Assurance and External Audit Lecture Notes

Key Topics Covered

• Definition of Assurance
• External Audit
• Five Elements of an Assurance Engagement
• Levels of Assurance
• Role of the External Auditor
• Audit Process
• Expectation Gap
• Ethical Considerations
• Corporate Governance
• Internal Auditors
• Audit Acceptance and Planning
• Audit Risk
• Audit Procedures and Evidence Gathering
• Quality Control and Documentation
• Special Considerations for Smaller Entities and NFPs
• Audit Report

Definition of Assurance

• Practitioner evaluates subject matter (responsibility of another party) against criteria to express a conclusion.
• Key terms: practitioner, subject matter, responsible party, conclusion, user.
• Used in external audits, building surveys, etc.

External Audit

• Provides assurance on financial statements, enhancing information credibility.
• Five Elements:
  1. Three parties: practitioner (auditor), responsible party (management), user (shareholders).
  2. Subject matter: financial statements.
  3. Suitable criteria: financial reporting framework.
  4. Sufficient appropriate evidence.
  5. Written assurance report (audit report).

Levels of Assurance

• Reasonable Assurance: High level, issuing a positive report.
• Limited Assurance: Moderate level, issuing a negative report.

External Auditor's Role

• Independent review of financial statements.
• True and fair view: not every transaction is reviewed, sample basis.
• Expectation Gap: Misunderstandings about auditor's responsibilities.

Audit Process

1. Acceptance: Decide whether to accept a client.
2. Engagement: Formal agreement with the client.
3. Planning: Identify risks and plan audit.
4. Assess Controls: Review control systems.
5. Substantive Testing: Test transactions and balances.
6. Completion and Review: Review evidence and conclusions.
7. Audit Report: Form and communicate opinion.

Ethical Considerations

• Fundamental Principles: Objectivity, Professional Behavior, Competence, Integrity, Confidentiality.
• Identify and manage threats: self-interest, self-review, familiarity, advocacy, intimidation.

Corporate Governance

• Guidelines for listed companies to protect shareholder interests.
• Five Main Principles: Leadership, effectiveness, accountability, remuneration, shareholder relationships.
• Role of audit committee and its responsibilities.

Internal Auditors

• Advise management, review control activities, identify risks.
• Differences from external auditors: independence, scope, objective.
• Relying on Internal Auditors' Work: Assess scope, competence, report quality, independence.

Audit Acceptance and Planning

• Preconditions: Acceptable financial reporting framework, management responsibilities.
• Other considerations: Professional clearance, ethical threats, audit risk.

Audit Risk

• Model: AR = IR x CR x DR (Inherent, Control, Detection Risks)
• Objective: Keep audit risk low.

Audit Procedures and Evidence Gathering

• Control Procedures: Test if controls work.
• Substantive Procedures: Identify material misstatements.
• Evidence Quality: Sufficient and appropriate.

Quality Control and Documentation

• ISO 220: Standards for audit firm quality control.
• Audit File: Planning, performance, completion documents.

Special Considerations for Smaller Entities and NFPs

• Smaller Entities:
  • May not require statutory audit.
  • Direct control by owners, simpler systems.
• Not-for-Profit Organizations:
  • Different structure, audit risks.
  • Complex regulations, income dependency.

Audit Report

• ISA 700: Objectives and format.
• Opinion Types: Unmodified, modified (qualified, adverse, disclaimer).
• Communicating with Governance: Engagement letter, management letter, audit report.