1. Assurance Engagements Flashcards
What are assurance engagements?
An assurance engagement is an engagement in which a practitioner aims to obtain sufficient appropriate evidence
in order to express
a conclusion designed to enhance the degree of confidence of the intended users about the subject matter information.
Why are assurance engagements important?
- Increases reliance on financial statements
- Reduces risk of error
- Enhances credibility of information in document
- Reduces management bias
- Provides a standardised approach to give assurance to economic users of the fs.
Who is the practitioner in the three party relationship in an assurance engagement?
Auditors (Skilled professionals)
What are the differences between a reasonable assurance engagement and a limited assurance engagement?
Reasonable assurance is a high, but not absolute, level of assurance. It does not guarantee that the information is 100% accurate, but rather the practitioner has gained sufficient, appropriate evidence that the information is free from major issues.
In a limited assurance engagement, the level of risk is higher than in a reasonable assurance engagement.
Therefore, less reliance can be placed on the opinion expressed, which is given in the negative form, as engagement risk is not reduced to as low a level as a reasonable assurance engagement due to less rigorous testing/procedures.
What does the subject matter mean in the element of an assurance engagement?
Subject matter is the data which the responsible party has prepared and requires verification.
e.g. financial performance, non-financial data, physical characteristics (such as capacity of a facility), systems and processes, or behaviour (eg corporate governance and human resource practices).
typically auditors do financial statements.
What elements must be demonstrated to be classed as an assurance engagement?
Acronym: CUTER
- Suitable Criteria
- An appropriate underlying subject
- A Three-party relationship (practitioner, responsible party and users);
- Sufficient, appropriate Evidence; and
- An assurance Report.
CUTER
What does “Suitable criteria” mean in the elements of an assurance engagement?
Suitable criteria are the benchmarks used to evaluate or measure the underlying subject matter.
For auditors, the suitable criteria would be the financial reporting framework as an example.
What does “Sufficient appropriate evidence” mean in the elements of an assurance engagement?
The practitioner must ensure that they have gathered sufficient appropriate evidence to give the required level of assurance. The level of assurance may be reasonable or limited.
For auditors, they would need to gather evidence that the financial statements give a true and fair view of the financial performance of the customer’s company.
What does “Assurance report” mean in the elements of an assurance engagement?
An assurance report provides the opinion which is given by the practitioner to the intended user.
In our example, the Auditor would give a written report of his or her findings.
What does “A three-party relationship” mean in the elements of an assurance engagement?
An assurance engagement will require a three-party relationship comprising of:
- The intended user: the person who requires the assurance report.
- The responsible party: the organisation/person responsible for preparing the subject matter to be reviewed.
- The practitioner (for example, the firm): the professional who will review the subject matter and provide assurance.
In our example, the intended user is the bank, the responsible party is the customer and the practitioner is the independent qualified party or the firm that will conduct the engagement.
In terms of procedures, what is the difference between reasonable and limited assurance?
Reasonable: Analytical review, Enquiry, Inspection, Observation, Recalculation, Re-performance and Confirmations - External
Limited: Analytical review and Enquiry
What criteria do practitioners use to decide if an assurance engagement should be accepted?
The practitioner (auditor) usually completes an acceptance checklist.
- identify the users and the nature of the engagement;
- assess the prospective client’s legal and financial stability;
- assess the integrity of those charged with governance, management and the principal owners;
- evaluate the firm’s ability to undertake the assurance engagement – practically and ethically;
- perform client identification procedures;
- agree the basis for performance of the assurance engagement;
- assess the commercial viability of the expected fee; and
- establish that the preconditions for an assurance engagement are present.
Additionally, for external audit engagements only, the auditor must:
9. communicate with the previous auditor (with permission from client)
What acceptance risks do assurance firms need to consider?
(2 types)
Commercial and Professional risks.
Commercial -
1) FINANCIAL: the risk of financial loss to the firm.
2) REPUTATIONAL: the risk of damage to the firm could face firm’s public perception and brand.
Professional -
1) ETHICAL: the risk that the firm fails (or is seen to fail) to conduct the engagement in a way that is professional and ethical.
2) LEGAL: the risk that the firm could face criminal or civil legal proceedings.
What is the difference between an acceptance decision and a continuance decision?
An ‘acceptance decision’ relates only to new assurance clients.
A decision on whether to continue to provide services to existing audit clients is referred to as a ‘continuance decision’.
