0:00:01.120,0:00:03.439 Awesome. Alright. So welcome, everybody, 0:00:03.439,0:00:05.400 to Lecture 1. Who's excited to be here 0:00:05.400,0:00:06.919 for auditing? 0:00:06.919,0:00:09.440 Hey, those people down the front. 0:00:09.440,0:00:11.480 Woo hoo. And everyone else is like, "I'm 0:00:11.480,0:00:13.120 here because I have to be. It's in the 0:00:13.120,0:00:17.439 major." So hopefully, over the semester, 0:00:17.439,0:00:18.880 you'll get to learn a little bit about 0:00:18.880,0:00:21.279 what auditing is all about. Even if you 0:00:21.279,0:00:23.000 don't want to be an auditor, if you want 0:00:23.000,0:00:24.560 to work in business or you want to work 0:00:24.560,0:00:27.160 in marketing or human resources, then 0:00:27.160,0:00:28.720 we're going to look at some key concepts 0:00:28.720,0:00:30.400 that going to help you no matter what 0:00:30.400,0:00:32.159 sort of business career you're 0:00:32.159,0:00:34.200 after. And the other thing that we do 0:00:34.200,0:00:35.840 here as well is that we also have our 0:00:35.840,0:00:38.120 annotated lecture slides. So you'll also 0:00:38.120,0:00:39.960 see me writing and that sort of thing on 0:00:39.960,0:00:42.640 them. This is all captured on the video. 0:00:42.640,0:00:45.399 The video will go on to UTS online and 0:00:45.399,0:00:48.559 also gets uploaded to YouTube. Okay. So, 0:00:48.559,0:00:53.520 you'll get files and access both ways. 0:00:53.520,0:00:55.239 So we're going to cover a lot in 0:00:55.239,0:00:56.280 the first week. You already know about 0:00:56.280,0:01:00.079 the subject from the prep week stuff. You 0:01:00.079,0:01:01.640 know about learning analytics from 0:01:01.640,0:01:03.399 looking online and our assessment, so I'm 0:01:03.399,0:01:07.320 not going to go through those. Alright. 0:01:07.320,0:01:09.240 So we're going to cover two chapters out 0:01:09.240,0:01:10.880 of the textbook today. We're going to 0:01:10.880,0:01:12.720 cover, well, why the hell do we have an audit 0:01:12.720,0:01:14.640 in the first place? And then we're also 0:01:14.640,0:01:17.680 going to cover the idea of what is 0:01:17.680,0:01:22.240 the output or the final product of 0:01:22.240,0:01:24.119 our audit. So we're going to look at a 0:01:24.119,0:01:26.720 whole range of 0:01:26.720,0:01:29.159 different objectives. Let me just put my 0:01:29.159,0:01:32.360 highlighter on here. Okay. Is my 0:01:32.360,0:01:34.119 highlighter the right size? No, I want 0:01:34.119,0:01:35.560 this 0:01:35.560,0:01:37.600 one. Alright. So we're going to look at 0:01:37.600,0:01:40.600 some basic stuff about describing what 0:01:40.600,0:01:43.280 assurance is all about. Why audit is 0:01:43.280,0:01:45.880 important in regards to reducing the 0:01:45.880,0:01:47.680 risk of shareholders, the idea of 0:01:47.680,0:01:49.640 information risk. We're going to look 0:01:49.640,0:01:51.479 at describing auditing, which is one 0:01:51.479,0:01:53.640 small subset of assurance. We're going to 0:01:53.640,0:01:55.600 look at the difference between auditing 0:01:55.600,0:01:57.719 and accounting. We're going to look at 0:01:57.719,0:01:59.439 some types of audits and some different 0:01:59.439,0:02:01.520 types of audit firms that provide them, 0:02:01.520,0:02:03.000 and the big four 0:02:03.000,0:02:05.079 firms. We're going to look at what the 0:02:05.079,0:02:08.038 professional bodies do, so CA and CPA. 0:02:08.038,0:02:09.520 We're going to look at the auditing 0:02:09.520,0:02:11.080 standards and why they're important to 0:02:11.080,0:02:12.920 us. We're going to look a little bit 0:02:12.920,0:02:15.000 at quality control, not too much, and then 0:02:15.000,0:02:16.840 also the basics of the Corporations Act. 0:02:16.840,0:02:18.160 So it sounds like a lot, but there's 0:02:18.160,0:02:21.360 actually just a few basic key concepts. 0:02:21.360,0:02:24.360 Now, in the lectures and in the lecture 0:02:24.360,0:02:26.920 notes, I pull out the most important 0:02:26.920,0:02:28.200 things that I want you to learn from the 0:02:28.200,0:02:30.120 textbook. Now, there are still going to be 0:02:30.120,0:02:31.440 some things in the textbook that I would 0:02:31.440,0:02:33.400 like you to read, but the things I think 0:02:33.400,0:02:35.040 are most important are the things that 0:02:35.040,0:02:36.440 are going to be in the lecture notes and 0:02:36.440,0:02:39.159 the things I'm going to discuss. And then 0:02:39.159,0:02:41.400 out of those, the things that I think are 0:02:41.400,0:02:43.280 key or most important are going to be 0:02:43.280,0:02:46.239 the things that will come up in the 0:02:46.239,0:02:49.760 quizzes each week. Alright? So that'll 0:02:49.760,0:02:51.720 give you a guide as to what I think is 0:02:51.720,0:02:54.920 most important when it comes to exam 0:02:54.920,0:02:58.080 prep. So if there's you know a whole 0:02:58.080,0:03:00.239 section in the textbook that I don't 0:03:00.239,0:03:01.760 really touch on, you might want to have a 0:03:01.760,0:03:04.000 read of it just for background but not 0:03:04.000,0:03:05.640 go too in-depth. 0:03:05.640,0:03:07.560 Alright. So what's our first 0:03:07.560,0:03:11.000 objective? What the hell is assurance? So 0:03:11.000,0:03:13.760 assurance is about having someone 0:03:13.760,0:03:17.000 independent, and that's us, the auditor, being 0:03:17.000,0:03:20.480 objective, trying to improve the quality 0:03:20.480,0:03:22.360 of information for decision 0:03:22.360,0:03:25.440 makers. Alright? We want decision makers 0:03:25.440,0:03:28.959 to have accurate, reliable information so 0:03:28.959,0:03:31.760 that they can make the best decisions 0:03:31.760,0:03:33.640 for themselves. And they could be 0:03:33.640,0:03:36.480 shareholders. They could be regulators. It 0:03:36.480,0:03:38.360 could be managers within the company. So 0:03:38.360,0:03:41.040 no matter who you are, you make decisions 0:03:41.040,0:03:43.120 based on information. Very rarely in 0:03:43.120,0:03:45.000 business do we make decisions just based 0:03:45.000,0:03:47.840 on flipping a coin or our gut. We're 0:03:47.840,0:03:50.159 going to need to use information. And so 0:03:50.159,0:03:51.840 the process of assurance is about 0:03:51.840,0:03:56.400 providing quality and then also the idea 0:03:56.400,0:04:00.400 of reliability 0:04:00.959,0:04:02.609 to that information. 0:04:03.330,0:04:05.877 Oops, -ilty. 0:04:06.557,0:04:07.766 Alright. So right down 0:04:07.766,0:04:08.753 here. 0:04:10.093,0:04:11.599 Oh, that's really bright. Can we 0:04:11.599,0:04:14.280 still see the slides if I leave the 0:04:14.280,0:04:16.639 curtains open? Yep. We've been in a 0:04:16.639,0:04:18.238 basement room this morning. I think just 0:04:18.238,0:04:20.160 having some natural light will help me 0:04:20.160,0:04:21.720 realize it's 0:04:21.720,0:04:24.360 daytime. So who can perform an audit? Our 0:04:24.360,0:04:25.960 public accounting firms, plus we're going 0:04:25.960,0:04:27.440 to look at some government auditors as 0:04:27.440,0:04:29.160 well. There's different levels of 0:04:29.160,0:04:30.360 assurance, which we'll talk about 0:04:30.360,0:04:33.800 in a future weeks. 0:04:33.800,0:04:36.759 Mostly, our assurance is provided on 0:04:36.759,0:04:39.919 historic information. So historic things 0:04:39.919,0:04:42.520 like the financial statements. We do see 0:04:42.520,0:04:45.960 some growth towards looking at forward- 0:04:45.960,0:04:47.680 looking information, but it's hard to 0:04:47.680,0:04:50.199 provide reliability on information about 0:04:50.199,0:04:52.440 the future. It's easy to prove that 0:04:52.440,0:04:54.120 information about the past, about 0:04:54.120,0:04:56.560 transactions that have already happened, 0:04:56.560,0:04:59.160 is reliable. It's a lot easier for us to 0:04:59.160,0:05:00.029 do. 0:05:01.639,0:05:03.039 So in terms of what we're going to be 0:05:03.039,0:05:06.720 studying this semester, our audit issues 0:05:06.720,0:05:08.600 are written communication. So we're going 0:05:08.600,0:05:10.759 to look at the audit report that 0:05:10.759,0:05:13.880 provides a conclusion about the 0:05:13.880,0:05:16.759 reliability of written assertions or 0:05:16.759,0:05:18.919 statements of another party. So let's 0:05:18.919,0:05:20.400 break that 0:05:20.400,0:05:22.479 down. We've got our audit of our 0:05:22.479,0:05:25.400 financial statements. Now, this one--oh, I almost 0:05:25.400,0:05:27.360 dropped my pen. This is what we're going 0:05:27.360,0:05:30.039 to spend our entire semester looking at. 0:05:30.039,0:05:31.680 Alright. Audits must be done under the 0:05:31.680,0:05:34.199 Corporations Act for every company 0:05:34.199,0:05:36.360 that's listed, and that requires an 0:05:36.360,0:05:38.520 audit where we give an opinion about 0:05:38.520,0:05:40.039 whether the financial statements are 0:05:40.039,0:05:43.319 true and fair, are a true representation 0:05:43.319,0:05:45.720 of the underlying economic transactions 0:05:45.720,0:05:47.120 and events that have occurred within 0:05:47.120,0:05:47.840 that 0:05:47.840,0:05:51.919 firm. The review is a slightly 0:05:51.919,0:05:54.479 lesser amount of assurance. So we're 0:05:54.479,0:05:56.960 giving very high levels of assurance in 0:05:56.960,0:05:59.680 the audit. We're giving less levels in 0:05:59.680,0:06:01.680 the review. And then there are other 0:06:01.680,0:06:02.960 services which we're not really going to 0:06:02.960,0:06:05.599 get into too much detail 0:06:05.599,0:06:07.560 on. 0:06:07.560,0:06:10.960 So, we can also have assurance over IT. 0:06:10.960,0:06:13.599 So if you go onto PayPal or eBay, they 0:06:13.599,0:06:15.840 have assurance that the information you 0:06:15.840,0:06:18.720 send to them or you store with them is 0:06:18.720,0:06:21.880 securely kept, isn't passed on to 0:06:21.880,0:06:23.759 other people. So we can provide assurance 0:06:23.759,0:06:27.039 on anything. Alright. There's actually an 0:06:27.039,0:06:30.400 assurance service that exists over lotto. 0:06:30.400,0:06:33.000 So we have the lotto balls that go into 0:06:33.000,0:06:35.240 Powerball, etc. There are actually 0:06:35.240,0:06:37.360 auditors whose job it is to make sure 0:06:37.360,0:06:39.680 that every single Powerball or lotto 0:06:39.680,0:06:43.400 ball is exactly the same size, is exactly 0:06:43.400,0:06:46.440 the same weight, and is exactly round. And 0:06:46.440,0:06:48.400 that security processes over those mean 0:06:48.400,0:06:50.120 that you can't manipulate the lotto 0:06:50.120,0:06:51.720 balls in any way to get a particular 0:06:51.720,0:06:54.280 outcome. So we could provide assurance 0:06:54.280,0:06:56.080 over anything. And it's the New South Wales 0:06:56.080,0:06:58.080 state government that provides assurance 0:06:58.080,0:07:00.280 over the lotteries, 0:07:00.280,0:07:02.240 but you could have assurance over a 0:07:02.240,0:07:04.759 range of different processes and 0:07:04.759,0:07:07.319 information as well. So if you jump onto 0:07:07.319,0:07:09.560 PolitiFact, which is a political 0:07:09.560,0:07:12.000 fact-checking website, you'll discover 0:07:12.000,0:07:15.560 that I think less than 3% of all Donald 0:07:15.560,0:07:19.160 Trump's statements can actually be assured 0:07:19.160,0:07:22.360 or be reliable. So he says 97% of stuff 0:07:22.360,0:07:24.599 that's not reliable. But you can 0:07:24.599,0:07:26.039 provide assurance on 0:07:26.039,0:07:29.319 anything. So what we're looking at is 0:07:29.319,0:07:32.520 this very small bit here. Alright? 0:07:32.520,0:07:34.160 So there's assurance of all sorts of 0:07:34.160,0:07:36.000 different areas. We've got consulting and 0:07:36.000,0:07:38.400 non-assurance services. I can provide 0:07:38.400,0:07:41.680 assurance over all sorts of IT 0:07:41.680,0:07:43.919 systems, but we're going to be looking 0:07:43.919,0:07:46.280 at just this little bit here, the audit 0:07:46.280,0:07:49.120 of the financial statements. And that is 0:07:49.120,0:07:51.560 what drives most of our big four firms. 0:07:51.560,0:07:55.080 Big revenues, and large proportions of 0:07:55.080,0:07:58.120 staff just involved in this little 0:07:58.120,0:08:01.039 component. So what is the idea about 0:08:01.039,0:08:04.199 information risk? Right? The risk that the 0:08:04.199,0:08:06.840 information I have might not be suitable 0:08:06.840,0:08:09.560 for my decision-making purposes. And that 0:08:09.560,0:08:12.560 risk comes about, well, the possibility 0:08:12.560,0:08:15.639 that information was made on a 0:08:15.639,0:08:17.199 decision that was made on information that 0:08:17.199,0:08:19.800 was inaccurate. I'll give you an example 0:08:19.800,0:08:21.360 of information 0:08:21.360,0:08:25.039 risk. You'll meet my son on some of 0:08:25.039,0:08:27.560 our audit slides. We affectionately 0:08:27.560,0:08:30.440 call him Audit Junior. And he's 0:08:30.440,0:08:32.080 come to every single open day since he 0:08:32.080,0:08:34.360 was born. And I'm starting to get 0:08:34.360,0:08:35.919 him to the point where we're going to 0:08:35.919,0:08:37.279 start training him up to talk in our 0:08:37.279,0:08:40.719 audit videos. But when he was one, I sent 0:08:40.719,0:08:43.279 out invitations for his first birthday, 0:08:43.279,0:08:45.080 and I put two numbers on there for 0:08:45.080,0:08:47.600 people to RSVP. I left my mobile number, 0:08:47.600,0:08:49.680 and I left my husband's mobile 0:08:49.680,0:08:51.959 number. And I 0:08:51.959,0:08:54.640 assumed that if my people had called my 0:08:54.640,0:08:57.320 husband and said we're coming, I assumed 0:08:57.320,0:08:58.600 that he was going to pass that 0:08:58.600,0:09:00.320 information on to me. 0:09:00.320,0:09:02.320 So I made all these plans for how many 0:09:02.320,0:09:04.279 people and how much catering and how 0:09:04.279,0:09:06.640 many party bags and all the rest of it 0:09:06.640,0:09:09.920 based on the people that had RSVP'd to me 0:09:09.920,0:09:12.760 and the assumption that he was going to 0:09:12.760,0:09:15.160 tell me if anyone had contacted him and 0:09:15.160,0:09:16.560 said that they were going to 0:09:16.560,0:09:19.920 go. Bad assumption. So I made all these 0:09:19.920,0:09:22.120 decisions. And then two days before the 0:09:22.120,0:09:23.880 party, I said to him, "Oh, look, I'm really 0:09:23.880,0:09:26.360 surprised that so and so is not coming." 0:09:26.360,0:09:28.200 And he said, "Oh, no. They sent me a text 0:09:28.200,0:09:30.920 message. They're coming." And I said, "Well, why 0:09:30.920,0:09:33.399 didn't you tell me?" He goes, "I thought you 0:09:33.399,0:09:35.079 would have 0:09:35.079,0:09:38.040 asked." So two days before, suddenly I have 0:09:38.040,0:09:40.440 like 20 more people coming to this party, 0:09:40.440,0:09:42.800 but I'd made a decision based on 0:09:42.800,0:09:45.040 information that was inaccurate. Now all 0:09:45.040,0:09:46.320 it meant was that I had to go out and 0:09:46.320,0:09:48.320 buy more food, and I was severely 0:09:48.320,0:09:49.760 stressed out, and I made him decorate 0:09:49.760,0:09:53.320 like hundreds of cupcakes for the extra 0:09:53.320,0:09:55.680 people. And that wasn't life-threatening 0:09:55.680,0:09:57.640 or it wasn't going to bankrupt a 0:09:57.640,0:10:00.480 business, but I made a decision based on 0:10:00.480,0:10:02.640 bad information. It wasn't complete. It 0:10:02.640,0:10:04.399 didn't have everything that I was 0:10:04.399,0:10:06.959 looking for. So if I'm doing this in a 0:10:06.959,0:10:09.680 business, I might make decisions 0:10:09.680,0:10:12.279 about a whole range of different things. 0:10:12.279,0:10:16.839 What raw materials to buy? What prices 0:10:16.839,0:10:18.959 I'm going to set for my products? 0:10:18.959,0:10:22.160 Alright. Am I going to offer any 0:10:22.160,0:10:25.839 discounts? I might make changes based 0:10:25.839,0:10:30.720 on manufacturing or marketing. 0:10:30.720,0:10:32.959 And if I make those decisions based on 0:10:32.959,0:10:34.959 the wrong information, that could have 0:10:34.959,0:10:38.000 serious consequences for my company. Now, 0:10:38.000,0:10:39.800 if I'm a 0:10:39.800,0:10:42.279 shareholder, then what are my decisions 0:10:42.279,0:10:44.519 about? My decisions are about whether to-- 0:10:44.519,0:10:46.120 whoops. 0:10:46.120,0:10:47.720 Undo. 0:10:47.720,0:10:49.140 Buy, 0:10:49.140,0:10:53.080 sell, or hold my 0:10:53.080,0:10:55.760 investment. Right? and if I don't have 0:10:55.760,0:10:58.800 accurate information as a shareholder, 0:10:58.800,0:11:02.440 then I might make the wrong choice when 0:11:02.440,0:11:04.360 it comes to doing that decision. So 0:11:04.360,0:11:06.720 there's risk that our information might 0:11:06.720,0:11:09.839 not be appropriate. So the reasons that we have 0:11:09.839,0:11:12.639 risk of information: remoteness 0:11:12.639,0:11:15.519 between the 0:11:16.000,0:11:19.639 user and management. I own shares in Woolworths. 0:11:19.639,0:11:21.240 I can't really go up to Woolworths 0:11:21.240,0:11:23.720 and say, "Hey, tell me how to cash flow is 0:11:23.720,0:11:26.240 going. How many issues of a going concern? 0:11:26.240,0:11:27.880 Which of the stores are not performing 0:11:27.880,0:11:30.240 well?" So I don't really know what's going 0:11:30.240,0:11:33.000 on inside the business. The provider of 0:11:33.000,0:11:34.760 the information is usually 0:11:34.760,0:11:37.079 management. And agency theory tells us 0:11:37.079,0:11:39.000 that they're biased. No manager wants to 0:11:39.000,0:11:41.519 say, "Hey, I did a sucky job this year, but 0:11:41.519,0:11:43.560 you should still pay me a bonus." They 0:11:43.560,0:11:45.200 want to make themselves look fantastic. 0:11:45.200,0:11:46.839 So there's always the bias that they're 0:11:46.839,0:11:49.000 going to present information in a way 0:11:49.000,0:11:52.320 that maximizes their own wealth under 0:11:52.320,0:11:54.839 agency 0:11:57.320,0:11:59.720 theory. Alright. There's lots 0:11:59.720,0:12:02.480 and lots and lots of data. Hundreds or 0:12:02.480,0:12:05.120 thousands or millions of transactions. 0:12:05.120,0:12:06.399 How do we know which ones are correct and 0:12:06.399,0:12:08.680 which ones are not correct? And then 0:12:08.680,0:12:12.160 there's complex transactions between 0:12:12.160,0:12:14.160 different companies within the same 0:12:14.160,0:12:16.600 company, across different borders, in 0:12:16.600,0:12:19.760 different jurisdictions, joint ventures, 0:12:19.760,0:12:22.360 partial subsidiaries. It can get really 0:12:22.360,0:12:26.079 complicated. Right? My parents have a 0:12:26.079,0:12:28.480 whole lot of shares. They're retired. And 0:12:28.480,0:12:29.959 my mom's a science 0:12:29.959,0:12:31.720 teacher. And I said, "Well, you know, what 0:12:31.720,0:12:33.040 are you looking for in the financial 0:12:33.040,0:12:34.600 statements? You know, what do you look at 0:12:34.600,0:12:35.720 when you look at the numbers?" And she 0:12:35.720,0:12:38.160 said, "I don't know." Right? I'm looking for 0:12:38.160,0:12:40.160 positive numbers, not negative numbers, in 0:12:40.160,0:12:42.279 the profit. I'm looking for numbers that 0:12:42.279,0:12:44.560 go up. But she doesn't understand 0:12:44.560,0:12:46.560 anywhere near the complexity of 0:12:46.560,0:12:49.800 accounting that I do as a CA to be able 0:12:49.800,0:12:51.480 to interpret that information and know 0:12:51.480,0:12:53.639 whether it seems appropriate or not. So 0:12:53.639,0:12:56.079 the audit is there to minimize this 0:12:56.079,0:13:00.079 information risk, to act as the 0:13:00.079,0:13:01.639 advocate of shareholders to say, "Well, 0:13:01.639,0:13:03.320 really, we want information that is absolutely 0:13:03.320,0:13:05.330 true for decision-making. 0:13:05.330,0:13:07.079 So how could we reduce 0:13:07.079,0:13:09.399 information risk? We could get users to 0:13:09.399,0:13:11.399 try and verify information. That would be 0:13:11.399,0:13:13.079 really tough, especially at Woolies with 0:13:13.079,0:13:15.360 all of their shareholders. Not really 0:13:15.360,0:13:18.199 reliable. The user does share some risk 0:13:18.199,0:13:20.360 with management because they make a risk 0:13:20.360,0:13:23.839 when it comes to investing, but the 0:13:23.839,0:13:28.519 audit is the thing that we use to reduce 0:13:28.519,0:13:33.000 agency cost. Alright. So to 0:13:33.000,0:13:36.279 reduce the risk of 0:13:36.279,0:13:39.040 agency, we have an audit. We have the 0:13:39.040,0:13:41.480 auditors independently check 0:13:41.480,0:13:43.720 management's work to make sure that they 0:13:43.720,0:13:45.880 are telling the truth when it comes to 0:13:45.880,0:13:47.720 what they present to 0:13:47.720,0:13:50.040 shareholders. So here's my son. You can 0:13:50.040,0:13:52.000 see him there. He's pretty 0:13:52.000,0:13:55.279 cute. And for those people who are 0:13:55.279,0:13:57.000 wondering, I'm not just getting fat. I 0:13:57.000,0:13:59.360 am going to having a baby at the 0:13:59.360,0:14:01.040 beginning of next year. So we call him 0:14:01.040,0:14:04.560 Audit Junior, and we just recently 0:14:04.560,0:14:05.959 announced--well, I announced on my 0:14:05.959,0:14:08.000 Facebook page, for all the students 0:14:08.000,0:14:09.600 who are friends with me--that he's 0:14:09.600,0:14:12.040 getting a promotion to Audit Senior. So 0:14:12.040,0:14:13.600 we'll have a new Audit Junior coming 0:14:13.600,0:14:15.839 along. But when it comes to describing 0:14:15.839,0:14:18.440 auditing, I always use this picture. This 0:14:18.440,0:14:21.240 was only taken a few months ago. And I 0:14:21.240,0:14:25.360 say, "Is this the world's cutest kid?" Right? 0:14:25.360,0:14:27.880 Because every parent thinks that their 0:14:27.880,0:14:30.639 child is the cutest kid ever. Nobody-- 0:14:30.639,0:14:32.040 I haven't met a new parent that says, 0:14:32.040,0:14:33.360 "Well, look, actually my son or daughter 0:14:33.360,0:14:34.199 is a bit 0:14:34.199,0:14:37.079 ugly." Right? Oh, everybody's like, "Oh, how 0:14:37.079,0:14:39.040 adorable. How 0:14:39.040,0:14:41.360 cute." And the same with managers. Right? 0:14:41.360,0:14:42.839 Managers are going to say, "We are the 0:14:42.839,0:14:45.360 best ever." And when I meet your parents 0:14:45.360,0:14:47.600 at graduation, your parents are going to 0:14:47.600,0:14:51.959 say, "Look, wasn't my son just the best 0:14:51.959,0:14:54.240 student?" Sometimes, Iook. And to be 0:14:54.240,0:14:57.040 honest with you, I lie sometimes. So, you 0:14:57.040,0:14:58.759 know, students who were really great--I 0:14:58.759,0:14:59.560 say, "Yeah, 0:14:59.560,0:15:02.440 absolutely." And sometimes if, you know, 0:15:02.440,0:15:05.399 perhaps you weren't the most diligent, 0:15:05.399,0:15:08.079 dedicated student, I will say something 0:15:08.079,0:15:10.720 like, "Oh, you know, they really put in some 0:15:10.720,0:15:13.600 good effort." That's my sort of, you know, 0:15:13.600,0:15:15.839 safety statement 0:15:15.839,0:15:19.440 there. But how would we determine who is 0:15:19.440,0:15:21.240 the world's cutest 0:15:21.240,0:15:24.160 kid? How would we figure that out? That's 0:15:24.160,0:15:27.399 a claim I'm making. We would need to have 0:15:27.399,0:15:29.800 somebody independent come up with some set 0:15:29.800,0:15:32.759 of standards on child 0:15:32.759,0:15:35.199 cuteness to figure out whether he really 0:15:35.199,0:15:37.759 is the cutest kid or not. Now, when it 0:15:37.759,0:15:40.360 comes to financial statements, that's 0:15:40.360,0:15:42.120 really easy because we have our 0:15:42.120,0:15:44.839 accounting standards that tell us this 0:15:44.839,0:15:48.120 is what accounting should look like. And 0:15:48.120,0:15:49.560 so when we're trying to figure out, "Well, 0:15:49.560,0:15:51.319 are management telling the truth? Is this 0:15:51.319,0:15:53.800 the right set of financial statements? Is 0:15:53.800,0:15:55.040 this what we should be presenting to 0:15:55.040,0:15:57.519 shareholders?" then we use our double AASBs 0:15:57.519,0:16:00.440 to do that. Rodri will be back to tell 0:16:00.440,0:16:02.160 you all sorts of other hints and tips as 0:16:02.160,0:16:03.519 well about 0:16:03.519,0:16:05.360 auditing. So 0:16:05.360,0:16:09.639 auditing is the accumulation of evidence. 0:16:09.639,0:16:11.360 Alright? So evidence is really critical 0:16:11.360,0:16:14.040 because I shouldn't make a decision 0:16:14.040,0:16:16.000 without having some 0:16:16.000,0:16:20.079 evidence. If you're sick or something 0:16:20.079,0:16:22.519 happens to you on the way to uni, then I 0:16:22.519,0:16:24.360 want evidence if you say, "Okay. I missed the 0:16:24.360,0:16:26.120 quiz because I fell down a flight of 0:16:26.120,0:16:28.639 stairs and broke my leg." I'm going to 0:16:28.639,0:16:31.079 have to see your broken leg. And I'd want 0:16:31.079,0:16:33.120 some evidence that was really the 0:16:33.120,0:16:36.880 case. Right? So I'm technically a doctor, 0:16:36.880,0:16:38.399 and friends always ask me, "Look, could 0:16:38.399,0:16:40.319 you write me a doctor's note?" Which I 0:16:40.319,0:16:43.920 can't do as a PhD sort of doctor. But if 0:16:43.920,0:16:46.040 you apply for something and you say, "Oh, okay. You 0:16:46.040,0:16:47.839 know, this is what's been going on." I want 0:16:47.839,0:16:49.440 to see actual evidence to know that 0:16:49.440,0:16:51.399 that's the truth. So just like on cop 0:16:51.399,0:16:53.120 shows, before they charge somebody with 0:16:53.120,0:16:55.920 the crime, they need evidence. Well, we 0:16:55.920,0:16:58.199 need evidence as well to be able to make 0:16:58.199,0:16:59.839 our opinion 0:16:59.839,0:17:02.880 and determine the degree of 0:17:02.880,0:17:05.720 correspondence between information--which 0:17:05.720,0:17:07.880 for us is going to be our financial 0:17:07.880,0:17:09.599 statements--let me put that in 0:17:09.599,0:17:12.039 red: Financial 0:17:12.039,0:17:15.679 statements and our established 0:17:15.679,0:17:18.280 criteria. And our established 0:17:18.280,0:17:21.319 criteria are our double 0:17:21.319,0:17:24.240 AASBs. Alright. So we're looking at 0:17:24.240,0:17:26.119 management's information and what the 0:17:26.119,0:17:29.679 double AASBs say it should be. And I 0:17:29.679,0:17:31.440 know--would you guys have had Helen, I 0:17:31.440,0:17:33.080 think, last semester for accounting 0:17:33.080,0:17:35.120 standards? So Helen would have taught you 0:17:35.120,0:17:37.640 how everything needs to be laid out, how 0:17:37.640,0:17:40.000 all the calculations need to work. So we 0:17:40.000,0:17:41.480 need to check that. That's part of the 0:17:41.480,0:17:45.080 auditor's role. So key things about the 0:17:45.080,0:17:47.760 audit: we need to be competent. We need to 0:17:47.760,0:17:49.559 have the right skills, which is part of 0:17:49.559,0:17:52.039 what we're doing here at uni, and we need 0:17:52.039,0:17:56.039 to be independent as well. Alright? So 0:17:56.039,0:17:57.840 competency is about having the right 0:17:57.840,0:18:00.400 skills, and and then being independent is 0:18:00.400,0:18:03.159 about being 0:18:03.159,0:18:05.000 objective. And I'll give you an 0:18:05.000,0:18:08.679 example. So many, many, many years ago, 0:18:08.679,0:18:10.440 my husband and I both met at an audit 0:18:10.440,0:18:12.520 firm. So it was an audit firm 0:18:12.520,0:18:14.320 romance. 0:18:14.320,0:18:16.679 And we were both working on different 0:18:16.679,0:18:18.960 audit clients. And one of my big 0:18:18.960,0:18:21.120 clients was QBE Insurance, which we've 0:18:21.120,0:18:23.200 all would have seen on TV and they 0:18:23.200,0:18:27.080 sponsor some sporting teams, etc. But he 0:18:27.080,0:18:31.480 left PwC and took a job at 0:18:31.480,0:18:34.520 QBE. At that point, I could no longer do 0:18:34.520,0:18:36.880 the audit because I was no longer 0:18:36.880,0:18:38.520 independent, because I knew somebody that 0:18:38.520,0:18:41.440 worked there, and part of his job was 0:18:41.440,0:18:43.320 consolidation of all of their 0:18:43.320,0:18:47.200 subsidiaries. So if I discovered that he 0:18:47.200,0:18:49.360 had, you know, somehow stolen $10,000,000 0:18:49.360,0:18:51.520 from the company, I probably wouldn't 0:18:51.520,0:18:54.120 have told anybody. We would have, you know, 0:18:54.120,0:18:56.799 very quietly resigned from our jobs, sold 0:18:56.799,0:18:58.919 our house, and skipped out a 0:18:58.919,0:19:02.679 non-extradition country. So we need to 0:19:02.679,0:19:05.480 have auditors who are objective and 0:19:05.480,0:19:09.080 independent. Right? To say that when 0:19:09.080,0:19:11.360 we see something that's not quite right, 0:19:11.360,0:19:13.640 we feel independent enough to put our 0:19:13.640,0:19:15.799 hands up and say, "Oh, I don't think this 0:19:15.799,0:19:17.840 should be happening." Or, "You know, 0:19:17.840,0:19:19.600 management are not doing the right thing." 0:19:19.600,0:19:20.559 So 0:19:20.559,0:19:22.559 independence is the cornerstone of 0:19:22.559,0:19:25.320 auditing. You open any audit textbook, and 0:19:25.320,0:19:27.360 I'm a bit of an audit nerd, so I have 0:19:27.360,0:19:29.640 audit textbooks from the 0:19:29.640,0:19:31.400 1940s and 0:19:31.400,0:19:33.600 earlier. And there's no pictures. No 0:19:33.600,0:19:35.080 diagrams. It's all in color. It's all 0:19:35.080,0:19:37.159 black and white, just typed text. But they 0:19:37.159,0:19:39.320 all start with this idea that audit is 0:19:39.320,0:19:41.600 the cornerstone--sorry. Independence is 0:19:41.600,0:19:43.919 the cornerstone of being able to do that 0:19:43.919,0:19:46.559 audit, to be independent. Just like when I 0:19:46.559,0:19:49.760 say my kid has got to be the cutest kid, 0:19:49.760,0:19:52.320 I'm not independent. So we would have to 0:19:52.320,0:19:55.880 find somebody who is an independent 0:19:55.880,0:19:58.799 expert in the judgment of kid cuteness 0:19:58.799,0:20:01.064 to be able to make that opinion. 0:20:01.559,0:20:03.720 Alright. So, what do we need to 0:20:03.720,0:20:05.679 be able to do our audit? We need to have 0:20:05.679,0:20:07.600 the information: the financial statements 0:20:07.600,0:20:09.320 and our criteria, which is our double 0:20:09.320,0:20:12.120 AASBs that we talked about. Alright. So 0:20:12.120,0:20:15.760 our financial statements and our double 0:20:15.760,0:20:18.720 AASBs. We need to be able to accumulate 0:20:18.720,0:20:19.960 evidence, and we're actually going to 0:20:19.960,0:20:22.679 practice doing that, designing ways to 0:20:22.679,0:20:25.240 collect evidence. So just like on CSI, 0:20:25.240,0:20:26.360 there's all these techniques for 0:20:26.360,0:20:29.280 collecting fingerprints and running DNA 0:20:29.280,0:20:31.559 and taking a tire track and running it 0:20:31.559,0:20:34.880 through a database. We also have 0:20:34.880,0:20:37.840 less cool procedures to collect 0:20:37.840,0:20:39.760 evidence. So there's no like, you know, 0:20:39.760,0:20:41.960 dark rooms with spotlights and 0:20:41.960,0:20:44.039 microscopes. Unfortunately, auditors 0:20:44.039,0:20:46.559 mostly just use our brains, might use a 0:20:46.559,0:20:49.880 computer, pen and some paper. But we're 0:20:49.880,0:20:51.840 going to look at specific methods that 0:20:51.840,0:20:54.280 we've developed over time to collect 0:20:54.280,0:20:56.240 evidence. We've talked about being 0:20:56.240,0:20:57.880 competent, having the right skills and 0:20:57.880,0:20:59.360 being independent 0:20:59.360,0:21:02.559 and then providing a report. So under the 0:21:02.559,0:21:03.880 Corporations Act-- 0:21:06.919,0:21:09.120 oops--I actually have to provide a 0:21:09.120,0:21:10.120 written 0:21:10.120,0:21:12.039 report that 0:21:12.039,0:21:15.440 says, "Here is the outcome of the audit. 0:21:15.440,0:21:18.440 Yes, management are telling the truth. Or, 0:21:18.440,0:21:20.880 no, they're not quite being truthful 0:21:20.880,0:21:22.279 about everything, and here are the things 0:21:22.279,0:21:25.000 that they not being honest about." 0:21:25.000,0:21:27.080 So, what's the difference between 0:21:27.080,0:21:29.360 auditing and accounting? The accounting 0:21:29.360,0:21:33.080 is the recording part of the business 0:21:33.080,0:21:35.960 process. So they record, summarize all the 0:21:35.960,0:21:38.240 debits and credits within the system, and 0:21:38.240,0:21:40.480 then the auditors are actually the ones 0:21:40.480,0:21:42.640 checking the accounting work. So we're 0:21:42.640,0:21:43.760 going to go back, and we're going to look 0:21:43.760,0:21:45.960 at the work of the accounts and say, "Are 0:21:45.960,0:21:48.240 they doing the right thing?" 0:21:49.310,0:21:50.400 I'm just going to move this over here 0:21:50.400,0:21:52.919 for a second. Alright. So we have three 0:21:52.919,0:21:55.360 main types of audits: the financial 0:21:55.360,0:21:56.679 statement, the performance, and the 0:21:56.679,0:21:58.600 compliance. As I mentioned before, 0:21:58.600,0:21:59.679 financial statement is the one that 0:21:59.679,0:22:01.440 we're going to be spending the most of 0:22:01.440,0:22:04.080 our time on. The performance is about: Are 0:22:04.080,0:22:05.720 we doing things efficiently, and 0:22:05.720,0:22:09.000 effectively within our business? So we 0:22:09.000,0:22:11.880 might have a sales process or a complex 0:22:11.880,0:22:13.520 consolidation process, and we can get an 0:22:13.520,0:22:15.559 auditor in to say, "Is this the best way 0:22:15.559,0:22:17.559 to do this? Do we need to re-engineer our 0:22:17.559,0:22:20.039 business process?" And then the compliance 0:22:20.039,0:22:22.360 audit, which is about following laws and 0:22:22.360,0:22:24.840 regulations. So, is a company reporting 0:22:24.840,0:22:27.440 GST appropriately? Are they following 0:22:27.440,0:22:30.320 occupational health and safety? Are 0:22:30.320,0:22:32.360 they doing anything else that requires a 0:22:32.360,0:22:34.480 specific law or regulation? But we're 0:22:34.480,0:22:37.000 going to focus on that one up 0:22:37.000,0:22:40.080 there. So there's some examples. Okay. 0:22:40.080,0:22:41.799 Different types of auditors: The public 0:22:41.799,0:22:43.360 accounting firms are the big four and 0:22:43.360,0:22:45.880 the second tier. They do most of the 0:22:45.880,0:22:49.260 publicly listed companies. The auditor-general 0:22:49.260,0:22:50.880 are the government 0:22:50.880,0:22:52.960 auditors. Alright. So the New South 0:22:52.960,0:22:55.159 Wales audit office and the auditor 0:22:55.159,0:22:57.760 general of Australia based in Canberra. 0:22:57.760,0:22:59.360 New South Wales auditor general will 0:22:59.360,0:23:02.320 audit state government 0:23:02.320,0:23:04.960 organizations, and the auditor general 0:23:04.960,0:23:07.559 will handle the audit for everything 0:23:07.559,0:23:09.039 else that's federal. 0:23:09.039,0:23:11.880 So the auditor general audits 0:23:11.880,0:23:14.480 the defense force. They're in charge 0:23:14.480,0:23:16.559 of the overall audit for 0:23:16.559,0:23:20.279 Telstra, Centrelink, and other big 0:23:20.279,0:23:21.919 government departments. 0:23:21.919,0:23:24.559 We have Auditors for tax 0:23:24.559,0:23:27.039 that work specifically for the ATO. 0:23:27.039,0:23:29.440 But they're more likely to be lawyers 0:23:29.440,0:23:31.720 and accountants, not just 0:23:31.720,0:23:34.480 accountants. And then internal auditors, 0:23:34.480,0:23:36.600 which focus on doing that compliance in 0:23:36.600,0:23:39.720 the performance audit. So most big top 0:23:39.720,0:23:41.400 100 companies will have their own audit, 0:23:41.400,0:23:45.080 internal audit team. So Quantis, the 0:23:45.080,0:23:47.840 Commonwealth Bank, Coca-Cola will all 0:23:47.840,0:23:50.679 have teams who look at internal 0:23:50.679,0:23:52.080 improvements and making sure that 0:23:52.080,0:23:54.000 they're following the rules and 0:23:54.000,0:23:55.840 regulations. And this is important 0:23:55.840,0:23:57.400 because they want to try and minimize 0:23:57.400,0:23:58.464 fines. 0:24:01.320,0:24:02.840 Alright. Because you could get a 0:24:02.840,0:24:04.799 government fine for not following a law 0:24:04.799,0:24:07.080 or a regulation appropriately. You could 0:24:07.080,0:24:10.809 be sued. It could create all sorts of issues. 0:24:14.620,0:24:16.600 Alright. So, let's look the big 0:24:16.600,0:24:19.880 firms. I worked for this one actually, 0:24:19.880,0:24:21.679 well, the predecessor for this one, which 0:24:21.679,0:24:23.640 was C&L brand, and then 0:24:23.640,0:24:27.960 PwC. So the big four audit--probably--I 0:24:27.960,0:24:30.919 think about 60% of the Australian stock 0:24:30.919,0:24:34.279 exchange, and then these guys here pretty 0:24:34.279,0:24:38.120 much audit the rest. Alright. So for 0:24:38.120,0:24:40.559 those people who are going to a later 0:24:40.559,0:24:43.000 afternoon to, and you'll have Kate, or 0:24:43.000,0:24:45.159 you'll have Nicole, we actually have 0:24:45.159,0:24:47.159 an agreement with Grant Thornton, where 0:24:47.159,0:24:49.799 they actually send real life auditors in 0:24:49.799,0:24:51.799 to teach tutorial. So you'll get to hear 0:24:51.799,0:24:54.399 lots of stories from them. The people 0:24:54.399,0:24:57.880 who are going to... who will have Ben 0:24:57.880,0:25:01.240 this afternoon in the 12:00 to 0:25:01.240,0:25:04.039 and I think also the 1:30 one. Ben works 0:25:04.039,0:25:07.200 at a small local firm in terms of 0:25:07.200,0:25:09.840 auditing. So he's got lots of experience 0:25:09.840,0:25:12.279 in doing much smaller audits, which are 0:25:12.279,0:25:14.919 required under the Corporations Act. 0:25:14.919,0:25:17.480 So you've got a range of staff with a 0:25:17.480,0:25:19.440 range of experience, and this means that 0:25:19.440,0:25:21.520 auditors exist at all sorts of different 0:25:21.520,0:25:24.279 levels. So I recently did the audit for 0:25:24.279,0:25:26.320 ISAC, which is one of the university 0:25:26.320,0:25:29.120 student groups. Audits happen for the 0:25:29.120,0:25:31.960 big ASX listed companies. They happen for 0:25:31.960,0:25:35.080 large privately listed--sorry--for large 0:25:35.080,0:25:37.279 private companies. And they also happen 0:25:37.279,0:25:39.360 for small companies that are required to 0:25:39.360,0:25:42.600 have audits under the Corporations Act 0:25:42.600,0:25:44.799 or maybe as part of charity 0:25:44.799,0:25:48.240 regulations. Firms do audits but just 0:25:48.240,0:25:49.720 of different sizes and of different 0:25:49.720,0:25:53.640 scales. So the big four are so large and 0:25:53.640,0:25:56.200 so specialized that people specialize by 0:25:56.200,0:25:59.399 industry. So you audit mining firms or 0:25:59.399,0:26:01.320 government firms or telecommunications 0:26:01.320,0:26:03.559 or financial services. My 0:26:03.559,0:26:05.960 specialization was financial services so 0:26:05.960,0:26:08.279 I didn't get to see much. I always envied 0:26:08.279,0:26:09.440 the people that got to audit 0:26:09.440,0:26:11.240 manufacturing firms or mining firms 0:26:11.240,0:26:12.960 because you could go places and see real 0:26:12.960,0:26:15.399 things happening until one time I did 0:26:15.399,0:26:17.600 get put on the audit of dairy farmers. 0:26:17.600,0:26:19.720 And that's not so Glamorous, like milk 0:26:19.720,0:26:22.880 processing plants really don't smell 0:26:22.880,0:26:25.279 great. We did get to drink, you know, 0:26:25.279,0:26:26.799 you had access to the corporate fridge, 0:26:26.799,0:26:28.320 so I could drink all the milk that I 0:26:28.320,0:26:30.320 could take. Though, I'm Asian, so I'm 0:26:30.320,0:26:31.919 partly lactose intolerance that doesn't 0:26:31.919,0:26:34.760 go down so well. But dairy farmers 0:26:34.760,0:26:36.279 made yogurt, again, I couldn't eat too 0:26:36.279,0:26:38.320 much of that. But fruit juice, I could 0:26:38.320,0:26:39.640 drink the fruit juice all day so that 0:26:39.640,0:26:42.000 was a good thing. So the public 0:26:42.000,0:26:44.919 accounting firms, big ones and small ones 0:26:44.919,0:26:47.600 provide audit services, so that's a big 0:26:47.600,0:26:49.600 part of their bread and butter. Audit 0:26:49.600,0:26:50.760 services though 0:26:50.760,0:26:54.240 are high volume 0:26:54.240,0:26:56.423 and low margin. 0:26:59.320,0:27:01.080 That means you don't make a lot of money 0:27:01.080,0:27:02.240 off an audit. 0:27:02.240,0:27:04.799 Right? It's not a really 0:27:04.799,0:27:07.440 profitable item to do. But the reason 0:27:07.440,0:27:09.640 that you do an audit is so that you can 0:27:09.640,0:27:13.120 convince your client to hire you to do 0:27:13.120,0:27:15.799 other things, like tax which can be a 0:27:15.799,0:27:18.039 little bit more lucrative and consulting 0:27:18.039,0:27:20.360 services, that could be helping them 0:27:20.360,0:27:23.200 expand into a new market, choosing a 0:27:23.200,0:27:25.760 new information system, you get 0:27:25.760,0:27:28.679 different departments within your 0:27:28.679,0:27:30.919 audit firm to do that. But 0:27:30.919,0:27:32.279 it's all about sort of growing the 0:27:32.279,0:27:35.520 bigger audit firm share. So, something 0:27:35.520,0:27:37.440 like management consulting services is 0:27:37.440,0:27:40.039 really high margin. 0:27:40.360,0:27:42.640 And towards my--at the end of my 0:27:42.640,0:27:44.080 career, I did a lot more management 0:27:44.080,0:27:47.679 consulting, and I remember back in 0:27:47.679,0:27:50.480 19, oh, I think it was 1999, 0:27:50.480,0:27:54.760 we had a $20,000,000 consulting job 0:27:54.760,0:27:56.039 with the Australian Broadcasting 0:27:56.039,0:27:58.279 Corporation just down the road for 0:27:58.279,0:28:00.279 implementing new software. And that was a 0:28:00.279,0:28:03.189 six-month project for $20,000,000. 0:28:03.189,0:28:04.279 So, and you wouldn't earn 0:28:04.279,0:28:06.000 anywhere near that much on an audit. 0:28:06.000,0:28:07.559 You'd probably earn a few million 0:28:07.559,0:28:09.159 dollars on an audit for about 6-8 0:28:09.159,0:28:12.360 weeks work, so there's definitely lots 0:28:12.360,0:28:14.000 of margin aid there. 0:28:14.000,0:28:17.240 Now, you find very few firms that 0:28:17.240,0:28:19.480 are in the sole proprietorship or the 0:28:19.480,0:28:22.240 partnership model. That's because of the 0:28:22.240,0:28:24.720 idea of joint and several liability, and 0:28:24.720,0:28:26.720 that would mean that if the partner of 0:28:26.720,0:28:28.000 the firm did something wrong and then 0:28:28.000,0:28:30.080 they they skipped out of town, I would be 0:28:30.080,0:28:32.799 liable as one of the partners left over. 0:28:32.799,0:28:36.200 The big four firms these days, and most 0:28:36.200,0:28:37.760 of our second tier are almost all 0:28:37.760,0:28:39.519 incorporated companies. So while you have 0:28:39.519,0:28:41.679 partners who are shareholders in the 0:28:41.679,0:28:43.960 firm, they're not partners in the typical 0:28:43.960,0:28:46.360 sense of a partnership. 0:28:46.360,0:28:48.279 Now, in terms of the 0:28:48.279,0:28:50.399 hierarchy or the shape of an audit 0:28:50.399,0:28:53.880 firm, previously, they looked like this. 0:28:53.880,0:28:56.519 Alright. So you had the partners 0:28:56.519,0:28:59.200 at the very top and then lots of junior 0:28:59.200,0:29:01.519 staff doing what we call grunt work, 0:29:01.519,0:29:03.120 ticking and bashing, or ticking and 0:29:03.120,0:29:06.559 flicking at the bottom. What we're seeing 0:29:06.559,0:29:08.480 in terms of trends and the data that's 0:29:08.480,0:29:09.880 coming out of CA, 0:29:09.880,0:29:12.679 is that the audit firm is looking a 0:29:12.679,0:29:13.880 lot more rectangular. 0:29:13.880,0:29:16.760 Now, and that you're 0:29:16.760,0:29:19.600 having a lot less staff at the junior 0:29:19.600,0:29:21.120 levels and that comes from a number of 0:29:21.120,0:29:23.399 different reasons. The first one 0:29:23.399,0:29:25.691 is outsourcing 0:29:26.679,0:29:28.880 or offshoring. 0:29:28.880,0:29:32.760 And that's especially... you 0:29:32.760,0:29:34.480 scan a lot of audit documentation then 0:29:34.480,0:29:37.279 you would have had graduates, interns 0:29:37.279,0:29:39.519 doing a lot of ticking and checking. All 0:29:39.519,0:29:41.399 of that gets scanned and then sent off 0:29:41.399,0:29:44.640 to India or, you know, Pakistan, and they 0:29:44.640,0:29:46.440 do a whole lot of the audit checking 0:29:46.440,0:29:48.120 work for about a third the price 0:29:48.120,0:29:50.480 overnight. So the amount of staff doing 0:29:50.480,0:29:53.480 that work is much less, and then we've 0:29:53.480,0:29:55.919 also seen a lot more automation. So we're 0:29:55.919,0:29:58.159 using a lot more big data, we're using a 0:29:58.159,0:30:00.399 lot more intelligent agents, and 0:30:00.399,0:30:03.480 artificial intelligence in audits. So, you 0:30:03.480,0:30:04.799 know, the future is still looking bright 0:30:04.799,0:30:06.360 for auditing, and auditing at this point 0:30:06.360,0:30:08.919 is not going to be replaced by machines. 0:30:08.919,0:30:10.640 But there's a lot less at the bottom 0:30:10.640,0:30:12.760 level than there was before. 0:30:12.760,0:30:14.919 What do the professional bodies 0:30:14.919,0:30:16.880 do? They do a few different things: they 0:30:16.880,0:30:18.440 help establish standards through the 0:30:18.440,0:30:20.720 Auditing Standards Board, they do a lot 0:30:20.720,0:30:22.760 of research and then the biggest 0:30:22.760,0:30:24.600 one is education to make sure that once 0:30:24.600,0:30:27.480 you become a member you are continuously 0:30:27.480,0:30:31.279 up to date on latest auditing trends and 0:30:31.279,0:30:33.480 changes within legislation, especially at 0:30:33.480,0:30:34.960 the international level. 0:30:34.960,0:30:37.279 Now, what about our auditing 0:30:37.279,0:30:38.919 standards? Our auditing standards are 0:30:38.919,0:30:40.679 called ASAs. 0:30:40.679,0:30:43.080 Alright. And you can find those 0:30:43.080,0:30:50.440 free on the auausb website. auasb.gov.au 0:30:50.440,0:30:54.399 Now, remember our exam is open book, so 0:30:54.399,0:30:56.320 you can bring in--oh, somebody has one of 0:30:56.320,0:30:58.880 these--I'm just going to borrow this here. 0:30:58.880,0:31:01.200 One of these handbooks, if you want all 0:31:01.200,0:31:03.480 your standards in one book, or you could 0:31:03.480,0:31:04.440 print them out. 0:31:04.440,0:31:06.880 Alright. And bring them into the exam. 0:31:06.880,0:31:08.159 You can bring your textbook into the 0:31:08.159,0:31:11.399 exam. You could bring anything you like, 0:31:11.399,0:31:12.600 comic books, if you think you're going to 0:31:12.600,0:31:14.440 have time at the end to, you know, have a 0:31:14.440,0:31:17.320 bit of a read. So you don't 0:31:17.320,0:31:19.320 necessarily need to buy the standards 0:31:19.320,0:31:21.200 book if you don't want to. You can look 0:31:21.200,0:31:23.000 at them online and then print out the 0:31:23.000,0:31:24.880 sections that you think you'll need. I 0:31:24.880,0:31:26.320 will actually tell you in the last week 0:31:26.320,0:31:27.480 of the term, which ones I think are going to 0:31:27.480,0:31:29.960 be key ones for the final exam. So you 0:31:29.960,0:31:31.440 don't have to worry about that. 0:31:31.440,0:31:34.200 So the AUASB 0:31:34.200,0:31:37.840 issues the auditing standards and 0:31:37.840,0:31:39.679 we're internationally harmonized so 0:31:39.679,0:31:41.440 they come down from the International 0:31:41.440,0:31:44.960 Auditing Standards Board, and the key is 0:31:44.960,0:31:46.519 that they are mandatory. 0:31:46.519,0:31:48.600 Alright. So while some 0:31:48.600,0:31:51.000 companies or some countries--sorry--the 0:31:51.000,0:31:54.000 auditing standards say, "The auditor 0:31:54.000,0:31:56.639 may..." Our auditing standards say, "The 0:31:56.639,0:31:59.760 auditor must or the auditor shall..." 0:31:59.760,0:32:02.240 because our requirements are enshrined 0:32:02.240,0:32:05.440 within the Corporations Act. We must do 0:32:05.440,0:32:08.679 them as the minimum set of standards. You 0:32:08.679,0:32:10.320 could do more than what the standard 0:32:10.320,0:32:13.519 says, but the minimum is contained within 0:32:13.519,0:32:15.960 the ASAs, and we'll be referring back and 0:32:15.960,0:32:17.480 I'll show you excerpts from the 0:32:17.480,0:32:20.240 standards on a regular basis of things 0:32:20.240,0:32:21.639 that are really critical and important 0:32:21.639,0:32:23.080 to understand. 0:32:23.080,0:32:25.440 Alright. So, how do we make 0:32:25.440,0:32:27.360 sure that everybody who's doing an audit 0:32:27.360,0:32:29.039 is doing the right thing that 0:32:29.039,0:32:31.639 comes from quality control? And so 0:32:31.639,0:32:37.039 quality control needs to exist across firms, 0:32:38.639,0:32:41.880 and quality control also needs to 0:32:41.880,0:32:45.320 exist within firms. 0:32:45.919,0:32:48.559 Alright. So I need to make sure 0:32:48.559,0:32:51.320 that PwC are doing the same minimum 0:32:51.320,0:32:55.679 standard as KPMG, and then within PwC's, 0:32:55.679,0:32:57.440 however many offices, we need to make 0:32:57.440,0:32:59.760 sure that all staff are doing the same 0:32:59.760,0:33:03.039 thing. And there are specific--whoops-- 0:33:03.039,0:33:06.200 specific quality control standards 0:33:06.200,0:33:09.000 that the auditing standards and the 0:33:09.000,0:33:11.440 Corporations Act actually set out. So 0:33:11.440,0:33:13.960 things about having leadership, 0:33:13.960,0:33:15.679 meeting ethical and independence 0:33:15.679,0:33:18.200 requirements, rules about how to accept 0:33:18.200,0:33:21.080 clients, selecting the right people doing 0:33:21.080,0:33:22.919 the audits, and then monitoring or 0:33:22.919,0:33:24.279 checking each other. 0:33:24.279,0:33:27.519 And that's where the peer review 0:33:27.519,0:33:29.000 program comes in 0:33:29.000,0:33:31.159 from chartered 0:33:31.159,0:33:33.279 accountants and CPA Australia, where 0:33:33.279,0:33:36.559 firms check each other's work to make 0:33:36.559,0:33:38.519 sure that they're all following the 0:33:38.519,0:33:40.639 standards appropriately. 0:33:40.639,0:33:44.159 So CA and CPA both have 0:33:44.159,0:33:45.919 sets of auditors that actually audit 0:33:45.919,0:33:50.760 them. Also, on top of that, we have the 0:33:50.760,0:33:53.880 Australian Securities and Investment 0:33:53.880,0:33:56.720 Commission doing their own inspection 0:33:56.720,0:33:58.346 program. 0:33:59.000,0:34:00.720 Alright. So they audit the big four 0:34:00.720,0:34:03.360 firms every single year. Smaller firms on 0:34:03.360,0:34:05.960 a rotating schedule, and they can find 0:34:05.960,0:34:08.000 audit firms for not complying with the 0:34:08.000,0:34:10.480 auditing standards. I'll provide you 0:34:10.480,0:34:13.000 guys with a link to look at the latest 0:34:13.000,0:34:15.800 inspection report from ASIC. It 0:34:15.800,0:34:18.679 doesn't actually show names of firms. 0:34:18.679,0:34:20.239 This also happens in the U.S. and the U.S. 0:34:20.239,0:34:22.000 has started naming firms who are not 0:34:22.000,0:34:24.280 doing the right thing. So there's big 0:34:24.280,0:34:27.440 bucks in making sure that everybody 0:34:27.440,0:34:30.119 within the firm is doing the right 0:34:30.119,0:34:31.719 thing in terms of following the order, 0:34:31.719,0:34:33.800 standards, acting independently, and 0:34:33.800,0:34:35.679 acting ethically. How are we doing on 0:34:35.679,0:34:39.520 time? Oh, okay. Alright. Corporations Act. 0:34:39.520,0:34:42.760 Besides governing company directors, 0:34:42.760,0:34:46.679 setting up companies in Australia-- 0:34:46.679,0:34:47.918 you guys have all done Australian 0:34:47.918,0:34:50.839 company law? Have you guys done company law? 0:34:50.839,0:34:52.079 Yep, or for the people who haven't done 0:34:52.079,0:34:54.679 it yet? One of the assignments many, many 0:34:54.679,0:34:56.918 years ago used to be prepare all the 0:34:56.918,0:34:59.200 documents to start company. Right? We'd 0:34:59.200,0:35:00.359 have to actually go back to the 0:35:00.359,0:35:01.920 Corporations Act and figure out what 0:35:01.920,0:35:04.280 that is. So while the Corporations Act 0:35:04.280,0:35:06.800 specifies how companies get set up, it 0:35:06.800,0:35:10.119 also specifies what auditors need to do. 0:35:10.119,0:35:12.280 You need to be qualified, you need to be 0:35:12.280,0:35:14.720 registered, management can't just choose 0:35:14.720,0:35:17.400 the auditor, it has to be ratified by 0:35:17.400,0:35:18.880 shareholders at an annual general 0:35:18.880,0:35:21.280 meeting, we can't just quit as an auditor, 0:35:21.280,0:35:22.280 there's all sorts of rules about 0:35:22.280,0:35:24.599 quitting. What our responsibilities are 0:35:24.599,0:35:25.760 and reporting. 0:35:25.760,0:35:27.800 And you can go into those 0:35:27.800,0:35:29.320 in more detail in the textbook. 0:35:29.320,0:35:32.400 Alright. So here is the output, 0:35:32.400,0:35:33.599 and this is really important. And you 0:35:33.599,0:35:35.119 might be thinking, "Well, why am I 0:35:35.119,0:35:38.560 interested in looking at the end point 0:35:38.560,0:35:39.920 when we're only at the beginning?" And 0:35:39.920,0:35:42.359 this is so that you have in your mind 0:35:42.359,0:35:45.480 the idea of what we're striving for, or 0:35:45.480,0:35:47.720 what we're planning to... 0:35:47.720,0:35:52.079 So, we're going to look at why do 0:35:52.079,0:35:54.960 we have the report? What goes into 0:35:54.960,0:35:56.720 something called an unmodified audit 0:35:56.720,0:35:58.640 report? We're going to look at when 0:35:58.640,0:36:00.760 we might do different sorts of reports, 0:36:00.760,0:36:05.760 and adding extra information. Okay. Now, before-- 0:36:05.760,0:36:07.800 oh, I'm trying to remember what 0:36:07.800,0:36:09.599 case it was--we'll go into the cases, I 0:36:09.599,0:36:11.119 think next week. 0:36:11.119,0:36:13.680 There was never a legal requirement 0:36:13.680,0:36:15.480 to produce a paper audit report. You 0:36:15.480,0:36:17.800 could have done a verbal audit report at 0:36:17.800,0:36:20.520 one stage. But now, we must provide a 0:36:20.520,0:36:22.880 written audit report about the financial 0:36:22.880,0:36:24.760 statements in accordance with the 0:36:24.760,0:36:27.560 Australian accounting the 0:36:27.560,0:36:28.920 standards and our auditing 0:36:28.920,0:36:31.000 standards. And reporting is pretty 0:36:31.000,0:36:33.000 similar, to the point, where if you go to 0:36:33.000,0:36:35.319 the auditing standard on audit reporting, 0:36:35.319,0:36:37.480 there's actually templates in the back. 0:36:37.480,0:36:39.640 And if you look at... almost all of the 0:36:39.640,0:36:41.520 publicly listed companies their audit 0:36:41.520,0:36:43.880 reports almost say exactly the same 0:36:43.880,0:36:45.520 thing word for word except the company 0:36:45.520,0:36:47.640 name is different, and the year might be 0:36:47.640,0:36:49.040 different, and the name of the audit 0:36:49.040,0:36:50.960 partner might be different. 0:36:50.960,0:36:53.520 So audit reporting is fairly 0:36:53.520,0:36:56.240 standardized and it has very specific 0:36:56.240,0:36:58.720 legal language. Because it is a legal 0:36:58.720,0:37:01.040 document that exposes the auditor to 0:37:01.040,0:37:04.160 liability, if we've done something wrong. 0:37:04.160,0:37:06.400 So, what is the gold standard that 0:37:06.400,0:37:08.720 everybody is looking for? So, what most 0:37:08.720,0:37:11.200 firms want... 0:37:12.640,0:37:16.720 Firms want what we call an 0:37:16.720,0:37:20.520 unmodified audit report, and it's also 0:37:20.520,0:37:23.319 sometimes called an unqualified report. 0:37:23.319,0:37:25.640 Now, this is where it's a bit funny and a 0:37:25.640,0:37:26.520 bit counterintuitive. 0:37:26.520,0:37:29.119 So when you do your CA, 0:37:29.119,0:37:31.520 or you do a medical degree, or you finish 0:37:31.520,0:37:34.040 your engineering qualification, you 0:37:34.040,0:37:35.400 become qualified. 0:37:35.400,0:37:38.359 Right? And qualified is a good 0:37:38.359,0:37:41.560 thing. Okay? When it comes to an audit, it 0:37:41.560,0:37:44.280 is the exact opposite. The one that 0:37:44.280,0:37:47.079 people want... The one that says, 0:37:47.079,0:37:50.880 "Big tick management are telling the 0:37:50.880,0:37:54.359 truth, is something called an unqualified 0:37:54.359,0:37:55.520 or an 0:37:55.520,0:37:58.319 unmodified audit report." 0:37:58.319,0:38:00.200 Okay. You might think why is it that way? 0:38:00.200,0:38:02.480 I don't know. It's probably something I 0:38:02.480,0:38:04.680 could historically dig into the 0:38:04.680,0:38:06.800 archives and look at. Sometimes, I wonder 0:38:06.800,0:38:08.400 if we do things sort of a bit back to 0:38:08.400,0:38:10.960 front in auditing to make it seem really 0:38:10.960,0:38:13.400 mysterious and difficult. Because 0:38:13.400,0:38:15.160 auditing is a lot about logic and common 0:38:15.160,0:38:16.599 sense, and we don't want too many people 0:38:16.599,0:38:18.359 getting into the awesome area that is 0:38:18.359,0:38:20.680 auditing. So we want to make it seem 0:38:20.680,0:38:22.800 really complicated and tricky by using 0:38:22.800,0:38:25.240 language that doesn't quite make sense. 0:38:25.240,0:38:27.599 So most firms 0:38:27.599,0:38:29.480 probably about-- 0:38:29.480,0:38:31.839 I think the last time we checked-- 0:38:31.839,0:38:35.119 it was something like 98% of firms on 0:38:35.119,0:38:38.240 the ASX, get an unqualified, unmodified 0:38:38.240,0:38:40.800 report. Management are telling the truth. 0:38:40.800,0:38:43.240 Now that sends a signal to shareholders. 0:38:43.240,0:38:46.200 That says, "Management, telling the truth. 0:38:46.200,0:38:47.720 You can rely on this information for 0:38:47.720,0:38:51.079 your decision-making." Alright. What happens 0:38:51.079,0:38:53.760 do you think to company share 0:38:53.760,0:38:55.920 prices, if I give them the opposite? If I 0:38:55.920,0:38:57.920 say, "Management are not being truthful, 0:38:57.920,0:39:00.200 and here are the reasons why." What do you 0:39:00.200,0:39:01.800 think is going to happen to share 0:39:01.800,0:39:04.560 price? it's going to go down and it goes 0:39:04.560,0:39:07.119 down pretty quickly in terms of what 0:39:07.119,0:39:08.680 we see from the research, in terms of 0:39:08.680,0:39:11.280 share price reaction. So firms want this. 0:39:11.280,0:39:13.920 Managers want to work with us, as the 0:39:13.920,0:39:16.680 auditors, to come to an agreement on a 0:39:16.680,0:39:18.240 set of financial statements that we 0:39:18.240,0:39:21.839 think is unqualified, is free from misstatement. 0:39:21.839,0:39:25.480 So ASA--this is our first ASA-- 0:39:25.480,0:39:27.880 700 and all the the ones I'm reporting 0:39:27.880,0:39:30.280 are in the 700 area. Say that we want 0:39:30.280,0:39:33.440 to get reasonable assurance that it's 0:39:33.440,0:39:36.040 free from misstatements due to fraud or 0:39:36.040,0:39:37.920 error. So I'm not interested--I don't care 0:39:37.920,0:39:40.720 whether it's a mistake, a type 5,000, 0:39:40.720,0:39:43.640 instead of 500,000, or it's fraud, I have 0:39:43.640,0:39:46.280 a responsibility to detect those. I want 0:39:46.280,0:39:48.000 to make sure that it matches the 0:39:48.000,0:39:50.880 applicable financial reporting framework, 0:39:50.880,0:39:54.160 which for us is at AASBs. 0:39:54.319,0:39:57.440 Alright. And that it is a fair 0:39:57.440,0:39:58.599 presentation 0:39:58.599,0:40:01.119 that it fairly represents 0:40:01.119,0:40:03.040 what happened during the 0:40:03.040,0:40:05.839 company's financial period. So if the 0:40:05.839,0:40:07.480 company was exposed to a lot of 0:40:07.480,0:40:10.040 fluctuation changes and adverse 0:40:10.040,0:40:12.640 movements in foreign exchange, and a 0:40:12.640,0:40:14.560 decline in sales, then we'd expect to see 0:40:14.560,0:40:17.200 a loss from that company. Is what we're 0:40:17.200,0:40:19.880 seeing commensurate with what we know 0:40:19.880,0:40:22.359 about the firm? And then making sure 0:40:22.359,0:40:24.640 that the financial report is, again, in 0:40:24.640,0:40:27.500 accordance with our double AASBs. 0:40:28.560,0:40:30.560 There's all sorts of parts to the audit 0:40:30.560,0:40:34.000 report, and this has actually 0:40:34.000,0:40:37.599 changed a little bit. So this bit here 0:40:37.599,0:40:40.000 used to be right at the end. We have a 0:40:40.000,0:40:41.920 new standard change, so in the textbook, 0:40:41.920,0:40:42.760 this is going to be a little bit 0:40:42.760,0:40:43.960 different than what you're looking at 0:40:43.960,0:40:49.119 right here. New ASA 700 now says that 0:40:49.119,0:40:51.319 we tell the shareholders the very first 0:40:51.319,0:40:54.359 thing, here's our opinion. We used to give 0:40:54.359,0:40:56.760 them all this legal jargon first, all 0:40:56.760,0:40:59.480 this other crap used to come first, and 0:40:59.480,0:41:01.160 then we would do this sort of at the end. 0:41:01.160,0:41:03.440 But now it's right at the front, to make 0:41:03.440,0:41:05.520 sure that shareholders know what's going 0:41:05.520,0:41:10.119 on. Now on UTS online, in this week's 0:41:10.119,0:41:12.640 folder, I've also put a whole lot of 0:41:12.640,0:41:14.400 audited opinions in there for you to 0:41:14.400,0:41:18.359 look at. And I'll also copy in for you 0:41:18.359,0:41:21.040 the link to the QBE Insurance 0:41:21.040,0:41:24.720 annual report because it is 0:41:24.720,0:41:27.440 one of the few early adopters of some 0:41:27.440,0:41:29.400 new regulations. And so I'll make a 0:41:29.400,0:41:30.760 little video on that in a couple of 0:41:30.760,0:41:34.720 weeks as well. Alright. Now, what happens 0:41:34.720,0:41:37.520 if management aren't being truthful? How 0:41:37.520,0:41:39.480 do I know what sort of opinion to give 0:41:39.480,0:41:41.800 them? Then, I'm going to use this table, 0:41:41.800,0:41:44.920 and this table comes out of ASA 700, 0:41:44.920,0:41:48.160 705--sorry. And so I'm just going to lean 0:41:48.160,0:41:49.560 over here because I want to write some 0:41:49.560,0:41:52.680 numbers here. So step one is this step 0:41:52.680,0:41:54.280 over here. 0:41:54.280,0:41:57.280 Alright. The first thing I want to 0:41:57.280,0:41:59.400 do is find out why I'm not giving an 0:41:59.400,0:42:01.839 unqualified opinion. Number one: The 0:42:01.839,0:42:04.359 financial report is materially misstated. 0:42:04.359,0:42:06.880 That is, essentially, saying management 0:42:06.880,0:42:09.520 are not being truthful 0:42:09.640,0:42:12.800 about something. Alright. So 0:42:12.800,0:42:14.880 they're understating a number, 0:42:14.880,0:42:16.720 they're failing to make a disclosure, 0:42:16.720,0:42:19.000 they're just lying about something. 0:42:19.000,0:42:21.520 Alright. The second one, which is this one 0:42:21.520,0:42:24.079 here, is that we cannot get enough 0:42:24.079,0:42:27.599 evidence. Alright. So not 0:42:27.599,0:42:29.529 enough evidence. 0:42:30.480,0:42:32.760 This is a bit like Donald Trump 0:42:32.760,0:42:35.359 refusing to release his tax returns. 0:42:35.359,0:42:36.800 Can't make an opinion if I don't have 0:42:36.800,0:42:40.319 any information. So step one is I look at 0:42:40.319,0:42:42.280 well, what are the two reasons why I 0:42:42.280,0:42:44.640 might go away from the 0:42:44.640,0:42:48.040 unqualified? Step two is I need to look 0:42:48.040,0:42:50.480 at the severity, and there's two terms 0:42:50.480,0:42:53.000 here, material but not pervasive or 0:42:53.000,0:42:55.240 material and pervasive. For material, 0:42:55.240,0:42:56.559 it means it's important enough that we 0:42:56.559,0:42:59.119 think shareholders should know about it, 0:42:59.119,0:43:00.760 but not pervasive. And I'm going to 0:43:00.760,0:43:02.200 introduce you to two different 0:43:02.200,0:43:03.760 characters here, and I didn't name these 0:43:03.760,0:43:05.160 guys--actually one of my other lectures 0:43:05.160,0:43:06.599 did. 0:43:06.599,0:43:10.359 So here we have Norman, 0:43:10.440,0:43:12.809 Norman the 0:43:12.809,0:43:17.150 non-pervasive slug. 0:43:17.640,0:43:20.839 Alright. And so Norman's there 0:43:20.839,0:43:22.400 because if you imagine your financial 0:43:22.400,0:43:24.720 statements--let me pick a different color 0:43:24.720,0:43:26.720 here--so imagine you've got your 0:43:26.720,0:43:29.200 financial statements and all of your 0:43:29.200,0:43:30.240 different 0:43:30.240,0:43:33.640 accounts here. If you prong to Norman on 0:43:33.640,0:43:35.079 one of those, 0:43:35.079,0:43:39.760 alright, and you said, "Okay, Norman 0:43:39.760,0:43:43.359 is right here." Norman's only can self-contain. 0:43:43.359,0:43:45.599 Right? He's only in a small 0:43:45.599,0:43:47.920 part of the financial statements. So 0:43:47.920,0:43:50.240 Norman is the situation where we have 0:43:50.240,0:43:52.480 either something not truthful or not 0:43:52.480,0:43:56.040 enough evidence in just one spot, and in 0:43:56.040,0:43:58.839 that case, we give an opinion called a 0:43:58.839,0:44:00.280 qualified opinion. 0:44:00.280,0:44:04.599 Okay. Now the second person I'm 0:44:04.599,0:44:07.400 going to introduce you to-- 0:44:07.400,0:44:09.920 let me make sure my pen is a bit 0:44:09.920,0:44:14.520 smaller, maybe I'll type, here we go--is 0:44:16.160,0:44:19.960 Perry, the pervasive octopus. 0:44:20.240,0:44:22.480 And I'd always use the octopus 0:44:22.480,0:44:24.559 but I've never named him, and then Nelson 0:44:24.559,0:44:26.839 who does our night classes said, "We 0:44:26.839,0:44:29.559 need to give the octopus a name." So his 0:44:29.559,0:44:30.800 name is Perry. 0:44:30.800,0:44:34.160 So if I took Perry, and I put Perry 0:44:34.160,0:44:35.599 on the financial statements 0:44:35.599,0:44:38.119 as my octopus. 0:44:38.119,0:44:40.859 Alright. 0:44:41.119,0:44:44.319 There's his body, there's his 0:44:44.319,0:44:46.480 little legs 0:44:46.480,0:44:48.680 everywhere--oh, that's not, that's a 0:44:48.680,0:44:50.800 really, you obviously, I'm not, you're not 0:44:50.800,0:44:53.359 coming for the art--but the idea with 0:44:53.359,0:44:56.640 Perry is that his little tentacles reach 0:44:56.640,0:44:59.000 far and wide across the financial 0:44:59.000,0:45:01.040 statements. So that is what we call 0:45:01.040,0:45:03.319 pervasive. Alright? There's lots of 0:45:03.319,0:45:06.559 tentacles of errors, so if I have errors 0:45:06.559,0:45:08.119 in the financial statements and I have 0:45:08.119,0:45:09.559 lots of them across lots of different 0:45:09.559,0:45:11.280 areas, I say, "I'm going to give an adverse 0:45:11.280,0:45:13.440 opinion," like "This is bad." This is the 0:45:13.440,0:45:14.920 signal to shareholders that management 0:45:14.920,0:45:17.040 aren't being truthful on a range of 0:45:17.040,0:45:19.960 things. If I can't get enough information 0:45:19.960,0:45:22.760 over a lot of different areas, then 0:45:22.760,0:45:24.200 Perry's going to say give me a 0:45:24.200,0:45:26.520 disclaimer of an opinion. And disclaimer 0:45:26.520,0:45:28.520 means that I'm not actually giving an 0:45:28.520,0:45:30.800 opinion at all. It's no 0:45:30.800,0:45:35.040 opinion. Alright. So you've got Norman, 0:45:35.040,0:45:36.480 and you've got Perry. 0:45:36.480,0:45:39.160 Okay. And a lot of students even 0:45:39.160,0:45:41.440 draw the little animals, that's cool. 0:45:41.440,0:45:42.960 But that's a way to figure out the 0:45:42.960,0:45:45.760 different sorts of modified audit 0:45:45.760,0:45:47.559 reports when I say, "I'm not going to give 0:45:47.559,0:45:49.839 an unqualified... I think something's 0:45:49.839,0:45:52.599 wrong." Then, there's my options right there. 0:45:53.529,0:45:56.810 Now. Okay. 0:45:57.780,0:46:01.020 Sometimes, everything is truthful. 0:46:01.880,0:46:04.839 I have an unmodified or unqualified report, but 0:46:04.839,0:46:06.920 I want to say, "Shareholders, I want to 0:46:06.920,0:46:08.880 draw your attention to some extra 0:46:08.880,0:46:13.400 information." And I do that using an 0:46:13.400,0:46:15.680 emphasis of matter paragraph. What color 0:46:15.680,0:46:19.119 pen am I using? Oh, let's change that to blue. 0:46:19.119,0:46:22.520 Alright. I use an emphasis of 0:46:22.520,0:46:25.200 matter paragraph, sometimes shortened to 0:46:25.200,0:46:26.828 an EOM. 0:46:27.740,0:46:29.510 Okay. Now, the emphasis of matter 0:46:29.760,0:46:33.440 paragraph says, "Everything is fine. But I 0:46:33.440,0:46:36.119 just want to draw your attention to a 0:46:36.119,0:46:37.880 new joint venture the company might be 0:46:37.880,0:46:40.880 involved in." Some unusual accounting 0:46:40.880,0:46:42.520 about something that is a little bit 0:46:42.520,0:46:46.040 different that we've found a mistake 0:46:46.040,0:46:47.599 in the previous report and we're now 0:46:47.599,0:46:50.079 revising it and reissuing it. So this is 0:46:50.079,0:46:51.760 still saying that management is still 0:46:51.760,0:46:54.240 being truthful, but my emphasis of matter 0:46:54.240,0:46:57.000 is just highlighting extra information 0:46:57.000,0:46:59.480 to shareholders. Alright. And in the 0:46:59.480,0:47:01.839 bundle on UTS online, you'll actually see 0:47:01.839,0:47:04.480 some examples of the sorts of things 0:47:04.480,0:47:07.000 that could go in emphasis of matter. 0:47:07.000,0:47:10.160 Probably, the biggest one is emphasis 0:47:10.160,0:47:12.559 of matter about going concerned. Do we 0:47:12.559,0:47:15.040 understand the concept of going concern? 0:47:15.040,0:47:17.839 Yes? Hopefully, that we expect companies 0:47:17.839,0:47:20.359 to continue in the future. If the company 0:47:20.359,0:47:22.359 is experiencing financial distress, 0:47:22.359,0:47:24.960 but they are being truthful 0:47:24.960,0:47:27.040 about their financial distress. So they're 0:47:27.040,0:47:29.880 showing a loss, they're showing lots of 0:47:29.880,0:47:32.480 debts and not many assets, then we can 0:47:32.480,0:47:34.359 still give them the big tick in the 0:47:34.359,0:47:36.400 financial report because they're being 0:47:36.400,0:47:38.520 truthful. But we might want to say, "Hey, 0:47:38.520,0:47:40.400 shareholders. There are some financial 0:47:40.400,0:47:42.559 difficulties at this firm. We do need to 0:47:42.559,0:47:45.694 warn you about those." So that's important. 0:47:46.160,0:47:49.920 Now, this is new. This is not going to be 0:47:49.920,0:47:52.839 in any textbook that you're looking 0:47:52.839,0:47:54.720 at--oh, I think there's a new textbook 0:47:54.720,0:47:55.800 coming out at the end of this year that 0:47:55.800,0:47:58.280 will have it in it. New standard is 0:47:58.280,0:48:02.119 ASA 701 about communicating key audit 0:48:02.119,0:48:04.960 matters in the auditor's report. And up 0:48:04.960,0:48:07.640 until this point in time, 0:48:07.640,0:48:10.640 what the auditors did was a black box. 0:48:10.640,0:48:12.480 The audit report simply said he's 0:48:12.480,0:48:15.400 our opinion, unmodified, unqualified, or 0:48:15.400,0:48:18.599 one of the other options, and that was 0:48:18.599,0:48:21.920 it. Now, the auditors must disclose 0:48:21.920,0:48:25.079 parts of the processes that 0:48:25.079,0:48:27.160 they go through to make their opinion. 0:48:27.160,0:48:29.000 Alright. Now, not for everything--oh, this 0:48:29.000,0:48:30.480 is how we audited sales, this is how we 0:48:30.480,0:48:32.000 audited cash, this is how we audited a 0:48:32.000,0:48:34.920 property of plant and equipment--instead, 0:48:34.920,0:48:38.400 it's only for areas that they think 0:48:38.400,0:48:41.240 there was significant judgment or that 0:48:41.240,0:48:43.119 they found particularly difficult, which 0:48:43.119,0:48:47.559 they call Key Audit Matters or KAMs. 0:48:48.480,0:48:49.670 Alright. 0:48:50.310,0:48:54.520 Now, the idea is to have increased 0:48:54.520,0:48:57.359 transparency over decision-making. If I 0:48:57.359,0:49:00.520 know how auditors made a difficult 0:49:00.520,0:49:02.880 decision about writing down an 0:49:02.880,0:49:06.680 intangible asset, then that allows me to 0:49:06.680,0:49:08.000 interpret the information in the 0:49:08.000,0:49:10.040 financial report with a little bit more 0:49:10.040,0:49:12.079 clarity. So this is about trying to make 0:49:12.079,0:49:14.920 auditors accountable and giving expert 0:49:14.920,0:49:16.640 uses of financial statements more 0:49:16.640,0:49:18.400 information. Now, I'm pretty sure the key 0:49:18.400,0:49:20.400 audit matters, my mom and dad are still 0:49:20.400,0:49:22.319 going to gloss over and be, like, "Oh, 0:49:22.319,0:49:24.400 whatever." Right? They look at the glossy 0:49:24.400,0:49:25.960 front part of the annual report with 0:49:25.960,0:49:28.960 smiling employees and graphs that go up. 0:49:28.960,0:49:30.240 They're not really looking at the 0:49:30.240,0:49:33.200 tricky bit at the back, but your share 0:49:33.200,0:49:35.920 analysts, your fun managers. 0:49:35.920,0:49:38.119 Those people are going to be 0:49:38.119,0:49:39.359 looking at the key audit matters and 0:49:39.359,0:49:41.880 saying, "Okay, well, this is an account like 0:49:41.880,0:49:44.319 intangibles that has a lot of discretion 0:49:44.319,0:49:46.599 by managers and the auditors. How did 0:49:46.599,0:49:49.839 they handle different opinions? How did 0:49:49.839,0:49:52.160 they handle a standard that was really, 0:49:52.160,0:49:53.680 you could do a couple of different 0:49:53.680,0:49:57.160 things?" Now, this must come in for all 0:49:57.160,0:50:00.240 financial years after the 31st of 0:50:00.240,0:50:02.640 December, at the end of this year. However, 0:50:02.640,0:50:05.240 we have three firms who are early adopters: 0:50:05.240,0:50:08.760 QBE Insurance, Cochelar, which are 0:50:08.760,0:50:11.359 the medical implants, and the Australian 0:50:11.359,0:50:12.960 Stock Exchange Limited because the stock 0:50:12.960,0:50:14.839 exchange is a public entity. They've 0:50:14.839,0:50:17.119 actually gone ahead. I'll include some 0:50:17.119,0:50:18.640 links so that you can look at the actual 0:50:18.640,0:50:21.280 key audit matters. And over the next 0:50:21.280,0:50:22.799 coming weeks, I'm going to make a video 0:50:22.799,0:50:24.760 where I actually walk through their 0:50:24.760,0:50:26.440 financial statements, and talk a little 0:50:26.440,0:50:29.520 bit about what goes into these 0:50:29.520,0:50:32.240 KAMs. At the moment, firms can write a lot, 0:50:32.240,0:50:34.880 or they can write a little. KAMs 0:50:34.880,0:50:38.000 first came in the UK, or here's the 0:50:38.000,0:50:39.400 requirements that says what they need to 0:50:39.400,0:50:42.880 do. It's not very exciting but there 0:50:42.880,0:50:45.319 is a risk. There's nothing to say how 0:50:45.319,0:50:47.040 many key audit matters the auditor needs 0:50:47.040,0:50:49.520 to describe, and when this was first 0:50:49.520,0:50:51.599 introduced in the first place, it came 0:50:51.599,0:50:53.640 up was in the UK 0:50:53.640,0:50:57.480 about 2012, I think it started. 0:50:58.080,0:51:00.600 Rolls-Royce and I think it was KPMG at 0:51:01.000,0:51:05.240 the time, wrote something like 12 pages 0:51:05.240,0:51:08.240 on key audit matters in tiny, tiny, tiny 0:51:08.240,0:51:09.640 font. It was a lot of 0:51:09.640,0:51:12.680 information. The very same year, Vodafone 0:51:12.680,0:51:15.640 wrote about two pages. The audit of a 0:51:15.640,0:51:18.200 Vodafone in the UK wrote about two pages on 0:51:18.200,0:51:20.920 key audit matters. Both were deemed to be 0:51:20.920,0:51:23.359 compliant with the standard. So, what we 0:51:23.359,0:51:25.119 worry about is something that we call 0:51:25.119,0:51:28.000 boiler plating. So the audit partner is 0:51:28.000,0:51:30.640 meant to really describe the tricky 0:51:30.640,0:51:33.160 decision-making per processes they went 0:51:33.160,0:51:36.440 through to look at auditing this really 0:51:36.440,0:51:38.799 difficult part of the firm. But what we 0:51:38.799,0:51:41.240 worry about is that firms will have 0:51:41.240,0:51:44.280 standard lines that they will use for 0:51:44.280,0:51:46.319 different things, and that won't provide 0:51:46.319,0:51:48.960 too much information, it'll just be a 0:51:48.960,0:51:51.799 standardized line that might not say 0:51:51.799,0:51:53.200 anything at all. And sometimes the 0:51:53.200,0:51:55.960 wording has been really, really bizarre. 0:51:55.960,0:51:57.520 In one of the early ones I read from 0:51:57.520,0:52:00.329 Rolls-Royce, it said something about 0:52:00.799,0:52:04.359 the auditor is reasonably optimistic 0:52:04.359,0:52:08.040 that management's forecasts are based on 0:52:08.040,0:52:10.400 reasonable assumptions of blah, blah, blah, 0:52:10.400,0:52:11.839 blah, blah. I'm like, what does reasonably 0:52:11.839,0:52:12.920 optimistic 0:52:12.920,0:52:15.520 mean? So there is going to be some issue 0:52:15.520,0:52:18.920 about what we see and I tell you that 0:52:18.920,0:52:20.640 the auditing researchers and the 0:52:20.640,0:52:22.799 linguists are all going to be looking at 0:52:22.799,0:52:25.520 this information of this topic very 0:52:25.520,0:52:27.960 closely. Alright. Oh, and we're doing--I'm 0:52:27.960,0:52:30.160 ahead of time. This is awesome. So if you 0:52:30.160,0:52:31.400 didn't get a subject outline, they're 0:52:31.400,0:52:33.040 down here at the front. Come grab one. 0:52:33.040,0:52:36.119 Next week, we start the weekly accessible quizzes. 0:52:36.119,0:52:39.400 Your quizzes will start 5 0:52:39.400,0:52:41.680 minutes past the start of your class 0:52:41.680,0:52:44.319 time. So my 9:00 class in the morning, 0:52:44.319,0:52:47.040 quiz starts at 9:05 AM, and if you're 0:52:47.040,0:52:48.280 late. that doesn't matter. You don't get 0:52:48.280,0:52:51.319 any extra time. How do you prep? You can 0:52:51.319,0:52:52.799 look at the textbook. There'll be some 0:52:52.799,0:52:55.920 videos. This lecture video will go up 0:52:55.920,0:52:58.200 and remember, it's open book. 0:52:58.200,0:53:01.160 Okay. So bring as much stuff as you 0:53:01.160,0:53:03.920 want. You can use the Internet. And one 0:53:03.920,0:53:08.160 other thing. Shhh. Just one last thing: Make sure 0:53:08.160,0:53:11.240 that the night before or the day 0:53:11.240,0:53:12.559 before, and I'm going to send you a 0:53:12.559,0:53:14.839 reminder email about this, that you can 0:53:14.839,0:53:16.920 log into Learning Catalytics. If you 0:53:16.920,0:53:18.319 haven't written down your password 0:53:18.319,0:53:20.200 somewhere, make sure you write it down 0:53:20.200,0:53:22.119 because the retrieve password function 0:53:22.119,0:53:26.640 in LC takes 6 hours. So if you need to 0:53:26.640,0:53:28.359 reset your password, you need to do it 0:53:28.359,0:53:30.680 well ahead of time because there's no 0:53:30.680,0:53:32.720 paper quizzes if you don't bring your 0:53:32.720,0:53:35.319 device. If you need a device or you don't 0:53:35.319,0:53:37.079 have one, come talk to me. We do have 0:53:37.079,0:53:40.160 spares you can borrow. Otherwise, thank 0:53:40.160,0:53:41.599 you for coming along to our first week, 0:53:41.599,0:53:43.775 and I will see you next week.