Specific assignments: formula sheet

Key formulas

Five elements of an assurance engagement

Three parties + subject matter + suitable criteria + sufficient appropriate evidence + written report

Use this as a checklist when a scenario asks whether an assignment is assurance.

Reasonable assurance conclusion

Positive form: 'In our opinion, the subject matter conforms, in all material respects, to the criteria'

High level of assurance, based on extensive evidence-gathering. Risk is reduced to an acceptably low level.

Limited assurance conclusion

Negative form: 'Nothing has come to our attention to cause us to believe the subject matter is materially misstated'

Fewer procedures, mainly enquiry and analytics. Risk is higher than reasonable assurance but the level must still be meaningful, with sufficient appropriate evidence.

Suitable criteria characteristics

Relevant, complete, reliable, neutral, understandable

Unsuitable criteria mean you should not accept the engagement.

Non-assurance assignments

Agreed-upon procedures = factual findings only; compilation = no assurance

No opinion or conclusion is expressed in either. In agreed-upon procedures you report the procedures performed and the factual findings. In a compilation you issue a compilation report that gives no assurance. Under ISRS 4400 (Revised) the standard does not require the AUP report to be restricted.

Level of assurance

Audit = reasonable assurance (positive opinion); Review = limited assurance (negative-form conclusion)

Limited assurance still needs enough work to give a meaningful level of comfort.

Main review procedures

Enquiry + analytical procedures (+ further procedures if matters arise)

Limited tests of controls or substantive detail work, only where needed to address concerns.

ISRE 2400 versus ISRE 2410

ISRE 2400 = practitioner who is not the entity's auditor; ISRE 2410 = entity's auditor reviewing interim information

Pick the right standard from who is doing the work.

Review conclusion wording

Nothing has come to our attention that causes us to believe that the information is not prepared, in all material respects, in accordance with the framework

Negative assurance. Do not say true and fair view is confirmed.

Modified conclusions

Qualified, adverse or disclaimer of conclusion

Used when there is material misstatement or a scope limitation. Use the same logic as ISA 705.

Forecast

Forecast = PFI based on best-estimate assumptions (what management expects)

Management expected events and actions at the date of preparation.

Projection

Projection = PFI based on hypothetical assumptions, or a mix of hypothetical and best-estimate

Used for 'what if' scenarios, for example a proposed new project or a change in business model.

Three areas of examination

Assumptions + Preparation + Presentation

Your conclusions in the report cover each of these.

Assurance on assumptions

Negative assurance on assumptions: nothing suggests they are unreasonable as a basis for the PFI

For a projection, the report states that the hypothetical assumptions are consistent with the purpose of the information.

Opinion on preparation

Opinion on whether the PFI is properly prepared on the basis of the assumptions and presented in line with the applicable framework

This opinion covers preparation and presentation only. It is not assurance that the results will be achieved, and the report cautions that actual results are likely to differ. Check that the basis of accounting is consistent with historical policies.

Purpose test for any due diligence question

Objective → Scope → Procedures → Risks → Report

Use this order to structure written answers.

Enterprise value to equity value bridge

Equity value = Enterprise value − Net debt − Other debt-like items

Debt-like items include unfunded pensions, leases and contingent liabilities found in diligence. Each reduces the price.

Normalised (adjusted) earnings

Adjusted EBITDA = Reported EBITDA ± one-off, non-recurring and non-market items

Common adjustments are restructuring costs, owner perks and above-market related-party charges.

Working capital

Net working capital = Inventory + Receivables − Payables

Compare the level at the deal date to the normal average level to set a price adjustment.

Elements of an assurance engagement

Three parties + subject matter + suitable criteria + sufficient appropriate evidence + written report

Use as a checklist when deciding whether an engagement is an assurance engagement and whether to accept it.

Suitable criteria characteristics

Relevance, completeness, reliability, neutrality, understandability

Apply to any criteria, including management-developed ones. Criteria must be available to intended users.

Reasonable assurance conclusion

Positive form: 'in our opinion, subject matter is prepared, in all material respects, in accordance with criteria'

Needs risk assessment, control understanding where relevant, and further procedures responding to assessed risks.

Limited assurance conclusion

Negative form: 'nothing has come to our attention that causes us to believe the subject matter is materially misstated'

Work is mainly enquiry and analytical procedures. Risk of wrong conclusion is higher than for reasonable assurance.

Value for money (the three Es)

VFM = Economy + Efficiency + Effectiveness

Economy is about inputs and cost, efficiency about output per input, effectiveness about outcomes against objectives. Say which E each point relates to.

Efficiency measure

Efficiency = Outputs ÷ Inputs

For example, cases processed per staff member or cost per case. Compare with a benchmark or prior period.

Fraud triangle

Fraud = Pressure + Opportunity + Rationalisation

Use it to explain why fraud may have happened and where to look. It is a model, not a rule.

Forensic evidence discipline

Secure → Preserve → Document → Analyse → Report

A memory aid for the order of work. Not a formal standard.

Quick revision

• An assurance engagement has a three-party relationship, a subject matter, suitable criteria, sufficient evidence and a written report.
• Reasonable assurance gives a positive opinion; limited assurance gives a conclusion in the negative form.
• Agreed-upon procedures and compilations give no assurance; the report states findings or the work done, not a conclusion on reliability.
• A review relies mainly on inquiry and analytical procedures, not on detailed testing or corroboration of everything.
• In a review, the practitioner must still be independent, plan the work and form a conclusion based on evidence.
• For prospective financial information, you do not give assurance that the forecast will be achieved.
• Examine the assumptions: are they reasonable and consistent with the purpose, and is the forecast properly prepared on them?
• Due diligence scope is set by the client's purpose, so agree the terms of engagement and limits clearly before starting.
• Non-financial assurance needs suitable, available criteria, and the practitioner must have the competence to assess the subject matter.
• Forensic work focuses on gathering evidence that may be used in a legal setting, so documentation and chain of custody matter.
• Always check ethics, competence and independence before accepting a specific assignment.
• In every answer, name the engagement, state the assurance level, and apply to the scenario facts.

Common mistakes

• Saying agreed-upon procedures give limited assurance. Fix: State that no assurance is given. The practitioner reports factual findings only and users draw their own conclusions.
• Describing limited assurance as 'no work' or a weak audit. Fix: Explain that it is a meaningful level of assurance, achieved mainly through enquiry and analytical procedures, supported by sufficient appropriate evidence, with higher risk of a wrong conclusion.
• Saying a review gives no assurance. Fix: Say it gives limited assurance. It is a real assurance engagement with a conclusion.
• Writing that a review report gives a true and fair opinion. Fix: Use the negative-form wording: nothing has come to our attention that causes us to believe the information is not prepared in accordance with the framework.
• Saying the auditor guarantees or confirms that the forecast will be achieved. Fix: State that you give assurance on the assumptions, preparation and presentation only. Actual results will probably differ.
• Mixing up forecasts and projections. Fix: Forecast means best-estimate assumptions. Projection means hypothetical assumptions or a mix. Check the scenario wording to see which one applies.
• Treating due diligence as an audit and giving an audit opinion. Fix: State that scope is set by the client, the report is usually findings or limited assurance, and no audit opinion is given unless the engagement says so.
• Listing generic procedures not tied to the scenario. Fix: Name the item from the case, for example a key customer, a recent acquisition or a forecast, and say what you would do to it.
• Treating the engagement as a financial audit and quoting ISA procedures only. Fix: Name ISAE 3000 (or ISSA 5000 if given) and talk about criteria, level of assurance and the assurance report.
• Ignoring whether the criteria are suitable. Fix: Always test criteria against the five characteristics and say whether the engagement can be accepted.

Exam tips

• Classify first. Examiners often test whether an assignment is assurance at all. Say so in your first line.
• Always contrast reasonable and limited assurance by evidence, risk and the form of conclusion, and apply it to the scenario.
• For agreed-upon procedures and compilations, write the word 'no assurance' explicitly and explain why.
• Comment on criteria and intended users in every ISAE 3000 answer. These are easy marks that students skip.
• Use professional skills: be sceptical, write for the named reader, and finish with a clear recommendation.
• Always state the assurance level first. It earns easy marks and frames the rest of your answer.
• Make procedures specific. Say what you would ask and compare, and link it to a figure or risk in the scenario.
• When asked to compare audit and review, use a clear structure: level of assurance, procedures, evidence, conclusion wording and cost. Do not just list facts about one.