can somebody please explain properly what assurance is?


#1

thinking about applying to big 4
thx x


#2

Certainly. Assurance means audit.

Every year, companies are required to file accounts with Companies House and deliver the accounts to shareholders. The auditors come in and check the accounts are a true & fair representation of the company’s affairs at that date. They give ‘assurance’ (‘comfort’) over the figures. Included in every company’s accounts is a letter from the auditors to the shareholders, giving their opinion on the accounts.

The purpose of auditors is often misunderstood, and it is NOT:
[LIST]
[]To test every transaction
[
]To search for fraud, although we keep our eyes open
[]To test employees of the company
[
]To give a guarantee about the accounts - it is only an opinion and we don’t take responsibility for how that opinion is used
[/LIST]

We do two kinds of testing:
[LIST]
[]Substantive Testing
[
]Controls Testing
[/LIST]

Substantive Testing

What we do is take a sample of transactions and test them from start to finish, from where they appear on the invoice to how they appear in the published accounts. For example, they might have purchased some new expensive computers this year. We might select from a list of purchases the most substantial ones and ask to see the invoices. If we were particularly inquisitive, we’d ask to see the computers as well. We’d then trace those invoices to where they will appear in the accounts, as part of a much larger figure.

Substantive testing basically means taking a transaction and seeking the proof that it exists.

Control Testing

When testing controls, we are not looking for evidence of transactions, but instead looking at the systems and processes the firm has in place to make sure mistakes do not happen. This might be, for example, that a computer automatically logs orders when they come in. We would test a sample of orders to see if they had gone into the computer successfully, and test any output. If we can put reliance that the computer is accurate, we do not need to test that part substantively. This is good because it is much less work. Processes can also be e.g. one person fills in a cheque, another person reviews it, and a third and fourth person sign it. This makes sure any mistakes are caught early. We would test that cheques have been reviewed and are correct.

Where controls are good, we have what we call ‘control reliance’ and are comfortable that they are well organised and do not make too many mistakes. If that is the case, then we do not have to do so much substantive testing, which is hard work for both the client and the auditor.

Hope this helps,
Chris.