Lecture Week 2 Flashcards
What is an assurance engagement?
An assurance engagement is one in which 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 are the key elements of an assurance engagement?
- Third Party Involvement
- Subject Matter
- Suitable Criteria
- Sufficient Appropriate Evidence
- Written Assurance Report
What are the two levels of assurance?
- Limited Assurance (conclusion expressed negatively)
- Reasonable Assurance (conclusion expressed positively but does not provide absolute assurance)
What increases assurance?
- More regulations and standards.
- Procedures would be more thorough.
- Evidence will need to be of a higher quality.
Who governs audits in the UK?
- Companies Act 2006
- International Standards on Auditing (ISAs)
What does ISA 200 state are the overall objectives of an independent auditor?
- Obtain reasonable assurance as to whether financial statements as a whole are free from material misstatement.
- Express an opinion as to whether the financial statements are prepared in accordance with the financial reporting framework.
- To report on the auditors’ findings.
Why do we have an audit?
- Shareholders aren’t often involved in the daily running of the business, therefore management needs to give an account of their stewardship.
- Directors prepare their accounts and have an incentive to manipulate the financial statements.
- Auditors provide an external verification.
What must an auditor do to comply with these requirements?
- Comply with relevant ethical requirements.
- Plan and perform the audit with professional scepticism.
- Exercise professional judgement.
- Obtain audit evidence that is sufficient and appropriate on which to base their opinion.
What is professional scepticism?
An attitude that includes a questioning mind, being alert to conditions, which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence.
What is professional judgement?
The application of relevant training, knowledge and experience in making informed decisions about the courses of actions that are appropriate in the circumstances of the audit.
What are the benefits of an audit?
- Higher quality information giving investors confidence.
- Independent scrutiny may help management.
- Reduce the risk of management bias, fraud and error.
- Enhances the credibility of the financial statements for other stakeholders.
- Deficiencies in the internal control system may be highlighted.
What are the limitations of an audit?
- Financial statements include subjective estimates and judgement.
- Internal controls may be relied upon by the auditors.
- Representations from management are not always reliable.
- Evidence is not always conclusive.
- Do not test all transactions, only samples.
Who is legally allowed to carry out an audit?
- A member of a recognised supervisory body e.g. ICAEW or ACCA and allowed to do so by that body.
- Someone authorised by the state.
Who legally cannot carry out an audit?
- Anyone that manages or works for the company.
- Anyone that has a business or personal connection with the company.
What is the Code of Ethics that is required to be followed by auditors?
- Independent
- Competent
- Keep all information gained on an audit confidential
