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
