prepare a power point side and points
Session 1 Module 2 INTRODUCTION TO AUDITING
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LEARNING OBJECTIVES
After this module you should be able to:
Define auditing
Differentiate between different levels of assurance
Appreciate different audit opinions (covered in depth in session11)
Differentiate between the different role of the preparer of financial statements and the auditor.
Explain the reasons for the demand for audit and assurance services
Appreciate the Corporations Act requirements for company audits
Explain the audit expectation gap.
These are the objectives that students are expected to understand and be able to explain and apply.
Students will only be assessed within the learning objectives provided for each module of the course.
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AUDITING AND ASSURANCE DEFINED
An audit is an assurance engagement defined as ‘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.’
This is a definition of an audit highlighting the main parties involved and their roles
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Diagram of assurance engagement
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*Comment on : main parties and their roles
Jaq (J) - add figure 1-1
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Five elements ofassurance engagement
Three-party relationships:
assurance practitioner (auditor)
responsible party (preparer)
intended user
Subject matter
Suitable criteria
Sufficient appropriate evidence
Written assurance report
Audit engagement has 5 elements
These are explained on following slides
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AUDITING AND ASSURANCE DEFINED
‘intended users’ - the people for whom the auditor prepares their report. Example: shareholders, creditors, employees
‘responsible party’ - the person or organisation responsible for preparing the financial statements. Example: company management
‘subject matter’ – that which the auditor is expressing a conclusion on. i.e. financial reports
‘criteria’ – the rules or principles by which the subject matter is being evaluated. i.e. Accounting standards and interpretations and Corporations laws
Comment on explanations of terms
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AUDITING AND ASSURANCE DEFINED cont’d.
Sufficient appropriate evidence
The quantity and quality of evidence the auditor requires in order to express a conclusion on the subject matter
*Written assurance report
Written report from the auditor expressing the auditor’s conclusion on the subject matter
Comment on explanations of terms
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DIFFERENT LEVELS OF ASSURANCE
AUDITORS MAY PROVIDE VARYING LEVELS OF ASSURANCE WHEN CONDUCTING ASSURANCE ENGAGEMENTS.
Reasonable assurance
Limited assurance
No assurance
There are 3 levels of assurance which are described on next slide
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DIFFERENT LEVELS OF ASSURANCE
| LEVEL OF ASSURANCE | EXAMPLE | THE ASSURANCE EXPRESSION | |
| REASONABLE Highest level of assurance but not absolute assurance on the reliability of the subject matter | Financial Statement Audit | The auditor has conducted sufficient tests and obtained appropriate and sufficient evidence to conclude positively that the information provided is assured as (or is not) reliable | Positive |
| LIMITED Moderate assurance on the reliability of the subject matter | Review of a company’s half-year financial report | Auditor has done adequate work to report whether or not anything came to their attention that would lead them to believe that the information that is assured is not true and fair. | Negative |
| NO ASSURANCE | Agreed-upon procedures engagement | The auditor does not report an opinion – merely report on the findings and the facts of their findings. The client determines the nature, timing and extent of evidence gathered and then draws their own conclusions about these findings | No Assurance given |
This explains the 3 levels of assurance
This unit is concerned with financial report Audits.
Students are required to differenciate the 3 levels only
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FINANCIAL REPORT AUDITS
THE MOST COMMON ASSURANCE SERVICES ARE
FINANCIAL REPORT AUDITS an engagement designed to express an opinion about whether the report is prepared in all material respects in accordance with a financial reporting framework
Financial report audit definition
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LIMITATIONS OF AN AUDIT
There is no guarantee that the financial report is free from error or fraud.
The nature of audit procedures and processes are required to be performed within a reasonable period and at a reasonable cost. Judgement is required in the process of preparation of the financial statements.
Financial report audit has limitations
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DIFFERENT AUDIT OPINIONS
Audit opinions are contained in audit reports provided by the auditor.
An unmodified audit report contains an unqualified or ‘clean’ opinion. Refer Figure 1.1 p. 12 of text.
All other reports are modified opinions.
I will briefly comment on the different audit opinions (or conclusions about the subject matter ) in this and the next slide.
The audit opinions will be covered in more depth towards the end of the course. However, it is useful at this stage of the course to appreciate
the possible eventual outcomes of audits
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DIFFERENT MODIFIED AUDIT OPINIONS
| Auditor’s Judgement about the Pervasiveness of the Effects or Possible Effects on the Financial Report | ||
| Nature of Matter Giving Rise to the Modification | Material but Not Pervasive | Material and Pervasive |
| Financial report is materially misstated | Qualified opinion | Adverse opinion |
| Inability to obtain sufficient appropriate audit evidence | Qualified opinion | Disclaimer of Opinion |
This describes the various types of modified opinions
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PREPARERS AND AUDITORS
It is the responsibility of those charged with governance to prepare the financial statements. The information should include the following attributes:
Relevant: has an impact on the decisions made by users regarding the performance of the entity.
Reliable: Information is free from material misstatements (errors or fraud.)
Comparable: information needs to be comparable through time. Comparable against the same entity over time and against other entities.
Understandable: Users need to be able to interpret the information presented in order to make decisions.
True and fair: requires the consistent and faithful application of an applicable framework when preparing report.
Preparers of financial statements and notes of disclosure-are to ensure they are prepared in accordance with the qualitative attributes of accounting information
The auditor assures that the subject matter of the audit-the financial statements and notes of disclosure- are prepared in accordance with the qualitative attributes of accounting information
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PREPARERS AND AUDITORS
AUDITOR ALSO HAS RESPONSIBILITIES RELATING TO THE AUDIT.
Professional scepticism: maintaining independence from the entity and having a questioning mind to thoroughly investigate all evidence presented.
Professional judgement: use of judgement based on level of expertise, knowledge and training obtained by the auditor.
Due care: being diligent, applying standards and documenting each stage of the audit process.
This describes professional responsibilities of auditor when conducting an audit
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DEMAND FOR AUDIT AND ASSURANCE SERVICES
The users of the financial statements are not limited to the shareholders or owners of the business.
Other users can include:
Investors: can include current or potential investors. Decisions include to buy, hold or sell stake in the organisation.
Suppliers: may want to assess whether the entity can pay them back for goods supplied.
Customers: may look into going concern if it is to rely on the entity for goods.
There is demand for audits from key stakeholders
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DEMAND FOR AUDIT AND ASSURANCE SERVICES cont’d
Lenders: to assess whether loan repayments can be made as and when they fall due.
Employees: to assess whether they can pay entitlements, and stability may be assessed for job security.
Governments: whether the entity is complying with regulations and paying appropriate taxes.
General Public: whether they should associate with the entity (future employee, customer or supplier,) what it does and plans to do in future.
More stakeholders
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SOURCES OF DEMAND FOR AUDIT & ASSURANCE SERVICES
REASONS WHY USERS DEMAND FINANCIAL REPORTS INCLUDE:
Remoteness: users do not have access to information themselves.
Complexity: users do not have knowledge to be able to make disclosure choices.
Competing incentives: users may find it difficult to identify when the incentives of management have been over-represented.
Reliability: as decisions are being made based on information presented, it is important that it be reliable.
Comment on: reasons why key stakeholders require an independent external audit
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CORPORATIONS ACT
Corporations Act provides guidance on conducting audit of financial reports.
This includes requirements for:
1.certain accounts to be audited (s. 301,)
2. the audit report to state whether financial reports provide a true and fair view & in accordance with accounting standards (s. 307,)
3.Accounting standards must be applied (s. 307A,)
4. retention of audit working papers (s. 307B,)
5. Auditor independence declaration (s. 307C.)
For publicly listed companies there is also a legislative requirement for audit services.
This describes the Australian legislation .
There are similar legislative requirements for jurisdictions in other countries.
This slide is for information only and students are not expected to know particulars about legislative requirements for this unit.
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AUDIT EXPECTATION GAP
Users of the audit report may have expectations which exceed the level of reasonable assurance provided by the auditor .This difference is referred to as the AUDIT EXPECTATION GAP
Can be caused by unrealistic expectations including:
The auditor providing a complete assurance.
The auditor guaranteeing future viability of entity.
An unqualified opinion denotes complete accuracy.
The auditor will find all frauds.
We know these cannot be met by the auditor.
The difference in expectations is referred to as the expectations gap
A factor in this gap is unrealistic expectations of users
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It’s not fair! This isn’t what auditors do.
You’re supposed to guarantee the financial report!
We lost all of our investments because of your report!!
You should have detected the fraud !
AUDIT EXPECTATION GAP
Users of the audit report may have expectations which exceed the level of reasonable assurance provided by the auditor
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The gap between audit expectation and audit performance
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The diagram also includes performance gap of auditors as components of the expectations gap.
Explain: Audit Performance Deficit; Audit Standards Deficit
Jaq (J) - add figure 1.5
AUDIT EXPECTATION GAP
THE EXPECTATION GAP CAN BE REDUCED BY:
Auditors performing their duties appropriately
Undertaking peer reviews of work performed
Reviewing and updating auditing standards.
Educating the public.
Enhanced reporting explaining audit processes and levels of opinion auditors provide to the entity.
Greater attention to the risk of material fraud occurring.
Auditors have taken action to reduce the expectations gap
Briefly comment on latest inclusion of Key Audit Matters in audit reports
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END
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