Lecture 1

What is assurance? , Why is it needed?, What are the levels of assurance? ,What is a statutory audit?, Benefits and limitations of assurance, What role does assurance have in relation to sustainability?

What is Assurance?

An assurance engagement is one 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.

Key elements of Assurance

Why?
Who?
How?
So What?

Key elements of Assurance (Why?)

We do this becuase the subject matter (the company or entity) lacks sufficient credibility without independent assurance.

Key elements of Assurance (Who?)

Usually three distinct groups of people
- The practioner
- The intended users
- The responsible party (person who prepared the subject matter)

Key elements of Assurance (How?)

Suitable Criteria
The person providing the assurance must have something (a benchmark) by which to judge whether the information is reliable and can be trusted

Sufficient appropriate evidence to support the assurance opinion
The practitioner must substantiate the opinion that he draws in order that the user can have confidence that it is reliable.
The practitioner must obtain evidence as to whether the criteria have been met.

Key elements of Assurance (So what?)

A written report in an appropiate format which contains a conclusion/opinion about said assurance.

Agency Problem

Circular in nature (something I inherently understand)

SImple Form of Agency Theory

- Principals (shareholders) appoint agents (directors) to run their business for them
- Principals needs to trust the agents to act in the principals’ best interest

- Situation results in ‘information asymmetry’ and agents may act in their own self-interest

Levels of Assurance

Limited assurance engagement (Lowest level) - negatively
Reasonable assurance engagement (High but not absolute level) - positive
More to do with level of depth.

Absolute Assurance mythology

We can never get an assurance that is 100% certain due to the inherent limitations in the structure.
Examples:
- The impracatablility of reviewing every item
- The possibility of fraud or misrepresentation of data
- The use of sampling can lead to erroneous conclusions

Benefits of Assurance

Gives confidence to other parties about the viability of an entity
Likeliness of an independent check can lead to fraud being mitigated

Statutory Audit

Most common type of assurance engagement

Definition of an audit

An audit is a process of collecting evidence, and exercising judgement upon that evidence, in order to form an opinion on the reliability of the financial statements (or other financial information) by persons independent of the preparer and of other persons likely to be affected by the use of the information

Objectives of an auditor

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error

To express an opinion on whether the financial statements are prepared, in all material (large enough to affect decision making) respects, in accordance with an applicable financial reporting framework.

Information Asymmetry

An economic condition where one party in a transaction/situation holds more or better knowledge than the other

Types of data used in assurances

Cash flow forecasts (solely) would usually be limited due to the predictive nature of the data
Historical data (past financial statements) in conjuction with other pieces of data would lead to a more reasonable assurance

Expression of assurances

“In our opinion the financial statements” this indicates positive which indicates reasonable assurance

“Nothing has come to our attention” this indicates negative which indicates limited assurance