Topic 1 - The concept of Assurance Flashcards
What is Assurance?
What this is expressed in?
An assurance firms’ satisfaction as to the reliability of the assertion being made by one part for the use of another party.
An assurance report
What is an assurance engagement?
Practioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome fo the evaluation or measurement of a subject matter agaisnt criteria
Who are the practioners, responsible parties, and users and what do they do?
- Auditor - give an opinion on whether the subject matter complies with critera
- Directors - determine the suitable criteria agaisnt which the auditor will test the subject matter on
- Shareholders
What are the subject matter and critera?
- Financial Statements
- Accouting standards (IFRS or UKGAAP)
What are the five key elements of an assurance engagement?
CREST
Criteria, Report, Evidence, Subject matter, Three party relationship
What are some examples of assurance engagements?
- reviews of annual/ interim financial statemnts
- reviews of effectiveness of internal control
- reviews of business plans
What criteria must you meet to be exempt from audits?
need to have 2/3
* no more than 50 employees
* revenure does not execeed £10.2 million
* gross assets do not exceed £5.1 million
What are the legal and professional requirements for auditors in the UK?
- Hold an ‘appropriate qualification’
- Are members of a Recognised Supervisory Body (RSB) eligible under their rules tosign audit reports
What makes a person ineligible for being a company auditor?
Under what Act is this
- An officer of employee of the company
- A partner of employee of such a person
- Any partner in a partnership in which such a person is a partner
Companies Act 2006
What is Reasonable Assurance?
A high level of assurance that is less than absolute assurance and allows a conclusion ot be expressed positively
Very regulated and a lot of work
What is Limited Assurance?
A meaningful level of assurance, that is more than inconsequential but is less than reasonable assurance and allows a conclusion to be expressed negatively
A lot of sense check and less work
What are the benefits of assurance?
- independent and external professional verification
- enhancing the credibility of info (giving confidence)
- deterrent againt fraud and error and reducing management bias
- draws attentiton to deficiences
What are the limitations of assurance?
- sampling- not all transactions recorded are tested
- most audit evidence is persuasive rather than conclusive
- human factor - collusion of parties in fradulent behaviour or errors
- estimates and judgements lead to uncertaintiy
What is the Expectations Gap?
The difference between the expectation of the users of financial statements and the service being provided by auditors
What auditors do vs what people think auditors do
What are common misunderstandings around audit work?
- the company will continue to trade for the forseeable future because they have been audited
- auditors will detect all fraud during the audit (only material/significant fraud + errors)
- audit will provide absolute assurance and all figures will be completely accurate
