Five Elements of Assurance Engagement

Assurance engagement involves five elements including three parties. Generally, the engagement serves as an accountability action to protect stakeholders or shareholders against the powers of the directors. How? When an external third party provides a reasonable assurance on the subject matter provided by the directors, it helps the shareholders rely on the report.

1. Parties to the Engagement

There are three parties to the engagement. They are the responsible party, the intended users, and the practitioner.

1.1 Responsible party: This is the individual responsible for providing the subject matter. He or she prepares the subject matter and makes it available to the practitioner for review. In a company, the board of directors are the responsible party. 

1.2 Intended users: These are the shareholders of the entity. Intended users can also include shareholders such as the tax authorities. For example, in filing company income tax, the Federal Inland Revenue Service requires a copy of the audited financial statement.

1.3 Practitioner: The third party engaged by the intended users or the responsible party to provide a review or audit on the subject matter. The practitioner is the external auditor for an audit engagement or an accounting/financial consultancy firm for a review engagement.

2. Subject matter

The subject matter is the information that requires assurance. In an audit engagement, the subject matter is the financial statements. It is the responsible party that provides the subject matter.

3. Suitable criteria

The subject matter of the assurance engagement must be reviewed based on suitable criteria. The criteria are based on two factors, that is, what the subject matter is about and the regulations that guide them. In a corporate governance review, the code of corporate governance is the suitable criteria. However, in a financial statement audit, the criteria are the international financial reporting standards and the company law of the country.

4. Sufficient Evidence

Sufficient evidence is collected from sources related to the subject matter. Evidence is collected from the entity source documents in an audit. The principle that guides such evidence is that it must be sufficient and relevant. The more evidence available, the higher the level of assurance.

5. Assurance Report

This is the report prepared by the practitioner. Here, the practitioner provides his or her opinion regarding the subject matter. A high degree of level of assurance is provided by an audit and a moderate level of assurance is required for a review.