Lecture 1

ACCT7103 Introduction, Overview &

Function of Auditing
Auditing
Chapters 1 & 4

1 2

Course Objectives Lecture 1 Introduction:

Nature and Function of Auditing
Introduction to the environment and 1. Nature and function of auditing
methodology of auditing. 2. Relationship between auditing & accounting
3. Auditing in the accounting profession
4. Types of audit
The course is intended to provide the 5. Demand, benefits and limitations of audit
theoretical framework around which 6. Professional standards
auditing knowledge and skills can be built 7. Statutory requirements
by further formal study or on the job 8. Audit objectives management assertions &
experience. auditors responsibility
3 4

Overview of course Auditing Who Cares?

Main topics of the course Shareholders / Members

Creditors & Customers (e.g., HIH, One. Tel)
Concept & context Suppliers & Employees
Audit testing Government / Regulators
of auditing
The Public (e.g., Ansett, HIH)
Parties involved in monitoring companies (e.g.,
directors: professional reputation, personal
Audit planning liability)
Audit report
Important issues:
Market integrity & investor confidence
5 Accountability & credibility 6

1
 Why the need for independent
financial report audits
Remember from earlier accounting courses: Company = Audit client
Regulators
Board of directors
Financial statements need to be relevant,
reliable, understandable & comparable to be
useful User decisions have economic Management
consequences. External
Auditors

Possible errors, fraud, manipulation & other Other employees

illegal acts, e.g., due to agency conflict.
7 8

What is Auditing? Demand for Financial Statement Audits

Obtaining and evaluating evidenceabout 1. Agency theory - monitoring

assertionsto form an opinion about those performance of agents.
assertionsand communicate that opinion to
interested users. 2. Information hypothesis reliability
ASA 200 Overall objectives of the independent of information for decision-making.
auditor and the conduct of an audit in 3. Insurance hypothesis provide
accordance with Australian Auditing Standards insurance if audit fails to report
Financial report audit is most common. material misstatements.
9 10

The relationship between accounting & auditing

The relationship between accounting and auditing

Management

records
makes

Economic reported in Financial

events, etc Assertions statements
evaluates
collects reviews
evidence
Audit
Auditor report
prepares

1.2 Relationship between auditing & accounting

11 12

2
 Assurance Engagements
Assurance Engagement:
An engagement in which a 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.
E.g., an audit or a review engagement
13
Different types of audit
1. Financial statement audit
2. Compliance audit
3. Performance audit efficiency, effectiveness
& economy
4. Comprehensive audit combination of above
5. Environmental audit impact of environment
on financial statements
6. Internal audit
15
Economic benefits of an audit
Reduce agency costs
Access to capital markets
Lower cost of capital
Deterrent to fraud and inefficiency
Control and operational improvements
Insurance
17
Attestation Services
A type of assurance service in which the
public accounting firm issues a written
communication that expresses a conclusion
about the reliability of a written
assertion/statement of another party.
Is a financial report audit / review a type of
attestation service?
14
Different types of auditor
Independent auditors: e.g., external auditors
who perform financial report audits.
Internal auditors: e.g., employees assigned to
evaluate the economy, efficiency and
effectiveness of the organisations.
Government auditors: Employed by the
Commonwealth or state audit offices; headed by
the Auditor General.
Tax auditors
16
Limitations of a financial report audit
Time lapse
Audit testing on selective samples
Assessment of materiality
Forming professional judgements in highly
specialised areas
Report format limitations (new ASA701
Key audit matters)
18
3
Auditing in the Accounting Profession Public Accounting Firms

Auditors are members of the accounting

International firms
profession.
Company auditors must be registered by the National firms
Australian Securities and Investment
Commission (ASIC) s1280.
Large local & regional firms

Small local firms

19 20

Hierarchy in public accounting firms Auditing Issues

Auditors responsibilities:
Partner
Audit quality
Competence
Manager
Ethics & Independence (topic 3)
Supervisor

Senior Assistant
21 22

Audit Quality & Ethics Statutory provisions (Corporations Act)

Financial Report Audits:

Regulations,
e.g., Corps Act, Auditing Standards
Self-regulation by the accounting profession
Individual accounting firms
Professional Accounting Associations (e.g.,
CAANZ, CPAA)
23
Disclosing entities MUST have their annual
financial report audited : s301
Public company - must appoint an auditor of
the company within one month after the date
of the company's registration: s327A.
A large proprietary company must have
annual financial statements prepared and
audited. s292
24

4
 Statutory provisions (Corporations Act) Auditing Standards

Appointment Basic principles and explanatory material

An auditor can be (s 324AA) With force of law (s307A)
an individual (natural person);
Important because:
a firm (partnership);
They set a minimum standard of technical
A company.
proficiency;
Removal by special resolution at a general
meeting (s.329) Users are informed that standards have been
Powers and duties (ss.307-309) followed;
Independence requirements (topic 3) Compliance is evidence against a malpractice
25
lawsuit. 26

Auditing Standards Audit Quality

ASA220 Quality control for financial report

Standards are divided into: audits
Introductory Specialised This standard establishes auditors
matters areas responsibilities regarding quality control
procedures for financial report audits.
Principles & Conclusions/
responsibilities
reporting

Risk assessment Audit Using the work

& response Evidence of others 27 28

Elements of Quality Control (ASA 220) Elements of Quality Control (ASA 220)
6. Engagement performance
1. Leadership responsibilities for quality on
a) Direction, supervision & performance
audits
b) Reviews
2. Ethical requirements, e.g., independence
c) Consultation

3. Client evaluation Acceptance & continuance

d) Engagement quality control review
e) Differences of opinion
4. Assignment of engagement teams
7. Monitoring
29
8. Documentation 30

5
 Next: Financial Statement Audits
The main focus of this course is on
financial statement audits.
Objectives & reporting frameworks
Assertions
Risks & Materiality (later)
Financial Reporting Framework
Now two types of financial reporting
framework (ASA200.13):
1. Fair presentation framework
2. Compliance framework
Financial Report Audit
Annual Report
Financial report: Other information,
including financial e.g., Managers
statements & notes to discussions
the financial
Reviewed by auditor
statements
for consistency, but
Audited. not audited.
Objective of a financial report audit
ASA200.11(a)
The overall objective of an audit of a financial
report is 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.
31 32
Responsibilities
Management is responsible for the financial
statements and for internal controls.
Auditors issue an opinion on compliance
and/or fair presentation of the financial
statements.
The external auditor performing a financial
report audit does NOT provide an opinion on
the performance or profitability of the entity.
33 34
The Audit Report Next Week
Unmodified audit report (ASA700)
Modified audit report (ASA705)
1. Qualified opinion,
2. Adverse opinion,
3. Disclaimer of opinion.
ASA701 Key audit matters
ASA706
Emphasis of matter paragraph
Other matter paragraph
35 36
6
 Steps to develop audit objectives Management Assertions
Understand objectives & responsibilities for the audit Management assertions implied or
expressed representations by management
Divide financial statements into cycles
about:
Know management assertions about accounts
Classes of transactions
Develop general audit objectives for Account balances
classes of transactions and accounts.
Presentation & disclosure in the
Develop specific audit objectives for financial statements.
classes of transactions and accounts.
37 38

Management Assertions Audit Objectives

5 main types of management assertions: Auditors need to test the accuracy of

management assertions in order to assess
1. Existence or occurrence
whether the financial report is materially
2. Rights and obligations misstated.
3. Valuation or allocation To test management assertions, auditors
4. Completeness develop:
5. Presentations and disclosure. general audit objectives
specific audit objectives
39
More about this later. 40

Think about this before next week: Next Time:

What are the management assertions
Financial statement cycles
associated with the following items?
How would you go about testing the
accuracy of these management assertions? Management assertions & Audit
objectives
(1) Sales revenue $2,000,000
(2) Accounts receivable $210,000
Audit reports audit opinions.
(3) Allowance for doubtful debts $8,300

41 42