Auditing

1. Auditing An audit enhances the reliability of the financial information contained in financial statements and accompanying notes

2. What is an audit of financial statements? Audit of financial statements involves a process of evidence gathering and examination of the entities financial report by an auditor Aim: to enable the auditor to express and independent opinion as to whether the financial report presents fairly the entity�s financial position and results of its operations and its cash flows in accordance with Aust. Accounting standards and other mandatory reporting requirements Auditor communicates the audit findings to the users of financial reports via the audit report

3. Auditing -A process of gathering, reviewing and assessing evidence to express an opinion

4. Why engage an auditor? Statutory requirements � Corporations Law requires public companies to be audited to ensure credibility of the financial reports and that they comply with relevant legislation and accounting standards SAC 1 defines �reporting entities� as all entities where it is reasonable to expect that there will be users dependent on general-purpose financial statements for decision making. These entities need to produce general-purpose financial statements, adhere to all accounting standards and SACs. and should be audited Reporting entities generally have the following common characteristics: Size Number of interested parties (shareholders, trade creditors) Separation of ownership and control Information needs of users

5. Why engage an auditor? Provide assurance to the provider of resources (financial institutions, suppliers, shareholders) that the claims of the user are accurate E.g.: The financial statements are free from material misstatements. Assets and liabilities reported in the financial statements existed at the balance date. Provides management letter outlining weaknesses or areas of concern of the organisations internal control

6. Roles of the Auditor Obligation to give an independent opinion of the financial reports. It is managements responsibility (not the auditors) to safeguard the entity�s assets, maintain adequate accounting records and prepare financial reports Auditors opinion only provides reasonable but not absolute assurance that the financial reports are free from material misstatements or fraud. Auditors must express an opinion as to the future viability (solvency) of the entity

7. Roles of the Auditor Auditors are not responsible for the internal control systems within the organisation. The audit process should however provide reasonable assurance of detecting errors or irregularities that could impact on the financial reports Because of costs and time constraints the scope of the audit is limited - An audit process cannot examine every item in the financial reports � Focus is on that items that are considered material or high risk

8. Qualifications of an auditor External auditors must: reside in Australia be a member of an approved professional body: ICAA or CPA have sufficient work experience in auditing be a fit and proper person to be registered as an auditor A member of NIA may have limited audit authority ie school councils, lawyers trust accounts

9. Audit firms Audit Partner � general responsibility for audits, registered company auditor Audit Manager � registered company auditor, communicate with client Audit Seniors �fully qualified, placed in control of audits with a team of assistants. Have routine contact with client and are responsible for assessing risk and audit sample Audit Assistants - recent graduates or still studying, follow instructions and carryout audit test programs

10. Fundamental ethical principlescontained in the Rules of Professional conduct of ICAA and the Code of Professional Conduct of the CPA and the ethical pronouncements of the NIA The Public Interest� Members must at all times safeguard the interests of their clients and employers provided that they do not conflict with the duties and loyalties owed to the community and its laws Integrity Members must be straightforward, honest and sincere in their approach to professional work. Objectivity Members must be fair and must not allow prejudice, conflict of interest or bias to override their objectivity. When reporting on financial statements which come under their review they must maintain an impartial attitude

11. Fundamental ethical principles continued Independence Members must be and should be seen to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity Public accounting practices may not deal with any company in which their staff or near relatives have a significant shareholding An auditor cannot be a member of the board or a officer and a client company Confidentiality Members must respect the confidentiality of information acquired in the course of their work and must not disclose any such information to a third party without specific authority or unless there is a legal or professional duty to disclose it����

12. Fundamental ethical principles cont. Technical & Professional Standards���� Members must carry out their professional work in accordance with the technical and professional standards relevant to that work. Competence and Due Care���� Members must perform professional services with due care, competence and diligence. A member has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques. Professional accountants should therefore refrain from performing any services which they are not competent to carry out unless advice and assistance is obtained to ensure that the services are performed satisfactorily. Ethical Behavior���� Members must conduct themselves in a manner consistent with the good reputation of their profession and refrain from any conduct which might bring discredit to their profession. 

13. Matters applicable to members providing public accounting services Professional Fees���� Professional Fees must reflect fairly and equitably the value of work performed for the client. Advisory Services - Fees and Commissions���� Members may charge a client a fee for advisory services and/or may receive commissions from third parties in respect of advisory services provided to a client. Where an agency, commission or other form of arrangement has been entered into with a third party, the member shall inform the client in writing of the existence of such arrangement, the identity of the other party or parties and the method of calculation of the agency fee, commission or other benefit occurring directly or indirectly to the member. Funds Held in Trust and Clients' Monies���� Members who hold funds in trust must keep records necessary to show that the funds have been correctly administered

14. Matters applicable to members providing public accounting services continued Practice Names and Descriptions �� Members in public practice are prohibited from using a practice name which is false, misleading or deceptive. Practice names and descriptions must not reflect adversely on the profession. Advertising, Publicity and Solicitation������ Members are permitted to advertise or obtain publicity for their services provided that the content or nature of such advertising or publicity is not false, misleading or deceptive or in any other way reflects adversely on the profession Members in public practice may approach potential clients personally or through direct mail to make known the range of services that they offer

15. Matters applicable to members providing public accounting services (cont) Changes in Professional Appointments���� Members in public practice must not accept an appointment with respect to any public accounting function, in replacement of another accountant providing public accounting services, without first communicating with that accountant and enquiring as to whether there are any circumstances they should take into account in deciding whether or not to accept the appointment. Members must also supply any successor with reasonable information pertaining to the work involved Referrals� Members in public practice who accept a special assignment from the client of an accountant providing public accounting services or direct from that accountant must not do anything which will impair the position of that accountant in the continuing work for the client.

16. Matters applicable to members providing public accounting services (cont) Incompatible Business���� Members engaged in the provision of professional services must not at the same time engage in any business or occupation which may create a conflict of interests in rendering such services or which is detrimental to the public good or the dignity of the profession Stationery and Signboards���� Stationery and signboards of a member in public practice must be professional and appropriate to their practice. Attention to Correspondence and Enquiries���� Members must reply to professional correspondence and enquiries expeditiously

17. Auditors Responsibilities under Corporations Law Under the corporations law the auditor must provide an auditor�s report to the members of the company before the annual general meeting. The report must state whether in the auditors opinion: The financial statements have been prepared as to give a true and fair view of the company�s financial position The financial statements have been prepared in accordance with corporations Law and the applicable accounting standards Whether the auditors has obtained all necessary information Whether proper documents and records have been maintained The auditor also has a statutory duty to report breaches of the Corporations Law to ASIC � breaches of directors duties or failure to maintain records

18. Auditors Responsibilities under Common Law The auditor has a primary responsibility to the shareholders The terms of the audit engagement should be clearly defined and documented The auditor must: Be independent Carry out duties with integrity Respect confidentiality Obtain appropriate evidence Exercise skill and care and document all findings 

19. Minimising liability Deal only with clients that have integrity Hire qualified personnel and provide them with adequate training and supervision Follow auditing standards, rules of conduct and other professional guidelines Maintain independence Understand clients business Perform quality audits Obtain an engagement letter and representation letter Maintain Confidential relations Provide adequate insurance 

20. Types of Audits Financial report audits a form of attest audits systematic examinations of the financial reports of an entity to enable the auditor to express an opinion as to whether they present fairly the financial affairs of the entity to enhance the credibility of the reports Compliance audits systematic review of an aspect or part of an organisation to assess the level of compliance with specified conditions such as legislative requirements for working conditions or management requirements about procedures e.g. tax audit, OHS audit by government bodies Performance (operations) audits systematic examination of part or all of an entities programs, operations or activities with a view to determining any or all of the economy, efficiency or effectiveness of those activities, operations or programs. Review of systems, controls or practices with regard to economy, efficiency and effectiveness Review of resource management with regard to economy and efficiency Review of effectiveness of programs, activities or operations

21. Types of Audits � cont Attest audits Carried out to express an opinion or an assertion made by someone else. I.e. audit of financial reports to ensure that the information is presented fairly in accordance with Sac�s and accounting standards Direct reporting and related services auditor engaged to examine and express an opinion about a matter such as the efficiency of a particular procedure or department of an organisation

22. Comparison between internal & external audit