Flashcards in Learning Outcomes Deck (13):
Define an assurance engagement.
An assurance engagement involves an assurance provider arriving at an opinion about some information being provided by their client to a third party. A financial statement audit is one type of assurance engagement. This engagement involves an auditor arriving at an opinion about the fair presentation of the financial statements. The audit report is addressed to the shareholders of the company being audited, but other users may read the financial statements. Learning about auditing and assurance requires an understanding of auditing and assurance terminology, including terms such as audit risk, materiality, internal controls, listed entity, and assertions
Differentiate between types of assurance services.
Assurance services include financial statements audits, compliance audits, performance audits, comprehensive audits, internal audits, and assurance on corporate social responsibility (CSR) disclosures.
Explain the different levels of assurance.
The different levels of assurance include reasonable assurance, which is the highest level of assurance, moderate assurance, and no assurance. Reasonable assurance is provided on an audit of a company's financial statements. Moderate assurance is provided on a review of a company's financial statements that provides negative assurance. No assurance is provided in a compilation engagement.
Outline different audit opinions
An auditor can issue an unmodified and unqualified opinion, also known as a clean report, an unqualified opinion with an emphasis of matter opinion, or a modified and qualified opinion, which is issued when the financial statements contain a material (significant) misstatement (error or fraud).
Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
It is the responsibility of a company's governing body to ensure that their financial statements are relevant, reliable, comparable, understandable, and true and fair. It is the responsibility of the auditor to form an opinion on the fair presentation of the financial statements. In doing so the auditor must maintain professional scepticism and utilize professional judgement and due care.
The firms that provide assurance services include the Big-4 international firms, the national firms (with international links), local and regional firms, and consulting firms that tend to specialize in assurance of CSR and environmental disclosures.
Explain why there is a demand for audit and assurance services.
Financial statement users include investors (shareholders), suppliers, customers, lenders, employees, governments, and the general public. These groups of users demand audited financial statements because of their remoteness from the entity, accounting complexity, their incentives competing with those of the entity's managers, and their need for reliable information on which to base decisions. The theories used to describe the demand for audit and assurance services are agency theory, the information hypothesis, and the insurance hypothesis.
Identify the different regulators, legislation, and regulations surrounding the assurance process.
Regulators of the assurance process include the Auditing and Assurance Standards Oversight Council (AASOC), the Auditing and Assurance Standards Board (AASB), the Canadian Business Corporations Act (CBCA), Canadian Securities Administrators (CSA) and the various provincial securities commissions, and the Canadian Public Accountability Board (CPAB). Relevant legislation includes the Canadian Business Corporations Act (CBCA). The three organizations responsible for accounting designations in Canada are the Canadian Institute of Chartered Accountants (CICA), the Certified General Accountants of Canada (CGA-Canada), and the Society of Management Accountants of Canada (CMA Canada).
Describe the audit expectation gap.
The audit expectation gap occurs when there is a difference between the expectations of assurance providers and financial statement or other users. The gap occurs when user beliefs do not align with what an auditor has actually done.
Define audit risk.
Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. The three components of audit risk are inherent risk, control risk, and detection risk.
Describe the concept of materiality.
Information is considered to be material if it impacts the decision-making process of users of the financial statements.
Describe how an auditor determines the audit strategy.
The audit strategy is a key component of the planning stage of the audit. It sets the scope, timing, and direction of the audit and provides the basis for developing a detailed audit plan. An audit strategy will depend on the auditor's preliminary inherent and control risk assessment.
Outline how clients measure performance.
By understanding how a client measures its own performance, an auditor can plan the audit to take into consideration areas where the client may be under pressure to achieve certain outcomes.