Part A: Framework and ethics
Assurance and non-assurance engagements
Key takeaways
- An assurance engagement ends in a conclusion that enhances users' confidence in a subject matter; agreed-upon procedures and compilations are non-assurance engagements and give no conclusion at all.
- Agreed-upon procedures under ISRS 4400 report factual findings from procedures the client agreed; a compilation under ISRS 4410 helps prepare financial information without giving assurance on it.
- Every engagement type needs its own engagement letter, because an audit letter's terms would not fit a compilation or an agreed-upon-procedures engagement.
- Reasonable assurance (an audit) gives a positive opinion; limited assurance (a review) gives a negative-form conclusion.
- A key audit matter shows where the auditor focused most attention and why; it is not a modified opinion and never stands in for one.
Standards for this chapter
The International Framework for Assurance Engagements; ISAE 3000 (Revised); ISRE 2400 (Revised) and ISRE 2410; ISRS 4400 (Revised) for agreed-upon procedures and ISRS 4410 (Revised) for compilations; ISA 210 for engagement letters; ISA 700 (Revised), ISA 701, ISA 705 (Revised) and ISA 706 (Revised) for the opinions and key audit matters an assurance report can carry.
The concept of assurance and non-assurance engagements
Revisits the assurance and non-assurance engagements chapter of CPA Auditing and Assurance at an advanced level: assurance engagements give a conclusion enhancing user confidence in a subject matter; non-assurance engagements, agreed upon procedures and compilations below, provide no such conclusion.
Engagement letters
Every engagement type needs its own tailored letter (extending the ISA 210 engagement letter treatment in CPA Auditing and Assurance) setting out the specific scope, since an audit engagement letter's terms would not fit a compilation or agreed-upon-procedures engagement.
Agreed upon procedures
Revisits ISRS 4400 from CPA Auditing and Assurance, under non-assurance engagements: the practitioner reports factual findings from specific, client-agreed procedures, with no opinion or assurance conclusion expressed at all.
Compilation engagements
Revisits ISRS 4410 from CPA Auditing and Assurance, under non-assurance engagements: the practitioner helps prepare financial information without providing assurance on it, distinct from an audit or review in giving no conclusion whatsoever on reliability.
Types of assurance reports
Reasonable assurance reports (audits, positive opinion) and limited assurance reports (reviews, negative-form conclusion), revisiting the assurance-level framework in CPA Auditing and Assurance.
Key Audit Matters
Revisits key audit matters from CPA Auditing and Assurance at an advanced level: matters of most significance in the audit of listed entities, communicated in the audit report to give users insight into where the auditor focused most attention and why, without themselves constituting a modified opinion.
Key audit matters are not a substitute for a modified opinion and candidates confuse the two every sitting. A key audit matter is a matter that, in the auditor's professional judgement, was of most significance in the audit of the current period, selected from matters communicated to those charged with governance. Reporting one says the matter took the most audit attention, not that anything is wrong. A modified opinion says something is wrong. Describing a going concern uncertainty as a key audit matter when it requires a material uncertainty paragraph is a reporting failure, not a stylistic choice.
Audit opinions and exemption in Kenya
Exam tip
The audit exemption for small companies is a specific, often-overlooked point, know the underlying policy rationale: statutory audit cost is proportionally heavier for small entities, so a size-based exemption balances assurance need against compliance burden.
Self-check
(a) Distinguish an assurance engagement from a non-assurance engagement. (3 marks)
(b) A client asks a practitioner to perform specific, client-agreed procedures on its receivables ledger and simply report the factual findings, with no opinion expressed. Identify the type of engagement and its assurance level. (2 marks)
(c) Explain what a Key Audit Matter communicates that a modified opinion does not. (3 marks)
(d) State the policy rationale for exempting certain small companies from mandatory statutory audit in Kenya. (2 marks)
Show worked answer
(a) An assurance engagement results in a conclusion that enhances the confidence of intended users in a subject matter; a non-assurance engagement (such as agreed-upon procedures or a compilation) provides no such conclusion at all (3 marks).
(b) An agreed-upon procedures engagement under ISRS 4400 (Revised); it carries no assurance level whatsoever, since the practitioner reports only factual findings from the specific procedures performed, without expressing any opinion or conclusion (2 marks).
(c) A Key Audit Matter communicates the areas of most significance in the audit of the current period, giving users insight into where the auditor focused most attention and why, without itself constituting or implying a modification of the opinion (3 marks).
(d) Statutory audit cost falls disproportionately heavily on small entities relative to their size and the assurance benefit obtained, so a size-based exemption balances the genuine need for assurance against the compliance burden it imposes (2 marks).