Hanrick Curran Audit Training - ASIC's Top 10 Focus Areas (March 2013)


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A brief overview of ASIC's (#ASIC) top 10 focus issues for audit. Training delivered to junior staff by our qualified managers.

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Hanrick Curran Audit Training - ASIC's Top 10 Focus Areas (March 2013)

  1. 1. Audit Top 10 Focus Areas
  2. 2. DisclaimerThis document contains information in summary form and is therefore intendedfor general guidance only. It is not intended to be a substitute for detailedresearch or the exercise of professional judgement. It does not purport to becomprehensive or to render professional advice. The reader should not act onthe basis of any matter contained in this publication without first obtainingspecific professional advice.We believe that the statements made by us in this document are accurate but nowarranty of accuracy or reliability is given. Our conclusions are based oninterpretations of accounting standards and other relevant professionalpronouncements and legislation current as at the date of this document. Shouldthe interpretations, accounting standards, other relevant professionalpronouncements or legislation change, our conclusions may not be valid. We areunder no obligation to update the matters considered in this document after itspublication.© Hanrick Curran, March 2013All rights reserved Liability limited by a scheme approved under professional Standards Legislation
  3. 3. About Hanrick Curran•Our client base is mainly located in South EastQueensland, but also extends to Northern NewSouth Wales, Western Queensland, Sydney,Melbourne, Darwin, Townsville and Mackay aswell as other regional areas.•We have a strong position with clients in PapuaNew Guinea and we also serve a growing Asianbusiness sector. While these internationalconnections may not be of immediate interest butwe believe they are important in enabling us toeffectively serve our clients. Hanrick Curran’s Client Base
  4. 4. Your Presenters – Bhavi Kumar CA – Matthew Green CA•Contact details: matthew.green@hanrickcurran.com.au• 0447 724 595• (07) 3218 3900• Twitter: @matthewjgreenca• LinkedIn: http://au.linkedin.com/in/matthewjgreenca• www.hanrickcurran.com.au
  5. 5. What to achieve at end of this presentation:• Top 10 Areas that ASIC found audit firms need to improve in• ASIC’s top 10 focus areas for 2013
  6. 6. Audit Top 10 Focus AreasASIC found three board areas requiring improvements by auditfirms:1. The sufficiency and appropriateness of audit evidence obtained by the auditor;2. The level of professional scepticism3. The extent of reliance that can be placed on the work of other auditors and experts
  7. 7. Audit Top 10 Focus AreasSome areas where ASIC found the above three matters were:1. Impairment testing and fair value measurement2. Going concern assessment3. Substantive analytical procedures4. Journal entry testing5. Related party transactions6. Subsequent event review7. External confirmations8. Consideration of the risk of fraud9. Professional scepticism10. Using the work of other auditors and experts
  8. 8. 1. Impairment Testing and Fair Value Measurement ASIC found that many auditors had not obtained sufficient appropriate audit evidence to support the values of assets and liabilities in the financial report. In many instances the auditors did not adequately test discount rates, forecast cash flows, growth rates and the number of cash generating units (CGUs) and items such as working capital and tax losses
  9. 9. 2. Going Concern Assessment ASIC found that auditors had not made the correct going concern assumption or whether an emphasis of matter paragraph was required.
  10. 10. 3. Substantive Analytical Procedures Auditors relied only on substantive analytical procedures for material balance and other procedures such as test of controls or substantive tests of details were not undertaken. Auditors did not investigate the difference between the expectation set and the variances recorded on the balance Used simplistic analytical comparisons which did not satisfy the requirement of auditing standards for designing and performing substantive analytical procedures.
  11. 11. 4. Journal Entry Testing This was a major concern as most files checked identified that no test of journal entries was performed either throughout the year or at year end.
  12. 12. 5. Related Party Transactions As part of the audit, auditors are required to perform adequate audit procedures to gain sufficient and appropriate audit evidence about all related party transactions and ensure they are appropriately disclosed in the financial statements. ASIC found that auditors did not adequately discuss and document related party transactions with management at planning stage. In most cases auditors relied on related party transactions provided to them by management without undertaking any additional work to determine if all related party transactions have been identified.
  13. 13. 6. Subsequent Event Review ASIC noted many files did not indicate if any subsequent event review was performed. An example of a subsequent review would be to look at financial report post year end or monthly management accounts right before when accounts are signed off and document if there appears to be any events post audit that would cause concerns for the entity.
  14. 14. 7. External Confirmations ASIC found many instances where bank confirmations were not obtained for material bank balances and no documentation was available on file as to why this was the case. Therefore we recommend where no bank confirmation is obtained a file note is placed on file disclosing the reasons behind why one was not obtained.
  15. 15. 8. Consideration of the Risk of Fraud Fraud risk is one of the most crucial items that need to be discussed with management during the audit. ASIC in many instances found that auditors had not discussed with management fraud risk and especially did not consider the risk of fraud for revenue recognition. Revenue recognition in the current environment is considered a very high risk fraud area.
  16. 16. 9. Professional Scepticism Auditors need to maintain professional scepticism at all times during the audit. This means that as auditors we need to make critical assessment with a questioning mind about the validity of audit evidence obtained and management’s judgement on accounting treatments and estimates. As per ASIC they identified insufficient professional scepticism was applied in relation to fair value measurement, impairment testing and going concern assessments. ASIC found many instances where auditor’s appeared:  To have over relied on or readily acceptable to management explanation and representation without challenging the underlying assumptions  Not explored evidence in other parts of audit file which was inconsistent or contradictory and;  Not considered the historical outcomes in assessing reasonableness of forecasts and assumptions underlying management’s decision.
  17. 17. 10. Using the Work of Other Auditors and Experts When relying on the work of other auditors, we as auditors need to assess the other auditor’s competence and objectivity and evaluate the appropriateness of work performed by them.
  18. 18. What next???
  19. 19. ASIC’s Top 10 Focus Areas for 20131. Audit Evidence2. Professional Scepticism3. Reliance on Other Auditors and Use of Experts4. Financial Reports5. Fee Reductions6. Audit Efficiency Measures7. Business Models and Risk Assessments8. Supervision and Review9. Auditor Independence10.Reporting Matters to ASIC
  20. 20. Case 1: Former Centro Auditor Suspended Mr Stephen John Cougle (Melbourne audit partner of Pricewaterhouse Coopers) Mr Cougle was the lead auditor for Centro Properties Group (CNP) and Centro Retail Group (CER) for 2006-07 audit financial years Based on ASIC’s investigation ASIC formed a view that:  There was not sufficient appropriate audit evidence in relation to the classification of interest bearing liabilities in the financial reports and that it was not disclosed in accordance with paragraph 5 of Auditing Standards ASA 500 Audit Evidence.  Financial report failed to properly classify as current approximately A$1.514 billion of interest bearing liabilities. (Para 60 of AASB 101 Presentation of Financial Statements)  Financial report failed to disclose A$600 million interest bearing liabilities correctly as current, instead classified as non-current.  The effect of subsequent events namely the After Balance Date Guarantees on the auditor’s report was not adequately considered in accordance with paragraph 5 of Auditing Standards ASA 560 Subsequent Events.  The financial report failed to disclose material events after reporting date, namely that CNP had given substantial guarantees to lenders totalling in excess of US$2.8 billion  The JP Morgan adjustment was not communicated to those charged with governance of CNP, or if was communicated, Mr Cougle failed to ensure that appropriate audit evidence was documented around the communication (Para. 5,15,22 and 26 of ASA 260 Communication of Audit Matter with those charged with Governance.)
  21. 21. Case 1: Former Centro Auditor SuspendedDue to the above Mr Cougle has been suspended from practising as a registeredauditor until 30 June 2015. At the end of the conclusion of the audit he is required tosubmit his first three audits for review by a registered company auditor approved byASIC.
  22. 22. Case 2: Former ABC Learning Centre AuditorSuspended Mr Simon Andrew Peter Green (former partner Brisbane Pitcher Partners) Mr Green has been prevented from auditing companies for five years following an investigation from ASIC into the collapse of ABC. ASIC formed the view that Mr Green failed to carry out or perform adequately and properly the duties of an auditor for the following reasons: i. Not sufficient appropriate audit evidence was obtained in relation to the correct accounting treatment for various fees which resulted in a significantly material overstatement of ABC’s revenue ii. Support the classification of income items – there were various items not from the provision of childcare services which were incorrectly classified as revenue which resulted in overstatement of ABC’s revenue iii. Enable a reasonably competent auditor to conclude that ABC was a going concern. iv. Support his conclusions with regard to related party transactions, property plant and equipment, wages and salaries v. To support his opinion that ABC’s 2007 financial report was free of material misstatement. vi. Adequately document the testing undertaken in respect to the risk of fraud. vii. Develop audit procedures to deal with assessed risks. viii. Perform sufficient and appropriate subsequent events procedures. ix. Use professional judgement and scepticism when auditing ABC’s 2007 financial report.
  23. 23. Case 2: Former ABC Learning Centre AuditorSuspendedDue to the above assessment Mr Green was suspended for 5 years.Following conclusion of the period of suspension, he is required to submit his first fiveaudits for review by a registered company auditor approved by ASIC.
  24. 24. Case 3: North Parramatta Auditor RegistrationCancelled  Mr Stuart Hamilton Cameron of KS Black & Co in North Parramatta had his registration as an auditor cancelled after concerns that he was not a fit and proper person to remain as an registered auditor.  The enforceable undertaking also follows an investigation of Mr Cameron’s audit of Citigold Corporation Limited (Citigold) for the financial year ended 30 June 2009.  Citigold is a gold mining company in Charters Towers in Queensland.  ASIC was concerned that Mr Cameron failed to ensure that a modified auditor’s report should have been issued, as in ASIC’s view:  The valuation of development property in the Citigold financial report was not in accordance with the relevant accounting standards; and  The Citigold financial report was materially misstated as Citigold subsequently reduced the value of its development properties by $80,043,376 in its financial report for the half-year ended 31 December 2009. Citigold described the change in accounting policy on moving into commercial production, such that Mr Cameron should have issued an adverse opinion for material non-compliance with an accounting standards.
  25. 25. Case 3: North Parramatta Auditor RegistrationCancelled ASIC was concerned that Mr Cameron failed to ensure that there was adequate planning and risk assessment procedures performed for the Citigold audit and that there was sufficient appropriate audit evidence regarding the $82 million Exploration, Evaluation and Development expenditure included in the Citigold financial report.
  26. 26. Thank you
  27. 27. Hanrick Currant. (07) 3218 3900f. (07) 3218 3901 Thank youLevel 11307 Queen StreetBrisbane Qld 4000GPO Box 2268Brisbane Qld 4001 Topic Date www.hanrickcurran.com.au