The Concept of Audit and Other Assurance Engagements

What this chapter covers

The concept of audit and other assurance engagements: topics in the order to study them

1. 1Introduction to Assurance EngagementsStart here because it defines assurance, the parties involved and the elements of an engagement, which every other topic builds on.
2. 2Reasonable vs Limited AssuranceOnce you know what assurance is, you need to compare its two levels, as this is a common objective test point.
3. 3The Statutory Audit and Its PurposeThis applies reasonable assurance to the main engagement you are examined on, the audit of financial statements.
4. 4Limitations of Audit and Inherent ConstraintsIt follows naturally: after learning what an audit provides, you learn why it cannot provide certainty.
5. 5Other Assurance Engagements and Related ServicesWith the audit clear, you can contrast it with reviews, agreed-upon procedures and compilations.
6. 6Audit Expectation Gap and Value of AuditFinish with this because it pulls together purpose, limits and alternatives into a discussion of what users expect and what audit is worth.

How to prepare The concept of audit and other assurance engagements

1. Read the assurance introduction and write the elements of an engagement in your own words: three parties, subject matter, criteria, evidence and conclusion.
2. Make a two-column comparison of reasonable and limited assurance covering level of assurance, type of procedures, form of conclusion (positive or negative) and example engagements.
3. Write one sentence on the purpose of a statutory audit: to give an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable framework. Then note who benefits.
4. List the inherent limitations, such as judgement, sampling, internal control limits, persuasive rather than conclusive evidence and management override, and link each to why assurance is not absolute.
5. Build a table that separates assurance engagements (audit and review, with the level of assurance each gives) from related services (agreed-upon procedures and compilations) that give no assurance. Make sure you can say clearly why the related services give none.
6. Practise objective questions on this chapter, then write a short paragraph explaining the expectation gap and one way to narrow it, to prepare for written requirements.

Common mistakes in The concept of audit and other assurance engagements

• Saying an audit guarantees the financial statements are correct or that no fraud exists.

  Fix: Always use reasonable assurance and material misstatement. Remember that inherent limitations make absolute assurance impossible.

• Mixing up positive and negative conclusions for reasonable and limited assurance.

  Fix: Link them: reasonable assurance gives a positive opinion; limited assurance conclusions are usually worded in negative form, as in a review engagement, stating what has not come to attention.

• Claiming that agreed-upon procedures or compilations provide assurance.

  Fix: State that these are related services. The practitioner reports findings or assists with preparation, and gives no assurance conclusion.

• Treating management as responsible for the audit opinion, or the auditor as responsible for the financial statements.

  Fix: Directors prepare the financial statements and maintain internal control. The auditor forms and expresses an opinion on them.

• Listing limitations as a vague point such as audits are not perfect.

  Fix: Name each limitation and explain its effect, for example sampling means not every transaction is checked, so some misstatement may go undetected.

• Describing the expectation gap without saying how it can be reduced.

  Fix: Add practical responses such as a clearer audit report explaining responsibilities, better public education on audit, and consistent auditing standards.

Last-day revision: The concept of audit and other assurance engagements

• ✓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.

The concept of audit and other assurance engagements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CA IntermediateNature, Objective and Scope of Audit
• CA FinalAdvanced Auditing, Assurance and Professional Ethics
• ACCA Strategic ProfessionalSpecific assignments
• CMA FinalCost Auditing and Assurance Standards