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Chapter 1 Assurance Engagements Handout

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Chapter 1 Assurance Engagements Handout

Uploaded by

m2rzxv2pnb
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 1: Assurance Engagements

Why do we need Assurance?

An audit of a company's accounts is needed because in companies, the owners of the business are often not the
same persons as the individuals who manage and control that business.

• The shareholders own the company.


• The company is managed and controlled by its directors.

The directors have a stewardship role. They look after the assets of the company and manage them on behalf of the
shareholders. In small companies the shareholders may be the same people as the directors. However, in most large
companies, the two groups are different.

Assurance Engagement

The practitioner examines the subject matter made available by the responsible party, matches it to the suitable
criteria using evidence and reports to the intended users.

Elements of an Assurance Engagement

1. An assurance engagement will require a three-party relationship comprising of:

a) The intended user who is the person who requires the assurance report.
b) The responsible party which is the management of the organization responsible for preparing the subject
matter to be reviewed.
c) The practitioner party (an auditor) reviews the subject matter and provide the assurance

2. A second element which is required for an assurance engagement is suitable subject matter. The subject matter is
the data which the responsible party has prepared, and which requires verification.

3. This subject matter is then evaluated or assessed against suitable criteria for it to be assessed and an opinion
provided.

4. Fourth, the practitioner must ensure that they have gathered sufficient appropriate evidence to give the required
level of assurance.

5. At Last, an assurance report provides the opinion which is given by the practitioner to the intended user (i.e.,
shareholders)

Types of assurance assignments

Reasonable assurance Limited assurance


An Assurance engagement in which the practitioner An assurance engagement in which the practitioner
reduces engagement risk to an acceptably low level in reduces engagement risk to a level that is acceptable in
the circumstances of the engagement as the basis for the circumstances of the engagement but where that
the practitioner’s conclusion. risk is greater than for a reasonable assurance
engagement.
Example: External Audit Example: Review of financial statements
High level of assurance but NOT absolute or Moderate level of assurance
100%. A high but not absolute level of assurance is The practitioner gathers sufficient evidence to be
provided, this is known as reasonable assurance. satisfied that the subject matter is logical; in this case
negative assurance is given whereby the practitioner
confirms that nothing has come to their attention
which indicates that the subject matter contains
material misstatements.

pg. 1
Sufficient appropriate evidence is obtained as part of a Lesser testing-focus on obvious errors only. The testing
systematic engagement process via extensive testing here is comprised of:
that is comprised of: ➢ Analytical Procedures
➢ Analytical Procedures ➢ Enquiries from management
➢ Test of Controls
➢ Substantive Procedures

Positive conclusion- Wording: Negative conclusion-Wording:


"In our opinion, the financial statements give (or do not "Nothing has come to our attention to suggest errors or
give) a true and fair view of the state of the company’s problems exist"
affairs." The assurance is therefore given on the absence of
The phrases used to express the auditor’s opinion is any indication to the contrary.
‘give a true and fair view’ or ‘Present fairly, in all
material respects’ which are equivalent terms.

Assignments where no assurance is given

a. Agreed-upon procedures: A report on factual findings is given but no assurance expressed. Users must judge for
themselves and drawn their own conclusions.
b. Compilation engagement: Users of the compiled information gain benefit from the accountant’s involvement but
no assurance is expressed. It is used to collect, classify, and summarize financial information. It means to present
data in a manageable and understandable form.

General principles of external audit engagements

According to the International Standards on Auditing, the general principles of an audit are:

➢ Compliance with Code of Ethics (IFAC’s)


➢ Performance of an audit in accordance with ISAs
➢ Audit with professional skepticism
➢ Professional judgment
➢ Sufficient appropriate audit evidence

Inherent Limitations of audit/ Reasons why absolute assurance cannot be given

1. Sampling – it is not practical for an auditor to test 100% of transactions and so they must apply sampling
methodologies in selecting balances/transactions to test. Therefore, there could be an error in an item not
selected for testing by the auditor.
2. Subjectivity – financial statements include judgmental and subjective areas and therefore the auditor is required
to use their judgment in assessing whether the financial statements are true and fair.
3. Inherent limitations of internal control systems – an internal control system is operated by people and hence is
liable to human error. In addition, there is the possibility of controls override by management and of collusion and
fraud. It is impossible to remove all of these inherent limitations and as the auditor relies on the internal control
systems, this can reduce the usefulness of the audit.
4. Evidence is persuasive not conclusive – the opinion is based on audit evidence gathered; however, while this
evidence can indicate possible issues affecting the audit opinion, evidence involves estimates and judgments and
hence does not give a definite conclusion.
5. Even if everything reported on was examined and found to be satisfactory, there may be other items which should
have been included– the completeness problem.
6. Auditors plan their work to detect material errors and frauds only – so small frauds (or large frauds split into many
small amounts) may go unnoticed.

pg. 2

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