Key Audit Matters

Common Key Audit Matters (KAMs) included asset impairments, as shown in various company audit reports. Hutchison Telecommunications (Australia) Limited had network asset depreciation, which included significant operating costs. The acquisition costs of these assets were depreciable based on estimated useful lives. These results were reflected using the equity method of accounting, which represents our share of the joint venture’s net loss. In this case, the main audit issue was the useful life of grid assets (Azim, 2013). Observation of historical experience on the same property was guaranteed. In Iluka Resource Limited a review on the impairment indicators of the company’s properties and equipment showed that some of these cash generating units (CGUs) were idle. For this reason, the assets could not contribute to future cash flows. To be more certain, this impairment had a charge of 201 million dollars. This key audit matter was addressed by the audit through consideration of the basis for which these assets were separated from the cash generating assets and certified idle (Council, 2013). Their feasibility especially when deployed to mineral sands operations were observed. The assessment was conducted to determine whether there was asset impairment. Impairment indicators were evident in some assets especially the tangible ones.

The other key audit matter was fraud in revenue recognition. This was evident in Iluku Limited where the significant carrying value of the company’s non-current assets was subjected to certain assumptions and judgments to detect the impairment charges. To prove all the assertions it was necessary to consider the appropriateness of the inflation rates and discount rates utilized through the market consensus. Also, the accounting treatment was applied to the alterations in the rehabilitation provision. In the same company, measurement and recognition of deferred tax were a key audit matter since there was an important judgment as to whether there will be adequate taxable profit in the future to restore the outdo the existing tax losses. In response to the matter, the reconciliation of the carry forward tax losses was obtained. It was then found to be in consistency with the carry forward tax losses. In Collin Food Limited the carrying value of non-current assets was questioned (Azim, 2013). According to the management’s assessment, a fixed assets impairment of 1.2 million dollars was detected. Such a result was obtained following the company’s formal policy to set up a value-in-use calculation for all the assets.

In response to this matter, audit procedures in management review were conducted. The first procedure was evaluating the cash flow forecast in the systems of the various restaurants of the company. The other step was comparing the cash flow forecast and conducting a sensitivity analysis. The report in Ausdrill Limited reveals varying levels of profitability, which shows that the cash generating unit (CGU) was operating the expected cash flows. Therefore, there was the underutilization of the CGUs such as plants, equipment, and properties. The key audit matter in this case just like some of the above-mentioned cases is the impairment indicator. It shows that the value of the assets and the material impact had an influence on the financial report. However, the audit showed that the utilization rate of the assets was as per the forecast conducted one year ago (Azim, 2013).

Question C:

Across the portfolio of clients, the unique key audit matters (KAMs) include sales transactions like in Ausdrill Limited the sale of non-core assets was taken into consideration. For instance, during the year the company sold two businesses; DT Hi Load and Drilling Tools Australia for 3.2 million dollars and 66 million dollars respectively. The unique aspect of this matter was that disclosing these transactions in the financial report became complex since the management had to separate the liabilities, operations, and assets into either a continuing or discontinuing business factors that can have pervasive and significant impacts on the financial state of the organization. This matter was key to audit since the users of the financial report would require an elaborate assessment of the continued and discontinued operations. Therefore, the audit had to account for the sales transactions through certain means. First, the sale agreement for the Drilling Tools and DT Hi-Load was read. It was found that the sale transaction had been disclosed and recorded as per the terms of the specific agreements. Lastly, recalculation of the carrying value for the liabilities and assets was conducted.

The other unique key audit matter was the carrying value of the intangible assets as witnessed in the Phosphagenics Limited company audit report. The organization’s financial report comprised of the consolidated income statement of changes, statement of financial position and records of “comprehensive income” among others. An analysis of this report showed that the company’s intangible assets relating to patents were purchased. The unique aspect of this matter is that it was not capitalized in the balance sheet. As a result, the management was forced to investigate whether there were impairment indicators for the intangible assets. There were two main indicators detected; the viability of the capitalized patent portfolio was persistent and the market capitalization was effective. In dealing with these indicators an expert was engaged to value the patents in accordance with the accounting standards. In doing this, the focus was on the carrying values of the intangible assets. However, the appropriateness of the methodology used by the management was considered. This process is one of the features of most of the unique key audit matters in that in assessing a unique matter, the audit must start with the organization’s processes to assess whether impairment review was conducted appropriately.

The key audit matters mentioned above were determined through certain means. For example, there are matters communicated with those charged with their management. These factors may attract an auditor’s attention. Also, higher risk assessment areas can be taken into account. The areas can help in forming audit judgments concerning certain business issues such as transactions and other significant events. The unique key audit matters must be areas of significance to an auditor or expert. This notion shows that audit is on the basis of risk and therefore concentrates on sectors with risks of significant omission. Hence, these areas will affect the allocation of resources since they entail significant risks and complexities. Such areas are perceived to be unique since they require senior personnel and more resources to assess. The means of communication this matter is as well important to note. The objective of communicating these matters is to show that an auditor has a formed opinion on all the financial records. Hence in the audit report, there must be an expression of opinion on the unique matters

References

Azim, M. I. (2013). Independent Auditors Report: Australian Trends From 1996 to 2010. Journal of Modern Accounting and Auditing, 9(3), 356.

Council, F. R. (2013). Proposed International Standard on Auditing (ISA) 701: Communicating Key Audit Matters in the Independent Auditor’s Report (2013).