Audit Notes 2020 PDF

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Table of Contents Week 1 Define an assurance engagement and differentiate between different types of assurance services Differentiate between different levels of assurance Identify the assurance providers Describe theoretical frameworks of Auditing Identify regulatory frameworks of Auditing Describe...

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Audit and Assurance Table of Contents Week 1 1.

Define an assurance engagement and differentiate between different types of assurance services

2. 3.

Differentiate between different levels of assurance Identify the assurance providers

4. 5.

Describe theoretical frameworks of Auditing Identify regulatory frameworks of Auditing

6.

Describe the different types of audit opinions

7. Describe the audit expectation gap Week 2 1. 2.

Explain the fundamental principles of professional ethics Describe and assess auditor independence

3. Specify the relationship between an auditor and key groups they have a professional link with during the audit engagement 4. Describe the economies of compliance with ethical rules by referring to ethics and moral development theory. 5. 6.

Illustrate the auditor’s legal liability to their client Describe contributory negligence

7. 8.

Explain the extent to which an auditor is liable to third parties Identify the factors to consider in client acceptance or continuance decision

Week 3 1. 2.

Identify the different phases of an audit Specify the process of understanding the client

3. 4.

Evaluate fraud risk Understand and evaluate the going concern assumption

5.

Find how client closing procedures may affect reported results.

Week 4 1. Evaluate audit risk 2. Outline the concept of materiality 3. Discuss how an auditor determines their audit strategy 4.

Specify how an auditor uses analytical procedures to assess risk.

Week 5 1. 2.

Define audit assertions Relate audit assertions to audit objectives

3.

describe the concepts of sufficient and appropriate audit evidence

4. 5.

Identify and appraise different types of audit evidence Explain the persuasiveness of audit evidence

6. Explain the factors affect nature, timing and extent of audit evidence. Week 6 1.

describe internal control

2. 3.

explain the seven generally accepted objectives of internal control activities describe the elements of internal control at the entity level and transaction level

4. 5.

explain the different techniques used to document internal controls explain the importance of identifying strengths and weaknesses in a system of internal controls

6. describe the way of communicating internal control strengths and weaknesses with client management. 7.

Outline the different types of controls

Audit and Assurance 8.

Compare the different techniques for testing controls

9. 10.

Describe how to select and design tests of controls Compare and contrast the results of testing of controls

Week 7 1. Define substantive audit procedures 2. Discuss the link between the audit risk model and the nature, timing and extent of substantive procedures 3. Produce examples of different substantive audit procedures 4. Differentiate the various levels of audit evidence obtained when performing substantive procedures 5.

Outline the documentation of the conclusions reached as a result of performing substantive procedures

Week 8 2. Discuss the relationship between risk of material misstatement for a significant account; and the nature, extent and timing of substantive procedures 3.

Substantive testing of inventories; payables and revenue.

4.

Assessment of results of substantive procedures

Week 9 1.

Procedures of wrapping up the engagement

2. 3.

Going concern considerations Effects of subsequent events

4. 5.

Evaluating misstatements (quantitative and qualitative considerations) Key components of audit reports

6.

Audit opinions

Week 10 1. Appreciate the framework of standards on assurance services. 5. Understand the assurance provider’s obligations in relation to audits of financial information other than general-purpose reports. 6. Appreciate procedures undertaken and level of assurance offered in a limited assurance (review) engagement. 7. Understand the assurance provider’s obligations and the level of assurance offered agreed-upon procedures engagements. 8. Understand the characteristics of engagements involving the assurance of prospective financial information. 9. Understand the characteristics of engagements involving the assurance of reports on internal controls, environmental and sustainability and integrated. 10. Understand the demand for assurance and assurance provider’s responsibilities of greenhouse gas statements and water reports, 11.

Understand assurance services provided in e-commerce and blockchain environments.

Audit and Assurance Week 1 1. Define an assurance engagement and differentiate between different types of assurance services 2. Differentiate between different levels of assurance 3. Identify the assurance providers 4. Describe theoretical frameworks of Auditing 5. Identify regulatory frameworks of Auditing 6. Describe the different types of audit opinions 7. Describe the audit expectation gap Why is an audit important? • Integrity of financial reporting is crucial for a healthy functioning of a market economy • •

auditor’s play a key role in enhancing credibility of financial reports major corporate collapses over that past decades gave important lessons in this regard, examples: o

Enron in the USA

o o

Lehman Brothers in the USA HIH in Australia (both were audited by Arthur Anderson)

o

Dick Smith in Australia (2016)

Enron Corporation • Enron was a giant energy company • With steady growth, Enron became largest natural gas company in the US by the mid-1980s. • • • •

Kenneth Lay, Enron’s CEO, and his top subordinate, Jeffrey Skilling were behind Enron’s growth. Created several special purpose entities (SPEs) to artificially increase reported profit using complex related party transactions. Enron’s financial condition eventually deteriorated. Enron filed for bankruptcy in December 2001. Lay and Skilling and Enron’s CFO (Andy Fastow) went to jail.

Arthur Andersen - Enron’s auditors • Arthur Andersen was one of the Big 5 accounting firms • Andersen enjoyed a reputation for honesty and integrity as independent auditors •

Andersen succeeded in generating $-billions of revenues from consulting and auditing services

•

Professional ethics o did Arthur Andersen do the right thing as auditors? o

Arthur Andersen received its share of the criticism regarding the Enron collapse:

o

earned substantial consulting revenues from Enron

o

questionable role in relation to Enron’s SPE transactions,

o

obstructed justice by shredding audit documents for Enron.

o

Arthur Andersen was convicted in 2002 and its proud history ended.

Failure of Dick Smith in 2016 • Dick Smith was an Australia-wide chain of electronic consumer retailer. • •

The company was founded in Sydney in 1968 by Dick Smith and owned by him and his wife until they sold 60% to Woolworths in 1980, the remaining 40% in 1982. It has been then acquired by Anchorage Capital Partners in 2012.

Causes for the failure:

Audit and Assurance • •

The consumer electronics market is highly competitive with rapid changes in consumer demand patterns. Dick Smith had a store network much larger than its competitors, and so a higher cost base, with considerable exposure to and reliance on the fast moving office/computer products market.

• •

Dick Smith was losing market share by experiencing declining comparable sales. Revenue growth was based on store growth and commercial sales at low margins.

•

Dick Smith’s expansion plan required considerable financial commitment, utilised all cash resources, required considerable supplier commitment and required bank borrowings.

•

Inventory decisions made in this environment were not consistent with consumer demand, and Dick Smith was ultimately left with a considerable level of obsolete and inactive stock, requiring a major write-down.

• •

Clearance sales did not generate sufficient sales or margin to alleviate the cash pressure. Inability to obtain favourable credit terms impacted on stock levels, product mix and store presentation.

• Cash flow pressures led to banking covenants being breached that could not be remedied. Dick Smith’s Auditor: Deloitte • The accounting profession has questions to confront with this business failure. • •

Dick Smith's long-time auditor Deloitte has come under scrutiny. The major question is why the auditor didn't raise red flags about: •

refinancing problems and

• inventory issues in the company's financial reports. What do auditors provide? • Auditors commonly provide an audit report to the financial reports (prepared by client management). • Auditor should conduct a comprehensive financial reports audit to provide an audit report. • Refer to the audit report provided in figure 1.2 (pp15-16) of the text. LO1: An assurance engagement 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’. Key terms of the above definition • Assurance Practitioner: Accounting firm • •

Evidence: More information about transactions and events Conclusion: Audit opinion

• •

Users: e.g. shareholders Responsible party: Client management

•

Subject matter: Financial reports

• Criteria: Accounting standards The audit Process

Audit and Assurance

Different assurance services Financial Report Audits • an engagement designed to express an opinion whether the report is prepared in all material respects in accordance with a financial reporting framework Compliance Audit • Involves gathering evidence to ascertain whether rules, policies, procedures, laws and regulations have been followed. Performance Audit • Refers to the economy, efficiency and effectiveness of an organisation’s activities. Comprehensive Audit • Combines elements of financial report audit, compliance audit and performance audit. Internal Audit • Provides assurance about various aspects of an organisation’s activities. Corporate Social Responsibility (CSR) Assurance • Includes voluntary reporting about environmental, employee and social subject matter.

LO2:Different levels of assurance

LEVEL OF ASSURANCE

EXAMPLE

Operational aspects

ASSURANCE EXPRESSION

REASONABLE - Highest level of assurance but - Not an absolute assurance on the reliability of financial reports

Financial Statement Audit

The auditor has to conduct sufficient tests and obtained appropriate and sufficient evidence to conclude positively that the information that is assured is (or is not) reliable

Positive

LIMITED - A moderate level of assurance on the reliability of financial reports

Review of a company’s halfyear financial report

Auditor has to do 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

Audit and Assurance

Agreed-upon procedures engagement

NO ASSURANCE

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 is given

LO3:Assurance providers Australia has three tiers of assurance providers • ‘Big 4’ firms (Deloitte, EY, KPMG and PWC) • Mid tier firms (most have international affiliations). • Next tier made up of regional and local accounting firms. Summary Assurance engagements

Demand for audit and assurance services comes from the shareholders and business owners. • •

Investors Suppliers

•

Customers

• •

Lenders Employees

• •

Governments; General public.

Why users demand assurance services? 1. Remoteness of information: Users do not have access to internal information of the company, hence they depend on auditor's certification. 2.

Complexity: Users’ lack of understandability of financial reports can be compromised with the audit report.

3.

Competing incentives: Users may find it difficulty to identify if management presents bias information.

4.

Reliability: Independent and competent third party’s assurance provides the reliability of information in financial reports.

LO4: Theoretical frameworks for the Demand for Auditing 1.

Agency Theory: Auditor intervenes as an independent third party to resolve the agency conflict between owners and managers of the company.

Audit and Assurance 2.

Information Hypothesis: Audit reports enhance the reliability of information in financial reports. Insurance Hypothesis: Investors prefer to invest in companies that issue audited financial statements, hoping to spread the risk of business failures. Auditors are required to take professional indemnity insurance. 3.

LO6: Audit opinion • The final phase of an audit is reporting findings

• o

ASA 700:Forming an Opinion and Reporting on a Financial Report http://www.auasb.gov.au/admin/file/content102/c3/Jun11_Compiled_ASA_700.pdf establishes mandatory requirements

o

provides explanatory guidance

o

form and content of the auditor’s report

LODescribe the different types of audit opinions Unmodified

Modified

Unqualified Opinion • •

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

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

Modified audit opinions Audit of General Purpose Financial Report

Auditor’s 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

LO5:Regulators and regulations Financial Reporting Council (FRC) • oversees the process used for setting accounting and auditing standards. Also monitors and reports on auditor independence.

Audit and Assurance Auditing and Assurance Standards Board (AUASB) • responsible for the formulation of auditing standards. International Auditing and Assurance Standards Board (IAASB) • Develops and issues International Standards on Auditing (ISAs). Accounting Professional and Ethical Standards Board (APESB) • established as an independent body by CPA Australia and ICAA to issue professional and ethical standards. Australian Securities and Investments Commission (ASIC) • government body that administers the ASIC Act and much of Corporations Act. Australian Securities Exchange (ASX) • provides additional obligations for entities wanting to list on the exchange. Companies Auditors and Liquidators Disciplinary Board (CALDB) • responds to ASIC and APRA regarding breaches of Corporations Act or ASIC Act. • o o

The Board may cancel or suspend auditor give a warning; or

o ask for undertaking to improve conduct. Professional bodies • CPA; CA ANZ, and IPA in Australia Regulations • Corporations Act •

CLERP 9 – now incorporated in Corporations Act 2001

•

Corporations Legislation Amendment (Audit Enhancement) Bill 2012

LO7:Audit expectation gap Is the difference between the expectations of assurance providers and financial report users.

Auditor Performance

Social Expectations

Causes for the expectation gap: • Unrealistic expectations of users •

Deficient performance of auditors and

Audit and Assurance • Deficiencies of accounting standards The audit expectation gap can be reduced by: • Educating the public about the auditor’s duties and the audit process

Week 1. 2. 3. 4. 5. 6. 7. 8.

• •

Improve the quality of audits Peer reviews of audit work performed;

•

Pay high level of attention towards the risk of occurring material errors and frauds

•

Continuous review and update of auditing standards

2 Explain the fundamental principles of professional ethics Describe and assess auditor independence Specify the relationship between an auditor and key groups they have a professional link with during the audit engagement Describe the economies of compliance with ethical rules by referring to ethics and moral development theory. Illustrate the auditor’s legal liability to their client Describe contributory negligence Explain the extent to which an auditor is liable to third parties Identify the factors to consider in client acceptance or continuance decision

LO1:Fundamental principles of Professional Ethics (APES 110: Code of ethics for professional accountants)

Integrity

Objectivity

Professional competence and duecare

Confidentiality

Professional behaviour

Integrity and objectivity Integrity (sec 110 of APES 110) - to be straightforward and honest Objectivity (sec 120 of APES 110) - Be unbiased, Maintain Objectivity when exercising professional judgements and to not allow conflict of interest or influence of others to impair decision making process Professional competence and due care (sec 130 of APES 110) • Maintain knowledge and skills • •

Keep up-to-date with changes in regulations and standards Continue education and work experience

• •

Act diligently complete each task thoroughly

•

document all work

•

Meet deadlines

Audit and Assurance Confidentiality (sec 140 of APES 110) • Refers to Refrain from disclosing information to people outside the workplace; that is • accessed as a result of employment • •

Not allowed to use confidential information to their advantage; or advantage of another person

•

Exception if legal requirement to disclose

Professional behaviour (sec 150 of APES 110) • Comply with rules and regulations and do not harm reputation of the profession • •

Be honest to clients Do not claim

• •

qualifications they do not possess; or experience they do not have<...