AUDITING

ASSURANCE ENGAGEMENT Assurance engagement is simply an engagement conducted by a practitioner at the end of which he expresses his opinion on the measurement of subject matter against a criteria. This opinion will ultimately enhance the degree of confidence of the intended users about the measurement of subject matter (outcome of evaluation) i.e. whether the measurement (evaluation) given is fair or not which in turn increases the credibility of subject matter. Here understanding the link between criteria, subject matter and measurement of subject matter is of crucial importance which is: *Measurement of subject matter is an information which is obtained by applying a criteria to a subject matter. Measurement of subject matter is also called subject matter information. As both terms mean one and the same thing therefore, from this point forward, measurement of subject matter and subject matter information will be used interchangeably in this answer. Now if we replace the formal terms in the definition above with common examples then we can easily understand what this definition is all about. That is: Responsible party- For example management Subject matter- It is the entitys actual financial position, financial performance and changes in cash flows about which users are interested. And if you have information about these three areas then you are in a much better position take economic decisions regarding entity. Therefore, the three aspects are in short called subject matter. Criteria- For example International Accounting Standards (IASs) or International Financial Reporting Standards (IFRSs), Local Accounting Standards and any other specific accounting framework that is in use for the preparation of financial statements in a particular jurisdiction or anything to be used as a benchmark. Subject matter information- In its true terms it is the information obtained as a result of evaluation of subject matter i.e. in simple words the financial statements. It is the financial statements which provide evaluation of entitys financial position, financial performance and changes in cash flows. And this evaluation is conducted by management by applying financial reporting framework (criteria) on the subject matter i.e. financial position, performance and changes in cash flows of the entity. Practitioner- For example; auditor, reviewer etc. [Remember, the term practitioner is much broader then "auditor"] Users- all those people, other than responsible party, who seek assurance of practitioner about the measurement of subject matter as given by the responsible party. In other words we can say that users, who have asked for the help of a practitioner, are not just interested in the subject matter but more importantly they want to be confident whether the subject matter information, which makes the subject matter relevant and reliable, is appropriate or not. To sum this all up and to understand it more consider the following example. Management (responsible party) of company A fulfilled its responsibility by publishing financial statements (subject matter) in accordance with International Financial Reporting Standards (criteria) and the assets, liabilities etc are recognized, measured, presented and disclosed (subject matter information) as per the requirements of IFRSs. Practitioner (auditor) is appointed by the shareholders (users) to express his opinion (assurance) in the form of a report over the recognition, measurement, presentation and disclosures (subject matter information) made by the

management (responsible party) in the financial statements (subject matter) are actually in accordance with IFRSs (criteria) Putting it in few words then assurance engagement is much broader term and concept as compared to attestation engagement. It will not be wrong if we say that all attestation engagements are assurance engagements but not every assurance engagement is attestation engagement. Assurance engagement is an engagement undertaken by the practitioner (e.g. auditor, reviewer etc.) and at the conclusion of engagement practitioner expresses an opinion about the evaluation of subject matter. This opinion ultimately enhances the confidence of intended users (other than responsible party) over the evaluation of subject matter. Now assurance engagements can take two forms i.e. 1. Attestation Engagement; Or 2. Direct Reporting Engagement Under attestation engagement, an evaluation of subject matter would have already been conducted by the responsible party against a set criteria. As this evaluation is usually given in the form of a report issued to the intended users by the responsible party. This report is actually a claim by the responsible party of a fair evaluation of subject matter. On that assertion made by the responsible party practitioner is asked to confirm whether such assertion of evaluation is fair or not. An engagement to attest the assertions of responsible party is called attestation engagement. And at the conclusion of attest engagement, practitioner will issue a report in which he may word his opinion as follows: Example 1: In our opinion, the responsible partys assertion that forecasts has been prep ared on best estimate basis, is fair. Example 2: In our opinion, the responsible partys assertion that internal controls are working effectively, is fair So, from above discussion we understood that attestation engagements are a sub-set of many different forms of assurance engagement in which a practitioner issues a report to attest the assertions of against a set criteria. However, assurance engagements is just any engagement in which users degree of confidence of is reinforced which need not to be attestation e.g. compilation services etc. If the measurement of subject matter is given by the responsible party, it takes the form of assertions if it is disclosed to the intended users and then practitioner is asked to affirm such assertions of the responsible party. Such assurance engagement is attestation engagement. Another name for attestation engagement is assertion-based engagement as practitioner express his opinion about assertions fairness. However, if the practitioner performs the measurement of subject matter himself OR obtains the representation from the responsible party who has conducted the measurement of subject matter where such evaluation was not disclosed to intended users by the responsible party then measurement of subject matter will be provided by the practitioner in his assurance report to intended users. Such engagements are called direct reporting engagements. IMPORTANT: Do not confuse attestation engagements and direct reporting engagements with reasonable assurance engagement and limited assurance engagements. All four are studied under assurance engagements. But the dimensions are different just like when we try to classify cost we are able to classify the same thing in different ways just because we look at it from different perspectives. Same way, if we talk about assurance engagement from the perspective of degree of assurance we get two types; reasonable assurance engagements and limited assurance engagements. Whereas if we look at assurance engagements from the perspective of what forms assurance engagement can take then we get attestation engagement and direct reporting engagements.

FINANCIAL STATEMENT AUDIT ENGAGEMENTS Financial statement audit engagements are relevant to a wide range of potential users; consequently, in addition to independence of mind, independence in appearance is of particular significance. Accordingly, for financial statement audit clients, the members of the assurance team, the firm and network firms are required to be independent of the financial statement audit client. Such independence requirements include prohibitions regarding certain relationships between members of the assurance team and directors, officers and employees of the client in a position to exert direct and significant influence over the subject matter information (the financial statements). Also, consideration should be given to whether threats to independence are created by relationships with employees of the client in a position to exert direct and significant influence over the subject matter (the financial position, financial performance and cash flows). Other assertion-based assurance engagements: (a) In an assertion-based assurance engagement where the client is not a financial statement audit client, the members of the assurance team and the firm are required to be independent of the assurance client. Such independence requirements include prohibitions regarding certain relationships between members of the assurance team and directors, officers and employees of the client in a position to exert direct and significant influence over the subject matter information. Also, consideration should be given to whether threats to independence are created by relationships with employees of the client in a position to exert direct and significant influence over the subject matter of the engagement. Consideration should also be given to any threats that the firm has reason to believe may be created by network firm interests and relationships. (b) In the majority of assertion-based assurance engagements, that are not financial statement audit engagements, the responsible party is responsible for the subject matter information and the subject matter. However, in some engagements the responsible party may not be responsible for the subject matter. For example, when members are engaged to perform an assurance engagement regarding a report that an environmental consultant has prepared about a company's sustainability practices, for distribution to intended users, the environmental consultant is the responsible party for the subject matter information but the company is responsible for the subject matter (the sustainability practices). (c) In those assertion-based assurance engagements that are not financial statement audit engagements, where the responsible party is responsible for the subject matter information but not the subject matter, the members of the assurance team and the firm are required to be independent of the party responsible for the subject matter information (the assurance client). In addition, consideration should be given to any threats the firm has reason to believe may be created by interests and relationships between a member of the assurance team, the firm, a network firm and the party responsible for the subject matter.