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Assurance engagements (external audit (done by auditor (gives independent…

- - - - required mostly by country laws
      - for most co.s (under UK Companies Act 2006)
      - may be required for investment businesses, charities, trade unions
      - advantages
        
        for SHs
        
        impartial opinion of the auditor
        
        for co.
        
        review of accounts and co. systems
        
        fraud+error detected
        
        recommendations made in relation to accounting and control systems
        
        give assurance to StHs
        
        stakeholders: parties interested in co. accounts
        
        eg.s of StHs: directors, SHs, employees, creditors, the public, taxation authorities
    - - performed by independent auditors
      - co. owners, members (SHs), trustees, professional and governing bodies, other interested parties want an audit
      - not legally required
      - can be carried out by every one including clubs, charities (some of these may require statutory one), sole traders, PSs
      - in addition to advantages common to all audit forms, they have additional benefits.
        
        for a PS these are
        
        means of settling accounts between partners
        
        audit makes the accounts more acceptable to the taxation
        authorities when it comes to agreeing an individual partner's liability to tax
        
        may facilitate sale of the business or the negotiation of loan or overdraft facilities
        
        An audit on behalf of a 'sleeping partner' is useful since generally such a person will have few other means of checking the accounts of the business or confirming the share of profits due to them (sleeping partner: a partner not sharing in the actual work of a firm)
- - - - An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information (that is, the outcome of the evaluation or measurement of a subject matter against criteria)
- - - - attestation engagements
        
        This is where the underlying subject matter has not been measured or evaluated by the practitioner, and the practitioner concludes whether or not the subject matter information is free from material misstatement.
        
        example
        
        the review of a sustainability report, which has
        been prepared by management. In this case, management measures and evaluates the extent to which the company has achieved its sustainability targets targets, and the practitioner provides a conclusion as to whether the measurement and evaluation is free from material misstatement.
      - direct engagements
        
        This is where the underlying subject matter has been measured and evaluated by the practitioner, and the practitioner then presents conclusions on the reported outcome in the assurance report.
        
        example
        
        when the practitioner is engaged to carry out a review of the effectiveness of a company's system of internal controls. The practitioner would evaluate the internal controls, and then issue an assurance report explaining the outcome of the review.
      - the main difference between the two types of review engagements lies in who is measuring, or evaluating, the underlying subject matter against the criteria.
  - - - Value for money (VFM) audits
        
        These examine the economy, efficiency and effectiveness of
        activities and processes.
      - information technology (IT) audit
        
        This is a test of controls in a specific area of the business.
      - Best value audits
        
        'Best value' is a performance framework introduced into local authorities by the UK Government. They are required to publish annual best value performance plans and review all
        of their functions over a five year period and internal audit can carry out this review
      - Financial, operational and procurement audits
- - - - The three parties are the intended user, the responsible party and the
        practitioner
        
        Intended users
        
        the person, persons or class of persons for whom the practitioner prepares the
        assurance report
        
        Responsible party
        
        the party responsible for the underlying subject matter (in a direct reporting
        engagement) or subject matter information of the assurance engagement
        
        Practitioner
        
        the individual providing professional services that will review the subject matter and
        provide the assurance
    - - This is the data to be evaluated that has been prepared by the responsible party. It can take many forms, including financial performance (eg historical financial information), non-financial performance (eg key performance indicators), processes (eg internal control) and
        behaviour (eg compliance with laws and regulations).
    - - The subject matter is evaluated or measured against criteria in order to reach an
        opinion
    - - Sufficient appropriate evidence needs to be gathered to support the required level of
        assurance
    - - A written report containing the practitioner's opinion is issued to the
        intended user, in the form appropriate to a reasonable assurance engagement or a limited
        assurance engagement
- - - - high but not absolute level of assurance is given
      - objective is a reduction in assurance engagement risk to an
        acceptably low level in the circumstances of the engagement as the basis for the assurance practitioner's conclusion. The conclusion would usually be expressed in a positive form
      - In order to give reasonable assurance, a significant amount of testing and evaluation is required to support
        the conclusion.
    - - a lower level of assurance
      - The nature, timing and extent of the procedures carried
        out by the practitioner in a limited assurance engagement would be limited compared with what is required in a reasonable assurance engagement. Nevertheless, the procedures performed should be planned to obtain a level of assurance which is meaningful, in the practitioner's professional judgement
      - For a limited assurance engagement, the conclusion conveys whether, based on the procedures performed
        and evidence obtained, a matter(s) has come to the practitioner's attention to cause the practitioner to believe the subject matter information is materially misstated. This would usually be expressed in a negative form of words.
- - - - The audit opinion is not an opinion of absolute correctness
    - - Information is factual and conforms with reality. In addition, the information conforms with required standards and law. The financial statements have been correctly extracted from the books and records.
    - - Information is free from discrimination and bias and in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company's underlying transactions.
    - - An audit gives the reader reasonable assurance on the truth and fairness of the financial statements, which is a high, but not absolute, level of assurance. The auditor's report does not guarantee that the financial statements are correct, but that they are true and fair within a reasonable margin of error.
      - One of the reasons that an auditor does not give absolute assurance is because of the inherent limitations
        of audit