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.
Alright? So evidence is really critical
because I shouldn't make a decision
without having some
evidence. If you're sick or something
happens to you on the way to uni, then I
want evidence if you say, "Okay. I missed 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 was really the
case. Right? So I'm technically a doctor,
and 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 and you say, "Oh, okay. 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 double
AASBs. Alright. So we're looking at
management's information and what the
double AASBs say it should be. And 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. Alright? So
competency is about having the right
skills, and and then being independent is
about being
objective. And I'll give you an
example. So many, many, many years ago,
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. 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 $10,000,000
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
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. And there's no pictures. No
diagrams. It's all in color. It's all
black and white, just typed 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.
Alright. 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
AASBs that we talked about. Alright. So
our financial statements and our double
AASBs. 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 DNA
and taking a tire track and running it
through a database. We also have
less cool procedures to collect
evidence. So there's no like, you know,
dark 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 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?"
I'm just going to move this over here
for a second. Alright. So we have three
main types of audits: 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 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. So, is a company reporting
GST appropriately? Are they following
occupational health and safety? 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. The auditor-general
are the government
auditors. Alright. So the New South
Wales audit office and the auditor
general of Australia based in Canberra.
New South Wales auditor general will
audit state government
organizations, and the auditor general
will handle the audit for everything
else that's federal.
So the auditor general audits
the defense force. They're in charge
of the overall audit for
Telstra, Centrelink, and other big
government departments.
We have Auditors for tax
that work specifically for the ATO.
But they're more likely to be lawyers
and accountants, 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. So Quantis, the
Commonwealth Bank, Coca-Cola will 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.
Alright. 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.
Alright. So, let's look the big
firms. I worked for this one actually,
well, the predecessor for this one, which
was C&L brand, and then
PwC. So the big four audit--probably--I
think about 60% of the Australian stock
exchange, and then these guys here pretty
much audit the rest. Alright. So for
those people who are going to a later
afternoon to, and you'll have Kate, or
you'll have Nicole, we actually have
an agreement with Grant Thornton, where
they actually send real life auditors in
to teach tutorial. So you'll get to hear
lots of stories from them. The people
who are going to... who will have Ben
this afternoon in the 12:00 to
and I think also the 1:30 one. 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.
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
ISAC, which is one of the university
student groups. Audits 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 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. 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. 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. But dairy farmers
made yogurt, again, I couldn't eat too
much of that. 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 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, choosing a
new information system, you get
different departments within your
audit firm to do that. But
it's all about sort of growing the
bigger audit firm share. So, something
like management consulting services is
really high margin.
And towards my--at the end of my
career, I did a lot more management
consulting, and I remember back in
19, oh, I think it was 1999,
we had a $20,000,000 consulting job
with the Australian Broadcasting
Corporation just down the road for
implementing new software. And that was a
six-month project for $20,000,000.
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 6-8
weeks work, 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 partnership.
Now, in terms of the
hierarchy or the shape of an audit
firm, previously, they looked like this.
Alright. 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, 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.
And that's especially... you
scan a lot of audit documentation then
you would have had graduates, 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, 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, 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 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.
Alright. And you can find those
free on the auausb website. auasb.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.
Alright. 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. 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 the 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 AUASB
issues the auditing standards and
we're internationally harmonized so
they come down from the International
Auditing Standards Board, and the key is
that they are mandatory.
Alright. 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.
Alright. So, how do we make
sure that everybody who's doing an audit
is doing the 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.
Alright. 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
that the auditing standards and the
Corporations Act actually set out. So
things about having leadership,
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
program comes in
from chartered
accountants and CPA 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.
Alright. 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. I'll provide you
guys with a link to look at the latest
inspection report from ASIC. It
doesn't actually show names of firms.
This also happens in the U.S. and the U.S.
has started naming firms who are not
doing the right thing. So there's big
bucks in making sure that everybody
within 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. Alright. Corporations Act.
Besides governing company directors,
setting up companies in Australia--
you guys have all done Australian
company law? Have 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.
And you can go into those
in more detail in the textbook.
Alright. 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 planning to...
So, we're going to look at why do
we have the report? What goes into
something called an unmodified audit
report? 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 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 the
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 it's 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 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 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." Alright. 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 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 misstatement.
So ASA--this is our first ASA--
700 and all the the ones I'm reporting
are in the 700 area. Say that we want
to get reasonable assurance that it's
free from misstatements due to fraud or
error. So I'm not interested--I don't care
whether it's a mistake, a 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.
Alright. And that it is a fair
presentation
that it fairly represents
what happened 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 commensurate with what we know
about the firm? And then making sure
that the financial report is, again, in
accordance with our double AASBs.
There's all sorts of parts to the audit
report, and 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. 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. And I'll also copy in for you
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. Alright. 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,
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.
Alright. 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. Alright. So
they're understating a number,
they're failing to make a disclosure,
they're just lying about something.
Alright. The second one, which is this one
here, is that we cannot get enough
evidence. Alright. So not
enough evidence.
This is a bit like Donald Trump
refusing to 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,
it 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.
Alright. 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 statements and all of your
different
accounts here. If you prong to Norman on
one of those,
alright, and you said, "Okay, Norman
is right here." Norman's only can self-contain.
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've never named him, and then Nelson
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.
Alright.
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. Alright? 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. Alright. So you've got Norman,
and you've got Perry.
Okay. And a lot of students even
draw the little animals, that's cool.
But that's a way to figure out the
different sorts of modified audit
reports when I say, "I'm not going to give
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.
Alright. I use an emphasis of
matter paragraph, sometimes shortened to
an EOM.
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 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. Alright. 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 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're
showing a loss, they're showing lots of
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 that you're looking
at--oh, I think there's a new textbook
coming out at the end of this year that
will 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, and that was
it. Now, the auditors must disclose
parts of the processes that
they go through to make their opinion.
Alright. 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 KAMs.
Alright.
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
tricky bit at the back, but your share
analysts, your fun managers.
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 after the 31st of
December, at the end of this year. However,
we have three firms who are early adopters:
QBE Insurance, Cochelar, which are
the medical implants, and the Australian
Stock Exchange Limited because the stock
exchange is a public entity. They've
actually gone ahead. I'll include some
links so that you can look at the actual
key audit matters. 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
KAMs. At the moment, firms can write a lot,
or they can write a little. KAMs
first came in the UK, or here's the
requirements that says what they need to
do. It's not very exciting 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 in the first place, it came
up was in the UK
about 2012, I think it started.
Rolls-Royce 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, Vodafone
wrote about two pages. The audit of a
Vodafone 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
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 and I tell you that
the auditing researchers and the
linguists are all going to be looking at
this information of this topic very
closely. Alright. 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 9:00 class in the morning,
quiz starts at 9:05 AM, 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
and remember, it's open book.
Okay. So bring as much stuff as you
want. You can use the Internet. And one
other thing. Shhh. 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 because 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.