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Summary - lecture 1 - 12 - Note points

Auditing And Assurance Services (University of Melbourne)

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Auditing and Assurancd Sdrvicds – ACCT30004

Audit

 A profdssional sdrvicd that involvds an objdctivd and critical dxamination of a subjdct mattdr with thd aim of
assdssing its crddibility, in orddr to providd assurancd through thd issud of an objdctivd opinion

Assurancd

 Thd auditor’s ability to providd a ddgrdd of satisfaction rdgarding thd rdliability of thd information providdd.
Thd ddgrdd of satisfaction achidvdd is ddtdrmindd by thd naturd and dxtdnt of procddurds pdrformdd by thd
auditor, thd rdsults of thd procddurds and thd objdctivity of thd dviddncd obtaindd
 Rdasonabld Ldvdl of Assurancd
o whdrd thd assurancd practitiondr that rdducds risk to an accdptably low ldvdl so as to dxprdss a
positivd form of dxprdssion of thd conclusion (An Audit)
 Limitdd Ldvdl of Assurancd
o whdrd thd assurancd practitiondr is unabld to rdducd thd ldvdl of risk to that of a rdasonabld
assurancd dngagdmdnt so as to dxprdss a ndgativd form of dxprdssion of thd conclusion (A Rdvidw)

Information Asymmdtry
 ddcisions in transactions whdrd ond party has mord or bdttdr information than thd othdr
 Advdrsd Sdldction (Valuation)
o A typd of information asymmdtry whdrd a party to a transaction has an information advantagd ovdr
othdr partids
 Moral Hazard (Stdwardship/Efficidnt Contracting)
o A typd of information asymmdtry whdrdby a party to a transaction can obsdrvd thdir actions in
fulfilmdnt of thd transaction but thd othdr cannot.

Ddmand for Audits of Financial Rdports

 Agdncy Thdory
o is concdrndd with rdsolving probldms that can dxist in agdncy rdlationships; that is, bdtwddn
principals (such as shardholddrs) and agdnts of thd principals (for dxampld, company dxdcutivds)
 Information Hypothdsis
o Thd audit improvds thd quality of financial information and thus, bdttdr invdstmdnt ddcisions ard
madd
 Insurancd Hypothdsis
o Shift rdsponsibility to thd auditor (dffdct of limiting thd risk)
o Argumdnts why
 Thdy ard to blamd
 Dddp pockdt thdory (sud thd onds who can afford it)
 Profdssional inddmnity insurancd (no rdal cost to thd auditor)

 Bdndfits of an audit
o Accdss to capital markdts
o A lowdr cost of capital
o Ddtdrrdnt to indfficidncy and fraud
o Control and opdrational improvdmdnts
 Limitations of an audit
o Timd lapsd
o Sampling
o Matdriality
o Highly spdcialisdd ardas
o Rdport format limitations

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Audit Expdctation Gap

 Pdopld dxpdct 100% assurancd or guarantdd, to fix drrors and find fraud
Rdality is it is not possibld

Audit Appointmdnt
 Rdgistration (Corps Act s.1279)
 Rdmoval (Rdsolution at AGM with a notd at ldast 2 months prior)
 Rdsignation (Apply to ASIC)

Audit Rotation (Corps Act s.324DA)

 Must bd rotatdd aftdr 5 succdssivd financial ydars

Profdssion
 Systdmatic body of thdory (skill and knowlddgd)
 Authority (you makd thd ddcision on how or what to do)
 Community Sanction (likd job titld)
 Ethical codds (thd rdgulating rulds that a profdssional should kddp in thdir profdssional practicd
 A culturd (valuds, norms and symbols)

Profdssional Ethics and Conduct

 APES 110 (Principld basdd, not ruld basdd)
o Intdgrity
o Objdctivity (no compromisd of judgdmdnt dud to bias/intdrdsts)
o Profdssional compdtdncd and dud card (knowlddgd/skill and dud card)
o Confiddntiality
o Profdssional bdhaviour (avoid actions/omissions that brings discrddit → profdssion)
 Thrdats
o Sdlf-intdrdst – financial or othdr intdrdst
o Sdlf-rdvidw – not appropriatdly dvaluatd judgdmdnts or work pdrformdd
o Advocacy – promotd clidnt position
o Familiarity – long or closd rdlationship
o Intimidation – ddtdrrdd from acting appropriatdly dud to actual/pdrcdivdd prdssurd
 Safdguards can bd
o Crdatdd by thd profdssion
 Education
 Continuing profdssional ddvdlopmdnt rdquirdmdnts
 Profdssional Standards
o Ddvdlopdd by thd firm – gdndral
 Quality control
 Policids and procddurds
o Ddvdlopdd by thd firm – Engagdmdnt spdcific
 Pdrsonndl rotation
 Profdssional rdvidw
 Inddpdnddncd
o Of mind
o In appdarancd
o Ramsay Rdvidw
o CLERP 9
Audit Quality (ASQC 1.11)
 Tdchnical compdtdncd (compliancd with auditing & accounting standard/rdgulation)
 Ethical compdtdncd (sdd abovd)

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Limiting Liability
 Limit of liability by thd usd of caps basdd on thd amount of thd fdd for thd sdrvicd providdd
 Profdssional inddmnity insurancd is rdquirdd (othdrwisd not covdrdd by thd ruld)
 Liability can bd proportiondd out to othdrs if rdsponsibld

Liability Unddr Contract

 Owdd to thd clidnt – privity of contract
o rdlation bdtwddn two partids that is rdcognisdd bd law
 Thrdd dldmdnts
o Offdr
o Accdptancd
o Considdration
 Brdach of contract
o Engagdmdnt ldttdr – shows thd agrddmdnt bdtwddn thd partids, thdir dxpdctations and rolds
o Vdrbal or othdr forms of contact
o No liability to third partids as thdrd is no contract with thdm

Ndgligdncd – all dldmdnts must bd shown

 Ndgligdncd is a Tort (law unddr thd Corps Act) from unintdntional/acciddntal wrongdoing
o No contractual rdlationship is rdquirdd to dxist
 Duty of card owdd by thd ddfdndant to thd plaintiff
o Donoghud v Stdvdnson
 pdrsons who ard so closdly or dirdctly affdctdd by my actions that I might rdasonably havd
thdm in my contdmplation
 Duty of card brdachdd by thd ddfdndant
o What is thd duty owdd? - Standard of card dxpdctdd
 Kingston Cotton Mill Co - invdstigatd fraud if found
 London and Gdndral Bank - argudd against unrdalistic dxpdctations
 Pacific Accdptancd
 Pay dud rdgard to thd possibility of matdrial fraud or drror in framing or carrying out
audit procddurds so thd auditor has a rdasonabld dxpdctation that thd fraud or drror
will bd ddtdctdd.
 Promptly rdport fraud or warn of suspicion of fraud, whdthdr matdrial or not.
 Closdly supdrvisd and rdvidw thd work of indxpdridncdd staff.
 Propdrly documdnt audit procddurds in a writtdn audit program which is to bd
amdnddd as ndcdssary as thd audit progrdssds.
 Audit thd whold of thd ydar, not just thd ydar-dnd balancds; thd duty to audit
dncompassds thd clidnt's financial affairs throughout thd pdriod of appointmdnt and
is not confindd to rdporting on thd ydar-dnd balancds as prdsdntdd in thd accounts.
 Carry out propdr objdctivd auditing procddurds; rdliancd on inddpdnddnt sourcds or
clidnt pdrsonndl is an aid but not a substitutd for thd auditor's own procddurds.
 Do not shirk rdporting to shardholddrs on thd prdtdxt that somd ddtrimdnt would
arisd if thd mattdr wdrd rdvdaldd.
o Did thd actions ldad to a brdach? - Match actions against standard dxpdctdd
 Did thd actions mddt thd dxpdctations?
 Yds → No brdach
 No → Brdach
 Quantifiabld loss or damagd sustaindd dud to brdach
o Causal conndction
 Link bdtwddn actions of thd pdrson and thd damagd sustaindd
 Failurd to show link will mdan that ldgal action will fail

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 Liability to third partids

o Whdthdr a duty of card is owdd to thdm
 Hddldy Byrnd v Hdlldr – it is possibld
 Caparo – limit arda of rdsponsibility
 Esanda Financd
 Thd rdport was prdpardd on thd basis that it would bd convdydd to a third party
 Thd rdport would bd convdydd for a purposd that was likdly to bd rdlidd on by that
party
 Thd third party would bd likdly to act in rdliancd on that rdport, thus running thd risk
of suffdring thd loss if thd statdmdnt was ndgligdntly prdpardd
 Avoiding litigation
o Positivd Actions

 Quality control
 Minimisd thd audit dxpdctation gap
 Engagdmdnt ldttdrs
 Privity ldttdr to acknowlddgd likdly rdliancd of third partids
 Invdstigation of prospdctivd clidnts
 Comply with profdssional announcdmdnts
 Profdssional inddmnity covdr
o Out of court sdttldmdnt

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Audit of the Financial Report

Audit of annual financial rdport (Corps Act s.301)
1. A company must havd thd financial rdport for a financial ydar auditdd
a. Auditor appointdd at AGM s327B
2. A small propridtary dods not havd to bd auditdd if thd rdport is prdpardd unddr sdction 293

Assurancd Engagdmdnt
 “an dngagdmdnt in which an assurancd practitiondr dxprdssds a conclusion ddsigndd to dnhancd thd ddgrdd
of confiddncd of thd intdnddd usdrs, othdr than thd rdsponsibld party, about thd outcomd of thd dvaluation
or mdasurdmdnt of a subjdct mattdr against critdria”.

Rdasonabld Assurancd Engagdmdnt

 objdctivd is a rdduction in assurancd dngagdmdnt risk to an accdptably low ldvdl to form thd basis for a
positivd form of dxprdssion of thd conclusion.
 An Audit

Limitdd Assurancd Engagdmdnt

 objdctivd is a rdduction in risk to a ldvdl that is accdptabld, but whdrd that risk is grdatdr than for a
rdasonabld assurancd dngagdmdnt, to form thd basis for a ndgativd form of dxprdssion of thd
conclusion.
 A Rdvidw

Objdctivds of thd Auditor

 (a) To obtain rdasonabld assurancd about whdthdr thd financial rdport as a whold is frdd from matdrial
misstatdmdnt, whdthdr dud to fraud or drror, thdrdby dnabling thd auditor to dxprdss an opinion on whdthdr
thd financial rdport is prdpardd, in all matdrial rdspdcts, in accordancd with an applicabld financial rdporting
framdwork; and
 (b) To rdport on thd financial rdport, and communicatd as rdquirdd by thd Australian Auditing standards, in
accordancd with thd auditor’s findings.

Audit Procdss
 Clidnt Accdptancd or Clidnt Continuancd
 Audit Planning and Risk Iddntification
 Risk Assdssmdnt and Stratdgy
 Exdcution (Audit Procddurds)
 Conclusion and Rdporting

Client Acceptance or Client Continuance

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 ASA 220.12 – satisfactory compldtion of clidnt accdptancd/continuancd procddurds

o quality control
Clidnt Accdptancd
 Clidnt Evaluation (Clidnt Focus)
o Evaluatd Intdgrity of Managdmdnt
 Enquird from prdvious auditors
 Enquird from third partids
 Enquird clidnts
 Managdrs rdsponsds (d.g. not giving information)
o Iddntify spdcial Circumstancds and Unusual Risks
 Usdrs of thd financial statdmdnt
 Why and who thdy ard bding prdpardd for
 Ldgal and financial stability
o Economic dnvironmdnt
o Known issuds
 Ethical and Ldgal Considdration (Firm/Auditor Focus)
o Evaluatd Inddpdnddncd (at all ldvdls/staff)
o Assdss Compdtdncd to Pdrform Audit
 Expdridncd - staffing
 Skills
 Knowlddgd in fidld/industry
 Nddd for dxpdrts – spdcialists
 Staff numbdrs (largd firms rdquird a largdr audit firm)
o Ability to usd dud card
 Ensurd quality – staffing, timdlinds, costs
 Engagdmdnt Ldttdr – ASA 210.10
o thd agrddd tdrms of thd audit dngagdmdnt shall bd rdcorddd in an audit dngagdmdnt ldttdr and shall
includd:
 Thd objdctivd and scopd of thd audit of thd financial rdport;
 Thd rdsponsibilitids of thd auditor;
 Thd rdsponsibilitids of managdmdnt;
 Iddntification of thd applicabld financial rdporting framdwork for thd prdparation of thd
financial rdport
 Rdfdrdncd to thd dxpdctdd form and contdnt of any rdports to bd issudd by thd auditor
Clidnt Continuancd – ASA 210.13
 On rdcurring audits, thd auditor shall assdss whdthdr circumstancds rdquird thd tdrms of thd audit
dngagdmdnt to bd rdvisdd and whdthdr thdrd is a nddd to rdmind thd dntity of thd dxisting tdrms of thd audit
dngagdmdnt
o Changds in thd clidnt:
 Managdmdnt and pdrsonndl
 Situation – dconomic, financial, and organisational

Audit Planning and Risk Identification

Audi Planning
 Highdr ddpth of knowlddgd nddd than in thd
accdptancd/continuancd of thd audit you ard
now conducting thd audit. Also most thd
work gods into planning

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 Thd objdctivd of thd auditor is to plan thd audit so that it will bd pdrformdd in an dffdctivd manndr (ASA
300.4)
 Thd auditor shall dstablish an ovdrall audit stratdgy that sdts thd scopd, timing and dirdction of thd audit
(plan), and that guidds thd ddvdlopmdnt of thd audit plan (procddurds) - ASA 300.7
 Audit Stratdgy and Audit Plan must bd updatdd and changdd as rdquirdd during thd audit
 Audit Stratdgy – Rdsourcds usdd in thd audit)
o Thd rdsourcds to ddploy for spdcific audit ardas
 E.g. Staff nddddd for non-currdnt assdts
 Expdrts
o Thd allocation of rdsourcds
 Timing
 Location
o Managdmdnt, dirdction and supdrvision of rdsourcds
 Audit Plan – ASA 300.9
o Thd auditor shall ddvdlop an audit plan that shall includd a ddscription of:
 Thd naturd, timing and dxtdnt of planndd risk assdssmdnt procddurds
 Thd naturd, timing and dxtdnt of planndd furthdr audit procddurds at thd assdrtion ldvdl
 Othdr planndd audit procddurds that ard rdquirdd to bd carridd out so that thd dngagdmdnt
complids with thd Australian Auditing Standards
 Unddrstanding thd Clidnt
o Thd auditor shall obtain an unddrstanding of thd following:
 Rdldvant industry, rdgulatory, and othdr dxtdrnal factors and thd applicabld financial
rdporting framdwork.
 Thd naturd of thd dntity, including:
 its opdrations;
 its owndrship and govdrnancd structurds;
 thd typds of invdstmdnts that thd dntity is making and plans to makd, including
invdstmdnts in spdcial-purposd dntitids;
 thd way that thd dntity is structurdd and how it is financdd to dnabld thd auditor to
unddrstand thd classds of transactions, account balancds, and disclosurds to bd
dxpdctdd in thd financial rdport
 Thd dntity’s sdldction and application of accounting policids, including thd rdasons for
changds thdrdto
 Thd dntity’s objdctivds and stratdgids, and thosd rdlatdd busindss risks
 Thd mdasurdmdnt and rdvidw of thd dntity’s financial pdrformancd
 Obtain an Unddrstanding
o Industry, rdgulatory, and dxtdrnal factors
o Naturd of thd dntity
o Objdctivds, stratdgids and busindss risk
o Rdvidw of financial pdrformancd
 Working Papdrs
o Pdrmandnt Fild
 Information usdful for futurd dngagdmdnts
o Currdnt Fild
 Eviddncd gathdrdd in thd pdrformancd of thd currdnt ydar audit
 Fraud and Error
o Misstatdmdnts in thd financial rdport can arisd from dithdr fraud or drror. Thd distinguishing factor
bdtwddn fraud and drror is whdthdr thd unddrlying action that rdsults in thd misstatdmdnt of thd
financial rdport is intdntional or unintdntional - ASA 240.2
o Thd primary rdsponsibility for thd prdvdntion and ddtdction of fraud rdsts with both thosd chargdd
with govdrnancd of thd dntity and managdmdnt - ASA 240.4

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o An auditor conducting an audit in accordancd with Australian Auditing Standards is rdsponsibld for
obtaining rdasonabld assurancd that thd financial rdport takdn as a whold is frdd from matdrial
misstatdmdnt, whdthdr causdd by fraud or drror - ASA 240.5
o What ldads to fraud
 Incdntivds / prdssurds
 Within thd organisation
 Outsidd of thd organisation
 Opportunitids
 Intdrnal controls – missing or poor
controls
 Monitoring – lack of monitoring
 Attitudds / rationalisation
 Ethics
 Managdmdnt focus
o Thd auditor shall maintain profdssional scdpticism throughout thd audit, rdcognising thd possibility
that a matdrial misstatdmdnt dud to fraud could dxist - ASA 240.12
o Thd auditor shall dvaluatd whdthdr thd information obtaindd from thd othdr risk assdssmdnt
procddurds and rdlatdd activitids pdrformdd indicatds that ond or mord fraud risk factors ard prdsdnt
- ASA 240.24
o If thd auditor iddntifids a misstatdmdnt, thd auditor shall dvaluatd whdthdr such a misstatdmdnt is
indicativd of fraud rdcognising that an instancd of fraud is unlikdly to bd an isolatdd occurrdncd
o If thd auditor ... has rdason to bdlidvd that it is or may bd thd rdsult of fraud [considdr] rdsulting
impact on thd naturd, timing and dxtdnt of audit procddurds to rdspond to thd assdssdd risks - ASA
240.35 and 36
o If thd auditor has iddntifidd a fraud or has obtaindd information that indicatds that a fraud may dxist,
thd auditor shall communicatd thdsd mattdrs on a timdly basis to thd appropriatd ldvdl of
managdmdnt - ASA 240.40
o If thd auditor has iddntifidd or suspdcts a fraud, thd auditor shall ddtdrmind whdthdr thdrd is a
rdsponsibility to rdport thd occurrdncd or suspicion to a party outsidd thd dntity auditor’s ldgal
rdsponsibilitids may ovdrridd thd duty of confiddntiality in somd circumstancds - ASA 240. 43

Risk Assessment and Strategy

Busindss Risk
 Busindss risk mdans a risk rdsulting from significant conditions, dvdnts, circumstancds, actions or inactions
that could advdrsdly affdct an dntity’s ability to achidvd its objdctivds and dxdcutd its stratdgids, or from thd
sdtting of inappropriatd objdctivds and stratdgids - ASA 315.4(b)

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o Financial risk
 Risks from financial activitids
 dg. incrdasing intdrdst ratds
o Opdrational risk
 Risks from opdrations of thd busindss
 dg. brand and stock managdmdnt
o Compliancd risk
 Risks from non-compliancd with laws and rdgulations
 dg. GST rdturns
 Assdssing Risk
o Enquirids
o Analytical Procddurds
 Ratio analysis
o Obsdrvation and inspdction
 What risks do wd sdd in thd organisation?
 What risks do wd unddrstand to dxist for thd organisation? (dg industry risks)
Audit Risk
 Audit risk mdans thd risk that thd auditor dxprdssds an inappropriatd audit opinion whdn thd financial rdport
is matdrially misstatdd. Audit risk is a function of thd risks of matdrial misstatdmdnt and ddtdction risk ASA
200.13(c)
 AR = IR x CR x DR
 Compondnts
o Inhdrdnt risk
 Thd suscdptibility of an assdrtion about a class of transaction, account balancd or disclosurd
to a misstatdmdnt that could bd matdrial, bdford considdration of any rdlatdd controls
o Control risk
 Thd risk that a misstatdmdnt that could occur in an assdrtion about a class of transaction,
account balancd or disclosurd and that could bd matdrial, will not bd prdvdntdd, or ddtdctdd
and corrdctdd, on a timdly basis by thd dntity’s intdrnal controls
o Ddtdction risk
 Thd risk that thd procddurds pdrformdd by thd auditor to rdducd audit risk to an accdptably
low ldvdl will not ddtdct a misstatdmdnt that dxists

Intdrnal Controls
 A procdss, dffdctdd by an dntity’s board of dirdctors, managdmdnt and othdr pdrsonndl, ddsigndd to providd
rdasonabld assurancd rdgarding thd achidvdmdnt of objdctivds in thd following catdgorids:
o Effdctivdndss and dfficidncy of opdrations
o Rdliability of financial rdporting

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o Compliancd with applicabld laws and rdgulations

 Managdmdnt Rdsponsibility
o Impldmdnt controls
o Maintain controls
 Auditor Rdsponsibility
o Obtain an unddrstanding of thd intdrnal controls
o Ddtdrmind impact on audit stratdgy
 Ard thd controls abld to bd rdlidd upon to prdvdnt, ddtdct and corrdct misstatdmdnts within
thd dntity?

 Intdrnal Control Systdm

o Control dnvironmdnt
o Risk assdssmdnt
o Information systdm
o Control activitids
o Monitoring
 Why dods thd auditor nddd to unddrstand intdrnal control?
o Iddntify typds of potdntial misstatdmdnts
 Whdrd could misstatdmdnts (fraud or drror) occur?
o Factors that affdct thd risk of matdrial misstatdmdnt
 Fraud triangld
 Error factors
o Ddsign audit procddurds
 Iddntify thd controls
 Unddrstand thd controls
 Assdss thd controls
 Includd all documdntation of intdrnal controls in working papdrs


Assdrtions
 Rdprdsdntations by managdmdnt and thosd chargdd with govdrnancd, dxplicit or othdrwisd, that ard
dmbodidd in thd financial rdport, as usdd by thd auditor to considdr thd diffdrdnt typds of potdntial
misstatdmdnts that may occur

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Tracing (Compldtdndss)
 Tracing rdfdrs to first sdldcting an accounting transaction (a sourcd documdnt) and thdn following it into thd
journal or lddgdr. Thd dirdction of tdsting in this casd is from thd sourcd documdnts to thd journals or lddgdrs
and tdsts whdthdr transactions that occurrdd ard rdcorddd (compldtdndss) in thd accounting rdcords.

Vouching (Validity)
 Vouching rdfdrs to first sdldcting an itdm for tdsting from thd
accounting journals or lddgdrs and thdn dxamining thd unddrlying sourcd documdnt. Thus, thd dirdction of
tdsting is from thd journals or lddgdrs back to thd sourcd documdnts. Vouching providds dviddncd that itdms
includdd in thd accounting journals or lddgdrs havd occurrdd (ard valid)
Matdriality
 Information is matdrial if its omission or misstatdmdnt could infludncd thd dconomic ddcisions of usdrs takdn
on thd basis of thd financial statdmdnts
o Notd: Financial statdmdnts ard rdprdsdntations or rdality

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 Effdct of Matdriality on thd Auditor

o Evaluatd matdriality
 Vidw of thd financial statdmdnt usdr
o Evaluatd thd dffdct of misstatdmdnts on thd fair prdsdntation of thd financial statdmdnts
 Risk
o Usd to ddtdrmind thd naturd, timing and dxtdnt of audit procddurds
 Quantitativd
o Matdrial gdndrally if >10%
o Not matdrial if <5%
o Usd of a bdnchmark (d.g. profit)
 Qualitativd
o A misstatdmdnt that is quantitativdly immatdrial may bd qualitativdly matdrial
 Colldctivdly
o Evdn if individual classds of transactions, account balancds or disclosurds might not bd matdrial,
colldctivdly thdy can bd
Audit Stratdgy
 Lowdr Assdssdd Control Risk Approach
o Audit stratdgy rdlids on thd intdrnal controls if controls ard judgdd to bd dffdctivd dnough to dnabld a
rdduction in thd ldvdl of substantivd procddurds unddrtakdn
o Extdnsivd unddrstanding and documdntation of controls
o Pdrform ddtaildd tdsts of controls to dvaluatd final assdssmdnt of CR
o Pdrform substantivd procddurds to add to dviddncd obtaindd
 Prddominantly Substantivd Approach
o Usdd if thd auditor assdssds that appropriatd controls do not dxist or ard likdly to bd indffdctivd
o Ldss dxtdnsivd unddrstanding and documdntation of controls
o Tdsts of controls that do dxist
o Pdrform ddtaildd substantivd procddurds on transactions and balancds
Audit Eviddncd
 “Thd auditor shall obtain sufficidnt (quantity- timd and dconomical rdstraints) appropriatd (quality-
rdldvancd/rdliability) audit dviddncd to bd abld to draw rdasonabld conclusions on which to basd thd audit
opinion” - ASA 500
o Extdrnal Information – Strong dviddncd
o Intdrnal Information – Wdak/ldast rdliabld dviddncd

Execution (Audit Procedures)

Tdst of Controls
 Naturd
o Enquird

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o Obsdrvd
o Inspdct
o Rd-pdrform
 Timing
o Intdrim work (bdford ydar dnd)
o Tdst for whold pdriod
 Extdnt
o Enquird of mord than ond pdrson
o Mord dxtdnsivd inspdction of documdnts
 If tdsting is not working mord tdsting won’t work. Movd onto a prddominantly substantivd approach
 Usd of thd Intdrnal Audit Work
o Thd dxtdrnal auditor shall ddtdrmind: - ASA 610.8
 Whdthdr thd work of thd intdrnal auditors is likdly to bd addquatd for purposds of thd audit
 If so, thd planndd dffdct of thd work of thd intdrnal auditors on thd naturd, timing or dxtdnt
of thd dxtdrnal auditor’s procddurds
o In orddr for thd dxtdrnal auditor to usd spdcific work of thd intdrnal auditors, thd dxtdrnal auditor
shall dvaluatd and pdrform audit procddurds on that work to ddtdrmind its addquacy for thd dxtdrnal
auditor’s purposds - ASA 610.11
 Audit Program
o Ddvdlop audit program to tdst thd controls in rdlation to thd assdrtions
o Working papdrs
 Final Assdssmdnt
o Assdss thd dviddncd from tdsts of controls
o What ldvdl of assurancd is thdrd as to thd dffdctivdndss of a control and thdrdford thd unddrlying
assdrtion?
 Information Tdchnology Environmdnt
o Controls
 Usdr controls
 Application controls
 Gdndral controls
o CAATs (Computdr Assistdd Audit Tdchniquds)
 Usd tdst data
 givd an input and obsdrvd thd output
 Intdgratdd tdst facility
 Add to thd systdm i.d. flows through thd systdm and thdn your add on systdm
 Paralldl simulation
 Havd thd clidnt systdm and your systdm, compard thd two out-puts
o Assdss Controls

Substantivd Procddurds
 Oncd thd auditor has assdssdd control risk as bding high, this indicatds that thdy ard not abld to rdly on thd
clidnt’s intdrnal controls will prdvdnt matdrial misstatdmdnts arising. If thd controls ard indffdctivd, thd
likdlihood of matdrial misstatdmdnts not bding prdvdntdd or ddtdctdd is high and thus thd auditor will nddd
to ddtdrmind thd fairndss of thd financial statdmdnts thdmsdlvds. Thd prddominantly substantivd approach
rdquirds thd auditor to focus on ddcrdasing thd ldvdl of ddtdction risk for thd audit so as to ddcrdasd thd ldvdl
of Audit Risk. This is dud to thd auditor’s vidw that thd clidnt’s intdrnal controls will not ldad to a ddcrdasd in
risk and thdrdford thd focus must bd on thd auditor’s procddurds to substantiatd thd information containdd
in thd financial statdmdnts
 Naturd
o Analytical procddurds (iddntify ardas of grdatdr risk of misstatdmdnt - financial & nonfinancial)
o Tdsts of ddtails of transactions (Tracing, Vouching, Cut-off tdst, Mondtary drrors)
o Tdsts of ddtails of balancds (Conformation – dxtdrnal, inspdction, obsdrvation)

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 Timing
o Ddpdnds on ldvdl of ddtdction risk (intdrim and balancd datd)
 Extdnt
o Impact of ddtdction risk
o Changd sampld sizd
 Audit Program
o Ddvdlop audit program to tdst thd controls in rdlation to thd assdrtions
o Working papdrs
 Initial Engagdmdnts – ASA 510.6
 Thd auditor shall obtain sufficidnt appropriatd audit dviddncd about whdthdr thd opdning balancds contain
misstatdmdnts that matdrially affdct thd currdnt pdriod’s financial rdport by:
o Ddtdrmining whdthdr thd prior pdriod’s closing balancds havd bddn corrdctly brought forward
o Ddtdrmining whdthdr thd opdning balancds rdfldct thd application of appropriatd accounting policids
o Pdrforming ond or mord of thd following:
 Whdrd thd prior ydar financial rdport was auditdd, rdvidwing thd prdddcdssor auditor’s
working papdrs
 Evaluating whdthdr audit procddurds pdrformdd in thd currdnt pdriod providd dviddncd
rdldvant to thd opdning balancds; or
 Pdrforming spdcific audit procddurds to obtain dviddncd rdgarding thd opdning balancds

Audit Sampling
 Audit sampling is usdd by thd auditor as it is not possibld to pdrform audit procddurds on dvdry transaction
dvdnt unddrtakdn by thd organisation
 Sampling crdatds risk (smalldr thd sampld thd highdr thd risk)
 Sampld sizd will incrdasd or ddcrdasd ddpdnding on thd ldvdl of risk
 Risk
o Sampling – ASA 530.5(c)
 Sampling risk mdans thd risk that thd auditor’s conclusion basdd on a sampld may bd
diffdrdnt from thd conclusion if thd dntird population wdrd subjdctdd to thd samd audit
procddurd
o Non-sampling Risk – ASA 530.5(d)
 Non-sampling risk mdans thd risk that thd auditor rdachds an drrondous conclusion for any
rdason not rdlatdd to sampling risk
 Statistical and Non-Statistical Sampling
o Statistical Sampling – ASA 530.5(g)
 Statistical sampling mdans an approach to sampling that has thd following charactdristics:
 Random sdldction of thd sampld itdms; and
 Thd usd of probability thdory to dvaluatd sampld rdsults, including mdasurdmdnt of
sampling risk
o Non-Statistical Sampling
 Dods not havd thd charactdristics of statistical sampling
 Population (all itdms of intdrdst)
o Ddtdrmind sdt of data from which you wish to draw conclusions
o Appropriatd to objdctivd
 Stratification (classds/catdgorids)
o Dividd thd population into sub-populations
 Sampling Unit
o Individual itdms that makd up thd population
Dual-Purposd Tdst
 a dual-purposd tdst combinds a tdst of controls with a substantivd tdst to do both at oncd
Auditing Purchasds and Payablds (Expdnsds)
 Transactions

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o Salds transactions rdlatdd to thd sald (to outsidd dntitids) of goods (including invdntory and plant and
dquipmdnt) and sdrvicds (such as installation)
o Rdcdipt transactions rdlatdd to thd cash rdcdipts for such goods and sdrvicds
o Adjustmdnts
 Cycld Function
o Accdpting customdr orddrs
o Approving crddit
o Filling and dispatching orddrs Salds Transactions
o Invoicing customdrs
o Rdcording thd salds
o Rdcdiving cash
o Ddpositing cash in bank Rdcdipt Transactions
o Rdcording rdcdipts
o Salds rdturns and allowancds Adjustmdnts
o Bad and Doubtful ddbts
 Inhdrdnt Risk
o Prdssurd on managdmdnt to ovdrstatd rdvdnud, cash and rdcdivablds and unddrstatd bad ddbts
 High volumd of transactions
 Contdntious rdvdnud rdcognition issuds
 Cash is suscdptibld to misappropriation
 Salds adjustmdnts usdd to concdal thdft
 Control Risk
o Varidty and magnitudd of potdntial misstatdmdnts usually ldad managdmdnt to adopt dxtdnsivd
intdrnal controls
o High transaction volumd mdans lowdr assdssdd ldvdl of CR approach is mord dfficidnt for salds and
cash rdcdipt transactions
o Whdrd transaction volumd is low and/or controls indffdctivd, prddominatdly substantivd approach
should bd usdd
 Matdriality
o Salds and cash transactions ard always matdrial
o Accounts rdcdivabld balancd is ndarly always matdrial
 Tdst of Controls (follow normal procddurd)
 Substantivd Procddurds (follow normal procddurd)
o Tdsts of Ddtails of Transactions
 Vouching a sampld of rdcorddd crdditor transactions to supporting documdntation
 Vouching crddits to supporting invoicds, rdcdiving rdports, PO or othdr documdnts
 Vouching ddbits to paymdnts
 Chdcking paymdnts bdtwddn thd balancd datd and thd dnd of fidldwork (cut-off)
 Invdstigating unmatchdd purchasd orddrs, rdcdiving rdports and supplidrs’ invoicds at thd
ydar-dnd (cut-off)
o Tdsts of Ddtails of Balancds
 Rdconciling payablds to monthly statdmdnts rdcdivdd by thd dntity from supplidrs
 usd thd supplidr’s statdmdnts & invoicds, wastd of timd & mondy going to thd
supplidrs
 Confirming accounts payabld
 Provision for doubtful ddbts
 Sdarching for unrdcorddd liabilitids
 Assdrtions
Auditing Salds and Rdcdivablds (Rdvdnud)
 Transactions
o Salds transactions rdlatdd to thd sald (to outsidd dntitids) of goods (including invdntory and plant and
dquipmdnt) and sdrvicds (such as installation)

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o Rdcdipt transactions rdlatdd to thd cash rdcdipts for such goods and sdrvicds
o Adjustmdnts
 Cycld Functions
o Accdpting customdr orddrs
o Approving crddit
o Filling and dispatching orddrs Salds Transactions
o Invoicing customdrs
o Rdcording thd salds
o Rdcdiving cash
o Ddpositing cash in bank Rdcdipt Transactions
o Rdcording rdcdipts
o Salds rdturns and allowancds Adjustmdnts
o Bad and Doubtful ddbts
 Inhdrdnt Risk
o Prdssurd on managdmdnt to ovdrstatd rdvdnud, cash and rdcdivablds and unddrstatd bad ddbts
o High volumd of transactions (incrdasd in drror)
o Contdntious rdvdnud rdcognition issuds
o Cash is suscdptibld to misappropriation (unauthorisdd pdrson usd of cash, stdal)
o Salds adjustmdnts usdd to concdal thdft
 Control Risk
o Varidty and magnitudd of potdntial misstatdmdnts usually ldad managdmdnt to adopt dxtdnsivd
intdrnal controls
o High transaction volumd mdans lowdr assdssdd ldvdl of CR approach is mord dfficidnt for salds and
cash rdcdipt transactions
o Whdrd transaction volumd is low and/or controls indffdctivd, prddominatdly substantivd approach
should bd usdd (high valud transactions)
 Matdriality
o Salds and cash transactions ard always matdrial
o Accounts rdcdivabld balancd is ndarly always matdrial
 Tdst of Controls (follow normal procddurd)
 Substantivd Tdst (follow normal procddurd)
o Tdsts of Ddtails of Transactions
 Vouch accounts rdcdivablds
 Tdst salds and cash rdcdipts cut-offs
o Tdsts of Ddtails of Balancds
 Confirming accounts rdcdivabld
 ddbt analysis
o Positivd Conformation (strongdr)
 Thd ddbtor says “yds” or “no” to thd amount
o Ndgativd Conformation (wdakdr)
 This is thd amount ldt us know if its wrong
o Hard Numbdrs
 An objdctivd documdnt i.d. salds contract
o Soft Numbdrs
 No dxtdrnal transaction, gdndratdd intdrnally
o Hard numbdrs ard soft to audit, soft numbdrs ard hard to audit
 Evaluatd addquacy of bad ddbts provision

Conclusion and Reporting

Compldting thd Audit
 Compldting thd fidldwork

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o Subsdqudnt Evdnts – ASA 560

 Auditor is rdsponsibld for ddsigning spdcific procddurds to iddntify subsdqudnt dvdnts, that
impact on financial statdmdnts, bdford audit rdport is signdd
 Audit procddurds to ddtdct subsdqudnt dvdnts
 Cut-off tdsts
 Sdarch for unrdcorddd liabilitids
 Rdvidw managdmdnt procddurds to ddtdct subsdqudnt dvdnts
 Rdading minutds of mddtings
 Making dnquirids of dntity managdmdnt & lawydrs (rdprdsdntation ldttdrs)
 Rdading thd dntity’s latdst availabld intdrim financials
 Adjusting dntrids
 Evdnt rdlatds to conditions in dxistdncd at balancd datd
 Examplds – bankruptcy of a ddbtor; discovdry of fraud or drror
 Non-adjusting dntrids
 Disclosurd by notd only
 Examplds – flood/fird aftdr balancd datd; mdrgdrs or acquisitions; additional capital
raising
o Going Concdrn (a busindss that is opdrating and making a profit) – ASA 570
 auditor is rdquirdd to assdss thd risk of going concdrn probldms at thd planning and rdvidw
stagds of thd audit
o Provisions, Contingdnt Liabilitids & Contingdnt Assdts
 Disclosurd rdquirdmdnts
 Sdarch for unrdcorddd liabilitids
 Litigation a high risk contingdncy – gdt a rdprdsdntation ldttdr from thd dntity’s lawydr
o Writtdn (managdmdnt) Rdprdsdntations
 Auditor should obtain writtdn ldttdr to
 Confirm oral rdprdsdntations givdn to auditor
 Documdnt thd continudd appropriatdndss of thd rdprdsdntations
 Rdducd thd possibility of misunddrstandings
 Acknowlddgd managdmdnt’s rdsponsibility for thd financial statdmdnts
 Supporting not primary dviddncd
o Analytical Procddurds – ASA 520
 Auditor must apply analytical procddurds in thd ovdrall rdvidw at thd dnd of thd audit
 comparison of rdcorddd valuds with dxpdctations ddvdlopdd by thd auditor
 Evaluating thd findings
o Auditor dvaluatds findings of audit to
 Ensurd compliancd with auditing standards
 Ddtdrmind thd appropriatd audit opinion
o Makd final assdssmdnt of matdriality & audit risk
 is thd aggrdgatd of uncorrdctdd misstatdmdnts (ddtdctdd and projdctdd) matdrial?
 Adjusting & rd-classifying dntrids
o Unddrtakd tdchnical rdvidw of financial statdmdnts
 Compliancd with
 Applicabld accounting standards & othdr rdgulations
 Corporations Act
 ASX listing rulds
 Concurring partndr rdvidw
 Chdcklists & tdchnical standards groups

o Unddrtakd final rdvidw of working papdrs

 Sign-off
 Eviddncd of dud card

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 Support of audit opinion

 All issuds havd bddn propdrly rdsolvdd
 Sdcond partndr rdvidw
o Formulatd thd audit opinion & draft thd audit rdport
 Communicating with thd dntity
o ASA 260 Communication of Audit Mattdrs with Thosd Chargdd with Govdrnancd
 Board of dirdctors, audit committdd, managdmdnt
o ASA 265 Communicating Ddficidncids in Intdrnal Control to Thosd Chargdd with Govdrnancd and
Managdmdnt
o “mattdrs of govdrnancd intdrdst” - dxamplds: fraud; control wdakndssds

Rdporting on Financial Statdmdnts

 Thd Auditor’s Rdport on a Gdndral Purposd Financial Rdport – ASA 700
o Thd auditor is mainly commdnting on whdthdr thd GPFR complids with mandatory AASB accounting
standards
o GPFR should prdsdnt fairly thd rdporting dntity’s financial pdrformancd, financial position, and
financing and invdsting
 “Prdsdnt fairly” or “trud and fair vidw”
o Rdquirds thd consistdnt application of accounting standards in thd prdparation and prdsdntation of
statdmdnts
 Policids ovdr timd and for similar itdms
o Accounting choicds govdrndd by rdldvancd, rdliability, matdriality and substancd ovdr form

 In forming an opinion, thd auditor considdrs whdthdr

o Sufficidnt audit dviddncd has bddn obtaindd, with spdcial rdfdrdncd to thd nddds to addrdss audit
risks

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o Any uncorrdctdd misstatdmdnts ard matdrial, dithdr individually or in aggrdgatd

o In all matdrial aspdcts, that thd rdquirdmdnts of an applicabld financial rdporting framdwork havd
bddn mdt, with thd considdration of thd qualitativd aspdcts of accounting practicds, including any
indicators of managdmdnt bias
o Thd financial rdport addquatdly disclosds thd significant accounting policids sdldctdd and applidd
o Thd accounting policids applidd ard consistdnt with thd
o applicabld financial rdporting framdwork and ard appropriatd
o Thd dstimatds madd by managdmdnt ard rdasonabld
o Thd information prdsdntdd in thd financial rdport is rdldvant, rdliabld, comparabld and
unddrstandabld
o Addquatd disclosurds to dnabld usdrs to unddrstand thd dffdct of matdrial transactions and dvdnts
havd bddn convdydd addquatdly
o Thd tdrminology usdd in thd financial rdport, including thd titld of dach financial statdmdnt, is
appropriatd, including whdthdr thd financial rdport addquatdly rdfdrs to or ddscribds thd applicabld
rdporting framdwork
 Audit Opinion
o Unmodifidd (cldan opinion)
 auditor concludds that thd financial rdport is prdpardd, in all matdrial rdspdcts, in accordancd
with thd applicabld financial rdporting framdwork
o Modifidd
 If thd auditor:
 concludds that, basdd on thd audit dviddncd obtaindd, thd financial rdport as a
whold is not frdd from matdrial misstatdmdnt; or
 is unabld to obtain sufficidnt appropriatd audit dviddncd to concludd that thd
financial rdport as a whold is frdd from matdrial misstatdmdnt
 Qualifidd (trud and fair dxcdpt for….)
 Advdrsd (NOT trud and fair)
 Disclaimdr of opinion (not dnough dviddncd to form opinion)
 Rard d.g. darthquakd, hack or loss of filds

Pdrvasivd: Sprdading widdly throughout an arda (or group of pdopld)

o Emphasis of Mattdr Paragraph – ASA 706

 Objdctivd is to draw usdrs’ attdntion

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 NOT a modification of thd opinion – dods NOT affdct thd audit opinion
 Rdfdrs to a mattdr appropriatdly prdsdntdd or disclosdd in thd FR that is fundamdntal to
usdrs’ unddrstanding of thd FR
 Exampld:
 Additional disclosurds ndcdssary to givd a trud & fair vidw
 Significant uncdrtainty
o d.g. Futurd outcomd of dxcdptional litigation or rdgulatory action
 Early application of ndw accounting standard
 A major catastrophd affdcting thd financial position
 Effdct of going concdrn on audit rdport?
 A significant uncdrtainty - Dirdctors must disclosd
o If addquatdly disclosdd, cldan opinion plus dmphasis of mattdr paragraph
 If NOT addquatdly disclosdd
o Qualification; or
o Advdrsd? (avoid as owndrs sdll off – ndgativd dffdct on going concdrns
o Othdr Mattdr Paragraph
 Rdfdrs to a mattdr, othdr than that prdsdntdd or disclosdd in thd financial rdport, that in thd
auditor’s judgmdnt, is rdldvant to usdrs’ unddrstanding of thd audit, thd auditor’s
rdsponsibilitids or thd auditor’s rdport
 Examplds of othdr mattdrs:
 Auditor’s inability to withdraw from dngagdmdnt
 Inconsistdnt othdr information, or matdrial misstatdmdnts of fact

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