Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia...

Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

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PowerPoint Slides to accompany

Auditing and Assurance Services in Australia 3r

By

Grant Gay & Roger Simnett

Slides prepared by Roger Simnett


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Part One

The Auditing and Assurance Services

Profession


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Chapter 1

Assurance and auditing: an overview


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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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Overview of the current auditing environment (cont.)

• The following issues will be among those covered in this course:

— A framework for all assurance services, not just financial statement audits

— Greater independence in the standard-setting process

— Legislation aimed at improving professional competence and independence

— Revised auditing standards for financial statement audits

— Corporate governance and ethics initiatives.


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Learning objective 1: The assurance framework

• Many parties provide reports to users as an aid in making decisions.

• Reports potentially may be biased due to the vested interests of the report providers.

• Users may demand that the credibility of the report be enhanced by having an independent expert examine it.

• Financial statements are just one type — the most common — of report that can be assured.


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The objective of assurance engagement

• Assurance engagement:

‘an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria’.

• International Framework/AUS 108, para. 7


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The objective of assurance engagement


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Five elements of assurance engagement

1. Three-party relationships:

— Practitioner (auditor)

— Responsible party (preparer)

— Intended user

2. Subject matter

3. Suitable criteria

4. Sufficient appropriate evidence

5. Written assurance report


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Why is there value in the assurance service?

• Independence: users derive value from the knowledge that a member of the profession has no interest in the information other than for its usefulness.

• Expertise: assurers must have the competence to obtain sufficient relevant information to provide a reasonable basis for their conclusions.


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Learning objective 2: Structure of assurance standards and pronouncements


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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. Reasonable assurance

2. Limited assurance.


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Reasonable assurance (Figure 1.3)

(cont.)


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Limited assurance (Figure 1.3 cont.)


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Level of assurance on financial statements

• Reasonable assurance engagements are called 'audit engagements'.

• Reasonable assurance = positive expression of opinion.

• Limited assurance engagements are called 'review engagements'.

• Limited assurance = negative expression of opinion.

• There are also engagements that provide no assurance: agreed-upon procedures engagements and reports of factual findings.


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Attest v direct reporting

• Audit and review engagements can involve either an attest or a direct reporting engagement.

• Attest engagement: the auditor issues an opinion on written assertions made by the party responsible for the subject matter.

• Direct reporting engagement: the auditor issues an opinion directly on the subjectmatter (no written assertion is made by the party responsible for the subject matter).


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Learning objective 3:Auditing defined

• A Statement of Basic Auditing Concepts (ASOBAC — the 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.’


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Auditing defined (cont.)

• The important parts of this definition:

— 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

— Communicating results — the results must be communicated to interested parties


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Learning objective 4: Fundamental principles underlying an audit• In 2005 the International and Australian Auditing Standards

Boards released a draft consultation paper in which they outlined possible fundamental principles underlying an audit. These principles should:

— Underpin the objective(s) of an audit, and help drive the conduct of the auditor in using professional judgment to meet the professional requirements of the auditing standards

— Be easily understood, both by auditors and other readers of auditing standards

— Be universally applicable to all audits

— Entrench the expectations that auditors are expected to accept and abide by.


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Draft ethical principles

• Integrity

• Objectivity

• Professional competence and due care

• Confidentiality

• Professional behaviour


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Draft auditing principles

• Knowledge

• Responsibility

• Quality control

• Rigour and scepticism

• Professional judgment

• Evidence

• Documentation

• Communication

• Association

• Reporting


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Learning objective 5: Attributes of accounting information

• From AASB/IASB framework:

— Relevance

— Reliability

— Comparability

— True and fair presentation

— These four attributes of accounting information provide the basis for the audit function.


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Learning objective 6: Demand for assurance

• Demand arises because users are not in a position to establish the credibility of the information they are presented with. This may be due to:

— 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 from assessing information quality.


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Hypotheses relating to demand assurance

1. Agency theory (stewardship hypothesis)

2. Information hypothesis

3. Insurance hypothesis


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Agency theory


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Learning objective 7: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 expression of an opinion as to whether the financial report is materially misstated.


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Audit approaches since the 1940s

These have evolved over time:

• Balance-sheet approach — this involved the auditor auditing the assets and liabilities with little emphasis on profit and loss account items.

• Transactions-cycle approach — this emphasised

the review of controls that operated within each transaction cycle and provided for limited testing of balance sheet items.


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More recent audit approaches

• Financial risk analysis approach: the 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.

• Business risk approach (current audit approach): as well as financial risk, the auditor considers business strategy, associated business risks, and management’s plans to respond to changes in the business environment.


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Learning objective 8:The auditor–client–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 or her duties.


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Learning objective 9: The expectation gap

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

• There are 3 components of the expectation gap:

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

2. The performance gap arising from deficient standards

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


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The gap between audit expectation and audit performance


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Four major issues in the expectation gap

1. The nature and meaning of audit report messages

2. Early warning by auditors of corporate failure

3. Auditor’s responsibility for the detection and reporting of earnings management and fraud

4. The auditor’s ability to communicate different levels of assurance


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Learning objective 10: The role of auditing standards

• Auditing standards in Australia are developed by the Auditing and Assurance Standards Board (AUASB).

• The standards prescribe the basic principles and essential procedures governing the conduct of an auditor.

• For audits conducted under the Corporations Act 2001, the auditing standards must be applied, thus giving them legal authority.


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Learning objective 10: The role of auditing standards (cont.)

• Auditing standards are applicable to all other audits, adapted as necessary (APES 410).

• Failure to observe these standards may expose a member to investigation and disciplinary action from the Australian Securities and Investments Commission (ASIC).


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AGSs and AAAs

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

• Audit and Assurance Alerts: bring matters of significant and immediate concern to the auditor’s attention.


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Authority of auditing standards

• Auditing standards applying to audits and reviews of financial reports prepared in accordance with the Corporations Act 2001 and commencing on or after 1July 2006 now have legal authority (force of law):

— Australian auditing standards relating to these audits are now designated as ASAs, and have the same numbering as the equivalent ISAs.

— 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).


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Authority of auditing standards (cont).• ASAs consist of paragraphs that are either mandatory

requirements, identified in bold type (black lettering); or explanatory guidance, identified in normal type (grey lettering).

• In the rare and exceptional circumstances where the auditor is unable to comply with an essential procedure contained in a mandatory requirement, the auditor is required, if possible, to perform appropriate alternative procedures, and document in working papers the circumstances and reasons why he or she cannot comply, and how the alternative procedures achieve the objectives

of the mandatory requirement.


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Learning objective 11: Audits under Corporations Act 2001• Management is responsible for the preparation

and presentation of appropriate accounts. Accounts are to be accompanied by a report of an independent auditor appointed by the shareholders.

• The Corporations Act 2001 (ss 292–306) indicates that directors must prepare a financial report (income statement, balance sheet, statement of changes in equity cash flow statement, directors’ declaration and other related notes and reports), together with any other information or explanation necessary to give a true and fair view.


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Auditors’ responsibilities under the Corporations Act 2001

• Auditors are responsible for reporting to company members on the directors’ financial report presented at the AGM. They say whether the financial report:

— Is in accordance with the law, including compliance with accounting standards (s 296)

— Provides a true and fair view (s 297).


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Learning objective 12: Other applications of the assurance function• Evidence-gathering methods of auditing are

also employable in the audit of activities other than financial reports.

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

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


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Learning objective 12 (cont.): Other applications of the assurance function (cont.)

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

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

• Forensic audit: associated many times with fraud detection.

Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia...

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