chapter 1- Reintroduction to audit and assurance

Question 1

Assurance engagement definition

Answer 1

An engagement in which a practitioner aims to obtain sufficient appropriate
audit evidence in order to express a conclusion designed to enhance the degree of confidence of
the intended users other than the responsible party about the subject matter information (that is, the
outcome of the measurement or evaluation of an underlying subject matter against criteria).

Assurance engagements include primarily audits but also other services such as reports on internal
control and review of a business plan.

Question 2

Elements of an assurance engagement

Answer 2

Any assurance engagement needs:
* a responsible party- company being audited
* a practitioner - auditing firm
* a user of the report- eg. potential investors
* a subject matter-what is being audited
* criteria - eg. UK GAAP
* sufficient appropriate evidence to support the conclusion
* a written report containing a conclusion
The engagement will be governed by its terms of engagement (found in an engagement letter).
The engagement will need to be:
* planned
* performed
* concluded upon
* reported on

Question 3

Levels of assurance

Answer 3

• Reasonable assurance engagements, which result in a positive expression of opinion and where
  the level of assurance given is deemed to be high
• Limited assurance engagements, which result in negative assurance and where the level of
  assurance given is deemed to be moderate

Question 4

Breakdown of levels of assurance

Answer 4

Assurance type- reasonable
Assurance level- High
Opinion/conclusion- positive
Example-audit of financial info

Assurance type-Limited
Assurance level- Moderate
Opinion/ conclusion- Negative
Example- Review of financial information

Question 5

Benefits of assurance

Answer 5

A key feature of assurance services is that they are provided by independent professionals who therefore give an objective, unbiased opinion. They give the following benefits to users:
* Enhances the credibility of the information being reported on
* Reduces the risk of management bias, error or even fraud in the information being reported on
* Draws the attention of the user to any deficiencies in the information being reported on

Assurance services also give added credibility to the wider share market:
* They ensure that high quality, reliable information circulates in the market
* They give investors added faith in the market
* They improve the reputation of organisations trading in the market

Question 6

Audit threshold and exemptions of the threshold

Answer 6

Small companies are exempt from mandatory audit if they can satisfy two out of three of the following criteria:
* The company has no more than 50 employees
* The company’s turnover does not exceed £10.2 million
* The company’s gross assets total does not exceed £5.1 million

Since January 2016, most subsidiary companies have been exempt from audit if certain conditions are met; one of the main conditions being that the parent company must guarantee the liabilities of the subsidiary.
Companies that take advantage of the audit exemption must include a statement to that effect in the financial statements.
Even if a company comes under the audit threshold, an audit must be carried out if:
* the articles of association require one
* shareholders who own at least 10% of the shares ask for one
* the company is a non-dormant public company
* the company is involved in the insurance or banking markets

Question 7

Why smaller companies might want an audit even though it’s not a legal requirement.

Drawbacks of audit for smaller companies.

Answer 7

Many would argue (and the auditors of smaller companies have found this to be true) that, in many cases, the audit is valued by management because of the following:
* They value having their business scrutinised by another set of professional eyes
* It provides additional assurance to third parties such as taxation authorities concerning the reliability of the financial statements
* A growing business will one day require an audit
* Audit may have subsidiary benefits, such as the auditors recommending improvements in company systems.

There are, however, some disadvantages relating to having an audit from the entity’s point of view.
These drawbacks include the following:
* Cost
* Staff time required in providing information, etc
* Disruption to client’s business
* Time spent on the initial appointment process
* Dealing with confidentiality
* Expectations gap, particularly surrounding fraud detection
* Inherent limitations of audit

Question 8

Audit procedures outlined in :
-ISA 500
-(ISRE) 2400
-(ISAE) 3400

Answer 8

ISA 500:
* Inspection of documentation
* Inspection of assets
* Observation
* External confirmation
* Recalculation
* Reperformance
* Analytical procedures
* Inquiry

ISRE 2400
* Inquiry, eg, into the accounting principles in place, the accounting systems in use, and concerning material assertions
* Analytical procedures, eg, comparison with prior periods, comparison with anticipated results, and analysis of expected patterns in elements of the financial statements

ISAE 3400
* Assessment of assumptions
* Recomputation
* Written representations