Audit and Assurance PDF

(AA) Audit and Assurance Chapter 1: Audit and Other Assurance Engagements Overview Objective: To introduce the concepts of audit and assurance engagements. 1.1 Development 1.1.1. External Audit During the middle of the 19th century, the development of joint-stock corporations required directors to...

(AA) Audit and Assurance Chapter 1: Audit and Other Assurance Engagements Overview Objective: To introduce the concepts of audit and assurance engagements. 1.1 Development 1.1.1. External Audit During the middle of the 19th century, the development of joint-stock corporations required directors to report to the shareholders whose capital they managed. As ownership and management became significantly separated, shareholders (and other stakeholders in today's corporate environment) required independent verification that what the directors (management) reported was true. Key Point The objective of an external audit is to express an opinion (in terms of truth and fairness) on whether the financial statements are prepared, in all material respects, in accordance with an identified reporting framework (e.g. International Financial Reporting Standards) and the relevant law.  Statutory audits (i.e. carried out according to statutory provisions) became mandatory for companies in the UK in 1900. The auditor was required to be independent of the company, hence an external auditor. Initially, an audit aimed to detect fraud, technical errors and errors of principle. However, as the size and complexity of companies grew, case law developed the principle that it was unreasonable to expect auditors to detect all aspects of fraud, even though they were expected to exercise reasonable skill and care. As companies grew, with many becoming international organisations, it became impracticable for auditors to verify the 100% accuracy of financial records. So, the audit of financial statements became an attestation (substantiation, testimony) of their credibility (i.e. believability). Key Point Company law requires statutory (external) audits in the jurisdiction in which a corporation operates. The general provisions for external audit typically contained in company law are discussed in Chapter 2. 1.1.2. Internal Audit Definition Internal auditing - an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and governance processes. - The Institute of Internal Auditors (IIA) The modern form of internal audits was initially developed as the growth and increasing complexity of entities in the early 1900s stretched the capabilities of managers to manage effectively. Senior management appointed specialist employees to review and report on various financial and other processes and ensure appropriate controls were effectively applied. The role of the early internal auditors ranged from checking routine financial and operational functions with a heavy emphasis on compliance, security and detection of fraud to (in some cases) the analysis and appraisal of financial and operational activities. The Institute of Internal Auditors (IIA) was founded in 1941. The expansion of the role of internal audit, whether required by legislation (e.g. in public sectors), listing regulations, corporate governance codes (e.g. the UK Corporate Governance Code) or as a voluntary activity, reflects organisations' economic and  international growth. The role of internal audit in governance is discussed in Chapter 14. 1.1.3. Assurance Services Definition Assurance services - independent professional services that improve the quality of information, or its context, for decision - makers. Over the years, the auditing profession has broadened its role (and income streams) by developing a wide range of assurance services (of which the financial statement audit is just one part). Factors contributing to the increasing demand for assurance services include: The rapid expansion of available information (e.g. systems capabilities of capturing, processing and delivering relevant and reliable information) The changing information needs of businesses and consumers (e.g. minimising information overload). The increase in demand for relevant information for decision-makers (e.g. budgets, cash flow forecasts and due diligence) Emerging technologies (e.g. automation, the internet and data analytics) and business processes (e.g. supply chain management, outsourcing). Changing expectations and demands of customers, suppliers and other stakeholders (e.g. quality control, market trends). Globalisation of businesses creating worldwide needs (e.g. ethical supply-chain codes). Increasing corporate accountability demanding more relevant and reliable information (e.g. corporate governance, compliance with laws and regulations, environmental performance, corporate social reporting and integrated reporting). Typical assurance services include: Audits of financial statements and reviews of historical financial information. Prospective financial information (e.g. cash flows) reviews. Business ethics audits, social responsibility reporting, environmental reporting. Risk assessments (including e-commerce). Value for money audits. Performance measurement. Systems and control reliability.  Exam advice Only audits and reviews of historical financial information are examinable in detail. 1.2. External Audit 1.2.0. Introduction An external audit provides confidence in the integrity of corporate reporting for the benefit of stakeholders and society by providing an external and objective view of the statutory financial statements. Specifically, the audit enhances the degree of confidence of the shareholders in the financial statements. 1.2.1. As an Assurance Service As an assurance service, an external audit must include the five elements of an assurance engagement: 1. The subject matter is the financial statements prepared under the applicable financial reporting framework (e.g. IFRS Accounting Standards). 2. The three-party relationship includes: the directors, who are responsible for the financial statements; the practitioner (i.e. the external auditor); and the shareholders (and other intended users of the financial statements). 3. The criteria used to evaluate the financial statements include the financial reporting framework. 4. The external auditor plans and performs the audit engagement to obtain sufficient appropriate evidence to support the expression of an opinion on the financial statements. 5. An opinion in an assurance report – the "independent auditor's report". These elements are described in more detail in s.3.2. Definition Applicable financial reporting framework – the financial reporting framework adopted by management in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements or that is required by law or regulation. 1.2.2. Stewardship, Agency and Accountability Exam advice These concepts were introduced in earlier examinations (Business and Technology and Corporate and Business Law). Generally, companies are:  Owned by shareholders (“principals”); and Managed by directors (“agents” of the principals) who are appointed by the shareholders. The shareholders appoint auditors to report to them (provide assurance) on the information provided by the directors (the annual financial statements as required by law). The essential attributes of the relationship between the directors, shareholders and auditors are stewardship, agency and accountability. 1.2.2.1 Stewardship Stewardship is the practice of managing another person's property. Directors and other managers of an entity are responsible for stewardship of the property of that entity, which the shareholders own. Activity 1 Stewardship Suggest FIVE responsibilities of company directors. *Please use the notes feature in the toolbar to help formulate your answer. Responsibilities (e.g. duties embodied in statute and corporate governance requirements) may include: 1. Keeping proper accounting records. 2. Safeguarding the entity's assets. 3. Implementing appropriate business, financial and risk management controls. 4. Producing financial statements (statement of financial position, statement of comprehensive income, statement of cash flows, statement of changes in equity, disclosure notes) that give a true and fair view and the results of their stewardship. 5. Producing a directors' report and other information (e.g. as required by listing rules) which is consistent with the financial statements and contains certain specified information. 1.2.2.2 Agency An agent is an individual (or another entity) employed or used to provide a particular service. The individual using the agent is the principal. Activity 2 Agency Describe the possible agency relationships between shareholders, directors and auditors. *Please use the notes feature in the toolbar to help formulate your answer. A director can be described as an agent having a fiduciary relationship (one of trust) with a principal (i.e. the company that employs her). A director is similarly an agent of the shareholders. Auditors, as the shareholders appoint them in most jurisdictions, are also agents of the shareholders. 1.2.2.3 Accountability Accountability is where one party is held responsible (answerable) to another party; it will be required to justify its actions and decisions to that party. Activity 3 Accountability Explain the accountability of directors and the auditor to shareholders. *Please use the notes feature in the toolbar to help formulate your answer. Directors are accountable to the shareholders. Many jurisdictions place legal requirements on directors regarding their accountability and communication with stakeholders, for example, through directors' reports and financial statements prepared under an appropriate framework (e.g. IFRS). Directors of listed companies will also be subject to listing rules and corporate governance codes (e.g. publication of interim financial statements, regular meetings with financial institutions, profit and going concern warnings, analysis and management of risk, audit committees and annual general meetings). The auditor of a company's financial statements is accountable to the shareholders. The auditor must act in the interests of the shareholders (the primary stakeholders) while also having regard for the broader public interest in that other stakeholders will read the auditor’s report. (However, the auditor is not an agent for any other stakeholder(s), and the auditor’s report is not addressed to such stakeholders, only to the shareholders.) Exam advice The role of the annual general meeting (AGM) in managing companies is assumed knowledge from Corporate and Business Law. 1.2.3. Auditor's Report  Key Point The objective of an audit of financial statements is: - to enable an independent auditor to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error; and (thereby) - to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The auditor's report, the product of the auditor's work, is a written communication to the shareholders. It is introduced here to provide the context of what an audit entails; it is explained in detail in Chapter 30. An example of an auditor’s report, which expresses the audit opinion, follows. INDEPENDENT AUDITOR’S REPORT To the Shareholders of ABC Company [or Other Appropriate Addressee] Report on the Audit of the Financial Statements Opinion We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of the Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. [Description of each key audit matter in accordance with ISA 701.] Other Information [Add detail in accordance with ISA 720] Responsibilities of Management and Those Charged with Governance for the Financial Statements Responsibilities of Management and Those Charged With Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. *As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is [name]. [Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate for the particular jurisdiction] [Auditor Address] [Date] *This description of the auditor’s responsibilities (as shaded above) may be included in a referenced appendix to the auditor’s report or by a specific reference to a website of an appropriate authority, where the auditor is permitted to do so. 1.2.3.1 Management and Auditor’s Responsibility Management is responsible for preparing and presenting fairly the financial statements (e.g. in accordance with the applicable financial reporting framework). This includes: designing, implementing and maintaining the necessary internal control; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Management’s responsibility is stated in: the auditor’s report; the engagement letter between the auditor and directors (see Chapter 5); and the written representations from the directors to the auditor (see Chapter 20). Oversight of management’s responsibilities (including those for the financial statements) is provided by those charged with governance (TCWG). The governance structure will vary depending on the jurisdiction that management operates within and the applicable corporate governance code (see Chapter 3). An audit of financial statements does not relieve management or TCWG of their responsibilities. The auditor is responsible for expressing an opinion on the financial statements based on the audit. The scope of audit work is described in the report, in an appendix to the auditor’s report, or by a specific reference to a website of an appropriate authority. The auditor is not responsible for the financial statement’s form and content. Although the audit opinion enhances the credibility of the financial statements, users cannot assume that the opinion assures the future viability of the entity or the efficiency or effectiveness of management’s stewardship. 1.2.3.2 International Standards on Auditing (ISA) Each ISA provides:  an introduction, objectives and definitions; requirements; and application and other explanatory material. An audit conducted in accordance with ISAs must consider the requirements of: ISAs (i.e. to plan, evaluate controls, obtain evidence, form conclusions and report); relevant professional bodies (e.g. ACCA); legislation and regulations (e.g. Companies Acts); the terms of the audit engagement and reporting requirements. The scope and authority of ISAs are discussed in Chapter 2. 1.2.3.3 Ethical Requirements The auditor should comply with the International Ethics Board for Accountants (IESBA) Code of Ethics for Professional Accountants (see Chapter 4). 1.2.3.4 Reasonable Assurance Definition Reasonable assurance – a high, but not absolute, level of assurance. In an audit engagement, reasonable assurance is expressed “positively” in the auditor's report that the information subject to audit (i.e. the financial statements) is free of material misstatement. To provide reasonable assurance, the auditor carries out specific detailed routines, conducts relevant testing and assesses the accumulated evidence obtained regarding the financial statements. The auditor must believe that the evidence obtained is sufficient and appropriate to provide a basis for his opinion. However, most evidence is persuasive rather than conclusive, and what is “sufficient appropriate” audit evidence (see Chapter 15) is a matter of professional judgment. An auditor cannot obtain absolute (i.e.100%) assurance because of the inherent limitations in an audit (see Chapter 2). Therefore, a audit cannot guarantee that the financial statements are free of material misstatement. There are practical limitations on the auditor’s ability to obtain audit evidence. For example: management or others may not provide, intentionally or unintentionally, the complete information that is relevant to the preparation of the financial statements or that has been requested by the auditor. Therefore, the auditor cannot be certain of the completeness of information;  fraud (as opposed to error)_is deliberate and likely to be concealed. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves collusion (i.e. management or employees conspiring together) to conceal it. 1.2.3.5 Materiality Definition Material – Information is material if its omission or misstatement could influence decisions that the primary users of general purpose financial reports make based on those reports. Materiality is an expression of the relative significance or importance of a matter, whether quantitative or qualitative (e.g. values and discursive disclosures), in the financial statements (see Chapter 10). In planning the audit, the auditor must consider those areas that are material to the financial statements and the possibility that material errors could be contained in the (unaudited) financial statements ("material misstatement"). Audit procedures must minimise the risk that material misstatements remain undetected by the audit. Key Point The auditor is not responsible for detecting misstatements that are not material to the financial statements. 1.2.3.6 Professional Judgment Professional judgment and professional scepticism are defined in ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing. Definition Professional judgment – the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Key Point Professional judgment is essential to the proper conduct of an audit. Professional judgment is necessary in particular: In interpreting relevant ethical requirements (see Chapter 4) and applying ISAs. In identifying and assessing risks of material misstatement (see Chapter 8). In determining ( the nature, timing and extent of audit procedures) to meet the requirements of ISAs and gather audit evidence.(see the audit plan in Chapter 7) In evaluating whether sufficient appropriate audit evidence has been obtained (see Chapter 15). In drawing conclusions based on evidence obtained (e.g. assessing the persuasiveness of conflicting evidence from different sources and the reasonableness of estimates made by management). 1.2.3.7 Professional Scepticism Definition Professional scepticism – an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement, and a critical assessment of evidence. Key Point The auditor should plan and perform (i.e. conduct) the audit with an attitude of professional scepticism, recognising that circumstances may exist that will cause a material misstatement in the financial statements. Professional scepticism includes being alert to, for example: conditions that may indicate risks of misstatement due to fraud or error; audit evidence that contradicts other audit evidence obtained; information that brings into question the reliability of documents or management representations (see Chapter 18) used as audit evidence; and circumstances that suggest the need for audit procedures in addition to those required by ISAs. However, records and documents may be accepted as genuine unless the auditor has reason to believe the contrary. Also, in planning and performing the audit, an auditor should assume neither dishonesty nor unquestioned honesty of management. Maintaining professional scepticism throughout the audit is necessary to reduce such risks as: Overlooking unusual circumstances. Overgeneralising when drawing conclusions from audit observations.  Using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and evaluating the results of procedures. 1.2.3.8 "True and Fair View" The term "true and fair view" is not defined in ISAs. True or truth relates to factual accuracy (bearing in mind materiality). The information provided conforms to required standards, regulations and laws. Fairness relates to the presentation of information and the view conveyed to the reader. Such information is free from bias. The financial statements reflect the commercial substance and reality of the underlying balances and transactions. View indicates that a professional judgment has been reached. A degree of imprecision is inevitable because of inherent limitations in an audit (e.g. the auditor does not inspect 100% of all transactions). A true and fair presentation (i.e. presented fairly in all material respects) means compliance with the applicable financial reporting framework. Where there is a choice of accounting policy (e.g. the cost or revaluation model under IAS 16 Property, Plant and Equipment), either choice will give a true and fair view if applied correctly. For example, the revaluation model must be applied to an entire class of property, plant and equipment; to apply selectively would be biased. Key Point The phrases “present fairly, in all material respects” and “give a true and fair view” are equivalent. 1.2.4. The Audit Process 1.2.4.1 Audit Cycle The audit process is often depicted as a continuous annual cycle of broad stages: Stage Description Engagement letter The auditor must send all clients an engagement letter setting out the auditor's duties and responsibilities and management’s. Chapter 5 Planning Planning audit work is essential to performing it to the required high standard of skill and care. It includes establishing the overall Chapter 7 audit strategy and developing the audit plan. Assess risk To determine audit strategy and the nature, timing and extent of audit procedures (the audit plan), auditors must identify and Chapter 8 assess the risks of material misstatement. Internal controls Regardless of the audit approach, the auditor must evaluate the design of the system of internal control. Chapter 9 Control If the auditor decides to rely on the system of internal control, the effectiveness operating effectiveness of internal controls must be tested. Chapter 12 Substantive All material assertions relating to balances, transactions and procedures related disclosures must be verified. For example, that transactions occurred, assets exist and disclosures are complete. Chapter 15  Stage Description Review and Audit working papers must be reviewed to ensure that audit finalisation evidence supports the audit opinion. Procedures typically include procedures an analytical review of the financial statements, subsequent events and going concern reviews. Chapter 29 Obtain The auditor asks management to formally acknowledge its management responsibilities (e.g. for the financial statements and internal representations controls). Representations may also be required to support audit evidence (e.g. all liabilities have been recognised). Chapter 20 Sign auditor's After the directors have approved the financial statements, the report auditor signs the auditor's report. The audit opinion will usually be unmodified but may need to be modified. Chapter 30 1.2.4.2 Relational Diagram This depiction of the process shows the two alternative audit approaches: The auditor’s understanding of the entity must include the internal controls over financial reporting. Depending on that understanding and the risk of material misstatement, the auditor decides whether to perform tests of controls (i.e. take a compliance approach) or adopt a wholly substantive approach. This general overview of the audit process is developed in later Chapters. 1.3. Assurance Engagements 1.3.1. International Framework for Assurance Engagements Definition Assurance engagement – an engagement in which a practitioner 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 criteria. The framework defines and describes the elements and objectives of assurance engagements, including audits and reviews of historical financial information and other assurance engagements. 1.3.2. Five Elements of an Assurance Engagement Three-party relationship: an assurance engagement includes three separate parties: a practitioner; a party responsible for the subject matter or an assertion about the subject matter; and the intended users of the assurance report. Subject matter: data prepared or assertions made by the responsible party. Criteria: benchmarks (relevant, complete, reliable, neutral, understandable) against which the subject matter can be assessed and an opinion provided. Evidence: the practitioner plans and performs an assurance engagement with an attitude of professional scepticism to obtain sufficient appropriate evidence about whether the subject matter is free of material misstatement. Assurance Report: a written report given by the practitioner to the intended users that provides either reasonable assurance or limited assurance about the subject matter. 1.3.3. Types of Assurance Engagement There are two types of assurance engagements: 1. reasonable assurance engagements; and 2. limited assurance engagements. For assurance engagements involving historical financial statements: reasonable assurance engagements are called "audits"; and limited assurance engagements are called "reviews". 1.3.3.1 Reasonable Assurance Engagement A reasonable assurance engagement provides a high level of assurance by expressing a conclusion in a positive form. For example: "In our opinion, the financial statements present fairly, in all material respects (give a true and fair view of) …" The practitioner should obtain sufficient appropriate evidence to express a conclusion in this positive form. The assurance engagement risk (i.e. the risk that an inappropriate opinion will be given) should be reduced to an acceptably low level. Reasonable assurance may be sought where: The subject matter and criteria are objective and formal; and Independent, reliable and persuasive evidence that can be obtained. In audit engagements, the auditor provides reasonable assurance by obtaining sufficient appropriate audit evidence to draw conclusions on which to base an opinion (see Chapter 15). 1.3.3.2 Limited Assurance Engagement A limited assurance engagement provides a limited or a lower level of assurance through expressing a conclusion in the negative form. For example: "Nothing has come to our attention that causes us to believe that the financial statements do not present fairly, in all material respects (give a true and fair view of …" The level of work carried out is limited and can only allow the practitioner to provide a negative form of expression. The assurance engagement risk is more significant (but still acceptable) than that for a reasonable assurance engagement.  Limited assurance is generally appropriate where: Subject matter and criteria are more subjective and informal; and Evidence may not be sufficiently independent or reliable. Key Point Reasonable assurance cannot be given in these circumstances. In a review engagement, the evidence obtained is through enquiry and analytical review. This is sufficient to enable only limited assurance to be given. There is a wide range of limited assurance engagements: Reviews of historical financial information (e.g. providing assurance on the reported receivables figure of an acquisition target); Providing assurance on non-financial matters (e.g. environmental performance indicators in a company’s annual report). Activity 4 Assurance State and explain the form of assurance that could be given on a company's code of business ethics. *Please use the notes feature in the toolbar to help formulate your answer. This would be a limited assurance engagement. Although there is a Code of Business Ethics, the subjectivity of applying and measuring the application of any specific ethical criteria (e.g. what is not ethical to one business may be considered ethical by another) would not enable the practitioner to reduce assurance risk to a sufficiently low level to allow reasonable assurance to be given. 1.3.4. Evidence Gathering Procedures and Reports The procedures used to gather evidence and the reports issued will vary depending on the level of assurance required. 1.3.4.1 Reasonable Assurance Engagement Evidence gathering for this type of engagement requires the practitioner to: Obtain an understanding of the engagement circumstances (Chapter 7). Assess risks and respond to them (Chapters 8 and 9). Perform further procedures using a combination of inspection, observation, confirmation, recalculation, performance recalculation, analytical procedures and  inquiry. This may involve "tests of controls" and "substantive procedures" (Chapters 12 and 15). Evaluate the evidence obtained (Chapter 29). When reporting, the practitioner expresses the conclusion in a positive form, such as: "In our opinion, internal control is effective, in all material respects, based on XYZ criteria." 1.3.4.2 Limited Assurance Engagement As for reasonable assurance engagements, the practitioner understands, assesses risks and responds to them (but in the context of limited assurance). The evidence-gathering procedures are deliberately set to be more limited (e.g. analytical review and inquiry). When reporting, the practitioner expresses the conclusion in the negative form, such as: "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." Key point Confirmations, recalculations and tests of controls, for example, will not be undertaken. 1.3.5. Review Engagements A review of historical financial information is a limited assurance engagement. The objective of a review engagement is to enable a practitioner to state whether, based on procedures (which do not provide all the evidence that would be required in an audit), anything has come to light that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework. Key point This is a negative form of a report that provides limited assurance. Exam advice Although the standards for review engagements are not examinable documents, you should understand the concept of reviews within the general assurance framework. In a review engagement, the practitioner obtains sufficient appropriate evidence primarily through inquiry and analytical procedures. An example of a review report follows. Exhibit 1 Standard Review Report Review Report To... We have reviewed the accompanying statement of financial position of ABC Company at 31 December 20X1, and the related statements of comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the International Standard on Review Engagements 2400 Engagements to Review Financial Statements. This standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not present fairly, in all material respects (give a true and fair view of) in accordance with International Financial Reporting Standards. Signature Date Address Conclusion Syllabus Coverage This chapter covers the following Learning Outcomes. A. Audit Framework and Regulation 1. The concept of audit and other assurance engagements a. Identify and describe the objective and general principles of external audit engagements. b. Explain the nature and development of audit and other assurance engagements. c. Discuss the concepts of accountability, stewardship and agency. d. Define and provide the objectives of an assurance engagement. e. Explain the five elements of an assurance engagement. f. Describe the types of assurance engagement. g. Explain the level of assurance provided by an external audit and other review engagements and the concept of true and fair presentation. Summary and Quiz Assurance services are independent professional services that improve the quality of information for decision-makers. Audits and reviews are assurance services. The objective of an audit is to obtain reasonable assurance that the financial statements are free from material misstatement and to express an opinion on whether the financial statements are properly prepared in accordance with a financial reporting framework. Management is responsible for: preparing and fairly presenting the financial statements; designing, implementing and maintaining internal control; selecting and applying appropriate accounting policies; and making reasonable accounting estimates. The auditor is responsible for expressing an opinion on the financial statements. An auditor should conduct an audit in accordance with ISAs and comply with IESBA's Code of Ethics for Professional Accountants. Key concepts in auditing are reasonable assurance, materiality, professional judgment, professional scepticism and "true and fair". The audit process includes: agreeing to the terms of the engagement; planning and risk assessment; understanding and testing the effectiveness of internal controls (when appropriate); substantive procedures; and final review procedures before signing the auditor's report. The five elements of an assurance engagement are a three-party relationship, an appropriate subject matter, suitable criteria, sufficient appropriate evidence, and a written assurance report. Assurance engagements provide reasonable (positive/high) or limited (negative/lower) assurance. Audit engagements provide reasonable assurance, and review engagements provide limited assurance. Technical Articles Chapter 2: External Audit Overview 2.1. Regulation 2.2. International Federation of Accountants (IFAC) 2.3. Standards Issued by IAASB 2.4. External Audit Conclusion Chapter 3: Corporate Governance Overview 3.1. Corporate Governance 3.2. OECD and UK Codes 3.3. Audit Committees Conclusion Chapter 4: Professional Codes of Ethics and Conduct Overview 4.1. ACCA's Code of Ethics and Conduct 4.2. Independence Standards 4.3. Second Opinions 4.4. Confidentiality 4.5. Conflicts of Interest Conclusion Chapter 5: Auditor Appointment Overview 5.1. Auditor Engagement 5.2. Existing Auditors 5.3. Terms of Audit Engagements (ISA 210) 5.4. Quality Control Procedures Conclusion Chapter 6: Audit Documentation Overview 6.1. ISA 230 Audit Documentation 6.2. Sufficient and Appropriate Record 6.3. Content 6.4. Confidentiality, Safe Custody, Retention and Ownership Conclusion Chapter 7: Audit Planning Overview 7.1. Overall Objectives (ISA 200) 7.2. Planning 7.3. Preliminary Engagement Activities 7.4. The Audit Strategy 7.5. Audit Plan 7.6. Direction, Supervision and Review 7.7. Documentation Conclusion Chapter 8: Identifying and Assessing Risk Overview 8.1. Identifying and Assessing Risk 8.2. New and Continuing Audits 8.3. Audit Risk Conclusion Chapter 9: System of Internal Control Overview 9.1. Internal Control 9.2. Use and Evaluation Conclusion Chapter 10: Audit Materiality Overview 10.1. Materiality 10.2. Considerations 10.3. Audit Procedures Conclusion Chapter 11: Fraud, Law and Regulations Overview 11.1. Fraud 11.2. Laws and Regulations Conclusion Chapter 12: Tests of Control Overview 12.1. IT Environment 12.2. Tests of Controls 12.3. Exam Skills for Tests of Control 12.4. Revenue Cycle 12.5. Purchases Cycle 12.6. Payroll Cycle 12.7. Inventory Cycle 12.8. Bank and Cash Cycle 12.9. Non-current Assets Conclusion Chapter 13: Communication on Internal Control Overview 13.1. Communication with Those Charged with Governance 13.2. Deficiencies internal Control 13.3. Communicating Deficiencies Conclusion Chapter 14 : Internal Audit Overview 14.1. Corporate Governance 14.2. Internal Audit Function 14.3. Outsourcing 14.4 Other Assignments 14.5. Internal Audit Reports Conclusion Chapter 15: Audit Evidence Overview 15.1. Audit Evidence (ISA 500) 15.2. Sufficient 15.3. Appropriate 15.4. Obtaining Audit Evidence 15.5. Substantive Procedures Conclusion Chapter 16: Analytical Procedures Overview 16.1. Meaning and Nature 16.2. In Planning 16.3. Substantive Analytical 16.4. Overall Conclusion 16.5. Investigating Results Conclusion Chapter 17: Accounting Estimates Overview 17.1. Auditing Accounting Estimates 17.2. Audit Procedures Conclusion Chapter 18: The Work of Others Overview 18.1. Experts 18.2. Internal Audit 18.3. Service Organisations Conclusion Chapter 19: Audit Sampling Overview 19.1. Obtaining Audit Evidence 19.2. Audit Sampling 19.3. Statistical v Non-Statistical Sampling Conclusion Chapter 20: Written Representations Overview 20.1. Purpose and procedure 20.2. Audit Evidence 20.3. Other Considerations 20.4. Representation Letter Conclusion Chapter 21: Automated Tools and Techniques Overview 21.1. Audit Approaches 21.2. Automated Tools and Techniques 21.3. Test Data 21.4. Audit Software 21.5. Big Data and Data Analytics 21.6. Emerging Technologies Conclusion Chapter 22: Non-current Assets Overview 22.1. Tangible Non-current Assets 22.2. Intangible Non-current Assets Conclusion Chapter 23: Inventory Overview 23.1. Inventory 23.2. Risks and Assertions 23.3. Attendance at Physical Inventory Count (ISA 501) 23.4. Cut-off 23.5. Valuation Conclusion Chapter 24: External Confirmations, Receivables and Sales Overview 24.1. External Confirmations (ISA 505) 24.2. Risks and Procedures 24.3. Direct Confirmation of Accounts Receivable 24.4. Other Evidence Conclusion Chapter 25: Share Capital, Reserves and Directors' Remuneration Overview 25.1. Audit Risks 25.2. Share Capital 25.3. Reserves 25.4. Directors' Emoluments 25.5. Statutory Books and Records Conclusion Chapter 26: Bank and Cash Overview 26.1. Risks 26.2. Audit Procedures 26.3. Bank Confirmation Report Conclusion Chapter 27: Liabilities, Provisions and Contingencies Overview 27.1. Accounting for Liabilities, Provisions and Contingencies 27.2. Risks 27.3. Audit Procedures Conclusion Chapter 28: Small Business and Not-for-Profit Organisations Overview 28.1. Characteristics 28.2. Engagement 28.3. Audit Approach 28.4. Not-for-Profit Organisations Conclusion Chapter 29: Audit Finalisation Overview 29.1. Audit Completion Review 29.2. Uncorrected Misstatements 29.3. Other information 29.4. Subsequent Events (ISA 560) Conclusion Chapter 30: The Independent Auditor's Report Overview 30.1. Basic Principles 30.2. Key Audit Matters 30.3. Unmodified Opinions Conclusion Chapter 31: Going Concern Overview 31.1. Responsibilities 31.2. Planning 31.3. Audit Evidence 31.4. Conclusions and Reporting Conclusion Resources Glossary