The auditing environment has changed in the last 30 years through:
- increased privatisation of services such as rail and telecommunications in New Zealand
- economic crisis
- corporate collapses related to accounting mis-statements, internal controls and apparent failure of auditors
- Shift from self-regulation to increased audit activity and regulation.
Definition of governance
The exercise of economic and administrative authority necessary to manage an entity’s affairs.
Governance generally refers to the processes by which the corporation is directed and run, with decisions made properly so the entity operates in accordance with relevant law and regulations.
Why corporate governance?
- In business, the essence of governance relates to the structure of separation of ownership and management (the agency structure).
- The board of directors and the managers conduct the business on behalf of the owners.
- The owners require not only laws, but also other means to ensure that the management acts in the best interests of the business and its owners. This is the origin of corporate governance.
- The authority exercised by a governance body is underpinned by transparency and accountability.
Effective governance through the audit committee
The audit committee reports to the board of directors and enhances internal accountability and credibility and facilitates the participation of independent directors in the governance process.
Oversees internal and external audit functions
Ensures effectiveness in audit planning, performance monitoring, and fostering integrity and objectivity.
Audit committee roles include:
* Audit planning
* Monitoring audit performance
* Fostering integrity and objectivity in audit relationships
* Ensure appropriateness of authority
* Ensure adequate resources and support
Issues in governance
- Risk management (the culture, process and system established to manage opportunities and minimise or control risks – a broad concept not only healthy and safety)
- Internal controls (core part of risk management)
- Earnings management (whether deliberate or not)
Earnings management
Earnings management occurs when financial statements and transactions are ‘managed’ in order to achieve a certain outcome and to influence people’s perceptions of the performance of the entity.
Earnings management techniques include:
Accruals
Revenue recognition
Restructuring charges
Estimation of liabilities
Delaying sales
Manipulating research and development write-offs
Professional bodies in Aotearoa NZ – Roles and Responsibilities
- Responsibility of CA ANZ to control members of the accounting and audition profession in NZ.
- Members are bound by CAANZ rules and professional standards including the Code of
- Ethics.
- CA ANZ have been accredited by the FMA to issue licences to “Issuer Auditors”.
External Reporting Board (XRB) and the NZ AuASB – Roles and Responsibilities
- NZ has adopted international auditing standards.
- The responsibility to prepare and approve auditing standards is that of the XRB.
- The XRB established the NZ AuASB and delegated authority to the board to develop the standards.
Statute law including the Financial Reporting Act 2013 and the Auditor
Regulation Act 2011 – Roles and Responsibilities
- The XRB was established under the FRA 2013.
- The Auditor Regulation Act 2011 established the Financial Markets Authority (FMA) who has responsibility for auditor registration and oversight under the Financial Markets Conducts Act 2013.
The role of auditing standards - Roles and Responsibilities
- Audit and assurance standards provide
- minimum guidance for auditors to help determine the extent of steps and procedures that should be applied to fulfil the objective of the audit or assurance engagement.
- They are the criteria or yardsticks against which the quality of audit or assurance results are evaluated.
The requirement for audits in Aotearoa NZ – Roles and Responsibilities
Large entities under the FRA 2013 and FMC entities are required to be audited.
Registered charities are required to be audited.
Describe the nature of corporate governance.
- The exercise of economic and administrative authority necessary to manage an entity’s affairs.
- Governance generally refers to the processes by which the corporation is directed and run, with decisions made properly so the entity operates in accordance with relevant law and regulations.
Risk management
Risk management is the culture, process and system established to manage opportunities and minimise or control risks.
Risk management is a broad concept and is not only confined to health and safety and includes business continuity, corporate governance, and fraud.
Internal controls
Internal controls are the policies and procedures an organisation puts in place
to ensure business is operated in an orderly manner and to prevent and detect fraud, error, misappropriation of assets and non-compliance with policies and procedures.
Earnings management 2
Earnings management is when management manipulates financial statements and transactions to influence the public perception about the financial performance of the entity.
Earnings management techniques include use of accruals, revenue recognition, restructuring charges, estimation of liabilities, delaying sales, and manipulation of research and development write-offs.
What influence has case law had on auditing?
- Auditors’ roles evolved from detecting fraud to focusing on risk, materiality, and sampling.
- Emphasis on “reasonable skill and care” rather than guaranteeing accuracy (Kingston Cotton Mill Co., London and General Bank).
- Increased focus on understanding and managing risks (Pacific Acceptance Corporation v Forsyth).
