Fundamentals of Assurance & NASs

• Assurance refers to the practitioner's satisfaction as to the reliability of an assertion being made by one party for use by another party.
• Independence is required when an accountant is performing an assurance service.
• Reasonable assurance is achieved if assurance engagement risk is reduced to an acceptably low level
• Reasonable assurance engagements are called audit engagements
• Absolute assurance is not attainable due to the following factors: (UNFIT)

  1. Use of judgment
  2. Nature and characteristics of the subject matter
  3. Furnished evidence are persuasive rather than conclusive
  4. Inherent limitations of Internal control
  5. Testing sample data rather than the entire population
• Limited assurance engagements or review engagements provides moderate assurance only.
• Assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated.
• Assurance engagement risk is higher in a limited assurance engagement than in a reasonable assurance engagement due to the difference in nature, timing, or extent of evidences.
• Components of assurance engagement risk includes the risk of material misstatements and detection risk.
• ROMM is the risk that the smi is materially misstated. This consists of the inherent risk and control risk.
• Inherent risk is the susceptibility of smi to a material misstatement, assuming that there are no related controls.
• Control risk is the risk that material misstatements that could occur will not be prevented, or detected and corrected, on a timely basis by related internal controls.
• Detection risk is the risk that the practitioner will not detect a material misstatement that exists.
• Assertion-based engagements are also known as attestation engagements. The examples of it includes Audit and review.
• Assertion-based engagements - evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to the interested users.
• Direct reporting engagements - the practitioner either directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users.
• Assurance engagement shall be accepted only when:

  1. Relevant ethical requirements, such as independence and professional competence will be satisfied; and
  2. The assurance engagement exhibits all the following characteristics:

  • SM is appropriate
  • Suitable criteria to be used
  • Practitioner has access to sufficient appropriate evidence
  • Conclusion is to be contained in a written report
  • There is a rational purpose
• Elements of Assurance Engagements:

  1. Suitable criteria
  2. Proper subject matter
  3. Appropriate and sufficient evidence
  4. 3-party relationship
  5. Written assurance report
• Criteria refer to the standard or benchmark used to evaluate or measure the subject matter of an assurance engagement.
• For a criteria to be suitable, it shall exhibit the following characteristics: (RUNCR)

  1. Relevance
  2. Completeness
  3. Reliability
  4. Neutrality
  5. Understandability
• Completeness - relevant factors that could affect the conclusions in the context of the engagement circumstances are not omitted
• Two types of criteria:

  1. Established
  2. Specifically developed
• Established criteria are those embodied in laws or regulations or issued by authorized or recognized bodies of experts that follow a transparent due process
• Specifically developed criteria are those specifically designed for the purpose of the engagement
• Availability of criteria to intended users:

  1. Publicly
  2. In SMI
  3. In assurance report
  4. By general understanding
• Subject matter refers to the information to be evaluated or measured against the criteria
• Subject matter information refers to the outcome of the evaluation or measurement of a subject matter
• Reqs. for a subject matter to be considered appropriate:

  1. Identifiable
  2. Capable of consistent measurement and evaluation against criteria
  3. Is in a form that can be subjected to procedures
• Professional skepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatements due to error or fraud, and a critical assessment of evidence.
• Evidence refers to the information obtained by the practitioner in arriving at the conclusions on which the engagement report is based.
• Sufficiency is the measure of the quantity of evidence
• Appropriateness is the measure of the quality of evidence, that is, its relevance and reliability.
• Hierarchy of reliability:

  1. External vs. Internal
  2. Effective IC
  3. Direct vs. Indirect
  4. Written vs. Oral
  5. Original vs. Reproduced
• Three party relationship involves:

  1. Practitioner
  2. Responsible party
  3. Intended user/s
• Responsible party - person/s who is responsible for the subject matter or assertion
• Intended user/s - person, or class of persons for whom the practitioner prepares the assurance report; they are the users to whom the practitioner usually addresses the report
• Forms of conclusion conveyed in the assurance report may be positive or negative.
• Elements of Assurance Engagements:

  1. Suitable criteria
  2. Appropriate subject matter
  3. Sufficient appropriate evidence
  4. 3-Party relationship
  5. Written report
• Attestation service is a type of assurance service in which a practitioner is engaged to issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.
• Assurance services encompass both audit and attestation services.