The concept of audit and other assurance engagements

review engagement level of assurance

.Where an opinion is being provided the practitioner gathers sufficient evidence to be satisfied that the subject matter is plausible, in this case negative assurance is given whereby the practitioner confirms that nothing has come to their attention which indicates that the subject matter contains material misstatements

5 Elements of Assurance engagements are:

1. 3 Parties - users (Public, Client, Auditor) 2. The Subject Matter 3. Criteria to judge reliability and accuracy (e.g. IFRS) 4. Sufficient Evidence to make an opinion 5. A written report

General Principles for the auditor to follow

1. Compliance with applicable ethical principles (such as the ACCA's Rules of Professional Conduct) 2. Compliance with International Standards on Auditing 3. Keeping an attitude of professional scepticism when planning and performing the audit (i.e. don't accept on face value - get evidence)

The Auditor must state an opinion as to whether the financial statements...

1. Give a true and fair view 2. The accounting records are accurate and complete 3. Are prepared in accordance with an applicable financial reporting framework in all material respects

fair means no bias

1. information is clear, impartial and unbiased 2. Reflects * the commercial substance of the transaction

true means free from error

1. information is factual and conforms with reality 2. complies with accounting standards and any relevant legislation 3. data is correctly transferred from accounting records to the financial statements

External Audit

It reports to shareholders that the financial statements provide a true and fair view. There are two types: • Statutory • Non - Statutory

assurance engagement will have

an engagement letter agreeing terms a decision on methods to gather and evaluate evidence to support conclusion a type of report to be produced at the end of the engagement

Accountability

holding those in charge accountable for their actions. In the context of a company, it means holding the directors who manage the company responsible for explaining their actions to the shareholders who own the company.

An assurance engagement

is when a professional examines information for which another party is responsible for

sufficient evidence

the material provided by the responsible party, which needs assurance on

how review engagements differ from external audits

the procedures undertaken are not nearly as comprehensive as those in an audit, with procedures such as analytical review and enquiry used extensively. In addition the practitioner does not need to comply with ISAs as these only relate to external audits.

Criteria

the subject matter can be assessed

Stewardship

when a person is responsible for taking care of something on behalf of another. This is known as a 'Fiduciary Relationship' and exists between directors and shareholders as directors are responsible for the management of the shareholders property.

Agency

where an agent acts on behalf of a principle to perform tasks for them. In the context of a company, the directors are the agents of the shareholders (principles) who entrust them to manage the running of the business. This separation of ownership and management is often referred to as the 'Agency Problem'.

reasonable assurance

where there is sufficient evidence that the subject matter agrees to certain criteria.

purpose of review engagements

which are often undertaken as an alternative to an audit, and involve practitioner reviewing financial data

types of assurance engagement

• External Audits An Auditor states an opinion as to whether the financial statements Give a true and fair view. An Auditor examining financial statements prepared by a board of directors to express an opinion as to whether they comply with accounting standards. • Review engagements The auditor reviews the financial statements using less evidence than required by an audit The report will be to the body that commissioned the review e.g. Bank, Directors.

Reasons to undertake a non-statutory audit will include

• Providing assurance to the owners over financial results • Making accounts more acceptable to Tax authorities • Making a sale of the business easier • Providing assurance to those financing the business e.g. Banks

Types of Review engagements:

• Risk assessment reports • Review of internal controls • System reliability reports • Value for money reviews • Social and environmental reports

Statutory Audit

• This is when entities are required by law to have an audit • All public and large companies are required to have one • Other organisations such as Building Societies and certain charities must also

external audit level of assurance

A high but not absolute level of assurance is provided, this is known as reasonable assurance. This provides comfort that the FS present fairly in all material respects and are free from material misstatements.

Objectives of an Assurance Engagements

To provide assurance from an independent source that the subject matter agrees with set criteria

Limited Assurance Agreement

Only necessary to gather enough evidence to be satisfied that the subject matter is plausible in the circumstances. In this case negative assurance is provided. Negative assurance is satisfaction that there is nothing to suggest that the subject has not been prepared in line with the relevant criteria. Limited assurance engagements provide a moderate level of assurance. An example of a limited assurance engagement is a review engagement. A review engagement is undertaken by an auditor using less evidence than required by an audit to review the financial statements. The auditor will state their opinion in the form of negative assurance i.e. that they are not aware that anything is materially misstated. This is not an audit. The report will not be to the shareholders but to the body that commissioned the review e.g. Bank, Directors.

3 users

The intended user - the person who wants the report The responsible party - the person who provides the subject matter The Practitioner - the person who reviews the subject matter and provides assurance

Subject matter

The material provided by the responsible party, which needs assurance on

assurance report

This is given to the intended user and the responsible party from the practitioner

Non-statutory audit

This is when there is no legal requirement. A small company for example may choose to be audited when not legally obliged.

Reasonable Assurance Engagement

To carry out a RAG, the practitioner gathers sufficient evidence to conclude that the subject matter agrees in all material respects to the agreed criteria. The assurance given is in the form of positive assurance. This means that in their opinion the subject has been prepared in accordance with the criteria required. To carry out such an engagement the information must have been prepared by another party, be identifiable and in a form that enables the auditor to gather evidence to form the opinion. RAG provide a high level of assurance An example of a RAG is the external audit.