An audit is the examination of the financial report of an organisation (as presented in the annual report) by someone independent of that organisation.
The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organisation at a given date. For example:
Are details of what is owned and what the organisation owes properly recorded in the balance sheet?
Are profits or losses properly assessed?
When examining the financial report, auditors must follow auditing standards which are set by a government body.
Once auditors have completed their work, they write a report (called an audit report) explaining what they have done and giving an opinion drawn from their work.
With some exceptions, all organisations subject to the Corporations Act must have an audit each year. Other organisations may require or request an audit depending on their structure and ownership or for a special purpose.
What don’t auditors do?
Check every figure in the financial report. (Audits are based on selective testing only.)
Test the adequacy of all of the organisation’s internal controls.
Look at every transaction carried out by the organisation.
Audit other information provided to the members of the organisation - eg the directors’ report.
Judge the appropriateness of the organisation’s business activities or strategies or decisions made by the directors.
Comment to shareholders on the quality of directors and management, the quality of corporate governance or the quality of the organisation’s risk management procedures and controls.
What can’t auditors do?
Predict the future.
The audit relates to a specific past accounting period. It does not judge what may happen in the future, and so cannot provide assurance that the organisation will continue in business indefinitely.
Be there all the time.
The audit is carried out during a defined timeframe, and auditors are not at the organisation all the time. The prime purpose of the audit is to form an opinion on the information in the financial report taken as a whole, and not to identify all possible irregularities. This means that although auditors are on the look-out for signs of potential material fraud, it is not possible to be certain that frauds will be identified.
How is the audit conducted?
The organisation’s management prepares the financial report. It must be prepared in accordance with legal requirements and financial reporting standards.
The organisation’s directors approve the financial report.
Auditors start their examination by gaining an understanding of the organisation’s activities, and considering the economic and industry issues that might have affected the business during the reporting period.
For each major activity listed in the financial report, auditors identify and assess any risks which could have a significant impact on the financial position or financial performance, and also some of the measures (called internal controls) that the organisation has put in place to mitigate those risks.
Based on the risks and controls identified, auditors consider what management does has done to ensure the financial report is accurate, and examine supporting evidence.
Auditors then make a judgement as to whether the financial report taken as a whole presents a true and fair view of the financial results and position of the organisation and its cash flows, and is in compliance with financial reporting standards and, if applicable, the Corporations Act.
Finally, auditors prepare an audit report setting out their opinion, for the organisation’s shareholders or members.
What do auditors do, specifically?
Auditors determine the type and extent of the audit procedures they will perform depending on the risks and controls they have identified. The procedures may include:
examining financial and accounting records, other documents, and tangible items such as plant and equipment.
watching certain processes or procedures being performed.
asking a range of questions - from formal written questions, to informal oral, questions - of a range of individuals at the organisation.
obtaining written confirmations of certain matters; for example, asking a debtor to confirm the amount of their debt with the organisation.
testing some of the organisation’s internal controls.
making judgments on significant estimates or assumptions that management made when they prepared the financial report.
Auditors maintain independence from management and directors so that tests and judgments are made objectively.
Auditors discuss the scope of the audit work with the organisation. The directors or management may request that additional procedures be performed.
Under the Corporations Act, certain entities (such as Australian listed companies and registered schemes) must prepare a financial report for each half year, in addition to the annual financial report.
The half year financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
The report must be reviewed or audited by someone independent of the entity (an independent auditor). Most entities choose to have the report reviewed rather than audited.
The half-year review is not as extensive as the annual audit. It involves limited procedures consisting mainly of enquiries of selected management and staff of the entity, and some analysis of financial information.
In reviewing the half-year financial report, auditors must follow those auditing standards applicable to reviews. Auditing standards are set by a government body.
The review is undertaken so that auditors can report to members on whether they are aware of anything, based on the review procedures they performed, that would suggest that the financial report does not, in all material respects, meet legal requirements and financial reporting standards.
When the review is completed, auditors write a review report explaining what they have done and giving a statement drawn from their work.
What don’t auditors do in a half-year review?
In a half-year review, auditors do not perform an audit. The extent of their procedures is significantly less than the procedures conducted during an audit. For example, when performing a review auditors do not ordinarily:
evaluate or test the adequacy of any of the entity’s internal controls
test the entity’s accounting records
test statements by the entity’s directors, management and staff by obtaining corroborating evidence (eg through inspecting items, observing activities or confirming with third parties).
As for an audit, auditors undertaking a review do not:
judge the appropriateness of the entity’s business activities or strategies or decisions made by the directors
comment to members on the quality of directors and management, the quality of corporate governance or the quality of the entity’s risk management procedures and controls.
What is the review process?
The entity’s management prepares the half-year financial report. It must be prepared in accordance with legal requirements and financial reporting standards.
The entity’s directors approve the half-year financial report.
Auditors consider matters which arose when the previous year’s audit was undertaken. This assists them to identify areas of particular risk of which they need to be aware.
Auditors make enquiries of selected staff, management and directors on how the entity has addressed these risks and what has been done to ensure the half-year financial report is consistent with the entity’s operations for the period.
Auditors undertake some analysis of the figures in the report in order to identify any unusual items, fluctuations or relationships of the elements of the financial report.
Auditors consider whether anything came to their attention in the course of the review to suggest that the half-year financial report has not been prepared, in all material respects, in accordance with legal requirements and financial reporting standards.
Auditors then prepare a review report giving a statement to that effect.
