Assurance Flashcards
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.
3 parties involved in assurance
practitioner
intended user
responsible party
Two levels of assurance
limited
reasonable
limited assurance
moderate/low level of assurance
conclusion expressed negatively
Reasonable assurance
high but not absolute level of assurance
conclusion expressed positively
Overall objectives of the auditor
ISA 200
To obtain reasonable assurance about whether the financial statements as a whole 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.
professional scepticism
is 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.
Professional judgement
is the application of relevant training, knowledge and experience in making informed decisions about the courses of actions that are appropriate in the circumstance of the audit.
Legally required to have a mandatory audit if?
Companies act 2006
exceed two of the three
50 employees
£10.2mil turnover
£5.1mil assets.
legal requirements to be an auditor
Be a member of a recognised supervisory body (RSB): required to have rules to ensure those eligible for appointment as a company auditor are either; individuals holding an appropriate qualification or part of a firm controlled by qualified persons.
Not be ineligible: companies act 2006 prohibits a person being the auditor of a company if he is: an officer or employee of the company or a partner or employee of the above.
Benefits of assurance
independent scrutiny of the business by experts.
Added credibility
by-products/subsidiary benefits (e.g. fraud deterrent)
Draws attention to issues (including ethical issues)
Reduced risk management bias.
Limitations of assurance
Sampling - we do not review 100% of transactions
Inherent limitations of systems that produce the financial information
Evidence is generally persuasive, not conclusive.
Collusion to defraud
Financial information includes subjective and judgmental matters.
Uses of management representations as evidence may be unavoidable.
Two methods of obtaining an engagement
Tender
Advertising
considerations before accepting an engagement
Are we professionally qualified to act (are there legal or ethical issues that would prevent us from accepting appointment)
Have we communicated with the existing or previous auditors?
Do we have adequate resources available?
Have we fulfilled the requirements to comply with the Money Laundering Regulations 2007 (client due diligence)?
Have we assessed the level of management integrity?
Have we assessed the level of risk?
purpose and practicalities of an audit engagement letter
Define the extent of firm’s and management’s responsibilities
Minimize potential for misunderstanding between client and firm
Provide written confirmation of: the firm’s acceptance of appointment, the scope of the engagement, the form of report to be issued.
Send to all clients.
Send as soon as possible after appointment.
Audit engagement letter must include (ISA 210)
Objectives of work/auditor’s responsibilities. Management’s responsibilities Scope of work Form of any reports Levels of access to books and records Reporting framework
Audit engagement letter may include
Inherent limitations of the engagement.
Expectation re: written management representations (evidence from management)
confidentiality/restricted circulation/ use of report
Arrangements re: reliance on internal audit (controls)
Restrictions on auditor’s liability (if possible) (liability cap e.g. you can only sue us to £1mill)
Basis of fee calculations.
Audit strategy
(determines the scope, timing and direction of audit and determines the development of the audit plan)
Audit plan
(shows how the overall strategy will be implemented.
Key components of audit strategy
Understanding the entity and its environment
Materiality
Risk assessment
Nature, extent and timing of audit procedures
Direction, supervision and review of work
Other matters.
What does audit planning ensures
Attention is paid to the most important areas (risk)
Potential problems are identified
The audit is properly organised and managed
Work is assigned to the appropriate member of the audit team (correct number of staff, doing the right work). Ongoing review and support in the audit department.
Appropriate direction and supervision of audit team members
Reviews by more senior auditors are facilitated.
Why understanding the entity?
To assess risk
To help design and perform audit procedures
To develop the audit strategy.
