W1 The Concept of Audit and Other Assurance Engagements

Question 1

What is an assurance engagement

Answer 1

An engagement in which a practitioner obtains sufficient appropriate audit evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of subject matter against criteria”

Question 2

What are the types of assurance engagements

Answer 2

Reasonable assurance
- Positively worded opinion
-High level of assurance

Limited assurance
-Negatively worded conclusion
-Moderate or lower level of assurance

Question 3

True or false: Reasonable assurance reports give greater confidence than limited assurance

Explain your answer

Answer 3

True

-There are more standards/regulations covering reasonable assurance assignments

The procedures will be more thorough

The evidence gathered will need to be of higher quality

Question 4

What is the purpose of an external audit? How is it achieved

Answer 4

The purpose of an external audit is to enhance the degree of confidence of the intended users of the financial statements

It is acheived by the auditor expressing an opinion on whether the financial staatements:

-give a true and fair view

-are prepared, in all material respects, in accordance with an applicable financial reporting framework

Question 5

What does true and fair mean

Answer 5

True implies that the financial statements:

-are factually correct and have been prepared according to an applicable reporting framework (IFRS)

and

• do not contain any material misstatements that may mislead users

Fair implies that:

the F.S present info faithfully without any element of bias

and

reflect the economic substance of transactions rather than just their legal form

Question 6

What is the need for an external audit

Answer 6

Shareholders provide finance for the company but dont run it. Directors manage the company on their behalf to achieve the company’s objective and prepare F.S to provide information on performance to shareholders.

There are incentives for directors to manipulate this information so there is a need for an independent review

Question 7

What are the limitations of an audit

Answer 7

Auditors cannot evaluate every relevant piece of financial information and assess every relevant financial system, therefore cannot provide absolute assurance over financial statements

Question 8

What is reasonable assurance

Answer 8

High but not absolute level of assurance due to the inherent limitations of an audit which are in most audit evidence from which conclusions are drawn from and bases the auditors opinion being persuasive rather than conclusive.

Question 9

What are the limiting factors of an audit

Answer 9

The nature of financial reporting

The nature of audit procedures

The need for the audit to be conducted within a reasonable period of time and at a reasonable cost

Question 10

What are the 5 elements of an assurance engagement

Answer 10

1) Three party involvement
- Practitioner - reviewer of the subject matter

-Intended user - people using the subject matter

-Responsible party - responsible for preparing the subject matter

2) Appropriate subject- info subject to examination by the practitioner

3) Suitable Criteria - criteria against which the subject matter is evaluated (standards/laws/)

4) Sufficient appropriate evidence - is needed to provide a basis for the opinion/conclusion

5) Written assurance report - output of the assurance engagement expressing an opinion about the subject matter