Chapter – 1: Introduction to Assurance
Chapter – 1: Introduction to Assurance
What is Assurance ?
Expressing a conclusion/opinion on a subject matter,
to give confidence to the intended users, based on
sufficient evidences and supportings.
Chapter – 1: Introduction to Assurance
Why is Audit/Assurance needed ?
Because big businesses operate limited companies, where there is a clear cut distinction between the
roles of owners and the management.
Here the comes the concept of ‘Stewardship’
Stewardship is the responsibility to take good care of resources. A steward
is a person who is entrusted with the responsibility of management of
another person’s property.
A fiduciary relationship (relationship of acting in ‘good faith’) exists
between the directors of a company and the shareholders of the company.
To sum up:
• The directors are the stewards of the company
• The shareholder is the principal who employs the directors, to act as
agents of the shareholders
• The directors are accountable to the shareholders for the way in which
they run the company
Chapter – 1: Introduction to Assurance
Why is Audit/Assurance needed – For other stakeholders
Other stakeholders who may be interested in the performance of business:
Employees
Customers
Suppliers and lenders
The government
Pressure groups
Chapter – 1: Introduction to Assurance
What is Assurance Engagement?
As briefed under the International Framework for Assurance Engagements, an engagement in which a practitioner obtains
sufficient and appropriate evidence, to express a conclusion to give confidence to the intended users, in the subject matter
studied.
Elements of an assurance engagement
1. Three party involvement (i.e. the practitioner, intended users and the
responsible party {the party who is responsible for preparing the
subject matter)
2. The subject matter
3. Suitable criteria (against which the subject matter is to be evaluated
such as laws, standards, regulations, etc.)
4. Appropriate evidence
5. Written assurance report
Chapter – 1: Introduction to Assurance
Types of Assurance Engagement
Reasonable Assurance Engagements Limited Assurance Engagements
External Audit Engagement Review Engagement
Chapter – 1: Introduction to Assurance
Types of Assurance Engagement
Point of distinction Reasonable assurance engagements Limited assurance engagements
The practitioner gathers sufficient and
reasonable conclusions limited conclusions
appropriate evidences to be able to draw…
thorough procedures including tests of very few procedures, mainly
Procedures performed to obtain evidence
controls enquiries and analytical procedures
Assurance opinion positively worded negatively worded
‘In our opinion, the financial ‘Nothing has come to our attention
Concluding words
statements give a true and fair view…’ that causes us to believe that the…’
Chapter – 1: Introduction to Assurance
External Audit Engagement – A Reasonable Assurance Engagement
Under an external audit, the auditor expresses an opinion on whether the financial statements give a true and fair view
and are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Why is external audit needed?
• Because in case of companies, the providers of finance are not involved in
the day to day running of the company, which is handled by the
management
• Shareholders would be interested in knowing the performance and
financial position of the company
• On the other side, the directors may have incentives to manipulate the
financial statements to show better performance of the company
‘True & Fair View’ - It means that the financial statements are free from any material misstatement, because of any fraud or error
Chapter – 1: Introduction to Assurance
Expectation Gap
A belief that the auditor tests all transactions and balances, that the auditor will detect all fraud, thereby giving
an absolute assurance on the financial statements of a company, is termed as ‘Expectation Gap’.
Limitations of an audit:
• Financial statements are made using subjective estimates
• Evidence is often persuasive not conclusive
• Representations from management are usually relied upon
by the auditor
• Testing of transactions and balances is done only a sample
basis
Remember, an auditor provides only a reasonable assurance, which is not absolute assurance.
Audit does not mean a 100% guarantee of accuracy.
Chapter – 1: Introduction to Assurance
Review Engagement - A Limited Assurance Engagement
Which company may opt for a review engagement?
A company which is not legally required to have an
audit done. It may rather choose to get a review done
for its financial statements.
The major objective of a review, is to enable an auditor
to state if he/she has discovered anything which can
indicate that the financial statements are not prepared
in accordance with the applicable financial reporting
framework.
Chapter – 1: Introduction to Assurance
Thank You