The Finance Manager of Nkran Ltd prepared a comprehensive cash flow forecast for the purpose of securing a Loan from the bank. This was presented to the bank for evaluation and approval. The bank after evaluating the cash flow forecast wrote to Nkran Ltd requesting for a reasonable assurance report. The Managing Director of Nkran Ltd, who was impressed with the Finance Manager’s cash flow forecast is now questioning the integrity of the Finance Manager to the extent of considering sacking him. The Managing Director decided to consult you the Auditor before taking the decision.
Required:
i) Write a letter explaining the need for a reasonable assurance and its advantages to Nkran Ltd and the elements of an assurance engagement. (8 marks)
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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.
ii) Advise the Managing Director on whether his intended decision is well founded. (2 marks)
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Intended decision is not well founded. The bank by requesting for a reasonable assurance is not questioning the Finance Manager’s integrity