Auditing and Assurance for Listed Companies
Listed companies and their shareholders play an enormous role in the Australian and world economy, along with the global economy more broadly. The information that listed companies provide to their shareholders, both current and prospective, is a key driver of capital markets and the broader economy. Without assurance as to the validity of this information, capital markets would not operate as efficiently and predictably as they do.
Auditing and assurance services provided by financial service providers such as Kingston and Knight allow current and prospective shareholders in listed companies to feel secure in the information they are given, and manage their investments accordingly.
In Australia, the auditing and assurance process is set out in best-practice guides issued by CPA Australia. This ensures a standard of practice across the 150,000 strong membership of the nation’s chief financial services body, allowing shareholders in Australian listed companies to feel secure in the knowledge gained from their company’s auditor.
What Does Assurance Mean and Why Does It Matter?
Assurance is a term used to express a conclusive statement that functions to increase the confidence of those receiving information as to the validity of that information. For example, an audience seeking confirmation about the statements issued to them by the company they have invested in may find assurance in the detailed financial audit report issued to them by an independent financial auditor. The information contained in such a report clearly demonstrates the facts relating to the subject matter, and provides a firm basis for opinion be it positive or negative.
The gist of the term assurance is this; assurance allows stakeholders to make an informed decision on some particular subject or in relation to particular matters, sound in the knowledge that all relevant information is accounted for and presented in a verified format.
Assurance matters, because without assurance there can be no confidence. In capital markets and financial systems more broadly, confidence is a key driver of growth and positive outcomes. The work of qualified financial auditors and assurance practitioners allows those taking part in these financial systems to express confidence in the information given to them by listed companies, ensuring that they are in fact making a sound investment based on verified financial evidence.
It is important to note that there are different levels of assurance available to stakeholders, and these levels of assurance depend on the nature of the work performed by their assurance practitioner. Different levels of assurance may result in different conclusions and have a differing effect on the level of confidence available to stakeholders.
The framework for these levels or types of assurance is set out by the peak body for financial auditors and assurance practitioners, ensuring that these professionals always have an answer for stakeholders, even if the answer can differ in the level of assurance it provides.
Levels of Assurance
No Assurance – This is the level of assurance stated by assurance practitioners who are still in the process of compiling or preparing financial statements, and therefore are unable to provide a conclusion for use by stakeholders. If auditing and analysis have not yet been conducted as the relevant financial information is still being compiled, the assurance practitioner is unable to offer assurance. The level of assurance offered at this stage is therefore no assurance.
Limited Assurance – When assurance practitioners reach the stage of conducting their preliminary review, analysis, and inquiries into the financial statements of the listed company, they may be able to provide limited assurance to stakeholders. This means that the assurance practitioner has begun their analysis of the financial statements and other data, and has not yet found evidence for the belief that these statements and data are not truthful and fair. At this stage of the assurance process, the practitioner has only completed the less detailed procedures involved in the overall process and therefore is unable to draw a firm conclusion with which to offer assurance to stakeholders.
Reasonable Assurance – Reasonable assurance is delivered by the practitioner only when they have completed gathering evidence and subjecting the financial information of the listed company to detailed testing and substantiation. This means that an audit of financial statements is complete, and the assurance practitioner has substantial evidence with which to support their statement of assurance. When reasonable assurance is provided, the practitioner is stating their genuine belief that the information contained in the relevant financial statements is a true and fair indicator of the level of confidence stakeholders may take.
Absolute Assurance – This is essentially a guarantee of authenticity issued by the assurance practitioner, stating that their detailed analysis has enabled them to conclude that the information contained in a company’s financial statements is in fact a fair and truthful depiction of that company’s financial position. Once shareholders have received a guarantee of absolute assurance, they may express the appropriate level of confidence and use this to inform their decisions relating to the company.
Why Are Reviews and Audits Required?
Shareholders are usually not intimately involved in the management and operation of the company in which they have invested, meaning that they may not be aware of the true nature of that company’s financial position. This has obvious implications for the stakeholder, meaning that they require an independent, reliable source of financial assurance so that they can assess their investment based on the facts.
For example, shareholders are tasked with the appointment of senior management, so they need a reliable and independent means of analyzing the performance of senior management. This enables them to make an informed decision when appointing management and making other important decisions relating to the company’s operations.
Financial statements are issued by the company, but these need to be subject to audit and assurance processes before shareholders can express confidence (or a lack thereof) in the contents of these statements.
Review of Financial Statements
Conducting a review of the listed company’s financial statements allows the assurance practitioner to offer limited assurance, as the level of analysis and engagement with financial data is not as comprehensive as that of the auditing process.
It is standard practice in Australia for listed companies to release half-yearly financial reports, and for these reports to be reviewed by an assurance practitioner who will later audit the end of year financial statements of that company. A review of these reports enables the reviewed to issue shareholders a conclusion about whether or not the reports offer a fair and truthful view of the company’s financial position.
In essence, the review process is limited to providing limited assurance, as the level of scrutiny placed on the relevant financial data is not as comprehensive as required for a statement of reasonable or absolute assurance.
Audit of Financial Statements
The auditing process involves a highly-detailed and comprehensive level of analysis and evidence gathering designed to substantiate or disconfirm the information contained within a company’s financial statements. This constitutes a process of reasonable assurance, and upon the conclusion of an audit, shareholders will have a reasonable view of the facts relating to their company’s financial position.
Auditors are engaged to deliver their professional opinion on the fairness and truthfulness of the company’s financial statements, and to offer shareholders reasonable assurance if the appropriate conditions are met.
In Australia, auditing of financial statements is conducted in line with the appropriate legislation, as well as the accounting standards set by the industry peak body. This ensures that the audit process is consistent, independent, and constitutes a reflection of best practice as determined by the peak body. These requirements enable the assurance process to continue by providing transparency and consistency that shareholders can rely on form judgements about their company.
Australian laws require listed companies to have their full-year financial statements audited by an approved, independent auditor. This requirement is not limited to listed companies, and other entities and organizations are also subject to regular auditing by law to provide assurance for relevant stakeholders.
Bear in mind that the level of assurance obtained from the auditing of financial statements is reasonable assurance, because an audit is a standardized procedure and therefore cannot apply to each and every transaction and action of each company. There are operational and functional differences between companies that result in the standardized audit procedure being unable to test each and every component of an individual entity’s financial position. Additionally, estimates and judgements are made in financial statements. That is, there are estimates present which cannot be verified discretely or exactly, and may be dependent on future events.
For listed companies, the auditor is usually appointed by an audit committee. The audit committee may consult the auditor at various points throughout the year to obtain their professional advice on matters such as risk, scheduling, and financial reporting. Auditors findings from previous years may be subject to ongoing examination, for example, in light of an event forecast by the auditor coming to fruition.
Once a audit of financial statements has been completed, the auditor usually produces a comprehensive and confidential report that is given to the audit committee. This enables them to form their own conclusions on the level of assurance provided by the audit, and any implications this may have for the board of directors and other shareholders.
It is standard practice in Australia for the appointed auditor to attend the Annual General Meeting of the listed company whose financial statements they have audited. This allows interested stakeholders to obtain any details they may require from the auditor, providing a useful means of clarifying specific elements of the audit and implications thereof.
Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting and auditing services, or email us at email@example.com.