1. Distinction between the Australian auditing standards and
Australian accounting standards with two illustrations
The auditing standards set out or prepared by the ‘Auditing and
Assurance Standards Board’ in Australia have been identified as the established
requirements specified by the body with reference to the responsibilities and
roles to be performed by an auditor and in relation to the contents of the
report presented by the auditor (www.auasb.gov.au, 2017). The
responsibilities to be performed by an auditor while undertaking the work of
audit of the financial reports and the financial statements have been specified
through the auditing standards put forward by the ‘Auditing and Assurance
Standards Board’. The standards for auditing in Australia have been placed
under Section 336 of the ‘Corporations Act, 2001’.
On the other hand, the ‘Australian accounting standards’ are put
forward by the ‘Australian Accounting Standards Board’. The accounting
standards developed by the Board are identified as financial reporting
standards which is applicable on both private and public sector entities
functioning in the country. The Australian accounting standards have been
prepared for organizations that are required to make financial disclosure and
reporting under the Corporation Act, 2001, government entities and for other
profit making and non-profit making private and public entities. Further, the
accounting standards are segregated into two different tiers in the form of :
Tier I and Tier II. Tier I consists of basic accounting standards whereas tier
II consists of accounting standards with respect to reduced or limited
disclosure requirements (www.aasb.gov.au, 2017).
For example, the basic difference between the Australian
accounting standards (AAS) and the auditing standards is that the former one is
governed by International Financial Reporting Standards (IFRS) and is required
to be implemented by the organizations while preparing financial reports and
statements. The Australian auditing standards are required to be adopted by the
auditors in providing auditing and assurance services and preparation of the
audit reports. In addition, Australian accounting standards such as AAS 1
(First time implementation of accounting standards), AAS 101 (Presenting the
financial statements), AAS 107 (cash flow statement) and many more standards
provide guidelines in presentation and presentation of financial statements and
disclosures by the corporate entities in Australia. In contrast, ASA 102
(Compliance of ethical requirements while performing auditing and assurance
services), ASA 220 (Quality Control of the audit conducted on financial reports
and other information), ASA 230 (Audit documentation) and many more provides
guideline on the auditing and assurances services provided by the auditors in
the country.
2. (A) Similarity between the services provided by the
Consumers Union and the public accounting firms with respect to assurance
services
Consumers Union on a global platform has been identified as a nonprofit
seeking organization that provides or offers extended information, guidance,
recommendation and advice with respect to goods and services provided or used
by the consumers within a country or economy (Brown,
2011). One of the key or important function performed by the Consumers
Union is to procure different consumer goods across several brands and
undertake a testing exercise. The results of the test are then published in the
Consumer Reports on a monthly basis. On the other hand, the assurance services
provided by the public accounting firms also undertake an evaluation exercise
of the financial information prepared by the corporate entities and establish
the suitability and sufficiency of the report. The assurance services provided
by the accounting firms are observed to be in close connection or similarity to
the services provided by the consumer unions as both the bodies undertake the
scope of establishing a relationship among three parties in the form of
preparers of the reports or the original manufacturers, the independent audit
practitioners or the quality testing authorities in consumer union and ultimate
stakeholders (Christopher, Sarens & Leung, 2009).
Therefore, it is observed that the services offered or provided by
the Consumers Forum is quite similar to the assurance related services provided
by the public accounting firms as both the services are designed or aimed at
improving the decision making power of the individuals and the management. In
addition both the services ensure the quality of information provided to the
decision makers is enhanced or improved.
(B) Comparison between the causes of information risk faced
by the users of the financial statements and the purchaser of a motor vehicle
Through this section a comparison of information risk faced by the
purchaser of a motor vehicle and the users or people accessing the financial
statements is expected to be the same. Since both the parties namely, the
purchaser of motor vehicle and the user of financial information are concerned
with the reliability and the transparency of the information provided to the
individuals therefore the level of information risk faced by the two parties is
considered to be the same (Deegan, 2012). In case of the users
of the financial statements such as the auditors and the stakeholders, they are
more concerned about the reliability of the information presented in the
financial reports since it will directly impact the assurance and auditing
services of the auditor. On the other hand, unreliable information in the
financial statements is expected to create inappropriate investment decisions
among the stakeholders and shareholders.
In comparison to this, the purchaser of motor vehicle is
confronted with the risk of unreliable information in relation to manufacturer
or the dealer. Due to uncertainty and unreliable information the user of the
motor vehicle may have to face certain undesirable consequences in the future.
An analysis of four different causes of information risk faced by the two
parties is presented hereafter:
- Inaccessibility of Information: The users or the people
accessing the financial reports are often faced with the risk of
information being not available in the reports resulting in confusion for
decision making (Leung et al. 2009). Similarly, the purchaser of
a motor vehicle is faced with information risk in the form of
non-availability of dealer information or product related information.
Further, the individual is expected to incur considerable amount of costs
in accessing such required information.
- Motive of the provider is not
known:
In both the scenarios with respect to information risk the motive of the
report presenter or the manufacturer is not known or clear. Chances of
biasness and fraud may exist.
- Huge amount of data
availability: Information risk is also faced in a scenario where
huge amount of data is available but the user of the financial statement
or the purchaser of the motor vehicle is unable to comprehend the required
or suitable information.
- Complex nature of the
transaction: Transactions in relation to users of financial
statements are in the form of audit and investment decisions (Rahman,
2013).
Whereas transaction in relation to the purchaser of motor vehicle is to
acquire the product through monetary exchange. Both the transactions are
complex in nature and involves increased amount of information risk.
(C) Comparison of the ways by which information risk can be
reduced by the users of financial statements as well as by the purchaser of the
motor vehicle
Through the following section, the different ways by which both
the parties mentioned above can reduce the level of information risk is
presented henceforth:
- Personal verification of
information: In this case the users of the financial information such
as the auditors can undertake a physical verification exercise of the
information provided by the company (www.sasb.org, 2017). Further, the stakeholders or the shareholders
can assess the financial information on the basis of compliance to
accounting and auditing standards. On the other hand, the purchaser of
motor vehicle can reduce the chances of information risk by accessing
information database with respect to the motor vehicle.
- Conveying the risk of
information to the management: With respect to this measure,
the user of the financial statement is expected to convey the risk
associated with the information to the management of the particular entity
whose financial reports are being accessed. In addition, the user of the
automobile or motor vehicle is expected to inform the management of the
motor vehicle company about the information risk faced by the individual
and it is the responsibility of the company to reduce the information risk
(Xu et al. 2017).
- Examination of the information
through implementation of standards and consumer reports: Through this measure the two
parties namely, the users of the financial information and the purchaser
of the motor vehicle is expected to refer to the standards and reports
provided bodies established to cater the issues related to information
risk. The auditors are required to ensure that the financial statements
are prepared in accordance to the accounting standards and auditing
standards. On the other hand the purchaser of motor vehicle is expected to
reduce information risk by utilising the facilities and reports provided
by the Consumer Union.
3. (A) Importance of independence for the auditors
Through the process of implementation of internal audit controls
companies undertake the activity of detecting the irregularities present in the
financial reporting system of the entity which further helps in providing
protection towards fraud and compliance management. Thus, the role of an
auditor is considered to be of immense importance for a company as it helps in
maintaining transparency of the business to the shareholders as well as the
stakeholders (Xu et al. 2017). It is important for
the auditor to be independent for the client body in order to ensure that the
opinion presented by the auditor on the financial performance of the entity is
not biased or influenced by the client entity. Further, the need for
independence of the auditors is felt in the case where users of the financial
statements are heavily dependent on the report provided by the auditor as it is
time consuming and hectic to comprehend the entire annual report of the
company.
4. Identification of client entity and its environment along
with illustrations
Through the process of identification of the client company and
the working environment prevailing within the entity the auditor undertakes the
initiative of identifying and assessing the internal control systems and the
risks associated with the entity. Thus, through this process the auditor is
able to design procedures that help in risk assessment and minimization (Brown,
2011). For examples, test of controls is implemented by the auditors
in order to assess the performance of the internal control systems.
5. Explanation on Preliminary Analytical Procedure
Through the ‘preliminary analytical procedures’ an assistance is
provided to the auditor in order to understand the business processes of the
client and implement appropriate plan with reference to the audit procedures.
In this method evaluation of both non financial information and financial
information is undertaken. The main motive behind preliminary audit is to gain
appropriate understanding of the business of client and identification of the
errors in the financial statements.
6. Concept of Materiality and its importance
The concept of ‘materiality’ has been identified as one of the
governing principles in accounting. Through the materiality principle it is
stated that the trivial or insignificant matters of accounting are to be disregarded
whereas the important or significant matters in relation to accounting
transactions are to be disclosed in the financial statements or report (Christopher,
Sarens & Leung, 2009). Thus, it observed that the material items are
to be considered for disclosure. Moreover, the materiality concept of
accounting is considered to be important as it creates an impact on the
economic decision making process of the users of the financial statements.
Thus, it can be concluded that errors which respect to the materiality concept
often misleads the decision makers.
7. Distinction between Inherent and Control Risk
In this section, differences between inherent risk and control
risk have been explained. The term ‘inherent risk’ is associated with specific
characteristics of a particular business or industry of the given client.
Further, it is observed that inherent risk is present within the structure or
framework of the company. For instance, in the case of banking and financial
institutions the inherent risk is identified to be the chances of cash robbery
as huge volumes of cash is handled by the industry on daily basis (Brown,
2011). On the other hand, ‘control risk’ refers to the risk associated
with a company due to the establishment of the internal controls within the
entity. Due to the existence of certain amount of flaws in the internal control
system the entity is threatened by the control risks. Thus, entities are
required to establish effective control system that will lower the level of
control risk faced by the company.
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