Chapter1 : Introduction to assurance

1. What is assurance?

An assurance engagement is an engagement in which a practitioner (AUDITOR) obtains SAE(eg: sales bill,
salary pay garyo 1cr: employees ko bank details etc. in order to express a conclusion designed to enhance
the degree of confidence of the intended users (Bank) other than the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria.
Giving assurance means offering an opinion about specific information so the users of that information
can make confident decisions knowing that the risk of the information being 'incorrect' is reduced (not
eliminated).

Five elements of an assurance engagement:

Element In relation to an audit In relation to a forecast
1. Three party involvement

Practitioner (reviewer of the Auditor,ACCA Assurance provider,ACCA

subject matter)
Intended user (User of the Shareholders(owner), bank Directors/provider of finance(bank)
subject matter)
Responsible party (party Directors(Management) Directors
responsible for preparing the
subject matter)

2. Appropriate subject matter Financial statements Forecast

(FS) (Practi. le verify garne
kura)
Suitable criteria (k kura ko Financial reporting framework Appropriate assumptions and financial
3. basis ma verify garcha ta? i.e. (written provided evidences reporting framework
laws and regulations) hunchaa)
4. Sufficient appropriate Obtained by performing audit Obtained by performing examination
evidence (SAE is needed to procedures such as tests of procedures such as inspection of
provide a basis for conclusion) controls, tests of detail and documents, enquiries and analytical
analytical procedures procedures.

5. Written assurance report in an Independent auditor’s report Independent assurance report

appropriate form providing an opinion as to providing a conclusion on whether
whether the financial anything has come to the practitioner’s
statements give a true and fair attention to suggest the assumptions
view. are not a reasonable basis for the
forecast, and an opinion on whether
the forecast has been prepared on the
basis of those assumptions

Assurance engagements Ilustration1:

• Audit of financial statements

• Review of financial statements

• Systems reliability reports

• Verification of social and environmental information

• Review of internal controls

• Value for money audit in public sector organisations.

(Auditor le kk Garcha ta??)

 General principles the assurance provider must follow
when performing such engagements include:
• Comply with ethical requirements.

• Apply professional scepticism and judgement.

• Perform acceptance and continuance procedures to ensure only work of acceptable risk is
accepted.

• Agree the terms of engagement.

• Comply with quality management standards.

• Plan and perform the engagement effectively.

• Obtain sufficient and appropriate evidence.

• Consider the effect of subsequent events on the subject matter.

• Form a conclusion expressing either reasonable or limited assurance as appropriate.

• Document the evidence to provide a record of the basis for the assurance report.

Types of assurance engagement

Reasonable assurance Limited assurance

engagements: engagements:
The practitioner: The practitioner:

• Gathers SAE to be able to draw reasonable • Gathers SAE to be able to draw limited
conclusion. (Report thik cha) conclusions. (Report mero according chai galat
• Performs very thorough procedures to obtain SAE chaina hai, aba idk)
including tests of controls and substantive • Performs significantly fewer procedures, mainly
procedures. enquiries and analytical procedures.
• Concludes that the subject matter conforms in all • Concludes that the subject matter, with respect to
material respects with identified suitable criteria. identified suitable criteria, is plausible in the
• Gives a positively worded assurance opinion. circumstances.
• Gives a high level of assurance (confidence) • Gives a negatively worded assurance conclusion.
E.G. In our opinion, the financial statements give a true • Gives a moderate or lower level of assurance than
and fair view of (or present fairly, in all material respects) that of an audit.
the financial position of Murray Company as at December E.G: Nothing has come to our attention that causes us
31, 20X4, and of its financial performance and its cash to believe that the financial statements of Murray
flows for the year then ended in accordance with Company as of 31 December, 20X4 are not prepared, in
International Financial Reporting Standards. all material respects, in accordance with an applicable
financial reporting framework.

The confidence inspired by a reasonable assurance report is designed to be greater than that inspired by a limited
assurance report.
Therefore:

• There are more regulations/standards governing a reasonable assurance assignment.

• The procedures carried out in a reasonable assurance assignment will be more thorough.
• The evidence gathered will need to be of a higher quality.
 2. External audit
An external audit is an example of a reasonable assurance engagement.
engagements
Purpose of an external audit engagement:
ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
International Standards on Auditing states the purpose of an external audit engagement is to ‘enhance
the degree of confidence of intended users in the financial statements.’
This is achieved by the auditor expressing an opinion on whether the financial statements:
• Give a true and fair view (or present fairly in all material respects).
• Are prepared, in all material respects, in accordance with an applicable financial reporting framework.

True and fair

• True: factually correct information which conforms with accounting standards and relevant
legislation and agrees with the underlying records.

• Fair: clear, impartial and unbiased information which reflects the commercial substance of the
transactions of the entity.

Objectives of the auditor:

The objectives of an auditor are to:
• Obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error.
• Express an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.
• Report on the financial statements, and communicate as required by ISAs, in accordance with
the auditor's findings.

Need for external audit :

• Shareholders provide the finance for a company and may or may not be involved in the day to
day running of the company.
• Directors manage the company on behalf of the shareholders in order to achieve the objectives
of that company (normally the maximisation of shareholder wealth).
• The directors must prepare financial statements to provide information on performance and
financial position to the shareholders.
• The directors have various incentives to manipulate the financial statements and show a
different level of performance.
• Hence the need for an independent review of the financial statements to ensure they give a
true and fair view – the external audit.
Benefits of an audit (HIRED)
• Higher quality information, which is more reliable, improving the reputation of the market.
• Independent scrutiny and verification may be valuable to management.
• Reduces the risk of management bias and fraud and error by acting as a deterrent. An audit may also
detect bias, fraud and error.
• Enhances the credibility of the financial statements, e.g. for tax authorities or lenders.
• Deficiencies in the internal control system may be highlighted by the auditor.
Expectation gap:
Some users incorrectly believe that an audit provides absolute assurance – that the audit opinion is a
guarantee the financial statements are 'correct'. This and other misconceptions about the role of an
auditor are referred to as the 'expectation gap'.
Examples of the expectation gap
• A belief that the auditor tests all transactions and balances – tests are performed on a sample
basis.
• A belief that the auditor will detect all fraud – the auditor is required to provide reasonable
assurance that the financial statements are free from material misstatement, which may be
caused by fraud.
• A belief that the auditor is responsible for preparing the financial statements – this is the
responsibility of management.
Limitations of an audit (FIRED) {disadvantages}:
• Financial statements include subjective estimates(bad debt paila yrs ma certain % so aba pani
certain %huna sakcha) and other judgemental matters.
• Internal controls (ma rely garcham) may be relied on which have their own inherent limitations.
• Representations from management(mgmt. le deko ma nai rely garna sakna parcha cause aru
chaina) may have to be relied upon as the only source of evidence in some areas.
• Evidence is often persuasive not conclusive.
• Do not test all transactions and balances, only a sample are tested by auditors
The auditor provides reasonable assurance which is not absolute assurance. The limitations of an audit
mean that it is not possible to provide a 100% guarantee of accuracy.
Limitations of an audit :
Nature of financial reporting – financial statement amounts are affected by management judgement
and therefore subject to bias.
Nature of audit procedures – information provided by the client may be incomplete or falsified
documents may be provided.
Timeliness of financial reporting – the relevance of information diminishes over time and the auditor
cannot investigate every matter exhaustively.

3. Review engagements
A review engagement is an example of a limited assurance engagement. [jun co lai audit mandatory
chaina by law still audit garchan]
Purpose and objective of a review engagement
A company which is not legally required to have an audit may choose to have a review of its financial
statements instead. The review will still provide some assurance to users but is likely to cost less and
be less disruptive than an audit.
The procedures will mainly focus on analytical procedures and enquiries of management. In particular,
no tests of controls will be performed. As only limited assurance is being expressed, the work does not
need to be as in depth as for an audit.
The objective of a review of financial statements is to perform primarily inquiry and analytical
procedures, to enable the practitioner to conclude whether anything has come to the auditor’s
attention that causes them to believe that the financial statements are not prepared in all material
respects in accordance with the applicable financial reporting framework.