Auditing: The Art and Science of Assurance

Engagements
Fifteenth Canadian Edition

Chapter 1
The Demand for Audit and
Other Assurance Services

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Learning Objectives
1. Define an assurance engagement.
2. Define auditing and its purpose.
3. Explain why there is a demand for audit and other
assurance services.
4. Describe major types of assurance engagements and
auditors.
5. Distinguish between accounting and financial statement
auditing.
6. Describe assurance and nonassurance services provided
by public accountants and distinguish the financial
statement audit from other assurance services.

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What are Assurance Engagements?
• An assurance engagement is an engagement in
which the practitioner expresses a conclusion
designed to enhance the degree of confidence of the
intended users about the outcome of the
measurement or evaluation of a subject matter
against criteria for which an accountable party is
responsible.
• Such services are valued because the auditor is
independent and perceived to be unbiased with
respect to the information being examined.

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Assurance Engagement Criteria
• An assurance engagement is an independent
professional service in which the assurance provider
expresses a conclusion on the outcome of an evaluation
or measurement of a subject matter against criteria.
• Any engagement that fulfills the following criteria is an
assurance engagement:
– Existence of a three-party relationship
– Subject matter
– Criteria
– Gathering of sufficient appropriate evidence
– Expression of opinion or conclusion
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Accountability Relationships Among Auditor,
Client, and External Users of Financial Statements

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Levels of Assurance
• Assurance engagements can be either moderate or high
assurance, which directly impacts what is judged to be
sufficient and appropriate evidence needed to make the
appropriate conclusion.
– Think about assurance in terms of the degree of
confidence that the auditors have on the reliability of the
subject matter.
– Limited assurance — assurance that provides negative
assurance on the reliability of the subject matter.
– Reasonable assurance — assurance that provides high
but not absolute assurance on the reliability of the subject
matter.
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Materiality
• The practitioner provides assurance that the relevant
information (subject matter) is free of material
misstatement.
• Misstatements or omissions are considered to be
material if, individually or in aggregate, they would
likely influence the economic decisions of users who
rely upon the information of a specific reporting entity,
such as the financial statements.
– Establishing materiality requires considerable
professional judgment.

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What is Auditing?
• Auditing is the accumulation and evaluation of
evidence about information to determine and report on
the degree of correspondence between the
information and established criteria.
• Auditing is done by a competent, independent person.

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Accumulation and Evaluation of Evidence
• Evidence is any information used by the auditor to
assess whether the information being audited is stated
in accordance with the established criteria. Evidence
takes many different forms, including the following:
– Electronic and documentary evidence about
transactions
– Written and electronic communication from outsiders
– Observations by the auditor
– Oral testimony of the auditee (client)
• To satisfy the purpose of the audit, auditors must obtain
sufficient quality and quantity of evidence.
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Report
• The final stage in the audit process is the
independent auditor’s report—the communication
of the audit findings to users.
• Reports differ in nature, but in all cases they must
inform readers of the degree of correspondence
between the information and established criteria.
• Reports also differ in form and can vary from the
auditor’s standard opinion usually associated with
financial statements to a customized report

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The Economic Demand for Audits
• Auditing can reduce information risk associated with
financial statements (the risk that the financial
statements are inaccurate).
• Financial information is prepared by an entity’s
management—this leads to a natural conflict of
interest between company managers and other
parties.
• The independent audit provides assurance to users
with respect to the reliability of the financial
statements.

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Causes of Information Risk
• Information risk is the risk that information upon
which a business decision is made is inaccurate.
• Some causes of information risk include:
– Remoteness of information
– Bias and motives of the provider
– Voluminous data
– Complex exchange transactions
– Perceived cost/benefit

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Reducing Information Risk
• User verifies information
• User shares information risk with management.
• Provider submits audited financial statements.
The latter is the most common way for users to obtain
more reliable information. Typically, management of a
private company or the audit committee for a public
company engages the external auditor to provide
assurances to users that the financial statements are
reliable.

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Common Types of Assurance Engagements
• Financial statement audit: Conducted by public
accountants to determine whether the overall financial
statements are stated in accordance with specified
criteria.
• Compliance audit: To determine whether the auditee
complied with specific laws, regulations, rules, or
provisions of contracts or grant agreements.
• Operational audit: A review of any part of an
organization’s operating procedures and methods for
the purpose of evaluating efficiency and effectiveness.

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Types of Auditors
• Internal auditor
• Government auditor
• Canada Revenue Agency (CRA) auditor
• Forensic Accountants and Fraud Auditors
• Public Accountant (PA)

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Public Accountants
• Only public accounting firms can conduct financial
statement audits or reviews, and only Canadian CPAs
with a public accountant’s licence can sign an
assurance report.
• Canadian provinces restrict the audit attest function to
those public accountants “licensed” in that province.

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Accounting vs. Auditing
• What is accounting—it is the recording, classifying
and summarizing of economic events in a logical
manner for the purpose of providing financial
information for decision making.
• When auditing accounting data, the concern is with
evaluating whether recorded information reasonably
reflects the economic events that occurred during the
accounting period within specified dollar ranges.

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Assurance and Nonassurance Services
Offered by Public Accountants
• Audit of Historical Financial Statements
– Many entities have audits done, often to support
financing. Audits are required for public companies.
• Review of Historical Financial Statements
– provides only moderate assurance, rather than high
assurance as in the case of an audit engagement.
• Audit of Financial Information Other Than Financial
Statements
– These engagements are audits of specific income
statement or balance sheet accounts (e.g., sales,
receivables, inventory) or audits of a single financial
statement.
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Assurance Engagements for Nonfinancial
Information
• Audit of Effectiveness of Internal Control over
Financial Reporting
• Audit of Controls of Service Organizations
• Assurance Engagements on Compliance With an
Agreement or Regulations
• Assurance Engagements on Greenhouse Gas
Statements
• Assurance Engagements for Other Nonfinancial
Information

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Assurance over Other Nonfinancial
Information
• There are almost no limits on what nonfinancial
information a public accountant can provide
assurance services for.
• Assurance services related to nonfinancial information
are not the sole domain of public accounting firms.

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Nonassurance Services Offered by Public
Accounting Firms
• Compilations
• Tax Services
• Management Advisory Services
• Accounting and Bookkeeping Services

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