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LEARNING OBJECTIVES
To understand:

Business and Economics

ACC 3160 AUDITING AND

ASSURANCE
Semester 2, 2014

1. the framework for assurance engagements and the

demand for assurance services;
2. definition and fundamental principles underlying an audit;
3. regulation of auditing and the subject matter of audits;
4. audits under the Corporations Act
5. attributes of professional status that exist in public
accounting;
6. characteristics of the professional bodies and accounting
firms engaged in the auditing profession;
7. elements of quality control within audit firms and practicemonitoring programs.
8. Current issues in Audit quality
9. the concept of expectation gap.

Topic 1
Assurance and auditing: an overview
1

Evolution of the audit function

The evolution of auditing practices

Since at least the thirteenth century

Until the early 1900s:
focus on companys solvency and, detection of
fraud and error.
From early 1900s to 1940s:
also aimed to verify financial report accuracy and
attest to financial report credibility.
Since the 1940s:
overall objective to express an opinion as to
whether the financial report is materially misstated.
1990s the term assurance replaces audit?

To date the 21st century characterised by

accounting and audit failures and the collapse of
Andersons
Enron Off balance sheet liabilities (AA)
HIH Understating future claims (AA)
Worldcom Capitalising expenses (AA)
Westpoint Solvency concerns (KPMG)
Centro Classification of liabilities (PWC)
Calls for tighter regulation and supervision of the
audit profession.
3

Learning objective 1:
The framework for assurance engagements

Definition of assurance engagement

Assurance engagement:

User
Report
Auditor

Subject
Matter

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.

Accountability
Management

Simple diagram of three parties involved in a

traditional assurance engagement.
5

Diagram of assurance engagement

Benefits of assurance services
Independence and Expertise of the assurance
provider:
competence
professional judgement, and
professional scepticism.
Access to capital markets (Lower cost of capital)
Assist management to improve the efficiency and
effectiveness of operations
1A-7

Copyright 2012 McGraw-Hill Australia Pty Ltd

PPTs t/a Auditing and Assurance Services in Australia 5e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

Demand for assurance

Hypotheses relating to demand assurance

Users are not in a position to establish the

credibility of the information they are presented
with.

stewardship hypothesis (Agency theory)

Information hypothesis
Insurance hypothesis

Reasons:

Deterrent to inefficiency and fraud

Conflict of interest
Consequence
Complexity
Remoteness

Levels of assurance and types of reporting

engagements

10

Learning objective 2:
Auditing defined

For any subject matter, two levels of assurance

can be provided:

Auditing is 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.

Reasonable assurance

audit engagements
positive expression of opinion

Limited assurance

review engagements
negative expression of opinion

No assurance engagements??????

(American Accounting Association (AAA) Committee

on Basic Auditing Concepts [1973])

Attest v Direct reporting

11

12

Fundamental principles underlying an audit

Ethical principles

Fundamental auditing principles

Integrity
Objectivity
Professional competence
and due care
Confidentiality
Professional behaviour
(Incorporated in APES 110, to be
discussed in Topic 2)

Knowledge
Responsibility
Quality control
Rigour and scepticism
Professional judgment
Evidence
Documentation
Communication
Association
Reporting
(Incorporated in ASAs)

Types of audit and assurance services some

examples
Financial report audit
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.
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
14

13

Financial report audit approaches since the 1940s

Learning objective 3:
Regulation of auditing and the subject matter of
audits

Statement of financial position approach

Financial Reporting Council (FRC):

Transactions-cycle approach

a statutory body established in 1999

with the responsibility of providing a broad
oversight of the accounting standard-setting
process.
this role was later expanded to include a broad
oversight of auditing standard-setting and the
monitoring of auditor independence.

Financial risk analysis approach

Business risk approach (current audit approach)

15

16

Structure of assurance standards and pronouncements

The Auditing and Assurance Standards Board
(AUASB)

Framework of Pronouncements issued by the AUASB

Foreword

AUASB was reconstituted as an independent statutory

body on 1 July 2004 and is responsible for the
development of auditing and assurance standards.

Glossary

ASQC 1

The Board consists of 12 members appointed by

FRC, and a Chair now appointed by the Minister
for Superannuation and Corporate Law
Responsibility for the final approval of auditing and
assurance standards now lies with parliament.
The AUASB has a long-standing policy of
convergence and harmonisation with International
Standards on Auditing (ISAs).

No Assurance

Assurance

Framework for Assurance Engagements

Audits and Reviews of Historical

Financial Information

Australian Auditing
Standards

17

Standards on Review
Engagements

Assurance Engagements Other

than Audits and
Reviews of Historical Financial
Information

Standards on Assurance
Engagements

Engagements Other than

Audits, Reviews and Other
Assurance Engagements

Standards on Related
Services
18

The role of auditing standards

The role of auditing standards (cont.)

Auditing standards in Australia (ASAs) are

developed by the Auditing and Assurance
Standards Board (AUASB) and have equivalent
international auditing standards (ISAs).

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.

The standards prescribe the basic principles and

essential procedures governing the conduct of an
auditor.

Failure to observe these standards may expose

a member to investigation and disciplinary action from
the Australian Securities and Investments Commission
(ASIC).

For audits conducted under the Corporations Act

2001, the auditing standards (ASAs) must be
applied, thus giving them legal authority.
19

The Accounting Professional and Ethical Standards

Board

20

Regulation of auditing (cont.)

Until 2006 CPA Australia and the ICAA maintained

control of the setting of ethical standards.
Since 2006, setting of ethical standards is done by a
body independent of the accounting profession, the
Accounting Professional and Ethical Standards Board
(APESB).
The APESB establishes ethical standards, as well as
professional standards, by which the members of the
professional accounting bodies are required to abide.
THE APESB consists of up to eight members,
including two nominated by CPA Australia and two by
ICAA.

Two other government agencies are also involved

in the regulation of auditors:
Australian Securities and Investments
Commission (ASIC) the administering
authority for the Corporations Act 2001
The Companies Auditors and Liquidators
Disciplinary Board (CALDB) 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
21

22

Learning objective 4:
Audits under Corporations Act 2001

Regulation of subject matter audits

Management is responsible for the preparation and

presentation of appropriate accounts.

Australian Accounting Standards Board

(AASB): responsible for the development of
accounting standards in Australia.

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 (ss 292306).

Financial Reporting Panel (FRP): Established in

2004 to provide a forum for review of disputes
between ASIC and entities lodging reports with
ASIC. Due to lower than expected number of
referrals, in early 2012 the government announced
its intention to wind up FRP.

Accounts are to be accompanied by a report of an

independent auditor appointed by the shareholders.
Auditing Standards must be applied.
23

24

Auditors responsibilities under the Corporations Act

2001

Registered company auditor (RCA)

In order to be appointed as a company auditor under s 1280 of the
Corporations Act 2001, a person must ordinarily:

Auditors are responsible for reporting to company

members on the directors financial report
presented at the AGM.

Be an Australian resident
Be a member of an approved body (CPA Australia, ICAA or IPA)
Be an accounting 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 fill out a logbook to demonstrate on-the-job
experience and have this certified by a current RCA.

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).
25

26

Internationalisation of auditing (cont.)

Key groups

Internationalisation of auditing
Increased international trade has contributed to the
development of international auditing practices.
Multinational organisations wish to ensure the quality
of financial information from subsidiaries and related
entities.
The International Organization of Securities
Commissions (IOSCO) (including SEC in the USA and
ASIC in Australia) supports the harmonisation of
international auditing standards.
Most countries consider International Standards on
Auditing (ISAs) carefully when developing their own
standards.

International Federation of Accountants (IFAC):

guides efforts to develop technical (accounting and
auditing) and ethical standards
Members include 167 accounting bodies (including
ICAA, CPA Australia and the IPA) in 127 countries.
International Auditing and Assurance Standards
Board (IAASB):
an independent body supported by IFAC
develops standards and guidance for audit and
assurance services.
Transnational Auditors Committee (TAC):
executive committee of the Forum of Firms (FOF)
performs auditing across national boundaries.
27

Learning objective 5:
Auditing as a profession

Auditing as a profession
Auditing can be classified as a profession
because of its:

Professional occupations can be distinguished

by five common attributes:

28

Reliance on an underlying theory of accounting

and auditing
Expertise
Ability to control admissions to the profession
Regulative codes in two areas, technical and
ethical
Behavioural subculture exhibiting integrity,
independence, objectivity, confidentiality and
public interest.

Systematic theory
Professional authority and expertise
Community sanction
Regulative codes
Well-established culture

29

30

Learning objective 6:
Professional accounting bodies

Types of auditor

There are now three primary professional accounting

organisations in Australia:

independent auditors
Independent (Fee for service)
Registered with ASC
internal auditors

CPA Australia
The Institute of Chartered Accountants in Australia
(ICAA)
The Institute of Public Accountants (IPA)
Membership of any of these bodies by public
accounting practitioners is voluntary.

Employee (or external provider!)

Seeks to maintain independence
government auditors

However, membership of one of these bodies is

necessary in order to become a registered company
auditor.

Federal: Australian National Audit Office

State: Auditor General
31

Disciplinary procedures

Audit firms
There are three levels of audit firms in Australia:
International (including the Big Four and other firms
that are members of Forum of Firms)
National Firms
Regional or local firms.
The largest international firms are known as the 'Big Four'.
They are:
PricewaterhouseCoopers
Ernst & Young
KPMG Australia
Deloitte.
The Big Four dominate the practice of public accounting,
especially for listed clients.

Independent auditors are subject to disciplinary

provisions of the their professional accounting bodies,
either ICAA, CPA Australia or NIA.
Sanctions can include:

32

Exclusion from membership;

Suspension from membership;
Disbarment from practice;
Being fined a sum not exceeding $100 000;
Being reprimanded; or
Having to pay costs and expenses of any
investigation.
33

Other services offered

Internal structure of an audit firm

Audit firm generally have practised as
partnerships.

While audit and assurance services form a

substantial part of a public accounting firms
client base and revenue stream, most firms
also offer:

34

As a result of CLERP 9 amendments, an audit

firm can now apply to be an authorised audit
company.

Taxation
Management services
Internal audit
Accounting services
Insolvency services

This provides advantages of limitations in

liability and adequate professional indemnity.
Insurance must be maintained.
Most large audit practices are usually
structured along industry specialisations.
35

36

Learning objective 7:
Quality control

Positions and duties in an audit firm

Quality controls (QCs) are implemented at both the

audit firm level and at the audit engagement level.
ASA 220 (ISA 220) requires the audit engagement
team to implement QC procedures.
ASQC 1 and APES 320 (ISQC 1)requires the audit
firm to implement QCs.
ASA 220 (ISA 220) acknowledge that the
engagement team may rely on the audit firms
system of QC.
37

APESB standards

38

APES 320 and ASQC 1

Two APESB standards relate to QC:

APES 210 establishes auditors responsibilities
in relation to compliance with Australian auditing and
assurance standards.
APES 320 establishes basic principles and essential
procedures at the audit firm level. Under APES 320,
firms must document QC procedures and
communicate these to the firms personnel, and
implement more comprehensive policies and
procedures for the assurance part of the firm.

APES 320 and ASQC 1 (ISQC 1) require a firms

system of QC to include policies and procedures
relating to:
Leadership responsibilities for quality within the
firm
Relevant ethical requirements
Acceptance and continuance and client
relationships
Human resources
Engagement performance; and
Monitoring.

As part of the clarity project, AUASB issued ASQC 1,

(based on ISQC 1), with similar requirements to APES 320.
39

APES 320 and ASQC 1 (cont.)

40

Other Quality control procedures

QC procedures adopted by auditing firms should provide reasonable

assurance of:
Ethics: personnel should adhere to principles of integrity, objectivity,
independence, confidentiality and professional behaviour
Employment: employ personnel with necessary technical skills and
professional competence
Assignment: work should be assigned to appropriately qualified
personnel
Supervision: work should be properly directed, supervised and
reviewed
Guidance and assistance: appropriate consultation should occur
Client evaluation: prospective and ongoing clients should be
evaluated for decision to accept or retain; and
Monitor: adequacy and effectiveness of QC procedures should be
continually monitored.
41

Key other quality control procedures employed by

the professional bodies are:
Internal review (engagement quality control eview)
auditor subject to review by another partner in
the practice
Periodical rotation of auditors (partners and staff)
to limit length of time spent on one client
Peer reviews independent periodic review by
another firm of public accountants
Continuing professional education requirements.
42

Learning objective 8:
Current issues

IS196 Audit quality: The role of directors and audit

committees

ASIC releases Information Sheet 196 (IS196) Audit quality:

The role of directors and audit committees

why audit quality is important

the responsibilities of the auditor
the roles of directors and audit committees

IAASB issued a revised Framework for Audit Quality: Key

Elements that Create an Environment for Audit Quality

the responsibilities of directors for auditor

independence
who should manage the appointment of auditors
what matters should be considered in setting audit
fees, and
what directors and audit committees can do to promote
audit quality.
43

44

43

Framework for Audit Quality: Key Elements that

Create an Environment for Audit Quality

44

Framework for Audit Quality: Key Elements that

Create an Environment for Audit Quality

The objectives of the Framework for Audit Quality include:

Raising awareness of the key elements of audit quality.

The Framework distinguishes the following

elements:
a) Inputs

Encouraging key stakeholders to explore ways to

improve audit quality.

b) Process
c) Outputs

Facilitating greater dialogue between key stakeholders

on the topic.

d) Key Interactions within the Financial Reporting

Supply Chain
e) Contextual Factors

45

46

47

48

45

47

46

48

Learning objective 9:
The expectation gap

The gap between audit expectation and audit

performance

the gap between societys expectations of auditors

and auditors performance as perceived by society.

Perceived
Performance
of Auditors

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

Performance

Reasonableness

Gap

Gap

Deficient

Deficient

Unreasonable

Performance

Standards

Expectations

Auditors
Existing
Duties
49

Societys
Expectations
of Auditors

Audit Expectations - Performance Gap

Duties
Reasonably
Expected of Auditors
50

Four major issues in the expectation gap

The nature and meaning of audit report messages
Early warning by auditors of corporate failure
Auditors responsibility for the detection and
reporting of earnings management and fraud
The auditors ability to communicate different levels
of assurance

51