Assurance

Short Note
Pr of essi onal St age- Knowl edge Level
 Chapter -1 Concept of and need for assurance
 An assurance engagement is one 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.
 Reasonable assurance: A high, but not absolute, level of assurance.
 Audit: The objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework.
 True: Information is factual and conforms with reality, not false. In addition the information
conforms with 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.

Chapter -3 Process of assurance “planning the assignment”

 Audit strategy: The formulation of the general strategy for the audit, which sets the scope, timing
and direction of the audit and guides the development of the audit plan.
 Audit plan: An audit plan is more detailed than the strategy and sets out the nature, timing and
extent of audit procedures (including risk assessment procedures) to be performed by engagement
team members in order to obtain sufficient appropriate audit evidence.
 An attitude of professional scepticism means the auditor makes a critical assessment, with a
questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that
contradicts, or brings into question, the reliability of documents and responses to inquiries and other
information obtained from management and those charged with governance.
 Analytical procedures means evaluation of financial information made by a study of plausible
relationships among both financial and non-financial data. Analytical procedures also encompass the
investigation of identified fluctuations and relationships that are inconsistent with other relevant
information or deviate significantly from predicted amounts.
 Materiality: An expression of the relative significance or importance of a particular matter in the
context of financial statements as a whole. BSA Framework for the Preparation and Presentation of
Financial Statements states that a matter is material if its omission or misstatement would reasonably
influence the economic decisions of users taken on the basis of the financial statements. Materiality
depends on the size of the error in the context of its omission or misstatement.
 Tolerable error: The maximum error that an auditor is prepared to accept in a class of transactions
or balances in the financial statements.
 Auditors follow a risk-based approach to auditing. In the risk-based approach, auditors analyze the
risks associated with the client's business, transactions and systems which could lead to
misstatements in the financial statements, and direct their testing to risky areas. They are therefore
not concerned with individual routine transactions, although they will still be concerned with
material, non-routine transactions.
 Audit risk: The risk that the auditors give an inappropriate opinion on the financial statements.
 Inherent risk: The susceptibility of an account balance or class of transactions to misstatement that
could be material individually or when aggregated with misstatements in other balances or classes,
assuming there were no related internal controls.
 Control risk: The risk that a material misstatement would not be prevented, detected or corrected by
the accounting and internal control systems.
 Detection risk: The risk that the auditors' procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material, either individually or when
aggregated with misstatements in other balances or classes.

Chapter -4 Process of assurance “evidence and reporting”

 Audit evidence: All of the information used by the auditor in arriving at the conclusions on which
the audit opinion is based.
 Tests of controls: Performed to obtain audit evidence about the effectiveness of controls in
preventing, or detecting and correcting material misstatements at the assertion level.
 Substantive procedures: Audit procedures performed to detect material misstatements at the
assertion level. They include: Tests of detail of classes of transactions, account balances and
disclosures. Substantive analytical procedures.
 Financial statement assertions: The representations by management, explicit or otherwise, that are
embodied in the financial statements.
 Sufficiency is the measure of the quantity of audit evidence.
 Appropriateness is the measure of the quality or reliability of the audit evidence.
 Unqualified Review Report Opinion: Based on our review, nothing has come to our attention that
causes us to believe that the accompanying financial statements do not give a true and fair view (or
'are not presented fairly, in all material respects,') in accordance with International Accounting
Standards.
 The 'expectations gap' is defined as the difference between the apparent public perceptions of the
responsibilities of auditors on the one hand (and hence the assurance that their involvement provides)
and the legal and professional reality on the other

Chapter-05 Introduction to internal control

 Internal control: ‘Internal control is the process designed and effected by those charged with
governance, management, and other personnel to provide reasonable assurance about the
achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness
and efficiency of operations and compliance with applicable laws and regulations. It follows that
internal control is designed and implemented to address identified business risks that threaten the
achievement of any of these objectives.’
 Audit committee: A subsection of the board of directors which has a particular interest in the
finance and accounting activities of the company.
 Control environment: The control environment includes the governance and management functions
and the attitudes, awareness and actions of those charged with governance and management
concerning the entity’s internal control and its importance in the entity.
 Entity's risk assessment process: The process by which management in a business identifies
business risks relevant to financial reporting objectives and decides what actions to take to address
those risks (for example, implementing internal controls).
 Business risk: The risk inherent to the company in its operations. It is risks at all levels of the
business
 Information system relevant to financial reporting objectives includes the procedures and records
designed to initiate, record, process and report entity transactions and to maintain accountability for
the related assets, liabilities and equity.
 Control activities: The policies and procedures that help ensure that management directives are
carried out.
 Application controls: Are manual or automated procedures that apply to the processing of
individual applications to ensure that transactions occurred, are authorized and are completely and
accurately recorded and processed.
 General controls: Are policies and procedures that relate to many applications and support the
effective function of application controls by helping to ensure the continued proper operation of
information systems.

Chapter-09 Internal Audit

 Operational audits: Audits of the operational processes of the organisation. They are also known as
management or efficiency audits. Their prime objective is the monitoring of management's
performance, ensuring company policy is adhered to.
 External audit: An audit carried out by an external, as opposed to an internal, auditor. Remember
that the objective of an external audit of financial statements is to enable auditors to express an
opinion on whether the financial statements are prepared (in all material respects) in accordance with
the applicable financial reporting framework.
 Internal audit: An appraisal or monitoring activity established within an entity as a service to the
entity. Its functions include, amongst other things, examining, evaluating and reporting to
management and the directors on the adequacy and effectiveness of components of the accounting
and internal control systems.

Chapter-10 Documentation
 Audit documentation (working papers) is the record of procedures performed, relevant evidence
obtained and conclusions reached.
 Automated working paper packages have been developed which can make the documenting of audit
work much easier. Such programs aid preparation of working papers, lead schedules, trial balance
and the financial statements themselves. These are automatically cross referenced, adjusted and
balanced by the computer.

Chapter-11 Evidence and Sampling

 Audit sampling involves the application of audit procedures to less than 100% of the items within
an account balance or class of transactions such that all sampling units have a chance of selection.
This will enable the auditor to obtain and evaluate audit evidence about some characteristic of the
 items selected in order to form or assist in forming a conclusion concerning the population from
which the sample is drawn.
 Population is the entire set of data from which a sample is selected and about which an auditor
wishes to draw conclusions. A population may be divided into strata, or sub-populations, with each
stratum being examined separately. The term population is used to include the term stratum.
 Statistical sampling is any approach to sampling that involves random selection of a sample, and
use of probability theory to evaluate sample results, including measurement of sampling risk.
 Non-statistical sampling is a subjective approach to inference, in that mathematical techniques are
not used consistently in determining sample size, selecting the sample, or evaluating sample results
 Error means either control deviations, when performing tests of control, or misstatements, when
performing substantive procedures.
 Expected error is the error that the auditor expects to be present in the population
 Sampling units are the individual items constituting a population.
 Sampling risk arises from the possibility that the auditor's conclusion, based on a sample of a certain
size, may be different from the conclusion that would be reached if the entire population were
subjected to the same audit procedure.
 Non-sampling risk arises from factors that cause the auditor to reach an erroneous conclusion for
any reason not related to the size of the sample. For example, most audit evidence is persuasive
rather than conclusive, the auditor might use inappropriate procedures, or the auditor might
misinterpret evidence and fail to recognize an error.
 Tolerable error is the maximum error in the population that the auditor would be willing to accept.
 Anomalous error means an error that arises from an isolated event that has not recurred other than
on specifically identifiable occasions and is therefore not representative of errors in the population.

Chapter-12 Management Representations

 Management comprises officers (directors and company secretary) and others who perform senior
managerial functions.

Chapter-14 Codes of professional ethics

 Integrity. A professional accountant should be straightforward and honest in all professional and
business relationships.
 Objectivity. A professional accountant should not allow bias, conflict of interest or undue influence
of others to override professional or business judgments.
 Professional competence and due care. A professional accountant has a continuing duty to
maintain professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in practice, legislation and
techniques. A professional accountant should act diligently and in accordance with applicable
technical and professional standards when providing professional services.
 Confidentiality. A professional accountant should respect the confidentiality of information
acquired as a result of professional and business relationships and should not disclose any such
information to third parties without proper and specific authority unless there is a legal or
professional right or duty to disclose. Confidential information acquired as a result of professional
 and business relationships should not be used for the personal advantage of the professional
accountant or third parties.
 Professional behavior. A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
 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 appearance: The avoidance of facts and circumstances that are so significant that
a reasonable and informed third party, having knowledge of all relevant information, including
safeguards applied, would reasonably conclude a firm's, or a member of the assurance team's,
integrity, objectivity or professional skepticism had been compromised.

Chapter-15 Integrity, objectivity and independence

 Integrity: This means that an accountant must be straightforward and honest. It implies fair dealing
and truthfulness.
 Objectivity: This is a state of mind that excludes bias, prejudice and compromise and that gives fair
and impartial consideration to all matters that are relevant to the task in hand, disregarding those that
are not.
 Independence is related to and underpins objectivity – it is freedom from situations and
relationships that make it probable that a reasonable and informed third party would conclude that
objectivity either is impaired or could be impaired.
 Financial interest exists where an assurance firm has a financial interest in a client's affairs; for
example, an assurance firm owns shares in the client, or is a trustee of a trust that holds shares in the
client.
 Direct financial interest: One which is owned directly by and under the control of an individual or
entity or beneficially owned through a collective investment over which the individual/entity has
control.
 Indirect financial interest: One beneficially owned through intermediaries, such as a pension
scheme, over which the individual/entity has no control.
 Immediate family means a spouse (or equivalent) or a dependant.
 Assurance team means all members of the engagement team for the assurance engagement and all
others within the firm who can directly influence the outcome of the assurance engagement.
 Close family is a parent, child or sibling who is not an immediate family member.
 Contingent fees: Fees calculated on a predetermined basis relating to the outcome or result of a
transaction or the result of the work performed.
 Valuation comprises the making of assumptions with regard to future developments, the application
of certain methodologies and techniques, and the combination of both in order to compute a certain
value, or range of values, for an asset, a liability or a business as a whole.