Chapter 1 Reintroduction to audit and assurance Flashcards
1.1 Assurance
An assurance engagement is one in which 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 suitable criteria.
1.2 Levels of assurance
- Reasonable (assurance type), high (assurance level), positive (opinion/conclusion). An example is the audit of financial statements
- Limited (assurance type), moderate (assurance level), negative (opinion/conclusion). An example is a review of financial information
A higher level of assurance requires more evidence to support the conclusion. No report on an assurance engagement can provide absolute assurance due to the nature of the evidence available.
1.3 Benefits of assurance
An independent practitioner should give an objective opinion with the following benefits to the users of the assurance report:
- Enhanced credibility of information
- Reduced risk of management bias, error, or fraud
- Any deficiencies in the information are highlighted
2.1 Audit
ISA 200 sets out the overall objectives of the auditor when conducting an audit of the financial statements:
- To obtain reasonable assurance on if the statements are free from material misstatement and properly prepared in accordance with applicable financial reporting framework
- To report on statements and communicate with those charged with governance
2.2 The audit threshold
Companies Act 2006 exempts small private limited companies from a mandatory audit if they satisfy two of the following three criteria. The criteria is having no more than 50 employees, turnover not exceeding £10.2m and gross assets not exceeding £5.1m.
Subsidiary companies do not require an audit if their parent companies guarantee their liabilities. Companies taking advantage of an audit exemption must include a statement to that effect in their financial statements. Some companies must have an audit even if they meet the exemption criteria, notably insurance companies, banks, plcs where shareholders owning at least 10% of the shares ask for an audit.
2.3 Benefits of audit
An audit is of value to management as:
- It provides an independent scrutiny of the business by professionals
- Additional assurance may be required for third parties – banks, tax authorities
- It promotes discipline over maintaining accounting records, reducing the risk of misstatement or non-compliance with statutory responsibilities
- Audits provide subsidiary benefits such as reports to management on identified deficiencies in the internal control systems
3.1 Audit and other assurance compared
- Nature of work: for the statutory audit scope is determined by Companies Act 2006 and ISAs. The main audit procedures are set out in ISA 500 (inspection, observation, confirmation, recalculation, reperformance, analytical procedures and enquiry). For other assurance engagements scope is determined by the terms of engagement and relevant international standards on assurance engagements or international standards on review engagements. ISREs and IASEs require the use of enquiry, analytical procedures, and written management representations
- Level of assurance: for statutory audit the level is reasonable. For other assurance engagements the level is usually limited
- Report to: Shareholders for statutory audit and usually management for other assurance engagements
- Report on: Statutory audits express an opinion on the financial statements (true and fair, properly prepared) and other matters such as information contained in directors report and strategic report, so it is consistent with the financial statements. Other assurance engagements report a conclusion depending on the nature of the work performed
- Circulation of report: for statutory audit it is in the public domain once the statements are filed. For other assurance engagements it is likely to be restricted
