Auditing and Assurance Services Introduction

ACC 3372: Auditing and Assurance Services - Session 1

• This session provides an introduction and framework for assurance engagements and the regulatory framework in Sri Lanka.

Learning Outcomes

• Understand the definition of assurance engagement.
• Explain the different types of assurance engagements.
• Explain the differences between assurance and no-assurance engagements.
• Describe the nature of a financial statement audit.
• Describe various types of audits and their respective objectives.
• Understand the regulatory framework for auditing and assurance services in Sri Lanka.

Assurance Engagement Defined

An engagement where a practitioner obtains sufficient, appropriate evidence.

• A conclusion is expressed, designed to enhance the degree of confidence.
• This confidence is for the intended users other than the responsible party.
• The conclusion is about the outcome of evaluating or measuring a subject matter against specific criteria.
• Giving assurance involves offering an opinion on specific information.
• This enables users to make decisions confidently, reducing the risk of incorrect information.
• Independent assurance services aim to improve the information quality for decision-makers.

Key Elements of an Assurance Engagement

• An assurance engagement has five key elements.
• These five elements are:
  • Three-party involvement.
  • Appropriate subject matter.
  • Suitable criteria.
  • Sufficient appropriate evidence.
  • Written assurance report.

Three-Party Involvement

• Practitioner: the reviewer who provides assurance.
• Intended Users: those who make economic decisions based on the subject matter.
• Responsible Party: the party responsible for preparing the subject matter.

Appropriate Subject Matter

• Appropriate subject matter consists of data or information subject to examination by a practitioner.

Suitable Criteria

• The criteria against which the subject matter is evaluated.
• Examples of suitable criteria are standards, guidance, laws, and regulations.

In Financial Audit Example

• Practitioner is the auditor.
• Intended users are shareholders.
• Responsible party is management.

Appropriate Evidence

• Sufficient appropriate evidence is needed to provide a basis for an opinion or conclusion.

Assurance Report

• Expresses conclusion/opinion about the subject matter.

Examples of Assurance Engagements

• Audit of financial statements.
• Review of financial statements.
• Systems reliability reports.
• Environmental, energy, and carbon audits.
• Review of internal controls.
• Value for money audits in public sector organizations.
• ISO 9000 certification.

Types of Assurance Engagements

• An auditor is permitted to perform two types of assurance engagements.
• These assurance engagements are:
  • Reasonable assurance engagement.
  • Limited assurance engagement.

Reasonable Assurance Engagement

• The objective is to reduce assurance engagement risk.
• Assurance engagement risk is reduced to an acceptably low level to provide a basis for a positive form of conclusion.
• Reasonable assurance is notably less than absolute assurance.
• Reducing assurance engagement risk to zero is rarely attainable or cost-beneficial.

Reasonable Assurance Factors

• Selective testing is used.
• Inherent limitations of internal control restrict assurance.
• Evidence tends to be persuasive rather than conclusive.
• Judgement is required when gathering/evaluating evidence.
• Subject matter characteristics may restrain complete assurance.
• An example is the output of a financial statement audit providing a true and fair view.

Limited Assurance Engagement

• The aim is minimizing assurance engagement risk.
• Risk is reduced to an acceptable level in the engagement's circumstances.
• The risk remains greater than in a reasonable assurance engagement.
• This limitation is used as the basis for a negative form of conclusion.

Conclusion Form

• Reasonable assurance engagement: practitioner expresses the conclusion in the positive form, for example: "In our opinion internal control is effective, in all material respects, based on XYZ criteria."
• Limited assurance engagement: practitioner expresses the conclusion in the negative form, for example: "Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria."

True and Fair

• True: factually correct information that conforms to accounting standards, relevant legislation, and underlying records.
• Fair: clear, impartial, and unbiased information that reflects the commercial substance of the entity's transactions.

Nature of Audit

• Auditing is the accumulation and evaluation of evidence about data, to determine the degree of how well the information corresponds to its established criteria.
• Auditing should be done by a competent, independent person.
• An auditor must be qualified to understand the criteria used.
• The qualifications entail being competent to know the types and the amount of evidence to accumulate in order to reach the proper conclusion after evidence is examined.
• Competence is devalued if the auditor is biased in the evidence gathering and evaluation.

Difference between Accounting and Auditing

• Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making.
• Auditing determines whether recorded information properly reflects the economic events that occurred during the accounting period.

Competent, Independent Person

• Competence, independence, and experience, all lead to proper evaluation of evidence and subsequently a proper conclusion

Need for An External Audit

• Shareholders provide the capital but are not always involved in daily operations.
• Directors manage the company for the shareholders seeking to maximize their wealth.
• Directors prepare financial statements to inform shareholders.
• The directors may have incentives to manipulate financial statements.
• An independent review of financial statements ensures a true and fair view.

Shareholders, Directors, and Auditors

• Shareholders appoint auditors.
• Auditors audit financial statements.
• Directors prepare financial statements.
• Shareholders own the company; directors manage it.

Types of Audits

• Operational Audits.
• Compliance Audits.
• Financial Statement Audits.

Types of Auditors

• Independent certified accounting firms.
• Governmental auditors.
• Inland Revenue agents.
• Internal auditors.

Operational Audit Defined and Example

• Operational Audit evaluates the efficiency and effectiveness of operating procedures and methods.
• Example: Evaluating a computerized payroll system for efficiency and effectiveness.
  • Information: Number of records, costs, errors.
  • Criteria: Company standards for efficiency.
  • Evidence: Error reports, payroll records.

Compliance Audit

• A compliance audit determines if the auditee follows specific procedures, rules, or regulations set by a higher authority.
• The controller may be prescribing procedures for accounting personnel.
• There will always be a process to review wage rates for compliance with minimum wage laws.
• Examiners review contractual agreements with lenders for legal requirements.
• Example: Determining whether bank requirements for loan continuation have been met.
  • Information: Company records.
  • Criteria: Loan agreement provisions.
  • Evidence: Financial statements and auditor calculations.

Audit of Historical Financial Statements

• Example: Annual audit of Boeing's financial statements.
  • Information: Boeing's financial statements.
  • Criteria: Generally accepted accounting principles.
  • Evidence: Documents, records, and outside sources.

Regulatory Framework in Sri Lanka

• Framework for Assurance Engagements.
• Companies Act No. 7 of 2007.
• Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995.

Companies Act No. 7 of 2007

• Section 154 (1): A company must appoint an auditor at each annual general meeting.
• Section 157 (1): A person cannot be appointed or act as an auditor unless they are a member of the Institute of Chartered Accountants of Sri Lanka or a registered auditor.
• Section 157 (2): An auditor that is not a private company it must be a member of the Institute of Chartered Accountants of Sri Lanka.
• Section 157 (3): The following persons may not be appointed or act as an auditor include, but are not limited to:
  • A director or employee of the company.
  • A person who is a partner or employee of a director or employee of the company.
  • A liquidator, administrator, or receiver of company property.
  • A body corporate.
  • A person who, due to the previous restrictions, may not be auditor of a related company.
• Section 157 (4): No individual who has held such a position may not be appointed or act as an auditor of a company for a period of two years after such person has ceased to hold that office.
• Section 163 (1): The auditor shall make a report to the shareholders on the financial statements audited.
• Section 164 (1): The board shall ensure the auditor has access to all accounting records and other documents.

Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995

• The Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995 (SLAAS 1995) empowers the Institute of Chartered Accountants of Sri Lanka to adopt Sri Lanka Accounting Standards and Sri Lanka Auditing Standards.
• SLAS and SLAuS adopted by ICASL council are applicable to all specified business enterprises (SBE).
  • Examples of businesses falling under this act are Listed companies, Banks, Leasing companies, Insurance companies, all Public Corporations, and All other companies which exceeds prescribed limits for: Turnover / Liabilities / Assets value / Equity Employees over.

Duties of SBEs

• SBEs should prepare financial statements in compliance with Sri Lanka Accounting Standards.
• Such entities should take all necessary measures to ensure that the financial statements are audited in accordance with Sri Lanka Auditing Standards.
• A true and fair view of the financial performance and financial position of such an enterprise should be presented.
• Financial statements are to be audited by members of the Institute of Chartered Accountants of Sri Lanka holding a certificate to practice issued by the Institute.

Duties of the Auditor

• Financial statements of every SBE shall be audited by a member which has a certificate to practice issued by the Institute.
• The Act requires the auditors to certify in their audit report that the audit has been conducted in accordance with the Sri Lanka Auditing Standards.
• The Act requires the auditors to certify in their audit report that the financial statements have been prepared and presented in accordance with the Sri Lanka Accounting Standards.

Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB)

• The Sri Lanka Accounting and Auditing Standards Monitoring Board was established by the Act No. 15 of 1995.
• Its main function is to monitor compliance with the Sri Lanka Accounting and Auditing Standards by the Specified Business Enterprises (SBEs).