What are the objectives of an external audit engagement?

 To enhance the degree of confidence through an independent auditor’s opinion.

 To give a true and fair view

What are the characteristics of an audit engagement?

 Independent
 True and fair view
 Professional
 An audit is an example of a reasonable assurance engagement
 Professional skepticism to add credibility

Our responsibility is to be independent and to adhere to the standards for auditing to obtain an
opinion on the financial statements.

External vs internal

 Responsibilities of the external auditor established by law (fixed under statute/companies

act)
 The responsibilities of the internal auditor are determined by the management

 The external auditor’s role is limited to the financial statements that he/she is auditing.
 Role of internal auditor is someone who is there to help the entity/management to manage
the company by providing information needed for planning, control, development, etc.
 The appointment of the external auditor is done by the shareholders (owners of the company).
This is also for the removal of the external auditor
 The appointment of the external auditor is done y the management

 The external auditor reports to shareholders

 The internal auditor reports to the management

 In order to be eligible for appointment as an external auditor you have to be a certified

accountant with a practicing certificate in auditing. i.e The professional qualification and
practical experience.
 There are no specific requirements to be appointed as an internal auditor.

 An external audit is done normally closer to the end of the year. The reasons for which is that
the focus/role is different.
 Internal auditing happens all year round

An external auditor is one who produces an external audit which is a type of assurance engagement
that is carried out by an auditor to give an independent opinion on a set of financial statements

An Assurance Engagement refers to an engagement in which a practitioner expresses a conclusion,

based on sufficient appropriate evidence, 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.

There are 5 elements of an assurance engagement:

1. Three Parties involved.

a. The responsible party who is the preparer f financial statements or in other words -
the directors.
b. The intended users who are the users of the financial statements, some of which are
namely present and potential investors.
c. The practitioner, or in specific terms, the auditor who conducts the audit to provide
an opinion on the financial statements.
 2. Subject matter under scrutiny – the data to be evaluated that has been prepared by the
responsible party
3. Suitable Criteria against which to judge the reliability of the subject matter. These are
namely either GAPSME or IFRS as adopted by the EU
4. Sufficient appropriate Evidence to substantiate an opinion - (sufficient appropriate audit
evidence) – audit evidence
5. A written Report in an appropriate form – audit report

Examples: The two types of assurance engagements that there are: reasonable assurance
engagement and limited review engagement. The level of assurance is different.

While an audit is meant to give some assurance that the financial statements are free of material
misstatements, a review engagement is only meant to ascertain whether or not the financial
statements are believable or plausible. Moreover, audit engagement may produce by-products
such as providing the directors with suggestions on how to improve internal controls.

An audit engagement is classified as a reasonable assurance engagement. In other words, an

audit engagement provides a high, but not absolute level of assurance that the information
audited is free of material misstatement (reasonable assurance). The conclusion of the audit is
expressed in a positive manner. The level of assurance provided with an audit engagement is
reasonable.

Example: “In our opinion the financial statements: » give a true and fair view of the financial
position of the company as at 31 December 2021 and of its financial performance and cash flows
for the year then ended in accordance with IFRSs as adopted by the EU; and » have been properly
prepared in accordance with the requirements of the Maltese Companies Act, 1995.”

On the other hand, review engagements are known to be a limited engagement. These provide a
moderate level of assurance that the information reviewed is free of material misstatement
(negative assurance). The conclusion of the audit Is expressed in a negative form. The level of
assurance provided with a review engagement is moderate.

Example: “Based on our review, nothing has come to our attention that causes us to believe that
the accompanying interim financial information is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting”

 Another difference is that either reasonable assurance or review engagement can be

used in the interim
 A reasonable assurance engagement is to be used for the full year mandatorily
  A reasonable assurance is more expensive than a review engagement, more resources
and more time.

 A reasonable assurance engagement uses ISA Standards.

 Review engagements follow ISRs standards

Reasonable assurance engagement == Audit Engagements

Accounting Tutorial 2

This case suggests an audit risk since it is indicated that the financial statements contain a
material misstatement. Specifically, this risk is identified as a Control risk since it is a risk that a
material misstatement could occur without being prevented or detected on a timely basis by the
entity’s internal control system.

This paragraph also hints at a detection risk since no audit procedure or test will help the auditor
in realising that the customer has gone bankrupt and therefore will have to have this
information disclosed to him prior to the audit conduction.
Control Risk