Download - ch01_ppt_moroney_2e f.ppt
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
1/33
CHAPTER 1
INTRODUCTION ANDOVERVIEW OF AUDIT AND
ASSURANCE
Prepared by:Daniella Juric
RMIT University
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
2/33
LEARNING OBJECTIVES
After studying this chapter you should be able to:1. Define an assurance engagement
2. Differentiate between different types of assurance services
3. Differentiate between different levels of assurance4. Verify different audit opinions
5. Differentiate between the different role of the preparer and the auditor, and
discuss the different firms that provide assurance services
6. Justify the demand for audit and assurance services
7. Discuss the different regulators and regulations surrounding the
assurance process
8. Verify the audit expectation gap.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
3/33
AUDITING AND ASSURANCE
DEFINED
An assurance engagement is defined as en
engagement in which an assurance practitioner
expresses a conclusion designed to enhance the
degree of confidence of the intended users other
than the responsible partyabout the outcome of
the evaluation or measurement of a subject matter
against criteria.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
4/33
AUDITING AND ASSURANCE
DEFINED
intended users - the people for whom the auditor prepares
their report.
Example: shareholders, creditors, employees
responsible party - the person or organisation responsiblefor preparing the financial statements. Example: company
management
subject matter that which the auditor is expressing a
conclusion on. Example: financial reports criteria the rules or principles by which the subject matter
is being evaluated. Example: Accounting standards and
interpretations and Corporations laws
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
5/33
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
6/33
DIFFERENT ASSURANCE SERVICES
LIMITATIONS OF AN AUDIT:
There is no guarantee that the financial report is free from error or
fraud.
The nature of audit procedures and processes are required to beperformed 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.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
7/33
DIFFERENT ASSURANCE SERVICES
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 organisations activities.
Usually done by internal auditors or can be outsourced to
external auditors.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
8/33
DIFFERENT ASSURANCE SERVICES
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
organisations activities.
Often contain elements of performance audits, compliance
audits, internal control assessments and reviews.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
9/33
DIFFERENT ASSURANCE SERVICES
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 theirclients financial reports (AGS 1036) even if reports
do not include any disclosures.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
10/33
DIFFERENT LEVELS OF
ASSURANCE
AUDITORS MAY PROVIDE VARYING LEVELS OF
ASSURANCE WHEN CONDUCTING ASSURANCE
ENGAGEMENTS.
1. Reasonable assurance
2. Limited assurance
3. No assurance
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
11/33
DIFFERENT LEVELS OF
ASSURANCELEVEL OFASSURANCE
EXAMPLE THEASSURANCE
EXPRESSION
REASONABLE
Highest level of
assurance but not
absolute assurance onthe reliability of the
subject matter
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
Positive
LIMITED
Moderate assurance
on the reliability of the
subject matter
Review of a
companys 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.
Negative
NO ASSURANCE Agreed-uponprocedures
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
No Assurance
given
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
12/33
Also known as an
UNQUALIFIED
OPINION or
clean opinionas 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
Modifications
that do not
affect the
auditors opinion Emphasis of
matter
Modifications
that affect the
auditors opinion
QualifiedOpinion
Adverse
opinion
Disclaimer of
Opinion
DIFFERENT AUDIT OPINIONS
UNMODIFIED MODIFIED
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
13/33
DIFFERENT AUDIT OPINIONS
Audit opinions are contained in audit reports providedby the auditor.
An unmodified audit report contains an unqualifiedorclean opinion. Refer Figure 1.1 p. 12.
All other reports are modified opinions.
A report can be an unqualified modified report when anemphasis of matteris added.
An emphasis of matter is used so that the reader can pay
appropriate attention to the issue raised, but does notchange the auditors opinion (ASA 706, ISA 706)
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
14/33
DIFFERENT AUDIT OPINIONS
Auditors Judgement about the
Pervasiveness of the Effects or Possible
Effects on the Financial Report
Nature of Matter Giving Rise to the
Modification
Material but Not
Pervasive
Material and
Pervasive
Financial report is materially
misstated
Qualified opinion
Adverse opinion
Inability to obtain sufficient
appropriate audit
evidence
Qualified opinion
Disclaimer of Opinion
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
15/33
DIFFERENT AUDIT OPINIONS
Other modified reports are qualified (ASA 705). Aqualified opinion is given when there are reservationsabout the truth and fairness of the financial statements.
Can include a qualified or except for opinion. This iswhen issue(s) are material but not pervasive.
Adverseopinion would arise when financial report ismisstatedand is material and pervasive.
Disclaimer of opinion would arise when there is aninability to obtain sufficient appropriate audit evidenceand is material and pervasive.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
16/33
PREPARERS AND AUDITORS
It is the responsibility of those charged with governance to prepare the financial statements. The information shouldinclude the following attributes:PREPARERS responsibility
1. Relevant: has an impact on the decisions made by users regardingthe performance of the entity.
2. Reliable: Information is free from material misstatements (errors orfraud.)
3. Comparable: information needs to be comparable through time.Comparable against the same entity over time and against otherentities.
4. Understandable: Users need to be able to interpret the informationpresented in order to make decisions.
5. True and fair: requires the consistent and faithful application of anapplicable framework when preparing report.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
17/33
PREPARERS AND AUDITORS
AUDITOR ALSO HAS RESPONSIBILITIES RELATING TO THE
AUDIT. AUDITOR RESPONSIBILITIES
1. Professional scepticism: maintaining
independent of the entity and having a questioning mindto thoroughlyinvestigate all evidence presented.
2. Professional judgement: use of judgement based on level
of expertise, knowledge and training obtained
by the auditor.
3. Due care: being diligent, applying standards and
documenting each stage of the audit process.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
18/33
PREPARERS AND AUDITORS
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,Ernst & Young, 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.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
19/33
DEMAND FOR AUDIT AND
ASSURANCE SERVICES
The users of the financial statements are not limited tothe shareholders or owners of the business.
Other users can include:
Investors: can include current or potential investors.Decisions include to buy, hold or sell stake in theorganisation.
Suppliers: may want to assess whether the entity can paythem back for goods supplied.
Customers: may look into going concern if it is to rely onthe entity for goods.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
20/33
DEMAND FOR AUDIT AND
ASSURANCE SERVICES
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 theentity (future employee, customer or supplier,) what it
does and plans to do in future.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
21/33
SOURCES OF DEMAND FOR AUDIT &
ASSURANCE SERVICES
REASONS WHY USERS DEMAND FINANCIAL REPORTS
INCLUDE:
1. Remoteness: users do not have access to information
themselves.2. Complexity: users do not have knowledge to be able to
make disclosure choices.
3. Competing incentives: users may find it difficult to identify
when the incentives of management have been over-represented.
4. Reliability: as decisions are being made based on
information presented, it is important that it be reliable.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
22/33
THEORETICAL FRAMEWORKS
THE DEMAND FOR AUDIT CAN BE EXPLAINED BY THE
FOLLOWING THREE THEORIES:
1. AGENCY THEORY: Due to the remoteness of the owners from the
entity, the owners have an incentive to hire an auditor to assessinformation provided by management.
2. INFORMATION HYPOTHESIS: Due to the need for
reliable information, users will demand that information be
audited to aid in decision making.
3. INSURANCE HYPOTHESIS: Investors demand audited
financial statements to insure against potential losses.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
23/33
DEMAND IN A VOLUNTARY
SETTING
It is becoming more common to voluntarily disclose CSRinformation in various forms.
This is as stakeholders are demanding information
regarding the entitys impact on the environment andactions taken to reduce their impact.
Entities are not required to have CSR disclosures
assured.
These services are provided to meet user demands forhigh-quality, reliable information and to demonstrate ahigh level of corporate social responsibility.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
24/33
THE ROLE OF REGULATORS AND
REGULATIONS
THERE ARE A NUMBER OF REGULATORS THAT IMPACT THEAUDIT PROCESS. THEY INCLUDE:
1. FINANCIAL REPORTING COUNCIL (FRC)
oversees the process used for setting accounting and auditing
standards. Also monitors and reports on auditorindependence.
2. AUDITING AND ASSURANCE STANDARDS BOARD (AUASB)
Responsible for the formulation of auditing standards.
AUASB redesigned auditing standards to bring in line withinternational standards.
Responsible for issuing ASRE, ASAE and GS standards andstatements.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
25/33
THE ROLE OF REGULATORS AND
REGULATIONS
3. INTERNATIONAL AUDITING AND ASSURANCE STANDARDS
BOARD
Develop and issue International Standards on Auditing (ISAs).
Operates under the auspices of International Federation ofAccountants (IFAC).
4. ACCOUNTING PROFESSIONAL AND ETHICAL STANDARDS
BOARD (APESB)
Established as an independent body by CPA Australia andICAA to issue professional and ethical standards.
APES standards are mandatory for all members of CPA
Australia, ICAA and NIA.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
26/33
THE ROLE OF REGULATORS AND
REGULATIONS
5. 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.
6. AUSTRALIAN SECURITIES EXCHANGE (ASX)
Formed in 1987 after merging of six state based exchanges.
Provide additional obligations for entities wishing to list onthe exchange.
O O G O S
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
27/33
THE ROLE OF REGULATORS AND
REGULATIONS
7. COMPANIES AUDITORS AND LIQUIDATORS DISCIPLINARYBOARD (CALDB)
Responds to ASIC and APRA regarding breaches ofCorporations Act or ASIC Act.
Board may cancel or suspend auditor, may give warning or askfor undertaking to improve conduct.
8. PROFESSIONAL BODIES (INCLUDING CPA AUSTRALIA,INSTITUTE OF CHARTERED ACCOUNTANTS IN AUSTRALIA &NATIONAL INSTITUTE OF ACCOUNTANTS)
Include professionals in public practice, industry, academiaand government.
Requires further post-graduate study and minimum workexperience periods to join as members.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
28/33
REGULATION
CORPORATIONS ACT
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.)
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
29/33
REGULATION
CLERP 9
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 formore than five out of the last seven years.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
30/33
Its not fair! This
isnt what auditors
do.Youre supposed to guarantee
the financial report!
We lost all of our
investments because
of your report!!
You should
have
detected the
fraud !
AUDIT EXPECTATION GAP
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
31/33
AUDIT EXPECTATION GAP
IS THE DIFFERENCE BETWEEN THE EXPECTATIONS OF
ASSURANCE PROVIDERS AND FINANCIAL REPORT OR
OTHER USERS.
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.
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
32/33
-
8/10/2019 ch01_ppt_moroney_2e f.ppt
33/33
SUMMARY
After studying this chapter you should be able to:1. Define an assurance engagement
2. Differentiate between different types of assurance services
3. Differentiate between different levels of assurance
4. Verify different audit opinions
5. Differentiate between the different role of the preparer and the auditor, and
discuss the different firms that provide assurance services
6. Justify the demand for audit and assurance services
7. Discuss the different regulators and regulations surrounding the assuranceprocess
8. Verify the audit expectation gap.