Financial reporting, audit and wider accountability — student companion

Accounting Ahead | Original study resource | accountingahead.com.au

Reporting, audit and accountability beyond

companies

MODULE 4 | PART A.4 | STUDENT COMPANION

The directors' reporting duties

Requirement What it means

Reporting cycle Annual and half-year financial reports and directors' reports, reporting to

members, and lodgement with ASIC (Corporations Act, Part 2M.3).

Comply with accounting

standards

The financial report must follow the standards (s 296).

True and fair view The report must give a true and fair view (s 297). If the standards alone don't

achieve that, add information in the notes; don't depart from the standards in the

main statements.

Executive declarations In a listed company, the chief executive and chief financial officer give the board

a written declaration about the financial statements.

Directors and management

prepare

Comply with the accounting standards

and give a true and fair view; extra

information goes in the notes

The external auditor tests and

reports

Sufficient appropriate evidence,

professional scepticism and

independence

Users rely on it

Shareholders, lenders and the wider

market

Earnings management

Bringing income forward or pushing costs back to flatter results

is misleading, even when every transaction is real. Example:

Tesco, 2014.

Who answers for errors?

Primary responsibility for a materially wrong report stays with

the board and management. An auditor who fails to gather

enough evidence can be liable too.

Legitimate judgement or earnings management?

Legitimate accounting judgement Earnings management (window dressing)

Estimating a provision using current, supportable

evidence

Choosing an estimate to hit a profit target

Recognising revenue when the goods or services are

delivered

Recording next period's deliveries as this period's sales

Recording costs in the period they relate to Holding back invoices so costs fall into the next period

Ethics link: earnings management threatens integrity, objectivity, professional competence and due care, and

professional behaviour.

ETHICS & GOVERNANCE | M4 PART A.4 | STUDENT COMPANION

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The external auditor

MODULE 4 | PART A.4 | EVIDENCE, SCEPTICISM AND INDEPENDENCE

What the Corporations Act requires In plain words

Audit to auditing standards (s 307A) The audit must follow the auditing standards.

Working papers (s 307B) Audit working papers must be kept for seven years.

Independence declaration (s 307C) The auditor declares in writing that independence rules were met.

Auditor's reports (ss 308, 309) Reports on the annual and half-year financial reports.

Information and help (ss 310, 312) The auditor can obtain information; officers must assist.

Reporting to ASIC (s 311) The auditor must report certain suspected contraventions to ASIC.

Threats to independence Board safeguards

A client whose fees are a big share of the firm's income Audit committee owns appointment, fees and evaluation

Large fees for non-audit services, such as consulting Approve or limit non-audit work

Long relationships between the same people Rotate key audit partners

Pressure from management Private meetings without management present

Reporting to the executives whose numbers are audited Periodic tenders and rules on hiring former audit staff

Professional scepticism means critically testing the evidence and management's judgements, especially

accounting estimates. ASIC's audit inspections keep finding weaknesses in the audit of revenue and of asset

values, including impairment, and concerns where firms sold other services to audit clients.

Real example. In October 2023, the UK Financial Reporting Council fined KPMG a record GBP 21 million

(reduced from GBP 30 million for cooperation) over its audits of Carillion, citing failures of professional

scepticism and of obtaining sufficient appropriate evidence.

ETHICS & GOVERNANCE | M4 PART A.4 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Widening responsibilities

MODULE 4 | PART A.4 | SUSTAINABILITY REPORTING, GOVERNMENT BODIES AND CHARITIES

Sustainability reporting

Development What it means

ISSB standards (June 2023) One standard on general sustainability-related financial disclosures and one

on climate.

Australia: largest entities Mandatory climate reporting for financial years starting on or after 1 January

2025.

Australia: further groups Phased in from 1 July 2026 and 1 July 2027.

Assurance Sustainability reports are assured, moving from limited towards reasonable

assurance.

Commonwealth government bodies Registered charities

Governance and performance law

How entities are governed, report performance, and manage risk

and fraud

Public interest disclosure law

Protects public sector whistleblowers

Audit legislation

The Australian National Audit Office audits Commonwealth entities

Fraud prevention centre

Helps entities strengthen their counter-fraud defences

To be a charity

Not-for-profit; only charitable purposes for the public benefit; no

disqualifying purpose; not an individual, political party or government

entity

Register and report

Register with the ACNC and lodge an annual information statement

Five governance standards

Purposes and not-for-profit nature; accountability to members;

compliance with Australian laws; suitable responsible persons; their

duties

Sources: Tesco - UK FCA final notice and SFO deferred prosecution agreement, 2017; KPMG and Carillion - UK FRC announcement, 12

October 2023; Australian climate reporting - Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024

and the Australian climate disclosure standard. Riverbend and other businesses named in the questions are imagined.

ETHICS & GOVERNANCE | M4 PART A.4 | STUDENT COMPANION

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Practice questions

MODULE 4 | PART A.4 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - spot the earnings management at Kestrel Furniture

Imagine Kestrel Furniture Ltd, with a 30 June year-end. Which of these are earnings management, and why?

(a) Furniture delivered on 3 July is recorded as June sales. (b) The June electricity bill is left out of the accounts

because the invoice arrived in July. (c) A supplier rebate that relates to next year's purchases is recognised in

full this year. (d) The warranty provision uses last year's claim rate, which matches current claims experience.

Question 2 - safeguards for Orbit Health's audit

Imagine Orbit Health Ltd, a listed company. The same firm has audited it for 12 years, with the same lead

partner for the last 7. Consulting fees paid to the firm are triple the audit fee. The chief financial officer negotiates

the fee, and the auditor reports to the chief financial officer. The chief executive sits on the audit committee.

Recommend safeguards.

ETHICS & GOVERNANCE | M4 PART A.4 | STUDENT COMPANION

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Question 3 - Coastal Animal Rescue

Imagine Coastal Animal Rescue Ltd, a registered charity and company limited by guarantee. It hasn't lodged

its annual information statement for two years. A director's spouse is its main veterinary contractor, and the

director votes on that contract. Donations have paid for a director's personal car. It hasn't held an annual general

meeting in two years. Which obligations and governance standards are at risk, and what should change?

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 4 | PART A.4 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Kestrel Furniture

(a) Earnings management. The goods were delivered after year-end, so the revenue belongs to next year.

(b) Earnings management (or at least an error). The cost relates to June, so it should be accrued this year.

(c) Earnings management. The rebate relates to next year's purchases, so recognising it now brings income

forward.

(d) Legitimate judgement. The estimate uses current, supportable evidence.

Question 2 - Orbit Health

Move the auditor's reporting line to the audit committee, and let the committee own appointment, fees and

evaluation.

Remove the chief executive from the audit committee; it should consist of non-executive directors, mostly

independent.

Restrict non-audit services so fees no longer dwarf the audit fee.

Rotate the lead partner, who has served too long, and consider putting the audit out to tender after 12 years.

Hold private sessions between the committee and the auditor without management present.

Question 3 - Coastal Animal Rescue

Issue Obligation or standard at risk Fix

No annual information statement

for two years

Ongoing ACNC reporting obligations;

registration is at risk

Lodge overdue statements and

diarise deadlines

Director votes on spouse's

contract

Duties of responsible persons (conflicts

of interest)

Declare the interest, step out of

decisions, keep a conflicts register

Donations used for a director's

car

Not-for-profit purposes; duties of

responsible persons; possibly the law

Recover the money, investigate,

tighten payment approvals

No annual general meeting Accountability to members Hold an AGM and report to members

Common slip: assuming charities are too small or too well-meaning for governance failures. The same

controls that protect a company protect donated money.

ETHICS & GOVERNANCE | M4 PART A.4 | WORKED ANSWERS

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