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The objective of an assurance engagement

In paragraph 1 it is stated that the purpose of the Framework is to define and describe the elements of an assurance engagement. We believe that the Framework, being a (or rather the) fundamental document, also should include at the very beginning a statement and a discussion of the objective of such an engagement. Paragraphs 1–3 in ISA 200 could serve as a model for that. In a different context, the objective of an assurance engagement is mentioned in paragraph 40 being ”to reduce assurance engagement risk to .”. Considering the objective of the IAASB according to the proposed Terms of reference, an objective of an assurance engagement limited to what is stated in paragraph 40 might not take into account what the ”key stakeholders” referred to in the Terms might expect being the objective of such an engagement.

The nature of the term assurance

The explanatory memorandum includes a comment that the terminology in both the Framework and ISAE 2000 has been amended to consistently refer to the fact that practitioners obtain assurance and provide a conclusion that conveys that assurance. This is a change from the present ISA terminology where provide assurance often is used.

One example is paragraphs 6–8 in the present ISA framework 120, proposed to be withdrawn as a whole. We do not object to this change of terminology. This amendment, though, would not be just any change but a change meriting further discussion in the framework. The perspective from which the very term ”assurance” is used is moved from the delivery of the service to the production of the service. In the Introduction, i.e. before the technical parts of the Framework, there should be a brief but still comprehensive discussion of the nature of an assurance engagement, including what is the nature of the very critical fact in an assurance engagement that ”practitioners obtain assurance and provide a conclusion that conveys that assurance”. We believe that such a discussion is necessary for an understanding as a basis not only for a proper translation of the Framework into other languages but also for any practitioner in his/hers turn to discuss the service ”assurance (engagements)” with any ”key stakeholder”.

Clarification of terms and wordings and consistent use of them

In paragraph 6 an assurance engagement is defined. However, none of the critical terms ”obtain”, ”provide” and ”convey” is used in the definition. This is confusing and unfortunate. For the same reasons as said above we recommend that all key terms and wordings related to ”assurance engagements” are identified, properly defined at the beginning of the Framework, and consistently used throughout the Framework and ISAE 2000 and other ISAEs to come. One example is a clarification of the very nature of ”conveying assurance” that would give an idea of the difference in nature, if any, compared to the wording ”providing assurance” previously used.

The user perspective in assurance engagements

It would seem appropriate to include in the Framework also some discussion addressing the user perspective of assurance engagements, perhaps included in the Assurance Report part. As they are drafted in the ED, paragraphs 46–48 are very much or wholly producer oriented and leave no message to the reader (practitioner, user and others) on the assurance conveyed. The practitioner (profession) ”owns” the concept of assurance and the tool assurance engagements and it is important that these professional parties set the keynote in the matters user perspective on assurance and assurance conveyed. Such a discussion would contribute to narrowing the so-called expectations gap and a better understanding of the term ”reasonable”, thus contributing to limiting the risk of litigations.

Paragraph 31

In paragraph 31 it is stated at the end that the practitioner considers materiality and assurance engagement risk when planning and performing the engagement. As regards the risk, reference is made to paragraph 37 but there is neither further discussion on ”materiality” in the Framework nor any reference to paragraph 20 in ED ISAE 2000 where ”materiality” is dealt with. If it is not considered appropriate to discuss materiality in an assurance engagement in the Framework, there should at least be a reference in paragraph 31 to paragraph 20 in the ED ISAE 2000.

Paragraph 38

The components of the assurance engagements risk are discussed in paragraph 38. The risk is structured in the same way as the risk in the audit of historical financial information. Inherent risk may certainly be relevant in many assurance engagements. However, considering the very different nature of the subject matter in assurance engagements, the inherent risk may not be as operational as it is in an audit of historical financial information. That fact should be better reflected in the last part of paragraph 38.

Paragraph 40

See reference at 1 above to what is stated in this paragraph about the objective of an assurance engagement.

Paragraph 48

The meaning of the last sentence is not easy to understand. It seems to be a circular reasoning, and we recommend that the wording be redrafted.

Explicit requirement to obtain an understanding the subject matter

Included in the ED is no explicit requirement that the practitioner should obtain an understanding of the subject matter. However ”an understanding of the subject matter” is addressed in paragraph 31. In an audit of historical financial information there is a fundamental precondition that the auditor should obtain an understanding of the entity and its environment. There should be no lesser requirement in an assurance engagement. This could be met by redrafting the beginning of bold-lettered paragraph 13 as follows: ”The practitioner should obtain an understanding of the subject matter and other relevant engagement circumstances that is sufficient to .”. The beginning of ordinary-lettered paragraph 14 should be redrafted accordingly.

Consistent use of ”understanding” and/or ”knowledge”

With reference to paragraphs 13 and 16, a search should be made throughout the ED to secure consistent choice of the words ”understanding” or ”knowledge” in connection with engagement circumstances.

The use of ”need to” in ordinary-lettered text in the ED

In some ordinary-lettered paragraphs the wording ”need to” is used with respect to the behaviour of the practitioner (for example paragraphs 20, 28 and 31). This is confusing, as ”need to” reasonably must be understood as a requirement. As requirements should be in bold letters, all paragraphs including ”need to” should be searched and redrafted (either bold-letters or present tense).

Definitions

In paragraphs 32 and 45 the terms ”direct reporting engagement” and ”assertion-based engagement” are used respectively without further clarification. These terms should be defined in the ED. An alternative might be a reference to paragraph 24 in the Framework.

Strong support for including small entities-considerations in the ISAs

We strongly support the decision to include the special considerations in the audit of small entities directly in future ISAs. We would also appreciate very much if the thinking and considerations regarding small entities were reflected in the IAASB agenda papers on a current basis during the course of the respective project.

Proposed amendments

We have no specific comments on the proposed amendments to IAPS 1005.