Flashcards in B - Assurance Pre Work. Deck (33):
There are various different types of assignments than an assurance provider could be engaged in. What are the fundamental elements that will always be present despite the variation?
Three party involvement (Buyer, Seller, Property surveyor)
Subject matter (The house)
Suitable criteria (The building regs etc)
Sufficient and appropriate evidence (Obtained from surveying house)
Written report (Opinion from third party)
What are key elements of an assurance engagement?
Three party involvement - The practitioner/accountant, The intended users (shareholders), responsible party (board of directors).
Subject matter - finanacial statements, data, systems and processes, behaviour.
Suitable criteria - law and accounting standards, governance codes, codes of practice
Evidence - to show the above criteria have been met.
Written report -
What is an assurance engagement?
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 ccriteria.
What does IFAC stand for? And what do they do?
International Federation of Accountants - they provide the International Framework for Assurance Engagements - provides a framework to protect the public interest by encouraging high quality practices. ICAEW is a member of IFAC.
What are the two types of assurance engagements? (include definitions)
Reasonable assurance engagement - aim is to provide a high level of assurance, that is less than absolute assurance, that engagement risk has been reduced to an acceptably low level which then allows a conclusion to be expressed positively.
Limited assurance engagement - a meaningful level of assurance, that is more than inconsequential but is less than reasonable assurance, that engagement risk has been reduced to an acceptable level which then allows a conclusion to be expressed negatively.
What are the key differences between the two types of assurance engagement? (How does this relate to the property surveyor example)
- the evidence obtained
- the type of opinion given
In all cases sufficient evidence must be obtained but it can be limited by level of access given. The opinion given depends on type of engagement.
EG a surveyor can only give assurance that a property is structurally sound if he is allowed to enter the property to inspect it. If eh is only given access to part of the building, he can only give limited assurance.
Give an example of a negative and a positive conclusion as presented in a report? (Use the example that a practitioner is seeking evidence to conclude whether the report issued by the chairman for a company in the financial statements is reasonable or not?)
Positive " In my opinion, the statement made by the Chairman regarding X is reasonable"
Negative - In the course of seeking evidence about the statement by the Chairman, nothing has come to my attention indicating that the statement is not reasonable.
List 9 types of assurance engagements
1. Statutory Audit
2. Local Authority Audits
3 Bank Audits
4. Pension Scheme Audits
5. Charity Audits
6. Solicitors Audits
7. Environmental Audits
8. Branch Audit
9. Insurance company Audits
What issues might users want assurance on?
Value for money studies
Reviews of specialist business activities
Reports on website security
Inventories and receivables reports
Internal control reports
Reports on business plans or projections
What is an audit? How would a UK auditor express his opinion?
AN audit is the most important assurance service and all large companies are required by law to have an audit. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
UK auditors normally express opinion with reference to the "true and fair view" - an expression of reasonable assurance.
What are the definitions of true and fair? Are they defined in law or audit guidance?
True: Information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records.
Fair: Information is free from discrimination and bias in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company's underlying transactions.
What legal requirements are auditors in the UK subject to? Where are they set out?
The legal requirements are all contained within the Companies Act 2006. It requires that auditors are members of a Recognised Supervisory Body (RSB) and are eligible for appointment under the rules of that body. RSBs are required to have rules to ensure that those eligible for appointment as a company auditor are either: 1) individuals holding an appropriate qualification or 2) firms controlled by qualified persons.
The ICAEW is an RSB - Professional qualifications are a prerequisite of membership of an RSB and these are offered by Registered Qualifying Bodies approved by Secretary of State.
RSBs must implement procedures for monitoring registered auditors.
The Companies Act 2006 also sets out factors which make a personal ineligible to be auditor: for example: being an employee or your partner being an employee of the company, or if the company is directly connected to any companies you have relations in.
Who monitors the UK accountancy profession? What two broad areas is it responsible for?
The government appointed the Financial Reporting Council (FRC) - which is responsible for issuing auditing standards through its Codes and Standards Committee. The FRC has adopted international standards.
The FRC also issues the Ethical Standards for Auditors (ESs) in relation to auditors independence, objectivity and integretiy.
What is Audit risk?
Auditors must assess the risks associated with audit and seek to minimise those risks so that the risk of giving the wrong opinion is minimised.
What does ISA 200 state?
ISA 200 - states that auditors shall comply with relevant ethical requirements relating to audit engagements.
How should auditors carry out their work?
Auditors are required to carry out their work with professional skepticism, meaning that they must make a critical assessment.
How do you determine who the users of an audit are?
Who the users are will depend on the nature of the subject matter.
What are the benefits of assurance? (8)
Key benefit - independent, professional verification given to users.
Can give additional confidence to other parties other than the user which can benefit a business (For example banks can gain confidence)
Reducing the risk of management bias
An independent check may help prevent errors or frauds - either by knwing an assurance service will be carried out may increase carefulness in preparation - a deterrant... or by finding the errors.
The assurance report draws attention to the deficiencies in the information so that users know what those deficiences are
Assurance helps to ensure high quality, reliable information exists, leading to effective markets that investors have faith in and trust.
Adds to the reputation and organisations and even countries - so investors will be happy to invest in country X because of a strong culture of assurance provision
You want to be seen to be acting responsibility - emissions targets, pledges to not employ kids are published and assurance gives reliability that this information is reliable and accurate.
Short hand: Independent professional opinion, adds to confidence of other users, deterrent to error/fraud
Is assurance absolute?
No - it can never be absolute due to limitations. There is always a risk that the wrong conclusion will be drawn.
What are the limitations? (8)
- the fact that testing is used - auditors do not oversee the process of building financial statements from start to finish
- the fact that accounting systems on which assurance providers may place a degree of reliance also have inherence limitations
- the fact that most audit evidence is persuasive rather than conclusive
- clients staff members may collude in fraud that can be deliberately hidden from the auditor or misrepresent matters to them for the same purpose
- assurance provision can be subjective and professional judgements have to be made
- assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means
- some items in the subject matter may be estimates and are therefore uncertain. It is impossible to conclude absolutely that judgemental estimates are correct
- the nature of the assurance report itself might be limiting, as every judgement and conclusion the assurance provider has drawn cannot be included in it
Short hand: Subjective, sampled, limitations of systems, information from third parties, limitation of reporting, includes estimates
What is the expectations gap? How can it be minimised?
This is used to describe an opinion users may experience in connection with the limitations of the assurance provision. This is often because the users are not aware of the nature of the limitation or do not understand them and therefore believe the assurance provider is offering a service such as a guarantee of correctness.
It is a gap between what the assurance provider is doing and what the user of the info thinks the assurance provider is doing.
Assurance providers needs to close this gap to maintain the value of the assurance provided - by issuing an engagement letter listing the work to be carried out and the limitations and regularly reviewing their own procedures/reports.
How do firms obtain an assurance engagement?
Accountants are permited to advertise for clients within certain professional guidelines.
Accountants are often invited to tender for particular engagements which means they quote for services, outlining benefits etc in competition with other firms
What must be considered before an auditor undertakes an appointment to ensure validity? Where is this detailed?
Section 210 of the ICAEW Code of Ethics sets out rules under which accountants should accept new appointments.
Before accepting a new client, it should be determined whether there are any independence or other ethical issues.
Auditors should also ensure they have been appointed in the proper and legal manner.
Name the 4 procedures auditors must carry out during the acceptance phase of an audit?
1. Ensure professionally qualified to act - consider legal and ethical grounds. (Conflict of interest with existing clients)
2. Ensure existing resources adequate - consider available time, staff and technical expertise. (Specialist knowledge if high risk?)
3. Obtain references - make independent enquiries if directors not personally known. The integrity of the managers is of great importance.
4. Communicate with present auditors - enquire whether there are reasons/circumstances behind the change which the new auditors ought to known.
Auditors wants a long term relationship to enjoy receiving fees but also get to know the client better.
What factors enable the firm to consider the client high or low risk?
Good long term prospects
Strong internal controls
Conservative, prudent accounting policies
Competent, honest management
Few unusual transactions
Poor recent or forecast performance
Likely lack of finance
Significant control weaknesses
Evidence of questionable integrity, doubtful accountin policies
Lack of FD
Significant unexplained transactions or transactions with connected companies
What happens is the risk is determined to be anything less than low?
The specific risks should be identified and documented - it may be necessary to assign specialists in response to these risks as independent reviewers.
How does the level of risk affect the fees?
The expected fees reflect expected risk. They should also offer the same sort of return expected of clients of this nature and reflect overall financial strategy. The fee level may be affected by how much the work is wanted.
What are good examples of sources of information about new clients? What info can be obtained?
Enquiries of other sources - bankers, solicitors
Review of document - most recent annual accounts, listing particulars, credit rating.
Previous accountants/auditors - should be invited to disclose fully all relevant information
Review of rule sand standards - consider which relate to industry.
What procedures should be carried out after accepting nomination?
1. Ensure that the outgoing auditors' removal or resignation has been properly conducted in accordance with national legislation. New auditors need to see a valid notice of the outgoing auditors resignation
2. Ensure that the new auditors appointment is valid. Obtain a copy of the resolution passed at the general meeting appointing them
3. Set up and submit a letter of engagement to the directs of the company.
4. Obtain all books and papers which belong to client from outgoing auditors. (Unless there is a lien - legal right to hold onto them because of unpaid fees. This cannot happen for a registered company)
How must assurance firms comply with Money Laundering Regs?
In order to comply with Money Laundering Regs 2007, assurance firms must keep certain records about clients and undertake what is known as client due diligence
When should you check a clients identity?
How do you check a clients identity?
How long must identity docs be kept for?
It is mandatory to check the identity of all clients before any work is undertaken when an ongoing relationship is envisaged or where a one-off transaction or series of transactions greater than 15000 euros will take place.
For individuals - obtaining official docs including a passport and identifying clients full name and permanent address (utilities bills/driving license)
For companies: obtaining similar legal information from the Registrar for companies for example: a certificate of incorporation, the registered address and a list of shareholders and driectors.
A minimum of 5 years and until 5 years have elapsed since the relationship with the client has ceased. It is necessary to keep a full audit trail of transactions with the client
What is the purpose of the engagement letter?
Define clearly the extent of the firms responsibilities and so minimise the possibility of any misunderstanding between the client and the firm
Provide written confirmation of the firms acceptance of the appoint, the scope of the engagement and the form of their report.
If it is not sent there is scope for argument about the extent of the obligations of the client. The elements of an engagement eltter should be discussed and agree with management before the letter is sent.
Auditing standards require that the auditor and the client agree on the terms of teh engagement.