PowerPoint Slides to

accompany
Auditing and Assurance
Services in Australia 4th ed.
By
Grant Gay & Roger Simnett

Slides prepared by Roger Simnett

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-1
Slides prepared by Roger Simnett
 Part One

The Auditing and

Assurance Services
Profession

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-2
Slides prepared by Roger Simnett
 Chapter 1

Assurance and auditing:

an overview

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-3
Slides prepared by Roger Simnett
 Learning objective 1:
The framework for assurance
engagements
Many parties provide reports to users as
an aid to making decisions.
Reports are potentially biased due
to the vested interests of the report providers.
Users may demand that the credibility of the
report be enhanced by having an independent expert
examine it.
Financial statements are just one type the
most common of report that can be assured.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-4
Slides prepared by Roger Simnett
Definition of assurance engagement
Assurance engagement:

an 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.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-5
Slides prepared by Roger Simnett
 Diagram of assurance engagement

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 Five elements of assurance
engagement
1. Three-party relationships:
Practitioner (auditor)
Responsible party (preparer)
Intended user

2. Subject matter

3. Suitable criteria

4. Sufficient appropriate evidence

5. Written assurance report

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-7
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 Why is there value in the assurance
service?
Independence:
Users derive value from the knowledge that the
assurance provider has no interest in the information
other than for its usefulness.
Expertise:
Assurers must have the competence
to obtain sufficient relevant information to provide
a reasonable basis for their conclusions.
Requires professional judgement and professional
scepticism.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-8
Slides prepared by Roger Simnett
 Professional judgement and
professional scepticism
Professional judgement:
Users derive value from the knowledge that the
assurance provider has no interest in the information
other than for its usefulness.
Professional scepticism:
An attitude that includes a questioning mind, being alert
to conditions indicating possible misstatement and
critically assessing audit evidence.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-9
Slides prepared by Roger Simnett
Learning objective 2:
Structure of assurance standards and pronouncements

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Slides prepared by Roger Simnett
 Levels of assurance

For any subject matter, two levels of

assurance can be provided:
1. Reasonable assurance
2. Limited assurance.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-11
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 Reasonable assurance (Figure 1.3)

(cont.)
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PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-12
Slides prepared by Roger Simnett
 Limited assurance (Figure 1.3 cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-13
Slides prepared by Roger Simnett
 Level of assurance on financial
statements
Reasonable assurance engagements are commonly
called 'audit engagements'.
Reasonable assurance = positive expression of
opinion.
Limited assurance engagements are commonly
called 'review engagements'.
Limited assurance = negative expression of opinion.
There are also engagements that provide
no assurance:
Agreed-upon procedures engagements and reports of
factual findings.
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-14
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 Attest v direct reporting

Audit and review engagements can involve

either an attest or a direct reporting engagement.

Attest reporting engagement:

The auditor issues an opinion on written assertions made by
the party responsible for the subject matter.

Direct reporting assurance engagement:

The auditor issues an opinion directly on the subject
matter (no written assertion is made by
the party responsible for the subject matter).

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-15
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 Learning objective 3:
Auditing defined

A Statement of Basic Auditing Concepts

(ASOBAC the American Accounting
Association) defines 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.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-16
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 Auditing defined (cont.)

The important parts of this definition:

Systematic process audits are structured activities
Objectivity freedom from bias
Obtaining and evaluating evidence allows the auditor
to determine the support for assertions or representations
Assertions about economic actions and events
describes the subject matter of an audit
Degree of correspondence established criteria
the purpose of the audit is to determine conformity
with some specified criteria
Communicating results the results must be
communicated to interested parties

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-17
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 Learning objective 4:
Fundamental principles underlying
an audit
The International and Australian Auditing Standards Boards
released a draft paper in which they outlined possible
fundamental principles underlying an audit. These
principles should:
Underpin the objective(s) of an audit, and help
drive the conduct of the auditor in using professional judgment to
meet the professional requirements
of the auditing standards
Be easily understood, both by auditors and other
readers of auditing standards
Be universally applicable to all audits
Entrench the expectations that auditors are
expected to accept and abide by.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-18
Slides prepared by Roger Simnett
 Ethical principles
Contained in national and international codes of
ethics:
Integrity

Objectivity

Professional competence and due care

Confidentiality

Professional behaviour

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-19
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 Fundamental auditing principles
Knowledge
Responsibility
Quality control
Rigour and scepticism
Professional judgement
Evidence
Documentation
Communication
Association
Reporting

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-20
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 Learning objective 5:
Attributes of accounting information
From AASB/IASB framework, the following four
attributes of accounting information provide the basis
for the audit function:
Relevance

Reliability

Comparability

True and fair presentation

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-21
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 Learning objective 6:
Demand for assurance
Demand arises because users are not in a position
to establish the credibility of the information they
are presented with. This may be due to:
Conflict of interest managers may present biased
information, as they are also evaluated on the information.
Consequence information provided forms the basis
of many users decisions.
Complexity many users do not have the expertise
required to determine the quality of information presented.
Remoteness the separation of owners from management
prevents users from assessing information quality.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-22
Slides prepared by Roger Simnett
 Hypotheses explaining demand for
assurance

1. Agency theory (stewardship hypothesis)

2. Information hypothesis

3. Insurance hypothesis

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 Agency theory

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 Learning objective 7:
Other benefits of assurance
An assurance service may also result in one or both
of the following:

Recommendations by the assurance provider to improve

the efficiency and effectiveness of operations; and/or

A positive influence on the behaviour of people whose

activities are being assured.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-25
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 Learning objective 8:
The evolution of the audit function
Audits have been performed since at least the
thirteenth century.
Until the early 1900s, audits focused on a companys
solvency and the detection of fraud and error.
Audits from early 1900s to 1940s added objectives
of verification of financial report accuracy and
attestation to financial report credibility.
Since the 1940s, the overall objective of auditing
has been the expression of an opinion as to
whether the financial report is materially misstated.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-26
Slides prepared by Roger Simnett
 Approaches to Auditing

These have evolved over time:

Statement of financial position approach this involved
the auditor auditing the assets and liabilities with little
emphasis on profit and loss account items.

Transactions-cycle approach this emphasised

the review of controls that operated within each transaction
cycle and provided for limited testing of balance sheet items.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-27
Slides prepared by Roger Simnett
 More recent audit approaches

Financial risk approach

The auditor considers relative financial risk and materiality
in planning the audit, such that audit work is concentrated
in areas where there is a higher risk of misstatement.

Business risk approach (audit risk approach)

As well as financial risk, the auditor considers business
strategy, associated business risks, and managements
plans to respond to changes in the business environment.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-28
Slides prepared by Roger Simnett
 Example of business risk approach
Refer Example 1.1 on page 13 of textbook.
The auditor uses a risk-based assertion-based methodology in
undertaking the audit. For example, the assertions that
management are implicitly making by recording an inventory
balance of $1 million in the statement of financial position are:
Inventory of $1 million exists (existence);
The entity has the rights of ownership of this inventory
(rights and obligations);
All inventory that should have been recorded has been
recorded (completeness); and
Inventory has been recorded in the financial report at the
appropriate value, and any resulting valuation adjustment
(such as obsolescence) has been correctly recorded
(valuation and allocation).

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-29
Slides prepared by Roger Simnett
 Example of business risk approach (cont.)
The auditor uses a risk-based methodology to identify risks of
misstatement and relates these through to assertions
(Chapters 68). For example, consider that the auditor
identifies major risk as entity wishing to overstate profit. They
can achieve this by overstating inventory, which understates
cost of goods sold (if goods are in inventory, they are not
sold). The auditor assesses how entity is likely to achieve this
overstatement, and concentrates their audit attention on the
related assertions.
In this example, two ways of achieving overstatement of
inventory are to include inventory that does not exist (for
example, goods that have been sold) or overstate valuation of
the inventory items included in the statement of financial
position (valuation and allocation). The auditor then uses
specific procedures to test assertions at risk (Chapters 9-11).

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-30
Slides prepared by Roger Simnett
 Learning objective 9:
The auditorclientpublic relationship
The auditors primary reporting responsibility
is to resource providers of the client entity; however,
the client entity usually engages the auditor and pays
the auditors fees.
The auditor also discusses the audit findings
with management prior to releasing information
to the resource providers.
In order to combat pressures on independence
and objectivity, the auditing profession has
issued a series of ethical rulings and professional
standards to guide the auditor in the conduct
of his or her duties.
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-31
Slides prepared by Roger Simnett
 Learning objective 10:
Expectation gap
Defined as: the gap between societys expectations
of auditors and auditors performance as perceived
by society.

There are 3 components of the expectation gap:

1. The reasonableness gap between what society
expects auditors to achieve and what they can
reasonably be expected to accomplish.
2. The performance gap arising from deficient
standards.
3. The performance gap arising from deficient
performance by auditors.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-32
Slides prepared by Roger Simnett
 The gap between audit expectation
and audit performance

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-33
Slides prepared by Roger Simnett
 Four major issues in the expectation
gap

1. The nature and meaning of audit report messages

2. Early warning by auditors of corporate failure

3. Auditors responsibility for the detection and

reporting of earnings management and fraud

4. The auditors ability to communicate different levels

of assurance

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-34
Slides prepared by Roger Simnett
 Learning objective 11:
The role of auditing standards
Auditing standards in Australia are developed by
the Auditing and Assurance Standards Board
(AUASB).

The standards prescribe the basic principles and

essential procedures governing the conduct of an
auditor.

For audits conducted under the Corporations Act

2001, the auditing standards (ASAs) must be
applied, thus giving them legal authority.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-35
Slides prepared by Roger Simnett
 The role of auditing standards (cont.)
Guidance Statements (GSs) or Auditing Guidance
Statements (AGSs): provide guidance on
procedural matters or industry-specific issues, but
do not establish new principles or amend existing
standards.
Professional obligations extend application of
standards to all other audit and assurance
engagements by members of professional bodies.
Failure to observe these standards may expose
a member to investigation and disciplinary action
from the Australian Securities and Investments
Commission (ASIC).
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-36
Slides prepared by Roger Simnett
 Authority of auditing standards

Auditing standards applying to audits and reviews

of financial reports prepared in accordance with the
Corporations Act 2001 :
Australian auditing standards relating to these
audits are now designated as ASAs, and have
the same numbering as the equivalent ISAs.

Note: there are still a number of standards designated as

AUSs, which relate to frameworks or assurance
engagements on other than financial reports prepared in
accordance with the Corporations Act 2001.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-37
Slides prepared by Roger Simnett
 Learning objective 12:
Audits under Corporations Act 2001
Management is responsible for the preparation
and presentation of appropriate accounts. Accounts
are to be accompanied by a report of an independent
auditor appointed by the shareholders.
The Corporations Act 2001 (ss 292306) indicates
that directors must prepare a financial report (income
statement, balance sheet, statement of changes in
equity cash flow statement, directors declaration
and other related notes and reports), together with
any other information or explanation necessary to
give a true and fair view.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-38
Slides prepared by Roger Simnett
 Auditors responsibilities under
the Corporations Act 2001
Auditors are responsible for reporting to company
members on the directors financial report presented
at the AGM.
They say whether the financial report:

Is in accordance with the law, including compliance

with accounting standards (s 296)

Provides a true and fair view (s 297).

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-39
Slides prepared by Roger Simnett
 Learning objective 13:
Other applications of the assurance
function
Evidence-gathering methods of auditing are
also employable in the audit of activities other
than financial reports.
Compliance audit:
Examination for the purpose of reporting on legality and
control of operations.
Performance audit:
Analyses organisation structure, internal systems,
workflow and managerial performance efficiency,
effectiveness and economy of these items.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-40
Slides prepared by Roger Simnett
 Other applications of the assurance
function (cont.)
Comprehensive audit:
Usually includes components of compliance, performance
and financial report audits.
Internal audit:
Audits performed by employees of the entity as a part of
the entitys risk management process.
Forensic audit:
Associated many times with fraud detection.
Assurance on subject matter other than
historical financial information:
Including prospective financial information, internal controls
and sustainability and carbon emissions reports.

Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett 1-41
Slides prepared by Roger Simnett