Lecture 1 - Overview and audit reporting

Awesome. Alright. So welcome, everybody,

to Lecture 1. Who's excited to be here

for auditing?

Hey, those people down the front.

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

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

major." So hopefully, over the semester,

you'll get to learn a little bit about

what auditing is all about. Even if you

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

to work in business or you want to work

in marketing or human resources, then

we're going to look at some key concepts

that going to help you no matter what

sort of business career you're

after. And the other thing that we do

here as well is that we also have our

annotated lecture slides. So you'll also

see me writing and that sort of thing on

them. This is all captured on the video.

The video will go on to UTS online and

also gets uploaded to YouTube. Okay. So,

you'll get files and access both ways.

So we're going to cover a lot in

the first week. You already know about

the subject from the prep week stuff. You

know about learning analytics from

looking online and our assessment, so I'm

not going to go through those. Alright.

So we're going to cover two chapters out

of the textbook today. We're going to

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

in the first place? And then we're also

going to cover the idea of what is

the output or the final product of

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

whole range of

different objectives. Let me just put my

highlighter on here. Okay. Is my

highlighter the right size? No, I want

this

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

some basic stuff about describing what

assurance is all about. Why audit is

important in regards to reducing the

risk of shareholders, the idea of

information risk. We're going to look

at describing auditing, which is one

small subset of assurance. We're going to

look at the difference between auditing

and accounting. We're going to look at

some types of audits and some different

types of audit firms that provide them,

and the big four

firms. We're going to look at what the

professional bodies do, so CA and CPA.

We're going to look at the auditing

standards and why they're important to

us. We're going to look a little bit

at quality control, not too much, and then

also the basics of the Corporations Act.

So it sounds like a lot, but there's

actually just a few basic key concepts.

Now, in the lectures and in the lecture

notes, I pull out the most important

things that I want you to learn from the

textbook. Now, there are still going to be

some things in the textbook that I would

like you to read, but the things I think

are most important are the things that

are going to be in the lecture notes and

the things I'm going to discuss. And then

out of those, the things that I think are

key or most important are going to be

the things that will come up in the

quizzes each week. Alright? So that'll

give you a guide as to what I think is

most important when it comes to exam

prep. So if there's you know a whole

section in the textbook that I don't

really touch on, you might want to have a

read of it just for background but not

go too in-depth.

Alright. So what's our first

objective? What the hell is assurance? So

assurance is about having someone

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

objective, trying to improve the quality

of information for decision

makers. Alright? We want decision makers

to have accurate, reliable information so

that they can make the best decisions

for themselves. And they could be

shareholders. They could be regulators. It

could be managers within the company. So

no matter who you are, you make decisions

based on information. Very rarely in

business do we make decisions just based

on flipping a coin or our gut. We're

going to need to use information. And so

the process of assurance is about

providing quality and then also the idea

of reliability

to that information.

Oops, -ilty.

Alright. So right down

here.

Oh, that's really bright. Can we

still see the slides if I leave the

curtains open? Yep. We've been in a

basement room this morning. I think just

having some natural light will help me

realize it's

daytime. So who can perform an audit? Our

public accounting firms, plus we're going

to look at some government auditors as

well. There's different levels of

assurance, which we'll talk about

in a future weeks.

Mostly, our assurance is provided on

historic information. So historic things

like the financial statements. We do see

some growth towards looking at forward-

looking information, but it's hard to

provide reliability on information about

the future. It's easy to prove that

information about the past, about

transactions that have already happened,

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

do.

So in terms of what we're going to be

studying this semester, our audit issues

are written communication. So we're going

to look at the audit report that

provides a conclusion about the

reliability of written assertions or

statements of another party. So let's

break that

down. We've got our audit of our

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

dropped my pen. This is what we're going

to spend our entire semester looking at.

Alright. Audits must be done under the

Corporations Act for every company

that's listed, and that requires an

audit where we give an opinion about

whether the financial statements are

true and fair, are a true representation

of the underlying economic transactions

and events that have occurred within

that

firm. The review is a slightly

lesser amount of assurance. So we're

giving very high levels of assurance in

the audit. We're giving less levels in

the review. And then there are other

services which we're not really going to

get into too much detail

on.

So, we can also have assurance over IT.

So if you go onto PayPal or eBay, they

have assurance that the information you

send to them or you store with them is

securely kept, isn't passed on to

other people. So we can provide assurance

on anything. Alright. There's actually an

assurance service that exists over lotto.

So we have the lotto balls that go into

Powerball, etc. There are actually

auditors whose job it is to make sure

that every single Powerball or lotto

ball is exactly the same size, is exactly

the same weight, and is exactly round. And

that security processes over those mean

that you can't manipulate the lotto

balls in any way to get a particular

outcome. So we could provide assurance

over anything. And it's the New South Wales

state government that provides assurance

over the lotteries,

but you could have assurance over a

range of different processes and

information as well. So if you jump onto

PolitiFact, which is a political

fact-checking website, you'll discover

that I think less than 3% of all Donald

Trump's statements can actually be assured

or be reliable. So he says 97% of stuff

that's not reliable. But you can

provide assurance on

anything. So what we're looking at is

this very small bit here. Alright?

So there's assurance of all sorts of

different areas. We've got consulting and

non-assurance services. I can provide

assurance over all sorts of IT

systems, but we're going to be looking

at just this little bit here, the audit

of the financial statements. And that is

what drives most of our big four firms.

Big revenues, and large proportions of

staff just involved in this little

component. So what is the idea about

information risk? Right? The risk that the

information I have might not be suitable

for my decision-making purposes. And that

risk comes about, well, the possibility

that information was made on a

decision that was made on information that

was inaccurate. I'll give you an example

of information

risk. You'll meet my son on some of

our audit slides. We affectionately

call him Audit Junior. And he's

come to every single open day since he

was born. And I'm starting to get

him to the point where we're going to

start training him up to talk in our

audit videos. But when he was one, I sent

out invitations for his first birthday,

and I put two numbers on there for

people to RSVP. I left my mobile number,

and I left my husband's mobile

number. And I

assumed that if my people had called my

husband and said we're coming, I assumed

that he was going to pass that

information on to me.

So I made all these plans for how many

people and how much catering and how

many party bags and all the rest of it

based on the people that had RSVP'd to me

and the assumption that he was going to

tell me if anyone had contacted him and

said that they were going to

go. Bad assumption. So I made all these

decisions. And then two days before the

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

surprised that so and so is not coming."

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

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

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

would have

asked." So two days before, suddenly I have

like 20 more people coming to this party,

but I'd made a decision based on

information that was inaccurate. Now all

it meant was that I had to go out and

buy more food, and I was severely

stressed out, and I made him decorate

like hundreds of cupcakes for the extra

people. And that wasn't life-threatening

or it wasn't going to bankrupt a

business, but I made a decision based on

bad information. It wasn't complete. It

didn't have everything that I was

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

business, I might make decisions

about a whole range of different things.

What raw materials to buy? What prices

I'm going to set for my products?

Alright. Am I going to offer any

discounts? I might make changes based

on manufacturing or marketing.

And if I make those decisions based on

the wrong information, that could have

serious consequences for my company. Now,

if I'm a

shareholder, then what are my decisions

about? My decisions are about whether to--

whoops.

Undo.

Buy,

sell, or hold my

investment. Right? and if I don't have

accurate information as a shareholder,

then I might make the wrong choice when

it comes to doing that decision. So

there's risk that our information might

not be appropriate. So the reasons that we have

risk of information: remoteness

between the

user and management. I own shares in Woolworths.

I can't really go up to Woolworths

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

going. How many issues of a going concern?

Which of the stores are not performing

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

on inside the business. The provider of

the information is usually

management. And agency theory tells us

that they're biased. No manager wants to

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

you should still pay me a bonus." They

want to make themselves look fantastic.

So there's always the bias that they're

going to present information in a way

that maximizes their own wealth under

agency

theory. Alright. There's lots

and lots and lots of data. Hundreds or

thousands or millions of transactions.

How do we know which ones are correct and

which ones are not correct? And then

there's complex transactions between

different companies within the same

company, across different borders, in

different jurisdictions, joint ventures,

partial subsidiaries. It can get really

complicated. Right? My parents have a

whole lot of shares. They're retired. And

my mom's a science

teacher. And I said, "Well, you know, what

are you looking for in the financial

statements? You know, what do you look at

when you look at the numbers?" And she

said, "I don't know." Right? I'm looking for

positive numbers, not negative numbers, in

the profit. I'm looking for numbers that

go up. But she doesn't understand

anywhere near the complexity of

accounting that I do as a CA to be able

to interpret that information and know

whether it seems appropriate or not. So

the audit is there to minimize this

information risk, to act as the

advocate of shareholders to say, "Well,

really, we want information that is absolutely

true for decision-making.

So how could we reduce

information risk? We could get users to

try and verify information. That would be

really tough, especially at Woolies with

all of their shareholders. Not really

reliable. The user does share some risk

with management because they make a risk

when it comes to investing, but the

audit is the thing that we use to reduce

agency cost. Alright. So to

reduce the risk of

agency, we have an audit. We have the

auditors independently check

management's work to make sure that they

are telling the truth when it comes to

what they present to

shareholders. So here's my son. You can

see him there. He's pretty

cute. And for those people who are

wondering, I'm not just getting fat. I

am going to having a baby at the

beginning of next year. So we call him

Audit Junior, and we just recently

announced--well, I announced on my

Facebook page, for all the students

who are friends with me--that he's

getting a promotion to Audit Senior. So

we'll have a new Audit Junior coming

along. But when it comes to describing

auditing, I always use this picture. This

was only taken a few months ago. And I

say, "Is this the world's cutest kid?" Right?

Because every parent thinks that their

child is the cutest kid ever. Nobody--

I haven't met a new parent that says,

"Well, look, actually my son or daughter

is a bit

ugly." Right? Oh, everybody's like, "Oh, how

adorable. How

cute." And the same with managers. Right?

Managers are going to say, "We are the

best ever." And when I meet your parents

at graduation, your parents are going to

say, "Look, wasn't my son just the best

student?" Sometimes, Iook. And to be

honest with you, I lie sometimes. So, you

know, students who were really great--I

say, "Yeah,

absolutely." And sometimes if, you know,

perhaps you weren't the most diligent,

dedicated student, I will say something

like, "Oh, you know, they really put in some

good effort." That's my sort of, you know,

safety statement

there. But how would we determine who is

the world's cutest

kid? How would we figure that out? That's

a claim I'm making. We would need to have

somebody independent come up with some set

of standards on child

cuteness to figure out whether he really

is the cutest kid or not. Now, when it

comes to financial statements, that's

really easy because we have our

accounting standards that tell us this

is what accounting should look like. And

so when we're trying to figure out, "Well,

are management telling the truth? Is this

the right set of financial statements? Is

this what we should be presenting to

shareholders?" then we use our double AASBs

to do that. Rodri will be back to tell

you all sorts of other hints and tips as

well about

auditing. So

auditing is the accumulation of evidence.

Alright? So evidence is really critical

because I shouldn't make a decision

without having some

evidence. If you're sick or something

happens to you on the way to uni, then I

want evidence if you say, "Okay. I missed the

quiz because I fell down a flight of

stairs and broke my leg." I'm going to

have to see your broken leg. And I'd want

some evidence that was really the

case. Right? So I'm technically a doctor,

and friends always ask me, "Look, could

you write me a doctor's note?" Which I

can't do as a PhD sort of doctor. But if

you apply for something and you say, "Oh, okay. You

know, this is what's been going on." I want

to see actual evidence to know that

that's the truth. So just like on cop

shows, before they charge somebody with

the crime, they need evidence. Well, we

need evidence as well to be able to make

our opinion

and determine the degree of

correspondence between information--which

for us is going to be our financial

statements--let me put that in

red: Financial

statements and our established

criteria. And our established

criteria are our double

AASBs. Alright. So we're looking at

management's information and what the

double AASBs say it should be. And I

know--would you guys have had Helen, I

think, last semester for accounting

standards? So Helen would have taught you

how everything needs to be laid out, how

all the calculations need to work. So we

need to check that. That's part of the

auditor's role. So key things about the

audit: we need to be competent. We need to

have the right skills, which is part of

what we're doing here at uni, and we need

to be independent as well. Alright? So

competency is about having the right

skills, and and then being independent is

about being

objective. And I'll give you an

example. So many, many, many years ago,

my husband and I both met at an audit

firm. So it was an audit firm

romance.

And we were both working on different

audit clients. And one of my big

clients was QBE Insurance, which we've

all would have seen on TV and they

sponsor some sporting teams, etc. But he

left PwC and took a job at

QBE. At that point, I could no longer do

the audit because I was no longer

independent, because I knew somebody that

worked there, and part of his job was

consolidation of all of their

subsidiaries. So if I discovered that he

had, you know, somehow stolen $10,000,000

from the company, I probably wouldn't

have told anybody. We would have, you know,

very quietly resigned from our jobs, sold

our house, and skipped out a

non-extradition country. So we need to

have auditors who are objective and

independent. Right? To say that when

we see something that's not quite right,

we feel independent enough to put our

hands up and say, "Oh, I don't think this

should be happening." Or, "You know,

management are not doing the right thing."

So

independence is the cornerstone of

auditing. You open any audit textbook, and

I'm a bit of an audit nerd, so I have

audit textbooks from the

1940s and

earlier. And there's no pictures. No

diagrams. It's all in color. It's all

black and white, just typed text. But they

all start with this idea that audit is

the cornerstone--sorry. Independence is

the cornerstone of being able to do that

audit, to be independent. Just like when I

say my kid has got to be the cutest kid,

I'm not independent. So we would have to

find somebody who is an independent

expert in the judgment of kid cuteness

to be able to make that opinion.

Alright. So, what do we need to

be able to do our audit? We need to have

the information: the financial statements

and our criteria, which is our double

AASBs that we talked about. Alright. So

our financial statements and our double

AASBs. We need to be able to accumulate

evidence, and we're actually going to

practice doing that, designing ways to

collect evidence. So just like on CSI,

there's all these techniques for

collecting fingerprints and running DNA

and taking a tire track and running it

through a database. We also have

less cool procedures to collect

evidence. So there's no like, you know,

dark rooms with spotlights and

microscopes. Unfortunately, auditors

mostly just use our brains, might use a

computer, pen and some paper. But we're

going to look at specific methods that

we've developed over time to collect

evidence. We've talked about being

competent, having the right skills and

being independent

and then providing a report. So under the

Corporations Act--

oops--I actually have to provide a

written

report that

says, "Here is the outcome of the audit.

Yes, management are telling the truth. Or,

no, they're not quite being truthful

about everything, and here are the things

that they not being honest about."

So, what's the difference between

auditing and accounting? The accounting

is the recording part of the business

process. So they record, summarize all the

debits and credits within the system, and

then the auditors are actually the ones

checking the accounting work. So we're

going to go back, and we're going to look

at the work of the accounts and say, "Are

they doing the right thing?"

I'm just going to move this over here

for a second. Alright. So we have three

main types of audits: the financial

statement, the performance, and the

compliance. As I mentioned before,

financial statement is the one that

we're going to be spending the most of

our time on. The performance is about: Are

we doing things efficiently, and

effectively within our business? So we

might have a sales process or a complex

consolidation process, and we can get an

auditor in to say, "Is this the best way

to do this? Do we need to re-engineer our

business process?" And then the compliance

audit, which is about following laws and

regulations. So, is a company reporting

GST appropriately? Are they following

occupational health and safety? Are

they doing anything else that requires a

specific law or regulation? But we're

going to focus on that one up

there. So there's some examples. Okay.

Different types of auditors: The public

accounting firms are the big four and

the second tier. They do most of the

publicly listed companies. The auditor-general

are the government

auditors. Alright. So the New South

Wales audit office and the auditor

general of Australia based in Canberra.

New South Wales auditor general will

audit state government

organizations, and the auditor general

will handle the audit for everything

else that's federal.

So the auditor general audits

the defense force. They're in charge

of the overall audit for

Telstra, Centrelink, and other big

government departments.

We have Auditors for tax

that work specifically for the ATO.

But they're more likely to be lawyers

and accountants, not just

accountants. And then internal auditors,

which focus on doing that compliance in

the performance audit. So most big top

100 companies will have their own audit,

internal audit team. So Quantis, the

Commonwealth Bank, Coca-Cola will all

have teams who look at internal

improvements and making sure that

they're following the rules and

regulations. And this is important

because they want to try and minimize

fines.

Alright. Because you could get a

government fine for not following a law

or a regulation appropriately. You could

be sued. It could create all sorts of issues.

Alright. So, let's look the big

firms. I worked for this one actually,

well, the predecessor for this one, which

was C&L brand, and then

PwC. So the big four audit--probably--I

think about 60% of the Australian stock

exchange, and then these guys here pretty

much audit the rest. Alright. So for

those people who are going to a later

afternoon to, and you'll have Kate, or

you'll have Nicole, we actually have

an agreement with Grant Thornton, where

they actually send real life auditors in

to teach tutorial. So you'll get to hear

lots of stories from them. The people

who are going to... who will have Ben

this afternoon in the 12:00 to

and I think also the 1:30 one. Ben works

at a small local firm in terms of

auditing. So he's got lots of experience

in doing much smaller audits, which are

required under the Corporations Act.

So you've got a range of staff with a

range of experience, and this means that

auditors exist at all sorts of different

levels. So I recently did the audit for

ISAC, which is one of the university

student groups. Audits happen for the

big ASX listed companies. They happen for

large privately listed--sorry--for large

private companies. And they also happen

for small companies that are required to

have audits under the Corporations Act

or maybe as part of charity

regulations. Firms do audits but just

of different sizes and of different

scales. So the big four are so large and

so specialized that people specialize by

industry. So you audit mining firms or

government firms or telecommunications

or financial services. My

specialization was financial services so

I didn't get to see much. I always envied

the people that got to audit

manufacturing firms or mining firms

because you could go places and see real

things happening until one time I did

get put on the audit of dairy farmers.

And that's not so Glamorous, like milk

processing plants really don't smell

great. We did get to drink, you know,

you had access to the corporate fridge,

so I could drink all the milk that I

could take. Though, I'm Asian, so I'm

partly lactose intolerance that doesn't

go down so well. But dairy farmers

made yogurt, again, I couldn't eat too

much of that. But fruit juice, I could

drink the fruit juice all day so that

was a good thing. So the public

accounting firms, big ones and small ones

provide audit services, so that's a big

part of their bread and butter. Audit

services though

are high volume

and low margin.

That means you don't make a lot of money

off an audit.

Right? It's not a really

profitable item to do. But the reason

that you do an audit is so that you can

convince your client to hire you to do

other things, like tax which can be a

little bit more lucrative and consulting

services, that could be helping them

expand into a new market, choosing a

new information system, you get

different departments within your

audit firm to do that. But

it's all about sort of growing the

bigger audit firm share. So, something

like management consulting services is

really high margin.

And towards my--at the end of my

career, I did a lot more management

consulting, and I remember back in

19, oh, I think it was 1999,

we had a $20,000,000 consulting job

with the Australian Broadcasting

Corporation just down the road for

implementing new software. And that was a

six-month project for $20,000,000.

So, and you wouldn't earn

anywhere near that much on an audit.

You'd probably earn a few million

dollars on an audit for about 6-8

weeks work, so there's definitely lots

of margin aid there.

Now, you find very few firms that

are in the sole proprietorship or the

partnership model. That's because of the

idea of joint and several liability, and

that would mean that if the partner of

the firm did something wrong and then

they they skipped out of town, I would be

liable as one of the partners left over.

The big four firms these days, and most

of our second tier are almost all

incorporated companies. So while you have

partners who are shareholders in the

firm, they're not partners in the typical

sense of a partnership.

Now, in terms of the

hierarchy or the shape of an audit

firm, previously, they looked like this.

Alright. So you had the partners

at the very top and then lots of junior

staff doing what we call grunt work,

ticking and bashing, or ticking and

flicking at the bottom. What we're seeing

in terms of trends and the data that's

coming out of CA,

is that the audit firm is looking a

lot more rectangular.

Now, and that you're

having a lot less staff at the junior

levels and that comes from a number of

different reasons. The first one

is outsourcing

or offshoring.

And that's especially... you

scan a lot of audit documentation then

you would have had graduates, interns

doing a lot of ticking and checking. All

of that gets scanned and then sent off

to India or, you know, Pakistan, and they

do a whole lot of the audit checking

work for about a third the price

overnight. So the amount of staff doing

that work is much less, and then we've

also seen a lot more automation. So we're

using a lot more big data, we're using a

lot more intelligent agents, and

artificial intelligence in audits. So, you

know, the future is still looking bright

for auditing, and auditing at this point

is not going to be replaced by machines.

But there's a lot less at the bottom

level than there was before.

What do the professional bodies

do? They do a few different things: they

help establish standards through the

Auditing Standards Board, they do a lot

of research and then the biggest

one is education to make sure that once

you become a member you are continuously

up to date on latest auditing trends and

changes within legislation, especially at

the international level.

Now, what about our auditing

standards? Our auditing standards are

called ASAs.

Alright. And you can find those

free on the auausb website. auasb.gov.au

Now, remember our exam is open book, so

you can bring in--oh, somebody has one of

these--I'm just going to borrow this here.

One of these handbooks, if you want all

your standards in one book, or you could

print them out.

Alright. And bring them into the exam.

You can bring your textbook into the

exam. You could bring anything you like,

comic books, if you think you're going to

have time at the end to, you know, have a

bit of a read. So you don't

necessarily need to buy the standards

book if you don't want to. You can look

at them online and then print out the

sections that you think you'll need. I

will actually tell you in the last week

of the term, which ones I think are going to

be key ones for the final exam. So you

don't have to worry about that.

So the AUASB

issues the auditing standards and

we're internationally harmonized so

they come down from the International

Auditing Standards Board, and the key is

that they are mandatory.

Alright. So while some

companies or some countries--sorry--the

auditing standards say, "The auditor

may..." Our auditing standards say, "The

auditor must or the auditor shall..."

because our requirements are enshrined

within the Corporations Act. We must do

them as the minimum set of standards. You

could do more than what the standard

says, but the minimum is contained within

the ASAs, and we'll be referring back and

I'll show you excerpts from the

standards on a regular basis of things

that are really critical and important

to understand.

Alright. So, how do we make

sure that everybody who's doing an audit

is doing the right thing that

comes from quality control? And so

quality control needs to exist across firms,

and quality control also needs to

exist within firms.

Alright. So I need to make sure

that PwC are doing the same minimum

standard as KPMG, and then within PwC's,

however many offices, we need to make

sure that all staff are doing the same

thing. And there are specific--whoops--

specific quality control standards

that the auditing standards and the

Corporations Act actually set out. So

things about having leadership,

meeting ethical and independence

requirements, rules about how to accept

clients, selecting the right people doing

the audits, and then monitoring or

checking each other.

And that's where the peer review

program comes in

from chartered

accountants and CPA Australia, where

firms check each other's work to make

sure that they're all following the

standards appropriately.

So CA and CPA both have

sets of auditors that actually audit

them. Also, on top of that, we have the

Australian Securities and Investment

Commission doing their own inspection

program.

Alright. So they audit the big four

firms every single year. Smaller firms on

a rotating schedule, and they can find

audit firms for not complying with the

auditing standards. I'll provide you

guys with a link to look at the latest

inspection report from ASIC. It

doesn't actually show names of firms.

This also happens in the U.S. and the U.S.

has started naming firms who are not

doing the right thing. So there's big

bucks in making sure that everybody

within the firm is doing the right

thing in terms of following the order,

standards, acting independently, and

acting ethically. How are we doing on

time? Oh, okay. Alright. Corporations Act.

Besides governing company directors,

setting up companies in Australia--

you guys have all done Australian

company law? Have you guys done company law?

Yep, or for the people who haven't done

it yet? One of the assignments many, many

years ago used to be prepare all the

documents to start company. Right? We'd

have to actually go back to the

Corporations Act and figure out what

that is. So while the Corporations Act

specifies how companies get set up, it

also specifies what auditors need to do.

You need to be qualified, you need to be

registered, management can't just choose

the auditor, it has to be ratified by

shareholders at an annual general

meeting, we can't just quit as an auditor,

there's all sorts of rules about

quitting. What our responsibilities are

and reporting.

And you can go into those

in more detail in the textbook.

Alright. So here is the output,

and this is really important. And you

might be thinking, "Well, why am I

interested in looking at the end point

when we're only at the beginning?" And

this is so that you have in your mind

the idea of what we're striving for, or

what we're planning to...

So, we're going to look at why do

we have the report? What goes into

something called an unmodified audit

report? We're going to look at when

we might do different sorts of reports,

and adding extra information. Okay. Now, before--

oh, I'm trying to remember what

case it was--we'll go into the cases, I

think next week.

There was never a legal requirement

to produce a paper audit report. You

could have done a verbal audit report at

one stage. But now, we must provide a

written audit report about the financial

statements in accordance with the

Australian accounting the

standards and our auditing

standards. And reporting is pretty

similar, to the point, where if you go to

the auditing standard on audit reporting,

there's actually templates in the back.

And if you look at... almost all of the

publicly listed companies their audit

reports almost say exactly the same

thing word for word except the company

name is different, and the year might be

different, and the name of the audit

partner might be different.

So audit reporting is fairly

standardized and it has very specific

legal language. Because it is a legal

document that exposes the auditor to

liability, if we've done something wrong.

So, what is the gold standard that

everybody is looking for? So, what most

firms want...

Firms want what we call an

unmodified audit report, and it's also

sometimes called an unqualified report.

Now, this is where it's a bit funny and a

bit counterintuitive.

So when you do your CA,

or you do a medical degree, or you finish

your engineering qualification, you

become qualified.

Right? And qualified is a good

thing. Okay? When it comes to an audit, it

is the exact opposite. The one that

people want... The one that says,

"Big tick management are telling the

truth, is something called an unqualified

or an

unmodified audit report."

Okay. You might think why is it that way?

I don't know. It's probably something I

could historically dig into the

archives and look at. Sometimes, I wonder

if we do things sort of a bit back to

front in auditing to make it seem really

mysterious and difficult. Because

auditing is a lot about logic and common

sense, and we don't want too many people

getting into the awesome area that is

auditing. So we want to make it seem

really complicated and tricky by using

language that doesn't quite make sense.

So most firms

probably about--

I think the last time we checked--

it was something like 98% of firms on

the ASX, get an unqualified, unmodified

report. Management are telling the truth.

Now that sends a signal to shareholders.

That says, "Management, telling the truth.

You can rely on this information for

your decision-making." Alright. What happens

do you think to company share

prices, if I give them the opposite? If I

say, "Management are not being truthful,

and here are the reasons why." What do you

think is going to happen to share

price? it's going to go down and it goes

down pretty quickly in terms of what

we see from the research, in terms of

share price reaction. So firms want this.

Managers want to work with us, as the

auditors, to come to an agreement on a

set of financial statements that we

think is unqualified, is free from misstatement.

So ASA--this is our first ASA--

700 and all the the ones I'm reporting

are in the 700 area. Say that we want

to get reasonable assurance that it's

free from misstatements due to fraud or

error. So I'm not interested--I don't care

whether it's a mistake, a type 5,000,

instead of 500,000, or it's fraud, I have

a responsibility to detect those. I want

to make sure that it matches the

applicable financial reporting framework,

which for us is at AASBs.

Alright. And that it is a fair

presentation

that it fairly represents

what happened during the

company's financial period. So if the

company was exposed to a lot of

fluctuation changes and adverse

movements in foreign exchange, and a

decline in sales, then we'd expect to see

a loss from that company. Is what we're

seeing commensurate with what we know

about the firm? And then making sure

that the financial report is, again, in

accordance with our double AASBs.

There's all sorts of parts to the audit

report, and this has actually

changed a little bit. So this bit here

used to be right at the end. We have a

new standard change, so in the textbook,

this is going to be a little bit

different than what you're looking at

right here. New ASA 700 now says that

we tell the shareholders the very first

thing, here's our opinion. We used to give

them all this legal jargon first, all

this other crap used to come first, and

then we would do this sort of at the end.

But now it's right at the front, to make

sure that shareholders know what's going

on. Now on UTS online, in this week's

folder, I've also put a whole lot of

audited opinions in there for you to

look at. And I'll also copy in for you

the link to the QBE Insurance

annual report because it is

one of the few early adopters of some

new regulations. And so I'll make a

little video on that in a couple of

weeks as well. Alright. Now, what happens

if management aren't being truthful? How

do I know what sort of opinion to give

them? Then, I'm going to use this table,

and this table comes out of ASA 700,

705--sorry. And so I'm just going to lean

over here because I want to write some

numbers here. So step one is this step

over here.

Alright. The first thing I want to

do is find out why I'm not giving an

unqualified opinion. Number one: The

financial report is materially misstated.

That is, essentially, saying management

are not being truthful

about something. Alright. So

they're understating a number,

they're failing to make a disclosure,

they're just lying about something.

Alright. The second one, which is this one

here, is that we cannot get enough

evidence. Alright. So not

enough evidence.

This is a bit like Donald Trump

refusing to release his tax returns.

Can't make an opinion if I don't have

any information. So step one is I look at

well, what are the two reasons why I

might go away from the

unqualified? Step two is I need to look

at the severity, and there's two terms

here, material but not pervasive or

material and pervasive. For material,

it means it's important enough that we

think shareholders should know about it,

but not pervasive. And I'm going to

introduce you to two different

characters here, and I didn't name these

guys--actually one of my other lectures

did.

So here we have Norman,

Norman the

non-pervasive slug.

Alright. And so Norman's there

because if you imagine your financial

statements--let me pick a different color

here--so imagine you've got your

financial statements and all of your

different

accounts here. If you prong to Norman on

one of those,

alright, and you said, "Okay, Norman

is right here." Norman's only can self-contain.

Right? He's only in a small

part of the financial statements. So

Norman is the situation where we have

either something not truthful or not

enough evidence in just one spot, and in

that case, we give an opinion called a

qualified opinion.

Okay. Now the second person I'm

going to introduce you to--

let me make sure my pen is a bit

smaller, maybe I'll type, here we go--is

Perry, the pervasive octopus.

And I'd always use the octopus

but I've never named him, and then Nelson

who does our night classes said, "We

need to give the octopus a name." So his

name is Perry.

So if I took Perry, and I put Perry

on the financial statements

as my octopus.

Alright.

There's his body, there's his

little legs

everywhere--oh, that's not, that's a

really, you obviously, I'm not, you're not

coming for the art--but the idea with

Perry is that his little tentacles reach

far and wide across the financial

statements. So that is what we call

pervasive. Alright? There's lots of

tentacles of errors, so if I have errors

in the financial statements and I have

lots of them across lots of different

areas, I say, "I'm going to give an adverse

opinion," like "This is bad." This is the

signal to shareholders that management

aren't being truthful on a range of

things. If I can't get enough information

over a lot of different areas, then

Perry's going to say give me a

disclaimer of an opinion. And disclaimer

means that I'm not actually giving an

opinion at all. It's no

opinion. Alright. So you've got Norman,

and you've got Perry.

Okay. And a lot of students even

draw the little animals, that's cool.

But that's a way to figure out the

different sorts of modified audit

reports when I say, "I'm not going to give

an unqualified... I think something's

wrong." Then, there's my options right there.

Now. Okay.

Sometimes, everything is truthful.

I have an unmodified or unqualified report, but

I want to say, "Shareholders, I want to

draw your attention to some extra

information." And I do that using an

emphasis of matter paragraph. What color

pen am I using? Oh, let's change that to blue.

Alright. I use an emphasis of

matter paragraph, sometimes shortened to

an EOM.

Okay. Now, the emphasis of matter

paragraph says, "Everything is fine. But I

just want to draw your attention to a

new joint venture the company might be

involved in." Some unusual accounting

about something that is a little bit

different that we've found a mistake

in the previous report and we're now

revising it and reissuing it. So this is

still saying that management is still

being truthful, but my emphasis of matter

is just highlighting extra information

to shareholders. Alright. And in the

bundle on UTS online, you'll actually see

some examples of the sorts of things

that could go in emphasis of matter.

Probably, the biggest one is emphasis

of matter about going concerned. Do we

understand the concept of going concern?

Yes? Hopefully, that we expect companies

to continue in the future. If the company

is experiencing financial distress,

but they are being truthful

about their financial distress. So they're

showing a loss, they're showing lots of

debts and not many assets, then we can

still give them the big tick in the

financial report because they're being

truthful. But we might want to say, "Hey,

shareholders. There are some financial

difficulties at this firm. We do need to

warn you about those." So that's important.

Now, this is new. This is not going to be

in any textbook that you're looking

at--oh, I think there's a new textbook

coming out at the end of this year that

will have it in it. New standard is

ASA 701 about communicating key audit

matters in the auditor's report. And up

until this point in time,

what the auditors did was a black box.

The audit report simply said he's

our opinion, unmodified, unqualified, or

one of the other options, and that was

it. Now, the auditors must disclose

parts of the processes that

they go through to make their opinion.

Alright. Now, not for everything--oh, this

is how we audited sales, this is how we

audited cash, this is how we audited a

property of plant and equipment--instead,

it's only for areas that they think

there was significant judgment or that

they found particularly difficult, which

they call Key Audit Matters or KAMs.

Alright.

Now, the idea is to have increased

transparency over decision-making. If I

know how auditors made a difficult

decision about writing down an

intangible asset, then that allows me to

interpret the information in the

financial report with a little bit more

clarity. So this is about trying to make

auditors accountable and giving expert

uses of financial statements more

information. Now, I'm pretty sure the key

audit matters, my mom and dad are still

going to gloss over and be, like, "Oh,

whatever." Right? They look at the glossy

front part of the annual report with

smiling employees and graphs that go up.

They're not really looking at the

tricky bit at the back, but your share

analysts, your fun managers.

Those people are going to be

looking at the key audit matters and

saying, "Okay, well, this is an account like

intangibles that has a lot of discretion

by managers and the auditors. How did

they handle different opinions? How did

they handle a standard that was really,

you could do a couple of different

things?" Now, this must come in for all

financial years after the 31st of

December, at the end of this year. However,

we have three firms who are early adopters:

QBE Insurance, Cochelar, which are

the medical implants, and the Australian

Stock Exchange Limited because the stock

exchange is a public entity. They've

actually gone ahead. I'll include some

links so that you can look at the actual

key audit matters. And over the next

coming weeks, I'm going to make a video

where I actually walk through their

financial statements, and talk a little

bit about what goes into these

KAMs. At the moment, firms can write a lot,

or they can write a little. KAMs

first came in the UK, or here's the

requirements that says what they need to

do. It's not very exciting but there

is a risk. There's nothing to say how

many key audit matters the auditor needs

to describe, and when this was first

introduced in the first place, it came

up was in the UK

about 2012, I think it started.

Rolls-Royce and I think it was KPMG at

the time, wrote something like 12 pages

on key audit matters in tiny, tiny, tiny

font. It was a lot of

information. The very same year, Vodafone

wrote about two pages. The audit of a

Vodafone in the UK wrote about two pages on

key audit matters. Both were deemed to be

compliant with the standard. So, what we

worry about is something that we call

boiler plating. So the audit partner is

meant to really describe the tricky

decision-making per processes they went

through to look at auditing this really

difficult part of the firm. But what we

worry about is that firms will have

standard lines that they will use for

different things, and that won't provide

too much information, it'll just be a

standardized line that might not say

anything at all. And sometimes the

wording has been really, really bizarre.

In one of the early ones I read from

Rolls-Royce, it said something about

the auditor is reasonably optimistic

that management's forecasts are based on

reasonable assumptions of blah, blah, blah,

blah, blah. I'm like, what does reasonably

optimistic

mean? So there is going to be some issue

about what we see and I tell you that

the auditing researchers and the

linguists are all going to be looking at

this information of this topic very

closely. Alright. Oh, and we're doing--I'm

ahead of time. This is awesome. So if you

didn't get a subject outline, they're

down here at the front. Come grab one.

Next week, we start the weekly accessible quizzes.

Your quizzes will start 5

minutes past the start of your class

time. So my 9:00 class in the morning,

quiz starts at 9:05 AM, and if you're

late. that doesn't matter. You don't get

any extra time. How do you prep? You can

look at the textbook. There'll be some

videos. This lecture video will go up

and remember, it's open book.

Okay. So bring as much stuff as you

want. You can use the Internet. And one

other thing. Shhh. Just one last thing: Make sure

that the night before or the day

before, and I'm going to send you a

reminder email about this, that you can

log into Learning Catalytics. If you

haven't written down your password

somewhere, make sure you write it down

because the retrieve password function

in LC takes 6 hours. So if you need to

reset your password, you need to do it

well ahead of time because there's no

paper quizzes if you don't bring your

device. If you need a device or you don't

have one, come talk to me. We do have

spares you can borrow. Otherwise, thank

you for coming along to our first week,

and I will see you next week.