Concept and need for assurance Flashcards
What is assurance?
An assurance firm’s satisfaction of the reliability of an assertion being made by one party for the use of another.
What is an assurance engagement?
A practitioner expresses a conclusion designed to enhance the degree of confidence of the other users about the outcome of the evaluation of a subject matter against criteria.
What are the members of a three party relationship?
Practitioner - auditors
Intended users - shareholders
Responsible party - directors
What are the key elements of an assurance engagement?
Three party relationship
Subject matter
Suitable criteria
Sufficient, appropriate evidence
A written report
What are the 2 types of assurance and evidence/opinion?
Reasonable - intrusive, high, positive
Limited - less intrusive, low, negative
Examples of reasonable and limited assurance?
bank, pension, charity, solicitors
environmental, due diligence, internal, fraud investigation
What is the objective of a statutory audit?
Enable the auditor to express an opinion on the financial statements in all material respects in accordance with an applicable accounting framework
What is a true and fair view?
Factual information correctly extracted from the books, free from discrimination and bias in compliance with expected standards
What are the overall objectives of an auditor?
To obtain reasonable assurance that the financial statements are free from material misstatements and to report on the financial statements and communicate as required by the ISAs
How are the overall objectives met?
Complying with ethical requirements
Professional scepticism
Professional judgement
Find sufficient and appropriate evidence
Benefits of assurance to each party
Shareholders - independent and professional verification
Third parties - more confidence to other parties
Board of directors - prevent errors and fraud
What criteria must be met to be exempt from an audit?
2/3 of:
Turnover < 10.2 mil
Assets < 5.1 mil
No. of employees < 50
What are the 4 limitations of assurance?
Testing and sampling - auditors don’t oversee the process, sampling
Reliance on controls - staff collude in fraud
Nature of FS - persuasive not conclusive, estimates
Quality of judgements - subjective and professional judgements can be uncertain
What are some gaps in expectation?
Do not understand opinion
Think they just find fraud
Not aware of limitations
How to reduce the expectation gap?
engagement letter saying what will be done and its limitations, regularly reviewing format and content of reports