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AUDITING
Governance and the Auditor
SHAREHOLDERS
OPERATIONAL
AUDIT
INTERNAL
AUDITORS
CORPORATE
GOVERNANCE
AUDITOR
AUDIT
COMMITTEE
BOARD
2.2
Study organiser
Before you begin this unit, please check through your study organiser. It shows
the topics that well be covering, the
the skills you need to acquire (the learning
outcomes)) and the activities youll do to help you acquire these skills.
Topic
2.1 Whats
governance?
Learning Outcomes
Activities
Activity 2.1
Review Question
2.11 Page 85
2.3 Issues in
governance
Discuss
iscuss the issues of internal control,
risks and operational audits in the
governance processes
2.5 Enhancing
accountability
through the audit
committee
Activity 2.2
Review Question
2.12 Page 85
Activity 2.3
Acknowledge the roles of internal
and operational audits in the
governance processes
Review Question
2.15 Page 85
Activity 2.4
Consider the significance of the role
of the audit committee in governance
Professional
Application
Question 2.33 Page
86
Activity 2.5
Review Question
2.20 Page 85
Study time
It should take you 10 -12
12 hours to complete this topic.
2.3
Introduction
This chapter introduces you to the concept of governance which is applicable to
all entities. The complexity of governing an enterprise involves applying the
concept to an environment where there is a range of expectations and competing
interests among different stakeholders. The governing body must find an
appropriate balance between business performance and management controls.
The following section explains the broad nature of governance, with an
appreciation of business performance and accountability.
Reference
Textbook:
Chapter Two
Modern Auditing: Assurance Services, Leung, Coram, Cooper, Richardson, 5th
Edition, Wiley.
Most contents are paraphrased from the text. For a full understanding, you
must read Chapter Two of the text.
2.4
2.5
The major role of external auditor is to give an independent opinion on the truth
and fairness of the financial statements of the organization. Depending on the
jurisdiction in which the organization is based, the external auditor may also be
required to ensure that the organization and the board of directors have complied
with all relevant legislation and regulations. The auditor works closely with those
charged with the governance of the organization, in particular the audit
committee where one exists. There have been major changes to guidelines for
corporate governance practices in Australia (CLERP 9) and USA (Sarbanes
Oxley Act) in recent times.
Auditing and assurance services include those assurance services that deal with
historical financial information (financial reports).
2.6
The following reading provides more detailed explanation and examples of the
above matter.
Pause now and prepare to do the reading below
2.7
2.8
Internal Auditing
Internal auditing has been regarded as the key component of the governance
process in organizations. It involves a function that evaluates and improves an
organizations risk management, control and governance processes to improve
Unit 2: Auditing - Governance and the Auditor
2.9
2.10
Operational auditing
Operational auditing is a non-financial operations audit and is used to evaluate
management's performance, management's planning and quality control systems,
and specific operating activities and departments. Operational auditing is referred
to as value-for-money or performance auditing or efficiency and effectiveness
audit.
An operational audit may include elements of a compliance audit, a financial
audit
and an information systems audit. It involves establishing performance indicators,
agreeing the standards and criteria for measurement, and evaluating actual
performance against targeted performance.
Thus operational auditing focuses on the future, in direct contrast to a financial
statement audit, which has a historical focus. Unlike a financial statement audit,
an operational audit does not end with a report on the findings, but extends to
making recommendations. Operational audits are an important element of
internal auditing. Three approaches for operational audit have been suggested as
risk-based audit, value-for-money audit and process audit. Details are listed on
page 63.
Typically there are five phases to an operational audit and each phase must be
completed. These phases are (1) preliminary preparation, (2) field survey, (3)
program development, (4) audit application and (5) reporting and follow up.
Details of these phases are listed on pages 63 and 64.
2.11
The following reading provides more detailed explanation and examples of the
above matter.
Pause now and prepare to do the reading below
2.12
Parliamentary committees
Parliamentary committees are set up by Parliament or by statute for a specific
purpose. A purpose of the committee may be to review the expenditure of public
finances or to review agency budgets and may consist of representatives from
both houses of Parliament.
2.13
Performance auditing
Performance audit is defined as:
An independent, objective and systematic assessment of public sector entities'
programs, resources, information systems, performance measures, monitoring
systems and legal and policy compliance. Performance audits play an important
role in improving the administration and management practices of public sector
entities. Performance audits involve the evaluation of the implementation of
specific government programs, policies, projects and activities. They also
examine how well administrative support systems operate. Performance audits
can include the consideration of:
economy (minimizing cost)
efficiency (maximizing the ratio of outputs to inputs)
effectiveness (the extent to which intended outcomes were
achieved)
Legislative and policy compliance.
Figure 2.7 on page 76 provides a brief cycle of performance audit that shows the
processes of planning, evidence gathering and reporting.
There are four types of performance audit:
1.
2.
2.14
3.
4.
Performance engagements
The aim of a performance engagement is to enable the assurance practitioner to
express a conclusion designed to enhance the degree of confidence of the
intended users other than the responsible party by reporting on assertions or
information obtained directly concerning the economy, efficiency or effectiveness
of an activity against identified criteria. There are two types of performance
engagements: (1) performance audit engagements which provide reasonable
assurance; and (2) performance review engagements which provide limited
assurance.
2.15
Ethical requirements
Ethical requirements include adherence to independence and application of the
appropriate
code of ethics (the professional accounting body's code of ethics).
The assurance practitioner shall comply with the fundamental ethical
principles of integrity, objectivity, professional competence and due care,
confidentiality and professional behavior. Details of all ethical codes can
be found in the respective professional accounting bodys ethical
pronouncements.
Quality control
There are many quality control procedures that assurance practitioners need to
implement for proper quality control system. These are the same as the quality
control elements of an audit.
Initiation or acceptance
There are several factors that assurance practitioners must consider before
accepting an assurance engagement. Pages 78 and 79 outline these factors.
2.16
form is used. Where both positive and negative forms are expressed, the
practitioner shall clearly separate the two types of conclusions.
The assurance report may be expanded by assurance practitioner to include
other information and explanations that that are not intended to affect their
conclusions. Examples of other information include:
Recommendations.
2.17
SUMMARY
This unit has introduced to you the concept of governance and corporate
governance and role of internal auditors, external auditors and audit committees
play within the governance framework. We also discussed auditing within the
public sector and the role of the auditor general and how this is linked to
accountability of public resources.
Activities
Turning now to your text book, look at the activities below and note your answers
down in your notebook.
These activities will be discussed in the tutorial sessions.
Activity 2.1
From Page 85, work on Review Question 2.11.
Activity 2.2
Again on Page 85, work on Review Question 2.12.
Activity 2.3
Work on Review Question 2.15 on Page 85.
Activity 2.4
Attempt the Professional Application Question 2.33 on Page 86
Activity 2.5
Lastly attempt Review Question 2.20 found on Page 85.
2.18