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Contents

Module 1...............................................................................................................................................2
Four classifications of Engagement:....................................................................................................2
1.

Audits of historical financials....................................................................................................2

2.

Reviews of historical financial information..............................................................................2

3.

Assurance engagements other than the audits or reviews of historical financial information. .2

4.

Related Services........................................................................................................................2

Types of assurance engagements..........................................................................................................2


Reasonable vs Limited.....................................................................................................................3
Attestation vs Direct.........................................................................................................................3
Elements of an assurance engagement.................................................................................................3
1.

A three-party relationship between a practitioner, responsible party, and intended users.........3

2.

Subject Matter...........................................................................................................................3

3.

Suitable Criteria.........................................................................................................................3

4.

Evidence....................................................................................................................................3

5.

Assurance Report......................................................................................................................4

Audit Quality........................................................................................................................................4
Audit Judgements.................................................................................................................................4
Review Engagements...........................................................................................................................4
Code of Ethics for Professional Accountants.......................................................................................4
Threats to compliance with fundamental principles:.......................................................................5
Safeguards........................................................................................................................................5
Fundamental principles of professional conduct..................................................................................5
Integrity............................................................................................................................................5
Objectivity........................................................................................................................................5
Professional competence and due care.............................................................................................5
Confidentiality..................................................................................................................................5
Professional behaviour.....................................................................................................................6
Code of ethics for professional accountants in public practice............................................................6
Professional appointment.................................................................................................................6
Conflicts of interest..........................................................................................................................6
Second Opinions...............................................................................................................................6
Fees and other types of remuneration...............................................................................................6
Marketing professional services.......................................................................................................6
Gifts and hospitality.........................................................................................................................6
Custody of client assets....................................................................................................................6
Objectivity All services.................................................................................................................7

Module 1
Four classifications of Engagement:
1

Audits of historical financials: to enable the auditor to express an opinion as to

whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework (Audits of historical financial information are
reasonable assurance engagements)
1. Reviews of historical financial information: to enable the auditor to express a
conclusion as to whether, on the basis of the review, anything has come to the auditor's
attention that causes the auditor to believe that the financial information is not prepared, in
all material respects (Reviews of historical financial information are limited assurance
engagements).
2. Assurance engagements other than the audits or reviews of
historical financial information:
Prospectus for potential investors
Internal management reports
Cash flow forecasts
Non-financial performance indicators
Operations of internal controls
4 Related Services1
Engagements to perform agreed upon procedures
Compilation of financial information
Preparation of tax returns
Management and tax consulting

Types of assurance engagements:


1

Not an assurance engagement

Reasonable vs Limited
Reasonable assurance engagement Audit: provides a positive form of expression of
the practitioner's conclusion; evidence gathering is extensive
Limited assurance engagement Review: provides a negative form of expression of the
conclusion; evidence gathering procedures are limited.

Attestation vs Direct
Attestation engagements: where a party other than the assuror measures or evalates the
underlying subject matter against the criteria (eg. audits and reviews of financial
statements)
Direct engagements: where the assuror measures or evaluates the underlying subject
matter against the criteria (e.g.: assuror undertakes the measurement of the internal
control system)

Elements of an assurance engagement


1. A three-party relationship between a practitioner, responsible party,
and intended users
Practitioner is the auditor
Responsible Party:
Direct reporting engagement: responsible party is responsible for the subject
matter
Assertion-based engagement: responsible party is responsible for the subject
matter information and may or may not be responsible for the subject matter
Intended users: a person or class of persons for whom the practitioner prepares the
assurance report.
2. Subject Matter:
Financial performance or conditions
Non-financial performance
Physical characteristics
Systems and processes
Behaviour: corporate governance, compliance, human resource practices
3. Suitable Criteria: benchmarks used to evaluate or measure the subject matter

Characteristics of suitable criteria: Relevance, completeness, reliability, neutrality,


understandability
4. Evidence:
Professional Scepticism: practitioner needs to make critical assessments with a
questioning mind in respect to the validity of evidence obtained, and is also alert to
evidence that contradicts the reliability of documents or representations by the
responsible party.
Sufficiency and appropriateness of evidence:
Sufficiency: measure of the quantity of evidence
Appropriateness: measure of the quality of evidence
We can increase the reliability of evidence obtained from management by
corroborating key factors and relationships used in the management information.

Assumptions with respect to such as inflation, interest rates and industry growth
rates can be compared with independently published information.
Materiality: is considered in the context of quantitative and qualitative factors, such
as relative magnitude, the nature and extent of the effect of these factors on the
evaluation or measurement of the subject matter, and the interests of the intended
users.
Assurance engagement risk: risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is materially misstated.
Inherent risk: the vulnerability of the subject matter information to a material
misstatement.
Control risk: the risk that a material misstatement will not be detected, prevented or
corrected by related internal controls.
Detection risk: that the practitioner will not detect a material misstatement that exists.

Nature, timing and extent of evidence-gathering procedures


5. Assurance Report
The practitioner needs to provide a written report containing a conclusion that conveys the
assurance obtained about the subject matter information.
Reasonable assurance engagement: conclusion is expressed in a positive form
Limited assurance engagement: conclusion is expressed in a negative form

Audit Quality
Drivers of audit quality:
The culture within an audit firm
The skills and personal qualities of audit partners and staff
The effectiveness of the audit process
The reliability and usefulness of audit reporting
Factors outside the control of auditors affecting audit quality
Australias audit regulation framework
The audit review process
Outcome of quality audit is due to the delivery of an appropriate and independent opinion in
compliance with the auditing standards. It is further noted that audit quality is about reaching the
right opinion but also how that opinion is reached the process, thought and integrity that is behind
the formal audit report.

Audit Judgements
The auditor shall exercise professional judgement in planning and performing an audit of financial
statements. The professional judgement of an auditor emanates from characteristics such as the
auditors experience, knowledge and training. Even though auditors exercise professional
scepticism in an attempt to mitigate risk of being deceived, there will always be some residual risk
of material misstatement due to fraud. With the increasing complexity of accounting standards,
these judgements are becoming even more difficult for auditors.

Review Engagements
While audits provide a reasonable level of assurance, a review provides a limited level of assurance
that the information subject to review is free of material misstatements.

Code of Ethics for Professional Accountants


ASA 102 Compliance with Ethical Requirements when Performing Audits: the auditor, assurance
practitioner, engagement quality control reviewer, and firm shall comply with relevant ethical
requirements, including those pertaining to independence, when performing audits, review and
other assurance engagements.

Threats to compliance with fundamental principles:

Self-interest may occur as a result of the financial or other interests of a professional


accountant
Self-review may occur when a previous judgement needs to be re-evaluated by the person
or firm responsible for that judgement
Advocacy- may occur when a professional accountant promotes a position or opinion to the
point that subsequent objectivity is compromised
Familiarity may occur when, because of a long or close relationship with a client, a
professional accountant becomes too sympathetic to their interests or too accepting of their
work; and
Intimidation may occur when a professional accountant may be deterred from acting
objectively because of actual or perceived threats.

Safeguards

Education, training and experience requirements for entry into the profession
Continuing professional development requirements
Corporate governance regulation
Professional standards
Professional or regulatory monitoring and disciplinary procedures
External review by a legally empowered third party of the reports, returns, communications
or information produced by a professional accountant
Effective, well-publicized complaint systems
An explicitly stated duty to respect breached of ethical requirements

Fundamental principles of professional conduct


Integrity
The principle of integrity imposes an obligation on professional accountants to be straightforward
and honest in all professional and business relationships.

Objectivity
Professional accountants are required to maintain an impartial attitude in their work.

Professional competence and due care


1. To maintain professional knowledge and skill at the level required to ensure that clients
or employers receive.
2. To act diligently to the best of ones ability in accordance with applicable technical and
professional standards when providing professional services (due care). Diligence
encompasses a responsibility to act carefully, thoroughly and on a timely basis.

Confidentiality
A professional accountant is required to respect the confidentiality of information acquired as a
result of professional and business relationships and not disclose any such information to third

parties without proper and specific authority, unless there is a legal or professional right or duty to
disclose.

Professional behaviour
A professional accountant shall comply with relevant laws and regulations and avoid any action that
discredits the profession. Therefore, in addition to their duty to clients, employers and the public,
accountants also have a responsibility to the profession.

Code of ethics for professional accountants in public


practice
Professional appointment
Before accepting a new client relationship, a professional accountant in public practice shall
determine whether acceptance would create any threats to compliance with the fundamental
principles. Before accepting a specific client engagement, a professional accountant in public
practice shall determine whether acceptance would create a self-interest threat to professional
competence and due care if the engagement team does not possess, or cannot acquire, the
competencies necessary to properly carry out the engagement.

Conflicts of interest
Under the Code, professional accountants in public practice have a responsibility to take reasonable
steps to identify circumstances that could pose a conflict of interest. It is also the responsibility of
the professional accountant to apply the safeguards including notifying relevant parties.

Second Opinions
Seeking a second opinion is common in many professions. However, in accounting, problems arise
when the client succeeds in obtaining an opinion favourable to his/her position and uses this opinion
to apply pressure on the existing accountant.

Fees and other types of remuneration


Before undertaking an assignment, a professional accountant in public practice must advice the
client of the basis on which fees will be compiled, clearly define the billing arrangement in writing
and advise the client without delay of any changes to the fee the structure or billing arrangements.

Marketing professional services


Generally, professional accountants in public practice are permitted to advertise or obtain publicity
for their services provided that the content or nature of such advertising or publicity is not false,
misleading or deceptive, or in any other way reflects adversely on the profession.

Gifts and hospitality


Professional accountants may find themselves in situations where they, or their immediate or close
family members, are offered inducements, including gifts, hospitality, preferential treatment and
appeals to friendship or loyalty. The decision to accept or reject a gift will depend on the nature,
value and intent behind the offer.

Custody of client assets


A professional accountant shall not assume custody of client monies, unless permitted to do so by
law. Threats include self-interest threats to professional behaviour and objectivity. Safeguards
include keeping such assets separate from firm assets, using them only as intended, ensuring any
dividends or gains are accounted for and complying with all relevant laws and regulations.

Objectivity All services


Threats can arise from having interest in, or relationships with, a client or directors, officers or
employees. Safeguards may include withdrawing from an audit team or terminating the financial or
business relationship giving rise to the threat.