Question

You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietary company Local Pty Ltd (Local) on 30 June 2018. The price of the acquisition was agreed at $5 million, on the condition that OEL is satisfied with the financial records of Local. As Local is a small proprietary company, it has not prepared statutory financial reports or undergone an audit since its incorporation in 2016. However, Local has agreed to allow your firm, which is the auditor of OEL, to access its books and records. The CEO of OEL, Wendy Champion, has requested that your firm provide assurance on the following three items:

The management accounts for the year ended 30 June 2017

All transactions occurring from the date negotiations commenced until the settlement date, to ensure that all transactions were within the normal course of operations

The financial report prepared at the acquisition date of 30 June 2018

In order to clarify your responsibilities, you requested that OEL indicate the level of assurance that they require for each item. Wendy replied that the financial report as at acquisition date is very important, as are the transactions since negotiations commenced, but that she is willing to have less work done on the previous year’s management accounts.

Required: Indicate the type of engagement that will most likely be undertaken for each of the three tasks and the level of assurance to be provided. Explain your selections.

Answer 1

The engagement to be undertaken for all the 3 items stated above would be an assurance engagement itself. The type of engagement does not change on the level of assurance required by the management.

There are mainly two types of assurances, reasonable assurance and limited assurance. However, a third type of assurance that exists is absolute assurance. However it is irrelevant in such circumstances as no accountant/auditor can provide absolute assurance no matter how much evidence is possessed by him.

In the first two cases, where the level of assurance required is high and important for the management, the auditor should try to deliver reasonable assurance and nothing more than that. A reasonable assurance is one where the auditor / accountant agrees that the evidence obtained meets or fulfills certain criteria which is necessarily required by the auditor/accountant in order to issue a reasonable assurance.

In the third case, since the management is willing to have less work done on it, the concerned auditor/ accountant can choose to provide limited assurance, however the fact that he is going to provide only limited assurance should be conveyed to the concerned management in writing and should be done only after obtaining their approval on the same.

I hope the above solution is what you were looking for. For any further queries or doubts in the solution, please feel free to drop a comment. Please do leave a positive feedback, Thank you :)