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ACCT3014 - Auditing and Assurance
Semester 1, 2013
Multiple Choice
1. Whenever sampling is used in an audit procedure, uncertainty will be present. The two sources of this uncertainty are: a. audit risk and detection risk. b. inherent risk and control risk. c. sampling risk and non-sampling risk. d. detection risk and control risk. If the sample supports the conclusion that the recorded account balance is materially misstated when in fact it is, this is: a. the risk of incorrect acceptance. b. the risk of incorrect rejection. c. the correct decision. d. the risk of overreliance.
2.
3. Random selection is used in audit sampling so that: a. larger items are more likely to be selected. b. each item has a known and equal chance of being selected. c. a representative sample is guaranteed. d. b and c 4. In which of these audit procedures is sampling most likely to be used? a. analytical procedures. b. enquiring. c. vouching. d. observing.
3
Lecture Outline
Auditors Reporting Obligations Subsequent Events evaluations Going Concern evaluations Structure of Audit Report
Accept / reject new client Established terms of engagement Engagement letter Obtain knowledge of the business ASA 315 (including ASA 250) 2.1.1 Preliminary analytical procedures Appraisal of risks, including fraud risk (ASA 240) going concern (ASA 570) ASA 315 Estimate of materiality Review of control components 2.4.1 Preliminary evaluation of control environment Develop overall audit plan (i.e. develop an audit strategy) in response to risks ASA 330 2.5.1 Determine reliance on internal controls 2.5.2 Determine extent and nature of testing 2.5.3 Write audit plan Assignment of staff Tests of control 3.1.1 Conducts tests 3.1.2 Make final evaluation of internal control 3.1.3 Modify audit approach Substantive testing activities 3.2.1 Conduct substantive tests of transactions and balances 3.2.2 Conduct substantive analytical procedures 3.2.3 Evaluate results of substantive procedures 3.2.4 Modify audit approach Obtain representations 3.3.1 Management 3.3.2 Solicitors 3.3.3 Bank Review financial report Review audit results Subsequent events Fraud and error ASA 240 4.5 Related party transactions 4.6 Formulate audit opinion 4.7 Draft issue reports (ASA 700/705)
2.6 3.1
A U D I T P R O C E S S
3.2
3.3
4. Opinion formulation
5. Continuous activities
5.5 5.6 5.7
Supervise conduct of examinations Review work of assistants Consider appropriateness of continuing relationship with client Make required special communication 5.4.1 Material weaknesses of internal accounting control 5.4.2 Material errors or irregularities Consult with appropriate persons in connection with special problems Document work performed, findings, and conclusions in appropriate working papers Consider going concern (ASA 570)
Whether the financial report as a whole is free from material misstatement, due either to fraud or error Whether the financial report is prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework Whether the financial report achieves a fair presentation Whether financial report is in accordance with the Corporations Act 2001
Title Addressee Introductory paragraph Managements responsibility for the financial report Auditors responsibility Opinion Signature Date of Report
Auditors address
Need to complete Tests of Balances after Balance Date Audit working papers are reviewed to assure audit program completion Analytical procedures to corroborate conclusions Perform the SUBSEQUENT EVENTS REVIEW Assess Going Concern basis (at planning and at the final review stage)
Directors Declaration
Balance Date
Auditors Report
Auditors Responsibility
Events Occurring Up to the Date of the Auditors Report
(ASA 560 paras. 6-9)
- Obviously have opportunity to disclose in the financial report either by adjustment or voluntary disclosure
- Auditors have a responsibility to discover and evaluate all material subsequent events (i.e. need to undertake appropriate audit procedures)
Examples of Subsequent Events Audit Procedures (ASA 560 para. 7 and A8)
Reading minutes of meetings of shareholders, the governing body and audit and executive committees held after period end, and inquiring about matters discussed at meetings for which minutes are not yet available Reading the entitys latest available interim financial report and budgets, cash flow forecasts and other management reports as considered necessary Inquiring or extending previous oral or written inquiries of the entitys solicitors concerning legal matters Reviewing the procedures that management has established to ensure that material after balance date evens are identified. Inquiring of management as to whether any such events have occurred which might affect the financial period being reported on.
Lecture Example #1
Kate Brewster is the engagement partner for the financial report audit of Playland Ltd for the year ended 30 June 2012. The following material events or transactions have come to Gregs attention before he is scheduled to issue his report on 31 August 2012:
(a)On 15 July 2012, the company settled and paid a personal injury claim of a former employee as a result of an accident that occurred in March 2009. The company has not previously recorded a liability for the claim.
(b)On 16 July 2012, the directors became aware of broken glass found in their prepackaged sandpits. This product had only been on sale for one week and had been purchased directly from the manufacturer, Hilltop Co, an unrelated company in Thailand, one week prior to being introduced to the public.
Required: Identify audit procedures that should have brought the item to the auditors attention, and determine the treatment required in the financial report
Final assessment of Materiality and Audit Risk Review of Other Information Examine Related- Party Transactions Comfort and Management Representation Letters Consider whether Financials are prepared on Going Concern Basis
Auditor is required to: - Assess the risk of going concern problems at the planning stage and again during the final review of the audit
During relevant period (ASA 570:A14), i.e. approximately 12 months from the date of the auditors report on the current financial report
- Creditors complaints
- Inability to obtain finance for product development
Examples of Audit Procedures regarding Going Concern Assumption ASA 570. A15
- analyse/discuss cash flow, profit, forecasts
- analyse/discuss latest financial information - review terms of debentures/loans for breaches - read minutes for reference to financial problems
The auditor must consider whether the going concern basis is appropriate, and if there is a problem the Auditor discusses with management its plans to overcome the problem e.g. raising additional finance or other mitigating factors such as liquidating assets, delaying expenditure, increasing capital(ASA 570. A16) Auditor needs to substantiate management plans (i.e. mitigating circumstances) with appropriate evidence
These disclosures or departures are commonly referred to as true and fair overrides
ASA 200 para11: Objective of an audit of the financial report is to enable the auditor to express an opinion as to whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework
Audit Reporting ASA 700 ASA 700 covers the auditors responsibility to form an opinion on the financial report
An audit report can either be:
Unmodified/Unqualified This means that there are no material problems with the financial statements Modified This means that there are problems with the financial statements
Unmodified/Unqualified Opinion
Issuing an unqualified opinion means that the auditor has concluded that they have obtained reasonable assurance that the financial report as a whole is free from material misstatement, whether due to fraud or error
Condition 1:
The financial report is materially misstated
Appropriateness of accounting policies and their application Adequacy of disclosures in the financial report
Condition 2:
Inability to obtain sufficient appropriate audit evidence
ASA 705 covers the types of modified opinions that can be issued: - Qualified opinion - Disclaimer of opinion - Adverse opinion
unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial report of undetected misstatements, if any, could be both material and pervasive
misstatements, individually or in combination, are material and pervasive to the financial report overall financial report is so materially misstated or misleading that it doesnt present fairly the financial position, performance or cash flows of the company
ASA705
Are not confined to specific elements, accounts or items of the financial report If so confined, could represent a substantial proportion of the financial report, or In relation to disclosures, are fundamental to users understanding of the financial report (ASA 705 para.5)
Emphasis of Matter
In limited circumstances it is appropriate for the auditor to draw attention to or emphasise a matter that is appropriately presented or disclosed in the financial report and is considered relevant to users Examples of EoM
ASA/ISA 706.A1 and Appendix 3 outlines circumstances in which Emphasis of Matter can be issued: Uncertainty relating to the future outcome of litigation/regulatory action Early application of a new accounting standard that has a pervasive effect on the financial report in advance of its effective date, and Major catastrophe that has had and continues to have, a significant effect on the entitys financial position
Inclusion of Other Matter paragraphs in the auditors report allows auditor to draw users attention to any other matters, not presented or disclosed in the financial report, that the auditor believes are sufficiently important to be highlighted
Unqualified/Unmodified (ASA 700/706) Unmodified (ASA 700) Modified (ASA 705/706) Emphasis of Matter Other Matter
Circumstances
Auditors Judgement about possible effects on the Financial Report Material but not Pervasive Material and Pervasive
Qualified Opinion
Adverse Opinion
Qualified Opinion
Disclaimer of Opinion
Lecture Example #2
You are the auditor of Wood Ltd (Wood) for the year ended 30 June 2012. The audit of Wood was extremely difficult this year, as Wood did not keep appropriate books and records. As the accounting department was chronically understaffed, transactions were not promptly entered and reconciliations not performed. In an attempt to sort out the mess, a temporary accountant was employed; however, he was unable even to reconcile the bank account at year end. You are not satisfied that all transactions that occurred during the year are reflected in the financial report.
Required Assuming that the matter remains unresolved, explain the audit opinion that should be issued for Wood for the year ended 30 June 2012.
Lecture Example #4
You are the audit partner at Short & Associates, a mid-tier accounting firm. You are responsible for the audits of the following four independent entities: (a) Median Constructions Ltd (Median) is a building contractor with a varying workload. In order to compensate for the irregularity of its contracted building projects, Median also purchases large vacant blocks of land that it later subdivides for the construction of houses and units; Median then sells these for its own account. The manner in which Median has allocated costs to these blocks of land is in question. Your analysis strongly suggests that the apportionment of costs to houses and units sold has been kept low in order to boost profits. In your opinion, this has resulted in the overvaluation of the unsold blocks of land. The directors of the company do not agree, and hold to their view that the stock of land is correctly valued.
Lecture Example #4
You are the audit partner at Short & Associates, a mid-tier accounting firm. You are responsible for the audits of the following four independent entities: (b) Alltime Entertainment Ltd (Alltime) arranges for popular overseas artists to perform in Australia. The band Pink Lights (PL) was booked by Alltime to play in major cities across the country. Alltimes written contract required the company to pay the band in US dollars but, in order to reduce costs, it did not hedge the amounts. Subsequent to year end, the Australian dollar fell against the US dollar and a substantial loss relative to the bands tour was predicted. The management of Alltime has tried unsuccessfully to renegotiate the bands contract and has been unable to obtain finance to cover the expected shortfall. Alltime has now cancelled the tour and expects a substantial claim from PL, which it believes is likely to exceed the tour losses. It is clear to you, as the auditor, that Alltime does not have the income, cash or other assets to sustain such a loss.