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Chapter 2

The Structure of the Profession

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Learning Objective 1:

Professional Status of the Auditor

• Professional occupations can be distinguished by five common attributes. These are:

– systematic theory– professional authority and expertise– community sanction– regulative codes– well-established culture

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Auditing as a profession

• Auditing can be classified as a profession because of its:

– reliance on an underlying theory of accounting and auditing;

– expertise; – ability to control admissions to the profession;– regulatory mechanisms employed; and– conservative behavioural subculture.

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Regulation of Auditing: The Financial Reporting Council

• Financial Reporting Council (FRC) – a statutory body established in 1999 with the responsibility of providing a broad oversight of the accounting standard-setting process. This role was recently expanded to include a broad oversight of auditing standard-setting and the monitoring of auditor independence.

Learning Objective 2:

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Regulation of Auditing: The Auditing and Assurance Standards Board

• The Auditing and Assurance Standards Board (AUASB) was reconstituted as an independent statutory body on 1 July 2004 and is responsible for the development of auditing and assurance services standards.

– The Board originally consisted of 10 members (12 in 2006) appointed by FRC, and a Chair appointed by the Treasurer.

– Responsibility for the final approval of auditing and assurance standards now lies with Parliament.

– The AUASB has a long-standing policy of convergence and harmonisation with International Standards on Auditing (ISAs).

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Regulation of Auditing: The Accounting Professional and Ethical Standards Board

• Until 2006 CPA Australia and the Institute of Chartered Accountants in Australia maintained control of the setting of ethical standards, which were promulgated through a joint Code of Professional Conduct (CPC).

• In 2006, a body independent of the professional accounting bodies, the Accounting Professional and Ethical Standards Board (APESB) was formed.

• The APESB establishes ethical standards, as well as professional standards by which the members of the professional accounting bodies will be required to abide.

• THE APESB will consist of 8 members, including 2 from CPA Australia and 2 from ICAA.

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Regulation of Auditing (Cont.)

• Two other government agencies are also involved in the regulation of auditors:

– Australian Securities and Investments Commission (ASIC) — the administering authority for the Corporations Act 2001.

– Companies Auditors and Liquidators Disciplinary Board (CALDB)— determines whether a registered auditor or liquidator has failed to carry out their duties properly or is not a fit and proper person to be registered.

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Registered company auditor

• In order to be appointed as a company auditor under s. 1280 of the Corporations Act 2001, a person must ordinarily:

– be an Australian resident;– be a member of an approved body (CPA Australia, ICAA or

affiliated bodies);– be an accounting graduate of a prescribed university or other

prescribed institution in Australia;– have sufficient auditing experience; and– be a fit and proper person.

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Learning Objective 3:Regulation of Subject Matter Audits

• Financial Reporting Council (FRC) — responsible for oversight of accounting standard-setting process.

• Australian Accounting Standards Board (AASB) — responsible for the development of accounting standards in Australia.

• Urgent Issues Group (UIG) — provides authoritative guidance on accounting issues that are otherwise likely to receive divergent or unacceptable treatment.

• Financial Reporting Panel (FRP) — established in 2004 to provide a forum for review of disputes between ASIC and entities lodging reports with ASIC.

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Learning Objective 4:Internationalisation of Auditing

• Increased international trade has contributed to the development of international auditing practices.

• Multinational organisations wish to ensure the quality of financial information from subsidiaries and related entities.

• The International Organisation of Securities Commissions (IOSCO) (including SEC in USA and ASIC in Australia) supports the harmonisation of international auditing standards.

• Most countries consider International Standards on Auditing (ISAs) carefully when developing their own standards.

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Internationalisation of Auditing (Cont.)

• Key groups include:– International Federation of Accountants (IFAC) — guide efforts

to develop technical (accounting and auditing) and ethical standards. Members include 163 accounting bodies (including ICAA and CPA Australia) in 119 countries.

– International Auditing and Assurance Standards Board (IAASB) — independent body supported by IFAC that develops standards and guidance for audit and assurance services.

– Transnational Auditors Committee (TAC) — executive arm of the auditing firms which perform auditing across national boundaries.

– International Forum on Accountancy Development (IFAD) — created in 1999 by IFAC and World Bank. Consists of a range of public and private organisations aiming to improve financial reporting, accountability and transparency worldwide.

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Learning Objective 5:Profile of the Auditing Profession

• Currently, there are two key accounting organisations in Australia:

– CPA Australia; and– The Institute of Chartered Accountants in Australia

(ICAA).

• Membership of either of these two bodies by public accounting practitioners is voluntary.

• However membership of either of these bodies (or another prescribed body) is necessary in order to become a registered company auditor.

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Membership of the ICAA or CPA Australia

• To become a full member of either organisation, a person must have:

– completed a recognised degree from a university;– completed the relevant educational entry programme (CA

or CPA program) of the professional body;– have appropriate employment experience; and– be considered a fit and proper person.

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CPA Australia ICAA

No. of members (2004) >100,000>40,000

Public practice 20% 40%

Commerce 42% 41%

Others (govt, retired, academic) 38% 19%

------- -------

100% 100%

Member profile of ICAA Australia and CPA

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Profile of the audit profession and audit firms

• The audit profession in Australia has two levels:(i) national and international (including the Big Four (since the demise of Arthur Andersen) and second tier firms); and(ii) regional or local firms.

• The largest international firms are known as the Big Four. They are:

– Deloitte– Ernst & Young– KPMG Australia– PricewaterhouseCoopers

• The Big Four dominate the practice of public accountancy.• They audit approximately two-thirds of listed companies in

Australia.

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Size of big four audit firms

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Profile of the audit firms and other services

• While audit and assurance services forms a substantial part of a public accounting firm’s client base and revenue stream, most firms also offer:

– taxation– management consulting– internal audit– accounting services– insolvency services.

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Learning Objective 6:Internal Structure of an Audit Firm

• Currently, audit firms generally practice as a partnership.

• As a result of CLERP 9 amendments, audit firms can now apply to be an authorised audit company.

• Provides advantages of limitations in liability and adequate professional indemnity. Insurance must be maintained.

• Most large audit practices are usually structured along industry specialisations.

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Positions and duties in an audit firm

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Learning Objective 7:Quality Control

• AUS 206/ASA 220 (ISA 220) requires the audit engagement team to implement quality control procedures.

• Procedures should be adopted in the followingareas:

– Ethics– Employment– Assignment of personnel– Supervision– Guidance and assistance– Client evaluation– Monitoring.

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Quality control procedures

• Key quality control procedures employed by the professional bodies are:

– Practice reviews and rotation of auditors: internal review (Engagement quality control review) —

auditor subject to review by another partner in the practice; periodical rotation of auditors (partners and staff) to limit

length of time spent on one client; peer reviews — independent periodic review by another firm

of public accountants; and continuing professional education requirements.

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Learning Objective 8:Auditing in the Public Sector

• Another important auditing sector, separate to the private auditing sector, is the public auditing sector.

• Many public sector entities require auditing.• Responsibility for public sector audits rest with the

Commonwealth and State Auditor-Generals.• They use AUSs/ASAs as the basis of their auditing

standards.• Sometimes audit mandate prescribes wider inclusions

than just financial statements. Compliance and performance audits may be required. (This is further discussed in Chapter 16).