1. 41MAY 2014
BUSINESS
L
egislation removing the statutory audit requirement for
many small- and medium-sized entities (SMEs) came
into force on 1 April 20141
, and is prompting many
practitioners to reassess their service offerings.
In the past, firms would have typically offered a choice
between accounts preparation and full audit. Now, more
firms are offering a broader range of assurance services.
WHAT’S THE DIFFERENCE?
An assurance service is any engagement in which an assurance
practitioner takes a close look at some specified business
information, comparing it to agreed criteria.
An audit is the most comprehensive assurance engagement:
it is designed to provide reasonable assurance over financial
statements, which are largely historical, and must be performed
in accordance with the 36 International Standards on Auditing
(New Zealand).
A review involves just one standard – while the subject
matter of a review is also historical financial statements, the
level of assurance provided is only limited.
Engagements other than audits and reviews are performed
under ISAE (NZ) 3000, Assurance Engagements Other than
Audits or Reviews of Historical Financial Information, and
can provide either reasonable or limited assurance.
In a “reasonable” assurance engagement, the practitioner
gathers sufficient appropriate evidence to conclude that the
subject matter conforms in all material respects with identified
suitable criteria, and gives a conclusion in a positive form (eg
“the financial statements have been prepared in accordance
with applicable legislation and accounting standards”). In
a “limited” assurance engagement, the practitioner gathers
sufficient appropriate evidence to conclude that the subject
matter is plausible in the circumstances, and provides a
conclusion in a negative form (eg “nothing has come to our
attention that causes us to believe that the financial statements
are not prepared in accordance with applicable legislation
and accounting standards”).
The level of assurance required is determined by the level
of risk that is acceptable under the specific circumstances. The
term “risk” means the possibility that the assurance practitioner
issues an inappropriate conclusion (eg an unmodified conclusion
when the subject matter is materially misstated).
An example of this type of targeted assurance engagement
might be an engagement on sustainability in which an entity
is seeking assurance based on a sustainability performance
report prepared by management.
CHANGES TO ASSURANCE STANDARD
As part of its commitment to meet the unique needs of SMEs,
the New Zealand Auditing and Assurance Standards Board
(NZAuASB) is in the process of revising ISAE (NZ) 3000.
The next phase will be the analysis of submissions received
on the proposals. The revised standard incorporates enhanced
requirements and guidance, and is expected to come into effect
for engagements commencing on or after 1 January 2015. In
particular it explains the differences between reasonable and
limited assurance engagements, and is redrafted to reflect the
clarity conventions used by the International Auditing and
Assurance Standards Board (IAASB).
This revised assurance engagement standard will help
practitioners to fulfil the emerging demand for alternative
assurance engagements, and contribute to increasing the
quality of such engagements over the long term.
The NZAuASB is also considering a project to develop
a new assurance standard which would cater for SMEs that
are not required to have an audit or a review.
Existing assurance standards are not restrictive and they
provide support for firms to experiment. Over time, and with
experience, principles of best practice can be identified and
drawn together to form more specific standards and guidance.
BY ZOWIE MURRAY CA AND AMY HEAD
THE POTENTIAL OF ASSURANCE
A broad range of assurance services is
now on offer.

2. 42 MAY 2014
BUSINESS
FOCUS ON ALTERNATIVES
If an audit is not required by law or regulation, entities are
encouraged to look at all of the different assurance options
and select the one that is most appropriate for them. For
many smaller entities, an audit may not be the most useful
form of assurance.
Entities that fall below the statutory audit thresholds may
still require a financial statement audit if they are looking to
grow. They may wish to maintain a higher level of scrutiny
in order to avoid any nasty surprises when they are required
to have an audit by statute. Few other SMEs are likely to see
value in voluntarily having an audit – users are more likely
to want the most cost-effective assurance engagement for
their needs.
Targeted assurance engagements are not only suited
to smaller organisations. Larger entities are increasingly
looking for additional assurance, over and above statutory
requirements; for example, on the narrative reporting in the
"front-half" of the annual report.
The fact that some organisations are already seeking more
wide-ranging assurance indicates that there is a market need
for more assurance than is required by law. Beyond statutory
audit, there are opportunities for innovation. It is all about
being flexible and tailoring services to the areas where clients
perceive risk.
ADVANTAGES OF ASSURANCE
Moving from a one-size-fits-all audit to a bespoke assurance
service has its advantages. When auditors are only validating
and reporting on what has been agreed, clients have more
control and a greater awareness and appreciation of what they
are paying for. They see an end report that is cost-effective
and relevant.
The practitioner and client will typically get together to
discuss areas that each of them feels may need assurance work
before agreeing on the specific terms of the engagement. A
contractual arrangement can lay out the rights and obligations
of the parties involved.
The prospect of lost revenue in a shift from audit to
assurance services should not put practitioners off. An
assurance engagement allows for a full costing, whereas an
audit presents the possibility of making a loss. Staff might even
find assurance work more enjoyable, as it is more focused.
UNIQUE SKILLS
Auditors have the ability to combine their training as chartered
accountants with heightened professional scepticism and
judgement. The value of an auditor is not simply their financial
reporting expertise – it is their questioning mind and their
courage to challenge the decisions of others. This mindset
can be transferred to other assurance engagements, such as
compliance engagements, and other assurance-type services,
such as agreed-upon procedures. Auditors can make use of
their unique skill-set in developing services that will better
meet stakeholders’ future needs.
THE FUTURE
The statutory audit is unlikely to disappear any time soon.
Independent external audit is fundamental to the effective
operation of the global capital markets; it contributes to
investor protection. Increasingly, however, other assurance
engagements should account for a higher proportion of
the market, because they give greater scope for services to
evolve. That evolution could lead to assurance coverage
over the entire annual report, and even extend to areas not
traditionally covered by financial reporting.
Assurance is more than just audit, and practitioners should
reach beyond the numbers and statutory requirements. The
role of assurance of all kinds is to inspire trust and confidence
in the reporting of business information.
Zowie Murray CA is a Technical Advisor and Amy Head is
a Publishing Editor, both are in NZICA’s Technical Services
Team.
1 The Financial Reporting Act 2013 and the Financial
Reporting (Amendments to Other Enactments Act) 2013 both
came into force on 1 April 2014, except the provisions that
amend the Charities Act, which will come into force on 1
April 2015.
FEE DISCUSSION PAPER
The Federation of European Accountants (FEE) is also
fostering the debate by publishing a discussion paper:
The Future of Audit and Assurance. The paper lays out
initial observations which could result in longer-term
developments in audit, assurance and other services. A
series of questions is posed to stakeholders and interested
parties. Submissions to FEE are due by 30 June 2014.
See online at fee.be

3. Copyright of Chartered Accountants Journal is the property of Institute of Chartered
Accountants of New Zealand and its content may not be copied or emailed to multiple sites or
posted to a listserv without the copyright holder's express written permission. However, users
may print, download, or email articles for individual use.