Assurance and Risk: Chapter 1 - Concept and Need for Assurance

Flashcards covering key concepts, definitions, and important information regarding assurance, audit processes, sustainability, and their significance.

What is assurance?

A professional service that provides confidence about whether some information, statement, or claim is reliable.

What is an assurance engagement?

When an independent expert reviews information against agreed standards and provides a conclusion to increase trust.

What does 'true and fair view' mean in auditing?

Accounts are accurate, unbiased, and reflect the actual financial position.

What does CREST stand for?

Criteria: What you compare the SM to

Report: Auditor gives an overall opinion/conclusion

Evidence: Supports auditor’s opinion

Subject matter: the criteria being evaluated

Third party relationship: (RIP)

Who are the three parties involved in an assurance engagement according to RIP?

Responsible party, intended user, practitioner.

What does 'subject matter' refer to in an assurance engagement?

The document that the practitioner reviews, such as financial statements.

What are the two types of assurance mentioned?

Reasonable assurance and limited assurance engagement.

What characterises reasonable assurance?

High confidence, positively worded opinion, and a true and fair view.

What characterises limited assurance engagement?

Low confidence, negatively worded opinion, and less information.

Name one example of a required assurance engagement.

Statutory audit.

Define statutory audit

A financial check that many UK companies are required to have each year. It is to give a true and fair view on whether the financial statements were prepared properly and follows all required laws/rules

Who is qualified to perform audits?

Independent auditors who are qualified and registered with a Recognised Supervisory Body (RSB) like ICAEW.

What are auditors expected to check during an audit?

To ensure that financial statements are free from material misstatements due to error or fraud.

What are the stages of any assurance engagement (OPPRR)?

Obtaining the engagement, planning, performing procedures, review and completion, reporting.

What is an audit exemption in the UK for small companies?

Small companies are exempt if they meet two of three criteria:

1) > 50 employees

2) Turnover (sales): > £15m

3) Total assets: > £7.5m

Why can assurance never be absolute (SANJ)? and explain why they are limitations

Due to limitations in testing/sampling, accounting controls, subjective nature of some items, and auditor judgment.

Sampling means the auditor only looks at a section of a firm’s population of data as it is too expensive and time consuming to test everything so errors could be missed. Accounting controls: Reliance is placed on accounting systems so errors could go unnoticed. Employees could also collude bypass security controls. Nature of subject matter: Not all info is available, responsive party may need to estimate or make judgments on info that may not be verifiable (e.g How long equipment will last). Auditor judgements: Auditors must use their professional experience to make judgements (e.g How and what to test).

What does the expectations gap refer to?

The difference between what users think auditors do and the reality of an auditor's responsibilities. People assume auditors can detect all errors.

How can the expectations gap be closed?

Through communication, such as issuing engagement letters and clarifying the audit report.

What is sustainability in the context of assurance?

Meeting present needs without compromising the ability of future generations to meet their own needs.

What does ESG stand for? + Define

Environmental, Social, and Governance.

Environmental: Impact on environment

Social: Working environment

Governance: Implementing policies and working from the top down as boss has the most influence on company. Implementing good practices to meet environmental and social requirements.

Why is sustainability important for businesses?

Because sustainability issues can directly affect financial performance and investor interests.

Which standards guide UK auditors?

International auditing standards adapted for the UK issued by the Financial Reporting Council (FRC).

Who are the 8 parties that benefit from assurance and audit reports? (SDECSLGI)

1. Shareholders/Owners: Increased confidence in financial accounts, informed investment decisions. 2. Management/Directors: Improved decision-making, reliable info to support strategy. 3. Employees: Assessment of company stability, job security insights. 4. Customers: Confidence in the company's durability and ability to TRADE (provide products/services). 5. Suppliers: Evaluation of the company's ability to pay for goods and services, more willing to offer credit terms. 6. Lenders/Banks: Easier and cheaper financing. 7. Governance/Regulatory Bodies: Ensuring compliance with tax laws, industry regulations, and legal standards. 8. Internal controls: Tells directors where controls could be improved or if they are working.