10. External audit process

Commonwealth entities’ annual financial statements must be audited by the ANAO, who issue their auditor’s report on the entity’s financial statements to the responsible Minister in accordance with section 43 of the PGPA Act (or shareholders in the case of Commonwealth companies in accordance with the Corporations Act). The ANAO auditor’s report is then included with the entity’s financial statements in its annual report.

The purpose of the ANAO is to support accountability and transparency in the Australian Government sector through independent reporting to the Parliament, and thereby contribute to improved public sector performance.

10.1 Understanding the auditor’s role

The auditor plays an important and ongoing role in assuring the integrity of an entity’s financial reports and reviews the entity’s financial reporting arrangements and the integrity of financial reports throughout the year.

The auditor’s report is formed on the basis of audit procedures, which include:

  • assessing the effectiveness of management’s internal controls over financial reporting and legal compliance
  • examining, on a test basis, information that provides evidence supporting the amounts and disclosures in the financial statements
  • assessing the appropriateness of the accounting policies and disclosures used, and the reasonableness of significant accounting estimates made by the accountable authority.

The audit procedures also extend to key aspects of legislative compliance, such as requirements relating to the appropriation of money. The results of relevant performance audits are also considered in determining the auditor’s report on the financial statements.

10.2 Establishing clearly defined roles and responsibilities with the auditors

The preparation of the financial statements involves applying appropriate accounting policies and financial management practices that comply with legislative and financial reporting requirements. Therefore, engagement with the auditor will often involve discussions about the interpretation and application of appropriate accounting standards, policies and procedures.

At the beginning of the process, it is useful to develop, in consultation with the auditor, clearly defined and documented roles and responsibilities for liaison, feedback and issues escalation. It is the CFO’s responsibility to identify and bring to the auditor’s attention in a timely manner all matters that may have an effect on the entity’s financial statements.

Better practice entities will strive for the adoption of a ‘no surprises’ approach by both parties and will foster a relationship based on mutual co-operation and understanding, characterised by regular and open communication, supported by an Audit Issues Register that details both parties’ agreement on the impact of the issue on the financial statements and tracks the status of issues identified by both the entity and auditor. The auditor attends audit committee meetings as an observer and to provide information on entity-specific financial statements and performance audit coverage and assurance reviews where applicable.

10.2.1 Audit liaison officer

An audit liaison officer may be appointed as a central point of contact for all audit related matters. The responsibilities of this role typically include:

  • organising the provision of the financial statements working papers at agreed times, through prior consultation between the auditor and the financial statements team on expectations and documentation requirements
  • establishing working arrangements between the entity and the auditor
  • facilitating the availability of key staff, including business managers, internal and external experts and internal audit during the external audit process
  • arranging audit access to an entity’s FMIS and related business systems
  • coordinating preparation and receipt of third party confirmation requests, such as bank confirmations and solicitor representation letters
  • in consultation with the financial statements team, assessing the implications of internal audit reports and audit reports on the financial statements
  • arranging regular contact so that both parties are abreast of progress in the preparation of the financial statements and audit to exchange ideas on solutions, provide opportunities for feedback, facilitate reaching agreements and eliminate surprises
  • coordinating and responding to audit reports and management letters promptly.

10.2.2 The role of the audit committee in the external audit

Auditor staff attend entity audit committee meetings as observers, and are able to speak to matters relating to the audit and provide other assistance to the audit committee as required.

Important matters that may be discussed by the audit committee and the auditor include:

  • issues of either a strategic or operational nature that have an effect on the entity’s financial statements. Such matters may include:
    • external developments affecting the entity
    • emerging business risks
    • significant new projects or programs
    • significant new contracts
    • restructuring plans
    • legislative changes major policy developments.
  • how significant risks of material misstatement are being addressed by the entity (whether due to fraud or error), the controls in place to handle such risks and how well they are being managed
  • the entity’s approach to any developments or changes in accounting standards and the FRR
  • the approach adopted in relation to materiality in the preparation of the financial statements, and the qualitative and quantitative factors that are considered when making materiality judgements, with a view to improving the relevance and readability of the financial statements
  • significant estimates and judgements used in the preparation of the financial statements
  • progress by the entity in addressing previous audit findings and implementing audit recommendations
  • the extent of the internal audit function’s coverage and/or involvement in the preparation of the financial statements and the extent to which the auditor may use the work
  • any other matters that may affect the quality and timeliness of the financial statements.

10.2.3 The role of internal audit in the external audit

Auditing Standard ASA 610 Using the Work of Internal Auditors (ASA 610) applies to auditors conducting:

  • an audit of a financial report for a financial year, or an audit or a review of a financial report for a half-year, in accordance with the Corporations Act
  • an audit of a financial report, or a complete set of financial statements, for any other purpose.

Auditing Standard ASA 610 also applies, as appropriate, where auditors are conducting an audit of other historical financial information.

Much of the information obtained by the auditor’s enquiries is obtained from management and those responsible for financial reporting, however, information may also be obtained by enquiries with the internal audit function and others within the entity.

Paragraph 6 (a) of ASA 315 requires external auditors to make enquiries to the internal audit function irrespective of whether or not the auditor intends to rely on the work of the internal auditor. This requirement arises as the internal audit function is considered a key internal control and may provide information to assist the auditor in obtaining an understanding of the entity and its environment, and in identifying and assessing risks of material misstatement at the financial statement and assertion levels. Where the auditor elects to use internal audit functions in the conduct of the audit of the entity’s financial statements, the use of work by internal audit is governed by ASA 610.

In performing its work, the internal audit function is likely to have obtained insight into the entity’s operations and business risks, and may have findings based on its work, such as identified control deficiencies or risks, that may provide valuable input into the auditor’s understanding of the entity, the auditor’s risk assessments or other aspects of the audit.

The role the internal auditor may have in the preparation of an entity’s financial statements should be discussed with the auditor at an early stage. This will enable both parties to ensure that working arrangements will comply with auditor standards and be completed within an agreed timeframe.

10.2.4 Documenting and communicating working arrangements

Documenting key elements of the working arrangements between an entity and the auditor, and sharing this information with the financial statements team, will support consistent understanding of the agreed approach.

These arrangements, developed in consultation with the auditor, could usefully cover matters such as:

  • the details of key entity and auditor contacts
  • timeframes and processes for responding to requests for information from the auditor and to address audit findings, including use of audit request and audit issues registers
  • arrangements for regular interaction between key entity and auditor staff
  • the processes for reaching agreement on the implementation of new accounting standard requirements, or new or changed accounting policies
  • agreement on the extent of review the auditor will undertake of the entity’s hard and/or soft close financial statements
  • arrangements for escalating and resolving issues, including the role of the audit committee, in the event of differences of opinion between the entity and the auditor.

10.2.5 Additional resources

Resource name Resource description

Template: Audit assistance package

Provides an example template that sets out details on an audit.

Template: Register of audit requests

Provides an example template for tracking audit requests.

Example: Audit protocols

Is an example of a formal communication plan with the auditors.

Template: Register of audit issues

Provides an example template for tracking issues identified by both the entity and the auditor throughout the audit.

10.2.6 Actions that may be taken by the CFO to support the audit

Particular actions that may be taken by the CFO to support the audit by the auditor include:

  • assisting the auditor to plan its audit by providing information such as emerging risks, the application of new or changed accounting policies, changes to systems and unusual transactions
  • taking a proactive approach to implementing effective internal controls in areas that underpin the entity’s financial statements
  • developing effective working arrangements between the entity and the auditor
  • discussing, early in the planning phase:
    • the application of materiality in the preparation of the financial statements
    • the potential opportunities to improve the relevance and readability of the statements, while still complying with applicable accounting standards and the FRR
  • implementing any necessary corrective action in a timely manner
  • adhering to agreed deadlines, and agreeing with the auditor the nature and extent of documentation to support the financial statements.

10.3 Seeking auditor feedback on proposed positions

The iterative nature of the preparation and audit processes, and the ongoing dialogue between the financial statements team and the auditor will often involve discussions about the interpretation and application of appropriate accounting standards, policies and procedures.

It is recognised that clarification and/or confirmation of the entity’s proposed position on a range of minor technical and procedural matters is part and parcel of an ongoing relationship between the entity and the auditor, and these would generally be resolved during regular dialogue between the parties.

Leaving significant issues ‘on the back burner’, or not discussing the entity’s proposed approach to addressing them with the auditor, increases the risk that the issue will affect the timely finalisation and audit of the financial statements.

Further information is available at: 7.7 Preparing accounting position papers.

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