Solutions manual
to accompany
Audit and assurance
2nd edition
by
Leung et al.
© John Wiley & Sons Australia, Ltd 2023
, Chapter 2: Sustainability and contemporary assurance engagements
Chapter 2: Sustainability and contemporary assurance
engagements
Review questions
2.12 Discuss why auditors and accountants are engaged in assurance
engagements other than financial report audits.
Auditors and accountants are sometimes called upon to provide assurance on various
types of financial and non-financial information that are produced for a particular
purpose or for a segment of stakeholders. This is the case because auditors and
accountants possess the expertise and credibility to undertake an independent
engagement and to perform tests and analysis in order to provide a required level of
assurance in relation to these reports. For example, special purpose financial reports
are produced for a particular purpose and involve financial analysis that is not
typically required in a general purpose financial report. In many instances, special
purpose financial reports are required to be audited, e.g., prospectuses.
Other assurance engagements can involve non-historical financial data, a segment of
the financial report only, reports on compliance of contractual arrangements, reports
on summarised financial reports, interim financial reports, etc. Moreover, there are
reports such as sustainability reports, and investigative reports such as forensic audit
engagements. Most of these reports involve accountants / auditors.
2.13 What is meant by reasonable and limited assurance engagements?
Give an example for each type.
Reasonable assurance engagement: aims to reduce the risk to an acceptably low level
of risk as a basis for a positive conclusion (high but not absolute level of assurance).
A limited assurance engagement: aims to reduce the risk to a level that is acceptable
in the circumstances (the risk is greater than the risk for a reasonable assurance
engagement) as a basis for a negative conclusion.
The assurance engagement can consist of an outcome, a set of criteria and a subject
matter, and include all the assurance engagements where ASAs, ASREs and ASAEs
apply. A financial report audit is a reasonable assurance engagement. A sustainability
assurance engagement based on a certain set of criteria is an example of limited
assurance engagement.
2.14 What is forensic auditing?
Forensic auditing is an investigation by an assurance provider into specific issues such
as fraud or other irregularities. The purpose of the investigation is to gather evidence
in relation to the activities that have led to the alleged fraud or other irregularities
occurring. The processes involve establishing the facts of the case by gathering and
analysing data. The assurance report will include the evidence and the facts of the
© John Wiley & Sons Australia, Ltd 2023 4.2
, Solutions manual to accompany Audit and assurance 2e by Leung et al.
case as they appear to the assurance provider with the possibility that this evidence
will be used to support a legal case. It is also likely that any report will include
recommendations to prevent similar problems arising in the future such as
improvements to internal controls.
2.15 What is meant by the term prospective financial information?
Prospective Financial Information (PFI) relates to assumptions about future events
and the possible actions that an organisation may take in the future.
PFI can take two forms:
1. Forecasts - these are prepared by management based on what they expect to
occur - that is the events that are expected to occur and the actions that
management expect to take in the future. These can be considered as the best
estimate what might happen in the future.
2. Projections - these are hypothetical assumptions about future events and
management actions rather than expectations of what is likely to happen. They
should not therefore be relied upon as a reflection of what is likely to occur.
PFI may be a combination of both forecasts and projections where there is a mix of
best estimates and hypothetical assumptions.
2.16 Should the internal auditor report to the chief accountant or the
board of directors? Give reasons.
It would be inappropriate for the internal auditor to report to the chief accountant as it
is likely that many of the areas under investigation will be the responsibility of the
chief accountant who could choose to suppress reports that suggest failings in his / her
department.
Reporting to the board of directors would ensure that reports are tabled at the highest
level and cannot be stopped by the chief accountant. Any deficiencies of internal
controls will therefore have to be considered and addressed.
A difficulty with this approach is that many of the board may not have the skills to
understand the reports presented to them by the internal auditor. This problem can be
avoided by having an audit committee made up of non-executive directors with
financial expertise who could assess the internal audit reports and the report in
summary of the impact at board meetings.
It would be appropriate to ensure that the chief accountant sees a copy and has a right
to review and reply to any reports and may be invited to sit as an observer on the audit
committee.
© John Wiley & Sons Australia, Ltd 2023 4.3
to accompany
Audit and assurance
2nd edition
by
Leung et al.
© John Wiley & Sons Australia, Ltd 2023
, Chapter 2: Sustainability and contemporary assurance engagements
Chapter 2: Sustainability and contemporary assurance
engagements
Review questions
2.12 Discuss why auditors and accountants are engaged in assurance
engagements other than financial report audits.
Auditors and accountants are sometimes called upon to provide assurance on various
types of financial and non-financial information that are produced for a particular
purpose or for a segment of stakeholders. This is the case because auditors and
accountants possess the expertise and credibility to undertake an independent
engagement and to perform tests and analysis in order to provide a required level of
assurance in relation to these reports. For example, special purpose financial reports
are produced for a particular purpose and involve financial analysis that is not
typically required in a general purpose financial report. In many instances, special
purpose financial reports are required to be audited, e.g., prospectuses.
Other assurance engagements can involve non-historical financial data, a segment of
the financial report only, reports on compliance of contractual arrangements, reports
on summarised financial reports, interim financial reports, etc. Moreover, there are
reports such as sustainability reports, and investigative reports such as forensic audit
engagements. Most of these reports involve accountants / auditors.
2.13 What is meant by reasonable and limited assurance engagements?
Give an example for each type.
Reasonable assurance engagement: aims to reduce the risk to an acceptably low level
of risk as a basis for a positive conclusion (high but not absolute level of assurance).
A limited assurance engagement: aims to reduce the risk to a level that is acceptable
in the circumstances (the risk is greater than the risk for a reasonable assurance
engagement) as a basis for a negative conclusion.
The assurance engagement can consist of an outcome, a set of criteria and a subject
matter, and include all the assurance engagements where ASAs, ASREs and ASAEs
apply. A financial report audit is a reasonable assurance engagement. A sustainability
assurance engagement based on a certain set of criteria is an example of limited
assurance engagement.
2.14 What is forensic auditing?
Forensic auditing is an investigation by an assurance provider into specific issues such
as fraud or other irregularities. The purpose of the investigation is to gather evidence
in relation to the activities that have led to the alleged fraud or other irregularities
occurring. The processes involve establishing the facts of the case by gathering and
analysing data. The assurance report will include the evidence and the facts of the
© John Wiley & Sons Australia, Ltd 2023 4.2
, Solutions manual to accompany Audit and assurance 2e by Leung et al.
case as they appear to the assurance provider with the possibility that this evidence
will be used to support a legal case. It is also likely that any report will include
recommendations to prevent similar problems arising in the future such as
improvements to internal controls.
2.15 What is meant by the term prospective financial information?
Prospective Financial Information (PFI) relates to assumptions about future events
and the possible actions that an organisation may take in the future.
PFI can take two forms:
1. Forecasts - these are prepared by management based on what they expect to
occur - that is the events that are expected to occur and the actions that
management expect to take in the future. These can be considered as the best
estimate what might happen in the future.
2. Projections - these are hypothetical assumptions about future events and
management actions rather than expectations of what is likely to happen. They
should not therefore be relied upon as a reflection of what is likely to occur.
PFI may be a combination of both forecasts and projections where there is a mix of
best estimates and hypothetical assumptions.
2.16 Should the internal auditor report to the chief accountant or the
board of directors? Give reasons.
It would be inappropriate for the internal auditor to report to the chief accountant as it
is likely that many of the areas under investigation will be the responsibility of the
chief accountant who could choose to suppress reports that suggest failings in his / her
department.
Reporting to the board of directors would ensure that reports are tabled at the highest
level and cannot be stopped by the chief accountant. Any deficiencies of internal
controls will therefore have to be considered and addressed.
A difficulty with this approach is that many of the board may not have the skills to
understand the reports presented to them by the internal auditor. This problem can be
avoided by having an audit committee made up of non-executive directors with
financial expertise who could assess the internal audit reports and the report in
summary of the impact at board meetings.
It would be appropriate to ensure that the chief accountant sees a copy and has a right
to review and reply to any reports and may be invited to sit as an observer on the audit
committee.
© John Wiley & Sons Australia, Ltd 2023 4.3
