TOPIC 1

THE CONCEPT OF AUDIT AND OTHER ASSURANCE ENGAGEMENTS

The objective of an audit: of financial statements is to enable the auditor to

express an opinion on whether the financial statements are prepared, in all

material respects, in accordance with an applicable financial reporting

framework. (ISA 200)

The objectives of an auditor: are to obtain reasonable assurance about

whether the financial statements as a whole are free from material (significant)

misstatement, whether due to fraud or error, in order to enable them to express

an opinion on whether the financial statements are prepared, in all material

respects, in accordance with an applicable financial reporting framework

ACCOUNTABILITY, STEWARDSHIP AND AGENCY

Auditor

Adds
Measure credibility
performanc Prepar
e Financial e
statements

Appoin
Shareholde t Manageme
rs nt

Ow Manag
n Compan e
y

LIMITATIONS OF THE AUDIT AND MATERIALITY

The assurance given by auditors is limited by the fact that auditors use

judgement in deciding what audit procedures to use and what conclusions

 to draw, and also by the limitations of every audit.

i. Auditing is objective. Judgement has to be made

ii. Audit report has inherent limitations

iii. Audit report can be used along time after the end of the reporting

period

iv. Audit evidence sometimes indicates what is possible nor certain

v. Limitations in accounting and control systems

vi. Not all items in the financial statements are tested

Elements of an assurance engagement

i. Three party relationship:

The three parties are the intended user, the responsible party (management)

and the practitioner (auditor).

ii. Subject matter

The data to be evaluated that has been prepared by the responsible

party. It can take many forms, including financial performance (eg

historical financial information), non-financial performance (eg key

performance indicators), processes (eg internal controls) and

behaviour (eg compliance with laws and regulations).

iii. Criteria

The subject matter is evaluated or measured against criteria in order

 to reach an opinion.

iv. Evidence

Sufficient (quantity) appropriate (quality) evidence needs to be

gathered to support the required level of assurance.

v. Report

A written report containing the practitioner’s opinion is issued to the

intended user, in the form appropriate to a reasonable assurance

engagement or a limited assurance engagement.

Examples of assurance engagements

i. A review of the effectiveness of an entity’s internal control

ii. A review of cash flow forecasts which will be

presented to a bank to obtain funding

iii. A review of threats which could affect the

business’s ability to continue as a going concern

iv. Statutory audit (financial statement audit) – external audit

v. A review of an entity’s financial results for the first half of the year

(interim audit)

vi. A review of an entity’s compliance with:

a. Corporate governance

b. Environmental issues

c. Contracts
APPROACH TO CONDUCTING ASSURANCE ENGAGEMENTS

Assurance engagements should be performed according to the following

process:

i. Agree scope of work to be performed with the client

ii. Formalize the terms of the engagement in a contract (engagement

letter)

iii. Plan the work required based on the risk and level of assurance

required

iv. Obtain sufficient appropriate evidence on which to base the

conclusion

v. Perform overall review and form opinion

vi. Issue assurance report to the client as per pre-agreed format

BENEFITS OF ASSURANCE REPORT

An assurance report provides the following benefits to the users of

information:

• Provides an independent opinion from an external source that

enhances the credibility of the information.

• Reduces management bias.

• Relevance of information is improved because of the expertise and

knowledge of the assurance firm.

 • Any non-standard or modified opinion (Negative report) draws

attention to risk.

LEVELS OF ASSURANCE

i. Absolute assurance (100%)

ii. Reasonable Assurance Engagements

A reasonable assurance engagement provides a high, but not absolute level of

assurance.

In order to give reasonable assurance, a significant amount of testing and

evaluation is required to support the practitioner’s conclusion.

The external audit is therefore a key example of a reasonable assurance

engagement.

The conclusion formed in any report relating to a reasonable assurance

engagement would usually be expressed in a positive form, for

example:

‘In our opinion internal control is effective, in all material respects, based on

XYZ criteria.’

iii. Limited Assurance Engagements

Limited assurance is a lower level of assurance. The nature, timing and

extent of the procedures carried out by the practitioner in a limited

assurance engagement would be limited compared with what is required in

a reasonable assurance engagement. Nevertheless, the procedures

performed should be planned to obtain a level of assurance which is

meaningful, in the practitioner’s professional judgement.

For a limited assurance engagement, the conclusion conveys whether,

based on the procedures performed and evidence obtained, a matter(s) has

come to the practitioner’s attention to cause the practitioner to believe the

subject matter information is materially misstated.

This would usually be expressed in a negative form of words, for example:

‘Based on our work described in this report, nothing has come to our

attention that causes us to believe that internal control is not effective, in all

material respects, based on XYZ criteria.’

Definition of terms

True: Information is factual and conforms with reality. In addition, the

information conforms with required standards and law. The financial

statements have been correctly extracted from the books and records.

Fair: Information is free from discrimination and bias and in compliance

with expected standards and rules. The accounts should reflect the

commercial substance of the company’s underlying transactions.

Present fairly: The financial statements show a true and fair view. They are

factual and free from bias.