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The main objective of this report is to review the 2019 audited annual reports of two listed companies in order to discuss about different audit related issues. The selected companies are Ramsay Health Care Ltd (Ramsay) which is a global health care company involved in providing high quality services and excellent patient care and Telstra Ltd (Telstra) which is an Australian telecommunication industry involved in building and operating telecommunication networks and others relevant products and services. The first issue addressed in this report is the identification of inherent risks for each companies in audit planning stage; and then, to develop audit procedures to address them. After that, this report carries out analytical audit procedures for each of these companies for identifying areas with higher risk and comfort. Then, it suggests the audit procedures for addressing the high risk areas. Lastly, this report discusses about the legal and ethical responsilities/liabilities of an auditor in case of inappropriate audit procedures.
According to ASA 330, Paragraph 8, it is needed for the auditor of Ramsay to design and perform the needed tests of controls so that adequate appropriate audit evidence can be obtained for assessing whether the employed internal control in the company is effective or not (auasb.gov.au, 2020). According to ASA 330, Paragraph 18, the auditor is needed to undertake the required substantive audit procedures for addressing the risk identified (auasb.gov.au, 2020).
The first inherent risk is due to the presence of intense competition which can pressure on Ramsay’s management to increase profit through overstating sales or understating the expenses. This requires the auditor to check both large and small revenue accounts for assessing the presence of overstatement; and expenses also need to be checked for identifying any understatement (Cannon & Bedard, 2017). The second inherent risk can obsolete the company’s products and services and therefore, the management can overstate its inventory value of medicines. Thus, the auditor is needed to test the inventory for assessing whether they have been recorded at the correct value. The third risk can create misstatement in revenue from contracts with customers because of incorrect implementation process. This requires the auditor to re-calculate the amount of revenue from contracts with customers after adopting AASB 15 for assessing whether there is any difference or not (DeFond, Lim & Zang, 2016).
Alike Ramsay, the auditor of Telstra should follow the provisions of ASA 330 for testing the internal control of the company and for developing the needed audit procedures in order to address the risks identified (auasb.gov.au, 2020).
Similar to Ramsay, the first inherent risk of Telstra because of intense competition can pressurize the management to involve in revenue overstatement or understatement of expenses. Thus, the audit procedure is to test all the documents related to revenue and expenses for assessing whether there is any misstatement or not (Brown et al., 2019). The second risk due to unfavourable regulatory and policy pressure can lead to the overstatement of sales as an attempt to improve financial performance. Hence, the auditor is needed to assess the company’s sales for identifying any misstatement in it. Lastly, it is needed for the auditor to evaluate the effectiveness of estimates and judgements used for assessing the presence of any kind of subjectivity in them (Zhang, 2018).
Table 1: Ratio Analysis
(Source: As created by Author)
Issue of an inappropriate audit opinion exposes the auditor to face both ethical and legal liabilities. An auditor is ethically liable to comply with the ethical codes mentioned in APES 110. Issue of an inappropriate audit opinion contribute to the violation of four ethical principles of APES 110. These principles are Integrity, Objectivity, Professional Competence and Due Care, and Professional Behaviour. Legal liabilities expose an auditor to face both civil and criminal offence (apesb.org.au, 2020). In case an inappropriate audit opinion is issued, the auditor becomes subject to criminal liability. Line any other person living in a country, the auditor is also responsible for complying with the country’s rules, regulations and laws. In the context of Australia, an auditor needs to comply with the Corporations Act 2001. Corporations Act 2001 considers this as a major crime of an auditor in case the disclosed information and facts in the independent auditor’s report are not appropriate and true. There is a possibility that the court consider this a deliberate act of the auditor and thus, the auditor can be prosecuted in the criminal court (Gimbar, Hansen & Ozlanski, 2016).
One major safeguard available for the auditor in case of the issue of an inappropriate audit opinion is seeking help from the higher auditing regulatory authorities in the country. This can provide the auditor to issue a revised opinion or can delay the period to issue an opinion. Complying with the required audit quality safeguard the auditor from such liabilities. In addition, the auditor can enter into Liability Limitation Agreement prior to commence the audit engagement (Samsonova-Taddei & Humphrey, 2015).
Inherent risk factors within an organization can create pressure on the management to improve financial performance in different manipulative and fraud manners which can lead to the risk of material misstatements; such as sales overstatement, expenses understatement and others. During the audit planning, the auditors are needed to identify the areas with higher risks and areas with comfort as it provides them with further direction to design and perform suitable audit procedures. In case of the areas of comfort, the auditor have the option to reduce the evidence gathering process. The auditors are required to aware of the fact that they are subject to both legal and ethical liabilities in the profession in case they fail to issue the appropriate audit opinion. This requires them to comply with the ethical principles and other required principles for maintaining the desired audit quality.
Our team consists of two members and we have completed this Assessment 1- Case Study under ACCT6006 Auditing Theory and Practice as a team. We, all the two members of the group, have contributed equally for the completion of the assessment. We divided the whole assessment in two sub-assessments in order to maintain proper segregation of duties and responsibilities. It was decided at the initiation of the assessment that I would be doing Part 3, 4 and 5 of the assessment which is to undertake analytical review of the financial statements of Ramsay and Telstra for identifying the areas with concern and comfort, planning the audit procedures and discussion of ethical and legal requirements. In order to complete my part, I have followed all the study materials, learning materials, notes and textbook along with some additional materials. The other member of the group also conducted the required research and undertook the needed reading for completed Part 1 and 2 of the assessment in the most perfect manner. Equal contribution of all the two group members have made us able to complete and submit the assessment within time. This assessment has enhanced our knowledge and insight in different aspects of audit planning.
APES 110. (2020). APES 110 Code of Ethics for Professional Accountants (including Independence Standards). Retrieved 19 November 2020, from https://apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Code_Nov_2018.pdf
Appelbaum, D. A., Kogan, A., & Vasarhelyi, M. A. (2018). Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics. Journal of Accounting Literature, 40, 83-101.
ASA 200. (2020). Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards. Retrieved 19 November 2020, from https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_Compiled_2019-FRL.pdf
ASA 240. (2020). Auditing Standard ASA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report. Retrieved 19 November 2020, from https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2019-FRL.pdf
ASA 330. (2020). Auditing Standard ASA 330 The Auditor's Responses to Assessed Risks. Retrieved 19 November 2020, from https://www.auasb.gov.au/admin/file/content102/c3/ASA_330_Compiled_2015.pdf
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Cannon, N. H., & Bedard, J. C. (2017). Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), 81-114.
DeFond, M. L., Lim, C. Y., & Zang, Y. (2016). Client conservatism and auditor-client contracting. The Accounting Review, 91(1), 69-98.
Gimbar, C., Hansen, B., & Ozlanski, M. E. (2016). Early evidence on the effects of critical audit matters on auditor liability. Current Issues in Auditing, 10(1), A24-A33.
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Ramsay Health Care Limited. (2020). Annual Report 2019. Retrieved 19 November 2020, from https://www.ramsayhealth.com/common/emag/rhc/annualreport2019/RHC-Annual-Report-2018-2019sml.pdf
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Zhang, J. H. (2018). Accounting comparability, audit effort, and audit outcomes. Contemporary Accounting Research, 35(1), 245-276.
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