Chapter 1 - Introduction To Assurance

Question 1

The elements of an audit engagement

Answer 1

1. The three parties involved:
   The preparers - management/ directors
   The users - shareholders
   The practitioners - the auditors
2. The subject matter
   The financial statements.
3. Sufficient appropriate evidence:
   Obtained by performing audit procedures and reviewing the financial statements.
4. Evaluating whether the FS are prepared in accordance with a relevant financial reporting framework.
5. The audit report: Summarises the auditors opinion whether the financial statements are presented fairly.

Question 2

Reasonable assurance engagement

Answer 2

1. Gathers sufficient appropriate evidence to draw conclusions.
2. Concludes the subject matter conforms in all material respects with identified suitable criteria.
3. Positively worded assurance opinion.
4. High level assurance.
5. Thorough procedures to obtain sufficient appropriate evidence.

Question 3

Limited assurance engagement

Answer 3

1. Gathers sufficient appropriate evidence to draw conclusions.
2. Concludes the subject matter is plausible in the circumstances.
3. Negatively worded assurance opinion.
4. Moderate or lower level of assurance.
5. Performs significantly fewer procedures.

Question 4

Objective of an external audit engagement

Answer 4

To enable whether the financial statements

1. Give a true and fair view.
2. Are prepared in all material respects, in accordance with an applicable financial reporting framework.

Question 5

Benefits of an audit

Answer 5

1. Improves the quality and reliability of information, giving investors faith and improving the reputation of the market.
2. Independent scrutiny and verification.
3. May reduce the risk of management bias, fraud and error by acting as a deterrent.
4. Enhances the credibility of the financial statements.
5. Deficiencies in the internal control system may be highlighted by the auditor.

Question 6

Expectations gap

Answer 6

Some users incorrectly believe an audit provides absolute assurance.

1. Belief auditors test all transactions and balances ; test on a sample basis.
2. Belief auditors are required to detect all fraud; auditors are required to provide reasonable assurance that the financial statements are free from material misstatement which may be caused by fraud.
3. Belief auditors are responsible for preparing the financial statements is responsibility of management.

Question 7

Limitations of an audit

Answer 7

Financial statements include subjective estimates and other judgemental matters.
Internal controls may be relied on which have their own inherent limitations.
Representations from management may have to be relied on as the only source of evidence.
Evidence is often persuasive not conclusive.
Do not test all transactions and balances. Auditors test on a sample basis.

Question 8

Review engagements

Answer 8

The objective of a review of financial statements is to enable an auditor to state whether (on the basis of procedures which do not provide all the evidence required in an audit) anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared in accordance with the applicable financial reporting framework.

Question 9

Assurance

Answer 9

An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended user other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.