WEEK 1
LECTURE 1: INTRODUCTION TO ACCOUNTING SERVICES
ASSURANCE: WHY AND WHAT? (KNECHEL, 2021)
Capital markets can only operate efficiently and fairly if they are
transparent. Transparency is dependent on reliable and credible
information. The information supply chain (fig.) models how
information is created through internal processes and controls within
the firm. Corporate governance and the internal audit are responsible
for overseeing these financial processes. Before information is
released to the public, it is filtered through by an audit/assurance. This
assurance is a signal about the credibility of the information.
If an audit reduces information risk, and enhances the degree of confidence of intended users in that information, then it should be
beneficial for any information that “moves the market” (= is important). Assurance services cover any type of information, not just
financial.
FORMAL DEFINITION OF AN AUDIT
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
International
statements. This is achieved by the expression of an opinion by the auditor on whether the financial
Standards on
statements are prepared, in all material respects, in accordance with an applicable financial reporting
Auditing (ISA)
framework. […] An audit conducted in accordance with ISAs and relevant ethical requirements enables the
200
auditor to form that opinion.
Audit = “An economically motivated professional service designed to reduce information risk that relies on
Knechel, 2021, P.
knowledge and skills of experts used in a systematic process that considers the idiosyncratic needs of a
134
client where the outcome is unobservable and subject to market forces and regulatory constraints”.
Information risk relates to the risk that information is incorrect (= includes material misstatements). To decrease information risk
one has to rely on knowledge and skills of experts: auditors. They are experts in verification processes and technical experts (of the
financial framework). The outcome of an audit is unobservable because it comes in the form of reduced information risk. The value
of the audit stems from the idea that the users of the services believe that the auditor can decrease the information risk to a
certain degree.
WHAT IS AN ASSURANCE ENGAGEMENT?
Assurance engagement – An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a
conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject
matter information (that is, the outcome of the measurement or evaluation of an underlying subject matter against criteria). ISAE
3000.12(a)
➔ The assurance provider can reduce the information risk for any type of information.
VALUE OF ASSURANCE (KNECHEL, 2021)
Important elements of assurance services: “An economically motivated professional service designed to reduce information risk (It
derives economic value from a reduction in information risk) that relies on knowledge and skills of experts (only valuable if it relies
on knowledge and skills of experts) used in a systematic process that considers the idiosyncratic needs of a client where the
outcome is unobservable (Outcome – reduction in information risk – is unobservable, and therefore users must trust the service)
and subject to market forces and regulatory constraints (Exist within a network of professional guidelines and regulatory
boundaries, that safeguard independence and enhance public trust)” (Knechel, 2021, P. 134).
THE DEMAND FOR ASSURANCE (KNECHEL, 2021)
• Demand from preparers of information. Preparers obtain benefits from assuring information. E.g., higher valuation, reduced cost
of capital, more accurate analyst forecasts, ability to attract capital, signaling value.
• Demand from users of information. Users of assured information benefit. E.g., (perception of) higher reliability and credibility of
disclosures, reduced information risk, less “greenwashing”.
• Regulatory demand. As regulators mandate information, there is a need to ensure that mandated information is reliable and
credible → CSRD.
Page 1 of 33
, TYPES OF ASSURANCE SERVICES (ISAE 3000.12(A))
An assurance service is any service that reduces information risk over a certain subject matter. Within this umbrella we have
attestation services and direct engagement:
➔ The difference between an attestation service and an audit is that an audit provides third-party assurance that a company’s
financial statements are correctly prepared and based on verified business data, while attestation is the process, performed by
accountants or auditors, of providing independent opinion on published financial and other business information of a business,
public agency, or other organization.
➔ The differences between attestation services and direct engagement:
o In attestation services the information is checked against criteria. The responsible party is the management of the
firm that puts out that information.
o In direct engagement the practitioner measures the underlying subject.
➔ Non-assurance services are a compilation of services where audit firms compile all information themselves into a financial
statement and perform agreed upon procedures. They do not provide an opinion.
TYPES OF ASSURANCE SERVICES (U.S. STANDARDS/SSAES)
• Assurance services
• Attestation services
o Examinations: practitioner expresses an opinion with high level of assurance/reasonable assurance that 1) the
subject matter is presented in accordance with criteria, in all material respects; 2) the assertion is fairly stated in
accordance with the criteria, in all material respects.
o Reviews: practitioner expresses an opinion with limited assurance whether any material modifications should be
made for the subject matter to be in accordance with the criteria.
o Agreed-upon procedures: engagements in which a practitioner is contracted to perform specific procedures on
subject matter or an assertion and report findings, without providing an opinion.
• Audit
PARTIES TO AN ASSURANCE ENGAGEMENT (ISAE 3000. APPENDIX)
• Responsible party is responsible for the underlying subject matter (e.g.,
board of directors and management).
• The measurer/evaluator uses the criteria (e.g. IFRS) to measure/evaluate
the underlying subject matter resulting in subject matter information (e.g.,
management).
• The engaging party agrees to the terms of the engagement with the
practitioner (e.g., board of directors/audit committee).
• The practitioner obtains sufficient appropriate evidence in order to express a
conclusion designed to enhance the degree of confidence of intended users
about the subject matter information (e.g., audit firm).
WHAT CAN BE ASSURED?
• Subject matter information - The outcome of the measurement or evaluation of the underlying subject matter against the
criteria, i.e., the information that results from applying the criteria to the underlying subject matter. (ISAE 3000.12)
• Criteria – The benchmarks used to measure or evaluate the underlying subject matter. The “applicable criteria” are the criteria
used for the particular engagement. → Criteria should exhibit the following characteristics: Relevance, completeness,
reliability, neutrality, understandability.
Page 2 of 33
LECTURE 1: INTRODUCTION TO ACCOUNTING SERVICES
ASSURANCE: WHY AND WHAT? (KNECHEL, 2021)
Capital markets can only operate efficiently and fairly if they are
transparent. Transparency is dependent on reliable and credible
information. The information supply chain (fig.) models how
information is created through internal processes and controls within
the firm. Corporate governance and the internal audit are responsible
for overseeing these financial processes. Before information is
released to the public, it is filtered through by an audit/assurance. This
assurance is a signal about the credibility of the information.
If an audit reduces information risk, and enhances the degree of confidence of intended users in that information, then it should be
beneficial for any information that “moves the market” (= is important). Assurance services cover any type of information, not just
financial.
FORMAL DEFINITION OF AN AUDIT
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
International
statements. This is achieved by the expression of an opinion by the auditor on whether the financial
Standards on
statements are prepared, in all material respects, in accordance with an applicable financial reporting
Auditing (ISA)
framework. […] An audit conducted in accordance with ISAs and relevant ethical requirements enables the
200
auditor to form that opinion.
Audit = “An economically motivated professional service designed to reduce information risk that relies on
Knechel, 2021, P.
knowledge and skills of experts used in a systematic process that considers the idiosyncratic needs of a
134
client where the outcome is unobservable and subject to market forces and regulatory constraints”.
Information risk relates to the risk that information is incorrect (= includes material misstatements). To decrease information risk
one has to rely on knowledge and skills of experts: auditors. They are experts in verification processes and technical experts (of the
financial framework). The outcome of an audit is unobservable because it comes in the form of reduced information risk. The value
of the audit stems from the idea that the users of the services believe that the auditor can decrease the information risk to a
certain degree.
WHAT IS AN ASSURANCE ENGAGEMENT?
Assurance engagement – An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a
conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject
matter information (that is, the outcome of the measurement or evaluation of an underlying subject matter against criteria). ISAE
3000.12(a)
➔ The assurance provider can reduce the information risk for any type of information.
VALUE OF ASSURANCE (KNECHEL, 2021)
Important elements of assurance services: “An economically motivated professional service designed to reduce information risk (It
derives economic value from a reduction in information risk) that relies on knowledge and skills of experts (only valuable if it relies
on knowledge and skills of experts) used in a systematic process that considers the idiosyncratic needs of a client where the
outcome is unobservable (Outcome – reduction in information risk – is unobservable, and therefore users must trust the service)
and subject to market forces and regulatory constraints (Exist within a network of professional guidelines and regulatory
boundaries, that safeguard independence and enhance public trust)” (Knechel, 2021, P. 134).
THE DEMAND FOR ASSURANCE (KNECHEL, 2021)
• Demand from preparers of information. Preparers obtain benefits from assuring information. E.g., higher valuation, reduced cost
of capital, more accurate analyst forecasts, ability to attract capital, signaling value.
• Demand from users of information. Users of assured information benefit. E.g., (perception of) higher reliability and credibility of
disclosures, reduced information risk, less “greenwashing”.
• Regulatory demand. As regulators mandate information, there is a need to ensure that mandated information is reliable and
credible → CSRD.
Page 1 of 33
, TYPES OF ASSURANCE SERVICES (ISAE 3000.12(A))
An assurance service is any service that reduces information risk over a certain subject matter. Within this umbrella we have
attestation services and direct engagement:
➔ The difference between an attestation service and an audit is that an audit provides third-party assurance that a company’s
financial statements are correctly prepared and based on verified business data, while attestation is the process, performed by
accountants or auditors, of providing independent opinion on published financial and other business information of a business,
public agency, or other organization.
➔ The differences between attestation services and direct engagement:
o In attestation services the information is checked against criteria. The responsible party is the management of the
firm that puts out that information.
o In direct engagement the practitioner measures the underlying subject.
➔ Non-assurance services are a compilation of services where audit firms compile all information themselves into a financial
statement and perform agreed upon procedures. They do not provide an opinion.
TYPES OF ASSURANCE SERVICES (U.S. STANDARDS/SSAES)
• Assurance services
• Attestation services
o Examinations: practitioner expresses an opinion with high level of assurance/reasonable assurance that 1) the
subject matter is presented in accordance with criteria, in all material respects; 2) the assertion is fairly stated in
accordance with the criteria, in all material respects.
o Reviews: practitioner expresses an opinion with limited assurance whether any material modifications should be
made for the subject matter to be in accordance with the criteria.
o Agreed-upon procedures: engagements in which a practitioner is contracted to perform specific procedures on
subject matter or an assertion and report findings, without providing an opinion.
• Audit
PARTIES TO AN ASSURANCE ENGAGEMENT (ISAE 3000. APPENDIX)
• Responsible party is responsible for the underlying subject matter (e.g.,
board of directors and management).
• The measurer/evaluator uses the criteria (e.g. IFRS) to measure/evaluate
the underlying subject matter resulting in subject matter information (e.g.,
management).
• The engaging party agrees to the terms of the engagement with the
practitioner (e.g., board of directors/audit committee).
• The practitioner obtains sufficient appropriate evidence in order to express a
conclusion designed to enhance the degree of confidence of intended users
about the subject matter information (e.g., audit firm).
WHAT CAN BE ASSURED?
• Subject matter information - The outcome of the measurement or evaluation of the underlying subject matter against the
criteria, i.e., the information that results from applying the criteria to the underlying subject matter. (ISAE 3000.12)
• Criteria – The benchmarks used to measure or evaluate the underlying subject matter. The “applicable criteria” are the criteria
used for the particular engagement. → Criteria should exhibit the following characteristics: Relevance, completeness,
reliability, neutrality, understandability.
Page 2 of 33
