What is an assurance engagement? (part III)

 

Appropriateness of the underlying subject matter in an assurance engagement

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

An appropriate underlying subject matter is identifiable and capable of consistent measurement or evaluation against the applicable criteria.

Different underlying subject matters have different characteristics, including the degree to which information about them is qualitative versus quantitative, objective versus subjective, historical versus prospective, and relates to a point in time or covers a period. Such characteristics affect the:

(a)    Precision with which the underlying subject matter can be measured or evaluated against criteria; and

(b)    The persuasiveness of available evidence.

In some cases, the assurance engagement may relate to only one part of a broader underlying subject matter. For example, the practitioner may be engaged to report on one aspect of an entity’s contribution to sustainable development, such as a number of programs run by an entity that have positive environmental outcomes. In determining whether the engagement exhibits the characteristic of having an appropriate underlying subject matter in such cases, it may be appropriate for the practitioner to consider whether information about the aspect on which the practitioner is asked to report is likely to meet the information needs of intended users and also how the subject matter information will be presented and distributed, for example, whether there are more significant programs with less favorable outcomes that the entity is not reporting upon.

 Suitability and availability of the criteria in the framework of an assurance engagement

 Suitability of the criteria

Suitable criteria possess the following characteristics:

(a)  Relevance: Relevant criteria result in subject matter information that assists decision-making by the intended users.

(b)  Completeness: Criteria are complete when subject matter information prepared in accordance with them does not omit relevant factors that could reasonably be expected to affect decisions of the intended users made on the basis of that subject matter information. Complete criteria include, where relevant, benchmarks for presentation and disclosure.

(c)  Reliability: Reliable criteria allow reasonably consistent measurement or evaluation of the underlying subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by different practitioners.

(d)  Neutrality: Neutral criteria result in subject matter information that is free from bias as appropriate in engagement circumstances.

(e) Understandability: Understandable criteria result in subject matter information that can be understood by the intended users.

Criteria may be suitable for a particular set of engagement circumstances but may not be suitable for a different set of engagement circumstances.

Criteria can be selected or developed in a variety of ways, for example, they may be:

● Embodied in law or regulation.

● Issued by authorized or recognized bodies of experts that follow a transparent due process.

● Developed collectively by a group that does not follow a transparent due process.

● Published in scholarly journals or books.

● Developed for sale on a proprietary basis.

● Specifically designed for the purpose of preparing the subject matter information in the particular circumstances of the engagement.

Availability of the criteria

Criteria need to be available to the intended users to allow them to understand how the underlying subject matter has been measured or evaluated. Criteria are made available to the intended users in one or more of the following ways:

(a)    Publicly.

(b)   Through inclusion in a clear manner in the presentation of the subject matter information.

(c)    Through inclusion in a clear manner in the assurance report.

(d)   By general understanding, for example the criterion for measuring time in hours and minutes.

 Criteria may also be available only to intended users, for example the terms of a contract, or criteria issued by an industry association that are available only to those in the industry because they are relevant only to a specific purpose.

 Examples of conclusions for an assurance engagement

Assurance engagements could be classified either as a reasonable assurance engagement or a limited assurance engagement.

Examples of conclusions expressed in a form appropriate for a reasonable assurance engagement include:

● When expressed in terms of the underlying subject matter and the applicable criteria, “In our opinion, the entity has complied, in all material respects, with XYZ law;”

● When expressed in terms of the subject matter information and the applicable criteria, “In our opinion, the forecast of the entity’s financial performance is properly prepared, in all material respects, based on XYZ criteria;” or

● When expressed in terms of a statement made by the appropriate party, “In our opinion, the [appropriate party’s] statement that the entity has complied with XYZ law is, in all material respects, fairly stated,” or “In our opinion, the [appropriate party’s] statement that the key performance indicators are presented in accordance with XYZ criteria is, in all material respects, fairly stated”.

 Examples of conclusions expressed in a form appropriate for a limited assurance engagement include: 

● When expressed in terms of the underlying subject matter and the applicable criteria, “Based on the procedures performed and evidence obtained, nothing has come to our attention that causes us to believe that [the entity] has not complied, in all material respects, with XYZ law.”

 ● When expressed in terms of the subject matter information and the applicable criteria, “Based on the procedures performed and evidence obtained, we are not aware of any material amendments that need to be made to the assessment of key performance indicators for them to be in accordance with XYZ criteria.”

● When expressed in terms of a statement made by the appropriate party, “Based on the procedures performed and evidence obtained, nothing has come to our attention that causes us to believe that the [appropriate party’s] statement that [the entity] has complied with XYZ law, is not, in all material respects, fairly stated.”