1. PowerPoint Slides to accompany Auditing and Assurance Services in Australia 4th ed. By Grant Gay & Roger Simnett Slides prepared by Roger Simnett
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

2. Part One The Auditing and Assurance Services Profession
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

3. Chapter 1 Assurance and auditing: an overview
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

4. Learning objective 1: The framework for assurance engagements
Many parties provide reports to users as an aid to making decisions.
Reports are potentially biased due to the vested interests of the report providers.
Users may demand that the credibility of the report be enhanced by having an independent expert examine it.
Financial statements are just one type — the most common — of report that can be assured.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

5. Definition of assurance engagement
‘an engagement in which an assurance 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’.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

6. Diagram of assurance engagement
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

7. Five elements of assurance engagement
Three-party relationships:
Practitioner (auditor)
Responsible party (preparer)
Intended user
Subject matter
Suitable criteria
Sufficient appropriate evidence
Written assurance report
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

8. Why is there value in the assurance service?
Independence:
Users derive value from the knowledge that the assurance provider has no interest in the information other than for its usefulness.
Expertise:
Assurers must have the competence to obtain sufficient relevant information to provide a reasonable basis for their conclusions.
Requires professional judgement and professional scepticism.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

9. Professional judgement and professional scepticism
Users derive value from the knowledge that the assurance provider has no interest in the information other than for its usefulness.
Professional scepticism:
An attitude that includes a questioning mind, being alert to conditions indicating possible misstatement and critically assessing audit evidence.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

10. Learning objective 2: Structure of assurance standards and pronouncements
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

11. Levels of assurance
For any subject matter, two levels of assurance can be provided:
Reasonable assurance
Limited assurance.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

12. Reasonable assurance (Figure 1.3)
(cont.)
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

13. Limited assurance (Figure 1.3 cont.)
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

14. Level of assurance on financial statements
Reasonable assurance engagements are commonly called 'audit engagements'.
Reasonable assurance = positive expression of opinion.
Limited assurance engagements are commonly called 'review engagements'.
Limited assurance = negative expression of opinion.
There are also engagements that provide no assurance:
Agreed-upon procedures engagements and reports of factual findings.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

15. Attest v direct reporting
Audit and review engagements can involve either an attest or a direct reporting engagement.
Attest reporting engagement:
The auditor issues an opinion on written assertions made by the party responsible for the subject matter.
Direct reporting assurance engagement:
The auditor issues an opinion directly on the subject matter (no written assertion is made by the party responsible for the subject matter).
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

16. Learning objective 3: Auditing defined
A Statement of Basic Auditing Concepts (ASOBAC — the American Accounting Association) defines auditing as:
‘A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria, and communicating the results to interested users.’
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

17. Auditing defined (cont.)
The important parts of this definition:
Systematic process — audits are structured activities
Objectivity — freedom from bias
Obtaining and evaluating evidence — allows the auditor to determine the support for assertions or representations
Assertions about economic actions and events — describes the subject matter of an audit
Degree of correspondence … established criteria — the purpose of the audit is to determine conformity with some specified criteria
Communicating results — the results must be communicated to interested parties
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

18. Learning objective 4: Fundamental principles underlying an audit
The International and Australian Auditing Standards Boards released a draft paper in which they outlined possible fundamental principles underlying an audit. These principles should:
Underpin the objective(s) of an audit, and help drive the conduct of the auditor in using professional judgment to meet the professional requirements of the auditing standards
Be easily understood, both by auditors and other readers of auditing standards
Be universally applicable to all audits
Entrench the expectations that auditors are expected to accept and abide by.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

19. Ethical principles
Contained in national and international codes of ethics:
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

20. Fundamental auditing principles
Knowledge
Responsibility
Quality control
Rigour and scepticism
Professional judgement
Evidence
Documentation
Communication
Association
Reporting
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

21. Learning objective 5: Attributes of accounting information
From AASB/IASB framework, the following four attributes of accounting information provide the basis for the audit function:
Relevance
Reliability
Comparability
True and fair presentation
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

22. Learning objective 6: Demand for assurance
Demand arises because users are not in a position to establish the credibility of the information they are presented with. This may be due to:
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 © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

23. Hypotheses explaining demand for assurance
1. Agency theory (stewardship hypothesis)
Information hypothesis
Insurance hypothesis
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

24. Agency theory
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

25. Learning objective 7: Other benefits of assurance
An assurance service may also result in one or both of the following:
Recommendations by the assurance provider to improve the efficiency and effectiveness of operations; and/or
A positive influence on the behaviour of people whose activities are being assured.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

26. Learning objective 8: The evolution of the audit function
Audits have been performed since at least the thirteenth century.
Until the early 1900s, audits focused on a company’s solvency and the detection of fraud and error.
Audits from early 1900s to 1940s – added objectives of verification of financial report accuracy and attestation to financial report credibility.
Since the 1940s, the overall objective of auditing has been the expression of an opinion as to whether the financial report is materially misstated.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

27. Approaches to Auditing
These have evolved over time:
Statement of financial position approach — this involved the auditor auditing the assets and liabilities with little emphasis on profit and loss account items.
Transactions-cycle approach — this emphasised the review of controls that operated within each transaction cycle and provided for limited testing of balance sheet items.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

28. More recent audit approaches
Financial risk approach
The auditor considers relative financial risk and materiality in planning the audit, such that audit work is concentrated in areas where there is a higher risk of misstatement.
Business risk approach (audit risk approach)
As well as financial risk, the auditor considers business strategy, associated business risks, and management’s plans to respond to changes in the business environment.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

29. Example of business risk approach
Refer Example 1.1 on page 13 of textbook.
The auditor uses a risk-based assertion-based methodology in undertaking the audit. For example, the assertions that management are implicitly making by recording an inventory balance of $1 million in the statement of financial position are:
• Inventory of $1 million exists (existence);
• The entity has the rights of ownership of this inventory (rights and obligations);
• All inventory that should have been recorded has been recorded (completeness); and
• Inventory has been recorded in the financial report at the appropriate value, and any resulting valuation adjustment (such as obsolescence) has been correctly recorded (valuation and allocation).
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

30. Example of business risk approach (cont.)
The auditor uses a risk-based methodology to identify risks of misstatement and relates these through to assertions (Chapters 6–8). For example, consider that the auditor identifies major risk as entity wishing to overstate profit. They can achieve this by overstating inventory, which understates cost of goods sold (if goods are in inventory, they are not sold). The auditor assesses how entity is likely to achieve this overstatement, and concentrates their audit attention on the related assertions.
In this example, two ways of achieving overstatement of inventory are to include inventory that does not exist (for example, goods that have been sold) or overstate valuation of the inventory items included in the statement of financial position (valuation and allocation). The auditor then uses specific procedures to test assertions at risk (Chapters 9-11).
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

31. Learning objective 9: The auditor–client–public relationship
The auditor’s primary reporting responsibility is to resource providers of the client entity; however, the client entity usually engages the auditor and pays the auditor’s fees.
The auditor also discusses the audit findings with management prior to releasing information to the resource providers.
In order to combat pressures on independence and objectivity, the auditing profession has issued a series of ethical rulings and professional standards to guide the auditor in the conduct of his or her duties.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

32. Learning objective 10: Expectation gap
Defined as: ‘the gap between society’s expectations of auditors and auditors’ performance as perceived by society’.
There are 3 components of the expectation gap:
The reasonableness gap between what society expects auditors to achieve and what they can reasonably be expected to accomplish.
The performance gap arising from deficient standards.
The performance gap arising from deficient performance by auditors.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

33. The gap between audit expectation and audit performance
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

34. Four major issues in the expectation gap
The nature and meaning of audit report messages
Early warning by auditors of corporate failure
Auditor’s responsibility for the detection and reporting of earnings management and fraud
The auditor’s ability to communicate different levels of assurance
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

35. Learning objective 11: The role of auditing standards
Auditing standards in Australia are developed by the Auditing and Assurance Standards Board (AUASB).
The standards prescribe the basic principles and essential procedures governing the conduct of an auditor.
For audits conducted under the Corporations Act 2001, the auditing standards (ASAs) must be applied, thus giving them legal authority.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

36. The role of auditing standards (cont.)
Guidance Statements (GSs) or Auditing Guidance Statements (AGSs): provide guidance on procedural matters or industry-specific issues, but do not establish new principles or amend existing standards.
Professional obligations extend application of standards to all other audit and assurance engagements by members of professional bodies.
Failure to observe these standards may expose a member to investigation and disciplinary action from the Australian Securities and Investments Commission (ASIC).
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

37. Authority of auditing standards
Auditing standards applying to audits and reviews of financial reports prepared in accordance with the Corporations Act 2001 :
Australian auditing standards relating to these audits are now designated as ASAs, and have the same numbering as the equivalent ISAs.
Note: there are still a number of standards designated as AUSs, which relate to frameworks or assurance engagements on other than financial reports prepared in accordance with the Corporations Act 2001.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

38. Learning objective 12: Audits under Corporations Act 2001
Management is responsible for the preparation and presentation of appropriate accounts. Accounts are to be accompanied by a report of an independent auditor appointed by the shareholders.
The Corporations Act 2001 (ss 292–306) indicates that directors must prepare a financial report (income statement, balance sheet, statement of changes in equity cash flow statement, directors’ declaration and other related notes and reports), together with any other information or explanation necessary to give a true and fair view.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

39. Auditors’ responsibilities under the Corporations Act 2001
Auditors are responsible for reporting to company members on the directors’ financial report presented at the AGM.
They say whether the financial report:
Is in accordance with the law, including compliance with accounting standards (s 296)
Provides a true and fair view (s 297).
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

40. Learning objective 13: Other applications of the assurance function
Evidence-gathering methods of auditing are also employable in the audit of activities other than financial reports.
Compliance audit:
Examination for the purpose of reporting on legality and control of operations.
Performance audit:
Analyses organisation structure, internal systems, workflow and managerial performance — efficiency, effectiveness and economy of these items.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

41. Other applications of the assurance function (cont.)
Comprehensive audit:
Usually includes components of compliance, performance and financial report audits.
Internal audit:
Audits performed by employees of the entity as a part of the entity’s risk management process.
Forensic audit:
Associated many times with fraud detection.
Assurance on subject matter other than historical financial information:
Including prospective financial information, internal controls and sustainability and carbon emissions reports.
Copyright © 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett