Auditing I

Welcome to ACT B416 Auditing I.

ACT B416 is a five-credit, one-term, higher-level course in the Bachelor of Business Administration (BBA) degree programme, BBA in Accounting, and the BBA (Hons) in Accounting.

Advisory prerequisites include ACT B331 and ACT B332 Company Accounting I & II and LAW B333 Company Law I and of course ACT B416 Auditing I. The excluded combinations of this course are ACT B406, ACT B406C, ACT B406F, ACT B417F, ACT B431 and ACT B431X.

ACT B416 is the first of the two courses offered to students on the subject of auditing. In ACT B416, students will learn about basic auditing concepts and the overall process of an audit. While in ACT B417, the second of the two courses, many real-life and practical examples are included to help students understand and apply the auditing concepts learnt earlier.

This course will be delivered using a custom textbook, supplemented by a Study Guide, online readings and multimedia components, and online tutorial and surgery sessions.

Course aims

The overall aims of ACT B416 are to introduce the concept of financial statement auditing, its function and importance in the business environment and the role and duties of an auditor. This course will also explain the key auditing principles and concepts and refer to the auditing and assurance standards as set by the Hong Kong Institute of Certified Public Accountants.

Course learning outcomes

Upon the completion of this course, you should be able to:

• analyse the role, responsibilities and ethical issues faced by auditors;
• apply the auditing concepts relating to audit approach, audit planning, audit risk assessment and audit evidence in accordance with the Hong Kong Standards on Auditing;
• evaluate a client's internal control system; and
• select an appropriate audit report in a given situation.

Course overview

The following information provides a general overview of the course structure and contents. The table suggests the amount of time you should allow for completing units and provides a broad schedule for you to plan your work. This estimation includes time for reading the units and custom textbook, completing activities, self-tests and assignments, attending online tutorials and preparing for your final examination.

Unit 1 describes the nature of auditing and the main duties of auditors, and explains the ethical standards governing the accountancy profession in Hong Kong. Unit 2 describes the audit process and the adequate steps regarding planning, and explains types of risks faced by auditors. Unit 3 describes the internal control structure, its evaluation and its limitations. Unit 4 explains audit evidence and the relevant audit procedures, as well as the need for audit documentation with different types of working papers. Finally, Unit 5 discusses the purpose and types of auditor's reports in relation to the Companies Ordinance and the auditing standards and guidelines as set out by the HKICPA.

In this custom textbook approach, a range of learning modules are selected by the course team from a leading international textbook on auditing and customised into a volume specifically designed for ACT B416 students. By incorporating the latest editions of book chapters, cases, exercises and self-tests, the custom textbook will provide you with a comprehensive description, explanation and discussion of the relevant concepts, principles and tools in analysing business information, performing audit decision making and evidence accumulation in today's complex, global auditing environment.

To keep you informed of the latest development of auditing in Hong Kong, the learning materials will be paired with the relevant auditing and assurance standards as set by the Hong Kong Institute of Certified Public Accountants (available online).

Your study pathway through this custom textbook will be set out in an HKMU-produced Study Guide. In addition to the guided activities and self-tests already provided in the custom textbook, the Study Guide will include supplementary materials and additional self- assessment opportunities. You will also have access to multimedia materials on the HKMU's Online Learning Environment (OLE) and regular online tutorials as learning support.

The custom textbook

You will be provided with the custom textbook along with a set of Study Guides. The Study Guide will indicate at which point you should read each chapter of the custom textbook. You will also need to refer back to the custom textbook for selected readings when you study ACT B417 Auditing II. So, please retain your custom textbook upon completion of this course.

The title of the custom textbook is ACT B416 Auditing I. The chapters are selected from the following textbook:

Elder, R. J., Beasley, M. S., Hogan, C. E. & Arens A. A. (2020). Auditing and assurance services (17th ed.). Pearson.

To supplement the custom textbook coverage, topics relating to professional ethics, audit documentation as well as communication of audit findings will be addressed by selected readings from the following:

Lau, P. T. Y., & Lam, N. C. Y. (2021). Auditing and assurance in Hong Kong (6th ed.). Pilot Publishing.

These readings will be made available online via the OLE.

Introductory video

To start off, you should watch the introductory video for the course in the ePub version of this Course Guide or on the OLE. Then turn to the Study Guide for further guidance through the course.

The Study Guide

The Study Guide serves two functions. First, it provides you with information on the aims, learning outcomes, assessment strategies and means of support for this course. Second, it sets out your study pathway through the custom textbook and other course learning resources.

You will therefore need to keep it by your side as you work through the course. The Study Guide is divided into the following five units:

1. An overview of the audit function and professional ethics
2. Risk assessment and risk response
3. Internal control systems and evaluation
4. Audit evidence, audit procedures and documentation
5. Communication of audit findings

E-Library E-Reserve readings

In the Study Guide, you may be instructed to read articles in the E-Library E-Reserve. To read these items, go to the university E-Library homepage and click on 'E-Reserve'. Log in, click 'Accept/Agree' on the Copyright Restrictions page, fill in the 'Course Code' box, and click 'Search'. Alternatively, you may access the readings via a hyperlink in the online course materials.

The Online Learning Environment (OLE)

This course is supported by HKMU's Online Learning Environment (OLE). You will find course materials and the latest course information on the OLE. You can also communicate with your tutor, the Course Coordinator and classmates through the OLE discussion board.

Learning support

You will be supported throughout the course by regular live online tutorials and a live online surgery.

You will be assigned a tutor for this course. Before the course begins, you will be advised by the HKMU Registry of your tutor's name, office address, email address and phone number. Your tutor will:

• conduct the tutorials and surgery for your group
• mark your assignments
• be available by phone at specified times to help you or reply to your questions via email. (You will be advised of the arrangement separately by your tutor.)

Your tutor is your first point of contact with HKMU. Please speak with your tutor first about any problem you might have or advice you may need. Your tutor will advise you if you need to contact the Course Coordinator. It is not the tutor's role to give lectures on the course material. Your tutor is a helper, or facilitator, who can provide you with considerable assistance when you run into difficulties. He or she is also a leader who can arrange opportunities for you to put into practice some of the course concepts. HKMU urges you to make use of this assistance.

Assessment

This course is designed to enable you to move easily from the stated objectives, through the study units, to the assignments and examination. You are expected to undertake regular self- assessment activities while working your way through the study units. When completing the assignments, you should apply concepts and theories acquired during the course.

Formative assessment includes various self-assessment activities (e.g. self-tests, activities, and online discussions) that you will undertake while working your way through the study units, textbook and readings. These activities allow you to develop and monitor your own progress.

Summative assessment consists of two assignments and one final examination. The assignments serve as continuous assessment within the study period and account for 40% of the total course mark. The final examination accounts for 60% of the total course mark.

The summative assessment items are outlined in the following table.

Assignments

There are two assignments for the course. The two assignments are weighted equally and account for a total of 40% of the overall course assessment.

• Assignment 1, worth 20% of the total marks for the course, evaluates materials in Units 1 to 2.
• Assignment 2, worth 20% of the total marks for the course, evaluates materials in Units 3 to 4.

How to submit assignments

You must use word processing software (such as Microsoft Word) to prepare the assignments, and submit the assignments via the Online Learning Environment (OLE). All assignments must be uploaded to the OLE by the due date. Failure to upload an assignment in the required format to the OLE may result in the score of the assignment being adjusted to zero.

Assignment submission extension policy

The assignment policy of the University as stated in the Student Handbook should be observed. You are required to submit the assignments for this course in accordance with the dates communicated by your Course Coordinator. You may apply for a submission extension on the grounds of illness, accident, disability, bereavement or other compassionate circumstances.

Applications for extensions must be submitted online via the OLE. Please note the following:

• Supporting documents must be submitted to justify applications for extensions of over seven days.
• Applications for extensions should normally be lodged before or on the due date.
• Applications are considered by:
  • your tutor for extensions of up to seven days;
  • the Course Coordinator for extensions of 8 to 21 days; and
  • the Dean for extensions of over 21 days.

After an assignment is submitted via the OLE, it is your responsibility to check that the assignment has been successfully submitted. Extension applications due to any problem with uploading will not be accepted. The University cannot accept any responsibility for assignments that are not received by your tutor due to any problem with submission via the OLE. As a precaution, you are advised to keep a copy of each assignment you submit.

According to the University's policy, no extension of the due date will be allowed for the final assignment. This policy will be strictly enforced. Any late submission of the final assignment will result in the score of the assignment being adjusted to zero.

Examination

The final examination for ACT B416 is worth 60% of the total course mark. The examination will be of three hours' duration. The examination will consist of questions that reflect the types of practice exercises and assignments students have previously experienced. The purpose of the examination is to assess your understanding of the materials covered in the entire course (Units 1–5).

Remember that your final result in this course depends on your performance in both the continuous assessment (assignments) and the examination. In order to pass the course, you need to pass both the continuous assessment and the examination. For more information on the University's policies on assignments and examination, please refer to the HKMU Student Handbook.

Case studies are a useful and increasingly popular form of learning and assessment in the Lee Shau Kee School of Business and Administration. In this section we will look at why case studies are used and then suggest some learning strategies that you can use to approach case studies. We will also briefly discuss some problems that you may encounter as you learn from case studies.

What is a case study approach to learning

One main purpose of a case study is to explore an issue or a number of issues in relation to an organisation. The intention is to get you to carefully diagnose an organisation; to focus on key problems, and to suggest how these might be resolved. Often the case is a real-life account of an organisation which you are required to analyse in order to focus on a problem. Usually, the information that is provided is incomplete and you are often expected to observe developments in the organisation over a period of time. The case study approach is an excellent opportunity to actively apply material that you have read and conceptual knowledge to the reality of an organisation.

At HKMU, case studies may be used as part of assignments, exams, study units, or day school exercises. You normally are given some information about a company (this could be both text and graphical information, such as figures and tables). You are then asked to think about some problems related to the company and to use concepts and apply theories that you have learnt in your course to propose possible solutions for the company.

Let's have a look at two kinds of case study questions that you might be asked to work through in your courses. The first example is quite structured, while the second is much more open-ended.

Two examples of case study questions

1. Read the case study entitled 'ABC Consultants' and consider the following issues:
   • Using your understanding of the resource-based model, what measures could be taken to improve ABC's returns?
   • Drawing on your broad understanding of the consultancy industry, assess ABC's relative competitiveness and its profit potential.
   • To what extent do internal factors account for ABC's financial weaknesses?
   • Based on your assessment of ABC's financial weaknesses, formulate a new strategic intent and develop a mission statement for ABC.
2. Read the case study entitled 'XYZ Industries'.
   • Identify the key problems that are currently faced by XYZ's management.
   • Propose viable solutions to these problems.

Why case studies

As you can see from the above examples, a case study approach to learning requires a great deal of thinking and often will not easily yield a quick 'wrong' or 'right' answer. However, case studies are also good preparation for dealing with real-life business problems. Cases may be short and relatively simple, or longer and complex. The purpose is the same for both types: to give you an opportunity to develop your skills in analysing the strengths and weaknesses of the organisation under examination, to consider the processes at work within the organisation, and to make decisions about future actions.

Case studies are not meant to replace textbooks, but rather to ask you to draw connections between theories and practice and to apply abstract ideas, concepts, and principles to specific concrete situations. Consequently, case analysis develops a number of skills that are crucial in business. In particular, they help you to:

• analyse complex, unstructured, sometimes ambiguous situations;
• identify critical issues and problems;
• question your own and others' assumptions;
• improve your problem-solving skills;
• develop your ability to find alternatives and make informed decisions;
• make decisions with incomplete information and think strategically;
• self-educate yourself and draw on a broad range of resources and knowledge; and
• present and justify recommendations in writing.

You may find that there are many possible 'right' answers to the questions in a case study. This illustrates that there is often no single best way to responsibly manage and solve real-life business problems.

Some guidelines for analysing case studies

The following strategies should help you to successfully analyse case studies:

1 Read the case and become familiar with the facts

First, skim read the case to obtain a general understanding of the main point(s). Highlight or underline the pertinent points as you read.

Read the case again, and this time note down the critical facts (such as names, time sequences and where events occurred). Try to understand how events have influenced decisions.
Identify the important individuals or stakeholders, and try to assess the importance of the supporting information in the case. How reliable is this supporting information? Are there any gaps in the information given?

Make a note of any questions that you may have as you read through the case.

2 Assess the context of the case

Try to understand the environment of the organisation and the wider context of the case. Ask yourself questions about:

• The state of the organisation: What is the state of this organisation: good, bad or in- between? Usually this involves thinking about interpersonal relationships, and assessing production or financial problems.
• Key players and systems: How do systems and people operate in this organisation? Why do they operate like this? Are the systems undergoing change? How successful are the changes? Is there someone who could sabotage any future strategy? Is there someone who can ensure the success of a future strategy?
• Significant trends: How does this industry operate? What are the main or unique characteristics of the industry? What were they five or ten years ago, and what are they likely to be in the future? What impact are trends likely to have on the organisation under investigation? How does this organisation's performance compare with that of competitors?
• Constraints: Clearly identify all constraints in the case. A constraint may be viewed as anything (usually beyond the control of the organisation) that may prevent an otherwise feasible course of action from becoming a success. What is outside the control of individuals in the case study? For example, it is unlikely that any company or individual in Hong Kong could prevent a foreign government from imposing tariff barriers on imports.

A SWOT analysis is a good way to get a better understanding of the organisation and the context or environment in which it is operating. A SWOT analysis considers the Strengths and Weaknesses of the organisation, and the Opportunities and Threats which the organisation faces in the external environment.

3 Recognize the case's symptoms

Read the case again and as you read, try listing all the symptoms of the case. The symptoms of a case are not the problems, but they may help you to identify the problems. Symptoms are all the things that are undesirable or that are not as expected. For example, falling sales could be a symptom of several problems such as poor market segmentation, poor product quality, or problems in a supply chain. At this stage of your analysis, you should just try to observe all the symptoms, and avoid prematurely identifying problems or suggesting solutions. (Like a doctor during a medical consultation, you would first need to observe and note all the symptoms of your patient before giving a definite diagnosis of the problem.) Then think about how the symptoms may be interrelated. Relationship diagrams, like the one below, may help you to see the relationships between symptoms.

4 Diagnose the case's problems

After getting a good grasp of the symptoms, you're ready to determine key issues that need to be analysed more closely. You are now diagnosing the situation, like a doctor diagnosing a patient's condition. Ask yourself, 'What seems to be the trouble in this organisation?' and make a list of what you now perceive to be the key problem(s). You will probably need to go back to the details of the case and as you do this, you may add to or refine your list of potential problems.

If there are several problems, you will need to order and prioritise them. You might want to number the problems according to your perception of their importance, or make a matrix, like the one below, showing the relationships between various criteria and each problem.

Also try to establish if there are relationships or themes in common among the problems. Perhaps different problems in your list are actually variations of a broader central problem.

Ask yourself what assumptions you have made about the case. Are these assumptions reasonable and supported by facts? Would other people objectively suggest the same problems based on the facts you have? Are you suggesting problems that are not supported by the facts of the case?

After you have considered and prioritised the possible problems and questioned your assumptions relating to these problems, you should write a statement of the problems as you perceive them. Avoid suggesting solutions at this stage.

Once you have a problem statement, you need to find evidence in the case to support your problem diagnosis. Also, try to identify ideas, concepts and theories from your textbook and course units which help to explain what is happening in the case.

5 Formulate criteria for a 'good' solution and identify possible constraints to solutions

Before you propose a solution, you need to consider the characteristics of a 'good' solution. Obviously, your solution should bring benefits such as improved productivity, reduced costs or greater profits. However, it also needs to be viable and be able to accommodate the constraints that you have already identified. For example, you should ask yourself, 'Is the solution legal? Is there a budget for this solution? Does it conflict with the organisation's culture?'

Try to brainstorm alternative solutions. Aim to generate a broad and creative range of options and then try to rate each according to various criteria.

The following matrix demonstrates how this can be done.

Also refer to ideas, concepts and theories from your course materials as you consider and assess each possible solution.

It's often wise to propose a solution that allows for plausible alternatives if it should fail. Managers use the term 'satisfice' when they are considering acceptable alternative solutions — that is, they consider whether a solution is able to satisfy the situation while also making some realistic sacrifices to the existing constraints. Such a solution is a satisficing one rather than a maximising one.

Finally, don't forget to consider the possibility of taking no action. What will actually happen if no action is taken? Are any (or all) of the solutions less viable than taking no action at all?

6 Recommend a viable solution

After you have assessed the merits and pitfalls of each alternative solution, select the best solution for the situation.

Remember that the solution needs to be viable. Can the recommended solution be introduced? Are there the resources and the willingness to implement it? Be realistic about what may work. Explain why it is the best solution within the constraints of the existing context and explain how it can be applied to the organisation. Suggest a time frame for the solution's implementation.

Outline possible strategies for implementing your solution, either partially or completely. You should consider as many feasible courses of action as possible should be considered before choosing the one that seems the most likely to succeed. The more ideas you have, the greater your chance will be of finding a solution that will work well. The complexity of most organisational problems means that it is highly unlikely that one idea alone will correct the situation. Usually a combination of actions is required, and these need to be funded differently, timed carefully and staffed as necessary.

7 Present your solution as a written recommendation

Review your final solutions and then prepare a set of written recommendations. These should clearly outline your proposed solutions in relation to the problems that you have identified. Your recommendations should also include details of why these solutions are the most appropriate given the circumstances and constraints of the case. Finally, you need to clearly state how and when your proposals will be implemented.

Your tutor and your course Assignment File can provide some guidelines on how to present your recommendations.

Some mistakes to avoid as you analyse cases

When you first tackle case studies, you should be careful to guard against the following mistakes:

1. One of the most common mistakes made in case analysis is repeating or simply summarising the facts of the case. Your tutor is already very familiar with the case details, so you do not have to restate them. You are required to use and analyse the facts, not repeat them. Your analysis should contain only enough case material to support your arguments. Therefore, be analytical!
2. You may often be tempted to just deal with symptoms and ignore the causes of the problems. It is very important to analyse the background of the case (and the climate in which the events of the case unfold).
3. Avoid discussing problems in isolation and do not overlook their interrelatedness. If you try to think in terms of 'systems' rather than individual problems, you will be more likely to avoid this pitfall.
4. Students often fail to state the assumptions underlying their analysis. If any important assumptions have been made, have you questioned them and are they reasonable and appropriate? Avoid using and interpreting case material selectively in order to justify a preconceived solution.
5. Practical limitations and constraints may sometimes be overlooked. For example, a recommendation that a whole team be fired is probably unrealistic.
6. A very common mistake is poor integration of the facts in the case with the concepts, principles, and theories in the textbook. Such integration is vital. Ask yourself if relevant theories from your course have been fully and constructively applied.
7. Finally, recommendations are too often not spelt out in detail or are unrealistic. A timetable for implementing them is also often omitted.

Analysing cases poses many challenges and this is one reason the case study method is so rewarding. It is a very active form of learning. It offers you a risk-free opportunity to gain managerial and organisational experience and should greatly increase your confidence to make informed decisions in the real world.

Good luck and we hope you enjoy working through the cases that you encounter!

ACT B416 Auditing I introduces you to the financial statement auditing, its function and importance in the business environment. ACT B416 explains to you the role and duties of an auditor, key principles of auditing and assurance standards as set by the Hong Kong Institute of Certified Public Accountants.

By the end of this course, you should be able to design appropriate audit procedures, evaluate internal control systems, apply the process of audit planning, assess the audit risk and collect audit evidence for different clients in accordance with the Hong Kong Standards on Auditing.

The course is presented through a blend of printed and multimedia materials. As you work through ACT B416, you will need to refer to your Study Guide, your custom textbook, and the OLE, and you will be provided with support through regular online tutorial sessions. The course is assessed through two assignments and a final examination.

We hope you find ACT B416 stimulating and insightful for your professional development.

If you wish to defer your studies of this course until a later date, you should apply for deferment of studies. For the regulations governing deferment of studies, please refer to your Student Handbook. If you have applied for deferment of studies you should continue with your studies of this course and submit the required assignments until formal approval is given by the University.

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