ACCM4400: Solutions – Workshop 1
Pre-Workshop Questions
Prior Knowledge Check Questions
In your own words, explain an assurance engagement. Why are assurance engagements needed?
Solution
An assurance engagement is an engagement in which an assurance 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.
Assurance engagements must have these 5 elements:
• Three party relationship – Assurance practitioner, responsible party, intended user
• Underlying subject matter
• Suitable criteria
• Sufficient appropriate audit evidence
• Written assurance report
The purpose of assurance engagement is to add credibility to the underlying subject matter, which
could be financial statements, internal controls, sustainability reports, performance, etc. The user
will than have the confidence on the subject matter.
Additional Question 1
What are the most important traits and characteristics an assurance provider should have? Why do
you think these traits are important?
Solution
Some of the traits that assurance practitioners should have are:
• Integrity - to be straightforward and honest in all professional and business
relationships.
• Objectivity - not to compromise professional or business judgements because of
bias, conflict of interest or undue influence of others.
• Professional competence and due care - attain and maintain professional knowledge and skill
at the level required to ensure that a client or employing organisation receives competent
Professional Activities, based on current technical and professional standards and relevant
legislation; and act diligently and in accordance with applicable technical and professional
standards.
• Confidentiality - to respect the confidentiality of information acquired as a result of
professional and business relationships.
• professional behaviour - to comply with relevant laws and regulations and avoid any conduct
that the Member knows or should know might discredit the profession
Apart from the above, independence is also important and will be addressed more thoroughly in
Workshop 2.
The above traits are important so that users can trust the work of the assurance practitioner and will
be able to rely on the assurance report.
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
Additional Question 2
What are some examples of assurance engagements?
Solution
There are many examples of assurance engagements. Some that are discussed in this workshop
include:
1. Audit of Financial reports
2. Reviews of financial reports
3. Assurance on prospective financial information
4. Assurance on internal controls
5. Assurance on sustainability reports
6. Assurance of Greenhouse Statements
7. Assurance on performance
8. Forensic accounting
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
During Workshop Questions (Class Activity)
Class Activity 1
Jason is at a neighbourhood Christmas party with several of his flatmates. Over a few beers, Jason
gets into a conversation with a neighbour, Tony, about mutual acquaintances. Jason is a junior
auditor with a large accounting firm (although he tells Tony that he is a partner at the firm), and
Tony works for a large bank. During the conversation Jason and Tony discover that they have both
had professional dealings with a particular family-owned manufacturing company. Tony reveals
that the company’s line of credit is about to be cancelled because of some irregularities with the
security documents. Jason is concerned to hear this news because he has just participated in the
company’s financial report audit and there was no indication of any problems with its borrowings.
Jason tells Tony that he believes that the founder of the family-owned company (and the current
CEO) is having an affair with his personal assistant, and has quietly increased his shareholdings in
a listed company that supplies components to the family manufacturing company. The components
manufacturing company is about to announce to the share market that it has just won a very large,
and very profitable, contract with a Chinese company.
Required:
Discuss the fundamental principles of ethics that are potentially breached by Jason’s behaviour at
the party.
Adapted from Moroney, R, Campbell, F & Hamilton, J (2020)
Solution
It’s a good idea to first list out the five fundamental principles i.e.
i. Objectivity
ii. Integrity
iii. Professional competence and due care
iv.
Confidentiality
v.
Professional behaviour
Now look at the case and identify what Jason might have done which appear to breach any of the
above:
• Jason is a junior auditor in an accounting firm but says that he is a partner – Jason is clearly
being dishonest and this breaches “Integrity”
• Jason tells Tony that the founder of the company is having an affair with the personal assistant
– this appears to be gossip and can give a negative view of Jason and his profession. Jason
lacks “Professional behaviour”.
• Jason also reveals information about the founder quietly increasing his shareholding in a listed
company (that has dealings with the company being audited) due to make an important
announcement – It is unlikely that Jason has permission from the founder to reveal this
information and as such Jason has breached “confidentiality”.
Please take note that it is important to use the correct terms as set out in APES 110
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
Class Activity 2
You have been asked by your audit client Blue Water Ltd to prepare a report that analyses the
potential acquisition of Ocean Pty Ltd. As part of your analysis, you decide to verify the accuracy
and completeness of Ocean’s most recent cash flow statement. After reviewing a draft of your
preliminary analysis, the chief financial officer (CFO) of Blue Water, Jill Symes, has asked you to
focus your attention on Ocean’s sales and profitability and to avoid the distraction of cash flow
reporting. She suggests that the acquisition will provide substantial future financial benefits to Blue
Water and that confusing the board with cash flow issues would not be helpful to the acquisition or
to the likelihood of your being asked to undertake similar engagements in the future.
Required: List two threats that may exist in regard to compliance with the fundamental principles
of professional ethics, and identify the fundamental principles that are at risk of being breached.
Adapted from Gay GE., and Simnett, R.(2018)
Solution
It’s a good idea to first list out the five fundamental principles and the five threats to fundamental
principles:
Fundamental principle:
• Objectivity
• Integrity
• Professional competence and due care
• Confidentiality
• Professional behaviour
Threats
• Self-interest
• Self-review
• Advocacy
• Familiarity
• Intimidation
Now look at the case and identify the threats and which fundamental principles have been breached.
Jill Symes does not want you to focus on the cash flow in your report. She says that confusing the
board with cash flow issues would not be helpful to the acquisition or the likelihood of your being
asked to undertake similar engagements in the future.
It appears that Jill Symes is trying to intimidate you by implying that you may not be able to gain
future work from Blue water – Intimidation threat.
You might then be worried about the inability to earn future revenue from Blue water – Self-interest
threat.
Due to these 2 threats, you may do as Jill Symes has requested. Your objectivity has been breached
as you are allowing Jill Symes intimidation and your self-interest to influence your work.
By not including your findings on the cash flow, you are omitting information that should be
included your report and this would breach integrity.
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
You also have not exercised sound judgement in applying professional knowledge and skill by
leaving out your analysis of the cash flows and therefore you would also breach professional
competence and due care.
Class Activity 3
Visit the website of the Auditing and Assurance Standards Board and other relevant sources to
answer the following questions:
1.
2.
3.
4.
Are the standards issued by AUASB legally enforceable?
What is the main purpose of AUASB?
What is the relationship of FRC and AUASB
Are the AUASB standards the same as International Standards on Auditing (ISA) issued by the
International Auditing and Assurance Standards Board (IAASB)?
Solution
1. Are the standards issued by AUASB legally enforceable? - The AUASB standards are legally
enforceable for audits or reviews of financial reports required under the Corporations Act 2001
(https://www.auasb.gov.au/About-the-AUASB.aspx) Through the standards issued by the
Accounting Professional and Ethical Standards Board (APESB), members of the Australian
Professional Accounting Bodies are compelled to comply with the requirements of AUASB
Standards (para 24 of the "Forward to AUASB Pronouncements“)
2. What is the main purpose of AUASB?
a. Develop, issue and maintain in the public interest, high quality Australian Auditing and
Assurance Standards and guidance that meet user needs and enhance audit and assurance
consistency and quality.
b. Contribute to the development of a single set of auditing and assurance standards and
guidance for world-wide use. (https://www.auasb.gov.au/About-the-AUASB.aspx)
3. What is the relationship of FRC and AUASB? - the FRC provides broad strategic direction and
advice to the AUASB and has oversight of the process for setting auditing and assurance
standards
in
Australia.
(https://www.auasb.gov.au/About-the-AUASB/OrganisationStructure.aspx)
4. Are the AUASB standards the same as International Standards on Auditing(ISA) issued by the
International Auditing and Assurance Standards Board (IAASB)? -Where appropriate, the
AUASB adopts pronouncements issued by the IAASB. Under the AUASB’s convergence
policy, international standards adopted in Australia are modified only if there are compelling
reasons to do so.
(https://www.auasb.gov.au/admin/file/content102/c3/Due_Process_Framework_December%2
02020_Updated_2_3_2021.pdf - AUASB Due process framework para 43)
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
Class Activity 4
a. Explain the 5 elements of assurance engagement using the audits of financial reports required
under the Corporations Act, as an example
b. Are audits of financial reports required under the Corporations Act attestation or direct
engagements? Explain
c. Do audits of financial reports required under the Corporations Act provide reasonable or limited
assurance?
Solution
a)1. In the audit of financial reports, the 3 parties to the engagement are as follows:
• The auditor is the assurance practitioner
• Those charged with governance (directors), together with management, are the responsible
party. Management prepares the financial reports while the directors prepare the directors’
declaration, declaring that the financial statements show a true and fair view.
• The shareholders are the intended user
2. The underlying subject matter are the financial reports.
3. The suitable criteria includes:
• Financial Reporting framework – Australian Accounting Standards
• Relevant requirements of the Corporations Act
4. The Auditor will need to obtain sufficient appropriate evidence to determine if the financial
reports have been prepared in accordance with the financial reporting framework and the
Corporations Act.
5. The conclusion of the auditor will be included in the written assurance report called the
Audit Report which is addressed to the shareholder
b) Audits of financial reports are attestation engagement. The directors (responsible party) declare
that the financial statements are prepared in accordance with the accounting standards and the
requirements of the Corporations Act (suitable criteria). In other words, the auditor (the assurance
practitioner) does not measure the subject matter.
c) Audits provide a reasonable assurance as opposed to reviews that provide limited assurance.
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
Class Activity 5
Numbers & Associates provide their client, Oak Ltd, with the following professional services:
1. Identification of new risks that arise from a changing business environment
2. Checking compliance with legislative obligations of a government grant and reporting to the
relevant government department
3. Assistance to management and the Board in achieving overall entity goals and objectives, as
well as strengthening internal controls and governance
4. Assistance in establishing and training the internal audit team
5. Attending stock take instructions only, as instructed by the Board
6. Providing advice on accounting policies and accounting standards
7. Providing an opinion whether the annual financial report gives a true and fair view.
Required:
Which of the above are assurance services? Explain.
Adapted from Gay GE., and Simnett, R.(2018)
Solution
1. There does not appear to be a three-party relationship. Management would hire the practitioner
to help management themselves identify risk – not an assurance engagement
2. Appears to be 3 parties – the assurance practitioner, responsible party (management) and the
intended user (government department). The compliance is the suitable underlying subject
matter and the regulations is the appropriate criteria – this is an assurance engagement
3. There does not appear to be a three-party relationship. Management is hiring the assurance
practitioner to assist management. This is a consulting activity– not an assurance engagement
4. There does not appear to be a three-party relationship. Management is hiring the assurance
practitioner to provide advice to management. This is a consulting activity– not an assurance
engagement
5. There does not appear to be a three-party relationship. Practitioner is required to attend stock
take as per Board’s instructions. This is an agreed upon procedure and not an assurance
engagement
6. There does not appear to be a three-party relationship. Management is hiring the assurance
practitioner to provide advice to management. This is a consulting activity– not an assurance
engagement.
7. All the five elements are present for the audit of financial statements – this is an assurance
engagement.
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
After Workshop Questions
Question 1
Discuss the difference between reasonable assurance, limited assurance and agreed upon procedures
(include examples of each, differences in procedures and reports in your discussion).
Solution
In a reasonable assurance engagement, the assurance practitioner provides a reasonable level of
assurance which is the highest level of assurance an assurance practitioner provides. In a limited
assurance engagement, the assurance practitioner provides a limited level of assurance which is
lower than reasonable assurance. For agreed upon procedures, the assurance practitioner does not
provide any assurance.
An assurance practitioner will gather more evidence and better-quality evidence for a reasonable
assurance engagement as compared to a limited assurance engagement. In agreed upon procedure,
the assurance practitioner carries out the procedures that have been agreed upon between the client
and the assurance practitioner.
The conclusion included in a reasonable assurance engagement is in the form of a positive
expression of opinion. The conclusion included in a limited assurance engagement is in the form of
a negative expression of opinion. For an agreed upon procedure, the assurance practitioner does not
provide a conclusion.
Example of a reasonable assurance engagement is the audit of financial reports. Example of a limited
assurance engagement is the review of financial reports. Example of an agreed upon procedure is
an assurance practitioner observing and recording the number of passengers for a particular public
transportation.
Question 2
Discuss the procedures an assurance practitioner carries out when assessing the assumptions used
in the preparation of prospective financial information.
Solution (extracted from para 111 of ASAE 3450)
The assurance practitioner’s assurance procedures on the assumptions shall include:
(a) reading the most recent audited or reviewed financial report, and, if appropriate, the most
recently prepared annual or interim financial information, to enable the assessment of the
assumptions used in the preparation of the prospective financial information;
(b) enquiry of the responsible party of:
(i) the source, degree of reliability, uncertainty, verifiability, and validity of the assumptions,
including whether the assumptions are objectively reasonable;
(ii) the time period the assumptions cover;
(iii) the methodology used in their development and quantification, including the extent to which
they are affected by the responsible party’s judgement;
(iv) the likelihood of the assumptions actually occurring;
(v) whether the assumptions have a wide range of possibilities, or their outcomes are particularly
sensitive to fluctuations, and if so, the effect on the prospective financial information of such
sensitivities; and/or
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
(vi) whether any hypothetical assumptions are included, and if so, their materiality to the
prospective financial information;
(c) evaluating whether all material assumptions required for the preparation of the prospective
financial information have been identified;
(d) determining whether the assumptions used in the preparation of the prospective financial
information are consistent with the stated basis of preparation;
(e) determining whether the assumptions are arithmetically correct;
(f) obtaining appropriate evidence to support all material assumptions;
(g) evaluating whether the assumptions are within the entity’s capacity to achieve in light of the
assurance practitioner’s understanding of the prospective financial information;
(h) performing, or reviewing the responsible party’s sensitivity analysis to test the responsiveness,
or otherwise, of the prospective financial information to material changes in key assumptions
underlying that prospective financial information; and
(i) considering the responsible party’s reliance on the work of experts in relation to the assumptions.
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1
Reference List
Auditing and Assurance Standards Board 2012, Standard on Assurance Engagements ASAE3450
Assurance Engagements involving Corporate Fundraisings and/or Prospective Financial
Information, Australian Government AUASB, Melbourne.
Gay, GE, & Simnett, R 2018, Auditing and Assurance Services in Australia, 7th edn, McGraw-Hill
Education, Sydney.
Moroney, R, Campbell, F & Hamilton, J 2020, Auditing, 4th edn, John Wiley & Sons Australia,
Queensland.
Source for questions not developed by KBS are included after the respective question. Solutions
are developed by KBS.
ACC4400 Solutions
Workshop 1