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F8 - Audit and Assurance Chapter 1

The document outlines the concept of assurance, specifically focusing on audit and assurance engagements, which involve a three-party relationship between a practitioner, a responsible party, and intended users. It details the essential elements of an assurance engagement, including appropriate subject matter, suitable criteria, sufficient evidence, and the assurance report. Additionally, it emphasizes the importance of professional skepticism in obtaining evidence and the characteristics of suitable criteria for evaluation.

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13 views9 pages

F8 - Audit and Assurance Chapter 1

The document outlines the concept of assurance, specifically focusing on audit and assurance engagements, which involve a three-party relationship between a practitioner, a responsible party, and intended users. It details the essential elements of an assurance engagement, including appropriate subject matter, suitable criteria, sufficient evidence, and the assurance report. Additionally, it emphasizes the importance of professional skepticism in obtaining evidence and the characteristics of suitable criteria for evaluation.

Uploaded by

ali.sajid.karachi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as ODP, PDF, TXT or read online on Scribd
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F8 - Audit and Assurance

Chapter 1
WHAT IS ASSURANCE?
1. Audit and assurance
•
You might not have the skills or the time, or you might be in
the wrong location. Therefore you must rely on someone else
to give you assurance. This means you have to decide:
– What standards should be applied?
– What represents ‘good’, ‘acceptable’ or ‘unacceptable?
– How much checking should be done? All checking and
assurance has an associated cost

•
Audit is one form of assurance.
•
An audit is defined as: the independent examination of and
expression of opinion on the financial statements of an entity
2. Elements of an assurance
engagement
The following are the five elements of an assurance engagement:
1. A three party relationship involving a practitioner, a
responsible party, and intended users.
2. Appropriate subject matter.
3. Suitable criteria.
4. Sufficient appropriate evidence.
5. A written assurance report in the form appropriate to a
reasonable assurance engagement or a limited assurance
engagement.
2.1 Three party relationship
A three party relationship involving a practitioner, a responsible
party, and intended users:
•
Practitioner: for example an auditor. The practitioner is
responsible for determining the nature, timing and extent of
procedures and is required to pursue anything that leads the
practitioner to question whether a material modification
should be made to the subject matter information.
•
A responsible party: the person responsible for the
information and assertions.
•
The intended users are the person(s) for whom the
practitioner prepares the assurance report. The responsible
party can be one of the intended users.
2.2 Appropriate subject matter
The subject matter can take many forms, such as:
•
Financial performance
•
Non-financial performance, for example the key indicators of
efficiency and effectiveness.
•
Physical characteristics, for example, the capacity of a facility.
•
Systems and processes, for example, an entity’s internal
control or IT system.
•
Behavior, for example, corporate governance, compliance
with regulation.
2.3 Criteria
Criteria are the benchmarks used to evaluate or measure the
subject matter.
For example:
•
When reporting on financial statements, The International
Financial Reporting Standards.
•
When reporting on internal control, the criteria may be an
established internal control framework.
•
When reporting on compliance, the criteria may be the
applicable law, regulation or contract.
Without the frame of reference provided by suitable criteria, any
conclusion is open to individual interpretation and
Characteristics of suitable criteria
Relevance: relevant criteria contribute to conclusions that assist
decision-making by the intended users.

Completeness: criteria are sufficiently complete when they include all


relevant factors that could affect the conclusions.

Reliability: reliable criteria allow reasonably consistent evaluation of


the subject matter.

Neutrality: neutral criteria so that conclusions that are free from bias.
2.4 Evidence
Attitude of professional skepticism to obtain sufficient
appropriate evidence.

Skepticism means you are aware that we can all be subject to


optimism (perhaps too much), human error, giving quick answers
because we are short of time, misunderstanding. Skepticism
means that evidence is required to test statements or
assumptions.

Sufficiency is the measure of the quantity of evidence.


Appropriateness is the measure of the quality of evidence - its
relevance and its reliability.
2.5 Assurance Report
The practitioner provides a written report containing a
conclusion.
Positive and negative assurance
Examples:
Positive
•
The financial statements show a true and fair view
•
The value of amount of inventory lost is $x
Negative
•
We have discovered nothing wrong with the financial
statements
•
The basis of the forecast is not unreasonable

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