The Control and Accountability of Government Corporations Assignment Sample

• Subject Name : Accounting and Finance

Auditing Research

Executive Summary of The Control and Accountability of Government Corporations

The company selected for this audit research is Telstra Corporation Limited. It is regarded as the leading telecommunications and technology companies in Australia that offers a wide range of communications services and carries out its operations in the rapidly changing environment. It has been analysed that the overall nature of the organization comprising of its governance and ownership structures, operations and the financial framework must be examined in order to get understanding about the classes of transactions, disclosures and account balances expected to be mentioned in the financial report. In Telstra, it has been estimated that every year, due to NBN rollouts, the earnings of the company are affected by approximately $2 billion to $3 billion unfavourably. There is a potential risk of material misstatement in the migration to NBN for Telstra with regard to the estimation made in the Executive Variable Remuneration Plan. The revenue recognition and its measurement with regard to NBN contracts require a significant amount of judgement of management and may likely to involve cut off issues with regard to the period attributable towards receipts from NBN.

Table of Contents

Executive Summary.

Introduction.

Areas of higher assessed risk of material misstatement

Migration of Telstra to NBN..

Decline in revenue and alteration in revenue recognition policies.

Implementation of impairment rules for financial assets for first time.

Raise in commitments of capital due to rollout of national 5G..

Areas in the financial report that involve significant management judgement

Conclusion.

References.

Introduction to The Control and Accountability of Government Corporations

Auditing Standard ASA 315 is concerned with the identification and evaluation of the risks of material misstatement by gaining appropriate understanding of the environment in which the entity is carrying out its operations (AASB 2015). This standard particularly applies to the audit of financial report as per the Corporations Act 2001. The auditor is required to perform several risk assessment procedures in order to provide a basis for effective identification and evaluation of risks at the assertion levels. These procedures may include enquiries of management, observation, inspection and analytical procedures. It is considered relevant for an auditor to acquire knowledge about the industry in which the organization is working, external and various regulatory factors that may affect its operations and performance. The complete nature of the organization comprising of its governance and ownership structures, operations and the financial framework must be examined in order to get understanding about the classes of transactions, disclosures and account balances expected to be mentioned in the financial report. Telstra Corporation Limited has been selected for the research and the areas of high assessed risk of material misstatements will be examined (ASX List 2020). It is regarded as the one of the leading telecommunications and technology companies in Australia that offers a wide range of communications services and compete effectively in the telecommunications markets. It carries out its operations in the rapidly changing environment (Telstra 2020). However, because of the raising complexities in the international reporting frameworks, Telstra is facing several types of audit risks and key events that may led to material misstatements in the firm.

Areas of Higher Assessed Risk of Material Misstatement

Migration of Telstra to NBN

The ACCC (Australian Competition and Consumer Commission) has given approval to the NBN migration plan that has been proposed by Telstra via the process of ITO (In Train Order). However, various adjustments in the plan related to Executive Variable Plan has been undertaken because of this proposed transaction. These adjustments are considered to have a net effect amounting to $295 million on the financial outcomes for the year 2017 in the positive side. In 2018, however, the net profit of the company has dropped by 8.9% (Annual report 2019). Some proportion of this decrease is also because of the decrease in average revenue generated by company per user. Moreover, it has also been estimated that every year, due to NBN, the earnings of the company are affected by approximately $2 billion to $3 billion unfavourably. These types of adjustments will continue to affect the financial results of the company in future period as well (Campbell 2019). The standard AASB related to share based payments becomes active in this kind of situation (Qu et al. 2018). The estimated amount that must be recorded as an expense in relation to variable pay cannot be reliably measured. There is a potential risk of material misstatement in the migration to NBN for Telstra with regard to the estimation made in the Executive Variable Remuneration Plan (Ng 2019). This may lead to a significant risk to the money related figure presented for net income as EBITDA is influenced directly by this. In the given scenario, the most relevant audit objective and the possible misstatement is accuracy. This can be regarded as the most adequate audit objective as the probable misstatement is directly influencing the income statement of the corporation.

Decline in Revenue and Alteration in Revenue Recognition Policies

There is decline in the total income of Telstra by 4.1% because of NBN rollout. The net profit after tax has been decreased by 27.4 % and EBITDA by 16.4 % in the financial year 2018. However, it has been found that in the same financial year, the revenue has fallen by only 1.7%. Also, it has claimed by the company in the same year that it has adopted new accounting procedures and policies when it has been asked for the revenue recognition. Every corporation is required to provide each and every information related to revenue that has been disaggregated according to AASB 15. This information must be material as well as consistent. However, this standard has been adopted by Telstra two years back. The past or old policies and procedures have been replaced with the new one. Due to all this, there is a potential risk that the corporation might have undertaken various errors while applying this standard either unintentionally or intentionally. There are chances that the reported amount of revenue is inaccurate. The audit objective specifying this event is accuracy. As the standard AASB 15 has been applied for the very first time, there are chances that unintentionally, the errors might take place that may influence the accuracy of the figures to the great extent. The financial performance may also get affected if there is material temperament to the accuracy. There is another possibility that all the transactions are not mentioned in the income statement due to which decrease in the revenue is observed.

Implementation of Impairment Rules for Financial Assets for First Time

Telstra Corporation Limited has implemented the major requirements with regard to impairment of new financial assets on a prospective basis effectively from 1^st July 2018. This impairment model is in accordance with AASB 9 related to financial instruments. With regard to this, the allowance holdings of Telstra have shown an increment as now, the Telstra has to make effective allowances even for the expected credit losses (Annual report 2019). The company has used the exemptions that are mentioned in that particular standard and has opted for not mentioning the restatements that are observed in the comparative periods with regard to the addition while applying the standard. Telstra made a declaration to undertake expectation regarding alterations in the amount of retained earnings on the lower side because of the formation of huge amount of probable credit losses. The corporation is now required to create an allowance of probable credit losses related to impairment of financial assets in accordance to the requirements mentioned in paragraph 5.5 of AASB 9 meant for financial instruments. The mentioned requirements are applicable to the organization on the basis of its nature (Ciro and Terzioglu 2018). As the company has implemented the impairment model in 2018 for the first time, there are chances that the company has made various mistakes in estimation that have been required for probable credit losses. This is leading to the risk of material misstatements. The relevant audit objective in the given scenario is valuation. A lot of estimation with regard to future events is required to create expected credit losses. There is high chance that Telstra has made mistakes while making the accurate estimates about the same. Due to this, the amount of retained earnings would have been affected as the balances of expected credit loss are reduced from the amount of retained earnings.

Raise in Commitments of Capital Due to Rollout of National 5G

Telstra Corporation Limited given the commitment to the customers that it will provide the 5 G data speed. The corporation has already made commitment to provide support to the national 5 G rollout by undertaking an investment of $386 million. The corporation has already made plans to organize over 1000 cells in smaller sizes in the areas of metros to bring an enhancement in the capacity (Fisher et al. 2020). For 5 G connections, the company has declared ‘soon – to – be – availability’. The capital commitments of the corporations have been raised by $315 million due to the announcement made in the news with regard to the investment in the national 5 G rollout. Under AASB 137 related to provisions, contingent liabilities and contingent assets, the corporation is under obligation to make adequate recognition for them and apply appropriate base of measurement of contingent assets, contingent liabilities and provisions (Wang 2019). The organization is required to disclose the nature timing and amount for three of them sufficiently as applicable on the organization. In the provided case scenario, the corporation has only mentioned the amount of probable capital commitment. The information with regard to the likely timing of the same have not been particularly mentioned by the corporation. This creates a chance of probable material misstatement with regard to the amount reflected for the commitments of capital. Just mentioning of very less details suggest that there are high chances of inaccuracy or error in such amount. The mentioned scenario is concerned with the audit objective of valuation. Estimation is involved and that too is based on several uncertain circumstances. There is high chance that the figure that has been imparted to the commitment of capital is inaccurate.

Areas in The Financial Report that Involve Significant Management Judgement

Inherent risk is considered as the vulnerability of account balance or set of transactions that may lead to material misstatements under the assumption that there are no linked internal controls. This risk varies from one corporation to another depending on various factors like nature and complications in business activities, unusual and large transactions, alterations in operating industry, history of frauds and errors, restructuring of corporation, etc. (Cannon and Bedard 2017). The environment in which Telstra carries out its operations is evolving continuously and changing at a rapid pace. This makes it necessary to have an effective framework at the right place in order to determine, evaluate, control and monitor the material risks that can be faced by the organization. in this section, all the inherent risks will be examined that may influence Telstra including any material experience related to environmental, economic and social sustainability risks.

• Rollout of NBN network – The influence of the NBN network rollout and the extreme competition in the industry acts as a major risk for Telstra. This may reduce the capability and the capacity to produce income in the future time period as NBN will be the net wholesale provider of fixed broadband services in Australia (Campbell and Milner 2019). This type of change will have an important influence on its operating activities at large. The contracts of NBN involves payments to Telstra. The revenue that may generate from such contracts are uncertain and is based on the number of subscribers. The revenue recognition and its measurement with regard to NBN contracts require a significant amount of judgement of management and may likely to involve cut off issues with regard to the period attributable towards receipts from NBN. Thus, Telstra Corporation Limited has the inherent risk with regard to the revenue and expenses of NBN contracts.
• Restructuring expenses – It is considered essential for Telstra Corporation Limited to be imperative in attracting, developing and retaining the workforce that is capable in delivering the goals and objectives. The second inherent risk is concerned with problem of restricting the corporation as NBN is taking over the whole business related to fixed broadband (Barry 2018). Telstra is required to lay off some proportion of its workforce that have become obsolete because of changes in the operating system of the company. The expenses with regard to restructuring are substantial and may subject to misstatement due to fraud and therefore, the auditor is required to examine the restructuring expenses to establish their completeness, accuracy and cut off period.
• Large impairments – The third risk is concerned with the large amortization, depreciation and impairments costs that may generally involve high level of estimation by the management (Robinson 2020). Above and beyond, the corporation has written down its legacy IT assets leading to impairment cost of nearly half a billion Australian dollars.

Conclusion on The Control and Accountability of Government Corporations

After critically reviewing the annual report of Telstra Corporation Limited, it can be concluded that the corporation is required to strengthen its internal control system and the audit procedure followed in the organization in order to lower down the chances of material misstatements in its financial report. There is also a high inherent risk present in the financial statements of the company because of raising international reporting. It has been found that there is decline in the total income of Telstra by 4.1% because of NBN rollout. The net profit after tax has been decreased by 27.4 % and EBITDA by 16.4 % in the financial year 2018. However, it has been found that in the same financial year, the revenue has fallen by only 1.7%. There is a potential risk of material misstatement in the migration to NBN for Telstra with regard to the estimation made in the Executive Variable Remuneration Plan. This may lead to a significant risk to the money related figure presented for net income as EBITDA is influenced directly by this. Moreover, it could be inferred that the revenue recognition and its measurement with regard to NBN contracts require a significant amount of judgement of management and may likely to involve cut off issues with regard to the period attributable towards receipts from NBN. Thus, Telstra Corporation Limited has the inherent risk with regard to the revenue and expenses of NBN contracts.

References for The Control and Accountability of Government Corporations

AASB. 2015. Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. [Online]. Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf [Accessed on: 11^th September 2020].

Annual Report. 2019. Telstra. [Online]. Available at: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/2019-Annual-Report.PDF [Accessed on: 11^th September 2020].

ASX List. 2019. ASX100 list. [Online]. Available at: https://www.asx100list.com/ [Accessed on: 11^th September 2020].

Barry, T.S. 2018. Australian broadband regulation reviewed. Australian Journal of Telecommunications and the Digital Economy, 6(1), pp.134-155.

Campbell, L.H. and Milner, M. 2019. The NBN futures forum: Discussing the future ownership of Australia's National Broadband Network. Journal of Telecommunications and the Digital Economy, 7(3), p.1.

Campbell, L.H. 2019. The NBN futures forum: Realising the user potential of the NBN. Journal of Telecommunications and the Digital Economy, 7(4), p.1.

Cannon, N.H. and Bedard, J.C. 2017. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), pp.81-114.

Ciro, T. and Terzioglu, B. 2018. Disclosures and Reporting of Financial Derivatives: Evidence from Australia’s S&P/ASX 50 Listed Firms. Journal of banking and finance law and practice, 29(2), pp.92-108.

Fisher, M., Freeman, T., Schram, A., Baum, F. and Friel, S. 2020. Implementing policy on next-generation broadband networks and implications for equity of access to high speed broadband: A case study of Australia's NBN. Telecommunications Policy, p.101911.

Ng, Y.F. 2019. In the Moonlight: The Control and Accountability of Government Corporations in Australia. Melb. UL Rev., 43, p.303.

Qu, X., Percy, M., Stewart, J. and Hu, F. 2018. Executive stock option vesting conditions, corporate governance and CEO attributes: evidence from Australia. Accounting & Finance, 58(2), pp.503-533.

Telstra. 2020. Our Company. [Online]. Available at: https://www.telstra.com.au/aboutus/our-company [Accessed on: 11^th September 2020].

Wang, X. 2019. Compliance Over Time by Australian Firms with IFRS Disclosure Requirements. Australian Accounting Review, 29(4), pp.679-691.

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