LECTURE 1 – AUDITING AND ASSURANCE, ETHICS AND AUDITING
Auditing: A Special Function
• Auditing is a type of assurance service - provides assurance on the quality of information in financial statements
to external users of these statements
• Auditing is particularly important in data for capital markets.
• An auditor contributes to effective capital markets by providing independent evaluations of the
reliability of an organisation’s financial statements on efficiency and effectiveness of various aspects of
‘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.’
There are four components:
Accounts, balance sheet
How is the information prepared? Ie. In accordance with AASB?
Audited in accordance with audit standards
Job of the auditor is to find this
Communicate the ability to rely on the accounts
What is Attestation?
• Auditing is a specific attestation service where the auditor:
o Gathers evidence to determine whether the financial statements are presented in accordance with
accounting standards and the ‘true and fair’ criteria
o Issues an opinion for third-party users, management and the board of directors.
Obtaining and Evaluating Evidence
• Evidence is crucial
• The auditor gathers evidence to determine whether:
o The client’s processes are working correctly
o Its financial data are recorded and presented correctly
o Its financial statements as a whole are presented in a true and fair manner.
Communicating Results to Users
• Communication of audit results to management and external users completes the audit process.
• Communication follows a prescribed format set out in Auditing Standards. These:
o State responsibilities of both management and the auditor
o Summarise the audit process
o Express the auditor’s opinion on the financial statements.
Unmodified Audit Reports
• An unmodified audit report is a clean report.
o The auditor has no reservation about the presentation of the financial statements.
Components of an Auditor’s Report
• The five components of the auditor’s report are:
o Director’s responsibility
o Auditor’s responsibility
o Auditor’s opinion. The Need for Assurance
Potential bias in providing information
o Management has a vested interest!
Remoteness of users
o Most users do not have the opportunity to interview management
o Many transactions are more complex than they were a decade ago
Increased Demand for Accountability
Major local and international corporate failure
o HIH in Australia o Enron in USA
Failure of one of the largest public accounting firms (Arthur Andersen, auditor for HIH and Enron)
o Perception that auditors were not independent from their clients
Public Policy Response
• CLERP 9 Act 2004 in Australia
• The CLERP 9 Act focused on four critical improvements to protect investors and financial statement quality: