CHAPTER 1

CONCEPT OF AND NEED FOR ASSURANCE

201056 - Concept of and need for assurance 1

 Learning outcomes
Students will be able to explain the concept of assurance, why
assurance is required and the reasons for assurance
engagements being carried out by appropriately qualified
professionals.

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 Topic list
1. What is assurance?
2. Why is assurance important?
3. Why can assurance never be absolute?
4. The statutory audit.

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 1.1 CONCEPT AND ROLE OF ASSURANCE

The Relationships Among Auditing, Attestation, and

Assurance Engagements

Assurance Services
Any Information
Attestation Services
Primarily Financial Information

Auditing
Financial Statements

201056 - Concept of and need for assurance

1. What is assurance?
1.1 Definition
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.

Assurance refers to an assurance firm’s satisfaction as to the reliability

of an assertion being made by one party for the use of another party.

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1. What is assurance? (cont.)
The responsible party will determine the suitable criteria.

The practitioner will provide the opinion on whether the subject

matter complies with the criteria after the evidence has been gathered
and evaluated accordingly.

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 5 key elements of Assurance engagement
• Practitioners
• Assurance reports are provided • Intended users
in a written form and contain THREE PARTY • Responsible party
certain specified information. INVOLVEMENT • Data (financial
• Key information is clear and statements)
unequivocal. • Systems or
processes
WRITTEN SUBJECT (internal control
REPORT IN MATTER systems or
APPROPRIATE ASSURANCE computer
FORM ENGAGEMENT systems)
• Behaviour (Social,
environmental
• To substantiate the performance)
practitioners’ SUFFICIENT
SUITABLE • Accounting standards
opinion is suitable. APPROPRIATE
CRITERIA • UK Corporate
• Evidence must EVIDENCE
Governance Code
meet criteria. (the Combined Code)
201056 - Concept of and need for assurance • Code of Practice 7
Worked example: Assurance engagement
Image you are buying a house. There are certain issues
you would want assurance about, particularly whether
the house is structurally sound. In this situation, you
would be unlikely just to trust the word of the person
who was selling the house but would seek the
additional assurance of a qualified professional, such as
a surveyor.

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 5 key elements of Assurance engagement
• Practitioners: Surveyor
• Intended users: You
THREE PARTY • Responsible party: House owner
• Issue a report to draw a conclusion. INVOLVEMENT
• Outline surveyors’ opinions
whether the house is sound or not
The house in
question (the
WRITTEN SUBJECT surveyor will test
REPORT IN MATTER whether the house is
APPROPRIATE ASSURANCE sound and then draw
FORM ENGAGEMENT a conclusion).

• Building regulations
• Damp patches. SUFFICIENT • Planning rules
SUITABLE
• Inspect key APPROPRIATE • Best practice in the
EVIDENCE CRITERIA
elements of the building industry
house.
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Interactive example 1: Assurance engagement
Image you are an accountant who has been approached
by Jamal, who wants to invest in Company X. He has
asked you for assurance whether the most recent
financial statements of Company X are a reliable basis
for him investment decision.
Requirement
Identify the key elements of an assurance engagement
in this scenario, if you accepted the engagement.
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 5 key elements of Assurance engagement
• Practitioners: You – an
accountant
• It must be in a written report. THREE PARTY • Intended users: Jamal
• Contain financial statements INVOLVEMENT • Responsible party: Company
• Your opinions on those financial X’s directors as they produce
statements. the financial statements.

WRITTEN SUBJECT
REPORT IN MATTER • The most recent
APPROPRIATE ASSURANCE financial
FORM ENGAGEMENT statements of
Company X

• Transactions SUFFICIENT
SUITABLE
• Contracts APPROPRIATE
EVIDENCE CRITERIA • Accounting standards
• Books and
documents
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 Elements of an assurance engagement
(CREST)
1. Criteria: Suitable criteria; responsible party

2. Report: A written assurance report in the form

appropriate to a reasonable assurance
engagement or a limited assurance
engagement.

3. Evidence: Sufficient appropriate evidence;

4. Subject matter: An appropriate subject matter; responsible party

5. Three party relationship: involving a

practitioner , a responsible party, and intended
users;
201056 - Concept of and need for assurance
 1.2 Levels of assurance
The International Federation of Accountants
A global organization for
(IFAC) accountancy profession,
Issued which works with its
member organisations to
protect the public interest
The International Framework for Assurance by encouraging high quality
Engagements practices around the world.

Identified The reason there are two types of assurance

engagement is that the level of assurance
depends on the evidence obtained by
practitioners.

Limited assurance Reasonable assurance

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 1.2 Levels of assurance
Limited assurance Reasonable assurance
• A meaningful level of • A high level of assurance, that
assurance, that is more than is less than absolute
inconsequential but is less assurance, that engagement
than reasonable assurance, risk has been reduced to an
that engagement risk has been acceptably low level,
reduced to an acceptable level,
The
The
• which then allows to a • which then allows to a highest
lowest
conclusion to be expressed conclusion to be expressed level of
level of
negatively positively. assurance
assurance

High Acceptable Low Zero

Engagement risk The key differences between the two types of assurance engagement are:
The evidence obtained
The type of opinion given
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 1.2 Levels of assurance
Summary of types of engagement
Type of engagement Evidence sought Conclusion given
Reasonable assurance Sufficient and appropriate Positive wording
“In my opinion, the statement by
the Chairman regarding X is
reasonable”.
Limited assurance Sufficient and appropriate Negative wording
(lower level) “In the course of my seeking
evidence about the statement by
the Chairman, nothing has come
to my attention indicating that the
statement is not reasonable”.
(also means I found no evidence yet,
that the statement is not reasonable)
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 Level of assurance

The key difference between the two types are:

Type of assurance The The type of

engagement evidence opinion given

Reasonable Full Positive

assurance
Limited assurance Limited Negative

201056 - Concept of and need for assurance

 Quiz 1
1. The director of Bolt plc have asked Rutherford LLP to audit the
financial statement of the year ended 31 March 202X.

Requirement:

From the scenario identify the following:

a) The practitioner
b) The subject matter
c) The responsible party

201056 - Concept of and need for assurance

 Quiz 1
2. For each the following assurance engagements, select what level of
assurance you would expect to be given
Assessment of effectiveness of internal controls
A. Reasonable
B. Limited
Statutory audit
C. Absolute
D. Reasonable
Review of cash flow forecast
E. Reasonable
F. Limited
201056 - Concept of and need for assurance
 2. Why is assurance important?
2.1 Users
• In the key assurance service of audit (i.e. the audit of financial
statements), the users are the shareholders of a company, to whom
the financial statement are addressed.

• In other cases (i.e. internal audit reports and fraud investigations and
(thẩm định) due diligence reports), the users might be the board of directors or a
subsection of them.

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 2. Why is assurance important?
2.2 Benefits of assurance
• The key benefit of assurance report is the independent, professional
verification being given to the users.

• It may give additional confidence to other parties in a way that

benefits the business.

• The existence of an independent check might help prevent errors or

fraud being made and reduce the risk of management bias.
An assurance service may act as a deterrent.

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 2. Why is assurance important? (cont.)

2.2 Benefits of assurance (cont.)

• Where problems exist within information, the existence of an
assurance report draws attention to the deficiencies in that
information.
It helps to ensure that high quality, reliable information exists,
leading to effective markets that investors have faith in and trust.

• Corporate responsibility or sustainability reports provide assurance

for stakeholders that this published information is reliable and
accurate.

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 Interactive question 2: Benefits of assurance

Which three of the following are benefits of assurance work?

An independent, professional opinion

Additional confidence given to other related parties

Testing as a result of sampling is cheaper for the responsible party Ko làm giảm chi
phí của
Respinsible
Parties

Judgements on estimates can be conclusive Ko liên quan đến câu hỏi

Assurance may act as a deterrent to error or fraud

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 3. Why can assurance never be absolute?

Assurance can never be absolute.

Assurance providers will never give a certificate of

absolute correctness due to the limitations set out
below:

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 3. Why can assurance never be absolute? (cont.)

3.1 Limitations of assurance

• External audits give reasonable assurance that the financial
statements are free from material misstatement. It means they are true
and fair within a reasonable margin of error.
Xét đoán chuyên môn

• Auditing is not objective and based on professional judgment of

the auditors (risk assessment, what and how much to test)
• Not all items in the FS are tested (sampling risk)
• Limitations in accounting and control systems (collusion, controls
overrides, human error…)

201056 - Concept of and need for assurance

 3. Why can assurance never be absolute? (cont.)

3.1 Limitations of assurance (cont)

• Audit evidence is sometimes persuasive that what is possible but
not represent the certainty! Not conclusive!
• Some items in subject matter may be estimates and
uncertainty, impossible to conclude absolutely estimates are
correct.
• Assurance providers rely on responsible party to provide the
information/data, which in some cases may be impossible to verify.
• Audit report is issued along time after the balance sheet date. Current
FS and Historical FS are different.

201056 - Concept of and need for assurance

 3. Why can assurance never be absolute? (cont.)
3.2 The expectations gap
• The expectations gap is the gap between what the user of
the information believes the assurance does and what he
actually does. Họ tin kiểm toán có thể làm đc nhưng kiểm toán ko thể làm đc điều đó

• Three common expectation gap:

The auditor’s report certifies the financial statement as
correct.Nghĩ rằng BCTC chính xác

The auditor’s principal duty is to detect fraud. Nghĩ rằng phát hiện ra gian lận

The auditor checks all transactions. Nghĩ rằng check all mọi nghiệp vụ

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 3. Why can assurance never be absolute? (cont.)
3.2 The expectations gap (cont.)
• This is often because users are not aware of or do not
understand the nature of the limitations on assurance provision
and believe that the assurance provision is a guarantee of
correctness.

• The distinction between reasonable and limited assurance may

also be misunderstood by users. Người dùng thường hiểu lầm

Assurance providers need to close this gap as far as possible in

order to maintain the value of the assurance provided for the
user.
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 4. The statutory audit
4.1. The statutory audit
• An audit is historically the most important type of assurance
service in UK. This is because it is a legal (statutory)
requirement that all companies over a certain size have an
audit.
The statutory external audit is one of the most common
forms of assurance engagements.

• A statutory audit provides reasonable assurance. No statutory

audit can give absolute assurance.
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 4. The statutory audit (cont.)
4.1. The statutory audit (cont.)
• The objective of an audit of financial statements is to enable
the auditor to express an opinion whether the financial
statements are in accordance with an applicable financial
reporting framework.

• A review of financial information gives limited assurance,

which is a lower level of assurance than a statutory audit. Its
conclusion would be worded negatively. Negative

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 4. The statutory audit (cont.)
4.1 The statutory audit
• The key outcome of the statutory audit is the audit opinion. In the UK,
the auditor will normally express his audit opinion by the reference to
the “true and fair view”. Although “true” and “fair” are not defined in
law or audit guidance, their definition are generally accepted.

• True: Information is factual and conforms with reality, not false. In

Trung thực

addition, the information conforms with required standards and law.

The accounts have been correctly extracted from the books and records.
Hợp lý • Fair: Information is free from discrimination and bias in compliance with
expected standards and rules. The accounts should reflects the
commercial substance of the company’s underlying transactions.
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 5 key elements of Assurance engagement in an Audit
• Practitioner: the audit firm
• Intended users: shareholders
THREE PARTY • Responsible party: the board
INVOLVEMENT of directors
• An assurance report is a written
report issued in a prescribed form

WRITTEN SUBJECT • The financial

REPORT IN MATTER statements
APPROPRIATE ASSURANCE
FORM ENGAGEMENT

• Transactions
• Invoices SUFFICIENT • Accounting standards
SUITABLE
• Contracts APPROPRIATE • Law
EVIDENCE CRITERIA
• Books and
documents
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 4. The statutory audit (cont.)
4.2 Audit exemption in the UK
• Small companies are not required to have an audit in the UK (except in
some particular situations).
• In pursuant to the Companies Act 2006, a small must meet two of three
of the following criteria, for both this financial year and the last financial
year
Periods beginning on or after
1 January 2016
Turnover <=: bé hơn hoặc bằng
< £ 10.2 million
Total assets bé hơn hoặc bằng
< £ 5.1 million
bé hơn hoặc bằng
Number of employees < 50

• All companies above these thresholds must have an audit.

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 4. The statutory audit (cont.)
4.3 Legal and professional requirements
Companies Act 2006 yêu cầu KTV là thành viên của RSB
• The Companies Act 2006 requires that auditors are members of
a Recognised Supervisory Body (RSB) and are eligible for
appointment as a company auditor under the rules of that
body. (đc bổ nhiệm đúng quy định trở thành KTV độc lập dưới

• RSBs are required to have rules to ensure that those eligible for
appointment as a company auditor are either:
Individuals holding an appropriate qualification; or Phải
hợp
có chuyên môn phù

Firms controlled by qualified persons

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 4. The statutory audit (cont.)
4.3 Legal and professional requirements (cont.)
• The Companies
Không được
Act 2006 also sets out factors which make a
person ineligible for being a company auditor, if he or she is:
An officer or employer of the company Khi đang làm Officer or Employer đang làm tại cty
A partner or employee of such a person Partner hoặc nhân viên tại cty đó
Any partner in a partnership in which such a person is a
partner
Ineligible by the above for appointment as auditor of any
directly connected companies

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 4. The statutory audit (cont.)

4.4 International Standards on Auditing (ISAs)

• Statutory audits conducted in the UK must be conducted in
accordance with ISAs (UK) as issued by the Financial
Reporting Council (FRC).

4.5 The value of the statutory audit

• Audits can be invaluable to an entity because they may
enhance the credibility of the financial statements, among
other key benefits discussed above.
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 4. The statutory audit (cont.)
4.6 Stages of an audit
Chapter 2 and the professional
Obtaining the engagement and ethical requirement in
chapter 14, 15 and 16.

Planning Chapter 3

Performing procedures Chapter 6, 7 and 8

Review and completion

Reporting Chapter 4
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 4. The statutory audit (cont.)
4.7 Overall objectives of the auditor
• ISA 200, Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with International Standards
on Auditing states the overall objectives of the auditor.
Thái độ hoài nghi nghề nghiệp
• Professional scepticism is an attitude that includes a questioning
mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of
audit evidence. Mình nên làm gì? Có nên làm như thế ko? Có tốt ko?
Xét đoán chuyên môn
• Professional judgement is the application of relevant training,
knowledge and experience in making informed decisions about
the courses of action that are appropriate in the circumstances of
the audit engagement.
201056 - Concept of and need for assurance 37
 4. The statutory audit (cont.)
4.8 Bookkeeping recap
Transactions

Nominal ledger
(Double-entry system)

TB (Trial Balance)

Financial Statements

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 SUMMARY

201056 - Concept of and need for assurance

 SUMMARY

201056 - Concept of and need for assurance

 End of chapter 1
Homework
• Textbook [1] – Study Manual: read – read &… READ
• Textbook [2] – Question Bank: MCQ Chapter 1

201056 - Concept of and need for assurance 41