Download to read offline
More Related Content
Bm509 b519 t1_l_v002
- 1. School of Business,Assurance and Risk Management, Topic 1 – Lecture Part 1: Introduction – what is assurance? Financial Assurance and Risk Management
- 2. School of Business,Assurance and Risk Management, Topic 1 – Lecture Learning Objectives and Outcomes Introduction to the course and examination/ assessment Understand the concept of assurance Define the three party relationship for an assurance engagement Understand the different levels of assurance Identify the ‘expectations gap’
- 3. School of Business,Assurance and Risk Management, Topic 1 – Lecture Financial Assurance and Risk Management • Look at financial assurance, focusing on external audit • Look at the need for assurance, the processes, and the testing that is performed in various scenarios • Consider the ethical issues external auditors must be aware of • Also consider risk management within a business • Strategies for this, with a focus on internal audit as a mechanism for internal control Introduction
- 4. School of Business,Assurance and Risk Management, Topic 1 – Lecture Assessment •1,500 word written assignment •Focus on risk management and internal control •Will use real business data Examination •1 ½ hour exam •Comprises 50 multiple choice questions •Mix of single/ multiple response (all worth the same number of marks) Examination and Assessment
- 5. School of Business,Assurance and Risk Management, Topic 1 – Lecture Definition of an assurance engagement: ‘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’ (ICAEW) For example: house purchase, or bank lending. Three party relationship. Concept of Assurance
- 6. School of Business,Assurance and Risk Management, Topic 1 – Lecture • Three party relationship: ◦ Practitioner – accountant ◦ Intended users – shareholders, directors ◦ Responsible party – prepared the subject matter • Practitioner reports on the subject matter to the intended users ◦ e.g. external audit – external auditors report to the shareholders regarding the financial statements • Various types of assurance engagement ◦ e.g. report on business plans, report on internal controls, report on supplementary information (anything where third party opinion required) Concept of Assurance
- 7. School of Business,Assurance and Risk Management, Topic 1 – Lecture Two different levels: 1.Reasonable assurance. High level, not absolute, allows a positive conclusion (see below). External audit. 2.Limited assurance. Meaningful level, but lower than reasonable, allows a negative conclusion (see below). Other assurance. •Conclusions given: ◦ Positive – ‘In our opinion’ ◦ Negative – ‘Nothing has come to our attention’ •Differences – amount of evidence obtained, work performed, reliability of evidence. •See table p. 5 ICAEW manual. Levels of Assurance
- 8. School of Business,Assurance and Risk Management, Topic 1 – Lecture Assurance can never be absolute. Reasons: •Not all transactions are tested •Evidence persuasive rather than conclusive •Professional judgement •Estimates •Collusion/ trust in client staff •Inherent limitations of internal controls and accounting systems Absolute Assurance
- 9. School of Business,Assurance and Risk Management, Topic 1 – Lecture Expectations gap Difference between what auditors do and what people think we do (in relation to external audit). Examples: •We don’t test everything •Our job isn’t to detect fraud •We won’t necessarily find all errors •We don’t give absolute assurance External auditors: •Give reasonable assurance regarding the truth and fairness of the financial statements •Given in the form of a standard report •External audit procedures governed by International Standards on Auditing (ISAs)
- 10. School of Business,Assurance and Risk Management, Topic 1 – Lecture Conclusion • Assurance is a three party process • Different levels of assurance for different work • Expectations gap must be minimised
- 11. School of Business,Assurance and Risk Management, Topic 1 – Lecture References • ICAEW assurance study manual chapter 1 • Assurance questions from chapter 1
- 12. School of Business,Assurance and Risk Management, Topic 1 – Lecture End of presentation
Editor's Notes
- #4 The course will take a look at the overall process of assurance, running from the need for assurance and acceptance procedures, right through to testing. The focus will be on external audit but some other assurance engagements will also be considered. There will be a small element of audit reporting but this will not be looked at in detail. The course will consider ethics, as these are key to external auditors. The second part of the course is risk management. Within looking at internal controls of a business, the internal audit function will be considered, and their role as an integral part of the internal controls of a business. Methods for documenting risk management will be looked at, and this will link back to the internal controls cycles of a business.
- #5 The course will be assessed in two ways. Firstly, a written assignment will be submitted, where students will consider the internal controls of a real business. The assessment will primarily cover the risk management part of the syllabus. The exam is a one and a half hour multiple choice exam. There will be 50 questions. Some of these will be single response, and some multiple response (e.g which TWO of etc). The answers are all weighted equally, so you either score two marks or zero. There will be question practice in class, but the best practice is to use the ICAEW question bank which is delivered along with the study manual. Now we’ll move on to the first area of assurance, which is the concept of and need for assurance..
- #6 Definition of assurance shows that the premise is to have an independent opinion on something. E.g for a house purchase, you would have a survey performed to gain assurance over the valuation of the house – you wouldn’t just trust the vendor. For a business, if they wanted a bank loan for an expansion, the bank would want some sort of assurance over the business plan for the expansion. Therefore an accountant can give assurance to the bank regarding the business plan. There is a three party relationship which will be explained next
- #7 The practitioner is the accountant, so the one who will be giving the assurance The intended users may be the shareholders, e.g external audit, or the directors, e.g controls report, or any other user e.g a bank for a business plan Responsible party – will usually be directors/ staff, they have done the work that assurance is being performed on. The practitioner is reporting on the subject matter to the intended users as is demonstrated in relation to external audit. External audit is the main focus of the course, but not the only type of assurance engagement that is carried out. There are many others, e.g on the slide
- #8 There are two different levels of assurance which can be given – reasonable and limited. Reasonable assurance is a high level, but never absolute. When giving reasonable assurance we can express a positive conclusion, which is worded ‘in our opinion’. This is the opinion which must be given for a external audit engagement. It is not usually given for other assurance due to the amount of testing and data involved (e.g if giving assurance on a business plan, as this is in the future it will be less reliable than reporting on financial statements for an external audit, as these are historic documents). Limited assurance is still a meaningful level, but a lower level than reasonable assurance. A negative opinion would be given, worded as ‘nothing has come to our attention…’ (e.g ‘nothing has come to our attention to suggest that the business plan proposed by Company X is not reasonably stated’). This limited assurance is usually given for other assurance engagements. There is a neat table summarising this on p.5 of the ICAEW study manual.
- #9 The assurance given cannot be absolute, or 100%. This is due to many reasons – we don’t test all transactions as this would not be feasible, and instead test samples. This means we use professional judgement, and that the evidence we gather is persuasive (so everything appears reasonable), rather than conclusive (everything is definitely reasonable). We have to use estimates for some figures such as provisions for bad debts, and therefore have to trust the client staff. If they are colluding and working together to defraud the practitioner/ auditor, this will be very difficult to spot. All systems also have inherent limitations, and if there has been an error when setting these up it could cause problems that would not be detected by a practitioner.
- #10 Linked into levels of assurance is the issue of the expectations gap. This is the difference between what the ‘public’, and staff at clients think auditors are there to do, and what they actually do. Auditors do not test all transactions, therefore they won’t necessarily find all accounting errors. We will come back to this idea next time. Auditors are not concerned with detecting fraud, it is not part of their duty. If they discover fraud as part of their audit proceudres they will disclose this to the client, but that is it. As previously mentioned, we don’t give absolute assurance, so we are not saying the financial statements are correct. The external auditors are responsible for giving an opinion on the financial statements. They conclude with reasonable assurance if the financial statements give a true and fair view of the financial statements of the company being reported on. This means are they factual and free from bias in the simplest sense. This concept will be referred to frequently in future sessions. The audit procedures are governed by ISAs, these may be referred to during the course but you do not need to know the numbers/ names of these. They are international, with some additional disclosures for UK/ Ireland only (and for other jurisdictions as appropriate)
- #11 The process of assurance is a three party process, and many different types of assurance engagement exist. There are different levels of assurance for different engagements, and assurance can never be absolute. The expectations gap exists in relation to audit assignments, and must be minimised in order to prevent conflict. The next session will look at the legal requirements to become an auditor, and start to consider the planning process.
- #12 The ICAEW study manual contains more detail on each area covered in lectures. Today’s session has covered chapter 1 in the study manual. There are useful worked examples and questions in the study manual so please review. Next time we will move on to look at how we obtain assurance engagements, and the planning of these assignments. The ICAEW assurance question bank contains multiple choice questions for each topic, so each chapter should be attempted. After this session, you can attempt the questions in chapter 1.