Introduction to Auditing and Assurance

2. OVERVIEW OF
AUDITING AND
ASSURANCE

3. • OUTLINE
• The meaning of audit
• The meaning of assurance
• The Applicable Financial Framework
• The Concepts of Accountability, Stewardship and Agency
• Levels and Types of Assurance
• Review
AUDITING OVERVIEW

4. • An audit is an official examination of the accounts ( or accounting
systems of an entity ( by an auditor)
• The main objective of an audit is to enable the auditor to convey
an opinion as to whether or not the financial statements of an
entity are prepared according to an applicable financial
framework
THE MEANING OF AUDIT

5. • Legislation within each individual country ( for example, in Ghana. Companies
Act 1963 (Act 179) , replaced by Act 992) , 2019. Insurance Act 2006 (Act 724),
National Pensions Act 2008 (Act 766) and
• Accounting standards ( for example IFRS)
• NB. The auditor seeks to express an opinion as a result of the audit work he
does. ( Will discuss the type of work in subsequent topics)
THE APPLICABLE FINANCIAL FRAMEWORK IS
DECIDED BY:

6. • The shareholders own the company
• The company is managed and controlled by its directors
• THEORETICAL BASIS
• Agency
• Stewardship
• Stakeholder
• Social Contract
• Resource dependency
• Political
• Legitimacy
CONCEPTS OF ACCOUNTABILITY,
STEWARDSHIP AND AGENCY

7. • They have a stewardship role- look after the assets of the
company and manage them on behalf of the shareholders.
• Agency relationship exist between the shareholders and the
directors of the company.
THE DIRECTORS- STEWARDS

8. • The concept applies whenever one person or group of individuals
acts as an agent on behalf of someone else ( the principal)
• The agent has a legal duty to act in the best interests of the principal
and should be accountable to the principal for everything that he
does as agent
AGENCY RELATIONSHIP

9. • An auditor reports to the shareholders on the financial
statements produced by a company’s management
THE AUDITORS REPORT: INDEPENDENCE,
MATERIALITY AND TRUE AND FAIR VIEW
Directors
Financial
statements
Shareholders
Audit report on
financial
statements

10. • Independence
• True and fair view and present fairly
• In all material respects
THE KEY FEATURES OF THE AUDIT REPORT ARE AS
FOLLOWS:

11. • “Assurance” means confidence: In an assurance engagement an
assurance firm is engaged by one party to give an opinion on a
piece of information that has been prepared by a another party.
• The opinion is an expression of assurance about the information
the information that has been reviewed.
• It gives assurance to the party that hired the assurance firm that
the information can be relied on.
THE MEANING OF ASSURANCE

12. • Audit: This may be external audit, internal audit or a combination of
the two
• Review
ASSURANCE CAN BE PROVIDED BY:

13. • The degree of assurance will depend on:
• the amount work performed in carrying out the assurance process and
• the results of that work
LEVELS OF ASSURANCE

14. • Reasonable Assurance- A high ( but not absolute) level of
assurance provided by the auditor in a positive form e.g “in our
opinion the accounts are true and fair” This is the main objective of
statutory audit.
• Limited Assurance: A moderate level of assurance provided by the
auditor in a negative form e.g “ based on our review , nothing
has come to our attention that causes us to believe that the
accompanying FS do not give true and fair view” . This is an
objective of a review engagement
THE RESULTING ASSURANCE FALLS INTO 2
CATEGORIES:

15. • A review is a voluntary investigation. In contrast to a reasonable level of
assurance provided by an audit
• A review into an aspect of financial statements would provide only a
moderate level of assurance that the information under review is free
from material misstatement.
• The resulting opinion is usually (although not always) expressed in the
form of negative assurance
• Negative assurance is an opinion that nothing is obviously wrong: in
otherwise “nothing has come to our attention to suggest that the
information is misstated’
REVIEW

16. • Review does not provide the same amount of assurance as an audit.
An external audit provides positive assurance that, in the opinion of
the auditors, the financial statements do present fairly the financial
position and performance of the company
• The higher level of assurance provided by n audit will enhance the
credibility provided by the assurance process but the audit work is
likely to be:
• A) more time consuming than a review, and so
• B) more costly than a review
REVIEW

17. • An engagement in which a practitioner aims to obtain sufficient
appropriate evidence in order to express a conclusion designed to
enhance the degree of confidence of the intended users other
than the responsible party about the subject matter information
(that is, the outcome of the measurement or evaluation of an
underlying subject matter against criteria).
• Each assurance engagement is classified on two dimensions:
• Either a reasonable assurance engagement or a limited assurance
engagement
• Either an attestation engagement or a direct engagement
• (IAASB Hanbook 2016-17)
ELEMENTS OF ASSURANCE ENGAGEMENT

18. • An assurance engagement in which a party other than the
practitioner measures or evaluates the underlying subject matter
against the criteria.
• A party other that the practitioner also often presents the resulting
subject matter information in a report or statement . { ..}
• In an attestation engagement, the practitioner’s conclusion addresses
whether the subject matter information is free from material
misstatement. { IAASB Handbook 2016-17} An example of an
attestation engagement is statutory audit
ATTESTATION ENGAGEMENT

19. • An assurance engagement in which the practitioner measures or
evaluates the subject matter against the applicable criteria and the
practitioner presents the resulting subject matter information as part
of, or accompanying, the assurance report.
• In a direct engagement, the practitioner ‘s conclusion addresses the
reported outcome of the measurement or evaluation of the
underlying subject matter against the criteria . { IAASB Handbook
2016-17}
• An example of a direct engagement is due diligence
DIRECT ENGAGEMENT

20. • A three party relationship
• Practitioner-Individual providing professional services that will
review the subject matter and provide the assurance . E.g the audit
firm in a statutory audit
• Responsible party- the person(s) responsible for the subject
matter. E.g the Directors are responsible for preparing the financial
statements to be audited
• Intended users- the person (s) or class of persons for whom the
practitioner prepare the assurance report. E.g the shareholders in a
statutory audit
• Subject matter: this is the data such as the financial statements
that have been prepared by the responsible
COMPONENTS OF ASSURANCE
ENGAGEMENT

21. • party for the practitioner to evaluate. E.g cash flow statement to be
reviewed by the practitioner.
• Suitable criteria – this can be thought of as the rules against which the
subject matter is evaluated in order to reach an opinion. In a statutory
audit this would be the applicable reporting framework (e.g IFRS and
Company law)
• Evidence –Information used by the practitioner in arriving at the
conclusion on which their opinion is based. This must be sufficient and
appropriate
COMPONENTS OF ASSURANCE ENGAGEMENT

22. • Assurance report – The report (normally written) containing the
practitioner’s opinion. This is issued to the intended user following
the collection of evidence.
COMPONENT OF ASSURANCE