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SOLUTION MANUAL
to accompany

MODERN AUDITING
&
ASSURANCE SERVICES
5th edition
Prepared by
Philomena Leung, Paul Coram, Barry J
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11

Discuss why auditors and accountants are engaged in assurance engagements
other than financial statement audits
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This is the case because auditors and accountants possess the
expertise and credibility to undertake an independent engagement and to perform tests and
analysis in order to provide a required level of assurance in relation to these reports
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In many
instances, special purpose financial reports are required to be audited, e
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, prospectuses
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Moreover, there are reports such
as sustainability reports, and investigative reports such as forensic audit engagements
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Reasonable assurance engagement: aims at reducing risk to an acceptable low level of risk as
a basis for a positive conclusion (high but not absolute level of assurance)
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The assurance engagement can consist of an outcome, a set of criteria and a subject matter,
and include all the assurance engagements where ASAs, ASREs and ASAEs apply
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A sustainability assurance
engagement based on a certain set of criteria is an example of limited assurance engagement
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13

Why do you think sustainability reports have become acceptable reports for the
community?

The trend of sustainability reporting has largely been a response to stakeholder concerns
about the social, economic and environmental performance of business, but it is also
increasingly linked to investor interests in emerging risk-related aspects of financial
performance
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© John Wiley & Sons Australia, Ltd 2011

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Triple Bottom Line reporting
focuses on decision-making and reporting which explicitly considers an organisation's
economic, environmental and social performance
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The Global Reporting Initiative (GRI) was started in 1997 as a multi-stakeholder process and
independent initiative to develop and disseminate globally applicable sustainability reporting
guidelines
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The GRI provides a generally accepted framework for
reporting an organisation’s economic, environmental and social performance
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Companies may
include a GRI index covering strategy and profile and performance indicators, as well as a
self-assessment of their GRI application
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14

What are the common features of sustainability assurance engagements?

Some of the Big Four accounting firms offer audits and reviews and advisory services on
sustainability reporting
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Sustainability assurance engagements typically will employ GRI guidelines as the
criteria for reporting
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However evidence suggests that information contained in sustainability reports is rarely used
or relied upon by stakeholders or by management to inform judgements and actions
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e
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It
draws from and builds on the mainstream financial, environmental and quality related
assurance, and integrates key indicator of sustainability management and accountability
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The key characteristics of the AA1000
Assurance Standards include:
 Covers the full range of organisational sustainability performance;
 Focuses on the materiality of subject matter to stakeholders, as well as accuracy;
 Assesses the organisation’s responsiveness to stakeholders;
 Applies to different types and sizes of organisations and assurance providers from
diverse geographical, cultural and social backgrounds; and
 Requires disclosure by the assurance providers covering their competencies and
relationships with the reporting organisations
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1 All principles must be
applied and the manner in which they are applied depends on the level of assurance pursued
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Also the
resources allocated for the assurance, any legal or other constraints together with the
professional competencies of the assurance practitioner will be factors which determine the
level of assurance relevant to particular circumstances
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Parameters
to be used may include compliance performance, policy-related performance, peer-based
norms and stakeholder based materiality such as stakeholder bahaviour impact are to be used
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The Responsiveness principle requires that the assurance
practitioner evaluate whether the reporting organisation has responded to stakeholder
concerns, policies and relevant standards, and have adequately communicated these
responses in its report (AAA Assurance Standard, AccountAbility 2003)
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15

What is the difference between the Global Reporting Initiative and AA1000?
Who should perform an assurance engagement?

(The following is repeated from the previous two questions for easy reference)
The Global Reporting Initiative (GRI) was started in 1997 as a multi-stakeholder process and
independent initiative to develop and disseminate globally applicable sustainability reporting
guidelines
...
The GRI provides a generally accepted framework for
reporting an organisation’s economic, environmental and social performance
...
Companies may
include a GRI index covering strategy and profile and performance indicators, as well as a
self-assessment of their GRI application
...
The key characteristics of the
AA1000 Assurance Standards include:
 Covers the full range of organisational sustainability performance;
 Focuses on the materiality of subject matter to stakeholders, as well as accuracy;
 Assesses the organisation’s responsiveness to stakeholders;
 Applies to different types and sizes of organisations and assurance providers from
diverse geographical, cultural and social backgrounds; and
 Requires disclosure by the assurance providers covering their competencies and
relationships with the reporting organisations
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© John Wiley & Sons Australia, Ltd 2011

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16

What are the likely factors that lead to fraud?

For the purpose of identifying the type of fraud, the KPMG survey of e-commerce fraud in
2001 cited a number of factors which gave rise to the increase in electronic frauds, including:
• poor security of access devices and passwords
• the ease with which valuable products and funds can be moved around the world
• the breakdown of traditional internal controls which were replaced by poorly
understood systems controls
• the growing acceptance of a certain level of fraud in doing business
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g
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Thus, a continuous audit is a process or method that enables independent
auditors to provide written assurance on subject matter using a series of auditors’ reports
issued simultaneously with, or a short time after, the occurrence of events underlying the
subject matter
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Auditors could be requested to continuously audit and report on:
• financial statements available on demand via a website
• specific financial information in conjunction with a debt covenant agreement
• compliance with published policies and practices regarding e-commerce transactions
(e
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reliance on secure encrypted systems for credit card processing)
• the effectiveness of controls operating in key systems or processes
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There is little time for the auditor to
gather audit evidence for verifying and substantiating the subject matter(s) concerned
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The auditor must use fully automated audit software such as IDEA or ACL to read,
manipulate and generate the information required
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Solution Manual to accompany Modern Auditing and Assurance Services 5e

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A special-purpose financial report is a financial report that is not a general purpose financial
report
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3 of the Corporations Act 2001
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The role of the auditor is to review and assess the
conclusions drawn from the audit evidence to form a clear written expression of opinion
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The auditor ordinarily
indicates in the report the purpose for which the report is prepared and any restrictions on its
distribution and use
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It is also customary that the auditor will include a statement about the intended user, and that
no opinion is expressed regarding the appropriateness of the financial reporting framework
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Regarding the format of the report, a measure of uniformity is desirable
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The auditor should also consider whether any significant interpretation of an
outside agreement on which the financial information is based is clearly disclosed
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The auditors must understand the purpose for which the financial information is
prepared and consult with respective governing bodies if necessary
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Chapter 4: Other assurance engagements and quality standards

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There is a strong view that the self-regulatory standards and regulations that ensure the
quality of professional services prevail in the profession
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These controls set a minimum list of mechanisms and standards with which professional
accountants and auditors must comply
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4
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With auditors becoming increasingly involved in auditing an entire business, ISO 9000 is
now used by auditors to identify and review issues that have an impact on quality
management in an organisation
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Based on work carried out in
different manufacturing organisations, the sustainability of total quality management was
found, for example, to rely on factors such as continual improvement, organisational
behaviour, human resources management, industrial relations and the labour process
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The issues found to have
an impact on such factors were analysis of strengths, weaknesses, opportunities and threats
(SWOT), competitors, quality and performance standards, new technologies, industrial
relations, management–worker relationship, policies design, the positioning of quality
functions and resources, functional boundaries, communication, job flexibility, the
supervisory structure, the improvement infrastructure, and education and training
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Furthermore, they may be able to use the standards specified
in ISO 9000 as audit tool benchmarks to provide the necessary level of assurance for
effectiveness
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Most
accountants and auditors are good at analysing situations in organisations, constructing

Solution Manual to accompany Modern Auditing and Assurance Services 5e

detailed work plans, explaining complex situations to clients from a variety of backgrounds
and keeping confidences
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According to Barthelemy and Zairi, quality auditing has progressed from a practice solely
concerned with tools used to detect non-conformance (non-compliance) to one concerned
with using instruments geared towards continual improvement
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In another more recent article, Francis
summarised audit quality to date:
• Auditing is relatively inexpensive, typically amounting to approximately only 0
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• There were very infrequent outright audit failures with material economic
consequences
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• Audit quality is positively associated with earnings quality
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• There is evidence of different audit quality by the Big Four and industry experts
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Chapter 4: Other assurance engagements and quality standards

Professional Application Questions
4
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Identify the different levels of assurance that will be
given and what form that opinion will take
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Compilation
Level of assurance: None
Opinion: There may be a report prepared to accompany the compiled statements which will
state that the information has been compiled from information and explanations provided,
that the work performed does not constitute a review or audit and that no opinion is given
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Examples of
compilations include the preparation of a financial report from a trial balance or other books
and records for an organisation or the compilation of a tax return from information provided
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This is negative form
assurance and gives a lower level of comfort to the user than an audit
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This level of work will reduce
engagement risk to a level that is appropriate to the engagement
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This is positive form assurance which clearly states to the users that the subject
matter is free from material error
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These procedures include: (1) obtaining an understanding of the
engagement, (2) assessing risk, (3) responding to those assessed risk, (4) performing
procedures such as substantive tests and where necessary tests of the effectiveness of internal
controls, and (5) evaluating the evidence
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Assertion-based or direct reporting

Required
For each of the above explain in detail the characteristics of each item and the extent to
which they differ from one another
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A direct
reporting engagement is one in which the practitioner reports directly on the subject matter
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Where an auditor is asked to express an opinion on an
organisation’s internal controls, then this would be a direct reporting engagement (if the
auditor was asked to give an opinion on a report, assertions, about the effectiveness of
internal controls that this would be an assertion-based engagement)
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This type of
opinion would never be provided due to the inherent limitations in the procedures performed,
for example: samples of a population only are checked, evidence is persuasive rather than
conclusive, judgment will be required for some issues, difficulty in auditing completeness
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The level of work performed by the auditor will ensure that the risk of giving an incorrect
opinion (engagement risk) is reduced to an acceptably low level
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Audits provide reasonable assurance
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Procedures are
generally restricted to obtaining representations and carrying out analytical procedures, rather
than detailed substantive testing
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No assurance engagements are those where no opinion is provided a statement of findings
may be provided instead
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(3) Positive form assurance and negative form assurance
Positive form opinion is a clear statement that the subject matter is or is not in compliance
with appropriate criteria
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© John Wiley & Sons Australia, Ltd 2011

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A review reduces engagement risk to a level appropriate to the engagement in order to
provide limited assurance with a negative form opinion
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Special purpose financial reports meet the needs of a specific user for a specific purpose, for
example a bank providing finance to a company might request information to be provided in
a particular way to meet their information needs
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PFI is in two
forms: (1) forecasts which are best estimates based on assumptions that management expect
to occur, and (2) projections which are hypothetical assumptions (and therefore less certain
than forecasts)
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Historical financial information relates to reporting events that have already occurred and
therefore evidence should be readily available to give some comfort as to the veracity of the
information
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Performance engagements are designed to give an opinion on the economy, efficiency and
effectiveness of processes
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Forensic engagements investigate the causes and effects fraudulent activities or system
failures that may be the consequences of fraud
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Continuous audits allow auditors to provide opinions on information provided by
organisations on a short time frame
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Solution Manual to accompany Modern Auditing and Assurance Services 5e

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For each assurance service identify what level of
assurance will be provided and what form the opinion will take
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No assurance is provided and no opinion given
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The report is providing
information to the auditor general indicating the extent to which the organisation has
complied with some regulatory requirements
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(3) Preparation of the company’s tax returns
This is a compilation of a return from information provided by the client
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(4) A report to management about the success of a marketing campaign
It is likely that this will be a report of findings giving details of the extent to which revenue
has increased after the marketing campaign
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Therefore this is likely to be agreed upon
procedures engagement on which no assurance or opinion would be provided
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These interim reports
must be either audited or reviewed and therefore most companies would have a review
performed rather than a full audit
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The review may be performed either by the company’s
independent auditor ((ASRE 2410) or another assurance practitioner (ASRE 2400)
...
This work could be a review or an audit
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© John Wiley & Sons Australia, Ltd 2011

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A statement of findings provides a statement of the results of
the procedures performed without giving an opinion as to whether the purchase ledger
balance are or are not fairly stated
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4
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A forensic audit is the investigation of irregularities, fraudulent activities or other
discrepancies to establish the causes and impact on systems and the financial position of
organisations
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Key considerations could include:
• Reviewing the overall design of the accounting system and checking for any
weaknesses that may have caused the breakdown or irregularity occurring
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• Determination of whether any back up procedures have been conducted, and whether
they were conducted properly
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• Review of the security procedures including the adequacy of the firewalls in computer
systems
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• Review for evidence of breakdown
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Solution Manual to accompany Modern Auditing and Assurance Services 5e

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For example password (with regular
password-changing control and encryption of data
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 Privacy issues relating to customer information
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 Processing controls to ensure accuracy and completeness
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Risks include:
 Unauthorised transaction being processed;
 Transaction processed incorrectly
(c) Authorisation of payments
Controls could include:
 Established levels of approval for expenditure
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 Identity and credit verification checks to prevent unauthorised use of credit cards
Risks include:
 Unauthorised payments made to unauthorised personnel;
 Incorrect payments made
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 Management’s awareness of the risks involved in the management of data and
associated security issues
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Chapter 4: Other assurance engagements and quality standards



Monitoring of the performance of the sales and accounting systems through
parameters agreed by management
Risks include:
 Breach of confidential commercial agreements;
 Loss of business credibility
4
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Students should access a public company’s sustainability report and discus the features, the
information contained, the analyses undertaken, and the standards used
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This question is best to be done by a group of
students and have the answers discussed in class
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27

Environmental auditing

Required
(a) Explain the meaning of environmental auditing
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(c) Describe the types of tasks that may be involved in environmental auditing
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An environmental audit is similar to an audit on the environment, it involves obtaining
and evaluating evidence about:
 Economy refers to the acquisition of resources that are environmentally-friendly (or
complying with relevant regulations) of appropriate quality and quantity at the lowest
reasonable costs (such as the acquisition of recycled paper at bulk for cost reduction),
 Efficiency refers to the use of a given set of inputs to maximise outputs (such as
minimisation of industrial wastage, use of solar-powered equipment to reduce
utility/fuel costs, etc
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Chapter 4: Other assurance engagements and quality standards

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Students should include the following in their answers:
• A description of the database – its objective, the scope and the features;
• What are the information provided in the database;
• Who are the assurance providers and what is the major methodology used?
Again this is a question suitable to be answered by students who have special interest in
carrying out more research in the area
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29

Fraud and accountability

Required
(1) Develop a check list for an organisation you are about to evaluate regarding its level
of risk in relation to fraud
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(2) Access the website of the AUASB and discuss its role in promoting accountability for
audit and assurance providers
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 Internal controls risks including failure of systems, reliance on external supplier for
system integrity, lack of internal expertise, lack of internal checking mechanisms
 Staff morale and likely fraudulent activities, employee problems
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 Other investment risks, transaction risks including insider trading
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The
AUASB gives assurance that the profession is actively involved in improving standards
and thus its image in relation to quality
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The role of AUASB in promoting accountability:
· It is the national auditing standards setting body – it gives the assurance of the
standards adhered to by auditors and assurance engagement providers
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· It provides a vehicle in which the auditing firms seek advice and guidance in relation
to auditing practices
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© John Wiley & Sons Australia, Ltd 2011

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