Hand Note of Assurance

Class Synopsis -01

Prepared by: Abdullah-Al-Mamun, ACA
Manager (Audit & Consultancy)
ACNABIN
Chartered Accountants

Concept & Need for Assurance

Assurance

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.

The key elements of an assurance engagement are as follows: • Three people or group of people involved ➢ The practitioner (accountant i.e. auditor) ➢ The intended users (stakeholders) ➢ The responsible party (the person(s) who prepared the subject matter i.e. the management) • A subject matter: As we shall see below, the subject matter of an assurance engagement may vary considerably. However, it is likely to fall into one of three categories: ➢ Data (for example, financial statements or business projections) ➢ Systems or processes (for example, internal control systems or computer systems) ➢ Behavior (for example, social and environmental performance or corporate governance) • Suitable Criteria: The person providing the assurance must have something by which to judge whether the information is reliable and can be trusted. So for example, in an assurance engagement relating to financial statements, the criteria might be accounting standards (e.g. BAS). The practitioner will be able to test whether the financial statements have been put together in accordance with accounting standards and if they have, then the practitioner can conclude that there is a degree of assurance that they are reliable.

• Sufficient appropriate evidence to support the assurance opinion The practitioner must substantiate the opinion that he draws in order that the user can have confidence that it is reliable. The practitioner must obtain evidence as to whether the criteria have been met. • A written report in appropriate form Lastly, it is required that assurance reports are provided to the intended users in a written form and contain certain specified information. This adds to the assurance that the user is being given, as it ensures that key information is being given and that the assurance given is clear and unequivocal (i.e. unambiguous).

Levels of Assurance

To provide assurance, the auditor (practitioner) assesses the evidence collected as a result of procedures conducted and expresses a conclusion. The degree of satisfaction achieved and, therefore, the level of assurance which may be provided is determined by the procedures performed and their results.

There are two types of assurance engagement: • Reasonable Assurance Engagement • Limited Assurance Engagement

The reason that there are two types of assurance engagement is that the level of assurance that can be given depends on the evidence that can be obtained by the practitioner. The key point about evidence is that in all assurance engagements, sufficient, appropriate evidence must be obtained. What determines whether evidence is sufficient and appropriate is the level of assurance that the practitioner is trying to give, so it is tied in with the type of opinion being given. The opinion given in an assurance engagement therefore depends on what type of engagement it is.

Reasonable Assurance Engagement

A high, but not absolute level of assurance is given. In audit engagement, the auditor (practitioner) provides a high, but not absolute, level of assurance that the information subject to audit is free of material misstatement. This is expressed positively in the audit report as reasonable assurance.

Limited Assurance Engagement

In a review engagement, the auditor (practitioner) provides a moderate level of assurance that the information subject to review is free of material misstatement. This is expressed in the form of negative assurance.

The key differences between the two types of assurance are therefore: • The evidence obtained • The type of opinion given

Example

Say, for example, that a practitioner is seeking evidence to conclude whether the report issued by the Chairman of a company in the financial statements is reasonable or not. He could seek evidence, conclude that the statement is reasonable and state in a report something like this: “In my opinion, the statement by the Chairman regarding X is reasonable.”
This is a positive statement of his conclusion that the statement is reasonable. Alternatively, he could state in a report something like this:

“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.”

Audit

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

The key criteria of an assurance engagement can be seen in an audit as follows: • Three party involvement ➢ The shareholders (users) ➢ The board of directors (the responsible party) ➢ The audit firm (the practitioner) • Subject matter ➢ The financial statements • Relevant criteria ➢ Law and accounting standards • Evidence ➢ Sufficient and appropriate audit evidence is required to support an assurance opinion. • Written report in a suitable form ➢ An assurance report is a written report issued in a prescribed form.

True and Fair View

True
Information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records.

Fair
Information is free from discrimination and bias in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions.

Legal and Professional Requirements of Auditors in Bangladesh

Auditors in Bangladesh are subject to both legal and professional requirements. The legal requirements are currently contained in Companies Act 1994. The Companies Act 1994 requires that the auditors must be a member of the Institute of Chartered Accountants of Bangladesh (ICAB). The ICAB is a Recognized Supervisory Body under the Ministry of Commerce of the Government of Bangladesh. Professional qualifications are a prerequisite of membership of ICAB. ICAB has also the responsibility to implement procedures for monitoring it’s licensed to auditors.

The Companies Act 1994 also sets out factors which make a person ineligible for being a company auditor, for example, if he or she is: i. an officer or employee of the company; ii. a person who is a partner or who is in the employment of an officer or employee of the company; iii. a person who is indebted to the company exceeding Taka 1,000; iv. a person who is a director or member of a partner company, or a partner of a firm, which is the managing agent of the company; v. a person who is a director, or the holder of shares exceeding 5% in nominal value of the subscribed capital.

Relevant provisions of Companies Act 1994 regarding Audit Issues

• U/S 210: Appointment and remuneration of auditors • U/S 211: Provisions as to resolutions for appointing or removing auditors • U/S 212: Qualification and disqualification of auditors • U/S 213: Power and duties of auditors • U/S 214: Audit of accounts of branch office of company • U/S 215: Signature of audit report, etc. • U/S 217: Right of auditor to attend general meeting
Benefits of Assurance • The key benefit of assurance is the independent, professional verification being given to the users. • Although an assurance report may only be addressed to one set of people, it may give additional confidence to other parties in a way that benefits the business. For example, audit reports are addressed to shareholders, but the existence of an unqualified audit report might give the bank more confidence to lend money to that business, in other words, it enhances the credibility of the information. • The existence of an independent check might help prevent errors or frauds being made and reduce the risk of management bias. Therefore, it can be seen that an assurance service may act as a deterrent. • Where problems exist within information, the existence of an assurance report draws attention to the deficiencies in that information, so that users know what those deficiencies are. • Assurance helps to ensure that high quality, reliable information exists, leading to effective markets that investors have faith in and trust. It adds to the reputation of organizations and even countries, so that investors are happy to invest in country X because there is a strong culture of assurance provision there.

Why can assurance never be absolute?

Assurance can never be absolute. Assurance providers will never give a certificate of absolute correctness due to limitations of assurance services.

Limitations of Assurance

A key issue for accountants is that there are limitations to assurance services and therefore there is always a risk involved that the wrong conclusion will be given. The limitations of assurance services include: • The fact that testing is used-the auditors do not oversee the process of building the financial statements from start to finish. • The fact that the accounting and internal control systems on which assurance providers may place a degree of reliance also have inherent limitations. • The fact that most audit evidence is persuasive rather than conclusive. • The fact that assurance providers would not test every item of in the subject matter (a sampling approach is used). • The fact that the client’s staff members collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose. • The fact that assurance provision can be subjective and professional judgments have to be made (for example, about what aspects of the subject matter are the most important, how much evidence to obtain etc.). • The fact that assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means. • The fact that some items in the subject matter may be estimates and therefore uncertain. It is impossible to conclude absolutely that judgmental estimates are correct. • The fact that the nature of the assurance report might itself be limiting, as every judgment and conclusion the assurance has drawn cannot be included in it.

The Expectation Gap

The expectation gap means a gap between what the assurance provider understands he is doing and what the user of the information believes he is doing. This is often because users are not aware of the nature of the limitations on assurance provisions, or do not understand them and believe that the assurance provider is offering a service (such as a guarantee of correctness) which is in fact he is not. The distinction between reasonable and limited assurance may also be misunderstood by users.

Assurance providers need to close this gap as far as possible in order to maintain the value of the assurance provided for the user. This is done in a variety of ways, for example, by issuing an engagement letter spelling out the work that will be carried out and the limitations of that work and by regularly reviewing the format and content of reports issued as a result of assurance work.