Auditing by liaoqinmei



An audit enhances the reliability of the
financial information contained in
financial statements and accompanying
What is an audit of financial
 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
 Auditor communicates the audit findings to the
  users of financial reports via the audit report
Auditing -A process of gathering, reviewing and assessing evidence to
express an opinion

                Auditor – member of ICAA or CPA

                (Member of the NIA in limited circumstances)

                              Obtain & Evaluate evidence objectively

                              Evidence: documents, observations,
                              confirmation by 3rd parties

                               Check the correspondence between
                               Assertions in financial statements and set
                               Assertions about financial statements:
                               completeness, accuracy, validity, valuation,
                               presentation and disclosure
                               Set Criteria: generally accepted accounting

                                         Communicate results

              Internal users: Management, shareholders & employees
              External Users: financial institutions, creditors, taxation dept, government dept
           Why engage an auditor?
1.     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
       Reporting entities generally have the following common
         Size
         Number of interested parties (shareholders, trade creditors)
         Separation of ownership and control
         Information needs of users
         Why engage an auditor?

2.   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
    Assets and liabilities reported in the financial
     statements existed at the balance date.

3.   Provides management letter outlining weaknesses or
     areas of concern of the organisations internal control
                                         Roles of the Auditor

1.   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

2.   Auditors opinion only provides reasonable but not
     absolute assurance that the financial reports are free
     from material misstatements or fraud.

3.   Auditors must express an opinion as to the future
     viability (solvency) of the entity
                                Roles of the Auditor

4.   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

5.   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
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
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 supervisors
   Audit Assistants - recent graduates or still
    studying, follow instructions and carryout audit
    test programs
           Fundamental ethical principles
           contained 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

 Members must be straightforward, honest and sincere in their
   approach to professional work.

 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
           Fundamental ethical principles continued

 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
     An auditor cannot be a member of the board or a officer and
       a client company
 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
             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
 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
                 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
        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
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

   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.
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
            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

 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
          Auditors Responsibilities under Common Law

 The auditor has a primary responsibility to the

 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
                     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
            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
       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
     Comparison between internal & external audit

Internal                                       External
Appointed by management                        Appointed by shareholders
Reports direct to management                   Reports to shareholders
Objectives established by management           Objectives established by legislation
Reporting requirement and nature of report     Reporting requirement and nature of report
established by management                      established by legislation
Any aspect of business may be reviewed         Financial records and reports are reviewed
Conducted by the internal auditor who is an    Conducted by an independent registered
employee of the business                       auditor
Auditor may came from many disciplines         Must be an accountant who satisfies the
                                               requirements of ASIC

May be a member if the Institute of Internal   Must be a member of the ICAA, CPA
Auditors – Australia                           Australia or other designated bodies
Audit involves the gathering of evidence       Audit involves the gathering of evidence
and the expression of an opinion               and the expression of an opinion
Purpose is generally to improve the            Purpose is to provide assurance to the users
processes and procedures of the business or    of financial reports
to ensure compliance with policies or
Report is an internal document                 Report is a public document
Internal audit is an ongoing activity          Financial audit is an annual event
Does not need to comply with auditing          Appraisal must comply with auditing
standards                                      performance and quality control standards

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