## **Learning Outcomes**

By the end of this article, you will be able to explain the purpose and structure of assurance engagements, distinguish between reasonable and limited assurance, describe the five elements of an assurance engagement, identify typical assurance scenarios, and compare key features and limitations of audits and reviews. You will also recognize the importance of assurance for user confidence and the impact of ownership and governance on assurance demand.

## **ACCA Audit and Assurance (AA) Syllabus**

For ACCA Audit and Assurance (AA), you are required to understand fundamental assurance and audit principles—and how they are applied in practice. Focus your revision on the following key topics:

- The objectives and overall principles of external audit engagements.
- The definition, purpose, and five elements of an assurance engagement.
- The roles of practitioner, responsible party, and intended users.
- Types of assurance engagement—reasonable vs limited assurance—with examples.
- The concept and implications of ‘true and fair view’ and materiality.
- How separation of ownership and control (agency, stewardship) creates demand for assurance.
- The benefits and limitations of audits, including the expectation gap.
- User needs and how reporting addresses stakeholder confidence.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Name the five required elements of an assurance engagement and briefly describe what each means.
2. Match each wording to the correct assurance level:
   - “In our opinion, the financial statements present fairly in all material respects...”
   - “Nothing has come to our attention to cause us to believe...”
3. True or false? An external auditor provides absolute assurance that the financial statements are correct.
4. Give two reasons why users value an external audit, and state two inherent limitations of audit.
5. For a review of a forecast statement, who is responsible for preparing the subject matter, and who are typically the intended users?

## **Introduction**

Assurance engagements are central to trustworthy information in business. At their core, these engagements provide an independent conclusion on subject matter (such as financial statements or forecasts) so that intended users can make better decisions, with reduced risk that information is materially misstated. Understanding the characteristics, types, and objectives of assurance engagements—including audits and reviews—is essential for success in the ACCA Audit and Assurance exam.

> **Key Term: assurance engagement**
> An assignment in which a practitioner collects sufficient appropriate evidence to provide a written conclusion, increasing user confidence about whether subject matter meets stated criteria.

## The Five Elements of Assurance Engagements

Whether for audit, review, or other assurance services, every engagement must include the following five components:

1. **Three-party relationship** — the practitioner (provides assurance), the responsible party (prepares the subject matter), and the intended users (rely on the conclusion).
2. **Appropriate subject matter** — the area being evaluated, such as financial statements or controls.
3. **Suitable criteria** — the benchmarks or framework used to assess the subject matter (e.g., IFRS, laws, policies).
4. **Sufficient appropriate evidence** — information obtained to support the conclusion.
5. **Written assurance report** — a document by the practitioner stating the conclusion for users.

> **Key Term: practitioner**
> A professional who collects evidence and provides an independent assurance conclusion to users.
>
> **Key Term: responsible party**
> The individual or organization accountable for preparing the subject matter for evaluation.
>
> **Key Term: intended users**
> People or organizations relying on the conclusion of the assurance engagement to inform their decisions.
>
> **Key Term: suitable criteria**
> Standards or rules against which the subject matter is evaluated to form a conclusion.

### **Worked Example 1.1**

A small business wants assurance over its annual energy usage data for sustainability reporting. It hires an independent practitioner to review the consumption records (subject matter) against government guidelines (criteria) and summarize findings in a report.

> **Answer:**  
> Here, the practitioner is the external reviewer, the business is the responsible party, and investors or regulators are the intended users. The guidelines provide suitable criteria, and the reviewer collects enough evidence to write a limited assurance report.

## Types and Levels of Assurance

There are two primary levels of assurance in professional engagements:

| **Reasonable Assurance**                              | **Limited Assurance**                                                    |
| ----------------------------------------------------- | ------------------------------------------------------------------------ |
| Provided by audit                                     | Provided by review engagement                                            |
| Requires extensive testing and substantiation         | Relies mainly on enquiries, analytics                                    |
| High user confidence                                  | Moderate user confidence                                                 |
| Conclusion is positively worded (“In our opinion...”) | Conclusion is negatively worded (“Nothing has come to our attention...”) |

> **Key Term: reasonable assurance**
> A high (but not absolute) level of confidence, reflecting thorough testing and supporting a positive conclusion.
>
> **Key Term: limited assurance**
> A moderate level of confidence, based on fewer procedures, reported using negative wording.

### **Worked Example 1.2**

An audit firm is engaged to examine a medium-sized company's financial statements. The auditors carry out detailed procedures and issue an independent report stating, “In our opinion, the financial statements present fairly, in all material respects...”

> **Answer:**  
> This is a reasonable assurance engagement (audit) with a high level of confidence provided to users.

### **Worked Example 1.3**

A lender requests a review—not a full audit—of a business’s forecasted cash flows. The practitioner performs strategic enquiries and analytical procedures. The report states, “Nothing has come to our attention to cause us to believe the forecast is not prepared, in all material respects, based on the stated assumptions.”

> **Answer:**  
> This is a limited assurance engagement (review) with moderate confidence for the lender about the plausibility of the forecast.

### **Exam Warning**

Be careful NOT to mix up positive (“In our opinion...”) and negative (“Nothing has come to our attention...”) report wordings. This is a frequent exam trap for distinguishing audits from reviews.

## Purpose, Structure, and Benefits of External Audit

External audit provides reasonable assurance to shareholders and other stakeholders on whether the financial statements give a true and fair view and are prepared in line with applicable standards.

> **Key Term: true and fair view**
> An expression that the financial statements are free from material misstatement and appropriately represent the entity’s performance and position.

The separation of ownership (shareholders) and control (directors) means owners must rely on directors’ representations. Audit provides independent review, reducing information risk and promoting accountability.

> **Key Term: accountability**
> Directors’ duty to explain and justify their actions and stewardship to shareholders and stakeholders.
>
> **Key Term: stewardship**
> The obligation of those managing resources to act in the best interests of the owners and take care of the entity’s assets.
>
> **Key Term: agency**
> The relationship where shareholders (principals) entrust directors (agents) to act on their behalf, creating a need for monitoring and assurance.

Audits offer several benefits:

- Improve the credibility of published information.
- Support confidence in capital markets or lender decision-making.
- May identify weaknesses in controls, supporting better governance.
- Discourage fraud and error via independent scrutiny.

## Limitations and the Expectation Gap

Despite its importance, audit has inherent limits:

- Sampling: not all transactions are tested.
- Use of judgement and estimates: some data is subjective.
- Potential for management override or concealed fraud.
- Timeliness: time and resource constraints.
- Most audit evidence is persuasive, not conclusive.

> **Key Term: expectation gap**
> The difference between what users think auditors do and what auditors are actually responsible for, leading to unrealistic expectations (such as expecting auditors to find all fraud or guarantee accuracy).

## Reviews (Limited Assurance Engagements)

A review engagement provides limited assurance—suitable for entities not needing a statutory audit, or for future-oriented subject matter (e.g., cash flow forecasts).

- Procedures focus on enquiries and analytics, not detailed tests.
- Report states that nothing has come to the practitioner’s attention to suggest material misstatements.
- Offers less confidence than an audit but may be faster and less costly.

| **Element**    | **Audit (Reasonable Assurance)**         | **Review (Limited Assurance)**                     |
| -------------- | ---------------------------------------- | -------------------------------------------------- |
| Purpose        | High confidence in past financial data   | Moderate confidence in plausibility of information |
| Evidence       | Detailed tests, confirmations, analytics | Mainly enquiry and analysis                        |
| Report wording | Positive (“In our opinion…”)             | Negative (“Nothing has come to our attention…”)    |
| Users          | Shareholders, regulators, lenders        | Management, lenders, other stakeholders            |

### **Revision Tip**

Remember: audits target past information, allow high confidence (reasonable assurance), and use positive wording. Reviews usually cover limited assurance, future/current data, and negative wording.

## Governance: Why Assurance Is Needed

Separation of ownership and control, plus conflicting incentives, create fertile ground for misstatement, bias, or fraud. Independent assurance—like audit—reduces information risk and ensures directors are accountable to users for stewarding resources faithfully.

Stakeholders relying on assurance include:

- Shareholders (owners)
- Those charged with governance (such as audit committees)
- Lenders and creditors
- Employees and pension trustees
- Regulators and tax authorities
- Suppliers and customers

## **Summary**

- Assurance engagements involve an independent evaluation to support user confidence.
- The five elements must be present: three parties, subject matter, criteria, evidence, written report.
- External audits provide reasonable assurance with a high level of confidence; review engagements provide limited assurance.
- Audits are essential for accountability where there is a separation of ownership and control.
- All assurance engagements have built-in limitations, requiring users to understand their scope and purpose.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The five elements common to all assurance engagements.
- Distinct features and objectives of reasonable and limited assurance engagements.
- The difference between audit (reasonable) and review (limited) engagement reports and procedures.
- The purpose and scope of an external audit.
- The limitations of audit and the nature of the expectation gap.
- The importance of assurance in the context of accountability, stewardship, and agency relationships.
- The principal benefits of assurance for users and the reasons it does not provide a guarantee.

## **Key Terms and Concepts**

- assurance engagement
- practitioner
- responsible party
- intended users
- suitable criteria
- reasonable assurance
- limited assurance
- true and fair view
- accountability
- stewardship
- agency
- expectation gap

Assurance and audit concepts - Purpose and types of assurance engagements