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Solutions Manual for Auditing A Practical Approach 3e (Australia) Robyn Moroney, Fiona Campbell, Jane Hamilton (All Chapters Download link at the end of this file) Stuvia.com - The Marketplace to Buy and Sell your Study Material

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Stuvia.com - The Marketplace to Buy and Sell your Study MaterialChapter 1: Introduction and overview of audit and assurance

Review questions

1.11 What does ‘assurance’ mean in the financial reporting context?An assurance engagement (or service) is defined as ‘an engagement in which an assurance practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria’ (Framework for Assurance Engagements, para. 8; International Framework for Assurance Engagements, para. 7).

In the financial reporting context ‘assurance’ relates to the audit or review of an entity’s financial report.

An audit provides reasonable assurance about the true and fair nature of the financial reports, and a review provides limited assurance. The audit contains a positive expression of opinion (e.g. ‘in our opinion the financial reports are in accordance with (the Act) including giving a true and fair view…), while the review contains a negative expression of opinion (e.g., ‘we have not become aware of any matter that makes us believe that…the financial reports are not in accordance with (the Act)...including giving a true and fair view..’).

An auditor may also perform agreed upon procedures for a client, but these do not provide any assurance. The client determines the nature, timing and extent of procedures and no opinion is provided to a third-party user.

1.12 Explain the difference between a financial report audit and an assurance engagement.

An assurance engagement is an engagement in which an assurance practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

A financial report audit is one type of assurance engagement. ASA 200 states that the objective of a financial report audit is for the auditor to express an opinion about whether the financial report is prepared in all material respect in accordance with a financial reporting framework. Therefore, a financial statement audit requires the auditor to use the financial reporting standards and the relevant law (e.g. Corporations Act 2001) as the relevant criteria, and assess whether the information provided by the company managers in the financial report is in accordance with those laws and standards.Stuvia.com - The Marketplace to Buy and Sell your Study Material

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Compliance and performance auditors are other examples of assurance engagements.In addition, the review or audit of a sustainability report is a type of assurance engagement.

1.13 Who are the three parties relevant to an assurance engagement in the financial reporting context? Explain why each party is interested in the result of an audit.

The assurance practitioner is an auditor working in public practice providing assurance on financial reports of publicly listed companies, or other entities.The assurance practitioner (or auditor) is interested in the result of an audit because they are providing the audit service. If the audit is not of the required standard, the auditor’s reputation will suffer.

Intended users are the people for whom the assurance provider prepares their report (e.g. the shareholders).Intended users are interested in the result of an audit because they will rely on the audit when making their decisions about the entity. If the audit opinion (or report) provides assurance that the subject matter is in accordance with the criteria (e.g. true and fair) then the user is likely to place more reliance on the subject matter than if the audit opinion (or report) states that there was not enough evidence, or that serious problems were found during the audit.

The responsible party is the person or organisation (e.g. a company) responsible for the preparation of the subject matter (e.g. the financial reports).They are interested in the result of an audit because they will use the report from the assurance practitioner (or auditor) to make improvements. They are also interested in receiving a positive report so that their interested users will place more reliance on the reports.

1.14 An assurance engagement involves evaluation or measurement of subject matter against criteria. What criteria are used in a financial report audit?

An auditor evaluates the contents of a financial report against the standards and laws that apply to that type of financial report. Listed public companies must abide by the Corporations Act, the Australian Accounting Standards (AASB) and the listing rules of the ASX. Certain companies must also abide by additional specific legislation, depending on their industry or legal status. In addition, if a company is listed in another country, foreign exchange listing rules and laws could apply to the financial report.

Auditing standards control the way an audit is conducted, they are not the criteria against which the financial report is evaluated.

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Stuvia.com - The Marketplace to Buy and Sell your Study Material Chapter 1: Introduction and overview of auditing

1.15 Who would request a performance audit? Why?

A performance audit is an assessment of the economy, efficiency and effectiveness of an organisation’s operations. It can be conducted internally (by internal audit) or externally (by an audit firm) and across the entire organisation or for part of an organisation.

Management may request a performance audit of its own company (or part thereof) in order to assess the economy, efficiency and effectiveness of the organisation. Ideally, the audit would identify issues that need to be addressed in order to increase the performance of the division or company. For example, the audit could examine a logistics department. It would assess the cost of running the department, the number of deliveries per input (such as labour hours, vehicle hours, etc.), and indicators of delivery on time to the correct address.

A performance audit could be conducted on a government department or agency as part of the process of accountability to the public. Stakeholders of government entities are usually seen to be more interested in economy, efficiency and effectiveness than in profit, or surplus. Performance auditing can expose poor practices, or even corruption, in an organisation. Performance auditing can provide information on the implementation of government policies. Regular performance auditing of government entities can help build trust between the government and the citizens.

1.16 What steps can an organisation take to increase the independence of its internal auditors?

Internal auditors are employees of the company, and therefore cannot be completely independent of the company. However, it is possible to increase the independence of the internal audit department through means such as funding, terms of reference, and reporting lines.

A well-funded internal audit department can investigate more issues and spend more time on each investigation, potentially increasing the chance of discovering fraud and other problems. An internal audit department with a small budget is likely to have fewer staff and less qualified staff (because they will be lower paid), and will have to make compromises on the issues to be investigated.

An internal audit department with wide terms of reference has the freedom to pursue the issues which the audit staff believe are most important or create the most risk for the organisation. A department with narrow terms of reference could be limited to investigating only certain matters, or must seek the approval of higher levels of management before commencing any investigation.

The internal audit department would be more independent if it reports to the audit committee rather than the CFO. If the internal audit department reports to the CFO it is possible that the CFO will prevent some issues from reaching other members of the management team, or the board of directors. Often, the problems will be within the CFO’s department, creating a conflict of interest for the CFO when deciding whether to report the issue more widely. An internal audit department that reports directly to Stuvia.com - The Marketplace to Buy and Sell your Study Material

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