Part Twelve
Other Assurance
Services
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Structure of Seminar
1.
2.
3.
4.
5.
6.
7.
Objectives of Seminar
Enterprise Governance
Audit Committees
Other Audit & Assurance Functions
Audit in the Public Sector
Quality Management
Conclusions
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1. Objectives of Seminar
To provide you with:
• An awareness of the latest developments
in the “value-adding” of an audit
• Reinforcement of the role of auditing in
corporate governance
• An overview of types of audit &
assurance services other than the
financial statement audit
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2. Enterprise Governance
• Framework that covers both corporate &
business governance of an enterprise
– “the set of responsibilities and practices
exercised by the board and executive
management, with the aim of providing
strategic direction, ensuring the objectives
are met, ascertaining that risks are managed
appropriately, and verifying that the
organization’s resources are used
responsibly” (CIMA/IFAC)
4
The framework of
enterprise governance
Enterprise
Governance
Corporate
Governance
Business
Governance
Conformance
Performance
Accountability
Value Creation
Assurance
Resource Utilisation
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Source: Adapted from CIMA/IFAC, Enterprise Governance — Getting the Balance
Right, February 2004, p. 10, www.ifac.org.
Conformance
(accountability) & Audit
• Corporate governance is the range of control
mechanisms that protect and enhance the
interests of shareholders of business
enterprises
• Structure, systems & relationships among
board, management, auditors, regulators,
shareholders and public
• ASX Principles of Good Corporate Governance
& Best Practice Recommendations
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Corporate Governance
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A broader role for audit?
• Assurance to stakeholders other
shareholders
– E.g. coy will not fail, no fraud, coy has acted
within the law, has been competently
managed, has adopted responsible attitude
to environmental and societal matters
• Is this realistic????
– Independence? Competence? Litigation risk?
8
Ongoing issues for external
auditors …
• The “credibility crisis”
– Earnings management, corporate collapses
• Codification of standards
– Removal of auditor discretion (“shall” v.
“should”)
• Audit quality → Independence,
Competence & Ethics
• Get the basics right, to maintain
professional credibility & value of audit
function!
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Business Performance &
Audit
• The responsibility of the board!!!
• “Value-adding” assurance services
– Due diligence
• Mergers & acquisitions, prospectuses, etc
–
–
–
–
Forensic audit
Social & environmental audit
Performance audits
Risk management
• These are consulting services – beware the
independence issue!
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Business Performance &
Audit
• Internal Control & Risk Management
– The responsibility of the entity
• Sarbanes-Oxley requirements
– CEOs & CFOs must “certify” adequacy of
internal control & risk management systems
– Applies to US-listed Australian coys
– Auditors also sign-off on these s.404 reports
– Risk (litigation?) sharing
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3. Audit Committees
• Sub-committee of the board of directors
– Independence & financial expertise of
members
– A forum for directors, management &
auditors to discuss & resolve financial
reporting issues
– Enhanced ethical culture & integrity of
financial reporting
– Mandatory for ASX Top 300 companies
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4. Other Audit & Assurance
Services
• Major services
–Internal auditing
–Operational auditing
–Forensic auditing
–Continuous auditing
–Social & environmental assurance
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4.1 Internal Auditing
• “An independent, objective assurance
and consulting activity designed to add
value and improve and organization’s
operations. It helps an organization
accomplish its objectives by bringing a
systematic, disciplined approach to
evaluate and improve the effective of risk
management, control and governance
processes”
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Internal Auditing
• Scope of internal auditing – examination
& evaluation of:
– Adequacy & effective of entity’s governance
and internal control structure
– Quality of performance in carrying out
responsibilities
– Procedures of risk identification &
management
– Mechanisms to ensure regulatory
compliance
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Internal Auditing
• A supplement (not substitute) to the
external audit
• ASA 610 Considering the Work of Internal
Audit
• Outsourcing of internal audit function
– Implications for audit independence if done
by external auditor
– Prohibited by SOX but not CLERP 9
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Organisational and functional
differences between internal
and independent auditors
Internal auditors
Employer
Companies and
government units
National
organisations
Institute of Internal
Auditors–Australia
Independent
auditors
Public practice
entities
• Institute of
Chartered
Accountants in
Australia (ICAA)
• CPA Australia
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Internal auditors
Certifying designation Certified internal
auditor (CIA)
Independent auditors
• Chartered accountant
(CA)
• Certified practising
accountant (CPA)
Licence to practise
No
• Registered
company/independent
auditor
• Public practising
certificate
Primary responsibility To board of
directors
To members of the
company (shareholders)
Scope of audits
Mainly financial
statements
All activities of an
organisation
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4.2 Operational Auditing
• Used to evaluate a variety of activities –
management’s performance, planning &
quality control systems and specific
operating activities & departments
• Relates to non-financial operations
• Normally conducted by internal auditor,
but may be outsourced
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4.3 Forensic Auditing
• The forensic auditor
–
–
–
–
looks for evidence of fraud
documents systems failures
Identifies extent of losses incurred
Expert witness/litigation support
• A major growth area is e-crime
– CSI Audit!!!
• ABIS Department – Postgraduate Certificate in
Business Forensics
• Professional certification – CFE?
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4.4 Continuous Audit
• An emerging issue
• Relevant for electronic (web-based)
reporting environments
• Demand for more timely information
• Issues
– No time to gather & evaluate traditional audit
evidence
– Need for fully automated audit software
package
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4.5 Social & Environmental
Assurance
• A “fringe” issue has been become mainstream
• Recent rapid growth in “sustainability” reporting
– Early reporting by industries with “image problems”
e.g. chemicals
• Impression management, political legitimacy, reduce
political costs, or good responsible corporate citizens?
Response to stakeholder concerns or concern for financial
risks?
• Competition for annual report awards
– Equator principles
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Social & Environmental
Assurance
• All voluntary reporting
– Choice of inclusions – what are the boundaries?
– Choice of reporting guidelines
• Triple-bottom line reporting (social, environmental &
economic)
• Global Reporting Initiative (GRI) (UN initiative from 1997)
• AA1000 – AccountAbility, a UK-based institute, opensource non-proprietary standard
• Hence, assurance on the reports is also
voluntary
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Climate Change &
Assurance
• Voluntary carbon offsets market
– Voluntary assurance
• Voluntary climate risk disclosures
• NOW – mandatory reporting of emissions
– For financial year ended 30 June 2009
– National Greenhouse & Energy Reporting
Act 2007, Measurement Act 2008.
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Climate Change &
Assurance
• Data from reporting to underpin
Emissions Trading Scheme
– Carbon Pollution Reduction Scheme (2011?)
– Carbon credits are financial instruments!!!
• Area of revenue growth for profession
– Big 4 recruitment of experts
– Partnerships with specialists
• E.g. KPMG with RepuTex, BDO Kendalls with
Carbon Planet
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Climate Change &
Assurance
• Issues & Problems
– No standard reporting framework
• But IASB plan a standard on emissions trading for
2010
– Voluntary assurance & no standard
assurance framework
• But IAASB are developing an assurance standard
• Intensive lobbying by profession for mandatory
assurance – to be provided by the profession
• Govt “External Audit Consultation Paper” 2008
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Climate Change &
Assurance
• Issues & problems (cont.)
– Unlike financial statement audits, no
mandated monopoly & a competitive market
• Profession argues they have:
–
–
–
–
–
Experience in assurance engagements
An existing assurance framework of standards
Code of ethics
Experience in using the work of experts
Independence
• However, previous failures in extending scope of
assurance services
– E.g. WebTrust, SysTrust
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5. Audit in the Public Sector
• Applies to the 3 tiers of government
– Local, state & federal
• Principles from private sector audit are
applicable
• Accountability is built into the
parliamentary system
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FIGURE 16.6: Outline of a parliamentary
system and the accountability process
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Public Sector Audit
• An auditor-general (A-G) is appointed by each
State & also the Commonwealth govt, and is an
independent officer of Parliament
• A-G audits & reports to Parliament on the
activities & performance of govt agencies,
authorities, coys & their controlled entities
• A-G appointed by G-G on recommendation of
responsible minister for a term of 10 years
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Public Sector Audit
• Financial statement audit gives opinion
on
– Whether F/s have been prepared in
accordance with orders of Minister of
Finance, &
– Give a true & fair view of matters required by
those orders
• Performance audits
– Efficiency & effectiveness in use of public
resources
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6. Quality Management
• Voluntary quality control standards
– Of audit firms
– Of audit clients
• ISO standards
– ISO 9000 : quality management
– ISO 14000: environmental management
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Conclusions
• Independent external financial statement
audit remains core service
• Growth in other assurance services
driven primarily by
– Environmental concerns
– Electronic commerce & reporting
• Traditional audit functions remain
important
– Internal audit & public sector audit
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