AUDIT AND ASSURANCE – Need to remember!!
Chapter 1 – Reintroduction to audit and assurance
An assurance engagement is one in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the
intended user other than the responsible party about the outcome of the
evaluation or measurement of a subject matter against a criteria
Key engagements of an assurance engagement:
- Three party involvement (practitioner, intended users, responsible
party)
- Subject matter: determined by responsible party - data (financial
statements), systems (internal control)
- Suitable criteria: determined by responsible party (eg accounting
standards)
- Sufficient appropriate evidence, gathered by practitioner
- Written report, written by the practitioner and given to intended user
Summary of types of engagement:
Limited Reasonable
Level Moderate – Negative opinion givenHigh – Positive opinion given
Example of engagementReview of FS, Review of business Statutory audit
plan
Example of wording ‘Nothing has come to our ‘In our opinion the financial show a
report attention...’ ...’
The objective of an audit of financial statements is to enable the auditor
to express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework
Comparison of audit and other assurance engagements:
Statutory audit Other assurance
Report to Members Commissioner of the work – often
management
Scope CA2006, ISAs, Other audit Agreement between assurance provider
determined by regulation and commissioner
Report on Truth and fairness, properly Determined by engagement terms
prepared, director’s report consistent
with FS
, Level of Reasonable Often limited
assurance
Circulation of In public domain, once accounts Likely to be restricted to management
report filed use
Small companies (turnover £6.5m, gross assets £3.26m, employees
£50) are not required to have an audit
- A company does not lose its small company status under CA06
unless its second year of ceasing to be small
Companies not allowed to claim an exemption:
- Companies regulated by -FSA
Public companies (wherever registered)
- Insurance companies - Any company which is a member of a group containing one of the above
Benefits of assurance:
- Enhances the credibility of the information being reported on
- Help prevent errors or frauds being made and reduce the risk of
management bias
- Draws the attention of the user to the deficiencies in the information
being reported upon
- Users benefit from receiving an independent, professional opinion
on the subject matter
- Give investors added faith in the markets
Assurance can never be absolute because of limitations (subjective,
sampled, limitations of systems, information from third parties,
limitations of reporting, includes estimates)
Chapter 2 – Responsibilities
Management responsibilities:
- Manage the business - Assess business risk and devise strategies to deal with
them
- Maintain proper accounting - Comply with relevant laws and regulations
records
- Safeguard assets - Prepare financial statements that show a true and fair
view
Assurance provider’s responsibilities:
All assurance engagements Statutory audit only
- Adhere to relevant professional and - Form an independent opinion on whether the
ethical standards financial statements show a true and fair view
- Apply quality control procedures - Confirm adherence to accounting standards
- Carry out assignments in accordance - State whether Director’s report consistent with FS
with terms
, - Properly plan, perform and review
work undertaken
Extra management responsibilities from Extra auditor responsibilities from Sarb-Ox
Sarb-Ox
- CEOs and CFOs attest to the veracity of- Stricter independence rules
the financial statements - PCAOB can inspect audit files
- Greater disclosure of amendments - Auditors of subsidiary of US listed companies must
made to financial statements during register with PCAOB (involves paying
audit registration fee)
Management responsibilities re: fraud Auditor responsibilities re: fraud
- Implement controls to prevent, detect and- Detect material misstatements whether due to
correct fraud error or fraud
Management responsibilities re: errors Auditor responsibilities re: errors
- Design and implement internal control - Detect material misstatements whether due to error
system capable of preventing or detectingor fraud
and correcting all errors in the financial - Assess system of internal controls and determine
statement reliance
- Report material weaknesses to those charged with
governance
Management responsibilities re: Auditor responsibilities: re compliance with laws
compliance and regulations
- Ensure the company complies with - Detect material misstatements whether due to non-
relevant laws and regulations compliance or not
- Have an understanding of the legal and regulatory
framework within which the company operates
- Assess risk of non compliance with laws and
regulations
- Obtain evidence relating compliance (inquiries,
discussions)
Management responsibilities re: related Auditor responsibilities re: related parties
parties
- Disclose all related parties in the - Obtain list of all related parties from management
financial statements - Assess the risk of undisclosed related party
- Provide written representations that such transactions
transactions have been properly - Carry out tests designed to identify related party
disclosed transactions
- Confirm adequate disclosure of related party
transactions
Responsibilities regarding money laundering:
- Statutory auditor required to report where there are grounds for
suspicion to MLRO who reports to SOCA
- Must not tip off client (overrides confidentiality requirement)
Expectations gap: gap between what the assurance provider understands he is doing and what the user of information
believes he is doing
Chapter 1 – Reintroduction to audit and assurance
An assurance engagement is one in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the
intended user other than the responsible party about the outcome of the
evaluation or measurement of a subject matter against a criteria
Key engagements of an assurance engagement:
- Three party involvement (practitioner, intended users, responsible
party)
- Subject matter: determined by responsible party - data (financial
statements), systems (internal control)
- Suitable criteria: determined by responsible party (eg accounting
standards)
- Sufficient appropriate evidence, gathered by practitioner
- Written report, written by the practitioner and given to intended user
Summary of types of engagement:
Limited Reasonable
Level Moderate – Negative opinion givenHigh – Positive opinion given
Example of engagementReview of FS, Review of business Statutory audit
plan
Example of wording ‘Nothing has come to our ‘In our opinion the financial show a
report attention...’ ...’
The objective of an audit of financial statements is to enable the auditor
to express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework
Comparison of audit and other assurance engagements:
Statutory audit Other assurance
Report to Members Commissioner of the work – often
management
Scope CA2006, ISAs, Other audit Agreement between assurance provider
determined by regulation and commissioner
Report on Truth and fairness, properly Determined by engagement terms
prepared, director’s report consistent
with FS
, Level of Reasonable Often limited
assurance
Circulation of In public domain, once accounts Likely to be restricted to management
report filed use
Small companies (turnover £6.5m, gross assets £3.26m, employees
£50) are not required to have an audit
- A company does not lose its small company status under CA06
unless its second year of ceasing to be small
Companies not allowed to claim an exemption:
- Companies regulated by -FSA
Public companies (wherever registered)
- Insurance companies - Any company which is a member of a group containing one of the above
Benefits of assurance:
- Enhances the credibility of the information being reported on
- Help prevent errors or frauds being made and reduce the risk of
management bias
- Draws the attention of the user to the deficiencies in the information
being reported upon
- Users benefit from receiving an independent, professional opinion
on the subject matter
- Give investors added faith in the markets
Assurance can never be absolute because of limitations (subjective,
sampled, limitations of systems, information from third parties,
limitations of reporting, includes estimates)
Chapter 2 – Responsibilities
Management responsibilities:
- Manage the business - Assess business risk and devise strategies to deal with
them
- Maintain proper accounting - Comply with relevant laws and regulations
records
- Safeguard assets - Prepare financial statements that show a true and fair
view
Assurance provider’s responsibilities:
All assurance engagements Statutory audit only
- Adhere to relevant professional and - Form an independent opinion on whether the
ethical standards financial statements show a true and fair view
- Apply quality control procedures - Confirm adherence to accounting standards
- Carry out assignments in accordance - State whether Director’s report consistent with FS
with terms
, - Properly plan, perform and review
work undertaken
Extra management responsibilities from Extra auditor responsibilities from Sarb-Ox
Sarb-Ox
- CEOs and CFOs attest to the veracity of- Stricter independence rules
the financial statements - PCAOB can inspect audit files
- Greater disclosure of amendments - Auditors of subsidiary of US listed companies must
made to financial statements during register with PCAOB (involves paying
audit registration fee)
Management responsibilities re: fraud Auditor responsibilities re: fraud
- Implement controls to prevent, detect and- Detect material misstatements whether due to
correct fraud error or fraud
Management responsibilities re: errors Auditor responsibilities re: errors
- Design and implement internal control - Detect material misstatements whether due to error
system capable of preventing or detectingor fraud
and correcting all errors in the financial - Assess system of internal controls and determine
statement reliance
- Report material weaknesses to those charged with
governance
Management responsibilities re: Auditor responsibilities: re compliance with laws
compliance and regulations
- Ensure the company complies with - Detect material misstatements whether due to non-
relevant laws and regulations compliance or not
- Have an understanding of the legal and regulatory
framework within which the company operates
- Assess risk of non compliance with laws and
regulations
- Obtain evidence relating compliance (inquiries,
discussions)
Management responsibilities re: related Auditor responsibilities re: related parties
parties
- Disclose all related parties in the - Obtain list of all related parties from management
financial statements - Assess the risk of undisclosed related party
- Provide written representations that such transactions
transactions have been properly - Carry out tests designed to identify related party
disclosed transactions
- Confirm adequate disclosure of related party
transactions
Responsibilities regarding money laundering:
- Statutory auditor required to report where there are grounds for
suspicion to MLRO who reports to SOCA
- Must not tip off client (overrides confidentiality requirement)
Expectations gap: gap between what the assurance provider understands he is doing and what the user of information
believes he is doing
