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AUDITING ACCT 2161

Interteaching

Topic 1 Introduction and overview of audit and assurance


The purpose of this topic is to provide an overview of audit and assurance services.

Learning Objectives:
After studying this chapter you should be able to:

1. Define an assurance engagement


2. Differentiate between different types of assurance services
3. Explain the different levels of assurance
4. Outline different audit opinions
5. Differentiate between the different role of the preparer and the auditor, and discuss
the different firms that provide assurance services
6. Explain why there is a demand for audit and assurance services
7. Identify the different regulators and regulations surrounding the assurance process
8. Describe the audit expectation gap

Set readings for this topic


Chapter 1 Moroney, Campbell and Hamilton 1st Edition.

What you need to do this week


1. Read this Topic Guide

2. Complete the set reading for this topic from Moroney, Campbell and Hamilton with
reference to the listed learning objectives of the topic. Make sure you achieve ALL the
listed learning objectives after reading the chapter.

3. Complete the Interteaching Questions before attending your tutorial class.


You are required to present your answers carefully in writing. Your notes will be exchanged
with other group members to be read and commented at the beginning of your group
discussion in the tutorials. The second part of the group discussion will be focused on
issues raised by group members for discussion or more explanation. To prepare for this
part, during your preparation at home you should note down all the points that (you are not
sure or not fully understand) you want to seek further clarification from your groups. You
are supposed to have gained most (if not all) understandings of the topic after the tutorials.
If there is/are are any remaining issues that cannot be solved in the group discussion, you
should note down as questions to be addressed in the lectures. In the Interteaching
Session you will also be expected to apply the information you have learnt from your
reading to address a real world issue.

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Interteaching Questions - To be completed before class
1) Define an audit. Explain why an audit is required (e.g on companys
financial statements)?
Audit is an assurance service where an independent party collects
evidence to give opinion on the quality of information given by a
responsible party (e.g the financial statements provided by the companys
management). Such information is used by users (third parties) for making
decisions. Therefore, an audit normally involves three parties and a
subject matter.

Requirements for an audit originated from the demand for high quality
information.
(students should list out and explain the reasons generating a demand for
the audit and assurance services).
An audit is the most efficient way that helps improve to quality of
information.

2) Define and distinguish financial reports, directors reports and audit


reports.

Financial reports Directors report Audit report


Are the periodic reports Are reports prepared Prepared by the
of financial by the directors to auditors to give an
performance and provide readers of an opinion on the truth
financial position of a insight analysis about and fairness of the
company (includes the companys financial statements
Balance sheet, Income performance during the
statement, Cashflow year and possible the
statement, Statement future prospect of the
of changes in equity, company
the notes to the
financial statements)
Responsibility (to Responsibility (to Prepared by
prepare) rests with prepared) rests with (responsibility of) the
management management auditor
Subject to being Not subject to being
audited audited

3) Give two examples of companies/organisations that are assurance


providers.
- Public accounting firms
- Consultants providing assurance about an environmental issues
- The tax department to audit the tax returns of tax payers

4) Explain the reasons why an auditor gives assurance but does not
guarantee about the quality (truths and fairness) of the financial
statements?

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The highest level of assurance given by the auditors is reasonable
assurance which is a high level of assurance but not a guarantee that the
financial statements are true and fair. This is due to the nature of the
audits, where the auditors:
- An unquailed opinion indicates that the auditor believes that there are
no material (significant) misstatements in the financial report.
However, it is not an indicator of a complete accuracy.
- Does not guarantee the future viability of the entity
- Auditor will assess risk of fraud and conduct tests to try to uncover any
fraud, but there is no guarantee that the auditor will find a fraud,
should one have occurred.
- The auditors test on a sampling basis

5) Briefly describe the responsibilities of the directors and the auditors in


relation to the Financial Statements

(extracted from the audit report figure 1.1)

Directors responsibilities:

Preparation and fair presentation of the financial report in accordance with


the relevant accounting standards. This includes:

o establishing and maintaining internal controls that are relevant


to the preparation of the financial report that is free from
material misstatements, whether from fraud or error.
o Selecting and applying appropriate accounting policies and
making accounting estimates that are reasonable in the
circumstances.

Auditors responsibilities:

To express an opinion on the financial report based on the audit

To do so, the audit should be conducted in accordance with the relevant (e.g
Australian) auditing standards. The auditors are also required to comply with
relevant ethical requirements and plan and perform the audit to obtain
reasonable assurance ether the financial report is free from material
misstatement. The auditor is required to apply appropriate professional
judgement, professional scepticism and due care in doing the audit.

6) Use the figure 1.1 & 1.2 of the textbook to answer the following questions:

5.1. Compare the two reports presented in figure 1.1 & 1.2 of the
textbook. Outline the similarities and differences between the two
reports in terms of, for examples

Figure 1.1 Figure 1.2

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Name of Audit report Review report
report
Issuer E& Y (public accounting E&Y
firm)
Addressee Members (shareholders) of Members (shareholders) of
the company being audited the company
Report - Introduction - Introduction
structure - - Directors - Directors
similarities responsibilities responsibilities
- Auditors - Auditors
responsibilities responsibilities
- Independence - Independence
statement statement

Report - Auditors opinion - Auditors


structure - - Introduction and conclusion
Differences audit opinion on - NA
the remuneration
report
Nature of Positive Negative
the opinion

5.2. Why type of audit opinion is that in figure 1.1 (i.e unqualified, qualified
etc?).

Unqualified

6) Carry a search on the internet to find a real company and identify:

- The financial reports

- Audit report

- Directors report

What type of audit opinion was issued for the company that you
found?

The answer varies according to the search result produced by each student.

7) List out the people/systems present to ensure auditors as well as the


audits are of good quality. Define and briefly list out the functions of
the following organisations in relation auditors and audit function:
i. ASIC
ii. CPA Australia

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How important these roles are in making sure the quality of the audits
and auditors?

i) ASIC stands for Australian Securities and Investments Commission,


which is an independent body of the Commonwealth Government of
Australia.
ASIC has an important role in overseeing the audit function, including :
- Registering auditors
- Processes annual statements from registered auditors
- Enforces independence requirements and provides a whistleblowing
facility for the reporting of contraventions of the Corporations Act.
- Conducts an audit inspection program to report on audit quality and
make recommendations for continued improvement. In relation to this,
ASIC visits a selection of audit firms annually to gain an understanding
of their policies and procedures in relation to their independence, audit
quality, methodologies and training programs.

ii) CPA Australia is professional body with members working in various


areas including finance, accounting, business professionals, academics
and public servants in Australia.
CPAs main functions include:
- Provide education to members
- Carrying research and issuing professional and ethical standards for
accountants
- Help members update professional knowledge etc.

8) Case study Cloud 9 Read the information and answer the following
questions:

8.1Why didnt Rons business need an in the previous years? Why is an


audit required in the current year?
Because its a private, family-owned business. An audit is
compulsory for public companies only.

8.2 What is the difference between reasonable in limited assurance?


Why would Chip ask Ron to have the Financial report audited rather
than reviewed?

Reasonable assurance is the highest level of assurance provided. Limited


assurance is a lower level of assurance. The level of work carried by the
assurance provider is high for them to be able to have sufficient evidence to give
a reasonable assurance (e.g an audit), whereas the level of work done is lower
(e.g a review) if a limited assurance is to be issued.

Chips need the financial statements to make a very critical decision which is to
purchase the business. Therefore he wants to make sure the financial statements
are reliable. As mentioned earlier, the auditor would do much more extensive
work (of verifying the financial statements) and the audit gives a higher

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assurance on the truth and fairness of the financial statements. Therefore, Chips
would like to have the financial statements audited rather than reviewed.