You are on page 1of 3

ASSURANCE ENGAGEMENT AND AUDIT Edited By: Salim Saifullah-Al-Ahsan, Bsc Hons (OBU) UK, ACCA (Finalist)

Assurance:
An assurance engagement is one in which a practitioner (auditor) expresses an opinion on a report prepared by an entity (auditor) which increases the confidence of the intended user (shareholder)
Three people or groups of people involved The practitioner (accountant) The intended users The responsible party (the person(s) who prepared the subject matter

Reasonable or Positive assurance It s where intensive procedures are undertaken to find high quality evidence, this in turn increase the credibility of the assurance given by practitioner. E.g. Audit Limited or Negative assurance It s also called moderate assurance, usually given in a review engagement. Practitioner agrees terms of engage and conducts analytical procedures, enquiries to produce a negative assurance report. i.e. Nothing has come to our attention that causes us to believe that the business have going concern threats Worked example: Assurance engagement In order to demonstrate these elements of an assurance engagement, the Worked example is that of a house purchase. Imagine you are buying a house. There are certain issues you would want assurance about, particularly whether the house is structurally sound. In this situation, you would be unlikely just to trust the word of the person who was selling the house but would seek the additional assurance of a qualified professional, such as a surveyor. You should already be able to see the first key element of an assurance engagement, which is the involvement of three people: You (the intended user) The house owner (the responsible party) The surveyor (the practitioner) The subject matter of this assurance engagement is the house in question. The surveyor will visit the house to test whether it is sound and will draw a conclusion.

The surveyor will judge whether the house is sound in the context of building regulations, planning rules and best practice in the building industry. These are the criteria by which he will judge whether he can give you assurance that the house is structurally sound. In order to make a conclusion, the surveyor will obtain evidence from the house (for example, by looking for damp patches and making inspections of key elements of the house). Lastly, when he has drawn a conclusion, the surveyor will issue a report to you, outlining his opinion as to whether the house is sound or not. This report will contain any limitations to his work, for example, if he was unable to access any of the property or he was unable to lift fitted carpets to inspect the floor underneath them.

Ultimately, when you have read the surveyor s report, you will have more assurance about the state of the property, and correspondingly, more confidence to pay the deposit, take out a mortgage and buy that house. Six elements -Three party relationships: y y y Practitioner (Professional accountant, Auditor, MBBS Doctor, Certified lawyer etc ) Responsible party( Whoever prepares the information e.g. Board of directors) Intended users( Whoever commissions the work e.g. The reader of financial statements)

-The subject matter (e.g Performance of the company) - Subject matter information (The annual F/S) .basis of review/work -Suitable criteria (The relevant framework) .Follow ISA/IAS -Sufficient appropriate evidence (Result of test) . -A written report (Audit report that is contained with the published F/S)

Audit
It s an official examination of the accounts of an entity by an auditor. The objective is to enable the auditor to express an opinion whether the financial statements represent true and fair view and are prepared, in all material respects, in accordance with an applicable financial reporting framework. (I.e. Country specific regulation and accounting standard)

The statutory requirement for audit


Most countries impose a statutory requirement for an annual (external) audit to be carried out on the financial statements of most companies. However, in many countries, smaller companies are exempt from this requirement for an audit. Other entities, such as sole traders, partnerships, clubs and

societies are usually not subject to a statutory audit requirement. Small companies and these other entities may decide to have a voluntary audit, even though this is not required by law.

Concepts of accountability, stewardship and agency


An audit of a companys accounts is needed because in companies, the owners of the business are often not the same persons as the individuals who manage and control that business. The shareholders own the company. The company is managed and controlled by its directors. The directors have a stewardship role. They look after the assets of the company and manage them on behalf of the shareholders. In small companies the shareholders may be the same people as the directors. However, in most large companies, the two groups are different. True and fair view (fair presentation) The auditor reports on whether (or not) the financial statements give a true and fair view, or present fairly, the position of the entity as at the end of the financial period and the performance of the entity during the period. The auditor does not certify or guarantee that the financial statements a re correct. Although the phrase true and fair view has no legal definition, the term true implies free from error, and fair implies that there is no undue bias in the financial statements or the way in which they have been presented.

You might also like