Chapter 2 The structure of the profession Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 1: Professional status of the auditor Professional occupations can be distinguished by five common attributes: Systematic theory Professional authority and expertise Community sanction Regulative codes Well-established culture Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Auditing as a profession Auditing can be classified as a profession because of its: Reliance on an underlying theory of accounting and auditing Expertise Ability to control admissions to the profession Regulative codes in two areas, technical and ethical Behavioural subculture exhibiting integrity, independence, objectivity, confidentiality and public interest. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 2: Regulation of auditing: the Financial Reporting Council Financial Reporting Council (FRC): a statutory body established in 1999 with the responsibility of providing a broad oversight of the accounting standard-setting process. This role was recently expanded to include a broad oversight of auditing standard-setting and the monitoring of auditor independence. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

The Auditing and Assurance Standards Board (AUASB) The AUASB was reconstituted as an independent statutory body on 1 July 2004 and is responsible for the development of auditing and assurance services standards. The Board consists of 12 members appointed by FRC, and a Chair appointed by the Treasurer. Responsibility for the final approval of auditing and assurance standards now lies with parliament. The AUASB has a long-standing policy of convergence and harmonisation with International Standards on Auditing (ISAs). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

The Accounting Professional and Ethical Standards Board Until 2006 CPA Australia and the Institute of Chartered Accountants in Australia maintained control of the setting of ethical standards. Since 2006, setting of ethical standards is to be done by a body independent of the accounting profession, the Accounting Professional and Ethical Standards Board (APESB). The APESB establishes ethical standards, as well as professional standards, by which the members of the professional accounting bodies are required to abide. THE APESB consists of eight members, including two nominated by CPA Australia and two by ICAA. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Regulation of auditing (cont.) Two other government agencies are also involved in the regulation of auditors: Australian Securities and Investments Commission (ASIC) — the administering authority for the Corporations Act 2001 The Companies Auditors and Liquidators Disciplinary Board (CALDB) determines whether a registered auditor or liquidator has failed to carry out his or her duties properly or is not a fit and proper person to be registered Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Registered company auditor (RCA) In order to be appointed as a company auditor under s 1280 of the Corporations Act 2001, a person must ordinarily: Be an Australian resident Be a member of an approved body (CPA Australia, ICAA or affiliated bodies) Be an accounting graduate of a prescribed university or other prescribed institution in Australia Have sufficient auditing experience Be a fit and proper person. Auditors are required to fill out a logbook to demonstrate on-the-job experience and have this certified by current RCA. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 3: Regulation of subject matter audits Australian Accounting Standards Board (AASB): responsible for the development of accounting standards in Australia. Urgent Issues Group (UIG): provides authoritative guidance on accounting issues that are otherwise likely to receive divergent or unacceptable treatment. Financial Reporting Panel (FRP): established in 2004 to provide a forum for review of disputes between ASIC and entities lodging reports with ASIC. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Disciplinary procedures Independent auditors are subject to disciplinary provisions of the their professional accounting bodies, either ICAA or CPA Australia. Sanctions can include: Exclusion from membership; Suspension from membership; Disbarment from practice; Being fined a sum not exceeding $100 000; Being reprimanded; or Having to pay costs and expenses of any investigation. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 4: Internationalisation of auditing Increased international trade has contributed to the development of international auditing practices. Multinational organisations wish to ensure the quality of financial information from subsidiaries and related entities. The International Organization of Securities Commissions (IOSCO) (including SEC in the USA and ASIC in Australia) supports the harmonisation of international auditing standards. Most countries consider International Standards on Auditing (ISAs) carefully when developing their own standards. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Internationalisation of auditing (cont.) Key groups International Federation of Accountants (IFAC): guides efforts to develop technical (accounting and auditing) and ethical standards. Members include 163 accounting bodies (including ICAA and CPA Australia) in 119 countries International Auditing and Assurance Standards Board (IAASB): an independent body supported by IFAC that develops standards and guidance for audit and assurance services Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Internationalisation of auditing (cont.) Key groups (cont.) Transnational Auditors Committee (TAC): executive arm of the auditing firms that perform auditing across national boundaries International Forum on Accountancy Development (IFAD): created in 1999 by IFAC and World Bank. Consists of a range of public and private organisations aiming to improve financial reporting, accountability and transparency worldwide Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 5: Profile of the auditing profession There are two primary professional accounting organisations in Australia: CPA Australia The Institute of Chartered Accountants in Australia (ICAA). Membership of either of these two bodies by public accounting practitioners is voluntary. However, membership of either of these bodies (or another prescribed body) is necessary in order to become a registered company auditor. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Member profile of ICAA Australia and CPA CPA Australia ICAA No. of members (2006) >100 000 >40 000 Public practice 20% 40% Commerce 42% 41% Others (govt, retired, academic) 38% 19% ______ ______ 100% 100% Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Audit firms There are two levels of audit firms in Australia: National and international (including the Big Four — since the collapse of Arthur Andersen and its merger with Ernst & Young — and second-tier firms) Regional or local firms. The largest international firms are known as the 'Big Four'. They are: PricewaterhouseCoopers Ernst & Young KPMG Australia Deloitte. The Big Four dominate the practice of public accountancy. They audit approximately two-thirds of listed companies in Australia. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Size of Big Four audit firms Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Other services offered While audit and assurance services form a substantial part of a public accounting firm’s client base and revenue stream, most firms also offer: Taxation Management services Internal audit Accounting services Insolvency services Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 6: Internal structure of an audit firm Currently, an audit firm generally practises as a partnership. As a result of CLERP 9 amendments, an audit firm can now apply to be an authorised audit company. This provides advantages of limitations in liability and adequate professional indemnity. Insurance must be maintained. Most large audit practices are usually structured along industry specialisations. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Positions and duties in an audit firm Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 7: Quality control ASA 220 (ISA 220) requires the audit engagement team to implement quality control procedures. Procedures should be adopted in the following areas: Ethics Employment Assignment of personnel Supervision Guidance and assistance Client evaluation Monitoring Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

APESB standards In addition to ASA 220 (ISA 220), there are two APESB standards concerning quality control: APES 410 established auditor’s responsibilities in relation to compliance with Australian auditing and assurance standards APES 320, establishes basic principles and essential procedures at the audit firm level (ASA 220/ISA 220 establish basic principles and essential procedures at the audit engagement level Under APES 320, firms must document quality control procedures and bring to attention of firm’s personnel, and implement more comprehensive policies and procedures for the assurance part of the firm. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Quality control procedures Key quality control procedures employed by the professional bodies are: Internal review (engagement quality control review) — auditor subject to review by another partner in the practice Periodical rotation of auditors (partners and staff) to limit length of time spent on one client Peer reviews — independent periodic review by another firm of public accountants Continuing professional education requirements. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 8: Auditing in the public sector Another important auditing sector, separate to the private auditing sector, is the public auditing sector. Many public sector entities require auditing. Responsibility for public sector audits rests with the Commonwealth and State Auditors-General. They use auditing standards approved by the AUASB as the basis of their auditing standards. Sometimes audit mandate prescribes wider inclusions than just financial statements. Compliance and performance audits may be required. (This is further discussed in Ch 16). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett