ACCA P7 (INT) Advanced Audit & Assurance - Study Text - 2010 (Emile Woolf Publishing)
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The accountant needs to have adequate knowledge of the client’s business and
its operations.
If the accountant becomes aware that the information provided is unsatisfactory,
he should ask management to correct or improve the information. If
management refuses to do this, the accountant should withdraw from the
engagement, and inform the entity accordingly.
Example: Compilation report
An example of a compilation report is set out below.
To: The Board of Management of the Manchester Metro Swimming Club
On the basis of the information provided by you, we have compiled, in
accordance with the International Standard on Related Services applicable to
compilation services, the statement of financial position of the Oxbridge
Swimming and Tennis Club as at 31
st
December 20X7, and the income statement
and statement of cash flows for the year ended 31
st
December 20X7.
Management is responsible for these financial statements. We have not audited or
reviewed these financial statements and accordingly express no assurance on
them.
ACCOUNTANT
Date
Address
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Paper P7 (INT)
Advanced audit and assurance
CHAPTER
12
Assurance services
Contents
1 Introduction and available guidance
2 The objective and nature of assurance
engagements
3 Main types of assurance engagement
4 Prospective financial information
5 Forensic auditing
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Introduction and available guidance
The need for assurance services
Available guidance on assurance engagements
The International Framework for Assurance Engagements
International Standard on Assurance Engagements (ISAE) 3000
1 Introduction and available guidance
1.1 The need for assurance services
Traditionally, the ‘assurance’ role of the professional accountant has mainly been
concerned with provision of audit services within a statutory framework – the audit
of published annual financial statements. An audit provides a high level (but not
absolute level) of assurance. The requirement for an audit of the annual financial
statements therefore has the objective of adding ‘assurance’ (or ‘credibility’) to the
financial statements under audit.
However, the management of companies and other organisations are required or
expected to report to stakeholders on a wide range of information, both financial
and non-financial, that is not subject to statutory audit. This might include such
matters as:
corporate governance issues, including risk assessment and internal control
systems
e-commerce and the operation of e-commerce activities
systems reliability
performance measurement (both financial and non-financial)
value for money (VFM).
Although information about these matters may not be subject to a statutory audit, it
is often considered important that the information should have credibility.
Credibility may be obtained from an assurance report provided by a professionally-
qualified accountant.
This chapter deals with:
the framework for the regulation of assurance reports
the objectives and key features of an assurance engagement
specific features of certain specific types of assurance engagement.
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1.2 Available guidance on assurance engagements
Guidance on the conduct of assurance engagements is provided by:
the International Framework for Assurance Engagements, and
International Standard on Assurance Engagements (ISAE) 3000
1.3 The International Framework for Assurance Engagements
The International Framework for Assurance Engagements is a series of
pronouncements that came into effect on 1 January 2005.
The Framework makes a distinction between:
audits and reviews of historical financial information (regulated by ISAs and
ISREs), and
assurance engagements other than audits and reviews of historical financial
information. These engagements are regulated by International Standards on
Assurance Engagements (ISAEs).
The Framework also makes a distinction between:
assurance assignments that give a reasonable level of assurance, and
assurance assignments that give a limited level of assurance.
In assurance engagements it is not possible to give an absolute level of assurance as
a result of:
the lack of precision often associated with the subject matter
the nature of the evidence available
the timescale involved.
Reasonable level of assurance
Where a reasonable level of assurance is given, the risk attached to the assignment is
at a sufficiently low level to enable the practitioner to give positive assurance.
Reasonable assurance can only be given in the following circumstances:
the subject matter of the assurance service engagement is the responsibility of
another party, and
the subject matter is identifiable and can be subjected to evidence-gathering
techniques.
In other words, a reasonable level of assurance can be given only if the accountant is
carrying out an assignment that looks at information that has not been prepared by
the accountant (or relates to some other subject matter that is not the responsibility
of the accountant). In addition, the accountant must be able to obtain sufficient
evidence for giving a positive opinion.
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Limited level of assurance
Where only a limited level of assurance is given:
the risk is higher than that for an engagement where the accountant is able to
give a reasonable assurance, but
the risk is sufficiently low to allow for a ‘negative’ expression of the accountant’s
conclusions (a negative opinion, as in a review report).
1.4 International Standard on Assurance Engagements (ISAE) 3000
ISAE 3000 Assurance engagements other than audits and reviews of historical financial
information sets out basic principles, key procedures and guidance for professional
accountants (referred to as ‘practitioners’) when carrying out relevant assurance
engagements.
Key general points from ISAE 3000 are set out below.
Ethical requirements. The IFAC ethical code should be followed.
Quality control. Appropriate procedures for quality control of the accountant’s
work should be applied to each engagement.
The engagement should be planned and performed with a degree of
professional scepticism, recognising that the subject matter of the engagement
may be materially misstated.
Before completion of an assurance engagement, the client may ask for the nature
of the engagement to be changed to a ‘non-assurance’ engagement, or for the
level of assurance to be reduced. If this happens, the practitioner should
consider whether the request is appropriate, and should not agree to the change
unless there is a good reason.
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The objective and nature of assurance engagements
Objective of an assurance engagement
The elements of an assurance relationship and an assurance engagement
Suitable criteria for assessment
Reporting on an assurance engagement
2 The objective and nature of assurance engagements
2.1 Objective of an assurance engagement
The objective of an assurance engagement is:
‘…to enable a practitioner to evaluate or measure a subject matter that is the responsibility
of another party against identified, suitable criteria and to express an opinion that provides
the user with a level of assurance about that subject matter.’
(Note: the accountant who carries out an assurance engagement is called a
‘practitioner’.)
2.2 The elements of an assurance relationship and an assurance
engagement
An assurance relationship is a three-party relationship between:
the practitioner (the accountant)
the party responsible for the subject matter of the engagement
the intended user of the subject matter of the engagement.
There will be:
a defined subject matter
suitable criteria for assessment
a formal engagement process: typically there is an engagement for the work and
the accountant gathers evidence and evaluates it
At the end of the engagement, the accountant prepares a report containing a
conclusion based on the evidence that has been gathered and evaluated.
2.3 Suitable criteria for assessment
Suitable criteria are the standards against which the subject matter of the
assignment is assessed. This can be a difficult aspect of some assurance assignments.
Establishing suitable criteria is relatively straightforward where regulations are
involved (for example, the law or accounting standards).
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The process is more difficult in more subjective assurance engagements, in areas
such as customer care or labour relations.
Example
A firm of accountants takes on an engagement to report on the standards of care
provided by a state-owned hospital.
What criteria are used to measure the standards of patient care in the hospital?
Suitable criteria might include the mortality rates of patients treated in the hospital.
(This might be expressed as the number of patients who die within a specified
period of time after treatment.) However, mortality rates are also affected by factors
such as the age of patients and the seriousness of their illnesses.
It is therefore not certain that mortality rates would be a suitable criterion for
assessing the performance of the hospital.
2.4 Reporting on an assurance engagement
The report prepared by accountants at the end of an assurance engagement will
include the following elements:
A title, indicating that the report is an independent assurance report.
An addressee (= the person or body to which the report is addressed).
Subject matter of the report, including any relevant information relating to the
subject matter reviewed, such as the time period for which the information was
gathered.
Suitable criteria that have been selected for assessment.
Where appropriate, a statement that the use of the report must be restricted to
certain specified users, or that the use of the report should be restricted to a
specific purpose for which it was prepared.
A statement that the engagement was carried out in accordance with ISAEs.
A summary of the work performed.
The practitioner's conclusion.
The date, name and address of the practitioner.
As with a statutory audit report, qualifications may be required in the conclusion
provided by an assurance report, where the matter involved may be material. These
possible qualifications are set out in the table below.
Situation Impact on the conclusion
Limitation on scope. A qualified conclusion or disclaimer of
opinion.
The assertion made by the responsible
party is not fairly stated.
A qualified or adverse conclusion.
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Table continues
Situation Impact on the conclusion
The subject matter has been materially
misstated.
A qualified or adverse conclusion.
The criteria are unsuitable or the
subject matter is not appropriate to an
assurance engagement.
A qualified or adverse conclusion, if
users are likely to be misled.
Otherwise, a qualified conclusion or
disclaimer.
The level of materiality that is attached to the matters giving rise to the
qualification in the report is important. This will determine whether the report
should be qualified, or whether the accountant should give a disclaimer of opinion
or an adverse opinion.
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Main types of assurance engagement
Engagements relating to risk assessment
Engagements relating to performance measurement
Engagements relating to value for money (VFM)
Engagements relating to systems reliability
Engagements relating to e-commerce matters
Continuous auditing
3 Main types of assurance engagement
Four types of assurance engagement that may be the subject of an examination
question are engagements relating to:
risk assessments
business performance measurement
systems reliability, and
e-commerce matters
3.1 Engagements relating to risk assessment
The concept of business risk assessment was introduced earlier, in the context of
auditors using business risk assessments as part of audit approach.
Obviously businesses have systems in place to identify and monitor business risks
themselves. Management will distinguish between strategic, operating and
information risks. They will analyse risks, considering potential impact on the
business and probability of the risk occurring.
When risks have been identified and analysed in this way, management has to come
up with strategies to manage risks. There are various strategies.
If risks are low impact, low probability, then they may well be accepted.
Higher impact risks must be dealt with, perhaps by taking out insurance against
the eventuality (transferring the risk) or by putting in place internal controls to
prevent the risk arising (managing the risk).
If a risk is high impact, high probability it might have to be avoided, for instance,
by not taking up the new business opportunity.
The risks associated with e-commerce particularly are looked at below.
Increasingly large companies are focusing on enterprise-wide risk management,
with an overall head of risk management, rather than dealing with it individually
on a department by department basis, as has traditionally been the case.