Week 1

Question 1

Auditing and assurance defined

Answer 1

An assurance engagement (or service) is defined as ‘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.’

Question 2

Intended users

Answer 2

The people for whom the assurance provider prepares their report.

Example: shareholders, creditors, employees.

Question 3

Responsible party

Answer 3

The person or organisation responsible for the preparation of the subject matter.

Example: company management.

Question 4

Different assurance services

The most common assurance services are:

Answer 4

Financial report audits

Compliance audit

Performance audit

Comprehensive audit

Internal audit

Corporate social responsibility (CSR) assurance

Question 5

Financial report audits

Answer 5

an engagement designed to express an opinion about whether the report is prepared in all material respects in accordance with a financial reporting framework

Question 6

Limitations of an audit

Answer 6

There is no guarantee that the financial report is free from error or fraud.

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.

Question 7

Compliance audit

Answer 7

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.

Question 8

Performance audit

Answer 8

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

Question 9

Comprehensive audit

Answer 9

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

Question 10

Internal audit

Answer 10

Provides assurance about various aspects of an organisation’s activities. Often contain elements of performance audits, compliance audits, internal control assessments and reviews.

Question 11

Corporate social responsibility (CSR) assurance

Answer 11

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.

Question 12

Auditors may provide varying levels of assurance when conducting assurance engagements.

Answer 12

Reasonable assurance.
Limited assurance.
No assurance.

Question 13

Different audit opinions

Answer 13

Unmodified

Modified

Question 14

Unmodified

Answer 14

Also known as an UNQUALIFIED OPINION or clean opinion – as in a ‘clean bill of health’.
Financial report is true and fair, presents fairly the financial position of the company, information complies with AAS and Corp Act.

Question 15

Modified:

Answer 15

Modifications that do not affect the auditor’s opinion:
Emphasis of matter.

Modifications that affect the auditor’s opinion:
Qualified Opinion
Adverse opinion
Disclaimer of Opinion.

Question 16

Different audit opinions

Answer 16

Other modified reports are qualified (ASA 705). A qualified opinion is given when there are reservations about the ‘truth and fairness’ of the financial statements.
Can include a qualified or ‘except for’ opinion. This is when issue(s) are material but not pervasive.
Adverse opinion would arise when financial report is misstated and is material and pervasive.
Disclaimer of opinion would arise when there is an inability to obtain sufficient appropriate audit evidence and is material and pervasive.

Question 17

Preparer responsibility

Answer 17

It is the responsibility of those charged with governance to prepare the financial statements.
The information should include the following attributes:

Relevant

Reliable

Comparable

Understandable

True and fair

Question 18

Auditor responsibility

Answer 18

Auditor also has responsibilities relating to the audit.

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.

Question 19

Assurance providers

Answer 19

Assurance services are provided by accounting and consulting firms.
There are three tiers of assurance providers in Australia.
First tier comprises of the ‘Big 4’, which includes Deloitte, EY, KPMG and PWC
Mid tier comprises of firms with significant presence and most have international affiliations.
Next tier made up of regional and local accounting firms.

Question 20

Financial report users:

Answer 20

The users of the financial statements are not limited to the shareholders or owners of the business.
Other users can include:

Investors

Suppliers

Customers

Lenders

Employees

Governments

General public

Question 21

Reasons why users demand financial reports include:

Answer 21

Remoteness: users do not have access to information themselves.

Complexity: users do not have knowledge to be able to make disclosure choices.

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.

Question 22

The demand for audit can be explained by the following three theories:

Answer 22

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.

Question 23

Demand in a voluntary setting:

Answer 23

It is becoming more common to voluntarily disclose CSR information in various forms.
This is as stakeholders are demanding information regarding the entity’s impact on the environment and actions taken to reduce their impact. Entities are not required to have CSR disclosures assured.
These services are provided to meet user demands for high-quality, reliable information and to demonstrate a high level of corporate social responsibility.

Question 24

There are a number of regulators that impact the audit process. They include:

Answer 24

FRC

AUASB

International auditing and assurance standards board

APSEB

ASIC

ASX

CALDB

PROFESSIONAL BODIES

Question 25

FRC

Answer 25

Financial reporting council (FRC):
Oversees the process used for setting accounting and auditing standards.
Also monitors and reports on auditor independence.

Question 26

AUASB

Answer 26

Auditing and assurance standards board (AUASB):
Responsible for the formulation of auditing standards.
AUASB redesigned auditing standards to bring in line with international standards. Responsible for issuing ASRE, ASAE and GS standards and statements.

Question 27

International auditing and assurance standards board

Answer 27

Develop and issue International Standards on Auditing (ISAs).
Operates under the auspices of International Federation of Accountants (IFAC).

Question 28

APSEB

Answer 28

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.

Question 29

ASIC

Answer 29

Australian securities and investments commission (ASIC):
Government body that administers the ASIC Act and much of Corporations Act.
Plays a role in overseeing of the audit function.

Question 30

ASX

Answer 30

Australian securities exchange (ASX):
Formed in 1987 after merging of six state based exchanges.
Provide additional obligations for entities wishing to list on the exchange.

Question 31

CALDB

Answer 31

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.

Question 32

PROFESSIONAL BODIES

Answer 32

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.

Question 33

Corporations act:

Answer 33

Provides guidance on conducting audit of financial reports.
This includes that certain accounts need to be audited (s. 301,) the audit report stating whether it is true and fair & in accordance with accounting standards (s. 307,) standards must be applied (s. 307A,) retention of audit working papers (s. 307B,) and independence declaration (s. 307C.)

Question 34

CLERP 9

Answer 34

Significant changes brought about from 1 July 2004 including auditing standards having ‘force of law.’

Other changes include:
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.

Question 35

Audit expectation gap

Answer 35

Is the if difference between the expectations of assurance providers and financial reports or other users. 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.

Question 36

The expectation gap can be reduced by:

Answer 36

Auditors performing their duties appropriately
Undertaking peer reviews of work performed
Reviewing and updating auditing standards.
Educating the public