Concept
& Need for Assurance
Assurance
services are (1) independent (2) professional services
that (3) improve the quality of information, or its context, (4) for
decision makers.
Assurance services include many
areas of information, including nonfinancial areas.
Why?
Ø
Increase confidence
Ø Reduce
Risk
•
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.
Elements
Assurance Engagement
•
The
key elements of an assurance engagement
•
Three Party Relationship
•
A subject matter
•
Suitable Criteria
•
Sufficient Appropriate Evidence
to Support the Assurance Opinion
•
A Written Report
•
Three
Party Relationship
·
The
practitioner (accountant i.e. auditor)
·
The
intended users (stakeholders)
·
The
responsible party (the person(s) who prepared the subject matter i.e. the
management)
Stakeholders
of a company
Ø The stakeholders of a company are
all those who are influenced by, or can influence, the company’s decisions and
action. The stakeholder group are:
o Shareholders
o Lenders
o Investors
o Customer
o Employee
o Government
and their Agent
o Public
at large
Ø Subject Matter
o Data (for example, financial
statements or business projections)
o Systems or processes (for
example, internal control systems or computer systems)
o Behavior (for example, social and
environmental performance or corporate governance)
Ø Suitable Criteria
o The person providing the
assurance must have something by which to judge whether the information is
reliable and can be trusted. So for example, in an assurance engagement
relating to financial statements, the criteria might be accounting
standards(e.g. BAS). The practitioner will be able to test whether the
financial statements have been put together in accordance with accounting
standards and if they have, then the practitioner can conclude that there is a
degree of assurance that they are reliable.
Ø Sufficient appropriate evidence
to support the assurance opinion
o 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.
Ø A written report in appropriate
form
o Lastly, it is required that
assurance reports are provided to the intended users in a written form
and contain certain specified information. This adds to the assurance that the
user is being given, as it ensures that key information is being given and that
the assurance given is clear and unequivocal.
Level
of Assurance
Level
of Assurance
Ø Reasonable Assurance Engagement
Ø Limited Assurance Engagement
Ø
Reasonable
Assurance Engagement
o A high, but not absolute level of
assurance
o In audit engagement, the auditor
(practitioner) provides a high, but not absolute, level of assurance that the
information subject to audit is free of material misstatement. This is
expressed positively in the audit report as reasonable assurance.
Ø
Limited
Assurance Engagement
•
A
Moderate level of assurance
•
In
a review engagement, the auditor (practitioner) provides a moderate level of
assurance that the information subject to review is free of material
misstatement. This is expressed in the form of negative assurance.
Ø
Key
differences between the two types of assurance are:
o The evidence obtained
o The type of opinion given
Ø
Say,
for example, that a practitioner is seeking evidence to conclude whether the
report issued by the Chairman of a company in the financial statements is
reasonable or not. He could seek evidence, conclude that the statement is
reasonable and state in a report something like this:
“In
my opinion, the statement by the Chairman
regarding X is reasonable.”
This
is a positive statement of his conclusion that the statement is reasonable.
Alternatively,
he could state in a report something like this:
“In the course of
my seeking evidence about the statement by the Chairman, nothing has come to my
attention indicating that the statement is not reasonable.”
This
is a negative statement of his conclusion that the statement is reasonable.
Standards
for specific engagements usually performed by CA firms
Ø International
Standards on Auditing (ISAs) -100-999
ISAs are to be applied in the
audit of historical financial information. (Reasonable Assurance)
Ø International
Standards on Review Engagements (ISREs)- 2000-2699
ISREs are to be applied in the
review of historical financial information. (Limited Assurance)
Ø International
Standards on Assurance Engagements (ISAEs)- 3000-3699
ISAEs are to be applied in
assurance engagements other than audits or reviews of historical financial
information.
Ø International
Standards on Related Services (ISRSs) - 4000-4699
ISRSs are to be applied to
compilation engagements, engagements to apply agreed-upon procedures to
information, and other related services engagements as specified by the IAASB.
(NO Assurance)
Audit Engagement
A
friend of yours, an investor in the DSE, has just received the annual financial
report of KL Company Ltd. a listed
company.
He
made the following comment:
“I
see the auditors have issued a clear report on the company. I can therefore
invest a further amount of money into the company, as there will be no risk
that I will lose my money owing to mismanagement”
Some thoughts
¨
Audit enhances credibility.
¨
Will not guarantee future viability.
¨
Does not guarantee efficiency and effectiveness.
¨
Gives reasonable but not absolute assurance.
¨
Inherent limitations in audit could affect auditor’s
ability to detect fraud.
¨
Audit work open to subjective judgement.
Objective:
The
objective of an audit of financial statements is to enable the auditor to
express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework.
•
The
key elements of an assurance engagement
•
Three
Party Relationship
•
The
shareholders (users)
•
The
board of directors (the responsible party)
•
The
audit firm (the practitioner)
•
A
subject matter
•
The
financial statements
•
Suitable
Criteria
•
Law
and accounting standards
•
Sufficient
Appropriate Evidence to Support the Assurance Opinion
•
Audit
evidence
•
A
Written Report
•
An
assurance report issued in a prescribed form.
True and Fair View
•
True
•
Information
is factual and conforms with reality, not false. In addition the information
conforms with required standards and law. The accounts have been correctly
extracted from the books and records.
•
Fair
•
Information
is free from discrimination and bias in compliance with expected standards and
rules. The accounts should reflect the commercial substance of the company’s
underlying transactions.
•
Legal
and Professional Requirements of Auditors in Bangladesh
•
The
legal requirements are currently contained in Companies Act 1994.
•
The
Companies Act 1994 requires that the auditors must be a member of the Institute
of Chartered Accountants of Bangladesh (ICAB)
The
Companies Act 1994 also sets out factors which make a person ineligible for
being a company auditor, for example, if he or she is:
a.
an
officer or employee of the company;
b.
a
person who is a partner or who is in the employment of an officer or employee of the company;
c.
a
person who is indebted to the company exceeding Taka 1,000;
d.
a
person who is a director or member of a partner company, or a partner of a
firm, which is the managing agent of the company;
e.
a
person who is a director, or the holder of shares exceeding 5% in nominal value
of the subscribed capital.
Relevant provisions of Companies Act 1994 regarding
Audit Issues
§ U/S
210: Appointment and remuneration of auditors
§ U/S
211: Provisions as to resolutions for appointing or removing auditors
§ U/S
212: Qualification and disqualification of auditors
§ U/S
213: Power and duties of auditors
§ U/S
214: Audit of accounts of branch office of company
§ U/S
215: Signature of audit report, etc.
§ U/S
217: Right of auditor to attend general meeting
Professional
Requirements
The Principles are
1.
Integrity
2.
Objectivity
3.
Professional
Competence and Due Care
4.
Confidentiality
5.
Professional
Behavior
Benefits of Assurance
Key Benefit
The
independent, professional verification being given to the users.
Subsidiary
benefits
Additional Confidence: It may give additional confidence
to other parties in a way that benefits to the business.
Reduce risk: The existence of an independent check might help
prevent errors or frauds being made and reduce the risk of management bias.
Therefore, it can be seen that an assurance service may act as a deterrent.
Users Attention :Where problems exist within information, the
existence of an assurance report draws attention to the deficiencies in that
information, so that users know what those deficiencies are.
Quality of Information:
Assurance helps to ensure that high quality, reliable information
exists, leading to effective markets that investors have faith in and trust.
Why can assurance never be absolute?
Assurance
providers will never give a certificate of absolute correctness due to
limitations of assurance services.
Limitations of assurance services.
1.
The
fact that testing is used-the auditors do not oversee the process of
building the financial statements from start to finish.
2.
The
fact that the accounting and internal control systems on which assurance
providers may place a degree of reliance also have inherent limitations.
3.
The
fact that most audit evidence is persuasive rather than conclusive.
4.
The
fact that assurance providers would not test every item of in the subject
matter (a sampling approach is used).
5.
The
fact that the client’s staff members collude in fraud that can then be
deliberately hidden from the auditor or misrepresent matters to them for the
same purpose.
6.
The
fact that assurance provision can be subjective and professional judgments
have to be made (for example, about what aspects of the subject matter are the
most important, how much evidence to obtain etc.).
7.
The
fact that assurance providers rely on the responsible party and its
staff to provide correct information, which in some cases may be impossible to
verify by other means.
8.
The
fact that some items in the subject matter may be estimates and
therefore uncertain. It is impossible to conclude absolutely that judgmental
estimates are correct.
9.
The
fact that the nature of the assurance report might itself be limiting,
as every judgment and conclusion the assurance has drawn cannot be
included in it.
The Expectation Gap
The
expectation gap means a gap between what the assurance providers understands he
is doing and what the user of the information believes he is doing.
This
is often because users are not aware of the nature of the limitations on
assurance provisions, or do not understand them and believe that the assurance
provider is offering a service (such as a guarantee of correctness) which is in
fact he is not. The distinction between reasonable and limited assurance may
also be misunderstood by users.
Assurance
providers need to close this gap as far as possible in order to maintain the
value of the assurance provided for the user. This is done in a variety of
ways, for example, by issuing an engagement letter spelling out the work that
will be carried out and the limitations of that work and by regularly reviewing
the format and content of reports issued as a result of assurance work.
Thank You
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