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Financial statement audit information
Updated
Friday 4 November 2022
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This page has information about financial statement audits.
Introduction
The purpose of this page is to provide additional information to ANAO financial statement auditees. This information should be read in conjunction with the Audit Strategy Document, Interim Management Letter, Final Management Letter and Closing Letter.
Our audit approach
We conduct our audits of financial statements in accordance with the ANAO Auditing Standards, which incorporate the Australian Auditing Standards made by the Australian Auditing and Assurance Standards Board.
Commonwealth entity
In auditing Commonwealth entity financial statements, our overall objective is to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, so that we can express an opinion on whether they are in accordance with the Public Governance, Performance and Accountability Act 2013 (PGPA Act), including:
- complying with Australian Accounting Standards1 and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and
- presenting fairly the entity’s financial position as at year end and its financial performance and cash flows for the year.
Commonwealth company
In auditing Commonwealth company financial statements, our overall objective is to obtain reasonable assurance about whether the annual financial report as a whole is free from material misstatement, whether due to fraud or error, so that we can express an opinion on whether it has been prepared in accordance with the Corporations Act 20012, including:
- giving a true and fair view of the company’s financial position as at year end and its financial performance for the year; and
- complying with the Australian Accounting Standards3 and the Corporations Regulations 20014
Subsidiary company of corporate Commonwealth entity or a subsidiary company of a Commonwealth company
In auditing a company that is a subsidiary of a corporate Commonwealth entity or a subsidiary of a Commonwealth company financial statements, our overall objective is to obtain reasonable assurance about whether the annual financial report as a whole is free from material misstatement, whether due to fraud or error, so that we can express an opinion on whether it has been prepared in accordance with the Corporations Act 2001, including:
- giving a true and fair view of the company’s financial position as at year end and its financial performance for the year; and
- complying with the Australian Accounting Standards5 and the Corporations Regulations 20016
We do not seek absolute assurance because of inherent limitations arising from the nature of financial reporting, the nature of audit procedures, and the need for the audit to be conducted within a reasonable period of time and at a reasonable cost. We obtain reasonable assurance by applying our professional judgement to gathering audit evidence and assessing whether it is both sufficient and appropriate.
We direct our audit effort to areas most expected to contain risks of material misstatement, whether due to fraud or error, with correspondingly less effort directed at other areas.
We identify these areas by obtaining and updating our understanding of the auditee, the environment in which it operates, its objectives and strategies and internal control. This includes obtaining an understanding of the information systems and related business processes relevant to your financial reporting objectives (including the accounting system) and how the auditee has responded to any related financial reporting risks. Relevant ANAO performance audits or internal audit activity are considered as part of this process.
Risks may arise due to the nature of, or changes, in the auditee’s business environment and business and accounting processes, including information technology. Sources of risk include changes in the auditee’s functions or objectives, complexity, financial market volatility, global uncertainty, or changes in legislation or the financial reporting framework.
Internal controls are designed and implemented by management to address identified operating, compliance and financial reporting risks in order to achieve the auditee’s objectives. Our particular interest is in the strength of internal control affecting financial reporting in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control.
We may gather the audit evidence we need by testing the operating effectiveness of internal control in addition to substantiating the amounts reported in the financial statements. We evaluate the evidence as the basis for forming and expressing our independent opinion on the financial statements.
Materiality
We apply materiality in establishing our overall audit strategy, assessing the risks of material misstatement, determining the nature, timing and extent of audit procedures and evaluating misstatements identified during the audit.
Information is material where, if omitted, misstated or not disclosed, it has the potential, individually or in aggregate, to influence the decisions of the users of the financial statements. We determine a dollar amount (overall materiality) for this purpose, against which we evaluate identified accumulated misstatements. However, there may also be qualitative factors that impact our evaluation of whether misstatements are material.
We audit individual line items and disclosures to an amount or amounts set at less than overall materiality to reduce to an appropriately low level the possibility that the aggregate of uncorrected and undetected misstatements exceeds materiality for the statements as a whole.
There are some items which in the circumstances of a particular entity may be material because of their nature, rather than because they are large in amount. We regard the following items as material by nature for:
Commonwealth entity audits:
- note disclosures for annual and special appropriations and special accounts (where relevant);
- authorisation of investments (where relevant); and
- disclosure of senior and key management personnel remuneration required by the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 and the Australian Accounting Standards.
Commonwealth company audits:
- disclosure of senior management personnel remuneration required by the Australian Accounting Standards.
We will request management to correct all misstatements that we communicate during the audit as a safeguard against accumulated undetected misstatements becoming material.
Consideration of fraud
The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity (TCWG) and management.
We are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with the ANAO Auditing Standards.
‘Fraud’ means an intentional act by one or more individuals among management, TCWG, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Two types of intentional misstatements are relevant to us — misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets.
We give particular attention during our audit to identifying fraud risk factors and assessing the risk of material misstatement that might result. Auditing standards require us to specifically address the risk of fraud from the possibility of management override of controls and in respect of revenue recognition.
It is important that you and the Audit Committee communicate to us any matters considered relevant to the audit, including the detection or suspicion of fraud.
Our reports
Commonwealth entities
The Auditor-General is required to report on the financial statements of Commonwealth entities under section 43(1) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). As the external auditor, we provide an independent auditor’s report on the financial statements to the responsible Minister(s).
Commonwealth companies
The Auditor-General is required to report on the financial statements of Commonwealth companies under section 98(1) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The ANAO provides an independent auditor’s report on the financial report to the members of the Commonwealth company.
Subsidiaries of corporate Commonwealth entities
The Auditor-General is required to report on the financial statements of subsidiaries of corporate Commonwealth entities under section 44 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The ANAO provides an independent auditor’s report on the financial report to the members of the subsidiary company.
Subsidiaries of Commonwealth companies
The Auditor-General is required to report on the financial statements of subsidiaries of Commonwealth companies under section 99 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The ANAO provides an independent auditor’s report on the financial report to the members of the subsidiary company.
The Auditor-General reports on audits of financial statements to the Parliament twice a year. The first of these reports, Interim Report of Key Financial Controls of Major Entities (Interim Report to Parliament), reports on our coverage of key financial systems and controls in major entities. The second report, Audits of the Financial Statements of Australian Government Entities (Year End Report to Parliament), reports on the results of the financial statements audits of all Australian Government entities. All significant or moderate audit findings are reported to the Parliament in these reports.
Audit communication
Audit communication
|
Deliverable |
Purpose |
|
Engagement Letter |
This letter agrees the terms of the audit engagement including both our and your respective responsibilities. |
|
Audit Strategy Document |
This document outlines the ANAO’s approach to the financial statements audit, including an overview of the planned scope and timing of the audit. |
|
Interim Management Letter |
This letter provides an assessment of the effectiveness of the operation of systems and internal controls, incorporating management’s responses on audit findings identified. We request management responses to audit findings identified within two weeks of the date of issue. |
|
Interim Report to Ministers |
This report summarises audit findings relating to internal control, including the internal control environment, information systems and control activities. |
|
Interim Report of Key Financial Controls of Major Entities (Interim Report to Parliament) |
This report focuses on the results of the interim audits, including an assessment of entities’ key internal controls, of departments of state and a number of major Australian government entities. |
|
Closing Letter on Results of Financial Statements Audit |
This letter discusses the audit and accounting findings that arise in the audit of the financial statements and any matters of significance that impact on the content of the auditor’s report. This letter also summarises all adjustments resulting from the audit and whether they have been corrected or not corrected by the management. |
|
Independent Auditor’s Report on the Financial Statements |
This document provides our auditor’s opinion on the financial statements. |
|
Final Management Letter |
This letter communicates findings arising from the final phase of our audit and the status of all findings reported to you during the audit. We request management responses to audit findings identified within two weeks of the date of issue. |
|
Final Report to Minister |
This report summarises findings arising from the audits of all reporting entities that the relevant Minister is responsible for. |
|
Audits of the Financial Statements of Australian Government Entities (Year End Report to Parliament) |
This report complements the interim phase report to Parliament and summarises the final results of the audits of the financial statements of Commonwealth entities and companies, including the Consolidated Financial Statements for the Australian Government. |
Legislative compliance
As part of obtaining an understanding of financial statements audit entities and their environment, we obtain a general understanding of the applicable legal and regulatory framework and how the entity is complying with that framework.
We then obtain evidence regarding compliance with the provisions of those laws and regulations which have a direct effect on the determination of material amounts and disclosures in the financial statements. This includes coverage of compliance with the Financial Reporting Rule relevant to financial reporting and Australian Accounting Standards and the appropriations framework.
We also perform audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements.
Any compliance matters identified are reported in accordance with the ANAO reporting policy.
ANAO Reporting Policy
The Auditor-General reports on audits of financial statements to the Parliament twice a year. The first of these reports, Interim Report on Key Financial Controls of Major Entities, reports on our coverage of key financial systems and controls in major entities. The second report, Audits of the Financial Statements of Australian Government Entities, reports on the results of the financial statements audits of all Australian Government entities. All significant or moderate audit findings are reported to the Parliament in these reports.
Category A, B and L1 audit findings are reported individually to the Minister and the Parliament in both reports. The aggregated number of Category C findings in major agencies is also reported to the Parliament in the Audit Report Interim Report on Key Financial Controls of Major Entities.
The categories are listed in the following table.
Audit finding categories
|
Category |
Description |
|
A |
Findings that pose a significant business or financial management risk to the entity; these include findings that could result in the material misstatement of the entity’s financial statements. |
|
B |
Findings that pose moderate business or financial management risk to the entity; these may include prior year findings that have not been satisfactorily addressed. |
|
C |
Findings that pose a low business or financial management risk to the entity; these may include accounting findings that, if not addressed, could pose a moderate risk in the future. |
|
L1 |
Instances of significant potential or actual breaches of the Constitution; and instances of significant non-compliance with the entity’s enabling legislation, legislation that the entity is responsible for administering, and the PGPA Act. |
|
L2 |
Other instances of non-compliance with legislation the entity is required to comply with. |
|
L3 |
Instances of non-compliance with subordinate legislation, such as the PGPA Rules. |
Financial reporting developments
The following table lists the accounting standards that the ANAO considers most likely to impact on a majority of Commonwealth reporting entities. Please refer to your entity’s audit strategy document for all relevant developments. A full list of all current accounting standards can be found on the Australian Accounting Standards Board website.
Table: Accounting standards that the ANAO considers most likely to impact on a majority of Commonwealth reporting entities
|
Applies year ended 30 June |
Number and title |
Main changes |
|
2023 |
AASB 2020-3 Amendments to Australian Accounting Standards – Annual Improvements 2018–2020 and Other Amendments
|
This Standard amends the following Australian Accounting Standards (AASs):
The amendments to AASB 116 require an entity to recognise the sales proceeds from selling items produced while preparing property, plant and equipment for its intended use and the related cost in profit or loss, instead of deducting the amounts received from the cost of the asset. This Standard applies to annual periods beginning on or after 1 January 2022. |
|
2023 |
AASB 2021-7 a, b and c Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 and Editorial Corrections (AASB 2021-7)
|
This Standard defers the mandatory application date of amendments to AASB 10 Consolidated Financial Statements (AASB 10) and AASB 128 Investments in Associates and Joint Ventures that were originally made in AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture so that the amendments are required to be applied for annual periods beginning on or after 1 January 2025 instead of 1 January 2022. This Standard also makes editorial corrections to various AASs, including Interpretations, and other pronouncements. Some of the editorial corrections apply to annual periods beginning on or after 1 January 2023. This Standard applies to annual periods beginning on or after 1 January 2022. |
|
2023 |
AASB 2022-3 Amendments to Australian Accounting Standards – Illustrative Examples for Not-for-Profit Entities accompanying AASB 15 |
This Standard adds an additional illustrative example to AASB 15 Revenue from Contracts with Customers (AASB 15) to demonstrate how the requirements of AASB 15 apply to transactions where a not-for-profit entity charges upfront fees as part of the goods and services offered. The Basis for Conclusions notes that the Australian Accounting Standards Board has deferred the decision about the initial measurement of right-of-use assets (at cost or at fair value) arising under concessionary leases until additional guidance on how to measure the fair value of such right-of-use assets is discussed. This Standard applies to annual periods beginning on or after 1 July 2022. |
|
2024 |
AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current (AASB 2020-1) |
This Standard amends AASB 101 Presentation of Financial Statements to clarify requirements for the presentation of liabilities in the statement of financial position as current or non-current. The amendments clarify that a liability is classified as current if an entity does not have the right at the end of the reporting period to defer settlement for at least 12 months after the reporting period. The amendments specify that the entity’s right to defer settlement of a liability for at least twelve months after the reporting period must have substance and must exist at the end of the reporting period. AASB 2020-6 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current – Deferral of Effective Date defers application of AASB 2020-1 to annual periods beginning on or after 1 January 2023 instead of 1 January 2022. |
|
2024 |
AASB 2021-2 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies and Definition of Accounting Estimates (AASB 2021-2) |
This Standard amends a number of AASs to improve accounting policy disclosures and to distinguish changes in accounting estimates from changes in accounting standards. This Standard amends:
This Standard applies to annual periods beginning on or after 1 July 2023. |
|
2024 |
AASB 2021-5 Amendments to Australian Accounting Standards – Deferred Tax related to Assets and Liabilities arising from a Single Transaction |
This Standard amends AASB 112 Income Taxes to clarify the accounting for deferred tax on transactions that, at the time of the transaction, give rise to equal taxable and deductible temporary differences. In specified circumstances, entities are exempt from recognising deferred tax when they recognise assets or liabilities for the first time. The amendments clarify that the exemption does not apply to transactions for which entities recognise both an asset and a liability and that give rise to equal taxable and deductible temporary differences. This Standard applies to annual periods beginning on or after 1 January 2023. |
|
2024 |
2021-6 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies: Tier 2 and Other Australian Accounting Standards |
To be consistent with the amendments made by AASB 2021-2 to accounting policy disclosures, this Standard amends:
This Standard applies to annual periods beginning on or after 1 January 2023. |
|
2024 |
AASB 17 Insurance Contracts (AASB 17)
|
AASB 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It also requires similar principles to be applied to:
AASB 17 replaces AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. Additionally,AASB 17does not apply to superannuation entities applying AASB 1056 Superannuation Entities and not-for-profit public sector agencies. In July 2020, AASB 2020-5 Amendments to Australian Accounting Standards – Insurance Contracts deferred the effective date of AASB 17 to 1 January 2023. |
|
2024 |
AASB 2020-6 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current – Deferral of Effective Date (AASB 2020-6)
|
This Standard amends AASB 101 Presentation of Financial Statements (AASB 101) to defer requirements for the presentation of liabilities in the statement of financial position as current or non-current that were added to AASB 101 in AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current. Those requirements will now apply to annual reporting periods beginning on or after 1 January 2023 instead of 1 January 2022. This Standard applies to annual reporting period beginning on or after 1 January 2022. |
|
2024 |
2022-1 Amendments to Australian Accounting Standards – Initial Application of AASB 17 and AASB 9 – Comparative Information
|
This Standard amends AASB 17 to add a transition option referred to as ‘a classification overlay’ relating to comparative information about financial assets presented on initial application of AASB 17 and AASB 9 at the same time. The amendments relate to financial assets for which comparative information presented on initial application of AASB 17 and AASB 9 has not been restated for AASB 9. This Standard applies to annual periods beginning on or after 1 January 2023. |
|
2026 |
AASB 2014-10 Amendments to AASs – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (AASB 2014-10) |
This Standard amends AASB 10 and AASB 128 to address an inconsistency between the requirements in AASB 10 and those in AASB 128 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. This Standard clarifies that a full gain or loss is recognised when a transfer to an associate or joint venture involves a business as defined in AASB 3. Whereas any gain or loss resulting from the sale or contribution of assets that does not constitute a business is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. AASB 2021-7 deferred the effective date of this Standard to annual periods beginning on or after 1 January 2025. |
Work of the ANAO
The ANAO supports the Auditor-General’s conduct of the full range of audits and related services under the Auditor-General Act 1997. More information about the work of the ANAO.
View the latest financial statement audit reports, including the Interim Report to Parliament and the Year End Report to Parliament.
View the latest performance audit reports.
View the in-progress performance audits.
Footnotes
1 Where the entity is a Tier 2 entity, reference (a) would state: “complying with the Australian Accounting Standards – Simplified Disclosures and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015”.
2 Where the entity is a Commonwealth company and an ACNC charity, this sentence would be expanded to include Division 60 of the Australian Charities and Not-for-profits Commission Act 2012.
3 Where the entity is a Tier 2 entity, reference (b) would state: “complying with the Australian Accounting Standards – Simplified Disclosures”.
4 Where the company prepares special purpose financial statements, reference (b) would state: “complying with the Australian Accounting Standards to the extent disclosed in the notes and the Corporations Regulations 2001”.
5 Where the entity is a Tier 2 entity, reference (b) would state: “complying with the Australian Accounting Standards – Simplified Disclosures”.
6 Where the subsidiary company prepares special purpose financial statements, reference (b) would state: “complying with the Australian Accounting Standards to the extent disclosed in the notes and the Corporations Regulations 2001”.