Professional Documents
Culture Documents
ADVANCED AUDITING
Week 1
Intros
Rob Vosslamber
rob.vosslamber@canterbury.ac.nz
ACCT356
Kia ora!
ACCT356
2
Today
Menu
1. Admin
2. Audit activities
3. Group assignment
Readings
On Learn
ACCT356
3
1. Admin
ACCT356
4
Course outline
Objectives of the course
Course requirements and assessment
Teaching arrangements
Textbooks etc. - XRB
Lecture and tutorial schedule
Student reps:
www.ucsa.org.nz/classreps
ACCT356
5
ACCT356
6
ACCT356
7
2. Audit activities
ACCT356
8
Audit vs review?
1. List the range and types of activity that may be
undertaken by an auditor.
ACCT356
06/05/2023 9
Audit vs. Review Engagement
Types of audit
“Assurance engagement – An engagement in which an assurance
practitioner aims to obtain sufficient appropriate evidence in
order to express a conclusion designed to enhance the degree
of confidence of the intended users other than the responsible
party about the subject matter information (that is, the outcome
of the measurement or evaluation of an underlying subject
matter against criteria). Each assurance engagement is
classified on two dimensions”:
◦ (a) Reasonable assurance engagement or Limited assurance
engagement
◦ (b) Attestation engagement or Direct engagement
10
Reasonable assurance engagement
An assurance engagement in which the assurance practitioner
reduces engagement risk to an acceptably low level in the
circumstances of the engagement as the basis for the assurance
practitioner’s conclusion. The assurance practitioner’s conclusion is
expressed in a form that conveys the assurance practitioner’s
opinion on the outcome of the measurement or evaluation of the
underlying subject matter against criteria.
(see XRB: Explanatory Guide AU4 Glossary of Terms)
ACCT356
11
“Attestation engagement – An assurance engagement in which a party
other than the assurance practitioner measures or evaluates the
underlying subject matter against the criteria. A party other than the
assurance practitioner also often presents the resulting subject matter
information in a report or statement. In some cases, however, the
subject matter information may be presented by the assurance
practitioner in the assurance report. In an attestation engagement, the
assurance practitioner’s conclusion addresses whether the subject
matter information is free from material misstatement. The assurance
practitioner’s conclusion may be phrased in terms of
a. The underlying subject matter and the applicable criteria;
b. The subject matter information, and the applicable criteria; or
c. A statement made by the appropriate party.”
(see XRB: Explanatory Guide AU4 Glossary of Terms)
ACCT356
12
“Direct engagement – An assurance engagement in which the
assurance practitioner measures or evaluates the underlying
subject matter against the applicable criteria and the assurance
practitioner presents the resulting subject matter information as
part of, or accompanying, the assurance report. In a direct
engagement, the assurance practitioner’s conclusion addresses
the reported outcome of the measurement or evaluation of the
underlying subject matter against the criteria.”
(see XRB: Explanatory Guide AU4 Glossary of Terms)
ACCT356
13
Audit vs. Review Engagement
Reasonable assurance engagement (i.e. an audit)
Level of risk: Acceptable in the circumstances of the engagement; higher than a reasonable
assurance engagement
15
Review engagements
The level of assurance engagement risk is higher in a limited
assurance engagement than in a reasonable assurance
engagement because they differ in the
Nature
Timing
Extent
of the procedures undertaken.
16
What is a Review engagement?
Process:
◦ Understanding the entity
◦ Considering materiality
◦ Making enquires with people responsible for
the management and financial control of the
organisation and applying analytical and other
review procedures
◦ Reporting
ACCT356
17
What is a Review engagement?
Objective of a review engagement
In a review of financial statements, the assurance practitioner
expresses a conclusion that is designed to enhance the degree of
confidence of intended users regarding the preparation of an
entity’s financial statements in accordance with an applicable
financial reporting framework. The assurance practitioner’s
conclusion is based on the assurance practitioner obtaining limited
assurance. The assurance practitioner’s report includes a
description of the nature of a review engagement as context for the
readers of the report to be able to understand the conclusion.
ACCT356
18
What is a Review engagement?
ISRE (NZ) 2400 Review of Historical Financial Statements
Performed by an Assurance Practitioner who is Not the
Auditor of the Entity
Para. 6: A review is designed to enhance the degree of confidence of
intended users, based on obtaining limited assurance.
Para. 7: The assurance practitioner performs primarily enquiry and
analytical procedures
Para. 8: If matters uncovered that suggest the accounts may be materially
misstated, then perform additional procedures
Para. 21: Must meet ethical requirements, including independence
Para. 24f: Quality control
Para. 43f. Materiality
Para. 45ff: Planning
Para. 69ff: Reporting
Para. 93ff: Documentation
ACCT356
19
INDEPENDENT ASSURANCE PRACTITIONER’S REVIEW REPORT
[Appropriate Addressee]
Report on the Financial Statements
We have reviewed the accompanying financial statements of ABC Entity, which comprise the statement of financial position as at
December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and a summary of significant accounting policies and other explanatory information.
Directors’ Responsibility for the Financial Statements
The directors are responsible for the preparation and fair presentation of these financial statements in accordance with New Zealand
equivalents to International Financial Reporting Standards Reduced Disclosure Regime, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud
or error.
Assurance Practitioner’s Responsibility
Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our review in accordance with
International Standard on Review Engagements (New Zealand) (ISRE (NZ)) 2400, Review of Historical Financial Statements
Performed by an Assurance Practitioner who is not the Auditor of the Entity. ISRE (NZ) 2400 requires us to conclude whether
anything has come to our attention that causes us to believe that the financial statements, taken as a whole, are not prepared in all
material respects in accordance with the applicable financial reporting framework. This Standard also requires us to comply with
relevant ethical requirements.
A review of financial statements in accordance with ISRE (NZ) 2400 is a limited assurance engagement. The assurance practitioner
performs procedures, primarily consisting of making enquiries of management and others within the entity, as appropriate, and
applying analytical procedures, and evaluates the evidence obtained.
ACCT356
20
A review of financial statements in accordance with ISRE (NZ) 2400 is a limited assurance
engagement. The assurance practitioner performs procedures, primarily consisting of making
enquiries of management and others within the entity, as appropriate, and applying analytical
procedures, and evaluates the evidence obtained.
The procedures performed in a review are substantially less than those performed in an audit
conducted in accordance with International Standards on Auditing (New Zealand). Accordingly, we
do not express an audit opinion on these financial statements.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that these financial
statements do not present fairly, in all material respects, (or do not give a true and fair view of) the
financial position of ABC Entity as at December 31, 20X1, and (of) its financial performance and
cash flows for the year then ended, in accordance with the New Zealand equivalents to International
Financial Reporting Standards Reduced Disclosure Regime.
Report on Other Legal and Regulatory Requirements
[Form and content of this section of the assurance practitioner’s report will vary depending on the
nature of the assurance practitioner’s other reporting responsibilities.]
[Assurance practitioner’s signature]
[Date of the assurance practitioner’s report]
[Assurance practitioner’s address]
ACCT356
21
So what are the issues?
Audit vs. Review Engagement
Rationale for assurance
Level of audit risk
Level of work undertaken
Level of fees
Level of compliance to ISA (NZ)s
Relevance
Regulatory requirements
Effect on auditee’s reputation, cost of borrowing
etc
ACCT356
22
Note also:
NZ ISRE 2410: Review of Financial
Statements Performed by the Independent
Auditor of the Entity
ACCT356
23
Audit vs. Review
When would you use an Audit ?
ACCT356
24
Case Study – Feltex Carpets
Background
◦ 22 September 2006 marked the end of over 80 years
of business for Feltex Carpet Limited (FCL)
◦ 8,000 shareholders left holding worthless shares.
◦ FCL had listed on the New Zealand Stock Exchange
(NZX) in May 2004 (some 27 months prior) where
they secured approximately $250 million, mainly
from “mum and dad” investors (Newberry, 2007)
◦ Cash burn of $167,000 a day and according to the
FCL directors “operating on a knife edge”
(Voughan, 2009b)
ACCT356
25
Case Study – Feltex Carpets
FCL’s failure was blamed on:
◦ Cheap imports from China
◦ Aging asset base
◦ Highly leveraged balance sheet
Purchase of Shaw Industries in May 2000 for $112M (with
debt)
◦ Directors claimed:
Had taken reasonable care to ensure compliance with FRA 1993
Auditors:
◦ Well let us see…
ACCT356
28
Feltex auditor breached accounting code: tribunal
4:09 PM Monday Sep 27, 2010
NZ Herald
The New Zealand partner of Ernst & Young who signed off a review
of the 2005 six month accounts of failed carpet maker Feltex, has been
found guilty of a charge of breaching an accounting industry code of
ethics.
He was ordered to pay $150,000 costs, but the tribunal is not imposing
a penalty (per Stuff.co.nz)
ACCT356
29
Feltex auditor breached accounting code: tribunal
4:09 PM Monday Sep 27, 2010
HZ Herald
“In our view the finding of guilt together with the considerable
level of present and prospective publicity is in itself a sufficiently
punitive result and gives appropriate effect to the Institute's
responsibility to maintain professional standards,” the tribunal said.
The Securities Commission had earlier said it did not consider the
work done by Ernst & Young and the responsible partner Fulton, in
their review of the accounts to December 31, 2005, met the
required standards of a review engagement
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&obje
ctid=10676478
ACCT356
30
Audit assignment
ACCT356
31
ACCT356
32
ACCT356
33
ACCT356
34
ACCT356
35