1: Concept of and need for assurance Flashcards
What is an assurance engagement?
One in which a practitioner
- expresses a conclusion
- designed to enhance the degree of confidence the intended users (other than the responsible party) have
- about the outcome of the evaluation or measurement of a subject matter against criteria
What are the key elements of assurance?
3 party involvement
- Practitioner
- Intended User
- Responsible Party
Subject matter
- financial statements, other data, systems
Criteria
- accounting standards, UK Corporate Governance Code
Evidence
- sufficient and appropriate
Written report
- conclusion or opinion
Who’s involved in the 3 party relationship?
Practitioner
- Auditor
- Assurance firm
Intended Users
- Shareholders
- Stakeholders
- Creditors
- HMCR
Responsible Party
- Usually the directors of the organisation
What are the two key levels of assurance?
- Limited assurance
- moderate/lower level of assurance
- conclusion expressed negatively
- example: reviewing interim accounts
- ‘nothing has come to our attention that causes us to believe the into does not give a true and fair view’ - Reasonable assurance
- high but not absolute level of assurance
- conclusion expressed positively
- example: audit
- ‘in our opinion, the statements show a true and fair view’
The level chosen depends on the subject matter
What are 6 types of assurance engagement?
- statutory audit
- fraud investigations
- due diligence
- internal controls assessments
- business plan/projection reviews
- environmental audits
What are the two things audit is governed by in the UK?
Companies Act 2006
International Standards on Auditing (ISAs)
ISA 200 states that there are two overall objectives of an audit:
- to obtain reasonable assurance about whether the statements are FREE FROM MATERIAL MISSTATEMENT, whether due to fraud or error
- to express an opinion on whether the financial statements are PREPARED, in all material respects, in ACCORDANCE with an applicable financial reporting framework
Four basic things the auditor must do?
- Comply with relevant ethical requirements
- Plan and perform the audit with professional scepticism
- Exercise professional judgement
- Obtain audit evidence that is sufficient and appropriate on which to base their opinion
Definition of professional scepticism?
An attitude that includes a questioning mind, being alert to conditions, which may indicate possible misstatement due to error or fraud
and a critical assessment of audit evidence
Definition of professional judgement?
The application of relevant training, knowledge and experience in making informed decisions about the course of actions that are appropriate in the circumstances of the audit
What are the criteria small private limited companies must meet to be except from audit?
(According to Companies Act 2006)
Two out of the following three,
for both THIS financial year and the LAST financial year:
Employees - 50 or fewer on average
Turnover - no more than £10.2 mil
Total assets - no more than £5.1 mil
What are the two conditions for an auditor to be eligible.
- Be a member of a Recognised Supervisory Body (RSB)
- holding an appropriate qualifications
- part of a firm controlled by qualified persons - Not be ineligible. Companies Act 2006 prohibits an auditor for a company if:
- officer or employee of the company
- partner or employee of the above
What are the 5 benefits of assurance?
- Independent scrutiny of the business by experts
- Added credibility
- By-products/subsidiary benefits (ie. fraud deterrent)
- Draws attention to issues (inc. ethical issues)
- Reduces risk of management bias
What are the limitations of assurance (or reasons we can’t give 100% assurance)?
- Sampling - we don’t review 100% of transactions
- Inherent limitations of systems that produce the financial information
- Evidence is generally persuasive not conclusion
- Collusion to defraud
- Financial info includes subjective and judgemental matters - ie. estimates
- Use of management representations as evidence may be unavoidable
What are 5 misunderstanding about audit that cause the expectations gap?
- Auditor detects all fraud and error
- Auditor tests 100% of transactions
- Auditor verifies that accuracy of the financial statements
- Company is guaranteed to continue to trade for the foreseeable future if a true and fair opinion is issued
- SFP shows the true value of the company
4 key global initiatives on ESG matters?
- United Nations Global Impact (2000)
- Global Reporting Initiative (2000)
- Task Force on Climate-related Financial Disclosure or TCFD (2015)
- Sustainable Development Goals (2016)
What are the aims of each branch of ESG?
Environmental
- counter the impact of climate change and reduce an organisation’s impact on the environment (enviro footprint)
Social
- wellbeing and impact of operations on society, and creating a good working environment for employees
Governance
- implement good governance practices from the top down, by providing its goods and services in a sustainable way and offers employment with good working conditions
What do ICAEW accountants needs to do in terms of sustainability?
- recognise that sustainability is at the core of what they do
- analyse how to make the sustainable economy work for everyone
- move beyond simply measuring and reporting the impact of climate change etc
What is mandatory when reporting on assurance?
There is no mandatory framework for reporting on assurance.
But, when climate change impacts, the auditor needs to consider the risk of material misstatement related to amounts and disclosures to do with climate risks
Auditors need to know how climate-related risks relate to them
What is the future of sustainability disclosure requirements?
International Auditing and Assurance Standards Board (IAASB) published considerations on audit/climate
IFRS establish the International Sustainability Standards Board (ISSB) to sit alongside IASB.
ISSB aims to deliver a comprehensive global baseline of disclosure standards that provide investors and other participants with info about sustainability risks
Two drafts issued:
- IFRS S1, general requirements for disclosure
- IFRS S2, climate related disclosures
FRC also made recommendations on auditing climate risks in 2020
What is required of board of directors with climate?
The government and the FCA have now placed a requirement on the largest companies in the UK to report all significant climate matters using these two headings:
- governance
- strategy
- risk management
- metrics and targets
Companies MUST relate on sustainability in both the strategic and directors report.
What needs to be included on the strategic report from directors on ESG?
A review of the company’s business, including risks and key performance indicators. Including:
- main trends and factors to affect the future development, performance and position of the company’s business
- info about enviro matters
- company’s employees
- social, community and human rights issues
Must also include CO2 emissions in tonnes
Currently no requirement for independent assurance on ESG stuff. Will change!
