Auditing FAQ

Do auditors have to comply with Accounting Standards?

Directors of the entity being audited are responsible for ensuring the financial statements comply with applicable accounting standards “AASB’s” as issued by the Australian Accounting Standards Board.

An auditor performs their audit to obtain sufficient and appropriate evidence to allow them to opine as to whether the financial statements are prepared in accordance with applicable accounting standards.

An auditor is required to perform their audit in accordance with Australian Auditing Standards “ASA’s” as issued by the Australian Auditing Standards Board “AuASB”.

What should an auditor do when they identify an error?

When an auditor identifies an error, they are required to communicate the identified error to management and those charged with governance, that is, the audit committee or Board.

In most cases, when a material error identified by the auditor is communicated to management and those charged with governance, the error is corrected before the financial report is issued.

What should an auditor do when they cannot obtain sufficient appropriate audit evidence?

Directors of an entity being audited are responsible for providing sufficient and appropriate audit evidence to the auditor to support the accounting positions adopted in the financial report being audited.

In the event that the auditor cannot obtain sufficient appropriate audit evidence as required by ASA 260 and ASA 330, the auditor is required to communicate these difficulties to the entity’s management and those charged with governance.

The communication should make it clear that if evidence is not provided in a timeframe that would allow the auditor sufficient time to review and analyse it, the auditor is required to issue a modified audit opinion in accordance with ASA 705.

What does a modified audit opinion mean?

There are three different types of modified audit opinions issued by auditors: qualified opinion, an adverse opinion, and a disclaimer of opinion.

A qualified audit opinion is issued when either the misstatement is known, but the material misstatement is not pervasive (for example, it is known that a property is carried above its fair value, but the entity does not want to write the asset down to its recoverable amount) or where sufficient audit evidence is not available, but the potential material misstatement is not pervasive.

An adverse audit opinion is issued when material misstatements are pervasive.

A disclaimer of opinion is issued when sufficient audit evidence is not available and the potential material misstatements are pervasive.

The inclusion of an emphasis of matter paragraph in the auditor’s report is not a modified audit opinion. An emphasis of matter paragraph is included in the auditor’s report when a matter is appropriately presented or disclosed in the financial report that, in the auditor’s view, is of such importance that it is fundamental to user’s understanding of the financial report.

How common are modified audit opinions?

Auditors regularly identify accounting errors. Management and Boards generally act upon the advice of the auditor to correct identified errors and provide the auditor with sufficient and appropriate audit evidence to enable the auditor to issue an unmodified audit opinion.

If an entity refuses to correct a known error identified by the auditor what should the auditor do?

If Directors fail to act on the auditor’s advice to correct identified errors and provide the auditor with sufficient, appropriate audit evidence to support the error correction, then the auditor is required to assess whether the error is pervasive and issue a modified audit opinion.

Where an audit is performed in compliance with the Corporations Act 2001 (Cth) and the Directors have failed to correct a known error, the auditor is required under s 311 of the Corporations Act 2001 (Cth) to notify the Australian Securities and Investments Commission that the Financial Report is materially misstated.

A group audit involves numerous audit firms, auditing various subsidiaries in the group. If an error occurs in a subsidiary not audited by the same firm as the head office auditor, is the head office auditor at fault?

Yes

In order to comply with the overall objective of an audit as set out in ASA 200, an auditor is required to obtain sufficient and appropriate audit evidence so as to opine on the group financial report.

The head office auditor is required to be satisfied that those performing the group audit engagement, including component auditors, collectively have the appropriate competence and capabilities to perform the group audit. ASA 600 paragraph 4 sets out that the head office auditor is responsible for the direction, supervision, and performance of the group audit engagement.

Can management representation alone be sufficient and appropriate audit evidence?

No – this is explicitly dealt with in ASA 580 which states that: Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfilment of management’s responsibilities, or about specific assertions.

Should post balance sheet events be used to test the validity of an estimate made at the year end?

Yes, where the subsequent event provides additional information about pre-existing conditions that existed at the balance sheet date. For example, if the company faced a legal claim before the balance sheet date and the legal claim is settled in the subsequent period before the financial report is signed, the estimated loss would be adjusted to reflect the actual settlement loss.

No, where the subsequent event provides new information about a condition that did not exist on the balance sheet date – for example post balance sheet date a fire destroys a company’s warehouse and the warehouse and inventory stored within the warehouse are lost. This is a post balance sheet event which should be disclosed in the financial report but would not adjust the value of the inventory and property asset included in the financial report.

What is an assertion?

The preparation of financial statements are the responsibility of the client’s directors and management. Financial statements contain the assertions about the transactions, events, and account balances.

Audit assertions provide areas of potential misstatement that may occur in financial statements. Audit assertions can be summarised as:

Existence or occurrence – assets and liabilities exist, and recorded transactions occurred.
Rights and obligations – The entity has the right to control and use its assets and has the obligation to pay its liabilities.
Completeness – all transactions that should have been recorded have been recorded in the financial statements.
Accuracy – amounts related to transactions have been recorded appropriately.
Cut-off – transactions have been recorded in the correct accounting period.
Classification – transactions are correctly classified in the financial report.
Presentation and disclosure – sufficient disclosures have been made in the financial statements.

What is materiality?

Materiality is a convention within accounting and auditing relating to the significance of an amount, transaction, or discrepancy. In considering whether an item is material AASB 108 requires entities to consider whether investors would be misled if the accounting treatment were incorrect.

Materiality is a key concept within Auditing. ASA 320 requires the auditor to consider materiality in the context of an Audit and notes that the auditor’s determination of materiality is a matter of professional judgement and is affected by the auditor’s perception of the financial information needs of users of the financial report. The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report and in forming the opinion in the auditor’s report.

What is an audit plan?

ASA 300 requires an auditor to plan an audit of a financial report. Planning an audit involves establishing the overall strategy for the engagement and developing an audit plan. The audit plan is a document or documents that includes a description of:

The nature, timing and extent of planned risk assessment procedures;
The nature, timing and extent of planned audit procedures at the assertion level;
Other planned audit procedures that are required to be carried out so that the engagement complies with Auditing Standards.

Planning is not a discrete phase of an audit, but rather a continual and iterative process that continues until completion of the engagement. As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results of audit procedures, the auditor modifies the overall strategy and audit procedures performed based on the revised consideration of assessed risks.

Must an auditor consider an entity’s ability to continue as a going concern?

Yes

Financial statements are prepared on a going concern basis unless the Directors and management determine that they intend to liquidate the entity, cease trading, or have no realistic alternative but to do so. The assessment of the entity’s ability to continue as a going concern involves making a judgement, at a particular point in time about inherently uncertain future outcomes of events or conditions.

Auditors need to ensure that the client has performed an appropriate assessment with respect to going concern. ASA 570 requires the auditor to exercise professional judgement when evaluating the client’s assessment, identifying critical assumptions and data, considering whether sufficient appropriate audit evidence has been obtained to support those key assumptions.

What must an auditor do, if there is uncertainty as to an entity’s ability to continue as a going concern, and that uncertainty is not adequately disclosed?

ASA 570 requires the auditor to express an adverse opinion if the financial report has been prepared using the going concern basis of accounting but, in the auditor’s judgement, management’s use of the going concern basis of accounting in the preparation of the financial report is inappropriate.

If in the auditor’s opinion the use of the going concern basis is appropriate but adequate disclosure of a material uncertainty is not made in the financial report, the auditor shall express a qualified opinion or adverse opinion, as appropriate. In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, the auditor states that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial report does not adequately disclose this matter.

Must an auditor consider the risk that management are biased in making accounting estimates?

ASA 540 is explicit in its requirement for the auditor to consider whether management have appropriately considered estimation risk, and if not, to request that management adjust their estimate.

The auditor is required to “stand back” and consider and evaluate evidence that both supports and contradicts management’s estimate and emphasises professional scepticism as a response to management bias.

Must an auditor consider events after an entity’s year end?

Yes

ASA 560 requires the auditor to perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the audit or the auditor’s report that require adjustment of, or disclosure in the financial statements have been identified.

What is an analytical review?

Analytical review is the evaluation of financial information through analysis of relationships among both financial and non-financial data.

Auditors perform analytical procedures in all phases of the audit. Where analytical procedures identify fluctuations or relationships that are inconsistent with other relevant information or differ from expected values by a significant amount, the auditor is required to investigate such differences and perform other audit procedures as necessary in the circumstances.

What is the difference between an audit and a review?

An audit provides a higher level of assurance than a review.

The purpose of an audit is to provide financial report users with an opinion by the auditor on whether the financial report is prepared in accordance with accounting standards and interpretations as issued by the AASB.

A review engagement is conducted to provide limited assurance that there are no material modifications that should be made to the financial report. Review engagements provide less assurance to the user of the financial report because the auditor performs mainly analytical procedures to understand key relationships as to the reasonableness of the financial information presented in the financial report.

Are ASAs the same as ISAs?

Australian Auditing Standards (ASA’s) conform with International Standards on Auditing (ISA’s). In certain instances, application and other explanatory paragraphs are added to the Australian Auditing Standards which do not appear in the text of the equivalent ISA and are identified with the prefix ‘Aus”.

Where can I find a copy of the auditing standards?

Copies of Australian Auditing Standards can be obtained from the Auditing and Assurance Standards Board at Australian Auditing Standards (auasb.gov.au)

What is involved in the risk assessment process?

The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial report and assertion levels thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.

ASA 315 requires the auditor to obtain an understanding of the client’s risk assessment process relevant to the preparation of the financial report and to assess the effectiveness of those processes in order to determine the risk of material misstatement.

Who takes responsibility for audit quality?

The signing audit partner takes responsibility for audit quality. ASA 700 requires the auditor’s opinion to include a section with the heading “Auditor’s Responsibility”. The auditor states whether they believe that the audit evidence they have obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.