Consideration for Annual Audit of Telstra Corp Ltd and Woolworths Group Ltd

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TO: The Engagement Partner

FROM: 3F Team – 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.

1. Inherent risk identification

1.1 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).

  1. 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 makes this zone generally inclined to blunders. (ASA 200, 2016).
  2. 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 (AASB 38, 2018). High estimation uncertainty makes this head prone to misstatement due to errors (ASA 200, 2016).
  3. 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 (ASA 330, 2016).

1.2 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:

  1. 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 (ASA 500, 2016). 
  2. 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 (ASA 240, 2016).
  3. 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 (ASA 200, 2016)).

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