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MODULE AIM
Explain the nature of

ASSURANCE
Explain the concept
internal controls,
of assurance, why
identify its existence
assurance is required
and weakness and why
by professionals
CERTIFICATE LEVEL they are important

Understand the
Select sufficient and
importance of
appropriate methods
PhD. Tạ Thu Trang & PhD. Doan Thanh Nga ethical behaviour to
of obtaining
a professional and
assurance evidence
identify related issues

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SPECIFICATION GRID EXAM

• 1½ hours

The concept,
• 50 questions with equal marks, together
Professional
process and
adding up to 100 marks
ethics
need for
20% • The questions are of the following types:
assurance
20%  Multiple choice – select 1 from 4 options A,
Gathering
B, C or D
evidence on an Internal
 Multiple response – select 2 or more
assurance controls
responses from 4 or more options
engagement 25%
35%  Multi-part multiple choice – select 1 from
2, 3 or 4 options, for two or more question
parts
• 55% pass mark
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CONTENTS CONTENTS
Chapter 1: The concept and need for Assurance Chapter 9: Internal Audit

Chapter 2: Process of Assurance: Obtaining an engagement Chapter 10: Documentation

Chapter 3: Process of Assurance: Planning the assignment Chapter 11: Evidence and sampling

Chapter 4: Process of Assurance: Evidence and reporting Chapter 12: Written representations

Chapter 5: Introduction to internal controls Chapter 13: Substantive procedures

Chapter 6: Revenue systems Chapter 14: Codes of professional ethics

Chapter 7: Purchases system Chapter 15: Integrity, objectivity and independence

Chapter 8: Employee costs Chapter 16: Confidentiality

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CHAPTER 1 LEARNING OBJECTIVES

CHAPTER 1:
1-1 Define the concept of assurance and compare the purposes and
CONCEPT OF AND NEED characteristics of reasonable and limited levels of assurance obtained
from different assurance engagements
1-2 State why users desire assurance reports and provide examples of the
FOR AUDIT benefits gained from them such as to assure the quality of an entity’s
published corporate responsibility or sustainability report
Instructor: Dr. Tạ Thu Trang 1-3 Compare the functions and responsibilities of the different parties
involved in an assurance engagement

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WHAT IS ASSURANCE?
1.1. DEFINITION

Assurance engagement
OBJECTIVE 1-1 is one in which a practitioner expresses a conclusion
What is assurance 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, 2005, para.7

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WHAT IS ASSURANCE? WHAT IS ASSURANCE?

1.1. DEFINITION 1.1. DEFINITION
5 key elements of an assurance engagement: 5 key elements of an assurance engagement:
Three party relationship
Three party relationship
This represents the practitioner (for example, the auditor), the
Subject matter intended users (for example, shareholders) and the responsible
parties (for example, the directors, who are responsible for
Criteria preparing the financial statements).

Evidence

Report

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WHAT IS ASSURANCE?
1.1. DEFINITION WHAT IS ASSURANCE?
1.1. DEFINITION
5 key elements of an assurance engagement: 5 key elements of an assurance engagement (CREST):
Three party relationship Subject matter

This may change according to the overall purpose of the engagement,

but the subject matter is likely to be one of the following categories:
• Data, such as reviewing budgets, financial statements or Business
projection
• Behaviour, such as reviewing corporate governance
• Systems or processes, such as internal controls, financial or computer
systems in place.

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WHAT IS ASSURANCE? WHAT IS ASSURANCE?

1.1. DEFINITION 1.1. DEFINITION
5 key elements of an assurance engagement (CREST):
Criteria
The assurance engagement must have a 'bar' or threshold that
should be met. Consider what the tests may be to ensure that the
subject matter is reliable and can be trusted.
For example, in an assurance engagement relating to financial
statements, the criteria may be accounting standards
Other criteria:
 processes may be compared to establish industry best
practices (accredited management standards such as ISO
9000)
 or behaviours to ethical standards, corporate governance or
environmental standards.
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5 key elements of an assurance engagement (CREST):
Evidence
The practitioner obtain and evaluate sufficient and appropriate
evidence to support the assurance opinion.
Any assurance engagement must document its evidence which
substantiates the opinion given. Audit evidence will be examined
later in this course book.
Report
Provided in the form of a written report and will contain key
information and any issues or assurances given as a result of the
engagement.
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WHAT IS ASSURANCE?
1.1. DEFINITION EXAMPLE
Jones LLP is the external auditor of Blue plc, a listed company. The
directors of Blue plc have requested that Jones LLP carry out a review
engagement assessing the effectiveness of its corporate governance
policies against the UK Corporate Governance Code.

Context example: Assurance engagement (page 6)

For the above review engagement, select which part of the engagement
description constitutes the subject matter, which describes the suitable
criteria and which party is the responsible party.

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Interactive question 1: Assurance Engagement (page 6) WHAT IS ASSURANCE?

1.2. LEVELS OF ASSURANCE
You are an accountant who has been approached by Jamal, who wants to invest in
Company X. He has asked you for assurance whether the most recent financial Summary of types of engagement
statements of Company X are a reliable basis for him to make his investment Type of Evidence obtained Example of wording Conclusion
decision. engagement given
Reasonable Sufficient appropriate In our opinion, the financial Positive
assurance evidence is obtained by: statements present fairly, in expression
Requirement: engagement: • Obtaining an all material respects, (or give
Identify the key elements of assurance engagement in this scenario High level of understanding of the a true and fair view of) the
assurance entity financial position of the
(less than • Assessing risk Company, and of its financial
absolute • Responding to risk performance and its cash
assurance) • Performing further flows for the year.
Eg: statutory procedures (sampling) to
audit draw a conclusion

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WHAT IS ASSURANCE? WHAT IS ASSURANCE?

1.2. LEVELS OF ASSURANCE 1.2. LEVELS OF ASSURANCE

Summary of types of engagement T/F Question:

Type of Evidence sought Example of wording Conclusion Reasonable assurance is high level of assurance
engagement given
Limited The evidence Based on our work Negative A False
assurance gathered is limited, described in this report, expression
engagement involving techniques nothing has come to our B True
(less than such as enquiry and attention that causes us to
reasonable analytical believe that internal control
assurance) procedures is not effective, in all
Eg: review of material respects, based on
half-year XYZ criteria.
results

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TYPES OF ASSURANCE
EXAMPLES OF ASSURANCE ENGAGEMENTS SUMMARY
The key example of an assurance engagement in the UK is Types of
a statutory audit. Other examples include: assurance
• Pension scheme audits
• Charity audits (Companies Act, Charities Act)
• Solicitors audits (in line with the Solicitors' Accounts Rules)
• Environmental audits Examples of
• Insurance company audits What is Levels of
assurance
• Local authority audits assurance assurance
engagements
• Other types of audit, for example magazine or newspaper circulation
reports, due diligence on an acquisition target, fraud investigations. Practitioner Reasonable Statutory audit
expresses an assurance: Charity audits
conclusion on a Positive statement Solicitor audits
subject matter Limited assurance: Environmental
against criteria Negative statement audits

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The following is an extract from an independent accountant’s unmodified report on a profit forecast: “Based on
our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us
to believe that these assumptions do not provide a reasonable basis for the forecast.”
OBJECTIVE 1-2
Requirement:
Why is assurance important
Which one of the following best describes the type of assurance provided by this statement?

A. Positive assurance expressed negatively

B. Negative assurance expressed positively

C. High level of assurance expressed negatively

D. Limited level of assurance expressed negatively

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WHY IS ASSURANCE IMPORTANT? WHY IS ASSURANCE IMPORTANT?

2.1. USERS
In the key assurance service of audit, the users are the shareholders
of a company, to whom the financial statements are addressed. In
other cases, the users might be the board of directors of a company
or a subsection of them
2.2. BENEFITS OF ASSURANCE
Key benefit: Independent and external professional verification.
Additional benefits:
• May give confidence to other users (enhancing the credibility of the
information)
• Deterrent against/Preventing fraud and error and reducing management
bias
• Draws attention to deficiencies or modifications in the prepared information
• Ensuring high quality and reliable information, leading to effective markets
as investors have more faith and trust in financial accounts and the
underlying companies
• Growing public perception that this is an important area and stakeholders
are unlikely to associate with businesses that could damage their reputation.
Corporate responsibility or sustainability reports provide assurance for
stakeholders that this published information is reliable and accurate

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WHY CAN ASSURANCE NEVER BE ABSOLUTE?

3.1. LIMITATIONS OF ASSURANCE

• Sampling – not all transactions/items in the accounting records are

tested
OBJECTIVE 1-3 • The fact that the accounting systems on which assurance providers
Why can assurance never be absolute? may place a degree of reliance also have inherent limitations.
• The fact that most audit evidence is persuasive rather than conclusive.
• Human factor – collusion of parties in fraudulent behaviour, errors,
override of controls
• Some items in the subject matter may be estimates and are therefore
uncertain. It is impossible to conclude absolutely that judgmental
estimates are correct.
• Nature of assurance => every judgment and conclusion the assurance
provider has drawn

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Interactive question 2: Benefit of assurance (page 10) WHY CAN ASSURANCE NEVER BE ABSOLUTE?
3.2. EXPECTATION GAP
Which three of the following are benefits of assurance work?
A. An independent, professional opinion The expectations gap is defined as the
difference between the apparent public
B. Additional confidence given to other related parties perceptions of the responsibilities of auditors
on the one hand (and hence the assurance that
C. Testing as a result of sampling is cheaper for the responsible party their involvement provides) and the legal and
professional reality on the other.
D. Judgements on estimates can be conclusive
Common misconceptions are that auditors are
E. Assurance may act as a deterrent to error or fraud responsible for detecting all instances of fraud
and error within the financial statements.

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WHY CAN ASSURANCE NEVER BE ABSOLUTE? WHY CAN ASSURANCE NEVER BE ABSOLUTE?
3.2. EXPECTATION GAP 3.2. EXPECTATION GAP
Consider the following examples of the expectation gap Consider the following examples of the expectation gap
below (page 96) below
Resolutions to the expectations gap
Nature of the misunderstandings
The assurance engagement letter will define the expectations and
a) Misunderstanding the nature of audited financial statements
limitations on both sides (the assurance team and the party
b) Misunderstanding the type and extent of the work undertaken by
responsible for the information). This helps to reduce
auditors
misunderstandings as to the extent or the role that the assurance
c) Misunderstanding the level of assurance provided by auditors
team have in the engagement.
The auditor’s report in the financial statements sets out the scope
and limitations of any opinion given by the assurance team. The
report is set out in a standard format to allow users to compare
reports of different companies with relative ease.

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Interactive question 2: Benefit of Assurance

Which three of the following are benefits of assurance work?

OBJECTIVE 1-4
A. An independent, professional opinion Statutory Audit
B. Additional confidence given to other related parties
C. Testing as a result of sampling is cheaper for the responsible party
D. Judgements on estimates can be conclusive
E. Assurance may act as a deterrent to error or fraud

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STATUTORY AUDIT STATUTORY AUDIT

4.1 DEFINITION OF AUDIT OF FINANCIAL AUDIT 4.1 DEFINITION OF AUDIT OF FINANCIAL AUDIT

True: Information is factual and conforms to reality, not false. In

• The most important type of assurance service in the UK.
• The objective of an audit is to enable the auditor to express an
opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial
reporting framework. This is often referred to as the financial
statements reflecting a 'true and fair view' of the business
addition the information conforms to 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.

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STATUTORY AUDIT STATUTORY AUDIT

4.2. AUDIT EXEMPTION IN THE UK 4.3. LEGAL AND PROFESSIONAL REQUIREMENTS FOR AUDITORS
There are both legal and professional requirements for auditors in the UK.
After 1st January 2016 The Companies Act 2006 requires that auditors are members of a
Recognised Supervisory Body (RSB), such as the ICAEW, and eligible
Turnover No more than £10.2m under their rules to sign auditor’s reports.
Total Assets No more than £5.1m
RSB are required to have rules to ensure that those eligible for
No of employees 50 or fewer on average appointments as company auditor are either:
• Hold an 'appropriate qualification; or
• Firms controlled by qualified persons.
The company must meet two of three following criteria, for both this financial
year and the last financial year. RSB must also implement procedures for monitoring their registered
auditor on a regular basis
All companies above these thresholds must have an audit

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STATUTORY AUDIT
4.3. LEGAL AND PROFESSIONAL REQUIREMENTS FOR AUDITORS STATUTORY AUDIT
4.4. INTERNATIONAL STANDARDS ON AUDITING (IASs)

The Companies Act 2006 also sets out factors which make a person ISAs are made up of:
ineligible for being a company auditor, for example if they are:
 Introductory material and definitions
• An officer or employee of the company
• A partner or employee of such a person  Objectives
• Any partner in a partnership in which such a person is a partner
• Ineligible by the above for appointment as auditor of any directly  Requirements
connected companies
 Application and other explanatory material
The Financial Reporting Council (FRC) issued the auditing standards
known as the International Standards on Auditing (ISAs) 4.5. THE VALUE OF THE STATUTORY AUDIT

 Enhance the credibility of the financial statements

 Legal requirement

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THE STATUTORY AUDIT (CONT.)

4.6. STAGES OF AN AUDIT STATUTORY AUDIT
4.7 OVERALL OBJECTIVES OF THE AUDITOR
Obtaining the engagement
ISA (UK) 200, Overall objectives of the Independent Auditor and the Conduct

Planning of an Audit:

 To obtain reasonable assurance about FSs as a whole are free from material
Performing procedures misstatement, enable the auditor to express an opinion on whether the FSs
are prepared in all material respect, in accordance with an applicable

Review and completion financial reporting framework; and

 To report on the FSs and communicate as required by the ISAs

Reporting
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STATUTORY AUDIT STATUTORY AUDIT

4.7 OVERALL OBJECTIVES OF THE AUDITOR 4.7 OVERALL OBJECTIVES OF THE AUDITOR
Professional scepticism
The auditor must:
Professional scepticism is an attitude that includes a questioning
 Comply with relevant ethical requirement mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of
 Plan and perform the audit with professional scepticism
audit evidence
 Exercise professional judgement
 Obtain audit evidence that is both sufficient and appropriate • Audit evidence that contradicts other audit evidence obtained;
• Information that brings into question the reliability of documents
and responses to inquiries to be used as audit evidence;
• Conditions that may indicate possible fraud; and
• Circumstances that suggest the need for audit procedures in
addition to those required by ISAs

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STATORY AUDIT STATORY AUDIT

4.7 OVERALL OBJECTIVES OF THE AUDITOR 4.7 OVERALL OBJECTIVES OF THE AUDITOR
Professional scepticism Professional judgement
The auditor should be alert to the existence of factors that could Professional judgement is the application of relevant training,
either facilitate or hinder levels of professional scepticism: knowledge and experience in making informed decisions about
courses of action that are appropriate in the circumstances of the audit
engagement.
Scepticism will be enhanced by the audit
team displaying good skills, an open
ISA (UK) 200 requires the auditor to exercise professional judgement in
mindset and independence. Training and Should audit team members lack the right planning and performing an audit of financial statements, including, but
review practices in place within the firm, skills though, placing too much trust in clients not restricted to the following:
plus strong and visible leadership and or being too easily deflected from their audit
culture will also improve scepticism. objectives, levels of professional scepticism • Materiality and audit risk
will fall. This can happen if procedures are too • Nature, extent and timing of audit procedures
rigidly prescribed and do not allow for
application to the circumstances of the client • Evaluating sufficient and appropriate audit evidence obtained
• Evaluating management judgements
• Drawing conclusions on the evidence obtained

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THE STATUTORY AUDIT (CONT.) CHAPTER 1: CONCEPT OF AND NEED FOR ASSURANCE
4.8. BOOKKEEPING RECAP

Transactions
Summary of this chapter 1
Books of original entry
Study manual: page 17
Nominal Ledger
Trial Balance
Financial Statements
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