2020 audit lecture series - Module 1, Topic 1

The script introduces the concept of auditing within the context of a flipped learning environment, where online content precedes in-class activities. It clarifies misconceptions about the audit's purpose, explaining that an audit's goal is to verify the truthfulness of management's financial statements, not to endorse their performance. The Australian Auditing Standards (ASAs) are highlighted as the authoritative guide for conducting audits, which are legally enforceable under the Corporations Act. The purpose of an audit is to increase confidence in the financial report's reliability for decision-making, with the auditor expressing an opinion on whether the report complies with the applicable financial reporting framework.

This section delves into the historical backdrop of audits, linking their inception to the Industrial Revolution and the rise of mass production. It discusses how the need for audits arose from the necessity to instill trust in investors and lenders, given the increasing complexity of business operations and the distance between management and shareholders. The script also touches on the broader concept of corporate governance, describing it as a framework of rules and processes to ensure accountability, with audits being a critical component of this framework.

The script corrects the common misconception that an audit opinion serves as a guarantee of a company's management quality or investment value. It emphasizes that an audit opinion merely confirms the truthfulness and fairness of the financial statements in accordance with accounting standards. The role of audits within corporate governance is further explored, highlighting the multi-party structure that includes entities, shareholders, management, the board of directors, regulators, and auditors, all contributing to a system of checks and balances.

This paragraph underscores the importance of audits in facilitating optimal decision-making by providing accurate and complete information to shareholders. It explains that shareholders rely on financial reports to make informed investment decisions and that the auditor's role is to ensure the reliability of these reports. The script also discusses the reasons for conducting audits, including the reduction of capital costs, and the improvement of information credibility, which is vital for maintaining the integrity of financial markets.

The script provides an in-depth explanation of the different types of audit opinions, ranging from unqualified (or 'clean') opinions, which indicate the financial statements are true and fair, to qualified, adverse, and disclaimer opinions, which communicate issues or limitations encountered during the audit. It also discusses the addition of emphasis of matter or other matter paragraphs to highlight significant issues for shareholders' attention.

This section examines the perceived value of audits, contrasting the views of clients who may see audits as a regulatory burden with those of shareholders who rely on them for accurate financial information. It presents various hypotheses explaining the demand for audits, such as agency theory, the information hypothesis, and the insurance hypothesis. The script also addresses the auditor's expectation gap, where public perceptions of auditors' roles may not align with the actual responsibilities and findings of the auditing standards.

The script outlines the legal obligations of auditors under the Corporations Act, which includes adherence to the Australian Auditing Standards (ASAs) and the preparation of an auditor's report that provides a true and fair view of the financial statements. It also highlights the importance of ethics in auditing, emphasizing the need for auditors to maintain independence, integrity, and objectivity to ensure the trustworthiness of their opinions.

This paragraph delves into the concept of independence in auditing, discussing both its factual and apparent aspects. It explains that auditors must be independent in reality, avoiding conflicts of interest, and in appearance, ensuring no perception of bias. The script also touches on the importance of auditors maintaining independence of mind, allowing them to exercise professional judgment without undue influence.

The script discusses the various safeguards that auditors must implement to protect their independence, including those mandated by the profession, legislation, and regulation, as well as individual firm safeguards. It explains the importance of continuously evaluating independence and the challenges of determining what constitutes an acceptable and reasonable level of threat to independence.