Topic 1 Flashcards
What are the elements to an assurance engagement?
There are 5 (Acronym CREST)
CREST
Criteria Report Evidence Subject Matter Three separate parties
who are the three separate parties
Intended user
responsible party
practitioner
who is the intended user
The intended user who is the person who requires the assurance report.
who is the responsiblle party
The responsible party, which is the organisation responsible for preparing the subject matter to be reviewed.
who is the practitioner
The practitioner (i.e. an accountant) who is the professional who will review the subject matter against the suitable criteria and provide the assurance.
what is the subject matter
The subject matter is the INFORMATION that the *responsible party has prepared which is being examined and verified
what is the criteria and what is compared against this
Suitable criteria are required in an assurance engagement.
The subject matter is compared to the criteria in order for it to be assessed and an opinion provided.
what is evidence
Evidence has to be obtained by the practitioner in order to give the required level of assurance and to provide a basis for the conclusion
what is an assurance report and who is it given to
An assurance report is the conclusion/opinion that is given by the practitioner to the intended user and the responsible party.
what is the objective of an audit?
3 things
The objective of an audit is for the auditor to express an opinion as to whether the financial statements are fairly presented, i.e. that they
✓ show a true (accurate) and fair (unbiased) view;
✓ have been prepared in accordance with ‘specific legislation’ (this will vary internationally).
✓ materially correct.
(This implies that either accounting standards have been complied with or that non-compliance with the accounting standards was necessary in order to show a true and fair view.)
what does true mean
there are three factors to it
Information is factual and conforms with reality in that there are no factual errors.
In addition, it is assumed that to be true it must comply with accounting standards and any relevant legislation.
Lastly true includes data being correctly transferred from accounting records to the financial statements.
what does fair mean in terms of data
Fair – Information is clear, impartial, and unbiased, and also reflects plainly the commercial substance of the transactions of the entity.
what does materiality mean
Materiality is an error or misstatement that will influence the user’s decision.
what are the benchmarks for Revenue, Profit before tax and Net assets
Revenue 0.5%-1%
PBT 5%- 10%
Net assets 1% - 2%
what is the purpose of an audit
to give users confidence in the statements and reduce the risk of fraud and error
not 100% guarantee but reasonable assurance
what is accountability
This is where people in positions of power can be held to account for their actions, i.e. they can be compelled to explain their decisions and can be criticised or punished if they have abused their position.
Directors are accountable to the shareholders for the decisions they make in relation to the company
what is the definition of stewardship and a steward
what is the relationship also known as?
Stewardship is the responsibility to take good care of resources. Known as fiduciary relationship
A steward is a person entrusted with management of another person’s property, for e.g.
- Directors are the stewards of the company. They are required to produce the financial statements giving an account of their stewardship
what is an agency relationshp
The Agency relationship occurs when one party, the principle, employs another party, the agent, to perform a task on their behalf. For example the directors act on behalf of the shareholders.
Directors are agents of the shareholder
external auditors are agents of the shareholder
when comparing reasonable/positive assurance vs Negative/Limited what things can you talk about
5things
Confidence in users Opinion Scope Law Report to
what is the difference between reasonable/positive assurance vs Negative/Limited for opinion
Gives a report in the form of a positive statement of opinion:
“In our opinion the financial statements shows a true and fair view”-
VS
Gives a report in the form of a negative statement of conclusion:
“In our opinion nothing has come to our attention”
i.e. provides moderate/limited level of assurance ensuring that there is enough info to make it sound plausable
what is the difference between reasonable/positive assurance vs Negative/Limited for scope and law
Scope of work governed by the law. Carry out in accordance with ethics, ISAs
vs
Scope of work decided by parties involved
Carry out in accordance with ethics, maybe other guidance
what is the difference between reasonable/positive assurance vs Negative/Limited for who they report to
report to members
vs
Report to party who engaged
what are some of the advantages of having an audit
HIRED
Helps improve quality and reliability of information
Independent scrutiny- i.e. confirmation to directors of profit
Reduces risk of management bias, fraud and error compliance with accounting standards
Enhances credibility to financial information
Deficiencies in internal controls are highlighted/recom
what are some of the disadvantages of having an audit
FIRED acronym
FIRED
Financial statements include subjective estimates and other judgmental matters.
Inherent limitations if relied on Internal controls
Representations from management not reliable (when they’re the only source of evidence in some areas)
Evidence is often persuasive not conclusive
Do not test all transactions and balances. Auditors test on a sample basis.
Additionally, cost and also time taken away from your BAU as you have to give them what they’re asking for
what is the purpose of an assurance
To increase the confidence of the user in the subject matter being relied on
For LIMITED audit, the practitioner: Gathers sufficient appropriate evidence to..?
Gathers sufficient appropriate evidence to be satisfied that the subject matter is plausible in the circumstances
Plausible: An explanation or statement that is plausible seems likely to be true or valid/able to be believed
what are some expectations gap
Auditor tests everything
auditor detects all fraud and error
auditor confirms the company is a going concern
auditor prepares the FS
