Week 1 – Introduction to auditing
Why is audit important?
Audit provides assurance that the financial information is true and fair and free from
any errors
It is an important part of the Financial System as it lends credibility to FS and other
reports issued to be audited.
--- as it increases confidence in the SH with respect the FS and assist them in decision
making.
Step 1 - Role and purpose of the auditing
Step 2 - Important decision the auditors need to make before they accept or continue with
an audit client because auditors must ensure that they have competence.
Step 3 - Examine stages of the audit
(Once the auditor examines the audit client’s business which requires professional
judgement, the auditor sets audit strategies.
Step 4 – Conclusion
Outcomes of the testing, evidence and forms an audit report
Assurance engagement
An engagement in which an assurance practitioner aims to obtain sufficient
appropriate evidence 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.
(Meaning of definition)
1) Assurance practitioner – In a financial report audit, the person undertaking the
audit or assurance work (like a consultant and external to the company)
2) Responsible party – The person or group of people who prepare the subject matter
(In the Financial report audit – the responsibility party is the Management i.e The
chief executive office and the chief financial officer, accountants).
3) Subject matter – What is the responsibility party preparing?
E.g. – In a financial report audit – The Financial statement is the subject matter
E.g. – In a Corporate social responsibility audit – The corporate social responsibility
report is the subject matter.
4) Intended Users – In most cases they are the ones who reply on the subject matter
to make decisions.
E.g. – Shareholder, stakeholders, creditors, customers.
5) Criteria – When the responsible party prepares the subject matter, the reports must
be prepared in accordance with the corporation’s act 2001 and the Australian and
international financial accounting standards. – these standards are the criteria
Question 1 – Whether is it an assurance engagement?
Solution: -
Hint – Check if it meets the definition of assurance engagement
1) If it is providing an opinion or just some advice
2) If the audit work is being performed.
Different levels of assurances
Examples of assurance – How the audit report looks like
Question 2 – Why an auditor cannot offer absolute assurance?
Question 3
Your audit firm, Red, Blue & Associates (RBA) is the auditor of Orange Juice Ltd (OJ). As a
fruit juice producer, OJ is subject to strict quality control requirements imposed by
legislation, which require all fruit juice producers to submit an annual report from an
appropriately qualified auditor on compliance with a range of quality control requirements.
OJ has approached you as its auditor requesting that you undertake the work.
OJ must pay the fee for the quality audit, but the auditor must send their report directly to
the Australian Food Safety Commission (AFSC). The quality requirements cover areas such as
the raw materials, manufacturing processes, plant and equipment, and production
personnel. Peter Fenwick, OJ’s chief financial officer, has advised the AFSC that RBA is OJ’s
nominated audit firm for the next quality audit. It is now 21 May 2018 and you have
received the quality requirements schedule from the AFSC. This schedule outlines the
specific procedures the auditor is to perform, together with space for the results of these
procedures and a final statement by the auditor certifying that the entity has complied with
the quality requirements of the legislation. This schedule mist be completed and returned
by 14 July 2018.
Required:
a) Indicate the type of engagement that this represents, the level of assurance
provided, and they type of report that the auditor can provide.
b) Indicate whether it is possible to meet the requirements of the AFSC.
Solution: -
Key – We need to find the subject matter, criteria and whether the auditor can provide an
opinion, or no?
Answer – Criteria, subject matter, opinion
--- Note – when schedule outlined the specific procedures the auditor is to perform is a no
assurance engagement because they cannot dig further and form an opinion as they must
follow the scheduled procedures.
Audit opinions
Unmodified – Vast majority in Australia is unmodified audit opinion.
Modified – inventory loss due to fire, it is good for the users/ shareholders to
know that there has been loss – the financial statement still remains true an
fair, the auditors just highlight the things that the users should know.
Modifications that affect the auditor’s opinion – The financial statements are
no longer true and fair.
Matrix To understand why modifications are required.
Hint: - If the modifications are material, then only the report will be modified.
Going concern – it is most commonly adverse opinion
Material
• Information is material if it impacts on the decision-making process of
users of the financial report
• Nature of the item e.g., fraud is material
• Magnitude of the item e.g., misstatement of > 10% of profit is material
Pervasive
• Where misstatements that are not confined to individual accounts or
elements of a financial report,
• Or, if confined, the misstatements affect an extensive portion of a
financial report or are disclosures that are vital to a user’s
understanding of the financial report.
E.g., if you have a big account like sales and the auditor cannot find
information like sales, even though it is limited to 1 account. If it is a major
account. (like a big one)
Examples
Question
You are the auditor in charge of ABC company. During the audit of 2017 annual
report, one office of ABC company was destroyed by fire. Because of the fire,
you are unable to find out some sales invoices (about 5% of total sales) and
there is not any backup in the company. Without the invoices, you are also
unable to contact customers for confirmation purpose. You have the access to
the remaining 95% invoices, and you believe there is no material misstatement
in these invoices.
Question: In this case, which type of audit opinion you would issue?
Solution: -
There is no material misstatement and not pervasive as only 5% of the total
sales invoices are not obtained. – Qualified opinion
Inability to obtain sufficient appropriate evidence and pervasive because sales
is a major account and can affect the whole balance sheet. – Disclaimer audit
opinion.
Demand for assurance
Why users demand assurance of services
Audit expectation gap
What we expect auditors to do and what auditors do (gap between the two)
If auditors are at fault – Performance gap (e.g., they will not provide sufficient
appropriate audit evidence) --- Deficient performance.
Acc Standards at fault – Deficient performance.
Society at fault – Unreasonable expectations.
Question
Solution
