OAG staff and contractors are required, by the AG Act, the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants and APES 320 Quality Control for Firms, and auditing standard ASQC1 , to be independent of the entities we audit.
Prior to assuming responsibility for LG financial audits, we were aware that it was often common practice for the existing auditors to perform other work for LGs, in addition to the annual financial audit. This can impair an auditor’s independence. We have therefore given careful consideration to this, taking into account factors including:
- limited access to alternate accounting firms in regional areas to perform these other tasks
- the efficiencies that can sometimes be achieved if, for example, the auditor of the annual financial report also audits grant acquittals
- the key principle that auditors should not audit financial reports that they have prepared, to avoid the ‘self-review threat to independence’
- whether some of the “other” tasks should be performed as part of the annual financial audit rather than as a separate task.
In 2017-18, we approved our contract auditors to perform various other audit tasks, in addition to the annual financial audit. We require our contractors to seek our approval, in advance. This is mainly to ensure that the nature of the proposed task does not impair their independence, and also to ensure that their fee is not too high in comparison to the fee for the annual financial audit, as that could also impair auditor independence.
For grant acquittals, including Royalties for Regions or Roads to Recovery, we generally permitted our contract auditors to, after obtaining our approval, engage directly with LGs and complete the required acquittals.
We also noted that some other work performed by audit firms was being regarded as separate from the annual financial audit, with separate fees, whereas part of the work should be routinely performed during the annual financial audit. For example, audit firms have often performed reviews of systems and procedures for the CEO as required by regulation 17 of the LG Audit Regulations or regulation 5(2)(c) of the LG Financial Management Regulations. Much of this work should already be covered during the annual financial audit and included in that audit fee. In our view, this had the effect of under-stating the audit fees for annual financial audits. We have taken steps to ensure adequate review of systems and controls as part of our annual financial audit process.
Some LGs also inquired whether our contract auditors could provide training to LGs where they were performing audits on our behalf. It is OAG practice that our contract auditors may provide general training in areas such as accounting principles or new accounting standards to entities, provided the fees are not so high as to impair their audit independence.
Independence can also be impaired through auditors instructing accounting staff on specific accounting entries that the auditors would subsequently audit. All additional work must be considered on a case by case basis for threats to impairment of auditor independence.