WEBVTT

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Awesome. Alright. So welcome, everybody,

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to Lecture 1. Who's excited to be here

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for auditing?

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Hey, those people down the front.

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Woo hoo. And everyone else is like, "I'm

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here because I have to be. It's in the

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major." So hopefully, over the semester,

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you'll get to learn a little bit about

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what auditing is all about. Even if you

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don't want to be an auditor, if you want

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to work in business or you want to work

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in marketing or human resources, then

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we're going to look at some key concepts

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that going to help you no matter what

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sort of business career you're

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after. And the other thing that we do

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here as well is that we also have our

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annotated lecture slides. So you'll also

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see me writing and that sort of thing on

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them. This is all captured on the video.

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The video will go on to UTS online and

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also gets uploaded to YouTube. Okay. So,

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you'll get files and access both ways.

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So we're going to cover a lot in

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the first week. You already know about

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the subject from the prep week stuff. You

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know about learning analytics from

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looking online and our assessment, so I'm

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not going to go through those. Alright.

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So we're going to cover two chapters out

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of the textbook today. We're going to

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cover, well, why the hell do we have an audit

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in the first place? And then we're also

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going to cover the idea of what is

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the output or the final product of

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our audit. So we're going to look at a

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whole range of

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different objectives. Let me just put my

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highlighter on here. Okay. Is my

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highlighter the right size? No, I want

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this

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one. Alright. So we're going to look at

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some basic stuff about describing what

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assurance is all about. Why audit is

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important in regards to reducing the

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risk of shareholders, the idea of

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information risk. We're going to look

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at describing auditing, which is one

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small subset of assurance. We're going to

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look at the difference between auditing

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and accounting. We're going to look at

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some types of audits and some different

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types of audit firms that provide them,

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and the big four

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firms. We're going to look at what the

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professional bodies do, so CA and CPA.

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We're going to look at the auditing

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standards and why they're important to

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us. We're going to look a little bit

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at quality control, not too much, and then

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also the basics of the Corporations Act.

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So it sounds like a lot, but there's

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actually just a few basic key concepts.

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Now, in the lectures and in the lecture

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notes, I pull out the most important

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things that I want you to learn from the

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textbook. Now, there are still going to be

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some things in the textbook that I would

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like you to read, but the things I think

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are most important are the things that

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are going to be in the lecture notes and

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the things I'm going to discuss. And then

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out of those, the things that I think are

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key or most important are going to be

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the things that will come up in the

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quizzes each week. Alright? So that'll

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give you a guide as to what I think is

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most important when it comes to exam

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prep. So if there's you know a whole

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section in the textbook that I don't

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really touch on, you might want to have a

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read of it just for background but not

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go too in-depth.

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Alright. So what's our first

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objective? What the hell is assurance? So

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assurance is about having someone

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independent, and that's us, the auditor, being

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objective, trying to improve the quality

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of information for decision

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makers. Alright? We want decision makers

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to have accurate, reliable information so

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that they can make the best decisions

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for themselves. And they could be

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shareholders. They could be regulators. It

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could be managers within the company. So

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no matter who you are, you make decisions

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based on information. Very rarely in

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business do we make decisions just based

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on flipping a coin or our gut. We're

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going to need to use information. And so

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the process of assurance is about

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providing quality and then also the idea

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of reliability

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to that information.

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Oops, -ilty.

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Alright. So right down

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here.

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Oh, that's really bright. Can we

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still see the slides if I leave the

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curtains open? Yep. We've been in a

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basement room this morning. I think just

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having some natural light will help me

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realize it's

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daytime. So who can perform an audit? Our

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public accounting firms, plus we're going

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to look at some government auditors as

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well. There's different levels of

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assurance, which we'll talk about

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in a future weeks.

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Mostly, our assurance is provided on

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historic information. So historic things

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like the financial statements. We do see

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some growth towards looking at forward-

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looking information, but it's hard to

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provide reliability on information about

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the future. It's easy to prove that

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information about the past, about

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transactions that have already happened,

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is reliable. It's a lot easier for us to

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do.

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So in terms of what we're going to be

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studying this semester, our audit issues

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are written communication. So we're going

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to look at the audit report that

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provides a conclusion about the

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reliability of written assertions or

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statements of another party. So let's

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break that

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down. We've got our audit of our

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financial statements. Now, this one--oh, I almost

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dropped my pen. This is what we're going

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to spend our entire semester looking at.

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Alright. Audits must be done under the

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Corporations Act for every company

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that's listed, and that requires an

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audit where we give an opinion about

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whether the financial statements are

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true and fair, are a true representation

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of the underlying economic transactions

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and events that have occurred within

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that

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firm. The review is a slightly

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lesser amount of assurance. So we're

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giving very high levels of assurance in

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the audit. We're giving less levels in

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the review. And then there are other

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services which we're not really going to

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get into too much detail

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on.

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So, we can also have assurance over IT.

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So if you go onto PayPal or eBay, they

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have assurance that the information you

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send to them or you store with them is

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securely kept, isn't passed on to

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other people. So we can provide assurance

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on anything. Alright. There's actually an

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assurance service that exists over lotto.

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So we have the lotto balls that go into

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Powerball, etc. There are actually

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auditors whose job it is to make sure

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that every single Powerball or lotto

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ball is exactly the same size, is exactly

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the same weight, and is exactly round. And

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that security processes over those mean

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that you can't manipulate the lotto

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balls in any way to get a particular

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outcome. So we could provide assurance

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over anything. And it's the New South Wales

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state government that provides assurance

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over the lotteries,

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but you could have assurance over a

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range of different processes and

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information as well. So if you jump onto

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PolitiFact, which is a political

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fact-checking website, you'll discover

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that I think less than 3% of all Donald

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Trump's statements can actually be assured

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or be reliable. So he says 97% of stuff

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that's not reliable. But you can

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provide assurance on

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anything. So what we're looking at is

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this very small bit here. Alright?

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So there's assurance of all sorts of

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different areas. We've got consulting and

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non-assurance services. I can provide

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assurance over all sorts of IT

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systems, but we're going to be looking

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at just this little bit here, the audit

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of the financial statements. And that is

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what drives most of our big four firms.

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Big revenues, and large proportions of

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staff just involved in this little

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component. So what is the idea about

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information risk? Right? The risk that the

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information I have might not be suitable

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for my decision-making purposes. And that

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risk comes about, well, the possibility

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that information was made on a

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decision that was made on information that

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was inaccurate. I'll give you an example

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of information

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risk. You'll meet my son on some of

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our audit slides. We affectionately

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call him Audit Junior. And he's

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come to every single open day since he

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was born. And I'm starting to get

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him to the point where we're going to

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start training him up to talk in our

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audit videos. But when he was one, I sent

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out invitations for his first birthday,

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and I put two numbers on there for

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people to RSVP. I left my mobile number,

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and I left my husband's mobile

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number. And I

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assumed that if my people had called my

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husband and said we're coming, I assumed

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that he was going to pass that

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information on to me.

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So I made all these plans for how many

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people and how much catering and how

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many party bags and all the rest of it

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based on the people that had RSVP'd to me

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and the assumption that he was going to

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tell me if anyone had contacted him and

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said that they were going to

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go. Bad assumption. So I made all these

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decisions. And then two days before the

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party, I said to him, "Oh, look, I'm really

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surprised that so and so is not coming."

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And he said, "Oh, no. They sent me a text

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message. They're coming." And I said, "Well, why

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didn't you tell me?" He goes, "I thought you

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would have

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asked." So two days before, suddenly I have

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like 20 more people coming to this party,

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but I'd made a decision based on

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information that was inaccurate. Now all

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it meant was that I had to go out and

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buy more food, and I was severely

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stressed out, and I made him decorate

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like hundreds of cupcakes for the extra

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people. And that wasn't life-threatening

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or it wasn't going to bankrupt a

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business, but I made a decision based on

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bad information. It wasn't complete. It

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didn't have everything that I was

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looking for. So if I'm doing this in a

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business, I might make decisions

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about a whole range of different things.

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What raw materials to buy? What prices

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I'm going to set for my products?

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Alright. Am I going to offer any

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discounts? I might make changes based

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on manufacturing or marketing.

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And if I make those decisions based on

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the wrong information, that could have

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serious consequences for my company. Now,

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if I'm a

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shareholder, then what are my decisions

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about? My decisions are about whether to--

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whoops.

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Undo.

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Buy,

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sell, or hold my

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investment. Right? and if I don't have

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accurate information as a shareholder,

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then I might make the wrong choice when

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it comes to doing that decision. So

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there's risk that our information might

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not be appropriate. So the reasons that we have

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risk of information: remoteness

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between the

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user and management. I own shares in Woolworths.

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I can't really go up to Woolworths

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and say, "Hey, tell me how to cash flow is

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going. How many issues of a going concern?

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Which of the stores are not performing

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well?" So I don't really know what's going

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on inside the business. The provider of

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the information is usually

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management. And agency theory tells us

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that they're biased. No manager wants to

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say, "Hey, I did a sucky job this year, but

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you should still pay me a bonus." They

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want to make themselves look fantastic.

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So there's always the bias that they're

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going to present information in a way

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that maximizes their own wealth under

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agency

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theory. Alright. There's lots

00:11:59.720 --> 00:12:02.480
and lots and lots of data. Hundreds or

00:12:02.480 --> 00:12:05.120
thousands or millions of transactions.

00:12:05.120 --> 00:12:06.399
How do we know which ones are correct and

00:12:06.399 --> 00:12:08.680
which ones are not correct? And then

00:12:08.680 --> 00:12:12.160
there's complex transactions between

00:12:12.160 --> 00:12:14.160
different companies within the same

00:12:14.160 --> 00:12:16.600
company, across different borders, in

00:12:16.600 --> 00:12:19.760
different jurisdictions, joint ventures,

00:12:19.760 --> 00:12:22.360
partial subsidiaries. It can get really

00:12:22.360 --> 00:12:26.079
complicated. Right? My parents have a

00:12:26.079 --> 00:12:28.480
whole lot of shares. They're retired. And

00:12:28.480 --> 00:12:29.959
my mom's a science

00:12:29.959 --> 00:12:31.720
teacher. And I said, "Well, you know, what

00:12:31.720 --> 00:12:33.040
are you looking for in the financial

00:12:33.040 --> 00:12:34.600
statements? You know, what do you look at

00:12:34.600 --> 00:12:35.720
when you look at the numbers?" And she

00:12:35.720 --> 00:12:38.160
said, "I don't know." Right? I'm looking for

00:12:38.160 --> 00:12:40.160
positive numbers, not negative numbers, in

00:12:40.160 --> 00:12:42.279
the profit. I'm looking for numbers that

00:12:42.279 --> 00:12:44.560
go up. But she doesn't understand

00:12:44.560 --> 00:12:46.560
anywhere near the complexity of

00:12:46.560 --> 00:12:49.800
accounting that I do as a CA to be able

00:12:49.800 --> 00:12:51.480
to interpret that information and know

00:12:51.480 --> 00:12:53.639
whether it seems appropriate or not. So

00:12:53.639 --> 00:12:56.079
the audit is there to minimize this

00:12:56.079 --> 00:13:00.079
information risk, to act as the

00:13:00.079 --> 00:13:01.639
advocate of shareholders to say, "Well,

00:13:01.639 --> 00:13:03.320
really, we want information that is absolutely

00:13:03.320 --> 00:13:05.330
true for decision-making.

00:13:05.330 --> 00:13:07.079
So how could we reduce

00:13:07.079 --> 00:13:09.399
information risk? We could get users to

00:13:09.399 --> 00:13:11.399
try and verify information. That would be

00:13:11.399 --> 00:13:13.079
really tough, especially at Woolies with

00:13:13.079 --> 00:13:15.360
all of their shareholders. Not really

00:13:15.360 --> 00:13:18.199
reliable. The user does share some risk

00:13:18.199 --> 00:13:20.360
with management because they make a risk

00:13:20.360 --> 00:13:23.839
when it comes to investing, but the

00:13:23.839 --> 00:13:28.519
audit is the thing that we use to reduce

00:13:28.519 --> 00:13:33.000
agency cost. Alright. So to

00:13:33.000 --> 00:13:36.279
reduce the risk of

00:13:36.279 --> 00:13:39.040
agency, we have an audit. We have the

00:13:39.040 --> 00:13:41.480
auditors independently check

00:13:41.480 --> 00:13:43.720
management's work to make sure that they

00:13:43.720 --> 00:13:45.880
are telling the truth when it comes to

00:13:45.880 --> 00:13:47.720
what they present to

00:13:47.720 --> 00:13:50.040
shareholders. So here's my son. You can

00:13:50.040 --> 00:13:52.000
see him there. He's pretty

00:13:52.000 --> 00:13:55.279
cute. And for those people who are

00:13:55.279 --> 00:13:57.000
wondering, I'm not just getting fat. I

00:13:57.000 --> 00:13:59.360
am going to having a baby at the

00:13:59.360 --> 00:14:01.040
beginning of next year. So we call him

00:14:01.040 --> 00:14:04.560
Audit Junior, and we just recently

00:14:04.560 --> 00:14:05.959
announced--well, I announced on my

00:14:05.959 --> 00:14:08.000
Facebook page, for all the students

00:14:08.000 --> 00:14:09.600
who are friends with me--that he's

00:14:09.600 --> 00:14:12.040
getting a promotion to Audit Senior. So

00:14:12.040 --> 00:14:13.600
we'll have a new Audit Junior coming

00:14:13.600 --> 00:14:15.839
along. But when it comes to describing

00:14:15.839 --> 00:14:18.440
auditing, I always use this picture. This

00:14:18.440 --> 00:14:21.240
was only taken a few months ago. And I

00:14:21.240 --> 00:14:25.360
say, "Is this the world's cutest kid?" Right?

00:14:25.360 --> 00:14:27.880
Because every parent thinks that their

00:14:27.880 --> 00:14:30.639
child is the cutest kid ever. Nobody--

00:14:30.639 --> 00:14:32.040
I haven't met a new parent that says,

00:14:32.040 --> 00:14:33.360
"Well, look, actually my son or daughter

00:14:33.360 --> 00:14:34.199
is a bit

00:14:34.199 --> 00:14:37.079
ugly." Right? Oh, everybody's like, "Oh, how

00:14:37.079 --> 00:14:39.040
adorable. How

00:14:39.040 --> 00:14:41.360
cute." And the same with managers. Right?

00:14:41.360 --> 00:14:42.839
Managers are going to say, "We are the

00:14:42.839 --> 00:14:45.360
best ever." And when I meet your parents

00:14:45.360 --> 00:14:47.600
at graduation, your parents are going to

00:14:47.600 --> 00:14:51.959
say, "Look, wasn't my son just the best

00:14:51.959 --> 00:14:54.240
student?" Sometimes, Iook. And to be

00:14:54.240 --> 00:14:57.040
honest with you, I lie sometimes. So, you

00:14:57.040 --> 00:14:58.759
know, students who were really great--I

00:14:58.759 --> 00:14:59.560
say, "Yeah,

00:14:59.560 --> 00:15:02.440
absolutely." And sometimes if, you know,

00:15:02.440 --> 00:15:05.399
perhaps you weren't the most diligent,

00:15:05.399 --> 00:15:08.079
dedicated student, I will say something

00:15:08.079 --> 00:15:10.720
like, "Oh, you know, they really put in some

00:15:10.720 --> 00:15:13.600
good effort." That's my sort of, you know,

00:15:13.600 --> 00:15:15.839
safety statement

00:15:15.839 --> 00:15:19.440
there. But how would we determine who is

00:15:19.440 --> 00:15:21.240
the world's cutest

00:15:21.240 --> 00:15:24.160
kid? How would we figure that out? That's

00:15:24.160 --> 00:15:27.399
a claim I'm making. We would need to have

00:15:27.399 --> 00:15:29.800
somebody independent come up with some set

00:15:29.800 --> 00:15:32.759
of standards on child

00:15:32.759 --> 00:15:35.199
cuteness to figure out whether he really

00:15:35.199 --> 00:15:37.759
is the cutest kid or not. Now, when it

00:15:37.759 --> 00:15:40.360
comes to financial statements, that's

00:15:40.360 --> 00:15:42.120
really easy because we have our

00:15:42.120 --> 00:15:44.839
accounting standards that tell us this

00:15:44.839 --> 00:15:48.120
is what accounting should look like. And

00:15:48.120 --> 00:15:49.560
so when we're trying to figure out, "Well,

00:15:49.560 --> 00:15:51.319
are management telling the truth? Is this

00:15:51.319 --> 00:15:53.800
the right set of financial statements? Is

00:15:53.800 --> 00:15:55.040
this what we should be presenting to

00:15:55.040 --> 00:15:57.519
shareholders?" then we use our double AASBs

00:15:57.519 --> 00:16:00.440
to do that. Rodri will be back to tell

00:16:00.440 --> 00:16:02.160
you all sorts of other hints and tips as

00:16:02.160 --> 00:16:03.519
well about

00:16:03.519 --> 00:16:05.360
auditing. So

00:16:05.360 --> 00:16:09.639
auditing is the accumulation of evidence.

00:16:09.639 --> 00:16:11.360
Alright? So evidence is really critical

00:16:11.360 --> 00:16:14.040
because I shouldn't make a decision

00:16:14.040 --> 00:16:16.000
without having some

00:16:16.000 --> 00:16:20.079
evidence. If you're sick or something

00:16:20.079 --> 00:16:22.519
happens to you on the way to uni, then I

00:16:22.519 --> 00:16:24.360
want evidence if you say, "Okay. I missed the

00:16:24.360 --> 00:16:26.120
quiz because I fell down a flight of

00:16:26.120 --> 00:16:28.639
stairs and broke my leg." I'm going to

00:16:28.639 --> 00:16:31.079
have to see your broken leg. And I'd want

00:16:31.079 --> 00:16:33.120
some evidence that was really the

00:16:33.120 --> 00:16:36.880
case. Right? So I'm technically a doctor,

00:16:36.880 --> 00:16:38.399
and friends always ask me, "Look, could

00:16:38.399 --> 00:16:40.319
you write me a doctor's note?" Which I

00:16:40.319 --> 00:16:43.920
can't do as a PhD sort of doctor. But if

00:16:43.920 --> 00:16:46.040
you apply for something and you say, "Oh, okay. You

00:16:46.040 --> 00:16:47.839
know, this is what's been going on." I want

00:16:47.839 --> 00:16:49.440
to see actual evidence to know that

00:16:49.440 --> 00:16:51.399
that's the truth. So just like on cop

00:16:51.399 --> 00:16:53.120
shows, before they charge somebody with

00:16:53.120 --> 00:16:55.920
the crime, they need evidence. Well, we

00:16:55.920 --> 00:16:58.199
need evidence as well to be able to make

00:16:58.199 --> 00:16:59.839
our opinion

00:16:59.839 --> 00:17:02.880
and determine the degree of

00:17:02.880 --> 00:17:05.720
correspondence between information--which

00:17:05.720 --> 00:17:07.880
for us is going to be our financial

00:17:07.880 --> 00:17:09.599
statements--let me put that in

00:17:09.599 --> 00:17:12.039
red: Financial

00:17:12.039 --> 00:17:15.679
statements and our established

00:17:15.679 --> 00:17:18.280
criteria. And our established

00:17:18.280 --> 00:17:21.319
criteria are our double

00:17:21.319 --> 00:17:24.240
AASBs. Alright. So we're looking at

00:17:24.240 --> 00:17:26.119
management's information and what the

00:17:26.119 --> 00:17:29.679
double AASBs say it should be. And I

00:17:29.679 --> 00:17:31.440
know--would you guys have had Helen, I

00:17:31.440 --> 00:17:33.080
think, last semester for accounting

00:17:33.080 --> 00:17:35.120
standards? So Helen would have taught you

00:17:35.120 --> 00:17:37.640
how everything needs to be laid out, how

00:17:37.640 --> 00:17:40.000
all the calculations need to work. So we

00:17:40.000 --> 00:17:41.480
need to check that. That's part of the

00:17:41.480 --> 00:17:45.080
auditor's role. So key things about the

00:17:45.080 --> 00:17:47.760
audit: we need to be competent. We need to

00:17:47.760 --> 00:17:49.559
have the right skills, which is part of

00:17:49.559 --> 00:17:52.039
what we're doing here at uni, and we need

00:17:52.039 --> 00:17:56.039
to be independent as well. Alright? So

00:17:56.039 --> 00:17:57.840
competency is about having the right

00:17:57.840 --> 00:18:00.400
skills, and and then being independent is

00:18:00.400 --> 00:18:03.159
about being

00:18:03.159 --> 00:18:05.000
objective. And I'll give you an

00:18:05.000 --> 00:18:08.679
example. So many, many, many years ago,

00:18:08.679 --> 00:18:10.440
my husband and I both met at an audit

00:18:10.440 --> 00:18:12.520
firm. So it was an audit firm

00:18:12.520 --> 00:18:14.320
romance.

00:18:14.320 --> 00:18:16.679
And we were both working on different

00:18:16.679 --> 00:18:18.960
audit clients. And one of my big

00:18:18.960 --> 00:18:21.120
clients was QBE Insurance, which we've

00:18:21.120 --> 00:18:23.200
all would have seen on TV and they

00:18:23.200 --> 00:18:27.080
sponsor some sporting teams, etc. But he

00:18:27.080 --> 00:18:31.480
left PwC and took a job at

00:18:31.480 --> 00:18:34.520
QBE. At that point, I could no longer do

00:18:34.520 --> 00:18:36.880
the audit because I was no longer

00:18:36.880 --> 00:18:38.520
independent, because I knew somebody that

00:18:38.520 --> 00:18:41.440
worked there, and part of his job was

00:18:41.440 --> 00:18:43.320
consolidation of all of their

00:18:43.320 --> 00:18:47.200
subsidiaries. So if I discovered that he

00:18:47.200 --> 00:18:49.360
had, you know, somehow stolen $10,000,000

00:18:49.360 --> 00:18:51.520
from the company, I probably wouldn't

00:18:51.520 --> 00:18:54.120
have told anybody. We would have, you know,

00:18:54.120 --> 00:18:56.799
very quietly resigned from our jobs, sold

00:18:56.799 --> 00:18:58.919
our house, and skipped out a

00:18:58.919 --> 00:19:02.679
non-extradition country. So we need to

00:19:02.679 --> 00:19:05.480
have auditors who are objective and

00:19:05.480 --> 00:19:09.080
independent. Right? To say that when

00:19:09.080 --> 00:19:11.360
we see something that's not quite right,

00:19:11.360 --> 00:19:13.640
we feel independent enough to put our

00:19:13.640 --> 00:19:15.799
hands up and say, "Oh, I don't think this

00:19:15.799 --> 00:19:17.840
should be happening." Or, "You know,

00:19:17.840 --> 00:19:19.600
management are not doing the right thing."

00:19:19.600 --> 00:19:20.559
So

00:19:20.559 --> 00:19:22.559
independence is the cornerstone of

00:19:22.559 --> 00:19:25.320
auditing. You open any audit textbook, and

00:19:25.320 --> 00:19:27.360
I'm a bit of an audit nerd, so I have

00:19:27.360 --> 00:19:29.640
audit textbooks from the

00:19:29.640 --> 00:19:31.400
1940s and

00:19:31.400 --> 00:19:33.600
earlier. And there's no pictures. No

00:19:33.600 --> 00:19:35.080
diagrams. It's all in color. It's all

00:19:35.080 --> 00:19:37.159
black and white, just typed text. But they

00:19:37.159 --> 00:19:39.320
all start with this idea that audit is

00:19:39.320 --> 00:19:41.600
the cornerstone--sorry. Independence is

00:19:41.600 --> 00:19:43.919
the cornerstone of being able to do that

00:19:43.919 --> 00:19:46.559
audit, to be independent. Just like when I

00:19:46.559 --> 00:19:49.760
say my kid has got to be the cutest kid,

00:19:49.760 --> 00:19:52.320
I'm not independent. So we would have to

00:19:52.320 --> 00:19:55.880
find somebody who is an independent

00:19:55.880 --> 00:19:58.799
expert in the judgment of kid cuteness

00:19:58.799 --> 00:20:01.064
to be able to make that opinion.

00:20:01.559 --> 00:20:03.720
Alright. So, what do we need to

00:20:03.720 --> 00:20:05.679
be able to do our audit? We need to have

00:20:05.679 --> 00:20:07.600
the information: the financial statements

00:20:07.600 --> 00:20:09.320
and our criteria, which is our double

00:20:09.320 --> 00:20:12.120
AASBs that we talked about. Alright. So

00:20:12.120 --> 00:20:15.760
our financial statements and our double

00:20:15.760 --> 00:20:18.720
AASBs. We need to be able to accumulate

00:20:18.720 --> 00:20:19.960
evidence, and we're actually going to

00:20:19.960 --> 00:20:22.679
practice doing that, designing ways to

00:20:22.679 --> 00:20:25.240
collect evidence. So just like on CSI,

00:20:25.240 --> 00:20:26.360
there's all these techniques for

00:20:26.360 --> 00:20:29.280
collecting fingerprints and running DNA

00:20:29.280 --> 00:20:31.559
and taking a tire track and running it

00:20:31.559 --> 00:20:34.880
through a database. We also have

00:20:34.880 --> 00:20:37.840
less cool procedures to collect

00:20:37.840 --> 00:20:39.760
evidence. So there's no like, you know,

00:20:39.760 --> 00:20:41.960
dark rooms with spotlights and

00:20:41.960 --> 00:20:44.039
microscopes. Unfortunately, auditors

00:20:44.039 --> 00:20:46.559
mostly just use our brains, might use a

00:20:46.559 --> 00:20:49.880
computer, pen and some paper. But we're

00:20:49.880 --> 00:20:51.840
going to look at specific methods that

00:20:51.840 --> 00:20:54.280
we've developed over time to collect

00:20:54.280 --> 00:20:56.240
evidence. We've talked about being

00:20:56.240 --> 00:20:57.880
competent, having the right skills and

00:20:57.880 --> 00:20:59.360
being independent

00:20:59.360 --> 00:21:02.559
and then providing a report. So under the

00:21:02.559 --> 00:21:03.880
Corporations Act--

00:21:06.919 --> 00:21:09.120
oops--I actually have to provide a

00:21:09.120 --> 00:21:10.120
written

00:21:10.120 --> 00:21:12.039
report that

00:21:12.039 --> 00:21:15.440
says, "Here is the outcome of the audit.

00:21:15.440 --> 00:21:18.440
Yes, management are telling the truth. Or,

00:21:18.440 --> 00:21:20.880
no, they're not quite being truthful

00:21:20.880 --> 00:21:22.279
about everything, and here are the things

00:21:22.279 --> 00:21:25.000
that they not being honest about."

00:21:25.000 --> 00:21:27.080
So, what's the difference between

00:21:27.080 --> 00:21:29.360
auditing and accounting? The accounting

00:21:29.360 --> 00:21:33.080
is the recording part of the business

00:21:33.080 --> 00:21:35.960
process. So they record, summarize all the

00:21:35.960 --> 00:21:38.240
debits and credits within the system, and

00:21:38.240 --> 00:21:40.480
then the auditors are actually the ones

00:21:40.480 --> 00:21:42.640
checking the accounting work. So we're

00:21:42.640 --> 00:21:43.760
going to go back, and we're going to look

00:21:43.760 --> 00:21:45.960
at the work of the accounts and say, "Are

00:21:45.960 --> 00:21:48.240
they doing the right thing?"

00:21:49.310 --> 00:21:50.400
I'm just going to move this over here

00:21:50.400 --> 00:21:52.919
for a second. Alright. So we have three

00:21:52.919 --> 00:21:55.360
main types of audits: the financial

00:21:55.360 --> 00:21:56.679
statement, the performance, and the

00:21:56.679 --> 00:21:58.600
compliance. As I mentioned before,

00:21:58.600 --> 00:21:59.679
financial statement is the one that

00:21:59.679 --> 00:22:01.440
we're going to be spending the most of

00:22:01.440 --> 00:22:04.080
our time on. The performance is about: Are

00:22:04.080 --> 00:22:05.720
we doing things efficiently, and

00:22:05.720 --> 00:22:09.000
effectively within our business? So we

00:22:09.000 --> 00:22:11.880
might have a sales process or a complex

00:22:11.880 --> 00:22:13.520
consolidation process, and we can get an

00:22:13.520 --> 00:22:15.559
auditor in to say, "Is this the best way

00:22:15.559 --> 00:22:17.559
to do this? Do we need to re-engineer our

00:22:17.559 --> 00:22:20.039
business process?" And then the compliance

00:22:20.039 --> 00:22:22.360
audit, which is about following laws and

00:22:22.360 --> 00:22:24.840
regulations. So, is a company reporting

00:22:24.840 --> 00:22:27.440
GST appropriately? Are they following

00:22:27.440 --> 00:22:30.320
occupational health and safety? Are

00:22:30.320 --> 00:22:32.360
they doing anything else that requires a

00:22:32.360 --> 00:22:34.480
specific law or regulation? But we're

00:22:34.480 --> 00:22:37.000
going to focus on that one up

00:22:37.000 --> 00:22:40.080
there. So there's some examples. Okay.

00:22:40.080 --> 00:22:41.799
Different types of auditors: The public

00:22:41.799 --> 00:22:43.360
accounting firms are the big four and

00:22:43.360 --> 00:22:45.880
the second tier. They do most of the

00:22:45.880 --> 00:22:49.260
publicly listed companies. The auditor-general

00:22:49.260 --> 00:22:50.880
are the government

00:22:50.880 --> 00:22:52.960
auditors. Alright. So the New South

00:22:52.960 --> 00:22:55.159
Wales audit office and the auditor

00:22:55.159 --> 00:22:57.760
general of Australia based in Canberra.

00:22:57.760 --> 00:22:59.360
New South Wales auditor general will

00:22:59.360 --> 00:23:02.320
audit state government

00:23:02.320 --> 00:23:04.960
organizations, and the auditor general

00:23:04.960 --> 00:23:07.559
will handle the audit for everything

00:23:07.559 --> 00:23:09.039
else that's federal.

00:23:09.039 --> 00:23:11.880
So the auditor general audits

00:23:11.880 --> 00:23:14.480
the defense force. They're in charge

00:23:14.480 --> 00:23:16.559
of the overall audit for

00:23:16.559 --> 00:23:20.279
Telstra, Centrelink, and other big

00:23:20.279 --> 00:23:21.919
government departments.

00:23:21.919 --> 00:23:24.559
We have Auditors for tax

00:23:24.559 --> 00:23:27.039
that work specifically for the ATO.

00:23:27.039 --> 00:23:29.440
But they're more likely to be lawyers

00:23:29.440 --> 00:23:31.720
and accountants, not just

00:23:31.720 --> 00:23:34.480
accountants. And then internal auditors,

00:23:34.480 --> 00:23:36.600
which focus on doing that compliance in

00:23:36.600 --> 00:23:39.720
the performance audit. So most big top

00:23:39.720 --> 00:23:41.400
100 companies will have their own audit,

00:23:41.400 --> 00:23:45.080
internal audit team. So Quantis, the

00:23:45.080 --> 00:23:47.840
Commonwealth Bank, Coca-Cola will all

00:23:47.840 --> 00:23:50.679
have teams who look at internal

00:23:50.679 --> 00:23:52.080
improvements and making sure that

00:23:52.080 --> 00:23:54.000
they're following the rules and

00:23:54.000 --> 00:23:55.840
regulations. And this is important

00:23:55.840 --> 00:23:57.400
because they want to try and minimize

00:23:57.400 --> 00:23:58.464
fines.

00:24:01.320 --> 00:24:02.840
Alright. Because you could get a

00:24:02.840 --> 00:24:04.799
government fine for not following a law

00:24:04.799 --> 00:24:07.080
or a regulation appropriately. You could

00:24:07.080 --> 00:24:10.809
be sued. It could create all sorts of issues.

00:24:14.620 --> 00:24:16.600
Alright. So, let's look the big

00:24:16.600 --> 00:24:19.880
firms. I worked for this one actually,

00:24:19.880 --> 00:24:21.679
well, the predecessor for this one, which

00:24:21.679 --> 00:24:23.640
was C&L brand, and then

00:24:23.640 --> 00:24:27.960
PwC. So the big four audit--probably--I

00:24:27.960 --> 00:24:30.919
think about 60% of the Australian stock

00:24:30.919 --> 00:24:34.279
exchange, and then these guys here pretty

00:24:34.279 --> 00:24:38.120
much audit the rest. Alright. So for

00:24:38.120 --> 00:24:40.559
those people who are going to a later

00:24:40.559 --> 00:24:43.000
afternoon to, and you'll have Kate, or

00:24:43.000 --> 00:24:45.159
you'll have Nicole, we actually have

00:24:45.159 --> 00:24:47.159
an agreement with Grant Thornton, where

00:24:47.159 --> 00:24:49.799
they actually send real life auditors in

00:24:49.799 --> 00:24:51.799
to teach tutorial. So you'll get to hear

00:24:51.799 --> 00:24:54.399
lots of stories from them. The people

00:24:54.399 --> 00:24:57.880
who are going to... who will have Ben

00:24:57.880 --> 00:25:01.240
this afternoon in the 12:00 to

00:25:01.240 --> 00:25:04.039
and I think also the 1:30 one. Ben works

00:25:04.039 --> 00:25:07.200
at a small local firm in terms of

00:25:07.200 --> 00:25:09.840
auditing. So he's got lots of experience

00:25:09.840 --> 00:25:12.279
in doing much smaller audits, which are

00:25:12.279 --> 00:25:14.919
required under the Corporations Act.

00:25:14.919 --> 00:25:17.480
So you've got a range of staff with a

00:25:17.480 --> 00:25:19.440
range of experience, and this means that

00:25:19.440 --> 00:25:21.520
auditors exist at all sorts of different

00:25:21.520 --> 00:25:24.279
levels. So I recently did the audit for

00:25:24.279 --> 00:25:26.320
ISAC, which is one of the university

00:25:26.320 --> 00:25:29.120
student groups. Audits happen for the

00:25:29.120 --> 00:25:31.960
big ASX listed companies. They happen for

00:25:31.960 --> 00:25:35.080
large privately listed--sorry--for large

00:25:35.080 --> 00:25:37.279
private companies. And they also happen

00:25:37.279 --> 00:25:39.360
for small companies that are required to

00:25:39.360 --> 00:25:42.600
have audits under the Corporations Act

00:25:42.600 --> 00:25:44.799
or maybe as part of charity

00:25:44.799 --> 00:25:48.240
regulations. Firms do audits but just

00:25:48.240 --> 00:25:49.720
of different sizes and of different

00:25:49.720 --> 00:25:53.640
scales. So the big four are so large and

00:25:53.640 --> 00:25:56.200
so specialized that people specialize by

00:25:56.200 --> 00:25:59.399
industry. So you audit mining firms or

00:25:59.399 --> 00:26:01.320
government firms or telecommunications

00:26:01.320 --> 00:26:03.559
or financial services. My

00:26:03.559 --> 00:26:05.960
specialization was financial services so

00:26:05.960 --> 00:26:08.279
I didn't get to see much. I always envied

00:26:08.279 --> 00:26:09.440
the people that got to audit

00:26:09.440 --> 00:26:11.240
manufacturing firms or mining firms

00:26:11.240 --> 00:26:12.960
because you could go places and see real

00:26:12.960 --> 00:26:15.399
things happening until one time I did

00:26:15.399 --> 00:26:17.600
get put on the audit of dairy farmers.

00:26:17.600 --> 00:26:19.720
And that's not so Glamorous, like milk

00:26:19.720 --> 00:26:22.880
processing plants really don't smell

00:26:22.880 --> 00:26:25.279
great. We did get to drink, you know,

00:26:25.279 --> 00:26:26.799
you had access to the corporate fridge,

00:26:26.799 --> 00:26:28.320
so I could drink all the milk that I

00:26:28.320 --> 00:26:30.320
could take. Though, I'm Asian, so I'm

00:26:30.320 --> 00:26:31.919
partly lactose intolerance that doesn't

00:26:31.919 --> 00:26:34.760
go down so well. But dairy farmers

00:26:34.760 --> 00:26:36.279
made yogurt, again, I couldn't eat too

00:26:36.279 --> 00:26:38.320
much of that. But fruit juice, I could

00:26:38.320 --> 00:26:39.640
drink the fruit juice all day so that

00:26:39.640 --> 00:26:42.000
was a good thing. So the public

00:26:42.000 --> 00:26:44.919
accounting firms, big ones and small ones

00:26:44.919 --> 00:26:47.600
provide audit services, so that's a big

00:26:47.600 --> 00:26:49.600
part of their bread and butter. Audit

00:26:49.600 --> 00:26:50.760
services though

00:26:50.760 --> 00:26:54.240
are high volume

00:26:54.240 --> 00:26:56.423
and low margin.

00:26:59.320 --> 00:27:01.080
That means you don't make a lot of money

00:27:01.080 --> 00:27:02.240
off an audit.

00:27:02.240 --> 00:27:04.799
Right? It's not a really

00:27:04.799 --> 00:27:07.440
profitable item to do. But the reason

00:27:07.440 --> 00:27:09.640
that you do an audit is so that you can

00:27:09.640 --> 00:27:13.120
convince your client to hire you to do

00:27:13.120 --> 00:27:15.799
other things, like tax which can be a

00:27:15.799 --> 00:27:18.039
little bit more lucrative and consulting

00:27:18.039 --> 00:27:20.360
services, that could be helping them

00:27:20.360 --> 00:27:23.200
expand into a new market, choosing a

00:27:23.200 --> 00:27:25.760
new information system, you get

00:27:25.760 --> 00:27:28.679
different departments within your

00:27:28.679 --> 00:27:30.919
audit firm to do that. But

00:27:30.919 --> 00:27:32.279
it's all about sort of growing the

00:27:32.279 --> 00:27:35.520
bigger audit firm share. So, something

00:27:35.520 --> 00:27:37.440
like management consulting services is

00:27:37.440 --> 00:27:40.039
really high margin.

00:27:40.360 --> 00:27:42.640
And towards my--at the end of my

00:27:42.640 --> 00:27:44.080
career, I did a lot more management

00:27:44.080 --> 00:27:47.679
consulting, and I remember back in

00:27:47.679 --> 00:27:50.480
19, oh, I think it was 1999,

00:27:50.480 --> 00:27:54.760
we had a $20,000,000 consulting job

00:27:54.760 --> 00:27:56.039
with the Australian Broadcasting

00:27:56.039 --> 00:27:58.279
Corporation just down the road for

00:27:58.279 --> 00:28:00.279
implementing new software. And that was a

00:28:00.279 --> 00:28:03.189
six-month project for $20,000,000.

00:28:03.189 --> 00:28:04.279
So, and you wouldn't earn

00:28:04.279 --> 00:28:06.000
anywhere near that much on an audit.

00:28:06.000 --> 00:28:07.559
You'd probably earn a few million

00:28:07.559 --> 00:28:09.159
dollars on an audit for about 6-8

00:28:09.159 --> 00:28:12.360
weeks work, so there's definitely lots

00:28:12.360 --> 00:28:14.000
of margin aid there.

00:28:14.000 --> 00:28:17.240
Now, you find very few firms that

00:28:17.240 --> 00:28:19.480
are in the sole proprietorship or the

00:28:19.480 --> 00:28:22.240
partnership model. That's because of the

00:28:22.240 --> 00:28:24.720
idea of joint and several liability, and

00:28:24.720 --> 00:28:26.720
that would mean that if the partner of

00:28:26.720 --> 00:28:28.000
the firm did something wrong and then

00:28:28.000 --> 00:28:30.080
they they skipped out of town, I would be

00:28:30.080 --> 00:28:32.799
liable as one of the partners left over.

00:28:32.799 --> 00:28:36.200
The big four firms these days, and most

00:28:36.200 --> 00:28:37.760
of our second tier are almost all

00:28:37.760 --> 00:28:39.519
incorporated companies. So while you have

00:28:39.519 --> 00:28:41.679
partners who are shareholders in the

00:28:41.679 --> 00:28:43.960
firm, they're not partners in the typical

00:28:43.960 --> 00:28:46.360
sense of a partnership.

00:28:46.360 --> 00:28:48.279
Now, in terms of the

00:28:48.279 --> 00:28:50.399
hierarchy or the shape of an audit

00:28:50.399 --> 00:28:53.880
firm, previously, they looked like this.

00:28:53.880 --> 00:28:56.519
Alright. So you had the partners

00:28:56.519 --> 00:28:59.200
at the very top and then lots of junior

00:28:59.200 --> 00:29:01.519
staff doing what we call grunt work,

00:29:01.519 --> 00:29:03.120
ticking and bashing, or ticking and

00:29:03.120 --> 00:29:06.559
flicking at the bottom. What we're seeing

00:29:06.559 --> 00:29:08.480
in terms of trends and the data that's

00:29:08.480 --> 00:29:09.880
coming out of CA,

00:29:09.880 --> 00:29:12.679
is that the audit firm is looking a

00:29:12.679 --> 00:29:13.880
lot more rectangular.

00:29:13.880 --> 00:29:16.760
Now, and that you're

00:29:16.760 --> 00:29:19.600
having a lot less staff at the junior

00:29:19.600 --> 00:29:21.120
levels and that comes from a number of

00:29:21.120 --> 00:29:23.399
different reasons. The first one

00:29:23.399 --> 00:29:25.691
is outsourcing

00:29:26.679 --> 00:29:28.880
or offshoring.

00:29:28.880 --> 00:29:32.760
And that's especially... you

00:29:32.760 --> 00:29:34.480
scan a lot of audit documentation then

00:29:34.480 --> 00:29:37.279
you would have had graduates, interns

00:29:37.279 --> 00:29:39.519
doing a lot of ticking and checking. All

00:29:39.519 --> 00:29:41.399
of that gets scanned and then sent off

00:29:41.399 --> 00:29:44.640
to India or, you know, Pakistan, and they

00:29:44.640 --> 00:29:46.440
do a whole lot of the audit checking

00:29:46.440 --> 00:29:48.120
work for about a third the price

00:29:48.120 --> 00:29:50.480
overnight. So the amount of staff doing

00:29:50.480 --> 00:29:53.480
that work is much less, and then we've

00:29:53.480 --> 00:29:55.919
also seen a lot more automation. So we're

00:29:55.919 --> 00:29:58.159
using a lot more big data, we're using a

00:29:58.159 --> 00:30:00.399
lot more intelligent agents, and

00:30:00.399 --> 00:30:03.480
artificial intelligence in audits. So, you

00:30:03.480 --> 00:30:04.799
know, the future is still looking bright

00:30:04.799 --> 00:30:06.360
for auditing, and auditing at this point

00:30:06.360 --> 00:30:08.919
is not going to be replaced by machines.

00:30:08.919 --> 00:30:10.640
But there's a lot less at the bottom

00:30:10.640 --> 00:30:12.760
level than there was before.

00:30:12.760 --> 00:30:14.919
What do the professional bodies

00:30:14.919 --> 00:30:16.880
do? They do a few different things: they

00:30:16.880 --> 00:30:18.440
help establish standards through the

00:30:18.440 --> 00:30:20.720
Auditing Standards Board, they do a lot

00:30:20.720 --> 00:30:22.760
of research and then the biggest

00:30:22.760 --> 00:30:24.600
one is education to make sure that once

00:30:24.600 --> 00:30:27.480
you become a member you are continuously

00:30:27.480 --> 00:30:31.279
up to date on latest auditing trends and

00:30:31.279 --> 00:30:33.480
changes within legislation, especially at

00:30:33.480 --> 00:30:34.960
the international level.

00:30:34.960 --> 00:30:37.279
Now, what about our auditing

00:30:37.279 --> 00:30:38.919
standards? Our auditing standards are

00:30:38.919 --> 00:30:40.679
called ASAs.

00:30:40.679 --> 00:30:43.080
Alright. And you can find those

00:30:43.080 --> 00:30:50.440
free on the auausb website. auasb.gov.au

00:30:50.440 --> 00:30:54.399
Now, remember our exam is open book, so

00:30:54.399 --> 00:30:56.320
you can bring in--oh, somebody has one of

00:30:56.320 --> 00:30:58.880
these--I'm just going to borrow this here.

00:30:58.880 --> 00:31:01.200
One of these handbooks, if you want all

00:31:01.200 --> 00:31:03.480
your standards in one book, or you could

00:31:03.480 --> 00:31:04.440
print them out.

00:31:04.440 --> 00:31:06.880
Alright. And bring them into the exam.

00:31:06.880 --> 00:31:08.159
You can bring your textbook into the

00:31:08.159 --> 00:31:11.399
exam. You could bring anything you like,

00:31:11.399 --> 00:31:12.600
comic books, if you think you're going to

00:31:12.600 --> 00:31:14.440
have time at the end to, you know, have a

00:31:14.440 --> 00:31:17.320
bit of a read. So you don't

00:31:17.320 --> 00:31:19.320
necessarily need to buy the standards

00:31:19.320 --> 00:31:21.200
book if you don't want to. You can look

00:31:21.200 --> 00:31:23.000
at them online and then print out the

00:31:23.000 --> 00:31:24.880
sections that you think you'll need. I

00:31:24.880 --> 00:31:26.320
will actually tell you in the last week

00:31:26.320 --> 00:31:27.480
of the term, which ones I think are going to

00:31:27.480 --> 00:31:29.960
be key ones for the final exam. So you

00:31:29.960 --> 00:31:31.440
don't have to worry about that.

00:31:31.440 --> 00:31:34.200
So the AUASB

00:31:34.200 --> 00:31:37.840
issues the auditing standards and

00:31:37.840 --> 00:31:39.679
we're internationally harmonized so

00:31:39.679 --> 00:31:41.440
they come down from the International

00:31:41.440 --> 00:31:44.960
Auditing Standards Board, and the key is

00:31:44.960 --> 00:31:46.519
that they are mandatory.

00:31:46.519 --> 00:31:48.600
Alright. So while some

00:31:48.600 --> 00:31:51.000
companies or some countries--sorry--the

00:31:51.000 --> 00:31:54.000
auditing standards say, "The auditor

00:31:54.000 --> 00:31:56.639
may..." Our auditing standards say, "The

00:31:56.639 --> 00:31:59.760
auditor must or the auditor shall..."

00:31:59.760 --> 00:32:02.240
because our requirements are enshrined

00:32:02.240 --> 00:32:05.440
within the Corporations Act. We must do

00:32:05.440 --> 00:32:08.679
them as the minimum set of standards. You

00:32:08.679 --> 00:32:10.320
could do more than what the standard

00:32:10.320 --> 00:32:13.519
says, but the minimum is contained within

00:32:13.519 --> 00:32:15.960
the ASAs, and we'll be referring back and

00:32:15.960 --> 00:32:17.480
I'll show you excerpts from the

00:32:17.480 --> 00:32:20.240
standards on a regular basis of things

00:32:20.240 --> 00:32:21.639
that are really critical and important

00:32:21.639 --> 00:32:23.080
to understand.

00:32:23.080 --> 00:32:25.440
Alright. So, how do we make

00:32:25.440 --> 00:32:27.360
sure that everybody who's doing an audit

00:32:27.360 --> 00:32:29.039
is doing the right thing that

00:32:29.039 --> 00:32:31.639
comes from quality control? And so

00:32:31.639 --> 00:32:37.039
quality control needs to exist across firms,

00:32:38.639 --> 00:32:41.880
and quality control also needs to

00:32:41.880 --> 00:32:45.320
exist within firms.

00:32:45.919 --> 00:32:48.559
Alright. So I need to make sure

00:32:48.559 --> 00:32:51.320
that PwC are doing the same minimum

00:32:51.320 --> 00:32:55.679
standard as KPMG, and then within PwC's,

00:32:55.679 --> 00:32:57.440
however many offices, we need to make

00:32:57.440 --> 00:32:59.760
sure that all staff are doing the same

00:32:59.760 --> 00:33:03.039
thing. And there are specific--whoops--

00:33:03.039 --> 00:33:06.200
specific quality control standards

00:33:06.200 --> 00:33:09.000
that the auditing standards and the

00:33:09.000 --> 00:33:11.440
Corporations Act actually set out. So

00:33:11.440 --> 00:33:13.960
things about having leadership,

00:33:13.960 --> 00:33:15.679
meeting ethical and independence

00:33:15.679 --> 00:33:18.200
requirements, rules about how to accept

00:33:18.200 --> 00:33:21.080
clients, selecting the right people doing

00:33:21.080 --> 00:33:22.919
the audits, and then monitoring or

00:33:22.919 --> 00:33:24.279
checking each other.

00:33:24.279 --> 00:33:27.519
And that's where the peer review

00:33:27.519 --> 00:33:29.000
program comes in

00:33:29.000 --> 00:33:31.159
from chartered

00:33:31.159 --> 00:33:33.279
accountants and CPA Australia, where

00:33:33.279 --> 00:33:36.559
firms check each other's work to make

00:33:36.559 --> 00:33:38.519
sure that they're all following the

00:33:38.519 --> 00:33:40.639
standards appropriately.

00:33:40.639 --> 00:33:44.159
So CA and CPA both have

00:33:44.159 --> 00:33:45.919
sets of auditors that actually audit

00:33:45.919 --> 00:33:50.760
them. Also, on top of that, we have the

00:33:50.760 --> 00:33:53.880
Australian Securities and Investment

00:33:53.880 --> 00:33:56.720
Commission doing their own inspection

00:33:56.720 --> 00:33:58.346
program.

00:33:59.000 --> 00:34:00.720
Alright. So they audit the big four

00:34:00.720 --> 00:34:03.360
firms every single year. Smaller firms on

00:34:03.360 --> 00:34:05.960
a rotating schedule, and they can find

00:34:05.960 --> 00:34:08.000
audit firms for not complying with the

00:34:08.000 --> 00:34:10.480
auditing standards. I'll provide you

00:34:10.480 --> 00:34:13.000
guys with a link to look at the latest

00:34:13.000 --> 00:34:15.800
inspection report from ASIC. It

00:34:15.800 --> 00:34:18.679
doesn't actually show names of firms.

00:34:18.679 --> 00:34:20.239
This also happens in the U.S. and the U.S.

00:34:20.239 --> 00:34:22.000
has started naming firms who are not

00:34:22.000 --> 00:34:24.280
doing the right thing. So there's big

00:34:24.280 --> 00:34:27.440
bucks in making sure that everybody

00:34:27.440 --> 00:34:30.119
within the firm is doing the right

00:34:30.119 --> 00:34:31.719
thing in terms of following the order,

00:34:31.719 --> 00:34:33.800
standards, acting independently, and

00:34:33.800 --> 00:34:35.679
acting ethically. How are we doing on

00:34:35.679 --> 00:34:39.520
time? Oh, okay. Alright. Corporations Act.

00:34:39.520 --> 00:34:42.760
Besides governing company directors,

00:34:42.760 --> 00:34:46.679
setting up companies in Australia--

00:34:46.679 --> 00:34:47.918
you guys have all done Australian

00:34:47.918 --> 00:34:50.839
company law? Have you guys done company law?

00:34:50.839 --> 00:34:52.079
Yep, or for the people who haven't done

00:34:52.079 --> 00:34:54.679
it yet? One of the assignments many, many

00:34:54.679 --> 00:34:56.918
years ago used to be prepare all the

00:34:56.918 --> 00:34:59.200
documents to start company. Right? We'd

00:34:59.200 --> 00:35:00.359
have to actually go back to the

00:35:00.359 --> 00:35:01.920
Corporations Act and figure out what

00:35:01.920 --> 00:35:04.280
that is. So while the Corporations Act

00:35:04.280 --> 00:35:06.800
specifies how companies get set up, it

00:35:06.800 --> 00:35:10.119
also specifies what auditors need to do.

00:35:10.119 --> 00:35:12.280
You need to be qualified, you need to be

00:35:12.280 --> 00:35:14.720
registered, management can't just choose

00:35:14.720 --> 00:35:17.400
the auditor, it has to be ratified by

00:35:17.400 --> 00:35:18.880
shareholders at an annual general

00:35:18.880 --> 00:35:21.280
meeting, we can't just quit as an auditor,

00:35:21.280 --> 00:35:22.280
there's all sorts of rules about

00:35:22.280 --> 00:35:24.599
quitting. What our responsibilities are

00:35:24.599 --> 00:35:25.760
and reporting.

00:35:25.760 --> 00:35:27.800
And you can go into those

00:35:27.800 --> 00:35:29.320
in more detail in the textbook.

00:35:29.320 --> 00:35:32.400
Alright. So here is the output,

00:35:32.400 --> 00:35:33.599
and this is really important. And you

00:35:33.599 --> 00:35:35.119
might be thinking, "Well, why am I

00:35:35.119 --> 00:35:38.560
interested in looking at the end point

00:35:38.560 --> 00:35:39.920
when we're only at the beginning?" And

00:35:39.920 --> 00:35:42.359
this is so that you have in your mind

00:35:42.359 --> 00:35:45.480
the idea of what we're striving for, or

00:35:45.480 --> 00:35:47.720
what we're planning to...

00:35:47.720 --> 00:35:52.079
So, we're going to look at why do

00:35:52.079 --> 00:35:54.960
we have the report? What goes into

00:35:54.960 --> 00:35:56.720
something called an unmodified audit

00:35:56.720 --> 00:35:58.640
report? We're going to look at when

00:35:58.640 --> 00:36:00.760
we might do different sorts of reports,

00:36:00.760 --> 00:36:05.760
and adding extra information. Okay. Now, before--

00:36:05.760 --> 00:36:07.800
oh, I'm trying to remember what

00:36:07.800 --> 00:36:09.599
case it was--we'll go into the cases, I

00:36:09.599 --> 00:36:11.119
think next week.

00:36:11.119 --> 00:36:13.680
There was never a legal requirement

00:36:13.680 --> 00:36:15.480
to produce a paper audit report. You

00:36:15.480 --> 00:36:17.800
could have done a verbal audit report at

00:36:17.800 --> 00:36:20.520
one stage. But now, we must provide a

00:36:20.520 --> 00:36:22.880
written audit report about the financial

00:36:22.880 --> 00:36:24.760
statements in accordance with the

00:36:24.760 --> 00:36:27.560
Australian accounting the

00:36:27.560 --> 00:36:28.920
standards and our auditing

00:36:28.920 --> 00:36:31.000
standards. And reporting is pretty

00:36:31.000 --> 00:36:33.000
similar, to the point, where if you go to

00:36:33.000 --> 00:36:35.319
the auditing standard on audit reporting,

00:36:35.319 --> 00:36:37.480
there's actually templates in the back.

00:36:37.480 --> 00:36:39.640
And if you look at... almost all of the

00:36:39.640 --> 00:36:41.520
publicly listed companies their audit

00:36:41.520 --> 00:36:43.880
reports almost say exactly the same

00:36:43.880 --> 00:36:45.520
thing word for word except the company

00:36:45.520 --> 00:36:47.640
name is different, and the year might be

00:36:47.640 --> 00:36:49.040
different, and the name of the audit

00:36:49.040 --> 00:36:50.960
partner might be different.

00:36:50.960 --> 00:36:53.520
So audit reporting is fairly

00:36:53.520 --> 00:36:56.240
standardized and it has very specific

00:36:56.240 --> 00:36:58.720
legal language. Because it is a legal

00:36:58.720 --> 00:37:01.040
document that exposes the auditor to

00:37:01.040 --> 00:37:04.160
liability, if we've done something wrong.

00:37:04.160 --> 00:37:06.400
So, what is the gold standard that

00:37:06.400 --> 00:37:08.720
everybody is looking for? So, what most

00:37:08.720 --> 00:37:11.200
firms want...

00:37:12.640 --> 00:37:16.720
Firms want what we call an

00:37:16.720 --> 00:37:20.520
unmodified audit report, and it's also

00:37:20.520 --> 00:37:23.319
sometimes called an unqualified report.

00:37:23.319 --> 00:37:25.640
Now, this is where it's a bit funny and a

00:37:25.640 --> 00:37:26.520
bit counterintuitive.

00:37:26.520 --> 00:37:29.119
So when you do your CA,

00:37:29.119 --> 00:37:31.520
or you do a medical degree, or you finish

00:37:31.520 --> 00:37:34.040
your engineering qualification, you

00:37:34.040 --> 00:37:35.400
become qualified.

00:37:35.400 --> 00:37:38.359
Right? And qualified is a good

00:37:38.359 --> 00:37:41.560
thing. Okay? When it comes to an audit, it

00:37:41.560 --> 00:37:44.280
is the exact opposite. The one that

00:37:44.280 --> 00:37:47.079
people want... The one that says,

00:37:47.079 --> 00:37:50.880
"Big tick management are telling the

00:37:50.880 --> 00:37:54.359
truth, is something called an unqualified

00:37:54.359 --> 00:37:55.520
or an

00:37:55.520 --> 00:37:58.319
unmodified audit report."

00:37:58.319 --> 00:38:00.200
Okay. You might think why is it that way?

00:38:00.200 --> 00:38:02.480
I don't know. It's probably something I

00:38:02.480 --> 00:38:04.680
could historically dig into the

00:38:04.680 --> 00:38:06.800
archives and look at. Sometimes, I wonder

00:38:06.800 --> 00:38:08.400
if we do things sort of a bit back to

00:38:08.400 --> 00:38:10.960
front in auditing to make it seem really

00:38:10.960 --> 00:38:13.400
mysterious and difficult. Because

00:38:13.400 --> 00:38:15.160
auditing is a lot about logic and common

00:38:15.160 --> 00:38:16.599
sense, and we don't want too many people

00:38:16.599 --> 00:38:18.359
getting into the awesome area that is

00:38:18.359 --> 00:38:20.680
auditing. So we want to make it seem

00:38:20.680 --> 00:38:22.800
really complicated and tricky by using

00:38:22.800 --> 00:38:25.240
language that doesn't quite make sense.

00:38:25.240 --> 00:38:27.599
So most firms

00:38:27.599 --> 00:38:29.480
probably about--

00:38:29.480 --> 00:38:31.839
I think the last time we checked--

00:38:31.839 --> 00:38:35.119
it was something like 98% of firms on

00:38:35.119 --> 00:38:38.240
the ASX, get an unqualified, unmodified

00:38:38.240 --> 00:38:40.800
report. Management are telling the truth.

00:38:40.800 --> 00:38:43.240
Now that sends a signal to shareholders.

00:38:43.240 --> 00:38:46.200
That says, "Management, telling the truth.

00:38:46.200 --> 00:38:47.720
You can rely on this information for

00:38:47.720 --> 00:38:51.079
your decision-making." Alright. What happens

00:38:51.079 --> 00:38:53.760
do you think to company share

00:38:53.760 --> 00:38:55.920
prices, if I give them the opposite? If I

00:38:55.920 --> 00:38:57.920
say, "Management are not being truthful,

00:38:57.920 --> 00:39:00.200
and here are the reasons why." What do you

00:39:00.200 --> 00:39:01.800
think is going to happen to share

00:39:01.800 --> 00:39:04.560
price? it's going to go down and it goes

00:39:04.560 --> 00:39:07.119
down pretty quickly in terms of what

00:39:07.119 --> 00:39:08.680
we see from the research, in terms of

00:39:08.680 --> 00:39:11.280
share price reaction. So firms want this.

00:39:11.280 --> 00:39:13.920
Managers want to work with us, as the

00:39:13.920 --> 00:39:16.680
auditors, to come to an agreement on a

00:39:16.680 --> 00:39:18.240
set of financial statements that we

00:39:18.240 --> 00:39:21.839
think is unqualified, is free from misstatement.

00:39:21.839 --> 00:39:25.480
So ASA--this is our first ASA--

00:39:25.480 --> 00:39:27.880
700 and all the the ones I'm reporting

00:39:27.880 --> 00:39:30.280
are in the 700 area. Say that we want

00:39:30.280 --> 00:39:33.440
to get reasonable assurance that it's

00:39:33.440 --> 00:39:36.040
free from misstatements due to fraud or

00:39:36.040 --> 00:39:37.920
error. So I'm not interested--I don't care

00:39:37.920 --> 00:39:40.720
whether it's a mistake, a type 5,000,

00:39:40.720 --> 00:39:43.640
instead of 500,000, or it's fraud, I have

00:39:43.640 --> 00:39:46.280
a responsibility to detect those. I want

00:39:46.280 --> 00:39:48.000
to make sure that it matches the

00:39:48.000 --> 00:39:50.880
applicable financial reporting framework,

00:39:50.880 --> 00:39:54.160
which for us is at AASBs.

00:39:54.319 --> 00:39:57.440
Alright. And that it is a fair

00:39:57.440 --> 00:39:58.599
presentation

00:39:58.599 --> 00:40:01.119
that it fairly represents

00:40:01.119 --> 00:40:03.040
what happened during the

00:40:03.040 --> 00:40:05.839
company's financial period. So if the

00:40:05.839 --> 00:40:07.480
company was exposed to a lot of

00:40:07.480 --> 00:40:10.040
fluctuation changes and adverse

00:40:10.040 --> 00:40:12.640
movements in foreign exchange, and a

00:40:12.640 --> 00:40:14.560
decline in sales, then we'd expect to see

00:40:14.560 --> 00:40:17.200
a loss from that company. Is what we're

00:40:17.200 --> 00:40:19.880
seeing commensurate with what we know

00:40:19.880 --> 00:40:22.359
about the firm? And then making sure

00:40:22.359 --> 00:40:24.640
that the financial report is, again, in

00:40:24.640 --> 00:40:27.500
accordance with our double AASBs.

00:40:28.560 --> 00:40:30.560
There's all sorts of parts to the audit

00:40:30.560 --> 00:40:34.000
report, and this has actually

00:40:34.000 --> 00:40:37.599
changed a little bit. So this bit here

00:40:37.599 --> 00:40:40.000
used to be right at the end. We have a

00:40:40.000 --> 00:40:41.920
new standard change, so in the textbook,

00:40:41.920 --> 00:40:42.760
this is going to be a little bit

00:40:42.760 --> 00:40:43.960
different than what you're looking at

00:40:43.960 --> 00:40:49.119
right here. New ASA 700 now says that

00:40:49.119 --> 00:40:51.319
we tell the shareholders the very first

00:40:51.319 --> 00:40:54.359
thing, here's our opinion. We used to give

00:40:54.359 --> 00:40:56.760
them all this legal jargon first, all

00:40:56.760 --> 00:40:59.480
this other crap used to come first, and

00:40:59.480 --> 00:41:01.160
then we would do this sort of at the end.

00:41:01.160 --> 00:41:03.440
But now it's right at the front, to make

00:41:03.440 --> 00:41:05.520
sure that shareholders know what's going

00:41:05.520 --> 00:41:10.119
on. Now on UTS online, in this week's

00:41:10.119 --> 00:41:12.640
folder, I've also put a whole lot of

00:41:12.640 --> 00:41:14.400
audited opinions in there for you to

00:41:14.400 --> 00:41:18.359
look at. And I'll also copy in for you

00:41:18.359 --> 00:41:21.040
the link to the QBE Insurance

00:41:21.040 --> 00:41:24.720
annual report because it is

00:41:24.720 --> 00:41:27.440
one of the few early adopters of some

00:41:27.440 --> 00:41:29.400
new regulations. And so I'll make a

00:41:29.400 --> 00:41:30.760
little video on that in a couple of

00:41:30.760 --> 00:41:34.720
weeks as well. Alright. Now, what happens

00:41:34.720 --> 00:41:37.520
if management aren't being truthful? How

00:41:37.520 --> 00:41:39.480
do I know what sort of opinion to give

00:41:39.480 --> 00:41:41.800
them? Then, I'm going to use this table,

00:41:41.800 --> 00:41:44.920
and this table comes out of ASA 700,

00:41:44.920 --> 00:41:48.160
705--sorry. And so I'm just going to lean

00:41:48.160 --> 00:41:49.560
over here because I want to write some

00:41:49.560 --> 00:41:52.680
numbers here. So step one is this step

00:41:52.680 --> 00:41:54.280
over here.

00:41:54.280 --> 00:41:57.280
Alright. The first thing I want to

00:41:57.280 --> 00:41:59.400
do is find out why I'm not giving an

00:41:59.400 --> 00:42:01.839
unqualified opinion. Number one: The

00:42:01.839 --> 00:42:04.359
financial report is materially misstated.

00:42:04.359 --> 00:42:06.880
That is, essentially, saying management

00:42:06.880 --> 00:42:09.520
are not being truthful

00:42:09.640 --> 00:42:12.800
about something. Alright. So

00:42:12.800 --> 00:42:14.880
they're understating a number,

00:42:14.880 --> 00:42:16.720
they're failing to make a disclosure,

00:42:16.720 --> 00:42:19.000
they're just lying about something.

00:42:19.000 --> 00:42:21.520
Alright. The second one, which is this one

00:42:21.520 --> 00:42:24.079
here, is that we cannot get enough

00:42:24.079 --> 00:42:27.599
evidence. Alright. So not

00:42:27.599 --> 00:42:29.529
enough evidence.

00:42:30.480 --> 00:42:32.760
This is a bit like Donald Trump

00:42:32.760 --> 00:42:35.359
refusing to release his tax returns.

00:42:35.359 --> 00:42:36.800
Can't make an opinion if I don't have

00:42:36.800 --> 00:42:40.319
any information. So step one is I look at

00:42:40.319 --> 00:42:42.280
well, what are the two reasons why I

00:42:42.280 --> 00:42:44.640
might go away from the

00:42:44.640 --> 00:42:48.040
unqualified? Step two is I need to look

00:42:48.040 --> 00:42:50.480
at the severity, and there's two terms

00:42:50.480 --> 00:42:53.000
here, material but not pervasive or

00:42:53.000 --> 00:42:55.240
material and pervasive. For material,

00:42:55.240 --> 00:42:56.559
it means it's important enough that we

00:42:56.559 --> 00:42:59.119
think shareholders should know about it,

00:42:59.119 --> 00:43:00.760
but not pervasive. And I'm going to

00:43:00.760 --> 00:43:02.200
introduce you to two different

00:43:02.200 --> 00:43:03.760
characters here, and I didn't name these

00:43:03.760 --> 00:43:05.160
guys--actually one of my other lectures

00:43:05.160 --> 00:43:06.599
did.

00:43:06.599 --> 00:43:10.359
So here we have Norman,

00:43:10.440 --> 00:43:12.809
Norman the

00:43:12.809 --> 00:43:17.150
non-pervasive slug.

00:43:17.640 --> 00:43:20.839
Alright. And so Norman's there

00:43:20.839 --> 00:43:22.400
because if you imagine your financial

00:43:22.400 --> 00:43:24.720
statements--let me pick a different color

00:43:24.720 --> 00:43:26.720
here--so imagine you've got your

00:43:26.720 --> 00:43:29.200
financial statements and all of your

00:43:29.200 --> 00:43:30.240
different

00:43:30.240 --> 00:43:33.640
accounts here. If you prong to Norman on

00:43:33.640 --> 00:43:35.079
one of those,

00:43:35.079 --> 00:43:39.760
alright, and you said, "Okay, Norman

00:43:39.760 --> 00:43:43.359
is right here." Norman's only can self-contain.

00:43:43.359 --> 00:43:45.599
Right? He's only in a small

00:43:45.599 --> 00:43:47.920
part of the financial statements. So

00:43:47.920 --> 00:43:50.240
Norman is the situation where we have

00:43:50.240 --> 00:43:52.480
either something not truthful or not

00:43:52.480 --> 00:43:56.040
enough evidence in just one spot, and in

00:43:56.040 --> 00:43:58.839
that case, we give an opinion called a

00:43:58.839 --> 00:44:00.280
qualified opinion.

00:44:00.280 --> 00:44:04.599
Okay. Now the second person I'm

00:44:04.599 --> 00:44:07.400
going to introduce you to--

00:44:07.400 --> 00:44:09.920
let me make sure my pen is a bit

00:44:09.920 --> 00:44:14.520
smaller, maybe I'll type, here we go--is

00:44:16.160 --> 00:44:19.960
Perry, the pervasive octopus.

00:44:20.240 --> 00:44:22.480
And I'd always use the octopus

00:44:22.480 --> 00:44:24.559
but I've never named him, and then Nelson

00:44:24.559 --> 00:44:26.839
who does our night classes said, "We

00:44:26.839 --> 00:44:29.559
need to give the octopus a name." So his

00:44:29.559 --> 00:44:30.800
name is Perry.

00:44:30.800 --> 00:44:34.160
So if I took Perry, and I put Perry

00:44:34.160 --> 00:44:35.599
on the financial statements

00:44:35.599 --> 00:44:38.119
as my octopus.

00:44:38.119 --> 00:44:40.859
Alright.

00:44:41.119 --> 00:44:44.319
There's his body, there's his

00:44:44.319 --> 00:44:46.480
little legs

00:44:46.480 --> 00:44:48.680
everywhere--oh, that's not, that's a

00:44:48.680 --> 00:44:50.800
really, you obviously, I'm not, you're not

00:44:50.800 --> 00:44:53.359
coming for the art--but the idea with

00:44:53.359 --> 00:44:56.640
Perry is that his little tentacles reach

00:44:56.640 --> 00:44:59.000
far and wide across the financial

00:44:59.000 --> 00:45:01.040
statements. So that is what we call

00:45:01.040 --> 00:45:03.319
pervasive. Alright? There's lots of

00:45:03.319 --> 00:45:06.559
tentacles of errors, so if I have errors

00:45:06.559 --> 00:45:08.119
in the financial statements and I have

00:45:08.119 --> 00:45:09.559
lots of them across lots of different

00:45:09.559 --> 00:45:11.280
areas, I say, "I'm going to give an adverse

00:45:11.280 --> 00:45:13.440
opinion," like "This is bad." This is the

00:45:13.440 --> 00:45:14.920
signal to shareholders that management

00:45:14.920 --> 00:45:17.040
aren't being truthful on a range of

00:45:17.040 --> 00:45:19.960
things. If I can't get enough information

00:45:19.960 --> 00:45:22.760
over a lot of different areas, then

00:45:22.760 --> 00:45:24.200
Perry's going to say give me a

00:45:24.200 --> 00:45:26.520
disclaimer of an opinion. And disclaimer

00:45:26.520 --> 00:45:28.520
means that I'm not actually giving an

00:45:28.520 --> 00:45:30.800
opinion at all. It's no

00:45:30.800 --> 00:45:35.040
opinion. Alright. So you've got Norman,

00:45:35.040 --> 00:45:36.480
and you've got Perry.

00:45:36.480 --> 00:45:39.160
Okay. And a lot of students even

00:45:39.160 --> 00:45:41.440
draw the little animals, that's cool.

00:45:41.440 --> 00:45:42.960
But that's a way to figure out the

00:45:42.960 --> 00:45:45.760
different sorts of modified audit

00:45:45.760 --> 00:45:47.559
reports when I say, "I'm not going to give

00:45:47.559 --> 00:45:49.839
an unqualified... I think something's

00:45:49.839 --> 00:45:52.599
wrong." Then, there's my options right there.

00:45:53.529 --> 00:45:56.810
Now. Okay.

00:45:57.780 --> 00:46:01.020
Sometimes, everything is truthful.

00:46:01.880 --> 00:46:04.839
I have an unmodified or unqualified report, but

00:46:04.839 --> 00:46:06.920
I want to say, "Shareholders, I want to

00:46:06.920 --> 00:46:08.880
draw your attention to some extra

00:46:08.880 --> 00:46:13.400
information." And I do that using an

00:46:13.400 --> 00:46:15.680
emphasis of matter paragraph. What color

00:46:15.680 --> 00:46:19.119
pen am I using? Oh, let's change that to blue.

00:46:19.119 --> 00:46:22.520
Alright. I use an emphasis of

00:46:22.520 --> 00:46:25.200
matter paragraph, sometimes shortened to

00:46:25.200 --> 00:46:26.828
an EOM.

00:46:27.740 --> 00:46:29.510
Okay. Now, the emphasis of matter

00:46:29.760 --> 00:46:33.440
paragraph says, "Everything is fine. But I

00:46:33.440 --> 00:46:36.119
just want to draw your attention to a

00:46:36.119 --> 00:46:37.880
new joint venture the company might be

00:46:37.880 --> 00:46:40.880
involved in." Some unusual accounting

00:46:40.880 --> 00:46:42.520
about something that is a little bit

00:46:42.520 --> 00:46:46.040
different that we've found a mistake

00:46:46.040 --> 00:46:47.599
in the previous report and we're now

00:46:47.599 --> 00:46:50.079
revising it and reissuing it. So this is

00:46:50.079 --> 00:46:51.760
still saying that management is still

00:46:51.760 --> 00:46:54.240
being truthful, but my emphasis of matter

00:46:54.240 --> 00:46:57.000
is just highlighting extra information

00:46:57.000 --> 00:46:59.480
to shareholders. Alright. And in the

00:46:59.480 --> 00:47:01.839
bundle on UTS online, you'll actually see

00:47:01.839 --> 00:47:04.480
some examples of the sorts of things

00:47:04.480 --> 00:47:07.000
that could go in emphasis of matter.

00:47:07.000 --> 00:47:10.160
Probably, the biggest one is emphasis

00:47:10.160 --> 00:47:12.559
of matter about going concerned. Do we

00:47:12.559 --> 00:47:15.040
understand the concept of going concern?

00:47:15.040 --> 00:47:17.839
Yes? Hopefully, that we expect companies

00:47:17.839 --> 00:47:20.359
to continue in the future. If the company

00:47:20.359 --> 00:47:22.359
is experiencing financial distress,

00:47:22.359 --> 00:47:24.960
but they are being truthful

00:47:24.960 --> 00:47:27.040
about their financial distress. So they're

00:47:27.040 --> 00:47:29.880
showing a loss, they're showing lots of

00:47:29.880 --> 00:47:32.480
debts and not many assets, then we can

00:47:32.480 --> 00:47:34.359
still give them the big tick in the

00:47:34.359 --> 00:47:36.400
financial report because they're being

00:47:36.400 --> 00:47:38.520
truthful. But we might want to say, "Hey,

00:47:38.520 --> 00:47:40.400
shareholders. There are some financial

00:47:40.400 --> 00:47:42.559
difficulties at this firm. We do need to

00:47:42.559 --> 00:47:45.694
warn you about those." So that's important.

00:47:46.160 --> 00:47:49.920
Now, this is new. This is not going to be

00:47:49.920 --> 00:47:52.839
in any textbook that you're looking

00:47:52.839 --> 00:47:54.720
at--oh, I think there's a new textbook

00:47:54.720 --> 00:47:55.800
coming out at the end of this year that

00:47:55.800 --> 00:47:58.280
will have it in it. New standard is

00:47:58.280 --> 00:48:02.119
ASA 701 about communicating key audit

00:48:02.119 --> 00:48:04.960
matters in the auditor's report. And up

00:48:04.960 --> 00:48:07.640
until this point in time,

00:48:07.640 --> 00:48:10.640
what the auditors did was a black box.

00:48:10.640 --> 00:48:12.480
The audit report simply said he's

00:48:12.480 --> 00:48:15.400
our opinion, unmodified, unqualified, or

00:48:15.400 --> 00:48:18.599
one of the other options, and that was

00:48:18.599 --> 00:48:21.920
it. Now, the auditors must disclose

00:48:21.920 --> 00:48:25.079
parts of the processes that

00:48:25.079 --> 00:48:27.160
they go through to make their opinion.

00:48:27.160 --> 00:48:29.000
Alright. Now, not for everything--oh, this

00:48:29.000 --> 00:48:30.480
is how we audited sales, this is how we

00:48:30.480 --> 00:48:32.000
audited cash, this is how we audited a

00:48:32.000 --> 00:48:34.920
property of plant and equipment--instead,

00:48:34.920 --> 00:48:38.400
it's only for areas that they think

00:48:38.400 --> 00:48:41.240
there was significant judgment or that

00:48:41.240 --> 00:48:43.119
they found particularly difficult, which

00:48:43.119 --> 00:48:47.559
they call Key Audit Matters or KAMs.

00:48:48.480 --> 00:48:49.670
Alright.

00:48:50.310 --> 00:48:54.520
Now, the idea is to have increased

00:48:54.520 --> 00:48:57.359
transparency over decision-making. If I

00:48:57.359 --> 00:49:00.520
know how auditors made a difficult

00:49:00.520 --> 00:49:02.880
decision about writing down an

00:49:02.880 --> 00:49:06.680
intangible asset, then that allows me to

00:49:06.680 --> 00:49:08.000
interpret the information in the

00:49:08.000 --> 00:49:10.040
financial report with a little bit more

00:49:10.040 --> 00:49:12.079
clarity. So this is about trying to make

00:49:12.079 --> 00:49:14.920
auditors accountable and giving expert

00:49:14.920 --> 00:49:16.640
uses of financial statements more

00:49:16.640 --> 00:49:18.400
information. Now, I'm pretty sure the key

00:49:18.400 --> 00:49:20.400
audit matters, my mom and dad are still

00:49:20.400 --> 00:49:22.319
going to gloss over and be, like, "Oh,

00:49:22.319 --> 00:49:24.400
whatever." Right? They look at the glossy

00:49:24.400 --> 00:49:25.960
front part of the annual report with

00:49:25.960 --> 00:49:28.960
smiling employees and graphs that go up.

00:49:28.960 --> 00:49:30.240
They're not really looking at the

00:49:30.240 --> 00:49:33.200
tricky bit at the back, but your share

00:49:33.200 --> 00:49:35.920
analysts, your fun managers.

00:49:35.920 --> 00:49:38.119
Those people are going to be

00:49:38.119 --> 00:49:39.359
looking at the key audit matters and

00:49:39.359 --> 00:49:41.880
saying, "Okay, well, this is an account like

00:49:41.880 --> 00:49:44.319
intangibles that has a lot of discretion

00:49:44.319 --> 00:49:46.599
by managers and the auditors. How did

00:49:46.599 --> 00:49:49.839
they handle different opinions? How did

00:49:49.839 --> 00:49:52.160
they handle a standard that was really,

00:49:52.160 --> 00:49:53.680
you could do a couple of different

00:49:53.680 --> 00:49:57.160
things?" Now, this must come in for all

00:49:57.160 --> 00:50:00.240
financial years after the 31st of

00:50:00.240 --> 00:50:02.640
December, at the end of this year. However,

00:50:02.640 --> 00:50:05.240
we have three firms who are early adopters:

00:50:05.240 --> 00:50:08.760
QBE Insurance, Cochelar, which are

00:50:08.760 --> 00:50:11.359
the medical implants, and the Australian

00:50:11.359 --> 00:50:12.960
Stock Exchange Limited because the stock

00:50:12.960 --> 00:50:14.839
exchange is a public entity. They've

00:50:14.839 --> 00:50:17.119
actually gone ahead. I'll include some

00:50:17.119 --> 00:50:18.640
links so that you can look at the actual

00:50:18.640 --> 00:50:21.280
key audit matters. And over the next

00:50:21.280 --> 00:50:22.799
coming weeks, I'm going to make a video

00:50:22.799 --> 00:50:24.760
where I actually walk through their

00:50:24.760 --> 00:50:26.440
financial statements, and talk a little

00:50:26.440 --> 00:50:29.520
bit about what goes into these

00:50:29.520 --> 00:50:32.240
KAMs. At the moment, firms can write a lot,

00:50:32.240 --> 00:50:34.880
or they can write a little. KAMs

00:50:34.880 --> 00:50:38.000
first came in the UK, or here's the

00:50:38.000 --> 00:50:39.400
requirements that says what they need to

00:50:39.400 --> 00:50:42.880
do. It's not very exciting but there

00:50:42.880 --> 00:50:45.319
is a risk. There's nothing to say how

00:50:45.319 --> 00:50:47.040
many key audit matters the auditor needs

00:50:47.040 --> 00:50:49.520
to describe, and when this was first

00:50:49.520 --> 00:50:51.599
introduced in the first place, it came

00:50:51.599 --> 00:50:53.640
up was in the UK

00:50:53.640 --> 00:50:57.480
about 2012, I think it started.

00:50:58.080 --> 00:51:00.600
Rolls-Royce and I think it was KPMG at

00:51:01.000 --> 00:51:05.240
the time, wrote something like 12 pages

00:51:05.240 --> 00:51:08.240
on key audit matters in tiny, tiny, tiny

00:51:08.240 --> 00:51:09.640
font. It was a lot of

00:51:09.640 --> 00:51:12.680
information. The very same year, Vodafone

00:51:12.680 --> 00:51:15.640
wrote about two pages. The audit of a

00:51:15.640 --> 00:51:18.200
Vodafone in the UK wrote about two pages on

00:51:18.200 --> 00:51:20.920
key audit matters. Both were deemed to be

00:51:20.920 --> 00:51:23.359
compliant with the standard. So, what we

00:51:23.359 --> 00:51:25.119
worry about is something that we call

00:51:25.119 --> 00:51:28.000
boiler plating. So the audit partner is

00:51:28.000 --> 00:51:30.640
meant to really describe the tricky

00:51:30.640 --> 00:51:33.160
decision-making per processes they went

00:51:33.160 --> 00:51:36.440
through to look at auditing this really

00:51:36.440 --> 00:51:38.799
difficult part of the firm. But what we

00:51:38.799 --> 00:51:41.240
worry about is that firms will have

00:51:41.240 --> 00:51:44.280
standard lines that they will use for

00:51:44.280 --> 00:51:46.319
different things, and that won't provide

00:51:46.319 --> 00:51:48.960
too much information, it'll just be a

00:51:48.960 --> 00:51:51.799
standardized line that might not say

00:51:51.799 --> 00:51:53.200
anything at all. And sometimes the

00:51:53.200 --> 00:51:55.960
wording has been really, really bizarre.

00:51:55.960 --> 00:51:57.520
In one of the early ones I read from

00:51:57.520 --> 00:52:00.329
Rolls-Royce, it said something about

00:52:00.799 --> 00:52:04.359
the auditor is reasonably optimistic

00:52:04.359 --> 00:52:08.040
that management's forecasts are based on

00:52:08.040 --> 00:52:10.400
reasonable assumptions of blah, blah, blah,

00:52:10.400 --> 00:52:11.839
blah, blah. I'm like, what does reasonably

00:52:11.839 --> 00:52:12.920
optimistic

00:52:12.920 --> 00:52:15.520
mean? So there is going to be some issue

00:52:15.520 --> 00:52:18.920
about what we see and I tell you that

00:52:18.920 --> 00:52:20.640
the auditing researchers and the

00:52:20.640 --> 00:52:22.799
linguists are all going to be looking at

00:52:22.799 --> 00:52:25.520
this information of this topic very

00:52:25.520 --> 00:52:27.960
closely. Alright. Oh, and we're doing--I'm

00:52:27.960 --> 00:52:30.160
ahead of time. This is awesome. So if you

00:52:30.160 --> 00:52:31.400
didn't get a subject outline, they're

00:52:31.400 --> 00:52:33.040
down here at the front. Come grab one.

00:52:33.040 --> 00:52:36.119
Next week, we start the weekly accessible quizzes.

00:52:36.119 --> 00:52:39.400
Your quizzes will start 5

00:52:39.400 --> 00:52:41.680
minutes past the start of your class

00:52:41.680 --> 00:52:44.319
time. So my 9:00 class in the morning,

00:52:44.319 --> 00:52:47.040
quiz starts at 9:05 AM, and if you're

00:52:47.040 --> 00:52:48.280
late. that doesn't matter. You don't get

00:52:48.280 --> 00:52:51.319
any extra time. How do you prep? You can

00:52:51.319 --> 00:52:52.799
look at the textbook. There'll be some

00:52:52.799 --> 00:52:55.920
videos. This lecture video will go up

00:52:55.920 --> 00:52:58.200
and remember, it's open book.

00:52:58.200 --> 00:53:01.160
Okay. So bring as much stuff as you

00:53:01.160 --> 00:53:03.920
want. You can use the Internet. And one

00:53:03.920 --> 00:53:08.160
other thing. Shhh. Just one last thing: Make sure

00:53:08.160 --> 00:53:11.240
that the night before or the day

00:53:11.240 --> 00:53:12.559
before, and I'm going to send you a

00:53:12.559 --> 00:53:14.839
reminder email about this, that you can

00:53:14.839 --> 00:53:16.920
log into Learning Catalytics. If you

00:53:16.920 --> 00:53:18.319
haven't written down your password

00:53:18.319 --> 00:53:20.200
somewhere, make sure you write it down

00:53:20.200 --> 00:53:22.119
because the retrieve password function

00:53:22.119 --> 00:53:26.640
in LC takes 6 hours. So if you need to

00:53:26.640 --> 00:53:28.359
reset your password, you need to do it

00:53:28.359 --> 00:53:30.680
well ahead of time because there's no

00:53:30.680 --> 00:53:32.720
paper quizzes if you don't bring your

00:53:32.720 --> 00:53:35.319
device. If you need a device or you don't

00:53:35.319 --> 00:53:37.079
have one, come talk to me. We do have

00:53:37.079 --> 00:53:40.160
spares you can borrow. Otherwise, thank

00:53:40.160 --> 00:53:41.599
you for coming along to our first week,

00:53:41.599 --> 00:53:43.775
and I will see you next week.