ACCA F8 Audit framework and regulation
1、The concept of audit and other assurance engagements
An audit is an evaluation of an organisation, system or process. Audits are performed to ascertain the validity and reliability of information, and also provide an assessment of a system's internal control.
In the context of a company and its accounting records, the external audit is an “independent examination and expression of opinion on the financial statements of an entity”. Many organisations (particul arly companies) are legally required to have an external audit.
The purpose of the external audit is for the auditor to obtain sufficient appropriate audit evidence on which to base the audit opinion. This opinion states that the financial statements give a ‘true and fair view’ of the position, performance (and cash flows) of the entity. This opinion is prepared for the benefit of shareholders and can be seen as helping to prevent these investors from being defrauded.
There is no strict legal definition o f “true and fair” but essentially it means that the financial statements contain no significant/material errors.
“True” can be considered as stating that the information in the financial statements is factual and complies with accounting standards.
“Fair” refers to information being clear, impartial and unbiased, reflecting the substance of transactions, rather than the legal form.
An audit is considered necessary for all but the smallest companies because there is often a distinction between those people that own the company – the shareholders – and those people that run the day- to-day operations of the company – the directors.
In this sense, the directors are considered to be the “stewards ” of the company – they are accountable to the owners for the way the performance of the company.
1.1 Assurance engagements
Assurance engagements (of which an external audit is an example) are simply assignments where a practitioner expresses a conclusion designed to give confidence about the outcome of a particular subject matter.
The five elements of an assurance engagement are:
(a) A three-party relationship:
(i) A practitioner (i.e. an accountant) who is the professional who will review the subject matter and provide the assurance
(ii) A responsible party, which is the organisation responsible for preparing the subject matter to be reviewed
(iii) Intended user, who is the person who requires the assurance report.
(b) An appropriate subject matter. The subject matter is the data that the responsible party has prepared and which requires verification (e.g. financial statements).
(c) Suitable criteria. The subject matter is compared to the criteria in order for it to be assessed and an opinion provided (e.g. accounting standards).
(d) Sufficient appropriate evidence has to be obtained by the practitioner in order
to give the required level of assurance.
Company Owned by Run by Shareholders Financial statements Directors Independent examination Opinion Auditor
(e) A written assurance report given by the practitioner to the intended user and the responsible party.
1.2 Explain the level of assurance provided by audit and other review assignments
There are two levels of assurance that an assurance engagement can provide, depending on the amount of work performed.
1.2.1 Limited level of assurance
This is a form of negative assurance, whereby the auditors state that “nothing has come to their attention” that causes them to believe that the subject matter is not free from material misstatement. This level of assurance is commonly used for forecasts (e.g. a cash flow forecast), where the auditor cannot “vouch” the accuracy of the data because the data cannot be tested against actual known figures.
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