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 gives confidence that information or claims are reliable.

What is an assurance engagement?

Independent expert reviews information against standards and provides a conclusion to build trust.

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

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

How do assurance engagements come together? (CREST)

• C – Criteria: standards compared against

• R – Report: auditor’s conclusion

• E – Evidence: supports conclusion

• S – Subject matter: what is evaluated

• T – Third-party relationship: independent parties involved

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 information or document reviewed, e.g., financial statements.

What are the two types of assurance mentioned?

Reasonable assurance (high confidence) and limited assurance (low confidence).

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 required check of financial statements to ensure they are true, fair, and follow the law.

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.

Materiality (material)

Errors big enough to influence someone’s decision

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

1. Obtain: Obtaining the engagennet

2. Planning: Planning the work

3. Performing: Auditors carry out tests/procedures

4. Review: Final review

5. Report: Report findings

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

1. Sampling: Cannot test every transaction, too Tiley and expensive

2. Accounting controls: Can be overridden or make errors

3. Nature of SM: Some things are subjective and require estimates

4. Judgements: Humans may make errors

What does the expectations gap refer to?

Difference between user expectations and what auditors actually do.

How can the expectations gap be closed?

Clear communication via engagement letters and audit reports.

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

• E: Environment – impact on natural environment

• S: Social – treatment of employees & stakeholders

• G: Governance – quality of leadership

Why is sustainability important for businesses?

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

Which standards guide UK auditors?

UK audits follow International Standards adapted by the FRC.

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

1. Shareholders/Owners – confidence in financial info

2. Directors/Management – informed decision making

3. Employees – job security insights

4. Customers – Trust who they are trading with

5. Suppliers – Figure out who they can safely take with, assess creditworthiness

6. Lenders/Banks – Figure out who they can safely give loans to, easier financing

7. Governance/Regulatory bodies – compliance check

8. Internal controls – identify areas for improvement