What is Assurance?

Introduction to Assurance

• Assurance provides comfort that something is correct.
• Examples: house surveys, car roadworthiness certificates.
  • House: Surveyor checks structure for safety.
  • Car (UK): Annual roadworthiness check after 3 years.

Definition of an Audit

• The independent examination of and expression of opinion on the financial statements of an entity by a duly appointed auditor in pursuit of that appointment.

Importance in Financial Statements

• Shareholders rely on auditors for assurance due to:
  • Lack of skills or time.
  • Inefficiency of individual checks.
  • Geographic constraints.
• Balance needed between thoroughness and cost.

Standards and Audits

• Auditing standards like International Standards on Auditing.
• Reports issued post-audit to share information.

Elements of Assurance Engagement

1. Three-party Relationship
   • Practitioner (auditor): Responsible for determining the nature, timing and extent of procedures. Required to pursue anything that leads the practitioner to question whether the subject matter information should be changed in some material respect.
   • Responsible party (management/directors): Person responsible for the information and assertions
   • Intended users (shareholders): Person(s) for whom the practitioner prepares the assurance report. The responsible party can be one of the intended users.
2. Appropriate Subject Matter
   • Financial statements
   • Non-financial information like environmental reports.
   • Physical characteristics, for example, the capacity of a facility
   • Systems and processes, for example, an entity's internal control or IT system
   • Behaviour, for example, corporate governance, compliance with regulation
3. Suitable Criteria
   • Financial statements must adhere to International Accounting Standards or International Financial Reporting Standards.
4. Sufficient Appropriate Evidence
   • Evidence is crucial to support assurance.
   • Professional Scepticism: Neither believe nor disbelieve without evidence.
5. Written Assurance Report
   • Positive form
   • Negative form

Types of Assurance

• Positive Assurance (Reasonable Assurance Engagement)
  • High-level assurance; states correctness.
  • Present fairly, in all material respects / show a true and fair view
    • True and fair means that financial statements are:
      • Factual;
      • Agree with the underlying records;
      • Clear;
      • Unbiased;
      • Free from material misstatements.
  • Example: "The value of amount of inventory lost is $x"
• Negative Assurance (Limited Assurance Engagement)
  • Lower assurance level; indicates nothing wrong found.
  • Example: "There is no evidence of discrimination in the appointment."

Challenges in Providing Assurance

• Unqualified Conclusion: When assurance is not possible due to:
  • Limitation on scope (e.g., destroyed evidence).
  • Material misstatements (significant errors in financial statements).

Notes:

• When reviewing information regarding future events, it is impossible to give a positive opinion as we cannot predict future events;
• The term 'nothing has come to our attention' is used if there is a negative opinion.