10. Foundations for a smooth external audit process

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.

While the ANAO must retain its independence from the entity, the iterative and inter-related nature of the financial statements development process and the ANAO’s external audit role requires ongoing dialogue between the entity and the ANAO.

In accordance with section 24 of the Auditor-General Act 1997, the Auditor-General sets ANAO Auditing Standards. These adopt the standards issued by the AUASB and relevant auditing and assurance standards issued by standard-setting bodies other than the AUASB as appropriate. They are to be followed by auditors conducting audits on behalf of the Auditor-General.

Further information on the role of the ANAO is included at: 3.3 Knowing the entity’s financial governance arrangements.

10.1 Understanding the ANAO’s role

The ANAO 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 entity’s annual financial statements must be audited by the ANAO.

The ANAO auditor’s report on the entity’s financial statements is issued to the responsible Minister (or shareholders in the case of Commonwealth companies) and is then included with an entity’s financial statements in the entity’s annual report. 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, and
  • 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 ANAO

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 ANAO 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 clearly define the roles and responsibilities for liaison, requesting feedback and issues escalation with the ANAO.

These arrangements, to be developed in consultation with the ANAO, will support the effective and efficient transfer of information between the entity and the ANAO.

10.2.1 Establishing a central point of contact

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

  • organising the provision of the financial statements working papers at agreed times, through prior consultation between the ANAO and the financial reporting team on expectations and documentation requirements
  • establishing working arrangements between the entity and the ANAO
  • facilitating the availability of key staff, including business managers, internal and external experts and internal audit during the audit process
  • arranging audit access to an entity’s FMIS and related business systems
  • in consultation with the financial reporting team, assessing the implications of internal audit reports and ANAO 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, and
  • coordinating and responding to audit reports and management letters promptly.

10.2.2 The role of the audit committee in the external audit

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

The ANAO attends audit committee meetings to brief committees on entity-specific financial statements and performance audit coverage and assurance reviews where applicable, as well as to make a contribution by bringing a public sector wide perspective, obtained through their audit and assurance work across the sector.

Important matters that may be discussed by the audit committee and the ANAO 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, and
    • 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 ANAO may use the work, and
  • 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

Where an audit committee 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 Auditing Standard ASA 610 Using the Work of Internal Auditors ( ASA 610 ).

This Auditing Standard applies to:

  • 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 , and
  • 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, to an audit of other historical financial information.

Much of the information obtained by the ANAO 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.

ASA 315 enquiries to the internal audit function 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.

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 ANAO at an early stage. This will enable both parties to ensure that working arrangements will comply with ANAO standards.

10.2.4 Documenting and communicating working arrangements

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

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

  • the details of key entity and ANAO contacts
  • timeframes and processes for responding to requests for information from the ANAO and to address ANAO audit findings
  • arrangements for regular interaction between key entity and ANAO staff
  • the processes for reaching agreement on the implementation of new accounting standard requirements, or new or changed accounting policies, and
  • 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 ANAO.

10.2.5 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.

ASA 610

AUASB guidance on using the work of internal auditors.

ASA 315

An AUASB compilation of auditing standards relating to risks of material misstatement.

Corporations Act

Federal Register of Legislation site for the Corporations Act.

10.3 Providing the ANAO with early advice on issues

It is the CFO’s responsibility to identify and bring to the ANAO’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.

10.3.1 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 ANAO include:

  • assisting the ANAO 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 ANAO
  • discussing, early in the planning phase:
    • the application of materiality in the preparation of the financial statements, and
    • 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, and
  • adhering to agreed deadlines, and agreeing with the ANAO the nature and extent of documentation to support the financial statements.

10.4 Seeking ANAO feedback on proposed positions

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

In seeking feedback from the ANAO with regard to proposed positions, it is important that the respective responsibilities of both management and the ANAO are reflected in the agreed arrangements.

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 ANAO, and these would generally be resolved during regular dialogue between the parties.

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

10.4.1 Audit-feedback process

Before seeking feedback on an issue from the ANAO, an entity should first conduct its own research, and prepare supporting documentary evidence. This may include information from:

  • key senior officers within the entity
  • the portfolio department
  • an external expert, and/or
  • the Department of Finance.

The entity should then formulate and substantiate its proposed position on the matter.

The ANAO may then be approached to provide audit-feedback on the entity’s proposed position, on the basis of the relevant supporting material that the entity has gathered.

Where feedback from the ANAO is required, this should be sought in a timely manner and preferably as soon as practicable once an issue has been identified and appropriately researched.

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