Topic: Introduction to Audit and Assurance Engagements

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  • 5 Marks

AA – Nov 2019 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explaining the difference between audit and assurance engagements, with a focus on statutory requirements and value to clients.

Accounting firms offer a wide range of professional services to their clients, including audit, other assurance, and related services. These services are regulated, with many jurisdictions requiring compliance with international standards and local regulations. The type of service delivered depends both on the statutory requirements and what will provide the most value to the client and users of the financial information.

Required:
Explain the difference between audit and assurance engagements. (5 marks)

  • An audit of financial statements is the examination of historical financial statements to enable the auditor to express an opinion whether the financial statements are prepared fairly, in all material respects or give a true and fair view, in accordance with an applicable financial reporting framework. An audit is a higher form of an assurance engagement performed only on historical financial information or statements.
  • An audit of financial statements is an assurance engagement.
  • Assurance engagement means an engagement in which a practitioner expresses 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. The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria to the subject matter. Here, a professional accountant evaluates a subject matter, which is the responsibility of a third party, and forms a conclusion about the subject matter’s conformity with an identified criterion to provide the intended user a level of confidence about the subject matter.
  • Not all assurance engagements are audits. An example of non-audit assurance engagements is a Review assignment.
  • Audit engagement gives reasonable assurance– low level of risk. Non-audit assurance gives limited assurance – the risk is limited to the circumstance surrounding the engagement.
  • More time is spent on audit assurance than other non-audit assurance, and it is more costly too.

(5 points for 5 marks)

  • 5 Marks

AA – Dec 2022 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explains the concept of self-regulation and outlines the roles of ICAG in regulating the accountancy profession in Ghana.

Institute of Chartered Accountants, Ghana (ICAG) is established by the Institute of Chartered Accountants, Ghana, Act 2020 (Act 1058). Its mission is to train professional accountants of the highest quality, ready to provide cutting-edge services to their clients at all times, upholding the ethical values of the accountancy profession. In addition, all companies must have their financial statements audited by accountants regulated by ICAG as it is the sole regulator of the accountancy practice in Ghana.

Required:

i) Define the concept of self-regulation.
ii) Outline THREE (3) roles of a regulatory body such as ICAG in regulating the accountancy profession in Ghana.

i) Self-regulation is a system where the regulation of auditors is carried out by their own professional bodies, such as ICAG, instead of another governmental agency.
(2 marks)

ii) Role of ICAG in regulating the accountancy practice in Ghana:

  • Offering professional qualifications for auditors to provide evidence that auditors possess a minimum level of technical competence.
  • Establishing procedures to ensure that the professional competence of auditors is maintained by ensuring that audit work is performed only by fit and proper persons.
  • Maintaining a list of registered auditors, which is made available to the public.
    (3 marks)
  • 10 Marks

AA – May 2017 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explanation of the purpose and role of external audit in large companies.

You are the audit manager of an audit firm where the purpose of an external audit and its role are not well understood. You have been asked to write some material for inclusion in your firm’s training materials dealing with these issues in the audit of large companies.
Required: In your paper, explain the purpose of an external audit and its role in the audit of large companies, for inclusion in your firm’s training materials.

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 accordance with the applicable accounting framework. It provides reasonable assurance that the financial statements are free from material misstatements, which adds credibility to the financial statements. The audit enhances the reliability of the information presented, which is vital for shareholders and other stakeholders who rely on the financial statements for decision-making. The audit also reassures shareholders that the financial statements are free from fraud or error, although it is the directors’ responsibility to detect and prevent fraud. Additionally, an audit serves as an independent evaluation to determine whether financial statements give a true and fair view, which is crucial for capital market confidence, especially for large companies. Finally, auditors must be independent and qualified under legal frameworks such as the ICAG, which maintain the credibility of the auditing profession.

  • 5 Marks

AA – May 2020 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Define and explain the concept of "true and fair view" in the context of ISA 700/701.

The main objective of an audit is to enable the auditor express an opinion on the financial statements being audited. ISA 700/701 requires that the auditors’ opinion should state whether the financial statements give a true and fair view and are fairly presented in all material respects in accordance with applicable financial reporting framework where an unmodified opinion is expressed.

Required:
Explain what is meant by true and fair view. (5 marks)

There is no formal (legal or professional) definition of the term “true and fair view.” However, from general usage, the meaning of the term can be looked at from its components, namely:

  • True: The accounts are free from material misstatements and reflect the underlying records.
  • Fair: Implies that there is no undue bias in the financial statements or the way they have been presented.

Additionally, it suggests that judgment exercised in the preparation and auditing of the financial statements is properly aligned with appropriate financial reporting standards. Both directors and auditors must exercise judgment to ensure that the financial statements provide a “true and fair” or “present fairly” assurance, in line with financial standards, and that they can be relied upon.

(5 marks)

  • 10 Marks

AA – May 2018 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explains the concept of reasonable assurance and its advantages while addressing the role of auditors in assessing the integrity of a finance manager.

The Finance Manager of Nkran Ltd prepared a comprehensive cash flow forecast for the purpose of securing a loan from the bank. This was presented to the bank for evaluation and approval. The bank, after evaluating the cash flow forecast, wrote to Nkran Ltd requesting a reasonable assurance report. The Managing Director of Nkran Ltd, who was impressed with the Finance Manager’s cash flow forecast, is now questioning the integrity of the Finance Manager to the extent of considering dismissing him. The Managing Director decided to consult you, the Auditor, before taking the decision.

i) Write a letter explaining the need for reasonable assurance and its advantages to Nkran Ltd and the elements of an assurance engagement. (8 marks)
ii) Advise the Managing Director on whether his intended decision is well-founded. (2 marks)

i) Reasonable assurance is provided in a report where the auditor has obtained sufficient evidence to feel confident to give reasonable assurance that the information is free from material error. A normal audit opinion (giving reasonable assurance) takes a positive form of words, e.g., ‘In our opinion, the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of…’

Advantages of reasonable assurance:

  • The bank will place more reliance on the forecast as it has been subject to review by an independent professional. The level of comfort given will be less than that of an audit, but forecast information cannot be verified to the same degree as historical information, so the limited assurance is the best that could be expected in the circumstances.
  • Reasonable assurance requires a lower level of work than a full scope audit, so it will be cheaper for the company.

The elements of an assurance engagement are:

  • The three-party relationship
  • Appropriate subject matter
  • Suitable criteria
  • Appropriate evidence
  • A conclusion

ii) The intended decision by the Managing Director is not well-founded. The bank’s request for a reasonable assurance report is not an indication that the Finance Manager has acted improperly. It simply reflects the bank’s need for an independent professional’s assurance on the reliability of the forecast. Therefore, there is no reason for questioning the Finance Manager’s integrity based on this request. (2 marks)

  • 10 Marks

AA – Nov 2018 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explains assurance engagements, differences between reasonable and limited assurance, and elements of assurance engagement.

a) The shareholders of Store and Quary Ltd namely Obodai and Obosie are residing abroad. They appointed directors to see to the day-to-day running of the company. The directors produced the financial statements of the company, which show a true and fair view. Other relevant information regarding directors’ pay and benefits, going concern, and management of risk have been provided by the directors. In order to know the accuracy of the information provided, the shareholders engaged your firm, Standard and Co. Chartered Accountants, to perform an assurance engagement.

Required:
i. Explain an assurance engagement as provided by IAASB. (2 marks)
ii. Explain FOUR (4) elements of an assurance engagement. (4 marks)
iii. Describe the differences between reasonable assurance engagement and limited assurance engagements. (4 marks)

i. An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users, other than the responsible party, about the subject matter information (i.e., the outcome of the evaluation or measurement of a subject matter against criteria). (2 marks)

ii. An assurance engagement performed by a practitioner consists of the following elements:

  • A three-party relationship: the intended user, the responsible party, and the practitioner.
  • A subject matter: this is the data to be evaluated that has been prepared by the responsible party.
  • Suitable criteria: the subject matter is evaluated or measured against criteria to reach an opinion.
  • Evidence: sufficient appropriate evidence needs to be gathered to support the required level of assurance.
  • An assurance report: a written report containing the practitioner’s opinion is issued to the intended user. (1 mark each for any four valid points made) (4 marks)

iii.

  • Reasonable assurance engagement provides a high, but not absolute, level of assurance. The objective is to reduce engagement risk to an acceptably low level. The conclusion is expressed positively.
  • Limited assurance engagement provides a lower level of assurance. The procedures performed are limited compared to reasonable assurance engagements. The conclusion is expressed negatively. (2 marks each) (4 marks)

(Total: 10 marks)

  • 5 Marks

AA – April 2022 – L2 – Q1a – Introduction to Audit and Assurance Engagements

State the primary and secondary objectives of an audit.

Audit is the examination or inspection of various books of accounts by an auditor to certify that the accounts have been prepared according to the principles of accounting and to determine whether the Financial Statements prepared reflect a true and fair view of the state of affairs of a business.

Required:
i) State the Primary objective of an audit.
ii) State the Secondary objectives of an audit. (5 marks)

i) The primary objective of an audit is to express an independent opinion on the financial statement.

ii) The secondary objectives of an audit are:

  • To fulfill legal requirements.
  • To add credibility to the financial statement.
  • To confirm the accuracy of figures, schedules, and notes that form part of the financial statements.
  • To prevent and detect fraud and errors.

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