Chapter 1

Audit and Other Assurance

Engagements

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Key to chapter content ICONS

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CHAPTER 1: Audit and Other Assurance Engagements

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Activity

What do you think audit is?

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External Audit

§ Ownership and management are separated.

§ Shareholders require independent verification

that what management report is true.

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External Audit

The objective of an external audit is to express an

opinion on whether the financial statements are
prepared, in all material respects, in accordance with
an identified reporting framework and relevant law.

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Internal Audit

What do you think internal audit is?

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Internal Audit

§ Internal audit – an independent, objective

assurance and consulting activity designed to add
value and improve an organisation's operations.

§ It helps an organisation accomplish its objectives

by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk
management, control, and governance processes.

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Assurance Services

§ Assurance services increase the quality of

information, or its context, for decision makers.

§ Both internal audit and external audit are

examples of assurance services.

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External Audit
Elements

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Relationship between Directors and Shareholders

Stewardship

Accountability Agency

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Stewardship

Stewardship is the practice of managing another

person's property.

Directors and other managers of an entity have the

responsibility of stewardship for the property of that
entity, which is owned by the shareholders.

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Agency

An agent is an individual (or another entity)

employed or used to provide a particular service.

The individual using the agent is the principal.

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Accountability

Accountability – where one party is held

responsible (answerable) to another party for its
actions.

Agents are accountable to principals.

Management (directors) are agents of shareholders,

and accountable to them.

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Audit of Financial Statements – Objective
not say sth wrong, just say it inappropriate

§ To enable an independent auditor to obtain reasonable

assurance about whether the financial statements are
free from material misstatement, whether due to fraud
or error; and

§ To express an opinion on whether the financial

statements are prepared, in all material respects, in
accordance with an identified financial reporting
framework.
The auditor’s report contains this opinion.
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Contents of an Independent Auditor’s Report

§ Addressee (recipient)
§ Opinion
Discussed in detail in
§ Basis for Opinion
Chapter 30
§ Key Audit Matters
§ Other Information
§ Responsibilities of Management
and Those Charged with Governance
§ Auditor’s Responsibilities for the Audit
§ Signature and date
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Management Responsibilities

Responsible for the preparation and fair presentation of the

financial statements. This includes:

§ designing, implementing and maintaining the necessary

internal control;
§ selecting and applying appropriate accounting policies;
and
§ making accounting estimates that are reasonable in the
circumstances.

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Auditor’s Responsibilities

The auditor is responsible for expressing an opinion on

the financial statements based on the audit.

The auditor is not responsible for the form and content of

the financial statements (this is management’s
responsibility).

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International Standards on Auditing (ISAs)

§ ISAs are issued by the International Audit and Assurance

Standards Board (IAASB).

§ They are a set of professional standards for the

performance of audits of historical financial information.

Each ISA has:

§ an introduction, objectives and definitions;
§ requirements; and
§ application and other explanatory material.
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Reasonable Assurance

§ An auditor provides a high level of assurance that the information

subject to audit is free of material misstatement.

§ The evidence obtained from procedures performed must be

sufficient and appropriate to provide a basis for his opinion.

§ An auditor cannot obtain absolute (e.g. 100%) assurance, and

cannot guarantee that the financial statements are free of
material misstatement.

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Materiality

§ Information is material if its omission or misstatement

could influence decisions that the primary users of
general-purpose financial reports make based on those
reports.

§ It is the relative significance of the matter.

§ Risks of undetected material misstatements must be

minimised by auditor.

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Professional Judgement

Required for every stage of audit process:

§ Interpreting and applying ethics and ISAs.

§ Dealing with risks of material misstatement
§ Determining audit scope and audit plan
§ Drawing conclusions from evidence.

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Professional Scepticism

Professional scepticism – an attitude that includes a

questioning mind and a critical assessment of evidence.

§ It recognises that circumstances may exist that cause

material misstatements in the financial statements

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“True and Fair View”
Not defined in ISAs. General guidelines:

§ Information is true relates to factual accuracy

(considering materiality).

§ Information is fair, if presentation is free from bias and

represents commercial substance.

Usually, it means that the appropriate financial framework

(i.e. IFRS) is complied with.
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Audit
Cycle

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Audit
Approaches

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Assurance Engagements

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.

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Guidance on Assurance Engagements

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External Audit Elements
Subject
Matter

Assurance Three-party
Report Relationship

Evidence Criteria
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Reasonable Assurance Engagement

§ High level of assurance

§ Conclusion expressed in a “positive” form
§ Sufficient appropriate evidence obtained

"In our opinion the financial statements present fairly, in all

material respects (give a true and fair view of) …"

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Limited Assurance Engagement

§ Limited or lower level of assurance

§ Conclusion expressed in a “negative” form
§ Lower level of work performed
§ Usually for review engagements

"Nothing has come to our attention that causes us to

believe that the financial statements do not present fairly,
in all material respects (give a true and fair view of …"

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Chapter 1: Summary
§ Assurance services improve the quality of information for decision-makers.
§ The objective of an audit is:
§ to obtain reasonable assurance that the financial statements are free from material
misstatement; and
§ to express an opinion on whether the financial statements are properly prepared in
accordance with a financial reporting framework.
§ Management is responsible for the financial statements.
§ The auditor is responsible for expressing an opinion on the financial statements.
§ An audit should be conducted in accordance with ISAs and in compliance with the
IESBA's Code of Ethics for Professional Accountants.
§ Key concepts in auditing are reasonable assurance, materiality, professional judgment,
professional scepticism and “presents fairly in all material respects."
§ An assurance engagement has a three-party relationship, an appropriate subject matter,
suitable criteria, sufficient appropriate evidence and a written assurance report.
§ Assurance engagements provide either reasonable (positive/high) or limited
(negative/lower) assurance.
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 Chapter 1: Practice questions

Study Question Bank

Responsibilities 10 mins

For AA
ØAttempt the Study Question Bank questions listed above after studying this chapter
ØAttempt Revision Question Bank questions in your revision phase, after studying all chapters

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Thank you

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