The concept of audit and other assurance engagements Flashcards
The purpose of external audit - ISA 200
- to promote confidence and trust in financial information
- enable auditor to express an independent opinion whether the FS
1. are free from material misstatement, whether due to fraud and error
2. have been prepared, in all material aspects, in accordance with acceptable financial reporting framework
3. comply with statutory requirement
Director’s responsibilities
- must prepare FS for shareholders
- responsible to ensure that entity complies with relevant laws and regulations
- account for their stewardship of the assets placed under their control
Auditor’s responsibilities
Seek to provide an opinion (give reasonable assurance - not guarantee) as to whether the FS are “presented fairly” and give a “true and fair” view
In this sense, auditor:
- have only a limited responsibility to detect fraud
- not responsible for prevention of non-compliance
- not expected to detect instance of non-compliance
- need to understand their clients in depth
- plan work to detect material errors and fraud, only, by
* obtaining reasonable assurance that the FS are free
from material misstatment
* considering those laws and regulations that have a direct & indirect effect on materiality and disclosures
- report this to management (primary legal responsibility)
Auditor’s objectives - ISA 250
- to obtain sufficient and appropriate evidence regarding compliance
- to perform specific audit procedures to help identify non-compliance
- to respond appropriately to non-compliance/ suspected non-compliance
Auditor’s overall objective (responsibilities) - ISA 200
To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement whether due to fraud and error
What is meant by TRUE (&fair view)?
- Information is:
- factual and conform with reality
- conforms with required standard and laws - The FS have been correctly extracted from the books and records
What is meant by FAIR (&true view)?
- Information is:
- free from discrimination and bias
- in accordance with expected standards and rules - The accounts reflect the commercial substance of the company’s underlying transactions
What is meant by “present fairly”?
The FS show a true and fair view; they are factual and free from bias
What is NON-COMPLIANCE?
acts of omission or commission by the enetity , either intentional or non-intentional, which are contrary to the prevailing laws or regulations.
What are the 5 element of an assurance engagement?
CREST
Criteria -suitable (in order to reach an opinion)
Report - written assurance report: reasonable/limited
Evidence - sufficient appropriate
Subject matter - appropriate (fin.perf., non-fin. perf., behaviour)
Three party relationship - auditor/ responsible party/ users
What types of assurance can be provided/ levels of assurance?
- Positive/reasonable assurance
2. Negative/limited assurance
What does a reasonable assurance engagement provides?
A positive assurance (external audit) - a high but not absolute level of assurance
What does a limited assurance engagement provides?
A negative assurance (in the review engagement) - a type of assurance engagement
“based on our review, nothing has come to our attention to indicate that the financial statements contain material misstatement”
What is the objective of an asssurance engagement?
To provide assurance from an independent source that the subject matter agrees with the set criteria.
When would a practitioner NOT be able to express an unmodified conclusion on an assurance engagement?
- There is a limitation of scope of the practitioner’s work
- The assertion is not fairly stated or the subject matter information is materially misstated.
What is materiality?
Misstatements, including omissions, which arise from fraud and error, are considered material if, individually or aggregated, could reasonable be expected to influence the economic decision of users, taken on the basis of the FS.
What is performance materiality?
Materiality refers to FS as a whole.
Performance materiality is an amount set by auditor, when designing the audit procedures, at less than materiality, to reduce the risk that misstatements, in aggregate, exceed FS materiality.
Engagement letter
A contract between client and auditor which signify the acceptance of the appointment.
It clearly defines:
- the scope of the audit
- the extent of auditor responsibilities
What are the elements of an Engagement Letter?
- confirmation of the appointment
- responsibilities of
- directors (Companies Act)
- auditors (professional responsibility)
- the scope of the audit
- management representation (confirmation that will seek)
- other information
- irregularities and fraud
- post Balance Sheet events
- other services
- fees
- law governing the terms of contract
- complaints procedures
Written representation
- necessary as audit evidence (on matters affecting FS)
- mentioned in the letter of engagement
- issued during the final review stage
- to confirm management responsibilities
- where required other ISAs
- to support other evidence
- to confirm that management have communicated to auditor all known deficiencies in IC
Summary of the audit process
- Accept
- Plan
- Perform (gather evidence)
- Revisit planning consideration
- Complete
Conclude on findings - Revisit planning consideration
- Issue Audit Opinion
- Debrief with audit team
Highlight issues for next audit and for reappointment considerations
Expectation gap
Appears due to the fact that auditors:
- are not responsible for accounts preparation
- are not legally responsible to detect fraud
- rarely check all transactions
- do not certify that the accounts are correct
if auditor issue an unqualified report - does not guarantee that the company is a going concern
Direct laws and regulations
Auditors need to gather sufficient and appropriate evidence that entity complied with such laws and regulations
Indirect laws and regulations
Auditors perform specific audit procedures with the objective of identifying non-compliance with such laws and regulations
Materiality levels
- 5% of Profit
- 1% of Revenue
- 1% of Total Assets
Materiality by nature
0% - in connection to related parties
to be disclosed
Audit engagement
- Provide a positive assurance which is a higher level of assurance comparing to negative assurance
- Auditors give an opinion on financial statements
- Usually state in the report as “In our opinion…”
- The risk is reduced to an acceptably low level
- Auditors need to make examination on subject matters by obtaining sufficient appropriate evidence to form a basis for opinion
Review engagement
- Provide a negative or limited assurance
- Auditors or professional accountants do not give an opinion on financial statements or subject matters
- Usually state in the report as “nothing has come to our attention…”
- The risk is reduced to a moderate level
- Auditors or professional accountants only need to review subject matters
Define Audit
The audit represents an independent examination of and expression of an opinion on the FS of an entity.
What percentage benchmarks are often applied as a starting point in determining materiality?
Revenue >1%
Total Assets >1%
Profit >5%
What 2 types of fraud may result in the misstatement of the FS?
- Managers can override controls
- Employees can
How are the auditor’s responsibilities fulfilled?
Auditor is required to assess the risk of material misstatement of the FS, whether due to fraud or error.
to do this, Auditor needs to obtain sufficient and appropriate evidence regarding the assessed risk of material misstatement due to fraud, through designing and implementing appropriate responses.
Audit must respond appropriately to fraud and error or suspected fraud and error identified during the audit.
Auditor is responsible to maintain professional scepticism throughout the audit:
* considering the potential for management to overrride controls
* recognising that the audit procedures that are effective in detecting error, may not be as effective in detecting fraud.
Auditors’ rights
- Access to records (at all times)
- Information and explanations (they consider necessary)
- Attendance at and Notice of any General Meeting (as any member)
- Right to speak at GM
- Rights in relation to written resolution
- Right to require laying of accounts (notice of a GM)
