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yd ney
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Welcome to
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Assurance Services and Audit

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Expectations
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U n iv o f
• What i g h t you can expect of me and the teaching team r s i ty
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© Dr Amanda White - University of Technology Sydney
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MODULE 1
Topic 1. Introduction to audit
Overview of audit and the profession
The ethics of auditing

© Dr Amanda White - University of Technology Sydney

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yd ney
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U n y o
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Overview of audit and the C opy
r i g h t U ni

profession
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yd ney
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lo g n e y
h n o yd
Tec y S
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s ity h n
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U n y o
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p y r ig ni v e r
Co h t U
r i g
C opy

What are audits? y d ne y

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ASA 200.3 says
Tec
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of o lo g
s ity h n
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U n iv o f
The ipurpose
g h t of an audit is to enhance the degree ofrsity
o pyr
confidence of intended users in the financial report.
U n ive This is
C h t
achieved by the expression of an opinion p by
y rig the auditor on
Co
whether the financial report is prepared, in all material
respects, in accordance with an applicable financial
reporting framework.
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yd ney
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Audits are a Tpart
ec
of corporate governance h n o lo
y S yd n e
of o lo g
s ity h n
e r Tec
U n iv o f
• Theighphrase
t “corporate governance” describes “thersity
o pyr
framework of rules, relationships, systems and U n ve
iprocesses
C h t
within and by which authority is exercised p y rigand controlled
Co
within corporations. It encompasses the mechanisms by
which companies, and those in control, are held to
account.”
• Justice Owen in the HIH Royal Commission, The Failure of HIH ne y
Insurance Volume 1: A Corporate Collapse and Its Lessons, S y d
og y
Commonwealth of Australia, April 2003 at page xxxiv n o l
Te ch
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n i ve
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C opy
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Corporate governance o l og structures are multi- y S
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hn yd
party ity
o fTe c
n o l o gy
S
e rs Te ch
U n iv y of
r i g ht e r s it
p y ni v
Co h t U
r i g
C opy

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Auditors workTecclosely with audit committees h n o lo
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of o lo g
s ity h n
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U n iv o f
• Auditi g h tcommittee is comprised of ___________ directors r s i ty
o pyr U n iv e
C• Responsible for oversight of the financial reporting h t
p y r ig
process Co
• Common responsibilities
• Ensure corporate reporting processes and internal controls are
adequate ey
d n
• Review the appropriateness of accounting judgements made y Sy
during the preparation of the financial report o l og
e c hn
• Scope, adequacy and fees for the audit o fT
r s ity
• Receive reports from the internal auditors n iv e
g h tU
i
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C
© Dr Amanda White - University of Technology Sydney
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yd ney
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Tec y S
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s ity h n
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U n y o
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p y r ig ni v e r
Co h t U
r i g
C opy

Why do we have audits? y d ne y

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yd ney
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lo g n e y
h n o yd
Tec y S
o f o lo g
r s ity c h n
n iv e o f Te
• Companies
g h t U provide information to users to help them make r s i ty
i
o pyr
business decisions. U n iv e
C h t
• What sort of decisions p y r ig
Co
• Users want the report to be checked by having an independent
expert examine it (to enhance it’s credibility)
• Users are not themselves in a position to establish the credibility of
the information they are presented with. ne y
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• The purpose of assurance is to overcome the issues of:

– Conflict of interest: Managers may present biased information as they
are also evaluated on the information.
– Consequence: Information provided forms the basis
of many users’ decisions.
– Complexity: Many users do not have the expertise required to determine
the quality of information presented.
– Remoteness: The separation of owners from management prevents users
from assessing information quality.

Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e
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yd ney
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U n y o
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p y r ig ni v e r
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opy
What is the output of an
C

audit? y d ne y
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o l og
ch n
Te
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yd ney
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lo g n e y
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Auditofopinion
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h n
lo g
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ity h n o
e r s ec
n iv o f T
t U y
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p y r ig ni v e r
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yd ney
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U n y o
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p y r ig ni v e r
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Do audits have value? y d ne y

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3 Hypotheses eExplaining
c Demand for Assurancey S h n o lo
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o fT o l og
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1. _________
g h tU Theory between managers and investors r s i ty
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(stewardship hypothesis). U n iv e
C h t
p y r ig
2. _____________ Hypothesis – Investors Co and other
stakeholders want to know that the information prepared by
management is reliable (i.e. “true and fair”).
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3. ___________ Hypothesis – Shifting the financial S y d
responsibility onto auditors if there are losses from litigation. og y
n o l
Te ch
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yd ney
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What the profession
Te c says h n o lo
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of o lo g
s ity h n
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U n iv o f
• Auditors
i g ht are independent and objective r s it y
py r v e
C o U ni
g h t
r i
C produce a high opy
• Auditors have significant expertise and
quality audit

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Let’s hear from
Te c a regulator - Prof Roger Simnett
yS h n o lo
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y o f o l og
s i t ch n
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Co h t U
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yd ney
What does theolmedia
og say? y S
n e y
ch n S yd
Te y
of o lo g
s ity h n
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f Tec
U n y o
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p y r ig ni v e r
Co h t U
r i g
C opy

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S y d
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Te ch
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yd ney
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What drives these different
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opinions? y d ne y
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The audit expectation
Te c gap h n o lo
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of o lo g
s ity h n
iv e r
What the f Tec
U n o
h t
What the iversi
ty Public
What
p y rigthe standards
perceptions
o thinks
Cpublic instruct auditors
h t Un
auditors do auditors to y rig do
actually
p
of auditor
C o performance
do

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yd ney
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lo g n e y
h n o yd
Tec y S
o f o lo g
s ity h n
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U n y o
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p y r ig ni v e r
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What are the auditor’s legal
C

obligations? y d ne y
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Responsibilities under the Corporations Act 2001

• Management is responsible for the preparation and fair
representation of appropriate accounts (i.e. the Financial Report).

• Auditors are responsible for the Auditor’s Report which assures

members that the Financial Report:

Ø Is in accordance with the law, including compliance with

Accounting Standards (s 296)
Ø Provides a true and fair view of the company (s 297).
• Section 307A of the Corporations Act requires auditors to conduct
audits and reviews of financial reports in accordance with Auditing
Standards (ASAs).

Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e
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yd ney
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lo g n e y
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U n y o
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What are the auditing
C

standards? y d ne y
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yd ney
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Tec y S
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s ity h n
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U n y o
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p y r ig ni v e r
Co h t U
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C opy

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yd ney
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lo g n e y
h n o yd
Tec y S
o f o lo g
s ity h n
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U n y o
h t s it
p y r ig ni v e r
Co h t U
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C opy

The ethics of audit

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ney
Fundamental Principles
o l o g of Professional Ethics ney
y S yd
ch n S yd
Te y
of o l og
er s ity ch n
Un
iv o f Te
t i ty
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p n
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Te ch
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Auditor
Te c Independence
h n o lo
y S yd n e
of o lo g
s ity h n
e r Tec
U n iv o f
• “Independence
g h t is the cornerstone of the Auditing r s i ty
o p y ri n i ve
C profession” h t U
p y r ig
Co
• It is a key characteristic of an Auditor.

• In order for auditors to add credibility to financial reports or

other subject matter, they need to remain independent. ne y
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• Independence is one of the fundamental ethical virtues or n o l
Te ch
principles required by The Code. Auditors are required stoity of
v e r
have independence of ______ and in _____________.Un
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y r ig h
p
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Auditor Independence:
Te c Ethical Requirements yS h n o lo
yd n e

y o f o l og
s i t ch n
i v er
• The test for independence is a reasonable person test. Would a
f Te
n o
reasonable
g h t U person having access to all facts consider that the auditor
r s i ty was
i
pyr
oindependent? U n iv e
C h t
y r i g
&p400.5):
• Ethical rules emphasise both (The Code, 120.12 A1 o
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ØIndependence of Mind (Actual independence): State of mind that
permits the expression of a conclusion without being affected by bias
and personal interest; to allow the exercise of professional judgement
without undue pressures or influences. Related to integrity, objectivity ne y
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and strength of character. og y
n o l
ØIndependence in Appearance (Perceived): How others will view the Tech
auditor. The avoidance of facts and circumstances that would lead t
to y of
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others concluding the Auditor’s integrity and objectivity hasUbeen
r i g ht
compromised. py
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yd ney
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h n o lo g y Auditors also have legalydney
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s it y o f T obligations to be hnolo g
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Other Corporations
Te c Act requirements h n o lo
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of o lo g
s ity h n
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U n iv o f
• s324CAi g ht – ensure no conflicts
of interest exist r s ity
py r iv e
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C• s324CI – key audit personnel n
Ua director,
cannot become h t
p y r ig
company secretary or member of senior Co management of a
client until a 2 year cooling off period has been held
• s324FA – audit partners can only stay on the audit for 5
years – must rotate to another partner. They cannot be ey
d n
involved for at least 2 successive years. y Sy
o l og
• S300(11)(b) – companies must disclose fees paid to the f Techn
auditor for audit and non-audit services t y o
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© Dr Amanda White - University of Technology Sydney
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Threats
hn o l ogto Independencey S
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ec Code, section 120.6 A3) S
(The
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yd ney
Threats to auditor
o l o g independence y S
APES110 ydne
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Te gy A3
Paralo120.6
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Intimidation Self-review

Threats y
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Major Threats to Auditor Independence

APES 110 Part 4A (p 108 onwards) provides specific guidance on independence requirements for audit
engagements including areas such as:
Ø Auditor employment relationships: A member of the assurance team cannot be employed by the
client.
Ø Financial and business relationships are a threat, including:
§ Investments in audit clients and Loans to and from clients

Ø When total fees generated from a client represent a large proportion of the auditor’s total
revenue, real or perceived financial dependency on the client may create self-interest/intimidation
threat.

Ø Fees from clients must be collected promptly. Overdue fees may create a self-interest threat.
Ø Provision of non-audit services can be threats, including:
§ Preparing accounting records and financial reports
§ Internal audit or Valuation services
§ Taxation services
§ Design and implementation of financial IT systems
§ Recruitment of senior management
Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e
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Safeguards
• Safeguards fall into two broad categories.
For an auditor these are:
– Safeguards created by the profession, legislation or regulation - education,
professional standards, monitoring and disciplinary processes, and inspections
and reviews.

– Safeguards within the work environment (firm wide and engagement specific)
- independence and quality control policies and procedures.

• Safeguards are intended to eliminate or reduce threats to an acceptable

and reasonable level.
• APES110 Part 4A discusses safeguards for specific types of threats – but
auditors may design any safeguard that they believe reduces the risk to a
reasonable level

Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e