Solutions for Audit and Assurance, 2nd Australian Edition Leung (All Chapters included)
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Course
Master of Science in Financial Engineering
Institution
Master Of Science In Financial Engineering
Complete Solutions Manual for Audit and Assurance, 2nd Australian Edition by Philomena Leung, Paul Coram, Dominic Canestrari-Soh ; ISBN13: 9781394173457..(Full Chapters included Chapter 1 to 12)...1. Auditing and governance.
2. Sustainability and contemporary assurance engagements.
3. Financial r...
Review questions
1.11 Describe the nature of an audit.
An auditor sets out to achieve enhanced credibility of information disclosed to increase
reliability for the users of the financial statements. A definition from the Committee on
Basic Auditing is as follows:
An audit is a 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.
1.12 What does an independent auditor do during a financial report audit?
The auditor will provide a written opinion to the shareholders of a company as to the
truth and fairness of the financial report prepared by management. This includes
ensuring that the financial report is free from material error and is prepared in
accordance with relevant accounting standards and corporate law; in Australia, this
means compliance with the Corporations Act and Australian Financial Reporting
Standards.
The auditor performs audit procedures, generally performing tests on samples of the
company’s transactions and balances, to provide sufficient and appropriate evidence
upon which to rely in forming the audit opinion. Where the company has an effective
internal control system that prevents, detects and corrects potential accounting and
reporting errors, the auditor may choose to rely on those internal controls and reduce
the amount of detailed testing performed. Where there are no effective internal
controls in place, the auditor will perform extensive tests of the company’s
transactions and balances.
Once the audit work is completed the evidence is assessed and judgments are made as
to the possibility of the financial report containing material errors. If the auditor
believes that the financial report contains material errors the management will be
requested to make any necessary amendments to the report. If management refuse to
amend the report the auditor will consider the need to modify the audit opinion to
highlight the errors to the users of the financial report.
,1.13 Explain how agency theory results in a demand for auditing.
In an agency relationship, investors (as principals) entrust their resources to managers
(as agents). The agent’s self-interest is expected to diverge from the principals’
interest, giving rise to agency costs. A consequence of this agency problem is that
investors will ‘price protect’ themselves on the assumption that managers are acting
for themselves. It is therefore a rational response that there is a demand for a financial
statement audit to verify the assertions made by management.
1.14 What are the current implications of the audit expectation gap? Can it be
reduced?
The current implications of the audit expectation gap are the same as it has always
been. A difference in expectations about what users think they are getting and what
they are actually getting is going to be a problem – particularly for a service like
auditing that is difficult to observe. There are three important areas where differences
in perceptions occur and they are as follows:
1. Reporting on internal control. Reporting on internal control has not been taken on
in the Australian environment – unlike in the US with Sarbanes-Oxley. In fact, the
most recent iteration of the audit report actually includes a specific disclaimer on
the issue of reporting on internal control.
2. Detection of fraud. This has been an area where auditors have expanded their
responsibilities in recent years through the development of ASA 240 The
Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report
(ISA 240). However, it is still not seen as the core objective of an audit and the
only responsibility that still exists in relation to fraud is material fraud. As stated
by the Chairman of the FRC, Jeff Lucy:
“I would say there is, in fact, now a clear market expectation to this effect –
that is, that auditors are bloodhounds not just watchdogs. Simply put, the
market expects auditors to pick up instances of fraud”.
3. Evaluation of going concern. Current auditors’ responsibilities include a
consideration of going concern. However, they make no positive assurance about
what they do in this regard. Despite not commenting on this issue, the fact is that
users think auditors are guaranteeing the ongoing financial viability of a firm,
which is not currently true.
Reducing the gap has traditionally focused on educating users about what an audit
is actually designed to provide. However, this has not been particularly successful,
and therefore, in the future, more substantive changes on what auditors do and
provide to users would seem the main way that a reduction in the expectation gap
could occur.
, 1.15 What are the suggestions to address the audit expectation gap?
The ACCA defines the audit expectation gap to include three gaps: (1) knowledge
gap; (2) performance gap; and (3) evolution gap.
The ACCA refers that the knowledge gap is the difference between what the public
thinks auditors do and what auditors actually do. This recognises that sometimes the
public has a misunderstanding about what auditors are responsible for. The
performance gap focuses on areas where auditors do not do what auditing standards or
regulations require due to insufficient focus on quality, complexity of certain auditing
standards, or differences in interpretation of auditing standards or regulatory
requirements. The evolution gap exists in the areas of the audit where there is a need
for evolution, taking into account the general public’s demand, technological
advances and how the overall audit processes can be enhanced to add more value.
ACCA recommends that there is an urgent need for audit to evolve and to listen to the
public’s legitimate concerns about audit. Closing the expectation gap in audit will
support a more constructive discussion about how audits can evolve to meet society’s
expectations.
In October 2021, CAANZ, together with ACCA, CPA Canada, and the AASB
Canada published a report which advocates a holistic approach to narrow the
expectation gap on fraud and going concern.
The main recommendations of the CAANZ report include:
• encouraging forensic specialists to be involved in risk assessment where a
high risk is identified, but allowing auditors to still apply their professional judgement
when determining how to respond to identified fraud risks, as mandatory use of
forensic specialists may widen the expectation gap
• encouraging the IASB and the IAASB to explore additional going concern
disclosures as supplements for the ‘current binary approach to disclosing material
uncertainty about going concern’
• suggesting that the IAASB, along with national standard setters, determine if
the auditing standards could be ‘enhanced’ in such a way as to assist audit
practitioners to apply professional scepticism rather than introducing an additional
‘suspicious’ mindset.
1.16 List and explain the elements of an assurance engagement.
Assurance is a broad term to describe any situation where information is prepared by
one party and then attested to its accuracy by another party. Assurance engagements
can relate to a broad set of potential engagements that may be financial or non-
financial, and the level of assurance provided can vary according to the particular
engagement. It is important to understand that in all assurance engagements
(regardless of the subject matter and level of assurance provided), the practitioner
must apply professional judgement and professional scepticism.
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