Chapter 16: Other assurance assignments Flashcards
1.1 Assurance engagements compared with assurance
Statutory audit Other assurance
Nature of work:
Determined by companies act 2006
and ISAs
Scope determined by terms of
engagement and relevant
international standards on
assurance engagements. Proceeds
more limited to enquiry, analytical
procedures and written management
representations
Level of assurance:
Reasonable Usually limited
Report to:
Shareholders Usually management
Report on: Express an opinion on the
accounts and certain other
matters
Report a conclusion depending on
the nature of the work performed
Circulation of report: In the public domain once the accounts
are filed
Likely to be restricted
1.2 Review of historical financial information (ISRE 2400)
Some clients require a review of the accounts rather than a full audit. Procedures focus on obtaining knowledge of the entity, making enquiries, performing analytical procedures and obtaining written representations from management.
If an issue is identified, then additional procedures will be performed. Negative assurance will be given. The negative opinion will state nothing has come to our attention to suggest that the accounts are not true and fair.
1.3 Review of interim financial information (ISRE 2410)
In some cases a review of the interim accounts will be required. These statements will be prepared under IAS 34.
1.4 Review of prospective financial information (ISAE 3400)
This is more difficult than a review of historic financial information because it is reporting on future events. The information usually takes place in the form of budgets and forecasts. Examples of work required when reviewing:
- Consider the competence of the preparer
- Cast/recalculate to check mathematical accuracy
- Vouch to any supporting documentation there may be
- Review assumptions for reasonableness. Agree estimated costs to current actual costs and consider price rises. Discuss with management
- Statement of profit or loss: agree accounting policies are consistent with the financial statements and compare contents to identify missing costs. Agree b/f to accounting records
- Cash flows: agree timings for amounts going in and out of the bank account.
1.5 Assurance reports on controls at a service organisation (ISAE 3402)
A service organisation is an entity that provides services to user entities that are relevant to their internal controls. There are two types of assurance report:
- Type 1: a report on the description and design of controls at a service organisation
- Type 2: a report on the description, design and operating effectiveness of controls at a service organisation
2.1 Due diligence
Due diligence is the process of gathering information for an investor about a potential investee in order to make an informed decision about the investment, including whether or not to invest, and what amount to invest.
The investee will have more information about its business than the investor when setting a deal price. Due diligence helps to narrow the information gap to enable a more informed decision by the investor. Due diligence may:
- Identify assets: ascertain legal title/rights, identify and value intangibles
- Identify and quantity potential risks
- Ensure the bid price is reasonable
- Give assurance to providers of finance
- Help with post-acquisition planning such as identifying possible areas of synergy, key personnel and areas in need of reorganisation
2.2 Detailed due diligence work
Due diligence procedures are similar to audit procedures, with a different focus on valuation of key assets, information affecting the price, identifying hidden or unrecognised obligations, as well as determining the value of recognised obligations, projections/forecasts and commercial information.
2.3 Warranties
The vendor may give warranties to the purchaser. Warranties are a type of insurance whereby the vendor compensates the purchaser if the warrants are breached. Examples of warranties include sales contracts exist and are current, all contingent liabilities have been disclosed and tax has been paid or accrued for.
3.1 Forensic accounting
This term covers fraud investigations, professional negligence claims, insurance claims, assessing damages in a litigation and financial disputes. Forensic investigation is the steps taken to perform a forensic accounting assignment. It includes planning, gathering evidence, reviewing and concluding and issuing a report.
3.2 Fraud
There are three main categories of fraud: corruption (conflict of interest, bribery, extortion), asset misappropriation (theft, false billing, payroll fraud) and financial statement profit.
3.3 Conducting a fraud investigation: considerations
Acceptance: need to consider if you have the necessary skills and experience, consider ethical threats and commercial considerations.
Planning: ensure the forensic accountant understands the specific objectives of the engagement.
Gathering evidence: evidence must be robust and conclusive. Procedures tailored to the specific type of fraud. Techniques include tests controls, analytical procedures, data analytic software and substantive techniques. Must approach all information and documentation with a sceptical attitude as it may be biased, false or incomplete.
4.1 Sustainability
UK statutory audit does not include the audit of any disclosures provided under sustainability-related financial information and climate-related disclosures. Auditors do need to understand the ESG issues facing a company including:
- Potential impairment of assets
- Costs of non-compliance
- Constructive obligations, contingent liabilities and provisions
- Impact on going concern status
- Motives for manipulation of figures to achieve targets or covenants
- Weaknesses in sustainability risk management by those charged with governance
4.2 Sustainability audits
Companies can choose to have an assurance engagement performed with respect to any social and environmental reports they prepare. Assurance firms may use AA1000 Assurance standard issued by Accountability. The principles for sustainability reporting are:
- Inclusivity: participation of stakeholders in developing and achieving an accountable and strategic response to sustainability
- Materiality: determine the significance of an issue to an organisation and its stakeholders
- Responsiveness: how an organisation responds to stakeholder issues that affect its sustainability performance by its decisions, actions and performance as well as communication with stakeholders
- impact: effect of behaviour/performance on the economy/environment
There are two types of reports:
- type 1 reports: evaluate the nature and extend of an organisations adherence to the four principles. Focus is how organisation manages sustainability performance and communicates, but does not provide assurance on reliability of the information provided
- type 2 reports: evaluate the nature and extent of an organisations adherence to the four principles and evaluate the reliability of the information provided
4.3 Greenhouse gas emission statements (ISAE 3410)
Companies listed on the main market of the London Stock Exchange are required to make a disclosure of greenhouse gas emissions. The level of assurance could be:
- reasonable: an opinion on whether the GHG statement has been prepared in accordance with the acceptable criteria
- limited: a conclusion on whether anything has come to the practitioner’s attention to indicate that the GHG statement has not been prepared in accordance with the acceptable criteria
5.1 Internal audit
Employed by the directors of the company to add value by improving the organisation’s operations. They can be members of the Institute of internal auditors and governed by the following standards:
- the code of ethics (integrity, objectivity, confidentiality and competency)
- international standards for the professional practice of internal audit: setting out the professional attributes the IA must have and how an IA should perform their work
typical IA assignments include value for money audits, operational audits, financial audits, project audits, management audits and social and environmental audits.
