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14 minExplore the assurance environment: why assurance exists, the families of standards that govern it, the international bodies that write those standards, and the regulators in Australia and New Zealand who watch over auditors.
▤ The assurance environment and its regulators →▤ The standards family →▤ Who does what in Australia →▤ Australia and New Zealand →
12 minExplore the ethical foundation under every assurance engagement: the five fundamental principles of the Code of Ethics, the conceptual framework for dealing with threats to those principles, the five types of threat, the safeguards that can reduce them, and what independence of mind and independence in appearance really mean.
▤ Fundamental principles, threats and safeguards →▤ The five fundamental principles →▤ The conceptual framework →▤ Five threats at Linden Ridge →
12 minExplore the ethical situations that public practitioners meet most often: conflicts of interest, accepting a new client or replacing another auditor, requests for second opinions, fees, gifts and hospitality, holding client money, and what to do when you discover that a client may be breaking the law. We'll finish with how the Code applies in Australia.
▤ Ethics in public practice →▤ Seven situations in practice →▤ Responding to NOCLAR →▤ From APES 110 to the standards →
12 minExplore how an audit firm manages quality across everything it does: the move from quality control to quality management, who in the firm is accountable, the eight components of a system of quality management, the firm's own risk assessment process, and the cycle of monitoring and remediation that keeps the system honest.
▤ ISQM 1: quality management for firms →▤ The eight components →▤ Risk assessment at Linden Ridge →▤ Monitoring and remediation →
11 minExplore quality at the level of a single audit: the engagement partner's responsibilities under ISA two hundred and twenty, the engagement quality review and the separate standard that governs it, ISQM two, and finally the wider framework for audit quality that looks at inputs, process, outputs and the environment around an audit.
▤ ISA 220, ISQM 2 and audit quality →▤ The engagement partner's duties →▤ Three gates before dating →▤ The Framework for Audit Quality →
11 minExplore what turns a piece of professional work into an assurance engagement: how the International Framework for Assurance Engagements describes one, the difference between attestation and direct engagements, the difference between reasonable and limited assurance, and the kinds of work that fall outside the Framework altogether.
▤ What makes an assurance engagement →▤ Subject matter and criteria →▤ Attestation and direct →▤ Reasonable and limited →
10 minExplore the building blocks that every assurance engagement must have, focusing on the first three of them: the three-party relationship, an appropriate underlying subject matter, and suitable criteria. We'll test each idea on an imagined charity whose headline number turns out to depend entirely on its criteria.
▤ Three parties, subject matter and criteria →▤ The five elements →▤ Who's who in three engagements →▤ Testing the meals criteria →
11 minExplore the fourth element of an assurance engagement, evidence, together with the two professional qualities that decide whether evidence is gathered and weighed properly: professional scepticism and professional judgement. We'll see what makes evidence sufficient and appropriate, what a sceptical mindset looks like in practice, and where judgement can and can't carry a decision.
▤ Evidence, scepticism and judgement →▤ Judging reliability →▤ The scepticism cycle →▤ Where judgement is needed →
10 minExplore three ideas that shape how much evidence a practitioner needs and what they finally say: materiality, engagement risk and its components, and the nature, timing and extent of procedures. Then we'll finish the five elements with the last one, the written assurance report.
▤ Materiality, engagement risk and reporting →▤ Materiality at Saltmarsh →▤ How audit risk fits together →▤ The written assurance report →
11 minExplore the main types of assurance engagement: audits of financial statements and their limitations, audits of specialised financial information, reviews, and the growing family of other assurance work: on systems and processes, on behaviour such as compliance, on the performance of an activity, on non-financial reports, and on forecasts and other information about the future.
▤ Types of assurance engagements →▤ Main types of assurance →▤ Three limitations of an audit →▤ Crestwater's assurance needs →
11 minExplore how the standards are actually applied: how the auditing standards are organised and what gives them authority, how they scale down for small and medium entities, how the law decides which entities need an audit or a review at all, how auditing works in the public sector, and how the review, assurance and related services standards fit in, with the Australian arrangements throughout.
▤ Applying the standards →▤ How the ISAs are organised →▤ Same standards, scaled work →▤ Charity tiers from 2022 →
10 minExplore two forces changing the environment that auditors work in: evolving business models, and the growing demand for disclosure of climate-related risks. For each one, we'll ask the auditor's question: where could this create a risk of material misstatement?
▤ Business models and climate-risk disclosure →▤ Business models and risks →▤ Physical and transition risks →▤ Climate in the statements →
11 minExplore how technology is changing both the businesses that auditors examine and the audit itself: automation and software robots, artificial intelligence, big data and data analytics, and blockchain. For each one, we'll ask what it makes possible, what new risks it brings, and what still needs a human auditor.
▤ Technology and the audit →▤ Three ways technology helps →▤ An imagined revenue audit bot →▤ What a blockchain can show →
11 minExplore why financial statements are audited, how responsibilities are split between management and the auditor, and the audit risk model that drives every planning decision: inherent risk and its five factors, control risk, and detection risk. We'll also meet the imagined company that we'll audit together across the next three modules.
▤ Audit objectives and the audit risk model →▤ How audit risk is built →▤ Inherent risk factors at Voltana →▤ The detection risk grid →
11 minExplore the legal side of auditor independence in Australia: the Corporations Act's general and specific independence requirements, the auditor's independence declaration, the rules for rotating audit partners and how they sit alongside the Code of Ethics, the debate about rotating whole audit firms, and how independence works for smaller clients.
▤ Independence, rotation and the law →▤ The Act's independence rules →▤ Partner rotation rules →▤ Firm rotation for and against →
5 minExplore what gets in the way of professional scepticism on a real audit: the unconscious biases that affect every auditor, the practical pressures that make scepticism harder, and the actions an engagement team can take to keep a questioning mind working.
▤ Five of the biases →▤ Impediments and counters →
6 minExplore how an audit is formally agreed: the preconditions that must exist before an auditor can accept an audit, what the terms of engagement must cover, when a recurring audit needs a fresh engagement letter, and what to do when a client asks to change the terms.
▤ The preconditions as gates →▤ Triggers for a new letter →
10 minExplore how an audit is planned: why planning matters, the difference between the overall audit strategy and the detailed audit plan, the two broad approaches to gathering evidence, and the financial statement assertions, which are the language auditors use to say exactly what could be wrong.
▤ Audit strategy, audit plan and assertions →▤ Strategy and plan side by side →▤ The assertions in two groups →▤ The direction of testing →
10 minExplore how an auditor turns the idea of materiality into numbers that guide the work: choosing a benchmark, setting materiality for the financial statements as a whole, setting lower amounts for sensitive items, setting performance materiality, and deciding what counts as clearly trivial. We'll calculate all of them for Voltana.
▤ Materiality and performance materiality →▤ Common materiality benchmarks →▤ Materiality at Voltana →▤ Why misstatements add up →
6 minExplore three pieces of audit housekeeping that turn out to be anything but minor: the engagement team's discussion of where the financial statements could be misstated, the rules for audit documentation, and the three phases that every audit moves through.
▤ Audit documentation →▤ The three phases of an audit →
10 minExplore what an auditor must understand about an entity and its environment before assessing risk: its industry, regulation and economic setting, the nature of its operations, investments and financing, its accounting policies, its objectives, strategies and business risks, and the way its performance is measured.
▤ Understanding the entity and its environment →▤ What the understanding covers →▤ From event to assertion →▤ Business risks at Voltana →
10 minExplore the entity's system of internal control: what internal control is, the five components the auditor must understand, the everyday control activities that make it work, the limitations that mean even good controls can fail, and how control looks different in a small business.
▤ The five components of internal control →▤ Five components of control →▤ Control activities at Voltana →▤ Limits of internal control →
10 minExplore controls in an IT environment: why IT changes the auditor's view of risk, the general IT controls that protect every system, the application controls built into individual processes, what changes when systems run in the cloud, and how all of this applies to Voltana's new accounting system.
▤ Controls in an IT environment →▤ How IT controls stack up →▤ Application controls →▤ Voltana's system change →
10 minExplore the auditor's responsibilities for fraud: what separates fraud from error, the main kinds of fraud, who is responsible for preventing and detecting it, the fraud triangle, and the procedures the standard requires on every audit, including the presumed risk in revenue and the ever-present risk of management override.
▤ The auditor and fraud risk →▤ Two kinds of fraud →▤ The fraud triangle at Voltana →▤ Fraud procedures on every audit →
10 minExplore two areas that the auditing standards treat as special risks: accounting estimates, where nobody can measure the answer precisely, and related parties, where transactions may not be what they seem. We'll audit Voltana's warranty provision step by step, and look at how a real deal with a chairman's family exposed one of the largest frauds in Asia.
▤ Accounting estimates and related parties →▤ Three ways to respond →▤ Voltana's warranty provision →▤ Where related parties surface →
11 minExplore three more risks the auditor must consider while planning: whether the entity can continue as a going concern, how climate-related risks can affect the financial statements, and the auditor's responsibilities when an entity may not be complying with laws and regulations.
▤ Going concern, climate and NOCLAR risks →▤ Going concern warning signs →▤ Two categories of laws →▤ Voltana's three risks →
9 minExplore the risk assessment procedures every auditor must perform, and three strategic analysis tools that help turn a mountain of information about a business into a focused list of audit risks: SWOT analysis, the PESTEL scan and value chain analysis. We'll apply all three to Voltana.
▤ Strategic analysis for risk assessment →▤ SWOT analysis of Voltana →▤ PESTEL scan of Voltana →▤ Voltana's value chain →
9 minExplore analytical procedures at the planning stage: the comparisons auditors make, the four families of ratios, how ratios explain one another, and common-size statements. We'll calculate Voltana's key ratios together and listen to what they're telling us.
▤ Analytical procedures and ratio analysis →▤ Four families of ratios →▤ Voltana's ratios →▤ Common-size statements →
9 minExplore audit data analytics: what they are, the main techniques, including cluster analysis, matching key fields, regression, time-series analysis and visualisation, how analytics help at the planning stage, and the cautions that keep them honest. We'll run several of them over Voltana's data and see what they find.
▤ Audit data analytics →▤ Six analytics techniques →▤ Regression at Voltana →▤ Journal entries to examine →
10 minExplore how the auditor turns assessed risks into an audit plan: overall responses to risks at the financial statement level, further audit procedures for risks at the assertion level, the choice between tests of controls and substantive procedures, the special rules for significant risks, and how the approach changes for smaller entities. We'll finish by building Voltana's risk-response plan, which carries us into Module Three.
▤ Responding to assessed risks →▤ Overall responses →▤ Tests of controls or substantive →▤ Voltana's risk-response plan →
9 minExplore the key principles behind gathering audit evidence: what makes evidence sufficient and appropriate, how the assertions decide which evidence is relevant, the seven types of audit procedure, and what to do when evidence conflicts or looks unreliable. We'll start carrying out the plan we built for Voltana.
▤ Evidence, assertions and audit procedures →▤ Voltana's plan by assertion →▤ Seven types of audit procedure →▤ Keeping control of confirmations →
9 minExplore tests of controls: how they differ from evaluating a control's design, the procedures used to test whether a control operated effectively, how automated controls and general IT controls are tested, how timing and evidence from earlier audits work, and what to do when a test finds deviations.
▤ Tests of controls →▤ Two different questions →▤ Ways to test a control →▤ Voltana's controls plan →
5 minExplore how auditors use computer-assisted techniques to test the controls built into software: test data, the integrated test facility, and parallel simulation, along with the strengths and limits of each.
▤ Voltana's test data set →▤ Three techniques compared →
6 minExplore audit sampling for tests of controls: what counts as sampling, the risks that sampling creates, how a sample is planned and selected, and how the results are evaluated. We'll finish Voltana's test of discount approvals.
▤ Four ways to select a sample →▤ Voltana's sample results →
9 minExplore substantive analytical procedures: analytics used not to find risks but to gather evidence that a balance or class of transactions is fairly stated. We'll work through the four questions the auditor must answer before relying on them, run three reasonableness tests on Voltana, and see what to do when the numbers don't match.
▤ Substantive analytical procedures →▤ Four questions before relying →▤ Three tests at Voltana →▤ Following up the payroll gap →
9 minExplore tests of details, the substantive procedures that examine individual transactions and balances: tests of transactions, tests of balances, external confirmations, attendance at the stocktake, cut-off tests and the search for unrecorded liabilities. We'll apply them to Voltana's revenue, receivables, inventory and payables, and see how one forged letter hid billions of euros.
▤ Tests of details →▤ Tests of details and assertions →▤ Positive or negative →▤ Voltana's stocktake →
6 minExplore how audit software and data analytics support substantive testing: what generalised audit software does, when purpose-written programs and utility programs help, how advanced analytics extend the work, and the cautions every team must respect.
▤ What audit software can do →▤ Voltana's full-population tests →
9 minExplore monetary unit sampling, the statistical method that treats every dollar in a balance as a separate item: how it selects a sample, why it suits tests for overstatement, how misstatements in the sample are scaled up to the whole population, and how the auditor decides whether the result is acceptable. We'll work through a full example on Voltana's receivables.
▤ Monetary unit sampling →▤ How the selection works →▤ Voltana receivables sample →▤ Projecting the misstatements →
6 minExplore how gathering evidence changes when a business sells online: the risks e-commerce creates, how the auditor tests controls, how substantive testing follows the money from a customer's click to the bank, and where continuous auditing fits.
▤ Risks of selling online →▤ Following the money →
6 minExplore the procedures that respond to related party risks: what the auditor does with a significant related party transaction outside the normal course of business, what happens when an undisclosed related party is discovered, and how claims that a deal was done at arm's length are tested. We'll follow both of Voltana's related party issues to a conclusion.
▤ A significant unusual deal →▤ The related party nobody named →
9 minExplore the audit of group financial statements: who's responsible for the group audit, how the group auditor decides where work is needed, how component auditors are evaluated, instructed and supervised, how materiality works across a group, and why the consolidation process needs its own attention. We'll scope the Voltana group, and see how assets on the other side of the world can be very hard to verify.
▤ Group audits and component auditors →▤ Who's who in a group audit →▤ Scoping the Voltana group →▤ Working with a component auditor →
9 minExplore three kinds of help an external auditor may use: the work of the entity's internal audit function, the findings of an expert the auditor engages, and information prepared by management's own expert. For each, we'll see what the auditor must evaluate before relying on it, and what responsibility stays firmly with the auditor.
▤ Using internal auditors and experts →▤ Three kinds of help →▤ Can internal audit be used →▤ Using an auditor's expert →
10 minExplore audit documentation in depth: why it matters, what a good working paper contains, how audit files are organised, the strict rules after the auditor's report is signed, and how auditors protect the confidential client data they hold. We'll build a working paper for Voltana, and see what happened when a firm tried to improve its files after the fact.
▤ Audit documentation →▤ Working paper R4 →▤ Permanent and current files →▤ Protecting client data →
10 minExplore how the auditor evaluates what the fieldwork has found: accumulating misstatements, classifying them as factual, judgemental or projected, communicating them to management, deciding whether the audit plan or materiality must change, and judging whether the evidence is finally sufficient and appropriate. We'll bring together everything the team has found at Voltana.
▤ Evaluating misstatements and evidence →▤ Three kinds of misstatement →▤ Voltana misstatement schedule →▤ Corrections change materiality →
9 minExplore the first steps in completing the audit fieldwork: a final look at the significant areas of estimates, related parties and fraud, and the procedures for identifying litigation and claims, including letters to the entity's lawyers. We'll also decide how Voltana's legal matters belong in its financial statements.
▤ Significant areas, litigation and claims →▤ Three significant areas →▤ Searching for litigation →▤ Provision, disclosure or nothing →
9 minExplore the auditor's final evaluation of going concern: what the auditor does when events or conditions cast doubt on an entity's future, how management's plans and cash flow forecasts are tested, how financial support from others is evaluated, and how the auditor reaches a conclusion. We'll finish Voltana's assessment.
▤ Going concern at completion →▤ Extra procedures →▤ Plans need evidence →▤ Voltana's conclusion →
9 minExplore two completion topics: the written representations the auditor must obtain from management, and the auditor's responsibilities for events that happen after the reporting date, in each of the three periods that follow it. We'll deal with two such events at Voltana.
▤ Written representations and subsequent events →▤ Written representations →▤ Adjusting or non-adjusting →▤ The three periods →
5 minExplore the analytical procedures the auditor performs near the end of the audit: why they're required, how they differ from the analytics used at planning and as substantive procedures, and what happens when they reveal something new. We'll run Voltana's final review.
▤ The steps →▤ Voltana's final read-through →
8 minExplore the final evaluation of misstatements: reassessing materiality one last time, evaluating uncorrected misstatements by size and by nature, including the effect of misstatements left over from last year, a technical check of the statements themselves, and the idea of pervasiveness, which links the evaluation to the type of opinion. We'll close Voltana's schedule.
▤ Final evaluation of misstatements →▤ Evaluating misstatements →▤ Voltana's final schedule →▤ Pervasiveness and the opinion →
8 minExplore the final steps before an opinion can be given: the layers of review of the audit file, finishing the engagement quality review, the completion checklist, how the auditor forms the opinion, and how the auditor's report is dated.
▤ Final review, EQR and forming the opinion →▤ Layers of review →▤ Completion checklist →▤ Forming the opinion →
9 minExplore the unmodified auditor's report: each section in order, what it says and why it's there, the extra sections that appear for listed companies in Australia, the auditor's responsibilities for the other information in the annual report, and the independence declaration that accompanies it. We'll walk through Voltana's report.
▤ The unmodified auditor's report →▤ Sections of the report →▤ Voltana's report decoded →▤ Other information path →
9 minExplore two sections that can appear in an unmodified auditor's report: the section on material uncertainty related to going concern, along with every other going concern outcome, and the key audit matters section required for listed companies. We'll look at a real Australian report with a material uncertainty, and draft one of Voltana's key audit matters.
▤ Going concern reporting and key audit matters →▤ Going concern outcomes →▤ Choosing key audit matters →▤ Voltana's warranty KAM →
5 minExplore two kinds of paragraph that can be added to an auditor's report without changing the opinion: the emphasis of matter paragraph and the other matter paragraph. We'll compare them, see when each is used, and work out how they differ from key audit matters.
▤ Emphasis of matter →▤ Which section →
9 minExplore modified opinions: the qualified opinion, the adverse opinion and the disclaimer of opinion, the two questions that decide which one applies, how the auditor's report changes, and what the auditor does when management limits the scope of the audit.
▤ Modified opinions →▤ The modified opinion grid →▤ How the report changes →▤ A limitation by management →
6 minExplore how the auditor reports on financial statements prepared for a particular user rather than the public: what makes a framework special purpose, what the auditor checks before accepting the engagement, and the extra wording the report must include.
▤ General v special purpose →▤ The special purpose report →
8 minExplore the auditor's communications with the entity: what must be communicated to those charged with governance and when, how deficiencies in internal control are reported and to whom, the management letter, and how suspected fraud is communicated, especially when it involves management. We'll prepare Voltana's communications.
▤ Communicating with management and the board →▤ What to tell the board →▤ Who hears about deficiencies →▤ Voltana's significant findings →
9 minExplore the auditor's reporting duties beyond the entity itself: what the Corporations Act makes the auditor form an opinion on and report to shareholders, the auditor's role at a listed company's annual general meeting, and the duty to report certain matters to ASIC, with a look at how other regulators fit in. We'll decide whether Voltana's auditor must contact ASIC.
▤ Reporting to shareholders and regulators →▤ Reporting to members →▤ Reporting to ASIC →▤ Voltana and ASIC →
8 minExplore audits of specialised areas: audits of financial statements prepared under special purpose frameworks, audits of a single financial statement or of one element, account or item, and engagements to report on summary financial statements, along with how each looks in Australia.
▤ Audits of specialised areas →▤ Three specialised audits →▤ Auditing a single element →▤ Reporting on a summary →
8 minExplore review engagements on historical financial information: how a review differs from an audit, the review of interim information by the entity's own auditor, a review by a practitioner who isn't the auditor, the Australian review standards, and what a review report can and can't tell you. We'll look back at Voltana's half-year review.
▤ Review engagements →▤ Review and audit compared →▤ Australia's review standards →▤ Modified review conclusions →
9 minExplore the umbrella standard for assurance engagements other than audits or reviews of historical financial information: what it covers and how it works with the subject-specific standards, the preconditions for accepting an engagement, how the work differs between reasonable and limited assurance, and what the assurance report must contain. We'll apply it to an imagined company's claim about how quickly it delivers.
▤ The overarching assurance standard →▤ The ISAE 3000 family →▤ Conditions for acceptance →▤ Reasonable and limited work →
9 minExplore assurance on greenhouse gas statements and on sustainability reports: the three scopes of emissions, where emissions figures go wrong and how practitioners test them, the frameworks behind sustainability reports, and the new generation of sustainability assurance standards. We'll test the emissions of the imagined port operator we met in Module One.
▤ Greenhouse gas and sustainability assurance →▤ Crestwater's three scopes →▤ Where emissions go wrong →▤ The path of the standards →
6 minExplore three more kinds of non-financial report that can be assured: water accounting reports, reports of performance measures, and integrated reports. For each, we'll ask what makes assurance valuable and what makes it hard.
▤ Three reports side by side →▤ The six capitals →
8 minExplore assurance on information about the future and on pro forma information: the difference between a forecast and a projection, what a practitioner examines and what the report can say, how pro forma financial information shows the effect of a transaction as if it had already happened, and how these engagements appear in Australian fundraising documents.
▤ Prospective and pro forma information →▤ Forecast or projection →▤ Examining a forecast →▤ Pro forma cash and borrowings →
9 minExplore internal audit: what it is and how it differs from external audit, the professional body and the global standards that govern it, where it sits among the lines of accountability in an organisation, the three areas it examines, and how an internal audit engagement runs from plan to follow-up. We'll see how Voltana's internal audit function changes after the events of its audit.
▤ Internal audit →▤ Five domains of the standards →▤ The three lines model →▤ Five parts of a finding →
8 minExplore assurance on controls: engagements on an entity's own controls, reports on the controls at service organisations and how user auditors rely on them, and continuous assurance. We'll check how Voltana's auditor uses its cloud provider's report, and look at what a breach through a supplier can teach.
▤ Controls assurance and continuous assurance →▤ Type 1 and type 2 reports →▤ Relying on a controls report →▤ Continuous assurance cycle →
8 minExplore assurance on how organisations behave: on the controls designed to achieve compliance and on compliance itself, the annual audit of self-managed superannuation funds, audits of client money held in trust, and assurance on corporate governance.
▤ Compliance and governance assurance →▤ Two standards for compliance →▤ The SMSF audit in two parts →▤ Checking client money →
11 minExplore performance audits: who carries them out and why, the three Es of economy, efficiency and effectiveness, the indicators that measure them, and how a performance audit differs from a financial statement audit. We'll finish with a real performance audit that changed the national conversation about grants.
▤ Performance audits and the three Es →▤ The three Es chain →▤ Indicators for Cooler Suburbs →▤ Performance vs financial audit →
10 minExplore how a performance audit is carried out: the parties and elements involved, the stages from choosing a topic to following up the recommendations, how criteria are set, the management systems the auditor examines, and how evidence becomes findings. We'll follow an imagined audit of the Cooler Suburbs program from start to finish.
▤ Conducting a performance audit →▤ Five stages of the audit →▤ Objective, criteria, evidence →▤ Where criteria come from →
11 minExplore two related services that give no assurance at all: agreed-upon procedures engagements, where the practitioner reports factual findings, and compilation engagements, where the practitioner helps prepare financial information. We'll see why the wording of an agreed-upon procedures report matters so much, how comfort letters are used when companies raise capital, and how these services compare with audits and reviews.
▤ Agreed-upon procedures and compilations →▤ Wording AUP findings →▤ Compiling Harrowgate's accounts →▤ Four services side by side →