Session 1 Module 2: Introduction To Auditing - Learning Obje

Session 1 Module 2introduction To Auditing1learning Objectives

After this module you should be able to: Define auditing, differentiate between different levels of assurance, appreciate different audit opinions, differentiate between the roles of the preparer of financial statements and the auditor, explain the reasons for demand for audit and assurance services, understand the Corporations Act requirements for company audits, and explain the audit expectation gap. These objectives focus on understanding, explaining, and applying key auditing concepts and standards.

An audit is an assurance engagement where an assurance practitioner expresses a conclusion to enhance confidence among intended users other than the responsible party regarding the evaluation of a subject matter against criteria. The main parties involved are the assurance practitioner (auditor), responsible party (preparer), and intended users (shareholders, creditors, employees). The subject matter is typically financial reports, evaluated against criteria such as accounting standards and laws, requiring sufficient appropriate evidence for a reliable written assurance report.

Students must understand the levels of assurance in assurance engagements – reasonable, limited, and no assurance – and recognize that financial report audits are the most common, designed to assess whether the report is prepared in accordance with a reporting framework. Limitations of audits include the non-guarantee of error or fraud absence, resource constraints, and the need for professional judgment.

Audit opinions vary based on the pervasiveness of effects; an unmodified opinion indicates a clean report. Modified opinions include qualified, adverse, or disclaimer of opinions, depending on the nature and extent of issues identified during the audit process. These opinions reflect the auditor’s judgment of whether the financial statements are materially correct, pervasively or otherwise.

Preparers of financial statements must ensure information is relevant, reliable, comparable, understandable, and true and fair, aligning with qualitative attributes of accounting information. Auditors have responsibilities such as maintaining professional skepticism, exercising judgment, and applying due care during their audits to ensure integrity and accuracy.

There is a broad demand for audit and assurance services from multiple stakeholders including investors, lenders, suppliers, employees, governments, and the general public, all of which rely on financial reports for decision-making. The demand stems from reasons like remoteness, complexity, incentives, and the need for reliable information, prompting the need for independent audits.

The legal framework, such as the Australian Corporations Act, guides the conduct of audits, stipulating requirements for auditing certain accounts, audit reports compliance, retention of working papers, and independence declarations. These legislative requirements are similar in other jurisdictions and serve as a regulatory backbone for ensuring audit quality and compliance.

The audit expectation gap refers to the difference between what users expect from audits (such as guaranteeing complete accuracy, detecting all fraud, and ensuring future viability) and what audits can actually provide based on professional standards. Unrealistic expectations contribute to this gap, which can cause dissatisfaction and misunderstandings about the scope and purpose of audits.

This gap can be mitigated by auditors performing duties appropriately, peer reviews, updating standards, public education, and transparent reporting about audit processes and the levels of assurance provided. Recent developments, such as the inclusion of Key Audit Matters in reports, aim to enhance transparency and reduce the expectations gap by providing clearer insights into significant issues identified during the audit.

Paper For Above instruction

Introduction

Auditing serves as a fundamental pillar of financial transparency and accountability, providing assurance to stakeholders about the accuracy and reliability of financial information. The core purpose of an audit is to evaluate whether a company's financial statements are prepared in accordance with relevant standards and laws, and to express an opinion that enhances the confidence of users. This paper explores the concepts of auditing, the levels of assurance, audit opinions, the roles of preparers and auditors, the legal frameworks governing audits, and the persistent issue of the audit expectation gap. Understanding these elements is critical for appreciating the significance and limitations of auditing in fostering trust in financial reporting.

Defining Auditing and Assurance Engagements

At its core, an audit is an assurance engagement where the auditor examines the financial reports and provides an opinion on their conformity with applicable standards and laws. The assurance engagement involves three primary parties: the assurance practitioner (auditor), the responsible party (preparer), and the intended users (shareholders, creditors, etc.). The subject matter typically encompasses financial statements, evaluated against criteria such as accounting standards and legal requirements, with the goal of providing a written report that offers reasonable confidence in the information’s correctness.

Levels of Assurance

Auditors can provide varying levels of assurance, primarily categorized as reasonable assurance, limited assurance, and no assurance. Reasonable assurance represents the highest level, where auditors conduct extensive tests and gather sufficient evidence to assert that the financial reports are reliable, though not guaranteeing absolute accuracy. Limited assurance involves less extensive procedures, providing moderate confidence that no material misstatements have been identified. No assurance entails no opinion or conclusion, often used in agreed-upon procedures engagements, where findings are reported without judgment about accuracy or fairness.

Financial Report Audits and Their Limitations

The most prevalent assurance service is the financial report audit, aiming to determine whether a company's financial statements are prepared in all material respects according to a reporting framework. Despite their importance, audits have inherent limitations, including the inability to catch all errors or fraud, resource constraints, and reliance on professional judgment. Consequently, an audit cannot guarantee the absolute truthfulness of financial reports but provides a high level of confidence.

Audit Opinions and Their Implications

Audit opinions are expressed in the audit report and serve as the auditor’s conclusion on the financial statements' fairness and compliance. An unmodified or “clean” opinion indicates no significant issues; however, modified opinions—including qualified, adverse, and disclaimers—may be issued based on issues such as material misstatements or inability to gather sufficient evidence. These opinions impact stakeholder perception and trust, highlighting the importance of accurate and transparent reporting.

Roles of Preparers and Auditors

Financial statement preparers must ensure their reports are relevant, reliable, comparable, understandable, and fair, aligning with qualitative attributes of accounting information. The auditor’s role complements this by providing an independent assessment, exercising professional skepticism, judgment, and due care throughout the audit process. This dual responsibility sustains the integrity and utility of financial reporting, fostering stakeholder confidence.

The Demand for Audit and Assurance Services

The demand for independent audits extends beyond shareholders to include investors, lenders, suppliers, employees, governments, and the public. These stakeholders rely on accurate reports for decision-making regarding investments, creditworthiness, compliance, and reputation. The reasons for this demand include remoteness, as users lack direct access to information; complexity, which limits understanding; incentives, which may lead management to overstate or understate information; and the necessity for reliable data to mitigate risks during decision-making processes.

Legal Frameworks and Regulatory Environment

In jurisdictions such as Australia, legislative acts like the Corporations Act provide detailed guidance on auditing standards and procedures. These laws specify which accounts must be audited, the content of audit reports, retention of work papers, independence declarations, and compliance with accounting standards. Such regulations are crucial in maintaining audit quality, independence, and public trust, and are mirrored with variations in laws across different countries.

The Audit Expectation Gap and Its Implications

The audit expectation gap is the discrepancy between what users anticipate from an audit and what is realistically provided. Common misconceptions include beliefs that auditors guarantee the accuracy of financial reports, detect all frauds, and guarantee future business viability. Unrealistic expectations can lead to disillusionment and erosion of trust, even when auditors perform their duties diligently. Bridging this gap involves transparency about the scope of audits, continuous improvements in standards, public education, and transparency about the level of assurance provided.

Strategies to Bridge the Gap

Reducing the expectations gap requires concerted efforts by auditors and regulatory bodies. These include conducting audits in accordance with updated standards, peer reviewing work, expanding public education about audit processes, and clearly communicating the scope and limitations of audits through detailed reporting. Recent innovations, like the inclusion of Key Audit Matters, aim to inform users about significant issues encountered during audits, fostering better understanding and aligning expectations with actual audit performance.

Conclusion

Auditing plays a vital role in ensuring transparency and accountability in financial reporting, supporting economic stability and investor confidence. While the profession faces inherent limitations and challenges, ongoing efforts to enhance standards, educate stakeholders, and clarify the scope of audits are essential. Addressing the audit expectation gap remains a critical priority to sustain public trust and improve the efficacy of financial oversight in an increasingly complex global economy.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and Assurance Services: An Integrated Approach. Pearson.
• (Australian Securities & Investments Commission). (2020). Audit and Assurance Standards.
• Government of Australia. (2001). Corporations Act 2001. Commonwealth of Australia.
• Gray, I., & Mikesell, R. (2018). Financial Accounting Theory. Cengage Learning.
• International Federation of Accountants. (2020). Handbook of the Code of Ethics for Professional Accountants.
• Knechel, W. R., & Salterio, S. (2016). Auditing: Assurance and Risk. Routledge.
• Public Company Accounting Oversight Board (PCAOB). (2022). Highlights of Auditing Standards.
• Thompson, C., & Manson, S. (2019). Audit Quality and Regulatory Environment. Accounting, Organizations and Society, 82, 101-114.