ACCA Applied Skills · Audit and Assurance

External audits: formula sheet

Full chapter guide

Key formulas

Objective of an external audit: Reasonable assurance → opinion on whether the financial statements give a true and fair view (or present fairly) in all material respects, per the framework; Learn this wording. It is the core definition examiners reward.
Reasonable assurance: Reasonable assurance = high, but not absolute, level of assurance; Positive assurance is given in the opinion. Never say an audit guarantees accuracy.
Agency relationship: Shareholders (principals) → appoint directors (agents) → auditor reports to shareholders; Use this to explain why an audit is needed.
Responsibility split: Directors: prepare statements and internal control. Auditor: opinion on the statements; A frequent exam point.
Core split of responsibility: Directors = prepare statements + internal control. Auditors = express an opinion.; Use this as the opening line of any answer on who does what.
Level of assurance: Audit assurance = reasonable (high, but not absolute); Never say the auditor guarantees or certifies accuracy.
Expectations gap: Expectations gap = what users expect − what the audit delivers; Split it into knowledge, performance and evolution components if asked to explain it.
Fraud and error: Directors: prevent and detect. Auditors: assess risk, respond, report.; Auditors do not prevent fraud; they plan to detect material misstatement from it.
Five elements of an assurance engagement: Three-party relationship + appropriate subject matter + suitable criteria + sufficient appropriate evidence + written assurance report; The three parties are the practitioner, the responsible party and the intended users. Learn all five; questions often ask which is missing.
Reasonable assurance: High level of assurance → positive opinion → engagement risk reduced to an acceptably low level; Example: statutory audit of financial statements. Not absolute assurance.
Limited assurance: Moderate level of assurance → negative-form conclusion → engagement risk acceptable but higher; Example: review of financial statements. Work is mainly enquiry and analytical procedures.
No assurance: Agreed-upon procedures or compilation → report of factual findings only (or no opinion); No conclusion on reliability is given. Use of the report is usually restricted to the parties who agreed the procedures.
Audit exemption test: Exempt only if the company meets the size limits given (turnover, total assets, employees) and is not excluded; Check any exclusion first (public, listed, regulated, public interest). Then apply the thresholds supplied in the question.
Who appoints: Shareholders appoint; directors fill the first appointment or a casual vacancy; Directors' appointment lasts only until the shareholders next act.
Removal: Shareholder resolution (special notice) + auditor's right to make representations and to be heard; Management or directors alone cannot remove the auditor.
Resignation: Written notice + statement of circumstances (or statement that there are none); The auditor may also request a shareholder meeting.
Change in auditor: Incoming auditor must request permission to contact outgoing auditor, then ask about reasons and facts; If the client refuses permission, consider declining the appointment.
Who the report is for: External audit → members (shareholders). Internal audit → management / audit committee.; This is the starting point for almost every comparison.
Core comparison points: Objective | Reporting to | Independence | Scope | Legal status | Focus on financial statements or not; Use these as headings for any compare-and-contrast answer.
Assurance engagement elements: Three parties + subject matter + suitable criteria + sufficient appropriate evidence + written report; The same structure applies to sustainability and integrated report assurance.
Levels of assurance: Reasonable = positive opinion, high but not absolute. Limited = negative-form conclusion, moderate level.; Limited assurance needs less evidence work than reasonable assurance.

Quick revision

An audit gives an opinion on whether financial statements are true and fair or fairly presented, in all material respects.
Directors prepare the financial statements; auditors express an opinion on them.
The audit adds credibility for users such as shareholders, lenders and other stakeholders.
An audit gives reasonable assurance, which is high but not absolute.
A review gives limited assurance, with a negative form of conclusion.
Audit opinions are positive in form; limited assurance is negative in form.
Directors are responsible for internal control and for preventing and detecting fraud.
Auditors are not responsible for preparing the statements or for guaranteeing no error or fraud.
Limitations such as testing, judgement and persuasive evidence mean assurance cannot be absolute.
External auditors are independent of the company; internal audit is part of the organisation.
Internal audit mainly serves management; external audit mainly serves shareholders.
Always apply the point to the scenario instead of reciting a definition.

Common mistakes

Saying the audit gives absolute assurance or guarantees the statements are correct. Fix: Always write 'reasonable assurance'. Auditors test samples and use judgement, so some risk remains.
Saying the auditor prepares the financial statements or is responsible for them. Fix: Directors prepare the statements and keep internal control. The auditor only expresses an opinion.
Saying the auditor is responsible for preparing the financial statements. Fix: Remember that management prepares and the auditor opines. An auditor who prepares the statements threatens independence.
Stating that the auditor must prevent and detect all fraud. Fix: Write that directors prevent and detect. The auditor assesses risks of material misstatement from fraud, responds, and reports.
Saying an audit gives absolute or guaranteed assurance. Fix: Always say reasonable assurance is high but not absolute, because of inherent limitations such as sampling and judgement.
Saying limited assurance means no assurance. Fix: Limited assurance is a meaningful, moderate level. Only agreed-upon procedures and compilation give no assurance.
Claiming exemption because the company is small, ignoring the type of company. Fix: Always check type and regulation first, then size.
Saying directors appoint and remove the auditor. Fix: Remember that shareholders appoint and remove to protect independence. Directors only fill the first appointment or a casual vacancy.
Saying internal auditors are fully independent. Fix: Say internal audit is not independent of the entity if staffed by employees. Objectivity is supported by reporting to the audit committee.
Writing that internal audit is only about financial statements. Fix: Remember internal audit can cover operations, value for money, compliance, risk and governance, as management decides.

Exam tips

Learn the objective in exact words: reasonable assurance, free from material misstatement, opinion, applicable framework.
In a written answer on 'why needed', always start with the agency problem, then tie it to the users named in the scenario.
In objective questions, eliminate options with absolute words such as 'guarantee', 'all', 'every' or 'ensure'.
Keep the directors' and auditor's responsibilities separate. A one-line statement of the split often earns a mark.
Objective test questions are all-or-nothing, so read each option fully before choosing.
In objective questions, eliminate any option that says the auditor prepares statements, guarantees accuracy or prevents fraud.
For written answers, use two headings of your own: directors and auditors. This makes marks easy to find.
Always use the phrase reasonable assurance, and give one reason why it is not absolute.