Audit, Assurance and Related Services

Online

Muhammad Aleem Zubair

Lecture 1

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Professionals’ Academy of Commerce
20 July 2018
Audit Definition

“An audit is a systematic process of objectively obtaining

and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of
correspondence between these assertions and
established criteria and communicating the results to
interested users.”
American Accounting Association

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Assurance engagement

• Means 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.

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 General Principles Governing an Audit of Financial
Statements

• An auditor could comply with the Code of Ethics for

Professional Accountants issued by IFAC.
• An auditor should conduct an audit in accordance with
International Standards on Auditing.

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 Business Risk and Audit Risk

• Companies, depending on the nature of their operations and

industry, the regulatory environment in which they operate,
and their size and complexity, they face a variety of business
risks.
• The risk that causes the greatest concern by the auditor is the
risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated (known
as audit risk). “The auditor should plan and perform the audit
to reduce audit risk to an acceptably low level that is
consistent with the objective of an audit.” (ISA 200)

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 Framework of Assurance Engagement

Subject matter evaluation Criteria

outcome
Practitioner

Responsible
party

Evidence gathering

Assurance Report

Intended users

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Framework of Assurance Engagement

• 1. Introduction
• 2.Ethical Principles and Quality Control Standards
• 3.Description of Assurance Engagements
• 4. Attestation Engagements and Direct Engagements
• 5. Reasonable Assurance Engagements and Limited
Assurance Engagements
• 6. Scope of the framework
• 7. Preconditions for an Assurance Engagement
• 8. Elements of assurance engagement:
• 9. Other Matters
• 10. Inappropriate use of the practitioner’s name:

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 Elements of Assurance
Engagement

I. Three party relationship

II. Appropriate subject matter
III. Suitable criteria
IV. Sufficient appropriate evidence
V. Written assurance report

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 I. Three Party Relationship

The three parties:

1. Practitioner
2. Responsible party
3. Intended user

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 II. Subject Matter

• Forms:
- Financial performance/ conditions
- Non financial performance/ conditions
- Physical characteristics
- Systems and processes
- Behaviour
• Characteristics:
- Qualitative/ quantitative
- Objective/ subjective
- Historical/ prospective
- Point in time/ covers a period
Characteristics affect precision in evaluation against criteria
and persuasiveness of audit evidence

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 III. Suitable Criteria

• Are benchmarks used for evaluation

• May be formal, e.g,
- Accounting Standards
- Internal control framework/ objective specifically
designed for engagement
• May be less formal, e.g,
- Internally developed code of conduct
• Required for consistent evaluation
• Are context sensitive

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IV. Sufficient Appropriate Evidence
• Professional skepticism
• Sufficiency and appropriateness
• Materiality
• Engagement risk
• Nature, timing and extent of evidence gathering procedures
• Quantity and quality of available evidence

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 IV.a Professional Skepticism

• Critical assessment, with questioning mind, as to validity of

evidence obtained
• Alertness to contradictory evidence
• RARELY involves authentication of documents.
Practitioner not trained/ expected to be expert in
authentication
• But consider reliability of evidence like faxes, photocopies,
electronic documents, etc., and control over their
preparation and maintenance

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 IV.b Components of
Engagement Risk
• Risk of material misstatement in outcome:
- Inherent risk: susceptibility of material misstatement
assuming no controls
- Control risk: material misstatement will not be
prevented/ detected and corrected on a timely basis by internal
controls
(control risk cannot be zero because of inherent limitations of
internal controls)
- Detection risk: Practitioner will not detect a material
misstatement

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 Can Engagement
Risk be Zero?
NO.
• Selective testing
• Inherent limitations of internal controls
• Persuasive nature of evidence
• Use of judgment in gathering & evaluating evidence
• Characteristics of subject matter

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Question and Answer session

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Professionals’ Academy of Commerce
20 July 2018
 Thanks! That’s
all for today.

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Professionals’ Academy of Commerce
20 July 2018