accg925 seminar1 s1

ACCG925 Auditing & Assurance

Services

1

Seminar 1 Part 1: Course overview & Introduction to

auditing and assurance services

Slides adapted from those prepared by Dr Phil Saj for Wiley Publishing

Seminar 1 Overview

Welcome to ACCG925! (i) Brief discussion of the course and specifically the UNIT GUIDE (ii) Icebreaker activity get to know your classmates (iii) Discussion of Seminar 1, Part 1, lecture slides (iv) Discussion in groups of the in class questions (v) Discussion of Part 2, slides (vi) Case study of a corporate collapse: ABC Learning


Reading guide for Seminar 1

LCCR (2014) Chapters 1 & 6


Lecture Outline_Part 1

1. Introducing auditing & assurance services 2. Introduction to the financial report audit 3. Why are audits needed? a- regulation b theoretical 4. Understanding the auditing environment 5. Who conducts audits? 6. In class discussion questions in groups


1. Accounting, Assurance & Auditing

Accounting provides financial information for decision-making, control and

accountability

Assurance provides confidence that information is reliable various levels (reasonable, limited); depending on nature and extent of

procedures and objectivity of evidence

Auditing provides (reasonable) assurance that accounting information is relevant,

reliable, comparable, understandable and conveys a true and fair view

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

Definition and elements of an assurance engagement

engagement in which an assurance 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. (Framework for Assurance Engagements)

Five elements Three-party relationship including the assurance

practitioner, the responsible party and intended users Subject matter Suitable criteria Sufficient appropriate evidence Written assurance report


Assurance engagements

May be financial or non-financial

The level of assurance will vary according to the particular engagement (according to the amount of evidence collected)

Audits of annual financial reports imply a reasonable (or high) level of assurance

In comparison (for example) half-yearly reviews imply a moderate (or low) level of assurance

7 Slides adapted from those prepared by Dr Phil Saj for Wiley Publishing

Examples of Assurance Services

Assurance services that add value:

Due diligence audits

Forensic and probity audits

Social auditing

Performance audits

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Forward

Framework for Assurance Engagements

Standards on Review

Engagements

Glossary ASQC 1

Assurance No Assurance

Audits and reviews of historical fin. info

Australian Auditing

Standards

Standards on Assurance Engagements

Standards on Related

Services

Assurance engagements other than audits & reviews

of historical fin. info

Engagements other than audits, reviews & other assurance

engagements

Guidance Statements

STRUCTURE OF AUASB PRONOUNCEMENTS


Standards on Review Engagements ASRE 2400 ASRE2405

ASRE 2410*

Standards on Assurance Engagements

ASAE 3000-3600

Australian Auditing Standards

ASA100-800* ASA 805 ASA 810

AUASB Glossary

ASQC1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services*

Forward to AUASB Pronouncements

Audits and reviews of historical financial information

Assurance engagements other than audits and reviews of historical financial information

Guidance Statements, other guidance and AUASB Bulletins

*Made under s.336 of the

Corporations Act

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STRUCTURE OF AUASB PRONOUNCEMENTS

Framework: levels of assurance


The relationship between auditing and assurance

Financial Report Audit

Assurance Engagement


What is an audit?

A systematic process of objectively obtaining and evaluating evidence regarding assertions made about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users American Accounting Association (1973)


rahatshahriarComment on TextAn audit is the examination of the financial report of an organisation - as presented in the annual report - by someone independent of that organisation. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.

Important parts of the definition ?

systematic process

objectively obtaining and evaluating evidence

regarding assertions made about economic actions and events

ascertain the degree of correspondence between those assertions and established criteria communicate the results to interested users


Types of audits


Types of Audit Nature of Focus Measurement Criteria

Reporting Format Primary use of Audit Report

Financial Report

Entity's Financial Statements

Legislation, Accounting (AASBs) and Auditing Stds (ASAs)

"True and Fair" Shareholders Creditors Regulatory Agencies and General Public

Compliance Policies/ Procedures & Regulations

Specific Conditions / Criteria (ASAE 3100)

Conclusion on compliance / non compliance

Management or Reporting Authority

Performance Management Goals and Resource Usage

Economy and Efficiency Indicators (ASAE 3500)

Recommendations Department Head and Management

2. What is a financial report?

Refer to the Virgin Australia financial report as an example

Financial reporting v auditing

ACCOUNTING (Guided by accounting standards. Responsibility of management.)

AUDITING (Guided by auditing standards.

Responsibility of auditor.)

Distribute the annual report, including financial statements and the auditors report

to shareholders.

Prepare the financial reports and other reports in accordance with the identified

financial reporting framework.

Verify that financial information has been presented fairly in accordance with an

identified financial reporting framework.

Obtain and evaluate evidence concerning the financial reports.

Express an opinion in the auditors report.

Deliver the auditors report to the entity.

Classify and summarise recorded data.

Measure and record transaction data.

Analyse events and transactions.

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The financial reporting and auditing framework

In preparing the financial report, management asserts that it is a true and fair record

The audit process to obtain evidence to validate managements assertions

Independent audit report to express an opinion as to whether the financial report is true and fair

Financial report users can use the information with reasonable assurance that it is free from

material misstatement

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The purpose of a financial report audit

To obtain reasonable assurance about whether or not the financial report is free from material misstatement.

To express an opinion about whether the financial report is prepared in all material respects in accordance with an applicable financial reporting framework.

To report that opinion. ASA 200.11


The audit opinion

The auditor must express an opinion on whether the financial report is prepared, in all material respects, in accordance with the applicable financial reporting framework.

The opinions expressed in an auditors report must be in accordance with ASA 700 (ISA 700) The Auditors Report on a General Purpose Financial Report.

20 20

The audit opinion

The audit opinion can be either unmodified or modified (qualified) in some way.

According to ASA 705 Modifications to the Opinion in the Independent Auditors Report, modifications are expressed as:

a qualified opinion;

an adverse opinion; or

a disclaimer of opinion.

21 21

Emphasis of matter or other matter in the audit report

The auditor may find it necessary to draw the attention of users to certain matters.

These are addressed in ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors Report.

An Emphasis of Matter Paragraph is included in the auditors report where it is necessary to draw the attention of users to a matter, or matters, that are presented or disclosed in the financial report that are of fundamental importance to users understanding of the financial report. of the financial report.

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Emphasis of matter or other matter in the audit report

An Other Matter Paragraph is included in the auditors report where it is necessary to draw the attention of users to a matter, or matters, other than those disclosed in the financial report, that are relevant to users understanding of the audit, the auditors responsibilities or the audit report.

The inclusion of an Emphasis of Matter Paragraph or an Other Matter Paragraph does not modify the audit opinion.

23 23

Duties of an independent auditor

When an auditor accepts an appointment, he or she enters into a contractual relationship with the company

The audit engagement letter, agreed to and signed by the auditor and the client, details some of the duties of an auditor for a company

See ASA 210 Terms of Audit Engagements

24 24

Duties of an independent auditor cont


Comply with ethical requirements (ASA 102 and

APES 110 / IESBA Code) Adopt attitude of professional scepticism Exercise professional judgment (assumes

expertise) Gather sufficient appropriate audit evidence to

reduce audit risk to an acceptably low level Conduct audit in accordance with ASAs (ISA/ASA 200 paras 14-20 and A.14-31)

See the audit report in Virgin Australia


3a: Audits are mandated by Regulation

Annual audits required by: Companies, registered schemes & disclosing entities (excludes small proprietary companies)

Commonwealth and state government departments, statutory authorities, government companies and business undertakings, municipalities

Not-for-profit organisations

[More on regulation soon]


3b: Theoretical reason audits are demanded

Agency theory

Information hypothesis

Insurance hypothesis

Regulation


Agency theory

A principal contracts an agent to work on their behalf

Each party is motivated by self interest

Information asymmetry arises

An independent audit reduces the incentives for problems


The agency relationship

Provision of capital

Obtain audit

Managers Investors

Provide financial

report


Information hypothesis

Investors demand quality information in assessing the risks and returns of their investments Audits improve the quality of information in financial reports Reduces information risk and leads to improved decision making



the ability to shift financial responsibility for reported

data to an auditor lowers the expected loss from

litigation or related settlements to managers, creditors

who might demand an audit

to show they are being prudent to insure against

losses Wallace (1980)



Interested parties:

Investors and creditors demand an audit to be prudent and insure against losses

Regulators to insulate themselves from criticism by directing blame to auditors


4. Over view of the auditing environment

Co-regulation

The accounting profession

Case law Statute



Professional bodies

Institute of Chartered Accountants in Australia

CPA Australia

National Institute of Accountants

Practice entities



Professional accounting bodies are involved in the development of audit practice by:

Developing standards of practice, professional education and rules of conduct

Ensuring professional conduct and self- regulation

Maintaining standards of qualifications


Case law

Early cases associated with detection of fraud

Change of focus resulting from increased complexity, increasing size of businesses and separation of owners from managers

Greater emphasis on reasonable skill and care

Concept of reasonable assurance


Case law

Pacific Acceptance case (1970) Concept of reasonable care and skill called for changed standards to meet changed business conditions.

Auditor should pay due regard to the possibility of fraud and actively investigate the possibility of fraud if suspicious circumstances exist.


Regulation of accounting and auditing

Government

Financial Reporting Council Oversee accounting and auditing standard setting Monitor companies compliance with audit-related disclosure requirements Advise on continuing steps to enhance auditor independence Monitor disciplinary proceedings of accounting bodies

Professional accounting

bodies

Other stakeholders

ASX Corporate

Governance Council

ASIC

CALDB

AASB AUASB Secretariat


Regulation: a duty to report

Auditor has a statutory duty to report to members on the company's financial statements.

The auditor must notify ASIC if there are reasonable grounds to suspect a contravention of the Corporations Act.

40

Regulation

Corporations Act Responsibility for accounting and auditing standard settings under government control

Regulatory changes focused on reporting issues Other issues involved fee dependence and importance of the

auditor in corporate governance


Regulation

Australian Securities and Investment Commission (ASIC)

Regulates corporate, markets and financial services sector Advise on selling of and disclosure of financial products and services to consumers Majority of work carried out under Corporations Act


Regulation

Companies Auditors and Liquidators Disciplinary Board (CALDB)

Established under ASIC Act Hears breaches under Corporations Act by auditors and liquidators

Australian Securities Exchange (AXS)


Auditing standards

Auditors reply on a codified set of auditing standards prepared by the Auditing and Assurance Standards Board (AUSASB).

Uniformity with international auditing standards.

Standards indicate the minimum level of care required in performing an audit.

Ultimately the courts determine whether the level of care provided is adequate.

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Auditing Standards

Mandatory requirements and guidance ASA 101 explains how auditing standard are to be interpreted and applied Have the force of law for audits undertaken pursuant to the Corporations Act The professional bodies require application Clarity Project (commenced 2004) International harmonisation


Auditing standards

Clarity standards introduced in October 2009.

Structure:

Mandatory components Application Operative date Objectives Definition Requirements

Explanatory material

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Introduction ASQC1

ASA 100s (3)

Auditing standards

Planning ASA 300s (4)

Responsibilities ASA 200s (8)

Internal Control

ASA 400s (2)

Audit Conclusions And Reporting ASA 700s (5)

Specialised Areas

ASA 800s (3)

Using the Work of Others

ASA 600s (3)

Audit Evidence ASA 500s (12)

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5. Who can provide an audit?

Financial audits are provided by independent auditors

Must be registered with ASIC to be able to perform audits on reporting entities

Criteria set out in s.1280 Corporations Act

Educational qualifications

Work experience

Good character (fit and proper person)

Member of ICAA or CPA Australia


Practice Structures

Most audit firms practise as a partnership. An audit firm can apply to ASIC to be an

authorised audit company (Part 9.2A of the Corporations Act 2001) provided certain prerequisites are met, including: all directors are registered company auditors

(RCAs) RCAs have voting majority adequate and appropriate professional indemnity

insurance is maintained


Audit firm structures

There are three levels of audit firms in Australia: 1. international (including the Big Four and other

firms that are members of Forum of Firms) 2. national firms 3. regional or local firms.

The largest international firms are known as the 'Big Four': PricewaterhouseCoopers Ernst & Young KPMG Australia Deloitte

The Big Four dominate the practice of public accounting, especially for listed clients.

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

Other services offered

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

tax services management services accounting services insolvency services


In class Discussion Questions in Groups


ACCG925 Auditing & Assurance ServicesSeminar 1 OverviewReading guide for Seminar 1Lecture Outline_Part 11. Accounting, Assurance & AuditingDefinition and elements of an assurance engagementAssurance engagementsExamples of Assurance ServicesSlide Number 9Slide Number 10Framework: levels of assuranceThe relationship between auditing and assuranceWhat is an audit?Important parts of the definition ?Types of auditsSlide Number 16Slide Number 17Slide Number 18The purpose of a financial report auditThe audit opinionThe audit opinion Emphasis of matter or other matter in the audit report Emphasis of matter or other matter in the audit report Duties of an independent auditorDuties of an independent auditor contSlide Number 26 3a: Audits are mandated by Regulation3b: Theoretical reason audits are demandedAgency theoryThe agency relationshipInformation hypothesisInsurance hypothesisInsurance hypothesis4. Over view of the auditing environmentThe accounting professionThe accounting professionCase lawCase lawRegulation of accounting and auditingRegulation: a duty to reportRegulationRegulationRegulationAuditing standardsAuditing StandardsAuditing standardsSlide Number 47 5.Who can provide an audit?Practice StructuresAudit firm structuresOther services offeredSlide Number 52

accg925 seminar1 s1

Documents

assurance audits

reasonable assurance

assurance services slides

assurance practitioner

accountability assurance

assurance report slides

assurance auditing accounting

high level of assurance