00 AUDIT ASSURANCE

In an assurance engagement, the auditor provides either reasonable assurance or limited assurance that the subject matter information (such as financial statements) is free from material misstatement.

---

Key Assurance Levels

Element	Reasonable Assurance (Audit)	Limited Assurance (Review)
Objective	Reduce audit risk to an acceptably low level to express a positive form of opinion.	Reduce risk to a moderate level to express a negative form of conclusion.
Form of Expression	Positive Opinion ("The financial statements present fairly, in all material respects...")	Negative Conclusion ("Nothing has come to our attention that causes us to believe that...")
Primary Procedures	Tests of controls, detailed substantive testing, third-party confirmations, physical inspection.	Inquiry with management/internal personnel and analytical procedures.
Example Engagement	Annual Financial Statement Audit.	Mid-Year / Interim Financial Statement Review.

---

Audit Risk Model Components

Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit Risk (AR) = Inherent Risk (IR) × Control Risk (CR) × Detection Risk (DR)

• Inherent Risk (IR): The susceptibility of an assertion to a misstatement before consideration of any related internal controls.
• Control Risk (CR): The risk that a misstatement will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.
• Risk of Material Misstatement (RMM): The combined assessment of IR × CR, which lies outside the auditor's direct control.
• Detection Risk (DR): The risk that the procedures performed by the auditor will not detect a misstatement that exists. Auditors adjust the nature, timing, and extent of audit procedures to lower DR when RMM is assessed as high.

---

Core Management Assertions

Auditors use assertions to assess potential misstatements across three main categories:

1. Transactions and Events (Income Statement)

• Occurrence: Transactions and events that have been recorded actually occurred and pertain to the entity.
• Completeness: All transactions and events that should have been recorded have been recorded.
• Accuracy: Amounts and other data relating to recorded transactions have been recorded appropriately.
• Cut-off: Transactions and events have been recorded in the correct accounting period.
• Classification: Transactions and events have been recorded in the proper accounts.

2. Account Balances (Balance Sheet / Statement of Financial Position)

• Existence: Assets, liabilities, and equity interests exist at the reporting date.
• Rights & Obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
• Completeness: All assets, liabilities, and equity interests that should have been recorded have been recorded.
• Valuation & Allocation: Assets, liabilities, and equity interests are included at appropriate amounts, and any resulting valuation adjustments are appropriately recorded.

3. Presentation and Disclosure

• Transactions and balances are clearly presented, relevant, and understandable in accordance with the applicable financial reporting framework (such as IFRS, US GAAP, or local GAAP).