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AUDITING
Week 4
6.11 What are the requirements that must be met in order to become a
registered auditor?
To be suitably qualified, the person must:
Be a member of the Institute of Chartered Accountants in Australia (ICAA), CPA
Australia, the Institute of Public Accountants or other prescribed body.
Hold a degree, diploma or certificate from a university or other prescribed body in
Australia and have passed a course of study in accountancy of not less than 3 years
duration and a course of study in commercial law of not less than 2 years duration.
Have such practical experience in auditing as prescribed (work experience in
company auditing under the direction of a registered company auditor and at least one
years experience in the supervision of audits of companies).
Be capable of performing the duties of an auditor and be a fit and proper person to be
registered as an auditor.
6.12 What are the main Corporations Act requirements with regard to the
appointment, removal and registration of auditors?
s.301 A company (except for a small proprietary company) must have its financial reports
audited.
Appointment
s.327A Directors of public and large proprietary companies are required to appoint an
auditor within one month after the company is incorporated.
s.327B The duration of the first appointment is only until the first annual general meeting,
where the members appoint the auditor.
Removal
s.329(1A) An auditor may be removed from office by resolution of the company at a
general meeting, for which special notice has been given at least two months before the
meeting is held.
s.329(2) A copy of this notice must be sent to the auditor and the ASIC.
s.329(3) The auditor has seven days to make representation in writing, with copies to be
sent to all members entitled to attend the meeting.
Registration
s.1279 There are a number of criteria that must be satisfied before an auditor may apply to
the ASIC to be registered.
s.1280 Requirements to be suitably qualified.
s.324CH Prohibits or disqualifies any person who is an officer of the company, a partner of
an officer of the company, an employer or employee of an officer of the company, or a
partner or employee of an employee of an officer of the company.

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6.17 What are the benefits of a financial report audit?
Financial report audits enable companies to:
1. Obtain access to capital markets. Without an audit, companies may be denied access to
capital markets by the ASX.
2. Have a lower cost of capital. Given the reduced risk resulting from audited financial
reports, potential creditors may offer low interest rates and potential investors may be
willing to accept a lower rate of return on their investment.
3. Be a deterrent to inefficiency and fraud. Knowledge that an independent audit is to be
performed is likely to result in fewer errors in the accounting process and reduce the
likelihood of employee misappropriation of assets.
4. Control and operational improvements. Based on observations made during the financial
report audit, the independent auditor can suggest how controls could be improved and
how greater operating efficiencies within the entitys organisation may be achieved.
6.18 What are the main limitations of a financial report audit?
The main limitations are as follows.
1.
Time lapse by the time the audit report is released the information is
relatively old.
2.
Audit testing on selective samples, which has limitations due to sampling risk.
3.
The assessment of materiality, with both quantitative and qualitative
considerations, requires a high degree of professional judgement. There are, however,
some guidelines, although by their nature are necessarily arbitrary.
4.
Forming professional judgements in highly specialised areas can often result
in disagreements between auditors and clients.
5.
Report format limitations and the consequent expectation gap often arises
with users of financial reports.
6.19 What are the duties of an independent auditor engaged to perform
a financial report audit?
When an auditor accepts an appointment, he or she enters into a contractual relationship with
the company. The audit engagement letter, agreed to and signed by the auditor and the client,
details some of the duties of an auditor for a company (ASA 210 Agreeing the Terms
of Audit Engagements).
There are express or implied terms in such contracts that the auditor will:
1.
exercise a reasonable degree of care and skill.
2.
be independent of the company.
3.
report to members his or her opinion, based on the audit, as to whether the
financial reports are properly drawn up so as to give a true and fair view of the companys
financial position, in accordance with the Corporations Act and applicable accounting
standards.
4.
report to ASIC if there are reasonable grounds of a contravention of the
Corporations Act.

6.22

Appointment of auditors

Revglow Ltd, a large proprietary company, was incorporated on 1 July 2011. A short time
later, one of the non-shareholding directors, Fred Bile, approached his tax agent, Gina
Rogers, to ask her to be Revglow's auditor. Ms Rogers is a chartered accountant, but had not
performed any audits and was hesitant about accepting the engagement Mr Bile said the
appointment would be only temporary until proper documentation could be prepared and the
audit work put out to tender. Ms Rogers said she would accept this arrangement and Mr Bile
prepared a letter confirming the appointment on 21 July 2011.
At its first meeting on 1 September 2011, the board decided to confirm Ms Rogers as the
auditor of Revglow for a period of 3 years. They were impressed with the recommendation
given by Mr Bile and decided that requesting tenders would be a time-consuming and
inefficient process.
Discuss whether the requirements of the Corporations Act have been followed in the
above scenario.
(1) Appointment of Gina Rogers as the auditor by Fred Bile.
s.327(1) Directors of public and large proprietary companies are required to appoint an
auditor within one month of incorporation. This requirement has been followed.
(2) Gina Rogers competency to complete the audit.
Does not appear to satisfy the criteria to be a registered auditor under s.1279.
s.324(1) prohibits an auditing firm from acting as an auditor of a company unless at least one
member of the firm is registered as a company auditor.
(3) A letter confirming the engagement was prepared on 21/7/2011.
Complies with the requirement under s.327(7) to confirm the consent in writing.
(4) Engagement confirmed on 1/9/2011 by the board.
s.327(3) The confirmation of the auditor should be by the first meeting of the members of
the entity, not the first meeting of the directors.
(5) No request for tenders.
Although it is common practice to request tenders there is no obligation to do so.Conclusion
The Corporations Act has been breached under s.324(1) because Gina Rogers appears not to
be a registered auditor. It has also been breached under s.327(3) because the appointment was
not confirmed by the first annual general meeting of members.
6.28 Auditor rotation
Audit independence has been important issue, particularly over the past ten years. A number
of the requirements associated with auditor appointment and removal are to enhance the
independence of the audit process. An auditing academic was heard to make the following
statement: True audit independence can never be achieved! Auditors operate in a commercial
environment and need to work to win the audit of a client. The ongoing fees that they receive

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are then obviously conditional on management's approval. If management is unhappy with
the auditor they will find a way to get rid of them - it is as simple as that. Perhaps a solution
could be to give the role of appointing auditors to ASIC? They could allocate auditors to the
top 300 listed companies and give them a fixed term audit ft'r five years. Then they would
reallocate auditors to those companies. Auditors would not have to compromise their
independence to win the client or keep the client. It is a brilliant idea - even if I do say so
myself!
Discuss the academic's proposal.
The fact that auditors fees are from the client does make it difficult to achieve independence.
There are some factors that help:
Although the client pays the auditor. The decision making in relation to payment of fees
and appointment and removal of the auditor rests with the board of directors or audit
committee and not the executive management of the company.
The audit firm has a strong incentive to behave in an independent manner. The most
valuable asset for an audit firm is its reputation/brand. Ensuring that this is not damaged
provides a strong incentive for independence.
The comment that management will find a way to get rid of the auditor may have some truth.
Hopefully the corporate governance of the firm will provide protection in relation to this
possibility. It should also be noted that there are a number of requirements under the
Corporations Act to protect auditors from inappropriate removal.
Special notice under s.329(1A) must be given at least two months before a general
meeting
A copy of the special notice needs to be sent to the auditor and a copy must also be
lodged with ASIC. (s.329(2))
The auditor has a right to respond and a right to be heard at the meeting. (s.329(3))
The company may appoint another auditor at the general meeting with at least a threequarter majority. (s.327(10)(a))
Appointing auditors performed by ASIC?
This is a substantial intervention in the audit market. Some advantages and disadvantages:
Advantages:
Independence would be enhanced because the fixed term would mean that independence
would not be compromised to win or keep the client.
There would be very little risk of a familiarity threat to audit independence.
It would provide the opportunity for a fresh set of eyes over the audit process every few
years.
Audit firms could develop skill sets over a range of different industries.
Might provide the opportunity for some second tier audit firms to audit larger clients?
Disadvantages:
What would happen to quality in the last few years of an auditors tenure?
There would be considerable expense in educating the new auditor every five years to
the client and the auditor.

Possible allocation of audit firms with a lack of appropriate industry skills.

Difficult to do rotation because there are only four major audit firms.