In line with ISA’s, what are the MAIN objectives of conducting an audit?
- to obtain reasonable assurance about whether the FS as a whole are free from material misstatement due to fraud/error…
- to report on the FS and communicate as required by ISA’s in accordance with the auditor’s findings
Shareholders must be able to ensure that the director’s actions are aligned with their objectives. Why is this false?
They may seek to ensure alignment (monitoring profits) but cannot ensure this due to the agency problem (the inevitable conflict that arises from the separation of management and ownership)
Directors being responsible for explaining their actions to shareholders, does this describe the concept of agency ?
No, it describes accountability
Directors being responsible for managing the shareholder’s property describes the concept of agency?
No, it describes stewardship
Explain the concept of agency
where an agent acts on behalf of a principal to perform tasks for them. They are accountable to the shareholders for their stewardship of the entity’s assets which are placed under their control.
True or false: engagement risk is greater for a reasonable assurance engagement
In a reasonable assurance engagement, engagement risk is reduced to an acceptably low level as the basis for the practitioner’s conclusion
Do limited assurance engagements require an understanding of the entity including its control environment?
No, understanding the subject matter to provide the lower level of assurance, does not require full understanding of the entity and its environment.
Which assurance engagement carries greater risk?
limited assurance engagements because their procedures are limited compared with what is necessary to provide reasonable assurance
Limitations of an audit
Audit evidence sometimes indicates what is possible nor certain
Limitations in accounting and control systems
Not all items in the FS are tested
Audit report has inherent limitations
Auditing is not objective, judgments have to be made
Audit report can be issued a long time after the end of the reporting period
Auditors can never certify that the accounts are correct, they can only ever express an opinon
Assurance engagement
one where a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria
Intended user
the individual/organisation that the practitioner expects will use the report
Responsible party
party responsible for the underlying subject matter
Practitioner
the individual (engagement partner, engagement team or as applicable the firm) who is conducting the engagement
Elements of an assurance engagement
Criteria - the subject matter is measured against criteria in order to reach an opinion
Report - a written report containing the practitioner’s opinion is issued to the intended user in the form appropriate to a reasonable assurance engagement or limited assurance engagement
Evidence - sufficient appropriate evidence needs to be gathered to support the required level of assurance
Subject matter - the data to be evaluated that has been prepared by the responsible party such as financial performance, internal controls and behaviour, non financial performance
Three party relationship - the intended user, responsible party, practitioner
What are the procedures performed in a limited assurance engagement?
- judgment is required to determine the appropriate procedures required to obtain this level of assurance.
- Enquiry including inuiry of management as to large and unusual items in the FS
- Analytical procedures to understand the relationship between items within the FS
Examples of assurance engagements
statutory audit
review of an entity’s financial results for the first half of the year
a review of the effectiveness of an entity’s internal control
a review of cash flow forecasts which will be presented to a bank to obtain funding
a review of threats which could affect the business ability to continue as a going concern
Approach to conducting assurance engagements
Agree scope of work to be performed with client
Formalise the terms of engagement in an engagement letter
Plan the work required based on risk and level of assurance required
Obtain sufficient evidence on which to base the conclusion
Perform overall review and form opinion
Issue assurance report to client as per pre agreed format
Benefits of assurance report
Reduces management bias
Any non standard or modified opinion draws attention to risk
Relevance of info is improved because of the expertise and knowledge of the assurance firm
Provides an independent opinion from an external source that enhances the credibility of the information
Levels of assurance
Reasonable assurance - significant amount if testing and evaluation is required to support the practitioners conclusion
Limited assurance - a lower level of assurance. The nature, timing and extent of the procedures carried out by the practitioner in a limited assurance engagement would be limited compared with what is required in a reasonable assurance engagement. however the procedures performed should be planned to obtain a level of assurance which is meaningful in the practitioner’s judgment.
Wording of reasonable assurance
in our opinion, internal control is effective in all material aspects based on XYZ criteria
Wording of limited assurance
Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective in all material aspects based on XYZ criteria
What are the procedures in a reasonable assurance engagement?
Obtaining an understanding of the entity
Assessing risk
Performing further procedures
Assurance report is positive
Procedures in a limited assurance engagement
evidence gathered is limited involving techniques such as enquiry and analytical procedures
It is the companies legislation that prescribes the requirement for statutory audit
True
