The five elements, evidence and engagement risk

Assemble the engagement before selecting procedures

The five elements are the parties, an appropriate underlying subject matter, suitable criteria, sufficient appropriate evidence and a written assurance report. Each solves a different problem: accountability, scope, measurement, support and communication. The engagement becomes difficult to defend when one is missing.

Concept sources: A Guide for Prescribing Assurance and Related Services — pages 5–13; original learning sequence.

Separate the parties and the information

The practitioner performs the assurance engagement. The responsible party owns responsibility for the underlying subject matter. Intended users rely on the report. The engaging party commissions the work; the measurer or evaluator produces the subject matter information. Roles can overlap, so map responsibilities rather than assuming five separate organisations are needed. A Guide for Prescribing Assurance and Related Services, pages 6 and 19–21.

The underlying subject matter is what is measured or evaluated; subject matter information is the resulting representation. Keep the two distinct. For example, the service's deliveries are different from a report claiming that 97% arrived within the agreed window. A report may be mathematically accurate yet misleading if its definition excludes inconvenient cases.

Make the criteria precise enough to challenge

Criteria must be relevant, complete, reliable, neutral, understandable and available to users. An internal metric must meet these characteristics too. ASAE 3000, paragraph 24 and A45–A50.

Concept sources: ASAE 3000 — A45; original criteria-testing questions.

Obtain enough evidence that actually answers the question

Sufficiency concerns quantity; appropriateness concerns relevance and reliability. Greater risk commonly demands stronger evidence, more evidence, or both. Repeating a weak procedure does not necessarily repair its weakness. Evidence reliability depends on its source, how it was obtained and the circumstances. External information is not automatically trustworthy. ASA 500 Audit Evidence, paragraphs 5–11 and A8–A9, A31–A35.

Concept sources: ASA 500 Audit Evidence — A14–A25; original applications of evidence procedures.

Nature means what procedure is used and why; timing means when it is performed or which period it addresses; extent means how much work is performed. Testing at year-end is not universally best: a claim about controls throughout a year needs evidence covering their operation during that period.

Combine scepticism, judgement and materiality

Professional scepticism means remaining willing to challenge explanations and investigate contrary evidence. Professional judgement turns knowledge and experience into reasoned decisions about the work and conclusion. They reinforce one another: scepticism raises the question; judgement selects a defensible response. IAASB Staff Issues Q&A Document on Professional Skepticism.

Materiality focuses attention on information capable of influencing user decisions. Both amount and nature matter, and several small errors may matter together. It affects planning, procedures and evaluation of results; it is not simply an end-of-engagement threshold. ASA 320 Materiality in Planning and Performing an Audit, paragraphs 2–6.

Understand where an inappropriate conclusion can arise

Concept sources: AUASB Glossary — definitions of risk of material misstatement and detection risk; original diagnostic questions.

Engagement risk concerns an inappropriate assurance conclusion when the information is materially misstated. It differs from the practitioner's commercial risk of losing a client. Uncertainty, selective testing, human judgement and control limitations prevent assurance from becoming a guarantee. A larger sample cannot cure testing the wrong population. A clean result on selected transactions cannot establish that omitted transactions never existed.

Make the report's boundaries visible

The written report connects the conclusion to identified information, criteria, responsibilities and users. In work covering several subjects or assurance levels, the reader must be able to identify which conclusion belongs to which scope. GS 022 explains these reporting issues for grant acquittals and engagements combining different scopes. GS 022 Grant Acquittals and Multi-Scope Engagements, paragraphs 1–2 and 115–118.

Sources and further reading

• ASAE 3000 — criteria and acceptance.
• ASA 500 and ASA 320 — evidence and materiality in financial audits.
• AUASB Glossary — terminology; consult the applicable study-period standards for requirements.
• GS 022 — reporting across different scopes.