Mona and Michael’s friend is right, public accountants provide three different types of assurance services. These are audit, review, and compilation services; here is a summary of these engagements: Audit:
Audit engagements provide a high level of assurance that financial statements present fairly in all material respects the financial position and results of operations of the company. Review:
Review engagements provide a moderate level of assurance that financial statements are in accordance with appropriate criteria, in all material respects. (paragraph 8100.05 of the CICA Handbook) Compilation:
A compilation engagement is referred to as a related service and is not an assurance engagement. This is because no assessment is made of the information that is compiled or organized into statements.
The following comparison of different types of assurance engagement will be helpful for Mona and Michael’s to understand Difference between an Audit, a review and a compilation: Basis| Audit| Review| Compilation|
Audit evidence| Require extensive audit evidence.| Require moderate audit evidence.| Require minor audit evidence.| Procedures| Inspection
Assurance level| High| Moderate| Low|
Understanding of and documenting internal control| Required| Not required| Not required| Cost| Higher| Medium| Lower|
Objectivity| Required| Required| Not required|
Report| Auditor’s report| Review engagement report| Notice to reader| Knowledge of the business| Required| Required| Mostly not required.|
Bank requested an audit:
Bank will need assurance on the preliminary conditions for the loan. They will need more than just information available in review engagement report (last year), they need reliable information of financial position, and results of operation are in accordance with GAAP applicable for Private Enterprises. This is the assurance provided by the audit engagement which always requires three-party accountability. The audit assurance engagement increases the reliability and decreases the information risk. This type of assurance engagement is generally required for entities with significant financing companies to make significant decisions such as whether to invest in the business, or to grant or continue loans.
Factors affecting Inherent Risk
1. New Audit Client: MPI is a new client for Sharp and Ming and as indicated there was no audit assurance engagement in 2011 for MPI. This is a significant factor that will affect Inherent Risk for the auditors at Financial Statement level.
2. Inventory-products are about to expire- Account level-inventory
There are numerous factors that contribute to the risk of misstatements in the assertions for stocks, such as: * Grocery products and some pharmaceutical products have short term expiry dates. * The volume of purchase and sale transactions that affects these accounts is generally high, increasing the opportunities for misstatements to occur, and * Accounting for scrap and wastage.
3. Increased competition-Financial Statement Level
Due to newly established superstores in the same neighborhood the business of MPI may be subject to a major upheaval.
Preliminary materiality for MPI is CAD 27,850 calculated as follows:
Preliminary materiality | CAD |
Net income before taxes and bonus| 357,000 |
Bonus| 200,000 |
Net income before taxes and bonus| 557,000 |
5% of Net income before taxes and bonus| 27,850 |
Users of financial statements: For MPI as a family enterprise the users of financial statements include employees, lenders, suppliers and other trade creditors, customers, governments and their agencies. They use financial statements in order to satisfy some of their different needs...