University of New South Wales School of Accounting

Auditing and Assurance Services 2013

LECTURE 1 Introduction to the Audit Function

Assurance Framework Australian Corporate Audits

Auditing Standards

Lecture Overview

• Announcements

• Overview course requirements

• Introduction to the course – Assurance

– Auditing

– Legal requirements

– Auditing standards

Announcements

• 1. Tutorial Allocation – Once classes are full no more will be admitted

– No new classes will be scheduled

– Staff-assisted changes • Will be allowed for exceptional circumstances only; and only

where the class is not already at maximum size

• 2. Student email address • used for course announcements including offer of supplementary

final exam where applicable so ensure it is linked to your regular email address

Review Course Requirements

• Refer Course outline - Staff – p.3

• Consultation Hours posted to web by week 2 – Course aims and outcomes – p.4

• understand the audit function and why there is a demand for it • establish the legal, professional and regulatory framework for

audits in the Australian environment • familiarise students with techniques such as risk analysis, evidence

collection and evaluation, and audit reporting • review current developments relating to audit practice

• NOTE: this is a very practical course. Rote learning is inappropriate. Need to apply skills to specific scenarios

Review Course Requirements

Course Structure/Teaching strategies – p.5 - 1 x 2-hour lecture + 1 x 1-hour tutorial/week 2 Note: tutorials will run in parallel with lectures (i.e. your tutorial

during week 2 will cover the material presented in lecture 2.

- Refer p.21 for weekly structure 1. Reading guide – expected prior to Lecture 3 components: Textbook, Standards, Lecture Examples. 2. Tutorial Questions It is expected that you will have attempted these questions prior

to class. They will be discussed in class.

Review Course Requirements

• Resources – p.9 - Blackboard

- http://www.elearning.unsw.edu.au/ - 3 Texts

• Gay and Simnett – 5th ED • Roebuck and Martinov – 5th ED – case book - bring each week • ICAA or CPAA Auditing Handbook 2013

– Note: It is NOT recommended to use handbooks from prior years. The auditing standards have been substantially changed since last year.

– Standards can also be downloaded from the AUASB website at http://www.auasb.gov.au

Review Course Requirements

• Assessment – p.6 – Three class quizzes – 24%

• To be held in your tutorials in weeks 5, 8 and 11

• Each quiz to be worth 8% of the final grade

– Assignment – 20% – due in week 11 • To be completed in groups of four students.

• Students will be assigned to groups by their tutor. Groups will be formed in the tutorial in Week 5

• The assignment is in Part D of the Course Outline (page 61).

– Final Exam – 56% • Details to be provided in Lecture 12

ACCT3718 Auditing Honours

• ACCT3718 is an honours stream of ACCT3708. • It involves an additional seminar class and additional

assessment tasks – Fri 10:00 – 12:00 – Quad G044 (from week 1)

• Seminars run every second week.

• It introduces students to current research areas and research methods in Auditing

• Entry is open to students with an average of 75 in 1st and 2nd yr accounting courses.

• For further information, contact: – Dr Radzi Jidin (r.jidin@unsw.edu.au)

Financial Reporting

• Financial statements are prepared by company management

• They are presented to shareholders

• (Most) shareholders have no way of checking that they present a true and fair view of the company

• This gives rise to agency costs

Assurance

• Agency costs can be reduced by having an independent third party provide assurance as to whether the financial statements are true and fair.

• The third party: – Conducts procedures to determine the truth and

fairness of the financial statements

– Issues an opinion on their truth and fairness to the shareholders.

Key Elements of Assurance Engagements

• An assurance engagement involves: – A three party relationship involving a practitioner, a

responsible party and intended users,

– An appropriate subject matter,

– Suitable criteria,

– Sufficient appropriate evidence,

– A written assurance report in a form appropriate to a reasonable assurance engagement or a limited assurance engagement.

• (Framework for Assurance Engagements para 21)

Absolute Assurance

• Absolute assurance can never be provided because of: – The nature of accounting:

• Valuation issues,

• Accounting policy choice and judgments,

• Contingent items,

– Time and cost of evidence collection and evaluation.

Reasonable Assurance

• Reasonable assurance is a high but not absolute level of assurance

• The conclusion is expressed in a positive form – The financial statements are true and fair.

• An audit engagement provides a reasonable level of assurance.

• The opinion is expressed in an audit report.

Limited Assurance

• Limited assurance is a lower level of assurance than reasonable assurance. – The actual level of assurance depends upon the nature of

the procedures that are carried out.

• The conclusion is expressed in a negative form – Nothing has come to our attention to suggest that the

financial statements are not true and fair.

• A review engagement provides a limited level of assurance.

Auditing

• The American Accounting Association (AAA) has 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 the results to interested users.

• (Ref: A Statement of Basic Auditing Concepts)

Financial Statement Audits

• An audit of a company’s financial statements has the following features.

• The audit is carried out by an independent auditor or audit firm (such as KPMG).

• The auditor is appointed by shareholders at the AGM (in theory) but by the board of directors (in practice).

• The auditor expresses their audit opinion to the shareholders via an auditor’s report, included in the annual report

Financial Statement Audits

• The auditor’s sole responsibility is to express an opinion on the financial statements

• The auditor has no right to change any aspect of the financial statements – The preparation of the financial statements is the

responsibility of the directors and the auditor’s report does not absolve them of this.

Financial Statement Audits

• The auditor needs to determine if the financial statements: – Comply with accounting standards:

– Present a “true and fair view”.

• In practice, this means that they are free of material errors in: – $ amounts

– Disclosures.

Financial Statement Audits

• Material errors arise from three sources: – Legitimate errors, – Deliberate misstatement (fraud), – Errors in accounting judgments.

• If errors are found – The auditor asks management to change the

financial statements – If they won’t, the auditor changes the audit

report.

Financial Statement Audits

• There are two basic types of audit opinions, expressed in an auditor’s report. – If there is nothing wrong with the financial

statements, the auditor issues an unqualified auditor’s opinion.

– If the financial statements contain material errors, the auditor issues a qualified auditor’s opinion.

• There are other types of auditor’s reports, which will be discussed in later lectures,

Company Audits

• There are a wide variety of circumstances under which an assurance engagement can be conducted.

• However, the main focus in this course will be on audits of general purpose financial statements of Australian companies.

• These are governed by the – Corporations Act 2001

Legal Requirement for an Audit

• A company, registered scheme or disclosing entity must have the financial report for a financial year audited in accordance with Division 3 and obtain an auditor’s report. – Corporations Act 2001 s301(1)

• This requirement applies to all Australian companies, except exempt proprietary companies (very small ones)

Auditing Standards s307A

• If an individual auditor, or an audit company, conducts: – (a) an audit of the financial report for a financial

year; or – (b) an audit or review of the financial report for a

half-year;

• the individual auditor or audit company must conduct the audit or review in accordance with the auditing standards.

Australian Auditing Standards

• The detailed rules about how to conduct an audit are contained in Australian Auditing Standards (ASAs).

• ASAs are legally enforceable (s307A).

• They are set by the Auditing and Assurance Standards Board (AUASB).

• The AUASB is a statutory body.

• Compliance with ASAs is monitored by ASIC.

ASA 101.9

• The auditor shall apply the mandatory components of the Australian Auditing Standards when conducting an audit or review in accordance with those Standards. The mandatory components are included in each Auditing Standard under the headings listed below: – (i) Application (paragraph Aus 0.1).

– (ii) Operative Date.

– (iii) Objective(s).

– (iv) Definition(s).

– (v) Requirements.

ASA 101.10

• The auditor shall consider the whole text of an Auditing Standard to understand, interpret and apply the mandatory components. The explanatory material is included in each Auditing Standard under the headings listed below: – (i) Application (paragraph Aus 0.2).

– (ii) Introduction.

– (iii) Application and Other Explanatory Material.

– (iv) Conformity with International Standards on Auditing.

– (v) Appendices.

• Explanatory material does not create or extend mandatory components. (Ref: Para. A1)

Audit Opinion s308(1)

• An auditor who audits the financial report for a financial year must report to members on whether the auditor is of the opinion that the financial report is in accordance with this Act, including: – (a) section 296 (compliance with accounting standards);

and – (b) section 297 (true and fair view).

• If not of that opinion, the auditor’s report must say why.

International Auditing Standards

• International Auditing Standards (ISA’s) are issued by the International Auditing and Assurance Standards Board (IAASB).

• These standards are not legally enforceable in Australia.

• All ASA’s are based on ISA’s. – They have the same number and same contents,

except for some minor differences.

Other Standards

• There are several other standards that affect assurance engagements – APES 110

• Australian Code of Ethics for Professional Accountants

– ASQC1 • Quality Control for Firms that Perform Audits and

Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements

• These will be discussed later in the course.

Other Standards

• Standards on Review Engagements (ASRE’s) – These cover review engagements on historical financial

information.

• Standards on Assurance Engagements (ASAE’s) – These cover assurance engagements other than audits or

reviews of historical financial information covered by Australian Auditing Standards or Standards on Review Engagements.

Other Documents

• The AUASB has released two other documents that have no legal force but are designed to explain concepts.

• Framework for Assurance Engagements – This is a conceptual framework for assurance.

• AUASB Glossary – This defines a large number of auditing terms

• Note, many of the definitions are repeated in the standards (giving them legal force)