What is Assurance Engagement:

Assurance Engagement Definition: Any assignment/engagement which has five elements(Below) becomes an assurance engagement

Five Elements of an Assurance Engagement

A three-party relationship, involving: the practitioner, a responsible party and intended users.

Appropriate subject matter.

Suitable criteria.

Sufficient, appropriate evidence to support the conclusion.

A conclusion contained within a written report.

An assurance engagement will require a three-party relationship comprising:

a) The intended user who is the person who requires the assurance report (Share Holders, Lenders, etc, etc)
b) The responsible party, which is the organization responsible for preparing the subject matter to be reviewed (Board of Directors)
c) The practitioner who is the professional who will review the subject matter and provide assurance. (i.e. an accountant)

The second element is required for an assurance engagement is a suitable subject matter. The subject matter is the data that the responsible party has prepared and which requires verification (e.g Financial statements)

The subject matter is then evaluated or assessed against suitable criteria in order for it to be assessed and an opinion provided (e.g IAS & IFRS)

The practitioner must ensure that they have gathered sufficient appropriate audit evidence in order to give the required level of assurance engagement.

In the last one, an assurance report provides the opinion which is given by the practitioner to the intended user(ShareHolders)

Types of assurance Engagement

Difference between audit and assurance OR Assurance meaning in accounting OR Types of assurance services

Types of Assurance assignments

Types of assurance assignments

Reasonable Assurance

An Assurance engagement in which the Practioner(Auditor) reduces engagement risk to an acceptably lower level in the circumstances of the engagement as the basis for the practitioner’s conclusion.
Example: External Audit
High level of assurance but NOT absolute or 100% A high level of assurance but not the absolute level of assurance is provided, this is known as reasonable assurance.
More testing (Analytical procedures, a test of controls and substantive testing) Going concern review also carried out
Positive conclusion- Wording: ‘in our opinion, the financial statements give (or do not give) a true and fair view of the state of the company’s affairs’.

Limited Assurance

An assurance engagement in which the practitioner(Auditor) reduces engagement risk to an acceptable level in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement
Example: Review of financial statements
Moderate level of assurance The practitioner gathers sufficient appropriate audit evidence to be satisfied that the subject matter is credible, in this case, negative assurance is given whereby the practitioner confirms that nothing has come to auditor's attention which indicates that the subject matter contains material misstatements in financial statements
Lesser testing-focus on obvious errors only (Analytical testing and Enquiry) Going concern review will not be performed The procedures undertaken are not nearly as comprehensive in assurance engagement, with procedures such as analytical review and inquiry used extensively. Also, the practitioner does not need to comply with ISAs And IFRSs as these only relate to external audits.
Negative conclusion-Wording: “Nothing has come to light to suggest errors or problems exist’' However, the assurance is given in the absence of any indication to the contrary.
Review engagements are often take up as an alternative to an audit and involve a practitioner reviewing financial data, such as six-monthly figures. This would involve the the practitioner takes up procedures to state whether anything has come to their attention which is the reason the practitioner to believe that the financial data is not in accordance with the financial reporting framework.

Assignments were no Assurance is given

Agreed-upon procedures: A report on factual findings is given but assurance will not be given. Users must judge for themselves and draw their own conclusions
Compilation engagement: Users of the compiled information gain benefit from the accountant’s involvement but no assurance is expressed. It is used to collect, classify, and summarise financial information. It means to present data in a manageable and understandable form

What is Audit and Inherent Limitation of Audit

Audit: The practitioner examines the subject matter made available by the responsible party, matches it to the suitable criteria using evidence and reports to the intended users. (Audit also have inherent limitation) see below.

An audit is an Independent Examination of Financial Statements.

Background:

Company is an artificial legal personality which owns by the shareholders, And Run by Board of Directors, The real Owners of the company are shareholders, Shareholders delegate their authority to the directors, So they can run the company on the behalf of shareholders.

Here Shareholders are the Principle owners and BOD are the agents. This also called the agency relationship. The Directors are the caretaker of Shareholder’s investment, Funds, Assets Everything in Company.

Now Directors Duty to Run the Company in the Best interest of shareholders, Maximising the shareholders wealth, have to establish the controls, Establishing the accounting system, Maintaining the accounting Record, Preparation of Financial Statements, Publishing Financial Statements, Conducting AGMs (Annual general meetings) etc etc For the sake of their Principle Owners (Shareholders).

In the end BOD’s Publish Financial Statement. These Financial statements actually announcing the performance Or work done by directors,

Now think Directors are performing the task all over the year and now announcing their results, Now shareholders how can relay on these Financial statements, Made by the Directors about their performance,

Now shareholders want an INDEPENDENT competent person, who is (Unbiased, Neutrality, qualified, Impartial). So they can give an Independent Opinion On FINANCIAL STATEMENTS. This called Audit (Audit is Independent Examination of Financial Statement.)

Highlight: Audit is not a guarantee, Audit is Independent Examination of Financial Statement And at the end, Auditor gives Independent Opinion on Financial Statements Weathers its Presents TRUE and FAIR view or not in all material aspects.

Inherent Limitation of Audit

Why Auditor cannot give an absolute opinion

1. Sampling –For auditors, it is not practical to test 100% of transactions and so they have to apply the sampling method in selecting balances/transactions to test. Therefore, there can be an error in an item not selected for testing by the auditor.

2. Subjectivity – financial statements include judgmental and subjective areas and therefore the auditor is required to use their judgment in assessing whether the financial statements are true and fair.

3. Inherent limitations of internal control systems – an internal control system is operated by people and hence is liable to human error. As well, there is the possibility of controls override by management and of collusion and fraud. It is not possible to remove all of these inherent limitations and as the auditor relies on the internal control systems, this can reduce the usefulness of the audit.

4. Evidence is not conclusive But persuasive: therefore opinion depends on audit evidence collected by Auditors; however, this evidence can identify possible issues affecting the audit opinion, evidence involves estimates and judgments and hence does not give an absolute conclusion.

5. Even if everything reported on was examined and found to be satisfactory, there may be other items which should have been included– the completeness problem.

6. Auditors plan their work to detect material errors and frauds only – so small frauds (or large frauds split into many small amounts) may go unnoticed.

an external audit has a number of other issues which reduce its usefulness

1. Audit report format – the format of the opinion is determined by International Standards on Auditing. However, the terminology used is not usually understandable by non-accountants. This means that users of Financial Statements may not actually understand the audit opinion given.

2. Historic information – the audit report is often issued sometime after the year-end, and so the financial information can be quite different from the current position. In the current circumstance marketplace where companies’ financial positions can change quite quickly, the audit opinion may no longer be relevant as it is outdated.

3. Auditors need to understand their clients in great depth if they are to understand how fraud could be carried out and hidden. However, auditors cannot become too close to their clients or their independence will be called into question.

4. Where auditors spot errors or fraud, their primary legal responsibility is to report this to management. Any external reporting is hampered by rules on confidentiality.