Audit and Assurance
Chapter 1: Intro to Audit and Assurance
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What is assurance?
o An assurance engagement in which a practitioner obtains sufficient appropriate
evidence in order to express a conclusion designed to enhance the degree of
confidence of the intended user other than the responsible party about the outcome
of the evaluation or measurement of a subject matter against criteria (IFRS)
Elements of Assurance Engagement (5 mark question possible) *
o Three Parties Involvement
 Practitioner – Auditor
 Intended Use – Shareholder (also public)
 Responsible Party (Directors)
o Appropriate Subject Matter – Financial Statements
o Suitable Criteria – IFRS (fr framework)
o Sufficient Appropriate Evidence
 Sufficient (quantity) and appropriateness (quantity)
 Needed to provide a basis for the opinion
o Written Assurance Report – Independent Auditors Report
 Report vs opinion is different
Assurance Engagements:
o Audit of f/s
o Review of f/s
o Systems reliability report
o Verification of social and environmental information (some are mandatory/or as a
sign of marketing)
o Review of internal controls (well designed and functioning)
o VMF audit in public sector organisations
 Value for Money: the 3 E’s
 Economy: most economical, not overspending but also not
sacrificing quality
 Efficiency: maximum output
 Effective: objective should be met
Types of Assurance Engagements: *
o Reasonable Assurance Engagement: (audit of f/s)
 The practitioner:
 Gathers sufficient appropriate evidence to be able to draw
reasonable conclusions
 Perform very thorough procedures (increase sample size, verify as
many transactions)
 Conclude that subject matter (f/s) conforms in all material respects
with the suitable criterea (IFRS)
 Gives positive worded assurance opinion
 Gives high level of assurance (confidence)
 Gives TRUE AND FAIR view
o Limited Assurance Engagements (all other assignments except f/s)
 The practitioner:
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Gathers sufficient appropriate evidence to be able to draw limited
conclusions
 Performs significantly fewer procedures, mainly enquiries and
analytical procedures (comparisons)
 Concludes that the subject matter, in respect to the suitable criteria,
is plausible in the circumstances
 Gives negatively worded assurance conclusion
 Gives moderate or lower level of assurance than that of an audit
 Nothing has come to our attention that causes us to believe that the
f/s are not true and fair
 The confidence inspired by a reasonable assurance report > limited
assurance report
o Therefore:
 There are more regulations/standards governing a
reasonable assurance assignment
 The procedures carried out will be more thorough
and evidence gathered will be of a higher quality
Objective of an Auditor
 Obtain reasonable assurance (True and Fair view)
 Express an opinion (Audit Opinion – objective of an auditor)
Need for External Audit
 Agency Relationship (shareholders vs directors = external audit)
Benefit of an Audit
 Higher quality information which is more reliable
 Independent scrutiny and verification may be valuable to management (may
learn)
 Reduces risk of fraud and errors
 Enhances credibility of f/s (loan providers)
 Deficiencies in the Internal Control Systems (ICS) – and report and
recommend
Expectation Gap *
 Some users incorrectly believe that an audit provides absolute assurance that the audit opinion is a guarantee the f/s is “correct.” This and other
misconceptions about the role of an auditor are referred to as the
“expectations gap.”
 A belief that auditor tests all transactions and balances
 A belief that auditors are required to detect all fraud
 A belief that auditors are responsible for preparing the f/s
Review Engagements
 Is an example of a limited assurance engagement
 Purpose and objective of a review engagement:
o Company is required to have an audit may choose to have a
review of it’s financial statement instead.
o The review will still provide some assurance to users but is
likely to cost less and less disruptive than the audit.
o The procedure will mainly focus on analytical procedures
and enquiries of management.
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Stakeholder Groups with an interest in the f/s:
 Shareholders
 Employees (wages, future career prospects)
 Those charged with Governance (NED’s)
 Customers and Suppliers
 Lenders
 The Government (Tax)