ACCT3600 NOTES
WEEK 1: INTRODUCTION
WHAT IS AN AUDIT?
ASSURANCE ENGAGEMENTS
• People who are responsible for a specific task (called responsible parties or managers) need to account for their
performance with respect to that task
• There may be many groups who will rely on this accounting for performance as an aid to their decision making
• Example:
o Shareholders relying on financial reports produced by companies’ management
o Government agencies relying on reports produced by entities to account for environmental considerations
o Parents relying on information produced by schools or information contained on websites when deciding where
to send their children
• Assurance engagement is defined as ‘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’
• Five elements of an assurance engagement:
o Three-party relationship (assurance practitioner, responsible party, intended users)
o Underlying subject matter
o Criteria
o Sufficient appropriate evidence
o A written assurance report
TYPES OF ASSURANCE ENGAGEMENTS
• Reasonable assurance engagements
o For assurance services on historical financial information, a reasonable assurance engagement is termed an
“audit”.
• Limited assurance engagements
o For assurance services on historical financial information, a limited assurance engagement is termed a “review”.
• Agreed-upon procedures
o The auditor does not have the discretion to undertake evidence-collection procedures outside those that have
been agreed upon
o The auditor only issues a report of factual findings, in which no conclusion is communicated and which
therefore expresses no assurance
o The assurance framework does not cover agreed-upon procedures engagements, where there is no conclusion
conveying a level of assurance
o Not deemed to be of an assurance nature
• Difference between reasonable and limited assurance engagements
1
,AUDITING
• Definition:
o 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
• Objectives:
o To obtain reasonable assurance about whether the financial report as a whole is free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report
is prepared, in all material respects, in accordance with an applicable financial reporting framework; and
o To report on the financial report, and communicate as required by the Australian Auditing Standards (ASAs), in
accordance with the auditor’s findings
WHY THERE IS A NEED FOR AUDITING SERVICES?
• Conflict of interest – preparers and users
• Consequence
• Complexity of information
• Remoteness of owners
o Agency theory / stewardship hypothesis
o Information hypothesis
o Insurance hypothesis
HOW IS THE AUDIT PROFESSION STRUCTURED?
AGENCY RELATIONSHIPS AND USERS
AGENCY
USERS
2
,THE ETHICAL REQUIREMENTS OF THE AUDIT PROFESSION
RESPONSIBILITIES OF AUDITORS, CORPORATIONS ACT 2001
• Responsibilities of auditors (section 308)
o Report to the members of the company on the financial report presented by the directors at the annual general
meeting
o Report an opinion as to whether the financial report is in accordance with the law, including compliance with
accounting standards, and provides a true and fair view
• Responsibilities of directors (section 292-306)
o Prepare annually a financial report and any other information or explanation as is necessary to give a true and
fair view and ensure that the financial report is audited
o Ensure that the financial report is prepared in accordance with the accounting standards and gives a true and fair
view
o Whether there are reasonable rounds to believe that the company will be able to pay its debts as and when they
become due and payable
• Which of the following statements best describes the term ‘assurance services’?
o Services designed to express an independent opinion on the truth and fairness of a financial report
o Services designed to provide confidence as to the integrity and security of e-commerce business to consumers
undertaking internet transactions
o Independent professional services that improve the quality of information for decision makers
o Services that result in better outcomes through the improvement of operation
• Answer:
o Independent professional services that improve the quality of information for decision makers
• The subject matter of an assurance engagement may be:
o financial position and performance
o systems and processes
o non-financial performance
o All of the given answers are correct
• Answer:
o All of the given answers are correct
CERTIFICATIONS OF THE AUDITOR
• The audited financial statements of a publicly listed company (a tier 1 entity) have a number of certifications singed by
the external auditor:
o The Audit Report to the members
o The Renumeration Report, and
o The Auditor’s Declaration of Independence
• We will work through the purpose of each (refer material uploaded to Week 1 on Canvas
REGULATION OF AUDITING
3
, • Statutory regulation
o Australian Securities and Investments Commission (ASIC) Act 2001 establishes Financial Reporting Council
(FRC) which oversees operations of Auditing and Assurance Standards Board (AUASB) who issues Australian
Auditing Standards (ASAs) based on International Standards on Auditing (ISAs) issued by International
Auditing and Assurance Standards Board (IAASB)
o The ASAs are mostly legislative instruments enforceable under Corporations Act administered by ASIC which
can apply to Companies Auditors and Liquidators Disciplinary Board (CALDB) to determine whether auditors
or liquidators have breached the Corporations Act 2001
• Professional regulation
o Chartered Accountants Australia and New Zealand (ICAA), CPA Australia and Institute of Public Accountants
(IPA) established the Accounting Professional and Ethical Standards Board (APESB) as an independent body to
set ethical standards to audits and assurance services carried out by members of the professional accounting
bodies
o The APESB issues APES110 Code of Ethics for Professional Accountants
o ASAs require compliance with relevant ethical requirements
ETHICS
• APES 110 Code of Ethics for Professional Accountants sets out the main ethical pronouncements for members of
Chartered Accountants ANZ, CPA Australia and the IPA
• APES 110 section 100.1 states that a distinguishing mark of the audit profession is its acceptance of the responsibility to
act in the public interest
o The public interest principle recognises that conflicts occur between the various stakeholder interest, and that
when such conflict occur, the auditor’s primary responsibility is to the public interest, not to himself or herself
or to the client
• Five fundamental principles (APES 110 Section 100.5)
THE IMPORTANCE OF INDEPENDENCE TO AUDITORS
AUDITOR INDEPENDENCE
• APES110 section 290
• Importance of auditor independence
o In today’s competitive world trust and confidence are essential to the stability of capital markets. The auditing
profession plays a critical role in the orderly functioning of capital markets by performing independent audits.
The independence of the auditor is crucial to this process and helps to build the trust of shareholders,
regulators and other stakeholders in financial information which has been subject to audit.
• Legislative requirements:
o Corporations Act 2001
o The Corporate Law Economic Reform Program (CLERP 9) amendments
§ Independence declaration (Section 307C)
§ Former auditors
§ Rotation of audit partners
§ Non-audit services
§ Auditors’ appointment
o The existing provisions relating to auditor resignation, auditor removal, right of access to records and right to
reasonable fee were maintained
4
WEEK 1: INTRODUCTION
WHAT IS AN AUDIT?
ASSURANCE ENGAGEMENTS
• People who are responsible for a specific task (called responsible parties or managers) need to account for their
performance with respect to that task
• There may be many groups who will rely on this accounting for performance as an aid to their decision making
• Example:
o Shareholders relying on financial reports produced by companies’ management
o Government agencies relying on reports produced by entities to account for environmental considerations
o Parents relying on information produced by schools or information contained on websites when deciding where
to send their children
• Assurance engagement is defined as ‘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’
• Five elements of an assurance engagement:
o Three-party relationship (assurance practitioner, responsible party, intended users)
o Underlying subject matter
o Criteria
o Sufficient appropriate evidence
o A written assurance report
TYPES OF ASSURANCE ENGAGEMENTS
• Reasonable assurance engagements
o For assurance services on historical financial information, a reasonable assurance engagement is termed an
“audit”.
• Limited assurance engagements
o For assurance services on historical financial information, a limited assurance engagement is termed a “review”.
• Agreed-upon procedures
o The auditor does not have the discretion to undertake evidence-collection procedures outside those that have
been agreed upon
o The auditor only issues a report of factual findings, in which no conclusion is communicated and which
therefore expresses no assurance
o The assurance framework does not cover agreed-upon procedures engagements, where there is no conclusion
conveying a level of assurance
o Not deemed to be of an assurance nature
• Difference between reasonable and limited assurance engagements
1
,AUDITING
• Definition:
o 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
• Objectives:
o To obtain reasonable assurance about whether the financial report as a whole is free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report
is prepared, in all material respects, in accordance with an applicable financial reporting framework; and
o To report on the financial report, and communicate as required by the Australian Auditing Standards (ASAs), in
accordance with the auditor’s findings
WHY THERE IS A NEED FOR AUDITING SERVICES?
• Conflict of interest – preparers and users
• Consequence
• Complexity of information
• Remoteness of owners
o Agency theory / stewardship hypothesis
o Information hypothesis
o Insurance hypothesis
HOW IS THE AUDIT PROFESSION STRUCTURED?
AGENCY RELATIONSHIPS AND USERS
AGENCY
USERS
2
,THE ETHICAL REQUIREMENTS OF THE AUDIT PROFESSION
RESPONSIBILITIES OF AUDITORS, CORPORATIONS ACT 2001
• Responsibilities of auditors (section 308)
o Report to the members of the company on the financial report presented by the directors at the annual general
meeting
o Report an opinion as to whether the financial report is in accordance with the law, including compliance with
accounting standards, and provides a true and fair view
• Responsibilities of directors (section 292-306)
o Prepare annually a financial report and any other information or explanation as is necessary to give a true and
fair view and ensure that the financial report is audited
o Ensure that the financial report is prepared in accordance with the accounting standards and gives a true and fair
view
o Whether there are reasonable rounds to believe that the company will be able to pay its debts as and when they
become due and payable
• Which of the following statements best describes the term ‘assurance services’?
o Services designed to express an independent opinion on the truth and fairness of a financial report
o Services designed to provide confidence as to the integrity and security of e-commerce business to consumers
undertaking internet transactions
o Independent professional services that improve the quality of information for decision makers
o Services that result in better outcomes through the improvement of operation
• Answer:
o Independent professional services that improve the quality of information for decision makers
• The subject matter of an assurance engagement may be:
o financial position and performance
o systems and processes
o non-financial performance
o All of the given answers are correct
• Answer:
o All of the given answers are correct
CERTIFICATIONS OF THE AUDITOR
• The audited financial statements of a publicly listed company (a tier 1 entity) have a number of certifications singed by
the external auditor:
o The Audit Report to the members
o The Renumeration Report, and
o The Auditor’s Declaration of Independence
• We will work through the purpose of each (refer material uploaded to Week 1 on Canvas
REGULATION OF AUDITING
3
, • Statutory regulation
o Australian Securities and Investments Commission (ASIC) Act 2001 establishes Financial Reporting Council
(FRC) which oversees operations of Auditing and Assurance Standards Board (AUASB) who issues Australian
Auditing Standards (ASAs) based on International Standards on Auditing (ISAs) issued by International
Auditing and Assurance Standards Board (IAASB)
o The ASAs are mostly legislative instruments enforceable under Corporations Act administered by ASIC which
can apply to Companies Auditors and Liquidators Disciplinary Board (CALDB) to determine whether auditors
or liquidators have breached the Corporations Act 2001
• Professional regulation
o Chartered Accountants Australia and New Zealand (ICAA), CPA Australia and Institute of Public Accountants
(IPA) established the Accounting Professional and Ethical Standards Board (APESB) as an independent body to
set ethical standards to audits and assurance services carried out by members of the professional accounting
bodies
o The APESB issues APES110 Code of Ethics for Professional Accountants
o ASAs require compliance with relevant ethical requirements
ETHICS
• APES 110 Code of Ethics for Professional Accountants sets out the main ethical pronouncements for members of
Chartered Accountants ANZ, CPA Australia and the IPA
• APES 110 section 100.1 states that a distinguishing mark of the audit profession is its acceptance of the responsibility to
act in the public interest
o The public interest principle recognises that conflicts occur between the various stakeholder interest, and that
when such conflict occur, the auditor’s primary responsibility is to the public interest, not to himself or herself
or to the client
• Five fundamental principles (APES 110 Section 100.5)
THE IMPORTANCE OF INDEPENDENCE TO AUDITORS
AUDITOR INDEPENDENCE
• APES110 section 290
• Importance of auditor independence
o In today’s competitive world trust and confidence are essential to the stability of capital markets. The auditing
profession plays a critical role in the orderly functioning of capital markets by performing independent audits.
The independence of the auditor is crucial to this process and helps to build the trust of shareholders,
regulators and other stakeholders in financial information which has been subject to audit.
• Legislative requirements:
o Corporations Act 2001
o The Corporate Law Economic Reform Program (CLERP 9) amendments
§ Independence declaration (Section 307C)
§ Former auditors
§ Rotation of audit partners
§ Non-audit services
§ Auditors’ appointment
o The existing provisions relating to auditor resignation, auditor removal, right of access to records and right to
reasonable fee were maintained
4
