The meaning of audit and assurance

The meaning of audit

Definition and objective of audit Concepts of accountability, stewardship and agency The audit report: independence, materiality and true and fair The statutory requirement for audit

Definition and objective of audit

An audit is an official examination of the accounts (or accounting systems) of an entity (by an auditor). The main objective of an audit is to enable an auditor to convey an opinion as to whether or not the financial statements of an entity are prepared according to an applicable financial framework

Concepts of accountability, stewardship and agency

The shareholders own the company. The company is managed and controlled by its directors. The directors have a stewardship role. The relationship between the shareholders of a company and the board of directors is also an application of the general legal principle of agency.

Concepts of accountability, stewardship and agency

As agents for the shareholders, the board of directors should be accountable to the shareholders. In order for the directors to show their accountability to the shareholders, it is a general principle of company law that the directors are required to prepare annual financial statements, which are presented to the shareholders for their approval.

The audit report: Independence, materiality and true and fair

Over time, the annual audit was developed as a way of adding credibility to the financial statements produced by management. The statutory audit is now a key feature of company law throughout the world. An auditor reports to the shareholders on the financial statements produced by a companys management.

The audit report: Independence, materiality and true and fair

Directors

Financial Statements

Shareholders

Adds credibility

Audit report on financial statements

The key features of the audit report

The auditors producing the report are independent from the directors producing the financial statements. The report gives an opinion on whether the financial statements give a true and fair view, or present fairly the position an results of the entity.

The key features of the audit report

The auditor does not certify or guarantee that the financial statements are correct. The term true implies free from error and fair implies that there is no undue bias in the financial statements or the way in which they have been presented. Judgment is exercised by the auditor in reaching his opinion.

The key features of the audit report

The report considers whether the financial statements give a true and fair view in all material respects. The concept of materiality is applied in reaching an audit opinion.
The auditor will concentrate his efforts on the more significant items in the financial statements, either (a) because of their high value, or (b) because there is a greater risk that they could be stated incorrectly.

The statutory requirement for audit

Most countries impose a statutory requirement for an annual (external) audit to be carried out on the financial statements of most countries.

The meaning of assurance

Definition of assurance Levels of assurance

Definition of assurance
Assurance means confidence. In an assurance agreement, an assurance firm is engaged by one party to give an opinion on a piece of information that has been prepared by another party. The opinion is an expression of assurance about the information that has been reviewed.

Definition of assurance
It gives assurance to the party that hired the assurance firm that the information can be relied on. It gives assurance to the party that hired the assurance firm that the information can be relied on.

Definition of assurance
Assurance can be provided by:
audit: this may be external audit, internal audit or a combination of the two review

Statutory audit is one form of assurance.

Levels of assurance
The degree of assurance that can be provided about the reliability of the financial statements of a company will depend on:
the amount of work performed in carrying out the assurance process, and the results of that work.

Levels of assurance
An audit provides a high, but not absolute, level of assurance that the audited information is free from any material misstatement. This is often referred to as reasonable assurance. A review would provide only a moderate level of assurance that the information under review is free of material of material misstatement.

Levels of assurance
The higher level of assurance provided by an audit will enhance the credibility provided by the assurance process, but the audit work is likely to be:
More time-consuming than a review, and so More costly than a review.