2.1 Introduction

Australia has comprehensive legislative and professional requirements concerning audit with the main legislative requirements set out in the Corporations Act 2001 (Corporations Act). The Australian Securities and Investments Commission (ASIC) is the key regulator under the Corporations Act and has responsibility for the surveillance, investigation and enforcement of the financial reporting requirements of the Corporations Act, including the enforcement of audit requirements.

The Corporations Act also gives legal effect to the auditing standards developed by the AUASB. The auditing standards require that auditors adhere to the relevant ethical standards as issued by the Accounting Professional and Ethical Standards Board (APESB). The professional accounting bodies enforce professional standards and comprise: Chartered Accountants Australia and New Zealand (Chartered Accountants ANZ); CPA Australia; and the Institute of Public Accountants (IPA).

Under the ASIC Act, the FRC is to provide strategic policy advice and reports to the Minister and professional accounting bodies in relation to the quality of audits conducted by Australian auditors. This advice may include: matters relating to the effectiveness of Corporations Act provisions relevant to audit; the review processes undertaken by the professional bodies to ensure that auditor skills and processes remain at a high level; and disciplinary processes. These three areas are addressed in this Chapter.

The Audit Quality Committee (AQC) of the FRC is tasked with assisting the FRC to meet this function. The AQC meets quarterly and makes recommendations to the FRC in regard to: strategic issues and structural trends within the audit profession; non-case specific systemic audit quality issues; international developments in audit quality and related professional standards; audit practice, auditing standards and professional standards; and investigation and disciplinary procedures for Australian auditors. During 2014-15, the AQC highlighted a number of issues and reports for the attention of the FRC.

The FRC continued to actively monitor international developments in audit quality processes and assessed their potential impact on, and usefulness for, Australian practitioners and the financial reporting industry. During 2014-15, the FRC considered that the current Australian audit quality framework continued to be robust and that it was not necessary to propose changes to the Minister at this time. The FRC noted the considerable ongoing international work in this area and will continue to monitor any changes in other jurisdictions to assess whether subsequent amendments would be appropriate in Australia.

2.2 The quality of audit

The AUASB Chair is a Public Interest member of the International Auditing and Assurance Standards Board (IAASB) and a member of its Steering Committee. The Chair attends all IAASB meetings. This active involvement enables AUASB to contribute directly to international standard setting development and understand the implications of audit regulation in different jurisdictions. This places the FRC and its Australian constituents in a sound position to oversee AUASB activity and consider any advice that should be provided to the Minister. The role of the AUASB in influencing international standard setting is also discussed in Chapter 4.2.2.

Auditor reporting

The FRC, through the AQC, has closely monitored the new auditor reporting standards issued by the IAASB in January 2015 and the process to adopt these changes in Australia. The FRC noted the specific changes relating to: auditor reporting; auditor responsibilities relating to other information and financial statement disclosures; and conforming amendments to auditor reporting for special purpose financial statements. The FRC was regularly briefed by the Chair of the AUASB on how it is implementing the auditor reporting standards in Australia and supported its timetable for consultation. The AUASB has extensively consulted with Australian assurance practitioners, directors and industry on these new requirements. The FRC will continue to monitor and support the introduction of the new standards including facilitating engagement and understanding of the new requirements.

Other audit matters

The AQC and its members have actively engaged with ASIC and the audit profession on ASIC's Audit Inspection Program. While the next audit inspection report is not scheduled for release until December 2015, the AQC has discussed with ASIC its methodology for conducting inspections, including the use of an expert panel to provide advice, and the communication of the results of the inspection program. These issues will be further discussed in 2015-16.

The AQC has also discussed the transparency reports issued by certain audit firms. In 2012, the Corporations Act was amended to require auditors who audit ten or more certain types of entities to publish a transparency report providing information, among other things, on the internal quality control system of the auditor.

The AQC welcomed the release of the Chartered Accountants ANZ report 'Clearer Transparency — Assessing the Second Year of the Audit Firm Transparency Reports in Australia'. The FRC noted the key findings that while all reports analysed met the prescribed information requirements, the larger network firms tended to go beyond the minimum requirements by including examples of actions taken to improve audit quality. The report also identified opportunities to communicate key quality messages more effectively and clearly. FRC members endorsed the release of a media statement to support the findings of the report and noted the ASIC information sheet INFO 196: Audit quality – The role of directors and audit committees, encouraging directors to consider the use of transparency reports.

2.3 Stakeholder engagement

The FRC and the AQC consulted widely with the audit profession during 2014-15 and received information on audit quality matters from ASIC and the professional accounting bodies. The FRC further informed its audit quality responsibilities through an ongoing review of releases from the professional accounting bodies, accounting firms, international audit standard setters and regulators and other audit stakeholders.

Australian Securities and Investments Commission

ASIC issued a new regulatory guide that fundamentally changed its approach to the resignation of company auditors. ASIC will now generally consent to the resignation of an auditor at any time of the year, subject to some conditions. Previously, ASIC only consented to the resignation of an auditor of a public company to take place at an annual general meeting unless there were exceptional circumstances.

In December 2014, ASIC launched a web-based financial reporting quiz to assist directors to understand their financial reporting responsibilities and to improve their knowledge. The quiz was developed by ASIC with Chartered Accountants ANZ, CPA Australia, IPA and the Australian Institute of Company Directors (AICD) and had over 2,000 respondents by 30 June 2015. Of those completing voluntary information on the quiz, 97 per cent found it useful and 90 per cent would recommend it to other directors. The FRC noted the significant value of this on-line tool in enhancing the financial literacy of directors and in raising awareness of the need for all directors to understand their financial reporting obligations.

ASIC has been working on a revised guide for the registration of company auditors, which is due for release in 2015-16 and has also released a new audit report for Australian Financial Services licensees to facilitate the accurate completion of the report.

Chartered Accountants Australia and New Zealand

Chartered Accountants ANZ reported its ongoing activities in relation to audit quality practices and for members.

During the year, Chartered Accountants ANZ focussed on discussions with firms and stakeholders on the application of standards, sharing experiences and highlighting expectations on matters relating to the conduct of audits. This occurred through formal meetings with stakeholders as well as through numerous meetings with members and other events. Chartered Accountants ANZ developed and published materials to support professionalism and quality in the audit professions, including:

  • Professional Scepticism on-line tool to train and test professional scepticism for audit leaders;
  • Clearer Transparency providing ideas on audit firms' quality control processes;
  • Audit Focus Areas for 2015 year ends which includes issues arising from Quality Reviews, and Year End Essentials covering reporting other updates for 2015 year ends;
  • updates of the Audit Manual for Small & Medium Entities and the SMSF Audit Guide and Toolkit;
  • a new Perspective online series which explores specific reporting or auditing issues in more depth. ASIC have provided articles for this series including on their audit inspection program;
  • fortnightly electronic newsletters providing regular and easy updates on changes to standards and regulations and upcoming areas of focus;
  • regular updates summarising key objectives of auditing standards and mandatory requirements; and
  • the FutureInc program, an on-line series which has included innovative options for considering financial statement disclosures, market advantages of the new audit reports and cyber security.

Chartered Accountants ANZ also commissioned detailed research from the University of Adelaide into auditor requirements in legislation. This research uncovered broader, serious issues in relation to understanding what accounts are required, what audit or review is necessary, and what qualifications an auditor requires. Chartered Accountants ANZ continued to support the removal of complicated and unnecessary legislative requirements including through its active participation in the FRC's Financial Reporting Taskforce and the FRC's Audit Quality Committee.

Effective auditor reporting was supported with the launch of the Revolutionising Reporting program which included a significant publication and associated events and activities to promote and support effective reporting. Chartered Accountants ANZ also supported the joint development and release of a financial literacy tool with ASIC and other professional bodies, with assessment of the activity currently being undertaken.

CPA Australia

CPA Australia reported policy and research initiatives that continue to contribute towards the improvement of Australia's audit framework based on international best practice standards and a robust legal and regulatory framework developed over many decades. Specific initiatives during the year included the following:

  • CPA Australia provided feedback on Australian and international audit consultations throughout the year, including assistance to the AUASB in its outreach activities which including hosting an auditor reporting roundtable in May 2015;
  • CPA Australia presented to the FRC's Audit Quality Committee in May 2015, providing an overview of its Quality Review programme and policy and research initiatives; and
  • in May 2015, CPA Australia invited AUASB staff to participate in a workshop with the members of the CPA Australia External Reporting Centre of Excellence to identify and develop training and other resources in anticipation of the new auditor reporting standards.

CPA Australia also reported a broad range of activities designed to ensure the audit profession's continued compliance with laws, standards and other requirements that are in place to uphold and improve audit quality in Australia. CPA provided the following overview for 2014-15:

  • an ongoing quality review program for all members in public practice (Registered Company Auditors (RCA) and Self-Managed Superannuation Fund (SMSF) Auditors are subject to review every three years);
  • robust and contemporary audit education programmes for both aspiring and established CPA Australia members;
  • ongoing requirements imposed on members including:
    • requirements to follow Australian auditing, assurance, professional and ethical standards; and
    • compliance with Continuing Professional Development requirements;
  • resources and toolkits including guides, fact sheets, manuals and competency standards;
  • online and face-to-face training products including workshops, webinars,
    e-learning modules and podcasts;
  • policy setting initiatives and advocacy to assist with the development of laws, regulations, standards and other requirements in Australia and internationally; and
  • regular liaison with ASIC, AUASB and other stakeholders that form the Australian co-regulatory framework to ensure the integrity of the Australian audit profession.

Institute of Public Accountants

The Institute of Public Accountants (IPA) continued to promote audit quality through their Continuing Professional Education (CPE) program and through their public practice program. In addition, the Public Practice Quality Assurance (PPQA) online review program was further refined with increased functionality. The IPA continued to communicate with members about developments and issues concerning audit quality. These included articles in professional journals and through fortnightly electronic newsletters. The IPA undertakes over 800 events every year relating to CPE including topics relating to audit and audit quality.

The IPA membership deals with audit matters relating to small firm/company audits, not-for-profits and SMSFs. There are very few RCAs in the IPA membership. Those who conduct audits are usually very small firms or sole practitioners.

During 2014-15, the Joint Accounting Bodies undertook a review of the Auditing Competency Standard for Registered Company Auditors, which has been submitted to ASIC for approval. This was the first time the Standard had been reviewed since 2004. The revised Standard will be communicated to members, incorporated into the CPE program and into the quality assurance program.

2.4 Review processes

Australia's auditor regulatory regime involves cooperation between ASIC and the professional accounting bodies. Each organisation runs an inspection or review program which encompasses audit engagements. The programs are complementary to manage different participants and types of engagement and to maintain a focus on audit quality.

2.4.1 ASIC Audit Inspection Program

ASIC publishes its public audit inspection reports every 18 months to inform audit firms, the investing public, companies, audit committees and other interested stakeholders in the financial reporting chain of findings and areas of focus. The next report is due in December 2015.

ASIC inspects firms that audit significant public interest entities. ASIC also continues to inspect smaller firms where they are responsible for audits of publicly listed entities, or other public interest entities.

The audit areas reviewed for the report include impairment of assets and other significant areas involving significant estimates or judgements. For regulatory purposes, ASIC considers that audit quality concerns matters that contribute to the likelihood that the auditor:

  • achieves the fundamental objective of obtaining reasonable assurance that the financial report as a whole is free of material misstatement; and
  • ensures material deficiencies detected are addressed or communicated through the audit report.

In the most recent report (June 2014), three broad areas continued to be specifically identified as requiring improvement by audit firms: the sufficiency and appropriateness of audit evidence obtained by the auditor; the level of professional scepticism exercised by auditors; and ensuring appropriate reliance on the work of experts and other auditors.

During 2014-15, ASIC continued to monitor action plans developed by the six largest accounting firms to improve audit quality and the consistency of audit execution. The results of these action plans are expected to be reflected in future ASIC reports.

2.4.2 Chartered Accountants ANZ Quality Review Program

The Quality Review Program is an integral component of Chartered Accountants ANZ's professional compliance framework. The program is designed to assess whether Australian members who hold a Certificate of Public Practice have implemented appropriate quality control policies and procedures in their practices. Where these policies and procedures are not sufficiently robust to maintain compliance with professional, technical and legislative requirements, Chartered Accountants ANZ actively works with individual practices to remediate problem areas. Chartered Accountants ANZ also uses the knowledge gained from this process to promote continuous improvement amongst members.

The program is a risk-based model with practices being reviewed:

  • within one year if significant non-compliance issues are found during a practice's initial review. This enables prompt assessment of whether appropriate remedial action has been taken by the practice;
  • once every three years where the practice signs off on audits requiring a RCA registration. This reflects the higher level of public interest incumbent in these audits; and
  • once every five years for other practices.

The overall results from 2014-15 are summarised below:

No departures from professional standards3%

  Percentage 2014‑15
Departures from professional standards, not classified as significant - practice is required to address the issues identified during the review 80%
Significant departures from professional standards - practice is required to develop an action plan outlining how the issues identified will be addressed, and reviewer re-visits practice to assess whether remedial action has been taken by the practice 17%

The percentage of practices with significant non-compliance issues decreased this year (2013-14: 21 per cent), reflecting the continuing efforts of members to implement effective quality control systems in their practices. The majority of re-reviews were required as a result of inadequate quality control procedures or insufficient documentation of audit evidence, or a combination of both.

As part of Chartered Accountants ANZ's overall objective of enhancing audit quality, the review approach for very small practices that conduct assurance engagements is being reviewed. This approach will use interactive online questionnaires tailored to the type and size of assurance engagements typically conducted by these practices.

Information regarding the quality review process is included in the Chartered Accountants ANZ 2015 Annual Report and the 2015 Quality Review Report. These reports will be provided to the FRC when issued.

2.4.3 CPA Australia Quality Review Program

  • members who hold a public practice certificate are subject to a Quality Review (QR) Program. CPA Australia's QR program adopts a cyclical, risk assessment approach to selecting members for review. Member selection is defined by the following criteria:
    • Public Practice Certificate (PPC) holders who are either an RCA or SMSF auditor are subject to review every three years;
    • all other members are reviewed on a four, three or one year cycle based on the outcome of their last review;
    • members who receive a qualified report (assurance report) are reviewed after three years instead of four years; and
    • members who are subject to further review (follow-up report) due to non-compliance issues are reviewed the following year.
  • considered to be low risk practitioners (i.e. do not perform audit or assurance engagements, insolvency or forensic work, and members who are not undergoing their first quality review), and members undergoing a follow up review are now subject to quality reviews performed by qualified in-house staff rather than accredited contracted reviewers.
  • the year to 30 June 2015 the results of the CPA Australia QR Program were:
    • 27.1 per cent Accept Reports with no departure from professional standards identified;
    • 62.4 per cent Assurance Reports with minor departures from professional standards identified; and
    • 10.5 per cent Follow-Up Review Reports where there were multiple departures from professional standards or a breach of an audit standard was identified. Any breach of an auditing standard is automatically included in this category and requires a follow-up review the following year. Where breaches fail to be addressed, CPA Australia treats the matter as a Professional Conduct matter which means an investigation is undertaken and disciplinary options may be pursued.
  • majority of all auditing breaches identified by the CPA Australia QR Program relate to audits of SMSFs. Education has been provided to members about the importance of perceived and actual independence, particularly with compilation and audit engagements for SMSFs.
  • the current review period (the 2015 calendar year) over 925 members are expected to complete a Quality Review and a further 144 follow-up reviews are expected to be completed from 2014 reviews.

2.4.4 IPA Quality Review Program

The IPA requires all members who are issued with a certificate of public practice to undertake a Public Practice Quality Assurance Review (PPQA) every three to five years. Members who are a RCA or a SMSF auditor are required to hold a certificate of public practice and must be reviewed every three years. All other members are reviewed every five years.

The IPA quality assurance review is designed to assist IPA public practitioners to improve their work practices to best practice levels. This in turn ensures clients have confidence in the level of service and professionalism being provided.

The IPA undertakes a review of around 500 members in public practice every year. For the year to 30 June 2015, all reviews were conducted using an online data collection program in relation to member practices and their client base. Reviews are now undertaken as a desk based online review and members must provide proof of their compliance with professional and ethical requirements of the IPA. A site visit and
face-to-face review will only occur where evidence by the member has been considered insufficient to establish compliance with the standards, or if the IPA otherwise deems it necessary. The PPQA system has been further developed with the capability for reviewers to incorporate all comments directly into the system. Each year a further 500 to 600 members are put on the online system. It is also designed to provide a practice/business diagnostic so that members can improve their practice management and application of professional and ethical standards to the highest possible level.

During 2014-2015:

  • 78.9 per cent of members reviewed met all professional standards and requirements and may have had minor non-compliance issues however they were resolved before the review was finalised;
  • 21.1 per cent of members reviewed showed a level of non-compliance where follow-up action was required; and
  • 16 members reviewed were self-managed superannuation fund auditors;
    • 15 of these members met all professional standards and requirements and may have had minor non-compliance issues, however they were resolved before the review was finalised; and
    • one member had a non-compliance issue relating to CPE requirements and the member is currently being monitored for compliance.

2.5 Disciplinary procedures

Under the ASIC Act, the FRC is required to provide strategic policy advice and reports in relation to the investigation and disciplinary procedures of professional accounting bodies as those procedures apply to Australian auditors. During 2014-15, the FRC sought information on disciplinary procedures from ASIC and the professional accounting bodies.


In addition to its regular inspections of firms, ASIC conducts surveillances where it is concerned that there may be significant deficiencies in an audit. In 2014-15 these surveillances led to two auditors agreeing to the cancellation of their registration as company auditors. Two other auditors had their registrations suspended by the Company Auditors and Liquidators Disciplinary Board for failing to comply with registration conditions.

ASIC also deregistered 373 SMSF auditors for not meeting a requirement to sit and pass a competency exam. Another two SMSF auditors were deregistered as a result of deficient audits.

The accounting bodies have provided the FRC with the following information concerning disciplinary matters for the year ended 30 June 2015.

Chartered Accountants ANZ

Chartered Accountants ANZ is responsible for disciplining members who breach the By-laws and Regulations of Chartered Accountants ANZ as well as the Code of Ethics, APES 110: Code of Ethics for Professional Accountants. Chartered Accountants ANZ's disciplinary arm, Professional Conduct, investigates conduct matters and may refer cases to the Professional Conduct Tribunal for independent hearing.

During the year ended 30 June 2015, 249 matters (arising from complaints against members and from limited surveillance activities) were bought to the attention of the Professional Conduct team regarding the conduct of Australian and International (outside New Zealand) members of Chartered Accountants ANZ (not limited to audit practitioners).

During 2014-2015 the Professional Conduct Tribunal heard one case concerning auditors. Details of the hearing were published in Acuity (the journal of Chartered Accountants ANZ) and on the Chartered Accountants ANZ website.

Information in relation to Chartered Accountants ANZ's disciplinary process is included in the Chartered Accountants ANZ 2015 Annual Report as well as the Professional Conduct Report 2015. These reports are being finalised and will be provided to the FRC when issued.

Chartered Accountants ANZ believes that as a professional body responsible for maintaining member standards, it is necessary to continually test the Professional Conduct function. In 2014 an independent review of Chartered Accountants ANZ's professional conduct function was undertaken. Key changes being introduced are:

  • the formation of an independent Professional Conduct Oversight Committee;
  • the formation of a Professional Conduct Committee, responsible for assessing complaints and other matters, assessing whether or not the matter should proceed to the Tribunal for hearing and entering into consent agreements with members in appropriate cases; and
  • the appointment of an experienced independent lawyer to advise the Tribunals as required on legal issues.

CPA Australia

During 2014-15, two CPA members holding a company auditor registration were referred to a Disciplinary Tribunal. Twenty members holding a PPC were referred to a Disciplinary Tribunal and included the following issues: two insolvency; one derogatory conduct; six adverse findings by the Tax Practitioners Board; five failures to undertake QR; three failures to respond to CPA Australia; one breach of the Trust Accounts Act 1973 (Queensland); and two adverse findings by statutory bodies.

The outcomes of CPA Australia Disciplinary Tribunal hearings are published on the CPA Australia website.

2.6 Professional and business ethics

The professional bodies have formal education and continuing professional development programs which provide the basis for teaching and maintaining professional and business ethics. During 2014-15, in addition to matters identified in section 2.3, these included the following activities.

CPA Australia promoted business ethics through regular articles in professional publications and industry conference presentations. The IPA supported professional and business ethics studies through formal modules as part of tertiary level studies at the Graduate Certificate and Masters level, as well as offering continuing professional education relating to audit. Chartered Accountants ANZ has a formal program as well as continuing professional development with specific requirements for auditors. The organisation also promotes ethics in its conference programs, online training and informal discussion groups.