Auditing Practice Notes

Course Overview

• Refer to Blackboard for course outline, lecture notes, tutorial questions, prior years' terms tests (multi-choice), and contact details.
• $25$ Lectures: Mondays and Wednesdays (8:00am – 8:50am).
• Tutorials: Best $4$ marks out of $5$. Questions posted on Blackboard. Hand answers into Tutors boxes (5th floor Acctg. & Finance Dept.).
• Terms Test: $1$ hour, Wednesday 7 May, 7.30pm -8.30pm. No written material allowed.
• Final Exam: $3$ hours, no written material allowed.

Tutorial Stream Changes

• Tutorial streams: Mondays and Tuesdays – both 6pm.
• Students may go to the department between 10-11am and 2-3pm each day for the first 2 weeks of the semester or email accountancyfinance@otago.ac.nz to change tutorial streams. Provide student I.D, paper code, and tutorial to change to with a valid reason.

Assessment Components

• Tutorials: $15\%$. Terms Test: $15\%$. Final Exam: $70\%$. TOTAL: $100\%$.

Course Texts

• XRB - Audit & Assurance Standards: Individual standards available from the XRB website.
• Audit and Assurance, 1st Edition:
  • Authors: Philomena Leung, Paul Coram, Barry J. Cooper, Peter Richardson
  • Textbook with Interactive E-Text (ISBN): 9780730363477
  • Interactive E-Text (ISBN): 9780730354925
  • Print New Zealand CAANZ 2021 Pack (ISBN): 9780730394471

Introduction to Auditing

• Overview of the Profession in New Zealand:
  • Chartered Accountants Australia & New Zealand (CAANZ), formerly New Zealand Institute of Chartered Accountants (NZICA).
  • Membership designations: Chartered Accountant, Accounting Technician.
  • Admission requirements.
  • The ‘Big 4’ accounting firms: PricewaterhouseCoopers (PwC), KPMG, Ernst & Young (EY), Deloitte.
  • ‘Mid-tier’ firms.

What is an Audit?

• Objective: to enable the auditor to express an opinion, based on evidence obtained, about a matter of accountability, which is the responsibility of another party.
• Auditor's responsibility: Seek sufficient appropriate evidence to enable the auditor to express an opinion on the audit subject matter.

Types of Audit Engagements

1. Financial Statement Audits (a.k.a. external audit or independent audit).
2. Internal Audits (a.k.a. compliance or performance audits).

• Course focus: Financial Statement Audits.

Financial Statement Audit Report

• Addressed to shareholders, trustees, committee, members, or readers of the financial statements.
• Contains legalistic phrases.
• An opinion that the financial statements present fairly in all material respects….. in accordance with financial reporting standards.
• Two broad types:
  • Unmodified (Unqualified).
  • Modified (Qualified).

Reasons for a Financial Statement audit

• Statutory requirement – Companies Act 1993 – but exemptions.
• Financial Reporting Act 2013:
  • FMC (Financial Market Conduct) Reporting Entities.
  • Publicly accountable.
  • Overseas owned and large.
  • Large Charities.
• Requirement of Bank / Lender.
• In Constitution, Rules, or Trust Deed.

Common misconceptions about Financial Statement auditing

• The audit provides absolute assurance.
• The auditor reviews every transaction.
• The auditor prepares the financial statements.
• It is the auditors’ job to oppose management.
• Auditors focus is to detect all fraud … the ‘expectation gap’.
• Audit is a review of management performance.

Financial Statement Audits: Who performs? Who appoints?

• Who performs? Qualified Auditor or Audit Firm.
• Who appoints the auditor? Shareholders (Company) / Members (Society) / Trustees (Trust).
  • Usually on Directors / Committee recommendation.
  • Auditor protection if change suggested.
  • Partner rotation required.

Typical engagement types for auditors

• Financial Statement Audits: Reasonable (Positive) but not absolute assurance…. “In our opinion, the financial statements fairly reflect….. ”
• Review Engagements: Limited (Negative) assurance… “Nothing has come to our attention to lead us to believe the financial statements do not fairly reflect…. ”
• Agreed Upon Procedures Engagements (AUP Engagements): Reporting factual findings only….. no opinion provided.
• Internal Audit Assignments: Typically, non-assurance engagements.

Level of assurance provided from engagement types

• Audits: Reasonable assurance; Express a positive opinion (e.g., 'in our opinion').
• Reviews: Limited assurance; Express a negative conclusion (e.g., 'nothing has come to our attention').
• Related services (e.g., agreed-upon procedures): Provide no assurance; Do not express an opinion or conclusion.

Differences - Internal Audits vs. Financial Statement (External) Audits

• Purpose of the audit:
  • Internal audit: Consider if business practices are helping the business manage its risks and meet its strategic objectives; can cover operational as well as financial matters.
  • External audit: Consider whether the annual financial statements give a