Chapter 1 - Concept of and need for assurance

Question 1

What is assurance?

Answer 1

The level of satisfaction as to the reliability of an assertion being made by one party for the use of another party

Question 2

What is an assurance engagement?

Answer 2

It is when a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

Question 3

What are the five key elements of an assurance engagement? Outline the mnemonic to use

Answer 3

CREST

Criteria - criteria agaisnt which the subject matter is to be measured
Report - A written report in appropriate form sufficent for the needs of the appointment
Evidence - Sufficient appropriate evidence to support the assurance opinion
Subject
matter Subject
matter - the thing being assesed (i.e. financial statements / internal controls / corporate governance etc)
Three Party Relationship - the three people or groups of people involved:
– The practitioner (accountant/auditor)
– The intended users (i.e. shareholders)
– The responsible party (the person(s) who prepared the subject matter)

Question 4

What are the two types of assurance engagements?

Answer 4

Reasonable assurance engagement and Limited assurance engagement.

Question 5

What is meant by reasonable assurance?

Answer 5

A high level of assurance, that is less than absolute assurance, that engagement risk has been reduced to an acceptably low level, which then allows a conclusion to be expressed positively.

Question 6

What is meant by limited assurance?

Answer 6

A meaningful level of assurance, that is more than inconsequential but is less than reasonable assurance, that engagement risk has been reduced to an acceptable level, which then allows a conclusion to be expressed negatively.

Question 7

What is the evidence sought and conclusion given with regards to reasonable assurance?

Answer 7

Evidence sought - Sufficient and appropriate
Conclusion given - positively worded

Question 8

What is the evidence sought and conclusion given with regards to limited assurance?

Answer 8

Evidence sought - Sufficient and appropriate (lower level)
Conclusion given - negatively worded

Question 9

What is absolute assurance and when is it given?

Answer 9

Assurance where you are saying the subject matter is 100% correct - you never give absolute assurance

Question 10

Outline some examples of assurance engagements

Answer 10

**Those required by regulators: **
* Statutory audit
* Bank audits
* Pension scheme audits
* Charity audits
* Solicitors’ audits

Voluntary engagements:
* Environmental audits
* Due diligence (where a report is requested on an acquisition target) Internal audit
* Fraud investigations
* Internal control reports
* Reports on business plans or projections

Question 11

Is the same level of assurance available to each difference assurance engagement?

Answer 11

No, different levels of assurance will be given for different assurance engagements.
For example, only limited assurance could be given for a report on a business plan as the data contained in that document would be based on forecast figures - limited asssurance for predictive figures

Question 12

What is a Statutory Audit?

Answer 12

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

Question 13

How will an auditor typically express their audit opinion?

Answer 13

The auditor will normally express their audit opinion by reference to the ‘true and fair view’, which is an expression of reasonable assurance

Question 14

What are the generally accepted definions for ‘true and fair’?

Answer 14

True: Information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records.
Fair: Information is free from discrimination and bias in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions.

Question 15

What does the Company Act 2006 require of auditors with regards to oversight?

Answer 15

The Companies Act 2006 requires that auditors are members of a Recognised Supervisory Body (RSB). The ICAEW is an RSB.

Question 16

What is the RSB responsible for?

Answer 16

The RSB is responsible for ensuring:
* Only Individuals holding an appropriate qualification or Firms controlled by qualified persons can conduct audits
* Those individuals or firms are monitored on a regular basis

Question 17

What are the overall objectives of an auditor?

Answer 17

• Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
• Report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings.

Question 18

What must an auditor do in order to achieve these overall objectives?

Answer 18

• Comply with relevant ethical requirements
• 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 reasonable conclusions may be drawn, on which the auditor’s opinion is then based

Question 19

What is the criteria that is used to determine whether a company is exempt from having an audit in the UK?

Answer 19

A company must meet two of three of the following criteria, for both this financial year and the last financial year:

– Turnover ≤ £10.2m
– Total assets ≤ £5.1m
– Number of employees ≤ 50

Question 20

Outline the stages of an audit

Answer 20

Question 21

Who are the main three aprties that gain benefit from an entities audit?

Answer 21

• Shareholders
• Third Parties
• Directors

Question 22

What are the benefits of assurance to the shareholders?

Answer 22

To shareholders the key benefit of assurance is the independent, professional verification being given to the users.

Question 23

What are the benefits of assurance to third parties?

Answer 23

To third parties it may give additional confidence to other parties in a way that benefits the business - it enhances the credibility of the information

For example an opinion on the truth and fairness of the financial statements may give the bank more confidence to lend money to that business

Question 24

What are the benefits of assurance to the board of directors?

Answer 24

To the board of directors an independent check might help prevent errors or frauds being made and reduce the risk of management bias - act as a deterrent to fraud and error. In other words, the fact that an assurance service will be carried out might make people involved in preparing the subject matter more careful in its preparation and reduce the chance of errors arising.

Question 25

Why can’t assurance ever be absolute?

Answer 25

Assurance can never be absolute. Assurance providers will never give a certification of absolute correctness due to a number of limitations

Question 26

Outline the limitations of assurance

Answer 26

• Testing & Sampling
• Reliance on Controls
• Nature of Financial Statements
• Quality of Auditor Judgements

Question 27

Explain how ‘ Testing & Sampling’ brings limitations to assurance

Answer 27

• The fact that testing is used – the auditors do not oversee the process of building the financial statements from start to finish.
• Assurance providers do not test every item in the subject matter (this would be too expensive for the responsible party), so a sampling approach is used

Question 28

Explain how ‘Reliance on controls’ brings limitations to assurance

Answer 28

• Accounting systems on which assurance providers may place a degree of reliance also have inherent limitations
• Client’s staff members may collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose.

Question 29

Explain how ‘Nature of the financial statements’ brings limitations to assurance

Answer 29

• The fact that most audit evidence is persuasive rather than conclusive.
• The fact that some items in the subject matter may be estimates and are therefore uncertain. It is impossible to conclude absolutely that judgemental estimates are correct.

Question 30

Explain how ‘Quality of auditor judgements’ brings limitations to assurance

Answer 30

• Assurance provision can be subjective and professional judgements have to be made (for example, about what aspects of the subject matter are the most important, how much evidence to obtain, etc).

Question 31

What is meant by the expectations gap?

Answer 31

This is the difference between what users think the auditor does and what the auditor actually does. This is often because users are not aware of the nature of the limitations on assurance provision, or do not understand them and believe that the assurance provider is offering a service (such as a guarantee of correctness) which in fact he is not.

Question 32

SUSTAINABILITY ASSURANCE