Concept of and need for assurance Flashcards
What is assurance?
An assurance firm’s satisfaction as to the reliability of an assertion being made by one party for the use of another party
What is an assurance engagement?
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
What is the three party relationship of an assurance engagement?
The practitioner e.g. auditor
The intended users e.g. shareholders
The responsible party e.g. management/directors
What are the key elements of an assurance engagement?
Three party relationship Subject matter Suitable criteria Sufficient appropriate evidence to support the opinion Written report providing an opinion
What are the two types of assurance engagement conducted by practioners?
Reasonable assurance engagement
Limited assurance engagement
What is the key distinction between reasonable assurance engagement and limited assurance engagement?
Evidence sought and type of opinion
What opinion is given for a reasonable assurance engagement?
Positive opinion - ‘true and fair’
What opinion is given for a limited assurance engagement?
Negative conclusion - ‘nothing makes us believe that the subject matter is misstated’
What does true mean?
Information is factual and conforms with reality, not false. The information conforms with required standards and law
What does fair mean?
Information is free from discrimination and bias in compliance with expected standards and rules
What does the Companies Act 2006 require?
Auditors must be a member of a Recognised Supervisory Body (RSB)
What is an RSB responsible for ensuring?
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
What is the FRC responsible for?
Monitoring the accounting profession and issuing auditing standards
Issuing ethical standards
What are the overall objectives of the auditor?
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
What must the auditor do to achieve their objectives?
Comply with ethical requirements
Display Professional Scepticism
Exercise professional judgement
Obtain sufficient and appropriate evidence
What is the benefit of assurance to shareholders?
Independent, professional verification
What is the benefit of assurance to third parties?
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
What is the benefit of assurance to the board of directors?
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)
What criteria must a company meet in order to be required to be audited?
2/3 of:
Turnover <10.2mil
Total Assets <5.1m
Number of employees <50
What are the limitations of assurance?
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
What is the expectations gap?
Difference between what users think the auditor does and what the auditor actually does
How are attempts made to close the expectations gap?
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
