Chapter 1

What are the areas for the basis of decision making for financial information?

• Invest in the company

• Lend to the company

• Supply the company

• Work with the company

• Purchase from the company

Answer explanation

6. Financial information is used as the basis of decision-making in many different areas, such as whether to:

7. • 1. Invest in the company;

   • 2. Lend to the company;

   • 3. Supply to the company; or

   • 4. Purchase from the company.

Users of financial information desire assurance reports because they can provide _ _of the financial information prepared by management.

Answer explanation

6. Users of financial information therefore desire assurance reports because they provide an independent view of the financial information prepared by the management of the reporting organisation.

8. Users can then make an objective assessment of the financial information, taking into account their objectives and the opinion given by the assurance firm. In the absence of a report from an assurance firm, an objective assessment may not be possible because of the possibility that management has prepared biased information.

What are the benefits of assurance reports?

• Provides independent view and enhances the credibility of the information

• Provides reasonable assurance to users

• Risk of management bias is reduced

• Qualified opinion and additional comments could draw the user's attention to risks or deficiencies in the information

• The relevance of information mayb have been improved by the expertise

Answer explanation

The benefits provided to the users of financial information include the following:

• 1. An independent opinion from an external source enhances the credibility of the information;

• 2. The risk of management bias is reduced;

• 3. The relevance of the information may have been improved by the expertise, experience and knowledge of the assurance firm; and

• 4. Qualified opinions and additional comments could draw the attention of the users to risks or deficiencies in the information.

Essentially, an assurance report reduces uncertainty, for example, by removing concerns about whether the information has been carefully compiled and is internally consistent.

What are the inherent limitations of assurance?

• Most evidence being conclusive rather than persuasive

• Impracticality of examining all items

• Detection risk of accounting and control system

• Possibility of collusion for fraudulent purposed

Answer explanation

11. The extent to which the assurance firm may give an inappropriate opinion on the financial statements cannot be reduced due to the inherent limitations of any audit work performed. Such limitations include those resulting from:

12. • 1. The impracticality of examining all items within an account balance or class of transactions;

    • 2. The inherent limitations of any accounting and control system;

    • 3. The possibility of collusion or misrepresentation for fraudulent purposes; and

    • 4. Most evidence being persuasive rather than conclusive.

    • Therefore, it is impossible for an assurance engagement to ever give total or absolute assurance.

Which one is not the level of assurance provided by practitioners?

• Limited assurance

• Absolute assurance

• Reasonable assurance

Answer explanation

13. Under the framework for assurance engagements established by IFAC, the assurance firms/practitioners are permitted to perform two types of assurance engagements:

    • 1. “Reasonable” assurance engagement – the objective of a “reasonable” assurance engagement is a reduction in the engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of conclusion; and

    • 2. “Limited” assurance engagement – the objective of a “limited” assurance engagement is a reduction in the engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a negative form of expression of conclusion.

The objective of reasonable assurance is a reduction in the engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a _ form of expression of conclusion.

• “Limited” assurance engagement – the objective of a “limited” assurance engagement is a reduction in the engagement risk to a level that is _ in the circumstances of the engagement as a basis for a negative form of expression of conclusion.

Which one is not the essential elements of assurance engagement?

• Three-party relationship

• Appropriate subject matter and suitable criteria

• Sufficient appropriate evidence

• Financial records

• Written report

Answer explanation

The essential elements of an assurance engagement are:

1. (a)  a three-party relationship;

2. (b)  an appropriate subject matter;

3. (c)  suitable criteria;

4. (d)  sufficient appropriate evidence; and

5. (e)  a written assurance report.

Who are the parties in the three-party relationship?

• The practitioner

• The intended users

• The shareholders

• The responsible party

What are the characteristics of acceptable subject matter?

• Complex data

• Identifiable

• Capable of consistent evaluation or measurement against the identified criteria

• Can be subjected to procedures for gathering evidence to support that evaluation or measurement