AUDITING AND ASSURANCE SERVICES IN AUSTRALIA. AUTHORS: GAY & SIMNETT

Transcription

1 AUDITING AND ASSURANCE SERVICES IN AUSTRALIA. AUTHORS: GAY & SIMNETT Prepared by Roger Simnett Copyright McGraw-Hill

2 PART ONE: The Auditing and Assurance Services Profession 2

3 CHAPTER 1 ASSURANCE AND AUDITING: AN OVERVIEW 3

4 OVERVIEW OF CURRENT ENVIRONMENT Crisis of confidence in current financial system. Need to consider role played by Accounting standards Corporate governance Ethics Independence of auditors Business complexity and globalisation. 4

5 AUDITING PROFESSION S RESPONSE TO CRISIS OF CONFIDENCE Numerous reviews and committees Auditing standards revisited Auditing independence revisited Auditor s role in corporate governance considered 5

6 THE ASSURANCE FRAMEWORK Many parties provide reports to users as an aid to decision-making. Reports may potentially be biased due to the vested interests of the report providers. Users may demand that credibility of report be enhanced by having someone who is both independent and expert examine the report. 6

7 OBJECTIVE OF ASSURANCE ENGAGEMENT for a professional accountant to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about a subject matter. ISAE 100/AUS 108 para.4 7

8 Fig. 1.1 Diagrammatic summary of an assurance service engagement (p. 9) 8

9 FORMS OF ASSURANCE SERVICES Audit engagements high level of assurance, positive expression of opinion. Review engagements moderate level of assurance, negative expression of opinion. Agreed-upon procedures engagements no assurance, report of factual findings. 9

10 ATTEST V DIRECT REPORTING Audit and review engagements can involve either an attest or direct reporting engagement. Attest engagement auditor issues an opinion on written assertions made by party responsible for the subject matter. Direct reporting engagement auditor issues an opinion directly on the subject matter, (no written assertion is made by the party responsible for the subject matter). 10

11 AUDITING DEFINED A Statement of Basic Auditing Concepts (ASOBAC) (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. 11

12 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; and Communicating results the results must be communicated to interested parties. 12

13 ATTRIBUTES OF ACCOUNTING INFORMATION Relevance Reliability Comparability Understandability These four attributes of accounting information provide the basis for the audit function. 13

14 DEMAND FOR ASSURANCE Arises because users are not in a position to establish the credibility of the information they are presented with, 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 having assessing information quality. 14

15 Hypotheses relating to demand for assurance: 1. Agency theory (stewardship hypothesis) 2. Information hypothesis 3. Insurance hypothesis 15

16 Investors Entrust resources Required periodic reporting on use of resources Managers Verification by independent expert Fig. 1.3 Simple diagram of agency relationship between managers and investors (p.16) 16

17 HISTORY OF THE AUDIT FUNCTION Audits have been performed at least since the thirteenth century. Audits until the early 1900s focused on the company s solvency and the detection of fraud and error. Since the 1940s: the overall objective of auditing has been the expression of an opinion as to whether the financial report is materially misstated. Audits from early 1900s to 1940s: added objectives of verification of financial report accuracy and attestation to financial report credibility. 17

18 AUDIT APPROACHES SINCE THE 1940s I These have evolved over time: Balance-sheet approach involved auditor auditing the assets and liabilities with little emphasis on profit and loss account items. Transactions cycle approach emphasised the review of controls which operated within each transaction cycle and provided for limited testing of balance sheet items. 18

19 AUDIT APPROACHES SINCE 1940s II Financial risk analysis approach 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. Strategic business risk approach as well as financial risk, auditor considers business strategy, associated business risks, and management s plans to respond to changes in the business environment. 19

20 THE AUDITOR, CLIENT AND PUBLIC RELATIONSHIP The auditor s primary reporting responsibility is to resource providers of the client entity; however the client entity usually engages the auditor and pays the auditor s 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/her duties. 20

21 THE EXPECTATION GAP Defined as: the gap between society s expectations of auditors and auditors performance as perceived by society. Three components: The reasonableness gap: gap between what society expects auditors to achieve and what they can reasonably be expected to accomplish; The performance gap arising from deficient standards; and The performance gap arising from deficient performance by auditors. 21

22 Fig. 1.5 Structure of the gap between audit expectation and audit performance (p.26) 22

23 FOUR MAJOR ISSUES IN EXPECTATION GAP The nature and meaning of audit report messages; Early warning by auditors of corporate failure; Auditor s responsibility for the detection and reporting of fraud; and Auditor s ability to communicate different levels of assurance. 23

24 THE ROLE OF AUDITING STANDARDS Auditing standards (AUSs) in Australia are developed by the Auditing and Assurance Standards Board (AuASB) of the AARF. In most cases AUSs reflect International Standards on Auditing (ISAs). Prescribe the basic principles and essential procedures which govern the professional conduct of an auditor. Mandatory for members of the two accounting bodies, but currently do not have legislative backing. Failure to observe these standards may expose a member to investigation and disciplinary action from their accounting body (APS1.1). 24

25 AUSs & AGSs Auditing Standards (AUS) outline basic principles and essential procedures which are identified with black letter (bold type). Black letter requirements are mandatory for auditor to follow if information is material, except in rare and exceptional circumstances. Rare and exceptional circumstances include where option for departure identified within basic principle or essential procedure (e.g. AUS 506 re Attendance at stocktake). 25

26 AUDITS UNDER THE CORPORATIONS ACT 2001 Management responsible for the preparation and presentation of appropriate accounts. Accounts to be accompanied by a report of an independent auditor appointed by the shareholders. Corporations Act 2001 (ss ) indicates that directors must prepare statements of financial position and performance, directors declaration and other related notes and reports, together with any other information or explanation as is necessary to give a true and fair view. 26

27 OTHER APPLICATIONS OF THE ASSURANCE FUNCTION Evidence-gathering methods of auditing also employable in audit of activities other than financial reports. Compliance audit examination for the purpose of reporting on Performance audit analyses organisation structure, internal systems, work flow, and managerial performance: efficiency, effectiveness and economy of these items. Comprehensive audit usually includes components of compliance, performance and financial report audits. Internal audit audits performed by staff of the entity as a service to management. Forensic audit investigate audit, associated many times with fraud detection. legality and control of operations. 27

28 CRITICAL PERSPECTIVE OF CURRENT ISSUES Expanded range of services provided by auditing firms what is the impact on independence? Strategic business risk audit methodologies are these an attempt to sell other services, and is management becoming the client of the audit rather than the shareholder? Effect of globalisation is business becoming too complex and can the auditor rely on auditing standards? Independence from the three issues above, is the auditor truly independent? 28