ACCT3014_lecture01_s12013

Business School

Auditing and Assurance

Course OverviewAudit Function

Audit ProfessionGovernance and the Auditor

Auditor Independence

The University of Sydney Business School

WELCOME ACCT3014 - Auditing and Assurance

Semester 1, 2013 Unit of Study Coordinator: Angela Hecimovic

Week 1 LectureThe Auditing and Assurance Environment

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Course Requirements

Unit of Study Aims:

• understand the audit function and why there is a demand for it

• establish the legal, professional and regulatory framework for audits in the Australian environment

• familiarise students with audit techniques such as business risk analysis, internal control assessment, evidence collection and evaluation, and audit reporting-this is your audit journey!

• review current developments in audit practice

NOTE: this is a very practical course. Rote learning is inappropriate. Need to apply skills to specific audit scenarios.

Calculators are not required !

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How to study well in Auditing?

Expected preparation prior to: Lecture

– Print lecture overheads

– Read prescribed Chapter material from textbook

After Lecture– Review relevant Australian Auditing Standards (ASAs)

– Extras; Attempt Multiple Choice at the end of Chapters, Read through the Lecture Discussion Qs when provided

Tutorial – attempt Tutorial questions, answers will only be discussed in the Tutorials.......please ask lots of Qs...........

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Course Resources

Prescribed texts: Modern Auditing and Assurance Services, 5th Edition by Philomena Leung,

Paul Coram, Barry J. Cooper, Peter Richardson, May 2012: Wiley

Recommended Resources: Chartered Accountants Auditing & Assurance Handbook 2012 by ICAA (The Institute of

Chartered Accountants in Australia), ISBN 978-0-7303-0419-7, January 2012: Wiley OR

CPA Auditing, Assurance and Ethics Handbook 2012-02-05 by CPA Australia, ISBN

781442558090, January 2012: Pearson

Australian Auditing Standards (ASAs) can also be located directly from the AuASB website:

http://www.auasb.gov.au/Standards-and-Guidance/Australian-Auditing-Standards-in-Clarity-format.aspx

Links to other references and resources may be placed on Blackboard as required, Announcements will be made to notify students.

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Academic Staff

- Unit of Study Coordinator: Angela Hecimovic (Room 345)

The Audit Team includes: Eric Clubb- Lecturer

Peter Markoulli - Tutor

- For staff emails and consulting times and locations refer to Staff Information folder on Blackboard

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Assessments

Assessment Date

Mid Semester examination Saturday 20th April 20131pm-2.30pmMerewether Lecture Rooms 4&5See BB for Further Details

Group Assignment Due Monday 13th May 2013By 5pmVia Turnitin, BB

Final Examination As advised by Central Examinations

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Key Learning's from THIS Lecture

What is an Audit?

What is the Auditors Role?

How is the Audit Profession Structured?

Why is Auditor Independence Critical to the Audit?

How does Governance fit into the Audit?

Joke: Why did the auditors cross the road?Because they looked in the file and that's what they did last year.

http://www.the-alternative-accountant.com/audit-jokes.html

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Accounting

- provides financial information for decision making, control and accountability

Assurance

- provides satisfaction as to reliability of provided information

- various levels (reasonable, limited) depending on nature and extent of procedures and objectivity of evidence

Auditing

- provides assurance that accounting information is relevant, reliable, comparable, understandable and conveys a true and fair view

Are Auditors Accountants?

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› Service to provide reasonable (i.e. high level) assurance through issue of an opinion about an accountability matter (e.g. financial report).

› The objective of an audit of a financial report is to enable the auditor to express an opinion as to whether the financial report is prepared, in all material aspects, in accordance with an applicable financial framework. (para. 11)......... Audit Objectives under ASA 200

What is an Audit?

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Scope of Audit of a Financial Report

The purpose of an audit and the auditor’s opinion is to enhance the degree of confidence of intended users of financial information (ASA 200.3). The user, however, should not assume that the auditors opinion is an assurance as to the future viability of the entity nor an opinion as to the efficiency or effectiveness with which management has conducted the affairs of the entity (ASA 200.A1).

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Audit Report Handout

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With reference to Qantas 2012 Independent Auditor’s Report (lecture handout):

(a) Identify the key users of the independent audit.

(b) Describe the objective of an independent audit.

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Key Elements / Framework for Assurance Engagements / Audits

Three-party relationship (auditor, responsible party, user)

Systematic process

Objectivity and integrity/independence

Evaluating controls

Testing these controls

Obtaining and evaluating evidence

Assertions about economic actions and events

Degree of correspondence to established criteria

Communicating/reporting results

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Requirements of an Audit

› Comply with ethical requirements (ASA 102 and APES 110)

› Conduct audit in accordance with ASAs

› Adopt attitude of professional scepticism (ASA 200 p 157)

› Exercise professional judgment (assumes expertise)

› Gather sufficient appropriate audit evidence to reduce audit risk to an acceptably low level

To express an opinion of the financial reportObtain sufficient appropriate audit evidence

Assess risks of material misstatementState whether the financial report is prepared in all material respects in

accordance with an applicable financial reporting framework

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Management’s Responsibilities?

› Preparing and presenting the financial report in accordance with financial reporting framework (ASA 200.A2)

› This generally requires:- maintenance of adequate accounting records

- maintenance of adequate system of internal control

- selection and application of appropriate accounting policies

- development of accounting estimates

Effective use of Financial Statements requires that the educated reader understands the roles of management in preparing financial statements and the Auditors responsibility in terms of auditing them

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Demand for Audit

› Conflict of interest – preparers and users

› Improve quality of information for important decisions

› Complexity of information

› Remoteness of owners

› Agency theory / stewardship hypothesis

› Information hypothesis

› Insurance hypothesis

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Audit DemandAnnual audits required by Regulation:

• Companies, registered schemes & disclosing entities (excludes small proprietary companies)

• Commonwealth & state government departments, statutory authorities, government companies and business undertakings, municipalities

• Not-for-profit organisations

Providers of Audits:• Independent auditors

• Must be registered with ASIC to be able to perform audits on reporting entities

• Criteria set out in s.1280 Corporations Act• Educational qualifications

• Work experience

• Member of ICAA or CPA Australia

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The Audit ProfessionThe Australian auditing profession operates under a co-regulatory regime. The three largest

professional bodies:

› The Institute of Chartered Accountants in Australia (ICAA),

http://www.charteredaccountants.com.au

› CPA Australia (CPAA),

http://www.cpaaustralia.com.au

› National Institute of Accountants (NIA) now called IPA-Institute of Public Accountants (http://www.publicaccountants.org.au)

ASIC is responsible for the registration of auditors.

The Companies Auditors and Liquidators Disciplinary Board (CALDB), established under the ASIC Act, is responsible for the discipline of auditors.

Corporate Collapse impacts on Auditing

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A clear objective to enhance and maintain the integrity of the profession;

Clearly address the auditor interest to the public is as important as to the client, such as safeguarding independence by eliminating complex relationship with audit clients;

Reiterate ethical governance; Stronger regulation on auditors and audit; Increasing the forensic nature of audit and stronger awareness

of corporate fraud; Relate audit risks to business risk

In recent years the audit profession has received consistently bad press . Audit independence, or rather the lack of it, has been blamed as a contributing factor in some of the

major corporate collapses the global financial crisis and, more recently, the Greek debt crisis.

A central issue in audit independence is the possibility of compromised independence when the same accounting firm provides both audit and non-audit services to a client.

http://theconversation.edu.au/europe-considers-tighter-audit-reins-but-australian-experience-indicates-need-to-be-wary-5737

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CLERP9 and Clarity ASAs

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› Corporate collapses resulted in a Royal Commission

› Recommendations incorporated in Corporate Law Economic Reform Program (CLERP 9) in 2004

› Objective to improve the clarity of auditing standards

› ASA Clarity standards legally binding from 1.1.2010› Main changes

- Mandatory requirements in first part of standard

- Includes overall standard objective + 41 standards

– Audit independence

• Non-audit services

• Audit partner rotation

• Auditor working for the client

– Quality related changes

• Role of Financial Reporting Council

• Annual general meetings

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Audit Oversight Structure in Oz

Audit does not exist in isolation

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Audit Oversight Structure in Oz

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Australian Securities and Investment Commission (ASIC)

Regulates corporate, markets & financial services sector

Advise on selling of and disclosure of financial products and services to consumers

Majority of work carried out under Corporations Act

Protects consumers, investors?

Companies Auditors and Liquidators Disciplinary Board (CALDB)

Established under ASIC ActHears breaches under Corporations Act of auditors and liquidators

Auditing and Assurance Standards Board (AUASB)Develops high quality audit & assurance standardsForce of law ASAs under s336 Corp Act 2001Treasurer appoints Chair of AUASB & FRC appoints other members of AUASB

Financial Reporting Council (FRC)Develops high quality audit & assurance standardsForce of law ASAs under s336 Corp Act 2001Treasurer appoints Chair of AUASB & FRC appoints other members of AUASB (13)

http://www.auasb.gov.au/Home.aspx

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Auditor Independence

› Independence is a very key characteristic of an audit or assurance service provider.

› For auditor to add credibility to financial report or other subject matter, needs to remain independent.

› Independence is fundamental to compliance with fundamental principles of integrity and objectivity.

› There are both ethical (APES 110) and legal (Corporations Act) rules.

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Independence – Ethical Requirements Section 290 of APES 110

› Emphasises both:

- Independence of Mind

The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

- Independence in Appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a Firm’s, or a member of the Assurance Team’s, integrity, objectivity or professional scepticism had been compromised.

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APES 110: Section 290 – Conceptual Approach to Independence (cont.)

‘Self-Interest Threats’ examples:

- A direct financial interest or material indirect financial interest

- A loan or guarantee

- Undue dependence on total fees

- Concern about of losing the engagement

- Close business relationship

- Potential employment

- Contingent fees

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‘Self-Review Threats’ examples:

- A member of the assurance team being, or having recently been, a director or officer or significant employee of the assurance client

- Performing services for an assurance client that directly affect the subject matter of the

- Assurance engagement

- Preparation of original data or preparation of records

Advocacy Threat’ examples:

- Dealing in, or being a promoter of, shares or other securities in an assurance client

- Acting as an advocate on behalf of an assurance client in

litigation or in resolving disputes with third parties

Compliments Google Images 28/2/2012

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‘Familiarity Threat’ examples:

- A member of the assurance team having an immediate family member or close family member who is a director or officer of significant employee of the assurance client

- A former partner, a director or officer of the assurance client or an employee in a position to exert direct and significant influence

- Long association

- Acceptance of gifts or hospitality

Intimidation Threat’ examples:

- Threat of replacement over a disagreement

- Pressure to reduce extent of work to reduce fees

Compliments Google Images 28/2/2012

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Safeguards created by the profession, legislation or regulation include:

- Educational, training and experience requirements for entry into the profession

- Continuing education

- Professional standards and monitoring and disciplinary processes

- External review of a firm's quality control system

- Legislation governing the independence requirements of the firm

- Recommendations on independence from relevant regulators

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Safeguards within the Assurance Client include:

- Persons other than management ratify or approve the appointment of auditor

- The assurance client has competent employees to make managerial decisions

- Policies and procedures that emphasise the assurance client's commitment to fair financial reporting

- Internal procedures that ensure objective choices in commissioning non-assurance engagements

- A corporate governance structure, such as an audit committee, that provides appropriate oversight and communications regarding a firm's services

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Independence Requirements – Corporations Act 2001

› The auditor independence requirements of the Corporations Act 2001 are contained in Divisions 3 and 5 of Part 2M.4 of the Act. They are divided into:

- general and specific independence requirements (separate sections applicable to individual auditors, audit firms and audit companies)

- auditor rotation rules for listed entities

- auditor independence declarations

› Subdivision A of Division 3 of Part 2M.4 of the Act (ss. 324CA-324CD) assesses general independence based on whether a ‘conflict of interest’ situation exists in relation to an audited body, and whether the auditor/audit firm:

- knew the situation existed

- did not, as soon as possible after becoming aware of the situation, take all reasonable steps to ensure the situation ceased to exist.

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Specific Independence Requirements – Corporations Act 2001

› ‘Relevant relationships’ covered by s.324CH(1) include:

- officer or audit-critical employee: the individual auditor, or a professional member of the audit team, is related to the audited body by being an officer or audit-critical employee of the audited body

- former officer or audit-critical employee: the individual auditor, or a professional member of the audit team, is related to the audited body by having been an officer or audit-critical employee of the audited body within the last 12 months before the financial year being audited

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Specific Independence Requirements – Corporations Act 2001 (cont.)

- audit firm, member of audit firm or professional member of the audit team owes money: if such a person or entity owes more than $5,000 to the audited body, a related body corporate or an entity that the audited body controls

- non-audit service provider who exceeds the ‘maximum hours test’: if a non-audit service provider has provided more than 10 hours of non-audit services during the period being audited…..

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Auditor Rotation for Listed Companies – Corporations Act 2001

› Division 3 of Part 2M.4 of the Act (ss. 324D-324DD) requires rotation of a person who ‘plays a significant role in an audit’ in two situations:

- if an individual has played a significant role in the audit for five successive financial years

- if an individual has played a significant role in the audit for five out of seven successive financial years

› A person ‘plays a significant role in the audit’ generally if the person is a lead or review auditor for the audit

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Lecture Discussion Question

Frank Fong who just completed his chartered accountant examinations, is given for the first time a lead role in the audit of a small chemical company. Frank is excited but concerned that he does not know much about chemical products. He is puzzled about the nature of some of the accounts prepared by the client. Furthermore he does not dare ask the company’s controller Thomas Kahn, who is known to be rude to auditors.

Imagine YOU ARE Frank’s supervisor, and notice that Frank is uneasy when you enquire about the audit progress.

Required:

Explain to Frank the importance of Professionalism, using the APES 110 Code of Ethics, in particular referring to guidance on competence. What would you suggest to Frank? Read the Relevant APES 110 Handout

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Lecture Discussion Questions

› The importance of a profession is evident in its attributes, which include, (1) a systematic body of theory, (2) authority, (3) community sanction, (4) ethical codes and (5) culture.

› The accounting professional bodies have implemented a built-in regulatory code to compel ethical behaviour on the part of its members. The profession would see this regulatory code as a key way of differentiating itself from other organisations. Through its ethical code, the profession’s commitment to social welfare becomes a matter of public interest, thereby helping to ensure the continued confidence of society.

› Frank should be advised that the exercise of due care and diligence is part of the duty of auditors. Where there are doubts relating to the tasks, he should raise it with his seniors and seek independent advice if necessary. He should be advised that it is not uncommon for auditors to consult others. Section 130 of the Code of Ethics for Professional Accountants (APES110) refers to the requirement to maintain adequate professional knowledge and technical skills regarding professional competence.

› Frank should be properly trained and properly supervised more closely in this case.

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Auditor Independence & FRC Role

› Why is audit independence important and what do you think is the role of the FRC in this regard?

› Independence is the cornerstone of the auditing profession. Ethical situations exist when accountants are faced with situations in which they may compromise their professional integrity in response to outside pressures. An auditor may be pressured by management to compromise his or her objectivity in deciding on an accounting policy

› Without independence, the auditor’s opinion is suspect. The greatest potential threat to the independence of the auditor is the auditor’s relationship with the directors and management.

› Without the strength of character to withstand such pressure, the auditor may be unable to express an independent opinion.

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Auditor Independence & FRC Role

› Why is audit independence important and what do you think is the role of the FRC in this regard?

› Auditor independence is not always readily visible to those relying on the auditor’s opinion. To ensure independence is more visible, the Corporations Act 2001 and Part B Section 290 of the Code of Ethics (IFAC Code) stipulate principles, rules and guidelines that emphasise the need for the appearance of independence. Independence in mind can be assessed using a ‘reasonable person’ test, whereas independence in appearance is based on specific rules or prohibitions.

› The role of the FRC is to advise the government in relation to the effectiveness of the professional independence regulations and statutory provisions. In particular it performs reviews and investigation of audit independence and audit inspection programs in order to report to the government concerning the state of audit independence.

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Corporate Governance

- What is Corporate Governance and who is primarily responsible for it?

ASX Corporate Governance Council’s Principles of good corporate governance and best practice recommendations:

“Corporate governance is the system by which companies are directed and

managed. It influences how the objectives of the company are set and

achieved, how risk is monitored and assessed, and how performance is

optimised”

Commissioner Owen after HIH Corporate Collapse distinguished between the adoption of a model of corporate governance and its practice in the following terms:

“There is a danger [corporate governance] will be recited as a mantra, without regard to its real import. If that happens, the tendency will be for those who pay regard to it

to develop a ‘tick in the box’

mentality …”

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Corporate Governance

› ASX Principle 4 – Safeguard integrity in financial reporting

› Recommendation 4.1 - Establish an audit committee

› Recommendation 4.2 – Structure of the audit committee

› Recommendation 4.3 – Audit committee to have formal charter

› Recommendation 4.4 – Disclosure re: audit committee

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Audit Expectation Gap

“the difference between what auditors actually do when they conduct an audit and what shareholders and others think auditor's do, or should do, in conducting the audit” Report of HIH Royal Commission

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What's on Next Week

• Professional Ethics

• Auditors Legal Liability

• Audit Quality

Jane Howard, head of professional liability at Wragge & Co, a UK-headquartered law firm, agreed that the legal climate for

accountants had been relatively benign. “The Big Four are so well risk-managed,” she said, adding that English law was

“really quite protective of auditors”.

Having the law on your side never hurts.

http://goingconcern.com/post/big-4-firms-performing-quite-well-self-preservation-department

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ACCT3014_lecture01_s12013

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