Chapter 1: Introduction to Assurance Service

Question 1

Discuss the concepts of stewardship.

Answer 1

Stewardship is the practice of managing other person’s property. The directors have a stewardship role. They look after the assets of the company, and manage them on behalf of shareholders.

[Chapter 1: LO 1]

Question 2

Discuss the concepts of Agent.

Answer 2

An agent is an individual who acts on behalf of the principal. In a company, Directors are agents and shareholders are principal i.e. directors act in accordance with instructions and in best interest of shareholders.

[Chapter 1: LO 1]

Question 3

Discuss the concepts of Accountability.

Answer 3

As agents of the shareholders, directors are accountable to shareholders. Directors show their accountability to shareholders by preparing annual financial statements and presenting them to the shareholders for their decision making.

[Chapter 1: LO 1]

Question 4

Which conflict between shareholders and management caused need for Audit Services?

Answer 4

Shareholders want financial statements which give “true-and-fair-view”. Management presents financial statements which give “best-view” due to some Incentives (e.g. bonus) or Pressures (e.g. fear of removal).

[Chapter 1: LO 1]

Question 5

What is a Statutory and Non-Statutory Audit.

Answer 5

 Statutory Audit is an audit which is required by law (e.g. audit of large companies), or
 Non-Statutory Audit is an audit which is not required by law but performed voluntarily (e.g. audit of Sole-proprietorships, Partnerships, Not for Profit Organizations, Societies, Clubs, and Small companies).

[Chapter 1: LO 1]

Question 6

What are advantages of an Audit:

Answer 6

1. It increases credibility of financial statements, as most of the misstatements are identified.
2. Auditor identifies deficiencies in entity’s internal control system, and gives recommendations to management to improve it.
3. It confirms that management is performing its statutory and non-statutory duties.
4. It assists in sale or purchase of business.
5. It assists in grant of loan by bank.

[Chapter 1: LO 1]

Question 7

Define Assurance Engagement:

Answer 7

“Assurance engagement” means an engagement in which a practitioner obtains evidence about evaluation of a subject matter against suitable criteria, and expresses his conclusion to enhance the confidence of the intended users (other than the responsible party).

[Chapter 1: LO 2]

Question 8

List down elements of Assurance Engagement.

Answer 8

1. Three party relationship
2. Subject Matter
3. Suitable Criteria
4. Evidence
5. Written Assurance Report

[Chapter 1: LO 2]

Question 9

An assurance engagement has 5 elements. Explain “Three party relationship”.

Answer 9

 Intended users (the parties who require subject matter and assurance report e.g. shareholders, bankers).
 Responsible party (the party which is responsible for preparation of subject matter i.e. directors/management). and
 Practitioner (the professional who verifies subject matter and provides assurance on it i.e. auditor in an audit)

[Chapter 1: LO 2]

Question 10

An assurance engagement has 5 elements. Explain “Subject Matter”.

Answer 10

Subject matter is the information prepared by responsible party, and is verified by practitioner e.g. Historical financial statements, or Cash flow forecast.

[Chapter 1: LO 2]

Question 11

An assurance engagement has 5 elements. Explain “Suitable Criteria”:

Answer 11

Criteria means framework/basis (e.g. IFRS, or Income Tax Ordinance) which is used by responsible party to prepare subject matter (e.g. financial statements), and used by practitioner to evaluate subject matter.

Suitable means it should be selected appropriately.

[Chapter 1: LO 2]

Question 12

An assurance engagement has 5 elements. Explain “Evidence”:

Answer 12

Evidence is the information used by practitioner in arriving at the conclusion on which his report is based.
Evidence should be Sufficient and Appropriate.

[Chapter 1: LO 2]

Question 13

An assurance engagement has 5 elements. Explain “Written Assurance Report”:

Answer 13

It is a report written in standard format (as per ISAs or as per local Laws) which includes conclusion of practitioner. It is provided by practitioner to intended users.

[Chapter 1: LO 2]

Question 14

Explain the concept of Limited/Moderate/Negative Assurance, and give example.

Answer 14

It is a moderate level of assurance, expressed in negative form of conclusion i.e.

“Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not give a true and fair view of the financial position of ABC Limited as at December 31. 20X1, and its financial performance and cash flows for the year then ended, in accordance with IFRS.”

This level of assurance is usually given in review of historical financial statements, or review of cash flow forecast.

[Chapter 1: LO 3]

Question 15

Explain the concept of Reasonable/High/Positive/Assurance, and give example.

Answer 15

It is a high, but not absolute, level of assurance expressed in positive form of conclusion i.e.

“In our opinion, financial statements give true and fair view of financial position of ABC Limited at December 31, 20X1 and its financial performance and cash flow for the year then ended in accordance with IFRS.”

This level of assurance is usually given in an audit of historical financial statements.

Reasonable assurance means auditor does not certify or guarantee that financial statements are free from all misstatements. There may still be some undetected misstatements even after the audit due to inherent limitations of audit.

[Chapter 1: LO 3]

Question 16

Explain Inherent Limitations of Audit OR Why auditor cannot provide Absolute Assurance.

Answer 16

Auditor cannot provide absolute assurance because most of the audit evidence is persuasive rather than conclusive due to inherent limitations of audit:
1. Nature of financial statements (estimates, judgments and uncertainties are involved e.g. in accounting estimates).
2. Nature of audit procedures
a. Management may not provide complete information to auditor.
b. Auditor does not have legal powers (e.g. power to search).
c. Fraud involving collusion and complex techniques, or involving senior management are harder to detect.
3. Time and Cost limitation (Therefore, auditor plans audit in such a way that he directs its efforts on risky areas, and uses sampling).
4. There are always some inherent limitations in client’s internal control system.
5. Company’s staff may not be available to answer auditor’s questions, or to provide him documents.
6. Many of the audit procedures are based on auditor’s judgment, which may be faulty.

[Chapter 1: LO 3]