Topic 1: The auditing profession and the role of auditors

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1 Topic 1: The auditing profession and the role of auditors
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2 Topic learning outcomes
B C D Outline the nature of and need for assurance services Understand the relationship between the auditor, the client and the public and evaluate the impact of this relationship on the expectation gap Distinguish the role of audits from accounting Explain the impact that the regulatory bodies have on the nature and quality of assurance services provided to the public E Appreciate the expanding scope of auditing in the current international business environment 1

3 Topic learning outcomes
Outline the nature of and need for assurance services A 2

4 The need for assurance services
Many parties provide reports to users as an aid in making decisions. Reports potentially may be 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. Assurance engagement: ‘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’ (Framework for Assurance Engagements paragraph 10). Crucial words that add value Independence: users derive value from the knowledge that a member of the profession 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 Need for independent auditor assurance Potential conflict of Interest Consequences Complexity Remoteness Theoretical explanation Agency theory Information hypothesis Insurance hypothesis 3 footer

5 The parties to an assurance engagement
Diagrammatic summary of the interrelationship of the five components 4 footer

6 Types of assurance engagements
Reasonable assurance Limited assurance No assurance There is an updated diagram on p.591 of the new text but I think this gives more detail. Assurance framework does not cover agreed-upon procedures engagements An audit of Historic Financial information carried the highest level of assurance – reasonable assurance A review of historic financial information or any other information about the entity carries a lesser level of assurance – limited assurance Agreed procedure engagements and comfort letter engagements carry no assurance. ASRE 2400 Review of a Financial Report Performed by an Assurance Practitioner Who is Not the Auditor of the Entity ASRE 2405 Review of Historical Financial Information Other than a Financial Report  ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity (Compiled)  ASRE 2415 Review of a Financial Report: Company Limited by Guarantee or an Entity Reporting under the ACNC Act or Other Applicable Legislation or Regulation We’ll talk more about ASAs v ASRE’s v AGSs later ASAE 3000 Assurance engagements other than audits or reviews of historical finance information ASAE 3100 Compliance engagements  ASAE 3150 Assurance engagements on controls  ASAE 3402 Assurance reports on controls at a service organisation  ASAE 3410 Assurance engagement on greenhouse gas statements ASAE 3420 Assurance engagements to report on the compilation of pro forma historical information included in a prospectus or other document  ASAE 3450 Assurance engagements involving corporate fundraising and/or prospective financial information   ASAE 3500 Performance engagements   ASAE 3610/AWAS 2 Assurance engagements on general purpose water accounting engagements  ASRS 4400 Agreed-Upon procedures engagements to report factual findings  ASRS 4450 Comfort letter engagements   5 footer

7 Reasonable v limited assurance
Engagement type Reasonable Limited Objective Reduce risk to level low enough for a positive expression of assurance Reduce risk to level low enough for a negative expression of assurance Evidence-gathering Obtain understanding of engagement circumstances, assessing and responding to risks, substantive procedures, evaluation of evidence obtained Obtain understanding of subject matter Assurance report Positive form of expression Negative form of expression Negative assurance—nothing has come to auditor’s attention to persuade them that the information has been materially misstated. 6 footer

8 Topic learning outcomes
Understand the relationship between the auditor, the client and the public and evaluate the impact of this relationship on the expectation gap Distinguish the role of audits from accounting Explain the impact that the regulatory bodies have on the nature and quality of assurance services provided to the public B C D 7

9 B Accounting v auditing
‘the recording, classifying and summarising of economic events in a logical manner for the purpose of providing financial information for decision making’ (Arens et al., 2011, p.13). ‘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’ (AAA cited in Gay & Simnett, 2015, p. 15). Arens, A.A., Best, P., Shailer, G., Fiedler, B., Elder R.J., & Beasley, M. (2011). Auditing. assurance services & ethics in Australia: An integrated approach – clarity update edition (8th ed.). Australia: Pearson Australia. Auditing definition not defined in the new glossary to the Australian Auditing Standards. An auditor must have all the skills of an accountant plus others e.g. the ability to collect and assess evidence 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 Auditors are super accountants 8 footer

10 Auditor-client-public relationship
The auditor’s primary reporting responsibility is to the 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. APES110: Code of Ethics for Professional Accountants 9 footer

11 C The expectation gap In current text this is Figure 1.5 on p.23 (no different to the above) ‘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. 10 footer

12 Major issues in the expectations 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 11 footer

13 Who regulates auditing?
Self-regulatory bodies (e.g. CA ANZ) and government agencies: FRC (1999): statutory body with oversight role of the accounting standard-setting process. Role recently expanded to include broad oversight of auditing standard-setting and the monitoring of auditor independence. AUASB (2004): reconstituted as an independent statutory body, responsible for the development of auditing and assurance standards. APESB (2006): a body independent of the profession with responsibility for setting ethical standards ASIC (1991): administering authority for the Corporations Act 2001 CALDB (2001): established under ASIC Act, determines whether a registered auditor or liquidator has failed to carry out duties properly or is not a fit and proper person to be registered Since the corporate collapses of the mid to late 90s more calls for government regulation Financial Reporting Council (FRC) Auditing and Assurance Standards Board (AUASB) Accounting Professional & Ethical Standards Board (APESB) Australian Securities and Investments Commission (ASIC) Companies Auditors and Liquidators Disciplinary Board (CALDB) 12 footer

14 The role of auditing standards
Australian Auditing standards developed by the AUASB The standards prescribe the basic principles and essential procedures governing the conduct of an auditor For audits conducted under the Corporations Act 2001 since 1 July 2006, the auditing standards must be applied = legal authority Failure to observe these standards may expose a member to investigation and disciplinary action from ASIC 13 footer

15 D ASAs v GSs Australian auditing standards now designated as ASAs and have the same numbering as the equivalent ISAs. ASAs comprise: mandatory requirements application and other explanatory material (begin with the letter ‘A’) appendices (some standards only) Australian specific paragraphs (begin with ‘Aus’) conformity to international standards note (at end of each standard) GSs: guidance on procedural matters or industry-specific issues, do not establish new principles or amend existing standards Our old auditing standards used the term AUS. The last of these (AUS 810: Special purpose reports on the Effectiveness of Control Procedures) was replaced on 1/1/2016 by ASAE 3150: Assurance engagements on controls. We also used to have old auditing guidance statements (AGSs) these also have now all been withdrawn, the final one AGS 1014 on Privity Letter requests. 14 footer

16 Audits under Corporations Act 2001
Management responsible for the preparation and presentation of appropriate accounts (ss ). 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 of the entity. A company, registered scheme or disclosing entity must have the financial report for a financial year audited in accordance with Division 3 and obtain an auditor's report (s 301). Auditors 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) and; provides a true and fair view (s 297). Provides a true and fair view (s 297) which aligns with the wording in ASA (b) – which is how the audit opinion for all listed companies, must be presented. (note there is different wording to ASA (a) ‘presents fairly’) 15 footer

17 Audits under Corporations Act 2001
Part 2M.4 & 4A: Appointment and removal of auditors, sets out: Registration requirements Independence requirements Auditor rotation Appointment and removal of auditors Transparency reporting Some other relevant sections of the Act: s307A: Auditors are legally required to conduct the audit in accordance audit standards s250RA: Auditors are required to attend AGMs or have a suitable alternate representative attend. s250T: Members have the right to ask questions (they can also ask questions in writing before the AGM) and the auditor is to respond. s249V: Auditors have the right to be heard at general meetings Provides a true and fair view (s 297) which aligns with the wording in ASA (b) – which is how the audit opinion for all listed companies, must be presented. (note there is different wording to ASA (a) ‘presents fairly’) 16 footer

18 Topic learning outcomes
Appreciate the expanding scope of auditing in the current international business environment E 17

19 Expanding scope of audit services
Environmental and Sustainability reports Integrated reports Greenhouse Gas Statements E Commerce assurance engagements Continuous Assurance & XBRL Forensic Auditing (Forensic Accounting) 18 footer

20 E Assurance on environmental & sustainability reports and integrated reports Integrated reporting incorporates financial and non-financial measures Stand alone reports more prevalent than integrated reporting No clear international standards, a system initiated by the Global Reporting Initiative is widely used No compulsory audit/review is required Most assurance engagements when completed utilise ASAE 3000 Though approximately a third use AccountAbility’s AA1000AS - A specialised area that traditional auditing is yet to fully infiltrate 19 footer

21 Assurance on greenhouse gas emissions
Increased concern over global warming Both compulsory and voluntary disclosures/statements Scope 1 (narrowest) to 3 (broadest) emissions Assurance of these activities is covered by ASAE 3410 20 footer

22 E E-Commerce Business to Business (B2B) Business to Consumer (B2C)
Key risks: Relationship issues with e-commerce trading partners Recording and processing of e-commerce transactions Pervasive security risks (e.g. privacy) Fraud System failures/crashes Computer-assisted audit techniques (CAATs) used to test system controls and transactions CAATs use in program control testing is questioned due to complexity of systems 21 footer

23 E Continuous assurance
Level of readily available business information is increasing, improving real time decision making Increased use of eXtensible Business Reporting Language XBRL Standardised financial information and information exchange Uses identifier tags on data to provide details on origin, links to other data and rules used to prepare the data This uniformity and the use of tags enables an auditor to monitor the key controls over the data system and the data Continuous assurance will occur either simultaneously or very shortly after the release of business information (both financial and non-financial). Will improve financial audits and lead to new assurance services Increased level of advanced computer assisted audit techniques – SCARF, Snapshot, Audit hooks (to be discussed in the Test of Control topics) are used 22 footer

24 E Forensic auditing Primarily used when there is: suspected fraud, large system failures or corporate failures. Traditional considered to be divided into 2 broad types of engagements: Investigative engagement: tracing funds, identify and recover assets, identify the nature and extent of fraud, establish the fraud perpetrator (if possible) Litigation support, includes: reviewing evidence and providing an assessment, including the areas of loss to establish a claim obtaining evidence to refute a claim assistance with settlement discussions assistance with cross examination in court Preventative/consulting engagements is now a new expanding area that involves assessing controls and recommending improvements to prevent fraud; direct input into computer system development. Usually an agreed upon procedure engagement rather than an assurance engagement. Exists in both public accounting firms and private practice (e.g. police, banks, insurance companies) 23 footer