What is an assurance engagement? (part I)

 

Assurance engagement is an engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information (that is, the outcome of the measurement or evaluation of an underlying subject matter against criteria).

Responsible party is the party(ies) responsible for the underlying subject matter.

Intended users are the individual(s) or organization(s), or group(s) thereof that the practitioner expects will use the assurance report.

 Assurance engagements could be classified on two dimensions:

1.      Either a reasonable assurance engagement or a limited assurance engagement.

2.      Either an attestation engagement or a direct engagement.

Not all engagements performed by practitioners are assurance engagements. Examples of other frequently performed engagements that are not assurance engagements include the following:

(a) Engagements such as agreed-upon procedure and compilation engagements.

(b) The preparation of tax returns where no assurance conclusion is expressed; and

(c) Consulting (or advisory) engagements, such as management and tax consulting.

Attestation engagement

Attestation engagement is an assurance engagement in which a party other than the practitioner measures or evaluates the underlying subject matter against the criteria. A party other than the practitioner also often presents the resulting subject matter information in a report or statement. In some cases, however, the subject matter information may be presented by the practitioner in the assurance report. In an attestation engagement, the practitioner’s conclusion addresses whether the subject matter information is free from material misstatement.

Underlying subject matter is the phenomenon that is measured or evaluated by applying criteria.

Criteria are the benchmarks used to measure or evaluate the underlying subject matter.

Subject matter information is the outcome of the measurement or evaluation of the underlying subject matter against the criteria, that is, the information that results from applying the criteria to the underlying subject matter.

Examples of Attestation Engagements

(a)    Sustainability is an engagement on sustainability involves obtaining assurance on a report prepared by management or management’s expert (the measurer or evaluator) on the sustainability performance of the entity.

(b)   Compliance with law or regulation is an engagement on compliance with law or regulation involves obtaining assurance on a statement by another party (the measurer or evaluator) of compliance with the relevant law or regulation.

(c)   Value for money is an engagement on value for money involves obtaining assurance on a measurement or evaluation of value for money by another party (the measurer or evaluator).

Direct assurance engagement

 Direct engagement is an assurance engagement in which the practitioner measures or evaluates the underlying subject matter against the applicable criteria and the practitioner presents the resulting subject matter information as part of, or accompanying, the assurance report. In a direct engagement, the practitioner’s conclusion addresses the reported outcome of the measurement or evaluation of the underlying subject matter against the criteria.

So, in a direct engagement, the practitioner is also the measurer or evaluator. In an attestation engagement, the responsible party, or someone else, but not the practitioner, can be the measurer or evaluator.

Preconditions for the assurance engagement.

In order to establish whether the preconditions for an assurance engagement are present, the practitioner shall determine whether:

(a)   The roles and responsibilities of the appropriate parties are suitable in the circumstances; and

(b)   The engagement exhibits all of the following characteristics:

·      The underlying subject matter is appropriate.

·    The criteria that the practitioner expects to be applied in the preparation of the subject matter information are suitable for the engagement circumstances and possess such characteristics as relevance, completeness, reliability, neutrality, understandability.

·     The criteria that the practitioner expects to be applied in the preparation of the subject matter information will be available to the intended users.

·   The practitioner expects to be able to obtain the evidence needed to support the practitioner’s conclusion.

·        The practitioner’s conclusion is to be contained in a written report; and

·    A rational purpose including, in the case of a limited assurance engagement, that the practitioner expects to be able to obtain a meaningful level of assurance.

 Planning of an assurance engagement

Planning involves the engagement partner, other key members of the engagement team, and any key practitioner’s external experts developing an overall strategy for the scope, emphasis, timing and conduct of the engagement, and an engagement plan, consisting of a detailed approach for the nature, timing and extent of procedures to be performed, and the reasons for selecting them.

 The nature and extent of planning activities will vary with the engagement circumstances, for example the complexity of the underlying subject matter and criteria. Examples of the main matters that may be considered include:

• The characteristics of the engagement that define its scope, including the terms of the engagement and the characteristics of the underlying subject matter and the criteria.
• The expected timing and the nature of the communications required.
• The results of engagement acceptance activities.
• The engagement processes.
• The practitioner’s understanding of the appropriate party(ies) and its environment, including the risks that the subject matter information may be materially misstated.
•  Identification of intended users and their information needs, and consideration of materiality and the components of engagement risk.
• The extent to which the risk of fraud is relevant to the engagement.
• The nature, timing and extent of resources necessary to perform the engagement, such as personnel and expertise requirements, including the nature and extent of experts’ involvement.
•  The impact of the internal audit function on the engagement.

Materiality in an assurance engagement.

Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence relevant decisions of intended users taken on the basis of the subject matter information.

The practitioner shall consider materiality when:

(a)    Planning and performing the assurance engagement.

(b)   Evaluating whether the subject matter information is free from material misstatement.

Materiality is considered in the context of qualitative factors and, when applicable, quantitative factors. The relative importance of qualitative factors and quantitative factors when considering materiality is a matter for the practitioner’s professional judgment.

Qualitative factors may include such things as:

·      The number of persons or entities affected by the subject matter.

·  The interaction between, and relative importance of, various components of the subject matter information when it is made up of multiple components, such as a report that includes numerous performance indicators.

·     The nature of a misstatement, for example, the nature of observed deviations from a control when the subject matter information is a statement that the control is effective.

·      Whether a misstatement affects compliance with law or regulation.

·    Whether a misstatement relates to the relationship between the responsible party, the measurer or evaluator, or the engaging party or their relationship with other parties.

Quantitative factors relate to the magnitude of misstatements relative to reported amounts for those aspects of the subject matter information, if any, that are:

● Expressed numerically; or

● Otherwise related to numerical values (for example, the number of observed deviations from a control may be a relevant quantitative factor when the subject matter information is a statement that the control is effective).

 Engagement risk when performing assurance engagement.

Engagement risk is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated.

Engagement risk does not include the practitioner’s business risks, such as loss from litigation, adverse publicity.

In general, engagement risk can be represented by the following components:

(a) Risks that the practitioner does not directly influence, which in turn consist of:

   (i) The susceptibility of the subject matter information to a material misstatement before consideration of any related controls applied by the appropriate party(ies) (inherent risk); and

  (ii) The risk that a material misstatement that occurs in the subject matter information will not be prevented, or detected and corrected, on a timely basis by the appropriate party(ies)’s internal control (control risk); and

(b)  The risk that the practitioner does directly influence, which is the risk that the procedures performed by the practitioner will not detect a material misstatement (detection risk).