ACCA Applied Skills · Audit and Assurance

The concept of audit and other assurance engagements: formula sheet

Full chapter guide

Key formulas

Five elements of an assurance engagement: Three-party relationship + Subject matter + Criteria + Sufficient appropriate evidence + Assurance report (conclusion); If any element is missing, the engagement is not an assurance engagement.
Three parties: Practitioner + Responsible party + Intended users; The responsible party and the intended users can be different people, and the responsible party can also be a user. The practitioner is always separate.
Levels of assurance: Reasonable assurance = positive form of conclusion (audit); Limited assurance = negative form of conclusion (review); Reasonable is high but not absolute. Absolute assurance is never given.
Suitable criteria: Relevance, completeness, reliability, neutrality, understandability; Use these to test whether criteria are suitable. Without suitable criteria, the subject matter cannot be evaluated consistently.
Reasonable assurance: High level of assurance (not absolute) → positive conclusion; Example: statutory audit opinion that the financial statements give a true and fair view.
Limited assurance: Moderate level of assurance → negative conclusion; Example: review engagement, 'nothing has come to our attention that causes us to believe...'.
Assurance risk: Assurance risk is lower for reasonable assurance than for limited assurance; Risk is the chance of giving an inappropriate conclusion. Lower risk needs more evidence.
Procedures by level: Reasonable: full range of procedures. Limited: mainly enquiry and analytical procedures; Limited assurance work is narrower in nature, timing and extent, not just smaller in volume.
Absolute assurance: Absolute assurance is not attainable; Because of sampling, inherent control limits, judgement and persuasive evidence.
ISA 200 objective: Audit objective = enhance users' confidence by giving an opinion on whether the financial statements are prepared, in all material respects, in line with the applicable framework; Learn this wording. Say 'opinion', 'material respects' and 'framework'.
Level of assurance: External audit = reasonable assurance (high, not absolute); Never say the auditor guarantees or certifies that the statements are correct.
Division of responsibility: Directors: prepare statements, keep records, run internal control, prevent and detect fraud. Auditors: obtain evidence and express an opinion; Questions often ask you to place a duty with the right party.
True and fair: True and fair view = fair presentation in all material respects under the framework (e.g. IFRS); Not the same as exactly correct or accurate.
Level of assurance in an audit: Reasonable assurance = high, but not absolute, level of assurance; Absolute assurance is not attainable because of inherent limitations. Never say an audit 'guarantees' or 'certifies' the accounts.
Audit risk: Audit risk = risk of material misstatement × detection risk; Reasonable assurance means audit risk is reduced to an acceptably low level. It is never reduced to zero.
Sources of inherent limitations (ISA 200): Nature of financial reporting + nature of audit procedures + need for audit to be done within a reasonable time and cost; Use this as a checklist to organise your answer.
Nature of audit evidence: Audit evidence is persuasive, not conclusive; Evidence is gathered to support conclusions, usually from samples and judgement.
Audit: Reasonable assurance → positive opinion; High but not absolute level of assurance. Evidence is obtained through a full range of procedures.
Review: Limited assurance → negative-form conclusion; Mainly enquiry and analytical procedures. Wording: nothing has come to our attention that causes us to believe the information is materially misstated.
Agreed-upon procedures: Agreed procedures → factual findings → no assurance; Users form their own conclusions. Report use is usually restricted to the parties who agreed the procedures.
Compilation: Management's records + accountant's expertise → financial information → no assurance; No verification of the information is performed.
Three-party relationship: Practitioner + responsible party + intended users; Required for assurance engagements. Subject matter must be suitable and criteria must be available.
Expectation gap: Expectation gap = what users expect − what an audit delivers; Split it into knowledge, performance and evolution parts when the question asks for causes.
Level of assurance: Audit = reasonable assurance (high, not absolute); Never say the auditor guarantees accuracy or that all fraud will be found.
Main parties' responsibilities: Directors prepare the statements and keep controls; auditors give an opinion; Use this to correct the common misunderstanding that the auditor prepares the accounts.
Value of audit test: Value = benefits to stakeholders − costs of audit; Use it to judge whether audit (or exemption) suits a given company.

Quick revision

Assurance engagement: a practitioner gives a conclusion to increase the confidence of intended users, other than the responsible party, in the subject matter information.
Three parties: the practitioner, the responsible party and the intended users.
Reasonable assurance is high but not absolute; the conclusion is in positive form, such as the financial statements give a true and fair view.
Limited assurance is a level lower than reasonable assurance that is still meaningful; the conclusion is usually expressed in negative form, such as nothing has come to our attention. Review engagements are the main example.
A statutory audit gives reasonable assurance on whether the financial statements are free from material misstatement.
The auditor gives an opinion; management remains responsible for preparing the financial statements.
Inherent limitations: judgement, sampling, control limits, persuasive evidence and management override or collusion.
Audit evidence is persuasive rather than conclusive, so audit cannot give absolute assurance.
Agreed-upon procedures and compilations give no assurance; users draw their own conclusions or rely on the preparer's work.
A review engagement gives limited assurance, with fewer procedures than an audit, mainly enquiry and analytical procedures.
The expectation gap is the difference between what users expect from an audit and what it actually delivers.
Audit adds value by increasing the credibility of financial information, which helps users and may lower the cost of finance.

Common mistakes

Treating every service a firm provides as assurance. Fix: Ask whether a conclusion is given to users. Tax advice, bookkeeping and consultancy are non-assurance services. Agreed-upon procedures and compilation are related services. None of these is assurance.
Saying the practitioner is the responsible party. Fix: The responsible party is accountable for the subject matter, for example directors for the financial statements. The practitioner gives a conclusion on it.
Saying an audit gives absolute or guaranteed assurance. Fix: Say reasonable assurance is high but not absolute, and give the inherent limitations such as sampling and management override.
Mixing up positive and negative conclusions. Fix: Positive means an affirmative statement of opinion (reasonable). Negative means 'nothing has come to our attention' (limited). Neither means the news is bad.
Saying the auditor gives a guarantee or absolute assurance that the statements are correct. Fix: Write 'reasonable assurance'. Explain that testing, sampling and judgement mean some risk remains.
Saying the auditor is responsible for preparing the financial statements. Fix: Directors always prepare and are responsible. The auditor only reports an opinion.
Saying an audit provides absolute assurance or a guarantee that the accounts are correct. Fix: Always use the words 'reasonable assurance'. The opinion says the statements give a true and fair view, not that they are exactly right.
Listing limitations as one-word points such as 'sampling' or 'judgement' with no explanation. Fix: Write a full sentence: say what the limitation is and why it prevents certainty, for example that untested items may contain errors.
Saying agreed-upon procedures give limited assurance. Fix: Remember that no conclusion is given, only factual findings. So it gives no assurance.
Treating a review as a smaller audit with a positive opinion. Fix: A review uses enquiry and analytical procedures and gives a negative-form conclusion at limited assurance.

Exam tips

OT case questions may ask which element is missing, so check for the conclusion first, then criteria. Constructed response questions may require you to explain the elements in the scenario.
Name the actual parties from the scenario. Generic answers lose marks in constructed response questions.
Use the exact terms: responsible party, intended users, subject matter, criteria. Examiners look for them.
Remember that objective test questions are all or nothing, so read each option fully before choosing. Watch for wording such as absolute or guarantee.
When contrasting assurance with non-assurance, state the reason: a conclusion is given or it is not.
Learn the two conclusion phrases word for word. Marks are often lost for loose wording.
In written answers, always name the level, the form of conclusion and the procedures. These are three separate marks.
Use the word 'reasonable' with 'not absolute' in the same sentence. Examiners look for both.