1 - Concept of and need for assurance Flashcards
What is assurance?
A firms satisfaction as to the reliability of an assertion being made by one party for the use of another party
An assurance report could give a negative or positive conclusion
What are some types of assurance?
The audit of a companies financial statements
Internal controls reviews - quality
Verify governance practices
A financial statements review
Prospective financial info - things that predict the future like budgets, cashflows or forecast. This is done to add credibility to your forecast information
What is a positive and negative opinion?
Positive means everything is true and fair and we’re happy with them
Negative means nothing has come to our attention so it’s okay
What is an assurance engagement?
This is an engagement which a practitioner (us) expresses a conclusion designed to enhance the degree of confidence of the intended users about the outcome of an evaluation of a matter against a certain criteria
What are the key elements of an assurance engagement?
3 party relationship:
The practitioner - The auditor (us)
The intended users - The shareholders
The responsible party - The directors (responsible for preparing a subject matter and determining the criteria)
A subject matter - either FS, Internal controls or corporate governance etc
A suitable criteria - IFRS, IAS or companies act. Int financial reporting standards, Int accounting standards or companies act
Sufficient and appropriate evidence - sufficient means enough and appropriate means it should support the subject matter
A written report which gives an opinion on a subject matter. Positive or Negative.
What are the 2 types of assurance engagement?
Reasonable assurance engagement - sufficient and appropriate evidence. Positive opinion. True and fair view You will be very intrusive. AEIOU. Analytical, inspection, observation, recalculation etc. Fraud and error stands a reasonable chance of detection. IT IS NOT ABSOLUTE AS WE DON’T TEST EVERYTHING. High risk (if something is spotted, you can sue me)
Limited assurance - It is sufficient and appropriate (but less intrusive) This is negative opinion. Nothing has come to our attention that makes us believe that the FS are misstated.
What is a statutory audit? When is it required?
Company has directors and shareholders. Directors produce FS to satisfy shareholders. They can however commit fraud to line their pockets or manipulate things. This is so they keep their job or get bonuses etc. Shareholders hire external auditors to make sure their FS looks perfect and to make sure nothing dodgy goes on bts. The shareholders can then remove the directors if they are being wronged
Revenue: 10.2m
Total assets: 5.1m
Employees: more than 50
What is True and fair? Definitions
True - Information is factual and conforms with reality, not false. Conforms with required standards and law. Accounts have been correctly extracted from the books and records
Fair: Info is free from discrimination and bias in compliance with expected standards and rules
What is RSB and the companies act of 2006?
The act requires that auditors are members of a recognised supervisory body (ICAEW).
They are responsible for ensuring:
Only individuals holding an appropriate qualification or firms controlled by qualified persons can contact audits (over 50% ACA qualified)
Those individuals or firms are monitored on a regular basis
What is the FRC and what do they do?
The FRC are responsible for issuing ethical standards and ISA’s which are international standards of audit. Tell you how to conduct audit on specific topics. They also monitor quality alongside the ICAEW who monitor ltd companies mostly whilst the FRC monitor plc audits mostly
What are the overall objectives of the auditor?
ISA 200:
Obtain reasonable assurance about whether the FS as a whole are free from material misstatement, whether due to fraud or error.
Report on the FS and communicate in accordance with your findings
Must comply with ethical requirements. PIPCO
Plan and perform the audit with professional scepticism - a questioning mind, being alert to conditions which may indicate possible misstatement and maintain critical assessment of audit evidence
Exercise professional judgement - application of relevant training, knowledge and experience in making decisions
Obtain audit evidence that is both sufficient and appropriate, from which conclusions may be drawn on which the auditors opinion is based on
Stages of an audit
Obtaining the engagement - Client acceptance and engagement letter
Planning - risk
Performing procedures - testing internal controls at preventing and detecting fraud and error. Substantive testing - verifying numbers in an audit
Review and completion - subsequent events review - post year end. Going concern status.
Reporting - True and Fair opinion
Why is assurance important?
Shareholders in a company etc benefit. They gain trust in FS provided to them which allows to make informed decisions on whether to buy or sell or dismiss board of directors.
Benefits of third parties - customer, supplier, employee, bank manager - gives the FS credibility which means more trust and confidence.
Board of directors - Management letter is produced and contains internal control deficiencies. Directors benefit from this. Put in place to ensure fraud and error is eliminated.
Assurance service may act as a deterrent for people thinking to do fraud with your company
What companies get audit exemptions?
Turnover of less than 10.2m
Total assets of less than 5.1m
Number of employees less than 50.
Must have 2/3 of these requirements for the current year and previous year to be applicable for an audit
Why can assurance never be absolute? (Limitations)
Testing and sampling - Auditors don’t oversee the process of the buildings of FS from start to finish. Also assurance providers don’t test EVERY item in the subject matter as this would be too expensive so a sampling approach is used
Reliance on controls - Accounting systems auditors use also have inherent limitations (mistakes can happen). Also the clients staff members may collude in fraud and hide stuff from the auditors
Nature of FS - Most audit evidence is persuasive rather than conclusive. Some items in the FS may be full of estimates and be uncertain
Quality of the auditors judgements - It is subjective and professional judgement has to be made on things like sample size and materiality figure etc
