Assurance (Knowledge Level) 01st Chapter

Concept of and need for assurance

01. What is assurance engagement? [P- 05] [J-11; D-13]
An assurance engagement is one 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 criteria.

02. Discuss the key criteria/ elements of an assurance engagement/ audit? [P- 05] [J-10,11,12,13]
I. Three people or group of people involved:
i. The practitioner (accountant)
ii. The intended users
iii. The responsible party (the persons(s) who prepared the subject matter)
II. A subject matter:
i. Data (for example, financial statements or business projections)
ii. Systems or process (for example, internal control systems or computer systems)
iii. Behavior (for example, social & environmental performance or corporate governance)
III. Suitable criteria:
If assurance engagement relating to financial statement then accounting standards is the suitable
criteria and the degree of assurance will be reliable.
IV. Sufficient appropriate evidence:
The practitioner must obtain evidence as to whether the criteria have been met.
V. A written report in appropriate form:
A report should be written form and contain specified information.

03. What are the types of assurance engagement? [P- 07] [J-12; D-11,13]
The Framework identifies two types of assurance engagement-
a) Reasonable assurance engagement (A high, but not absolute, level of assurance)
b) Limited assurance engagement

04. What are the key differences between the two types of assurance engagement? [P- 07]
The key differences between the two types of assurance engagement are given below:
The evidence obtained
The type of opinion given
Summary of types of engagement:
Subject Reasonable assurance Limited assurance
Evidence Sufficient & appropriate Sufficient & appropriate (lower level)
Opinion Positive Negative
Risk Low High
Level of assurance High Low

05. Give some examples of assurance engagements. [P- 08]

Other examples of assurance engagements include other audits, which may be specialised due to the nature
of the business, for example:
Statutory audit (Key example) Pension scheme audits
Local authority audits Charity audits
Insurance company audits Solicitors' audits
Bank audits Environmental audits
Branch audit (where an overseas company trades in Bangladesh through a branch and requires an
audit of that branch although an audit is not required by Bangladesh law)

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06. In addition to audit, users want some other assurance services. Give few examples. [P-08][J-13]
There are also many issues users want assurance on, where the terms of the engagement will be agreed
between the practitioner and the person commissioning the report, for example:
Value for money studies
Circulation reports (for example, for magazines)
Cost/benefit reports
Due diligence (where a report is requested on an acquisition target)
Reviews of specialist business activities
Internal audit
Reports on website security, such as Web Trust
Fraud investigations
Inventories and receivables reports
Internal control reports
Reports on business plans or projections

07. What are the objectives of an audit of financial statements? [P-08]

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects, in accordance with an applicable financial
reporting framework.

08. How auditors express his audit opinion? [P-09]

In Bangladesh, the auditor will normally express his audit opinion by reference to the true and fair view,
which is an expression of reasonable assurance. Whilst this term is at the heart of the audit, true and fair
are not defined in law or audit guidance.

09. Describe the terms of True & Fair: [P- 09] [J-10; D-13]
a) True:
Information is factual and conforms with reality, not false.
Conforms with required standards and law.
The accounts have been correctly extracted from the books and records.
b) Fair:
Information is free from discrimination and bias
Compliance with expected standards and rules
The accounts should reflect the commercial substance of the companys underlying transactions.

10. What are the legal and professional requirements of auditors? [P- 09]
a) The legal requirements are-
Currently contained in the Companies Act 1994.
The Companies Act 1994 requires that auditors must be a member of ICAB (the Institute of
Chartered Accountants of Bangladesh).
b) Professional qualifications are-
A prerequisite of membership of ICAB.
ICAB has also the responsibility to implement procedures for monitoring its licensed auditors.

11. Which person ineligible for being a company auditor, under Companies Act 1994? [P- 09]
Following persons are ineligible for being a company auditor, under Companies Act 1994-
i. An officer or employee of the company
ii. A partner or an employee of any officer, employee to the company
iii. Managing agent of the company.
iv. A person who is indebted to the company exceeding Tk. 1,000.
v. A person who is a director or holder of shares exceeding 5% of the subscribed capital.

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12. For which ICAB is responsible for issuing Ethical Standards (ESs)? [P- 10]
ICAB is responsible for issuing Ethical Standards (ESs) in relation to the-
Independence
Objectivity
Integrity of auditors.

13. States about BSA 200 Objectives and General Principles Governing an Audit of financial
Statements. [P- 10]
Auditors should comply with relevant ethical requirements relating to audit engagements.

14. Who are the users of assurance Engagement? [P- 10]

Shareholders of a company, to whom the financial statements are addressed
The board of directors of a company or a subsection of them.

15. What are the benefits of assurance? [P- 10] [D-13]

The key benefit of assurance is,
- The independent &
- Professional,
verification being given to the users.
Subsidiary benefit,
- Give additional confidence to other parties.
- Enhances the credibility of the information.
- Helps to prevent errors or frauds.
- Reduce the risk of management bias.
- Increases faith and trust.
- It helps to ensure that high quality, reliable information exists, leading to effective markets.

16. Why can assurance never be absolute? [P- 11] [J-12; D-10,13]
What are the limitations of assurance?
Assurance can never be absolute for the following reason:
Sampled/ Test basis.
Inherent limitation
Most audit evidence is persuasive rather than conclusive.
Assurance provision can be subjective.
The subject matter may be estimates and uncertain.
Impossible to conclude absolutely.
Expectations gap
Limitation of third parties
Limitation of systems.

17. What is expectations gap? [P- 11] [J-12]

The expectations gap is a gap between what the assurance providers understands he is doing and what the
user of the information believes he is doing. Shortly it is lack of understanding of users.

18. How create the expectations gap between assurance providers and intended users? [P- 11]
For the following reason the expectations gap can be create:
Users are not aware of the nature of the limitations on assurance provision,
Lack of the knowledge,
Do not understand properly and
Believe that the assurance provider is offering a service which in fact he is not.

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19. How can we minimize the gap? [P- 11]

Assurance providers can minimize the gap by the following way:
By issuing an engagement letter spelling out the scope of the work.
Explain the limitations of the work.
Reviewing the format and content of reports.

20. What is Audit Opinion? [D-12]

The audit opinion is that part of the auditor's report to the members of an entity in which the auditor
expresses an opinion on the extent to which the financial statements are materially misstated. The fact that it
is an opinion, and not a certification, is meant to indicate to financial statement users that the auditor is
providing reasonable assurance, and not complete assurance, as to whether or not the financial statements
are materially misstated. Audit opinion is the statement recorded in an auditors report by the external
auditor.

21. Audit and Assurance are always used together. What is the exact difference between these? [D-11]

Subject Audit Assurance

All audit engagements are assurance But not all assurance engagements are
engagements. audit engagements.
Audit engagement provides reasonable Assurance engagements can be
assurance. reasonable assurance engagements and
limited assurance engagements.

22. Which of the following are specialized audit?

Ans:

Branch audit
Bank audit

Internal audit
Pension scheme audit

Fraud investigations

23. Which level of assurance engagement gives the following opinion: In the course of my seeking
evidence about the statement by the chairman, nothing has come to my attention indicating that the
statement is not reasonable.
Ans: Limited assurance.

20. Which of the following factor make a person ineligible for being a company auditor?

An employee of the client company.

A shareholder of 0.05% of the subscribed capital.

A person who is indebted to the company not exceeding Tk. 1000.

Director of X Ltd. which is the managing agent of the client.

Interactive question 1: Assurance engagement [Difficulty level: Easy]

You are an accountant who has been approached by Jamal, who wants to invest in Company X. He has
asked you for assurance whether the most recent financial statements of Company X are a reliable basis for
him to make his investment decision.
Identify the key elements of an assurance engagement in this scenario, if you accepted the engagement.

Interactive question 2: benefits of assurance [Difficulty level: Exam standard]

Which three of the following are benefits of assurance work? [P- 12] [D- 10]

An independent professional opinion

Additional confidence given to other related parties

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Testing as a result of sampling is cheaper for the responsible party

Judgments on estimates can be conclusive

Assurance may act as a deterrent to error or fraud

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