ACCG925 Auditing

& Assurance
Services
Seminar 1 Part 1: Course
overview & Introduction to
auditing and assurance services

Slides adapted from those prepared by Dr

1 Publishing
Phil Saj for Wiley

Seminar 1 Overview
Welcome to ACCG925!
(i) Brief discussion of the course and specifically the UNIT
GUIDE
(ii) Icebreaker activity get to know your classmates
(iii) Discussion of Seminar 1, Part 1, lecture slides
(iv) Discussion in groups of the in class questions
(v) Discussion of Part 2, slides
(vi) Case study of a corporate collapse: ABC Learning

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

Reading guide for Seminar 1

LCCR (2014)
Chapters 1 & 6

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

Lecture Outline_Part 1
1. Introducing auditing & assurance services
2. Introduction to the financial report audit
3. Why are audits needed?
a- regulation
b theoretical
4. Understanding the auditing environment
5. Who conducts audits?
6. In class discussion questions in groups
Slides adapted from those prepared by Dr
Phil Saj for Wiley Publishing

1. Accounting, Assurance &

Auditing
Accounting
provides financial information for decision-making, control and
accountability

Assurance
provides confidence that information is reliable
various levels (reasonable, limited); depending on nature and extent of
procedures and objectivity of evidence

Auditing
provides (reasonable) assurance that accounting information is relevant,
reliable, comparable, understandable and conveys a true and fair view

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

Definition and elements of an

assurance engagement
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. (Framework for Assurance Engagements)

Five elements
Three-party relationship including the assurance
practitioner, the responsible party and intended users
Subject matter
Suitable criteria
Sufficient appropriate evidence
Written assurance report
Slides adapted from those prepared by Dr
Phil Saj for Wiley Publishing

Assurance engagements
May be financial or non-financial
The level of assurance will vary according to the
particular engagement (according to the amount
of evidence collected)
Audits of annual financial reports imply a
reasonable (or high) level of assurance
In comparison (for example) half-yearly reviews
imply a moderate (or low) level of assurance
Slides adapted from those prepared by Dr
7 Publishing
Phil Saj for Wiley

Examples of Assurance Services

Assurance services that add value:
Due diligence audits
Forensic and probity audits
Social auditing
Performance audits

STRUCTURE OF AUASB PRONOUNCEMENTS

Forward
Glossary
ASQC 1
Assurance

No Assurance

Framework for Assurance Engagements

Audits and reviews
of historical fin. info

Assurance engagements
other than audits & reviews
of historical fin. info

Engagements other
than audits, reviews
& other assurance
engagements

Australian
Auditing
Standards

Standards
on Assurance
Engagements

Standards
on Related
Services

Standards on
Review
Engagements
Guidance
Statements
Slides adapted from
those prepared by Dr
Phil Saj for Wiley Publishing

STRUCTURE OF AUASB PRONOUNCEMENTS

Forward to AUASB Pronouncements

AUASB Glossary
ASQC1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports
and Other Financial Information, Other Assurance Engagements and Related Services*

Audits and reviews of

historical financial information
Australian Auditing
Standards
ASA100-800*
ASA 805
ASA 810

Assurance engagements other than audits

and reviews of historical financial information

Standards on Review
Engagements
ASRE 2400
ASRE2405
ASRE 2410*

Standards on Assurance
Engagements
ASAE 3000-3600

Guidance Statements, other guidance and AUASB Bulletins

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*Made under
s.336
of the
Corporations
Act

Framework: levels of assurance

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

The relationship between

auditing and assurance
Assurance
Engagement

Financial
Report Audit

Slides adapted from those prepared by Dr

12 Publishing
Phil Saj for Wiley

What is an audit?
A systematic process of objectively obtaining and
evaluating evidence regarding assertions made about
economic actions and events to ascertain the degree
of correspondence between those assertions and
established criteria and communicating the results to
interested users
American Accounting Association (1973)

Slides adapted from those prepared by Dr

13 Publishing
Phil Saj for Wiley

Important parts of the

definition ?
systematic process
objectively obtaining and evaluating evidence
regarding assertions made about economic
actions and events
ascertain the degree of correspondence
between those assertions and established
criteria
communicate the results to interested users
Slides adapted from those prepared by Dr
14 Publishing
Phil Saj for Wiley

Types of audits

Types of Audit

Nature of Focus

Measurement
Criteria

Reporting Format

Primary use of
Audit Report

Financial
Report

Entity's Financial
Statements

Legislation,

"True and Fair"

Shareholders
Creditors
Regulatory Agencies
and General Public

Compliance

Policies/ Procedures
& Regulations

Specific
Conditions /
Criteria

Conclusion on
compliance / non
compliance

Management or
Reporting Authority

Recommendations

Department Head
and Management

Accounting
(AASBs) and
Auditing Stds
(ASAs)

(ASAE 3100)
Performance

Management Goals
and Resource Usage

Economy and
Efficiency
Indicators
(ASAE 3500)

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

2. What is a financial
report?

Refer to the Virgin Australia financial report as an example

Financial reporting v auditing

ACCOUNTING

AUDITING

(Guided by accounting standards.

Responsibility of management.)

(Guided by auditing standards.

Responsibility of auditor.)

Analyse events and transactions.

Obtain and evaluate evidence concerning the

financial reports.

Measure and record transaction data.

Verify that financial information has been

presented fairly in accordance with an
identified financial reporting framework.

Classify and summarise recorded data.

Express an opinion in the auditors report.

Prepare the financial reports and other

reports in accordance with the identified
financial reporting framework.

Deliver the auditors report to the entity.

Distribute the annual report, including
financial statements and the auditors report
to shareholders.
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The financial reporting

and
auditing
framework
In preparing the financial report, management asserts
that it is a true and fair record
The audit process to obtain evidence to validate
managements assertions
Independent audit report to express an opinion as to
whether the financial report is true and fair
Financial report users can use the information
with reasonable assurance that it is free from
material misstatement
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The purpose of a financial

report audit
To obtain reasonable assurance about whether
or not the financial report is free from material
misstatement.
To express an opinion about whether the financial
report is prepared in all material respects in
accordance with an applicable financial reporting
framework.
To report that opinion.
Slides adapted from those prepared by Dr
19 Publishing
Phil Saj for Wiley

ASA 200.11

The audit opinion

The auditor must express an opinion on whether the
financial report is prepared, in all material respects, in
accordance with the applicable financial reporting
framework.
The opinions expressed in an auditors report must be
in accordance with ASA 700 (ISA 700) The Auditors
Report on a General Purpose Financial Report.

20

20

The audit opinion

The audit opinion can be either unmodified or modified
(qualified) in some way.
According to ASA 705 Modifications to the Opinion in
the Independent Auditors Report, modifications are
expressed as:
a qualified opinion;
an adverse opinion; or
a disclaimer of opinion.

21

21

Emphasis of matter or other

matter in the audit report
The auditor may find it necessary to draw the attention of
users to certain matters.
These are addressed in ASA 706 Emphasis of Matter
Paragraphs and Other Matter Paragraphs in the
Independent Auditors Report.
An Emphasis of Matter Paragraph is included in
the auditors report where it is necessary to draw
the attention of users to a matter, or matters, that
are presented or disclosed in the financial report that
are of fundamental importance to users
understanding of the financial report.
of the financial report.
22

22

Emphasis of matter or other

matter in the audit report
An Other Matter Paragraph is included in the
auditors report where it is necessary to draw the
attention of users to a matter, or matters, other than
those disclosed in the financial report, that are
relevant to users understanding of the audit, the
auditors responsibilities or the audit report.
The inclusion of an Emphasis of Matter Paragraph or an
Other Matter Paragraph does not modify the audit
opinion.
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23

Duties of an independent
auditor
When an auditor accepts an appointment, he or she enters
into a contractual relationship with the company
The audit engagement letter, agreed to and signed by
the auditor and the client, details some of the duties of
an auditor for a company
See ASA 210 Terms of Audit Engagements

24

24

Duties of an independent auditor

cont
Comply with ethical requirements (ASA 102 and
APES 110 / IESBA Code)
Adopt attitude of professional scepticism
Exercise professional judgment (assumes
expertise)
Gather sufficient appropriate audit evidence to
reduce audit risk to an acceptably low level
Conduct audit in accordance with ASAs
(ISA/ASA 200 paras 14-20 and A.14-31)
Slides adapted from those prepared by Dr
Phil Saj for Wiley Publishing

See the audit report in Virgin Australia

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

3a: Audits are mandated by

Regulation
Annual audits required by:
Companies, registered schemes & disclosing
entities (excludes small proprietary companies)
Commonwealth and state government
departments, statutory authorities, government
companies and business undertakings,
municipalities
Not-for-profit organisations
[More on regulation soon]
Slides adapted from those prepared by Dr
27 Publishing
Phil Saj for Wiley

3b: Theoretical reason audits

are demanded
Agency theory
Information hypothesis
Insurance hypothesis
Regulation
Slides adapted from those prepared by Dr
28 Publishing
Phil Saj for Wiley

Agency theory
A principal contracts an agent to work on their
behalf
Each party is motivated by self interest
Information asymmetry arises
An independent audit reduces the incentives for
problems
Slides adapted from those prepared by Dr
29 Publishing
Phil Saj for Wiley

The agency relationship

Provision of
capital
Managers

Investors

Obtain audit

Provide
financial
report

Slides adapted from those prepared by Dr

30 Publishing
Phil Saj for Wiley

Information hypothesis
Investors demand quality information in assessing
the risks and returns of their investments
Audits improve the quality of information in
financial reports
Reduces information risk and leads to improved
decision making

Slides adapted from those prepared by Dr

31 Publishing
Phil Saj for Wiley

Insurance hypothesis
the ability to shift financial responsibility for reported
data to an auditor lowers the expected loss from
litigation or related settlements to managers, creditors
who might demand an audit
to show they are being prudent to insure against
losses

Wallace (1980)

Slides adapted from those prepared by Dr

32 Publishing
Phil Saj for Wiley

Insurance hypothesis
Interested parties:
Investors and creditors demand an audit to
be prudent and insure against losses
Regulators to insulate themselves from
criticism by directing blame to auditors

Slides adapted from those prepared by Dr

33 Publishing
Phil Saj for Wiley

4. Over view of the auditing

environment
Co-regulation
The
accounting
profession

Case law

Slides adapted from those prepared by Dr

34 Publishing
Phil Saj for Wiley

Statute

The accounting profession

Professional bodies
Institute of Chartered Accountants in Australia
CPA Australia
National Institute of Accountants
Practice entities

Slides adapted from those prepared by Dr

35 Publishing
Phil Saj for Wiley

The accounting profession

Professional accounting bodies are involved in
the development of audit practice by:
Developing standards of practice,
professional education and rules of conduct
Ensuring professional conduct and selfregulation
Maintaining standards of qualifications

Slides adapted from those prepared by Dr

36 Publishing
Phil Saj for Wiley

Case law
Early cases associated with detection of fraud
Change of focus resulting from increased
complexity, increasing size of businesses and
separation of owners from managers
Greater emphasis on reasonable skill and care
Concept of reasonable assurance
Slides adapted from those prepared by Dr
37 Publishing
Phil Saj for Wiley

Case law
Pacific Acceptance case (1970)
Concept of reasonable care and skill called for
changed standards to meet changed business
conditions.
Auditor should pay due regard to the possibility of
fraud and actively investigate the possibility of fraud
if suspicious circumstances exist.
Slides adapted from those prepared by Dr
38 Publishing
Phil Saj for Wiley

Regulation of accounting
and auditing
Government
ASX
Corporate
Governance
Council

Professional
accounting
bodies

Other
stakeholders

Financial Reporting Council

Oversee accounting and auditing
standard setting
Monitor companies compliance with
audit-related disclosure requirements
Advise on continuing steps to enhance
auditor independence
Monitor disciplinary proceedings of
accounting bodies

AASB

Secretariat

Slides adapted from those prepared by Dr

39 Publishing
Phil Saj for Wiley

AUASB

ASIC

CALDB

Regulation: a duty to report

Auditor has a statutory duty to report to members on
the company's financial statements.
The auditor must notify ASIC if there are reasonable
grounds to suspect a contravention of the Corporations
Act.

40

Regulation
Corporations Act
Responsibility for accounting and auditing standard
settings under government control
Regulatory changes focused on reporting issues
Other issues involved fee dependence and importance of the
auditor in corporate governance

Slides adapted from those prepared by Dr

41 Publishing
Phil Saj for Wiley

Regulation
Australian Securities and Investment
Commission (ASIC)
Regulates corporate, markets and financial
services sector
Advise on selling of and disclosure of financial
products and services to consumers
Majority of work carried out under Corporations
Act
Slides adapted from those prepared by Dr
42 Publishing
Phil Saj for Wiley

Regulation
Companies Auditors and Liquidators
Disciplinary Board (CALDB)
Established under ASIC Act
Hears breaches under Corporations Act by
auditors and liquidators
Australian Securities Exchange (AXS)

Slides adapted from those prepared by Dr

43 Publishing
Phil Saj for Wiley

Auditing standards
Auditors reply on a codified set of auditing standards
prepared by the Auditing and Assurance Standards Board
(AUSASB).
Uniformity with international auditing standards.
Standards indicate the minimum level of care required
in performing an audit.
Ultimately the courts determine whether the level
of care provided is adequate.

44

Auditing Standards
Mandatory requirements and guidance
ASA 101 explains how auditing standard are to
be interpreted and applied
Have the force of law for audits undertaken
pursuant to the Corporations Act
The professional bodies require application
Clarity Project (commenced 2004)
International harmonisation
Slides adapted from those prepared by Dr
45 Publishing
Phil Saj for Wiley

Auditing standards
Clarity standards introduced in October 2009.
Structure:
Mandatory components
Application
Operative date
Objectives
Definition
Requirements
Explanatory material
46

Auditing standards
Introduction
ASQC1
ASA 100s (3)

Using the
Work of Others
ASA 600s (3)

Responsibilities
ASA 200s (8)

Planning
ASA 300s (4)

Audit Evidence
ASA 500s (12)

Internal
Control
ASA 400s (2)

Audit Conclusions
And Reporting
ASA 700s (5)

Specialised
Areas
ASA 800s (3)

47

5. Who can provide an audit?

Financial audits are provided by independent auditors
Must be registered with ASIC to be able to perform
audits on reporting entities
Criteria set out in s.1280 Corporations Act
Educational qualifications
Work experience
Good character (fit and proper person)
Member of ICAA or CPA Australia
Slides adapted from those prepared by Dr
48 Publishing
Phil Saj for Wiley

Practice Structures
Most audit firms practise as a partnership.
An audit firm can apply to ASIC to be an
authorised audit company (Part 9.2A of the
Corporations Act 2001) provided certain
prerequisites are met, including:
all directors are registered company auditors
(RCAs)
RCAs have voting majority
adequate and appropriate professional indemnity
insurance is maintained
Slides adapted from those prepared by Dr
Phil Saj for Wiley Publishing

Audit firm structures

There are three levels of audit firms in Australia:

1. international (including the Big Four and other

firms that are members of Forum of Firms)
2. national firms
3. regional or local firms.
The largest international firms are known as the 'Big Four':

PricewaterhouseCoopers
Ernst & Young
KPMG Australia
Deloitte

The Big Four dominate the practice of public accounting, especially

Slides adapted from those prepared by Dr
for listed clients.
Phil Saj for Wiley Publishing

Other services offered

While audit and assurance services form a substantial
part of a public accounting firms
client base and revenue stream, most firms
also offer:
tax services
management services
accounting services
insolvency services

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing

In class Discussion Questions in Groups

Slides adapted from those prepared by Dr

Phil Saj for Wiley Publishing