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An Auditors Engagement

IAASB Standards
- Course 2 -

03.02.2015

IAASBs Engagement Standards


Some engagement standards are based on
International Framework for Assurance Engagements
(assurance engagements), and others result from the
Related Services Framework (related services
engagements).
Three sets of standards (ISAs, ISREs and ISAEs) share
the assurance engagement framework and one
standard set (ISRS) is based on the related services
framework.
ISAs, ISREs, ISAEs and ISRSs are collectively referred to
as the IAASBs Engagement Standards.

Illustration 4.1

Reasonable and Limited Assurance Engagements


Reasonable assurance engagement and limited assurance
engagement are the two types of assurance engagement.
The objective of a reasonable assurance engagement is a
reduction in assurance engagement risk to an acceptably low
level as the basis for a positive form of expression of the
practitioners conclusion - presents fairly in all material
respects
The objective of a limited assurance engagement is a reduction
in assurance engagement risk to a level that is acceptable in the
circumstances, as the basis for a negative form of expression of
the practitioners conclusion. E.g., nothing has come to our
attention that causes us to believe that financial statements
do not conform, in all material respects, with IFRS.

Besides the International Framework for Assurance Engagements, ISAs, ISREs


and ISAEs, practitioners who perform assurance engagements are governed
by:

The IFAC Code of Ethics for Professional


Accountants
International Standards on Quality Control
(ISQCs)

Assurance Engagements for Audits and Reviews for


Historical Financial Information (ISAs / ISREs)
Historical Financial Standards are divided into those
governed by International Standards on Auditing (ISAs)
and International Standards on Review Engagements
(ISREs)
Audit standards are described in ISA 200-799. Special
Purpose Engagement and other examinations of historical
financial information is ISA 800 899 (except reporting
which is ISA 701).
Review standards are ISREs 2000 2699

Assurance Engagements on Subject Matters Other than


Historical Financial Information (ISAEs)

The ISAE standards are divided into two parts:


(1) ISAEs 3000 3399 which are topics that
apply to all assurance engagements
(2) ISAEs 3400 3699 which are subject
specific standards, for example standards
relating to examination of prospective financial
information

Not all engagements performed by practitioners are assurance


engagements

Frequently performed engagements that are not


covered by the Assurance Framework are:
Engagements covered by International
Standards for Related Services (ISRS), such as
agreed-upon procedures and compilations.
The preparation of tax returns where no
conclusion conveying assurance is expressed.
Consulting (or advisory) engagements, such
as management and tax consulting.

Related Services Framework (ISRSs)

Standards under this framework, International


Standards on Related Services (ISRSs), are
applied currently to two audit services:
Agreed-upon procedures (ISRS 4400) Agreedupon procedures are assurance based on audit
procedures in a very limited agreed upon area
with a proscribed set of users.
Compilations (ISRS 4410 ).
Compilations offer no assurance.

Assurance Engagements Defined


Assurance engagement means an
engagement in which a practitioner
(professional auditor), expresses a
conclusion (in report form) that is
designed to enhance the degree of
confidence users have about the
evaluation of a subject matter against
identified criteria.

Five elements for all assurance


engagements
(1) a three party relationship involving a
practitioner; a responsible party; and the
intended users,
(2) a subject matter,
(3) suitable criteria,
(4) evidence
(5) an assurance
report.

Illustration 4.2

Three Party Relationship


The practitioner (e.g., auditor, accountant, expert)
gathers evidence to provide a conclusion to the intended
users about whether a subject matter (e.g., financial
statements) conforms, in all material respects, with
identified criteria.
The responsible party (usually management or the board
of directors) is one who is responsible for the subject
matter and is not the intended user.
The intended users are generally the addressee of the
assurance report.

Illustration 4.3

The assurance engagement evaluates


whether the subject matter conforms to
suitable criteria that will meet the needs of
an intended user.
A subject matter of an assurance is the topic
about which the assurance is conducted.
Subject matter could be information such as
financial statements, statistical information,
non-financial
performance
indicators,
capacity of a facility, etc.
The subject matter could also be systems and
processes (e.g., internal controls, IT systems)
or behavior (e.g., corporate governance,
compliance with regulation, human resource
practices).

Subjec
t
Matte
r

Suitable Criteria
Suitable criteria are the benchmarks (standards,
objectives or set of rules) used to evaluate evidence
or measure the subject matter of an assurance
engagement.

International Financial Reporting Standards


U.S. Generally Accepted Accounting Principles
national standards
internal control criteria
Applicable law, regulation or contract
An agreed level of performance

Characteristics of Suitable
Criteria

(a) Relevance
(b) Completeness
(c) Reliability
(d) Neutrality
(e) Understandability

Assurance Report
The practitioner provides a written
report containing a conclusion that
conveys the assurance obtained as
to whether the subject matter
conforms, in all material respects,
with the identified criteria.
For instance, an audit of financial
statements provides an opinion on
conformity with IFRS.

Assurance Report Basic Elements

A title
An addressee:
A description of the subject matter.
A statement restricting the use of the assurance
report
identification the responsible party
Statement - performed in accordance with ISAEs.
A summary of the work undertaken
Identification of the criteria
The practitioners conclusion
The assurance report date.
The name and location of the firm or the practitioner

Engagements to Review Financial Statements (ISRE 2400)

Where
reviews
of
financial
statements differ most from a
financial statement audit is in the
limited
procedures
performed
(limited in inquiry of management
and analytical procedures) and the
review report.
Reviews are
engagements.

limited

assurance

ISRE 2400 Objective of Review

The objective of a review of financial statements


is to enable an auditor to state whether, on the
basis of procedures which do not provide all the
evidence that would be required in an audit,
anything has come to the auditors attention
that causes the auditor to believe that the
financial statements are not prepared, in all
material respects, in accordance with the
applicable financial reporting framework
(negative assurance).

Engagements to Review Interim Financial Statements (ISRE 2410)

The objective of a review of interim financial


information differs significantly from that of
an audit in accordance with ISAs. A review of
interim financial information does not provide
a basis for expressing an opinion.
A review may bring significant matters
affecting the interim financial information to
the auditors attention, but it does not provide
all of the evidence that would be required in
an audit.

Review: Review of Financial Statements Conclusion

The review report should contain a clear


written expression of negative assurance.
The auditor should assess whether
anything has come to the auditors
attention based on the review that causes
the auditor to believe the financial
statements do not give a true and fair
view (or are not presented fairly, in all
material respects,) in accordance with the
identified financial reporting framework.

The Examination of Prospective


Financial Information (ISAE 3400)

Prospective financial information means financial


information based on assumptions about events that
may occur in the future. Prospective financial
information can be in the form of a forecast, a
projection or a combination of both.
A forecast is prospective financial information prepared on the
basis of managements assumptions as to future events (bestestimate assumptions).
A projection means prospective financial information prepared
on the basis of hypothetical assumptions about future events and
management actions which may or may not take place, such as a
possible merger of two companies.

Related Services International Standards on Related Services


(ISRS)

Engagements covered by
International Standards for Related
Services, including:
Agreed-upon procedures (ISRS
4400)
Compilation of financial or other
information (ISRS 4410)

Engagements to Perform Agreed-Upon Procedures Regarding


Financial Information (ISRS 4400)

An agreed-upon procedures engagement


is an engagement in which the party
engaging the professional accountant or the
intended user determines the procedures to
be performed and the professional
accountant provides a report of factual
findings as a result of undertaking those
procedures.

Matters to be agreed between auditor and management


include the:

nature of the engagement including the fact


that no assurance will be expressed on the
procedures performed;
identification of the financial information to
which the agreed-upon procedures will be
applied;
nature, timing, and extent of the specific
procedures to be applied.

Audit Procedures
Agreed
The auditor performs certain procedures
concerning individual items of financial
data (for example, accounts payable,
accounts receivable, purchases from
related parties and sales and profits of a
segment of an entity), a financial statement
(for example, a balance sheet) or even a
complete set of financial statements.

The objective of a compilation


engagement is for the accountant to
use accounting expertise, as opposed
to auditing expertise, to collect,
classify and summarize financial
information. This ordinarily entails
reducing detailed data to a
manageable and understandable form
without a requirement to test the
assertions
underlying
that
information.

Engagements to
Compile Financial
Information (ISRS
4410)

The accountant is not ordinarily


required to:
Make any inquiries of management to assess
the reliability and completeness of the
information provided;
Assess internal controls;
Verify any matters; or
Verify any explanations.

Thank You for Your Attention


Any Questions?