• An audit of financial statements is the examination of historical financial statements to enable the auditor to express an opinion whether the financial statements are prepared fairly, in all material respects or give a true and fair view, in accordance with an applicable financial reporting framework. An audit is a higher form of an assurance engagement performed only on historical financial information or statements.
• An audit of financial statements is an assurance engagement.
• Assurance engagement—means an engagement 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.
  The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria to the subject matter. Here, a professional accountant evaluates a subject matter which is the responsibility of a third party and to form a conclusion about the subject matter conformity with an identified criteria in order to provide the intended user a level of confidence about the subject matter.
• Not all assurance engagements are audits. An example of non-audit assurance engagements is Review assignment.
• Audit engagement gives reasonable assurance– low level of risk.
• Non-audit assurance gives limited assurance – the risk is limited to the circumstance surrounding the engagement.
• More time is spent on audit assurance than other non-audit assurance and more costly too.
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• Independent audits are important for inspiring and maintaining donor trust because they demonstrate that the non-profit is committed to financial transparency and accountability.
• It helps the management in detection of errors and frauds.
• It helps the management in obtaining loans from banks and other financial institutions as the audited statements are relied upon.
• It builds up the reputation of the business.
• Auditors can give concrete suggestion regarding improvement of business on the basis of their findings in records.
• Audited financial statements help the board of director have more confidence in the organization’s finances because they are based on an analysis by an objective third-party.
• Some private foundations require that potential grantees submit audited financial statements, or similarly certified financial statements, in order to be eligible for funding.
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The phrase “the auditor must be seen to be independent both in fact and appearance”

• Independent in fact – This is the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgement, allowing an individual to act with integrity and exercise objectivity and professional skepticism.
• Independence in appearance – This is the avoidance of facts and circumstances that are so significant that a reasonable and informed third party having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firms, or a member of the assurance team’s integrity, objectivity or professional skepticism had been compromised. This refers to how independent observers perceive the auditors behavior in relation to performance of his professional duty.

• Minimization and not elimination of errors – Due to time and cost constraints, the auditor uses selective testing to examine the transactions. Consequently, there may be material misstatements resulting in errors and fraud that remain undetected. It is also not possible for the auditor to uncover a carefully laid scheme of fraud. Thus auditing only reduces and does not eliminate the possibility of existence of errors and fraud in books of account and financial statements.
• Inconclusiveness of evidence- The evidence obtained by an auditor is persuasive rather than conclusive. Therefore, an auditor can only draw reasonable conclusions from such evidence.
• Exercise of judgement – The nature, timing and extent of audit procedures to be performed is a matter of professional judgment of the auditor. In addition, the auditor exercises judgment to ascertain the reasonableness of various estimates made by the management in the financial statements. As a result, audit conclusions are based on judgement and not reached through the scientific process.
• Inherent limitations of internal control systems – These also contribute to the inherent limitations of audit. This arises due to:

 Potential human error
 Possibility of collusion
 Manipulation by management
 Possibility that a person responsible for exercising control could abuse the authority and
 Possibility that procedures may become inadequate due to changes in entity’s business and economic environment

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 subject matter information (that is, the outcome of the evaluation or measurement of a subject matter against criteria).

• A three party relationship – The three party are the intended user, the responsible party and the practitioner.
• A subject matter: This is the data to be evaluated that has been prepared by the responsible party. It can take many forms including financial performance (e.g. historical financial information, non-financial performance (e.g. key performance indicators), processes (e.g. internal control) and behavior (e.g. compliance with laws and regulations).
• Suitable criteria: The subject matter is evaluated or measured against criteria in order to reach opinion.
• Evidence: Sufficient appropriate evidence needs to be gathered to support the required level of assurance.
• An assurance report: A written report containing the practitioners’ opinion is issued to the intended user, in the form appropriated to a reasonable assurance engagement or a limited assurance engagement.

• Reasonable assurance engagement is where a high, but not absolute level of assurance is given. The object of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for the assurance practitioner’s conclusion. The conclusion would usually be expressed in a positive form. In order to give reasonable assurance, a significant amount of testing and evaluation is required to support the conclusion.
  Limited assurance is a lower level of assurance. The nature, timing and extent of the procedures carried out by the practitioner in a limited assurance engagement would be limited compared with what is required in a reasonable assurance engagement. Nevertheless, the procedures performed should be planned to obtain a level of assurance which is meaningful in the practitioner’s professional judgment.
• For a limited assurance engagement the conclusion conveys whether, based on the procedures performed and evidence obtained, a matter (s) has come to the practitioner’s attention to cause the practitioner to believe the subject matter information is materially misstated. This would usually be expressed in a negative form of words.

Reasonable assurance is provided in a report where the auditor has obtained sufficient evidence to feel confident to give reasonable assurance that the information is free from material error. A normal audit opinion (giving reasonable assurance) takes a positive form of words, ie ‘In our opinion the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of…’
The advantages of the reasonable assurance would be:

• The bank will be able to place more reliance on the forecast as it has been subject to review by an independent professional. The level of comfort given will be less than that of an audit but forecast information cannot be verified to the same degree as historical information so the limited assurance is the best that could be expected in the circumstances.
• Reasonable assurance requires a lower level of work than a full scope audit so will be cheaper for the company.

The elements of assurance engagement are: the three-party relationship; appropriate subject matter; suitable criteria; appropriate evidence; and a conclusion.

Intended decision is not well founded. The bank by requesting for a reasonable assurance is not questioning the Finance Manager’s integrity

Purpose and role of external audit
Basic definition
The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable accounting framework. The opinion is often worded as …………… give a true and fair view.
The nature of the audit is to give reasonable (but not absolute) assurance that the financial statements are free from material misstatement. This should add to the credibility of the financial statements.
Regulatory framework
In a large company, the owners of the business, the shareholders, are unlikely to be involved in the management of the business.
They therefore, depend on the information provided to them by the directors to let them assess the performance of the business and to make decisions such as whether to stay invested in that business or how to cast their votes in respect of the director’s appointment.
The directors have a duty of stewardship of the company on behalf of the shareholders and the preparation of annual financial statements is part of their accountability towards the shareholders.
An unmodified audit opinion should reassure the shareholders that the information is free from any significant misstatement, whether due to fraud or error.
Although it is the directors who are responsible for prevention and detection of fraud, the auditors must consider the risks that a material misstatement may arise from fraud, and maintain professional skepticism when carrying out the audit. Because of this an audit may act as a fraud deterrent even though this is not the primary audit objective.
The role of the auditor is that of an independent expert who gathers evidence and issues an opinion that will indicate, to shareholders and other third parties who may use the financial statements, the degree of reliance that should be placed on the information.
Third parties who may benefit from the assurance given in the auditor’s report could include lenders, potential investors or potential suppliers. Large companies often raise funds through capital markets and high quality auditing is therefore integral to capital market confidence.
Under the legal framework, and the rules of recognised professional bodies such as the ICAG, there are strict requirements as to who may carry out audits to ensure that only properly qualified people can perform this service.
The ICAG also issues ethical rules to ensure that auditors are genuinely independent. This regulatory framework should maintain the credibility of the role of the audit.