Telstra limited is the market leader in the Australian telecommunication industry, and this report will be based on the annual report of this company for the financial year 2018. In this report, there are three requirements under, which different aspect of Telstra Limited will be discussed. The first requirement of the report is to identify the items, which show characteristics of material misstatement. This identifying of items will be done through the analytical procedure of the financial report of the company. The analytical procedure of the financial report will include the simple comparisons and ratio analysis. The second requirement of the report is to check the result of the analytical procedure and determine the areas which includes the high inherent risk of material misstatement. The topic, which will be discussed, will include the different aspect of the board of directors of the company like their integrity or experiences. The third requirement of the report is to identify the items, which have a high level of risk of material misstatement in their account balance and different aspects of them like key assertion validation or substantive procedure for auditing these items account balances or internal control that can be used to mitigate the risk of material misstatement. Overall the material misstatement of the financial report of the mentioned company will be discussed.
Apply analytical procedures (simple comparisons and ratio analysis) to the financial report information of your company for the last three financial years. Explain how the results of your analytical procedures would influence your audit planning decisions for the audit for the last financial year.
From the analytical procedure of the simple comparison of the income statement, the items, which are found to in need of investigation are other income and finance income of the income statement. There is high fluctuation in finance income of the financial year 2018 from the previous two years. There is also a trend of increase in the amount of other income in the total income of Telstra Limited., which is not a healthy situation for any companies as the business should get more income from its core business operation.
From the analytical procedure of simple comparison of the balance sheet of the three consecutive years, the items, which are found to be in need of investigation, are cash and cash equivalent and prepayment. There are trends of decrease in the amount of cash and cash equivalent and increase in the amount of prepayment asset. The investigation is conducted to see that the reason for Telstra limited for decreasing its cash and cash equivalent amount and increasing the prepayment amount as these two changes are negatively affecting the liquidity of the total asset of the company, which is not a good condition for any business.
From the analytical procedure of ratio analysis of company of the three consecutive years, the ratio component, which will need to investigate is net profit margin, return on assets and quick ratio as their ratio is lower than the industry average.
These analytical procedures will affect your audit planning decisions for the audit for the last financial year, which is the financial year ending 30th June 2018 by making the items which are found to needing investigation will form the key auditing matters of the company and the audit planning decisions will mainly focus on these items. The items are selected in the analytical procedures by analysis their changes and performance with industry average and the industry average for this purpose has been taken from retuer.com. All these items and factors mentioned in the analytical procedures are important basis of the auditing planning.
Discuss fully your company’s inherent risk at the financial report level for the five factors discussed in Gay and Simnett (2015, page 253-254);
(a) Integrity of management (directors),
The integrity of the directors cannot be questioned as the majority of board of directors have high level of experience and lot of reputation in the industry and the analysis of the financial report do not show any fraudulent activities involving directors and there are independent directors overseeing the different committee progress. Therefore, the inherent risk in this aspect is low.
(b) Management (Director) experience, knowledge and changes during the period
Telstra limited board of directors consist of the following persons.
John P Mullen is the non executive director since July 2008 and chairman from 27th April 2016, and he has more than 26 years experience in the industry. Andrew R Penn is the chief executive officer and managing director of Telstra limited form the year 2015 in the month of May. He has experience of more than 40 years in the role of executive. Roy H Chestnutt is the non- executive director of the company from the current year 2018 in the month of May. He has more than 30 years of experience.
Peter R Hearl is a non-executive director from 15th August 2014. Therefore, having experience of more than four years in this company. He had also served in Yum! Brands Inc from 1997 to 2008, in senior executive roles and was president of Pizza Hut from the year 2002 to 2006. Also, the person had some experience in the PepsiCo and EXXON. Therefore, the total experience of Peter R Hearl is more than 21 years. Craig W Dunn is the non- executive director of the company from 12th April 2016. He has more than 20 years of experience in the industry related to the financial service. Jane Hemstritch is the non- executive director of Telstra limited form the 12th August 2016. She has around 27 years of experience in the industry with brands like Accenture and Andersen Consulting,
Russell A Higgins AO is the non-executive directors of the company appointed in September 2009 and has more than 14 years of experience in the industry. Nora L Scheinkestel is the non- executive director of Telstra limited from the year 2010 in the month of august, and she has more than 20 years of experience in the role of non- executive director. Margaret L Seale is the executive director of the company from the month of May of 2012 and has more experience of 25 years in the role of the executive in both overseas and Australian market.
Steven M Vamos was appointed as non-executive directors in the month of September of 2009 and more than 30 years of experience in the field of information technology. Trae Vassallo is the non executive directors form the year of 2015 in month of October. The recent of the board of director structure include the appointment of Roy H Chestnutt as non-executive directors of the company. The knowledge of the board of director is more than satisfying level and therefore, the inherent risk in this aspect is low of the business.
(c) Unusual pressure on management (directors)
The pressure level of the management is not more than what can be seen in the industry. The managements especially the director’s had to see to it that the all the rules and regulations are followed, and all the working processes are done with the compliance of all industry standards. The management also should have definite ideas about the short coming of the current working processes and work to remove it by making different strategies and policies as its remuneration and reputation are also depended on it. The inherent risk of this aspect is medium as the possibility of manipulation always there in any business.
(d) Nature of the entity’s business
The nature of Telstra Limited, which is a telecommunication services business, is dynamic as one innovation of any of the company in this industry can change the whole market situation of Telstra Limited. The companies in this industry need to investment appropriate amount in Research and Development of the product line. The nature of this industry also includes the fact that big companies dominate this industry as a high investment is needed in this industry and there is a high barrier to entry in this industry. Therefore, the inherent risk in this is high as this industry is volatile (Ey.com., 2018).
(e) Factors affecting the industry in which the entity operates.
The factors affecting the telecommunication services industry in which the entity operates are innovation, customer service, rules and regulation related to the telecommunication, level of competitions and effective pricing. The main factors influencing the performance of this business are innovation and customer services as all the companies of this industry are trying to simplify their process for customer benefit and making their processes more effective and attractive for the customers by a different strategy. The main strategy of Telstra Limited is to make their business unit unique to increase their efficiency and simplify their business process for customer empowerment. Also, Telstra Limited is also trying to effective pricing strategy by effective management of portfolio and cost reduction program. Telstra is the market leader in the telecommunication industry but the level of competition in this industry is very high as new entry or existing competition in the market can also lessen the market share of the company by giving new innovative more customer friendly services or offering more lower price of the same services of the company. Also, the influence of government rules and regulation plays a big role in this industry. As there is high level of pressure in this industry therefore, the risk of material misstatement is high in this aspect.
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