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Solutions manual

to accompany

Audit and assurance


1st edition
by

Leung et al.

© John Wiley & Sons Australia, Ltd 2019


Chapter 5: Overview of the audit of financial reports

Chapter 5: Overview of the audit of financial reports

Review questions

5.11 What are the requirements that must be met in order to become a
registered auditor?

To be suitably qualified, the person must:


 Be a member of Chartered Accountants Australia New Zealand (CAANZ),
CPA Australia, the Institute of Public Accountants or other prescribed body.
 Hold a degree, diploma or certificate from a university or other prescribed
body in Australia and have passed a course of study in accountancy of not less
than 3 years duration and a course of study in commercial law of not less than
2 years duration.
 Have such practical experience in auditing as prescribed (work experience in
company auditing under the direction of a registered company auditor and at
least one year’s experience in the supervision of audits of companies).
 Be capable of performing the duties of an auditor and be a fit and proper
person to be registered as an auditor.

5.12 What are the main Corporations Act requirements with regard to the
appointment, removal and registration of auditors?

s.301 – A company (except for a small proprietary company) must have its financial
reports audited.

Appointment
s.327A – Directors of public and large proprietary companies are required to appoint
an auditor within one month after the company is incorporated.
s.327B – The duration of the first appointment is only until the first annual general
meeting, where the members appoint the auditor.

Removal
s.329(1A) – An auditor may be removed from office by resolution of the company at
a general meeting, for which special notice has been given at least two months before
the meeting is held.
s.329(2) – A copy of this notice must be sent to the auditor and the ASIC.
s.329(3) – The auditor has seven days to make representation in writing, with copies
to be sent to all members entitled to attend the meeting.

Registration
s.1279 – There are a number of criteria that must be satisfied before an auditor may
apply to the ASIC to be registered.
s.1280 – Requirements to be suitably qualified.
s.324CH – Prohibits or disqualifies any person who is an officer of the company, a
partner of an officer of the company, an employer or employee of an officer of the
company, or a partner or employee of an employee of an officer of the company.

© John Wiley and Sons Australia, Ltd 2019 5.2


Solutions manual to accompany Audit and assurance 1e by Leung et al.

5.13 Why is independence crucial for an external auditor?

Independence is crucial for an external (independent) auditor because one of the key
reasons for appointing an auditor is associated with agency theory. Agency theory
suggests that there will be a demand for monitoring by someone outside of the
entity being audited. The value of the auditor to the entity is that the auditor is from
outside of the entity and can therefore comment objectively on the behaviour of
management. Therefore, the auditor’s independence is crucial. It should also be noted
that independence is important in both fact and appearance and this is reinforced by
APES 110, Code of Ethics for Professional Accountants. Regulators also
see the value of independence and therefore have included some statutory protection
in relation to the removal of auditors in the Corporations Act.

Independence is required so that the auditor will report in an unbiased manner to the
members and on any required regulatory matters to ASIC.

Independence is particularly needed in dealings with management. ASA 200 states in


paragraph 15 “The auditor shall plan and perform an audit with professional
scepticism recognising that circumstances may exist that cause the financial report to
be materially misstated.”

5.14 Why must auditors follow Australian auditing standards?

There are a couple of major reasons why auditors must follow Australian auditing
standards:

(1) As members of the accounting profession, auditors must follow the standards.

APES 410 stipulates that compliance with auditing standards is mandatory — i.e. the
standards are enforceable under the Code of Ethics, which stipulates that non-
compliance can lead to disciplinary proceedings by the professional body to which the
auditor belongs.

(2) Legal enforceability

The importance of the auditing standards in Australia has been further enhanced by
the changes to make them legally enforceable. These changes were implemented as
part of the CLERP 9 initiatives to enhance the credibility of audited financial reports
in Australia. Auditing standards with the force of law are now issued by the Auditing
and Assurance Standards Board under s.336 of the Corporations Act, as discussed in
chapter 1. The force of law is by virtue of s.307A where it states, ‘the individual
auditor or audit company must conduct the audit or review in accordance with the
auditing standards’.

© John Wiley and Sons Australia, Ltd 2019 5.3


Chapter 5: Overview of the audit of financial reports

5.15 What are some of the benefits of an effective audit committee?

An audit committee of non-executive directors should act as an intermediary between


management and the external auditor. The audit committee usually has oversight
responsibilities of the financial reporting and auditing process. The auditor, therefore,
need be less concerned about being replaced in the event of a disagreement with
management.
Other benefits include:
 improving the credibility and objectivity of the accountability process
(including financial reporting);
 assisting the board of directors to discharge its responsibility to exercise due
care, diligence and skill;
 improving the effectiveness of the internal and external audit functions and the
communication between the board of directors and the external and internal
auditors;
 facilitating the maintenance of the independence of the external auditor;
 strengthening the role and influence of non-executive directors.

5.16 How does the relationship that independent auditors have with
shareholders compare with their relationship with management?

Shareholders of the company are the primary beneficiaries of the audit function.
Shareholders rely on the audited financial statement for assurance that management
has properly discharged its stewardship responsibility. The auditor, therefore, has
an important responsibility to shareholders of the company. During the course of an
audit engagement, the auditor is not likely to have direct personal contact with
shareholders who are often not officers, key employees, or directors of the entity. On
the other hand, the auditor’s appointment, removal or resignation are ultimately
determined by (or influenced by) the shareholders. In theory, the directors’ powers to
appoint the auditor are limited. In practice, the members of the company generally
accept the recommendations of the directors.

During the course of an audit, there is extensive interaction between the auditor and
management. To obtain the evidence needed, the auditor often requires confidential
data about the entity. It is imperative, therefore, to have a relationship based on
mutual trust and respect. An adversarial relationship would obviously be counter-
productive. The typical approach the auditor should take towards management’s
assertions may be characterised by one of professional scepticism. This means the
auditor should neither disbelieve management’s assertions nor thoughtlessly accept
them without concern for their truthfulness. Rather, the auditor should recognise the
need to evaluate objectively the conditions observed and evidence obtained during the
audit.

In summary, the relationship with management is much more direct than the
relationship with shareholders. The auditor must be careful to remember the true
beneficiaries of the audit as he or she is reminded in the title of the audit report:
‘Independent Auditor’s Report to the Members of XYZ Ltd’

© John Wiley and Sons Australia, Ltd 2019 5.4


Solutions manual to accompany Audit and assurance 1e by Leung et al.

5.17 What are the benefits of a financial report audit?

Financial report audits enable companies to:


1. Obtain access to capital markets. Without an audit, companies may be denied
access to capital markets by the ASX.
2. Have a lower cost of capital. Given the reduced risk resulting from audited
financial reports, potential creditors may offer low interest rates and potential
investors may be willing to accept a lower rate of return on their investment.
3. Be a deterrent to inefficiency and fraud. Knowledge that an independent audit
is to be performed is likely to result in fewer errors in the accounting process
and reduce the likelihood of employee misappropriation of assets.
4. Control and operational improvements. Based on observations made during
the financial report audit, the independent auditor can suggest how controls
could be improved and how greater operating efficiencies within the entity’s
organisation may be achieved.

5.18 What are the main limitations of a financial report audit?

The main limitations are as follows.


1. Time lapse – by the time the audit report is released the information is
relatively ‘old’.
2. Audit testing on selective samples, which has limitations due to sampling risk.
3. The assessment of materiality, with both quantitative and qualitative
considerations, requires a high degree of professional judgement. There are,
however, some guidelines, although by their nature are necessarily arbitrary.
4. Forming professional judgements in highly specialised areas can often result
in disagreements between auditors and clients.
5. Report format limitations and the consequent “expectation gap” often arises
with users of financial reports.

5.19 What are the duties of an independent auditor engaged to perform


a financial report audit?

When an auditor accepts an appointment, he or she enters into a contractual


relationship with the company. The audit engagement letter, agreed to and signed by
the auditor and the client, details some of the duties of an auditor for a company
(ASA 210 Agreeing the Terms of Audit Engagements).

There are express or implied terms in such contracts that the auditor will:
1. exercise a reasonable degree of care and skill.
2. be independent of the company.
3. report to members his or her opinion, based on the audit, as to whether the
financial reports are properly drawn up so as to give a true and fair view of the
company’s financial position, in accordance with the Corporations Act and
applicable accounting standards.
4. report to ASIC if there are reasonable grounds of a contravention of the
Corporations Act.

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Chapter 5: Overview of the audit of financial reports

5.20 What are the different phases in the audit process?

Phase I: Perform risk assessment procedures


Phase II: Assess the risk of material misstatement
Phase III: Respond to assessed risks
Phase IV: Perform further audit procedures
Phase V: Evaluate audit evidence
Phase VI: Communicate audit findings

© John Wiley and Sons Australia, Ltd 2019 5.6


Solutions manual to accompany Audit and assurance 1e by Leung et al.

Professional application questions

 BASIC |  MODERATE |  CHALLENGING

5.21 Appointment of auditors 


Revglow Ltd, a large proprietary company, was incorporated on 1 July 2019. A
short time later, one of the non-shareholding directors, Fred Bile, approached
his tax agent, Gina Rogers, to ask her to be Revglow’s auditor. Ms Rogers is a
chartered accountant, but had not performed any audits and was hesitant about
accepting the engagement. Mr Bile said the appointment would be only
temporary until proper documentation could be prepared and the audit work
put out to tender. Ms Rogers said she would accept this arrangement and Mr
Bile prepared a letter confirming the appointment on 21 July 2019.
At its first meeting on 1 September 2019, the board decided to confirm Ms
Rogers as the auditor of Revglow for a period of 3 years. They were impressed
with the recommendation given by Mr Bile and decided that requesting tenders
would be a time-consuming and inefficient process.

Required
Discuss whether the requirements of the Corporations Act have
been followed in the above scenario.

(1) Appointment of Gina Rogers as the auditor by Fred Bile.


s.327(1) Directors of public and large proprietary companies are required to appoint
an auditor within one month of incorporation. This requirement has been followed.

(2) Gina Rogers’ competency to complete the audit.


Does not appear to satisfy the criteria to be a registered auditor under s.1279.
s.324(1) prohibits an auditing firm from acting as an auditor of a company unless at
least one member of the firm is registered as a company auditor.

(3) A letter confirming the engagement was prepared on 21 July 2015.


Complies with the requirement under s.327(7) to confirm the consent in writing.

(4) Engagement confirmed on 1 September 2015 by the board.


s.327(3) – The confirmation of the auditor should be by the first meeting of the
members of the entity, not the first meeting of the directors.

(5) No request for tenders


Although it is common practice to request tenders there is no obligation to do so.

Conclusion
The Corporations Act has been breached under s.324(1) because Gina Rogers appears
not to be a registered auditor. It has also been breached under s.327(3) because the
appointment was not confirmed by the first annual general meeting of members.

© John Wiley and Sons Australia, Ltd 2019 5.7


Chapter 5: Overview of the audit of financial reports

5.22 Management and Auditor responsibilities 


You are a newly qualified accountant who works for the audit firm Fulford & Co.
You have been approached by a potential new client, Bishopthorpe Electronics Pty
Ltd, who is looking for an audit firm to carry out an audit on its annual financial
report prepared in accordance with the Corporations Act. The managing director,
Bob Fleming, is not sure exactly what an audit involves and what are the
responsibilities of the auditor.

Required
Prepare notes for a meeting with Bob Fleming which identifies the
responsibilities of the auditor and the responsibilities of management.

Your notes should cover the following points:


 Distribution of the annual report to shareholders.
 Delivery of the audit report to the entity.
 Obtaining and evaluating evidence concerning the financial report.
 Preparation and presentation of the financial report.
 Maintaining adequate internal controls.
 Testing internal control procedures.
 Expressing an opinion on the financial report.
 Selecting appropriate accounting policies.
 Ensuring the financial report is presented in accordance with standards.

Responsibilities of the auditor


 Understand internal control and test internal control procedures.
 Obtain and evaluate evidence concerning the financial reports.
 Verify that financial information has been presented fairly in accordance with an
identified financial reporting framework.
 Express an opinion on the financial report.
 Deliver the auditor’s report to the entity.

Responsibilities of management
 Analyse events and transactions.
 Measure and record transaction data.
 Select appropriate accounting policies.
 Classify and summarise recorded data.
 Maintain adequate internal controls.
 Prepare the financial reports and other reports in accordance with the identified
financial reporting framework.
 Distribute the annual report, including financial reports and the auditor’s report,
to shareholders.

© John Wiley and Sons Australia, Ltd 2019 5.8


Solutions manual to accompany Audit and assurance 1e by Leung et al.

5.23 Removal of an auditor 


On 31 March 2020, Black and Black (a firm of certified practising accountants)
completed the audit of E-Wine Pty Ltd for the year ended 31 December 2019. E-
Wine is a wine store that operates solely on the internet. On 15 May 2020, Tom
Black (the audit partner responsible for E-Wine) received a phone call from the
financial controller of E-Wine, Ms Chong, who was very angry. Ms Chong said
that their accounts receivable clerk suddenly resigned a month ago. This sudden
departure raised suspicions and, after an investigation of the accounting records, it
was discovered that $200 000 was missing. Subsequently, the board met and
decided Black and Black was almost entirely to blame. As a result, Ms Chong said
the board had decided to dismiss Black and Black as auditors, effective
immediately. Black and Black would receive written confirmation in the next week
and legal action would probably follow.

Required
(a) Explain whether E-Wine has taken the proper action to remove
their auditor.

No. The proper process to remove an auditor is as follows:


· Special notice under s.329(1A) must be given at least two months before a general
meeting
· A copy of the special notice needs to be sent to the auditor and a copy must also be
lodged with ASIC. (s.329(2))
· The auditor has a right to respond and a right to be heard at the meeting. (s.329(3))
· The company may appoint another auditor at the general meeting with at least a
three-quarter majority. (s.327(10)(a))

In this case, the main problem is that the company has not properly followed the due
process. The auditor should be given the opportunity to justify why the $200 000 fraud
was missed during the audit at the general meeting and the ASIC should be made aware
of what is going on.

(b) Explain why restrictions are placed on removing auditors.

Restrictions are placed on the removal of auditors so auditors can feel free to act
independently without potential recrimination from the company through dismissal.
This is because independence is a fundamental attribute of the audit function.

© John Wiley and Sons Australia, Ltd 2019 5.9


Chapter 5: Overview of the audit of financial reports

5.24 Statutory and professional duties 


You are an audit senior working in a Big Four accountancy practice in
Australia. It is April and not long until the ‘busy’ season, which generally starts
from about May. A number of audit managers and seniors will come from the
United Kingdom on secondment for the Australian busy season.
Your audit partner notes that you do not have much work at the moment and he
suggests that you prepare a memo for the new UK arrivals to help their
acclimatisation into the Australian audit environment. He wants the following
outlined in the memo:
• statutory duties to report, as outlined in the Corporations Act
• a discussion of the purpose of Australian auditing standards.

Required
Prepare the memo as requested by the audit partner.

Memo

Date: 20 April
To: UK Audit managers and seniors on secondment
From: Audit senior
Re: Australian reporting requirements and auditing standards

1) Corporations Act reporting requirements

There are a number of duties for auditors to report in the Australian regulatory
environment. The main duties are outlined below:

The audit opinion


The auditor must express an opinion on whether the financial report is in accordance
with the Corporations Act and whether it complies with accounting standards (s.296)
and gives a true and fair view (s.297).
The opinions expressed in an auditor’s report must be in accordance with ASA 700
(ISA 700). The audit opinion can be either ‘unqualified’ or ‘other than unqualified’.
An ‘unqualified’ opinion may however be modified by an ‘emphasis of matter’,
namely there are matters that are brought to the attention of members of the entity but
which nevertheless do not affect the auditor’s opinion.
An ‘other than unqualified’ opinion, which is also a modified opinion, should be
expressed as:
• a qualified opinion;
• a disclaimer of opinion; or
• an adverse opinion.

Duty to report
An auditor is under a statutory duty to report to members on the company’s financial
statements for an accounting period and on the accounting records relating to those
financial statements (s.308). A copy of the auditor’s report must be laid before the
AGM of a public company and must be furnished to the directors in sufficient time to
reach members by the earlier of 21 days before the AGM after the end of the financial
year or 4 months after the end of the financial year (s.315).

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Solutions manual to accompany Audit and assurance 1e by Leung et al.

Section 308 sets out the matters, which must be contained in an auditor’s report. The
report must state whether or not, in the auditor’s opinion, the financial statements are
properly drawn up:
• so as to give a true and fair view of the financial affairs of the company; in
accordance with Corporations Law;
• in accordance with applicable Accounting Standards and the Corporations
Regulations.
Section 308(3) also requires the report to describe any defect or irregularity in the
financial reports.

Duty to report to the ASIC


The auditor conducting a financial report audit must notify the ASIC as soon as
possible if there are reasonable grounds to suspect that a contravention of the
Corporations Act has taken place. This is required unless the auditor believes the
contravention will be adequately dealt with by commenting on it in the auditor’s
report or bringing it to the attention of the directors (s.311).

2) Purpose of Auditing Standards

The Australian Auditing Standards (ASAs) contain:


• the basic principles and essential procedures with which the auditor is required to
comply in the planning, conduct and reporting of an audit;
• explanatory and other material to assist the auditor in interpreting and applying
the basic principles and essential procedures.
The basic principles and essential procedures are identified separately in bold type
(black lettering) in each of the Auditing Standards.
The statements in the standards that are set in bold type must be complied with
whenever a financial report audit is conducted. (They have the authority of the law.)
They must also be applied (with adaptation as necessary) to audits of other financial
and non-financial information and audit-related services. A departure from the basic
principles and procedures must be explained in the auditor’s report (APS 1.1.05).
Auditing Guidance Statements (AGSs) have been issued to provide guidance in the
application of Auditing Standards. These are not mandatory.

I hope the above is of assistance.

Regards
Audit Senior

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Chapter 5: Overview of the audit of financial reports

5.25 Harmonisation of auditing standards 


Australia made a decision to harmonise its auditing standards with the ISAs
issued by the IAASB. Since 2006, the AUASB has been issuing ASAs based on
the ISAs. In relation to the Clarity project where the Clarity format ISAs were
used as the underlying auditing standards for the ASAs, the underlying
standards could only be amended from the equivalent ISA due to one of three
reasons:
1. where the ASA must address Australian legal and/or regulatory
requirements
2. where the ASA must comply with Australian legislative instrument
requirements
3. where the ASA needs to address ‘additional public interest’ matters.

Required
Given how closely Australian auditing standards are to ISAs, discuss
the pros and cons of setting separate Australian auditing standards.
Pros
- Independence in setting of auditing standards.
- Can deal with Australian legal and/or regulatory requirements.
- In particular, auditing standards are legally mandated in Australia, which is different
to many other countries.
- ASAs can address specific issues of importance in the Australian environment.

Cons
- ISAs are so close to ASAs, why not just make them one set of standards?
- The costs of setting standards in the Australian environment.
- Impedes international comparability of audit reports?

© John Wiley and Sons Australia, Ltd 2019 5.12


Solutions manual to accompany Audit and assurance 1e by Leung et al.

5.26 Audit committees 


You work for a mid-sized audit firm, Green & Co. One of your clients, Wedford
Ltd, recently established an audit committee in compliance with the Australian
Securities Exchange listing requirements. The committee is made up of Francis
Carton, Jo Pashtoon and Charles Digson.
Francis is an executive of the company and has worked his way up from a
factory worker through to management. Francis is the chairperson of the audit
committee.
Jo is not a member of management and is therefore a non-executive director, but
she does serve on a number of other boards. Jo’s background is in accounting
and before she became a director she was the CFO of a large corporation for
many years.
Charles is the chairperson of the board of directors and is an executive of the
company. Charles’ background is in manufacturing and he has been with
Wedford Ltd for 5 years.
The committee has drafted a charter which details its rights and responsibilities.
This will include the committee’s interactions with the newly formed internal
audit department. The Board would like to discuss with you the relationship
between your firm as external auditors, the internal audit team and the audit
committee.

Required
Prepare a report for the Board, covering the following matters:
1. Outline the objectives of an audit committee.

· improving the credibility and objectivity of the accountability process (including


financial reporting);
· assisting the board of directors to discharge its responsibility to exercise due care,
diligence and skill;
· improving the effectiveness of the internal and external audit functions and the
communication between the board of directors and the external and internal
auditors;
· facilitating the maintenance of the independence of the external auditor;
· strengthening the role and influence of non-executive directors.

2. Discuss the interaction between the audit committee and both


the internal and external audit functions.

The main role is an alternative to management as point of communication for the


internal and external auditors. This allows for a greater degree of independence in
reporting and helps ensure a stronger level of corporate governance for the company.

3. Identify the strengths and weaknesses of Wedford Ltd’s audit committee.

Strengths:
· Chairperson of the audit committee is not the same as chairperson of the board
· One member (Jo) with financial expertise
· Formal charter specifying the rights and responsibilities (but still only a draft)

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Chapter 5: Overview of the audit of financial reports

Weaknesses:
· Only one non-executive member (should be a majority)

4. Recommend terms of reference for the committee.

It might include:
· Review monthly financial reports.
· Review reports from internal auditors.
· Liaise with internal auditors and assist in directing the internal audit work
program.
· Liaise with external auditors at the planning, performance and completion of the
external audit.
· Review the external auditor’s management letter before it goes to management.
· Be involved in any discussions between auditors and management on contentious
accounting issues or treatments in the financial reports.
· Be available for the communication of problems experienced by internal and
external auditors.

© John Wiley and Sons Australia, Ltd 2019 5.14


Solutions manual to accompany Audit and assurance 1e by Leung et al.

5.27 Auditor rotation 


Audit independence has been important issue, particularly over the past ten
years. A number of the requirements associated with auditor appointment and
removal are to enhance the independence of the audit process. An auditing
academic was heard to make the following statement:

True audit independence can never be achieved! Auditors operate in a commercial


environment and need to work to win the audit of a client. The ongoing fees that
they receive are then obviously conditional on management’s approval. If
management is unhappy with the auditor, they will find a way to get rid of them —
it is as simple as that. Perhaps a solution could be to give the role of appointing
auditors to ASIC? They could allocate auditors to the top 300 listed companies and
give them a fixed term audit for five years. Then they would reallocate auditors to
those companies. Auditors would not have to compromise their independence to
win the client or keep the client. It is a brilliant idea — even if I do say so myself!

Required
Discuss the academic’s proposal.

The fact that auditor’s fees are from the client does make it difficult to achieve
independence. There are some factors that help:
 Although the client pays the auditor. The decision making in relation to payment
of fees and appointment and removal of the auditor rests with the board of
directors or audit committee and not the executive management of the company.
 The audit firm has a strong incentive to behave in an independent manner. The
most valuable asset for an audit firm is its reputation/brand. Ensuring that this is
not damaged provides a strong incentive for independence.

The comment that management will find a way to get rid of the auditor may have
some truth. Hopefully the corporate governance of the firm will provide protection in
relation to this possibility. It should also be noted that there are a number of
requirements under the Corporations Act to protect auditors from inappropriate
removal.
· Special notice under s.329(1A) must be given at least two months before a general
meeting
· A copy of the special notice needs to be sent to the auditor and a copy must also
be lodged with ASIC. (s.329(2))
· The auditor has a right to respond and a right to be heard at the meeting. (s.329(3))
· The company may appoint another auditor at the general meeting with at least a
three-quarter majority. (s.327(10)(a))

Appointing auditors performed by ASIC?


This is a substantial intervention in the audit market. Some advantages and
disadvantages:

Advantages:
 Independence would be enhanced because the fixed term would mean that
independence would not be compromised to win or keep the client.
 There would be very little risk of a ‘familiarity threat’ to audit independence.
 It would provide the opportunity for a ‘fresh set of eyes’ over the audit process

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Chapter 5: Overview of the audit of financial reports

every few years.


 Audit firms could develop skill sets over a range of different industries.
 Might provide the opportunity for some ‘second tier’ audit firms to audit larger
clients?

Disadvantages:
 What would happen to quality in the last few years of an auditor’s tenure?
 There would be considerable expense in educating the new auditor every five
years – to the client and the auditor.
 Possible allocation of audit firms with a lack of appropriate industry skills.
 Difficult to do rotation because there are only four major audit firms.

Case study

© John Wiley and Sons Australia, Ltd 2019 5.16


Solutions manual to accompany Audit and assurance 1e by Leung et al.

5.28 Corporate governance and the audit role 


Outlined below is an extract from the Qantas Corporate Governance Statement
issued in 2017:i

The Board safeguards the integrity of financial reporting


Audit Committee
The Board has an Audit Committee that:
• has three Members who are Independent Non-Executive Directors;
• is chaired by Barbara Ward, an Independent Non-Executive Director;
• has a written Charter which is available on the Corporate Governance page of the Qantas website at
http://www.qantas.com.au/infodetail/about/corporateGovernance/AuditCommitteeCharter.pdf;
• includes Members who are all financially literate;
• is responsible for assisting the Board in fulfilling its corporate governance responsibilities with
regard to financial reporting, audit and risk management, including:
– the integrity of the Qantas Group’s financial reporting;
– compliance with legal and regulatory obligations;
– the effectiveness of the Qantas Group’s enterprise-wide risk management and internal control
framework; and
– oversight of the independence of the external and internal auditors.
In particular, the Audit Committee undertakes the functions of an audit committee and elements of
a risk committee (other than those undertaken by the Safety, Health, Environment and Security
Committee) as set out in the ASX Principles.
The experience and qualifications of Members of the Audit Committee are contained in the Qantas
Annual Report 2017. Membership of and attendance at 2016/2017 Audit Committee Meetings are
also detailed in the Qantas Annual Report 2017.
The Board and Audit Committee closely monitor the independence of the external auditor.
Regular reviews occur of the independence safeguards put in place by the external auditor. As
required by section 300(11D)(a) of the Corporations Act and the Audit Committee Charter, the
Audit Committee has advised the Board that it is appropriate for the following statement to be
included in the 2017 Directors’ Report under the heading ‘Non-Audit Services’:
‘The Directors are satisfied that:
1. the non-audit services provided during the 2016/2017 financial year by KPMG as the external
auditor were compatible with the general standard of independence for auditors imposed by the
Corporations Act 2001; and
2. Any non-audit services provided during the 2016/2017 financial year by KPMG as the external
auditor did not compromise the auditor independence requirements of the Corporations Act 2001
for the following reasons:
i. KPMG services have not involved partners or staff acting in a managerial or decision-making
capacity within the Qantas Group or being involved in the processing or originating of
transactions;
ii. KPMG non-audit services have only been provided where Qantas is satisfied that the related
function or process will not have a material bearing on the audit procedures;
iii. KPMG partners and staff involved in the provision of non-audit services have not participated
in associated approval or authorisation processes;
iv. a description of all non-audit services undertaken by KPMG and the related fees have been
reported to the Board to ensure complete transparency in relation to the services
v. the declaration required by section 307C of the Corporations Act 2001 confirming
independence has been received from KPMG.’
Qantas rotates the lead external audit partner every five years and imposes restrictions on the
employment of personnel previously employed by the external auditor.
Policies are in place to restrict the type of non-audit services which can be provided by the
external auditor and a detailed review of non-audit fees paid to the external auditor is undertaken on
a quarterly basis.
At each meeting, the Audit Committee meets privately with Executive Management without the
external auditor, and with the internal and external auditors without Executive Management. The
external auditor attends each AGM.

© John Wiley and Sons Australia, Ltd 2019 5.17


Chapter 5: Overview of the audit of financial reports

Internal Audit
The internal audit function is carried out by Group Audit and Risk and is independent of the
external auditor. Group Audit and Risk provides independent, objective assurance and consulting
services on Qantas’ system of risk management, internal control and governance through:
 maintaining and improving the risk management framework as approved by the Audit
Committee;
 bi-annual risk reporting to the Audit Committee; and
 performing audits and other advisory services to assure risk management throughout the
Qantas Group.
Group Audit and Risk adopts a risk-based approach in formulating its audit plan, to align audit
activities to the key risks across the Qantas Group. The audit plan is approved by the Audit
Committee bi-annually and submitted to the Safety, Health, Environment and Security Committee
for information and approval where appropriate.
The Audit Committee approves the Group Audit and Risk Internal Audit Charter which provides
Group Audit and Risk with full access to Qantas Group functions, records, property and personnel,
and establishes independence requirements. The Audit Committee also approves the appointment or
replacement of the internal auditor. The internal auditor has a direct reporting line to the Audit
Committee and also provides reporting to the Safety, Health, Environment and Security Committee.
In addition to Group Audit and Risk, operationally focussed business units within the Qantas
Group have their own internal audit functions to provide assurance to accountable managers on the
effectiveness of operational risk management and compliance. The findings from these audit
activities, along with the status of audit management actions, are reported through operational
safety governance structures and to the Safety, Health, Environment and Security Committee.

Required
Outline seven key strengths of this policy and explain why each one
will help the independent auditor do his or her work.

(1) Audit committee is comprised of independent non-executive directors.

This will be the primary point of contact for the auditor with the firm. It is important
that this group not involve anyone who is part of the executive management team to
ensure that the auditor can speak freely about his or her concerns.

(2) All members of the audit committee will be financially literate.


This is not a requirement but it will make dealing with the audit committee much
easier for the auditor. This is because many of the issues raised by auditors will be of
a financial nature, which means it will be much easier to discuss/resolve if they are
dealing with someone with financial expertise.

(3) The responsibilities of the audit committee.

The responsibilities of the audit committee include: integrity of financial reporting;


risk management and internal control framework; and oversight of independence of
external and internal auditors. These are all important aspects of financial reporting
that if done properly will enable the auditor to reduce some of the risk assessments
when evaluating the client.

(4) Qantas rotates the lead audit partner every five years and imposes restrictions on
the ex-employees of the external auditor.

This is a requirement of the Corporations Act. However, it has the effect of enhancing
the independence of the external auditor.

© John Wiley and Sons Australia, Ltd 2019 5.18


Solutions manual to accompany Audit and assurance 1e by Leung et al.

(5) The audit committee meets privately with the internal and external auditors
without executive management.

This will facilitate more open communication by the external auditor. Much of what
the external auditor raises that will be of ‘concern’ will relate to decisions of the
executive management. Allowing the external auditor to discuss these issues without
management will facilitate enhanced and open communication.

(6) The audit committee reviews and approves the internal auditor’s plans on a bi-
annual basis.

Oversight by the audit committee on the work of the internal auditors will give the
external auditor more confidence in the internal audit function. It may increase the
likelihood that the external auditor will rely on the internal auditor’s work.

(7) The audit committee has a formal charter.

The terms of reference should be clearly defined in the charter so that the committee’s
role does not overlap with that of management’s. The charter should ensure that the
committee has adequate resources and authority to enable it to meet its objectives. As
such, an effective audit committee will provide a mechanism for the external auditor
to communicate with management about key audit issues.

© John Wiley and Sons Australia, Ltd 2019 5.19


Chapter 5: Overview of the audit of financial reports

Research question

5.29 Focus on audit quality

The International Auditing and Assurance Standards Board (IAASB) released a


publication, A Framework for Audit Quality: Key Elements that create an
Environment for Audit Quality in 2014. The aim of this publication was to raise
awareness of the key elements of audit quality, facilitate greater dialogue
between key stakeholders, and encourage key stakeholders to challenge
themselves to do more to increase audit quality in their environments.

Required
(a) Briefly outline the stakeholders who are encouraged to use the
framework.

Stakeholders include: national audit firms, international networks of audit firms,


professional accountancy organisations, management, those charged with governance,
Audit Committees, standard setting bodies (IAASB, IESBA and IAESB), Audit
Regulators, financial statement users (such as institutional investors/shareholders)
finance providers, academic researchers and auditing students.

(b) Describe the five elements of the Framework for Audit Quality.

Briefly, the five elements include:


1. inputs – the values, ethics and attitudes of auditors and the knowledge, skills,
and experience of auditors and the time allocated for them to perform the
audit.
2. process – the rigor of the audit process and quality control procedures impact
audit quality.
3. outputs – reports and information that are formerly prepared and presented by
one party for another and outputs arising from the audit process.
4. key interactions with Financial Reporting Supply Chain – formal and informal
communications.
5. contextual factors – environmental factors such as laws and regulations and
corporate governance which have the potential to impact on the nature and
quality of financial reporting.

© John Wiley and Sons Australia, Ltd 2019 5.20


i . Qantas, ‘Corporate Governance Statement’, 2017, pp. 9, 12, http://www.qantas.com.au, viewed 25 September 2017.