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Chartered Accountants Audit Conference Problem Audit Reports

Chartered Accountants Audit Conference Problem Audit Reports. Andrew Stringer Head of Audit The Institute of Chartered Accountants in Australia Heather Watson Director, Financial Audit Services The Audit Office of NSW. charteredaccountants.com.au. Problem Audit Reports.

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Chartered Accountants Audit Conference Problem Audit Reports

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  1. Chartered Accountants Audit Conference Problem Audit Reports Andrew Stringer Head of Audit The Institute of Chartered Accountants in Australia Heather Watson Director, Financial Audit Services The Audit Office of NSW charteredaccountants.com.au

  2. Problem Audit Reports • The “old” – AUS 702 and AUS 802 • The “new” – ASA 700, ASA 701 and ASA 800 • Problem audit reports – • Uncertainty in general • Going concern issues • Scope limitations • Emphasis of matter requirements • Events occurring after balance date affecting audit report • “Except for” opinions • Denials of opinion • Adverse opinions • Corporations Act breach reporting

  3. Audit reports – the “old” • AUS 702 – The audit report on a general purpose financial report • AUS 802 – The audit report on financial information other than a general purpose financial report Other • Guidance Note issued July 2003 by the AuASB - issued in Australia knowing that changes being proposed at international level – clearer and more informative – optional – improved structure & wording • Auditing Guidance Statement – AGS 1028 – “Uncertainty” – now withdrawn

  4. Audit reports – the “old” AUS 702 and AUS 802 – format of the audit report • Title, addressee, signature, address & date • Scope section (AUS 802 included ref to reason for preparation of the special purpose financial report) • Audit opinion

  5. Audit reports – the “new” • THE AUDIT REPORT • Old AUS 702 now split into two standards • ASA 700 – The auditor’s report on a general purpose financial report • ASA 701 – Modifications to the auditor’s report • Split into: • Emphasis of matter • Other than unqualified • Qualified opinions (old – “except for”) • Disclaimers of opinion (old – “inability to form opinion”) • Adverse opinions • Effective for financial reporting periods commencing on or after 1 July 2006

  6. Audit reports – the “new” • THE AUDIT REPORT • Old AUS 802 “The Audit Report on Financial Information other than a General Purpose Financial Report” • Replaced by ASA 800 “The Auditor’s Report on Special Purpose audit Engagements” • Effective for financial reporting periods commencing on or after 1 July 2006

  7. Audit reports – the “new” Terminology used & applicable standard

  8. Audit reports – the “new” MANDATORY REQUIREMENTS - THE AUDIT REPORT NEEDS Title and Addressee Identify entity, what has been audited, and period covered Responsibility of Those Charged with Governance for Financial Report (Directors’ responsibility for the financial report) Auditor’s responsibility (what we used to call the ‘scope’ paragraph) Statement of independence (required for Corporations Act audits – recommended for all others) Audit opinion

  9. Audit reports – the “new” (ASA 700) 6 The auditor’s report shall contain a clear expression of the auditor’s opinion on the financial report • Unless required by law or regulation to use different wording, the auditor’s opinion on a general purpose financial report prepared in accordance with a financial reporting framework that is designed to achieve fair presentation shall state whether the financial report “gives a true and fair view” or “presents fairly, in all material respects,” in accordance with the applicable financial reporting framework. • The auditor shall evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial report.

  10. Audit reports – the “new” (ASA 700) • TITLE 23 The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor ADDRESSEE 25 The auditor’s report shall be addressed as required by the circumstances of the engagement

  11. Audit reports – the “new” (ASA 700) INTRODUCTORY PARAGRAPH 27 The introductory paragraph in the auditor’s report shall identify the entity whose financial report has been audited and shall state that the financial report has been audited. The introductory paragraph shall also: (a) identify the title of each of the financial statements that comprise the financial report; (b) refer to the summary of significant accounting policies, other explanatory notes and, when appropriate, the directors’ declaration; and (c) specify the date and period covered by the financial report

  12. Audit reports – the “new” (ASA 700) THE RESPONSIBILITY OF THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL REPORT 33 The auditor’s report shall state that those charged with governance are responsible for the preparation and the fair presentation of the financial report in accordance with the applicable financial reporting framework and that this responsibility includes: (a) establishing (previously “designing, implementing”) and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; (b) selecting and applying appropriate accounting policies; and (c) making accounting estimates that are reasonable in the circumstances

  13. Audit reports – the “new” (ASA 700) AUDITOR’S RESPONSIBILITY 37 The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial report based on the audit 39 The auditor’s report shall state that the audit was conducted in accordance with Australian Auditing Standards. The auditor’s report shall also explain that those standards require that the auditor complies with relevant ethical requirements relating to audit engagements and that the auditor plans and performs the audit to obtain reasonable assurance whether the financial report is free from material misstatement

  14. Audit reports – the “new” (ASA 700) AUDITOR’S RESPONSIBILITY 42 The auditor’s report shall describe an audit by stating that: (a) an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report;

  15. Audit reports – the “new” (ASA 700) AUDITOR’S RESPONSIBILITY (cont’d) 42 The auditor’s report shall describe an audit by stating that: (b) the procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor shall consider internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial report, the auditor shall omit the phrase that the auditor’s consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; and

  16. Audit reports – the “new” (ASA 700) AUDITOR’S RESPONSIBILITY (cont’d) 42 The auditor’s report shall describe an audit by stating that: (c) an audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of accounting estimates made by those charged with governance, as well as the overall presentation of the financial report

  17. Audit reports – the “new” (ASA 700) AUDITOR’S RESPONSIBILITY 43 The auditor’s report shall state that the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

  18. Audit reports – the “new” (ASA 700) AUDITOR’S OPINION 44 An unqualified opinion shall be expressed when the auditor concludes that the financial report gives a true and fair view or presents fairly, in all material respects, in accordance with the applicable financial reporting framework.

  19. Audit reports – the “new” (ASA 700) AUDITOR’S OPINION 45 When expressing an unqualified opinion, the auditor shall include a section headed “Auditor’s Opinion”. The opinion paragraph of the auditor’s report shall state the auditor’s opinion that the financial report gives a true and fair view or presents fairly, in all material respects, in accordance with the applicable financial reporting framework (unless the auditor is required by law or regulation to use different wording for the opinion, in which case the prescribed wording shall be used).

  20. Audit reports – the “new” (ASA 700) AUDITOR’S OPINION 46 When Australian Accounting Standards are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion shall identify the jurisdiction or country of origin of the financial reporting framework.

  21. Audit reports – the “new” (ASA 700) CHANGE EFFECTIVE FOR 30 JUNE 2007 YEAR ENDS ONWARDS 49A When an entity, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, has included in the notes to the financial statements, an explicit and unreserved statement of compliance with International Financial Reporting Standards (IFRSs), and the auditor agrees with the entity’s statement of compliance, the auditor shall state that in the auditor’s opinion, the financial report complies with IFRSs.

  22. Audit reports – the “new” (ASA 700) OTHER REPORTING RESPONSIBILITIES 51 When the auditor addresses other reporting responsibilities within the auditor’s report on the financial report, these other reporting responsibilities shall be included in a separate section in the auditor’s report that follows the opinion paragraph.

  23. Audit reports – the “new” (ASA 700) AUDITOR’S SIGNATURE 53 The auditor’s report shall be signed in one or more of the name of the audit firm, the name of the audit company or the personal name of the auditor, as appropriate.

  24. Audit reports – the “new” (ASA 700) DATE OF THE AUDITOR’S REPORT 54 The auditor’s report shall be dated as of the date the auditor signs that report. The auditor shall date the auditor’s report on the financial report no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial report. Sufficient appropriate audit evidence shall include evidence that the entity’s financial report has been prepared and that those charged with governance have asserted that they have taken responsibility for it.

  25. Audit reports – the “new” (ASA 700) AUDITOR’S ADDRESS 58 The report shall name the location in the country or jurisdiction where the auditor practices. OTHER 59 The auditor’s report shall be in writing.

  26. Audit reports – the “new” (ASA 700) AUDITOR’S REPORT FOR AUDITS CONDUCTED IN ACCORDANCE WITH BOTH AUSTRALIAN AUDITING STANDARDS AND INTERNATIONAL STANDARDS ON AUDITING 62 The auditor may conduct the audit in accordance with both the Australian Auditing Standards and the International Standards on Auditing (“ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”). The conformity section explains the relationship of this Auditing Standard with its equivalent ISA issued by the IAASB. 63 The auditor’s report shall refer to the audit having been conducted in accordance with the Australian Auditing Standards and ISAs only when the auditor has complied fully with all of the Auditing Standards and ISAs relevant to the audit.

  27. Audit reports – the “new” (ASA 700) UNAUDITED SUPPLEMENTARY INFORMATION PRESENTED WITH AN AUDITED FINANCIAL REPORT 64 The auditor shall be satisfied that any supplementary information presented together with the financial report that is not covered by the auditor’s opinion is clearly differentiated from the audited financial report. 67 If the auditor concludes that the entity’s presentation of any unaudited supplementary information does not differentiate it sufficiently from the audited financial report, the auditor shall explain in the auditor’s report that that information has not been audited.

  28. Audit reports – the “new” (ASA 700) WORDING FOR 30 JUNE 2007 YEAR ENDS ONWARDS (where there is a statement of compliance with IFRS) Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. [In note XX, the Directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards (IFRSs) ensures that the financial report, comprising the financial statements and notes, complies with IFRSs. ]

  29. Audit reports – the “new” (ASA 700) • WORDING FOR 30 JUNE 2007 YEAR ENDS ONWARDS (where there is a statement of compliance with IFRS) • Auditor’s Opinion In our opinion: (a) the financial report of [name of entity] is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the [company/registered scheme/disclosing entity]’s financial position as at 30 June 20XX and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note XX.

  30. Special Purpose Audit Engagements – (ASA 800) • ASA 800 “The Auditor’s Report on Special Purpose Audit Engagements” applies to four audit engagements: • Financial reports prepared in accordance with a comprehensive alternative basis of accounting • Components of financial reports • Compliance with contractual agreements • Summarised financial reports.

  31. Special Purpose Financial Reports – (ASA 800) • Financial reports designed to meet the needs of specific users • Financial reports prepared in accordance with an alternative comprehensive basis of accounting are often referred to as ‘special purpose financial reports’ • Financial reports prepared in accordance with all recognition and measurement requirements (but not the disclosure requirements) of accounting standards are special purpose • Auditor’s report must identify the basis of accounting applied • Auditor reports on whether financial report is prepared in accordance with the basis of accounting

  32. Special Purpose Financial Reports – (ASA 800) WORDING FOR SPECIAL PURPOSE FINANCIAL REPORT OPINIONS “We have audited the accompanying financial report, being a special purpose financial report…” “Those charged with governance …have determined that the accounting policies described in Note 1 are appropriate to meet the financial reporting requirements…” “No opinion is expressed as to whether the accounting policies used, as described in Note 1, are appropriate to meet the needs of the members.” “In our opinion, the financial report presents fairly…in accordance with the accounting policies described in Note 1…”

  33. Components of a financial report – (ASA 800) • Engagement may be undertaken in conjunction with an audit of an entity’s financial report, or as a separate engagement • Components include a single financial statement (e.g. balance sheet), an account balance or line item from a financial report (e.g. accounts receivable) • Auditor’s report must identify the basis of accounting • “In our opinion, the schedule of accounts receivable…presents fairly the accounts receivable of the entity as of [date] in accordance with the Australian Accounting Standards that are relevant to the preparation and presentation of the schedule of accounts receivable”

  34. Compliance with contractual agreements – (ASA 800) • ASA 800 only addresses contractual agreements when the overall aspects of compliance relate to accounting and financial matters (otherwise consider ASAE 3000 “Assurance Engagements other than Audits or Reviews of Historical Financial Information”) • Auditor’s opinion relates to compliance with particular provisions of the agreement • “In our opinion, the entity was, in all material respects, in compliance with the accounting and financial reporting matters of the agreement”

  35. Summarised financial report – (ASA 800) • A financial report summarising the annual audited financial report – not a concise financial report prepared in accordance with AASB 1039 “Concise Financial Reports” • Auditor cannot report on a summarised financial report unless they have also reported on the “full” financial report • Auditor reports on whether the summarised financial report is consistent with the audited financial report • “In our opinion, the information…is, in all material respects, consistent with the financial report from which it was derived”

  36. Other ASA 800 considerations • Many prescribed auditor’s reports do not comply with auditing standards • An audit engagement does not provide sufficient assurance to “certify” that information is correct 13. When requested to report in a prescribed format, the auditor shall consider the substance and wording of the prescribed report and, when necessary, shall make appropriate changes to conform to the requirements of this Auditing Standard • The basic elements of an ASA 800 auditor’s report are similar to those required by ASA 700. Refer to paragraph 9 for basic elements and appendices of ASA 800 for templates

  37. Corporations Act Requirements – Part 2M.3 These could be ASA 700 or ASA 800 engagements. • Duty to form an opinion whether financial report: • Complies with accounting standards • Gives a true and fair view • Any additional information was necessary to give a true and fair view • Whether auditor given all info, explanations and assistance necessary for conduct of audit • Whether entity kept financial records sufficient to enable financial report to be prepared and audited • Whether entity kept other records and registers as required by Act

  38. Corporations Act Requirements – Part 2M.3 • Auditor must report to members • If don’t comply with accounting standards, auditor must, to the extent practicable, quantify the effect of non-compliance. If this not practicable, report must say why • Audit report must describe any defect or irregularity in the financial report • Audit report must include any statements or disclosures required by the auditing standards • Include a statement of auditor’s opinion on whether the inclusion of any additional information the entity included to give a true and fair view, was necessary to give a true and fair view

  39. Corporations Act Requirements – Part 2M.3 Auditor’s independence declaration Auditor must give the directors of the company, registered scheme or disclosing entity: (a) a written declaration that, to the best of the auditor’s knowledge and belief, there have been: (i) no contraventions of the auditor independence requirements of the Act in relation to the audit or review; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit or review; or (b) a written declaration that, to the best of the individual auditor’s knowledge and belief, the only contraventions of: (i) the auditor independence requirements of the Act in relation to the audit or review; or (ii) any applicable code of professional conduct in relation to the audit or review, are those contraventions details of which are set out in the declaration.

  40. Corporations Act – Breach Reporting Does an audit qualification for non-compliance with accounting standards require notification to ASIC under Section 311 of the Corporations Act?A: Yes, a notification to ASIC would usually be required in these circumstances Under Section 311(1)(a) of the Corporations Act, an auditor is required to notify ASIC if the auditor has reasonable grounds to suspect a contravention of the Act and they believe that the contravention is either significant or, if not significant, cannot be adequately dealt with by inclusion in the audit report or by bringing it to the attention of the directors

  41. Corporations Act – Breach Reporting • Section 311 of the Corporations Act • Auditor has to notify ASIC in writing within 28 days of becoming aware: • Have reasonable grounds to suspect a contravention of the Act • Or an attempt to unduly influence, coerce manipulate or mislead a person involved in conduct of audit IF • The contravention is significant, OR • The contravention is not significant and the auditor believes it has not or will not be adequately dealt with by comment in the audit report or bringing to the attention of directors

  42. Corporations Act – Breach Reporting • ASIC – Regulatory Guide 34 (re-issued December 2007) • (previously Practice Note 34) clarifies auditor’s obligations • Guidance to help auditors comply with S311 (and S601HG – AFS licensees) reporting obligations • What considered to be significant contraventions • Suspected contraventions that are unlikely to be significant include: • Isolated relatively minor failure to assist auditor • Entity’s failure to lodge accounts where required (NB – however if the failure continues – auditor should notify ASIC)

  43. Audit report wording Is this wording acceptable? In our opinion, except for our inability to form an opinion on (the nature of the uncertainty), the financial report presents fairly in accordance with . . .

  44. Audit report wording Generally “No” • Cannot qualify your way out of doing audit work • You must do enough audit work to be able to form an opinion • However, it may be acceptable if uncertainty relates to a disagreement with management or scope limitation • The uncertainty could possible result in an “emphasis of matter” • where effect of matter not capable of reasonable estimation • potential for matter to affect financial report not so remote as to make its disclosure irrelevant

  45. Audit report wording THE AUDIT REPORT – WHAT’S WRONG WITH THIS? I have examined the records of ABC Pty Ltd for the year ended 30 June 2006. For most of the year the accounts were properly maintained however three times during the year clients were paid money in excess of funds held in the trust and the money was outstanding for some weeks. This is unacceptable without Principal’s funds being held in the account to cover such overpayments. The trust has only been used in relation to transactions for client funds that have been received and require disbursement on behalf of clients.

  46. Audit reports – the “new” Terminology used & applicable standard

  47. Circumstances for modification – the “old” * Extreme – where effects or possible effects are so material that auditor is unable to obtain sufficient appropriate audit evidence, or where an unqualified opinion is inadequate to disclose the misleading or incomplete nature of financial report

  48. Circumstances for modification – the “new” * Extreme – where effects or possible effects are so material that auditor is unable to obtain sufficient appropriate audit evidence, or where an unqualified opinion is inadequate to disclose the misleading or incomplete nature of financial report

  49. Circumstances for modification – the “old”

  50. Circumstances for modification – the “new”

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