Auditing full-notes PDF

Preview

Summary

Ee Sing’s Notes AUDITING AND ASSURANCE SERVICES Why study Auditing and Assurance ?     A better understanding of business, risk and financial accounting Open up your eyes to the business and economic environment Use the knowledge you have gained in your degree Growing area of accounting Define a...

Description

Ee Sing’s Notes AUDITING AND ASSURANCE SERVICES Why study Auditing and Assurance ?    

A better understanding of business, risk and financial accounting Open up your eyes to the business and economic environment Use the knowledge you have gained in your degree Growing area of accounting

Define and Explain the Meaning of the Terms audit and assurance

ASA 200 Overall Objectives of the Independent Auditor and Conduct of an Audit in Accordance with Australian Auditing Standards (ISA 200) states the objective of a financial report audit is for the auditor to express an opinion about whether the financial report is prepared in all material aspects in accordance with an applicable financial reporting framework(true and fair view). Mautz and Sharaf stated that purpose of an audit still seems to be to provide certain interested parties with an attestation of the reliability of certain information supplied by those entrusted with the property of others. American Accounting Association defined 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 results to interested users. Lecture Definition : A professional service (knowledge and skill) that involves an objective and critical examination of a subject matter with the aim of assessing its credibility in order to provide assurance through the issue of an objective opinion. Objective and critical examination

Without bias and true and fair view financial reports Ask underlying question – Is the revenue value true? What is the evidence? Subject matter questioned in detail Examining financial report (focus on the topic) Particular thing Information in subject matter is credible/realistic (not accurate)- add weights to the subject matter Judgment being made/ Decision made Eg : Level of AFDD, depreciation, revaluation, impairment Something is appropriate, gives confidence to the users Examine and focus on subject matter, assess it with confidence and then make a statement Form and publish a view on the subject matter and its credibility

Subject matter Assessing creditability

Provide assurance Issue of Objective Opinion

Summary: The auditor is setting out to achieve enhanced creditability of information disclosed to increase reliability of the users of the financial statements.

Management's assertions to prepare a true and fair set of financial reports

The audit process to obtain evidence to validate the assertions

Independent audit report to express an opinion as to whether the financial reports are true and fair

Financial report users can use the information with reasonable assurance that it is free of material mistatement

What does an audit provide ? ASA700 Forming an Opinion and Reporting on a Financial Report Auditor’s Responsibility  Express an opinion on financial report

Auditor’s Opinion (Not absolute guarantee)  Fair representation framework, auditor form opinion

Ee Sing’s Notes  Audit was conducted in accordance with Australian on whether the financial report present fairly, in all auditing standards material aspects, in accordance with applicable  Describe procedures to obtain evidence about the financial reporting framework  Compliance framework, auditor forms an opinion on amounts and disclosures in financial report. These vary dependent on auditor’s assessment of risks of whether financial report is prepared in all material respects in accordance the framework. material misstatement  Sufficient and appropriate audit evidence has been obtained to form an opinion *’Presents fairly’ or a ‘true and fair view’ based on the condition that immaterial misstatement may not be detected. *Reasonable assurance is obtained when sufficient appropriate audit evidence to reduce risk to acceptable low level but not completely eliminate it (limitations) Who provides audits? Financial report audits are provided by external auditors who are either individual practitioners or members of public accounting firms who render professional auditing services to clients.  Education, training and experience  In early days, it was to detect fraud, checking all or most transaction and trust in management assertions.  Audit independence involves both conceptual and technical considerations. Independence auditor register with ASIC can perform audit of reporting entities in Australia.  Purpose of registration is to set minimum standards of competence, integrity and accountability.  S1280 of Corporation Acts state eligibility : i) Ordinarily resident in Australia ii) Member of Institute of Chartered Accountants in Australia or CPA or approved body iii) Graduate or obtained diploma from a prescribe university or other prescribed institution in Australia and passed examination in such subject as the university or other institution certifies to ASIC to represent a course of study in accountancy of not less than 3 years duration and in commercial law not less than 2 years or who has other equivalent qualification acceptable to ASIC

Assurance describes any situation where information is prepared by one party and then attested to its accuracy by another party. Australian Auditing Standards define assurance engagement as ‘an engagement in which an assurance practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Lecture Definition : The auditor’s ability to provide a degree of satisfaction regarding the reliability of the information provided. The degree of satisfaction achieved is determined by the nature and extent of procedures performed by the auditor, the results of the procedures and objectivity of evidence obtained. Degree of Satisfaction Reliability of information Nature and extent of procedures Results of procedures Objectivity of evidence Two types of Assurance :

Level of confidence Trust placed in the information related to subject matter. Level of confidence regarding the reliability What was done to gather evidence regarding subject matter, when it was done, how it was done and who did it Procedures gives user a level of confidence about reliability of subject matter The findings of what was done - evaluation If there is possible bias in the evidence

a) Reasonable assurance - where the assurance practitioner that reduces risk to an acceptably low level so as to express a positive form of expression of the conclusion b) Limited Assurance – where the assurance practitioner is unable to reduce the level of risk to that of a reasonable assurance engagement so as to express a negative form of express of the conclusion.

Ee Sing’s Notes

Objectives of financial report audits : a) Reasonable assurance whether the financial report as a whole is free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report is prepared in all material aspects, in accordance with an applicable financial reporting framework b) To report on financial report and communicate as required by the Australia Auditing Standards, in accordance with auditor’s findings Explain and discuss why audit and assurance services exist and the underlying theories behind demand of audits

Information Asymmetry:  Different people using the information that wasn’t prepared themselves. Different access to information.  Need the level of confidence and assurance what information give enable to make good decisions.  Relationship and the stewardship function between the information preparer and users. Value from Auditing and Assurance:    

Facilitates information user confidence Promotes public interest – share price increase benefit shareholders/people Meets regulatory obligation Feature of corporate governance – Acting as an agent and take position seriously, making sure can provide information with confidence. Users to have confidence towards the agents as well.

Auditor’s help to make things clear and ensure the financial report is free from material misstatement to ensure risk of individual that manipulate the values for own benefits to me minimise.

Encourage company to have audit even though not required due to the 3 theories as below. Separation of ownership and control : Information Preparer : Company, management Information User : Shareholders(Main/paramount), bankers, government, creditors, employee, wider public, management of company Value of audit : Whether they get audit right (false negatives and positives), market premium paid False Negative is where there has been a clean report and in actual fact should have been a going concern qualification issued while false positive is where a going concern report is issued for a firm that does not subsequently fail. Quality Control : Mechanisms that are instituted by the profession and the firms to govern audit quality. Quality control mechanisms include processes that protect the integrity of how audits are managed and performed. Agency Theory Separation of ownership and control theory

Principals (shareholders) engage agents (company management) to use the resources of the organisation in the most appropriate ways. A contract under which one or more persons engage another person to perform some service on their behalf which involves delegating some decision-making authority to the agent. Agents are to act in the best interest of the principal. However : Agent act in the benefit on their own at the expense of the others.  Aligning interest and priorities – need assurance on the numbers reported Eg : Bonus link to profit  Manipulation of profit number  Achieve goal at the expense of others. Managers produce financial reports for shareholders to try alleviating their concerns with a risk that information might still be biased.  This is why it is in the best interest of both parties to obtain the services of an independent auditor to check the financial reports prepared by management and

Ee Sing’s Notes provide reasonable assurance that it is true and fair to the users of the financial reports  Audit is a monitoring activity that will increase value of the firm when there are agency problem.  Management recognizes the desirability of an audit and will incur additional cost for it Examples : 1. Posting of a bond by agents meant that a sum of money was posted as a bond to provide security by fraudulent or other inappropriate behaviour to protect the principals capital. 2. Obtaining a car loan Investors

Provision of capital

Obtain audit

Managers Provide financial reports

Information Hypothesis

Insurance Hypothesis Litigation crisis in auditing

An audit confirms the assertions manager make about FS on matters such as the net assets and net income of the company owned by the shareholders. Demand for information for decision making – reliability of the information  Best decision  Best information for the best reason Better quality information will lead to better decision making  Audit of financial statements therefore leads to better information and thus better able to make decisions. Improves the quality of information which provides the benefits through the reduction of risks, improvement of decisions and the increase in profits.  Audit reduces estimation risk  Value in improving financial data for internal decision making  Detect errors and motivate employees to exercise more care in preparing records in anticipation of an audit More toward decision usefulness role rather than stewardship. Auditing comes from a greater number of users of financial information from both within and outside of the firm. Shift responsibility to the auditors – effect of limiting the risk.  Auditor express the opinions so if it is express wrongly, auditors can be sued.  Even if there was a failure and auditors did not defect it, there is potential of lawsuits ‘The ability to shift the financial responsibility for reported data to an auditor lowers the expected loss from litigation or related settlements to managers, creditors, and other professionals involved in the securities market. As potential litigation awards increase, this insurance demand for an audit from managers and professional participants in financial activities can be expected to grow.’ Two groups that demand audit for this theory: a) Investor and creditors – prudent to insure against losses  Auditors as the ones with ‘deep pockets’ – good option to make a claim for funds to recover losses by investors and a useful potential claim if things went wrong. b) Diverse set of regulators who can potentially insulate themselves from criticism by directing blame at the auditors.  Focus on auditors deflected the criticism regulatory board. HIH Case where Australian Prudential Regulation Authority was not completed blamed

Ee Sing’s Notes Regulation

In 1844, Joint Stock Companies Registration and Regulation Act(UK) was first regulation to provide for an audit to examine the accounts of a company. Self regulation in audit profession is to promote ethical behaviours among auditors In Australian environment, all of the following bodies are required to have an annual audit : 1. Companies, registered schemes and disclosing entities (small proprietary companies) 2. Commonwealth and state government departments, statutory authorities, government companies and business undertakings and municipalities 3. Not-for-profit organisations including educational institutions

Explain and discuss the audit expectation gap

Gap between public perception and auditor role and performance. An audit is not :  A guarantee – not 100% but at a reasonable assurance. Not absolute as there is always element of risk  Proof that company is good or a good investment  There to fix errors  There to find fraud Only form opinion on the subject matter whether it is free from bias and true and fair manner. Education is needed to minimise the gap between expectation and audit service provided.  Comprises the difference between what financial statement users believe the audit provides and what an audit actually provide.  Gap has 2 major component : 1) A gap between what the society expects auditors to achieve and what they can be reasonably expected to accomplish (reasonableness gap)- unreasonable expectations 2) A gap between what society can reasonably expect auditors to accomplish and what they are perceived to achieve (performance gap)- deficient performance and standards  3 key areas to address deficient standards component : 1) Reporting internal control – Includes a specific disclaimer on the issue of reporting on internal control 2) Detection of fraud – ASA240 The auditor’s responsibilities relating to fraud in an audit of a financial report 3) Evaluation of going concern  Improve communication with users about what an auditor already does. Gap continue to exist for many other factors including the complexity of the audit environment, global business practices, and increasing demand by stakeholders for accountability and assurances. It will never be close as users expectation will change over time. Explain the impact of the recent corporate history on audit role and function Corporate Collapses : Enron, WorldCom, HIH Insurance, One.Tel, Harris Scarfe, ABC Learning Issues : Earnings management, corporate governance failure, fraud, auditor role failure Responses:

Ee Sing’s Notes -

What happened to independence from the client? How can you be objective and critical when you are reliant on consulting fees ? Where is the credibility in your role? Where is the assurance?

AUSTRALIA Corporate Law Economic Reform Program (CLERP9) 2004

UNITED STATES Sarbanes Oxley Act 2002

RAMSAY Report

      

Additional disclosures in the directors’ report General and specific auditor independence requirement Creation of the Financial Reporting Council (FRC) Restrictions on auditors being employed by an audit client Auditor rotation for listed companies Created the Public Company Accounting Oversight Board Provision regarding auditor independence, corporate governance, internal control assessment, conflicts of interest and enhanced financial disclosure  Illegal to provide certain non-audit services to audit client and changed the regulation of auditing profession  S404 required to disclose in their annual report the adequacy of internal control structure and procedures for financial reporting and auditor to provide assurance and report on these issues.

Auditor independence and also incorporated some fo the recommendations from the HIH Royal Commission

Problems Faced: a) Audit quality states that it is the market-assessed joint probability that a given auditor will both (a) discover the breach in the client’s accounting system (b) report the breach. b) Independency questioned by firm who were earning large fees from non audit services. It is problematic as they are more profitable, audit firm marketed these services heavily and public and government saw these fees affect independency. c) Issues of objectivity, lack of care taken in reviewing and assessing the financial statements and a general failure to add credibility to the statements. Aims of the reforms :    

Enhanced independence of auditors to the client Encourage greater objectivity Expand Requirements of the auditors, including attending the annual general meeting of the client Enhanced understanding of the role of corporate governance.

Describe the environment in which assurance practitioners operate, including audit standard setting in Australia Accounting profession : a) Developing standards of practice through research and issuance of standards, professional education, and establishment of rules of conduct for members b) Ensuring professional conduct and effective self-regulation of quality of service c) Maintaining standards of qualifications through accredited courses, examination and practical experience for accountants seeking to become members. Regulation of accounting maintained by ASIC : Declaration of qualified accountant and revoking the declaration made. Professional Bodies : a) Institute of Chartered Accountants in Australia - 1928  Member of the Global Accounting Alliance(GAA)  Professional and technical standards and continuing professional education, including the education of future members through the CA Program  Maintains a library, information service and bookshop for its members.

Ee Sing’s Notes  Monthly journal (Charter) and Member’s Handbook  Strategic plan : Enhances and promotes the reputation and role of Chartered Accountants, both individually and collectively and ensures that the highest professional quality of its current and future members for the benefit of the business community and the public interest. b) CPA Australia - 1952  Education, training, technical support and advocacy  Staff and members work together with local and international bodies to represent the views and concerns of the profession to governments, regulators, industries, academia and general public. c) The Institute of Public Accountants  Recognised for their practical and hands-on skills and broad understanding of the total business environment. Case Law : Cases on what an auditor does and what an auditor reports is since late nineteenth century EG : Kingston Cotton Mill Co and Pacific Acceptance Corporation v Forsyth Regulation and other oversight: Audit Independence : Non Audit Services

Audit Partner Rotation Auditor working for the client

Detailed disclosures of the types of non-audit services were included in the requirement of CLERP9 as well as a requirement for a statement by directors that they satisfied th...