The document discusses various topics related to assurance engagements and auditing:
1. It defines two levels of assurance engagements - reasonable assurance and limited assurance. Reasonable assurance requires more evidence and a positive report while limited assurance requires less evidence and a negative report.
2. It outlines the key elements of an assurance engagement including the three party relationship between the user, responsible party, and practitioner. It also discusses the subject matter, suitable criteria, evidence, and written report.
3. It explains the importance of independence for auditors. Independence requires being free from bias, conflicts of interest, and undue influence in order to maintain objectivity and issue an unbiased opinion. Safeguards like removing individuals from
2. Amin Siddiki FCA
1. a
Level of Assurance
Reasonable
Assurance
Engagement
Under this type sufficient &
appropriate evidence are collected
and report is given in positive form
Limited Assurance
Engagement
Under this type sufficient &
appropriate evidence are collected
but relatively lower level and report
is given in negative form
International Framework for Assurance Engagement has
identified two level of assurance as follows.
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1. b
The key elements of an assurance engagement
Three Party Relationship
• Mr. Rahim(users)
• the responsible party- Directors of Bengal group
• The audit firm (the practitioner)
A subject matter
• The most recent financial statements
Suitable Criteria
• Law and accounting standards
Sufficient Appropriate Evidence to Support the Assurance
Opinion
• Audit evidence gathered by professional accountant to
support the opinion
A Written Report
• An assurance report issued in a prescribed form.
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1.C
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.
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1.D
• Consider whether disqualified on legal or ethical grounds,
for example, if there would be a conflict of interest with
another client
Ensure professionally qualified to act
• Consider available time, staff and technical expertise
Ensure existing resources adequate
• Make independent enquiries if directors are not personally
known.
Obtain references
• Enquire whether there are reasons/circumstances behind the
change which the new auditors ought to know, also as a
matter of courtesy
Communicate with present auditors
Before accepting engagement auditor must carry out following procedures
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2.A
What is this It is a process
Designed &
effected by
Those Charged
with governance
Management Other personnel
Works for
To provide
reasonable
assurance
On
Reliability on
financial
reporting
Effectiveness and
efficiency of
operation
Compliance with
applicable laws &
regulations
Definition of Internal Control
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2.A
Ultimate Objectives of Internal Controls
The objectives for internal control can be seen in the example.
They includes:
Minimising the company’s business risk
Ensuring the continuing effective function of the company
Ensuring the company complies with relevant laws and
regulations
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2.B
Control Environment
Control Environment is the set of standards, processes, and structures that
provide the basis for carrying out internal control across the organization. The
board of directors and senior management establish the tone at the top
regarding the importance of internal control including expected standards of
conduct.
Audit Committee
A sub section of board of directors which has a particular interest in the
finance and accounting activities of the company
Risk Assessment Process
The Process by which management in a business identifies business risk
relevant to financial reporting objectives & decides what actions to take to
address those risk.
i. Identify relevant business risk
ii. Estimate the impact of risks
iii. Assessment the likelihood of occurrence
iv. Decide upon action to mange
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2.C
Function of Audit Committee
Review the integrity of financial statements
Formal announcements of company performance
Review the internal financial control & risk assessment system
Monitor & review the effectiveness of internal audit function
Recommendation to the board in relation to the external auditor
Monitor the independence of the external auditor
Implement policy of non audit service by the external auditor
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2.C
Denominator Internal Audit External Audit
Objective It is an activity designed to
add value and improve an
organisation’s operation
To express an independent
opinion on Financial
Statements
Appointed by Management Shareholders
Responsible
to
Management Shareholders
Relating to Whole operation of the
organisation both financial
and non financial
Concern to the Financial
Statement and related
information
Who they are Usually employee Independent Firm
Difference between Internal and External Audit
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How to obtain Audit Evidence
Inspection
of Tangible
Assets
Physical verification of assets but not
confirmation of rights and obligation
Inspection
of
Documents
Examination of records or documents like:
share certificates, valuation , lease agreement
etc
Observation Watching the procedure whether correctly
performed or not.
Inquiry Seeking information from
management/staff/external sources etc
3.A
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How to obtain Audit Evidence
Confirmmation Seeking confirmation from third party ie:
receivable, bank balance
Recalculation Checking mathematical accuracy of subject
matter
Reperformance Independently executing procedures or
control either manually or CAAT
Analytical
procedures
Evaluating and comparing data
3.A
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Sl Assertion What to do
01. Rights &
Obligation
Vouching the document to ensure ownership
02. Existence a. Select the asset in the asset register
b. Physical Verification.
3.B.i
Addition of Non Current Assets
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Sl Assertion What to do
03. Completeness a. Obtain a non current asset schedule
b. Confirm the addition are correct
04. Valuation a. Confirm the valuation as suggested by IAS
i. Cost of purchase through purchase invoice
ii. Directly attributable cost to capitalize
iii. Valuation certificate
b. Depreciation has been correctly calculated
05 Presentation
& Disclosure
a. Ensure disclosure criteria has been meet
Addition of Non Current Assets
3.B.i
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3.B.ii
Sl Assertion What to do
01. Rights &
Obligation
a. Review sales invoice for sold assets to ensure that
ownership has been transferred
02. Existence a. Select the asset in the asset register
b. Physical Verification.
Disposal of Non Current Assets
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3.B.ii
Sl Assertion What to do
03. Completeness a. Confirm sold assets are deleted from register
04. Valuation a. Depreciation has not been charged against sold asset
b. Recalculate the profit/loss against sales of asset
05 Presentation
& Disclosure
a. Ensure disclosure criteria has been meet
Disposal of Non Current Assets
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3.C
Authorisation Approval & Control of
document
Transactions must be approved
by appropriate person
Performance
Review
Reconciliation Difference between two figures
should be reconciled
Information
Processing
Checking arithmetical
accuracy
Ex. Manual calculation of certain
items
Physical Control Physical counting of
inventory
Ex. Physical verification of petty
cash counting
Segregation of
duty
More person involve
in one accounting
process
Receivable collectors are not
allowed to post to receivable
books
Control Activities
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3.D
Documentation
Documentation means the material (working papers) prepared by and
for, or obtained and retained by the auditor in connection with the
performance of the audit. Working papers may be in the form of data
stored in paper, film, electronic media or other media.
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Purposes of Keeping documentation or working papers
Particularly in relation to audit, assurance providers record their work to:
a. Assist the audit team to plan and perform the audit.
b. Assist the relevant members of the team to direct supervise work.
c. Enable the audit team to be accountable for its work (and to prove
adherence to BSAs in a litigious situation). and
d. Retain a record of matters of continuing significance to future audits.
e. Enable an experienced auditor to carry out quality control reviews.
f. Enable an experienced auditor to conduct external inspections in
accordance with applicable legal, regulatory or other requirements.
3.D
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4.A
Purpose of an Engagement Letter
The purpose of an engagement letter is to:
1. Define clearly the extent of the firm’s responsibilities
and so minimize the possibility of any
misunderstanding between the client and the firm.
2. Provide written confirmation of the firm’s acceptance
of the appointment, the scope of the engagement and the
form of their report.
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4.A
Form & Content of an Audit Engagement Letter
The form and content audit engagement letters may vary for each
client, but they would generally include reference to the following:
1. The objective of the audit of financial statements.
2. Management’s responsibility for the financial statements.
3. The scope of the audit, including reference to applicable legislation,
regulations or pronouncements of ICAB to whom the auditor
adheres.
4. The form of any reports or other communication of results of the
engagement.
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4.A
5. The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent limitations of
any accounting and internal control systems, there is an
unavoidable risk that even some material misstatements may
remain undiscovered.
6. Unrestricted access to whatever records, documentation and
other information is requested in connection with the audit.
7. The agreement of management to make available to the auditor
draft financial statements and any accompanying other
information in time to allow the auditor to complete the audit in
accordance with the proposed timetable.
Form & Content of an Audit Engagement Letter
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4.D
Effects on Audit Report
i. Matters fully disclosed in the Financial Statements
An unqualified report with an emphasis of matter paragraph
on going concern uncertainty highlighting the existence of
material uncertainty relating to the events or condition that
may cast significant doubt about the entities ability to continue
as a going concern and draw attention to the notes to the
financial statements that disclose the matters where
management plans to deal with events are explained.
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4.D
Effects on Audit Report
i. Matters not disclosed in the Financial Statements
If considered material but not pervasive---qualified opinion
If considered material and pervasive ---Adverse opinion
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5.A
Independence and objectivity are matter so much for following
reasons:
1. External auditors have a responsibility to consider the public
interest and maintain the reputation of the profession.
2. The auditor should be independent from the client company, so
that the audit opinion will not be influenced by any relationship
between them.
3. The auditors are expected to give an unbiased and honest
professional opinion on the financial statements to the
shareholders.
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5.A
To maintain the objectivity an auditor should remain
free from
1. Biasness
2. Conflict of interest
3. Undue influence
To override professional or business judgments.
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5.B
Independence of mind
The state of mind that permits the expression of a conclusion without being
affected by influences that compromise professional judgment, allowing an
individual to act with integrity, and exercise objectivity and professional
skepticism.
Independence in fact
Independence in fact exists when the auditor is actually able to maintain unbiased
attitude throughout the audit
Independence in appearance
The avoidance of facts and circumstances that are so significant that a reasonable
and informed third party, having knowledge of all relevant information.
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5.C
The following safeguards will therefore be relevant but not limited to
Disposing the interest
Removing the individual form the team
Inform the audit committee of the situation
Using an independent partner to review work carried out.
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5.D
A professional accountant even in business has a continuing duty to maintain
professional ethics as like professional in practices including integrity, objectivity
and others to ensure that employer receives competent professional service based
on current developments in practices, legislation and techniques.
Often accountants in business find themselves in dilemma when they are guided by
management as to the treatment of certain accounting transaction or presentation
in the interest of management rather public interest.
Example of probable unethical act may
1. Misleading auditors
2. Issue or to be associated with public reports that materially represent the fact.