Week 1 - Introduction to Assurance and Auditing Concepts

Introduction to Assurance

  • Course: Audit and Assurance
  • Instructor: Neil Young
  • Course Code: ACFI 3214
  • Week: 1

Objectives of Week 1 Lecture

  • Understand the concept of assurance.
  • Recognize why an audit qualifies as an assurance engagement.
  • Identify which types of companies are required to undergo an audit.
  • List the benefits and limitations associated with audits.

What is Assurance?

  • Definition: A positive declaration intended to give confidence.
  • It enhances the degree of confidence in the work performed via an expressed opinion.

Elements of an Assurance Engagement

  1. Criteria: Suitable criteria must be established.
  2. Report: An assurance report must be created.
  3. Evidence: A base of evidence must be gathered.
  4. Subject Matter: This refers to the specific targets of the engagement (e.g., financial statements).
  5. Three-Party Relationship: Involves the intended user, responsible party, and practitioner.

Levels of Assurance

  • Reasonable Assurance:

    • Provides a positive expression.
    • Example: “In our opinion, the financial statements present fairly.”

  • Limited Assurance:

    • Provides a negative expression.
    • Example: “Nothing has come to our attention that causes us to believe that the financial statements do not give a true and fair view.”

Reasonable Assurance Engagement

  • Practitioner’s Role:
    • Gathers sufficient appropriate evidence to draw reasonable conclusions.
    • Concludes subject matter complies materially with suitable criteria.
    • Provides a positively worded assurance opinion.

Limited Assurance Engagement

  • Practitioner’s Role:
    • Gathers sufficient appropriate evidence for limited conclusions.
    • Concludes that, with respect to guidelines, the subject is plausible.
    • Provides a negatively worded assurance opinion.

External Audit Engagement

  • Definition: A type of assurance engagement that gives an independent opinion on financial statements.
  • Purpose: Provides a reasonable level of assurance regarding the truth and fairness of these statements.

Understanding 'True' and 'Fair'

  • True: Information is factual and corresponds with reality.
  • Fair: Information is unbiased, free from discrimination, and adheres to expected standards and rules.

Objective of an External Audit

  • To allow the auditor to form an opinion on whether financial statements are prepared in compliance with applicable financial reporting frameworks in all material respects.

Materiality in Auditing

  • Definition: Significance or importance of a matter in financial reporting.
  • A matter is considered material if misstatement could influence users' economic decisions based on financial statements.
  • Materiality is context-sensitive; it varies based on size and circumstances.

Auditor's Duties

  • Review and test accounting systems.
  • Perform sample-based tests on accounting systems.
  • Ensure compliance with accounting standards.
  • Verify Completeness, Ownership, Valuation, Existence, and Disclosure of assets and liabilities.

Audit Exemptions for Small Companies

  • Companies can be exempt from audit if:
    • Classified as small under the Companies Act 2006.
    • Have revenue under £10.2 million.
    • Gross assets below £5.1 million.
    • Employ no more than 50 staff.

Mandatory Audits Regardless of Size

  • Specific companies must have an audit, regardless of size:
    • Banks and financial services.
    • Insurance companies.
    • Public companies (wherever registered).
    • Any company part of a group with one of the above types.

Benefits of an Audit

  • Enhances credibility of financial information.
  • Reduces risk of bias, error, or fraud.
  • Identifies deficiencies in reported information.
  • Ensures market circulation of high-quality and reliable information.
  • Provides added confidence to investors.
  • Improves reputation of the organization in the market.

Limitations of an Audit

  • Reliance on estimation and judgment.
  • Historical nature of reporting can limit current relevance.
  • Use of sampling may not cover all areas.
  • Unavoidability of human error.
  • Complex nature of evidence can complicate assurance.
  • Intrinsic nature of audits introduces certain limitations.

Preview of Week 2 Lecture

  • Coming topics will cover Professional Ethics.