Unformatted text preview: LECTURE 2
MODULE 2 The Financial
Statement Audit &
Professional
Standards Learning Objectives
xExplain why a demand exists
for financial statement audits
xDescribe the benefits and
limitations of financial statement
audits
xDiscuss the legal and professional
issues regarding the appointment
& duties of the independent
auditor Learning Objectives
xState the statutory and other
duties of the independent auditor
xIndicate the current auditing
standards and their major
concepts
xExplain the importance of Auditing
Standards for the profession Learning Objectives
xDescribe the auditor’s
relationship with the shareholders,
audit committee and other
important groups
xExplain the interrelationship
between management’s and the
auditor’s responsibilities Key Terms & Concepts
xAudit committees
xStatutory Provisions
xIndependence
xAuditing Standards (called ASA’s) The Demand for Auditing
NOT EXAMINABLE
xAgency theory
monitoring performance of agents xInformation hypothesis
reliability of information for decision- making xInsurance hypothesis
minimising litigation Benefits of Financial
Report Audits
Access
The to capital markets lower cost of capital A deterrent to inefficiency and
fraud Control and operational
improvements Limitations of Financial
Report Audits
A time lapse Audit testing on selective
samples Assessment of materiality Highly specialised area Report format limitations Corporations Act 2001 main Corporations Act 2001
sections in Study Book Statutory Audit of Companies required under s301
Appointment of Company Auditors s327A
Registration – Part 9.2 s1279, s1280
Rotation – s324DAs324DD
Removal and Resignation s329
Auditing standards have force of law s307A Auditor Duties s307, s311
Auditor Rights – s310, s329, s331, s1289 Duties of an Independent
Auditor
xThe duty to use reasonable skill
and care
xThe duty to be independent Legal requirements Professional standards Duties of an Independent
Auditor
xStatutory duties to report to
members and the ASIC The audit opinion The duty to report Reporting to the ASIC xProfessional duties – comply with
accounting and auditing standards Auditor Rights
Auditor Rights
1. 2.
3. 4. s310 right to access to books, obtain reasonable information, explanation and assistance. s331 right to receive reasonable fees and expenses.
s329 right to make representations when application is made for his/her removal & to be heard at the general meeting. s1289 right to claim professional privilege as a defence in certain defamation cases Auditing Standards
xImportance of Auditing Standards
“Sets a minimum standard of technical
proficiency in auditing, codifying best
practice.”
within each ASA, the basic principles and essential procedures identified in
bold type are mandatory Auditing Standards
Auditing Standards Prior to 1995 Auditing pronouncements where predominantly nonmandatory They contained some 47 Standards Contained more than 300 Essential Procedures Australian Auditing Standards are based on ISAs (International Standards on Auditing).
From 1/7/2006 there are 35 new statutory, legally enforceable standards (called ASAs) Format of ASA’s
Format of ASA’s Mandatory requirements are identified in boldtype Explanatory guidance are identified in normal (grey) type
Contain Preamble
Mandatory requirements consist of:
– Basic principles and
– Essential procedures Essential Procedures designed to facilitate achievement of Basic Principles Mandatory for members of CPA and ICAA
Compatibility with International Standards on Auditing Some Auditing Standards Some Auditing Standards General Standards – ASA 100 Preamble toAUASB Standards – ASA 200 Objectives and General Principles
– ASA 210 Terms of Audit Engagements ASA 200 ‘Objective’
ASA 200 ‘Objective’ ASA 200.5 The objective of an audit of a financial report is to enable the auditor to express an opinion whether the financial report is prepared in all material respects, in accordance with an identified financial reporting framework. ASA 210 Terms of Audit ASA 210 Terms of Audit Engagement ASA 210.5 Auditor shall agree on the terms of the audit engagement, recorded in writing and forwarded to the client (entity). More Auditing Standards More Auditing Standards Performance/Field Work Standards – ASA 220 Quality Control – ASA 230 Documentation – ASA 240 Fraud
– ASA 300 Planning – ASA 315 Understanding the Entity, its Environment, Risk Assessment & Internal Control – ASA 500 Audit Evidence ASA 220 Quality Control
ASA 220 Quality Control ASA 220.5 The audit firm shall implement quality control procedures that are applicable to the individual audit engagement. ASA 230 Documentation
ASA 230 Documentation ASA 230.5 The Auditor shall prepare audit documentation that provides – A sufficient and appropriate record of the basis of the auditor’s report
– evidence that the audit was performed in accordance with Auditing Standards and applicable legal and regulatory requirements. ASA 240 Fraud
ASA 240 Fraud ASA 240.6 In planning and performing the audit to reduce audit risk to an acceptably low level, the auditor shall consider the risks of material misstatements in the financial report due to fraud. ASA 300 Planning ASA 300 Planning ASA 300.5 The auditor shall plan the audit so that the audit engagement will be performed in an effective manner. ASA 315 Understanding the Entity, It’s ASA 315 Understanding the Entity, It’s Environment, Risk Assessment and Internal Controls ASA 315 The auditor shall obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial report whether due to fraud or error, and sufficient to design and perform further audit procedures. ASA 500 Audit Evidence
ASA 500 Audit Evidence ASA 500.5 The auditor shall obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion. Still More Auditing Standards Still More Auditing Standards Reporting Standards – ASA 700 The Audit Report – ASA 560 Subsequent Events – ASA 570 Going Concern ASA 700 Audit Reports
ASA 700 Audit Reports The auditor’s report shall contain a clear expression of auditor’s opinion on the financial report. ASA 700.15 The auditor shall evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial report.
ASA 700.8 The auditor’s opinion …. shall state whether the financial report “gives a true and fair view” or “presents fairly, in all material respects” in accordance with the applicable reporting framework. ASA 560 Subsequent Events ASA 560 Subsequent Events ASA 560.5 The auditor shall consider the effect of subsequent events on the financial report and on the auditor’s report. ASA 570 Going Concern ASA 570 Going Concern ASA 570.5 When planning and performing audit procedures and in evaluating the results thereof, the auditor shall consider the appropriateness of management’s use of the going concern assumption in the preparation of the financial report. Management & the Auditor
- Responsibilities
xThe relationship between
accounting and auditing
Preparation of financial information
Evaluating management assertions xDivision of responsibility Relationship between Accounting & Auditing
Accounting – AASBs/IASs Auditing – ASAs Analyse Events & Transactions Obtain & Evaluate Evidence Measure & Record
Transactions Determine Fairness of the
Financial Report in Accordance
with AASBs & IASs Classify & Summarise Data Prepare Audit Report
Prepare Prepare Financial Report per
Prepare
AASBs & IASs Deliver Report to Entity Distribute Financial Report including Auditor’s
Report to Shareholders Independent Auditor
Relationships
xShareholders
xBoard of Directors
xAudit committee
xInternal auditors
xManagement Audit Committees Audit Committees Audit committees are not compulsory in Australia. Drawn from the board of directors. Majority of independent or non
executive directors. Provide an Oversight function over financial reporting and audit.
Communicate with Internal and External Auditors Audit Committees
Audit Committees Assess efficiency of directors and to ensure maintenance of accountability to shareholders. Review financial statements provide emphasis to audit function Oversight of internal controls, auditing, financial reporting and corporate governance
Review Risk Management and Financial Reporting Issues Benefits of Audit Benefits of Audit Committees Improve Credibility and Objectivity of the Accountability Process
Assist Directors to carry out Responsibilities
Improve effectiveness of internal and external audit function Facilitate and maintain the Independence and Objectivity of the External Auditor Benefits of Audit Benefits of Audit Committees Strengthen the role and influence of Non
Executive Directors
Better communication between management and internal and external auditors Satisfy Shareholder’s need for Assurance that directors are exercising their Duty of Care when carrying out their responsibilities Summary Summary 1.
2.
3.
4.
5.
6.
7. Factors Driving the Demand for Auditing Benefits to be Derived from Independent Audits Corporations Act Impacts on the Company Auditor
The Importance of Australian Auditing Standards Specific Auditing Standards Overview
The Relationship between Accounting and Auditing The Role and Benefits of Audit Committees ...
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