The Concept of Audit and Other Assurance Engagements

The Concept of Audit and Other Assurance Engagements

Contents:

Session 1: Objective and general principles of external audit engagements
Session 2: Summary of differences between internal and external audit
Session 3: Concept of true and fair
Session 4: Nature and development of audit and other assurance engagements
Session 5: Other assurance engagements

Referenced syllabus:

Syllabus A Audit framework and regulation: 1. The concept of audit and other assurance engagements (a)-(g) Except part (c)

Referenced standards:

ISAE 3000 (Revised) Assurance Engagements other than Audits or Reviews of Historical Financial Information

Session 1: Objective and general principles of external audit engagements:

Types of audit – internal audit and external audit. Internal audit involves internal auditor (employee of client) checking whether client’s control systems are operating effectively.

External audit - the work conducted by external auditors to check whether Financial Statements prepared by audit client are true and fair.

The objective of external audit – only responsible for giving audit opinion on true and fairness of client’s accounts. External auditors are not responsible for the client’s internal control system weakness unless it has a material impact on the client’s Financial Statements.

Audit assurance - the opinion given by the auditor to shareholders informing them whether the business’s Financial Statements are true and fair.

Types of assurance – the level of confidence given by auditors to intended users. Reasonable assurance is given in audit engagements (in our opinion…) whilst limited or negative assurance is given in non-audit engagements such as review of cash flows or profits forecasts (according to our review or findings…).

Session 2: Summary of differences between internal and external audit:

	External audit	Internal audit
Objective	Express an opinion on the truth and fairness of the financial statements.	Improve a company’s operations, by reviewing the efficiency and effectiveness of the company’s internal controls.
Reporting	Report to the shareholders or members of the company. External audit reports are contained within the financial statements and therefore, are publicly available.	Internal auditors normally report to management or those charged with governance. Internal audit reports not publicly available and are only intended to be seen by the addressee of the report. The reports are normally provided to the board of directors and those charged with governance such as the audit committee.
Scope of work	Obtain sufficient and appropriate audit evidence to express the audit opinion on the truth and fairness of the accounts.	Work is determined by management and those charged with governance. Some of their works may also be reliant by external auditors, such as attending inventory counts and works could be used by external auditors.
Relationship with company	External auditors are appointed by the company’s shareholders. They are independent of the company.	Internal auditors are appointed by management. As internal auditors are normally employees of the company they lack independence. However, the internal audit department can be outsourced and this can increase their independence.

Exam rehearsal question

Which of the following statements relating to internal and external auditors is correct?

A Internal auditors are required to be members of a professional body

B Internal auditors’ scope of work should be determined by those charged with governance

C External auditors report to those charged with governance

D Internal auditors can never be independent of the company

Answer: B

A is incorrect as internal auditors are not required to be members of any professional body. C is incorrect as external auditors report to shareholders rather than those charged with governance. D is incorrect as internal auditors can be independent of the company, if, for example, the internal audit function has been outsourced.

Session 3: Concept of true and fair:

True

Fair

No factual error in information.

Information complies with accounting standard.

Data is transferred correctly to Financial Statements.

No bias in information.

Information reflects commercial substance of client’s business.

Exam rehearsal question

Which TWO of the following are objectives of the external auditor?

A To consider the adequacy of the accounting records which have been maintained

B To confirm the company will continue trading for the foreseeable future

C To obtain an understanding of the internal control system in place

D To access the books and records of the company

Answer: A and C

The auditor does not guarantee the going concern status of the company. Accessing the books and records of the company represents one of the rights of the auditor which enables them to achieve their objectives.

Session 4: Nature and development of audit and other assurance engagements:

In 1900: the birth of the company and the idea of compulsory audit of accounts.
In 1980: the development of auditing standards.
In 1990: the development of those auditing standards to focus on risk.
In 2000: there are many scandals in the audit industry. For instance, the collapse of the largest audit firm Andersen back in around 2000 together with the energy company Enron in the US as the audit firm is accused of assisting the client into falsifying accounting records.
In 2014: the scandal of PWC into assisting Tesco which is a leading retailer in the UK to cover frauds to overstating profits leading to huge losses suffered by investors. As a result, the PWC is severely fined by the government.
In 2018: the PCAOB in the US decided to sue a few partners in KPMG since these partners have been stealing information from the PCAOB onto the review of the firms’ audits.

Session 5: Other assurance engagements:

Overview:

Audit related services include review assurance and agreed upon procedures.

ISAE 3000 (Revised) Assurance Engagements other than Audits or Reviews

of Historical Financial Information

Overview of the standard:

Elements of an assurance engagement: (Mnemonics: S3SER)

A subject matter: audit or non-audit engagement.

3 main parties: (for instance, in the audit engagement)

The responsible person (directors): responsible for the preparation of true and fairness of the accounts

The assurance provider (practitioner): responsible for checking whether accounts are true and fair

The intended user (shareholder): intended user of the accounts and audit report

Standards – Audit (ISA); Review (ISRE)

Evidence – in audit engagement, sufficient and appropriate audit evidence should be obtained by the external auditor.

Report – this is different if reasonable (form of conclusion: positive) assurance or limited (form of conclusion: negative) assurance is given.

Elements of an engagement letter (Mnemonics: FARSES)

Fee cover note - how the fees are calculated.
Address to directors.
Responsibilities of auditors and directors:
Auditors – obtain sufficient and appropriate audit evidence; request to management to confirm the receipt of engagement letter.
Directors - sound internal controls and accounts are free from material misstatements; management representations should be provided at the end of the audit.
Scope of audit – carry out audit per auditing standards, however, if the scope needs to be changed per management, a new engagement letter needs to be issued.
Extra services provided to client
Signature and date

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Categories: : Audit and Assurance (AA)