Nature, Purpose

and scope of Audit

and Assurance
Services
ACU 08206
Meaning
Auditing
 Audit is an examination of financial statement to determine if they give true and
fair view or fairly present the financial statement in conforming with specified
criteria eg. IFRS, IAS, GAAP e.t.c
WHY AUDITING
➢ Owners are not involved in the day to day operation of the entity, they are interested in
knowing the financial position and performance of the entity. Apart from the owners;
1. Suppliers
2. Employees
3. Banks and financial institutes
4. Tax and other government authorities
➢ They all want an assurance from an independent person as to the truth and fairness of
the financial statements.
 Scope of Audit

➢ The scope of audit is increasing with the increase in the complexities of the
business.
➢ Today most of the economic activities are largely conducted through public
finance. The auditor has to see whether these larger funds are properly
used.
➢ The scope of audit encompasses verification of accounts with a intention of
giving opinion on its reliability.
➢ It should be remembered that an auditor just expressed his opinion on the
authenticity of the account. He has no power to take action against
anybody, in this regard its said that “an auditor is a watch dog but not a
blood hound”.
 Objectives and importance of
audit
 Primary Objective.
 The objective of the external audit of the financial statements is to
enable the auditors to express an opinion as to whether the
financial statements show true and fair view

 Secondary Objective:
 These are accompanying objectives to the primary objective of
auditing. They include the following:
 Objectives and importance of
audit
1) Detection and prevention of errors
Errors are mistakes committed unintentionally because of ignorance,
carelessness. Errors are of many types:
 Errors of Omission
 Errors of Commission
 Compensating Errors
 Error of Principle
 Clerical Errors
 Objectives and importance of
audit
 2. Detecion and Prevention of Fraud: A fraud is an Error committed intentionally to
deceive/ to mislead/ to conceal the truth/ the material fact.
 Misappropriation of Cash: This is one of the majored frauds in any organization it
normally occurs in the cash department. This kind of fraud is either by showing
more payments/ less receipt. Eg: not recording cash sales. Not allowing discounts
to customers.
 Misappropriation of Goods: here records may be made for the goods not purchase
not issued to production department, goods may be used for personal purpose.
 Manipulation of Accounts: this is finalizing accounts with the intention of misleading
others. This is also known as “WINDOWS DRESSING”.
 Importance & Limitation of audit

1. In the complex business world, where there has been a complete separation
between ownership and management, an audit is the only effective source of crucial
checks on directors or managers.
2. Although auditing does not ensure complete absence of errors and frauds,
these are material misstatements should be found and corrected.
3. Auditing facilitates tax calculations and makes them more reliable and acceptable to
tax authorities.
4. Audited accounts are a source of evidence in a court of law.
5. Auditing can help a company in:
 settling disputes in the firm
 obtaining or extending credit
 obtaining loans
 selling the business
Importance & Limitation of audit
 Auditing Limitations
1. Auditors examine the prepared accounts. They may find
themselves unable, despite their training and knowledge, to
reveal any ingenious manipulation of accounts at the
preparatory level. Hence, audited accounts do not always
disclose the complete facts.
2. Auditing is normally conducted on a test basis.
3. Auditing depends largely on judgment and opinion. Any error
made in matters involving judgment can lead to an incorrect
opinion.
4. Auditing, to be real, must have an independent auditor.
This independence, however, can be compromised in
practical life.
5. A real and purposeful audit demands a sense of judgment,
 TOPIC 2a
Assurance engagements
 INTRODUCTION
Assurance engagement
 Its an independent professional service for improving quality of information can be
performed by CPA OR by variety of other professional
OR
 Means an engagement in which a practitioner (professional accountant or auditor) expresses
a conclusion (in report form) that is designed to enhance the degree of confidence users have
about the evaluation of the subject matter against identified criteria

Objective of other Assurance services

 The main objective of assurance services, as stated by the AICPA, is to provide information
that assist in better decision making.
 Assurance services encompass audit and other attestation services but also include
nonstandard services. Assurance services do not encompass consulting services.
Examples of Assurance 11

Engagements
➢ An audit of financial statements
➢A review of financial statement
➢ Risk assessment reports
➢ systems reliability reports
➢ Reports on social and environmental issues
➢ Reviews of internal controls
➢ Value for money audit in public sector
organizations.
TYPES OF ASSURANCE
Limited Assurance

➢ There are some exceptions to using the positive form of assurance.

➢ In a review of historical financial statements, the conclusion is

expressed in the negative form

 E.g. “nothing has come to our attention that causes us to believe that
[subject matter] does not conform, in all material respects, with
[criteria].”

➢ Prospective financial reports give a disclaimer that “actual results

are likely to be different from forecast.”
 TYPES OF ASSURANCE

Reasonable Assurance
 In most assurance services the audit conclusion is expressed in the
positive form:
 E.g. “in our opinion [subject matter] conforms, in all material
respects, with [criteria].”
 This conveys “reasonable assurance,”
 i.e. indicates that the auditor has obtained sufficient appropriate
evidence
 E.g. report on financial statement audit.
 Why reasonable assurance 14
 “Reasonable assurance” is less than absolute assurance.
Reasons:
 The use of selective testing.
 The inherent limitations of internal control.
 The fact that much of the evidence available to the practitioner
is persuasive rather than conclusive.
 The use of judgment in gathering and evaluating evidence and
forming conclusions based on that evidence.
 In some cases, the characteristics of the subject matter when
evaluated or measured against the identified criteria.
Assurance and Non-assurance Engagements

 The IAASB framework distinguishes between assurance engagements and non-

assurance engagements
 Assurance engagements on other information such as reviews of
VFM audits
Key Performance Indicators (KPI)
Internal control and systems
Due diligence assignments
Prospective Financial Information
 Non-assurance engagements are indicated as including:
Agreed upon procedures
Review engagements
Compilation work
Assurance and Non Assurance services
Elements of Assurance Engagements
Five Elements that all assurance engagements exhibit are:
1. Three party relationship (practitioner, responsible party,
and the intended users);
2. Subject matter;
3. Suitable criteria;
4. Evidence;
5. Assurance report.
[Link] part Relationship
 i.e. practitioner, a responsible party, and the intended
users.
 Practitioner - (e.g. auditor, accountant, expert)
 gathers evidence to give conclusion to intended users
 Responsible party - (management/board)
 responsible for: subject matter, criteria and engaging the
practitioner.
 Intended users
 Identifiedby the responsible party or by law.
 They are the address of the report
[Link] Matter

 The subject matter can take many forms, such as:

 Information/data about historical/prospective financial performance
 Physical characteristics (e.g. statistical information, non-financial
performance indicators, capacity of a facility).
 Systems and processes (e.g. internal controls, IT systems).
 Behavior (e.g. corp’ governance, compliance with regulation, human
resource practices).
3. Suitable criteria

 Criteria are benchmarks (standards, objectives, or set of rules)

used to:
 Evaluate evidence or
 Measure the subject matter of an assurance engagement.

 E.g.,
 Financial statements = IFRS, or national standards.
 Environmental = Global Reporting Initiative (GRI)
[Link]

 Same evidence gathering procedures as in normal audit

 Quantity or quality of evidence is affected by:
1. The characteristics of the subject matter (e.g. when future
oriented, less objective evidence might be expected to exist
than when the subject matter is historical.

2. Other non-subject matter characteristics.

Assurance Report

 The auditor provides a written report containing a

conclusion that conveys the assurance obtained as to
whether the subject matter conforms, in all material
respects, to the identified criteria.

 For instance, an audit of financial statements provides an

opinion on conformity with IFRS.
Five elements of an assurance engagement
Level of Assurance for an Engagement
Content of assurance report
“ “If a thing’s worth doing,
it’s worth doing well.” ~
CHINESE PROVERB
”
 Individual Assignment 1
1. Highlight standard(s) guiding Assurance engagements
2. Briefly explain Key consideration before Accepting an engagement.
Note: specify standards


To be attempted by all, Presented by selected group;