A Guide To Understanding Auditing And Assurance

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A GUIDE TO UNDERSTANDINGAUDITING AND ASSURANCE:AUSTRALIAN LISTED COMPANIESNOVEMBER 2019

CPA Australia Ltd (‘CPA Australia’) is one of the world’s largest accounting bodies representing morethan 164,000 members of the financial, accounting and business profession in 150 countries.ISBN: 978-0-6482918-8-6For information about CPA Australia, visit our website cpaaustralia.com.au2019 Edition. First published in 2013 byCPA Australia LtdLevel 20, 28 Freshwater PlaceSouthbank VIC 3006AustraliaLegal Notice CPA Australia Ltd, 2019.All content in this guide (‘the Guide’) is proprietary or licensed to CPA Australia Ltd.The reproduction, adaptation, communication or sale of the Guide is strictlyprohibited unless expressly permitted under Division 3 of the Copyright Act 1968 (Cth).For permission to reproduce any part of the Guide, please contact legal@cpaaustralia.com.au.CPA Australia Ltd does not provide any warranties or make representations as to the accuracy, completeness,suitability or fitness for purpose of the Guide and accepts no responsibility for any acts or omissions made inreliance of the Guide. The Guide has been produced for reference purposes only and is not intended, in part orfull, to constitute legal or professional advice. To the extent permitted by the applicable laws in your jurisdiction,CPA Australia Ltd (including its employees, agents and consultants) exclude all liability for any loss, damage, claim,proceeding and or expense including but not limited to legal costs, indirect special or consequential loss or damage,arising from acts or omissions made in reliance of the Guide. Where any law prohibits the exclusion of such liability,CPA Australia Ltd limits its liability to the resupply of the information within the Guide.

A GUIDE TO UNDERSTANDING AUDITING AND ASSURANCE: AUSTRALIAN LISTED COMPANIES 3TABLE OF CONTENTSFOREWORD 4THE PURPOSE AND SCOPE OF AUDITS AND REVIEWS 5WHY ARE AUDITS AND REVIEWS REQUIRED? 5WHAT DO USERS NEED TO UNDERSTAND ABOUT FINANCIAL REPORTS? 5WHAT DOES ASSURANCE MEAN? 5WHAT IS THE IMPACT OF THE LEVEL OF ASSURANCE? 6WHAT IS AN AUDIT OF A FINANCIAL REPORT? 7WHAT IS A REVIEW OF A FINANCIAL REPORT? 7RELATIONSHIPS IN FINANCIAL REPORTING 8WHAT IS THE ROLE OF THE AUDIT COMMITTEE? 8WHAT INFORMATION IS AUDITED? 9WHAT INFORMATION IS REVIEWED? 9WHAT IS AUDITOR INDEPENDENCE? 10UNDERSTANDING WHAT EXTERNAL AUDITORS CAN PROVIDE 11DIFFERENCE BETWEEN INTERNAL AND EXTERNAL AUDIT 11ASSURANCE ON NON-FINANCIAL INFORMATION 11WHAT IS AUDIT QUALITY? 11HOW CAN FINANCIAL REPORT USERS ASSESS AUDIT QUALITY? 12WHAT ROLE DO LISTED COMPANIES HAVE IN OBTAINING QUALITY AUDITS? 13THE AUDITOR’S REPORT 14UNMODIFIED AUDIT OPINIONS AND REVIEW CONCLUSIONS 14WHAT DOES A “TRUE AND FAIR VIEW” MEAN? 14BASIS FOR OPINION 14KEY AUDIT MATTERS 15EMPHASIS OF MATTER AND OTHER MATTER PARAGRAPHS 15GOING CONCERN 15OTHER INFORMATION 16CONTENTS OF PARAGRAPHS FOR SPECIFIC MATTERS IN THE AUDITOR’S REPORT 17HOW CAN YOU TELL IF THE AUDITOR’S REPORT IS CLEAN OR NOT? 18DOES A CLEAN AUDITOR’S REPORT MEAN A CLEAN BILL OF HEALTH FOR THE ENTITY? 18MODIFIED AUDITOR’S OPINIONS 19BASIS FOR MODIFIED OPINION 19THE AUDIT AND REVIEW PROCESS 20WHAT DO AUDITORS AND REVIEWERS DO? 20WHAT IS A MATERIAL MISSTATEMENT? 21WHAT DO AUDITORS DO IF THEY FIND NON-COMPLIANCE WITH LAWS AND REGULATIONS? 21WHAT DO AUDITORS DO WITH RESPECT TO FRAUD? 21WHAT DO AUDITORS DO IN REGARD TO THE GOING CONCERN ASSUMPTION? 22APPENDIX 1 – GLOSSARY 23APPENDIX 2 – EXAMPLE INDEPENDENT AUDITOR’S REPORT 24

A GUIDE TO UNDERSTANDING AUDITING AND ASSURANCE: AUSTRALIAN LISTED COMPANIES 4FOREWORDIn recent years audit quality and the value ofaudit have been a focus of ongoing commentaryin the public domain, and this has includedpublic inquiries into a broad suite of issues,such as the basis and sufficiency of auditorindependence, audit market competition, auditquality and the scope and purpose of the audit.CPA Australia has long held the view thatinvestors and other stakeholders need to betterunderstand the existing reporting and auditingframeworks in order to appreciate the meritsand impact of changes that may be proposedfrom time to time.CPA Australia’s revised publication - A guideto understanding auditing and assurance:Australian listed companies explains in plainlanguage the value and purpose of auditing andassurance. This will assist shareholders, investorsand other readers of financial reports who arenot experts in auditing and assurance to betterunderstand the messages from the company’sauditor and make use of this information in theirdecision making.Since its inception some years ago, the Guidehas been widely recognised for its contributionto enhancing financial literacy across bothAustralian stakeholders and internationally.There have been some significant changesto the auditor’s report since the previousedition, including the introduction of “KeyAudit Matters” to improve the informationvalue of the auditor’s report to users. ThisGuide has been updated for all of the currentrequirements impacting the auditor’s report.In addition, it has been updated for changes tothe auditor’s responsibilities when conductingan audit engagement, including how theauditor responds to suspected or identifiednon-compliance with laws and regulations,and highlights the directors’ role in supportingaudit quality.This updated Guide has been produced as partof CPA Australia’s ongoing commitment as aprofessional accountancy organisation to servethe public interest. It was first developed as aninitiative of the External Reporting Centre ofExcellence of CPA Australia.Merran Kelsall FCPADeputy PresidentCPA Australia Ltd

A GUIDE TO UNDERSTANDING AUDITING AND ASSURANCE: AUSTRALIAN LISTED COMPANIES 5THE PURPOSE AND SCOPEOF AUDITS AND REVIEWSShareholders of listed companies are usually quiteseparate from those managing and governingthe companies they own.1 They need a reliableand independent source of financial informationon which to assess the company, and theperformance of management and those chargedwith governance. It is the same for otherstakeholders of companies, such as creditors,lenders, employees, analysts, prospectiveshareholders, regulators, governments andcommunities. Audits and reviews enhance thecredibility of the information contained within thefinancial report,2 comprising: the financial statements; notes to the financial statements; and the directors’ declaration about the financialstatements and notes.This information enables shareholders andother stakeholders to make assessments anddecisions, such as investing, divesting, lending orcontracting with the company, with confidenceand on a consistent basis.An audit of a listed company’s financial report isrequired annually, as well as a review of a listedcompany’s half year financial report in Australia.WHAT DO USERS NEED TO UNDERSTANDABOUT FINANCIAL REPORTS?Auditors consider the information needs of usersof financial reports when determining what isimportant (material) to those users, which driveswhat the auditor will focus on. It is reasonable forthe auditor to assume that users of the financialreport:3 4a) have a reasonable knowledge of business,economic activities and accounting, as well asa willingness to study the information in thefinancial report with reasonable diligence;c) recognise the uncertainties inherent in themeasurement of amounts based on the use ofestimates, judgement and the consideration offuture events; andd) make reasonable economic decisionson the basis of the information in thefinancial statements.WHAT DOES ASSURANCE MEAN?The term assurance refers to the expression ofa conclusion by an assurance practitioner thatis intended to increase the confidence that userscan place in a given subject matter. An audit is aform of assurance engagement which providesan opinion giving reasonable assurance ona financial report. An auditor is an assurancepractitioner who conducts an audit. Therefore,an auditor’s report provides a conclusion thatincreases the confidence that users can place ina company’s financial report. There are differinglevels of assurance, which result in different typesof conclusions, depending on the type of workthat the assurance practitioner performs.The following diagram illustrates different levelsof assurance, in some of the different activitiesperformed by accountants:MOREASSURANCE OBTAINEDWHY ARE AUDITS AND REVIEWS REQUIRED?LESSAbsolute assurance – for examplea guaranteeReasonable assurance – for example an auditof financial statementsLimited assurance – for example a review offinancial statementsNo assurance – for example, preparingfinancial statements on behalf ofmanagement (a compilation engagement)b) understand that the financial report isprepared, presented and audited to levels ofmateriality;This guide refers to audits and reviews of listed company financial reports. The concepts of audit and review are also applicable to other types of entities such as private companies,companies limited by guarantee and public sector entities. 2 As defined under the Corporations Act 2001, sections 295 and 303. 3See CPA Australia’s A Guide to Understanding AnnualReports: Australian Listed Companies. 4Source: ASA 320 Materiality in Planning and Performing the Audit, paragraph 4.1

A GUIDE TO UNDERSTANDING AUDITING AND ASSURANCE: AUSTRALIAN LISTED COMPANIES 6WHAT IS THE IMPACT OF THE LEVEL OF ASSURANCE?Type of assuranceFor exampleNature of keywork performedExample form of conclusionReasonable assuranceAn audit of afinancial reportGathering of sufficientappropriate auditevidence based on anassessment of risk andmateriality to support theauditor’s opinion.In our opinion, the financial report isin accordance with the CorporationsAct 2001, including giving a true andfair view of the company’s financialposition at year end and of its financialperformance for the year then endedand complying with the AustralianAccounting Standards and theCorporations Regulations 2001.5This is commonly referred to aspositive assurance.Limited assuranceA review of a half-yearfinancial reportPrimarily enquiries andanalytical review, withless detailed procedures,based on an assessmentof risk and materialityto support the auditor’sconclusion.Based on our review, which is not anaudit, we have not become aware ofany matter that makes us believe thatthe half-year financial report of thecompany is not in accordance with theCorporations Act 2001 including: givinga true and fair view of the company’sfinancial position as at 31 December20XX and of its performance for thehalf-year ended on that date; andcomplying with Accounting StandardAASB 134 Interim Financial Reportingand Corporations Regulations 2001.6This is commonly referred to asnegative assuranceNo assurance Preparing financialstatements (compilationengagement; Preparation of thefinancial statements No conclusion provided Agreed-uponprocedures Performing an agreedset of procedures Factual findings from performing theprocedures reported but no opinion(either positive or negative) is providedto the users on the work that has beenundertaken.5Auditing Standard ASA 700 Forming an Opinion and Reporting on a Financial Report provides the requirements for the auditor’s report. 6Auditing Standard on Review EngagementsASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity as Amended provides the requirements for the review report.

A GUIDE TO UNDERSTANDING AUDITING AND ASSURANCE: AUSTRALIAN LISTED COMPANIES 7WHAT IS AN AUDIT OF AFINANCIAL REPORT?WHAT IS A REVIEW OF AFINANCIAL REPORT?An audit of a listed company’s financial report isa reasonable assurance engagement where theauditor provides an opinion about whether thefinancial report is prepared in accordance withthe Corporations Act 2001. This includes givinga true and fair view of the financial positionof the company at year end, and of its financialperformance for the period ended on that date,and complying with Australian AccountingStandards7 and Corporations Regulations 2001.Full-year financial reports of Australian listedcompanies are required by law to be audited.Many other types of entities are also required tohave their financial report audited, including nonlisted companies over a certain size threshold andlarge charities.A review of a half-year financial report, referredto as an interim financial report in the accountingstandards,7 is a limited assurance engagementwhere the auditor provides a conclusion to theusers of the financial report as to whether theauditor has become aware of any matter thatmakes them believe that the financial report isnot in accordance with the Corporations Act2001, including giving a true and fair view andcomplying with Accounting Standard AASB 134Interim Financial Reporting and CorporationsRegulations 2001.While the reasonable assurance obtained in anaudit is a high level of assurance, it is not absoluteassurance (that is, it is not a certification that thefinancial report is completely correct).Obtaining absolute assurance is not possible infinancial report audits for a number of reasons,including: It would be impractical for the auditor to testand audit every transaction or balance. Preparation of the financial report involvesjudgements and estimates by managementand may be contingent on future events, whichmeans that valuation of assets or liabilities inthe financial report often cannot be determinedprecisely.AASB 134 Interim Financial Reports.7Australian listed company half-year financialreports are required by law to be audited orreviewed by the same auditor that conducts theaudit of the financial report at year end.

A GUIDE TO UNDERSTANDING AUDITING AND ASSURANCE: AUSTRALIAN LISTED COMPANIES 8RELATIONSHIPS IN FINANCIAL REPORTINGThe following diagram illustrates the relationshipbetween shareholders and other stakeholders,management, those charged with governanceand the auditor. Those charged with governanceare those responsible for overseeing the strategicdirection and accountability obligations ofthe company, including the financial reportingprocess. In a listed company this includes theboard of directors, which may include someexecutive members, and the audit committee.In Australia, auditors attend a listed company’sAnnual General Meeting (AGM) and are availableto answer questions from interested parties thatare entitled to participate in the meeting, suchas shareholders. This is a useful opportunityfor shareholders to clarify specific aspects ofthe audit.ThoseCharged withGovernanceManagementprepares thefinancial reportManagementDirectors preparethe Directors’Report & Directors’declaration on thefinancial reportShareholdersandother usersThe auditor provides anopinion or conclusion onthe financial report andremuneration reportThe auditor isindependentfrom the companyExternalAuditorWHAT IS THE ROLE OF THE AUDITCOMMITTEE?The Australian Securities Exchange (ASX)requires8 listed companies included in the S&PAll Ordinaries Index to have an audit committeeand recommends9 all other listed entities have anaudit committee, which is a sub-committee of theboard of directors. The audit committee overseesthe appointment or removal of the externalauditor, the fees payable for both audit and nonaudit work, rotation of the audit engagementpartner, the scope and adequacy of the externalaudit, the independence and performanceof the external auditor and the impact of anyproposed non-audit services on the auditor’sindependence.10Consequently, the audit committee usuallyarranges the appointment of the auditor, whichis then confirmed by the members at the AGM.The audit committee typically meets with theauditor during the year to discuss details suchas scheduling, risks, financial reporting issues,the auditor’s findings, matters to be included as“Key Audit Matters” in the auditor’s report andother matters relevant to the audit of the financialreport. At the end of the audit, the auditor oftenprovides a more detailed, in-depth confidentialreport to the audit committee.Audit committees also oversee the corporatereporting processes, internal control framework,the preparation of the financial report, includingthe appropriateness of the accountingjudgements or choices exercised by managementin preparing that financial report, and the internalaudit function.ASX listing rules. 9ASX Corporate Governance Council Corporate Governance Principles and Recommendations 4th Edition 2019, recommendation 4.1 10 Corporations Act 2001 section299A(1) requires a listed entity’s directors’ report to contain information that shareholders would reasonably require to make an informed assessment of the entity’s operations (section 299A(1)(a)); financial position (section 299A(1)(b)); and business strategies, and prospects for future financial years (section 299A(1)(c) – the operating and financial review.8

A GUIDE TO UNDERSTANDING AUDITING AND ASSURANCE: AUSTRALIAN LISTED COMPANIES 9WHAT INFORMATION IS AUDITED?WHAT INFORMATION IS REVIEWED?Only certain sections of a company’s annualreport are audited. The auditor’s report provides an opinion on the financial report,which comprises the financial statements,the notes to the financial statements and thedirectors’ declaration. The auditor’s report alsoprovides an opinion on the remuneration reportin the directors’ report but not on the Operatingand Financial Review (OFR)10 or other information.This is important to remember as the directorsprovide their assessment of the company’soperations, financial position, and businessstrategies and prospects for future financialyears in the OFR.An interim financial report14 for the half-year is required to beissued by listed companies and that interim financial reportis required to be either audited or reviewed by the auditorof the company. The work conducted in a review is primarilycomprised of making enquiries of persons responsible forfinancial and accounting matters and performing analyticalprocedures, and so the scope of a review is substantially lessthan the scope of an audit.As the directors’ report is intended to complementand support the financial report, it may appearto be part of the audited financial informationand may also include non-GAAP (GenerallyAccepted Accounting Principles) measures,which are financial information not prepared inaccordance with the accounting standards.Although the information provided in thedirectors’ report is not audited, with the exceptionof the remuneration report, the auditor still needsto consider and report on whether it containsmaterial inconsistencies with the financial report,or knowledge gained through the audit, orappears to be materially misstated. This providessome comfort to shareholders. See section on“The Auditor’s Report - Other Information”.11Annual ReportFinancial ReportDirector’s ReportFinancial StatementsAuditedNotes to theFinancial StatementsRemunerationreportDirectors’ DeclarationNOTAudited*Operating &Financial ReviewOther Information* Material inconsistencies with financial report and auditor’s understanding of the companyidentified only.The financial report may be published as partof an integrated report,12 which addresseshow an organization’s strategy, governance,performance and prospects, in the contextof its external environment, lead to the creationof value in the short, medium and long term,by reporting on inputs, outputs and outcomesin relation to six capitals, of which financial capitalis just one. The financial report may also bepresented with other information in the annualreport or with other reports which are preparedvoluntarily by the company, such asa sustainability report.1310Corporations Act 2001 section 299A(1) requires a listed entity’s directors’ report to contain information that shareholders would reasonably require to make an informed assessment of theentity’s operations (section 299A(1)(a)); financial position (section 299A(1)(b)); and business strategi

to understanding auditing and assurance: Australian listed companies explains in plain language the value and purpose of auditing and assurance. This will assist shareholders, investors and other readers of financial reports who are not experts in auditing and assurance

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