UNSW Business School

School of Accounting, Auditing and Taxation

ACCT5908
Auditing and Assurance Services

Topic 1

Overview of the Audit Function and the

Importance of Ethics
Course Overview

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What is an assurance engagement?

“Assurance engagement means an engagement in which a

practitioner expresses a conclusion designed to enhance
the degree of confidence of the intended users other than
the responsible party about the outcome of the evaluation
or measurement of a subject matter against criteria”

• Audits of historical financial statements (the subject matter)

are a type of assurance.
• Examples of other ‘subject matter’ include
• Greenhouse gas emission statements
• Corporate Social Responsibility reporting
• Sustainability reports
• Cyber security statements

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Demand for Assurance

• Demand arises because users are not in a position to

establish the credibility of the information they are presented
with.
• This may be due to:
• Conflict of interest – managers may present biased
information, as they are evaluated on the information.
• Consequence – information provided forms the basis of
many user’s decisions.
• Complexity – many users do not have the expertise required
to determine the quality of information presented.
• Remoteness – the separation of owners from management
prevents users from assessing information quality.

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Other benefits of assurance

An assurance service may also result in one or both of the

following:
• Recommendations by the assurance provider to improve the
efficiency and effectiveness of operations, and/or
• A positive influence on the behaviour of people whose activities
are being assured.

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The parties to an assurance engagement

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Five elements of assurance engagement

• Three party relationship:

• Assurance practitioner
• Responsible party
• Intended user
• Underlying subject matter
• Criteria Acc Standard & CA Law
• Sufficient appropriate evidence
• A written assurance report

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The framework for assurance engagements
and the types of assurance engagements
• Many parties provide reports to users as an aid to making
decisions.
• Reports are potentially biased due to the vested interests of
the report providers.
• Users may demand that the credibility of the report be
enhanced by having an independent expert examine it.
• Financial reports are just one type of report that can be
assured.

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Focus of assurance work

• Assurance can be of assistance in improving the efficiency

and effectiveness of any agency relationship characterised by
information asymmetry.
• The most recognizable form of assurance is the audit of
financial statements (this is the primary focus of the course).

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Other applications of the assurance
function
• Evidence gathering methods of auditing are also employable
in the audit of activities other than historical financial reports.
• Compliance audit
Examination for the purpose of reporting on legality and control of
operations
• Performance audit
Analyses organisation structure, internal systems, workflow and
managerial performance – efficiency, effectiveness and
economy of these items.
• Comprehensive audit
Usually includes components of compliance, performance and
financial report audits (mainly performed in the public sector).

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Other applications of the assurance
function
• Internal audit
Audits performed by employees of the entity as a part of the entity’s
risk management process.
• Forensic audit
Often associated with fraud detection and business failure.
• Assurance of prospective financial statements:
Forecasts - prepared on the basis of assumptions of future events
expected to take place and reflect expected future position and,
Projections - Present hypothetical courses of action and prepared on the
basis of assumptions not necessarily expected to take place.
• Assurance on subject matter other than historical financial
information
Including internal controls, sustainability and carbon emissions
reports (refer following slides).
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Assurance of reports on the
effectiveness of internal controls
• Providing assurance on reports on the effectiveness of
internal controls is a growth area in assurance services.
• This is required as part of the audit of many entities in the US as per the
Sarbanes Oxley Act.
• Other nations have similar requirements (e.g., Japan).
• Many nations are considering introducing requirements for assurance
on internal controls (including Australia – this was a recommendation
arising from the recent Parliamentary Enquiry)
• Research highlights the benefits in having reports on internal controls
assured (but do the benefits outweigh the costs!)
• In Australia, reports on internal control are normally separate
engagements (i.e., not integrated with the financial report
audit).

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 Assurance of environmental /
sustainability reports
• In Australia, mandatory sustainability reporting, with a primary
focus on climate-related financial disclosures, is now in effect
for certain large businesses and financial institutions. These
disclosures are part of a broader sustainability report required
under the Corporations Act 2001 and align with the Australian
Sustainability Reporting Standards (ASRS).

• There is a phased introduction of assurance requirements for

climate-related disclosures, with the first annual reporting
period starting on or after 1 January 2025 (refer more detail in
topic 9).

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Assurance of greenhouse gas statements

• Environmental reporting has become increasingly prevalent,

with increasing pressure on governments, companies,
regulators and standard setters to respond to the global
challenge of climate change.
• Assurance of GHG statements (GHG emissions disclosures)
enhances the credibility of these disclosures and any
associated trading and reporting schemes.
• ASAE 3410 Assurance Engagements on Greenhouse
Statements

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Types of assurance engagements

• Reasonable assurance engagements are commonly called

‘audit engagements’.
• Limited assurance engagements are commonly called
‘review engagements’.
• There are also engagements that provide no assurance:
• Agreed-upon procedures engagements where the auditor
reports their findings and doesn’t provide assurance.

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A review of levels of assurance

Form of Reference to Level of Reference to

engagement for all historic Assurance for historical financial
subject matter financial all subject information
information matter
Reasonable
Audit Reasonable High
Assurance
Limited
Review Limited Moderate
Assurance
Agreed-upon
No Assurance
Procedures

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Limited assurance (review) engagements

A limited assurance engagement:

• Is undertaken when limited (low-moderate) rather than
reasonable (high) assurance is deemed appropriate.
• Involves a reduced set of evidence gathering procedures
compared with a reasonable assurance engagement, and is
therefore lower cost.
• Report provides a basis for conclusion that nothing has come
to the auditor’s attention that the financial statements are not
true and fair, compared with more positive form of opinion for
audit (in my opinion the financial report is true and fair).

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Review of financial reports

• Limited assurance engagements for financial reports are

called reviews.
• In planning for a review engagement, knowledge of the entity
is critical.
• Major evidence collection procedures are:
• Enquiries of management
• Analytical procedures
• Important that both client and user understand that a review is
being undertaken, not an audit:
• Engagement letter and discussions with client must ensure that
differences between a review and an audit are understood.
• For user, review report must clearly state that lower level of assurance
than that obtained from an audit is provided.
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Agreed-upon procedures engagements

• The distinguishing feature between an agreed-upon

procedures engagement and an assurance engagement is
that for an agreed-upon procedures engagement the auditor
undertakes specific procedures and does not have the ability
to vary the procedures to be undertaken that have been
agreed with the client.
• Such engagements are broad-ranging and can be in any area
where the client and user perceive them to be beneficial. For
example:
• Accounts payable listing is complete and accurate
• Orders in an order book exist and are accurate
• Academy award votes are confidentially maintained and properly
counted.
• … 19
Agreed-upon procedures

• In accepting an agreed-upon procedures engagement it is

essential that there is a clear understanding as to which
procedures are agreed upon and the terms of the
engagement.
• Engagement letter should clearly set out:
• The nature of the engagement, and the fact that procedures performed
are not an audit or review.
• A list of procedures to be performed as agreed.
• The anticipated form of report.
• Restrictions on distribution of report.

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Reporting considerations

• The reports that are issued for agreed-upon procedures

engagements are different from those issued for audits or
reviews.
• The auditor reports facts only (findings), and provides no opinion.
• It is up to the user to draw a conclusion from the information provided,
and to determine the level of assurance to attach to this information.
• The report clearly communicates to the user that agreed-upon
procedures were undertaken, not an audit or review.

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Definition of auditing

A systematic process of objectively obtaining and evaluating

evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between
those assertions and established criteria, and communicating the
results to interested users.

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 Definition of auditing

• The important parts of this definition:

• Systematic process – audits are structured activities
• Objectivity – freedom from bias
• Obtaining and evaluating evidence – allows the auditor to
determine the support for assertions or representations
• Assertions about economic actions and events – describes the
subject matter of an auditor
• Degree of correspondence … established criteria – the purpose
of the audit is to determine conformity with some specified
criteria
• Communicating results – the results must be communicated to
interested parties.

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Objective of financial report (FR) audit

To obtain reasonable assurance about whether FR as

a whole is free from material misstatement, whether
due to fraud or error, thereby enabling auditor to
express an opinion on whether the FR is prepared, in
all material aspects, in accordance with a financial
reporting framework. (ASA 200.11)

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 Scope of financial report (FR) audit

The purpose of an audit and the auditor’s opinion is to

enhance the degree of confidence of intended users of
financial information (ASA 200.3).
The auditor’s opinion does not assure the future viability
of the entity nor the efficiency or effectiveness with which
management has conducted the affairs of the entity (ASA
200.A1).

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Why is there value in the assurance
service?
• Independence
• Users derive value from the knowledge that the assurance
provider has no interest in the information other than for its
usefulness.
• Expertise
• Assurers must have the competence to obtain sufficient relevant
information to provide a reasonable basis for their conclusions.
• Requires professional judgment and professional
scepticism.
• Trust and Confidence
• Stakeholders must have trust and confidence in the practitioner's
independence and expertise.

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Expertise: Professional judgment and
professional scepticism
• Professional Judgment
• Involves the application of relevant training, knowledge and
experience in making informed decisions bout appropriate
courses of action.
• Professional Scepticism
• An attitude that includes a questioning mind, being alert to
conditions indicating possible misstatement and critically
assessing audit evidence.

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Audit firms
• There are three levels of audit firms in Australia:
• International (including the Big Four and other firms that are
members of Forum of Firms).
• National firms
• Regional or local firms
• The largest international firms are known as the ‘Big Four’. They
are: PWC, EY, KPMG, Deloitte
• The Big Four are the most visible and public face of auditing,
especially for large listed clients.
• Mid-Tier Firms (e.g., Pitcher Partners, Grant Thornton) are also
active in the large client audit market.
• Small to Medium Practices (SMP) conduct the majority of audits
in Australia, but mostly for smaller clients.

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Other services

• While audit and assurance services form a significant part of a

public accounting firm’s client base and revenue stream, firms
also offer other advisory / consulting services:
• Tax services
• Management services
• Sustainability services
• Internal audit
• Accounting services
• Insolvency services

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Internal structure of an audit firm

• Currently, most audit firms generally practice as a partnership.

• An audit firm can now apply to be an authorised audit
company. This provides advantages and limits liability. The
majority of voting power must be in the hands of registered
company auditors. Adequate professional indemnity
insurance must be maintained.
• Most large audit practices are structured along industry
specialisations.

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Internal structure of an audit firm

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Regulation of auditing and of the subject
matter of audits

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Management responsibilities under the
Corporations Act 2001
• Management is responsible for the preparation and
presentation of appropriate accounts. Accounts are to be
accompanied by a report of an independent auditor appointed
by the shareholders.

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Auditors’ responsibilities under the
Corporations Act 2001
• Auditors are responsible for reporting to company members
on the directors’ financial report presented at the Annual
General Meeting.
• They say whether the financial report:
- Is in accordance with the law, including compliance with
accounting standards.
- Provides a true and fair view.

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The Auditing and Assurance Standards
Board (AUASB)
The AUASB was reconsitituted as an independent statutory body
on 1 July 2004 and is responsible for the development of
auditing and assurance services standards.
• The board consists of 11 members appointed by the FRC, and a
chair appointed by the relevant minister.
• The AUASB has a long standing policy of convergence and
harmonisation with International Standards on Auditing (ISAs).
• Auditing standards are legally enforceable.

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The Accounting Professional and Ethical
Standards Board (APESB)
APESB is equally funded by CPA Australia, CA ANZ and the IPA.

The APESB is an independent, national body that sets the code of

ethics and professional standards.
an
APESB standards are applicable to and mandatory for accounting
professionals who are members of Chartered Accountants Australia
and New Zealand (CA ANZ), CPA Australia or the Institute of Public
Accountants (IPA). This includes accountants working in accounting
firms (of all sizes), the corporate sector and in government.

CPA Australia, CA ANZ or IPA are each responsible for enforcing the
standards and for undertaking any subsequent disciplinary action for
breaches of the standards by their members.

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The Australian Securities and
Investments Commission (ASIC)
The administering authority for the Corporations Act 2001
has responsibility for the surveillance, investigation and
enforcement of the financial reporting and auditing
requirements of the Corporations Act.
• Until recently, ASIC conducted risk based reviews of the way
auditors perform audits (referred to as the inspection program)
– ASIC named audit firms with identified deficiencies and provided statistics on
percentage of files had deficiencies.
• ASIC now reviews audit files where there are concerns that the
financial statements may be materially misstated.
– Performance of individual firms is no longer publicly reported.

ASIC has recently announced an additional proactive surveillance will now be

undertaken focused on compliance with auditor independence and conflicts of
interest requirements.

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The Companies Auditors and Liquidators
Disciplinary Board (CALDB)

The CALDB determines whether a registered auditor or liquidator

has failed to carry out his or her duties properly or is not a fit and
proper person to be registered.

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Registered company auditor

• In order to be appointed as a registered company auditor

(RCA) under s1280 of the Corporations Act 2001, a person
must:
• be ordinarily resident in Australia
• be a member of an approved accounting body
• be a graduate of a prescribed university or other prescribed
institution in Australia, and have passed a course in accounting
and commercial law acceptable to ASIC
• have sufficient auditing experience
• be a fit and proper person
• Auditors are required to fill out a logbook to demonstrate on-
the-job experience and have this certified by a current RCA.

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What if something goes wrong?

• What are the consequences if an auditor performs a poor

audit?
• Sometimes no consequence!
• Sanction by audit form and/or ASIC
• Suspension / loss of auditor registration
• Legal sanction.

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Structure of auditing and assurance
standards and pronouncements

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The auditor-client-public relationship and
the expectation gap
• The auditor’s primary reporting responsibility is to resource
providers of the client entity; however, the client entity usually
engages the auditor and pays the auditor’s fees.
• The auditor also discusses the audit findings with
management prior to releasing information to the resource
providers.
• In order to combat pressures on independence and
objectivity, the auditing profession has issued a series of
ethical rulings and professional standards to guide the auditor
in the conduct of his or her duties.

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The expectation gap

• Defined as :’the gap between society’s expectations of

auditors and auditors’ performance as perceived by society.
• There are three components of the expectation gap:
• The reasonableness gap between what society expects auditors
to achieve and what they can reasonably be expected to
accomplish.
• The performance gap arising from deficient standards.
• The performance gap arising from deficient performance by
auditors.

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The expectation gap

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Three major issues in the expectation gap

• Early warning by auditors of corporate failure.

• Auditor’s responsibility for the detection and reporting of
earnings management and fraud.
• The auditor’s ability to communicate different levels of
assurance.

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Auditor independence

• Independence is a key characteristic of an audit or assurance

service provider.

• In order for auditors to add credibility to financial reports or

other subject matter, they need to remain independent.

• Independence is one of the fundamental ethical virtues or

principles required by APES110.

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Independence: Ethical Requirements

• Test for independence is a reasonable person test: Would a

reasonable person having access to all facts consider that the
auditor was independent? (APES 110)

• Ethical rules (definition) emphasize both (APES 110):

• Perceived independence (independence in appearance) – how
others will view the auditor.
• Actual independence (independence of mind) – state of mind
of the auditor. Whether the auditor can actually eliminate bias
and personal interest from his or her decisions and not succumb
to any undue pressures or influences. Related to integrity,
objectivity and strength of character.

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APES110, s200: Threats to independence

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Categories of Threats
APES110 s100.12

– Self-interest threats e.g. direct financial interest in the client,

undue dependence on fees.

– Self-review threats e.g. preparation of records for the client.

– Advocacy threats e.g. dealing in litigation disputes for an

assurance client or being asked to promote their business.

– Familiarity threats e.g. a member of the assurance team having

an immediate or close family member who is a director or
significant employee of the assurance client.

– Intimidation threats e.g. threat of replacement over a

disagreement, pressure to reduce extent of work to reduce fees.

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APES110: Safeguards

• Safeguards fall into two broad categories. For an auditor

these are:
• Safeguards created by the profession, legislation or regulation –
education, professional standards, monitoring and disciplinary
processes, and inspections and reviews.
• Safeguards within the work environment (firm wide engagement
specific) – independence and quality control policies and
procedures.

• The safeguards are aimed at reducing or resolving

circumstances that pose threats to independence.

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Rotation of audit firms

• Ramsay Report said it was not appropriate to mandate

rotation of audit firms
• But recent proposals have suggested it would further improve
auditor independence to rotate audit firms.
• In 2014 the European parliament voted to implement wide
ranging reforms to audit profession, including mandatory audit
firm rotation by listed companies every 10 years.

• Currently, individuals who have played a significant role in the

audit for five consecutive years are not eligible to continue to
play a significant role for at least two years (also have a 5/7
rule.
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Fee determination

• Audit fees should be commensurate with the service provided.

Thus, they should reflect the time taken to audit and the
knowledge, skills and expertise required.

• An auditor should not enter into fee arrangements that may

comprise his or her independence.

• Fees for a period should not be dependent on fees from the

provision of future audits or other services.

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Fee determination

• Fees from clients must be collected promptly. Overdue fees

may create a self interest threat.

• When total fees generated from a client represent a large

proportion of the auditor’s total fees, real or perceived
financial dependency on that client may create a self-interest
or intimidation threat.

• Audit clients must disclose in the financial report the amount

of fees paid to the auditor, split between audit and non audit
services.

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Independence - Legislative requirements:
Corporations Act 2001.
• Section 307C: Independence declaration.
• Auditors must give directors a written declaration of their
independence and this is to be included in the directors’ report.
• Section 324CA: Conflict of interest
• Auditor must take reasonable steps to ensure conflict of interest
situations cease to exist as soon as possible. Conflict of interest
is where members of audit team are not capable of exercising
objective and impartial judgment, as judged by a reasonable
person.

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Independence - Legislative requirements:
Corporations Act 2001.
• Section 300(1)(ca): Former auditors
• Directors’ report is to include names of each officer of client who
was a former partner or director of current auditor.
• Section 324CI: Member of audit firm
• Cannot become director, company secretary or member of
senior management of a client until two years after ceasing to be
with audit firm.
• Section 324DA: Rotation of audit partners
• Lead or review partner for five successive years cannot play a
significant role in the audit of that entity for at least another two
successive years.

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Independence - Legislative requirements:
Corporations Act 2001.
• Section 300(11)(B): Non-audit services
• Boards of all listed companies are required to provide a
statement in their annual report that identifies all non-audit
services provided by an audit firm, the fee for each service and
an explanation of why provision of the service did not impair
independence.

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Auditors’ appointment

• s327B: Shareholders are responsible for the appointment of

auditor
• Auditor is in breach of independence requirements if, while
auditing at a time that a s324CH(1) relationship exists, the
auditor is aware of relationship and does not take all reasonable
steps to discontinue the audit.
• s324CH(1) Relationships include
• Auditor or immediate family member cannot be an officer or audit
critical member (influencing financial report) of client.
• Auditor cannot provide remuneration to officer or audit critical
employee for acting as a consultant.
• Auditor cannot have an investment in client.
• Auditor cannot owe money to a client (unless a housing or
commercial loan on normal terms and conditions).
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Auditors’ removal and resignation

• Removal: Difficult to remove an auditor.

• Section 329: Requires a resolution of company at a general
meeting of which special notice has been given. Auditor
entitled to make written representation and speak at general
meeting. A copy of notice must be sent to ASIC.
• Resignation (s329(9)): Auditor can resign. Must have written
consent from ASIC if a public company. Application outlines
reason and ASIC must approve the reason. Designed to
ensure independence and integrity of audit function is
maintained.

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Right of access to records and
reasonable fees
• Section 310: Auditing has right of access at all reasonable
times to the accounting and other records and registers, and
an entitlement to require from any officer of the company such
information and explanations as required for the purposes of
audit.
• Section 331: Auditor is entitled to receive reasonable fees and
expenses for the work carried out.
• Collectively, all these provisions assist an auditor to maintain
actual and perceived independence and create a suitable
environment for an audit process that is free from undue
influence and obstruction.

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Ethical principles

• An ethical disposition underpins the value of an assurance

service.

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 Accounting bodies’ codes of ethics
• APES 110 sets out the ethical pronouncements for professional
accountants (not just auditors).

• APES 110 consists of five sections:

• Part 1: General Application of the Code
• Part 2: Members in Business
• Part 3: Members in Public Practice
• Part 4: Independence Requirements
• Part 5: Sustainability Assurance (incl Independence requirements) – new
requirements which take effect from 1 January 2026 and support mandatory
climate-related financial disclosures and sustainability reporting, which became
effective for Group 1 entities from 1 January 2025.

• Auditing standards, which in Australia have the ‘Force of Law’ require

compliance with ethical standards.
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Purpose of the code of ethics

• Code of ethics: formal, systematic statement of rules,

principles, regulations or laws developed by a community to
promote its well-being and punish undermining behaviour.

• The code therefore:

• Makes explicit the values implicitly required.
• Indicates how members should act towards one another.
• Provides an objective basis for sanctions.

62
Ethical codes and disciplinary rules

• The establishment of ethical codes and disciplinary rules does

not necessarily create an ethical culture or ensure the moral
integrity of employees.

• APES 110 ‘Code of Ethics for Professional Accountants’,

issued by the Accounting Professional and Ethical Standards
Board (APESB), indicates that members are expected to
comply with the spirit as well as the letter of the rules.

• Ethics are principally attitudes of mind rather than compliance

with written rules of conduct.

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Fundamental ethical principles

• Contained in national and international codes of ethics:

• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour

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Applying Ethics

• Sound ethical practice requires;

• Knowledge of the basic principles on which moral values and
rules are based.
• Competence in decision making skills.
• Ability to choose appropriate policies and decision processes in
different situations.
• Key factors to be considered in ethical conflict resolution are:
• relevant facts.
• ethical issues involved.
• fundamental principles related to the matter in question.
• established internal procedures.
• alternate courses of action.

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 Topic 1 Discussion Questions - Ethics
1. ABC Chartered Accountants currently audits X Limited. The managing
director of X Limited has asked ABC to provide management
consulting services, including the purchasing of a new computer. Ms T,
a partner at ABC, is a minor shareholder in a computer manufacturer
and retailer that will sell the new computer to X Limited.

Identify and discuss the ethical fundamental principle involved?

bias involved so it violates objectivity

2. ABC Chartered Accountants was previously engaged by X Limited to

value its intellectual property on 1 November 2024. The consolidated
balance sheet as at 31 December 2024 includes material intangible
assets worth $40 million, the carrying amount of which was
substantiated by the valuation prepared by ABC.

Identify and explain the potential type of threat to ABC’s

independence?

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Negligence

Negligence can be defined as any conduct that is careless or

unintentional in nature and entails a breach of any contractual
duty or duty of care in tort owed to another person or person.

67
Claims for negligence

• To be successful in a claim for negligence, a plaintiff must

prove that:
• Duty was owed to the plaintiff by the defendant (duty of care).
• A breach of the duty of care (negligent conduct) occurred.
• Loss or damage was suffered by the plaintiff.
• A causal relationship existed between the breach of duty by the
defendant and the harm suffered by the plaintiff.

• Auditor’s defense normally rests on ‘duty of care’.

• Auditor’s owe a duty of care to the client (and members of the
client).
• Does an auditor owe a duty of care to third parties?

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Contributory negligence: AWA case
Exists where the plaintiff (client) fails to exercise the
required standard of care, thus contributing to its own loss.
Prior to AWA, such a defence by auditors was
unsuccessful

AWA Ltd v Daniels t/a Deloitte Haskins (1992)

– Losses suffered by company due to internal control weaknesses
over foreign exchange
– Auditor liable for failure to report to board of directors
– Company contributed to loss by officers not reporting to board of
directors and failure to put in place adequate internal control
system

69
Liability to third parties: Esanda case
A number of cases have considered the auditor’s liability in relation to
persons other than the immediate client (third parties) e.g. Caparo,
AGC, Columbia Coffee.
Must now establish a reasonable degree of foreseeability and proximity
between the third party and the auditor
Esanda Finance Corporation v Peat Marwick Hungerfords (1997)
provides the current test:
– whether statement by the auditor was meant to induce the third party
to undertake specific actions
– would be hard to show that audits on general purpose financial
reports were ever intended to induce third parties to undertake a
specific course of action
– it is now very difficult for third parties to sue auditors for negligence

71
Liability to third parties:
Competition and Consumer Act 2010
• Consideration needs to be given to the provisions of the
Commonwealth Competition and Consumer Act and relevant
state Fair Trading Acts:
• Acts prohibit misleading and deceptive conduct.
• It is possible that, in issuing an inappropriate auditor’s report, an
auditor might be guilty of conduct that is misleading or deceptive.

71
Liability to third parties: ASIC Act

• Under section 50 of the ASIC Act, ASIC may, in the public

interest, take civil action to recover damages or property on
behalf of others who have suffered loss.

• ASIC will commence Section 50 proceedings in very limited

circumstances.

• In 2008 ASIC launched action under this section against the

auditors of Westpoint Group.

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Criminal Liability of auditors

• Auditors can be subject to criminal prosecution.

• It is an offence under Section 989ca of the Corporations Act
to not conduct an audit in accordance with auditing standards.
• Criminal actions against auditors are rare. There has only
ever been two convictions in Australia.
• Robert Evett in 2021.
• Graham Swan in 2022

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Limitation of Liability

• Prior to CLERP 9, audit firms were required to operate as sole

traders or in partnerships – still the dominant form of
organisation for audit firms.
• Therefore, auditors are personally liable for damages arising
from failure by either themselves or their partners to exercise
reasonable skill and care.
• Spiraling litigation costs and court-awarded damages.
• Professional indemnity insurance is difficult to obtain and
prohibitively expensive (claimed to be about 14% of audit
revenues).

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Changes to auditor liability

• Changes to the Corporations Act 2001 as a result of CLERP9

allow:
• Introduction of Professional Standards legislation to provide a
statutory cap to auditor’s liability.
• Auditors to incorporate and form authorised audit companies
with adequate and appropriate professional indemnity insurance.
• Apportionment between plaintiff and defendant according to
blame, and proportionate liability if there are two or more
defendants.

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Auditing is an honorable and rewarding profession, but it comes
with considerable public interest responsibilities.

All members of the business community (and capital market

participants) must interact with the audit profession, so it is
important for all to understand the audit function (even those not
planning to be an auditor).

We hope you enjoy the course.

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