Assurance 1: Concept + Need for Assurance

Question 1

Levels of Assurance

Answer 1

Reasonable Assurance

• Sufficient and appropriate evidence
• Positive opinion: the FS show a true and fair view in all material aspects
• Assertive statement = lots of work

Limited Assurance

• Sufficient and appropriate evidence (less intrusive)
• Negative opinion: nothing has come to our attention that make us believe that the subject matter is misstated

Not practical to give absolute assurance (100%)!

Question 2

Reasonable Assurance

Answer 2

• Sufficient and appropriate evidence
• Positive opinion: the FS show a true and fair view in all material aspects
• Assertive statement = lots of work

Question 3

Limited Assurance

Answer 3

• Sufficient and appropriate evidence (less intrusive)

- Negative opinion: nothing has come to our attention that make us believe that the subject matter is misstated

Question 4

Key elements of an assurance engagement (5)

Answer 4

• Three party relationship: the practitioner, the intended users, the responsible party
• A subject matter (ie. FS, internal controls, corporate governance)
• Suitable criteria (ie. IRFS accounting standards)
• Sufficient appropriate evidence to support the assurance opinion - do I have enough evidence and the right sort of evidence to support my opinion?
• A written report providing an opinion on the subject matter

Question 5

Types of assurance engagements

Answer 5

• Statutory audit = legal requirement
• Those required by regulators: bank audits (FCA), pension scheme audits (FCA, charity audits (charities commission), solicitors audits
• Voluntary engagements = increase credibility (look good) - environmental audits, due diligence, internal audit, fraud investigations, internal control reports, reports on business plans or projections

Question 6

Statutory audit: requirements

Answer 6

Legal audit - require at least 2:

• Revenue > £10.2m
• Total assets >£5.1m
• Employees >50

Has to be a POSITIVE opinion (reasonable: true + fair)

Question 7

Overall objectives of the auditor

Answer 7

• To obtain reasonable assurance about whether the FS are free from material misstatement, whether due to fraud or error
• Report on the FS + communicate as required by the ISAs
• Comply with relevant ethical requirements
• Plan + perform the audit with professional scepticism (questioning mindset)
• Exercise professional judgment
• Obtain sufficient and appropriate audit evidence to draw reasonable conclusions

Question 8

Stages of an audit

Answer 8

1. Obtaining the engagement
2. Planning
3. Performing procedures
4. Review + completion
5. Reporting (T + F)

Question 9

What are the limitations of assurance?

Answer 9

• Testing + sampling: testing is being used (auditors do not oversee the process from start to finish); sampling (not testing every item)
• Reliance on controls: accounting systems also have inherent limitations; collusion in fraud may override controls
• Nature of the FS: most audit evidence is persuasive rather than conclusive; some items are estimates and are therefore uncertain

Quality of auditor judgements: assurance provision can be subjective and professional judgements have to be made

Question 10

The expectations gap + closing the gap

Answer 10

The difference between what users think the auditor does and what the auditor actually does - users are often not aware of the nature of the limitations, or do not understand the job role and think that assurance is offering services which they are not (ie. a guarantee of correctness)

True + fair does not equal correct

A lack of understanding

Closing the gap:

• Issuing an engagement letter: roles + limitations
• Regularly reviewing the format and content of reports issued

Question 11

What is the most important benefit of an assurance report?

Answer 11

It may help to deter fraud within an entity