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ACCT3101
Auditing & Public Practice
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Course Objectives
Introduction to the environment and
methodology of auditing.
The course is intended to provide the
theoretical framework around which
auditing knowledge and skills can be built
by further formal study or on the job
experience.
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Overview of course
What is Auditing?
(3)
Audit Process
(7)
Risk and
Evidence (1)
Testing and
Procedures(2)
Planning (3)
Auditors
Liability(1)
Completing
the audit (1)
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Overview & Introduction
Chapters 1 & 4
Lecture 1
Tutorial Questions
Chapter 1: 14;21(a,c);23(corr);29
Chapter 4: 28
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Lecture 1 Introduction:
Nature and Function of Auditing
1. Nature and function of auditing
2. Relationship between auditing & accounting
3. Auditing in the accounting profession
4. Types of audit
5. Demand, benefits and limitations of audit
6. Professional standards
7. Statutory requirements
8. Audit objectives management assertions &
auditors responsibility
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Who Cares?
Shareholders / Members
Creditors
Customers (e.g., HIH, One. Tel)
Suppliers & Employees
Government / Regulators
The Public (e.g., Ansett, HIH)
Parties involved in monitoring companies
(professional reputation, personal liability)
Important issues:
Market integrity & investor confidence
Accountability & credibility
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Why the need for independent
financial report audits
Remember from ACCT2101:
Financial statements need to be relevant,
reliable, understandable & comparable to be
useful User decisions have economic
consequences.
Possible errors, fraud, manipulation & other
illegal acts, e.g., due to agency conflict.
Can users trust the financial statements?
Complexity
Remoteness
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Board of directors
Management
Other employees
External
Auditors
Regulators
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What is Auditing?
Obtaining and evaluating evidenceabout
assertionsto form an opinion about those
assertionsand communicate that opinion to
interested users.
ASA 200 Overall objectives of the independent
auditor and the conduct of an audit in
accordance with Australian Auditing Standards
Financial report audit is most common.
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Demand for Financial Statement Audits
1. Agency theory - monitoring
performance of agents.
2. Information hypothesis reliability
of information for decision-making.
3. Insurance hypothesis provide
insurance if audit fails to report
material misstatements.
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The relationship between accounting & auditing
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The relationship between accounting and auditing
Economic
events, etc
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Management
Economic
events, etc
records
The relationship between accounting and auditing
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Management
Economic
events, etc
Assertions
records
makes
The relationship between accounting and auditing
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Management
Economic
events, etc
Assertions
Financial
statements
records
makes
reported in
The relationship between accounting and auditing
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Management
Auditor
Economic
events, etc
Assertions
Financial
statements
records
makes
reviews
reported in
The relationship between accounting and auditing
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Management
Auditor
Economic
events, etc
Assertions
Financial
statements
records
makes
collects
evidence
reviews
reported in
The relationship between accounting and auditing
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Management
Auditor
Economic
events, etc
Assertions
Financial
statements
records
makes
collects
evidence
reported in
evaluates
reviews
The relationship between accounting and auditing
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Management
Auditor
Economic
events, etc
Assertions
Audit
report
Financial
statements
records
makes
collects
evidence
reviews
prepares
reported in
evaluates
1.2 Relationship between auditing & accounting
The relationship between accounting and auditing
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Assurance Engagements
Assurance Engagement:
An engagement in which a 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.
E.g., an audit or a review engagement
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Different types of audit
1. Financial statement audit attest function
2. Compliance audit
3. Performance audit efficiency, effectiveness
& economy
4. Comprehensive audit combination of above
5. Environmental audit impact of environment
on financial statements (AGS 1036)
6. Internal audit
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Different types of auditor
Independent auditors: e.g., external auditors
who perform financial report audits.
Internal auditors: e.g., employees assigned to
evaluate the economy, efficiency and
effectiveness of the organisations.
Government auditors: Employed by the ANAO
and Auditor General
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Economic benefits of an audit
Reduce agency costs
Access to capital markets
Lower cost of capital
Deterrent to fraud and inefficiency
Control and operational improvements
Insurance
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Limitations of a financial report audit
Time lapse
Audit testing on selective samples
Assessment of materiality
Forming professional judgements in highly
specialised areas
Report format limitations
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Auditing in the Accounting Profession
Auditors are members of the accounting
profession.
Company auditors must be registered by the
Australian Securities and Investment
Commission (ASIC) s1280.
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International firms
National firms
Large local & regional firms
Small local firms
Public Accounting Firms
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Partner
Manager
Supervisor
Senior
Assistant
Hierarchy in public accounting firms
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Auditing Issues
Auditors responsibilities:
Audit quality
Competence
Ethics & Independence
Audit Quality & Ethics
Regulations,
e.g., Corps Act, Auditing Standards
Self-regulation by the accounting profession
Individual accounting firms
Professional Accounting Associations
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Statutory provisions (Corporations Act)
Financial Report Audits:
Disclosing entities MUST have their annual
financial report audited : s301
Public company - must appoint an auditor of
the company within one month after the date
of the company's registration: s327A.
A large proprietary company must have
annual financial statements prepared and
audited, s292
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Statutory provisions (Corporations Act)
Appointment
An auditor can be (s 324AA)
an individual (natural person);
a firm (partnership);
A company
Removal by special resolution at a general
meeting (s.329)
Powers and duties (ss.307-309)
CLERP9 changes since 2004 e.g.,
independence requirements
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Auditing Standards
Basic principles and explanatory material
Now with force of law (s307A)
Important because:
They set a minimum standard of technical
proficiency;
Users are informed that standards have been
followed;
Compliance is evidence against a malpractice
suit.
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Standards are divided into:
Introductory
matters
Principles &
responsibilities
Risk assessment
& response
Audit
Evidence
Conclusions/
reporting
Using the work
of others
Specialised
areas
Auditing Standards
Audit Quality
ASA220 Quality control for audits
This standard establishes the methods used to
make sure that the firm meets its professional
responsibilities to clients.
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Elements of Quality Control (ASA 220)
1. Leadership responsibilities for quality on
audits
2. Ethical requirements, e.g., independence
3. Client evaluation Acceptance & continuance
4. Assignment of engagement teams
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Elements of Quality Control (ASA 220)
5. Engagement performance
a) Direction, supervision & performance
b) Reviews
c) Consultation
d) Engagement quality review
e) Differences of opinion
6. Monitoring
7. Documentation
Next: Financial Statement Audits
The main focus of this course is on financial
statement audits.
Objectives & reporting framworks
Assertions
Risks & Materiality (later)
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Objective of a financial report audit
ASA200.11
The overall objective of an audit of a financial
report is to obtain reasonable assurance about
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 respects, in
accordance with an applicable financial
reporting framework.
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Financial Reporting Framework
Now two types of financial reporting
framework (ASA200.13):
1.Fair presentation framework
Compliance & fair presentation
2.Compliance framework
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Responsibilities
Management is responsible for the financial
statements and for internal control.
Auditors issue an opinion on compliance
and/or fair presentation of the financial
statements.
The external auditor performing a financial
report audit does NOT provide an opinion on
the performance or profitability of the entity.
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Financial Report Audit
Financial statement
Other information,
e.g., Managers
discussions
Reviewed by auditor,
but not audited.
Financial report:
including financial
statements & notes to
the financial
statements
Audited.
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The Audit Report Next Time
Unmodified audit report
ASA700
Modified audit report
ASA705 3 types of modified opinions:
1. Qualified opinion,
2. Adverse opinion,
3. Disclaimer of opinion.
ASA706
Emphasis of matter paragraph
Other matter paragraph
Questions
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