Learning Unit 1 Part 2 Slides

External auditors: Assurance engagements
By the end of this session you must be able to answer

the following questions:
• Explain what an assurance engagement is.
• Distinguish between an assurance engagement and a non-
assurance engagement.
• Determine if an engagement is an assurance or non-
assurance engagement using the 5 elements of an
assurance engagement.
• Give examples of the elements of an assurance
engagement in an audit engagement and in a review
engagement.
• Explain the different levels of assurance.
• List and explain the limitations of an audit
1
• Explain the role of internal auditors in an organisation
Assurance and Non-assurance
engagements
Assurance engagements:
• Definition by International Framework for
Assurance Engagements.
“The professional accountant expresses a
conclusion designed to enhance the degree of
confidence of the intended users, other than the
responsible party, about the outcome of the
evaluation or measurement of a subject matter
against the criteria”
Elements of an assurance engagement
Element of definition
1. Three party relationship
• Professional accountant
• Responsible party
• Intended user
2. Subject matter: e.g financial position, financial performance
3. Suitable criteria: IFRS or IFRS for SMEs
4. Sufficient appropriate evidence : In order to form an opinion or a

conclusion
5. A written assurance report : An opinion or a conclusion

Audit engagement
Audit engagement:
• The auditor gathers sufficient evidence to form an
opinion on whether the directors , who are
responsible for the financial statements, have
applied the IFRS appropriately in presenting the
financial position, financial performance, changes in
equity, cashflows and disclosure notes of an
organisation. The opinion is then reported by the
auditors to the shareholders in the audit report.
• Audit engagement provides reasonable assurance
Elements of an assurance engagement: Audit
Element of definition example
1. Three party relationship • Registered auditor
• Professional accountant • Directors responsible for AFS
• Responsible party • shareholders
• Intended user
2. Subject matter Financial position, results
3. Suitable criteria International Financial Reporting
Standards
4. Sufficient appropriate The evidence the practitioner needs to
evidence be in a position to conclude that the
financial statements are free of material
misstatement and are presented “fairly”
according to IFRS
5. A written assurance Audit opinion report on fair presentation
report
Review engagement
• Review engagement:
In a review engagement the reviewer (often a registered
auditor) gathers sufficient evidence on whether anything has
come to his attention to suggest that AFS prepared by the
directors are NOT prepared according to IFRS for SME’s (or
IFRS). This is reported by the reviewer to the shareholders in a
report in which the reviewer form a conclusion. (negative
expression)
• Review engagements provide limited assurance
Therefore:
Audit engagements give r e a s o n a b l e assurance
Review engagements give l i m i t e d assurance
Elements of an assurance engagement - review
Element of definition example
*three party relationship • Registered auditor
• Professional accountant • Directors responsible for AFS
• Responsible party • shareholders
• Intended user
Subject matter Financial position, results
Suitable criteria International Financial Reporting
Standards for SME’s or IFRS
Sufficient appropriate The evidence the reviewer needs to
evidence express a conclusion on whether
anything has come to his attention which
causes him to believe the FS are not
prepared in accordance with IFRS for
SME’s
A written assurance report Review conclusion
Non-assurance engagements
Non-assurance engagements:
• Do not meet the definition of an assurance
engagement
• Do not contain the elements of assurance
engagements (no reporting to third party, no suitable
criteria, client does not require any assurance)
• There is no expression of an opinion or forming a
conclusion
Examples:
• Compile information for the client, but do not express
an opinion or comment
• Prepare and submit the client’s tax return
Levels of assurance
Reasonable assurance (ISA 200)

• High but not absolute
• Only possible when you gather sufficient
appropriate evidence to satisfy yourself that the
risk of expressing an inappropriate opinion on the
subject matter is acceptably low (expressing an
opinion that the AFS are fairly presented when in
fact they are not)
• In our opinion the financial statements present
fairly….(positive statement)
Levels of assurance
Limited assurance (ISRE 2400)

• Lower than reasonable but still meaningful to users
• Only given when you gather enough evidence to
satisfy yourself that the risk of expressing an
inappropriate conclusion is greater than for a
reasonable assurance engagement, but still at an
acceptably low level
• Nothing came to our attention which causes us to be
believe that these financial statements do not present
fairly…..(negative expression)
Why not absolute assurance?

Why not ABSOLUTE Assurance - Limitations
Only Reasonable assurance can be provided due to :

Why not absolute assurance?
Limitations of an audit
• Nature of Financial reporting (judgment in applying
the relevant reporting framework, & using estimates
to calculate depreciation, bad debts)
• Nature of audit procedures (incomplete information,
collusion)
• Audit evidence is usually persuasive rather than
conclusive (did not witness it personally)
Why not ABSOLUTE Assurance - Limitations
Limitations…
• The use of testing (impossible to test/repeat
everything)
• The inherent limitations of accounting and internal
control systems (human error, collusion, overriding
controls)
• Timeliness of financial reporting and the balance
between benefit and cost
• Other matters that affect the inherent limitations of an
audit
Internal auditors?
Factors contributing to the development of IA
• Numbers of transactions
• Complexity
• Owners/managers not present
• Expanded span of control
• Potential subjective reporting
• Technical expertise
• Eyes and ears in the field
No more a watch dog performing
assurance services for management
http://www.internationalsupermarketnews.com/news/5522 ; http://newjersey.watchdog.org/about-2/ ;
http://www.webpronews.com/consumer-watchdog-calls-on-european-commission-to-block-google-motorola-deal-2012-01 ;
http://www.insurancetimes.co.uk/attachment?storycode=1397887&attype=P&atcode=28358
But a guide dog assisting and advising
http://www.guidedogswa.com.au/guide-dogs/puppy-raising/ ;
http://www.guidedogs.org.uk/schools/how-can-a-guide-dog-change-a-life/how-are-guide-dogs-tra
ined/
;
http://www.shutterstock.com/pic-63262918/stock-photo-guide-dog-is-helping-bilnd-people.html ;
http://www.cnib.ca/en/living/guide-dog/Pages/default.aspx ;
http://www.guidedogs.com/site/PageServer?pagename=landing_southwest
Institute of Internal Auditors
• Motto = Progress through sharing
• Vision: that the internal audit profession will be
universally recognised as indispensable to effective
governance, risk management and control
• Goals of the IIA
Role of IA in the business
environment
• IA make meaningful contributions to assist organisations to meet
strategic objectives
• Add value by advising
To be effective:
 Be at center and be respected for its role
 Have full co-operation and support of the board and management
 Ensure independence by reporting to the highest level of authority
What reasonable assurance should the
internal auditor provide the organisation?
• Governance processes are adequate and effective

• Risk management processes are adequate and effective
• Control processes are adequate and effective
Services provided by internal
auditors
Assurance:
• Adherence to Policies and procedures
• Processes (including control activities) are mitigating risk
• Adherence to Laws and regulations
Consulting:
• Staff training
• Advice on control, risk issues and governance
• Assist in developing Policies
• Participation in Quality teams
Why should an organisation have
internal auditors?
• Assist management to comply with its responsibilities as

it might not always have the necessary knowledge
• Assist management by adding value and improving the
organisation’s operations
To Do
• Study and write notes on the following sections
- Types of auditors
- Assurance engagements (master the elements)
- ---Audit engagement
- ---Review engagement
- ---Differences between an audit and a review engagement.
- Understand the difference between assurance and non-assurance
engagements
- Different levels of assurance
- Limitations of an audit
- History of internal auditing
- The role of internal auditing
- Services provided by IA (Assurance and consulting,,,, give examples)

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External auditors: Assurance engagements

By the end of this session you must be able to answer

4. Sufficient appropriate evidence : In order to form an opinion or a

5. A written assurance report : An opinion or a conclusion

Reasonable assurance (ISA 200)

Limited assurance (ISRE 2400)

Why not absolute assurance?

Only Reasonable assurance can be provided due to :

• Governance processes are adequate and effective

• Assist management to comply with its responsibilities as

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