Everything you need to know about Audit and Assurance – ACCA F8

All-Inclusive for Audit and Assurance – F8/AA Students 

This blog post covers the concept of assurance engagements, as per the syllabus learning outcomes for the ACCA Audit and Assurance (AA) exam.

Definition of Assurance Engagements

As per the IAASB Framework paragraph 7, assurance engagement is:

‘an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the response party about the outcome of the evaluation or measurement of a subject matter against criteria.’

In simple words, it involves assuring a group of individuals by expressing an opinion on the information that is the responsibility of someone else.

It is important to note that not all engagements partaken by the practitioner call for assurance engagement. An engagement becomes an assurance engagement if it includes the following five elements:

The Five Elements of Assurance Engagements

1. Three-Party Relationship

An assurance engagement consists of a relationship between three parties – the assurance provider (practitioner), the responsible party, and the intended users. The assurance provider assesses and assures the subject matter to the intended users.

2. Subject Matter

The subject matter is the data prepared by the responsible party, including financial statements, performance metrics, and compliance with regulations.

3. Criteria

Criteria are the standards or benchmarks used to evaluate the subject matter, providing a basis for forming an opinion and making assessments. Benchmarks should be relevant, understandable, neutral, complete, and reliable.

4. Evidence

Assurance providers gather and analyze sufficient and appropriate evidence to support their opinions on the subject matter. They are expected to demonstrate ‘professional skepticism’ while concluding if the subject matter does not have any material misstatement.

5. Assurance Report

This is the formal report produced by the practitioner to the intended users. An assurance report conveys the practitioner’s opinion about the subject matter, whether it offers reasonable assurance or limited assurance.

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International Framework for Assurance Engagements

The following international standards are used for the audit and reviews of historical financial information:

1. ISA 100+ International Standards on Auditing
2. ISRE 2000+ International Standards on Review Engagements

The following international standards are used for assurance engagements other than audits and review of historical financial information:

1. ISAE 3000+ International Standards on Assurance Engagements

Types of Assurance Engagement

There are two primary types of assurance engagements:

1. Reasonable Assurance Engagement

A reasonable assurance engagement delivers a high level of assurance, stating that the subject matter agrees to the criteria. The auditor/practitioner expresses a positive conclusion, meaning that the subject complies with the relevant criteria.

Key Points to Remember

• The auditor should gather sufficient appropriate evidence to reach a positive conclusion.
• The risk of assurance engagement has to be diminished to an acceptably low level, i.e. the risk that an inappropriate audit opinion might be provided.
• The criteria and subject matter are formal and objective.
• The practitioner can gather persuasive, reliable, and independent evidence for the engagement.

2. Limited Assurance Engagement

This type of assurance engagement extends a reduced/limited degree of assurance, where the practitioner expresses a conclusion framed in negative terms. It reports that the subject matter is plausible and reasonable as per the circumstances.

Key Points to Remember

• The level of assurance is moderate.
• The level of risk associated is higher than in reasonable assurance engagements, but still within acceptable bounds.
• The subject matter and criteria entail a higher degree of subjectivity and informality.
• The available evidence may lack sufficient independence or reliability.

Collecting Evidence for Assurance Engagements

The practitioners will adopt different procedures and techniques to collect evidence and issue reports, depending on the degree of assurance.

Reasonable Assurance Engagements

In this type of engagement, the process of collecting evidence necessitates the practitioner to:

• gain a comprehension of the engagement’s context and conditions.
• evaluate potential risks and formulate suitable responses.
• carry out additional procedures by employing a variety of methods, such as examination, observation, verification, reevaluation, analytical techniques, and questioning. These procedures can be considered using ‘tests of controls’ and ‘substantive procedures.’ 
• assess the evidence obtained to conclude.

Limited Assurance Engagements

The process of obtaining and gathering evidence is intentionally limited here, although the practitioner comprehends the situation, evaluates risks, and takes appropriate actions in the same way as reasonable assurance engagements. The auditor will not undertake any confirmations, tests of controls, and recalculations of the subject matter here.

Review Engagements

An example of limited assurance engagements is the practitioners’ review of historical financial information for a company. The purpose of a review engagement is to allow the auditor to determine if, based on procedures that do not encompass the complete evidence set required in an audit, there is any indication that the financial statements have not been prepared considering the respective financial reporting framework.

Key Points to Remember

• The review engagement is not an audit.
• It provides a negative form of report, resulting in limited assurance.
• The financial statements are reviewed using less than the required evidence by the practitioner.
• The report is not presented to the shareholders but to the body of individuals who commissioned the review.
• Sufficient, appropriate evidence is gathered using analytical procedures and inquiry.

What is included in assurance engagements?

All assurance engagements comprise of the following factors:

• an engagement letter that sets out the terms and conditions
• a decision on the strategies utilized to obtain and appraise evidence to support the subsequent conclusion
• a discussion on the type of report that will be generated at the end

The Concept of True and Fair Presentation

Assurance engagements require auditors to provide their opinion regarding whether the financial statements deliver a ‘true’ and ‘’fair’ presentation.

True means that the financial statements:

• adhere to relevant accounting standards and legislation.
• are factual and align with reality.
• correctly transfer the data from accounting records to financial statements.

Fair means that the information should:

• be unbiased, clear, and impartial.
• illustrate the commercial nature of transactions.

Frequently Asked Questions (FAQs)

1. Is a reasonable assurance the same thing as conducting an audit?

An audit is a type of reasonable assurance.

2. How do practitioners express a conclusion in a positive form (reasonable assurance)?

One way to word a positive conclusion is, “In our opinion, the financial statements present fairly, in all material respects (give a true and fair view of) …”

3. How do practitioners express a conclusion in a negative form (limited assurance)?

One way to word a negative conclusion is, “Nothing has come to our attention that causes us to believe that the financial statements do not present fairly, in all material respects (give a true and fair view of …”

4. Which type of assurance engagement provides absolute assurance?

Whether it is an audit or a review, the practitioner will NEVER provide absolute assurance for any type of assurance engagement.

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About the Author

“I’m Inbisaat Ahmed, currently on the final leg of my ACCA Skills Levels exams journey. By day, I am a freelance content writer, and I’m passionate about sharing insights on finance and business.”