Assurance & Auditing (An Overview) - Week 1 Flashcards
Try to memorize answers to questions from Week 1!
What are the responsibilities outlined in the Corporations Act, for both auditors and management?
An auditor’s responsibility is to form an opinion on the financial reports. Management’s (e.g. client) responsibilities is to prepare and present the financial reports in order for them to be assessed by the auditor.
The auditor’s opinion must distinguish:
- whether or not the financials are prepared in accordance with the law, including compliance with accounting standards (s.296)
- whether or not the financial reports provides a true and fair view (s.297)
Why do we need an auditor?
Reports are potentially biased because companies wish to present themselves in the best light. There is a conflict of interest. Users therefore demand that an independent expert examine it to determine the credibility of the report.
What are the five elements of an assurance engagement? (Q1.1 of textbook)
- Three party relationship, involving:
i) Responsible party (i.e. the preparer)
ii) An intended user (i.e. shareholders, employees, government services, etc.)
iii) An independent practitioner (i.e. auditor) - Subject matter (what is being audited?)
- Suitable criteria (against what? Usually the accounting standards)
- Sufficient appropriate evidence (e.g. quality)
- Written assurance report.
What are the reasonable, limited and agreed-upon procedures engagements?
- An audit (1 year) provides:
- reasonable/high level of assurance
- A direct opinion (not conclusion) on whether the financial reports represent a true and fair view
- A low engagement risk - Review (1/2 year) provides:
- Limited level of assurance/ limited evidence
- A conclusion on whether or not the financials are materially misstated
- A low engagement risk - Agreed-upon procedures (AUP) or known as “statement of factual findings” provides:
- No assurance, no engagement risk and no opinion or conclusion.
The need for an independent auditor arises from (4 reasons):
- Conflict of interest -> biases are presented
- Consequence -> important decisions are made based on information presented
- Remoteness -> The separation of users from the preparers prevents users to assess the quality of information
- Complexity -> The average user of financial information doesn’t have the expertise to judge the quality of the information being presented.
Types of assurance engagements (audit): What is a compliance audit?
A compliance audit involves the examination of financial information which focuses on legality and control of operations. This kind of audit is very prominent in government departments who are accountable for large receipts and expenditures. Examples are OH&S audits, ATO desk audits, etc.
Type of assurance engagements (audit): What is a performance audit?
A performance audit is very common in the public sector. They are designed to analyse workflow, organisational structure and managerial performance. Greatly used for personnel training and restructuring.
Type of assurance engagements (audit): What is a forensic audit?
Forensic audits involve the practice of investigating, detecting and deterring fraud. Analyzing unauthorised financial transactions, reconstructing incomplete accounting records, etc.
Type of assurance engagements (audit): What is an internal audit?
Internal audits are undertaken by the employees of the firm being audited. Role varies immensely from checking internal controls to checking corporate governance, etc.
Type of assurance engagements (audit): What is a comprehensive audit?
Comprehensive audits involve components of compliance, performance and financial report audits.
What is the objective of a financial report audit? Explain. (Q1.4 of textbook)
The objective of a financial report audit is to obtain reasonable assurance on whether or not the financials are free from material misstatement. This enables an auditor to make an opinion on whether the financials are prepared within the framework.
