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School of Accountancy

110.279 Auditing

Study Guide

Semester Two – 2009

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Contents

110.279 Auditing

Study Guide Contents

Week Topic Page: Week 1: Auditing, Assurance and the Profession 2

Week 2 & 3 Overview of the Audit of Financial Statements and The Audit Report 5

Week 4: Legal Environment 13

Week 5: Professional Ethics and Conduct. 17

Week 6: Client Evaluation and Planning 19

Week 7: Business and Audit Risk Assessment 21

Week 8: Materiality & Evidence 23

Week 9: Tests of Controls 25

Week 10: Designing Substantive Procedures 27

Week 11: Governance, Internal Audit & Public Sector Audits 29

Week 12: Other Assurance Engagements 32

Readings 34

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Auditing, Assurance and the Profession Week One

Learning Objectives

After studying this topic, you should be able to:

1. Define audit and assurance.

2. Appreciate the development of the nature and scope of audit and assurance services.

3. Evaluate the significance of the principal-agent relationship in an audit engagement.

4. Describe the influence of case law in the development of auditing.

5. Discuss the shifting paradigm of auditing, which involves the changing expectations of auditors and the consequences of corporate collapses.

6. Discuss the impact of regulatory reforms on the audit function.

7. Discuss the development and nature of the auditing and assurance engagement framework internationally and within New Zealand.

8. Describe the accounting profession and its associated organisations, including the standard-setting and oversight bodies in New Zealand.

9. Discuss the services provided by public accountants, their skills and challenges.

10. Identify the different types of audit activities and auditors.

11. Discuss the regulatory framework for ensuring quality services.

Commentary

The material for week 1 provides an introduction to auditing and assurance and its development over the years, especially since the spate of corporate collapses which took place around the turn of the century.

You need to understand a few key introductory concepts: Exactly what is an audit as opposed to other types of “assurance”? …. Why is there a need for audits/ assurance? …. How and why has the role of the auditor changed over the years? …. What makes up the professional environment within which the auditor works? ….

The text chapter covers each of the learning objectives above, but as you will note, the text is written from an Australian perspective. The readings therefore focus on providing

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New Zealand relevant information, where appropriate to the aims of the paper.

Readings

Text: • Chapter 1: Auditing, assurance and the public accounting profession. Selected Readings

• NZICA – Explanatory Foreword to Engagement Standards • NZICA – Framework for Assurance Engagements (10/07).

Tutorial Questions

Week 1:

• Chapter 1 Questions

Prepare answers to the following questions in preparation for the tutorial. After the tutorial, you should follow up by comparing your answers to the suggested solutions provided on the course website:

• Review Questions: 1.11 to 1.20 (excluding 1.12)

• Professional Application Questions: 1.25 (sub-parts 1-10 only)

• Other Questions:

Other questions will be introduced at the Tutorial (“Unseen Questions”). Your ability to attempt and discuss these will depend to a large extent on how conscientiously you have completed the Review Questions and Professional Application Questions above. These “Unseen Questions” may be drawn from sources other than the text e.g. past tests and exams. The purpose of this component of the tutorial is the “callousing principle” - to give you practice/ coaching which will improve your exam technique and your understanding of what is required to structure a good answer.

Additional Information

The purpose of this section is to provide supplementary information regarding the recommended text by Leung et al. As noted earlier, this is an Australian text, but the Australian and New Zealand reporting and auditing environment are similar in many ways, so do not be put off by references in the text to the Australian environment etc.

The following table provides some comparability between Australian references in the Leung text and their New Zealand equivalents:

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Australian Reference New Zealand Equivalent Corporations Act Companies Act 1993 &

Financial Reporting Act 1993

CPA Australia &

Institute of Chartered Accountants of Australia (ICAA)

New Zealand Institute of Chartered Accountants (NZICA)

Australian Securities and Investment Commission (ASIC)

Securities Commission &

Registrar of Companies

Australian Securities Exchange (ASX) New Zealand Stock Exchange (NZX)

Financial Reporting Council Accounting Standards Review Board (ASRB) – an independent body &

NZICA’s Financial Reporting Standards Board (FRSB)

Australian Auditing and Assurance Standards Board (AUASB) – an independent body

NZICA’s Professional Standards Board (PSB)

Auditing Standards (ASAs) Auditing Standards (AS – old standards) and ((ISA(NZ) – international standards which are replacing the old standards on an ongoing basis)

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Overview of the Audit of Financial Statements & The Audit Report Weeks Two and Three

Learning Objectives

After studying this material, you should be able to:

1. Explain why a demand exists for audits of financial statements. 2. Describe the benefits and limitations of audits of financial statements. 3. Describe the auditor’s relationship with the shareholders, audit committee and

other stakeholder groups. 4. Explain the inter-relationship between management’s and the auditor’s

responsibilities.

5. Identify the different phases typically associated with the external audit process.

6. Explain why planning is an important part of the audit process.

7. Discuss the different elements of an unqualified audit report and the purpose of each.

8. Outline what is meant by a “modified audit report with an emphasis of matter”

9. Outline the different types of qualified audit reports and why it may be necessary for these to be issued.

Commentary

The material for weeks 2 and 3 is intended to provide an understanding of some of the fundamentals of auditing financial statements, as well as a clear overview of “The Audit Process”. This should give you a “big picture” understanding of an audit. In the remaining weeks we go into a fair amount of detail, so you need to understand this overview in order to see the detail of the remaining weeks in context. We deal with the Audit Report, (i.e. the final product and end of the audit process) here too, as again it is helpful to study the detail in the weeks which follow with an understanding of what it is all working towards.

Some of the material in Chapter 4 of the Text is very specific to Australia (sections 4.2 to 4.4 inclusive) and so can be ignored for our purposes.

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The Reading and Additional Information for these two weeks supplement the contents of Chapter 4 from the Leung text – they are essential reading, particularly as we will not be using the Leung text this year as regards the Audit Report.

Readings

Text:

• Chapter 4: Overview of the audit of financial statements (excluding all of 4.2 to 4.4 on pg 171 - 179)

Selected Readings

• Knechel, W.R., Salterio, S.E., Ballou, B. (2007). Auditing: Assurance and Risk, 3e (pp. 125-128). USA: Thomson South Western.

Tutorial Questions

Weeks 2 & 3:



• Review Questions: 4.11 to 4.18 (excluding 4.14)

• Professional Application Questions: There are no suitable “Professional Application Questions for this topic, so please attempt the following instead:

o Why do companies normally prefer to receive a standard unqualified audit report, rather than a modified or qualified audit report?

o An audit report is normally only one to two pages long:

Why then are audit fees often so expensive?

What is the purpose of the different sections of an audit report?

o Explain why you would use each of the following:

Adverse opinion,

Except for opinion (uncertainty),

Disclaimer,

Emphasis of matter


Other questions will be introduced at the Tutorial (“Unseen Questions”). Your ability to attempt and discuss these will depend to a large extent on how conscientiously you have completed the Review Questions and Professional

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Application Questions above. These “Unseen Questions” may be drawn from sources other than the text e.g. past tests and exams. The purpose of this component of the tutorial is the “callousing principle” - to give you practice/ coaching which will improve your exam technique and your understanding of what is required to structure a good answer.


There are two sub-sections to “Additional Information”:

A) Overview of the Audit Process.

B) The Audit Report.

A) Overview of the Audit Process

The purpose of this sub-section is to provide supplementary information on the phases

involved in the Audit Process. There are four main phases:

Overview of the Audit Process

Pre-engagement: Client Acceptance / Continuance

then

Plan the Audit then

Conduct the Audit then

Complete the Audit

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Taking each of the above phases in more detail:

Overview of the Audit Process

Pre-engagement Appointment / Continuance

Client Evaluation:

• Evaluate integrity of management

• Identify special circumstances or unusual risks

Ethical Considerations:

• Evaluate independence

• Assess competence to perform audit

• Determine ability to use due care

Engagement:

• Prepare Engagement Letter

Plan the Audit • Obtain knowledge of the business, then

• Perform analytical procedures, then

• Make preliminary judgements about materiality

levels, then

• Consider the audit risk, then

• Obtain an understanding of the entity’s control

structure, then

• Develop preliminary audit strategies for significant

assertions

Conduct the Audit • Tests of controls and evaluation, then

• Modify audit strategy / program? Then

• Substantive tests and evaluation, then

• Modify audit strategy / program?

Complete the Audit • Completion checklists / working papers / reviews

• Manager / partner reviews and opinion

• Obtain Letter of Representation from management

• Issue Audit Report & Management Letter

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B) The Audit Report

The purpose of this sub-section is to provide an introductory look at the Standard

Unqualified Audit Report (also known as a “Clean” Audit Report, as the auditor is not

raising any issues/problems – this is the case for the large majority of audits). Also, a

summary overview is provided of the types of audit report that may be used where the

auditor does need to bring certain issues to the attention of users.

We have provided a recent example of a Standard Unqualified Audit Report on the

next page. We go on now to discuss the purpose and significance of each element of

this report:

Standard Unqualified Audit Report Element Explanation

Title: “Auditors’ Report”

• This title informs readers that the report carries the highest level

of assurance i.e. distinguishes it from a report for a review

engagement or agreed upon procedures.

Addressee: “To the shareholders of …”

• Defines the intended users of the report - important, as this may

have implications for the purpose of the audit and extent of the

auditor’s liability.

• Note that our example report is a statutory audit report for a

company, which is the most common type of audit report.

There are many other types of audits and the addressees for

these may vary, but will usually be the party who has requested

the audit.

Introductory paragraph:

“We have audited the

financial statements …”

This paragraph should identify exactly what has been done. In the

example report, it is an audit of financial statements. Note the care

taken in this paragraph to define “what?”; “where?” and “which?”

financial statements, as opposed to other information included in

the Annual Report, (Can you find the answers?)

Responsibilities: • Directors’ • Auditors’

“ … are responsible for …”

These paragraphs emphasise that an audit does not include

preparing the financial statements; it is about expressing an

independent opinion on the truth (and certain other matters) of

information prepared by others (the directors in this case).

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Element Explanation Basis of Opinion: “An audit includes …”

This paragraph explains what the auditor does/ is required to do in

order to form an audit opinion. This information is intended to clarify

that, while there are rigorous requirements which the auditor needs

to comply with, an audit does have limitations. (Can you identify and

explain these requirements and limitations in the example report? )

-

Unqualified Opinion: • “We have obtained all

… we have required.” • “In our opinion …”

The opinion is the conclusion that the auditor draws after performing

all of the audit work:

• The first section confirms that nothing is missing from what the

auditor needs, to properly form an opinion.

• The second section must clearly state what the auditor thinks of

the financial statements:

o Have they been properly prepared?

o Are they telling the truth?

In the example report, the auditor is satisfied with regard to these

questions and hence has issued an “Unqualified Opinion”.

Standards require that the heading of this section of the audit report

must clearly indicate whether the opinion is “Qualified” or

“Unqualified”, because this distinction is so important.

Date: “Our audit was completed

on …”

This element of the audit report is significant in that the auditor is

responsible for actively seeking out and considering audit related

information up until this date:

• This again has implications which may extend the auditor’s

liability, so obviously it is in the interests of the auditor for this

date to be as early as possible.

• The date used may, however, not be any earlier than the date

on which the directors sign the financial statements. In practice,

auditors normally sign the audit report on the same date as that

on which the directors sign the financial statements.

• Reminder: This date is normally within 5 months of year-end

(FRA s 10)

Signature The Audit Report must show the name and business location of the

auditor/ audit firm.

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Now that we have considered the Standard Unqualified Audit Report in some detail,

we look very briefly at what happens where there are issues that the auditor needs to

bring to the attention of users i.e. it is not appropriate to issue a “Clean” audit report

(note this is a summary overview only – this topic is handled in depth in 110.379

Advanced Auditing):

Summary Overview of Modified Audit Reports Issue Type of Report/Modification

Material Fundamental 1. Scope limitation i.e. The

auditor has not been able

to obtain all evidence

required and hence is not

sure whether the F/S’s are

true and fair in one or

more aspects.

Qualified

“Except for …”

Qualified – Disclaimer

“We are unable to express an

opinion …”

2. Disagreement i.e. The

auditor thinks that the

F/S’s are not true and fair

in one or more aspects.

Qualified

“Except for …”

Qualified – Adverse

“ The financial statements do

not …”

3. The F/S’s are true and

fair, but there is an

important/unusual

matter which should be

brought to attention of

users.

Unqualified but “Modified”

Modified by adding an “Emphasis of Matter” paragraph,

however the Opinion paragraph still states “Unqualified Opinion”.

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Legal Environment Week Four Learning Objectives

This topic concerns two sub-topics:

A) Statutory Law

B) Case Law and the auditor’s Legal Liability


A) For Statutory Law

1. Identify the primary statutory and regulatory sources that govern external auditing in New Zealand.

2. Discuss statutory law requirements regarding:

a. Corporate governance responsibilities,

b. Independent audits in New Zealand.

3. Explain why statute may override the auditor’s duty of confidentiality in certain circumstances.

B) For Case Law and the Auditor’s Legal Liability

1. Explain what conditions need to be proven to the courts for the auditor to be held liable to a plaintiff.

2. Explain what is meant by the auditor’s ‘duty of care’ and to whom a duty of care is owed.

3. Explain the concepts of ‘negligence’ and ‘contributory negligence’ as well as implications of contributory negligence for the extent of auditor liability.

Commentary

The “Statutory Law” material for week 4 is taken from Chapter 5 of the New Zealand text by van Peursem & Pratt. In this regard, you need to understand what entities are required by statute to have an independent audit, who may perform such audits, and what the rights and duties of auditors are. This reading is supplemented by some of the more important sections of statute, which have been extracted directly from the Acts concerned.

“Case Law and the auditor’s Legal Liability” is covered at a brief and introductory level

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only in this paper, using a few brief extracts from Chapter 7 of the New Zealand text by van Peursem & Pratt. This material deals with the main legal principles (see “Additional Information” below) that have arisen out of case law over the years. You need to understand how these principles supplement statute in clarifying who the auditor owes a duty to; what constitutes proper performance of duties; when the auditor may be held liable for inadequate performance of duties and to what extent he/she may be held liable.

The Readings for these two weeks introduce sections from key pieces of New Zealand legislation namely the Companies Act 1993 and the Financial Reporting Act 1993.

Readings

Text: • N/A (Chapter 3 is, however used for the 110.379 Advanced Auditing paper,

where we deal with this topic in more depth). Selected Readings

• Van Peursem K. and Pratt, M.J. (2006). Auditing Theory and Practice in New Zealand, 5th edition. New Zealand. Pearson:

o Chapter 5, pgs 73-88, and

o Chapter 7 pg 112 - end of first para on pg 115, (but excluding Figure 7.1); pg 121 – 123 “Liability for Reasonable skill and care” and “Evidence: what the courts expect”; and pg 126 – 128 “Contributory negligence”.

• Companies Act (1993). Selected extracts from the Companies Act 1993 from:

http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM319570.html?search=ts_act_Companies+Act_resel&sr=1

o The definition of a company and of an exempt company under section 2;

o The essential features of a company in Part 2, section 10; o Part 10, Section 189 – Company Records o Part 11, sections 194- 207 (inclusive) - Accounting Records and

Auditors; o Part 12, Sections 208 and 209 - Obligation to produce an annual report

and report to be sent to shareholders; and o Part 12, Section 211 - Contents of annual report. o Part 21, Section 377/ 380 – Auditor’s Liability

• Financial Reporting Act 1993.

Selected extracts from the Financial Reporting Act 1993 from: http://www.legislation.govt.nz/act/public/1993/0106/latest/DLM323598.html?search=ts_act_Financial+Reporting+Act_resel&sr=1

o Section 2, Definitions of ‘company’, ‘entity’, ‘registrar’, and ‘reporting entity’; o Section 3 - Meaning of ‘generally accepted accounting practice’; o Section 4 - Meaning of ‘issuer’; o Section 6 - Persons that are not considered an issuer; o Section 6a - Meaning of ‘exempt company’; o Section 8 - Meaning of ‘financial statements’; o Section 10 - Obligation to prepare financial statements;

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http://www.legislation.govt.nz/act/public/1993/0106/latest/DLM323598.html?search=ts_act_Financial+Reporting+Act_resel&sr=1

http://www.legislation.govt.nz/act/public/1993/0106/latest/DLM323598.html?search=ts_act_Financial+Reporting+Act_resel&sr=1

o Section 11 - Content of financial statements; o Section 15 - Financial statements to be audited; o Section 16 - Auditor’s report. o Section 41 – Auditor’s liability

Textbook Errata

The following errors have been identified in the van Peursem text:

1. Under the section titled “Adequate documents and records” (v P & P ed. V, first line, last

paragraph, pg. 75). Company’s Act s. 189 (1) does not require that these documents be

retained for 10 years but for 7 years. This time period also applies to the section titled “Audit

Report” on pg 80.

2. Under the section titled “Adequate documents and records” (vP & P ed. V, pg. 75), 10th

line of last paragraph states that the FRA 16(2) requires that the auditor reports qualified

financial statements to the Securities Commission and the ASRB.

3. Under the section titled “Independent audit requirement” pg 77:

a) The last word in the first paragraph should be “reporting entities” not

“companies”,

b) The “Exempt companies” thresholds should be updated: turnover has been

increased from $1 million to $2 million; assets from $450,000 to $1 million.

c) Delete (“S 122”) from the final paragraph

This information was correct at the time this study material was assembled. Students should confirm these conditions by referencing the government’s legislation web site http://www.legislation.govt.nz/browse_vw.asp?content-set=pal_statutes .

Tutorial Questions

Week 4:


• Van Peursem text Chapter 5 Questions

• Review Questions: 5.1 to 5.5

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http://www.legislation.govt.nz/browse_vw.asp?content-set=pal_statutes

• Leung Chapter 4 Questions

• Professional Application Questions: 4.20; 4.21



• Review Questions 7.1 - 7.4




The purpose of this section is to clarify the conditions that need to be proven to the

courts for the auditor to be held liable to a plaintiff. There are four conditions (extracted

with reference to Leung pg 126):

a. A duty of care must be owed to the plaintiff

i. Contract – duty owed

ii. 3rd Parties – no duty is owed unless “Proximity” is proven

b. Auditor negligence must be proven

c. The plaintiff must have suffered a quantifiable loss

d. The loss must be a result of the auditor’s negligence

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Professional Ethics and Conduct Week Five Learning Objectives


1. Distinguish between the role of accountant and auditor.

2. Describe the purpose and some key aspects of NZICA’s Code of Ethics.

3. Discuss the significance of ethical judgements on the audit and the accounting profession.

4. Explain the role of independence in auditing and how that may be compromised.

5. Discuss the respective roles that education and regulation can play in enhancing auditor ethics and independence.

Commentary

The material for week 5 is taken from the New Zealand text by van Peursem & Pratt. The extracts from Chapter 6 of this text deal with the profession, professional standards and NZICA’s code of ethics. In particular emphasis is placed on the importance of auditor independence. You should be aware that there will be a question on Ethics in the final exam which will count approximately 10% of the total mark for the exam and which will test your ability to evaluate ethical dilemmas and provide reasoned alternatives for their resolution.

Readings

Text: • N/A (The readings below have been selected to avoid confusion regarding some

of the Australian specific material in the Leung text).

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Selected Readings

• Van Peursem K. and Pratt, M.J. (2006). Auditing Theory and Practice in New Zealand, 5th edition, Chapter 6, New Zealand, Pearsons. 89-111.

• Cox G. (2003), The Ethical Mindset, Chartered Accountants Journal, September 2003, 8.

• Gray J. (2005), The Code of Ethics: Not just a Statutory Obligation, Chartered Accountants Journal, September 2005, 27-28.

Tutorial Questions

Week 5:




• Exercise: 6.1



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Client Evaluation and Planning Week Six Learning Objectives


1. Describe the steps involved in client acceptance and continuance.

2. State the purpose and content of an engagement letter.

3. Explain the components of an audit plan.

4. Describe the procedures used in obtaining an understanding of the entity and its environment.

5. Explain the role of analytical procedures in audit planning.

6. Describe the requirements to consider the risk of fraud in the audit planning process.

7. Explain the purpose and function of audit working papers.

Commentary

The material for week 6 is the beginning of the detailed consideration of the phases presented in the “Overview of the Audit Process” (see Weeks 2-3). This topic discusses the “Pre-engagement” phase and the initial steps involved in the “Planning” phase of the audit, including consideration of the risk of fraud in the audit planning process. You need to be able to describe/explain these steps and their importance/ significance.

Readings

Text: • Chapter 6: Client evaluation and planning the audit. Selected Readings

• None.

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Tutorial Questions

Week 6:




• Professional Application Questions: 6.21; 6.23 and 6.27



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Business and Audit Risk Assessment Week Seven Learning Objectives


1. State the categories and types of management’s financial statement assertions.

2. Explain the importance of business risks in audit planning.

3. Appreciate the importance of internal control to an entity and to its independent auditors.

4. Indicate the procedures for obtaining and documenting an understanding of the entity’s internal control.

5. Explain the purpose of making a preliminary assessment of control risk.

6. Describe the approach to evaluating the design effectiveness of control procedures.

7. Explain the importance of the concept of audit risk and its three components.

Commentary

The material for week 7 continues the detailed consideration of the phases presented in the “Overview of the Audit Process” (see Weeks 2-3). You need to understand what “financial statement assertions” are as well as how and why the auditor goes about assessing business and audit risk with reference to these assertions.

Chapter 7 considers risk assessment and business risk, followed by a discussion of the nature of internal control and risks related to internal control, and concludes with a discussion on the nature of audit risk.

Readings

Text: • Chapter 7: Business and audit risk assessment.

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Selected Readings

• None.

Tutorial Questions

Week 7:




• Professional Application Questions: 7.19; 7.20 and 7.22



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Materiality and Evidence Week Eight Learning Objectives


1. Define the concept of materiality used in auditing.

2. Describe the relationship between materiality and audit evidence.

3. Describe alternative audit strategies.

4. Indicate the factors that affect the sufficiency and appropriateness of audit evidence.

5. Identify the types of corroborating information available to the auditor.

6. Enumerate and describe the types of auditing procedures that may be used in an audit.

7. Describe the classifications of auditing procedures and their purpose.

Commentary

The material for week 8 continues the detailed consideration of the phases presented in the “Overview of the Audit Process” (see Weeks 2-3). You need to understand the concept of materiality and why this has a significant effect on firstly, the audit plan and secondly, the auditor’s final assessment of the financial statements before finalising the audit opinion. You also need to understand how and why a preliminary audit strategy should be developed. Finally, you need to understand a number of concepts concerning audit evidence and how it may be gathered (auditing procedures). The auditor is required to use professional judgement regarding all of these concepts and how they relate to audit risk, in order to gain the necessary confidence that the financial statements are fairly stated.

Readings

Text: • Chapter 8: Materiality and audit evidence.

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Selected Readings

• None.

Tutorial Questions

Week 8:




• Professional Application Questions: 8.21, 8.24 and 8.25



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Tests of Controls Week Nine Learning Objectives


1. Understand the difference between the preliminary and final assessment of control risk.

2. Describe the relationship between control risk assessment and audit strategy.

3. State the purpose of tests of controls and the nature of such tests.

4. Describe how the work of internal auditing may be used in tests of controls.

5. Explain the process of assessing control risk and documenting the conclusion.

6. Describe the types of controls you would expect to see in an information technology environment.

7. Describe the types of computer-assisted techniques.

Commentary

The material for week 9 continues the detailed consideration of the phases presented in the “Overview of the Audit Process” (see Weeks 2-3). You need to understand how and why the auditor goes about testing controls and (as for concepts covered in prior weeks) how this relates to audit risk and the audit strategy. There are some considerations specific to IT environments, which you need to understand.

Readings

Text: • Chapter 9: Tests of controls. Selected Readings

• None.

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Tutorial Questions

Week 9:




• Professional Application Questions: 9.21 and 9.24



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Designing Substantive Procedures Week Ten Learning Objectives


1. Describe how various risk factors relate to the type of potential misstatement.

2. Explain the process for determining the appropriate level of substantive procedures based on the assessment of inherent risk and control risk.

3. Indicate how the nature of substantive procedures is varied to achieve an acceptable level of detection risk.

4. Indicate how the timing and extent of substantive procedures are varied to achieve an acceptable level of detection risk.

5. Explain how computer-assisted audit techniques may be used as substantive procedures.

6. Describe and apply a general framework for developing audit programs for substantive procedures.

7. Explain why substantive procedures may normally be included in an audit program.

8. Indicate special considerations when designing substantive procedures.

Commentary

The material for week 10 concludes the detailed consideration of the phases presented in the “Overview of the Audit Process” (see Weeks 2-3). An auditor has a fairly wide variety of options to choose from when designing substantive procedures and has to exercise professional judgement in order to collect sufficient appropriate evidence in the most efficient manner possible. You need to understand what these options are and the implications of each for quality of evidence and cost. You also need to understand how the assessment of the risk of material misstatement affects the required level of detection risk and how this in turn will affect the design of substantive procedures.

Having completed this week’s topic we have essentially completed the Audit Process which was introduced in Weeks 2 and 3. You will recall from Weeks 2 and 3 that the principal output from the Audit Process is the Audit Report. It is therefore timely that we reflect on the contents and purpose of the Audit Report.

It is important to note that up until Week 10 we have concentrated on the Audit Process for an assertion-based/ attest audit of financial information (usually a set of financial

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statements). You are reminded that there are forms of assurance other than the audit. In the remaining weeks we consider Corporate Governance and the role that audits and other forms of assurance can play in promoting good governance.

Readings

Text: • Chapter 10: Designing substantive procedures. Selected Readings

• Recap the Additional Information material in Week 3 relating to the Audit Report.

Tutorial Questions

Week 10:




• Professional Application Questions: 10.21 and 10.23



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Governance, Internal Audit and Public Sector Audits Week Eleven Learning Objectives


1. Discuss the concept and framework of governance.

2. Appreciate the role of auditing and assurance in corporate and business governance processes.

3. Explain the role and functions of internal and operational auditing in the governance process.

4. Appreciate the expanded role of internal audit, which encompasses conformance and value-added services.

5. Understand the work of the audit committee in enhancing governance.

6. Consider the governance framework of the public sector.

7. Describe the nature of performance auditing.

Commentary

This week’s material provides an overview of auditing in enhancing the effectiveness of corporate and business governance. You need to understand what “Governance” is, as opposed to “Management” and the role which audit and assurance services play in assisting those charged with governance. Such assistance includes assurance regarding compliance with the conformance requirements of organisations, as well as reports of management regarding performance and stewardship of assets.

The chapter also reviews internal auditing, audit committees and internal accountability in the public sector, linking them to governance issues. You need to understand the difference between external auditors, internal auditors and audit committees and the roles each of these parties should play in promoting good governance.

Some of the material in Chapter 18 of the Text is very specific to Australia (section 18.5 in particular). You are still required to read this section, but you will not be examined on detail that is specific to Australia.

The Readings and Additional Information for this week supplement the contents of Chapter 18 from the Leung text to provide New Zealand specific information.

110.279 STUDY GUIDE

Readings

Text: • Chapter 18: Enterprise governance, internal auditing, and public sector auditing. Selected Readings

• Appendix 16 to the NZX Listing Rules: “Corporate Governance Best Practice Code” from http://www.nzx.com/asset/current_sxdx_app16.pdf

• Van Peursem K. and Pratt, M.J. (2006). Auditing Theory and Practice in New

Zealand, 5th edition, Chapter 5, New Zealand, Pearsons. 84-86 (a copy of the entire Chapter 5 was provided in Week 4’s Readings).

• “About Us” information regarding the Controller and Auditor General (New

Zealand) from: http://www.oag.govt.nz/about-us

Tutorial Questions

Week 11:



• Review Questions: 18.11, 18.12, 18.14 to 18.16 and 18.20

• Professional Application Questions: 18.22




The Securities Commission and the New Zealand Stock Exchange (NZX) have both issued requirements and guidance with the aim of promoting good corporate governance in New Zealand. While only one reading from the NZX is required of you in terms of the above “Selected Readings”, it is also useful to be aware of the Securities Commission’s Corporate Governance Handbook at:

http://www.seccom.govt.nz/publications/documents/governance-handbook/

110.279 STUDY GUIDE

http://www.nzx.com/asset/current_sxdx_app16.pdf

In New Zealand, Government Auditors can work for a number of departments and in a variety of roles. The Office of the Controller and Auditor General was set up in 1993 to carry out policy-related activities for central government.

Audit New Zealand used to conduct all audits of state owned enterprises and government departments. Now a number of these audits are subject to tender and Audit New Zealand competes with professional accounting practices to undertake these activities.

110.279 STUDY GUIDE

Other Assurance Engagements Week Twelve Learning Objectives


1. Discuss assurance engagements involving special-purpose financial reports and interim financial reports.

2. Discuss the features and extent of other assurance engagements.

3. Use examples to illustrate the scope of assurance engagements other than those relating to historical financial information.

Commentary

This week’s material provides an overview of non-audit assurance engagements. You should understand this range of services and how they can be used as tools to enhance enterprise governance – either in place of audits (perhaps as a less expensive option for obtaining assurance) or as a supplement to the assurance that the audit is able to provide.

Chapter 17 covers non-audit assurance engagements for financial and non-financial information.

Readings

Text: • Chapter 17: Other assurance engagements and quality standards. (pg 688 –

707, Sections 17.1 – 17.4 only (i.e. Excluding 17.5). Selected Readings

Recap the following readings from Week 1: • NZICA – Explanatory Foreword to Engagement Standards • NZICA – Framework for Assurance Engagements (10/07).

110.279 STUDY GUIDE

Tutorial Questions

Week 12:



• Review Questions: 17.11,to 17.18

• Professional Application Questions: 17.21



110.279 STUDY GUIDE

110.279 STUDY GUIDE

Readings

Week 1: • NZICA – Explanatory Foreword to Engagement Standards • NZICA – Framework for Assurance Engagements (10/07)

Week 2 & 3: • Knechel, W.R., Salterio, S.E., Ballou, B. (2007). Auditing: Assurance and Risk, 3e (pp. 125-

128). USA: Thomson South Western.

Week 4 • Van Peursem K. and Pratt, M.J. (2006). Auditing Theory and Practice in New Zealand, 5th

edition. New Zealand. Pearson: o Chapter 5, pgs 73-88, and o Chapter 7 pg 112 - end of first para on pg 115, (but excluding Figure 7.1); pg 121 –

123 “Liability for Reasonable skill and care” and “Evidence: what the courts expect”; and pg 126 – 128 “Contributory negligence”.

• Extracts from the Companies Act • Extracts from the Financial Reporting Act


edition, Chapter 6, New Zealand, Pearsons. 89-111. • Cox G. (2003), The Ethical Mindset, Chartered Accountants Journal, September 2003, 8. • Gray J. (2005), The Code of Ethics: Not just a Statutory Obligation, Chartered Accountants

Journal, September 2005, 27-28.


edition, Chapter 5, New Zealand, Pearsons. 84-86 (a copy of the entire Chapter 5 was provided in week 4’s Readings).

• Appendix 16 to the NZX Listing Rules: Corporate Governance Best Practice Code at


• “About Us” information on the website of the Controller and Auditor General (New Zealand) extracted from: http://www.oag.govt.nz/about-us

110.279 STUDY GUIDE


110.279 STUDY GUIDE

Week 1: • NZICA – Explanatory Foreword to Engagement Standards • NZICA – Framework for Assurance Engagements (10/07)

110.279 STUDY GUIDE

110.279 STUDY GUIDE

Week 2 & 3: • Knechel, W.R., Salterio, S.E., Ballou, B. (2007). Auditing: Assurance and Risk, 3e (pp. 125-

128). USA: Thomson South Western.

110.279 STUDY GUIDE

110.279 STUDY GUIDE


edition. New Zealand. Pearson: o Chapter 5, pgs 73-88, and o Chapter 7 pg 112 - end of first para on pg 115, (but excluding Figure 7.1); pg 121 –

123 “Liability for Reasonable skill and care” and “Evidence: what the courts expect”; and pg 126 – 128 “Contributory negligence”.

• Extracts from the Companies Act • Extracts from the Financial Reporting Act

110.279 STUDY GUIDE

110.279 STUDY GUIDE


edition, Chapter 6, New Zealand, Pearsons. 89-111. • Cox G. (2003), The Ethical Mindset, Chartered Accountants Journal, September 2003, 8. • Gray J. (2005), The Code of Ethics: Not just a Statutory Obligation, Chartered Accountants

Journal, September 2005, 27-28.

110.279 STUDY GUIDE

110.279 STUDY GUIDE

110.279 STUDY GUIDE


edition, Chapter 5, New Zealand, Pearsons. 84-86 (a copy of the entire Chapter 5 was provided in week 4’s Readings).

• Appendix 16 to the NZX Listing Rules: Corporate Governance Best Practice Code at


• “About Us” information on the website of the Controller and Auditor General (New Zealand) extracted from: http://www.oag.govt.nz/about-us


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