1 Flashcards
What is an assurance engagement?
An assurance engagement is when a professional gathers enough reliable evidence to give a judgment or opinion, helping people trust the result of an evaluation or measurement of something based on certain rules or standards.
What are the five main elements of an assurance engagement?
Three-party involvement
Appropriate subject matter
Suitable criteria
Sufficient appropriate evidence
Written assurance report in an appropriate form
Who are the parties involved in an assurance engagement?
practitioner (the reviewer of the subject matter
who provides the assurance)
AUDITOR
intended users (of the information)
SHAREHOLDER
responsible party
(those responsible for preparing
the subject matter)
Directors
DIRECTORS
What is the “appropriate subject matter” in an assurance engagement?
The information subject to examination by the practitioner, such as financial statements.
What are “suitable criteria” in an assurance engagement?
The standards against which the subject matter is evaluated, such as a financial reporting framework.
What is meant by “sufficient appropriate evidence”?
“Sufficient appropriate evidence” means that the auditor or professional gathers enough valid and reliable information through testing and analysis (like checking financial records, conducting interviews, or reviewing documents) to form a solid, trustworthy opinion or conclusion about the subject being examined.
For example, when auditing financial statements, the auditor looks at documents, transactions, and data to make sure everything is correct and in line with accounting rules. If the evidence is enough and reliable, it supports the auditor’s final decision.
What is the “written assurance report”?
“Written assurance report” is the final result of the engagement, like an official report written by an auditor. It explains what they found, how they evaluated it, and provides their conclusion or opinion, such as whether the financial statements are accurate and trustworthy.
For example, after reviewing financial records, the auditor might issue a written report that says, “Based on our review, the financial statements give a true and fair view of the company’s financial position.”
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.
What is an assurance engagement
What is a “limited assurance engagement”
In a limited assurance engagement, the practitioner:
Gathers sufficient appropriate evidence to draw limited conclusions.
Concludes that the subject matter is plausible based on suitable criteria.
Provides a negatively worded assurance opinion (e.g., “Nothing has come to our attention…”).
Gives a moderate level of
assurance than that of an auditperforms significantly fewer
procedures mainly enquiries and analytics
What is a “reasonable assurance engagement”?
In a reasonable assurance engagement, the practitioner:
Gathers sufficient appropriate evidence to draw reasonable conclusions.
Concludes that the subject matter conforms in all material respects with the identified criteria.
Provides a positively worded assurance opinion (e.g., “In our opinion, the financial statements give a true and fair view…”).
Performs very thorough procedures to
obtain sufficient appropriate evidence-
tests of controls and substantive
procedures
What is the main difference between reasonable and limited assurance engagements?
Reasonable assurance provides a high level of assurance using detailed procedures.
Limited assurance provides a moderate level of assurance using fewer, less detailed procedures.
What kind of wording is used in the opinions for each type of assurance engagement?
Reasonable assurance: Positively worded (e.g., “In our opinion…”).
Limited assurance: Negatively worded (e.g., “Nothing has come to our attention…”).
What is the purpose of an external audit engagement?
To enhance the degree of confidence of intended users in financial statements by having an auditor express an opinion on the financial statements.
What are the two key aspects of the auditor’s opinion in an external audit?
- The financial statements give a true and fair view (or present fairly in all material respects).
- The financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
What international standard guides external audit engagements?
International Auditing Standards (IAS) 200.
What does “True” mean in the context of financial statements?
TRUE: factually correct information which conforms with accounting standards and
relevant legislation, and agrees with the underlying records
What does “Fair” mean in the context of financial statements?
FAIR: clear, impartial and unbiased information which reflects the commercial
substance of the transactions of the entity.
What is one key objective of an auditor under ISA 200, 11?
o obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
What is the auditor’s responsibility regarding their opinion on financial statements?
To express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
What is the auditor’s role in reporting?
To report on the financial statements and communicate, as required by International Standards on Auditing (ISAs), in accordance with the auditor’s findings.
What does “reasonable assurance” mean in the auditor’s objectives?
It refers to a high level of confidence that the financial statements are free from significant misstatements, though not an absolute guarantee.
Why is the need for external audits justified?
Remoteness of information: Users may not have direct access to the organization’s data.
Biases and motives of the provider: Management may present information in their favor.
Voluminous data: Large amounts of data increase the risk of errors or misstatements.
Complex exchange transactions: Transactions can be complicated and require expertise to evaluate properly.
What are the key benefits of an external audit?
- Higher quality information ensures reliability.
- Independent scrutiny and verification may help management make better decisions.
- Reduces the risk of management bias, fraud, and errors.
- Enhances the credibility of financial statements for stakeholders.
- Allows for the early discovery of deficiencies in the internal control system.
What is meant by the “expectation gap” in auditing?
The difference between:
What society expects from auditors.
What auditors are reasonably required to do under their responsibilities.
What are some examples of expectation gaps in auditing?
Believing auditors test all transactions and balances.
Expecting auditors to detect all fraud.
Assuming auditors are responsible for preparing financial statements (instead of management).
Who is responsible for preparing financial statements?
Management, not the auditors. Auditors review the statements but do not prepare them.
What are the key elements of the expectation gap?
Duties society expects auditors to perform.
Reasonable expectations of auditors’ responsibilities.
How well auditors fulfill these expectations.
Why do auditors provide only reasonable assurance and not absolute assurance?
Because audits have limitations, including reliance on judgment, sampling, and evidence that may be persuasive rather than conclusive.
What are some limitations of an audit related to judgmental matters?
Auditors deal with subjective estimates and other judgmental areas like provisions or valuation of assets, which involve uncertainty.
What are two key areas where auditors rely on others during an audit?
Deficient internal controls: Auditors may rely on a client’s control systems, which might have weaknesses.
Representations from management: Auditors depend on management’s statements and explanations, which may not always be accurate.
Why don’t auditors test all transactions and balances?
Audits are performed using sampling techniques to examine only a selection of transactions, making audits efficient but not exhaustive.
list some limitations of audit
Subjective estimates and other judgmental matters.
Relying on deficient internal controls
Relying on representations from management
Persuasive Evidence
Do not test all transactions and balances
How does the nature of financial reporting limit an audit?
Financial statement amounts involve management judgment (e.g., estimates, valuations), which can lead to bias and affect reliability.
Why does the nature of audit procedures create limitations?
Auditors may rely on incomplete or falsified information provided by the client, and cannot investigate every transaction due to time constraints.
Why is timeliness of financial reporting a limitation for audits?
The relevance of financial information decreases over time, and auditors face deadlines, preventing them from investigating every issue exhaustively.
What is a review engagement?
A review engagement is a type of limited assurance engagement where an auditor reviews financial statements and provides a conclusion about whether they are prepared in accordance with the applicable financial reporting framework.
Why might a company choose a review of their financial statements instead of a full audit?
Companies that are not legally required to audit their financial statements may choose a review engagement to obtain a reasonable level of assurance about the statements without the extensive procedures of an audit.
What is accountability in the context of financial management?
Accountability means people in positions of power (e.g., management) can be held responsible for their actions and the management of resources.
What is agency in business terms?
Agency occurs when one party, called the principal, employs another party, the agent, to perform a task or duty on their behalf.
What is the role of a steward?
stewardship is the
responsibility to
take good care
of resources.
A steward is a
person entrusted
with
management of
another person’s
property.
Who are the primary stakeholder groups in financial reporting?
Shareholders
Employees
Those charged with governance
Customers
Suppliers and lenders
The government
What are the roles of shareholders in relation to financial statements?
Shareholders use financial statements to decide whether to alter their shareholdings in the company based on the company’s financial performance and stability.
Why do employees care about financial statements?
Employees evaluate the reasonableness of their pay and benefits, as well as the financial health of the company to ensure job security and fairness.
What do customers look for in financial statements?
Customers judge the company’s financial strength (liquidity) to ensure it is able to maintain or continue future business and trading relationships.
What do suppliers and lenders look for in a company’s financial statements?
They assess the financial stability of the company before extending credit or offering supplies to ensure the company can meet its payment obligations.
What does the government evaluate from financial statements?
The government reviews financial statements to determine whether the company has paid the correct amount of taxes and is complying with laws and regulations.
