companies 2 theory

Financial reporting council (FRC)

The FRC acts as a governing body to oversee and advise the AASB. Representatives from professional associations and industry groups are on the council. The FRC appoints people to the AASB. It also reviews and approves the activities of the AASB, including budgets and staffing.

Australian Securities and Investments Commission (ASIC)

ASIC adminsters the Corporations Act as well as other corporate legislation. ASIC enforces the standards set out by the AASB for all reporting entities. ASIC reviews accounting standards and corporate legislation and releases ‘Accounting Practice Notes’ which clarify how regularipms change accounting practices.

International Accounting Standards Board (IASB)

The IASB is an international body that develops accounting standards on global basis. The AASB has worked with the IASB to align Australian accounting practice with international accounting standards.

Australian Accounting Standards Board (AASB)

AASB develops and updates accounting standards and works to adopt international standards. AASB also ensures that standards in Australia are aligned with international standards. AASB has the backing of the Corporations Act, so all reporting entities must comply with the standards. Its functions include: building the conceptual framework, developing accounting standards, participating in the development of a set of international accounting standards.

Australian Securities Exchange (ASX)

The influence of the ASX extends to public companies listed on the stock exchange. Before a company can be listed it must satisfy the disclosure and listing rules set out by the ASX. Audited annual reports must be lodged with the ASX to remian listed with the exchange. Company reports must be shown to comply with accounting standards and reports must disclose material changes, such as changes to the dividends, the rights of the shareholders and other significant events that could affect the share price. If the companies do not adhere to the disclosure and listing rules, they can be suspended from trading.

Lobby groups

Professional associations and industry groups lobby Treasury and the FRC. Their aim is to ensure that accounting standards reflect current and anticipated issues in accounting practice and capital markets. An example is the move to consistency with international standards because of globalised trade, for example the submission made bu the Certified Practising Accountants of Australia in support of the move to adopt international standards and to encourage the AASB to work with the IASB.

Role of external auditor

The role of the external auditors is to underwrite the financial reports and guarantee report users that they can rely on the information to make decisions. The external auditor will state whether they think the reports guve a true and fair respresentation of the affairs of the reporting entity.

Why is an independent audit required?

To protect external users. External users depend on financial reports of a company to make decisions about investing capital. External users do not have access to internal documents or management meetings, so they have to rely on the financial reports for their information. The financial reports will be clear, understandable, relevant and reliable if they comply with accounting standards and the qualitative characteristics of reports. External auditors guarantee users that the financial reports are free from error and bias, contain all material information and are able to be compared with those of previous years. The if auditor finds that the accounting standards have not been followed, they are required to notify the Australian Securities and Investment Commission (ASIC)

Independent audit

External auditors focus on accounting processes and standards. They do not give general advice or an opinion. They must have access to all the companie’s financial records. They must give a thorough audit report which is free from bias or influence of the company directors and management.

Appointment of external auditors

A company or any large organisation will have an audit committee. Such a committee will be made up of directors or senior managers. When an internal audit is conducted, the report is given to the audit committee to review and take action to correct any problems. The audit committee also works with external auditors. An external auditor is chosen by the board of directors. A selection process is conducted to nominate an external auditor. The nomination is presented at the AGM where shareholders can vote on an external auditor.