W1 Assurance, Auditing, The structure of the
profession: an overview
Chapter 1&2
Assurance engagement
‘An engagement in which a 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 outcome of the measurement or evaluation of an underlying subject
matter against criteria.’
-engagement: at least 2 persons
First party: use the information
Another party: provide information
Subject matter: financial statements
Criteria: Australian Accounting Standard
Five elements of Assurance Engagement
Three-party relationships:
1. Assurance practitioner (auditor)
2. Responsible party (client/preparer)
3. Intended user/ Stakeholders
Underlying subject matter (Financial reports)
Criteria (Audit standard)
Sufficient appropriate evidence (Bank statements & receipts)
A written assurance reports
Value in the assurance service
1. Independence
Users derive value from the knowledge that the assurance provider has no interest in the formation
other than for its usefulness
-no bias
-not be restricted by my own interest and concern
-friend with boss then may report something may or may not happened
2. Expertise
Assurers must have the competence to obtain sufficient relevant information to provide a
reasonable basis for their conclusions
Attestation and direct engagements
Attestation engagement
-requires a party other than the assurer to measure or evaluate the underlying subject matter
against the criteria. The assurer then measures or evaluates the underlying subject matter against
the criteria, and applies assurance skills and techniques to obtain sufficient appropriate evidence
about the outcome of this measurement or evaluation
Direct engagement
-the auditor directly measures or evaluates the underlying subject matter against the criteria
,Auditing
‘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.’
Systematic process - audits are structured activities
Objectivity - freedom from bias
Obtaining and evaluation 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
The Relationships among Auditing, Attestation, and Assurance Engagements
Ethical Principles
-Integrity
-Objectivity
-Professional competence and due care
-Confidentiality
-Professional Behavior
Demand for Assurance
1. Conflict of interest
Managers may present biased information, as they are also evaluated on the information
2. Consequences
Information provided forms the basis of many users' decisions
3. Complexity
Many users do not have the expertise required to determine the quality of information presented
-interpret the numbers in simpler terms
4. Remoteness
The separation of owners from management prevents users from assessing information quality
,Agency Relationship
The expectation gap: the gap between society's expectation of auditors and auditor's performance
as perceived by society
Three major issues in the expectation gap
1. Early warning by auditors of corporate failure
2. Auditor's responsibility for the detection and reporting of earnings management and fraud
3. The auditor's ability to communicate different levels of assurance (reasonable, moderate, none)
None - only check based on the list from the company, charge less
Moderate - collect more evidence (In my opinion)
Regulation of auditing and of the subject matter of audits
, Regulations of auditing
1. Australian Securities and Investments Commission (ASIC)
the administering authority for the Corporations Act 2001.
2. Companies Auditors Disciplinary Board (CADB)
determines whether a registered auditor or liquidator has failed to carry out his or her duties
properly or is not a fit and proper person to be registered.
Registered Company Auditor (RCA)
In order to be appointed as a company auditor under s 1280 of the Corporations Act 2001, a person
must:
• be ordinarily resident in Australia
• be a member of an approved accounting body
• be a graduate of a prescribed university or other prescribed institution in Australia, and have
passed a course in accounting and commercial law acceptable to ASIC
• have sufficient auditing experience
• be a fit and proper person.
Auditors are required to demonstrate on-the-job experience and have this certified by a current
RCA.
Financial Reporting Council (FRC)
A statutory body with the responsibility for the broad oversight of the accounting standard-setting
process, auditing standard setting and the monitoring of auditor independence
The Role of and Authority 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.
• Guidance Statements (GSs) provide guidance on procedural matters or industry-specific issues, but
do not establish new principles or amend existing standards.
• For audits conducted under the Corporations Act 2001, the auditing standards (ASAs) must be
applied, thus giving them legal authority.
The Auditing and Assurance Standards Board (AUASB)
The AUASB was reconstituted as an independent statutory body on 1 July 2004 and is responsible for
the development of auditing and assurance services standards.
• The Board consists of 11 members, 10 appointed by FRC, and a chair appointed by the
Treasurer.
• Responsibility for the final approval of auditing and assurance standards lies with parliament.
• The AUASB has a long-standing policy of convergence and harmonization with International
Standards on Auditing (ISAs).
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:
1. is in accordance with the law, including compliance with
accounting standards (s 296)
2. provides a true and fair view (s 297).
profession: an overview
Chapter 1&2
Assurance engagement
‘An engagement in which a 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 outcome of the measurement or evaluation of an underlying subject
matter against criteria.’
-engagement: at least 2 persons
First party: use the information
Another party: provide information
Subject matter: financial statements
Criteria: Australian Accounting Standard
Five elements of Assurance Engagement
Three-party relationships:
1. Assurance practitioner (auditor)
2. Responsible party (client/preparer)
3. Intended user/ Stakeholders
Underlying subject matter (Financial reports)
Criteria (Audit standard)
Sufficient appropriate evidence (Bank statements & receipts)
A written assurance reports
Value in the assurance service
1. Independence
Users derive value from the knowledge that the assurance provider has no interest in the formation
other than for its usefulness
-no bias
-not be restricted by my own interest and concern
-friend with boss then may report something may or may not happened
2. Expertise
Assurers must have the competence to obtain sufficient relevant information to provide a
reasonable basis for their conclusions
Attestation and direct engagements
Attestation engagement
-requires a party other than the assurer to measure or evaluate the underlying subject matter
against the criteria. The assurer then measures or evaluates the underlying subject matter against
the criteria, and applies assurance skills and techniques to obtain sufficient appropriate evidence
about the outcome of this measurement or evaluation
Direct engagement
-the auditor directly measures or evaluates the underlying subject matter against the criteria
,Auditing
‘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.’
Systematic process - audits are structured activities
Objectivity - freedom from bias
Obtaining and evaluation 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
The Relationships among Auditing, Attestation, and Assurance Engagements
Ethical Principles
-Integrity
-Objectivity
-Professional competence and due care
-Confidentiality
-Professional Behavior
Demand for Assurance
1. Conflict of interest
Managers may present biased information, as they are also evaluated on the information
2. Consequences
Information provided forms the basis of many users' decisions
3. Complexity
Many users do not have the expertise required to determine the quality of information presented
-interpret the numbers in simpler terms
4. Remoteness
The separation of owners from management prevents users from assessing information quality
,Agency Relationship
The expectation gap: the gap between society's expectation of auditors and auditor's performance
as perceived by society
Three major issues in the expectation gap
1. Early warning by auditors of corporate failure
2. Auditor's responsibility for the detection and reporting of earnings management and fraud
3. The auditor's ability to communicate different levels of assurance (reasonable, moderate, none)
None - only check based on the list from the company, charge less
Moderate - collect more evidence (In my opinion)
Regulation of auditing and of the subject matter of audits
, Regulations of auditing
1. Australian Securities and Investments Commission (ASIC)
the administering authority for the Corporations Act 2001.
2. Companies Auditors Disciplinary Board (CADB)
determines whether a registered auditor or liquidator has failed to carry out his or her duties
properly or is not a fit and proper person to be registered.
Registered Company Auditor (RCA)
In order to be appointed as a company auditor under s 1280 of the Corporations Act 2001, a person
must:
• be ordinarily resident in Australia
• be a member of an approved accounting body
• be a graduate of a prescribed university or other prescribed institution in Australia, and have
passed a course in accounting and commercial law acceptable to ASIC
• have sufficient auditing experience
• be a fit and proper person.
Auditors are required to demonstrate on-the-job experience and have this certified by a current
RCA.
Financial Reporting Council (FRC)
A statutory body with the responsibility for the broad oversight of the accounting standard-setting
process, auditing standard setting and the monitoring of auditor independence
The Role of and Authority 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.
• Guidance Statements (GSs) provide guidance on procedural matters or industry-specific issues, but
do not establish new principles or amend existing standards.
• For audits conducted under the Corporations Act 2001, the auditing standards (ASAs) must be
applied, thus giving them legal authority.
The Auditing and Assurance Standards Board (AUASB)
The AUASB was reconstituted as an independent statutory body on 1 July 2004 and is responsible for
the development of auditing and assurance services standards.
• The Board consists of 11 members, 10 appointed by FRC, and a chair appointed by the
Treasurer.
• Responsibility for the final approval of auditing and assurance standards lies with parliament.
• The AUASB has a long-standing policy of convergence and harmonization with International
Standards on Auditing (ISAs).
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:
1. is in accordance with the law, including compliance with
accounting standards (s 296)
2. provides a true and fair view (s 297).
