Audited financial statements are an important part of the financial information that is available to the capital markets and an important part of effective corporate governance.
Ian M Ramsay, Independence of Australian Company Auditors: Review of Current Australian Requirements and Proposals for Reform, Report to the Minister for Financial Services and Regulation, Department of Treasury (October 2001) [4.01]Introduction: The audit role and where it fits into corporate governance
Overview of the audit role
Auditing is defined as an assurance service that objectively gathers evidence and communicates it to third parties. Companies that are required to prepare a financial report for a financial year must have their financial report audited and obtain an auditor's report. Thus all large proprietary companies and public companies must appoint an auditor. Small proprietary companies, and small companies limited by guarantee, are not required to prepare a financial report in normal circumstances and hence need not appoint an auditor. However, they must do so in a limited range of circumstances, namely where members holding at least 5 per cent of the votes in a general meeting require preparation of accounts and ask for an auditor.
Broadly, the function of an auditor is to conduct a review and verification of the financial affairs of the company and to ascertain whether the financial report provided by the company complies with relevant legal requirements and accounting principles, and gives a true and fair account in all material respects of the company's financial affairs. The audit role has several objectives. The main one is to provide reasonable assurance that the financial information reported by the company is free from material misstatement. In the process, auditors provide a barrier of protection against careless or dishonest company officers. In order to fulfil this role, the auditor must have suitable skills and expertise, and must be independent of the company.
The main auditing requirement is to provide a report to the members, within the financial report, for a financial year. This is laid before the annual general meeting and lodged with the Australian Securities and Investments Commission (ASIC).
It is important to note that the auditor's role is essentially procedural, not substantive, in nature. More particularly, pursuant to sections 307 and 308 of the Corporations Act 2001 (Cth), the auditor's report to members must set out a number of matters in relation to the financial report for a financial year.