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com-II Bzu
Means an engagement 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 a criteria.
OR
So simply we can conclude the definition into following words for your better understanding:
In simple terms, giving assurance means: offering an opinion about specific information so the users of
that information are able to make confident decisions knowing that the risk of the information being 'incorrect'
is reduced.
In order to understand the concept of Assurance engagement we will take some common practical examples. In
many situations, there are people who need to be assured about something:
● Parents need assurance that schools are suitably educating their children
● Diners need assurance that a restaurant is serving food that is safe to eat
● Shareholders need assurance that the published Financial Statements of a company are not wrong
● Directors need assurance that the systems inside the company they run are working.
The practitioner
The practitioner/the assurance provider– the party who forms the opinion on the subject matter and gives the
assurance.
The responsible party – the person preparing/working on the subject matter; (company, government, dept., etc.)
Compiled& composed by Kamran Arshad MPhil (Finance)* Contact# 03023967507
E-mail kamranarshd413@gmail.com
Principal of Almeezan Academy of Education Karor
Fundamental of Auditing For B.com-II Bzu
The intended user– the party who relies on the assurance report. (Investors, public, pressure group)
=>Suitable criteria: Criteria are the standards or benchmarks used to evaluate or measure the subject matter of an
assurance engagement. It is easy to consider criteria for financial statements but in other matters criteria are not
always established.
=>Conclusion and report: The practitioner’s conclusion and report relates to an assertion by the responsible party.
The assertion is the responsible party’s conclusion about the subject matter based on identified suitable criteria. The
practitioner can either express a conclusion about; the assertion by the responsible party or the subject matter in a
form similar to the assertion made by the responsible party.
Reasonable assurance normally express in the positive form. It is sometimes called positive assurance.
This type of assurance engagement expresses their opinion that reduces the assurance engagement risks to the
acceptable low level for the subject matter that the firm being express on.
For example, an audit on financial statements is an example of the reasonable assurance engagement. Auditors will
express their opinion based on the result of their examination. Those opinions will be based on a positive form
Fair view
Means that the financial transactions are treated fairly as they should be and all significant information is
sufficiently disclosed in the financial statements to ensure that the users are not misleading.
Fair view mainly focuses on the ways how the quality of the information in the financial statements is.
For example, financial statements have enough comparative information. Information that should have been
disclosed is disclosed.
In simple words Fair implies that the financial statements present the information faithfully without any
element of bias and they reflect the economic substance of transactions rather than just their legal form.
What is the Materiality Concept?
The materiality concept refers to a situation where the financial information of a company is considered to be
material from the point of view of the preparation of the financial statements if it has the potential to alter the view
or opinion of a reasonable person. In short, all those important financial information that is likely to influence the
judgment of a knowledgeable person should be captured in the preparation of the financial statements of the
company. The materiality concept in accounting is also known as materiality constraint.
The concept of materiality in accounting is very subjective, relative to size and importance. Financial
information might be of material importance to one company but stand immaterial to another company. This aspect
of materiality concept is more noticeable when the comparison between companies which vary in terms of their size
i.e. a large company vis-à-vis a small company. A similar cost may be considered to be the large and material
expense for a small company, but the same may be small and immaterial for a large company because of their large
size and revenue.
As such, it can be said that the main objective of the materiality concept in accounting is to assess whether the
financial information under consideration makes any significant impact on the opinion of the financial statement
users. If the information is not material, then the company does not need to worry about including it in their
financial statements. The financial statement users mentioned here can be auditors, shareholders, investors etc.
On the Income statement, a variation of more than 5% of before-tax Profit or more than 0.5% of sales
revenue may be seen as “large enough to matter”
On the Balance sheet, a variation in the entry of more than 0.5% of total assets or more than 1% of total
equity may be viewed as “large enough to matter” Concept as per GAAP and FASB
The magnitude of an omission or misstatement of accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a reasonable person relying on the information would
have been changed or influenced by the omission or misstatement.” Concept in let’s understand the Materiality
concept in accounting with the help of a simple example to understand it better.
Let us take the example of a large company that had a building located in the hurricane zone during the
recent natural calamity. The company building has been totally destroyed by the hurricane and after a
gruesome legal battle with the insurance provider, the company has reported an extraordinary loss of
$30,000. Determine the materiality of the event based on the below-given conditions:
Compiled& composed by Kamran Arshad MPhil (Finance)* Contact# 03023967507
E-mail kamranarshd413@gmail.com
Principal of Almeezan Academy of Education Karor
Fundamental of Auditing For B.com-II Bzu
For company B which is very small and generates a net income of $90,000
a) Now, let us calculate the materiality for company A by dividing the loss of $30,000 by the net income of the
company i.e. $30,000 / $4,000,000 * 100% = 0.08%
According to the materiality concept, this loss of $30,000 is immaterial for company A because the average financial
statement user would not be concerned with something that is only 0.08% of the total net income.
b) Again, let us calculate the materiality for company B by dividing the loss by the net income of the company i.e.
$30,000 / $90,000 * 100% = 33.34%
The materiality of Company B = 33.33%According to materiality concept, this loss of $30,000 is material for
company B because the average financial statement user would be concerned and might opt out of the business
given that the loss constitutes around 33.33% of the total net income. The above example emphasizes on the
difference in the sizes of the two companies and as such the variation in the behavior of the financial statement users
of the companies.