Chapter 14 - Other assurance engagements Flashcards
What types of other assurance engagements can audit firms be involved in, aside from statutory audits?
In addition to statutory audits, audit firms can undertake a variety of other assurance engagements that provide independent assurance over non-financial or specific financial information. These may include:
- Reviews of financial statements – Providing limited assurance that no material modifications are needed.
- Assurance on internal controls – Assessing the design and effectiveness of internal control systems.
- Sustainability or ESG reporting assurance – Providing assurance over environmental, social, and governance disclosures.
- Assurance on regulatory or compliance reports – Ensuring the entity has complied with specific legal or regulatory requirements.
- Agreed-upon procedures – Performing specific procedures agreed with the client, without expressing an opinion.
- Prospective financial information reviews – Reviewing forecasts or projections to support planning or investment decisions.
What is the main difference between statutory audits and other assurance engagements?
The key difference lies in the scope and level of assurance provided:
- A statutory audit is a mandatory, comprehensive examination of an entity’s financial statements, required by law. It provides a high level of assurance (reasonable assurance) that the financial statements give a true and fair view, and follows strict standards such as ISA (International Standards on Auditing).
- Other assurance engagements are typically voluntary and may provide a lower level of assurance (limited assurance) or be tailored to specific areas (e.g., sustainability reporting, internal controls). These engagements follow different standards, such as the ISAE series (International Standards on Assurance Engagements).
In short:
Statutory audits = legally required + high assurance
Other assurance = optional/specific purpose + varying levels of assurance
What factors should a firm evaluate before accepting an assurance engagement, and why are they important?
Before taking on an assurance engagement, a firm must carefully evaluate several key factors to ensure it is appropriate, feasible, and that both the firm and the client understand the scope and limitations of the engagement. Each of the following factors plays a crucial role in shaping the quality and reliability of the assurance provided:
- Who the users are and why they need the information: Understanding who will rely on the assurance (e.g., management, regulators, investors) and why helps the firm gauge the level of risk involved and tailor the engagement accordingly. External users often increase the importance of the engagement and the potential consequences of error.
- Who will have access to the information: The distribution scope (general public or restricted group) affects the firm’s potential liability. Broader access may increase exposure to legal claims if users suffer a loss based on the assurance provided.
- How much assurance can reasonably be given: Assurance is never absolute. The firm must evaluate whether the subject matter allows for a meaningful level of assurance. For instance, reviewing hypothetical or highly uncertain forecasts (e.g., prospective financial information) limits how much confidence can be given. Assurance is stronger when the subject matter is concrete, reliable, and measurable.
- What type of report is required: Different engagements require different formats and levels of reporting (e.g., limited vs. reasonable assurance). The firm must ensure it is capable of preparing the appropriate type of report and that the client understands its limitations and scope.
- The period covered by the engagement: Longer timeframes, especially those involving predictions or forecasts, carry greater uncertainty, reducing the reliability of the assurance. The firm must assess whether assurance over such a period is practical and explain any limitations clearly.
- Whether the firm has the required skills and resources: The firm must consider whether it has relevant experience, expertise, and capacity to deliver the engagement effectively. Non-financial or specialised engagements (e.g., sustainability reporting) may require niche knowledge or training.
- Ethical and independence considerations: The firm must remain objective and independent, particularly if the engagement is for an existing audit client. Even if the assurance is a standalone engagement, the firm must assess any conflicts of interest or ethical barriers before proceeding.
By thoroughly addressing these factors, the firm ensures that the terms of the engagement are clear, realistic, and aligned with both professional standards and client expectations. It also protects the firm’s integrity, quality of service, and legal position.
What type of evidence must auditors obtain when performing assurance engagements on prospective financial information (PFI)?
When conducting assurance engagements on PFI, auditors must obtain sufficient and appropriate evidence, primarily through the following procedures:
- Enquiry – Discussing the assumptions and methodology with management
- Analytical procedures – Comparing figures and trends to assess consistency and logic
- Recalculation – Verifying the mathematical accuracy of projections and estimates
Additionally, the auditor should obtain written representations from management confirming the completeness and accuracy of the information, assumptions, and estimates used.
The focus of the evidence is on evaluating key assertions made by management about the PFI, typically that it is:
- Reasonable – The information aligns with the auditor’s understanding of the project or entity, and is internally consistent across all assumptions and projections.
- Properly prepared – The projections are based on appropriate accounting policies (consistent with historical financial statements), have been prepared by qualified individuals, and are supported by appropriate internal controls.
This approach helps ensure the PFI is credible and reliable within the limits of assurance that can be provided.
What type of evidence must auditors obtain when performing assurance engagements on historical financial information?
In assurance engagements involving historical financial information, auditors are required to gather sufficient and appropriate evidence, using procedures typically limited to:
- Enquiry – Speaking with management to understand the context and transactions involved
- Analytical procedures – Comparing actual results against expectations, prior periods, or industry norms
- Recalculation – Verifying numerical accuracy where relevant (e.g., totals, ratios)
Auditors must also obtain written representations from management confirming that the historical information is complete, accurate, and properly presented.
The focus of evidence in this type of engagement is to evaluate assertions that are similar to those in a statutory audit, including:
- Existence – The items recorded in the financial records actually exist
- Accuracy and valuation – Amounts are correctly recorded and appropriately measured
- Rights and obligations – The entity has ownership or control over the items
- Completeness – All relevant transactions and balances are included
- Presentation – The information is clearly and appropriately presented and relates to the reporting entity
These procedures help provide limited assurance that the historical information is reliable and free from material misstatement, within the scope of the engagement.
What type of evidence must auditors obtain when performing assurance engagements other than those on prospective or historical financial information?
In other engagements, assertions will depend more heavily on the subject matter and the criteria.
Outline what is included in a report on the review of historical financial information, covering:
* format
* address
* scope
* standards
* opinion/conclusion
* level of assurance
* signatory.
A report on the review of historical financial information includes the following key elements:
- Format: The report follows the structure and guidance set out by the International Standards on Review Engagements (ISREs).
- Address: It is addressed to relevant stakeholders such as directors, management, or the company - depending on the terms of engagement.
- Scope: The review determines whether there is any evidence to suggest that the historical financial information is not free from material misstatement. This includes misstatements due to error or fraud.
- Standards: The engagement is conducted in accordance with the International Standards on Review Engagements, if agreed by the parties involved.
- Opinion/Conclusion: The auditor expresses a negative assurance conclusion, meaning the report states: “Nothing has come to our attention that causes us to believe the financial information is materially misstated.”
- Level of Assurance: This type of engagement provides limited assurance -less than that of a full audit.
- Signatory: The report is signed in the firm’s name, rather than by an individual statutory auditor.
Outline what is included in a report on the review of prospective financial information, covering:
* format
* address
* scope
* standards
* opinion/conclusion
* level of assurance
* signatory.
A report on the review of prospective financial information (PFI) includes the following key elements:
- Format: The report follows the structure and guidance set out by the International Standard on Assurance Engagements (ISAE) 3400.
- Address: It is addressed to the intended users, as determined by the terms of the engagement - which may vary depending on the purpose of the PFI.
- Scope: The review evaluates whether there is any evidence to suggest that the prospective financial information is not reasonable and properly prepared in accordance with the applicable assumptions and basis of preparation.
- Standards: The engagement is conducted in accordance with the International Standard on Assurance Engagements (ISAE) 3400, if agreed by the parties.
- Opinion/Conclusion: The auditor provides a negative assurance conclusion, typically stating: “Nothing has come to our attention that causes us to believe the prospective financial information is not properly prepared or is unreasonable.”_
- Level of Assurance: This engagement provides limited assurance, meaning less certainty is conveyed compared to an audit.
- Signatory: The report is signed in the firm’s name, not by an individual auditor.
What are the two types of opinions given in other assurance engagement reports? Define each
- Unmodified Opinion (also called an Unqualified Opinion or Clean Conclusion): this is given when the auditor concludes that the subject matter (e.g., historical or prospective financial information) is prepared in accordance with the applicable criteria and there are no material misstatements or issues. It reflects a satisfactory outcome of the engagement.
- Modified Opinion: This is given when the auditor identifies material misstatements or is unable to obtain sufficient appropriate evidence, and these issues are significant enough to affect the overall fairness of the subject matter. There are three types of modified opinions.
What are the three types of modified opions? Define each
- Qualified Opinion: Issued when the misstatement or scope limitation is material but not pervasive.
- Adverse Opinion: Issued when misstatements are both material and pervasive, meaning the subject matter do not present a true and fair view.
- No Opinion: Issued when the auditor is unable to obtain sufficient audit evidence, and the possible effects are material and pervasive, preventing them from forming an opinion.
Outline and explain the matrix to determine the type of modified opinion to give
The matrix is used by auditors to decide which type of modified opinion to issue when they encounter problems during the engagement. It considers two key factors:
-
Nature of the issue:
- A misstatement, where the auditor disagrees with the accounting treatment, policies, or disclosures.
- An inability to obtain sufficient and appropriate evidence, such as when records are missing or access is restricted.
-
Severity of the issue:
- Whether the issue is material but not pervasive (i.e., significant but isolated), or
- Material and pervasive (i.e., the issue has widespread impact on the subject matter).
Based on this assessment, the auditor will issue one of the following modified opinions:
- Qualified Opinion – Given when the issue is material but not pervasive, whether due to a misstatement or lack of evidence.
- Adverse Opinion – Given when a misstatement is material and pervasive, meaning the subject matter is fundamentally misleading.
- No Opinion – Given when the auditor cannot obtain sufficient evidence and the potential effects are material and pervasive, meaning they cannot form an opinion at all.
