Ch1 - Concept and need for assurance

Question 1

What is an assurance engagement

Answer 1

When a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended user other that the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria

Question 2

What are the 5 key elements of an assurance engagement?

Answer 2

1. Three party Relationship (A practitioner, intended user, responsible party)
2. A subject matter (i.e. what are you auditing)
3. Suitable criteria (i.e. something to judge the subject matter against. e.g. IFRS standards for FS audit)
4. Sufficient appropriate evidence to support the audit opinion
5. Written report (for the intended user)

Question 3

A. Two potential types of assurance engagements?

B. What is the key difference between the two?

Answer 3

A:

1. Reasonable assurance engagement - High level of assurance, that the engagement risk has been reduced to an acceptably low level, allowing a positive conclusion/opinion to be expressed.
2. Limited assurance engagement - Meaningful level of assurance (less than reasonable), the engagement risk has been reduced to an acceptable level, allowing a negative conclusion/opinion to be expressed.

B:

The evidence obtained in a limited assurance engagement is less and hence that impacts the opinion which may be expressed.

The type of opinion; where there is more evidence obtained, the assurance engagement is reasonable and hence a positive opinion is made. If there is lower level of evidence obtained there is a negative opinion and it is a limited assurance engagement.

Question 4

What kind of assurance engagement / opinion is this:

“In the course of my seeking evidence about the statement by the Chairman, nothing has come to my attention indication that the statement is not reasonable”

Answer 4

Limited assurance engagement - Negative opinion

A lower level of evidence has been obtained for these kinds of engagements.

Question 5

What are the benefits of assurance?

Answer 5

• Independent, professional verification is given to users of the assurance service
• Gives confidence to other parties (e.g. bank has more confidence to lend money if FS has been audited)
• Enhances the credibility of a companies information
• Independent check helps to prevent errors or frauds, and reduces the risk of management bias. It also may act as a deterrent for errors as employees are more cautious of an upcoming audit
• Users can see the deficiencies are in the company information
• Enhance investor confidence in markets if they know that a strong culture of assurance exists, and therefore investors have more faith and trust

Question 6

What are the limitations of assurance?

Answer 6

• ## Auditors test in assurance engagements; they don’t oversee the building of the FS from start to finish.