Lecture 1 - Overview and audit reporting

awesome all right so welcome everybody

to lecture one who's excited to be here

for

auditing hey those people down the front

woohoo and everyone else is like I'm

here because I have to be it's in the

major so hopefully over the semester um

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 um

you'll get files um and access both ways

so we're going to cover a lot in a f in

the first week you already know about

the subject from the prep week stuff you

know about learning catalytics from

looking online in our assessment so I'm

not going to go through those all right

so we're going to cover two chapters out

of the textbook today we're going to

cover why the hell do we have an audit

in the first place and then we're also

going to cover um the idea of what is

the output or the final um 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 here okay is my

highlighter the right size no I want

this

one all right 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 uh 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 uh 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 uh 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 um will come up in the

quizzes each week all right so that'll

give you a guide as to what I think is

most important when it comes to exam

prep um 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 all right so what's our first

objective what the hell is Assurance so

Assurance is about having someone

independent that's ask the auditor being

objective trying to improve the quality

of information for decision

makers all right 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

[Music]

oops all right so right down

here oh that's really bright can we

still see the uh 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 which we'll talk about

in a future weeks um

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

are 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

a 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 almost

dropped my pen this is what we're going

to spend our entire semester looking at

right audits must be done under the

corporations act for every company

that's listed um 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 uh we can also have Assurance over it

so if you go on to PayPal or Ebay they

have assurance that the information you

send to them or you store with them is

securely kept isn't uh H passed on to

other people so we can provide Assurance

on anything right there's actually an

assurance service that exists over Lotto

so we have the lotto balls that go into

Power Ball Etc there are actually

Auditors whose job it is is to make sure

that every single power ball 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 new southwell

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 on to

potifa which is a u political

factchecking website you'll discover

that I think less than 3% of all Donald

Trump statements can actually be assured

or be reliable so he says 97% of stuff

that's not reliable um but you can

provide Assurance on

anything so what we're looking at is

this this very small bit here all right

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 um 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 um 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 uh a

decision was made on information that

was inaccurate I'll give you an example

of information

risk um you'll uh meet my son on some of

our audit slides um we affectionately

call him audit Junior um um and he's

come to every single open day since he

was born and he's I'm starting to get

him to the point where uh 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 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 why

didn't you tell me he goes I thought you

would have

asked so 2 days before suddenly I have

like 20 more people coming to this party

but i' 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 lifethreatening

or it wasn't going to bankrupt a

business but I made it 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 may 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 all

right 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 appro so the reasons that we have

uh risk of information remoteness

between the

user and management I own shares in WW

worths I can't really go up to ww worth

and say hey tell me how to cash flow is

going 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 an 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 all right there's there's lots

and lots and lots of data hundreds or

thousands or millions of transactions

how do we know which ones are correct

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 assigned

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 uh

advocate of shareholders to say well

really we want information that is act

and 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 cost all right 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 um and um for those people who are

wondering I'm not just getting fat so I

am going to having a baby at the uh

beginning of next year so we call him

audit Junior um and we just recently

announced well I announced on my

Facebook page uh for all the students

who are friends with me that um 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 what ever nobody

I haven't met a new parent that says

well look actually my son or daughter's

a bit

ugly right oh everybody's like oh how a

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 I look 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 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 what

our 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 asbs

to do that Roger will be back to tell

you all sorts of other hints and tips as

well about

auditing so

auditing is the accumulation of evidence

all right so evidence is really critical

because I shouldn't make a decision

without having some

evidence if you're sick or uh something

happens to you on the way to UNI then I

want evidence if you say look I miss the

quiz because I fell down a flight of

stairs and broke my leg I'm going to

have to see your broken leg and I'd want

some evidence that that was really the

case right so I'm technically a doctor

and um friends always ask me look could

you write me a doctor's note which I

can't do as a PhD sort of doctor but if

you apply for something you oh look you

know this is what's been going on I want

to see actual evidence to know that

that's the truth so just like on cop

shows before they charge somebody with

the crime they need evidence well we

need evidence as well to be able to make

our opinion

and determine the degree of

Correspondence between information which

for us is going to be our financial

statements let me put that in

red financial

statements and our established

criteria and our established

criteria are our

asbs all right so we're looking at

Management's information and what the

double asbs say it should be and um I

know would you guys have had Helen I

think last semester for accounting

standards so Helen would have taught you

how everything needs to be laid out how

all the calculations need to work so we

need to check that that's part of the

auditor's role so key things about the

audit we need to be competent we need to

have the right skills which is part of

what we're doing here at Uni and we need

to be independent as well all right so

competency is about having the right

skills and and then being independent is

about being

objective um and I'll give you an

example so many many many years ago um

my husband and I both met at an audit

firm so it was an audit firm

romance

and we were both working on different

audit clients um and one of my big

clients was QBE Insurance which we've

all would have seen on TV and they

sponsor some sporting teams Etc but he

left PWC and took a job at

QBE at that point I could no longer do

the audit because I was no longer

independent because I knew somebody that

worked there and part of his job was

consolidation of all of their

subsidiaries so if I discovered that he

had you know somehow stolen $10 million

from the company I probably wouldn't

have told anybody we would have you know

very quietly resigned from our jobs sold

our house and skipped out a

non-extradition country so we need to

have Auditors who are objective and

independent right to say that when some

we see something that's not quite right

we feel independent enough to put our

hands up and say oh I don't think this

should be happening or you know

management are not doing the right thing

so

Independence is the Cornerstone of

auditing you open any audit textbook and

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

audit textbooks from the

1940s and

earlier um and there's no pictures no

diagrams it's all in color it's all

black and white just type text but they

all start with this idea that audit is

the Cornerstone sorry Independence is

the Cornerstone of being able to do that

audit to be independent just like when I

say my kid has got to be the cutest kid

I'm not independent so we would have to

find somebody who is an independent

expert in the Judgment of kid cuteness

to be able to make that

opinion all right so what do we need to

be able to do our audit we need to have

the information the financial statements

and our criteria which is our double

asbs that we talked about all right so

our financial statements and our double

asbs we need to be able to accumulate

evidence and we're actually going to

practice doing that designing ways to

collect evidence so just like on CSI

there's all these techniques for

collecting fingerprints and running DN

and taking a tire Triad and running it

through a database we also

have less cool procedures to collect

evidence so there's no like you know

Dart rooms with spotlights and

microscopes unfortunately Auditors

mostly just use our brains might use a

computer pen and some paper but we're

going to look at specific methods that

we've developed over time to collect

evidence we've talked about being

competent having the right skills and

being independent

and then providing a report so under the

corporations

act

oops I actually have to provide a

written

report that

says here is the outcome of the audit

yes management are telling the truth or

no they're not quite being truthful

about everything and here are the things

that they not being honest

about so what's the difference between

auditing and accounting the accounting

is the recording part of uh the business

process so they record summarize all the

debits and credits within the system and

then the Auditors are actually the ones

checking the accounting work so we're

going to go back and we're going to look

at the work of the accounts and say are

they doing the right

thing just going to move this over here

for a second all right so we have three

main types of audits uh the financial

statement the performance and the

compliance as I mentioned before

financial statement is the one that

we're going to be spending the most of

our time on the performance is about are

we doing things efficiently and

effectively within our business so uh we

might have a sales process or a complex

consolidation process and we can get an

auditor in to say is this the best way

to do this do we need to re-engineer our

business process and then the compliance

audit which is about following laws and

regulations um so is a company reporting

GST appropriately are they following

occupational health and safety um are

they doing anything else that requires a

specific law or regulation but we're

going to focus on that one up

there so there's some examples okay

different types of Auditors the public

accounting firms are the big four and

the second tier they do most of the

publicly listed companies um the auditor

general are the government

Auditors all right so the New South

Wales audit office and the auditor

general of Australia based in Cambra um

New South Wales auditor general will

audit state government

organizations um and the auditor general

will handle the audit for everything

else that's

Federal um so the auditor general audits

the Defense Force uh they're in charge

of the overall audit for

Telstra um center link um other big

government

departments we have Auditors for tax

that work specifically for the ATO um

but they're more likely to be lawyers

um and accountants uh not just

accountants and then internal Auditors

which focus on doing that compliance in

the performance audit so most big top

100 companies will have their own audit

internal audit team um so quantis the

Commonwealth Bank Coca-Cola will'll all

have teams who look at internal

improvements and making sure that

they're following the rules and

regulations and this is important

because they want to try and minimize

fines

all right because you could get a

government fine for not following a law

or a regulation appropriately you could

be sued it could create all sorts of

issues all right so let's look the big

firms um I worked for this one actually

well the predecessor for this one which

was Cooper and Li brand and then

PWC um so the big four audit probably I

think about 60% of the Australian stock

exchange and then these guys here pretty

much AIT the rest all right um so for

those people who are going to a later

afternoon toot and you'll have Kate or

you'll have Nicole um we actually have

an agreement with Grant thoron where

they actually send real life Auditors in

to teach tutorial so you'll get to hear

lots of stories from them uh the people

who are going to um who will have Ben

this after afternoon um in the 12:00 CH

and I think also the 1:31 uh Ben works

at a small local firm in terms of

auditing so he's got lots of experience

in doing much smaller audits which are

required under the corporations act um

so you've got a range of Staff with a

range of experience and this means that

Auditors exist at all sorts of different

levels so I recently did the audit for

ISC which is one of the University

student groups um AUD s happen for the

big ASX listed companies they happen for

large privately listed sorry for large

private companies and they also happen

for small companies that are required to

have audits under the corporations act

or maybe as part of Charity

regulations firms do audits um but just

of different sizes and of different

scales so the big four are so large and

so specialized that people specialize by

industry so you audit mining firms or

government firms or telecommunications

or financial services um my

specialization was financial services so

I didn't get to see much I always envied

the people that got to audit

manufacturing firms or mining firms

because you could go places and see real

things happening until one time I did

get put on the audit of Dairy Farmers

and that's not So Glamorous like milk

processing plants really don't smell

great um we did get to drink you know

you had access to the corporate fridge

so I could drink all the milk that I

could take though I'm Asian so I'm

partly lactose intolerance that doesn't

go down so well um but Dairy Farmers

made yogurt again it couldn't eat too

much of that uh but fruit juice I could

drink the fruit juice all day so that

was a good thing so the public

accounting firms big ones and small ones

provide audit services so that's a big

part of their bread and butter audit

Services

though are high

volume and low margin

that means you don't make a lot of money

off an

audit right it's it's not a really

profitable item to do but the reason

that you do an audit is so that you can

convince your client to hire you to do

other things like tax which can be a

little bit more lucrative and consulting

services that could be helping them

expand into a new market um choosing a

new information system um you get

different departments within your umm

within your audit firm to do that but

it's all about sort of growing the

bigger uh audit firm share so something

like management consulting services is

really high

margin and towards my the end of my

career I did a lot more management

consulting um and I remember back in

19 oh I think it was

99 we had a $20 million consulting job

with the Australian Broadcasting

Corporation just down the road

implementing new software and that was a

six-month project for $20

million so and you wouldn't earn

anywhere near that much on an audit

you'd probably earn a few million

dollars on an audit for about six to 8

weeks work um so there's definitely lots

of margin Aid

there now you find very few firms that

are in the sole proprietorship or the

partnership model that's because of the

idea of joint and several liability and

that would mean that if the partner of

the firm did something wrong and then

they they skipped out of town I would be

liable as one of the partners left over

the big four firms these days and most

of our second tier are almost all

Incorporated companies so while you have

Partners who are shareholders in The

Firm they're not Partners in the typical

sense of a a

partnership now in terms of the

hierarchy or the shape of an audit

firm previously they looked like

this all right so you had the partners

at the very top and then lots of junior

staff doing what we call grunt work

ticking and bashing or ticking and

flicking at the bottom what we're seeing

in terms of Trends and the data that's

coming out of

CA is that the audit firm is looking a

lot more

rectangular now um and that you're

having a lot less staff at the junior

levels and that comes from a number of

different reasons the first

one is

outsourcing or

offshoring um and that's especially you

scan a lot of audit documentation that

you would have had graduates um interns

doing a lot of ticking and checking all

of that gets scanned and then sent off

to India or you know Pakistan and they

do a whole lot of the audit checking

work for about a third the price

overnight so the amount of staff doing

that work is much less um and then we've

also seen a lot more automation so we're

using a lot more big data we're using a

lot more intelligent agents um and

artificial intelligence in audits so you

know the future is still looking bright

for auditing and auditing at this point

is not going to be replaced by machines

but there's a lot less at the bottom

level than there was

before what do the professional bodies

do they do a few different things they

help establish standards through the

auditing Standards Board they do a lot

of research and then they the biggest

one is education to make sure that once

you become a member you are continuously

up to date on latest auditing Trends and

changes within legislation especially at

the international

level now what about our auditing

standards our auditing standards are

called

ASAS all right and you can find those

free on the aub's website AAS

sb.gov

Au now remember our exam is open book so

you can bring in oh somebody has one of

these I'm just going to borrow this here

one of these handbooks if you want all

your standards in one book or you could

print them

out right and bring them into the exam

you can bring your textbook into the

exam you could bring anything you like

comic books if you think you're going to

have time at the end to you know have a

bit of a read um so you don't

necessarily need to buy the standards

book if you don't want to you can look

at them online and then print out the

sections that you think you'll need I

will actually tell you in the last week

of term which ones I think are going to

be key ones for the final exam so you

don't have to worry about

that so the

aasb issues the auditing standards and

uh we're internationally harmonized so

they come down from the international

auditing Standards Board and the key is

that they are

mandatory all right so while some

companies or some countries sorry the

auditing standards say the auditor

May our auditing standards say the

auditor must or the auditor shall

because our requirements are enshrined

within the corporations act we must do

them as the minimum set of Standards you

could do more than what the standard

says but the minimum is contained within

the ASAS and we'll be referring back and

I'll show you excerpts from the

standards on a regular basis of things

that are really critical and important

to

understand all right so how do we make

sure that everybody who's doing an audit

is doing the right right thing that

comes from quality control and so

quality control needs to exist across

firms and quality control also needs to

exist within

firms all right so I need to make sure

that PWC are doing the same minimum

standard as KPMG and then within pwc's

however many offices we need to make

sure that all staff are doing the same

thing and there are specific whoops

specific quality control standards um

that the uh auditing standards and the

corporations act actually set out so

things about having leadership um

meeting ethical and Independence

requirements rules about how to accept

clients selecting the right people doing

the Audits and then monitoring or

checking each

other and that's where the peer review

Pro

program comes in from Chartered

Accountants and zpa Australia where

firms check each other's work to make

sure that they're all following the

standards

appropriately so CA and CPA both have

sets of Auditors that actually audit

them also on top of that we have

the Australian Securities and investment

commission doing their own inspection

program

all right so they audit the big four

firms every single year smaller firms on

a rotating schedule and they can find

audit firms for not complying with the

auditing standards um I'll provide you

guys with a link to look at the latest

inspection report from Asic um it

doesn't actually show names of firms um

this also happens in the US that the US

has started naming firms who are not

doing the right thing so there's big

bucks um in making sure that everybody

Within in The Firm is doing the right

thing in terms of following the order

standards acting independently and

acting ethically how are we doing on

time oh okay all right operations act

besides governing company directors

setting up companies uh in Australian

you guys have all done Australian

company law you guys done company law

yep or for the people who haven't done

it yet one of the assignments many many

years ago used to be prepare all the

documents to start company right we'd

have to actually go back to the

corporations act and figure out what

that is so while the corporations act

specifies how companies get set up it

also specifies what Auditors need to do

you need to be qualified you need to be

registered management can't just choose

the auditor it has to be ratified by

shareholders at an annual general

meeting we can't just quit as an auditor

there's all sorts of rules about

quitting what our responsibilities are

and

Reporting um and you can go into those

in more detail in the

textbook all right so here is the output

and this is really important and you

might be thinking well why am I

interested in looking at the end point

when we're only at the beginning and

this is so that you have in your mind

the idea of what we're striving for or

what we're uh planning to

create so we're going to look at why do

we have the report um what goes into

something called an unmodified audit

report we're we're going to look at when

we might do different sorts of reports

and adding extra information okay now

before Oh I'm trying to remember what

case it was we'll go into the cases I

think uh next

week there was never a legal requirement

to produce a paper audit report you

could have done a verbal audit report at

one stage but now we must provide a

written audit report about the financial

statements in accordance with the

Australian accounting uh uh the

accounting standards and our auditing

standards and Reporting is pretty

similar to the point where if you go to

the auditing standard on audit reporting

there's actually templates in the back

and if you look at almost all of the

publicly listed companies their audit

reports almost say exactly the same

thing word for word except the company

name is different and the year might be

different and the name of the audit

partner might be

different so audit reporting is fairly

standardized and it has very specific

legal language because it is a legal

document that exposes the auditor to

liability if we've done something wrong

so what is the gold standard that

everybody is looking for so what most

firms

want firms want what we call an

unmodified audit report and is also

sometimes called an unqualified report

now this is where it's a bit funny and a

bit

counterintuitive so when you do your ca

or you do a medical degree or you finish

your engineering qualification you

become

qualified right and qualified is a good

thing okay when it comes to an audit it

is the exact opposite the one that

people want the one that

says big tick management are telling the

truth is something called an unqualified

or an

unmodified audit report

okay you might think why is it that way

I don't know it's probably something I

could historically uh dig into the

archives and look at sometimes I wonder

if we do things sort of a bit back to

front in auditing to make it seem really

mysterious and difficult because

auditing is a lot about logic and Common

Sense and we don't want too many people

getting into the awesome area that is

auditing so we want to make it seem

really complicated and Tricky by using

language that doesn't quite make sense

so most firms

probably

about I think the last time we checked

it was something like 98% of firms um on

the ASX get an unqualified unmodified

report management are telling the truth

now that sends a signal to shareholders

that says management telling the truth

you can rely on this information for

your decision- making all right what

happens do you think to company share

prices if I give them the opposite if I

say management are not being truthful

and here are the reasons why what do you

think is going to happen to share

price it's going to go down and it goes

down pretty quickly um in terms of what

we see from the research in terms of

share price reaction so firms want this

managers want to work with us as the

Auditors to come to an agreement on a

set of financial statements that we

think is unqualified is free from

statement so ASA this is our first ASA

700 and all the the ones on reporting

you're in the 700 area say that we want

to get M reasonable assurance that it's

free from misstatements due to fraud or

error so I'm not interest I don't care

whether it's a mistake type 5,000

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

a responsibility to detect those I want

to make sure that it matches the

applicable financial reporting framework

which for us is at

aasbs all right and that it is a fair

fair

presentation that it fairly represents

what happened during the during the

company's Financial period so if the

company was exposed to a lot of

fluctuation changes and adverse

movements in foreign exchange and a

decline in sales then we'd expect to see

a loss from that company is what we're

seeing uh commensurate with what we know

about the firm um and then making sure

that the financial report is again in

accordance with our double asbs

there's all sorts of parts to the audit

report um and uh this has actually

changed a little bit so this bit here

used to be right at the end we have a

new standard change so in the textbook

this is going to be a little bit

different than what you're looking at

right here um new ASA 700 now says that

we tell the shareholders the very first

thing here's our opinion we used to give

them all this legal jargon first all

this other crap used to come first and

then we would do this sort of at the end

but now it's right at the front to make

sure that shareholders know what's going

on now on UTS online in this week's

folder I've also put a whole lot of

audited opinions in there for you to

look at um and I'll also copy in for you

um the link to the QBE

Insurance annual report because it is

one of the few early adopters of some

new regulations and so I'll make a

little video on that in a couple of

weeks as well all right now what happens

if management aren't being truthful how

do I know what sort of opinion to give

them then I'm going to use this table

and this table comes out of Asa 700 uh

705 sorry and so I'm just going to lean

over here because I want to write some

numbers here so Step One is this step

over

here all right the first thing I want to

do is find out why I'm not giving an

unqualified opinion number one the

financial report is materially misstated

that is essentially saying management

are not being

truthful about something all right so

they they're understating a number

they're failing to make a disclosure

they're just lying about something all

right the second one which is this one

here is that we cannot get enough

evidence all right so not

enough

evidence this is a bit like Donald Trump

refusing to uh release his tax returns

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

any information so Step One is I look at

well what are the two reasons why I

might go away from the

unqualified step two is I need to look

at the severity and there's two terms

here material but not pervasive or

material and pervasive for material

means it's important enough that we

think shareholders should know about it

but not pervasive and I'm going to

introduce you to two different

characters here and I didn't name these

guys actually one of my other lectures

did

so here we have

Norman Norman the

non

pervasive

slug all right and so Norman's there

because if you imagine your financial

statements let me pick a different color

here so imagine you've got your

financial Cal statements and all of your

different

accounts here if you plong to Norman on

one of

those all right and you said okay Norman

is right here Norman's only can self

contained right he's only in a small

part of the financial statements so

Norman is the situation where we have

either something not truthful or not

enough evidence in just one spot and in

that case we give an opinion called a

qualified

opinion okay now the second person I'm

going to introduce you

to let me make sure my pen is a bit

smaller maybe I'll type here we go

is

Perry the pervasive

octopus and I'd always use the octopus

but i' never named him and then Nelson

who who does our night classes said we

need to give the octopus a name so his

name is

Perry so if I took Perry and I put Perry

on the financial

statements as my

octopus all

right there's his body there's his

little

legs everywhere oh that's not that's a

really you obviously I'm not you're not

coming for the art but the idea with

Perry is that his little tentacles reach

far and wide across the financial

statements so that is what we call

pervasive all right there's lots of

tentacles of Errors so if I have errors

in the financial statements and I have

lots of them across lots of different

areas I say I'm going to give an adverse

opinion like this is bad this is the

signal to shareholders that management

aren't being truthful on a range of

things if I can't get enough information

over a lot of different areas then

Perry's going to say give me a

disclaimer of an opinion and disclaimer

means that I'm not actually giving an

opinion at all it's no

opinion all right so you've got Norman

and you've got

Perry okay and a lot of students even

draw the little animals that's cool um

but that's a way to figure out the

different sorts of modified audit

reports when I say I'm not going to give

a an unqualified I think something's

wrong then there's my options right

there

now okay

sometimes everything is truthful I have

an unmodified or unqualified report but

I want to say shareholders I want to

draw your attention to some extra

information and I do that using an

emphasis of matter paragraph what color

pen am I using oh let's change that to

Blue all right I use an emphasis of

matter paragraph sometimes shortened to

an eoom

okay now the emphasis of matter

paragraph says everything is fine but I

just want to draw your attention to a

new joint venture the company might be

involved in some unusual accounting

about something that is a little bit

different um that we've found a mistake

in the previous report and we're now

revising it and reissuing it so this is

still saying that management is still

being truthful but my emphasis of matter

is just highlighting extra information

to shareholders all right and in the

bundle on UTS online you'll actually see

some examples of the sorts of things

that could go in emphasis of matter

probably the biggest one is uh emphasis

of matter about going concerned do we

understand the concept of going concern

yes hopefully that we expect companies

to continue in the future if the company

is experiencing financial

distress but they are being truthful

about their financial distress so they

showing a loss they're showing lots of

uh debts and not many assets then we can

still give them the big tick in the

financial report because they're being

truthful but we might want to say hey

shareholders there are some financial

difficulties at this firm we do need to

warn you about those so that's important

now this is new this is not going to be

in any textbook um that you're looking

at oh I think there's a new textbook

coming out at the end of this year that

will'll have it in it new standard is

Asa 701 about communicating key audit

matters in the auditor's report and up

until this point in

time what the Auditors did was a black

box the audit report simply said he's

our opinion unmodified unqualified or

one of the other options um and that was

it now the Auditors must

disclose parts of the processes that

they go through to make their opinion

all right now not for everything oh this

is how we audited sales this is how we

audited cash this is how we audited a

property of plant and Equipment instead

it's only for areas that they think

there was significant judgment or that

they found particularly difficult which

they call Key audit matters or

k all right

now the idea is to have increased

transparency over decision- making if I

know how Auditors made a difficult

decision about writing down an

intangible asset then that allows me to

interpret the information in the

financial report with a little bit more

clarity so this is about trying to make

Auditors accountable and giving expert

uses of financial statements more

information now I'm pretty sure the key

audit matters my mom and dad are still

going to gloss over and be like oh

whatever right they look at the glossy

front part of the annual report with

smiling employees and graphs that go up

they're not really looking at the the

tricky bit at the back but your share

analysts your fun

managers um those people are going to be

looking at the key audit matters and

saying okay well this is an account like

intangibles that has a lot of discretion

by managers and the Auditors how did

they handle different opinions how did

they handle a standard that was really

you could do a couple of different

things now this must come in for all

Financial years uh after the 31st of

December at the end of this year however

we have three firms who are early

adopters QBE Insurance ccka which are

the medical implants and the Australian

stock exchange limited because the stock

exchange is a public entity they've

actually gone ahead um I'll include some

links so that you can look at the actual

key audit matters um and over the next

coming weeks I'm going to make a video

where I actually walk through their

financial statements and talk a little

bit about what goes into these

Kam at the moment firms can write a lot

or they can write a little um kamam

first came in in the UK or here's the

requirements that says what they need to

do it's not very exciting um but there

is a risk there's nothing to say how

many key audit matters the auditor needs

to describe and when this was first

introduced and the first place it came

up was in the UK

about 2012 I think it it's started

rollsroyce and I think it was KPMG at

the time wrote something like 12 pages

on key audit matters in tiny tiny tiny

font it was a lot of

information the very same year Vodaphone

wrote about two pages uh the audit of a

vone in the UK wrote about two pages on

key audit matters both were deemed to be

compliant with the standard so what we

worry about is something that we call

boiler plating so the audit partner is

meant to really describe the tricky

decision-making per processes they went

through to look at auditing this really

difficult part of the firm but what we

worry about is that firms will have

standard lines that they will use for

different things and that won't provide

too much information it'll just be a

standardized line that might not say

anything at all and sometimes the

wording has been really really bizarre

in one of the early ones I read from

Rolls-Royce it said something about um

the auditor is reasonably optimistic

that Management's forecasts are based on

reasonable assumptions of blah blah blah

blah blah I'm like what does reasonably

optimistic

mean so there is going to be some issue

about what we see um and I tell you that

the auditing researchers and the

linguists are all going to be looking at

this information of this topic very uh

closely all right oh and we're doing I'm

ahead of time this is awesome so if you

didn't get a subject outline they're

down here at the front come grab one

next week we start the weekly accessible

quizzes your quizzes will start 5

minutes past the start of your class

time so my 9800 class in the morning

quiz starts at 9:05 a.m. and if you're

late that doesn't matter you don't get

any extra time how do you prep you can

look at the textbook there'll be some

videos this lecture video will go up um

and remember it's open

book okay so bring as much stuff as you

want you can use the internet and one

other thing sh just one last thing make

sure that the night before or the day

before and I'm going to send you a

reminder email about this that you can

log into learning catalytics if you

haven't written down your password

somewhere make sure you write it down

because the retrieve password function

in LC takes 6 hours so if you need to

reset your password you need to do it

well ahead of time uh cuz there's no

paper quizzes if you don't bring your

device if you need a device or you don't

have one come talk to me we do have

spares you can borrow otherwise thank

you for coming along to our first week

and I will see you next week