Wk 1: Introduction of audit assurance

  1. Assurance engagement
    • Assurance engagement (or service): ‘an engagement in which an assurance practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria.
    • 3 parties involved
    • Inputs: unedited financial statements- income statement, balance sheet, cash flow, trial balance. Regulatory requirements, accounting standards

    Outputs: audited financial statements in annual report, auditor's opinion (true and fair- free of material errors), key audit matters (required significant effort)
  2. Intended users
    • Intended users: the people for whom the assurance provider prepares their report.
    • 1. Financial report users: the users of the financial statement are not limited to the shareholders or owners of the business.
    • Investors: current or potential investors.
    • Suppliers: may want to assess whether the entity can pay them back for goods supplied.
    • Customers: may look into going concern if it is to rely on the entity for goods.
    • Lenders: to assess whether loan repayments can be made as and when they fall due. 
    • Employees: to assess whether they can pay entitlements and stability may be assessed for job security. 
    • Governments: whether the entity is complying with regulations and paying appropriate taxes.
    • General public: whether they should associate with the entity (future employee, customer, supplier), what it does and plans to do in the future.
  3. Responsible party
    Responsible party: the person or organisation responsible for the preparation of the subject matter. Example: company management.

    • Preparer responsibility: It is the responsibility of those charged with governance to prepare the financial statements. (Management)
    • The information should include the following attributes:
    • Relevant: has an impact on the decisions made by users regarding the performance of the entity.
    • Reliable: Information is free from material misstatements (errors or fraud.
    • Comparable: information needs to be comparable through time. Comparable against the same entity over time and against other entities.
    • Understandable: Users need to be able to interpret the information presented in order to make decisions.
    • True and fair: requires the consistent and faithful application of an applicable framework when preparing report.
  4. Auditor responsibility
    • Professional scepticism: maintaining independent of the entity and having a questioning mind to thoroughly investigate all evidence presented.
    • Professional judgement: use of judgement based on level of expertise, knowledge and training obtained by the auditor.
    • Due care: being diligent, applying standards and documenting each stage of the audit process.
  5. Sources of demand for audit and assurance services
    • Remoteness: users do not have access to information themselves
    • Complexity: users do not have knowledge to be able to make disclosure choices. (through the auditor opinion)
    • Competing incentives: users may find it difficult to identify when the incentives of management have been over-represented.
    • Reliability: as decisions are being made based on information presented, it is important that it be reliable.
  6. Theoretical frameworks to explain audit demand
    • Agency theory: Due to the remoteness of the owners from the entity, the owners have an incentive to hire an auditor to assess information provided by management.
    • Information hypothesis: Due to the need for reliable information, users will demand that information be audited to aid in decision making.
    • Insurance hypothesis: Investors demand audited financial statements to insure against potential losses.
  7. Demand in a voluntary setting
    • More common to voluntarily disclose CSR info in various forms. 
    • As stakeholders are demanding info regarding the entity's impact on the environment and actions taken to reduce impact
    • Entities not required to have CSR disclosures assured. 
    • These services are provided to meet user demands for high quality, reliable info and to demonstrate a high level of corporate social responsibility.
  8. Assurance providers
    • Assurance services provided by accounting and consulting firms. 
    • 3 tiers of assurance providers in Australia
    • First tier comprise of the Big 4- Deloitte, EY, KPMG, PWC
    • Mid tier comprises of firms with significant presence and most have international affiliations.
    • Next tier made up of regional and local accounting firms.
  9. The role of regulators and regulations
    • Regulators: 
    • Financial reporting council (FRC): oversees the process used for setting accounting and auditing standards. Also monitors and reports on auditor independence. Don't really play active role.

    • Auditing and assurance standards board (AUASB): responsible for the formulation of auditing standards.
    • Mainly take from the international standards and rename.
    • Redesigned auditing standards to bring in line with international standards.
    • Responsible for issuing ASRE, ASAE and GS standards and statements (guidance on voluntary audits) .
    • Take IASB standards and changing to Aus environment.

    International auditing and assurance standards board: Develop and issue International Standards on Auditing (ISAs).

    • Accounting professional and ethical standards board (APSEB): Established as an independent body by CPA Australia and CAANZ to issue professional and ethical standards.
    • APES standards are mandatory for all members of CPA Australia, CAANZ and NIA.

    • Australian securities and investments commission (ASIC): Government body that administers the ASIC Act and much of Corporations Act.
    • Plays a role in overseeing the audit function. Releases findings on audit quality of audit firms every year.

    Australian securities exchange (ASX): Auditors audit companies listed on stock exchange. Provide additional obligations for entities wishing to list on the exchange.

    Companies auditors and liquidators disciplinary board (CALDB): Responds to ASIC and APRA regarding breaches of Corporations Act or ASIC Act. Board may cancel or suspend auditor, may give warning or ask for undertaking to improve conduct.

    Professional bodies (including CPA Australia and Chartered Accountants Australia and New Zealand): Include professionals in public practice, industry, academia and government. Requires further post-graduate study and minimum work experience periods to join as members.

    • Corporations act: Provides guidance on conducting audit of financial reports.
    • Which accounts need to be audited, whether true and fair, retention of audit papers.

    • CLERP 9 act: Significant changes brought about from 1 July 2004 including auditing standards having ‘force of law.’
    • Disclosure of non-audit services provided by auditor.
    • Enhanced independence and employment requirements.
    • Auditor rotation based on not exceeding being auditor for more than five out of the last seven years.
  10. Limitations of an audit
    • There is no guarantee that the financial report is free from error or fraud. (time, cost constraint)
    • The nature of audit procedures and processes are required to be performed within a reasonable period and at a reasonable cost (ASA 200, ISA 200).
    • Judgement is required in the process of preparation of the financial statements.
  11. Audit expectation gap
    • Is the difference between the expectations of assurance providers and financial reports or other users.
    • Auditor performance affected by:
    • Auditing standards
    • Ethical standards
    • Regulations
    • Legislation
    • Firm policy and procedures.

    • Financial report reader's expectations affected by:
    • Audit firm reputation
    • Audit firm independence
    • Reader's knowledge of auditing
    • Economic condition

    Can be caused by unrealistic expectations including:

    –The auditor providing a complete assurance.

    –The auditor guaranteeing future viability of entity.

    –An unqualified opinion denotes complete accuracy.

    • –The auditor will find all frauds.
    • We know these cannot be met by the auditor.
  12. Expectation gap can be reduced by
    • Auditors performing their duties appropriately
    • Undertaking peer reviews of work performed
    • Reviewing and updating auditing standards.
    • Educating the public.
    • Enhanced reporting explaining audit processes and levels of opinion auditors provide to the entity.
    • Greater attention to the risk of material fraud occurring.
  13. Most common assurance services
    • 1. Financial report audits: an engagement designed to express an opinion about whether the report is prepared in all material respects in accordance with a financial reporting framework 
    • Not tested:
    • 2.Compliance audit: Involves gathering evidence to ascertain whether rules, policies, procedures, laws and regulations have been followed. A tax audit is an example of a compliance audit.

    3.Performance audit: Refers to the economy, efficiency and effectiveness of an organisation’s activities. Usually done by internal auditors or can be outsourced to external auditors.

    4.Comprehensive audit: Combines elements of financial report audit, compliance audit and performance audit.Often occur in the public sector

    • 5.Internal audit: Provides assurance about various aspects of an organisation’s activities.
    • Often contain elements of performance audits, compliance audits, internal control assessments and review.

    • 6.Corporate social responsibility (CSR) assurance: Includes voluntary reporting about environmental, employee and social subject matter.
    • Incorporates both financial and non-financial information.
    • Auditor must consider environmental issues on their clients’ financial reports (AGS 1036) even if reports do not include any disclosures.
  14. Different levels of audit assurance
    • Auditors may provide varying levels of assurance when conducting assurance engagements.
    • 1.Reasonable assurance.
    • 2.Limited assurance.
    • 3.No assurance.
  15. Reasonable Assurance
    • Highest level of assurance but not absolute assurance on the reliability of the subject matter.
    • Eg. Financial Statement Audit.
    • The auditor has conducted sufficient tests and obtained appropriate and sufficient evidence to conclude positively that the information that is assured is (or is not) reliable.
    • Assurance expression: positive
  16. Limited level of assurance
    • Moderate assurance on the reliability of the subject matter.
    • eg. Review of a company’s half-year financial report.
    • Auditor has done adequate work to report whether or not anything came to their attention that would lead them to believe that the information that is assured is not true and fair.
    • Assurance expression: negative
  17. No assurance level of assurance
    • Agreed-upon procedures engagement.
    • The auditor does not report an opinion – merely report on the findings and the facts of their findings.
    • The client determines the nature, timing and extent of evidence gathered and then draws their own conclusions about these findings
    • Assurance expression: no assurance given
  18. Different audit opinions: unmodified
    • Also known as unqualified opinion or clean opinion.
    • Financial report is true and fair, presents fairly the financial position of the company, information complies with AAS and Corp Act.
    • Asked company to fix it and they fixed it.
  19. Different audit opinions: modified
    • Modifications that do not affect the auditor's opinion: Emphasis of matter (?)
    • Modifications that affect the auditor's opinion:
    • Qualified opinion: when it is material but not pervasive. 
    • Can include a qualified with ‘except for’ opinion. This is when issue(s) are material but not pervasive.
    • Adverse opinion: the financial report is materially misstated. Material and pervasive.
    • Disclaimer of opinion: inability to obtain sufficient appropriate audit evidence. Material and pervasive.
  20. Key audit Matters (KAM)
    Key audit matters: are those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial report of the current period.

    Requires auditors to report significant audit judgements to the audit committee.

    Areas that required key judgement.

    eg. Revenue must be audited carefully. Overstatement vs understatement.

    May not be adding value- may be adding complexity to the audit opinion
Card Set
Wk 1: Introduction of audit assurance
Wk 1: Introduction of audit assurance 1.1 Describe an assurance engagement 1.2 Discriminate between different types of assurance services 1.3 Discriminate between different levels of assurance 1.4 Categorise different audit opinions 1.5 Discriminate between the different role of the preparer and the auditor, and discuss the different firms that provide assurance services 1.6 Justify the demand for audit and assurance services 1.7 Compare the different regulators and regulations surrounding the assurance process