Concept of and need for assurance

Question 1

What is assurance?

Answer 1

An assurance firm’s satisfaction as to the reliability of an assertion being made by one party for the use of another party

Question 2

What is an assurance engagement?

Answer 2

When 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 criteria

Question 3

What is the three party relationship of an assurance engagement?

Answer 3

The practitioner e.g. auditor
The intended users e.g. shareholders
The responsible party e.g. management/directors

Question 4

What are the key elements of an assurance engagement?

Answer 4

Three party relationship
Subject matter
Suitable criteria
Sufficient appropriate evidence to support the opinion
Written report providing an opinion

Question 5

What are the two types of assurance engagement conducted by practioners?

Answer 5

Reasonable assurance engagement

Limited assurance engagement

Question 6

What is the key distinction between reasonable assurance engagement and limited assurance engagement?

Answer 6

Evidence sought and type of opinion

Question 7

What opinion is given for a reasonable assurance engagement?

Answer 7

Positive opinion - ‘true and fair’

Question 8

What opinion is given for a limited assurance engagement?

Answer 8

Negative conclusion - ‘nothing makes us believe that the subject matter is misstated’

Question 9

What does true mean?

Answer 9

Information is factual and conforms with reality, not false. The information conforms with required standards and law

Question 10

What does fair mean?

Answer 10

Information is free from discrimination and bias in compliance with expected standards and rules

Question 11

What does the Companies Act 2006 require?

Answer 11

Auditors must be a member of a Recognised Supervisory Body (RSB)

Question 12

What is an RSB responsible for ensuring?

Answer 12

Only individuals holding an appropriate qualification or firms controlled by qualified persons can conduct audits
Those individuals or firms are monitored on a regular basis

Question 13

What is the FRC responsible for?

Answer 13

Monitoring the accounting profession and issuing auditing standards
Issuing ethical standards

Question 14

What are the overall objectives of the auditor?

Answer 14

Obtain reasonable assurance whether the financial statements as a whole are free from misstatement, whether due to fraud or error
Report on the financial statements and communicate in accordance with the auditor’s findings

Question 15

What must the auditor do to achieve their objectives?

Answer 15

Comply with ethical requirements
Display Professional Scepticism
Exercise professional judgement
Obtain sufficient and appropriate evidence

Question 16

What is the benefit of assurance to shareholders?

Answer 16

Independent, professional verification

Question 17

What is the benefit of assurance to third parties?

Answer 17

Additional confidence to other parties in a way that benefits the business
e.g. may give bank more confidence to lend money
Enhances credibility of information

Question 18

What is the benefit of assurance to the board of directors?

Answer 18

Help prevent errors or frauds being made and reduce the risk of management bias.
Might make people involved in preparing the subject matter more careful in its preparation and reduce the chance of errors arising
(A deterrent)

Question 19

What criteria must a company meet in order to be required to be audited?

Answer 19

2/3 of:
Turnover <10.2mil
Total Assets <5.1m
Number of employees <50

Question 20

What are the limitations of assurance?

Answer 20

Testing is used - auditors don’t oversee process from start to finish
Sampling approach is used
Reliance on controls
Client’s staff members may collude in fraud
Most audit evidence is persuasive rather than conclusive
Some items in subject matter may be estimates
Assurance provision can be subjective

Question 21

What is the expectations gap?

Answer 21

Difference between what users think the auditor does and what the auditor actually does

Question 22

How are attempts made to close the expectations gap?

Answer 22

Issuing an engagement letter spelling out the work that will be carried out and the limitations of that work
Regularly reviewing the format and content of reports issued as a result of assurance work