Lecture 1 (Week 1): Introduction, Overview and Function of Auditing
Lecture 1 (Week 1): Introduction, Overview and Function of Auditing 1. Nature and function of auditing Auditing- who cares?
• • • • • •
Government bodies/regulators- to protect general public Shareholders- ensures managers are doing their job properly to increase shareholder wealth Employees and suppliers Potential investors Customers Creditors
Why the need for independent financial report audits?
Information must be relevant, reliable, understandable and comparable because: • •
Comparability is important in order to compare performance from one year to the next and between different companies It ensures information is free from fraud and bias
What is auditing?
• • • • • •
•
Obtaining and evaluating evidence about assertions to form an opinion about those assertions and communicate that opinion to interested users ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Accounting Standards Financial report audit is most common Must be information in a verifiable form and some standards the auditor can evaluate the information against Evidence- any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria Competent, independent person- auditor must be qualified to understand the applicable criteria and must be competent to know the types and amount of evidence required to reach the proper conclusion Audit report- the communication of audit findings to users
Demand for financial statement audits
• • •
Agency theory Information hypothesis Insurance hypothesis
Management assertions
1. 2. 3. 4. 5.
Existence or occurrence Rights and obligations Valuation or allocation Completeness Presentations and disclosure
1
2. Relationship between auditing and accounting
3. Auditing in the accounting profession • • •
Auditors are members of the accounting profession Company auditors must be registered by ASIC (s1280) Accounting is recording, classifying and summarising economic events in a logical manner for the purpose of providing financial information for decision making
Assurance engagements
An engagement (job) in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. E.g. An audit or a review engagement • •
Improve the quality of information- improves relevance and reliability Can be performed by public accountants or by a variety of other professionals
Attestation services:
A type of assurance service in which the public accounting firm issues a written communication that expresses a conclusion about the reliability of a written assertion/statement of another party • •
Audit of historical financial statements- auditor issues a written report expressing an opinion about whether the financial statements are in material conformity with accounting standards Review of historical financial statements- provides less assurance than an audit as to whether the financial statements are in material conformity with accounting standards
4. Types of audit 1. Financial statement audit- conducted to determine whether the overall financial statements of an entity are stated in accordance with specified criteria (accounting standards) 2. Compliance audit- to determine whether the client is following specific procedures, rules or regulations 3. Performance audit- a review of any part of an organisation’s operating procedures and methods for the purpose of evaluating efficiency and effectiveness 4. Comprehensive audit- combination of 1,2 or 3 5. Environmental audit
2
6. Internal audit Types of auditor
• • • • •
Independent auditors- external auditors who perform financial report audits Public accounting firms- responsible for auditing the published financial statements of all publicly traded companies Internal auditors- auditors employed by a company to audit for the company’s board of directors and management Government auditors (officers serving the Auditor-General)- reports to and is solely responsible to Parliament Tax auditors- auditors who work for the ATO and conduct examinations of taxpayers returns
5. Demand, benefits and limitations of audit Economic benefits
• • • • • •
Reduce agency costs Access to capital markets Lower cost of capital by reducing information risk Deterrent to fraud and inefficiency Control and operational improvements Insurance
Limitations
• • • • •
Time lapse Audit testing in selective samples Assessment of materiality Forming professional judgements in highly specialised areas Report format limitations (new ASA 701- Key Audit Matters)
6. Professional standards Australian auditing standards
Auditing standards establish mandatory requirements and provide explanatory guidance to auditors in fulfilling their professional responsibilities in the audit of financial reports. •
• • •
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9)- s307A requires auditors to conduct audits and reviews of the financial reports prepared under Part 2M.3 in accordance with auditing standards Set a minimum standard of technical proficiency Users are informed that standards have been followed Compliance is evidence against a malpractice lawsuit
Auditing standards are divided into: 1. Introductory matters- intentions on how auditing standards should be understood, interpreted and applied
3
2. General principles and responsibilities- specify requirements on issues such as the objectives of an audit, terms of engagement, quality control, audit documentation, consideration of fraud and communication with management 3. Risk assessment and response to assessed risks- developing an audit plan in order to reduce audit risk to an acceptably low level 4. Auditing evidence- auditor shall accumulate sufficient appropriate audit evidence necessary to express the audit opinion 5. Using the work of others 6. Audit conclusions and reporting- obligation of auditors to report on whether the financial report is presented fairly in all material aspects, in accordance with standards and regulations 7. Specialised areas
7. Statutory requirements Corporations Act
Financial report audits: • • •
• • • •
s301: Disclosing entities must have their annual financial report audited s327A: Public company must appoint an auditor of the company within one month after the date of the company’s registration s292: Large proprietary company must have annual financial statements prepared and audited - $25m consolidated revenue - 50+ employees - $12.5m gross assets s324 AA: An auditor can be: an individual natural person); a firm (partnership); or a company s329: Removal by special resolution at a general meeting ss307-309: Powers and duties Independence requirements
4
• • • • • •
Government bodies/regulators- to protect general public Shareholders- ensures managers are doing their job properly to increase shareholder wealth Employees and suppliers Potential investors Customers Creditors
Why the need for independent financial report audits?
Information must be relevant, reliable, understandable and comparable because: • •
Comparability is important in order to compare performance from one year to the next and between different companies It ensures information is free from fraud and bias
What is auditing?
• • • • • •
•
Obtaining and evaluating evidence about assertions to form an opinion about those assertions and communicate that opinion to interested users ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Accounting Standards Financial report audit is most common Must be information in a verifiable form and some standards the auditor can evaluate the information against Evidence- any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria Competent, independent person- auditor must be qualified to understand the applicable criteria and must be competent to know the types and amount of evidence required to reach the proper conclusion Audit report- the communication of audit findings to users
Demand for financial statement audits
• • •
Agency theory Information hypothesis Insurance hypothesis
Management assertions
1. 2. 3. 4. 5.
Existence or occurrence Rights and obligations Valuation or allocation Completeness Presentations and disclosure
1
2. Relationship between auditing and accounting
3. Auditing in the accounting profession • • •
Auditors are members of the accounting profession Company auditors must be registered by ASIC (s1280) Accounting is recording, classifying and summarising economic events in a logical manner for the purpose of providing financial information for decision making
Assurance engagements
An engagement (job) in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. E.g. An audit or a review engagement • •
Improve the quality of information- improves relevance and reliability Can be performed by public accountants or by a variety of other professionals
Attestation services:
A type of assurance service in which the public accounting firm issues a written communication that expresses a conclusion about the reliability of a written assertion/statement of another party • •
Audit of historical financial statements- auditor issues a written report expressing an opinion about whether the financial statements are in material conformity with accounting standards Review of historical financial statements- provides less assurance than an audit as to whether the financial statements are in material conformity with accounting standards
4. Types of audit 1. Financial statement audit- conducted to determine whether the overall financial statements of an entity are stated in accordance with specified criteria (accounting standards) 2. Compliance audit- to determine whether the client is following specific procedures, rules or regulations 3. Performance audit- a review of any part of an organisation’s operating procedures and methods for the purpose of evaluating efficiency and effectiveness 4. Comprehensive audit- combination of 1,2 or 3 5. Environmental audit
2
6. Internal audit Types of auditor
• • • • •
Independent auditors- external auditors who perform financial report audits Public accounting firms- responsible for auditing the published financial statements of all publicly traded companies Internal auditors- auditors employed by a company to audit for the company’s board of directors and management Government auditors (officers serving the Auditor-General)- reports to and is solely responsible to Parliament Tax auditors- auditors who work for the ATO and conduct examinations of taxpayers returns
5. Demand, benefits and limitations of audit Economic benefits
• • • • • •
Reduce agency costs Access to capital markets Lower cost of capital by reducing information risk Deterrent to fraud and inefficiency Control and operational improvements Insurance
Limitations
• • • • •
Time lapse Audit testing in selective samples Assessment of materiality Forming professional judgements in highly specialised areas Report format limitations (new ASA 701- Key Audit Matters)
6. Professional standards Australian auditing standards
Auditing standards establish mandatory requirements and provide explanatory guidance to auditors in fulfilling their professional responsibilities in the audit of financial reports. •
• • •
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9)- s307A requires auditors to conduct audits and reviews of the financial reports prepared under Part 2M.3 in accordance with auditing standards Set a minimum standard of technical proficiency Users are informed that standards have been followed Compliance is evidence against a malpractice lawsuit
Auditing standards are divided into: 1. Introductory matters- intentions on how auditing standards should be understood, interpreted and applied
3
2. General principles and responsibilities- specify requirements on issues such as the objectives of an audit, terms of engagement, quality control, audit documentation, consideration of fraud and communication with management 3. Risk assessment and response to assessed risks- developing an audit plan in order to reduce audit risk to an acceptably low level 4. Auditing evidence- auditor shall accumulate sufficient appropriate audit evidence necessary to express the audit opinion 5. Using the work of others 6. Audit conclusions and reporting- obligation of auditors to report on whether the financial report is presented fairly in all material aspects, in accordance with standards and regulations 7. Specialised areas
7. Statutory requirements Corporations Act
Financial report audits: • • •
• • • •
s301: Disclosing entities must have their annual financial report audited s327A: Public company must appoint an auditor of the company within one month after the date of the company’s registration s292: Large proprietary company must have annual financial statements prepared and audited - $25m consolidated revenue - 50+ employees - $12.5m gross assets s324 AA: An auditor can be: an individual natural person); a firm (partnership); or a company s329: Removal by special resolution at a general meeting ss307-309: Powers and duties Independence requirements
4
