Saifuddin Khan

Assistant Professor
Dept. of Accounting and Information
Systems, RU
01777018158
[email protected]
It is often not possible to check the situation yourself

Skill? Time? Location?

Therefore rely on someone else

Standards?
How much checking?

Report

Audit is an example of assurance engagement

 What is assurance?
An assurance engagement is: '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.'
 International Audit and Assurance Standards Board(IAASB)

Giving assurance means: offering an

opinion about specific information so
the users of that information are
able to make confident decisions
knowing that the risk of the
information being 'incorrect' is
reduced.
 Elements of an Assurance
Engagement
• A three party relationship involving a
practitioner, a responsible party, and intended
users
• An appropriate subject matter
• Suitable criteria
• Sufficient appropriate evidence
•A written assurance report in the form
appropriate
 Three Party Relationship
• Practitioner: for example an auditor. Responsible
for determining the nature, timing and extent of
procedures and must pursue doubts and queries
• A responsible party: the person responsible for
the information and assertions
• The intended users: the person(s) for whom the
practitioner prepares the assurance report. The
responsible party can be one of the intended
users.
 Subject matter
Many types:
• Financial performance
• Non-financial performance e.g. the key
indicators of efficiency and effectiveness.
• Physical characteristics e.g. capacity of a
facility.
• Systems and processes e.g. an entity’s
internal control or IT system
• Behaviour e.g.- corporate governance,
compliance with regulation
 Suitable Criteria
Criteria are the benchmarks used to evaluate or
measure the subject matter. Without the frame of
reference provided by suitable criteria, any
conclusion is open to individual interpretation
and misunderstanding.
Examples:
• Financial Statements: IFRS
• Internal Control: an internal control framework.
• Compliance: the applicable law, regulation or
contract.
They must be available to intended users
 Sufficient appropriate evidence

• Professional scepticism
• Sufficient, appropriate evidence

Sufficiency = quantity of evidence.

Appropriateness = quality of
evidence (relevance and its
reliability)
 Assurance Report

A written report containing a

conclusion is provided to the
intended users.
 Types of assurance engagement

The IAASB International Framework for

Assurance Engagements permits two
types of assurance engagement:

• Reasonable assurance engagement

(Audit)
• Limited assurance engagement
(Review Engagement)
 Reasonable assurance engagements
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.
Positive form (reasonable assurance engagement):
“In our opinion internal control is effective, in all
material respects, based on XYZ criteria.”
 Limited assurance engagement
In a limited assurance assignment, 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.
Negative form (limited assurance engagement):
“Based on our work described in this report,
nothing has come to our attention that causes us to
believe that internal control is not effective, in all
material respects, based on XYZ criteria.”
 Audit Defined
An audit is still a key example of and
assurance service in Bangladesh, where all
registered companies are required to have
audits by law.

An audit is an official examination of the

accounts (or accounting systems) of an
entity (by an auditor).
 The main objective of an audit is to
enable an auditor to convey an opinion
as to whether or not the financial
statements of an entity are prepared
according to an applicable financial
framework.
 Benefits of an audit:
• An audit improves the quality and
reliability of information,
• Giving investors faith in and improving
the reputation in the market.
• Independent scrutiny and verification
may be valuable to management.
• An audit may reduce the risk of
management bias, fraud and error by
acting as a deterrent.
• An audit enhances the credibility
of the financial statements, e.g. for
tax authorities/lenders.
• Deficiencies in the internal control
system may be highlighted by the
auditor.
• Auditors recommending
improvements in company systems.
 Purpose and Objectives of Audit
The purpose of an audit is to enhance the
degree of confidence of the intended users in
the financial statements.
The objective of an external audit engagement
is to enable the auditor to express an opinion
on whether the financial statements:
• give a true and fair view (or present fairly in
all material respects).
• are prepared, in all material respects, in
accordance with an applicable financial
reporting framework.
 Review Engagement
It is possible for small companies, who
are not legally required to have a full
audit, to have a review of their financial
statements to enable them to present
their accounts (for example) to potential
lenders.

A review engagement is an example of a

limited assurance 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
auditor’s attention that causes the auditor
to believe that the financial statements are
not prepared in accordance with the
applicable financial reporting framework
(i.e. negative/limited assurance).
 Expectations gap
Some users incorrectly believe that an
audit provides absolute assurance; that
the audit opinion is a guarantee the
financial statements are 'correct'. This
and other misconceptions about the role
of an auditor are referred to as the
'expectations gap'.
 Level of assurance engagement/
Limitation of Audit
The greatest level of assurance auditors
can provide is reasonable. They cannot
provide absolute assurance (i.e. 100%
validation) for the following reasons:
• The financial statements contain
estimates and judgments;
• Auditors have to test on a sample basis;
• Fraud may be disguised; and
• Much of the evidence obtained will be
persuasive rather than conclusive.
• do not review 100% of the transaction.
Other examples of the expectations gap
include:
• a belief that auditors test all transactions and
balances; they test on a sample basis.
• a belief that auditors are required to detect
fraud;
• a belief that auditors are responsible for
preparing the financial statements; this is the
responsibility of management.