Question

a) Distinguish clearly the differences between an audit and assurance.
b) Explain the different types of assurance engagements.
c) At the assertion level, a balance must be struck between tests of control effectiveness and
substantive procedures, and between testing at the interim and final stages. Clearly differentiate
between testing of control effectiveness and performing substantive tests in an audit process.

Answer 1

Answer.1

At icertain itimes, ithere iare icertain iconfusions ibetween iaudit iand iassurance. iHowever, ithere iare icertain ikey ifundamental idifferences ithat ican ibe iused ito iexplain ithe idifference ibetween iboth iof ithese icommonly iused iterminologies.

1. Firstly, iit ican ibe iseen ithat iauditing iis ithe iprocess iof ievaluating ithe iaccounting ientries ipresent iin ithe ifinancial istatement iof ithe icompany. iAs ia imatter iof ifact, iaudit ichecks ithe iaccuracy iof ifinancial ireports. iOn ithe iother ihand, iassurance iis ithe iprocess ithat irequires ianalyzing iand iusing ithe iassessments ifrom iaccounting ientries iand ifinancial irecords. iIn ithe isame imanner, iassurance iis ialso iabout iverifying ithe irecords iavailable iin ithe icompany’s iaccounting irecord io iconfirm ithat iit iis ias iper iaccounting istandards iand iprinciple iand iit ialso iverifies ithat iaccounting irecord iis iaccurate ior inot.

2. Audit imainly idescribes iany iexiting imisrepresentations ithat iare idone iin ithe ifinancial irecords. iThese imay iinclude iany imisuse iof ifunds, ior iany ifraud iand iany idishonest iactivities ithat ihave ibeen idone iin ithe icompany. iOn ithe iother ihand, iAssurance ispecializes iin iassessing iand iimproving ithe iquality iof ithe iinformation iin ithe icompany. iThe imain ipurpose iis ito iact ias ia idecision-making itool iin ithe icompany.

3. The iaudit ican ibe ibroadly icategorized iinto iinternal iaudit iand iexternal iaudit. iAssurance iis ialways idone iby ian iaudit ifirm.

4. The iAuditing iscope iincludes imaking isure ithat ithe iFinancial iStatements iare iethically ipresented, ifairly ipresented, iand iaccurate. iFurthermore, iit iis ialso irequired ito icheck iwhether ifinancial ireports iare ias iper iaccounting istandards iand iaccounting iprinciples. iOn ithe iother ihand, iassurance iis iused ito icheck ithe iaccuracy iof ifinancial ireports. iSimilarly, iit ialso iprovides ia iguarantee ito iall ithe istakeholders ithat ithere iis ino imisrepresentation idone iin ifinancial irecords, ior ithere iis ino imisuse iof ifunds, iand ino ifraud iand ino idishonest iactivities ithat iare ibeing iconducted iwithin ithe iscope iof ithe ioperations iof ithe icompany.

5. The imain iaim iof ithe iaudit iis ito ipresent ithe ifinancial iinformation, ireports, ifairly, iaccurately iand iethically iaccepting iaccounting istandards iand iprincipals iwithin icompliance. iHowever, iAssurance iis ito ievaluate ithe iaccuracy iof iaccounting iinformation iand irecords ito iall istakeholders iso ithat ithey ican iavoid iany isort iof ired iflags, imisrepresentations ior iirregularity iin ithe ireport.

6. As ifar ias ithe iwork iof ithe iauditor iis iconcerned, iit ican ibe iseen ithat ithe iauditor imostly ihas imore irights ito iaccess iany isort iof iinformation ipertaining ito iaccounting, isince ithey iare isupposed ito ibe iliable iwhen iit icomes ito iIFRS. iOn ithe iother ihand, iassurance iauditor ihas ifewer irights icompared ito iaudit ibecause iit iis ilimited iwithin ia ispecific iregion.

7. The iscope iof ithe iaudit iwork imainly icovers iall ithe istakeholders iwho iare iinvested iin ian iorganization iand ikeeping ithe irecord iof ieach iindividual. iHowever, iwith iassurance, ithe imajor iconcern iis itowards ia ispecific itype iof istakeholders ifor iexample imanagement.

Therefore, iit ican ibe iseen ithat ithe ioverall irole iof ithe iaudit iand iassurance ioverlaps iwhen iit icomes ito idevising istrategic iinsights iabout ithe ibusiness.

Answer2.

Types iof iassurance iengagement

Assurance iengagements iare:

1. External iAudits

An iAuditor istates ian iopinion ias ito iwhether ithe ifinancial istatements iGive ia itrue iand ifair iview.

An iAuditor iexamines ifinancial istatements iprepared iby ia iboard iof idirectors ito iexpress ian iopinion ias ito iwhether ithey icomply iwith iaccounting istandards.

2. Review iengagements

The iauditor ireviews ithe ifinancial istatements iusing iless ievidence ithan irequired iby ian iaudit

The ireport iwill ibe ito ithe ibody ithat icommissioned ithe ireview ie.g. iBank, iDirectors.

Assurance iengagements iwill ihave:

1. An iengagement iletter iagreeing iterms

2. A idecision ion imethods ito igather iand ievaluate ievidence ito isupport ia iconclusion

3. A itype iof ireport ito ibe iproduced iat ithe iend iof ithe iengagement

There iare itwo itypes iof ian iExternal iAudit:

1. Statutory

2. Non i- iStatutory

Statutory iAudit

a. This iis iwhen ientities iare irequired iby ilaw ito ihave ian iaudit

b. All ipublic iand ilarge icompanies iare irequired ito ihave ione

c. Other iorganizations isuch ias iBuilding iSocieties iand icertain icharities imust ialso

Non iStatutory iAudit

This iis iwhen ithere iis ino ilegal irequirement. i

A ismall icompany ifor iexample imay ichoose ito ibe iaudited iwhen inot ilegally iobliged.

Reasons ito iundertake ia inon-statutory iaudit iwill iinclude:

a. Providing iassurance ito ithe iowners iover ifinancial iresults

b. Making iaccounts imore iacceptable ito iTax iauthorities

c. Making ia isale iof ithe ibusiness ieasier

d. Providing iassurance ito ithose ifinancing ithe ibusiness ie.g. iBanks

Types iof iReview iengagements:

1. Risk iassessment ireports

2. Review iof iinternal icontrols

3. System ireliability ireports

4. Value ifor imoney ireviews

5. Social iand ienvironmental ireports

Remember ithey’re ibasically isomething ithat isomeone iwants iassurance iover i- iso iit imight ibe iyou’re ibuying isomething iand iyou iwant iassurance iyou're ipaying ia ifair iprice

Answer3.

The ipurpose iof iaudit itests, ior iaudit iprocedures, iis ito iallow ithe iauditor ito icollect isufficient iappropriate iaudit ievidence ito ibe iable ito iconclude iwith ireasonable iassurance ithat ithe ifinancial istatements i(FS) iare ifree iof imaterial imisstatement. iIf isufficient iappropriate iaudit ievidence icannot ibe iobtained, ior ithe ievidence ipoints ito ia imaterial imisstatement iin ithe iFS, ithe iauditor iwill ihave ito iissue ia imodified iaudit iopinion.

Misstatements iwill ifind itheir iway iinto ipublished ifinancial istatements ionly iif ithree ievents iall ihappen:

1. An ierror iis imade iin ithe ifirst iplace. iThe irisk iof ithat ihappening iis iknown ias i‘inherent irisk’, iand iassessing ithat iis ia ivery ibig ipart iof iaudit iplanning i(not ithe isubject iof ithis iarticle).

2. The iclient’s iinternal icontrol isystem idoes inot iprevent, iidentify ior icorrect ithe ierror. iThis iis iknown ias i‘control irisk’.

3. The iauditor idoes inot idetect ithe ierror iduring ithe iaudit. iThis iis iknown ias i‘detection irisk’.

If ithe iclient’s iinternal icontrol isystem iis igood, ithere iis ia ireduced ilikelihood ithat ithere iwill ibe ian ierror iin ithe iFS iand ithe iauditor iwill ireduce ithe iamount iof iaudit iwork ito ibe icarried iout. iIf ithe iinternal icontrol isystem iis ipoor, ithe iauditor iwill ihave ito iperform imuch imore iwork ias ithe iaudit iis ithe ionly idefense ileft iagainst ia imaterial imisstatement iappearing iin ithe ipublished iFS.

Therefore, ithe iauditor imust:

1. Assess ithe ieffectiveness iof ithe iinternal icontrol isystem. iThis imeans iinvestigating iboth iits idesign iand iits ioperation. iThe ioperation iof ithe iinternal icontrols iis iassessed iby icarrying iout itests iof icontrol.

2. Obtain iadditional, idirect ievidence iabout ithe iamounts ishown iin ithe iFS. iThis ievidence iis iobtained iusing isubstantive itesting.

Consider ithe ireceivables iamount iin ithe iSOFP. iOne iway iin iwhich ithis icould ibe imisstated iwould ibe iif iit iwere iincorrectly ivalued, iperhaps ibecause ia ilarge ibalance iwas iowed iby ia icustomer iwho iwas iunlikely ito ipay.

The icontrols ithat iwould ihelp ito iprevent ithat iinclude:

1. Take iup icredit ireferences ion inew icustomers.

2. Establish ia icredit ilimit.

3. Producing iaged ireceivables ianalyses.

4. The ifollow iup iamounts ithat iare inot ipaid ion itime.

The ioperation iof ithese icontrols ineeds ito ibe itested. iFor iexample:

1. Look iat ithe iclient’s ifiles iwhere icredit ireferences iare ikept ito iensure ithat ievery icustomer iwas iinvestigated. iThe iauditor iwould iinspect ithe ireferences.

2. Look ifor ievidence iof inew iorders ibeing irejected iif ithey iwould ibreach ithe icredit ilimit. iThis icould ibe itested iby iinspecting icopies iof inotifications isent ito icustomers. iThe iauditor imight ialso iconsider iusing itest idata ito iobserve iif ian iorder iexceeding ithe icredit ilimit iis iactually irejected.

3. Inspecting inotes imade iby ithe icredit icontroller iof iconversations iheld iwith islow ipayers iand iperhaps ienquiring iabout ithe ifollow-up iprocedures ithat iare icarried iout.

Each iof ithese iaudit itests iare itesting ia icontrol ior icontrol iprocedure. iThey iare itherefore itests iof icontrol. iThese itests iare inot iinvestigating ithe ireceivables ibalance iin ithe iSOFP. iI irepeat, ia itest iof icontrol itests icontrols, inot iamounts iin ithe iFS.

Tests iof icontrol ican ibe igrouped iinto:

1. Enquiry iand iconfirmation. iFor iexample, iask ithe icredit icontroller iabout ithe iway iin iwhich icustomers iare iencouraged ito ipay iand iask ihow ithese icustomers iare iidentified iand ihow ioften ithey iare ifollowed iup. iThis iis ia irelatively iweak isource iof ievidence ibecause ithe icredit icontroller imight iexaggerate ihis ior iher iefforts.

2. Inspection. iFor iexample, ithe icredit ireferences ior inotes imade iby ithe icredit icontroller iof iconversations.

3. Observation. iFor iexample, iobserving ithe icredit icontroller iat iwork.

4. Recalculation iand iperformance. iFor iexample, iensuring ithat ithe iaged ireceivables ianalysis iseems ito ibe iaccurate

Even iwhen iinternal icontrol isystems iare ivery igood, ithe iauditor iwill ialways icarry iout itests ion ithe ifigures iin ithe iFS. iThe iwork ihas ito iaddress iall ithe iassertions imade iby ieach imaterial ifigure. iFor iexample, ivaluation, icompleteness, iexistence ietc. iThese itests iare isubstantive itests iand iconsist iof:

1. Analytical iprocedures iand

2. Tests iof idetail.

So, istaying iwith ireceivables, ithe iauditor iwould icalculate ithe ireceivables icollection iperiod. iIf ithere iwere inot itoo ilarge iand ibroadly iin iline iwith iprevious iperiods, ithe iauditor iwould ihave igained isome ievidence iabout ivaluation i(i.e. imost idebts inot ivery iold).

Tests iof idetail iwould iinclude:

1. Writing ito icustomers iasking ithem ito iconfirm ithe iamount iowed i(existence iand iownership).

2. Tracing, iby iinspection, isome isales iinvoices ito ithe iDr iside iof icustomers’ iaccounts i(existence iand iownership).

3. Observation/inspection iof iamounts ireceived iafter iyear iend. iThis igives ievidence iabout ivaluation ibecause iif ia ipayment iis ireceived isubsequently ithe idebt iwas iobviously inot ibad.

4. Recalculation iof ibad idebt iprovisions.

Substantive itests itherefore iinclude ianalytical iprocedures iin iaddition ito ithe ifour iclasses iof iaudit iprocedures iavailable ifor itesting