Tutorial 01 Wk02 - auditing PDF

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HI5026 Auditing and Assurance Services, Tutorial 01 Wk02 Prescribed Textbook -- 5th edition, 2013 CHAPTER 1 Question 1.19 1.9 According to ASA 200.A3 (ISA 200.A3), management and, where appropriate, those charged with governance are responsible for: the identification of the applicable financial reporting framework, within the context of any relevant laws or regulations the preparation and presentation of the financial report in accordance with that framework an adequate description of that framework in the financial report. 1.11 The Glossary in the textbook defines assurance as ‘satisfaction as to the reliability of information provided’. The degree of satisfaction achieved depends on the nature, extent and results of the procedures performed by the auditor and the objectivity of the evidence obtained. Paragraph 11 of the Framework for Assurance Engagements (International Framework for Assurance Engagements) says that a practitioner can provide two levels of assurance for an assurance engagement: reasonable assurance and limited assurance. For assurance services on historical financial information, a reasonable assurance engagement is commonly termed an audit, and a limited assurance engagement is commonly termed a review. The objective of a reasonable assurance engagement (audit) is reducing assurance engagement risk to an acceptably low level, and this is associated with a positively expressed assurance opinion (such as that the financial information is true and fair). The objective of a limited assurance engagement (review) is reducing assurance engagement risk to a level that is acceptable under the circumstances—but where the remaining risk is greater than with a reasonable assurance engagement—and this is associated with a negatively expressed assurance opinion (such as that nothing has come to the auditor’s attention to persuade them that the information has been materially misstated). 1.13 An assurance provider’s opinion is an expression of informed judgment. Financial reports and assurance reports on other subject matters are too imprecise to make a statement of fact, because of the choices available regarding such things as acceptable accounting policies and other criteria. The assurance provider’s opinion is usually based on a subset or a sample of the available evidence, meaning that an opinion cannot be given with 100 per cent certainty. 1

1.15 The required characteristics of accounting information that are identified in the Framework for the Preparation and Presentation of Financial Statements include: Relevance: This requires that the information provided be useful in assisting financial report users to make and evaluate decisions about the allocation of scarce resources and to assess the accountability of the preparers of these reports. Reliability: The reliability of financial information is the extent to which the information presented to users represents, without bias or undue error, the underlying transactions and events that have occurred. Comparability: The usefulness of information requires that its presentation in a financial report results in users being able to compare aspects of an entity at one time and over time, and between entities at one time and over time. True and fair presentation: The application of the qualitative characteristics and of appropriate accounting standards (suitable criteria) will normally result in financial reports that convey a true and fair view.

1.19 The expectation gap is the difference between the expectations of auditors and the expectations of the assurance report users concerning the role and responsibilities of auditors. As shown by Figure 1.5, it consists of unrealistic expectations on the part of users (reasonableness gap) and inadequate performance by auditors (performance gap). Unrealistic expectations include expectations that ignore limitations inherent in the financial report such as those that require significant professional judgment or estimation, and those where the cost of providing assurance exceeds the probable benefits. Inadequate performance includes both a failure by individual auditors to comply with required auditing standards (deficient performance), and a failure of the auditing standards to meet the legitimate needs of users (deficient standards). Some expectations of users that are not currently being met include expectations that: the company will not fail there has been no fraud the financial reports are 100 per cent accurate; associated with this is the fact that users are being confused by the wording of reports by which the assurance provider is trying to convey different levels of assurance (e.g. audit versus review) the company has been competently managed.

1.23 The rights of an auditor under the Corporations Act 2001 are as follows. S 310 S 312 S 331

Auditor has right of access to records and information at all reasonable times Officer must allow auditor access to records and provide information and explanations Auditor is entitled to reasonable fees and expenses

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The duties of an auditor under the Corporations Act 2001 are as follows. S 307A Audit must be conducted in accordance with auditing standards S 307B Audit working papers must be retained for seven years S 307C An auditor must make a written independence declaration Auditor must give an opinion as to whether the financial report is S 308 properly drawn up: So as to give true and fair view In accordance with the corporations act 2001 In compliance with accounting standards

S 311

Auditors have a duty to inform the ASIC as soon as possible if they: Have reasonable grounds to suspect that there has been a significant contravention of the Corporations Act 2001 For all other contraventions, if they believe that the matter has not been or will not be adequately dealt with by comment in the auditor’s report on the financial report or by bringing the matter to the notice of the directors of the company.

1.24 (a) Performance audit: Performance audits are a comprehensive activity designed to analyse organisational structure, internal systems, work flow and managerial performance. They are usually associated with issues of efficiency, effectiveness and economy. In short, performance auditing is intended to provide a measure of an entity’s operational achievements. (b) Forensic audit: Forensic auditing involves detecting, investigating and deterring fraud and white-collar crime. As outlined in the chapter, some examples of situations in which forensic auditors have been involved include: analysing financial transactions involving unauthorised transfers of cash between companies reconstructing incomplete accounting records to settle an insurance claim over inventory valuation proving the commission of money-laundering activities by reconstructing cash transactions investigating and documenting embezzlement, and negotiating insurance settlements. (c) Compliance audit: Compliance audits involve the expression of an opinion on an entity’s compliance with statutes, regulations or other directives that govern the activities of the entity. Thus any example of compliance with any regulation, including compliance with internal control activities, would be appropriate.

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1.36 (Medium) For audits undertaken under the Corporations Act 2001, the auditing standards have legal authority by virtue of the amendments contained in CLERP 9. Failure to observe these standards may expose an auditor to investigation and disciplinary action from the Australian Securities and Investments Commission (ASIC). For other audits there is a mandatory obligation for members of the accounting bodies in Australia to comply with the ASAs, which is found in APES 210 Conformity with Auditing and Assurance Standards, issued by the Australian Professional and Ethical Standards Board (APESB). APES 210 states that the basic principles and essential procedures in an ASA are mandatory and are to be complied with in the planning, conduct and reporting of an audit engagement. APES 210 indicates that the standards are to be applied to all financial report audits and to all audits of other financial and non-financial information, adapted as necessary. Failure to follow APES 210 would result in disciplinary action against the auditor by the accounting body of which they are a member. Therefore, the auditor would need to follow the auditing standards for the audits of both Geelong Cricket Club, a not-for-profit entity, and Freedom Ltd, a public company, although the penalties for non-compliance are more severe under the Corporations Act.

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