PART A -AUDIT FRAMEWORK AND REGULATION

SESSION 1
 Audit & Assurance
 5 Elements of Assurance Engagements
 Objectives of an Audit
 Concept of True and Fair view
 Types of Assurance Engagement
 Levels of Assurance
 Benefits & Drawbacks of Audit
 General Principles for an auditor to follow
 Accountability, Stewardship & Agency

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 SESSION 1 – ASSURANCE & OTHER ENGAGEMENTS

AUDIT & ASSURANCE

An external audit is a type of assurance engagement that is carried out

by an auditor to give an independent opinion on a set of financial
statements.
The objective of an audit of financial statements is to enable the auditor
to express an opinion on whether the financial statements are prepared,
in all material respects, in accordance with an applicable financial
reporting framework. (ISA 200: para. 3)
Assurance engagement is 'an engagement in which a practitioner
obtains sufficient appropriate evidence in order to express 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.’

5 ELEMENTS OF AN ASSURANCE ENGAGEMENT

 Criteria
Criteria involves the criteria that is used to judge the reliability and
accuracy of the subject matter. For example, IFRS.

 Report
Report is given to the intended user by the practitioner stating the
Auditor’s opinion and conclusions on the subject matter.

 Evidence
Evidence is required inorder to back up the conclusions provided
by the practitioner, which is the Auditor.
The evidence collected should be of sufficient quantity and should
have the appropriate quality.

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  Subject Matter
The matter that is provided by the responsible party, on which
assurance is given. In the case of an external audit, the Financial
Statements.

 Three Parties (User, Preparer, Reviewer)

The 3 parties involved in an assurance engagement are –
 The intended user – Usually the shareholder, but there are
other stakeholders. They are the ones who needs assurance
on the subject matter.

 The responsible party – The management, the person who

prepares the subject matter.

 The Practitioner – The Auditor, the person who reviews the

subject matter and provides assurance on it.

OBJECTIVES OF AN AUDIT

The objective of an Auditor is to state an opinion as to whether the

financial statements -
 Give a true and fair view

 The accounting records prepared by management are accurate

and complete

 Ensure that the FS are prepared in accordance with an applicable

financial reporting framework in all material respects

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 CONCEPT OF TRUE AND FAIR VIEW

True

 Information is factual and conforms with reality

 Complies with accounting standards and any relevant legislation

 Data is correctly transferred from accounting records to the FS

Fair

 Information is clear, impartial and unbiased

 Reflects plainly the commercial substance of the transactions

TYPES OF ASSURANCE ENGAGEMENTS

EXTERNAL AUDITS
In an External Audit, an Auditor states an opinion as to whether the
financial statements give a true and fair view.
There are two types of External Audits:
1. Statutory Audits
2. Non – Statutory Audits

1. Statutory Audit

 A statutory audit is when entities are required by law to have an

audit

 This includes Public Companies, Large Companies, Building

Societies, Charities, Financial Institutions, etc.

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 2. Non Statutory Audit

 This is when there is no legal requirement to conduct an audit.

For example, a small company may or may not conduct an audit.

 The is done because they find it beneficial due to the following

reasons –

 The owners of the company, i.e, shareholders, will have a

great deal of confidence on the financial results of their
business as they are provided with reliable information.

 It provides an assurance to those financing the business e.g.

Banks

 It makes the FS look more acceptable to tax authorities.

 It helps to make the sale of the business easier as it provides

the buyer with reliable financial information.

INTERNAL AUDIT

The internal audit function performs 'assurance and consulting activities

designed to evaluate and improve the effectiveness of the entity's
governance, risk management and internal control processes'
There are a number of assignments that may be carried out by internal
auditors and these include:
 Value for money (VFM) audits.
 An information technology (IT) audit.
 Best value audits.
 Financial, operational and procurement audits

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 REVIEW ENGAGEMENTS

In a Review Engagement, the Auditor provides limited assurance over

the subject matter and obtains less evidence than required by an Audit.
The reviewer will provide an opinion, and it will be stated in a Report.
This Report will be commissioned to those who assigned the reviewers
their job.

The following are some examples of review engagements –

 Risk assessment reports
 Review of internal controls
 System reliability reports
 Due Diligence reviews
 Social and environmental reports

LEVELS OF ASSURANCE

Basis Reasonable assurance Limited Assurance

Draws reasonable Draws limited

Conclusion
conclusions conclusions

What should we Subject matter

Subject matter conforms
ensure about the plausible in
in all material respects
subject matter? circumstances

Moderate or low level

Assurance level High level assurance
assurance

Quantity of
Thorough procedures Fewer procedures
Procedures

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 Wording Positively worded Negatively worded

Nothing has come to

our attention that
In our opinion FS give a
Examples of causes us to believe
true & fair view fairly in
wording that the FS are not
all material respects
prepared, in all
material respects

GENERAL PRINCIPLES FOR AN AUDITOR

 The Auditor must comply with applicable ethical principles put

forth by their professional body

 The Auditor must comply with the International Standards on

Auditing (ISAs)

 The Auditor must keep an attitude of professional skepticism

when planning and performing the audit

BENEFITS AND DRAWBACKS OF AUDITING

BENEFITS (H-I-R-E-D)

 Higher quality information which is more reliable improving the

reputation of the company in the market or industry.

 Independent scrutiny and verification may be valuable to

management.

 Reduces the risk of management bias, fraud and error.

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  Enhances the credibility of the financial statements, e.g. for tax
authorities or lenders.

 Deficiencies in the internal control system may be highlighted by

the auditor.

DRAWBACKS (F-I-R-E-D)

 Financial statements include subjective estimates and other

judgmental matters.

 Internal controls may be relied on, but they may have their own
inherent limitations.

 Representations from management may have to be relied upon as

the only source of evidence in some areas.

 Evidence is often persuasive not conclusive.

 Do not test all transactions and balances. Auditors test on a

sample basis.

ACCOUNTABILITY, STEWARDSHIP & AGENCY

Accountability
Accountability means that people in a position of power can be held to
account for their actions, i.e. they can be compelled to explain their
decisions and can be criticised or punished if they have abused their
position.
For example, in the context of a company, it means holding the directors
answerable for explaining their actions to the shareholders.

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 Stewardship
Stewardship is when a person is responsible for taking care of
something on behalf of another.
For example, the directors of a company have a fiduciary duty to
safeguard the assets of the company for the shareholders.

Agency
Agency occurs when one party, the Principal, employs another party, the
Agent, to perform a task on their behalf.
In the case of a company, the directors (Agents), acts on behalf of the
shareholder (the Principal).
When there is a difference in the objectives of the principal and the
agent, then there arises an ‘Agency Problem’.

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