Solutions Manual
to accompany
Auditing: a practical approach
by
Jane Hamilton
CHAPTER 1
Introduction and overview of auditing
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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
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Finally, the auditors will benefit from additional revenue which can be used to subsidise the audit firm’s investments in knowledge and systems, and streamline the audit.
The main disadvantages of audit firms providing services to their audit clients relate to potential adverse effects on the auditor’s independence. The auditor could be unwilling to provide services which would reduce their audit fees or cause the client to seek another auditor. The auditor could be unwilling to criticise something to the client which was provided by their consulting division. The auditor could be ‘blind’ to potential adverse impacts on the client’s accounting systems from products and services provided by their consulting division. Even if the consulting provided unquestionable benefits to the client, the relationship between the audit firm and the client could become ‘too cosy’, and discourage the client from considering other auditors. Finally, the auditor could be reluctant to qualify the audit report for fear of losing lucrative fees from consulting services. If this occurs, the audit is less valuable because the auditor is less independent.
4. 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
Describe what you believe is implied by the term “engagement risk.” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client proposes a higher than normal degree of engagement risk?
Compare the primary auditor objectives in auditing historical financial statements to auditing internal controls over financial reporting. Identify at least two (2) objectives that are the most significant in reducing the risk of reporting errors or misstatements in financial statements. Provide a rationale for your response.
Q1. What is the link between audit risk and engagement risk? How does the audit risk model allow the auditor to deal with these risks in the most cost effective manner?
Describe what you believe is implied by the term “engagement risk.” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client proposes a higher than normal degree of engagement risk?
Recognition and Measurement Criteria: the auditor shall obtain sufficient appropriate audit evidence about whether management's decision to recognize, or to not recognize, the accounting estimates in the financial statements; and the selected measurement basis for the accounting estimates, are in accordance with the requirements of the applicable financial reporting framework.
Auditor independence and a prohibition on audit firms offering value-added (read "conflict of interest") services
A review and an audit report are both a form of an attestation engagement. A Review, however, is less in scope so it provides a moderate level of assurance on the financial statements. It is considered a “sniff” of an audit, which comparatively provides reasonable assurance that no material misstatements occurred. Since a review deals with a limited scope, it does not provide the basis for expressing an opinion on the presentation of the
The second type of engagement that provides no assurance is a compilation. According to AR-C 80, the objective of a compilation engagement is for the accountant “to apply accounting and financial expertise to assist management in the
• (Framework for Assurance Engagements para 21) Absolute Assurance • Absolute assurance can never be provided because of: – The nature of accounting: • Valuation issues, • Accounting policy choice and judgments, • Contingent items, – Time and cost of evidence collection and evaluation. Reasonable Assurance • Reasonable assurance is a high but not absolute level of assurance • The conclusion is expressed in a positive form – The financial statements are true and fair. • An audit engagement provides a reasonable level of assurance. • The opinion is expressed in an audit report.
Auditors should plan the audit so that the engagement is conducted in an effective manner.
This frequently puts the auditor in the position, in effect, of deciding whether a company is able to obtain the funds it needs to continue operating. Thus, the auditor’s qualification tends to be a self-fulfilling prophecy. The auditor’s expression of uncertainty about the company’s ability to continue may contribute to making it a certainty.
Auditors having the appropriate competence and capabilities to perform the audit, and follow ethical requirements, and maintain professional skepticism throughout the audit.
Assurance- deals wth objective examination of independent assessment on governance risk management and so forth. Checking to see if everything is going well within the company.
Auditors don 't particularly favor to turn down current or prospective clients, especially when they own stock % in the company or if it is well-known company like Shell however being worried about their reputation and future works, they try not to audit dishonest clients, because it can have dire consequences for the auditor. In the case if auditor becomes involved with bad clients, it is necessary to weigh revenues earned from desirable clients against potential problems.
Assurance Engagement: Key elements of an assurance engagement: Levels of assurance Objective of an Audit: True & Fair Why is assurance important? Why can assurance never be absolute? Professional ethics: Basic principle governing of an audit: Threats and safeguards: Suggestion to improve or safeguard against threat: ICAB Code