BUSI2090 Audit and Assurance 1

Lecture 1:
Introduction to auditing covering regulatory
framework and environment of audit and
assurance services and role of auditors
 Learning Objectives
• Introduction to International Standards of
Assurance and Auditing
• Types of assurance engagements and audit
• Purpose of audit
• Difference between auditing and accounting
Audit & Assurance Services
 1. International Standards on Auditing
(ISAs)—to be applied to the audit of
historical financial information.
2. International Standards on Review
Engagements (ISREs)—to be applied
to the review of historical financial
information.
3. International Standards on Assurance
Four Type of Engagements (ISAEs)—to be applied
in assurance engagements dealing
Engagements with information other than historical
financial information
(e.g. prospectus, sustainability
report). Information that is ‘other
than historical financial’ may be
future oriented and/or non-financial.
4. International Standards on Related
Services (ISRSs) (e.g. tax, consulting,
compilation).
 Review Engagement
Let's look at review engagements in more detail:

'The objective of a review engagement is to enable a

practitioner to state whether, on the basis of procedures
which do not provide all the evidence that would be
required in an audit, anything has come to the
practitioner's attention that causes the practitioner to
believe that the financial statements are not prepared, in
all material respects, in accordance with an applicable
financial reporting framework.'

ISRE 2400 Engagements to review financial statements

Review Engagement
 'An assurance engagement is an engagement
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'.
[International Framework for Assurance
Engagements]
Assurance
Engagement
 Question
(a) Explain what is an assurance engagement
and the different levels of assurance.
[11 marks]

(b) Explain the importance of an “audit of

historical information”.
[14 marks]
[Total: 25 marks]
 There are five elements to an assurance
engagement:
• Criteria – suitable criteria
• Report – an assurance report
5 Elements of • Evidence
• Subject matter
an Assurance • Three party relationship (intended user,
Engagement responsible party, practitioner)

Use the mnemonic CREST to remember the

five elements of an assurance engagement!
 CREST – Assurance Engagement
Element Explanation
Three party relationship The three parties to an assurance engagement are
the intended user, the responsible party and the
practitioner.
Subject matter The subject matter is the data to be evaluated that
has been prepared by the responsible party.

Criteria The criteria are used to measure and evaluate the

subject matter to reach an opinion.

Evidence Sufficient appropriate evidence needs to be

gathered to support the required level of assurance.

Report A report of the practitioner's opinion is issued to the

intended user.
CREST – Assurance Engagement

Practitioner

Criteria

Subject matter

Users Responsible Party

Evidence

Report
 Question:
Auditors are frequently required to provide
assurance for a range of non-audit engagements.

Required:
List and explain the elements of an assurance
engagement. (5 marks)
 Tips for Answering:
• First, note the requirement to 'List and explain…' and the
mark allocation. Assume there is ½ mark for each element
and ½ mark for a brief explanation of it.
• There are five marks here so you have just under 10
minutes to answer this question.
• Use a 'two column' format – identifying the element in the
left had column and then explaining it in the right hand
column. Alternatively, use a heading for each element and
explain it underneath.
• Remember CREST to help you list the elements of an
assurance engagement.
• You will need to give a brief explanation of each element to
score sufficient marks to pass the requirement.
 • International Standard on Auditing
(ISA)
The • According to ISA 200.3
– The purpose of an audit is to
Purpose enhance the degree of confidence
of intended users in the financial
of Audit statements.
 Why an Audit is Required?
• Shareholders are often separate from those managing &
governing the companies they own

• Shareholders need reliable & independent source of

financial information to assess the company

• Thus, audit enhance the credibility of the information

contained within the financial statements

• Shareholders & stakeholders can make assessments &

decisions with confidence & on a consistent basis
Accountability, Stewardship & Agency
Elements of a financial statement audit

Source: ISAE 3000

 The output of an Audit
• Audit Report
– Illustration of Independent Auditor’s Reports on
Financial Statements
What do 'true' and 'fair' actually mean
(ISA 200)?
• True: information is factual and conforms with reality. In
addition the information conforms with required standards
and law. The financial statements have been correctly
extracted from the books and records.

• Fair: information is free from discrimination and bias and in

compliance with expected standards and rules. The
financial statements should reflect the commercial
substance of the entity's underlying transactions.
 Reasonable Assurance

Reasonable assurance Limited assurance

e.g. external audit e.g. review engagement

Negative expression:
Positive expression:
'Nothing has come to our
'In our opinion, the attention that causes us to believe
financial statements that the financial statements do
present fairly …..' not give a true and fair view …….'
Engagement Assurance Assurance Opinion/ Example
provided Level Conclusion
External audit Reasonable High Positive Statutory audit

Review Limited Moderate Negative Review of

interim
financial
statements
Agreed-upon None – it is NA NA Examination
procedures not an of segmental
assurance sales and
engagement profit
Compilation None – it is NA NA Preparation of
not an financial
assurance statements
engagement
Comfort letter None – it is NA NA Letter relating
engagement not an to information
assurance in an offering
engagement document for
a new share
issue
 Question:
Heavenly Drinks Sdn. Bhd. would like to takeover Hellis Sdn. Bhd., a
company manufacturing soft drinks. The Chief Operating Officer, Mr
Jason has approached your audit firm to review Hellis Sdn. Bhd.’s
financial position. He understands that review engagement can be of
assurance or non-assurance basis. However, he could not differentiate
the difference between an assurance and a non-assurance
engagement that your audit firm provides. He has asked you to explain
to him so that he can decide what type of engagement service suits
him better.

Required:
Explain what a review engagement is, and what is the difference
between an assurance engagement and a non-assurance review
engagement.
[15 marks]
 Why doesn't the external audit give
absolute assurance over the truth and
fairness of the financial statements?
• While the reasonable assurance obtained in an audit is
a high level of assurance, it is not absolute assurance (a
certification that the FS are completely correct)

• Absolute assurance is not possible:

– Impractical for auditor to test & audit every transaction
– FS involve estimates & judgements
– Inherent limitations (refer to next slide)
Why not certified it as CORRECT?
 Question:
One of your clients, Randler Ranch Bhd. wrote a
letter to your firm requesting a report certifying
absolute assurance of the truth and fairness of the
company’s financial statements, in order to secure
additional bank term loan to finance the expansion
of the company.

Required:
Should your firm comply with this request? Explain
your answer.
[15 marks]