AUDIT AND ASSURANCE

AUDIT FRAMEWORK AND OTHER ASSURANCE ENGAGEMENTS

A. AUDIT FRMAEWORK AND REGULATION
The concept of audit and other assurance engagements
1. What is assurance?
An engagement in which a practitioner expresses a conclusion designed to enhance
the degree of confidence of the intended users other that the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria.
(a practitioner who offering a professional service must be competent, objective and
independent, and also follow the expected standards of performance)
2. The elements of an assurance engagement.

The three parties involved

The subject matter under scrutiny
Suitable criteria against which to judge the reliability and accuracy of the subject
matter (such as IFRS)
Appropriate evidence
Report

3. Incorporation and the separation of ownership and control

Refer to a creation of a limited company. Incorporation has the following
implications:
1. The creation of a legal distinction between the owners of the business and the
business itself.
2. The opportunity for the owners/investors to detach themselves from the operation of
the business
3. The need for the managers to operate the business on a daily basis
4. The role of the auditor
The three parties involved in audit process are; the preparers, the users and the
practitioners. Management (preparer) prepares the subject matter which is financial
statements. Auditor (practitioner) will review the financial statements and perform procedures
to obtain appropriate evidence that the financial statements are a reasonable basis for making
decisions. This means that they are prepared in accordance with a relevant financial reporting
framework (suitable criteria). Finally the auditor prepares a written report (the audit report)
which they will present to the shareholders. This report summarises their opinion as to
whether the financial statements are fairly presented (true and fair view) which consist of;

Reasonably accurate
Prepared in accordance with laws and regulations
Unbiased
PREPARED BY; AUFA AMALINA KAMARUDIN

AUDIT AND ASSURANCE

Clear and understandable

5. Audit engagements
Two types of auditor; internal auditor and external auditor. In most developed
countries, publicly quoted companies are required by laws to produce annual financial
statements that have been audited by an external auditor. The objective of an external audit
engagement is to enable the auditor to express an opinion on whether the financial statements
give true and fair view and had been prepared in accordance with the financial reporting
framework.
6. Types of assurance engagement

Reasonable
o In a reasonable assurance engagement, the practitioner
Gathers sufficient appropriate evidence to be able to draw reasonable
conclusions
Concludes that the subject matter conforms in all material respects
with identified suitable criteria
Gives a positively worded assurance opinion
(statutory audit is an example of a reasonable assurance engagement)

Limited
o In a limited assurance engagement, the practitioner
Gathers sufficient appropriate evidence to be able to draw limited
conclusions
Concludes that the subject matter with respect to identified suitable
criteria, is plausible in the circumstances
Gives a negatively worded assurance opinion

7. What level of assurance can auditors provide?

The greatest level of assurance auditors can provide is reasonable. They cannot
provide absolute assurance (100% validation) for the following reasons:

The financial statements contain estimates and judgements

Auditors have to test on a sample basis
Fraud may be disguised
Much of the evidence obtained will be persuasive rather than conclusive.

8. What is a review engagement?

The objective of a review of financial statements is to enable an auditor to state
whether, on the basis of procedures which do not provide all the evidence required in an
audit, anything has come to the auditors attention that causes the auditor to believe that the
financial statements are not prepared in accordance with the applicable financial reporting
framework.
PREPARED BY; AUFA AMALINA KAMARUDIN

AUDIT AND ASSURANCE

Typically review engagements will be carried out using much more limited
procedures that a statutory audit which are; analytical review and enquiry.
9. The Expectations Gap
There is a common misconception about the role an auditor plays. This is often
referred to as the expectations gap. Examples of these misconceptions include:

A belief that auditors test 100% of transactions and balances: they test on a sample
basis.
A belief that auditors are required to detect fraud: auditors are required to offer an
opinion that the financial statements are free of material misstatement, which may be
caused by fraud.
Auditors are responsible for preparing the financial statements: this is the
responsibility of management.

PREPARED BY; AUFA AMALINA KAMARUDIN