Chapter 1 Flashcards
What initiated the origin of assurance services?
The origin of assurance services started in the 18th-century Industrial Revolution with Joint Stock Companies.
What was the relationship between shareholders and management?
Shareholders required financial statements to judge management’s performance.
How did financial statements initially reflect management’s view?
Financial statements initially reflected management’s ‘best-view’ rather than a ‘true-and-fair view.’
What role do independent assurance providers play?
Independent assurance providers (auditors) were hired to verify financial statements.
What are the two types of assurance engagements?
Statutory (required by law) vs. Non-statutory (voluntary) engagements.
What is the role of directors as stewards?
Directors manage company assets on behalf of shareholders.
What is the agency relationship between shareholders and directors?
Directors act on behalf of shareholders (principal).
How do directors show accountability?
Directors show accountability by preparing and presenting financial statements.
What is an advantage of audit/assurance engagement?
Increases credibility of financial statements.
How does assurance engagement help in business transactions?
Assists in the sale or purchase of a business.
What is the definition of assurance engagement?
An engagement where a practitioner obtains evidence about a subject matter against suitable criteria and expresses a conclusion to enhance the confidence of intended users.
What are the elements of assurance engagement?
Three-Party Relationship, Subject Matter, Suitable Criteria, Evidence, Written Assurance Report.
What is the three-party relationship in assurance engagement?
Intended Users (e.g., shareholders), Responsible Party (e.g., directors), Practitioner (e.g., auditor).
What is an example of subject matter in assurance engagement?
Information prepared by the responsible party (e.g., financial statements).
What is an example of suitable criteria in assurance engagement?
Framework used (e.g., IFRS, tax laws).
What is the purpose of a written assurance report?
Formal report with conclusions in standard format.
What is limited assurance?
Moderate level of assurance in negative form (e.g., ‘nothing has come to our attention…’).
When is reasonable assurance used?
Used in audits of historical financial statements.
What is absolute assurance?
Certification that financial statements are free from all misstatements.
Why can’t absolute assurance be provided?
Due to the nature of financial statements, audit procedures, time and cost limitations, and inherent limitations of internal controls.
What are some inherent limitations of audit procedures?
Management may withhold information and auditors lack legal powers.
What are judgment-based procedures in auditing?
Subject to auditor’s judgment, which can be faulty.
