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ASSURANCE AND AUDITING: INTRODUCTION

ACCG 340 Lecture 1 Semester 1 2009

Renee Radich

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Introduction of the unit ACCG340

WELCOME!

• Teaching staff and Lectures

• Tutorials and consultations• Text: Gay, G. & Simnett, R. (2007), Auditing and Assurance Services in Australia, Revised 3rd edition. McGraw-Hill Irwin

• Assessment: refer to unit outline p5-6!!

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CLASSES

• Students are required to attend 3 hours face-to-face teaching per week consisting of 1 x 2 hour lecture and 1 x 1 hour tutorial.

• The timetable for classes can be found on the University web site at:

• http://www.timetables.mq.edu.au/ • Changing Classes: Students may only attend

their registered tutorial. Tutorial performance will be taken into account when considering any appeals for special consideration. Changes to tutorial classes can only be done ONLINE. Please do not email academic staff to request changes.

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Assessment

Tutorial quizzes 10%Tutorial assignments 5%Mid-semester test 25%Group assignment 10%Final examination 50%Assessment Total 100%

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Assessment

• Tutorial assignments -four occasions collected at random Each satisfactorily attempted piece of work will receive a mark of 1.25 percent

• Short quizzes during the semester. Five short quizzes (one each fortnight) during tutorials commencing in the week beginning 9 March.

• Mid-semester test: Saturday 4 April 2009 at 10.30 am

• Group assignment maximum 4 students per group). Your tutor will allocate groups once tutorial enrolments have been finalised, in weeks 3-4. 7 pm Friday 22 May 2009

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Lecture 1

Lecturer: Renee Radich

– Chapter 1: Assurance and Auditing: An Overview

– Chapter 2: The Structure of the Profession

– Tutorial Questions: are available on line

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Introduction: overview of the current auditing environment

• 2001–2003 developments:– Crisis of confidence in financial system:

• Numerous corporate collapses (e.g. Enron, HIH, OneTel)

• Collapse of major auditing firm (Arthur Andersen)

• Auditor value questioned during this period

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Overview of the current auditing environment (cont.)

• 2004–2007 developments:

– The auditing profession has gone from strength to strength.

– Society’s need for a strong independent auditing profession has been recognised.

– There have been many legislative and professional developments aimed at ensuring (or even increasing) the auditor’s professional competence and independence.

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Assurance and demand for assurance

• Arises because users are not in a position to establish the credibility of the information they are presented with. This may be due to:– ____________________— managers may present biased

information, as they are also evaluated on the information

– ____________________— information provided forms the basis of many users’ decisions

– ____________________ — many users do not have the expertise required to determine the quality of information presented

– ____________________— the separation of owners from management prevents users from assessing

information quality.

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Agency theory, Information hypothesis, Insurance hypothesis

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Force of law auditing standards (1 July 2006)• The force of law auditing standards apply to

all audits and reviews of Corporations Act 2001

financial reports that commence on or after 1 July 2006 (these would be under the left branch of Figure 1.2): – Australian Auditing Standards relating to such

audits are now designated as ASAs, and have the same numbering as the equivalent ISAs.

– For related reviews, the relevant standard is Australian Standard on Review Engagements ASRE 2410, equivalent to the International Standard on Review Engagements, ISRE 2410

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Levels of assurance

• For any subject matter, two levels of assurance can be provided:

1.___________ assurance

2.___________ assurance.

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Level of assurance on financial statements

• Reasonable assurance engagements are called ' ________ engagements'.

• Reasonable assurance = high assurance, ________ expression of opinion.

• Limited assurance engagements are called ' ________ engagements'.

• Limited assurance = moderate assurance, ________ expression of opinion.

• There are also engagements that provide no assurance: _____________engagements—reports of factual findings.

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Question:

The difference between an audit and a review is that:

A: The opinion for a review is negative, while the opinion for an audit is positiveB: A review covers half year accounts, while an audit covers full year accountsC: Both A and BD: Neither A nor B

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Auditing defined

• A Statement of Basic Auditing Concepts (ASOBAC — the American Accounting Association) defines auditing as:

‘A systematic process of ________ obtaining and evaluating ________ regarding assertions about economic actions and events to ascertain the degree of correspondence between those ________ and ________ , and communicating the results to interested users.’

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History of the audit function

• Audits have been performed since at least the thirteenth century.

• Until the early 1900s, audits focused on a company’s solvency and the detection of fraud and error.

• Audits from early 1900s to 1940s: added objectives of verification of financial report accuracy and attestation to financial report credibility.

• Since the 1940s, the overall objective of auditing has been the _________________________ as to whether the financial report is ______________.

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Question:

The main objective of an audit is to provide:

A: An opinion as to whether the financial statements are correctB: Recommendations as to how the company can improve operationsC: An invoice

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The expectation gap

• Defined as: ‘the gap between society’s ________ of auditors and auditors’ ________ as perceived by society’.

• Three components of the expectation gap:

1.The ________ gap between what society expects auditors to achieve and what they can reasonably be expected to accomplish

2.The ________ gap arising from deficient standards

3.The ________ gap arising from deficient performance by auditors.

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The gap between audit expectation and audit performance

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Major issues in the expectation gap

1. Auditor’s responsibility for the detection and reporting of _________________________

2. The auditor’s ability to communicate _________________________ of assurance

3. The ________ and ________ of audit report messages

4. ________ by auditors of corporate failure

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Question:

An auditing standard requires attendance at a stock-take, but the auditor does not comply. This is an example of the:

A: Reasonableness gapB: Performance gap arising from deficient standardsC: Performance gap arising from deficient performance by auditors

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Regulation of Audits and The role of auditing standards I

Financial Reporting Council (FRC) —oversight of _________________________ and auditor ________.

The Auditing and Assurance Standards Board (AUASB) - development of auditing and assurance services ________.

Australian Securities and Investments Commission (ASIC) — the administering authority for the _________________.

Companies Auditors and Liquidators Disciplinary Board (CALDB)— determines whether a registered auditor or liquidator has _______to carry out their duties properly or is not a fit and proper person to be _______.

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Regulation of Audits and The role of auditing standards II

• _________________________ outline basic principles and essential procedures which are identified with ‘black letter’ (bold type).

• Black letter requirements are ________ for auditor to follow if information is material, except in rare and exceptional circumstances.

• Rare and exceptional circumstances include where option for departure identified within basic principle or essential procedure (e.g. ASA 501 re Attendance at stocktake).

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Regulation of Audits and The role of auditing standards III

Auditing standards (ASAs and AUSs) are developed by the _______________________ .

ASAs are effective for audits of financial periods commencing on or after 1/7/06. The key difference from the old standards (AUSs) is that ASAs have ____________- for audits under the Corporations Act 2001 the auditing standards must be applied.

• Failure to observe ASAs may result in disciplinary action by the professional bodies (APS1.1) and by ____________.

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Regulation of Audits and The role of auditing standards IV

Note: there are still a number of AUSs, which predominantly relate to frameworks (e.g. AUS 106, 108, 110) or assurance engagements on other than financial reports prepared in accordance with the Corporations Act 2001 (e.g. AUS 804, 806, 808, 810, 904).

• _________________________ provide guidance on procedural matters or industry-specific issues, but do not establish new principles or amend existing standards.

• _________________________ bring matters of significant and immediate concern to the auditor’s attention.

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Question:

If an auditor contravenes ASAs while auditing a company, they may be liable to be:

A: Disciplined by the professional bodiesB: Sent to prisonC: Burned at the stakeD: Both A and B

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Profile of the auditing profession I

• There are two primary professional accounting organisations in Australia:

1._________________

2._________________• Membership of either of these two bodies by

public accounting practitioners is voluntary.

• However, membership of either of these bodies (or another prescribed body) is necessary in order to become a ___________ company auditor.

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Profile of the auditing profession II: Audit firms

• There are two levels of audit firms in Australia:1. National and international (including the Big Four

— since the collapse of Arthur Andersen and its merger with Ernst & Young — and second-tier firms)

2. Regional or local firms.• The largest international firms are known as the 'Big

Four':

– ______________– ______________– ______________– ______________.

• The Big Four dominate the practice of public accountancy:

audit approximately ______ of listed companies in Australia.

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Profile of the auditing profession III: Other services offered

• While audit and assurance services form a substantial part of a public accounting firm’s client base and revenue stream, most firms also offer:

– Taxation

– Management services

– ________________________

– ________________________

– Insolvency services

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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 financial reports.

• _______________: examination for the purpose of reporting on legality and control of operations.

• _______________: analyses organisation structure, internal systems, workflow and managerial performance — efficiency, effectiveness and economy of these items

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Other applications of the assurance function (cont.)

• ________________: usually includes components of compliance, performance and financial report audits.

• _______________: audits performed by employees of the entity as a part of the entity’s risk management process.

• _______________: associated many times with fraud detection.

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Internal structure of an audit firm

• Currently, an audit firm generally practises as a ______________.

• As a result of CLERP 9 amendments, an auditfirm can now apply to be ______________.

• This provides advantages of ______________ and adequate professional indemnity. Insurance must be maintained.

• Most large audit practices are usually structured along _____________specialisations.

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Positions and duties in an audit firm

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Regulation of subject matter audits

• Australian Accounting Standards Board (AASB): responsible for the development of accounting standards in Australia.

• Urgent Issues Group (UIG): provides authoritative guidance on accounting issues that are otherwise likely to receive divergent or unacceptable treatment.

• Financial Reporting Panel (FRP): established in 2004 to provide a forum for review of disputes between ASIC and entities lodging reports with ASIC.

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Internationalisation of auditing

• Key groups

– International Federation of Accountants (IFAC): guides efforts to develop technical (accounting and auditing) and ethical standards. Members include 163 accounting bodies (including ICAA and CPA Australia) in 119 countries

– International Auditing and Assurance Standards Board (IAASB): an independent body supported by IFAC that develops standards and guidance for audit and assurance services

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Internationalisation of auditing

– Transnational Auditors Committee (TAC): executive arm of the auditing firms that perform auditing across national boundaries

– International Forum on Accountancy Development (IFAD): created in 1999 by IFAC and World Bank. Consists of a range of public and private organisations aiming to improve financial reporting, accountability and transparency worldwide

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Quality control

• ASA 220 (ISA 220) requires the audit engagement team to implement quality control procedures.

• Procedures should be adopted in the followingareas:– _______________– Employment– Assignment of personnel– ________________– Guidance and assistance– ________________– Monitoring

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Quality control procedures

• Key quality control procedures employed by the professional bodies are:

– ________________ (engagement quality control review) — auditor subject to review by another partner in the practice

– ________________ of auditors (partners and staff) to limit length of time spent on one client

– Peer reviews — independent periodic review by another firm of public accountants

– Continuing professional education requirements.

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Auditing in the public sector

• Another important auditing sector, separate to the private auditing sector, is the public auditing sector.

• Many public sector entities require auditing.• Responsibility for public sector audits rests with

the Commonwealth and State Auditors-General.• They use auditing standards approved by the AUASB as

the basis of their auditing standards.• Sometimes audit mandate prescribes wider inclusions

than just financial statements. Compliance and performance audits may be required. (This is further discussed in Ch 16).

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WHERE ARE YOU GOING TO BE?