An Auditors Engagement

IAASB Standards

- Course 2 -

03.02.2015

IAASBs Engagement Standards

Some engagement standards are based onInternational Framework for Assurance Engagements(assurance engagements), and others result from theRelated Services Framework (related servicesengagements).

Three sets of standards (ISAs, ISREs and ISAEs) share Three sets of standards (ISAs, ISREs and ISAEs) sharethe assurance engagement framework and onestandard set (ISRS) is based on the related servicesframework.

ISAs, ISREs, ISAEs and ISRSs are collectively referred toas the IAASBs Engagement Standards.

Illustration 4.1

Reasonable and Limited Assurance Engagements

Reasonable assurance engagement and limited assuranceengagement are the two types of assurance engagement.

The objective of a reasonable assurance engagement is areduction in assurance engagement risk to an acceptably lowlevel as the basis for a positive form of expression of thepractitioners conclusion - presents fairly in all materialrespectsrespects

The objective of a limited assurance engagement is a reductionin assurance engagement risk to a level that is acceptable in thecircumstances, as the basis for a negative form of expression ofthe practitioners conclusion. E.g., nothing has come to ourattention that causes us to believe that financial statementsdo 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 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 Engagementsand 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(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 asStandards 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, InternationalStandards on Related Services (ISRSs), areapplied currently to two audit services:

Agreed-upon procedures (ISRS 4400) Agreed-upon procedures are assurance based on auditprocedures in a very limited agreed upon areawith a proscribed set of users.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 ofdesigned 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, (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. 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

Subjec

t

Matte

r

The assurance engagement evaluateswhether the subject matter conforms tosuitable criteria that will meet the needs ofan intended user.

A subject matter of an assurance is the topicabout which the assurance is conducted.

Subject matter could be information such asfinancial statements, statistical information,non-financial performance indicators, rnon-financial performance indicators,capacity of a facility, etc.

The subject matter could also be systems andprocesses (e.g., internal controls, IT systems)or behavior (e.g., corporate governance,compliance with regulation, human resourcepractices).

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 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(d) Neutrality

(e) Understandability

Assurance Report

The practitioner provides a writtenreport containing a conclusion thatconveys the assurance obtained asto whether the subject matterconforms, in all material respects,conforms, in all material respects,with the identified criteria.

For instance, an audit of financialstatements provides an opinion onconformity 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. 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 performedlimited procedures performed

(limited in inquiry of management

and analytical procedures) and the

review report.

Reviews are limited assurance

engagements.

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 attentionanything 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 provideinterim 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 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. projection or a combination of both.

A forecast is prospective financial information prepared on the

basis of managements assumptions as to future events (best-

estimate 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)4400)

Compilation of financial or other

information (ISRS 4410)

Engagements to Perform Agreed-Upon Procedures Regarding

Financial Information (ISRS 4400)

An agreed-upon procedures engagementis an engagement in which the partyengaging the professional accountant or theintended user determines the procedures tointended user determines the procedures tobe performed and the professionalaccountant provides a report of factualfindings as a result of undertaking thoseprocedures.

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 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 proceduresconcerning individual items of financialdata (for example, accounts payable,data (for example, accounts payable,accounts receivable, purchases fromrelated parties and sales and profits of asegment of an entity), a financial statement(for example, a balance sheet) or even acomplete set of financial statements.

Engagements to

Compile Financial

Information (ISRS

4410)

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 formmanageable and understandable form

without a requirement to test the

assertions underlying that

information.

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; Assess internal controls;

Verify any matters; or

Verify any explanations.

Thank You for Your Attention

Any Questions?