Unit 1a - What is assurance? Flashcards
What is an audit?
Audit is defined as the independent examination of opinion on the financial statements of an entity by a duly appointed auditor in pursuit of that appointment.
Independence is essential and underlies the value of auditing.
Opinion really just means that one auditor could look at a set of financial statements and disagree with the opinion of another auditor.
Judgement is essential to all auditing, there are no certainties and there are no certifications of correctness or accuracy.
5 Elements of an Assurance Engagement?
1 - A three party relationship involving a practitioner, a responsible party and intended users.
2 - Appropriate subject matter.
3 - Suitable criteria
4 - Sufficient appropriate evidence
5 - A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement.
What is the Three party relationship?
Practitioner: for example an auditor. The practitioner is responsible for determining the nature, timing and extent of procedures and is required to pursue anything that leads the practitioner to question whether a material modification should be made to the subject matter information.
A responsible party: the person responsible for the information and assertions.
The intended users are the persons for whom the practitioner prepares the assurance report. The responsible party can be one of the intended users.
What forms can subject matter take?
Financial Performance
Non-financial performance, e.g. KPI of efficiency and effectiveness
Physical characteristics e.g. the capacity of a facility
Systems and processes e.g. an entity’s internal control or IT system
Behaviour e.g. corporate governance, compliance with regulation
What is appropriate subject matter?
Identifiable and capable of consistent evaluation or measurement against the identified criteria
Such that the information about it can be subjected to procedures for gathering sufficient appropriate evidence
What is subject matter criteria?
Benchmarks used to evaluate/measure subject matter
When reporting on F/S, the IFRS – most relevant to AA
When reporting on Internal control, this criteria may be an established internal control framework.
When reporting on compliance, the criteria may be the applicable law, regulation or contract.
Without the frame of reference provided by suitable criteria, any conclusion is open to individual interpretation and misunderstanding.
What 5 characteristics do suitable criteria exhibit?
What criteria is unsuitable?
Relevance – relevant criteria to conclusions that assist decision-making by the intended users
Completeness – Criteria are sufficiently complete when they include all relevant factors that could affect the conclusions.
Reliability – Reliable criteria allow reasonably consistent evaluation of the subject matter
Neutrality – Neutral criteria so that conclusions are free from bias
Understandability – Conclusions that are clear, comprehensive and not subject to significantly different interpretations
The evaluation or measurement of a subject matter on the basis of the practitioner’s own expectations, judgements and individual experience would not constitute suitable criteria.
Criteria need to be available to the intended users to allow them to understand how the subject matter has been evaluated or measured.
What is sufficient appropriate evidence and what approach does the auditor take to get it?
The practitioner plans and performs an assurance engagement with an attitude of professional scepticism to obtain sufficient appropriate evidence about whether the subject matter information is free from material misstatement. An attitude of professional scepticism means the practitioner questions the validity of evidence and is alert to evidence that brings into question the reliability of documents or representations.
What is professional scepticism?
Scepticism means that you don’t know. It does not mean that that the practitioner assumes everyone is dishonest or that figures have been deliberately misrepresented. Nor does it means that you believe all figures/statements are correct. It means you are aware that we can all be subject to optimism (perhaps too much), human error, giving quick answers because of a shortage in time/misunderstanding. It also recognises that sometimes people are deliberately misleading or dishonest.
Scepticism means that evidence is required to test statements or assumptions. You could almost summarise the process of assurance in the phrase ‘collect evidence that supports everything that is being claimed’.
Assurance report…
Reasonable assurance
Limited assurance
The practitioner provides a written report containing a conclusion.
In a reasonable assurance engagement the practitioner’s conclusion is worded in the positive form, for example: “in our opinion internal control is effective, in all material respects, based on XYZ criteria.”
In a limited assurance engagement the conclusion is worded in the negative form, for example, “based on our work described in the report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria.
Example of positive/negative assurance?
Positive
The financial statements show a true and fair view
The value of amount of inventory lost is $x
Negative
We have discovered nothing wrong with F/S
The basis of the forecast is not unreasonable
There is no evidence of discrimination in the appointment
All statutory audits attempt to provide what assurance? But why might they be unable to do that? Is it possible to give a guarantee?
All statutory audits attempt to provide positive assurance that the financial statements show a true and fair view (or present fairly, in all material respects). There are some types of assurance assignments where giving positive assurance is not possible. For example it would be impossible to give assurances that a budget is correct because it depends on so many assumptions and factors that cannot be verified with certainty, such as the state of the economy next year, competitors’ plan and sales forecasts.
Why might a practitioner not express an unqualified conclusion for either type of assurance engagement?
A practitioner would not express an unqualified conclusion for either type of assurance engagement when:
There is a limitation on the scope of the practitioner’s work (ie sufficient appropriate evidence cannot be obtained)
The assertion is not fairly stated (in all material respects) or the subject matter information is materially misstated (ie the assertion is incorrect).
