Concept of and need for assurance

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Assurance
An assurance providers satisfaction as to the reliability of an assertion being made by one party for the use of another party. It is expressed in a written document with a positive or negative conclusion given.
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Assurance engagement
An independent practitioner expresses 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.
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Key elements of an assurance engagement
Three party relationship (practitioner, intended user, responsible party), subject matter, suitable criteria, sufficient appropriate evidence, written report providing an opinion
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Practitioner
Professional, provides an opinion
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Responsible party
Prepares material, determines the suitable criteria
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Subject matter
Material assurance needed for intended user
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Suitable crtieria
Benchmark
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Written report providing an opinion
What the intended user wants
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Reasonable assurance
High level of confidence, sufficient and appropriate evidence (lots of work), positive opinion, financial statements show a true and fair view in all material respects
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Limited assurance
Low level of confidence, sufficient and appropriate evidence (less work), negative opinion, nothing has come to our attention to make use believe the financial statements are misstated
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Absolute assurance
This cannot be given (i.e. 100%)
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Examples of assurance engagements
Statutory audit (required by law), bank and pension scheme audit (highly regulated and complex), due diligence, internal control reports, fraud investigations
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Statutory audit
Objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with applicable financial reporting framework
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True
Information is factual, conforms with required standards and laws, accounts correctly extracted from books and records
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Fair
Information is free from discrimination and bias in compliance with standards and rules, accounts reflect commercial substance of companies underlying transactions
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Auditor requirements in Companies Act 2006
Auditors members of Recognised Supervisory Body (RSB)
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What the RSB is responsible for
Only individuals with an appropriate qualification or firms controlled by qualified persons can conduct audits, those individuals/firms are monitored on a regular basis
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Responsible for issuing auditing standards
Auditing Practices Board (APB) which adopts international standards on auditing (ISAs)
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What the APB is responsible for
Issuing Ethical Standards (ESs), being a subsidiary of the Financial Reporting Council (FRC)
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Importance of assurance to users
Users do not have detailed professional knowledge of the subject matter (or criteria) so an independent expert is needed to give the information credibility
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Benefits of assurance: Intended users
Independent, professional verification of subject matter
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Benefits of assurance: Third parties
Assurance report gives additional confidence to other users of subject matter
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Benefits of assurance: Responsible party
Independent check acts as a deterrent to help prevent or detect errors or fraud, reduce the risk of bias
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Limitations of assurance
Testing is used (auditors don't oversee entire process), systems have limitations, audit evidence is persuasive not conclusive, assurance providers don't test every transaction, staff collude in fraud, professional judgement used, items are estimates
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Expectations gap
Difference between what the users think the auditor does and what the auditor actually does as users are not aware of limitations provided by statutory audit
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Ways to reduce expectations gap
Issue engagement letter setting out the work to carry out as well as limitations of that work, regularly review the form and content of assurance reports issued
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Other cards in this set

Card 2

Front

An independent practitioner expresses 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.

Back

Assurance engagement

Card 3

Front

Three party relationship (practitioner, intended user, responsible party), subject matter, suitable criteria, sufficient appropriate evidence, written report providing an opinion

Back

Preview of the back of card 3

Card 4

Front

Professional, provides an opinion

Back

Preview of the back of card 4

Card 5

Front

Prepares material, determines the suitable criteria

Back

Preview of the back of card 5
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