Summary-chapter-notes PDF

Preview

Summary

StuDocu is not sponsored or endorsed by any college or universitySummary - chapter notesAuditing (University of Western Australia)StuDocu is not sponsored or endorsed by any college or universitySummary - chapter notesAuditing (University of Western Australia)Audit Chapter NotesChapter 1: A overview...

Description

Summary - chapter notes

Auditing (University of Western Australia)

StuDocu is not sponsored or endorsed by any college or university Downloaded by Theroy Why ([email protected])

Audit Chapter Notes Chapter 1: A overview of Assurance and Audit Key terminology / Legislation

Notes

Assurance engagement 5 Elements of an Assurance engagement

Independence of Auditor

Regulation and structure of Assurance standards

Types of Assurance

Is an engagement in which an assurance practician expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome against an criteria. 1. Three Party relationship: Assurance practitioner (Auditor), Responsible Party, intended User 2. Subject Matter: e.g. financial position and performance, physical characteristics 3. Suitable criteria; criteria are standards or benchmark used to measure and evaluate the subject matter of the assurance engagement 4. Sufficient and appropriate evidence: the practitioner considers materiality and the relevant components of engagement risk, collecting information that is large in enough in quantity and accurately reflects the entire subject mater 5. A written assurance report: must be a written conclusion Independence of the auditor remains the corner stone in which the assurance function is based, it increases the value of the report for users knowing that the provider has no interest in the information other then its usefulness Independence is a absence of interests that create an unacceptable risk of material bias Professional judgement: assurance engagement requires the exercise of professional judgement through application of relevant training, knowledge and experience in making informed decision Scepticism: the auditor should engage with a degree of scepticism which includes a questioning mind, being alert to potential conditions that could indicate possible misstatement or fraud AUASB (Australian auditing and assurances standards board); responsible for setting assurance standards and others IAASB (international auditing and assurance standards board): responsible for setting auditing and assurances standards at an international level APESB (Australian professional ethical standards board) sets standards that apply to audits and assurance services carried out by members of the professional accounting bodies, particularly APES110 code of conduct for accountants and APES320 the standards of quality control for audit firm The framework of Assurance engagements: providers a general framework for all assurance services, defines and describes the elements of an assurance engagement Reasonable Assurance Engagement: Positive form of expression – this is termed an audit if it is a reasonable assurance engagement Where assurance engagement is of an acceptably low level and information is true and fair Limited Assurance engagement: negative form of expression of the conclusion – this is termed a review Related Services engagement: which covers a particular agreed upon procedures engagement, assurance of techniques such as evidence collection procedures, only reports on factual finding and therefore expresses no assurance

Auditing definition breakdown

Fundamental Principles underlying the objective of an audit

Assertion Based assurance engagement: requires the auditor to issue an opinion in written assertion made by others, attest reporting engagement e.g. the audit purpose general financial report Direct reporting assurance engagement: requires the auditor to provider assurance on an accountability matter on which the responsible party has not made a written assertion AAA A statement of Basic Auditing concepts defines it as: A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic events and action to ascertain the degree of correspondence between those assertion and established criteria and communicating the results to interest users. Key terminology: systematic process, objectivity, evidence, assertions about economic actions and events, degree of correspondence and communicating results 1. Knowledge: auditor should possess a sufficient understanding of entity and environment 2. Responsibility: auditor should take responsibility for the auditors opinion 3. Quality control 4. Rigour and scepticism 5. Professional judgement 6. Evidence 7. Documentation 8. Communication 9. Association 10. Reporting

Downloaded by Theroy Why ([email protected])

The expectation gap

The di:erence between the expectation of auditors by users of financial reports and the role and responsibilities of auditors 1. The reasonableness gap: the gap between what society expects to achieve and what they can reasonably be expected to achieve 2. The performance gap: the gap between what society can reasonably expect auditor to accomplish and what they are perceived to achieve, by either a deficient standards or deficient performance Main expectation gap issues are: nature and meaning of auditors report messages, early warning by auditors on corporate failure, auditors responsibility to detect fraud and auditors ability to communicate di:erent levels of assurance

Chapter 2: The Structure of the Profession Key terminology / Legislation

Notes Auditing Profession Regulating of Auditing

The elements of a professional occupation and Auditing: Systematic theory (underlying theory rests pf auditing and accounting theory), Professional authority and expertise, Community sanction, Regulative code and a culture The financial reporting council: overview of the AASB and the AUASB including appointing their members, monitoring international accounting standards development and monitoring auditors independence Auditing and Assurance Standards Board: responsible for developing and maintaining auditing and assurance standards and other publication, with a longstanding policy of convergence and harmonisation with international standards Accounting professional and ethical standards board ASIC: responsible for consumer protection and enforcement of standards and practices uphold aw and promote confident and informed participation by investors

Chapter 3: Ethics, Independence and Corporate governance Key terminology / Legislation

Notes Ethical Theory

APES110 Code of ethics

Key virtues of an auditor

Corporate governance

ASX Corporate Governance principles and recommendations

Teleological ethics: consequential ethics and general if the pros outweigh the costs then it is considered ethical e.g. utilitarianism Deontological ethics; this is rules and rights based ethics e.g. Kants theories Virtue ethics: this is considered as those actions taken that are of a virtuous person e.g. aristotles theories, based on the qualities of fairness, courage, compassion and generosity In 110 it sets out the main ethical pronouncements for members of professional accounting bodies Part A sets out the general principles and conceptual framework, part B is application in public practice and Park C is application in business

Auditors responsibility to act in the public interest, which is defined as the collective wellbeing of the community and the people in which serve it. Integrity: auditors should act with consistency and treating all cases in a like manner, honesty is a big part of this. Also imposes an obligation on a auditor to be straightforward and honest in professional relationships Objectivity: auditors must act fairly and mist not allow bias, conflict of interest or undue influence of others to override their objectivity. Professional competence and due care: indicates that auditors have a duty to attain and maintain their professional competence and only undertake work they can complete, take due care in accordance with applicable technical and professional standards Confidentiality: auditors hold a position of trust with client and therefore should respect their confidentiality Professional Behaviour: should comply with relevant legislation and standards and conduct themselves in a manner that is consistent with a good reputation of their profession Is a system by which companies are direct and managed on their relationship between board, management and shareholders – it is the framework, rules and process within and by which authority is exercised and controlled by corporations 1. 2. 3. 4.

Lay solid foundations for management and oversight Structure the board to add value e.g. independent directors, chair should be independent Promote ethical and responsible decision making Safeguard the integrity of financial reporting

Downloaded by Theroy Why ([email protected])

Whistleblowing

Auditors independence

Auditor Rotation

Non Audit Services

Other requirements

Threats to independence

5. Make timely and balanced disclosure 6. Respect rights of shareholders 7. Recognise and manage risk 8. Remunerate fairly and responsibly Those who disclose information that they reasonably believe is evidence of violation of law, rule, regulation or mismanagement There however is only limited protection to those who whistleblowing, must satisfy the criteria of reasonable grounds of contravene, disclosure is made in good faith and must provide their name to the person of whom they are making the disclosure Independence is on the fundamental ethical virtues or principles required for an assurance engagement under APES110 and has been enforced throughout the Corps act S307C (crops act) requires an auditor to give directors a written declaration to the e:ect that, to the best of the auditors knowledge there have been no contraventions of the auditors independence  Independence requirements: reasonable person test, would it reasonable for a third party to consider that the third party was independent?  The ethical rules also emphasise the importance of actual and perceived independence (independence by appearance)  Also actual independence, independence of the mind, main factors are integrity, objectivity and strength of character Corps Act S324DA the audit of a listed company for five successive financial years, the individual may not play a role in the audit of that entity for at least another two successive years. In addition, the individual can not play a significant role for more than five out seven successive financial years, where the involvement is not in consecutive years Small regional firms can extend that to seven years with ASIC permission S300 the boards of listed companies required to provide a statement in annual report identifying all the non audit services provided by the audit firm, the fee for each anf explanation of why provision did not impair the independence

Conflict of interest: auditor must be aware of a conflict of interest in relation to the audit client and take reasonable steps to ensure that the conflict of interest situation ceases to exists as soon as possible, within 7 days of becoming aware, if COI still exists must inform ASIC If the auditor was not aware of the COI but if reasonable steps of control had of been taken the auditor would have been aware it contravenes the conflict of interest Former Auditors: requires the directors report for disclosing the entities to include the names of each officer who was formerly part of audit committee so that the new auditor can contact the former auditor and ask as to why the previous engagement ended and any other mitigating circumstances 1. Self interest threats 2. Self review threats; firm will have to review their own work to form a judgement 3. Advocacy threats 4. Familiarity threats 5. Intimidation threats

Chapter 5: Overview of Elements of the financial report Audit Process Key terminology / Legislation

Notes

Financial Reporting Assertions

Audit Evidence Common Audit Procedures

Transaction Assertions A) Occurrence Presentation and Disclosure Assertions B) Completeness: all transaction that should have been recorded have A) Occurrence and rights and obligations C) Accuracy: all records are appropriate B) Completeness D) Cut0o: C) Classification and understand-ability E) Classification Account Balances Assertions D) Accuracy and valuation A) Existence B) Rights and obligations C) Completeness D) Valuation and Allocation All the information used by the auditors in arriving at the conclusions on which the auditors opinion is based, taken through audit procedures. Audit evidence = Underlying accounting data + corroborating information Inspection: involves examination of documents, records or tangible assets

Downloaded by Theroy Why ([email protected])

Sufficient Audit Evidence

Audit Risk

Other risks

Types of tests

Audit Working papers

Observation: involves the auditor observing the behaviour of operating personal and the functioning of the business External confirmation: a type of inquiry by which the auditor will obtain written statements from outside parties like banks, solicitors or debtors Re-calculation Re-performance Analytical procedures: are based on the dual nature of transaction and the interrelationships between the variables of business operations Inquiry The basic criteria of procedures is that should provide sufficient appropriate audit evidence for the auditor to form conclusions concerning the validity of the assertions embodied into the components of the financial report An Absolute level of assurance is not possible because there are inherent limitations of an audit, that means that most audit evidence is persuasive rather then conclusive Audit risk at the financial report level as the risk that the auditor will give an inappropriate auditors opinion when the financial report is materially misstated. Engagement risk: is the auditors exposure to loss or injury to the professional practice from litigation, adverse publicity or other events arising in connection with the financial report audit. engagement risk can not directly be controlled by the auditor, although some control can be exercised through the careful acceptance and retention of clients, while audit risk is directly controlled

Components of Audit Risk 1. Inherent risk: the susceptibility of an assertion about a class of transaction, account balance or disclosure to material misstatement 2. Control Risk: the risk that material misstatement is an assertion about a class of transactions, account balance or disclosure may not be prevented or may not be promptly detected and corrected by the entity’s internal control 3. Detection risk: as the risk that an auditors substantive procedures performed to reduce audit risk to an acceptably low level will not detect material misstatement 1. Sampling Risks: the risk that the sample is not representative of the population, this is the risk that the auditors conclusion based on the sample would be di:erent had the entire population been subject to the same audit procedure 2. Non sampling Risk: the risk that arriving at incorrect audit conclusions by failing to apply appropriate or e:ective audit procedures by applying the procedures improperly Business risk: as the risk that entity’s business objectives will not be attained as a result of the external and internal factors, pressures and forces brought to bear on the entity and ultimately the risks associated. Test of controls: are preformed to obtain evidence about either 1. The e:ectiveness of design of the policies or procedures in internal control Substantive tests: are preformed to obtain evidence about the validity and the propriety of the accounting treatment using analytical procedures and test of details Analytical procedures: study of comparison of relationship between accounting and related information Test of details: involves obtaining evidence on the items, test of balances, transaction and disclosures The three main functions of the audit working papers to plan and preform the audit, supervising and reviewing the audit work and gathering evidence and support for the auditors opinion The permanent file: is used to store documents, schedules and other information permanent to the current audit and continuing significance to the audit engagement in future years e.g. their constitution, documents relating to contracts Current working file: contains all the papers accumulated during the currents years examination, evidence gathered and conclusion reaches in the audit for that yea, must include the entire audit process communications and working in this file

Chapter 6: Planning, understanding the entity and evaluating Business Risk Key terminology / Legislation Client Acceptance and Continuance

Notes 1. 2.

3.

Quality control policies and client evaluation procedures; the audit firm needs to take precautions to avoid association with a client whose management lacks integrity, this include consideration of business reputation Communication with previous auditor: an auditor who accepts a new client is usually replacing another, therefore when approached by a new client an auditor should inquire as to why the previous audit engagement ended. Must request permission to communicate with the previous auditor and in writing for information necessary to enable a decision as to wether the nomination should be accepted Engagement letters: after accepting engagement require the auditor to agree on the terms of the engagement, disclosing things like scope, responsibilities f management and auditor and applicable reporting frameworks

Downloaded by Theroy Why ([email protected])

Major steps in the Audit Process

Lower assessed level of control risk

Understanding the environment of Entity

Risk assessment procedures (Business risk)

Analytical procedures

1. Understanding the entity and its environment 2. Understanding internal control 3. Assessing the risks of material misstatement 4. Developing responses to assessed risk 5. Test of controls 6. Substantive procedures 7. Completion and review If internal control is highly e:ective and well designed, the auditor may adopt lower level of control risk approach; Use a planned assessed level of control risk low or medium Obtain extensive understanding of relevant parts of internal control Plan extensive tests of controls Plan restricted substantive audit procedures Can help: assess risks and problems, determine materiality, consider appropriateness of policies, identify areas requiring specialist and develop expectations for use when performing analytical procedures 1. Organisational structure understanding 2. Operation and legal structure; including knowledge of operations, tour of plants, legal documents, minutes and contracts and understanding of related parties 3. Economic and industry conditions understanding; through PEST and SWOT analysis can learn about common accounting practices and trends in that industry, form expectations about what they should be seeing 1. SWOT analysis 2. PEST analysis (political, economic sociocultural and technological factors) 3. Value chain analysis 4. Non financial performance measurement: Market share, customer satisfaction, new product success rates, time to market for new products and warranty rates 1. Simple comparisons: identify changes in account balances by comparing amounts 2. Ratio analysis; comparison against industry, internal or benchmarks 3. Common size statements: measuring the income statement as a percentage of sales or another significant figure 4. Time series analysis and modelling 5. Regression analysis 6. Financial modelling

Chapter 7: Assessing Inherent risk, other specific business risk and materiality Key terminology / Legislation Inherent Risk at financial reporting level

Red Flags areas that will increase inherent risk

Notes Is the susceptibility of an...