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1.2 Define the term 'assurance engagement' and explain the various levels of assurance that my be provided by an auditor

1.2 Define the term 'assurance engagement' and explain the various levels of assurance that my be provided by an auditor

Paragraph 10 of the Framework for Assurance Engagements (International Framework for Assurance Engagements) defines an assurance engagement 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’.

The Framework says that a practitioner can provide two levels of assurance for an assurance engagement: reasonable assurance and limited assurance. For assurance services on historical financial information, a reasonable assurance engagement is commonly termed an audit, and a limited assurance engagement is commonly termed a review. The objective of a reasonable assurance engagement (audit) is reducing assurance engagement risk to an acceptably low level, and this is associated with a positively expressed assurance opinion (such as that the financial information is true and fair). The objective of a limited assurance engagement (review) is reducing assurance engagement risk to a level that is acceptable in the circumstances—but where the remaining risk is greater than with a reasonable assurance engagement— as the basis for expressing a conclusion in a form that conveys whether, based on procedures performed and evidence obtained, any matter has come to the auditor’s attention to persuade them that the information has been materially misstated.

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1.4 Explain the objective of a financial report audit

1.4 Explain the objective of a financial report audit

ASA 200.11/ISA 200.11 states that the objectives of the auditor in undertaking an audit of a financial report are:

(a) 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

(b) To report on the financial report, and communicate as required by the Australian Auditing Standards (ISAs), in accordance with the auditor’s findings.

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1.7 Explain the key attributes of accounting information and how those attributes relate to an audit

1.7 Explain the key attributes of accounting information and how those attributes relate to an audit

The demand for an independent financial report audit arises from the following conditions:

 + Conflict of interest: The user may perceive an actual or potential conflict with the preparer. For example, management could have an incentive to present biased information in a financial report because these reports are a means of conveying information about management’s performance or may impact on their bonus. An independent, third-party examination reduces the likelihood of bias and enhances the credibility of the information.

 + Consequence: When a user is contemplating using information to make decisions of significant consequence, the quality of that information is a major concern.

 + Complexity: The subject matter and the process by which the data (for example, transactions) is converted into information (for example, financial reports) is complex, increasing the possibility of error and the need for high level of expertise to judge the quality of information.

   + Remoteness: The separation of owner and manager, and therefore the user and the preparer, prevents the user from assessing the quality of the information.

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1.9 Explain how the auditor's relationship with the client creates a potential conflict with their professional duties

1.9 Explain how the auditor's relationship with the client creates a potential conflict with their professional duties           

Although in theory auditors are appointed by shareholders, in practice auditors are effectively selected and paid by the people affected by their work, i.e. management, with shareholders merely endorsing those decisions. Further, an audit of a financial report requires the auditor to have a close working relationship with management and an intimate knowledge of many of management’s actions, decisions and judgments, which have a significant effect on the financial report. Therefore, an auditor is subject to conflicting pressures and complete independence is very difficult to achieve. The auditor depends on fees from clients and necessarily has a close relationship with clients, but may need to persuade a client to disclose unfavourable information in fulfilling the duties imposed by the audit function.

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1.12 Explain the following applications of the assurance function, including the types of activities involved:

(a) internal audit

(b) forensic audit

(c) compliance audit

(d) performance audit

 

1.12 Explain the following applications of the assurance function, including the types of activities involved:

(a) internal audit

(b) forensic audit

(c) compliance audit

(d) performance audit

 

(a) Internal audit: Internal audit is an appraisal activity within an entity for the review of financial and business risks and other operations as a basis for service to management. It is an audit undertaken by a body of audit professionals who are internal to or employees of the audited entity.

(b) Forensic audit: Forensic auditing involves detecting, investigating and deterring fraud and white-collar crime. Some examples of situations in which forensic auditors have been involved include:

  • analysing financial transactions involving unauthorised transfers of cash between companies
  • reconstructing incomplete accounting records to settle an insurance claim over inventory valuation
  • proving the commission of money-laundering activities by reconstructing cash transactions
  • investigating and documenting embezzlement, and negotiating insurance settlements.

(c) Compliance audit: Compliance audits involve the expression of an opinion on an entity’s compliance with statutes, regulations or other directives that govern the activities of the entity. Thus any example of compliance with any regulation, including compliance with internal control activities, would be appropriate.

(d) Performance audit: Performance audits are designed to analyse organisational structure, internal systems, work flow and managerial performance. They are usually associated with issues of efficiency, effectiveness and economy. In short, performance auditing is intended to provide a measure of an entity’s operational achievements.

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Sunrise Ltd has requested its auditor, Brown & Associates, to undertake the following three engagements and report on the results of their work:

(a) Carry out whatever tests are deemed necessary to determine whether its annual general purpose financial report presents a true and fair view, and whether it has been prepared in accordance with Australian Accounting Standards.

(b) Check whether the annual schedule of bonuses paid to senior management has been calculated correctly by checking the figures used in the calculations to the company's audited accounting records.

(c) Carry out detailed analytical procedures and enquiries of management as to whether the half-yearly financial report lodged with ASIC presents a true and fair view, and whether it has been prepared in accordance with Australian Accounting Standards

REQUIRED

Identify whether the engagement is an audit, review or agreed-upon-procedures engagement and the levels of assurance provided for each engagement.

(i) This engagement is an audit, as a full range of tests are being carried out and the auditor is deciding on what testing is to be done. A reasonable level of assurance would be provided.

(ii) This engagement is an agreed-upon-procedures engagement, as the client is deciding on the procedures to be undertaken when checking the calculations. No assurance is provided, but rather a statement of factual findings would be provided and the client could deduce their own assurance from it, as they are the ones that decided on what needed to be done.

(iii) This engagement is a review engagement, as analytical procedures and enquiries only are being carried out. A limited level of assurance will be provided.

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1.23 Numeroous corporate scandals or collapses and audit failures in the early 2000s resulted in users and prepares of financial reporting information losing faith in the audit function

REQUIRED

How have auditors, audit committees and regulators responded to redress this perception and restore user and preparer confidence in the audit function?

There have been a number of responses undertaken by the auditors, audit committees and regulators to restore user and preparer confidence in the audit function. These include:

+ a framework for all assurance services, not just financial report audits

greater independence requirements in the standard-setting process

+ legislation and auditing standards aimed at improving professional competence and independence

+ revised auditing standards for financial report audits and the revised auditing standard regarding fraud

+ in Australia, auditing standards required to be followed by legislation

new standards for assurance engagements other than financial report audits

+ new corporate governance and ethics initiatives embodied in legislation, including the requirement for certain public companies to have an audit committee.

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Slingh & Associates offer their clients a variety of audit and assurance services, including:

(a) analysis of financial transactions involving unauthorised transfers of cash between companies

(b) conformity of annual financial reports with applicable accounting standards

(c) reconstruction of incomplete accounting records to settle insurance claims

(d) checking adherence to legislative requirements

(e) review of half-yearly financial reports based on analytical procedures and enquiries of entity personnel

(f) assessment of energy usage patterns and recommendation of energy conservation opportunies

REQUIRED

For each of the services listed above, indicate the type of audit (financial report, compliance, performance, internal or forensic) performed

 

 

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2.1 Explain the attributes of auditing that result in it achieving the status of a profeesion

2.1 Explain the attributes of auditing that result in it achieving the status of a profeesion

The AUASB, which is an independent statutory body, develops and maintains auditing and assurance standards, which are applicable to all audits. For audits undertaken under the Corporations Act 2001, the standards have legal authority. Failure to observe these standards may expose a member to investigation and disciplinary action from the Australian Securities and Investments Commission (ASIC) through the Companies Auditors and Liquidators Board (CALDB).

For other audit and assurance engagements there is a mandatory obligation for members of the accounting bodies to follow the standards contained in APES 210 Conformity with Auditing and Assurance Standards, issued by the Accounting Professional and Ethical Standards Board (APESB). Failure to follow these standards in engagements can result in disciplinary action by the accounting bodies.

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2.5 Explain the factors that have contributed to the need for the internationalisation of auditing

2.5 Explain the factors that have contributed to the need for the internationalisation of auditing

Globalisation of business has meant that there is a need for harmonisation of the working methods of auditors in different countries and the adoption of international auditing standards. Multinational clients want to be assured that, all over the world, members of the audit firm will be able to communicate easily on the outcomes of the audit and will apply one set of quality criteria to ensure the quality of the audit. Uniformity of the main elements of the audit process on an international scale also enables audit firms to increase the efficiency and effectiveness of the audit process worldwide.

IOSCO, which is the International Organisation of Securities Commissions, has pushed strongly for the adoption of international auditing standards for the audit of companies listed on world stock exchanges.

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2.7 Who are the Big Four auditing firms and to what extent do they dominate the auditing profession?

2.7 Who are the Big Four auditing firms and to what extent do they dominate the auditing profession?

The largest international audit firms, consisting of PricewaterhouseCoopers, EY, KPMG and Deloitte, are known as the ‘Big Four’. In the US, more than 90 per cent of the ‘Fortune 500’ companies and thousands of smaller entities are audited by the Big Four. In the UK, the Big Four account for two-thirds of the audit market. In Australia, the Big Four’s annual revenues in 2013 averaged $1199 million, which was 3 to 4 times the size of the next largest mid-tier audit firm.