Concept of and need for assurance

Assurance (confidence) - an assurance provider's satisfaction as to reliability of an assertion being made by one party for the use of another party. Assurance is expressed in a written document with a positive/negative conclusion.

Assurance engagement - an independent practitioner expresses a conclusion to enhance the confidence of intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria

Key elements of assurance engagement:

• three party relationship - practitioner (professional, provides opinion), intended user, responsible party (prepare material, determine suitable criteria)
• subject matter - material assurance needed for intended user
• suitable criteria - benchmark
• sufficient appropriate evidence
• written report - what intended user wants

Reasonable assurance

• high level of confidence
• sufficient appropriate evidence (lots of work)
• positive opinion
• financial statements show a true and fair view in all material respects

Limited assurance

• low level of confidence
• sufficient appropriate evidence (less work)
• negative opinion
• nothing has come to our attention to believe the financial statements are misstated

It is not practical or possible to give absolute assurance (i.e. 100%)

Key example: statutory audit (required by law)

Other examples:

• bank audit
• pension scheme audit
• environmental audit
• due diligence
• fraud investigations
• internal control reports
• reports on business plans/projections

Bank and pensinon scheme audits are highly regulated and complex

Different levels of assurance are given for different assurance engagements

All companies of a certain size must have an audit by law

Objectives of an audit of financial statements: enable the audit to express an opinion on whether the financial statements are prepared, in all material aspects, in accordance with applicalbe financial reporting framework

Auditors express their view by reference to the 'true and fair view' which is an expression of reasonable assurance

• true: factual, information conforms with required standards and laws, accounts correctly extracted from the books and records
• fair: information free from discrimination and bias in compliance with expected standards and rules, accounts reflect commercial substance of company's underlying transactions

If financial statements are properly prepared in accordance with applicable standards/laws and they are free from material misstatements then they are true and fair

Companies Act 2006 requires auditors to be members of a Recognised Supervisory Body (RSB)

The RSB is responsible for ensuring:

• only individuals holding an appropriate qualification or firms controlled by qualified persons can conduct audits
• those individuals/firms are monitored regularly

Responsibility for issuing auditing standards is delegated to Auditing Practices Board (APB) which has adopted international accounting standards on auditing (ISAs).

The APB also issues Ethical Standards (ESs) in relation to conduct of auditors. It is also a subsidiary of the Financial Reporting Council (FRC) to whom the government has delegated the task of independent monitoring of the accounting profession.

Users

• Intended users do not have detailed professional knowledge of subject matter (or criteria)
• Need an independent expert to give them confidence in the information (enhances credibility)

Benefits of assurance

• Intended users - independent, professional verification of the subject matter
• Third parties - assurance report gives additional confidence to other users of subject matter
• Responsible party - independent check acts as deterrent to help prevent/detect errors/fraud and reduce the risk of bias

Limitations of assurance:

• testing is used - auditors do not oversee process of building statements from start to finish
• accounting systems are relied on and have inherent limitations
• most audit evidence is persuasive rather than conclusive
• assurance providers do not test every transaction undertaken by the company
• client's staff may collude in fraud
• assurance may be subjective and professional judgement is required
• some items in the subject matter may be estimates

Expectations gap:

• arises in relation to statutory audit
• difference between what users think the auditor does and what the auditor actually does as users aren't aware of the nature of limitations of the assurance provided by a statutory audit

Ways to reduce the expectations gap:

• issue an engagement letter setting out the work to carry out and the limitations of the work
• regularly review the form and content of assurance reports that they issue