Overview of Auditing and Assurance Engagements Assurance engagement
- Practitioner expresses conclusion designed to
Primary function of independent audit: enhance the degree of confidence of intended users
● To lend credibility to FS prepared other than the responsible party about the outcome
● Auditor’s opinion enhances value and usefulness of evaluation or measurement of subject matter
FS against criteria
● Provides increased assurance to users that FS are - 3-party contracts in which assurers report on (or
reliable improve) the quality of information
- Describe broad range of information enhancement
Assurance services
● Audit of FS - Performed by independent professional designed to
● Review of FS improve quality or enhance credibility of subject
● Other assurance services matter
Non-assurance Elements of Assurance Engagement (3SECC)
● Agreed-upon procedures a. 3-party relationship - practitioner, responsible
● Compilation of financial and other information party, and intended users
● Tax services b. Appropriate subject matter
● Management consulting and other advisory c. Suitable criteria
services d. Sufficient appropriate evidence
e. Written assurance report (Conclusion)
- In the form appropriate to reasonable
assurance engagement or limited
USERS ECONOMIC DECISION assurance engagement
Potential and existing ● Decide when to
investors buy, hold or sell ★ 3-party relationship
equity investment
● Assess ● Professional accountant
stewardship or - CPA engaged in any area
accountability of - Education, commerce and industry,
management government, public practice
● Determine
● Practitioner
distributable
profits and - CPA rendering professional services
dividends (for (assurance/ non-assurance)
BOD) ● Auditor
- Practitioner rendering audit and review
Lenders and other creditors ● Assess security services
for amounts lent
Employees ● Assess ability of ★ Appropriate subject matter
entity to pay and
provide other ● Subject matter
benefits - Nature of assertion practitioner gathers
sufficient evident
Government ● Determine - Underlying matter of interest to intended
taxation policies
users
● Preparer and use
national income
statistics ● Subject matter information
● Regulate activities - Outcome of evaluation or measurement of
subject matter
- For which practitioner gathers sufficient
Assurance appropriate evidence to provide
- Practitioner’s satisfaction as to reliability of reasonable basis for expressing conclusion
assertion being made by one party for use by in an assurance report
another party
- How sure or certain the practitioner is that
representation made by particular party is reliable
subject matter information is free from
misstatement
d. Assurance engagement risk
- Risk that practitioner expresses
inappropriate conclusion when subject
matter information is materially misstated
Audit engagement risk
● Risk of material misstatement
a. Inherent risk
Characteristics of Subject matter - Susceptibility of subject matter
a. Identifiable, and capable of consistent evaluation or information to a material
measurement against identified criteria misstatement, assuming that there
b. Information about it can be subjected to procedures are NO related controls
for gathering sufficient appropriate evidence to b. Control risk
support reasonable assurance or limited assurance - Material misstatement that could
conclusion occur will NOT be prevented, or
detected and corrected, on a
These affect: timely basis by related internal
a. Precision which subject matter can be evaluated or controls
measured against criteria ● Risk of non-detection or Detection Risk
b. Persuasiveness of available evidence - Practitioner will NOT detect material
c. Assurance report notes characteristics of particular misstatement that exists
relevance to intended users
e. Cost-benefit consideration
- Benefits that will be derived from
★ Criteria obtaining evidence should exceed the cost
- Standards or benchmark used to evaluate or of obtaining it
measure subject matter of assurance engagement f. Professional skepticism
- Practitioner makes critical assessment,
Formal - Less Formal - Established - Specifically Developed with questioning mind
Characteristics of suitable criteria (RUN CR) ★ Written assurance report (Conclusion)
● Reliability
● Understandability Type of opinion Common phrase used
● Neutrality
● Completeness unmodified/unqualified Present fairly, in all
● Relevance material respect
Qualified Except for
★ Sufficient appropriate evidence Adverse Do not present fairly, in all
● Evidence material respect
- All information gathered by practitioner in
evaluating subject matter against criteria Disclaimer of opinion We do not express
conclusion/ opinion
which conclusion is based
Consideration when planning and performing Types of assurance engagement (as to level of assurance)
engagement:
a. Quantity of evidence (Sufficiency) ● Reasonable assurance engagement
b. Quality of evidence (Appropriateness) - Positive form of expression of
- Relevance and reliability practitioner’s expression
c. Materiality - Aims to reduce risk to an acceptably low
- Relevant when determining nature, timing, level
and extent of evidence-gathering - Performs more detailed work to gain
procedures, and when assessing whether sufficient appropriate evidence to reduce
the risks (TOC and ST)
● Limited assurance engagement - Practitioner obtains representation from
- Negative form responsible party that has performed
- Aims to reduce risk to a level that is evaluation or measurement (not available
acceptable to intended users)
- Generally requested by company based on
their purpose/objectives Non-assurance engagements
1. Agreed-upon procedures
- Based on procedures agreed upon by
auditor, third parties (if any)
Reasonable Limited
- Report on factual findings
Level of Reasonable or high, but Limited or moderate - Recipients of report must form their own
assurance not absolute conclusions from report by auditor
provided - Report is restricted to those parties who
have agreed to procedures to be performed
Form Positive Negative
Example Audit Review 2. Compilation of financial and other information
- Accountant is engaged to use accounting
Procedures ● Inquiry ● Inquiry expertise (collect, classify, summarize
performed ● Observation ● Analytical financial information)
● Inspection procedures - Accountant will not express any assurance
● Analytical on financial information
procedures
- Intended users derive some benefits as a
● Confirmation
● Reperformance result of accountant’s involvement
● rccalculation
Example:
Example:
3. Some tax services where no conclusion is express
Types of Assurance Engagements (as to structure) and tax consulting
● Attestation engagements - Practitioner provides advice on income tax
- Practitioner is engaged to issue or does not and business strategies
issue written communication that - Practitioner develops tax strategies to
expresses a conclusion about reliability of minimize business’ tax L and worries
written assertions that is responsibility of
another party 4. Management consulting and other advisory
a. Audit engagement services
b. Review engagement - Practitioner provides advice or
recommendations for improvement of
● Direct engagements client’s use of its capabilities and
- Residual definition of assurance resources
engagement as to structure
- Practitioner either directly performs the
evaluation or measurement of subject
matter; or
Summary of differences
Types of audit
General overview of Audit Process
Examples:
Assurance
● Attestation
- Audit
- Review Detailed approach of Audit Process
- Other attest services
● Other services
- Performance review
- Examination of forecasts
Non-assurance
- Compilation
- Bookkeeping
- Management advisory
- Agreed-upon procedures
- Taxes services (no conclusion)
Auditing
- Systematic process of objectively obtaining and
evaluating evidence regarding assertions about
economic actions and events to ascertain the degree
of correspondence between these assertions and
established criteria and communicating the results
thereof
