating over 3000 stores operating in the global marketplace as of today, WGL continues to be one of the leading players in the Australia’s retail market. With a reported revenue of $59,984 million, it is second largest company in Australia in terms of its revenue which is mostly driven by the retail business (with famous brands like Woolworths, BIGW, countdown and BWS) as well as liquor takeaway retail business. The company also has hotel and gaming poker business (Woolworths Group, 2019). Following inherent risks are identified:
- (i) Retail businesses often have a problem of receivables against credit sales not being honored and WGL is no exception. The new standard AASB 9 Financial Instruments (AASB, 2018) requires impairment testing of receivables to identify if any write off is required and its requirements are applicable on WGL.
- (ii) In retail businesses there is always a risk of write down certain inventories that are obsolete, damaged or slow-moving. This risk is often insured by the retail businesses and it would be interesting to see how WGL mitigates this risk and to what extent it is reflected in its financial statements.
- Finally, the group operates through various wholly owned subsidiaries. As stated earlier, there is an inherent risk that consolidate procedures as per AASB 10 are not appropriately applied (AASB, 2018).
Audit procedures in response to inherent risks identified
TCL
- (i) Detailed testing of the revenue is not possible for such a large number of transactions in telecom industry (IAASB, 2018). Therefore, the audit strategy should be to perform extensive control testing over the systems that record revenue including assessing whether the Company utilizes any information system and relies on its results, what are the benefits and whether any exceptions are identified during the year. Walkthrough tests should also be performed to check how AASB 15 recognition criteria is satisfied.
- (ii) Ensure that goodwill recorded on acquisition of business and intangible assets with indefinite useful life are tested for impairment annual in accordance with the requirements of IAS 36 Impairment of Assets. More specifically there is an impending need to identify the cash generating units (CGUs) to which goodwill is allocated, and separately assess the recoverable amount for these CGUs. Experts assistance may be called for if required.
- Obtaining a complete schedule of intercompany transactions / investments and independently reperforming the consolidation procedures required by AASB 10. Intercompany balances.
WGL
- (i) Generally, a bigger team with greater number of personnel having higher level of skills and experience is required to perform the audit of WGL as it is a large-sized entity and an industry giant.
- (ii) Evaluating the aging schedule of debtors to identify any long outstanding and overdue debts. Further, circularize positive debtor confirmations to obtain external and more persuasive evidence about their outstanding balances.
- Obtain evidence as to valuation assertion in inventory balances at year end, and completeness assertion in provision for obsolescence by reading minutes of meetings of BOD for any quality control issues and evaluating the adequacy of provision required. 4. Analytical review of the financial statements with the purpose of identifying areas of concern or comfort
Telstra – Analytical Reviews
|
|
|
2019 |
2018 |
% change |
% of total |
|
Trade and other receivables |
5,392 |
5,588 |
-3.5% |
13% |
|
|
Inventories |
448 |
492 |
-8.9% |
1% |
|
|
Derivative financial assets |
179 |
75 |
138.7% |
0% |
|
|
Assets classified as held for sale |
121 |
0 |
100.0% |
0% |
|
|
Property, plant and equipment |
|
22,332 |
22108 |
1.0% |
52% |
|
Intangible assets |
|
7,210 |
7922 |
-9.0% |
17% |
|
Total Assets |
42,589 |
42732 |
-0.3% |
100% |
|
|
Trade and other payables |
|
4,528 |
4528 |
0.0% |
16% |
|
Borrowings |
1,657 |
1532 |
8.2% |
6% |
|
|
Contract liabilities and other revenue received in advance |
2,222 |
1635 |
35.9% |
8% |
|
|
Long term Borrowings |
15,031 |
15316 |
-1.9% |
54% |
|
|
Total liabilities |
28,059 |
28104 |
-0.2% |
100% |
|
|
|
|
2019 |
2018 |
% change |
% of revenue |
|
Revenue |
25,259 |
25,848 |
-2.3% |
100% |
|
|
Labour expense |
|
5,279 |
5,207 |
1.4% |
21% |
|
Goods and services purchased |
|
9,138 |
8,338 |
9.6% |
36% |
|
Other expenses |
5,234 |
4,887 |
7.1% |
21% |
|
|
Depreciation and amortisation |
4,282 |
4,470 |
-4.2% |
17% |
|
|
Finance costs |
|
868 |
806 |
7.7% |
3% |
|
Income tax expense |
923 |
1,582 |
-41.7% |
4% |
|
|
PBT |
3,072 |
5,139 |
-40.2% |
12% |
|
(Telstra, 2019)
Areas of concern
- Intangible assets have shown a reduction of 9% during the current year which represents a significant decrease. Moreover, these assets constitute about 17% of the total assets and hence material to the financial statements as a whole.
- Profit and loss line item titled “Good and services purchased” represents the direct prime cost of providing services and has increased by over 10% when compared with the last year. This is a significant increase and has caused the gross profit margin of the company to go down from 47.6% to 42.92%. Since this expense represents over 36% of the total revenue of the company, it is also highly material to the financial statements as a whole and therefore needs significant audit consideration.
- There is a huge disconnect between finance costs and long-term borrowings. Finance costs have increased by 7.7% during the year despite long term borrowing increasing by only about 2%.
Areas of comfort
- Property, plant and equipment which are the fixed costs of the company have only increased by 1% during the year. This little movement could possibly be reconciled form opening balance to closing balance by accounting for additions, disposals and depreciation during the year. Since we have comfort over the opening balance TCL being a continuing audit client. Detailed testing of only movement could provide the assurance level required.
- Trade and other payables have remained exactly same at $4,528 million throughout the year. A further detailed analytical reviewed followed with some subsequent test would be sufficient.
- Labor expense has only shown a minimal 1.4% change in contrast with the last year. This could be reconciled with increase in staff salaries due to inflationary factors, incoming and outgoing employees and other factors that could be explained by the management of the Company.
