Module 1
Chapter 1:
An overview
of auditing
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Learning objectives
After studying this presentation, you should be able to:
1.1 explain what an audit is, what it provides, and why it
is demanded
1.2 evaluate whether audits meet the demands of users
1.3 discuss the importance of regulation to auditing
1.4 explain the importance of national and international
auditing standards.
What is an audit?
“A systematic process of objectively obtaining and
evaluating evidence regarding assertions made about
economic actions and events to ascertain the degree of
correspondence between those assertions and established
criteria and communicating the results to interested users”
American Accounting Association (1973)
What is an audit?
• systematic process
• objectively obtaining and evaluating evidence
• regarding assertions made about economic actions and
events
• ascertain the degree of correspondence between those
assertions and established criteria
• communicate the results to interested users.
What does an audit provide?
• Auditor’s opinion:
– Fair presentation framework: forms an opinion on
whether the financial report presents fairly, in all
material respects (or a true and fair view) in
accordance with the applicable financial reporting
framework
– Compliance framework: forms an opinion on whether
the financial report is prepared, in all material respects,
in accordance with the framework. ASA 700
Why is there a demand for audits?
• Agency theory
• Information hypothesis
• Insurance hypothesis
• Regulation
Agency theory
• A principal contracts an agent to work on their behalf
• Each party is motivated by self interest
• Information asymmetry arises
• An independent audit reduces the incentives for
problems
Information hypothesis
• Investors demand quality information in assessing the
risks and returns of their investments
• Audits improve the quality of information in financial
reports
• Reduces information risk and leads to improved decision
making
Insurance hypothesis
• Interested parties:
– Investors and creditors demand an audit to be prudent
and insure against losses
– Regulators to insulate themselves from criticism by
directing blame to auditors.
Regulation
• Annual audits required by:
– Companies, registered schemes & disclosing entities
(excludes small proprietary companies)
– Commonwealth and state government departments,
statutory authorities, government companies and
business undertakings, and municipalities
– Not-for-profit organisations including educational
institutions.
Who provides audits?
• Financial audits are provided by independent auditors
• Must be registered with ASIC to be able to perform
audits on reporting entities
• Criteria set out in s.1280 Corporations Act:
– Educational qualifications
– Work experience
– Good character (fit and proper person)
– Ordinarily resident in Australia
– Member of CA ANZ, CPA Australia, or IPA.
The audit expectation gap
“the difference between what auditors actually do when
they conduct an audit and what shareholders and others
think auditor's do, or should do, in conducting the audit”
Report of HIH Royal Commission
Audit expectation gap
Audit expectation-performance gap
Society’s
Perceived
Performance
Performance
gap
Reasonableness expectation
gap
of auditors
of auditors
Deficient
Deficient
performance standards
Unreasonable
expectations
Regulation and other oversight
• CLERP 9 changes
– Major impacts:
• Role of audit in corporate governance
• Auditor independence
• Audit quality.
Quality-related changes
• Role of Financial Reporting Council:
– role broadened to include oversight of the AUASB
– auditing standards given the force of law.
• Annual general meetings:
– Shareholders permitted to submit questions to the
auditors before the AGM
– Auditor must attend the AGM and answer questions
asked by shareholders.
Regulation and other oversight
• Australian Securities and Investment Commission
(ASIC):
– Regulates corporate, markets and financial services
sector
– Advise on selling of and disclosure of financial products
and services to consumers
– Majority of work carried out under Corporations Act.
Regulation and other oversight
• Companies Auditors Disciplinary Board (CADB):
– Established under ASIC Act
– Hears breaches under Corporations Act by auditors and
liquidators.
• Australian Securities Exchange (AXS):
– Monitors specific aspects of the businesses of other
organisations
– Listing Rules are enforceable against listed entities
under the Corporations Act.
Auditing Standards
• Auditing and Assurance Standards Board (AUASB):
– AUASB’s role is to develop high-quality auditing and
assurance standards
– Standards have the force of law under the Corporations
Act s. 336
– Ensure ASAs conform with their IAASB equivalents,
address local regulatory issues and promote
consistency in application
– Also issues ASREs (review engagements), ASAEs
(assurance engagements) and ASRSs (related services).
International auditing standards
• Issued by the IAASB under the auspices of the
International Federation of Accountants
• IAASB’s objective:
– serve the public interest by setting high-quality
international standards for auditing, quality control,
review, other assurance, and related services
– facilitating the convergence of international and
national standards.