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Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett1
AUDITING AND ASSURANCESERVICES IN AUSTRALIA.
AUTHORS: GAY & SIMNETT
Prepared by
Roger Simnett
Copyright McGraw-Hill 2003
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett2
PART ONE:
The Auditing and Assurance
Services Profession
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett3
CHAPTER 1
ASSURANCE AND AUDITING: AN
OVERVIEW
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett4
OVERVIEW OF CURRENT ENVIRONMENT
Crisis of confidence in current financial system. Need to consider role played by• Accounting standards• Corporate governance• Ethics• Independence of auditors• Business complexity and globalisation.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett5
AUDITING PROFESSION’S RESPONSE TO CRISIS OF CONFIDENCE
• Numerous reviews and committees• Auditing standards revisited• Auditing independence revisited• Auditor’s role in corporate
governance considered
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett6
THE ASSURANCE FRAMEWORK
• Many parties provide reports to users as an aid to decision-making.
• Reports may potentially be biased due to the vested interests of the report providers.
• Users may demand that credibility of report be enhanced by having someone who is both independent and expert examine the report.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett7
OBJECTIVE OF ASSURANCE ENGAGEMENT
‘ … for a professional accountant to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about a subject matter.’
ISAE 100/AUS 108 para.4
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett8
Fig. 1.1 Diagrammatic summary of an assurance service engagement (p. 9)
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett9
FORMS OF ASSURANCE SERVICES• Audit engagements — high level of
assurance, positive expression of opinion.
• Review engagements — moderate level of assurance, negative expression of opinion.
• Agreed-upon procedures engagements — no assurance, report of factual findings.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett10
ATTEST V DIRECT REPORTING• Audit and review engagements can
involve either an attest or direct reporting engagement.
• Attest engagement — auditor issues an opinion on written assertions made by party responsible for the subject matter.
• Direct reporting engagement — auditor issues an opinion directly on the subject matter, (no written assertion is made by the party responsible for the subject matter).
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett11
AUDITING DEFINED• A Statement of Basic Auditing Concepts
(ASOBAC) (American Accounting Association) defines auditing as: A systematic process of objectively
obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett12
• Systematic process — audits are structured activities;
• Objectivity — freedom from bias;• Obtaining and evaluating evidence — allows
the auditor to determine the support for assertions or representations;
• Assertions about economic actions and events — describes the subject matter of an audit;
• Degree of correspondence…established criteria — the purpose of the audit is to determine conformity with some specified criteria; and
• Communicating results — the results must be communicated to interested parties.
The important parts of this definition:
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett13
ATTRIBUTES OF ACCOUNTING INFORMATION
• Relevance • Reliability• Comparability• Understandability
These four attributes of accounting information provide the basis for the audit function.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett14
• Conflict of interest — managers may present biased information as they are also evaluated on the information.
• Consequence — information provided forms the basis of many users’ decisions.
• Complexity — many users do not have the expertise required to determine the quality of information presented.
• Remoteness — the separation of owners from management prevents users having assessing information quality.
DEMAND FOR ASSURANCEArises because users are not in a position to establish the credibility of the information they are presented with, due to:
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett15
Hypotheses relating to demand for assurance:
1. Agency theory (stewardship hypothesis)
2. Information hypothesis3. Insurance hypothesis
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett16
Fig. 1.3 Simple diagram of agency relationship between managers and investors (p.16)
Entrust resources
ManagersInvestors
Required periodic reportingon use of resources
Verificationby independent expert
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett17
HISTORY OF THE AUDIT FUNCTION• Audits have been performed at least since the
thirteenth century.• Audits until the early 1900s focused on the
company’s solvency and the detection of fraud and error.
• Since the 1940s: the overall objective of auditing has been the expression of an opinion as to whether the financial report is materially misstated.
• Audits from early 1900s to 1940s: added objectives of verification of financial report accuracy and attestation to financial report credibility.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett18
AUDIT APPROACHES SINCE THE 1940s IThese have evolved over time:• Balance-sheet approach — involved
auditor auditing the assets and liabilities with little emphasis on profit and loss account items.
• Transactions cycle approach — emphasised the review of controls which operated within each transaction cycle and provided for limited testing of balance sheet items.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett19
AUDIT APPROACHES SINCE 1940s II
• Financial risk analysis approach — auditor considers relative financial risk and materiality in planning the audit, such that audit work is concentrated in areas where there is a higher risk of misstatement.
• Strategic business risk approach — as well as financial risk, auditor considers business strategy, associated business risks, and management’s plans to respond to changes in the business environment.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett20
THE AUDITOR, CLIENT AND PUBLIC RELATIONSHIP • The auditor’s primary reporting responsibility is
to resource providers of the client entity; however the client entity usually engages the auditor and pays the auditor’s fees.
• The auditor also discusses the audit findings with management prior to releasing information to the resource providers.
• In order to combat pressures on independence and objectivity, the auditing profession has issued a series of ethical rulings and professional standards to guide the auditor in the conduct of his/her duties.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett21
THE EXPECTATION GAP
• The reasonableness gap: gap between what society expects auditors to achieve and what they can reasonably be expected to accomplish;
• The performance gap arising from deficient standards; and
• The performance gap arising from deficient performance by auditors.
Defined as: ‘the gap between society’s expectations of auditors and auditors’ performance as perceived by society’. Three components:
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett22
Fig. 1.5 Structure of the gap between audit expectation and audit performance (p.26)
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett23
FOUR MAJOR ISSUES IN EXPECTATION GAP• The nature and meaning of audit
report messages;• Early warning by auditors of
corporate failure;• Auditor’s responsibility for the
detection and reporting of fraud; and
• Auditor’s ability to communicate different levels of assurance.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett24
THE ROLE OF AUDITING STANDARDS• Auditing standards (AUSs) in Australia are
developed by the Auditing and Assurance Standards Board (AuASB) of the AARF. In most cases AUSs reflect International Standards on Auditing (ISAs).
• Prescribe the basic principles and essential procedures which govern the professional conduct of an auditor.
• Mandatory for members of the two accounting bodies, but currently do not have legislative backing.
• Failure to observe these standards may expose a member to investigation and disciplinary action from their accounting body (APS1.1).
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett25
AUSs & AGSs• Auditing Standards (AUS) outline basic
principles and essential procedures which are identified with ‘black letter’ (bold type).
• Black letter requirements are mandatory 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. AUS 506 re Attendance at stocktake).
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett26
AUDITS UNDER THE CORPORATIONS ACT 2001• Management responsible for the preparation and
presentation of appropriate accounts. Accounts to be accompanied by a report of an independent auditor appointed by the shareholders.
• Corporations Act 2001 (ss 292-306) indicates that directors must prepare statements of financial position and performance, directors’ declaration and other related notes and reports, together with any other information or explanation as is necessary to give a true and fair view.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett27
OTHER APPLICATIONS OF THE ASSURANCE FUNCTIONEvidence-gathering methods of auditing also employable inaudit of activities other than financial reports.• Compliance audit — examination for the purpose of
reporting on Performance audit — analyses organisation structure, internal systems, work flow, and managerial performance: efficiency, effectiveness and economy of these items.
• Comprehensive audit — usually includes components of compliance, performance and financial report audits.
• Internal audit — audits performed by staff of the entity as a service to management.
• Forensic audit — investigate audit, associated many times with fraud detection.
• legality and control of operations.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett28
CRITICAL PERSPECTIVE OF CURRENT ISSUES• Expanded range of services provided by
auditing firms — what is the impact on independence?
• Strategic business risk audit methodologies — are these an attempt to sell other services, and is management becoming the client of the audit rather than the shareholder?
• Effect of globalisation — is business becoming too complex and can the auditor rely on auditing standards?
• Independence — from the three issues above, is the auditor truly independent?