Auditing and Financial Report

Topics: Auditing, Auditor's report, Audit Pages: 25 (7096 words) Published: June 4, 2013
Solutions Manual

to accompany

Auditing: a practical approach


Jane Hamilton


Introduction and overview of auditing


John Wiley & Sons Australia, Ltd 2010 Chapter 1 – Introduction and overview of auditing

1. What does ‘assurance’ mean in the financial reporting context? Who are the three parties relevant to an assurance engagement?

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. The assurance practitioner is an auditor working in public practice providing assurance on financial reports of publicly listed companies, or other entities. Intended users are the people for whom the assurance provider prepares their report (e.g. the shareholders). 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).

2. What qualities must an ‘assurer’ have in order for you to feel that their statement has high credibility?

An assurer must have the knowledge and expertise to assess the truth and fairness of the information being presented by the preparers. Auditors of financial reports need to be trained accountants with detailed knowledge about the complex technical accounting and disclosure issues required to assess the choices made by the financial report preparers. When undertaking an audit, the auditor should use professional scepticism, professional judgement and due care. Auditors should be independent of the client. Independent auditors have no incentives to aid the entity in presenting their results in the best possible light. They are concerned with ensuring that the information contained in the financial report is reliable and free from any significant (material) misstatements (error or fraud). A user needs to believe that the auditor is acting independently. This means that not only should auditors be independent (i.e. not have any undue personal or financial incentive to protect the client), auditors should avoid doing anything that would cause a reasonable person to doubt their independence.

3. Why do audit firms offer consulting services to their audit clients? Why don’t they just do audits and let consulting firms provide the consulting services?

The arguments in favour of audit firms providing other services to their audit clients relate to the benefits to be derived by all parties. The audit firm has very detailed knowledge about the client and can use that knowledge to recommend actions or products that would suit the client’s needs. In some cases, the auditor could identify a potential problem that the client had not identified. To the extent that the audit firm...
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