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ACCT3014 - Auditing and Assurance
Semester 1, 2013

Week 8 Lecture More on Auditing

Mid Exam Feedback Using the Work of Others Auditing in the Public Sector

Business School Auditing and Assurance

Lecture Outline
Mid Exam Marking Feedback
Using the Work of Others : When and Why would the
External Auditor use the Work of Others?

Auditing in the Public Sector

Thanks for being so efficient and professional in your Mid Exam performance on that Rainy Saturday!
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Multiple Choice
1. In making judgements about materiality at the account balance level, the auditor must consider the relationship between it and overall materiality. This should lead the auditor to plan the audit to detect misstatements that: a. are individually material to the statements taken as a whole. b. are individually immaterial to the statements taken as a whole. c. bring the cumulative total of known misstatements to the level of materiality established by management. d. may be immaterial individually, but may aggregate with misstatements in other accounts to a material level. 2. Which of the following is not a course of action an auditor may take if they discover material misstatements in the accounts? a. consider issuing an unqualified audit opinion. b. consider issuing a qualified audit opinion. c. perform additional audit procedures. d. ask management to correct the errors. 3. In determining the sufficiency of evidential matter, which of the following would not normally be a factor? a. materiality of the account. b. audit risk. c. the sampling technique used. d. the size of the population. 4. a. b. c. Which of these would generally be considered the least appropriate form of evidence? the auditors computation of earnings per share pre-numbered sales invoices prepared by the accounts receivable clerk the auditors inspection of new machinery acquisitions for the current year where the client is a computer manufacturer d. correspondence from the clients solicitor concerning litigation
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External Auditors - Reliance on Others

Audit Evidence (Using Managements Expert) - ASA 500

Special Considerations:
Audits of a Group Financial Report (Work of another auditor) Internal auditor External Expert -ASA 600 -ASA 610 -ASA 620

The involvement of other auditors/professionals during the audit may impact on the planning including business risk and internal control evaluation as well as on the audit evidence gathering process.

Principal Auditors reliance on Other Auditors

Why is this a key issue for the Principal Auditor?
- ASA 600 para 11 to 25 - Only the Principal Auditor has the obligation to express an opinion - The Principal Auditor should not refer to the work of others in their formal report - The user of an Audit Report may misunderstand the role of the Other Auditor and that of the Principal Auditor, (responsibility)

Using the Work of Other Auditor

In verifying the amounts included in financial reports, the principal auditor may have to use the work of another independent auditor (Other Auditor) with respect to the financial reports of one or more significant components (e.g. divisions, branches, subsidiaries, joint ventures or associated entities) and the principal auditor has to determine how the work of the Other Auditor will affect the audit.

The Principal Auditors Acceptance and Procedures: (ASA 600 para 49.1)
If financial reports of component(s) are material to the consolidated/overall financial report on which the principal auditor is reporting, he/she must: Consider whether own participation is sufficient; Consider professional competence of the other auditor;

Advise component auditor of independence requirements, obtain representation of other auditors compliance;
Advise other auditor of reliance to be placed on their work and any special requirements, eg. identification of intercompany transactions; Consider the significant findings of the component auditor and their impact on the audit opinion at Group level.

Using the Work of an External Expert:

(ASA 620 paras. 7-13)
There are potentially many areas (e.g. mineral reserves, actuarial valuations) where auditor may not have sufficient expertise to conclude on unresolved condition as at balance date.

Necessity for expert will depend on: Materiality of item Risk of error Availability of other evidence (Quantity and Quality)

Using the Work of an Expert:

(ASA 620 paras. 9, 10 & 12) Expert will be chosen for his:
- skills/competence

- professional certification
- membership of professional body - experience and reputation - independence and objectivity

Consider also:
- scope of experts work - evaluating experts work
The external auditor must be satisfied with respect to:
- Competence, capabilities and objectivity of the expert. - Must be able to understand the approach on methodology of the expert - Correctly evaluate the results of that work in the context of the evaluation of any other audit evidence.

- reporting on use of expert

Internal Audit
Institute of Internal Auditors (IIA) has developed the globally accepted definition of internal auditing as follows: Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisations operations. It helps an agency accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

What Must The External Auditor Verify ?

Item Competence Independence Qualifications Scope of Work Knowledge & Experience Evidence Collected Valid Opinion Based on Evidence

Other Auditor

Managements Expert

External Expert

Internal Auditor

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Principal Auditor & Internal Auditor

Independence
- Need to compare and contrast the concepts of Independence - Independence as expected by The Professional Accounting Bodies - Independence as expected as part of the work performed by the Internal Auditor (Para 9 & A4) - In this environment refers to a reporting line to the Audit Committee and/or the Board - Not under the influence of line management - No restriction on the scope of work in the performance of the Internal; audit function

Examples of Functions Performed by Internal Audit

Financial auditing, including detailed testing of transactions, balances and procedures

Compliance auditing, review of internal control system:

- compliance with laid-down procedures - compliance with relevant legislation Involvement in systems design and development Reviewing management effectiveness and efficiency Undertaking special projects including suspected misappropriation

The Differences Between External Audit and Internal Audit Functions

External Audit
Primary objective Whether the financial report is in accordance with the Corporations Act 2001, including compliance with accounting standards and presents a true and fair view

Internal Audit
Generally provides assurance to the Board that the internal control environment is operating as intended but objective/scope can vary depending on the organisation

Scope

Minimum scope set out in the Corporations Act (2001)

The Board (or Audit Committee) determine the overall scope of the internal audit function
The head of internal audit reports to the Board/Audit Committee

Reporting Line

Audit report to members (shareholders)

Professional Body

Institute of Chartered Accountants in Australia (ICAA) CPA Australia Auditing Standards (ASAs)

The Institute of Internal Auditors, Australia (IIA) Standards for the Professional Practice of Internal Auditing (IIA Standards) Business processes (e.g. financial and operational risks, management, etc.)

Professional Standards

Skills and competencies

Financial

Relationship Between External Auditor and Internal Auditor (ASA 610 refer Appendix 1)
External audit views internal audit as a potential internal control in the organisation. It may be an important component of the control environment (i.e. part of corporate governance) and may enable external auditor to increase reliance on all other internal controls. Appendix 1 (ASA610) is a Proforma Questionnaire that may assist the External Auditor in understanding the functions of the internal auditor.

http://www.iia.org.au/Libraries/QUALIFICATIONS/StudentPathwa y_EM17JAN12.sflb.ashx

Relationship Between External Auditor and Internal Auditor (ASA 610 para 9)
Important criteria to consider in understanding and assessment of internal audit are: - organisation status (functional and administrative reporting
line independence)

- scope of function (covers financial and operational areas)

- technical competence (business processes including
financial, operational, management, etc.)

- due professional care (similar quality control issues to

external audit)

If all above areas are satisfactory, consider timing and liaison of functions and evaluation of specific internal audit work.

IA and their Function

Internal auditors can assist the board of directors of an organisation in the following ways:
As internal auditors are directly reporting to the Audit Committee, the Audit Committee can advise the board of the level of compliance and performance in relation to each directors portfolio of responsibilities, Independently review operations or programs to ascertain whether they are being carried out consistently with the boards objectives and policies, Assisting the board to improve on governance policys setting and operations by providing recommendations, Providing evidence-based information regarding the effectiveness of internal controls and risk management policies and processes, Giving assurance on financial and management reports.

IA Independence
Independence for internal auditors differs from the external auditors: internal auditors are employees of the companies they audit. Independence is achieved through organisational status and objectivity. Is the internal auditor subject to a Limitation of Scope? Some ways of enhancing independence are: The chief internal audit executive is responsible to an individual in the organisation with sufficient authority to promote independence and to ensure broad audit coverage and adequate consideration of audit reports, and appropriate action on audit recommendations. The chief internal audit executive has direct communication with the board of directors or its audit committee. The internal audit department has a formal charter that defines its purpose, authority and responsibility.

Audit Committee
The audit committee plays a key role in assisting the board to fulfil its corporate governance and oversight responsibilities in relation to a companys financial reporting, internal control systems, risk management systems and the internal and external audit functions... Australian Institute
of Company Directors

The role of the audit committee involves making recommendations to the board about the appointment of the auditor, agreeing audit fees, reviewing the scope of external audit work, and holding private meetings with the auditor to discuss its findings. It also includes reviewing, with the external auditor, the external auditor's independence.

Audit Committee

http://www.pwc.com.au/assurance/publications/financial/ audit-committee-guide/materiality-in-audits.htm

Lecture Discussion Q 3. Audit Committee

Continuous monitoring of the impact of global financial crisis especially on the investments. As the organisation have lost a significant amount of investments, audit committee should identify potential impairments or write-offs that should be done so that the investments will be properly reflected in the financial statements. Broaden range of risks analysed and managed. Greater focus on continuous disclosure requirement. Audit committee should ensure that all material information relating to the organisation to be disclosed.

Public Sector and Other Assurance Engagements

Public Sector:
- Government Departments - Statutory Authorities - Federal, State and Local Government Level (Local Councils)

Wider service delivery:

- Financial Audit - Performance Audit - Compliance Audit

Public Sector Principal Auditor Auditor General (AG)

Auditor General Act 1997 empowers the AG to set the audit standards to apply:
- The AG has adopted the Australian Auditing Standards including ASAE 3100 Compliance Engagements and ASAE3500 Performance Engagements with effect from 1 January 2009. Independence of the AG as an Auditor assisted by:
- Fixed Term in Office (10 years Federal Level, 7 years State level). - May only be removed by the agreement of both houses of parliament and consent of the Governor-General.

- Is an Officer of Parliament, Parliament may not direct the AG in to how the AGs work is to be undertaken.

Public Sector
The AG will complete all areas of an audit inclusive of:
- Financial reporting - Performance

- Economy - value for money criteria

- Efficiency and effectiveness of delivery of services etc. - Compliance - Legal and regulatory compliance to the delivery and administration of services.

The auditor needs to access the entitys performance in terms of: - Economy - Acquisition of goods and services of acceptable quality at an appropriate cost. - Efficiency - Resources used produce the required outcome with minimal waste. - Effectiveness - A focus on the achievement of the entities objectives, (eg City Rail on time schedules & reliability benchmarks).

Compliance Audits
The Auditor is required to assess whether the entity is complying with both external and internal criteria:
- External - Legislation (eg OH&S) - Ministerial Directions - Industry or professional standards (eg Staff hold qualifications) - Third party contracts - Internal - Organisational rules and policies (eg rules on promotion, travel confidentiality etc.)

(ASAE 3100)

What's on Next Week

Auditing in an IT Environment

Background to IT Controls

Compliments Google Images 28/2/2012

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