Audit and Assurance in brief

Summary of main points

The purpose of an assurance service is to increase the confidence of the user of that service
and to help them reduce the risk associated with their decision making.

Three parties involved -> tripartite engagement:

- User (e.g. shareholders if external audit)

- Responsible party (e.g. the board of directors of the co. preparing financial
statements)
- Practitioner (i.e. auditor) who needs to be:
o Competent
o Objective & independent
o Work needs to be carried out to expected standards (i.e. IAS, IFRS, ISA, Ethical
Standards, etc.)

Types of assurance services:

- Audit of financial statements

- Review of fin. Statements
- System reliability report
- Review of internal controls, etc.

Types of assurance engagements:

- Reasonable assurance engagements – the practitioner :

o Gathers sufficient appropriate info to be able to draw conclusions
o Concludes that the subject matter (e.g. the company’s financial performance
represented by its fin. Statements) conforms in all material respects with
identified suitable criteria
o Gives a report in the form of positive assurance
o High level of assurance
- Limited assurance engagements – the practitioner:
o Gathers sufficient appropriate info to be able to draw conclusions
o Concludes that the subject matter, with respect to identified suitable criteria,
is plausible in the circumstances. In other words nothing has come to the
practitioner’s attention that causes him/her to believe that the subject matter
is not true & fair.
 o Gives report in the form of negative assurance
o Low level of assurance

Incorporation implications:

- Distinction between owners and the business => may lead to managers distinct from
owners
- Limited liability status => may be misappropriated

- Thus framework needed to protect owners & business world =>

o Legal requirement to produce accounts by management to account for their
stewardship
o Accounts to be checked by an independent auditor

Objective of external audit engagement is to enable auditors to express an opinion on

whether the fin. Statements are:

- True&fair in all material respects

- Prepared in accordance with an appropriate fin. Reporting framework

Audit provides reasonable assurance (they are reasonable assurance engagement) of the
true and fair view of financial statements

Review engagements – limited assurance engagements

THERE IS NO ABSOLUTE ASSURANCE!

Audit Review
Criteria Applicable law & accounting Agreed in the engagement
standards letter
Procedures carried out Significant amount and broad Less procedures
range
Type of assurance Positive assurance Negative assurance

Responsibilities of external auditors:

- Plan their work independently and with due professional care and professional
skepticism
- Gather sufficient appropriate evidence to draw conclusions
 o Evaluate accounting policies
o Statements adequately disclose policies
o Reasonable estimates?
o Info is relevant, reliable, comparable
o Compare to industry – reasonable?
- Form an opinion on whether the company’s financial statements give a true and fair
view
- NOT responsible for the preparation of fin. Statements!!!!

Audit opinion:

- Everything fine – true & fair => unmodified opinion

- Modified opinion if either:
o Statements are materially misstated
o Could not obtain sufficient evidence

o If the auditor comes to either of the above conclusions they must consider
how significant (material & pervasive) the matter is:

Nature of matter Material but not pervasive Material & pervasive

Fin. Statements materially Qualified opinion Adverse
misstated
Inability to obtain evidence Qualified opinion Disclaimer

Qualified opinion – the auditor basically says that whilst there are, or may be, material
misstatements they are confined to a specific element but the remainder may be relied
upon.

If the auditor concludes that the matter is pervasive they are claiming the financial
statements may not be relied upon in any part.
 Reference and further reading:
ACCA (2010) Audit and Assurance (AA) Paper F8 UK. Wokingham: Kaplan Publishing