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PowerPoint Slides to accompany
Auditing and Assurance Services in Australia 4th ed.
‘an 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’.
• A Statement of Basic Auditing Concepts (ASOBAC — the American Accounting Association) defines auditing as:
‘A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria, and communicating the results to interested users.’
• The important parts of this definition: – Systematic process — audits are structured activities– Objectivity — freedom from bias– Obtaining and evaluating evidence — allows the auditor
to determine the support for assertions or representations– Assertions about economic actions and events
— describes the subject matter of an audit– Degree of correspondence … established criteria
— the purpose of the audit is to determine conformity with some specified criteria
– Communicating results — the results must be communicated to interested parties
Learning objective 4: Fundamental principles underlying
an audit• The International and Australian Auditing Standards
Boards released a draft paper in which they outlined possible fundamental principles underlying an audit. These principles should:
– Underpin the objective(s) of an audit, and help drive the conduct of the auditor in using professional judgment to meet the professional requirements of the auditing standards
– Be easily understood, both by auditors and other readers of auditing standards
– Be universally applicable to all audits– Entrench the expectations that auditors are
• Demand arises because users are not in a position to establish the credibility of the information they are presented with. This may be due to:– Conflict of interest — managers may present biased
information, as they are also evaluated on the information.– Consequence — information provided forms the basis
of many users’ decisions.– Complexity — many users do not have the expertise
required to determine the quality of information presented.– Remoteness — the separation of owners from management
prevents users from assessing information quality.
These have evolved over time:• Statement of financial position approach — this involved
the auditor auditing the assets and liabilities with little emphasis on profit and loss account items.
• Transactions-cycle approach — this emphasised the review of controls that operated within each transaction cycle and provided for limited testing of balance sheet items.
Example of business risk approach• Refer Example 1.1 on page 13 of textbook.• The auditor uses a risk-based assertion-based methodology
in undertaking the audit. For example, the assertions that management are implicitly making by recording an inventory balance of $1 million in the statement of financial position are:• Inventory of $1 million exists (existence);• The entity has the rights of ownership of this inventory
(rights and obligations);• All inventory that should have been recorded has been
recorded (completeness); and• Inventory has been recorded in the financial report at the
appropriate value, and any resulting valuation adjustment (such as obsolescence) has been correctly recorded (valuation and allocation).
Example of business risk approach (cont.)• The auditor uses a risk-based methodology to identify risks of
misstatement and relates these through to assertions (Chapters 6–8). For example, consider that the auditor identifies major risk as entity wishing to overstate profit. They can achieve this by overstating inventory, which understates cost of goods sold (if goods are in inventory, they are not sold). The auditor assesses how entity is likely to achieve this overstatement, and concentrates their audit attention on the related assertions.
• In this example, two ways of achieving overstatement of inventory are to include inventory that does not exist (for example, goods that have been sold) or overstate valuation of the inventory items included in the statement of financial position (valuation and allocation). The auditor then uses specific procedures to test assertions at risk (Chapters 9-11).
Learning objective 9:The auditor–client–public relationship• The auditor’s primary reporting responsibility
is to resource providers of the client entity; however, the client entity usually engages the auditor and pays the auditor’s fees.
• The auditor also discusses the audit findings with management prior to releasing information to the resource providers.
• In order to combat pressures on independence and objectivity, the auditing profession has issued a series of ethical rulings and professional standards to guide the auditor in the conduct of his or her duties.
The role of auditing standards (cont.)• Guidance Statements (GSs) or Auditing Guidance
Statements (AGSs): provide guidance on procedural matters or industry-specific issues, but do not establish new principles or amend existing standards.
• Professional obligations extend application of standards to all other audit and assurance engagements by members of professional bodies.
• Failure to observe these standards may expose a member to investigation and disciplinary action from the Australian Securities and Investments Commission (ASIC).
• Auditing standards applying to audits and reviews of financial reports prepared in accordance with the Corporations Act 2001 :– Australian auditing standards relating to these
audits are now designated as ASAs, and have the same numbering as the equivalent ISAs.
– Note: there are still a number of standards designated as AUSs, which relate to frameworks or assurance engagements on other than financial reports prepared in accordance with the Corporations Act 2001.
Learning objective 12:Audits under Corporations Act 2001
• Management is responsible for the preparation and presentation of appropriate accounts. Accounts are to be accompanied by a report of an independent auditor appointed by the shareholders.
• The Corporations Act 2001 (ss 292–306) indicates that directors must prepare a financial report (income statement, balance sheet, statement of changes in equity cash flow statement, directors’ declaration and other related notes and reports), together with any other information or explanation necessary to give a true and fair view.