1.

High volume of transactions (Multiple sources of income)

According to the Annual report of Telstra 2008 shows that it is having various sources of
income. Some of them are income from Fixed Telephony, PSTN products, Mobile, Internet, IP
& data access, Pay TV bundling… etc. This kind of multiple sources of income generating
activities causes’ high volume of transactions and will naturally moved towards to cause the risk
of material misstatements and errors. As an example according to the financial report, other
miscellaneous income of Telstra is amounted upto 136Millions. As there is no note provided for
this. Therefore, this kind of suspicious transaction can cause material misstatements in the
financial report. As per the audit procedure the auditor should gather evidence through on site
visits and check all the internal and external documents to ensure that the accounts such as the
miscellaneous incomes are not misstated.
Obsolete assets and inventory

Telestra inventory consists of various types of assets. Such as

Thus the inventories such as mobile phones, internet related inventories are due to change in
value depanding on technology and upgrades.

The telecommunications industry by nature is very technically driven, thereby the inventory that
Telstra hold at the end of the financial year must reflect the correct value.but when technologies
change some inventories become obsolete. For instance the Telstra deciding to discontinue its
CDMA operations and upgrading it to Next G broadband services.( Marcus Browne,
ZDNet.com.au,2008) therefore the assets and inventores that were used for cdma technology will
become obsolete. So there is an inherent risk that the obelete inventories here may be overstated.

Auditors need check the actual value of the obsolete inventory by analysing the markets
valuations at that point. if the engagement team does not poses the appropriate knowledge they
must obtained the an experts opinion in arriving at the valuations of such inventories.
Furthermore the valuvation of Telstra main assets such as infrastructure which is used for land
lines is based upon professional judgement. The reason given that there is no comparable
existing assets. At present $ 1000 000 received as revenue by Telstra from its competitors for
using their telecommunications infrastructure .thus by oversating the infrasturture value Telstra
can charge a higher amount as rent from other telecommunication companies. The ACCC has
stated that ‘proclaiming the charges Telstra has submitted for the use of its assets are
‘unreasonable and anti-competitive’ ‘ Kevin Clarke 2005. Therefore this can be seen as an
inherent risk.
Foreign currency transactions

According to Telstra annual report revenue generated through international customers amounted
to 1944 million and Telstra holds 3207 million non current assets outside Australia. During the
year of 2008 telstra acquired SouFun Holdings and Norstar Media. As these revenues are derived
trough foreign exchange exchange rate fluctuations may cause misstatements. Audiors must take
into consideration the polices that telestra has adopted to treat these transactions and make sure
that they are recorded at the appropriate exchange rate. By verifying the Telstra foreign exchange
policy and procedures auditors can identify any unreasonable gains or losses through foreign
exchange transactions.
Related party transactions

Telstra according to annual report of 2008 consists of many controlling entities thereby its
related party transactions are very complex. Telestras borrowings from its controlling eitities
amounts to 585 million whereas it has invested 12648 million(Telstra annual report 2008). As
these tranctions are complex that itself creates a inherent risk because management can easily
manipulate these transactions to overstate reported earnings. These manipulations can occur in
accounts such as of interest payables, purchases and sales. A thorough understanding of these
transactions is necessary by the auditors. In analysing these transactions auditors should gather
evidence from sources independent of the client. For example conformation from banks for
reviewing loans payable and receivable. audiotrs must also need to examine Telstras documents
and records to verify that these transactions are properly recorded.
IT systems and fraud

Telstra in 2008 have partnered with IBM on a seven year project to outsource there procumbent
process. The reason given that Many different vendors were supplying the same goods and
services to the company, often at different prices. The possibility of inherrat risk is due to two
reasons; firstly the different vendors supplying good in different prices may create a situation
where expenses may be oversated. Secondly the by standardized single procument process over a
period of seven years may have give rise to significant errors due to system upgrades. In addition
Telstra carried out a five year project on technology transformation and it identified more or over
150 systems that were unused.

This gives the opportunity to Telstra

this indicates that the it systems are

Competition

Telstra main revenue generating source is the PSTN products. during the financial year of PSTN
revenue was $6.7 billion, a 3.2% decline for the year compared with 4.4% in fiscal 2007. Retail
PSTN revenue decreased just 0.1% for the fiscal year and retail lines actually grew by 87,000
resulting in 14 months of consecutive increases. Further Telstra exclusion from the 5 billion
National broadband network bid due its brief proposal has made the shareholders to voice out
the potential revenue losses. Share holders were mainly concern that Telstra could miss out
future revenues or be blocked out of using the broadband network if another telco won the
tender. (Telstra broadband bid knockout). Given these loss of revenues the annual profits for the
financial year of 2008 is 440 miilion, which is an increase of 13% in revenue in comparison to
2007(Telstra annual report 2008). the top management having such pressure from competitors
and shareholders may be pressured into intentional misstatements in financial reports. All these
are likely reasons for Telstra management to oversate revenue or understate its expenses to
maintain their dividend payout ratio. This can be considered as an inherent risk. Auditors must
closely monitor the revenue that Telstra has generated mainly the transactions which occur near
to end of financial year. Judement accounts such as doubtful debts, warranty claims must be
compared with previous years. In such situations auditors must also check the validity of Telstra
strategies for the nect years to come. Validity here means that auditors must ensure that the
strategies are in a achievable scope.
Director’s expenses

The recent past Telestra director board have been accused by the unions of taking a luxury trip to
lasvegas where the board meeting was held. The director board having all their expenses at a cost
of the shareholders money have been accused of not concentrating industrial disputes and its
national broad band bid. Telstra director boards such expense at a difficult financial time indicate
the following. Firstly the Telstra top management are really not concerned about the share
holder’s interest given the fact that there hasn’t been any improvement in the share price with in
this financial year. Secondly they may have other ways to intentionally cover up these cost by
misstating the financial reports.By overstating profits the director board can stop unions digging
such matters. Therefore audiors must ensure that the transactions of such expenses are properly
classified and disclosed. In addition checking the meeting minutes and making sure that such
transactions comply with the companies’ policies and procedures.
Assets spread over vast geographical area

According to Telstra annual report 2008 telstra has operations which expands to several
countries world wide including China Hong Kong,Europe and New Zealand. Given the nature
of such operations Telstra’s fixed assets are spered out in many locations. In a such situation an
inherent risk may arise due to procedures and policies that are placed in the mother company
may not be mirrored in its global operations. Misstatements may occur in terms of
miscalculations in valuing these fixed asserts. .(ASA 240 para 74) Auditors in a such a situation
phycial observation or inspection of certain fixed asset may be important. Chose to use computer
assisted audit techniques to gather more evidence by selecting certain electronic transactions to
ensure that the revenue generated from foreign resources recorded properly.in addition auditors
need to check the fixed assets registry to ensure that all the listed assets are present and they are
valued correctly.
Marcus Browne, ZDNet.com.au http://www.zdnet.com.au/news/communications/soa/Telstra-s-
CDMA-shutdown-No-gain-without-pain-/0,130061791,339288393,00.htm

Kevin Clarke Splitting Telstra - Think About The Options!

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