SYLLABUS AREA A - Chap 1 Flashcards
what is assurance engagement?
Assurance engagement is an engagement in which
a practitioner obtains sufficient appropriate evidence
To offer an opinion about specific information
to enhance the confidence of the intended users of the information
So they can make confident decisions knowing risk of info being incorrect is reduced,
what are the five elements of an assurance engagement?
1- three party involvement (practitioner, intended user, responsible party)
2- appropriate subject matter (The information subject to examination by the practitioner)
3- suitable criteria
the criteria against which subject matter is evaluated (standards, guidance, laws and regulations)
4- sufficient appropriate evidence (needed to provide basis for the opinion/ conclusion)
5- written assurance report in an appropriate form (output of assurance engagement expressing a conclusion/ opinion about subject matter)
what are some examples of assurance engagements?
- audit of financial statements
- review of financial statements
- systems reliability reports
- verification of social and environmental information
- review of internal controls
- value for money audit in public sector organisations
what are the general principles that must be followed by auditor during external audit?
• Comply with ethical requirements.
• Apply professional scepticism and judgment.
• Perform acceptance and continuance procedures to ensure only work of acceptable risk is accepted.
-agree with the terms of engagement
• Comply with quality control requirements
• Plan and perform the engagement effectively.
• Obtain sufficient appropriate evidence.
-consider the effect of subsequent events on the FS
-form a conclusion giving reasonable assurance
-document the evidence to provide a record of the basis for the audit report
what are the two types of assurance engagement that are permitted and what are their differences?
1- reasonable assurance engagement
2- limited assurance engagement
Differences:
1) level of evidence
In RAE, practitioner gathers sufficient appropriate evidence to draw a reasonable conclusion.
In LAE, he gathers enough evidence to draw a limited conclusion
2) level of testing:
In RAE, very thorough testing.
In LAE, fewer procedures.
3) Suitable criteria conclusion:
In RAE, its concluded that subject matter conforms in all material aspects with the criteria.
In LAE, its concluded that its likely in the given circumstances.
4) wording
In RAE a positively worded assurance opinion is given “in our opinion…”
In LAE a negatively worded assurance conclusion is given, “nothing has come to our attention that…”
5) level of assurance:
RAE gives high level of assurance.
LAE gives moderate or lower level of assurance.
RAE says: in our opinion FS give a true and fair view. and fS are prepared in accordance with IFRS.
LAE says: nothing has some to our attention that causes us to believe that FS are wrong or not made in accordance of ISA.
what is the purpose of an external audit engagement? And how is it achieved ?
its purpose is to enhance the degree of confidence of intended users in the financial statements
this is achieved by the auditor expressing an opinion on whether the financial statements:
-give a true or fair view
-are prepared in all material aspects, in accordance with an applicable financial reporting framework.
what does true and fair mean?
• True: factually correct information which conforms with standards, laws and agrees with past records
• Fair: clear, impartial and unbiased information which reflects the commercial substance of the transactions of the entity.
what are the objectives of an auditor?
The objectives of an auditor are to:
• Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error.
• Express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
• Report on the financial statements, and communicate as required by ISAs, in accordance with the auditor’s findings.
why is there a need for external audit?
• Shareholders provide the finance for a company and may or may not be involved in the day to day running of the company.
• Directors manage the company on behalf of the shareholders in order to achieve the objectives of that company (normally the maximisation of shareholder wealth).
• The directors must prepare financial statements to provide information on performance and financial position to the shareholders.
• The directors have various incentives to manipulate the financial statements and show a different level of performance.
• Hence the need for an independent review of the financial statements to ensure they give a true and fair view – the external audit.
in most developed countries, listed and large co are required by LAW to produce annual FS and have them audited by an external auditor.
what are the benefits of an audit?
• Higher quality information which is more reliable 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 may be highlighted by the auditor.
what are the limitations of an audit
Limitations means its not possible to provide a 100% guarantee of accuracy
F- Financial statements include subjective estimates and other judgmental matters.
I- Internal controls may be relied on which have their own inherent limitations.
R- Representations from management may have to be relied upon as the only source of evidence in some areas.
E- Evidence is often persuasive not conclusive.
D- Do not test all transactions and balances. Auditors test on a sample basis.
what is the expectation gap?
Some users incorrectly believe that an audit provides absolute assurance – that the audit opinion is a guarantee the financial statements are ‘correct’. This and other misconceptions about the role of an auditor are referred to as the ‘expectation gap’.
examples of the expectation gap are:
-a belief that auditor tests all transactions and balances
that auditor will detect ALL fraud
-that auditor is required to PREPARE the FS.
what is the purpose and objective of a review engagement?
companies who aren’t legally required to have an audit may choose to have a review of FS instead.
it will still provide some assurance but will cost less and be less disruptive.
work is not as in depth as audit
focus will be on analytical procedures and enquiries of management. no tests of controls will be performed.
The objective is to state whether anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared in accordance with the applicable financial reporting framework.
definitions of accountability, agency and stewardship
accountability- means that ppl in power can be held to account for their actions.. to explain their decisions, criticised and punished if they abuse their position. Eg. A politician in charge of a country.
This is central to the concept of good corporate governance.
agency- when one party, the principal, employs another party, the agent to perform a task on their behalf.
stewardship- responsibility to take good care of resources. steward is a person entrusted with management of another person’s property, eg. Someone paid to look after someones house when owner is on holiday, steward is responsible for the way they carry out their role.
what is a fudiciary relationship?
Fiduciary relationship is where one person has a duty of care towards someone else.
its a relationship of “good faith” such as that between the SH and directors of company
