What is an assurance engagement?

The relevant quote from the Oxford online Dictionary defines an assurance as “a positive declaration intended to give confidence; a promise.” From the same source, engagement is defined as “An arrangement to do something or go somewhere at a fixed time.”

It is of vital importance for auditors to consider the definition of an assurance engagement using non-audit jargon as this will help them to get an understanding on what a layman (the general public who are the majority users of financial statements) perceive the audit task to comprise of and hence obtain an understanding of how pivotal their duties are, and how vigilant they have to be in performing those duties entrusted to them. As such, the pure English definition will be used to define an assurance engagement.

By combining the oxford definition of assurance and engagement it can be appreciated that an assurance engagement can be construed to mean an arrangement to do something (which is the audit work) and provide a positive declaration to give confidence (to the stakeholders).

IFAC definition: “Assurance engagement” means an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

From the above definitions, it is quite evident that independence is important for the following reasons:

  1. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them.
  2. The need for independence arises because, in many cases, users of financial statements and other third parties do not have sufficient information or knowledge to understand what is contained in a company’s annual accounts. Thus, they rely on the auditor’s independent assessment. Public confidence in financial markets and the conduct of public interest entities relies partly on the credibility of the opinions and reports given by auditors in relation with financial audits.

What is Independence?

Independence may be a state of mind or behaviour. Independence requires a freedom from bias, personal interest, prior commitment to an interest, or susceptibility to undue influence or pressure. This suggests that an auditor possessing the requisite state of mind will act in the correct fashion. In this context, auditors should not only be independent in fact, but more importantly they should be seen to be independent in examining and attesting clients’ financial statements. Precisely, auditors are expected to be able to independently decide on reporting strategies without any influence from their clients’ management.

Putting importance of Independence into perspective

There are two recent cases in the United States of America that have brought into question the meaning and perception of Independence. The recent cases include: Tesco dropping its auditor after 32 years after a massive accounting scandal was discovered resulting in the dismal and resignation of key board members in the group. The FIFA scandal where the auditor was also the adviser for the official Russia and Qatar organising committees where they prepared the winning bids that are now targeted in corruption investigations in the U.S. and Switzerland.

The most prominent of these cases involves FIFA, the world governing body of soccer, a sport watched and supported by million if not billions over the world and who receive billions in sponsorship. Robert Appleton, a former assistant United States attorney, a special investigations counsel with Paul Volcker’s U.N. Iraqi Oil for Food Commission Investigation and the former chief of the United Nations Anti-Corruption Task Force, said the auditor absolutely should have caught, and called out, these alleged illegal activities. “There were sufficient red flags of improper and highly suspicious payments, as well as money transfers to and from officials and others, including other highly questionable activities coupled with a history of similar issues, that should have been identified and that should have caused the auditors to highlight and report on them internally, and recommend further investigation. This is especially the case in light of the recent history of this organisation, where recent investigations already had found bribery and corruption activity,” Appleton said.

Matt Scott, a journalist and broadcaster, has an interesting take on the matter as the auditors have refused to disclose amounts received as audit fees for service rendered over the years. “Auditors have a number of functions. Chief among them is that they act as the guarantors of the transparency, accountability and honesty of the entity they are auditing. It is pretty troubling if they are not even willing to say how much they get paid by a not-for-profit organisation, particularly at what is so controversial a time for FIFA.”

Conclusion

It can be seen that both forms of independence are of great importance, not only for the audit firm but for all the stakeholders. It is therefore vital that an auditor ensures that independence from the engagement client is maintained at all times to ensure continued confidence in the audit profession and thus also avoiding not only putting the profession into disrepute but also prevent any potential financial nuclear warfare.

Victor Takaindisa

Audit Manager, Johannesburg