Awesome. Alright. So welcome, everybody,
to Lecture 1. Who's excited to be here
for auditing?
Hey, those people down the front.
Woo hoo. And everyone else is like, "I'm
here because I have to be. It's in the
major." So hopefully, over the semester,
you'll get to learn a little bit about
what auditing is all about. Even if you
don't want to be an auditor, if you want
to work in business or you want to work
in marketing or human resources, then
we're going to look at some key concepts
that going to help you no matter what
sort of business career you're
after. And the other thing that we do
here as well is that we also have our
annotated lecture slides. So you'll also
see me writing and that sort of thing on
them. This is all captured on the video.
The video will go on to UTS online and
also gets uploaded to YouTube. Okay. So,
you'll get files and access both ways.
So we're going to cover a lot in
the first week. You already know about
the subject from the prep week stuff. You
know about learning analytics from
looking online and our assessment, so I'm
not going to go through those. Alright.
So we're going to cover two chapters out
of the textbook today. We're going to
cover, well, why the hell do we have an audit
in the first place? And then we're also
going to cover the idea of what is
the output or the final product of
our audit. So we're going to look at a
whole range of
different objectives. Let me just put my
highlighter on here. Okay. Is my
highlighter the right size? No, I want
this
one. Alright. So we're going to look at
some basic stuff about describing what
assurance is all about. Why audit is
important in regards to reducing the
risk of shareholders, the idea of
information risk. We're going to look
at describing auditing, which is one
small subset of assurance. We're going to
look at the difference between auditing
and accounting. We're going to look at
some types of audits and some different
types of audit firms that provide them,
and the big four
firms. We're going to look at what the
professional bodies do, so CA and CPA.
We're going to look at the auditing
standards and why they're important to
us. We're going to look a little bit
at quality control, not too much, and then
also the basics of the Corporations Act.
So it sounds like a lot, but there's
actually just a few basic key concepts.
Now, in the lectures and in the lecture
notes, I pull out the most important
things that I want you to learn from the
textbook. Now, there are still going to be
some things in the textbook that I would
like you to read, but the things I think
are most important are the things that
are going to be in the lecture notes and
the things I'm going to discuss. And then
out of those, the things that I think are
key or most important are going to be
the things that will come up in the
quizzes each week. Alright? So that'll
give you a guide as to what I think is
most important when it comes to exam
prep. So if there's you know a whole
section in the textbook that I don't
really touch on, you might want to have a
read of it just for background but not
go too in-depth.
Alright. So what's our first
objective? What the hell is assurance? So
assurance is about having someone
independent, and that's us, the auditor, being
objective, trying to improve the quality
of information for decision
makers. Alright? We want decision makers
to have accurate, reliable information so
that they can make the best decisions
for themselves. And they could be
shareholders. They could be regulators. It
could be managers within the company. So
no matter who you are, you make decisions
based on information. Very rarely in
business do we make decisions just based
on flipping a coin or our gut. We're
going to need to use information. And so
the process of assurance is about
providing quality and then also the idea
of reliability
to that information.
Oops, -ilty.
Alright. So right down
here.
Oh, that's really bright. Can we
still see the slides if I leave the
curtains open? Yep. We've been in a
basement room this morning. I think just
having some natural light will help me
realize it's
daytime. So who can perform an audit? Our
public accounting firms, plus we're going
to look at some government auditors as
well. There's different levels of
assurance, which we'll talk about
in a future weeks.
Mostly, our assurance is provided on
historic information. So historic things
like the financial statements. We do see
some growth towards looking at forward-
looking information, but it's hard to
provide reliability on information about
the future. It's easy to prove that
information about the past, about
transactions that have already happened,
is reliable. It's a lot easier for us to
do.
So in terms of what we're going to be
studying this semester, our audit issues
are written communication. So we're going
to look at the audit report that
provides a conclusion about the
reliability of written assertions or
statements of another party. So let's
break that
down. We've got our audit of our
financial statements. Now, this one--oh, I almost
dropped my pen. This is what we're going
to spend our entire semester looking at.
Alright. Audits must be done under the
Corporations Act for every company
that's listed, and that requires an
audit where we give an opinion about
whether the financial statements are
true and fair, are a true representation
of the underlying economic transactions
and events that have occurred within
that
firm. The review is a slightly
lesser amount of assurance. So we're
giving very high levels of assurance in
the audit. We're giving less levels in
the review. And then there are other
services which we're not really going to
get into too much detail
on.
So, we can also have assurance over IT.
So if you go onto PayPal or eBay, they
have assurance that the information you
send to them or you store with them is
securely kept, isn't passed on to
other people. So we can provide assurance
on anything. Alright. There's actually an
assurance service that exists over lotto.
So we have the lotto balls that go into
Powerball, etc. There are actually
auditors whose job it is to make sure
that every single Powerball or lotto
ball is exactly the same size, is exactly
the same weight, and is exactly round. And
that security processes over those mean
that you can't manipulate the lotto
balls in any way to get a particular
outcome. So we could provide assurance
over anything. And it's the New South Wales
state government that provides assurance
over the lotteries,
but you could have assurance over a
range of different processes and
information as well. So if you jump onto
PolitiFact, which is a political
fact-checking website, you'll discover
that I think less than 3% of all Donald
Trump's statements can actually be assured
or be reliable. So he says 97% of stuff
that's not reliable. But you can
provide assurance on
anything. So what we're looking at is
this very small bit here. Alright?
So there's assurance of all sorts of
different areas. We've got consulting and
non-assurance services. I can provide
assurance over all sorts of IT
systems, but we're going to be looking
at just this little bit here, the audit
of the financial statements. And that is
what drives most of our big four firms.
Big revenues, and large proportions of
staff just involved in this little
component. So what is the idea about
information risk? Right? The risk that the
information I have might not be suitable
for my decision-making purposes. And that
risk comes about, well, the possibility
that information was made on a
decision that was made on information that
was inaccurate. I'll give you an example
of information
risk. You'll meet my son on some of
our audit slides. We affectionately
call him Audit Junior. And he's
come to every single open day since he
was born. And I'm starting to get
him to the point where we're going to
start training him up to talk in our
audit videos. But when he was one, I sent
out invitations for his first birthday,
and I put two numbers on there for
people to RSVP. I left my mobile number,
and I left my husband's mobile
number. And I
assumed that if my people had called my
husband and said we're coming, I assumed
that he was going to pass that
information on to me.
So I made all these plans for how many
people and how much catering and how
many party bags and all the rest of it
based on the people that had RSVP'd to me
and the assumption that he was going to
tell me if anyone had contacted him and
said that they were going to
go. Bad assumption. So I made all these
decisions. And then two days before the
party, I said to him, "Oh, look, I'm really
surprised that so and so is not coming."
And he said, "Oh, no. They sent me a text
message. They're coming." And I said, "Well, why
didn't you tell me?" He goes, "I thought you
would have
asked." So two days before, suddenly I have
like 20 more people coming to this party,
but I'd made a decision based on
information that was inaccurate. Now all
it meant was that I had to go out and
buy more food, and I was severely
stressed out, and I made him decorate
like hundreds of cupcakes for the extra
people. And that wasn't life-threatening
or it wasn't going to bankrupt a
business, but I made a decision based on
bad information. It wasn't complete. It
didn't have everything that I was
looking for. So if I'm doing this in a
business, I might make decisions
about a whole range of different things.
What raw materials to buy? What prices
I'm going to set for my products?
Alright. Am I going to offer any
discounts? I might make changes based
on manufacturing or marketing.
And if I make those decisions based on
the wrong information, that could have
serious consequences for my company. Now,
if I'm a
shareholder, then what are my decisions
about? My decisions are about whether to--
whoops.
Undo.
Buy,
sell, or hold my
investment. Right? and if I don't have
accurate information as a shareholder,
then I might make the wrong choice when
it comes to doing that decision. So
there's risk that our information might
not be appropriate. So the reasons that we have
risk of information: remoteness
between the
user and management. I own shares in Woolworths.
I can't really go up to Woolworths
and say, "Hey, tell me how to cash flow is
going. How many issues of a going concern?
Which of the stores are not performing
well?" So I don't really know what's going
on inside the business. The provider of
the information is usually
management. And agency theory tells us
that they're biased. No manager wants to
say, "Hey, I did a sucky job this year, but
you should still pay me a bonus." They
want to make themselves look fantastic.
So there's always the bias that they're
going to present information in a way
that maximizes their own wealth under
agency
theory. Alright. There's lots
and lots and lots of data. Hundreds or
thousands or millions of transactions.
How do we know which ones are correct and
which ones are not correct? And then
there's complex transactions between
different companies within the same
company, across different borders, in
different jurisdictions, joint ventures,
partial subsidiaries. It can get really
complicated. Right? My parents have a
whole lot of shares. They're retired. And
my mom's a science
teacher. And I said, "Well, you know, what
are you looking for in the financial
statements? You know, what do you look at
when you look at the numbers?" And she
said, "I don't know." Right? I'm looking for
positive numbers, not negative numbers, in
the profit. I'm looking for numbers that
go up. But she doesn't understand
anywhere near the complexity of
accounting that I do as a CA to be able
to interpret that information and know
whether it seems appropriate or not. So
the audit is there to minimize this
information risk, to act as the
advocate of shareholders to say, "Well,
really, we want information that is absolutely
true for decision-making.
So how could we reduce
information risk? We could get users to
try and verify information. That would be
really tough, especially at Woolies with
all of their shareholders. Not really
reliable. The user does share some risk
with management because they make a risk
when it comes to investing, but the
audit is the thing that we use to reduce
agency cost. Alright. So to
reduce the risk of
agency, we have an audit. We have the
auditors independently check
management's work to make sure that they
are telling the truth when it comes to
what they present to
shareholders. So here's my son. You can
see him there. He's pretty
cute. And for those people who are
wondering, I'm not just getting fat. I
am going to having a baby at the
beginning of next year. So we call him
Audit Junior, and we just recently
announced--well, I announced on my
Facebook page, for all the students
who are friends with me--that he's
getting a promotion to Audit Senior. So
we'll have a new Audit Junior coming
along. But when it comes to describing
auditing, I always use this picture. This
was only taken a few months ago. And I
say, "Is this the world's cutest kid?" Right?
Because every parent thinks that their
child is the cutest kid ever. Nobody--
I haven't met a new parent that says,
"Well, look, actually my son or daughter
is a bit
ugly." Right? Oh, everybody's like, "Oh, how
adorable. How
cute." And the same with managers. Right?
Managers are going to say, "We are the
best ever." And when I meet your parents
at graduation, your parents are going to
say, "Look, wasn't my son just the best
student?" Sometimes, Iook. And to be
honest with you, I lie sometimes. So, you
know, students who were really great--I
say, "Yeah,
absolutely." And sometimes if, you know,
perhaps you weren't the most diligent,
dedicated student, I will say something
like, "Oh, you know, they really put in some
good effort." That's my sort of, you know,
safety statement
there. But how would we determine who is
the world's cutest
kid? How would we figure that out? That's
a claim I'm making. We would need to have
somebody independent come up with some set
of standards on child
cuteness to figure out whether he really
is the cutest kid or not. Now, when it
comes to financial statements, that's
really easy because we have our
accounting standards that tell us this
is what accounting should look like. And
so when we're trying to figure out, "Well,
are management telling the truth? Is this
the right set of financial statements? Is
this what we should be presenting to
shareholders?" then we use our double AASBs
to do that. Rodri will be back to tell
you all sorts of other hints and tips as
well about
auditing. So
auditing is the accumulation of evidence.
all right so evidence is really critical
because I shouldn't make a decision
without having some
evidence if you're sick or uh something
happens to you on the way to UNI then I
want evidence if you say look I miss the
quiz because I fell down a flight of
stairs and broke my leg I'm going to
have to see your broken leg and I'd want
some evidence that that was really the
case right so I'm technically a doctor
and um friends always ask me look could
you write me a doctor's note which I
can't do as a PhD sort of doctor but if
you apply for something you oh look you
know this is what's been going on I want
to see actual evidence to know that
that's the truth so just like on cop
shows before they charge somebody with
the crime they need evidence well we
need evidence as well to be able to make
our opinion
and determine the degree of
Correspondence between information which
for us is going to be our financial
statements let me put that in
red financial
statements and our established
criteria and our established
criteria are our
asbs all right so we're looking at
Management's information and what the
double asbs say it should be and um I
know would you guys have had Helen I
think last semester for accounting
standards so Helen would have taught you
how everything needs to be laid out how
all the calculations need to work so we
need to check that that's part of the
auditor's role so key things about the
audit we need to be competent we need to
have the right skills which is part of
what we're doing here at Uni and we need
to be independent as well all right so
competency is about having the right
skills and and then being independent is
about being
objective um and I'll give you an
example so many many many years ago um
my husband and I both met at an audit
firm so it was an audit firm
romance
and we were both working on different
audit clients um and one of my big
clients was QBE Insurance which we've
all would have seen on TV and they
sponsor some sporting teams Etc but he
left PWC and took a job at
QBE at that point I could no longer do
the audit because I was no longer
independent because I knew somebody that
worked there and part of his job was
consolidation of all of their
subsidiaries so if I discovered that he
had you know somehow stolen $10 million
from the company I probably wouldn't
have told anybody we would have you know
very quietly resigned from our jobs sold
our house and skipped out a
non-extradition country so we need to
have Auditors who are objective and
independent right to say that when some
we see something that's not quite right
we feel independent enough to put our
hands up and say oh I don't think this
should be happening or you know
management are not doing the right thing
so
Independence is the Cornerstone of
auditing you open any audit textbook and
I'm a bit of an audit nerd so I have
audit textbooks from the
1940s and
earlier um and there's no pictures no
diagrams it's all in color it's all
black and white just type text but they
all start with this idea that audit is
the Cornerstone sorry Independence is
the Cornerstone of being able to do that
audit to be independent just like when I
say my kid has got to be the cutest kid
I'm not independent so we would have to
find somebody who is an independent
expert in the Judgment of kid cuteness
to be able to make that
opinion all right so what do we need to
be able to do our audit we need to have
the information the financial statements
and our criteria which is our double
asbs that we talked about all right so
our financial statements and our double
asbs we need to be able to accumulate
evidence and we're actually going to
practice doing that designing ways to
collect evidence so just like on CSI
there's all these techniques for
collecting fingerprints and running DN
and taking a tire Triad and running it
through a database we also
have less cool procedures to collect
evidence so there's no like you know
Dart rooms with spotlights and
microscopes unfortunately Auditors
mostly just use our brains might use a
computer pen and some paper but we're
going to look at specific methods that
we've developed over time to collect
evidence we've talked about being
competent having the right skills and
being independent
and then providing a report so under the
corporations
act
oops I actually have to provide a
written
report that
says here is the outcome of the audit
yes management are telling the truth or
no they're not quite being truthful
about everything and here are the things
that they not being honest
about so what's the difference between
auditing and accounting the accounting
is the recording part of uh the business
process so they record summarize all the
debits and credits within the system and
then the Auditors are actually the ones
checking the accounting work so we're
going to go back and we're going to look
at the work of the accounts and say are
they doing the right
thing just going to move this over here
for a second all right so we have three
main types of audits uh the financial
statement the performance and the
compliance as I mentioned before
financial statement is the one that
we're going to be spending the most of
our time on the performance is about are
we doing things efficiently and
effectively within our business so uh we
might have a sales process or a complex
consolidation process and we can get an
auditor in to say is this the best way
to do this do we need to re-engineer our
business process and then the compliance
audit which is about following laws and
regulations um so is a company reporting
GST appropriately are they following
occupational health and safety um are
they doing anything else that requires a
specific law or regulation but we're
going to focus on that one up
there so there's some examples okay
different types of Auditors the public
accounting firms are the big four and
the second tier they do most of the
publicly listed companies um the auditor
general are the government
Auditors all right so the New South
Wales audit office and the auditor
general of Australia based in Cambra um
New South Wales auditor general will
audit state government
organizations um and the auditor general
will handle the audit for everything
else that's
Federal um so the auditor general audits
the Defense Force uh they're in charge
of the overall audit for
Telstra um center link um other big
government
departments we have Auditors for tax
that work specifically for the ATO um
but they're more likely to be lawyers
um and accountants uh not just
accountants and then internal Auditors
which focus on doing that compliance in
the performance audit so most big top
100 companies will have their own audit
internal audit team um so quantis the
Commonwealth Bank Coca-Cola will'll all
have teams who look at internal
improvements and making sure that
they're following the rules and
regulations and this is important
because they want to try and minimize
fines
all right because you could get a
government fine for not following a law
or a regulation appropriately you could
be sued it could create all sorts of
issues all right so let's look the big
firms um I worked for this one actually
well the predecessor for this one which
was Cooper and Li brand and then
PWC um so the big four audit probably I
think about 60% of the Australian stock
exchange and then these guys here pretty
much AIT the rest all right um so for
those people who are going to a later
afternoon toot and you'll have Kate or
you'll have Nicole um we actually have
an agreement with Grant thoron where
they actually send real life Auditors in
to teach tutorial so you'll get to hear
lots of stories from them uh the people
who are going to um who will have Ben
this after afternoon um in the 12:00 CH
and I think also the 1:31 uh Ben works
at a small local firm in terms of
auditing so he's got lots of experience
in doing much smaller audits which are
required under the corporations act um
so you've got a range of Staff with a
range of experience and this means that
Auditors exist at all sorts of different
levels so I recently did the audit for
ISC which is one of the University
student groups um AUD s happen for the
big ASX listed companies they happen for
large privately listed sorry for large
private companies and they also happen
for small companies that are required to
have audits under the corporations act
or maybe as part of Charity
regulations firms do audits um but just
of different sizes and of different
scales so the big four are so large and
so specialized that people specialize by
industry so you audit mining firms or
government firms or telecommunications
or financial services um my
specialization was financial services so
I didn't get to see much I always envied
the people that got to audit
manufacturing firms or mining firms
because you could go places and see real
things happening until one time I did
get put on the audit of Dairy Farmers
and that's not So Glamorous like milk
processing plants really don't smell
great um we did get to drink you know
you had access to the corporate fridge
so I could drink all the milk that I
could take though I'm Asian so I'm
partly lactose intolerance that doesn't
go down so well um but Dairy Farmers
made yogurt again it couldn't eat too
much of that uh but fruit juice I could
drink the fruit juice all day so that
was a good thing so the public
accounting firms big ones and small ones
provide audit services so that's a big
part of their bread and butter audit
Services
though are high
volume and low margin
that means you don't make a lot of money
off an
audit right it's it's not a really
profitable item to do but the reason
that you do an audit is so that you can
convince your client to hire you to do
other things like tax which can be a
little bit more lucrative and consulting
services that could be helping them
expand into a new market um choosing a
new information system um you get
different departments within your umm
within your audit firm to do that but
it's all about sort of growing the
bigger uh audit firm share so something
like management consulting services is
really high
margin and towards my the end of my
career I did a lot more management
consulting um and I remember back in
19 oh I think it was
99 we had a $20 million consulting job
with the Australian Broadcasting
Corporation just down the road
implementing new software and that was a
six-month project for $20
million so and you wouldn't earn
anywhere near that much on an audit
you'd probably earn a few million
dollars on an audit for about six to 8
weeks work um so there's definitely lots
of margin Aid
there now you find very few firms that
are in the sole proprietorship or the
partnership model that's because of the
idea of joint and several liability and
that would mean that if the partner of
the firm did something wrong and then
they they skipped out of town I would be
liable as one of the partners left over
the big four firms these days and most
of our second tier are almost all
Incorporated companies so while you have
Partners who are shareholders in The
Firm they're not Partners in the typical
sense of a a
partnership now in terms of the
hierarchy or the shape of an audit
firm previously they looked like
this all right so you had the partners
at the very top and then lots of junior
staff doing what we call grunt work
ticking and bashing or ticking and
flicking at the bottom what we're seeing
in terms of Trends and the data that's
coming out of
CA is that the audit firm is looking a
lot more
rectangular now um and that you're
having a lot less staff at the junior
levels and that comes from a number of
different reasons the first
one is
outsourcing or
offshoring um and that's especially you
scan a lot of audit documentation that
you would have had graduates um interns
doing a lot of ticking and checking all
of that gets scanned and then sent off
to India or you know Pakistan and they
do a whole lot of the audit checking
work for about a third the price
overnight so the amount of staff doing
that work is much less um and then we've
also seen a lot more automation so we're
using a lot more big data we're using a
lot more intelligent agents um and
artificial intelligence in audits so you
know the future is still looking bright
for auditing and auditing at this point
is not going to be replaced by machines
but there's a lot less at the bottom
level than there was
before what do the professional bodies
do they do a few different things they
help establish standards through the
auditing Standards Board they do a lot
of research and then they the biggest
one is education to make sure that once
you become a member you are continuously
up to date on latest auditing Trends and
changes within legislation especially at
the international
level now what about our auditing
standards our auditing standards are
called
ASAS all right and you can find those
free on the aub's website AAS
sb.gov
Au now remember our exam is open book so
you can bring in oh somebody has one of
these I'm just going to borrow this here
one of these handbooks if you want all
your standards in one book or you could
print them
out right and bring them into the exam
you can bring your textbook into the
exam you could bring anything you like
comic books if you think you're going to
have time at the end to you know have a
bit of a read um so you don't
necessarily need to buy the standards
book if you don't want to you can look
at them online and then print out the
sections that you think you'll need I
will actually tell you in the last week
of term which ones I think are going to
be key ones for the final exam so you
don't have to worry about
that so the
aasb issues the auditing standards and
uh we're internationally harmonized so
they come down from the international
auditing Standards Board and the key is
that they are
mandatory all right so while some
companies or some countries sorry the
auditing standards say the auditor
May our auditing standards say the
auditor must or the auditor shall
because our requirements are enshrined
within the corporations act we must do
them as the minimum set of Standards you
could do more than what the standard
says but the minimum is contained within
the ASAS and we'll be referring back and
I'll show you excerpts from the
standards on a regular basis of things
that are really critical and important
to
understand all right so how do we make
sure that everybody who's doing an audit
is doing the right right thing that
comes from quality control and so
quality control needs to exist across
firms and quality control also needs to
exist within
firms all right so I need to make sure
that PWC are doing the same minimum
standard as KPMG and then within pwc's
however many offices we need to make
sure that all staff are doing the same
thing and there are specific whoops
specific quality control standards um
that the uh auditing standards and the
corporations act actually set out so
things about having leadership um
meeting ethical and Independence
requirements rules about how to accept
clients selecting the right people doing
the Audits and then monitoring or
checking each
other and that's where the peer review
Pro
program comes in from Chartered
Accountants and zpa Australia where
firms check each other's work to make
sure that they're all following the
standards
appropriately so CA and CPA both have
sets of Auditors that actually audit
them also on top of that we have
the Australian Securities and investment
commission doing their own inspection
program
all right so they audit the big four
firms every single year smaller firms on
a rotating schedule and they can find
audit firms for not complying with the
auditing standards um I'll provide you
guys with a link to look at the latest
inspection report from Asic um it
doesn't actually show names of firms um
this also happens in the US that the US
has started naming firms who are not
doing the right thing so there's big
bucks um in making sure that everybody
Within in The Firm is doing the right
thing in terms of following the order
standards acting independently and
acting ethically how are we doing on
time oh okay all right operations act
besides governing company directors
setting up companies uh in Australian
you guys have all done Australian
company law you guys done company law
yep or for the people who haven't done
it yet one of the assignments many many
years ago used to be prepare all the
documents to start company right we'd
have to actually go back to the
corporations act and figure out what
that is so while the corporations act
specifies how companies get set up it
also specifies what Auditors need to do
you need to be qualified you need to be
registered management can't just choose
the auditor it has to be ratified by
shareholders at an annual general
meeting we can't just quit as an auditor
there's all sorts of rules about
quitting what our responsibilities are
and
Reporting um and you can go into those
in more detail in the
textbook all right so here is the output
and this is really important and you
might be thinking well why am I
interested in looking at the end point
when we're only at the beginning and
this is so that you have in your mind
the idea of what we're striving for or
what we're uh planning to
create so we're going to look at why do
we have the report um what goes into
something called an unmodified audit
report we're we're going to look at when
we might do different sorts of reports
and adding extra information okay now
before Oh I'm trying to remember what
case it was we'll go into the cases I
think uh next
week there was never a legal requirement
to produce a paper audit report you
could have done a verbal audit report at
one stage but now we must provide a
written audit report about the financial
statements in accordance with the
Australian accounting uh uh the
accounting standards and our auditing
standards and Reporting is pretty
similar to the point where if you go to
the auditing standard on audit reporting
there's actually templates in the back
and if you look at almost all of the
publicly listed companies their audit
reports almost say exactly the same
thing word for word except the company
name is different and the year might be
different and the name of the audit
partner might be
different so audit reporting is fairly
standardized and it has very specific
legal language because it is a legal
document that exposes the auditor to
liability if we've done something wrong
so what is the gold standard that
everybody is looking for so what most
firms
want firms want what we call an
unmodified audit report and is also
sometimes called an unqualified report
now this is where it's a bit funny and a
bit
counterintuitive so when you do your ca
or you do a medical degree or you finish
your engineering qualification you
become
qualified right and qualified is a good
thing okay when it comes to an audit it
is the exact opposite the one that
people want the one that
says big tick management are telling the
truth is something called an unqualified
or an
unmodified audit report
okay you might think why is it that way
I don't know it's probably something I
could historically uh dig into the
archives and look at sometimes I wonder
if we do things sort of a bit back to
front in auditing to make it seem really
mysterious and difficult because
auditing is a lot about logic and Common
Sense and we don't want too many people
getting into the awesome area that is
auditing so we want to make it seem
really complicated and Tricky by using
language that doesn't quite make sense
so most firms
probably
about I think the last time we checked
it was something like 98% of firms um on
the ASX get an unqualified unmodified
report management are telling the truth
now that sends a signal to shareholders
that says management telling the truth
you can rely on this information for
your decision- making all right what
happens do you think to company share
prices if I give them the opposite if I
say management are not being truthful
and here are the reasons why what do you
think is going to happen to share
price it's going to go down and it goes
down pretty quickly um in terms of what
we see from the research in terms of
share price reaction so firms want this
managers want to work with us as the
Auditors to come to an agreement on a
set of financial statements that we
think is unqualified is free from
statement so ASA this is our first ASA
700 and all the the ones on reporting
you're in the 700 area say that we want
to get M reasonable assurance that it's
free from misstatements due to fraud or
error so I'm not interest I don't care
whether it's a mistake type 5,000
instead of 500,000 or it's fraud I have
a responsibility to detect those I want
to make sure that it matches the
applicable financial reporting framework
which for us is at
aasbs all right and that it is a fair
fair
presentation that it fairly represents
what happened during the during the
company's Financial period so if the
company was exposed to a lot of
fluctuation changes and adverse
movements in foreign exchange and a
decline in sales then we'd expect to see
a loss from that company is what we're
seeing uh commensurate with what we know
about the firm um and then making sure
that the financial report is again in
accordance with our double asbs
there's all sorts of parts to the audit
report um and uh this has actually
changed a little bit so this bit here
used to be right at the end we have a
new standard change so in the textbook
this is going to be a little bit
different than what you're looking at
right here um new ASA 700 now says that
we tell the shareholders the very first
thing here's our opinion we used to give
them all this legal jargon first all
this other crap used to come first and
then we would do this sort of at the end
but now it's right at the front to make
sure that shareholders know what's going
on now on UTS online in this week's
folder I've also put a whole lot of
audited opinions in there for you to
look at um and I'll also copy in for you
um the link to the QBE
Insurance annual report because it is
one of the few early adopters of some
new regulations and so I'll make a
little video on that in a couple of
weeks as well all right now what happens
if management aren't being truthful how
do I know what sort of opinion to give
them then I'm going to use this table
and this table comes out of Asa 700 uh
705 sorry and so I'm just going to lean
over here because I want to write some
numbers here so Step One is this step
over
here all right the first thing I want to
do is find out why I'm not giving an
unqualified opinion number one the
financial report is materially misstated
that is essentially saying management
are not being
truthful about something all right so
they they're understating a number
they're failing to make a disclosure
they're just lying about something all
right the second one which is this one
here is that we cannot get enough
evidence all right so not
enough
evidence this is a bit like Donald Trump
refusing to uh release his tax returns
can't make an opinion if I don't have
any information so Step One is I look at
well what are the two reasons why I
might go away from the
unqualified step two is I need to look
at the severity and there's two terms
here material but not pervasive or
material and pervasive for material
means it's important enough that we
think shareholders should know about it
but not pervasive and I'm going to
introduce you to two different
characters here and I didn't name these
guys actually one of my other lectures
did
so here we have
Norman Norman the
non
pervasive
slug all right and so Norman's there
because if you imagine your financial
statements let me pick a different color
here so imagine you've got your
financial Cal statements and all of your
different
accounts here if you plong to Norman on
one of
those all right and you said okay Norman
is right here Norman's only can self
contained right he's only in a small
part of the financial statements so
Norman is the situation where we have
either something not truthful or not
enough evidence in just one spot and in
that case we give an opinion called a
qualified
opinion okay now the second person I'm
going to introduce you
to let me make sure my pen is a bit
smaller maybe I'll type here we go
is
Perry the pervasive
octopus and I'd always use the octopus
but i' never named him and then Nelson
who who does our night classes said we
need to give the octopus a name so his
name is
Perry so if I took Perry and I put Perry
on the financial
statements as my
octopus all
right there's his body there's his
little
legs everywhere oh that's not that's a
really you obviously I'm not you're not
coming for the art but the idea with
Perry is that his little tentacles reach
far and wide across the financial
statements so that is what we call
pervasive all right there's lots of
tentacles of Errors so if I have errors
in the financial statements and I have
lots of them across lots of different
areas I say I'm going to give an adverse
opinion like this is bad this is the
signal to shareholders that management
aren't being truthful on a range of
things if I can't get enough information
over a lot of different areas then
Perry's going to say give me a
disclaimer of an opinion and disclaimer
means that I'm not actually giving an
opinion at all it's no
opinion all right so you've got Norman
and you've got
Perry okay and a lot of students even
draw the little animals that's cool um
but that's a way to figure out the
different sorts of modified audit
reports when I say I'm not going to give
a an unqualified I think something's
wrong then there's my options right
there
now okay
sometimes everything is truthful I have
an unmodified or unqualified report but
I want to say shareholders I want to
draw your attention to some extra
information and I do that using an
emphasis of matter paragraph what color
pen am I using oh let's change that to
Blue all right I use an emphasis of
matter paragraph sometimes shortened to
an eoom
okay now the emphasis of matter
paragraph says everything is fine but I
just want to draw your attention to a
new joint venture the company might be
involved in some unusual accounting
about something that is a little bit
different um that we've found a mistake
in the previous report and we're now
revising it and reissuing it so this is
still saying that management is still
being truthful but my emphasis of matter
is just highlighting extra information
to shareholders all right and in the
bundle on UTS online you'll actually see
some examples of the sorts of things
that could go in emphasis of matter
probably the biggest one is uh emphasis
of matter about going concerned do we
understand the concept of going concern
yes hopefully that we expect companies
to continue in the future if the company
is experiencing financial
distress but they are being truthful
about their financial distress so they
showing a loss they're showing lots of
uh debts and not many assets then we can
still give them the big tick in the
financial report because they're being
truthful but we might want to say hey
shareholders there are some financial
difficulties at this firm we do need to
warn you about those so that's important
now this is new this is not going to be
in any textbook um that you're looking
at oh I think there's a new textbook
coming out at the end of this year that
will'll have it in it new standard is
Asa 701 about communicating key audit
matters in the auditor's report and up
until this point in
time what the Auditors did was a black
box the audit report simply said he's
our opinion unmodified unqualified or
one of the other options um and that was
it now the Auditors must
disclose parts of the processes that
they go through to make their opinion
all right now not for everything oh this
is how we audited sales this is how we
audited cash this is how we audited a
property of plant and Equipment instead
it's only for areas that they think
there was significant judgment or that
they found particularly difficult which
they call Key audit matters or
k all right
now the idea is to have increased
transparency over decision- making if I
know how Auditors made a difficult
decision about writing down an
intangible asset then that allows me to
interpret the information in the
financial report with a little bit more
clarity so this is about trying to make
Auditors accountable and giving expert
uses of financial statements more
information now I'm pretty sure the key
audit matters my mom and dad are still
going to gloss over and be like oh
whatever right they look at the glossy
front part of the annual report with
smiling employees and graphs that go up
they're not really looking at the the
tricky bit at the back but your share
analysts your fun
managers um those people are going to be
looking at the key audit matters and
saying okay well this is an account like
intangibles that has a lot of discretion
by managers and the Auditors how did
they handle different opinions how did
they handle a standard that was really
you could do a couple of different
things now this must come in for all
Financial years uh after the 31st of
December at the end of this year however
we have three firms who are early
adopters QBE Insurance ccka which are
the medical implants and the Australian
stock exchange limited because the stock
exchange is a public entity they've
actually gone ahead um I'll include some
links so that you can look at the actual
key audit matters um and over the next
coming weeks I'm going to make a video
where I actually walk through their
financial statements and talk a little
bit about what goes into these
Kam at the moment firms can write a lot
or they can write a little um kamam
first came in in the UK or here's the
requirements that says what they need to
do it's not very exciting um but there
is a risk there's nothing to say how
many key audit matters the auditor needs
to describe and when this was first
introduced and the first place it came
up was in the UK
about 2012 I think it it's started
rollsroyce and I think it was KPMG at
the time wrote something like 12 pages
on key audit matters in tiny tiny tiny
font it was a lot of
information the very same year Vodaphone
wrote about two pages uh the audit of a
vone in the UK wrote about two pages on
key audit matters both were deemed to be
compliant with the standard so what we
worry about is something that we call
boiler plating so the audit partner is
meant to really describe the tricky
decision-making per processes they went
through to look at auditing this really
difficult part of the firm but what we
worry about is that firms will have
standard lines that they will use for
different things and that won't provide
too much information it'll just be a
standardized line that might not say
anything at all and sometimes the
wording has been really really bizarre
in one of the early ones I read from
Rolls-Royce it said something about um
the auditor is reasonably optimistic
that Management's forecasts are based on
reasonable assumptions of blah blah blah
blah blah I'm like what does reasonably
optimistic
mean so there is going to be some issue
about what we see um and I tell you that
the auditing researchers and the
linguists are all going to be looking at
this information of this topic very uh
closely all right oh and we're doing I'm
ahead of time this is awesome so if you
didn't get a subject outline they're
down here at the front come grab one
next week we start the weekly accessible
quizzes your quizzes will start 5
minutes past the start of your class
time so my 9800 class in the morning
quiz starts at 9:05 a.m. and if you're
late that doesn't matter you don't get
any extra time how do you prep you can
look at the textbook there'll be some
videos this lecture video will go up um
and remember it's open
book okay so bring as much stuff as you
want you can use the internet and one
other thing sh just one last thing make
sure that the night before or the day
before and I'm going to send you a
reminder email about this that you can
log into learning catalytics if you
haven't written down your password
somewhere make sure you write it down
because the retrieve password function
in LC takes 6 hours so if you need to
reset your password you need to do it
well ahead of time uh cuz there's no
paper quizzes if you don't bring your
device if you need a device or you don't
have one come talk to me we do have
spares you can borrow otherwise thank
you for coming along to our first week
and I will see you next week