Audit and Assurance – AYB 301

• If you haven’t downloaded copies of the Unit Outline and Week 1 Document – as advised by email last week - just download one after the lecture from the Blackboard site (Unit Details page on Blackboard).

Audit and Assurance – AYB 301

• Unit Outline and Week 1 document on Blackboard site• Text and ACL CD• Tutorials –20% - Your best 4 of 5 weeks, 5% per week to a max of 20%. Weeks

selected at random. Full attempt in point format and bring a copy, (to take notes after handing up your original). Questions in Week 1 document or weekly slides, CRA sheet, next slide

• NO PLAGIARISM !!!!!• No changing of tutes, as different approach in different weeks. All evens out in the

end, don’t panic!)• Assignment 20% posted on Blackboard shortly, – next slides, includes CRA sheet

* Lecture notes on Blackboard weekly• “Selected” solutions to tute questions on Blackboard, but get them at tutorial• Check Blackboard notices regularly!

CRA sheet Tutorial - draftCriteria Unsatisfactory

0 1Low Pass – Pass1.25 1.5

Above Average1.75 2

Excellent2.25 2.5

Mark

Knowledge and Understanding

Demonstrated little understanding of relevant concepts and principles.

Demonstrated some understanding of relevant concepts and principles, using simple examples.

Demonstrated a good understanding of relevant concepts and principles, through explanation and examples.

Demonstrated a comprehensive understanding of relevant concepts and principles, through depth of explanation and linking knowledge and examples.

/2.5

Analysis and Communication

Provided incomplete summary of the questions.No logical argument was presented leading to a satisfactory conclusion.

Identified information from the questions relevant to the problem.There was some evidence of logical argument leading to a conclusion.

Identified and analysed information from the questions relevant to the problems. There was good evidence of logical argument leading to and supporting conclusions.

Relevant information from the questions was identified and analysed comprehensively. Strong evidence of a logical argument that led to and supported conclusions.

/2.5

Mark out of 5

OR

Criteria Unsatisfactory1 2

Low Pass – Pass2.25 3

Above Average3.25 4

Excellent4.25 5

Mark

Technology Application

Demonstrated a lack of proficiency in the use of audit software and summarising results

Demonstrated competence in the use of audit software and summarising results

Demonstrated proficiency in the use of audit software and summarising results

Demonstrated high proficiency in the use of audit software and summarising results

/5

Mark out of 5 /5

CRA sheet Assignment - draftCriteria Unsatisfactory

0 1.75Low Pass – Pass2 3

Above Average3.25 4

Excellent4.25 5

Mark

Knowledge and Understanding

Demonstrated little understanding of relevant concepts and principles.

Demonstrated some understanding of relevant concepts and principles, using simple examples.

Demonstrated a good understanding of relevant concepts and principles, through explanation and examples.

Demonstrated comprehensive understanding of the concepts and principles by thorough explanations. Linked knowledge to examples.

/5

Unsatisfactory0 3

Low Pass – Pass3. 25 6

Above Average6 .25 9

Excellent9.25 11

Analysis and Communication

Provided a summary of the case but no logical argument was presented leading to a satisfactory conclusion.Did not use clear presentation methods and wrote in an unclear and unstructured manner with unsatisfactory spelling, punctuation, and grammar. Did not acknowledge sources.

Identified information from the case relevant to the problem.Showed some evidence of logical argument leading to a conclusion.Wrote in a clear and structured manner with satisfactory spelling, punctuation, and grammar.Acknowledged sources.

Identified and analysed information from the case relevant to the problem. There was good evidence of logical argument leading to and supporting a conclusion.Communicated well using appropriate presentation methods and wrote in a clear, logical and structured manner with good spelling, punctuation, grammar and referencing.

Relevant information from the case was identified and analysed comprehensively. Strong evidence of a logical argument that led to and supported a conclusion.Communicated effectively using appropriate presentation methods and wrote in a clear, logical and structured manner with very good spelling, punctuation, grammar and referencing.

/11

Unsatisfactory0 1

Low Pass – Pass1.25 2

Above Average2.25 3

Excellent3.25 4

Groupwork Did not form a group, attend meetings or perform work allocated. Contributed nothing to all aspects. Failed to cooperate

Attended some meetings. Performed a little of the work allocated. Contributed and cooperated minimally to all aspects.

Attended most meetings. Performed most of the work allocated to them. Contributed and cooperated moderately to all aspects.

Attended almost all meetings. Performed all work allocated. Contributed and cooperated equally to all aspects.

/4

Total Mark 20 * If groupwork mark (out of 4), is significantly different from other group members, content mark (out of 16) may be reduced accordingly after review with unit coordinator.

/20

CRA sheet Assignment - draft• Groupwork Scores: Each Student completes one of these individually and puts in

Conor O’Leary’s pigeon Hole (Level 3 B-Block)• The students in my group are listed in the table below:• 1• 2• 3• 4• 5• As per the CRA sheet criteria, I would give each member of my group a mark out

of 4 for “Groupwork” as follows:• Students’ Names: (All students in group)Groupwork Mark: (From 0-4)• My name:_____________________________________• My Signature:_____________________________________

Audit and Assurance – AYB 301

• Bring texts and h/outs – advised by notice – to each class

• Knowledge of Auditing Standards and professional pronouncements such as Professional and Ethical Statements as per text, but look them up in Library and/or website

• www.auasb.gov.au – Auditing Standards• www.apesb.org.au – Ethical Statements

Chapter 1

The Importance of Auditing

Auditing: A Special Function

• Auditing is a type of assurance service

• It provides assurance on the quality of information in financial statements to external users of these statements

• Other types of auditing include internal and operational auditing, governmental auditing, and other services that evaluate and report on managerial performance.

Auditing: A Special Function

• Auditing is particularly important in data for capital markets.

• An auditor contributes to effective capital markets by providing independent evaluations of the reliability of an organisation’s financial statements on efficiency and effectiveness of various aspects of its performance.

Auditing Defined

A ‘systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events (information) to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.’

There are four components:evidenceInformationcriteriaCommunicating .

What Is Attestation?

• Auditing is a specific attestation service where

the auditor:

– gathers evidence to determine whether the financial statements are presented in accordance with accounting standards and the ‘true and fair’ criteria

– issues an opinion for third-party users, management and the board of directors.

Obtaining and Evaluating Evidence

• Auditing is all about evidence.

• The auditor gathers evidence to determine whether:

– the client’s processes are working correctly– its financial data are recorded and presented

correctly– its financial statements as a whole are

presented in a true and fair manner.

Assertions and Established Criteria

• When management prepares financial statements, they assert that those statements are presented in accordance with the criteria of accounting standards.

• The question is whether conforming to accounting standards makes the financial statement ‘true and fair’?

Assertions and Established Criteria (cont.)

• However, applying accounting standards is difficult.

– Accounting standards allow discretion by users.

– Management prepares statements using this discretion.

• The auditor’s task is to determine whether the financial statements present a true and fair view of the financial status and performance of the organisation.

Fin Sts Audit - Example

• Woolworths accounts (see O/Heads, from www.woolworthslimited.com.au/investorcentre/reports/annualreport2009)

• Who are users?• Who prepares them• How could they be “slanted”• How should they be prepared• What provides assurance this has been done• What can the users now do?

Communicating Results to Users

• Communication of audit results to management and external users completes the audit process.

• To minimise misunderstandings, this communication follows a prescribed format set out in what are known as Auditing Standards. These:

– state responsibilities of both management and the auditor

– summarise the audit process– express the auditor’s opinion on the

financial statements.

Unmodified Audit Reports

• An unmodified audit report is a clean report.

• The auditor has no reservation about the presentation of the financial statements.

• Most audits result in reports are unqualified.

Components of an Auditor’s Report

• The five components of the auditor’s report are:– introduction– director’s responsibility– auditor’s responsibility– independence– auditor’s opinion.

– Look at Woolworths Example

The Need for Assurance• Potential bias in providing information– Management has a vested interest!

• Remoteness of users– Most users do not have the opportunity to

interview management,

– ComplexityMany transactions are more complex than they were a decade ago.

Increased Demand for Accountability

• Major local and international corporate failure– HIH in Australia – Enron in USA

• Involve major misrepresentation of financial statements• Investors lost billions of dollars • Failure of one of the largest public accounting firms (Arthur

Andersen, auditor for HIH and Enron)• Perception that auditors were not independent from their

clients

Public Policy Response

• CLERP 9 Act 2004 in Australia

• Sarbanes-Oxley Act 2002 in the United States

• The CLERP 9 Act focused on four critical improvements to protect investors and financial statement quality:

– improved corporate governance– greater independence of audit function– acknowledgment of greater audit responsibility– setting of audit standards moved to a new

public organisation.

Levels of Assurances Provided

• Positive assurance (such as an audit opinion)

• Limited or negative assurance (such as a review of financial statements)

• No assurance (such as a compilation of financial statements)

Attributes Needed to Perform Assurance Services such as audit

• Subject matter knowledge • Independence from parties requesting assurance• Agreed-upon criteria to evaluate quality of presentation• Expertise in the process of gathering and evaluating

evidence

Requirements to Enter the Public Accounting Profession

• Accounting and auditing expertise:

• Knowledge of business and its risks:

• Understanding accounting system complexity:

The Providers of Assurance Services

• Public accounting profession

• Internal audit profession

• Public sector audit profession

The Public Accounting Profession

• Public accounting firms in Australia range from local sole practitioners to large multinational firms. The largest firms are known the Big 4.

• These firms provide a variety of services in the areas of assurance and financial statement services, tax planning and compliance, and consulting.

– compliance audits– operational audits– performance audits.

Organisation of Public Accounting Firms

• Historically, public accounting firms have been partnerships.

• Their organisational hierarchy is usually a pyramid structure.

• Partners (or owners) are at the top and are responsible for the overall conduct of each audit.

• Next, managers review the detailed audit work performed by staff auditors.

Organisation of Public Accounting Firms (cont.)

• Seniors are responsible for overseeing much of the day-to-day activities on a specific audit.

• Staff auditors perform the basic, detailed audit work.

• Partners and managers may be involved in a number of audit engagements being conducted simultaneously; seniors and staff are usually assigned to only one audit at a time.

Professional and Regulatory Organisations

• Public accounting professional bodies in Australia:

– CPA Australia (CPAA)– The Institute of Chartered Accountants in

Australia (ICAA)– The National Institute of Accountants (NIA).

• These bodies have established the Australian Professional Ethical Standards Board (APESB).

Professional and Regulatory Organisations (cont.)

• The Australian Securities and Investment Commission (ASIC) registers all company auditors.

• The Companies Auditors and Liquidators Disciplinary Board (CALDB) can cancel registration.

• The Australian Securities Exchange (ASX)

• The Institute of Internal Auditors (IIA)

• Legal system

Rules Governing auditing

• The Corporations Act• Auditing Standards• Ethical code

Corporations act

Audit Provisions

QualificationsAppointmentRemovalPowers & DutiesReportingAuditing Standards

Accounting Provisions

Accounting Standards

Reliable financial reports

Director Responsibilities

Auditing standards (p.12)

Represent MINIMUM standards of performance for auditors

Standards are divided into:

Introduction

Responsibilities

Planning RiskAudit Evidence

Conclusions/reporting

Using the work of others

Other

Chapter 3

Ethics: Understanding and Meeting Ethical Expectations

Ethical conduct of professionals

The term ‘The term ‘Professional’Professional’ implies special implies special responsibility for conduct responsibility for conduct

through the need for through the need for ‘public confidence’‘public confidence’ in the quality of servicein the quality of service

Public confidence is enhanced when Public confidence is enhanced when

the profession encourages high the profession encourages high

standards of performancestandards of performance

APESB• In 2005 the establishment of an independent ethical standards board to set

the code of professional conduct and professional statements.

The Accounting Professional and Ethical Standards Board (APESB).

• http://www.apesb.org.au/

Code of professional conduct

EthicalEthicalrulesrules

EthicalEthicalrulesrules

Members are required to follow Members are required to follow the ethical rulesthe ethical rules

Members face disciplinary measuresMembers face disciplinary measuresfor non-compliancefor non-compliance

Fundamental principles of professional conductAPES 110 Sec 100.4

1. Integrity1. Integrity

Auditors must be straightforward, honest Auditors must be straightforward, honest & sincere in their professional work& sincere in their professional work

Auditors must not allow prejudice, conflict Auditors must not allow prejudice, conflict of interest or bias to override objectivityof interest or bias to override objectivity

2. Objectivity2. Objectivity

Fundamental principles of professional conductAPES 110 Sec 100.4

3. Professional Competence and Due Care3. Professional Competence and Due Care

Auditors must Auditors must perform professional perform professional services with due care, competence & services with due care, competence & diligence and comply with technical & diligence and comply with technical & professional standardsprofessional standards

Auditors must respect the confidentiality Auditors must respect the confidentiality of informationof information acquired in their workacquired in their work

4. Confidentiality4. Confidentiality

Fundamental principles of professional conductAPES 110 Sec 100.4

5. Professional behaviour5. Professional behaviour

Auditors must comply with Laws and Auditors must comply with Laws and Regulations and refrain from any conduct Regulations and refrain from any conduct

that might bring discreditthat might bring discredit

Summary

• Auditing• Discuss tutorials• Readings Ch 1 and Ch3 (70-77)• Qs Ch1: 22,50,52,56. Ch 3: 3,8.