Why management wants to present “best view” of its performance to shareholders?
[Chapter 1]
Due to some Incentives (e.g. bonus) or Pressures (e.g. fear of removal).
What is meant by statutory assurance engagement and non-statutory assurance engagement?
[Chapter 1]
If an assurance engagement is required by law, it is called statutory assurance engagement (e.g. in case of large companies).
If an assurance engagement is not required by law, it is called non-statutory assurance engagement (e.g. in case of Sole-proprietorships, Partnerships, Not for Profit Organizations, and Small companies).
Define “Stewardship”
[Chapter 1]
Stewardship is the practice of managing other person’s property e.g. directors in a company manage shareholders’ property.
Define “Agent”
[Chapter 1]
An agent is an individual who acts on behalf of the principal e.g. directors in a company act on behalf of shareholders.
Define “Accountability”
[Chapter 1]
Accountability means being answerable to others e.g. directors are accountable to shareholders for their acts.
What are Advantages of Audit or Assurance Engagement?
[Chapter 1]
- Increases credibility of F/S.
- It confirms that management is performing its duties.
- It identifies deficiencies in internal control system.
- It assists in sale or purchase of business.
- It assists in grant of loan by bank.
Define “Assurance Engagement”
[Chapter 1]
“Assurance engagement” means an engagement in which a practitioner obtains evidence about evaluation of a subject matter against suitable criteria, and expresses his conclusion to enhance the confidence of the intended users (other than the responsible party).
Define “Three party relationship”
[Chapter 1]
- Intended users (the parties who require subject matter and assurance report e.g. shareholders, bankers).
- Responsible party (the party which is responsible for preparation of subject matter i.e. directors/management). and
- Practitioner (the professional who verifies subject matter and provides assurance on it i.e. auditor)
Define “A subject matter”
[Chapter 1]
Subject matter is the information prepared by responsible party, and is verified by practitioner e.g. Historical financial statements, or Cash flow forecast.
Define “A Suitable Criteria”
[Chapter 1]
Criteria means framework/basis (i.e. standard rules and regulations) which is used to prepare subject matter (e.g. financial statements).
Define “Evidence”.
[Chapter 1]
Evidence is the information used by practitioner in arriving at the conclusion on which his report is based.
Evidence should be Sufficient and Appropriate.
Define “Written Assurance Report”
[Chapter 1]
It is a report written in standard format (as per ISAs or as per local Laws) which includes conclusion of practitioner. It is provided by practitioner to intended users.
Explain “Limited Assurance” with example.
[Chapter 1]
It is a moderate level of assurance, expressed in negative form of conclusion i.e.
“Based on our review, nothing has come to our attention that causes us to believe that accompanying financial statements do not give true and fair view in accordance with IFRSs.”
Examples: review of historical financial statements, or review of cash flow forecast.
Explain “Reasonable Assurance” with example.
[Chapter 1]
It is a high, but not absolute, level of assurance expressed in positive form of conclusion i.e.
“In our opinion, accompanying financial statements give true and fair view in accordance with IFRS.”
Examples: audit of historical financial statements.
What are inherent limitations of audit? (or why absolute assurance cannot be provided)
[Chapter 1]
- Nature of financial statements (estimates, judgments and uncertainties are involved).
- Nature of audit procedures
(a) Management may not provide complete information to auditor.
(b) Auditor does not have legal powers.
(c) Fraud involving collusion and complex techniques. - Time and Cost limitation.
- Many of the audit procedures are based on auditor’s judgment, which may be faulty.
- inherent limitations in internal control system.
- Company’s staff may not be available.
What is the treatment of litigations pending at year end against client?
[Chapter 1]
- If outflow is probable AND measurable, record provision.
- If outflow is not probable or not measurable, disclose.
