Chapter 2 Auditing and Assurance Services in Australia - (Chapter 2 Audit regulation structure of the profession and auditor’s l PDF

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CHAPTER 2 Audit regulation, structure of the profession and auditor’s liability

LEARNING OBJECTIVES (LO) 2.1 2.2 2.3 2.4

Identify the attributes of professional status and describe to what extent they exist in public accounting. Describe the regulation of auditing and its subject matter. Explain the impacts of internationalisation on auditing. Outline the characteristics of the professional bodies and accounting firms engaged in the auditing profession, and describe the internal structure of an audit firm.

2.5 2.6 2.7

Describe alternative methods used to limit the auditor’s liability.

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2.8 2.9

Explain the concepts of reasonable care and skill, and negligence.

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

RELEVANT GUIDANCE ASA 101

Preamble to Australian Auditing Standards

ASA 220/ISA 220

Quality Control for an Audit of a Financial Report and Other Historical Financial Information

ASA 501/ISA 501

Audit Evidence—Specific Considerations for Inventory and Segment Information/Audit Evidence —Specific Considerations for Selected Items

ASQC 1/ISQC 1

Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements

ASAE 3000/ISAE 3000

Assurance Engagements Other than Audits or Reviews of Historical Financial Information

APES 110/IFAC

Code of Ethics for Professional Accountants

APES 210

Conformity with Auditing and Assurance Standards

APES 320

Quality Control for Firms

AUASB

Foreword to AUASB Pronouncements

AUASB/IAASB

Framework for Assurance Engagements/International Framework for Assurance Engagements

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IAASB

Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services

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Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

CHAPTER OUTLINE The auditor is a member of a time-honoured profession, and the status of the profession and the responsibilities that accompany this status affect the audit and assurance function and the structure of the profession. The auditor is subject to regulations imposed by the profession and by society. The audit and assurance function is carried out in a complex environment composed of interrelationships between governmental and professional organisations and individual auditors and audit firms. These regular and enduring relationships form the structure of the profession. In addition, the audit environment includes the requirements of legislation, particularly the Corporations Act 2001, discussed in Chapter 1 ; public expectations of the audit and the existence of the expectation gap, also discussed in Chapter 1 ; and the legal liability of an auditor and the impact of common law, discussed in this chapter. This chapter explains the role of government and professional associations in the auditing and assurance environment and the relationship between them. It recognises the impact of globalisation on business and the auditing profession and discusses how the profession has reacted to the need for internationalisation. It outlines the characteristics of the types of audit firms that make up the auditing profession and the services they provide. The internal structure of an audit firm and the influence of that structure on an auditing practice are also covered. There is also discussion of the quality control procedures that are essential to

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ensure that auditors meet their responsibilities to clients and other users and carry out the audit in accordance with legislation, the auditing standards and the ethical rules. Finally, this chapter considers an auditor’s legal liability to clients and third parties. The concept of reasonable care and skill is explained and the elements necessary for a claim of negligence to be successful are outlined with reference to legal cases. The concept of contributory negligence and methods used to limit the auditor’s liability are discussed. How this chapter fits into the overall auditing and assurance profession is illustrated in Figure 2.1 , which is an expansion of part of the overall flowchart provided in Chapter 1 . Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

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FIGURE 2.1 Flowchart of auditing and assurance profession

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

Page 37

LO 2.1 Professional status of the auditor The status of a profession can be determined by the extent to which the professional group exhibits certain attributes which distinguishes it from those that are nonprofessional. Greenwood (1957) indicates that all professions seem to possess five elements: systematic theory; professional authority and expertise; community sanction; regulative codes; and a culture.

Systematic theory One significant difference between a professional and a non-professional occupation is the underlying body of theory that supports the work of the professional. Although nonprofessional work may require procedural skill, that skill does not rest on a body of systematic theory. The underlying theory of the auditing profession consists of auditing theory and accounting theory. Knowledge of systematic theory can best be achieved through formal education in an academic environment. Today, therefore, a tertiary education is considered a prerequisite for people entering the auditing profession. They are then required to complete the education program of one of the three accounting bodies (Chartered Accountants Program, CPA Program or IPA Program) and also undertake continuing professional development throughout their auditing career.

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Professional authority and expertise Expertise in the systematic theory of auditing and accounting is the basis for the auditor’s work in these areas. Professionals have authority within the area of their expertise because their clients lack the requisite theoretical knowledge. However, professionals only have authority if society confers that authority upon them.

Community sanction Professionals normally attempt to formalise their authority by gaining community approval of certain powers and privileges. First and foremost among the powers for which professions strive is control over admissions to the profession. To be a registered company auditor a person must, among other things, be a member of one of the accounting bodies

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

(discussed later in this chapter) or other prescribed bodies, each of which controls admission to their own organisation. Another privilege that professions strive for is relative immunity from community judgment on technical matters. Although professions are responsible to the community for their actions, it is generally accepted that a professional’s performance should be judged by standards established by the profession itself. Prior to the CLERP 9 legislative amendments, made as part of the Corporate Law Economic Reform Program, discussed in Chapter 3 , the setting of auditing and assurance standards was undertaken by the accounting bodies through the Australian Accounting Research Foundation (AARF). While auditing standards are now set by the Auditing and Assurance Standards Board (AUASB), which is an independent statutory body, the profession contributes heavily to the process, with a majority of AUASB members being members of the profession, and members of the profession also contributing to the consultation/development process for auditing standards, as discussed later in this chapter. Among the powers and privileges for which professions strive, privileged communication stands out as perhaps the ultimate criterion of professionalism. Professional performance is facilitated if the client feels free to volunteer information which otherwise might not be divulged. Privileged information is a right granted by the community to protect the client from legal encroachment on confidential communications with a professional. Although the professions of medicine and law have generally been granted this privilege, legal privilege between auditor and client does not exist. However, because an auditor will have access to information that a client would not normally make available to external parties, the ethical rules of the accounting bodies (discussed in Chapter 3 ) prohibit auditors from disclosing such information to a third party without specific authority from the client or unless there is a legal or professional duty to disclose, such as under section 311 of the Copyright © 2018. McGraw-Hill Australia. All rights reserved.

Corporations Act 2001. Page 38

Regulative codes The powers and privileges granted to a profession by the community effectively constitute a monopoly. In Australia, registered company auditors have been granted a monopoly on rendering external auditors’ opinions on the financial reports of companies. Since any monopoly is subject to abuse, a profession must take steps to assure the community that the profession will discipline its members. Professions therefore establish regulative codes. Regulation of the auditing profession is directed at two areas: technical and ethical.

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

Auditing standards govern the technical work of the auditor while the ethical rules govern the auditor’s behaviour.

A culture Another distinguishing feature of a profession is a well-established culture that applies to the professional group. Sociologists call this a subculture. A subculture contains specific behavioural prescriptions and proscriptions. For example, auditors are expected to behave in a way that is in accord with APES 110 Code of Ethics for Professional Accountants, including exhibiting integrity, independence, objectivity, confidentiality and public interest. New members of the profession must learn what is expected of them or they will not be accepted as colleagues by their associates.

QUICK REVIEW 1. Auditing is a profession.

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2. The auditing profession is regulated largely by the auditing and assurance standards and its own ethical rules. 3. Confidentiality is an important requirement for the auditing profession.

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LO 2.2 Regulation of auditing and of the subject matter of audits

Regulation of auditing Our society is so complex that there is a whole set of organisations whose function is to organise and supervise other organisations. The organisations of this type that are of

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concern to the auditing profession include both government agencies and professional associations that regulate auditing as indicated in Figure 2.2 . (In addition, there are similar agencies that regulate the subject matter of audits, which we will discuss separately below.)

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

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FIGURE 2.2 Professional and statutory regulation of auditing

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

Financial Reporting Council The Financial Reporting Council (FRC) is a statutory body established under section 225(1) of the Australian Securities and Investments Commission Act 2001. The FRC was established during 1999 as a peak body with responsibility for the broad oversight of the accounting standard-setting process for the private, public and not-for-profit sectors. As a result of the CLERP 9 amendments, the FRC’s role has been significantly expanded to include broad oversight of the auditing standard-setting process and monitoring of auditor independence. Specific matters for which the FRC is responsible include: overseeing the operations of the Australian Accounting Standards Board (AASB) and the Australian Auditing and Assurance Standards Board (AUASB), including appointing their members, other than the chairs, who are appointed by the Treasurer monitoring the development of international accounting and auditing standards and accounting and auditing standards that apply in major international financial centres furthering the development of a single set of accounting and auditing standards Page 39 for worldwide use with appropriate regard to international developments monitoring the operation of Australian accounting and auditing standards to assess their continued relevance and effectiveness in achieving their objectives monitoring auditors’ independence monitoring the effectiveness of the consultative arrangements used by the AASB and AUASB seeking contributions towards the costs of the Australian accounting and auditing standard-setting process

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monitoring and periodically reviewing the level of funding, and the funding arrangements, for the AASB and AUASB. The legislation expressly limits the FRC’s ability to become involved in the technical deliberations of the AASB and AUASB. As a result, the FRC does not have the power to direct the AASB or AUASB in relation to the development, or making, of a particular standard, or to veto a standard formulated or recommended by the AASB or AUASB. This provision is designed to ensure the independence of the AASB and AUASB.

Auditing and Assurance Standards Board

Page 40

As a result of the CLERP 9 amendments, the AUASB was reconstituted and established as an independent statutory body on 1 July 2004. The AUASB is responsible for developing Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

and maintaining auditing and assurance standards and other publications, and consists of 11 members, including the chair. The members of the AUASB are appointed by the FRC and the chair is appointed by the Treasurer. Membership currently includes auditing practitioners from the private and public sectors and non-auditors from academia and other stakeholder groups. The members are supported by the full-time technical staff of the AUASB. Responsibility for final approval of auditing and assurance standards now lies with the Parliament, as these are now disallowable legal instruments, following the CLERP 9 amendments. Auditors are required to follow these standards and therefore they are an important influence on the way in which members of the profession perceive and discharge their audit responsibilities. The AUASB has developed a strategy document for 2017 to 2021 which sets out its vision, mission and strategic objectives (see Auditing in the global news 2.1 ).For the first time the AUASB’s strategy document has been aligned with that of the AASB and the strategy documents of the two boards have been issued together, illustrating that the two boards are working closely together to better achieve the desired outcomes. In order to

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achieve their strategic objectives, the AASB and AUASB have both indicated that they will use collaboration, communication, research and education as enablers.

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=5729228. Created from aut on 2020-07-14 19:10:33.

2.1Auditing in the global news... AUASB strategy, 2017–2021 AUASB Vision Contribute to stakeholder confidence in the Australian economy, including its capital markets, and enhanced credibility in external reporting through independent auditing and assurance. AUASB Mission Develop, issue and maintain in the public interest, high quality Australian auditing and assurance standards and guidance that meet user needs and enhance audit and assurance consistency and quality. Contribute to the development of a single set of auditing and assurance standards and guidance for world-wide use. AUASB Strategic Objectives 1. Develop, issue and maintain high quality Australian auditing and assurance standards and guidance that meet the needs of external report users. Use IAASB Standards—where they exist, modified as necessary—or develop Australian-specific standards and guidance. 2. With the AASB, play a leading role in reshaping the Australian external reporting framework by working with regulators to develop objective criteria on: who prepares external reports (including financial reports)

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the nature and extent of assurance required on external reports. 3. Actively influence international auditing and assurance standards and guidance by demonstrating thought leadership and enhancing key international relationships. 4. Attain significant levels of key stakeholder engagement, through collaboration, partnership and outreach. 5. Influence initiatives to develop assurance standards and guidance that meet user needs for external reporting beyond financial reporting. 6. Monitor and respond to emerging issues impacting the development of auditing and assurance standards and guidance, including changing technologies. 7. Develop guidance and education initiatives, or promote development by others, to enhance consistent application of auditing and assurance standards and guidance.

Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill ...