Wk-1: Ch-1: Assurance Services: Independent professional services that improve the quality of information for decision makers.

Provide
satisfaction regarding the reliability and relevance of provided information. Can be performed by public accountants or a variety of other
professionals. Various levels (reasonable, limited) depending on nature and extent of procedures and evidence. Growth continues given the
demand for real-time and forward-looking information. Attestation Services: Type of assurance service in which the public accounting firm issues
a written communication that expresses a conclusion about the reliability of a written assertion or statement of another party. Audit of historical
financial statements: Auditor issues a written report with an opinion about whether the financial statements are in material conformity with
accounting standards. Review of historical financial statements: Provides a moderate amount of assurance on the financial statements. Other
attestation services: Must involve written assertions on an accountability matter. Other Assurance Services: Most do not meet the formal
definition of attestation services. Assurance services on information technology: Web Trust services & Sys Trust services. Assurance services on
other types of information: Business performance measurement services & Elder Care Plus. WebTrust services provide assurance related to the
integrity of Internet-generated business transactions. SysTrust services provide similar assurance as to the reliability of information systems.
ElderCare Plus involves defining and developing measures of quality for services to the elderly. Non-assurance Services Provided by Public
Accountants: Accounting and bookkeeping services, Tax services, Management consulting services. Economic Demand for Auditing: Information
risk: The possibility that information on which a business risk decision was made was inaccurate. Auditing can have a significant effect on
information risk. Causes of Information Risk: Remoteness of information. Biases and motives of the provider. Voluminous data. Complex exchange
transactions. Reducing Information Risk: User verifies information, User shares information risk with management, audited financial statements
are provided. Nature of Auditing: Auditing is the accumulation and evaluation of evidence about information to determine and report on the
degree of correspondence between the information and established criteria. Auditing should be performed by a competent, independent person.
Information and established criteria: Verifiable information and criteria. Accumulating and evaluating evidence: Sufficient quality and volume.
Competent, independent person: Qualified, competent and independent. Reporting: Communication of the auditor’s findings to users.
Information and Established Criteria: Examples of routine audits are those of a companies financial statements and individuals’ income tax returns.
More subjective audits include the effectiveness of computer systems and the efficiency of manufacturing operations. Accumulating and
Evaluating Evidence: Oral testimony from client. Written communication from outsiders. Auditor observations. Not only is the proper kind of
evidence important, but also it is important to have the necessary volume to ensure the audit is properly performed. Competent, Independent
Person: Understand applicable criteria. Competent to know type and quantity of evidence. Independent mental attitude. Reporting: Must inform
readers of the degree of correspondence between information and established criteria. Reports can vary from merely oral to highly technical.
Accountants: Record, classify, and summarize economic events for the purpose of providing financial information used in decision making.
Auditors: Determine whether recorded information properly reflects the economic events that occurred during the accounting period. Types of
Audits- Financial statement audit: To determine whether the overall financial statements are stated in accordance with specified criteria.
Performance audit: Evaluation of efficiency and effectiveness of organisation’s operating procedures and methods. Compliance audit: To
determine whether the client is following specific procedures, rules, or regulations set by a higher authority. Types of Auditors-Public accounting
firms: Responsible for auditing historical financial statements of publicly traded companies. Registered as company auditors under the
Corporations Act 2001. Officers serving the Auditor-General: Responsible for performing the audit function for government. Audit of financial
information and evaluation of efficiency and effectiveness. Tax auditors: Audit tax returns to determine compliance with tax laws. Internal auditors:
Responsibilities vary considerably depending on the employer. Involved in compliance auditing and performance auditing. Activities of Public
Accounting Firms-Audit services, Accounting and bookkeeping services, Tax services, Management consulting services. Structure of Public
Accounting Firms: Forms of public accounting firms: Sole proprietorship, Partnership, Incorporated company. Hierarchy in public accounting firms:
Partners, managers, supervisors, seniors, and assistants. Structure of Public Accounting Firms-Institute of Chartered Accountants in Australia. CPA
Australia. Main functions: Establishing standards and rules. Research and publications. Continuing education. Students can join: CPA Passport
Program at: http://www.cpaaustralia.com.au. ICAA Student Club at: http://www.charteredaccountants.com.au/Students. Australian Auditing
Standards (ASAs): The AUASB issues ASAs-Mandatory requirements and provide explanatory guidance to auditors in fulfilling their professional
responsibilities in the audit of financial reports. CLERP 9 led to amendments to the Corporations Act 2001: Gave ASAs the ‘Force of Law’. ASAs
represent minimum standards of performance for auditors. Quality Control-Procedures used by the public accounting firm to help it consistently
meet auditing standards. Elements of quality control: Leadership responsibilities, Ethical requirements, Client acceptance and continuance, Human
resources, Engagement performance, Monitoring. Peer Review or Quality Review-Review of a public accounting firm’s compliance with its quality
control system. ICAA and CPA Australia operate Quality Review Programs: Demonstrate a commitment by the professional bodies to the concept
of excellence. Programs aim to be educational, not disciplinary. Ensure that practices understand their professional responsibilities. The
Corporations Act 2001-Main purpose is to help ensure corporations serve the public interest. Accounting provisions: Accounting standards,
Reliable financial reports, Director responsibilities. Audit provisions: Qualifications, Appointment, Removal, Powers and duties, Reporting.

Ch-2: Audit Regulation-Auditing is highly regulated: Australian Securities Exchange (ASX) Corporate Governance rules and recommendations.
Australian Securities and Investments Commission (ASIC). Corporations Act 2001. Australian Prudential Regulatory Authority (APRA). Australian
Competition and Consumer Commission (ACCC). Trade Practices Act 1974. State and Territory Fair Trading Acts. Statutes and Auditors’ Liability-
Criminal Codes – Crimes Act of 1914. Consumer Law – Competition and Consumer Act of 2010. Corporations Act 2001. Criminal Codes-Crimes Act
1914 requires reporting of offences to: The police, Taxation officials, Customs officials. Commonwealth, State and Territory legislation: May impose
obligations on and sanctions against auditors. Consumer Law-Australian Consumer Law (ACL) is Schedule 2 of the Competition and Consumer Act
2010: Pertains to individuals. ‘misleading or deceptive conduct’. misleading or deceptive statement (or similar breach) and that a party
subsequently suffered a loss. Section 18 of ACL: No notion of proximity. Silence (inaction) can amount to misrepresentation. Corporations Act
2001-Direct Regulation: Registration of auditors, Monitoring of auditors, Auditor independence, Auditor changes: appointment, resignation or
removal, and rotation requirements, Auditing standards, Reporting obligations, Limiting auditor liability. Registration and Monitoring of Auditors-
Registration of auditors. Registered company auditor or authorized audit company. Monitoring of auditors: Individual audit firms, Professional
bodies, Financial Reporting Council (FRC) and ASIC, Companies Auditors and Liquidators, Disciplinary Board (CALDB). Auditor Independence and
Changes- Auditor Independence: Auditor is prohibited from engaging in audit activity if there is a conflict of interest, Independence requirements,
Auditor’s independence declaration. Auditor Changes: Appointment, Resignation/Removal, Rotation. Auditing Standards and Reporting- Auditing
Standards: Australian Auditing and Assurance Standards Board (AUASB) establishes auditing standards. Force of law for audits performed under
the Corporations Act. Reporting Obligations: Report particular matters to ASIC. Provide an audit transparency report**. Attend the AGM and
answer questions orally. ** Audit Transparency Report-Annual Audit Transparency Report includes: a description of the audit firm’s legal structure
and ownership, if the firm belongs to a network, a description of the network, the legal arrangements of the network, a description of the audit
firm’s governance structure, a description of the audit firm’s internal control system. provides existing and potential clients, stakeholders that rely
on the audit report, with factual information about operation of the audit firm. Limiting Auditors’ Liability- Authorized audit companies. Treasury
Legislation Amendment (Professional Standards) Act 2004. Liability caps-$20 million for Accountants. Proportionate liability. Foreign regulation:
U.S. Sarbanes–Oxley Act 2002, Public Company Accounting Oversight Board (PCAOB) monitoring requirements. Criminal Liability-Presentation of
false financial statements that are used to defraud or cheat. Statutory offences of auditors: Failure to comply with statutory duties in the
Corporations Act 2001, Contravention of independence requirements. Vicarious liability. Fraud-related Penalties-$10,000 and/or 2 Years,
Imprisonment, Conviction could come from failure to report false financial statements even if not in complicity with the client. Nature of Auditing-
Reasonable person concept: Reasonable degree of professional skill and care to be used by auditors. Liability for acts of others: Partners are jointly
liable. May be liable for work of employees, other firms and specialists. Lack of privileged communication: Client and auditor discussions cannot
be withheld from the courts or ASIC. Auditors’ Liability to Clients- Auditors failing to perform auditing functions with due care: Defalcations that
the auditor failed to uncover. Breach of contract: Plaintiff can recover losses suffered or profit forgone. Tort action for negligence: Restoration to
the plaintiff’s position in the absence of the negligence. Auditors’ Liability to Clients- An unavoidable duty: Auditors have a duty to report to
shareholders as their clients, not the directors, (Re London and General Bank Ltd (No. 2) [1895]. Duty of an auditor to use skill, care and caution
which a reasonably competent, careful and cautious auditor would use, (Re Kingston Cotton Mill Co. (No. 2) [1896]. Pacific Acceptance Corporation
Ltd v. Forsyth (1970) key case to establish auditors’ duties and responsibilities. Contributory Negligence- Failure by a person to take reasonable
care that contributes to the harm or loss. AWA involved considerable negligence by management and not just the auditor. Negligence calculus:
Probability that harm would occur if care was not taken. Likely seriousness of that harm. Burden of taking precautions to avoid the harm. Social
utility of the risk-creating activity. Liability to Third Parties- A number of cases have considered the auditor’s liability in relation to persons other
than the immediate client. Must establish a reasonable degree of proximity between third party and auditor. Donoghue v. Stevenson [1932]:
Established the precedent that a duty of care is owed to third parties. Candler v. Crane, Christmas & Co [1951]: No liability for financial loss resulting
from negligent misstatements in the absence of: A contractual relationship, an established fiduciary relationship or fraud. Foreseeability- Relevant
case law: Hedley Byrne & Co. Ltd v. Heller and Partners Ltd [1964], MLC Co. Ltd v. Evatt [1968], Scott Group Ltd v. McFarlane [1978], JEB Fasteners
Ltd v. Marks Blooms & Co. [1981]. Two tests: Plaintiff to have relied on the audited accounts & Reliance reasonably foreseeable by auditor.
Proximity-A third party must show that the auditors knew or should reasonably have foreseen that a particular third party would rely on the
auditor’s work or opinion. Caparo Industries plc v. Dickman [1988]: Auditors’ owe a duty of care to existing shareholders collectively, but not to
potential shareholders. Al Saudi Banque v. Clark Pixley [1989]: Foreseeability of damage, Proximity of relationship, Imposition of duty is fair, just
and reasonable. Tests for Auditor Liability- Auditor owed a duty of care to the plaintiff, Auditor breached that duty of care, Plaintiff suffered a
loss, Plaintiff’s loss resulted from the auditor’s breach of duty. Privity Letters-Third parties requesting auditors to formally acknowledge the third
party’s reliance on the audited financial report. AGS 1014 advice to auditors in dealing with privity letter requests: Statement that audit report is
only for use by the body of shareholders. Written representation from the third party identifying the nature and scope of the audit. Disclaimers-
Corporations Act 2001: Auditors prevented from disclaiming their liability to clients. Does not apply to third parties. Disclaimers are unlikely to be
effective if the auditor intended to mislead. Purpose and Use of Audit Report- Statutory audit report (House of Lords in Caparo): Meant only to
provide information to the company and its shareholders to exercise collective powers of corporate governance. Not intended as advice to
potential investors or those contemplating a takeover bid. Fraud and Error- Re London and General Bank Ltd [1895]: What is reasonable care
depends on the circumstances. Re Kingston Cotton Mill Co. [1896]: Auditor is a watchdog not a bloodhound. ASA 240: Examples of conditions and
events that increase the risk of irregularities. Managing Legal Liability- Deal only with clients possessing integrity. Employ qualified personnel,
while providing appropriate training and supervision. Follow the auditing standards assiduously. Maintain independence. Understand the client’s
business. Perform quality audits. Document the work properly. Obtain an engagement and a representation letter. Carry adequate insurance. Seek
legal counsel. An auditor’s main defense against potentially ruinous claims is to invest in strategies that help to ensure high quality audits.

Wk-2: Ch-17: Auditors Approach to Obtaining Evidence for Presentation and Disclosure Objectives: Perform procedures to obtain and
understanding of controls related to presentation and disclosure objectives as a part of risk assessment procedures. Conduct tests of controls
related to disclosures when the initial assessment of control risk is below the maximum. Perform substantive procedures to obtain assurance that
all audit objectives are achieved for information and amounts presented and disclosed in the financial statements. Reviewing for Contingent
Liabilities and Commitments: Potential future obligation to an outside party for an unknown amount resulting from activities that have already
taken place but are conditional on some future event. Examples of considerable concern to the auditor: Pending legal action for patent
infringement, Income tax disputes, Product warranties, Notes receivable discounted, Guarantees of obligations of others, Unused balances in
letters of credit. Contingent Liabilities and Commitments: Commitments e.g.: To purchase raw materials, To lease facilities at a certain price,
Agreements to sell merchandise at a fixed price. Procedures for finding contingencies e.g.: Inquire of management, Review ATO correspondence,
Review minutes of meetings, Analyse legal expense. Litigation and Claims- Lawyer’s representation letter: Initiated by auditor, Prepared and sent
by management, Sent direct to auditor. Some legal counsel may be reluctant: Lack of knowledge about matters, Refusal to disclose due to
confidentiality. Letter of Specific Inquiry: Should include: A list of litigation and claims. Where available, management’s assessment of the outcome
of each of the identified litigation and claims and its estimate of the financial implications, including costs involved. A request that the entity’s
external legal counsel confirm the reasonableness of management’s assessments and provide further information, if necessary. Lawyer Concerns
Regarding Contingencies: Impairment of the client-lawyer confidentiality privilege, Disclosure of client confidence or secret, Prejudice of a client’s
defence of a claim, Constitution of an admission by the client. Reviewing Subsequent Events-Auditor’s responsibility for reviewing for subsequent
events is normally limited to the period: Beginning with the balance sheet date, Ending with the date of the auditor’s report. Types of Subsequent
Events- Those events that have a direct effect on the financial statements and require adjustment: Provide additional information to management
and auditors to the valuation of account balances. Require an adjustment of account balances if amounts are material: Bankruptcy of a major
debtor, Settlement of litigation at a different amount, Disposal of equipment below current book value. Those events that have no direct effect
on the financial statements but for which disclosure is advisable. Provide evidence of conditions that didn’t exist at the date of the financial report
- require disclosure. Ordinarily can be adequately disclosed in the notes: Decline in market value of securities, Issuance of bonds or shares, Decline
in market value of inventory, Uninsured loss of inventory from fire, Merger or acquisition. Subsequent Events Audit Tests- Inquiries of
management, Corresponding with lawyers, Reviewing internal statements prepared after balance date, Reviewing records prepared subsequent
to the balance sheet date, Examining minutes issued subsequent to the balance sheet date, Obtaining written representations from management
(often called a management representation letter). Final Evidence Accumulation- Performing final analytical procedures: Final review for material
misstatements. Evaluating going-concern assumption: Analytical procedures are important. Adverse opinion where highly improbable the entity
will continue as a going concern. ASA 580 Requirements- Auditor needs to obtain a management representation letter acknowledging:
Responsibility for the financial report, Completeness of information, Recognition, measurement and disclosure, Significant risks and uncertainties,
Subsequent events. Reading other information accompanying the financial reports: To ensure correspondence with information in the financial
reports. Evaluate Results- Sufficiency of evidence: Reviewing the audit program. Evidence supports auditor’s opinion: Summarizing the
misstatements uncovered in the audit. Financial report disclosures: Adequacy of financial statement disclosures. Working paper review: To
evaluate performance of inexperienced personnel. To ensure the audit meets the public accounting firm’s standard of performance. To counteract
the bias that often enters into the auditor’s judgement. Independent review: By a staff member with no experience on the engagement.
Engagement Quality Control Review- Consider the evaluation of the firm’s independence in relation to the audit engagement. Discuss all
significant engagement matters with the engagement partner. Review the financial reports and the proposed auditor’s report. Review selected
audit documentation relating to the significant judgments the engagement team made and the conclusions it reached, and consider whether audit
documentation selected for review reflects the work performed in relation to the significant judgments made and supports the conclusions
reached. Significant risks identified during the engagement in accordance with ASA 315, and the responses to those risks in accordance with ASA
330 including the engagement team’s assessment of, and response to, the risk of fraud in accordance with ASA 240. Judgments made, particularly
with respect to materiality and significant risks. The significance and disposition of corrected and uncorrected misstatements identified during the
audit. The matters to be communicated to management, those charged with governance and regulatory bodies. Consider whether there was
appropriate consultation on matters involving differences of opinion or other difficult or contentious matters, and the conclusions arising from
those consultations. Evaluate the conclusions reached in formulating the auditor’s report and consider whether the proposed auditor’s report is
appropriate. Communicating With the Audit Committee and Management- Communicate any irregularities: Including fraud and other illegal acts.
Communicate significant deficiencies in internal control (reportable internal control structure conditions). Communicate auditor independence
requirements. Other communication with the audit committee: General approach and overall scope of the audit. Selection of, and changes to,
significant accounting policies. Material audit adjustments. Management letter: To inform client management of the auditor’s recommendations
for improving the client’s business. Subsequent Discovery of Facts - After the auditor issues the audit report and completes all communication
with management and the audit committee: The audit is finished. If the auditor becomes aware after the audited financial statements have been
issued that some information included in the statements is materially misleading: The auditor is obliged to inform statement users and may decide
to re-issue the audit opinion unless the report is changed.

Ch-18: Categories of Audit Report- Audit report based on an audit of financial reports prepared in accordance with Australian Accounting
Standards. Report based on performing a review engagement. Special audit report based on audits of certain accounts, agreed-on audit
procedures, or an alternative financial reporting framework. The profession recognizes the need for uniformity in reporting. Standard Unmodified
Audit Report- ASA 700 requires Auditor to gain reasonable assurance on: Whether the financial report as a whole is free from material
misstatement, due to either fraud or error. Whether the financial report is prepared, in all material respects, in accordance with the requirements
of the applicable financial reporting framework. Whether the financial report achieves a fair presentation. Whether financial report is in
accordance with the Corporations Act 2001. Unmodified Audit Report Parts- Uniformity in the form and content of the auditor’s report enhances
the effectiveness of communication with readers of the report: Title, Addressee, Introductory paragraph, Management’s responsibility for the
financial report, Auditor’s responsibility, Opinion, Signature, Date of Report, Auditor’s address. Statutory Requirements- An auditor is required to
report on certain additional matters when an audit is conducted in accordance with the provisions of the Corporations Act 2001: Compliance with
accounting standards, True and Fair view, Auditor’s independence declaration, Notify ASIC on certain circumstances, Reports on consolidated
accounts. Conditions Requiring a Departure-Condition 1: The financial report is materially misstated. Condition 2: Inability to obtain sufficient
appropriate audit evidence. Condition 1: The financial report is materially misstated. Appropriateness of accounting policies and their application.
Adequacy of disclosures in the financial report. Condition 2: Inability to obtain sufficient appropriate audit evidence. Limitations imposed by the
client. Caused by circumstances beyond either the client’s or auditor’s control. Audit Reports Other Than Unmodified-qualified opinion: A
qualified opinion may be issued when the auditor believes that the financial report is materially misstated (Condition 1), or has been unable to
obtain sufficient appropriate audit evidence (Condition 2), but Where the impact on the financial report as a whole is not pervasive. adverse
opinion- Misstatements, individually or in combination, are material and pervasive to the financial report. Overall financial report is so materially
misstated or misleading that it doesn’t present fairly the financial position, performance or cash flows of the company. disclaimer of opinion-
Unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the
financial report of undetected misstatements, if any, could be both material and pervasive. Materiality- Materiality is an essential consideration
in determining the appropriate type of report for a given set of circumstances. AASB 1031, an item should be considered material: If its omission,
misstatement or non-disclosure has the potential to adversely affect: (a) decisions about the allocation of scarce resources made by the users of
the financial report or (b) the discharge of accountability by the management or governing body of the entity. Modified Audit Report-A report
(other than unmodified) that is issued in which the layout includes: ‘A Basis for Opinion’ highlighting: Substantive reasons for the opinion.
Quantification of the effects on the financial report. Section ‘heading’ highlighting opinion type. Deviation and the amount of the misstatement.
State clearly that the financial report does not present a true and fair view. Unmodified Audit Report with an Emphasis on Matter- An unmodified
audit report with an emphasis of matter is appropriate for an audit with satisfactory results and a financial report that is fairly presented but where
the auditor is required to provide additional information. Unmodified Audit Report with an Emphasis of Matter Conditions- Additional disclosures.
Significant uncertainties and going concern. Inconsistent other information. Revised financial report. Financial Indications- High gearing or a net
liability pension. Fixed-term borrowing arrangements without realistic prospects of repayments and excessive reliance on short-term borrowings
to finance non-current assets. Material operating losses. Adverse key financial ratios. Arrears or discontinuance of dividends. Inability to pay
creditors on due dates. Difficulty in complying with terms of loan agreements. Change from credit to cash-on-delivery transactions with suppliers.
Inability to obtain financing for necessary new product development or other necessary investments. Operating Indications- Management’s
intentions to cease operations. Loss of management expertise or loss of key management without replacement. Loss of major market, franchise,
license, or principal supplier. Labor difficulties or shortage of important supplies. Other Indications- Non-compliance with capital or other statutory
requirements. Pending legal proceedings against the entity that may, if successful, result in judgments that could not be met. Changes in legislation
or government policy. Uninsured or underinsured catastrophes when they occur. Impact of E-Commerce: Corporate websites provide: Audited
financials, including the auditor’s report. Unaudited quarterly reports, sustainability reports, other selected financial information. Current auditing
standards do not require auditors to read other information on corporate websites.

Wk-3: Ch-3: Audit Quality and Corporate Governance -‘The annual audit is one of the cornerstones of corporate governance’ (Cadbury Report
1992, para. 5.1). Corporate governance: Is the term used to describe processes, structures and mechanisms that influence the control and direction
of corporations. Considers how stakeholders and external agencies control or influence those responsible for directing and managing the
corporation. Corporate Governance Regulatory Mechanisms in Australia- Emphasis on: Potential conflicts of interest of board of directors and
management in serving the interests of shareholders. Accountability and transparency. Audit quality: How well an audit detects and reports
material misstatements. Detection reflects auditor competence. Reporting reflects ethics or auditor integrity. Expectations Gap- Differences
between the views of auditors and the expectations of other stakeholders regarding: The appropriate roles and responsibilities of auditors. The
performance of auditors. Cause of the gap include: The nature of auditing in regards to sampling and subjectivity. Application of hindsight. Self-
interest of complainants. Self-interest of auditors. Changes in social expectations. Misunderstanding or ignorance of roles. Lack of understanding
by financial statement users of the difference between: Business failure and audit failure. Audit failure and audit risk. Auditor Competence-
Appropriate technical knowledge and quality control processes. Ability to interpret complex evidence and form an appropriate opinion.
Professional bodies provide guidance on competencies required and processes to be followed. Quality Control (ASA 220)- Leadership
responsibilities for quality on audits. Ethical requirements (including independence). Acceptance and continuance of client relationships and
specific engagements. Assignment of engagement teams. Engagement performance (in accordance with professional and legal requirements) and
engagement quality control review. Monitoring relevance and adequacy of, and compliance with, quality control policies and procedures. Ethics-
A set of moral principles or values. Each of us has such a set of values: We may not consider them explicitly. It is common for people to differ in
their moral principles or values. Differences result from our relationships with and opinions of others, including parents, academics, mentors,
friends and our life experiences, including life successes and failures. ASIC—Australian Securities and Investments Commission-Identified three
broad areas where audit-related ethics needed improvement: Sufficiency and appropriateness of audit evidence obtained by the auditor. The level
of professional skepticism exercised by auditors. Ensuring appropriate reliance on the work of experts and other auditors. ASIC and Quality
Control- ASIC also concluded that some firms should improve quality control systems in order to: Comply with the auditor rotation requirements
of the Corporations Act. Ensure there is appropriate supervision and review of audit engagements, including appointing an engagement quality
control reviewer. Create clear links between audit quality and partner evaluation and remuneration. Need for Ethics- Ethical behaviour is necessary
for a society to function in an orderly manner. The need for ethics in society is sufficiently important that: Many commonly held ethical values are
incorporated into laws. Ethics is one of the forces that holds a society together... Why People Act Unethically-Two primary reasons: The person’s
ethical standards are different from those of society as a whole: For example, cheating on tax returns. The person chooses to act selfishly: For
example, think of the young man who recently found $12 000 in a bag at McDonalds and kept it. In many instances, both reasons exist. Ethical
Dilemmas- A situation that requires a decision about the most appropriate behaviour: For example, finding something of value and deciding
whether to attempt to find the owner or to keep it. Auditors, accountants and other businesspeople face many ethical dilemmas: For example,
dealing with a client who threatens not to give the auditor’s firm a consultancy job unless the auditor agrees to management’s treatment of a
particular accounting issue. Rationalising Unethical Behaviour- Commonly employed rationalisations: Everybody does it. If it’s legal, it’s ethical.
The likelihood of discovery and consequences. Resolving Ethical Dilemmas- Obtain the relevant facts. Identify ethical issues from the facts.
Determine who is affected by the outcome of the dilemma. Identify the alternatives available. Identify the likely consequence of each alternative.
Decide the appropriate action. Ethical Conduct in Professions- Professionals are expected to conduct themselves at a higher level than most
others members of society: A need for public confidence in the quality of service by the profession. Auditors’ relationship with financial statement
users is different from the relationship most other professionals have with the users of their services. Ways in which Auditors are Encouraged to
Engage in Professional Conduct- Five ethical principles (Framework for Assurance Engagements—AUASB): Integrity, Objectivity, Professional
competence and due care, Confidentiality, Professional behavior. The Code of Ethics for Professional Accountants APES 110- Emphasis on
conceptual elements of professionalism: General statements of ideal conduct. Advantage of general statements: Emphasis on positive attitudes
and activities. Disadvantage of general statements: Difficulty of enforcing general ideals. Code provides guidance on: Minimum acceptable
standards of professional conduct. Enforcement- Fines, suspensions and forfeiture of membership. Potential effectiveness of enforcement
provisions may be criticised: Powers of enforcement cease with the revocation of membership from CPA and/or ICAA. The Ethical Rules- The Code
has three parts: Part A—General Application of the Code, Part B—Members in Public Practice, Part C—Members in Business. Part A also establishes
the fundamental principles of professional ethics for members, and provides a conceptual framework for applying those principles. Parts B and C
illustrate how the conceptual framework is to be applied to identify and address threats in specific situations. Fundamental Principles of
Professional Ethics -Part A of the Code: Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional behavior.
Conceptual Framework Approach- The Code adopts a principles approach: It is impossible to anticipate every situation that might generate an
ethical problem. It provides a framework for identifying, evaluating and resolving threats to the fundamental principles. Safeguards- The Code
identifies two broad categories of safeguards that reduce threats to an acceptable level: The profession, legislation and regulation. The work
environment. These are discussed in Part B of the Code. Specific Guidance on Professional Conduct- Part B of the Code: 210: Professional
appointments, 220: Conflicts of interest, 230: Second opinions, 240: Fees and other types of remuneration, 250: Marketing professional services,
260: Gifts and hospitality, 270: Custody of client assets, 280: Objectivity—all services, 290: Independence—assurance engagements.
Independence- Professional’s freedom from any bias in relation to an engagement. Taking an unbiased viewpoint in: The performance of audit
tests. The evaluation of the results. The issuance of the audit report. Section 307C of the Corporations Act requires a signed auditor’s independence
declaration to be given by the individual auditor to the directors of the company for each financial and half-year report. Independence—Ethical
Requirements
Section 290 of APES 110- Emphasises both: Independence of Mind The state of mind that permits the expression of a conclusion without being
affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and
professional scepticism. Independence in Appearance The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member
of the assurance team’s, integrity, objectivity or professional scepticism had been compromised. Threats to Independence - Material financial
interests. Directors, officers, management or employees of a company. Providing non-audit services to clients. Audit fees and independence. Legal
action between audit firm and client, and independence. Auditor switching. Aids to Maintaining Independence and Integrity of the Audit- Audit
committees, Auditor rotation, Protection of working papers: Audit integrity, Personal gain, Client confidentiality, Exceptions to confidentiality,
Resignation.

Ch-4: Objective of Conducting an Audit-ASA 200 states: The purpose of an audit is to enhance the degree of confidence of intended users in the
financial report. This is achieved by the expression of an opinion by the auditor on whether the financial report is prepared, in all material respects,
in accordance with an applicable financial reporting framework…An audit conducted in accordance with Australian Auditing Standards and relevant
ethical requirements enables the auditor to form that opinion. Management’s Responsibility- Adopting sound accounting policies. Maintaining
adequate internal controls. Making fair representations in the financial statements. Auditor’s Responsibilities- ASA 200 requires that an audit be
designed: To provide reasonable assurance of detecting material misstatements in the financial report arising from fraud and error. Material vs.
immaterial misstatements: Auditors are responsible for obtaining reasonable assurance that the materiality threshold has been satisfied. Errors
vs. fraud (ASA 200): Error: Unintentional misstatement of the financial statements. Fraud: Intentional, Misappropriation of assets, Fraudulent
financial reporting. The value of exercising professional scepticism in auditing is front and foremost for auditors in practice, (ICCA 2013). Scepticism
is an essential attitude that enhances the auditor’s ability to exercise professional judgement in identifying and responding to conditions that may
indicate possible misstatement. Professional scepticism includes a critical assessment of audit evidence. It also means remaining alert for evidence
that contradicts other audit evidence or that brings into question the reliability of information obtained from management and those charged
with governance (AUASB, August 2012). Auditor’s Responsibilities for Detecting Material Errors- The auditor plans and performs an audit to detect
unintentional mistakes. Auditors find a variety of errors resulting from: Mistakes in calculation. Omissions, misunderstanding and misapplication
of accounting standards. Incorrect summarisations and descriptions. Auditor’s Responsibilities for Detecting Material Fraud- Auditor must obtain
reasonable assurance about whether the statements are free of material misstatements. Characteristics of fraud: Pressure or incentive to commit
the fraud. Perceived opportunity to commit the fraud. Auditor’s Responsibilities for Discovering Illegal Acts- Auditors should obtain a general
understanding of the legal and regulatory framework applicable to the client. Auditors should also consider which laws and regulations have a
direct effect on the financial report. Illegal acts: Violations of laws or government regulations other than fraud. Direct-effect illegal acts: Direct
financial effect on specific account balances in the financial statements. Indirect-effect illegal acts: e.g. fines resulting from violation of
environmental laws. Auditors provide no assurance that these acts will be detected. Auditor’s Responsibility for Finding and Reporting Illegal
Acts- Evidence accumulation when there is no reason to believe indirect-effect illegal acts exist. Evidence accumulation and other actions when
there is reason to believe direct- or indirect-effect illegal acts may exist. Actions when an auditor knows of an illegal act. Financial Statement
Cycles-Division of financial statements into smaller segments: Makes the audit more manageable. Aids in the assignment of tasks to different audit
team members. Each segment is audited separately, but not on a completely independent basis. Segmenting an Audit- Cycle approach: Keeping
closely related types of transactions and account balances in the same segment. Various cycles: Sales and collection cycle. Acquisition and payment
cycle. Payroll and personnel cycle. Inventory and warehousing cycle. Capital acquisition and repayment cycle. Setting Audit Objectives- Auditors
perform audit tests of the: Transactions making up ending balances. Account balances themselves. Different audit objectives: Transaction-related
audit objectives. Balance-related audit objectives. Presentation and disclosure audit objectives. General Balance-related Audit Objectives-
Existence, Cutoff, Completeness, Detail tie-in, Accuracy, Realisable value, Completion, Rights and obligations. Management Assertions- Implied or
expressed representations by management about: Classes of transactions and the related accounts and disclosures in the financial statements.
Directly related to accounting standards. Assertions apply to classes of transactions, account balances, and presentations and disclosures.
Assertions About Classes of Transactions and Events- Occurrence: Whether transactions actually occurred during the accounting period.
Completeness: Whether all transactions that should be included are in fact included. Accuracy: Whether transactions have been recorded at
correct amounts. Classification: Whether transactions are recorded at correct amounts. Cutoff: Whether transactions are recorded in the proper
accounting period. Assertions About Account Balances- Existence: Whether assets, liabilities and equity interests actually existed at balance date.
Completeness: Whether all accounts that should be presented are included. Valuation and allocation: Whether assets, liabilities and equity
0interests have been included at appropriate amounts. Rights and obligations: Whether the assets are the rights of the entity and whether the
liabilities are the obligations of the entity. Assertions About Presentation and Disclosure- Occurrence and rights and obligations: Whether
disclosed events have occurred and are the rights and obligations of the entity. Completeness: Whether all required disclosures have been
included. Accuracy and valuation: Whether financial information is disclosed fairly and at appropriate amounts. Classification and Understand
ability: Whether amounts are appropriately classified. General Transaction-Related Audit Objectives- Occurrence, Completeness, Accuracy,
Posting and summarization, Classification, Timing. Balance-Related Audit Objectives- Applied to account balances as opposed to classes of
transactions. Increase in audit objectives for account balances in comparison to classes of transactions. Presentation and Disclosure Audit
Objectives- Occurrence and rights and obligations, Completeness, Accuracy and valuation, Classification and understandability. How Audit
Objectives are Met- The auditor plans the appropriate combination of: Audit objectives. The evidence that must be accumulated to meet them.
Audit process is: A well-defined methodology for organising an audit to ensure that: The evidence gathered is sufficient and appropriate, All audit
objectives are both specified and met.

Wk-4: Ch-5: Auditors are required by Auditing Standards to accumulate sufficient appropriate evidence on which to base their opinions on the
financial statements. Nature of Evidence- Any information used by the auditor to determine whether the information being audited is stated in
accordance with established criteria. The use of evidence is not unique to auditors: it is also used extensively by scientists, solicitors and historians.
Audit Evidence Decisions- Audit procedures: Detailed instruction for the collection of audit evidence. Sample size: Is likely to vary from audit to
audit. Items to select: Which items in the population to test. Timing: Can vary from early in the accounting period to long after it has ended. Audit
program: List of audit procedures for an audit area or an entire audit. Usually includes sample sizes, items to select and timing of the tests. Most
auditors use computers to prepare them. Persuasiveness of Evidence- ASA 500 requires the auditor to obtain sufficient appropriate evidence to
support the opinion issued. Persuasiveness of evidence is the degree to which the auditor is convinced that the evidence supports the audit opinion.
Two determinants of the persuasiveness of evidence: Appropriateness & Sufficiency. Competence (Reliability)- The degree to which evidence can
be considered believable or worthy of trust. Relevance: Relevant to the audit objective. Independence of provider: Outside evidence is more
reliable than inside evidence. Effectiveness of client’s internal controls: Evidence is more reliable when controls are effective. Auditor’s direct
knowledge: Evidence obtained directly by the auditor is more competent than indirect evidence. Qualifications of individuals providing the
information. Degree of objectivity: Objective evidence is more reliable than evidence requiring considerable judgement. Timeliness: Can refer to
either when it is accumulated or the period covered by the audit. Sufficiency- Sufficiency of evidence is measured primarily by: The sample size
the auditor selects. Factors determining the appropriate sample size: Auditor’s expectation of misstatements. Effectiveness of client’s internal
controls. Individual items tested also affect the sufficiency of evidence: e.g. items with large dollar values and items with a high likelihood of
misstatement. Types of Audit Evidence- Physical examination, Confirmation, Documentation, Observation, Inquiries of the client, Recalculation,
Reperformance, Analytical procedures. Physical Examination- Inspection or count by the auditor of a tangible asset: Usually associated with
inventory and cash. An objective means of: Ascertaining the quantity and description of the asset. Verifying the asset’s condition or quality. Not
sufficient evidence to verify: Ownership & Valuation. Confirmation- The receipt of a written or oral response from an independent third party
verifying the accuracy of information requested by the auditor. Costly to obtain as auditors typically obtain written responses. Two common types
of confirmations: Positive: Recipient is asked to return the confirmation in all circumstances. Negative: Recipient is requested to respond only
when the information is incorrect. Technology Impact on Evidence- Technology may weaken a number of traditional forms of audit. Evidence:
Businesses require scanners, printers, e-mail etc. to perform routine transactions. Complex computer information systems. Complex electronic
data interchanges. ...have altered not only the actual form of evidential matter required to be obtained by auditors, but also the reliability of this
evidence. Documentation- Auditor’s examination of the client’s documents and records to substantiate: The information that is or should be
included in the financial statements. An internal document: Prepared and used within the client’s organization. Retained without ever going to an
outside party e.g. duplicate sales invoice. An external document: May originate outside the client and end up in the client’s hands e.g. vendor’s
invoice. May go to an outsider and finally be returned to the client e.g. cancelled cheques. Vouching-When auditors use documentation to support
recorded transactions or amounts. Observation- Use of the senses to assess certain activities. Auditor may tour the plant to: Obtain a general
impression of the client’s facilities. Observe whether equipment is obsolete. Watch individuals performing accounting tasks. Observation alone is
rarely sufficient. Inquiries of the Client- Inquiry: obtaining of written or oral information from the client in response to questions from the auditor.
Usually cannot be regarded as conclusive given: it is not from an independent source, it may be biased in the client’s favor. Normally necessary to
obtain further corroborating evidence through other procedures. Recalculation- Recalculation involves rechecking a sample of calculations made
by the client by: Testing the client’s arithmetical accuracy including: extending sales invoices and inventory, adding journals and subsidiary records,
checking the calculation of depreciation expense, checking prepaid expenses. Most auditor recalculations are performed by computer-assisted
audit software. Reperformance- Reperformance is the auditor’s independent tests of client accounting procedures or controls that were originally
done as part of the entity’s accounting and internal control system. Recalculation involves rechecking a calculation, reperformance involves
checking other procedures. Analytical Procedures- Use of comparisons and relationships: To assess whether account balances or other data appear
plausible. May be the only evidence needed for certain audit objectives or small account balances. Are required during the planning and completion
phases on all audits. Analytical Procedures- Evaluations of financial relationships, Analysis of plausible relationships, among financial and non-
financial data, Understanding the client’s industry and business, Assessment of the entity’s ability to continue as a going concern. Identification of
possible misstatements. Reduction of detailed audit tests. Timing: Planning phase, Testing phase, Completion phase. Compare client data with:
Industry data, Similar prior-period data, Client-determined expected results, Auditor-determined expected results, expected results, using non-
financial data. Statistical Techniques- Several statistical techniques that aid in interpreting results can be applied to analytical procedures.
Advantages are: The ability to make more sophisticated calculations. Their objectivity. Most common statistical technique is regression analysis.
Auditors’ Computer Software- Auditors’ can input the client’s general ledger into the auditor’s computer system. Software reduces cost of
analytical calculations, and assists data interpretation. Ease of updating calculations when adjusting entries to the client’s statements are made.

Wk-5: Ch-6: Planning the Audit- Gaining an understanding of the client’s business and industry is one of the most important steps in audit planning.
Auditors should plan audit engagements (ASA 300): To enable the auditor to obtain sufficient appropriate evidence. To keep audit costs reasonable.
To avoid misunderstandings with the client. Risk Terms-Acceptable (desired) audit risk: How willing the auditor is to accept that the financial
statements may be materially misstated when an unmodified opinion has been issued. Inherent risk: Auditor’s assessment of the likelihood of
material misstatements in an account balance before considering the effectiveness of internal control. Initial Audit Planning- Step 1: Accept new
client or continue to service existing client. Step 2: Identify the client’s reasons for an audit. Step 3: Obtain mutual understanding with the client
about the terms of the engagement. Step 4: Develop strategy for the audit, including the evaluation of the potential need for outside specialists.
Client Acceptance and Continuance- New client investigation: Investigating the company to determine its acceptability. Examining the prospective
client’s: Standing in the business community. Financial stability. Relations with previous accounting firm. Continuing engagements: Reasons to
drop a client: e.g. conflicts over audit scope, type of opinion or fees. Identify the Client’s Reasons for Audit-Most likely uses of the statements can
be determined from: Previous experience with the client. Discussion with management. Information may affect the auditor’s assessment of
acceptable audit risk. Obtain an Understanding with the Client-Engagement letter: Documents the auditor’s understanding with the client and
includes: Objectives of engagement, Responsibilities of the auditor and management, Limitations of engagement, Agreement to provide other
services, Agreement on fees, Does not affect auditor’s responsibility to external users. Overall Audit Strategy- Audit Strategy considers the nature
of the client’s business and industry, and the areas where there is greater risk of significant misstatement, in order to develop a preliminary
approach to the audit, including: Engagement team staff selection: Must have the appropriate capabilities, competence and time to perform the
audit. Staff must be knowledgeable about the client’s industry. Evaluate the Need for Outside Specialists- If an audit requires specialized
knowledge: It may be necessary to consult a specialist or an expert. The auditor needs to evaluate the expert’s: Professional competence and
qualifications. Relationship to the client. Understanding the Client’s Business and Industry- ASA 315.11 states: The auditor shall obtain an
understanding of the following: (a) Relevant industry, regulatory, and other external factors and the applicable financial reporting framework. (b)
The nature of the entity e.g. operations, ownership, governance, structure. Increased Importance of Understanding the Client’s Business and
Industry- Increased auditor understanding of economic declines on client’s business risks. Information technology (IT). Client expansions of
operations globally. IT impacts on client’s internal processes. Business impact on the environment. Importance of human capital and intangibles.
Complexity of financial instruments and accounting. Industry and the External Environment- Risks associated with specific industries may affect
the auditor’s assessment of client business risk and acceptable audit risk. Certain inherent risks are typically common to all clients in certain
industries. Familiarity with those risks aids the auditor in assessing their relevance to the client. Many industries have unique accounting
requirements that the auditor must understand to evaluate whether the client’s financial statements are in accordance with Australian accounting
standards. Business Operations and Processes- Auditor needs understanding of: Major sources of revenue. Key customers and suppliers. Sources
of financing. Identify related parties: inquiry of management regarding known related parties, review of the information related to third parties,
examination of share registers, inquiry as to the affiliation of management with other entities, Review minutes of meetings. Management and
Governance- Auditor should understand and assess: Management’s philosophy and operating style. Client’s ability to identify and respond to risk.
The company’s governance system. The company policies, constitution, code of ethics and corporate minutes. The company's system of
measuring/reviewing performance. Auditor should understand client objectives related to: Reliability of financial reporting. Effectiveness and
efficiency of operations. Compliance with laws and regulations. Client Business Risk- The risk that the client will fail to achieve its objectives.
Auditor’s primary concern is: The risk of material misstatements in the financial statements due to client business risk. Management is the primary
source for identifying client business risks. Factors Affecting Client Business Risk -Reliability of financial reporting. Effectiveness and efficiency of
operations. Compliance with laws and regulations. Preliminary Analytical Procedures- Preliminary analytical procedures are performed to: Better
understand the client’s business. Assess client business risk. Comparing client ratios to industry or competitor benchmarks: Reveals unusual
changes in ratios compared to prior years or industry averages. Identifies areas with increased risk of misstatements. Categories of Financial Ratios
-Short-term debt-paying ability. Liquidity activity. Ability to meet long-term obligations. Profitability. Purposes of Audit Documentation- Audit
documentation is the principal record of: Auditing procedures performed - Evidence obtained, Conclusions the auditor reached. Purposes of
working papers: Basis for planning, Record of evidence accumulated and results of tests, Data for deciding on audit report, Basis for review by
supervisors and partners. Ownership and Retention of Audit Files- The working papers prepared during the audit are the property of the audit
firm (ASA 230). At the completion of an engagement: The audit firm retains the working papers and computer files until the end of seven years
after the date of the audit report. This period may be extended, depending on the possible period of reliance that could be placed on the audit
report and the need to satisfy any pertinent legal requirements of record retention. Confidentiality of Audit Documentation- The auditor is
responsible for adopting appropriate policies and procedures for maintaining the confidentiality, safe custody, integrity and retrievability of
working papers (ASA 230 – Aus A 24.1 and ASQC 1). Ordinarily, the working papers can be provided to someone else only with the express
permission of the audit client (APES 110). Disclosure may also occur under legal obligations. They may be subject to review by the professional
bodies. Content and Organisation of Audit Files- Permanent audit files: Contain data of a historical or continuing nature pertinent to the current
audit e.g.: Extracts of key company documents. Important analyses from previous years. Details of internal control systems and assessment of
control risk. Results of previous analytical procedures. Current audit files: Audit documentation applicable to the year under audit e.g.: Audit
program, General information and planning, Working trial balance, Adjusting and reclassification entries, Supporting schedules. Working papers
should possess certain characteristics: Client’s name, period covered, description of contents, initials of the preparer, date of preparation and an
index code. Indexed and cross-referenced. Indication of audit work performed. To prepare working papers, auditors must know their goals.
Conclusions reached about the audit segment. Documentation should be prepared in sufficient detail to provide an experienced auditor with no
connection to the audit a clear understanding of the: Work performed, Evidence obtained and its source, Conclusions reached. Electronic Audit
Documentation- Audit evidence is increasingly in electronic form. Auditors use computers to read and examine evidence. Auditors also use
technology to: Convert traditional paper-based documentation into electronic files. Organise and analyse audit documentation. Commercial audit
software programs such as ACL Software and Interactive Data Extraction and Analysis (IDEA) software are designed specifically for use by auditors.