Intro to Assurance

Question 1

What are the key elements of an assurance engagement?

Answer 1

• Three Party involvement - Practitioner, Intended user & Responsible party.
• Subject Matter - Financial statements, other financial data or systems.
• Suitable criteria - UK or international accounting standards, Corporate Governance code
• Sufficient and Appropriate evidence - To enable a conclusion or opinion to be formed.
• Written Assurance report - Expressing a conclusion or opinion.

Question 2

What is the general description of and assurance engagement?

Answer 2

An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the 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

Who are the three parties in the relationship?

Answer 3

Practitioner - This is usually and assurance firm (Audit firm)

Intended User - This will vary depending on the assignment. e.g. Buying a house - intended user of surveyors report is the buyer.

Responsible party - this is usually the directors of a company.

Question 4

What are the different levels and types of assurance?

Answer 4

Limited Assurance -

• Moderate/low level of assurance.
• Conclusion expressed negatively.
• Could be an engagement to examine a forecast.

Reasonable assurance -

• High but not absolute level of assurance.
• Opinion expressed positively.
• Audit of financial statements.

Question 5

Why is there a need for External Audit?

Answer 5

• To give the shareholders of a company, who provide the finance for the company, to be confident in the financial reports produced by the company
• To provide independent verification of the statements to ensure they give a true and fair view.
• External audits are governed by International Standards on Auditing

Question 6

What benefits are there to carrying out an audit?

Answer 6

Higher quality information which is more reliable, giving investors faith in and improving the reputation of the market.

Independent scrutiny and verification may be valuable to management.

Reduces the risk of management bias, fraud and error by acting as a deterrent. An audit may also detect bias, fraud and error.

Enhances the credibility of the financial statements, e.g. for Tax authorities or lenders.

Deficiencies in the internal control system nay be highlighted by the auditor.

Question 7

What limitations are there to an Audit?

Answer 7

Financial statements include subjective estimates and other judgemental matters.

Internal controls may be relied upon which have their own inherent limitations

Representations from management and other client generated evidence are less reliable than independent evidence or evidence obtained directly by the auditor.

Evidence is often persuasive not conclusive.

Do not test all transactions and balances, only a sample are tested.

Question 8

What is meant by the Expectation gap?

Answer 8

Expectation Gap = misconceptions about the role of the auditor. e.g.

• Belief that the Auditor tests all transactions and balances.
• That auditor will detect all fraud.
• That the auditor is responsible for preparing the financial statements.
• That and unmodified auditors opinion guarantees that the company is a going concern.

Question 9

What is a review engagement?

Answer 9

This is an example of a limited assurance engagement and may be carried out for:

• A company which is not legally required to have an audit.
• It will focus on analytical procedures and enquiries to management.
• Gives a lower level of assurance but is also less disruptive.