• 15 Marks

AA – May 2024 – L2 – SA – Q6 – Assurance Services

This question focuses on assurance engagements, explaining the differences between reasonable and limited assurance, and details the elements of assurance engagements as performed by a practitioner.

Each assurance engagement is classified on two dimensions: It is either a reasonable assurance engagement or a limited assurance engagement, and either it is an attestation engagement or a direct engagement.

Required:

a. Specify the two channels through which assurance can be provided. (2 Marks)

b. Differentiate reasonable assurance from limited assurance. (3 Marks)

c. Explain the five elements of an assurance engagement performed by a practitioner. (10 Marks)

a. Two Channels Through Which Assurance Can Be Provided:

  1. Audit (Reasonable Assurance): An audit provides a high, but not absolute, level of assurance that the financial statements are free from material misstatement, enabling the auditor to express a positive opinion.
  2. Review (Limited Assurance): A review engagement provides a moderate level of assurance, typically expressed in a negative form, such as “nothing has come to our attention that causes us to believe…”

b. Reasonable Assurance vs. Limited Assurance:

Reasonable Assurance Limited Assurance
Level of Assurance: High Level of Assurance: Moderate
Conclusion Expression: Positive (e.g., “the financial statements give a true and fair view…”) Conclusion Expression: Negative (e.g., “nothing has come to our attention that causes us to believe…”)
Objective: To provide reasonable assurance that financial statements are free from material misstatement Objective: To provide limited assurance that nothing material has been identified
Time: More time-consuming Time: Less time-consuming
Cost: More costly Cost: Less costly
Evidence Required: High level of audit evidence required Evidence Required: Lower level of audit evidence required

c. Five Elements of an Assurance Engagement Performed by a Practitioner:

  1. Three-Party Relationship:
    • Practitioner: The professional providing assurance, such as the auditor.
    • Responsible Party: The entity responsible for the subject matter, such as the management of the company.
    • Intended Users: The people for whom the assurance report is prepared, such as shareholders.
  2. Subject Matter: This refers to the data that the practitioner evaluates, such as financial statements, internal controls, or sustainability reports.
  3. Suitable Criteria: The framework or set of standards (e.g., IFRS, CAMA) used to assess the subject matter against a benchmark.
  4. Evidence: The information collected by the practitioner to support their conclusion. This must be sufficient and appropriate to form a basis for the assurance.
  5. Assurance Report: The formal report issued by the practitioner, stating their opinion or conclusion based on the evidence gathered during the engagement.
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