Overview: The auditing and assurance profession
The main reason for this first module is to make it clear how auditing fits within the larger public accounting profession and broader range of assurance services. You will learn about different types of assurance and audit services as well as the different levels of assurance each offers – the most important point being that no guarantees (or absolute assurances) are provided. You will learn about the alternative audit opinions that can be expressed, the important distinction in responsibilities of preparers and auditors, and consider why audits are even required. The significance of regulators to the governance of the profession and the role of the audit expectation gap in the need for regulatory intervention allows the importance of auditor independence and other matters of professional ethics to be explored. The significance of decided court cases on the responsibilities and legal liability of auditors is important to understand the central role of auditing standards. The way all these matters need to be considered in decisions about working with new and existing clients is explored.
This is the ‘big picture’ providing the professional context in which the audit of a financial report process takes place. You are also introduced to the Lakeside Company case study which is embedded throughout the learning materials to illustrate the application of the principles. The financial report audit process and its application to the Lakeside Company case study is covered in the remaining three modules.
You will find a copy of the diagram presented below at the beginning of each chapter of your text. The relevant section of the diagram being covered in each module is shown in colour coding below. You might find it a useful study aide to annotate the diagram with the relevant figures, tables, readings and Lakeside cases and exhibits that are applicable. This should provide a fairly complete roadmap for you of the material you need to cover to put you in the best position to attempt the activities in each module designed to develop your application of your auditing knowledge - it is this ability to apply what you have learned that will be the focus of your final examination. Figure 1.1 will only be presented at the beginning of each Module in this study guide.
Refer to Figure 1.1 (adapted from your text) which aligns the modules to the chapters in your textbook using the colour coding key at the top of the Figure.
What to do now?
What reading is required to expand on, and explore, the content referred to in this Overview?
You will see from Figure 1.1 that your focus will be on Chapters 1 & 2 of your textbook (Moroney, et al.). You will see sections in the study guide for each of those chapters and also suggestions for background readings to get your study of those Chapters underway. The final section presented for Module 1 will be introducing the Lakeside Company case study to you. This will enable you to begin to see a practical example of the principles you are being asked to learn throughout the unit.
In each module any prescribed background reading, will be followed by the reading of the relevant chapters from your textbook and then reading of the relevant case(s) from Lakeside. The reason any background reading is the starting point in each topic is to convey a sense of the unstructured business environment from which you need to identify the problems that exist in the complex business world that have formed the demand of regulators to takeover the governance of the profession. The intention is to have you appreciate that the order and structure presented when you study the principles in your text and the professional standards are born of a much more complex and chaotic real business environment. This is then followed by Lakeside case studies where you need to make sense by applying the principles you have (hopefully) learnt and identify and solve problems that comprise your work as a professional!
You are in a transition period for the profession; there are always new standards in the handbook and text you are using. These are part of a worldwide change to international harmonisation of accounting and auditing standards. This is why you should ensure you are not using a version of the handbook which contains earlier versions of standards - current developments always impact on audit practice so you should ensure you are using the most current standards for guidance. This continues a message about needing to remain up to date and practise lifelong learning you first received in your earliest accounting units.
Chapter 1: Introduction and overview of audit and assurance
Background readings
Bibliographic detail for each reading is provided below. Making the effort to read each reference will improve your ability to understand and apply the principles you read about and activities that follow.
Please note: where Readings are “Supplied” you need to access them in MyReadings.
Supplied: Reading 1.1
Brown, RG 1985, ‘Changing audit objectives and techniques’, in DR Carmichael & JJ Willingham (eds) 1985, Perspectives in Auditing, 4th edn, McGraw-Hill, New York, pp. 46–55. (9 pages)
While Reading 1.1 (Brown 1985) was written some years ago, it still provides a valuable and more detailed historical perspective on the developments outlined in your text.
Text reading
Here is a VERY brief overview which in no way intends to be a substitute for making your own summary/notes. My recommendation is that you makes notes for each chapter objective, compare yours to those at the end of each chapter, including key terms that you should be making notes about and any standards that are referred to. This is the technical auditing language you need to develop an understanding for auditing financial reports. You are encouraged to develop and use your own glossary to compare with the one in the text and your Auditing, Assurance and Ethics Handbook.
So at this point you are moving from the lessons learned from real auditing practice, set out in the background readings which you will later apply in the Lakeside case, to illustrate how those lessons can be implemented using the principles and standards that the profession has in place to guard against due skill and care not being exercised in the performance of audit and assurance services. You may even find it beneficial to read through each of the CLOUD 9 case boxes in the relevant chapters for each Module BEFORE or AFTER (we all have our own preferences) you read through the text chapter in detail … this will expose you to similar issues for another “audit client” that are explored and presented in your text (to compare and contrast with the Lakeside Company case).
As you read each chapter from your text you will be invited to complete a series of activities (questions) to reinforce your ability to apply the material you have been learning about auditing. The idea is, once again, to encourage you to see how the various resources (readings, cases, text and standards) you are being asked to use are inter-related and not a series of discrete items to be learned individually. Try the following activity as an example … it is based on what you might have done as you read this brief introduction to the Module reading suggested from your text.
Key terms at the end of each chapter or clicking on active links if I am using the e-book.
In the Definitions paragraph of ASAs you are referred to.
Text reading
There’s no need to get bogged down in the detail that is contained in your text … realise that the detail is all contained in your Handbook … get into the habit early of recognising this and learning how to use the Handbook you have to avoid that sense of needing to memorise things.
Yes, your text often provides a nice neat version of the principles and content, but it is an elaboration of what is specified by the Auditing and Assurance Standards. As a simple example to illustrate, Section 1.1 in defining an assurance engagement quotes paragraph 10 of the Framework for Assurance Engagements. Take the time to locate paragraph 10 in the Framework and read through it … all the way through to paragraph 11. For each of the following cards you will need to scan through the Framework.
Activity 1.1
Reorder the items on the right to match the items on the left:
That is correct.
It is very important to remember that before you actually get to look at the financial statement audit process in detail, you will be exploring and placing auditing and assurance more generally in the wider historical and business context. This is the start of developing the ‘big picture’ into which you will dig to find the place (or position) of financial statement auditing that you will learn about during the unit. This chapter offers a view of how auditing and assurance services fit into the broader range of services provided by the accounting profession. The role of the profession in the broader business environment is also covered.
This exploration will also allow you to reconnect with the prerequisite units to develop a sense of how you will be enhancing your ability to integrate and utilise the knowledge you have been building up through your degree so far. For example, you will have learned about a number of the regulatory and professional organisations already (for example, ASIC, CAANZ (formerly ICAA), CPA Australia and the IPA in Financial Accounting and Legal Studies); now you will be learning about their role from an auditing rather than accounting perspective. The following matching activity (Test Yourself) offers the opportunity to review the roles of various Australian regulators (text, Section 1.7).
Activity 1.2
Reorder the items on the right to match the items on the left:
That is correct.
Further, you will be reminded about the roles and responsibilities of management in the accounting process that you have learned; now you will learn how those roles and responsibilities are central to the effectiveness of external independent audits to corporate governance – again, a different perspective rather than new material.
Once you have made the effort to read through Chapter 1, compiled your summary and attempted the simple activities above, it is time to see how you go applying the knowledge by attempting the questions set out below. Remember, it is quite OK to ask for clarification of any content you feel you do not understand - scroll down and use the link to the Module 1 Discussion Forum; in addition, if you are not sure your comprehension of the material is good you can always try the multiple choice and review questions, as explained below.
Questions and Activities (Text Chapter 1)
If you wish to review your comprehension of the content you should feel free to attempt the:
- Multiple Choice Questions, and
- Review Questions presented for each Chapter.
Please note that:
- PAQ = Professional Application Question at the end of chapter of the text
- DQ = Discussion Question at the end of each Lakeside case
- Ex = Exercise Question at the end of each Lakeside case.
You will find suggested answers to Multiple Choice Questions as you attempt them embedded in you e-text (3rd ed). You will NOT find suggested answers to the Review Questions provided BECAUSE I expect that you are capable of locating the relevant material in the Chapter … the questions are in the same sequence as the objectives and sections of the Chapter.
You should NOT expect Multiple Choice or Review style questions in your Final Examination – the style of questions will be based on those set out below that are designed to develop your skills at applying the content you have been learning.
You are provided with suggested feedback for each of the questions from your text set out below. It is very important that you attempt to develop an answer for yourself before you check the suggestion - otherwise you will not learn to apply your knowledge. What we DO know about learning is that the very best way is to learn is by DOING.
It is recommended that you follow the sequence of questions presented. You will be encouraged to explore how the various resources (readings, case, text and standards) you are being asked to use are interrelated and not a series of discrete items to be learned individually.
Module 1 Discussion Forum
This point marks your first learning milestone as it concludes your work around background readings and Chapter 1 of the text. Well done on achieving this small, but significant step. Before moving towards your next milestone, it is recommended you make some time to pause and reflect on your progress …
If there are any suggested answers, or even material you have been reading, that do not make sense or require clarification please use the Module 1 Discussion Forum (DF) in the MySCU site to ask for help!
Be as specific as possible about what is not clear to you so that replies can be most immediately helpful. For example, a question or statement like “I did not understand section 1.8 of the textbook” is of little help to me in providing a useful response. This is because you have not indicated ”what” it was or “why” some part in section 1.8 did not make sense to you. By being more specific in your statement/question it is much easier to provide a helpful response. One example (there are numerous other ways) of how the original question above might be made more specific is: “Section 1.8 on the audit expectation gap lists a series of dot points for the reality of what an auditor does. I am not clear about how I was meant to know these things?” This would allow me to refer to you some specific parts of Ch 1 or related standards or other resources and also much that lies ahead for the remainder of the unit.
You are encouraged to help each other and not rely solely on staff responding.
Chapter 2: Ethics, legal liability and client acceptance
Background readings
Bibliographic detail for each reading is provided below. Making the effort to read each reference will improve your ability to understand and apply the principles and activities that follow.
In case you are thinking you will just skip over, or return to these later, or even ignore them entirely, you WILL find them most helpful for applying what you read about in Chapter 2.
Supplied: Reading 1.2
Thomas, T 1993, ‘Practise safe auditing by learning to say no’, Business Review Weekly, 9 July, pp. 84–85. (2 pages)
Reading 1.2 (Thomas 1993) is an excellent article to reiterate the importance of full and proper client evaluation. Prevention is easier than cure when it comes to the consequences of legal liability! You might also note with a good deal of irony the context of this article in light of the demise of Andersens – perhaps they needed to heed their own advice? - when you get to Reading 1.3.
(*) Not supplied: Reading 1.3
(*) this means you need to develop your research skills and find it yourself.
Wyatt, AR 2004, ‘Accounting professionalism – they just don’t get it!’, Accounting Horizons, vol. 18, no. 1, March, pp. 45–54. (9 pages)
Reading 1.3 (Wyatt 2004) is another excellent article providing an insider view of the impact of some of the expanded and potential revenue opportunities the profession has pursued so that the traditional dominance of auditing in the governance of the accounting practices has been eroded. It reiterates the importance of full and proper client evaluation raised in Reading 1.2 and will be reinforced at the beginning of Module 2. Remember also, that an audit firm (a professional accounting practice) is usually a business operating as a partnership … it is in business to make a profit for the owners (partners) just like any other business. What is different is the embedded Code of Ethics for Professional Accountants and quality control standards which should underpin the operations and against which their (professional) exercise of due skill and care are judged by the legal system.
Text Reading
The matters covered serve to offer a view of what ethics and quality control standards are required for the accounting (and auditing) profession. The oversight of adherence to the standards is an important element to be appreciated. You continue developing the ‘big picture’ more clearly by digging into the important role that professional obligations place on the auditor to do their job properly (exercise due skill and care) and the basis, or framework, within which such judgements are made by those charged with that responsibility. This responsibility has several levels - on behalf of the public and shareholders; the profession; the public accounting firm; the individual audit team and the individual auditor.
You learn about why it is important to serve your client with integrity and independence and to do the job well. The consequences of not taking these fundamental obligations seriously will be demonstrated (the legal liability of the auditor) – and you have examples above in the background readings so you already “know” they are real consequences! The matters covered also serve to show you the impact of legal liability on the auditing profession. The point is to make it clear to you the consequences of not doing your audit with due skill and care - of not doing your job properly, as required by the auditing and quality control standards. The following sorting activity will provide you with some assurance that you can identify some types of threats to auditor independence - you might like to use APES 110, Part B (pre 2018), or Part 1, R120.6 (post 2018) to guide your effort so that you improve your awareness that your Handbook contains detail you do not need to commit to memory from your text.
Activity 1.3
Drop the cards into their correct category:
Self-interest threat
Intimidation threat
Familiarity threat
That is correct.
You continue your development of the ‘big picture’ by digging more deeply into the professional obligations placed on the auditor to do their job properly and the basis, or framework, within which such judgements are made by those charged with that responsibility. The focus is on the interpretation, after the fact, by the courts about how well the job has been done (the exercise of due skill and care – adhering to auditing standards) by the auditor. This responsibility of the courts is the ultimate review on behalf of the public and shareholders about the success of the ethical and quality control mechanisms put in place by regulators, the profession, public accounting firms and individual audit teams. You should also develop the ability to recognise and apply the relevant case law to decisions that will confront you.
You will also study the steps involved in accepting an audit engagement. A key element of this is to know is what to include in, and when to use, an engagement letter. Figure 2.1 in your text shows an example … make a note of where you can find one in your Handbook (just DO NOT make the note IN your Handbook – see your UIG!) (ASA 210) - of course, this is an important part of the auditor’s strategy to avoid legal liability. You might pay attention to the fact that these steps are equally important for existing (also called continuing) clients … you need to be clear about what your contract requires as your relationship continues (think about it like a contract renewal) because things about your client and your own firm are likely to change from year to year.
Activity 1.4
Which of the following sections/paragraphs in standards and regulations impact on client acceptance decisions?
Very good … “the” answer is often informed by more than a single standard or regulation! Your Handbook contains a wealth of information you do not need to memorise, just learn where to find it quickly.
Are you sure this is the only source of information required? Make the effort to review Section 2.5 carefully.
Questions and Activities (Text Chapter 2)
It is recommended that you follow the sequence of questions presented. You are being encouraged to explore how the various resources (readings, case, text and standards) you are being asked to use are interrelated and not a series of discrete items to be learned individually.
Remember, that:
- PAQ = Professional Application Question at the end of chapter of the text
Clicking on the question numbers below AFTER you have attempted the question will provide a suggestion for you to compare your attempt against. It is important NOT to think that your attempt must match the suggestion … there is a LOT more in the suggestions than I expect you to be able to present (especially in the early stages of the unit). What is important is you can identify how the suggestion assists your learning by demonstrating what other resources you can tap into … so long as you can see some elements of your attempt you are doing OK … the more you struggle to reconcile your attempt to the suggestion, the more you need to consider asking on the Module DF and/or joining one of the Student Support sessions and ask for guidance. Remember, you WILL learn by DOING (ATTEMPTING) but will struggle if you rely on just reading/memorising the suggestions!
Making sense of legal liability
If you have successfully worked through the material above and relevant questions and activities, the Overview of the Australian legal liability for auditors video should reassure you that you have understood the fundamentals of an auditor’s legal liability. Ideally, you will have made your own summary of key principles and cases so that YOUR summary can be compared and reflected on and adapted (if necessary) with what you see in the video.
Module 1 Discussion Forum
Well done on reaching your next learning milestone as it concludes your work around Chapter 2 of the text and background readings. Well done on achieving another small, but significant step. Significant because now you will move on to the Lakeside Company case study and begin learning of the challenges of applying what you have been learning to an audit client engagement as you conclude Module 1.
So, before moving to the Lakeside Company case, it is recommended you make some time to pause and reflect on your progress … If there are any suggested answers, or even material you have been reading and summarising, that do not make sense or require clarification please use the Module 1 Discussion Forum (DF) in the MySCU site to ask for help!
You are encouraged to help each other and not rely solely on staff responding.
The Lakeside Company case
The objective of you reading through the Lakeside cases prescribed for Module 1 (see below) is to develop a sense of how a public accounting firm positions itself to be in the best position, professionally and ethically, to determine if it is a worthwhile business opportunity to take on a new audit client.
Hopefully, as you read through the cases describing the steps taken by the public accounting firm, Abernethy and Chapman (hereafter referred to as A&C) in their acceptance of Lakeside as a new client, you should reflect on Readings 1.2 and 1.3 as well as what you read in chapters 1 and 2 of your text. As you read through the Lakeside cases, think and make notes about any points presented that illustrate (that is, provide examples of) issues that were raised and highlighted; can you see examples of what A&C do that recognises the lessons pointed out in those readings and your text? Remember, the whole point of writing articles and sharing experiences is so that lessons that others have learned, often the hard way, can be used by others to avoid making the same mistakes. So ask yourself if it seems like A&C are heeding the advice that is offered in the articles and text. In the same way, think about how the standards you have been exposed to already provide the authoritative guidance for the structures A&C have put in place to facilitate the decisions they need to make.
This way you are being encouraged to see how the various resources (background readings, text and standards) you are being asked to use are interrelated and not a series of discrete items to be learned individually.
So what is each case prescribed in this module intended to convey? This is a very brief overview and in no way intended to be a substitute for making your own summary/notes.
Introductory case: A look inside a CPA firm (2 pages)
This is your opportunity to get to know some things about the public accounting firm, A&C. As you read the case, try to develop a picture of the size of the firm and the types of work, staff and clients they offer services to. Think about which of their services would be assurance and which would be non-assurance.
Case 1: Analysis of a potential audit client (4 pages)
Here you are moving on to get to know some things about the company you (the public accounting firm you work for) will be auditing – Lakeside. As you read the case, begin to develop a sense about whether you think (whether you ‘feel’ might be a more relevant term at this point) Lakeside will be a ‘good’ client for your firm, A&C, to take on as a new client. Think about what Lakeside do, how they do it, what they are telling you about their operations. How do these things seem to ‘fit’ the resources (staff expertise) you are aware of that your firm has to conduct the audit (refer back to the Introductory Case)? Do not be overly concerned about specific details at this point … develop what is a ‘gut feel’, but do make notes about things that give you a ‘good feel’ and those that give you a ‘not-so-good feel’. This will develop and provide the basis for your professional judgement as your learning progresses. What guidance is there from the Readings and Standards about the “good things” and the not so good … generally, from the lessons of the past, checklists of the not so good find their way into the standards more often than the good things. Maybe you will find out information as you progress that allows you “move” some items from the good to the not so good list (and vice versa).
You might also reflect on how Assessment 2 requires you to choose an entity’s annual report from which to extract and share certain information directly relevant to auditing. Think of your choice as providing you with another ‘client’ against which to contrast what you are learning about the Lakeside Company. Think about whether you believe your firm, A&C, has the resources, skills and staff to conduct the services they offer to an entity (client) like the one you choose for Assessment 2. You will be asked to think about these contexts regularly as your learning proceeds. One important difference to point out at this stage for your learning is that you will access a lot more detailed information about Lakeside than you will be able to for the entity you use for Assessment 2. However, both will be valuable to your learning. Finally, don’t lose sight that Lakeside is still a potential client at this point. This limits who and what information your firm can access … be conscious as you proceed about the “quality” of the sources of information your firm is drawing on. Think of the case a role play.
Case 2: New clients and an auditor’s legal liability (2.5 pages)
You might even benefit from reminding yourself about who is responsible in your firm for specific quality control monitoring by quickly reviewing the Introductory Case.
In this case, A&C is at the stage of signing off on its evaluation of Lakeside as a new client – you need to be documenting the process and reasons for your firm’s decision. What you are doing (or illustrating) is actually considering and applying some of the ethical and quality control matters covered in this module. While reading Case 1 you were also asked to develop a sense about whether you thought (or felt) Lakeside would be a ‘good’ client for A&C to take on. Think about how ASQC 1 and ASA 220 are being applied. Lakeside certainly offers potential fee growth. The decision of your firm in this case confronts the challenges in pursuing those fees – does A&C have the resources, skills and staff required to offer any of the potential services and what is the firm’s exposure to liability and threats to independence if they don’t get this decision right?
Activity 1.5
Drop the cards into their correct category:
ASQC 1
ASA 220
That is correct.
You need to have this context for your new client so that you can learn how the case law (legal precedent) is a powerful influence (or ought to be!) on your decision to take on a new client, or continue auditing an existing client. Once again, take the time to make your own notes about how this is (hopefully) illustrating that some of those lessons pointed out in Readings 1.2 and 1.3 are being taken notice of.
At this point, it should be clear to you that A&C have accepted Lakeside as a new client (though this is NOT explicitly stated until Case 3). You should be able to explain the way that A&C have complied with relevant professional and ethical obligations to document the reasons for their decision, including their awareness of their potential legal liability to Lakeside as their client, and to third parties. If this is not clear to you, then it will be doubly important to be sure that you review Chapter 2 from your text.
Activity 1.6
Which of the following reasons for changing auditors offered by Rogers did William King, from King & Co., NOT agree with?
Good to see your careful reading of Cases 1 & 2 paying off - well done!
You may find it helpful to more carefully review Cases 1 & 2 to assist here. Remember, the answer often lies in more than a single place!
Questions and Activities (Lakeside)
It is recommended that you follow the sequence of questions presented. You are being encouraged to explore how the various resources (readings, case, text and standards) you are being asked to use are interrelated and not a series of discrete items to be learned individually.
Remember, that:
- DQ = Discussion Question at the end of each Lakeside case.
- Ex = Exercise Question at the end of each Lakeside case.
Lakeside Introductory Case: DQ 2
Hints:
- Lakeside Case 1 Ex 2 - review the second dot point on p. 3 and the fourth paragraph on p. 8 to help you identify the nature of any issue that might be influential in your decision).
- Lakeside Case 3 DQ 1 - you only need to use Exhibit 3-1 for this – you do not need to read Case 3).
Module 1 Discussion Forum
Another very important learning milestone achieved – well done! [perhaps here we might be able to provide a digital stamp?? You should now feel like you have a sound basic understanding of how A&C operates as well as what information is needed for them to decide to accept a new financial statement audit client and why. This is the end of Module 1 but before moving on, it is recommended you make some time to pause and reflect on your progress … If there are any suggested answers, or even material you have been reading, that do not make sense or require clarification please use the Module 1 Discussion Forum (DF) to ask for help!
You are encouraged to help each other and not rely solely on staff responding.