Chapter-1: Introduction

What is Assurance?

An assurance engagement is: 'An engagement in which a practitioner obtains

sufficient appropriate evidence in order to express a conclusion designed to
enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a
subject matter against criteria.

Elements of an assurance engagement

There are five elements of an assurance engagement:

(1) Three party involvement
Practitioner – the reviewer of the subject matter who provides the
assurance.
Intended users – the people using the subject matter to make economic
decisions.
Responsible party – the party responsible for preparing the subject
matter.
(2) Appropriate subject matter
The information subject to examination by the practitioner.
(3) Suitable criteria
The criteria against which the subject matter is evaluated, i.e., standards,
guidance, laws and regulations.
(4) Sufficient appropriate evidence
Sufficient appropriate evidence is needed to provide a basis for the
opinion/conclusion.
(5) Written assurance report in an appropriate form
The output of the assurance engagement expressing a conclusion/opinion
about the subject matter.

Use MNEMONIC “CREST” to remember the elements

Examples of assurance engagements include:

• Audit of financial statements
• Review of financial statements
• Systems reliability reports
 • Verification of social and environmental information
• Review of internal controls
• Value for money audit in public sector organisations.

General principles the assurance provider must follow when performing

such engagements include:
• Comply with ethical requirements.
• Apply professional skepticism and judgment.
• Perform acceptance and continuance procedures to ensure only
• work of acceptable risk is accepted.
• Agree the terms of engagement.
• Comply with quality control requirements (ISQC 1).
• Plan and perform the engagement effectively.
• Obtain sufficient appropriate evidence.
• Consider the effect of subsequent events on the subject matter.
• Form a conclusion expressing either reasonable or limited
• assurance as appropriate.
• Document the evidence to provide a record of the basis for the
• assurance report.

Types of Assurance engagements

Reasonable Assurance Limited Assurance Engagements
Engagements
The practitioner gathers sufficient Gathers sufficient appropriate
appropriate evidence to be able to evidence to be able to draw limited
draw conclusions. Example: Review of
reasonable conclusions. Example: financial statements.
External Audit
High level of assurance but NOT Moderate level of assurance
absolute or 100%
The practitioner gathers sufficient
A high but not absolute level of evidence to be satisfied that the
assurance is provided, but subject matter is plausible; in this
conforms in all material respects case negative assurance is given
this is known as reasonable whereby the practitioner confirms
assurance. that nothing has come to their
attention which indicates that the
subject matter contains material
 misstatements.
Gives a positively worded assurance Gives a negatively worded
opinion assurance conclusion

In our opinion, the financial Nothing has come to our attention

statements give a true and fair view that causes us to believe that the
of (or present fairly, in all material financial statements of Murray
respects) the financial position of Company as of 31 December, 20X4
Murray Company as at December 31, are not prepared, in all material
20X4, and of its financial respects, in accordance with an
performance and its cash flows for applicable financial reporting
the year then ended in accordance framework.
with International Financial
Reporting Standards
More testing (Analytical tests, test of Lesser testing-focus on obvious
controls and substantive testing) errors only (Analytical testing and
Enquiry)
Going concern review carried out
No going concern reviews

The procedures undertaken are not

nearly as comprehensive as those in
an audit, with procedures such as
analytical review and enquiry used
extensively. In addition, the
practitioner does not need to comply
with ISAs as these only relate to
external audits.

The confidence inspired by a reasonable assurance report is designed to be

greater than that inspired by a limited assurance report. Therefore:
• There are more regulations/standards governing a reasonable
assurance
• assignment.
• The procedures carried out in a reasonable assurance assignment will
be
 • more thorough.
• The evidence gathered will need to be of a higher quality.

EXTERNAL AUDIT ENGAGEMENTS

An external audit is an example of a reasonable assurance engagement

Purpose of an external audit engagement

ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with International Standards on Auditing states the
purpose of an external audit engagement is to ‘enhance the degree of
confidence of intended users in the financial statements.’

This is achieved by the auditor expressing an opinion on whether the financial

statements:
• Give a true and fair view (or present fairly in all material respects).
• Are prepared, in all material respects, in accordance with an applicable
financial reporting framework.
• True: factually correct information which conforms with accounting
standards and relevant legislation, and agrees with the underlying
records.
• Fair: clear, impartial and unbiased information which reflects the
commercial substance of the transactions of the entity.

Objectives of the auditor

The objectives of an auditor are to:

1. Obtain reasonable assurance about whether the financial statements

as a whole are free from material misstatement, whether due to fraud or
error.

2. Express an opinion on whether the financial statements are prepared,

in all material respects, in accordance with an applicable financial
reporting framework.
 3. Report on the financial statements, and communicate as required by
ISAs, in accordance with the auditor's findings.

Expectation gap

Examples of the expectation gap

• A belief that auditors test all transactions and balances – they test on a
sample basis.
• A belief that auditors are required to detect all fraud – auditors are required
to provide reasonable assurance that the financial statements are free from
material misstatement, which may be caused by fraud.
• A belief that auditors are responsible for preparing the financial statements
– this is the responsibility of management

Limitations of an audit

• Financial statements include subjective estimates and other judgmental

matters.
• Internal controls may be relied on which have their own inherent
limitations.
• Representations from management may have to be relied upon as the only
source of evidence in some areas.
• Evidence is often persuasive not conclusive.
• Do not test all transactions and balances. Auditors test on a sample basis.

Review Engagements

A review engagement is an example of a limited assurance engagement.

A review engagement → Voluntary → Analytical Procedure → Make enquiries

→ Negative assurance report

The objective of a review of financial statements is to enable an auditor to

state whether, on the basis of procedures, which do not provide all the
evidence required in an audit, anything has come to the auditor’s attention
that causes the auditor to believe that the financial statements are not
prepared in accordance with the applicable financial reporting framework.
The procedures will mainly focus on analytical procedures and enquiries of
management. In particular, no tests of controls will be performed.
As only limited assurance is being expressed, the work does not need to be as
in depth as for an audit.

Accountability, Agency & Stewardship

Accountability: Accountability means holding those in charge accountable for

their actions.

In the context of a company, it means holding the directors who manage the
company responsible for explaining their actions to the shareholders who
own the company.

Agency: Agency is where an agent acts on behalf of a principle to perform

tasks for them.

In the context of a company, the directors are the agents of the shareholders
(principles) who entrust them to manage the running of the business.

This separation of ownership and management is often referred to as the

‘Agency Problem’.

Stewardship: Stewardship is when a person is responsible for taking care of

something on behalf of another.

This is known as a ‘Fiduciary Relationship’ and exists between directors and

shareholders as directors are responsible for the management of the
shareholders property