Auditing and Assurance Services in Australia - (Chapter 1 Assurance and auditing an overview)

Page 3 CHAPTER 1
Assurance and auditing: an overview LEARNING OBJECTIVES (LO) 1.1
Understand the framework for assurance engagements and the
types of assurance engagements that can be provided. 1.2
Define auditing and appreciate the fundamental principles underlying an audit. 1.3
Appreciate the attributes of accounting information and
understand the reasons giving rise to demand for assurance and resulting benefits. 1.4
Explain the concept of the expectation gap, especially in the areas
of auditor’s report messages, corporate failures, fraud and
communicating different levels of assurance, and appreciate the
relationships between the auditor, the client and the public. 1.5
Appreciate the role of auditing standards and their authority under the Corporations Act 2001. 1.6
Obtain an overview of other applications of the assurance function,
including compliance engagements, performance engagements,
comprehensive engagements, internal auditing and forensic . d
auditing, as well as of providing assurance on subject matter other ver se er s
than historical financial information. t h gir llA .ailarstuA lliH-war cG M .8102 © thgiyrpoC
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
Created from cdu on 2020-07-21 22:31:21. RELEVANT GUIDANCE ASA 102
Compliance with Ethical Requirements when
Performing Audits, Reviews and Other Assurance Engagements ASA 200/ISA 200
Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with
Australian (International) Auditing Standards ASA 220/ISA 220
Quality Control for an Audit of a Financial Report
and Other Historical Financial Information ASAE 3000/ISAE 3000
Assurance Engagements Other than Audits or
Reviews of Historical Financial Information APES 210
Conformity with Auditing and Assurance Standards AUASB
Foreword to AUASB Pronouncements AUASB/IAASB
AUASB Glossary/Glossary of Terms AUASB/IAASB Framework for Assurance
Engagements/International Framework for Assurance Engagements IAASB
Preface to the International Standards on Quality
Control, Auditing, Review, Other Assurance and Related Services Page 4 . d ver se er
s thgir llA .ailarstuA lliH-war cG M .8102 © thgiyrpoC
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
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CHAPTER OUTLINE AND REVIEW OF CURRENT AUDITING ENVIRONMENT
Entities achieve their goals through the use of human and economic resources.
In order to account for the use of these human and economic resources, entities
issue reports explaining the use of the resources entrusted to their control.
These reports can take a number of forms, including financial reports, which are
prepared in accordance with accounting standards in order to provide
information on the financial position and performance of an entity, and
environmental reports, which are prepared in accordance with environmental
standards to provide information on the environmental performance of an entity.
A primary function of the auditing and assurance profession is to provide
independent and expert opinions on these reports based on an examination of
the evidence underlying the information reported, in order to improve the credibility of these reports.
Auditors usually bring two major types of expertise to an audit. One of these is
an expertise on the subject matter of the underlying report. For example, if the
audit is of a financial report, this requires expertise on the accounting standards
and regulations that underpin the financial report. Students will have started to
develop this expertise by undertaking the financial accounting subjects
contained in an accounting degree, and will further develop it in practice.
The second major type of expertise is auditing and assurance expertise. This
involves, firstly, understanding the auditing and assurance services profession (Chapters 1 –3
). Further, for any particular engagement, it involves
appropriately planning and assessing risk, including developing an . d
understanding of the reporting entity and of the industry and environment in ver se er s
which it operates, assessing the major risks of misstatement in the underlying t h gir llA report (Chapters 4 –7
), collecting audit evidence so that the risk of .ailarst
misstatement is reduced to an acceptably low level (Chapters 8 –10 ) and u A lliH-
effectively communicating the findings (Chapters 11 –12 ). This book w ar cG M
explains this process and helps to develop this expertise. .8102 © thgiyr
The auditor has developed the audit process and their own expertise and p o C
reputation in the area of auditing financial reports. However, this process and
expertise can be applied to areas other than financial reports, such as providing
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
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assurance on an entity’s disclosure of its corporate social responsibility or its
level of carbon emissions. The concept of applying the audit process more
broadly is introduced in this chapter and discussed further in Chapters 13 –15 . Figure 1.1
outlines the way the text works through the various stages of the
audit process in a logical manner. Each step in the process builds on the steps
that precede it. This framework is expanded upon in each chapter of the text. Page 5 . d ver se er
s thgir llA .ailarstuA lliH-war cG M .8102 © thgiyrpoC
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
Created from cdu on 2020-07-21 22:31:21. . d ver se er s thgir
Flowchart of overall auditing and assurance framework ll A .ailarstuA lliH-war cG M .8102 © thgiyrpoC
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
Created from cdu on 2020-07-21 22:31:21. Page 6
LO 1.1 The framework for assurance engagements and
the types of assurance engagements
Framework for assurance engagements
In many situations in today’s society, people who are responsible for a specific task (called
responsible parties or managers) need to account for their performance with respect to that
task. There may be many groups who will rely on this accounting for performance as an aid
to their decision making. These groups may be either resource providers or third parties to
the process (other users). There are many examples of such relationships, including:
shareholders relying on financial reports produced by a company’s management
government agencies relying on reports produced by entities to account for environmental considerations
parents relying on information produced by schools or contained on websites, when
deciding where to send their children.
In order for users to be able to judge the performance of the responsible party, they may
ask the responsible party to provide them with a report of how the resources under their
care have been used in achieving the aims of the relationship. However, it is recognised that
the report by the responsible party is potentially biased, as the responsible party may have
an incentive to prepare a report that reflects their own performance in the best possible
light. Thus, before the report is made available to the user, the credibility of the report is
enhanced by having someone who is both independent and expert (called the auditor or
assurance service provider) examine that the of the report is
prepared and presented in accordance with an agreed reporting framework (called . d ver
) and provide an assessment (the audit or assurance report) that accompanies the se er s th
report prepared by the responsible party. gir llA .ailarstuA The , issued by the International lli H- w a
Auditing and Assurance Standards Board (IAASB) (and in Australia by the Australian r cG M .8
Auditing and Assurance Standards Board (AUASB) as the 1 0 2 © t
), covers both audits and reviews of historical financial information and all h gi yr p o
other assurance engagements. This initiative therefore recognises the increasing demand C
for assurance over a wide range of subject matter.
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
Created from cdu on 2020-07-21 22:31:21. The framework defines an
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’ (paragraph 10). is a diagrammatic summary
of the interrelationship of the five components, which are discussed below.
The parties to an assurance engagement
Source: ASAE 3000 Appendix 1/ISAE 3000 Appendix 1. (c) 2018 Auditing and Assurance Standards Board
(AUASB). The text, graphics and layout of this publication are protected by Australian copyright law and the . d ver
comparable law of other countries. No part of the publication may be reproduced, stored or transmitted in any se er s
form or by any means without the prior written permission of the AUASB except as permitted by law. For t h gir l
reproduction or publication permission should be sought in writing from the Auditing and Assurance Standards l A .ail
Board. Requests in the first instance should be addressed to the Technical Director, Auditing and Assurance ar st u
Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria, 8007. A lliH-war cG M
The following five elements of an assurance engagement are identified (paragraph 26 of . 8 1 0 2 © the assurance framework): thgiyrpoC 1.
This is the individual(s) undertaking the
assurance engagement. In Australia this would normally be a member of a
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
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recognised accounting body (CPA Australia, Chartered Accountants Australia and
New Zealand (Chartered Accountants ANZ) or the Institute of Public Accountants
(IPA)), and one who is bound by the profession’s code of ethics.
This is the person or persons responsible for the underlying
subject matter. For example, the board of directors (responsible party) is
responsible for the financial position and performance of the entity, which is
communicated by a financial report. In many attestation engagements, the
responsible party may also be the or and the
. Where the financial report is the subject matter information, management
isdesignatedas the measurer/evaluator.
These are the persons expected to use the assurance practitioner’s
report. Often the intended users will be the addressees of the report by the
assurance practitioner, although there will be circumstances where there will be other identified users. Page 7 2.
The underlying subject matter of an assurance
engagement can take many forms, such as:
financial position and performance (for example, historical or prospective financial information)
non-financial performance (for example, information aimed at efficiency and
effectiveness of use of resources or level of carbon emissions)
physical characteristics (for example, capacity of a facility)
systems and processes (for example, internal controls)
behaviour (for example, corporate governance, compliance with regulation, human resource practices).
Thus, the definition of assurance engagements is very broad in its coverage and
includes both existing assurance engagements and newly evolving assurance
engagements. The framework also draws a distinction between the underlying subject
matter (such as the underlying financial position and performance of an entity) and
the report on the subject matter, which is called subject matter information (such as
the statements of financial position and income statements). . d ver se er s th 3.
Suitable criteria are the standards or benchmarks used to measure and gir ll
evaluate the underlying subject matter of an assurance engagement. Criteria are A .aila
important in the reporting of a conclusion by an assurance practitioner, as they r st u A
establish and convey to the intended user the basis on which the conclusion has been lliH-
formed. For example, the criteria used for preparing a financial report may be w Page 8 ar
International Financial Reporting Standards. The auditor then assesses cG M .8
whether the financial report is prepared in accordance with these criteria. Without 1 0 2 ©
this frame of reference any conclusion is open to individual interpretation and thgi misunderstanding. yr p o C 4.
The engagement process for an assurance
engagement is a systematic methodology requiring specialised knowledge, a skill
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
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base and techniques for evidence gathering and evaluation to support a conclusion,
irrespective of the nature of the underlying subject matter. Underlying the process is
the assurance practitioner gathering sufficient appropriate evidence that the subject
matter information (e.g. the financial report) has been prepared in accordance with
the criteria (e.g. the accounting standards and relevant legislation) and appropriately
portrays the underlying subject matter (the financial position and performance of the
entity). The process involves the assurance practitioner and appointing party agreeing
to the terms of the engagement. Within that context, the assurance practitioner
considers materiality and the relevant components of engagement risk when planning
the engagement and collecting sufficient and appropriate evidence. 5.
The assurance practitioner presents a written conclusion
that provides a level of assurance about the underlying subject matter.
Independence and expertise: professional
judgment and professional scepticism
The assurance practitioner will seek to obtain sufficient appropriate evidence as the basis
for the provision of the level of assurance. In conjunction with the nature and form of the
underlying subject matter, criteria and procedures, the reliability of the evidence itself can
impact on the overall sufficiency and appropriateness of the evidence available.
There are a number of characteristics that make it appropriate for the profession to provide
assurance on a range of underlying subject matter. As mentioned earlier, the profession is
leveraging off its reputation as a high-quality professional provider of assurance services.
In particular, it is the independence and expertise of the assurance practitioner that are sought after.
Users derive value from the knowledge that the assurance provider has no interest in the
information other than to enhance its credibility. Assurance independence is an absence of
interests that create an unacceptable risk of material bias with respect to the quality or . d ver se
content of information that is the subject of an assurance engagement. Independence er s thgir
remains the cornerstone on which the assurance function is based, and will be discussed in llA .ailar more detail in . st u A lliH-war
The exercise of professional judgment permeates the notion of professional service. An cG M .810
assurance service engagement requires the exercise of (ASA 2 © thg
200.16/ISA 200.16), which involves the application of relevant training, knowledge and i yr p o C
experience in making informed decisions about the courses of action that are appropriate in
the circumstances of the assurance engagement. The auditor should also plan and perform the assurance engagement with , which is an attitude that
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
Created from cdu on 2020-07-21 22:31:21.
includes a questioning mind, being alert to conditions that may indicate possible
misstatement due to error or fraud, and a critical assessment of audit evidence (ASA
200.15/ISA 200.15). The provision of a professional service requires the assurance
practitioner to offer only those services that they have the competence to complete, to
exercise due care in the performance of the service, to adequately plan and supervise the
performance of the service and to obtain sufficient relevant information to provide a
reasonable basis for conclusions or recommendations. Consideration must also be given to
the appropriateness of measurement criteria and to the need to communicate the
engagement results. Users can obtain assurance from the service only if they are aware of
the assurance practitioner’s involvement.
It could be argued that professional reputation is the critical factor that adds value to the
assurance services offered by the professional accountant. As a profession, we need to
protect or even improve the profession’s brand name, thus enhancing the value of the
assurance services. A further advantage to having members of the accounting profession
provide assurance is that accountants are subject to many professional quality Page 9
controls and disciplining mechanisms, and this should provide assurance to users
about the quality of the inputs to and processes of our services, and therefore the quality of
the final report, the output. It is through this process that assurance services add value.
Whether the accounting profession is successful in becoming the most appropriate group
for providing assurance in a wide range of areas will depend on a number of factors,
including whether society sees accountants as experts in the underlying subject matter of
the assurance engagement. Financial report auditors are expert in the subject matter of
accounting information prepared in accordance with accounting standards, and have
developed processes and a reputation as high-quality assurance providers. Whether this
reputation easily transfers to other areas—such as providing assurance on environmental
reports (or, as argued in Huggins et al., 2011, greenhouse gas reports), and possibly as a . d ve
high-cost provider given the necessity of having high-level ethical standards and quality r se er s t
controls in place associated with being a member of the accounting profession—will be the h gir llA test of success. .
ailarstuA lliH-war Types of assurance engagements cG M .8102 © thgi
Reasonable, limited and agreed-upon procedures yr p o C engagements
Gay, Grant E., and Roger Simnett. Auditing and Assurance Services in Australia, McGraw-Hill Australia, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/cdu/detail.action?docID=5729228.
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