Assurance and Forensic Accounting

Topic 1 – An Overview of Assurance, Evidence Collection

and Forensic Services in Society
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Topic 1 – An Overview of Assurance, Evidence Collection and Forensics Services in Society i

Contents

Contents ii

Introduction 3
Learning objectives 3

What is assurance? 4

Who provides audits? 4

Users that demand audits 5
The accounting profession 5
Regulation and other oversight 6

Auditing Standards 7
The audit expectations gap 7
Audit Evidence 6

Nature of Forensic Accounting 8

Fraud and social impact 9

Summary and conclusion 9

References 11

ii Assurance and Forensic Accounting

Introduction
Auditors can be found globally where business is conducted. However the
general public does not know much about the role of auditors and the scope
of their responsibilities. Some of the core roles of auditors are to ensure
the stability of capital markets and assist in ensuring accountability for the
government sector. Although there are several types of audits, this unit
focuses on the financial statement audit, which is the most common type
of audit. In understanding the auditing environment we need to consider
the laws and regulations within which auditors operate. The most important
regulation that auditors deal with is the auditing standards. These
standards and the standard setting bodies are introduced to students in this
topic.

Learning Objectives
At the end of this topic you should be able to:
 identify the differences between assurance and audit services
 identify and discuss who provides and uses audit services
 develop a basic understanding of the key professional bodies in the
accounting profession and the main regulatory authorities
 develop an overview what auditing standards are and who sets them in
Australia
 assess and discuss the audit expectations gap and why it continues to
be a problem

Topic 1 – An Overview of Assurance, Evidence Collection and Forensics Services in Society iii
 Recommended Text:
Audit and Assurance, 1st edition, Leung, Coram, Cooper and
Richardson (2019) Chapter 1

Additional Reading
Albrecht et al., Fraud Examination, 6th edition, (2019) Chapter 1

There are three research papers or reports of particular relevance:

AUASB, 'Regulation Impact Statement', April 2006.

Commonwealth of Australia, 'Audit Quality in Australia: A Strategic

Review', The Treasury, March, 2010.

Houghton, K. Kend, M. and Jubb, C. (2013), "The CLERP 9 audit

reforms: Benefits and costs through the eyes of regulators,
standard setters and audit service suppliers", ABACUS, Vol. 49 No.
2, pp. 139-160. https://login.ezproxy.lib.rmit.edu.au/login?
url=http://dx.doi.org/10.1111/abac.12002

Web resource
All Auditing and Assurance Standards are available from:
http://www.auasb.gov.au/

What is Assurance?
Assurance is a broad term used to describe any situation where information
is prepared by one party and then attested to its accuracy by another
party. Assurance engagements relate to a much broader set of potential
engagements that may be financial or non-financial. The level of assurance
provided can vary according to the particular engagement and this service
can be provided by other professionals not from the accounting profession.

An audit is an assurance engagement. An audit usually relates to a financial

statement audit and implies a reasonable level of assurance. Auditors
cannot guarantee that financial statements are free from error or
misstatements, however they can provide reasonable assurance that the

iv Assurance and Forensic Accounting

 financial statements are a true and fair representation of a company's
financial position at a certain point in time, usually the end of year balance
date. The financial statement audit is a very significant type of assurance
service, it represents a major source of revenue for accounting firms and
the accounting firms continue to have a mandated monopoly on the
provision of financial statement audits.

Who Provides Audits?

External auditors provide financial statement audits, and may operate as
individual practitioners or members of public accounting firms. External
auditors are also described as independent auditors, and like members of
the legal and medical profession, operate on a fee basis. An auditor is
expected to be independent of the client in carrying out an audit and
reporting the results. The auditor’s role is to protect the public and report
to the shareholders of the companies they audit. Only independent auditors
registered with ASIC (the Australian Securities and Investments Commission)
can perform an audit of reporting entities in Australia. In addition the
person must have sufficient experience in auditing and must be a fit and
proper person to be registered as an auditor.
The external auditor's responsibility is to express an opinion on the financial
statements. The auditor's report they produce shall state that the audit was
conducted in accordance with the Australian Auditing Standards (ASAs), and
that the auditor believes that they have obtained sufficient and appropriate
audit evidence to form an audit opinion. Professional judgement is required
to assess the risks of material misstatement which is then used to
determine what is sufficient and appropriate audit evidence. Reasonable
assurance is obtained by undertaking this process.
There are other types of auditors and they include internal auditors, public
sector auditors, tax auditors, and environmental auditors, etc. It is
important to know the difference between an internal and external auditor.
While the external auditor is independent and operating as an individual or
a member of a public accounting firm, an internal auditor is usually not
considered independent as they are employed by reporting entities that are
audited by the external auditors, and therefore the internal auditors
respond to company or management's directives. While external auditors
may consider relying on the internal audit function, they do so under
guidance from the Australian Auditing Standards.

Users That Demand Audits

Demand for audits has existed ever since there has been separation of
ownership and control of organisations. The audit is primarily designed for
the shareholders of a company. However other stakeholder groups may
potentially use the audited financial statements more extensively than the
current shareholders. There are a variety of parties that might be
interested in the audit reports of a public company, such as:
Topic 1 – An Overview of Assurance, Evidence Collection and Forensics Services in Society v
  current and potential future shareholders
 employees, company management
 bankers, creditors, other loan providers
 Government agencies, the media, the wider public
As auditing is mandated by government regulation it cannot just completely
ignore the fact that there are a diverse range of users of the audit report.
The auditing profession must manage the expectations of this very diverse
group of users. However, the auditor must ultimately remember that
despite these various users, the importance of current shareholders is
paramount in terms of an auditor's legal liability. There are a large number
of possible users and the reality is that the auditor cannot be all things to
all people.

The Accounting Profession

The accounting profession emerged in conjunction with the rapid growth of
auditing in the nineteenth century. A side effect of this development was
that the accounting professional societies began to establish brand names.
However the last ten years have seen a significant change in the role of the
accounting profession in Australia. This is in part due to the corporate
scandals of the early 2000s where there was a large amount of trust lost in
the accounting profession. There are three main professional accounting
bodies in Australia:
 The Institute of Chartered Accountants in Australia (ICAA) now
called CA ANZ
 CPA Australia, and
 The Institute of Public Accountants (IPA)
The services the CAANZ provides to its members include professional and
technical standards and continuing professional education, as well as the
education of future members through the CA program. CPA Australia has
the largest membership base in Australia and is focused on global
recognition for its members (whom it refers to as strategic business leaders
from within global accountancy). The IPA is the youngest professional
accounting body in Australia, and is the organisation for accountants
recognised for their practical and hands-on skills in a total business
environment.
The public accounting profession comprises firms that vary in size from
large international firms, to smaller regional accounting firms. The 'Big
Four' (Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers) are the
main suppliers of audit and assurance services in Australia and dominate
the market for listed company audits. There has been concern about the
dominance of these four major audit service providers, particularly when
there is a perceived lack of choice for large company audits at the top end
of the market. However, there has been significant growth in the 'second
tier' accounting firms in recent times. There are a number of 'second tier'
firms that have grown in size and influence over the past ten years,
including Pitcher Partners, PKF Australia, WHK Group and Moore Stephens.

vi Assurance and Forensic Accounting

 Regulation and Other Oversight
After the major corporate collapses of early 2000s (e.g. Enron, HIH
Insurance), Australia reformed its corporate governance regime to, amongst
other things, provide legal backing for auditing standards (from 2006) when
corporations, whether listed or unlisted, are audited or reviewed. France,
the U.K. and Canada similarly provide legal backing for auditing standards
in at least some circumstances. Under the Corporate Law Economic Reform
Program (CLERP) (Audit Reform and Corporate Disclosure) Act 2004 (CLERP
9), the changes to the regulatory environment for audit were profound in
Australia. For example, in Australia, after the passage of the CLERP 9 Act
(2004), in the wake of the HIH Insurance Ltd collapse, the consequence for
auditors of non-compliance with the standards includes the criminal penalty
of jail.
Briefly, the reforms included:
i) introducing a requirement for auditors to be independent under the
Corporations Act, ii) incorporating in the Corporations Act constraints to
the employment of auditors by clients and financial relationships between
the accounting firm and clients, to ensure independence, iii) enhancing
disclosure requirements in relation to non-audit and assurance services, iv)
prohibiting accounting firm partners who were directly involved in an audit
from becoming directors of the audited client within two years of the
auditor resigning from the audit firm, v) establishing auditor independence
oversight provisions, vi) giving legal backing to auditing standards through
the Corporations Act, and vii) reconstituting the board responsible for the
setting of auditing standards to make it a statutory board and distancing it
from professional co-regulation.
The principal CLERP 9 audit and audit-related reforms in 2004 included
enhanced auditor oversight and independence. The Australian Securities &
Investments Commission (ASIC) commenced its audit inspection and
surveillance program in 2004-05. The on-site inspection program focused
initially on the Big Four and later the mid-tier accounting firms. The
program was expanded in early 2008 to include some smaller accounting
firms, specifically those with listed audit clients. There is little
independent research on the effectiveness of the ASIC on-site inspection
and surveillance program as a means of monitoring accounting firm quality.
More work is needed in that particular area, and further research has been
called for by various accounting academics.

Auditing Standards
Auditing standards are of critical importance to clarify auditors'
responsibilities. The Auditing and Assurance Standards Board (AUASB),
which had been an arm of the professional accounting bodies, was
reconstituted as a national statutory body. This new statutory body was
charged with revising the existing auditing standards such that they could
be enforced legally. The Australian standards, issued by the AUASB, at the
behest of the Financial Reporting Council (FRC) which sets the strategic
direction and has oversight of the AUASB, are based on those of the

Topic 1 – An Overview of Assurance, Evidence Collection and Forensics Services in Society vii
 International Auditing and Assurance Standards Board (IAASB).
The FRC is a statutory body and its objectives are to set accounting and
auditing standards in the Australian environment and as part of this they
also promote the continued adoption of international best practice
accounting and auditing standards. The primary role of the AUASB under
the oversight of the FRC is to develop high-quality auditing and assurance
standards.

The Audit Expectations Gap

The audit expectations gap has been a public issue for the auditing
profession since the early 1970s. The audit expectations gap comprises the
difference between what financial statement users believe to be the true
role of auditors, versus what the audit profession themselves actually
provide. The true role of auditors is a difficult role for the general public to
understand mainly due to the lack of information available. Therefore the
audit expectations gap can never be closed. It can be managed or narrowed
but never closed. There will always be members of the public that do not
understand the true role of auditors. This is an ongoing problem for the
profession because it underpins the value of the audit and the perceived
credibility of the audit function. Adding to this confusion is when auditors
perform technically poor audits, thus within the audit expectations gap lies
what's called the performance gap. Suggestions for narrowing or managing
the audit expectations gap have included better education of the public on
the role of external auditors, improved training of auditors to control the
performance gap issue, and finally more publicly visible sanctions so when
auditors do not perform up to expectations the public can see that they
have been penalised for poor performance, thus helping to manage these
expectations.

Audit Evidence
Auditors should obtain sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base the audit opinion (ASA 500).
There are two major phrases of the standard:
1. Sufficient appropriate evidence.
The auditor must obtain evidence that is relevant, competent, and
timely and there must be a sufficient quantity of that evidence.
2. To be able to draw reasonable conclusions on which to base the audit
opinion.
The auditor cannot expect to be completely certain that the financial
statements are presented fairly but there must be persuasive evidence.
The collection of evidence gathered by the auditor provides the basis
for the auditor's opinion.

Sufficiency deals with the quantity of evidence. Appropriateness is the

viii Assurance and Forensic Accounting
 measure of the quality of the evidence, its relevance, reliability and
timeliness. What is sufficient and appropriate depends on the
circumstances, and is affected by assessments of inherent and control risk,
materiality, results from previous audits, results from other procedures,
and the source and reliability of information available.

Nature of Forensic Accounting

Accountants often perform an investigative role in disputed matters which
culminate into the production of an expert report and quite often, the
giving of expert evidence, hence the use of the term ‘forensic’. In other
words, forensic accountants produce information that can become
admissible evidence in court proceedings.
Accounting information that is admissible in evidence is therefore deemed
to be relevant and reliable by the court for the purposes of users who are
stakeholders in a particular dispute. This is consistent with the conceptual
attributes of accounting reports. Forensic accountants and auditors are
both concerned with identifying the existence of common risk factors that
could indicate the presence of fraud (see ASA240.A25m and the Fraud
Triangle = pressure, opportunity, rationalisation. More on this later).

Whilst audit practice and forensic accounting practice are both concerned
with the impact of fraud, both practices tackle the fraud problem from
different dimensions.

Fraud and Social Impact

This course includes the fraud offences of theft; obtaining property by
deception, and false accounting (including financial statement fraud) as
these feature prominently in survey studies and various corporate collapses.
Bribery is also another form of fraud. Whatever the offence, the elements
of proof that constitute the offence, need to be investigated and
established (proved) before the alleged offender can be charged by law
enforcement or sued by victims of crime. More on this later. As we shall
see, the impact of fraud on society is significant.
Standards Australia finds that:
 Fraud costs the Australian economy $3B per year
 The larger the organization, the more likely it will suffer
fraud/corruption
 Australian organizations are highly susceptible to fraud relative to the
global average
 Internal fraud accounts around 77% of incidents and value of loss

Topic 1 – An Overview of Assurance, Evidence Collection and Forensics Services in Society ix

 suffered
 Significant number of fraud matters detected not reported to law
enforcement
 Many Australian entities are ill-prepared to detect and prevent fraud.

Summary
This topic has provided a brief introduction to the key professional
accounting bodies, the accounting firms and the regulation under which
they operate. Also introduced are the auditing standard setting bodies and
the concerns over the audit expectations gap. In the past decade or so we
have seen financial collapses and economic strain, and it has been argued
that external auditing was part of the structure that went wrong. There are
many lessons that can be learned. One needs to look at the wider picture as
to understand the problems that manifest themselves within the auditing
profession. With the benefit of hindsight, going forward, the changes to the
regulatory regime of compliance and control needs to be re-evaluated to
determine if it has been very effective in improving audit quality.
Ultimately, the success of auditing is also to do with how it is perceived by
its key stakeholders. In the future, as the audit continues to evolve to meet
the changing demands of users, it will be judged on the value it provides to
society, as it needs to be seen as an 'adding value' service.

x Assurance and Forensic Accounting

References

Albrecht et al., (2019), Fraud Examination, 6th edition, Cengage.

AUASB (2006), ASA 240, ‘The Auditor's Responsibilities Relating to Fraud in an Audit
of a Financial Report’.

AUASB, 'Regulation Impact Statement', April 2006.

Commonwealth of Australia, Corporations Act 2001 (Cth).

Commonwealth of Australia, 'Corporate Law Economic Reform Program Proposals for

Reform (CLERP): Discussion Paper No. 9. Corporate Disclosure: Strengthening the
Financial Reporting Framework', September, 2002.

Commonwealth of Australia, 'Audit Quality in Australia: A Strategic Review', The

Treasury, March, 2010.

Houghton, K. Kend, M. and Jubb, C. (2013), "The CLERP 9 audit reforms:

Benefits and costs through the eyes of regulators, standard setters and
audit service suppliers", ABACUS, Vol. 49 No. 2, pp. 139-160.

Leung, Coram, Cooper and Richardson (2019) Audit and Assurance Services,
1st edition, Wiley.

Topic 1 – An Overview of Assurance, Evidence Collection and Forensics Services in Society xi