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Muhasebe ve Finansman Dergisi Temmuz 2017 Özel Sayı
Auditing And Assurance Services
Mihriban COŞKUN ARSLAN Serkan DEMİRKAN
ABSTRACT The main reason behind the development of the concept of audit is the different parties’ desire to count on the financial and nonfinancial information provided by companies so that they can verify their decisions. The trustworthiness of financial information is provided with independent audit while the trustworthiness of nonfinancial information is ensured by assurance audit. The aim of this study is to explain the assurance audit services demanded by companies to increase the reliability of information used by them in decision making process. Assurance audit services aren’t widely known in Turkey. However, it is considered that these services will become popular through the studies conducted and because the technological developments lead close relations between countries, economies, financial markets, and companies.
Keywords: Assurance services, Assurance audit, Audit. Jel Classification : M41, M42.
Denetim Ve Güvence Hizmetleri ÖZET İşletmelerin sunduğu finansal ve finansal olmayan bilgileri kullanarak karar alan veya kararlarının doğruluğunu ispatlamak isteyen çeşitli taraflar için bu bilgilere güven duyma arzusu denetimin ortaya çıkmasının temel nedenidir. Bağımsız denetim ile finansal bilgilerin güvenilirliği hakkında görüş bildirilirken; günümüzde finansal bilgiler dışındaki bilgilerin güvenilirliğiyle ilgili denetim alanı güvence denetimi ile sağlanmaktadır. Bu çalışmanın amacı; işletme taraflarının kararlarında temel olarak kullandıkları bilginin güvenilirliğini arttırmaya yardımcı olması için talep ettikleri güvence denetim hizmetlerini genel hatlarıyla açıklamaktır. Güvence denetimi hizmetleri Türkiye’de pek bilinmemekte olup; teknolojik gelişmelerin ülkeleri, ekonomileri, finansal piyasaları ve işletmeleri birbirlerine yakınlaştırması sebebiyle ve yapılan çalışmalar ile yaygınlaşacağı düşünülmektedir.
Anahtar Kelimeler: Güvence hizmetleri, Güvence denetimi, denetim. JEL Sınıflandırması: M41, M42.
(^) This article was presented as a paper at the IV. International Symposium on Accounting and Finance in
Ohrid, Macedonia, July 3-5, 2017. (^) Asst. Prof. Mihriban Coşkun Aslan, Gaziosmanpaşa Üniversitesi, [email protected] (^) Ph.D., Serkan DEMİRKAN, Gaziosmanpaşa Üniversitesi Sosyal Bilimler Enstitüsü,
[email protected]
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1. INTRODUCTION
Parties related to companies seek to make accurate decisions using both the financial and nonfinancial information. Therefore, they demand the information provided to be reliable. The aim of independent audit is to examine the company's financial statement to ensure the financial position and operating results are accurate and compliant with financial reporting standards by an independent auditor. Today, assurance audit services as well as independent audit and tax audit services are demanded by decision makers to increase the reliability of information used by them in decision making process. Within this context, assurance audit become crucial in formation of the feeling of thrust ensured by third parties.
In Turkey, Public Oversight, Accounting and Auditing Standards Authority (POA) decided to base the international standards published by International Federation of Accountants (IFAC) by right of publishing the Turkey Auditing Standards (TAS) granted by Statutory Decree (SD) number 660. Accordingly, 36 independent audit standards, 2 limited independent audit standards, 4 assurance audit standards, and 1 related-services standard were published.
Assurance services emerged in response to the needs of information users since decision makers’ needs for assurance about the reliability of information related to companies as a result of the developments in capital market and globalization. In short, assurance services are the independent professional services which improve the quality of information for decision makers (Güredin, 2014: 4, Arens et al. 2012:8). It is required to increase the awareness of practitioners about this novel audit service in Turkey, and an increase in the number of studies related to this issue is considered important within this context. In this study, assurance services and audit are explained. Then, the standards within the audit standards are mentioned, and developments in Turkey and around the world and literature review are presented. The study is concluded by explaining the audit process through which it is aimed to increase awareness by explaining the regulations about assurance audit services theoretically.
2. ASSURANCE SERVICES
Assurance is the feeling of trust formed by a well-accepted authority’s statement about the compliance of a subject with an aim (Power,1997:14). Turkish Language Association defines this concept as the convincing statement made for removing the doubts of someone. Assurance services are a broad phenomenon involving independent audit and certification services, and it can be defined as independent professional services increasing the quality of information (Madray,2006:105-106).
The goal of assurance services is to increase the reliability and quality of financial and nonfinancial information about the company. The subject of assurance service must be in a way that can be measured and assessed consistently by a criterion. It also should enable the conduction of operations to gather enough and appropriate evidence to support the measurement and assessment (Hayes et al. 2005:119-120).
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Practicing Accountants (ASCPA) (Coram,1998). In the report, a growing tendency from traditional services of audit profession to assurance services.
The CICA Task Force on Assurance Services (TFAS) was constituted by Canadian Institute of Chartered Accountant (CICA) in August 1995 in order to develop plans, implement them and ensure the dominance of auditors in the field of assurance services with the aim of expanding the assurance services (CICA,1998). Assurance Contract Standards were published in the part 5025 of CICA Handbook in 1997 in Canada (Smieliauskas, Robertson,2004:42)
In United Kingdom, a report was published in 2006 by The Institute of Chartered Accountants but Continental European Countries didn’t make similar efforts. However, regulations about assurance services of IFAC were added to the agenda after the European Union confirmed the related directive (Soltani,2007:131).
Moreover, IFAC, within the body of IAASB, made regulations about International Standards on Assurance Engagements and International Standards for Related Services within the scope of Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. Two standards about the services for a specific subject are present within the scope of IAASB: International Standards on Assurance Engagements (ISAE) 3400: The Examination of Prospective Financial Information; and ISAE 3402: Assurance Reports on Controls at a Service Organization. Additionally, International Standards for Related Services (ISRS) 4400: Engagements to Perform Agreed-Upon Procedures Regarding Financial Information is present within the scope of International Standards on Related Services. Assurance services around the world under these regulations can be listed as: assurance services for prospective financial information; assurance services for internal controls; website controls within information technologies and reliability of information systems; assurance services for sustainability; compliance with laws and regulations within the scope of other services; and assurance services such as agreed-upon procedures and statements of administration (Altıntaş,2011:110).
2.2. Developments in Turkey
The first effort about assurance services was made in 2002 by Turkish Auditing Standards Board (TASB) within the body of (UCCPA^1 ), by which audit standards published by IAASB was translated into Turkish and published. The board translated the Handbook of International Auditing, Assurance, and Ethics Pronouncements into Turkish and published under the title of International Auditing and Assurance Standards. However, these translated works don’t have legal binding. Assurance services other than independent audit mentioned in part 33 of notification with Serial X, 22 published by Capital Markets Board of Turkey (CMB) on 12.06.2006 are the legal efforts made on assurance services. Moreover, some regulations about assurance services can be observed in “Notification about Main Principles on the Management of Information Systems in Banks”, which was published by Banking Regulation and Supervision Agency (BRSA) on Official Gazette numbered 26643 in 2007. The most
(^1) Union of Chambers of Certified Public Accountants Turkey
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comprehensive regulation about assurance services in Turkey was made by Public Oversight Authority (POA), which has the sole authorization to make regulations in the fields of accounting and audit. The authority published four standards related to assurance services, and these standards are in effect.
3. ASSURANCE AUDIT
Assurance audit can be defined as an audit operation providing an assurance by an expert as a result of confirmation of relation between parties depending a contract by an external expert or auditing of that relation directly by specific criteria. In Assurance Audit Standards (AAS) 3000, assurance audit is defined as the collecting the evidences and preparing assurance report by auditors or experts in terms of specific criteria in order to increase the assurance levels of users who benefit from the process.
The goals of assurance audit are mentioned in 10th^ paragraph of AAS. Accordingly, the goals of auditors are: providing reasonable or limited assurance about the importance and accuracy of information depending on the conditions; reporting conclusions about the output of measurement or evaluation of audit through an assurance report; and providing notices in compliance with both AAS 3000 and other related assurance audit standards.
Assurance audit elements can be categorized under five headings as: triple party relation, subject, criterion, evidence, and assurance report. Below is a diagram including these elements (Hayes et al.,2005:119).
Appropriate Criterion
Responsible Party
Member of a Profession
Determination of the Criterion
Determination of the Subject
Landing a Contract with the Member of a Profession
Data Collection about the Accuracy of the Statement
Forming Statement
Preparing Assurance Report
Information Users
Figure 1. Data Flowchart Of Assurance Contract Elements
1. Triple Party Relation: There are three parties in assurance contracts: practitioners, which are auditors or experts; responsible party; and intendent users, for whom the assurance is provided. 2. Subject: The subjects are prospective financial information, internal control system, information technologies, statements of the management, policies, the state of
Muhasebe ve Finansman Dergisi Temmuz 2017 Özel Sayı
criteria with contract’s goal and the structure of subject are important for the comprehension of practitioner’s opinion.
A statement expressing that the audit was performed in accordance with Audit Assurance Standards.
An explanation stating that the company of auditor implements the provisions in Corporate Quality System 1 (CQS) or other legislation provisions meeting at least the ones in Corporate Quality System 1.
Significant limitations about assessment and measurement of a subject which is important and inconsistent with the criteria. The report should state if the it is prepared upon the request of a user or for a specific purpose. The responsibilities of responsible party and auditor should be involved in the report. A summary should be provided to the party demanding assurance about the procedures performed.
3.1. Types of Assurance Audit
Assurance audit can be divided into two categories depending on (a) the assurance level provided as a result of audit and (b) contract type and the outcome. Assurance audit is examined under two titles in terms of the assurance level.
- Reasonable assurance audit: minimizing the assurance contract risk to an acceptable level within the scope of contract conditions.
- Limited assurance audit: there is an increased risk that an auditor may not become aware of a significant error based on the techniques used by the auditor and evidences obtained. The risk in this audit is higher than the reasonable assurance audit. The reason behind this situation can be sourced from the quality of the procedures, timing, and more limited content (Altıntaş, 2011:31).
In reasonable assurance contracts, the member of a profession states the opinion more directly while in limited assurance contracts, the opinion is expressed more indirectly in inverted sentences. For example, the statement of “from our point of view, internal controls are efficient in terms of all aspects according to criterion A” represents the reasonable assurance while the statement of “according to our report, there is no reason for us not to convince that internal controls are efficient in terms of all aspects according to criterion A” represents limited assurance, which means that the member of profession gathered enough evidence to decrease the assurance contract risk to medium level (Altıntaş,2016:31-32). The differences between reasonable and limited assurance audit contracts are presented in Figure 2.
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Contract Type Evidence Collection Report
Reasonable
Assurance
Contract
As a part of systematic contract process, sufficient and appropriate evidence is obtained. Systematic contract process involves:
- Apprehension of contract conditions
- Assessment of risks
- Responding to assessed risks
- Using a combination of investigation, observation, confirmation, recalculation, reimplementation, analytical procedures, and inquiry, conduction additional operations. These operations include obtaining complementary information and substantive operations involving testing the efficiency of controls and assessing the evidences (prg 51-52)
Contract conditions are defined and the opinion is expressed directly (prg 58)
Limited
Assurance
Contract
As a part of systematic contract process, sufficient and appropriate evidence is obtained. Systematic contract process involves apprehension of subject and contract conditions but the operations are more limited compared to reasonable assurance contracts (prg 53)
Contract conditions are defined and the opinion is expressed indirectly in inverted sentences (prg 59)
Source: IFAC Handbook Framework, Figure 2. Differences Between Reasonable And Limited Assurance Contracts
Assurance audits are classified into two categories in terms of contract type and outcome (Dinç and Atabay,2016:1531):
- Direct audit: it is conducted by auditors.
- Confirmation service: it is conducted by experts other than auditors.
Issues such as sustainability and regulatory compliance are accepted as confirmation services. Confirmation services are about the accuracy of information obtained by the practitioner as a result of the audit. In direct audit, what is meant by audit is the measurement of the subject using valid criteria and reporting the results in an assurance report to the parties. In this audit, the practitioner both assesses the subject and asks for a statement from the responsible party who do the assessment and measurement (Dinç and Atabay,2016:1531).
3.2. Assurance Audit Standards
Assurance Audit Standards (AAS) regulate the assurance audits other than the independent or limited independent audits of historical financial information. When an
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Affairs involving professional opinions, convictions, and statements used by the user for make an inference when the situations below are valid:
- Insignificance of aforementioned opinions, convictions, and statements for the whole operation,
- Limitation of the report for the use of only the users mentioned in the report,
- Within the scope of the written agreement with specified target users, the service don’t have the goal of being an assurance audit, and
- Not presenting the service as an assurance audit in the audit report. 4. LITERATURE REWIEV
According to the literature review, the first study focusing on the updated initiatives with the aim of development of novel assurance services in order to meet the demand of novel information types related to the assurance services other than the independent and limited audit was conducted by Holstrum and Hunton in 1998. Another study was conducted by Reed in 2001 on the audit companies in USA. Reed examined the results of the research conducted by the Special Committee on Assurance Services in order to determine whether audit firms provide novel services and apply the recommendations of the board of assurance services. In their study conducted in 2005, Morsheda, Luehlfing and Wilkie sent questionnaires about the type of assurance contracts and levels to 5 large audit companies and other companies in 11 countries. Elliott and Jacobson (1994; 1995; and Bukics and Fleming (1998) focused on the assurance services and regulations about them. When the international books were reviewed, it was observed that Arens and Elder (2006), Ricchiute (2006), Glover and Beasley (2000), and Louwers (2015) published books on assurance services. These works can be examined under the titles such as Advanced Audit Approach, and Audit and Assurance Services. No book was found under the title of assurance audit or assurance services.
In Turkey, a doctoral dissertation on assurance services was completed by Altıntaş in 2011. In her work entitled Assurance Services Other Than Financial Statement Audit and Tax Audit, Altıntaş aimed at determining the scope of assurance services provided by members of auditing profession and their opinions related to these services. For this purpose, members of the profession working in independent audit companies in Istanbul within the within the scope of CMB legislation were the focus of the study. Moreover, the first book about assurance services in Turkey was published by Güredin in 2007. Additionally, audit materials used in independent auditor trainings under the provision of POA were prepared by Cömert et al in 2013 and published by Sakarya University – Research Center for Continuing Education. In 2016, Selimoğlu and Özsözgün published an article focusing on Internation Assurance Audit Standard within the context of Sustainability AAS (ISAE) 3410 Greenhouse Gas Statements. This study dealt with international accounting and assurance standards that could be used as a guide in accounting, reporting and assurance auditing within voluntary carbon markets. A study on assurance audit standards and the process of assurance auditing was conducted by
Muhasebe ve Finansman Dergisi Temmuz 2017 Özel Sayı
Dinç and Atabay in 2016. In this study, assurance audit was explained in general terms and the necessity of increasing the awareness about assurance audit was mentioned. Uyar’s study in 2016 gave information about assurance services standards and explained the examination of prospective financial information in detail.
5. ASSURANCE AUDITING PROCESS
Assurance audit is a process where a variety of operations are conducted between the businesses demanding assurance audit and the practitioners (individual auditor or expert) conducting audits. In this process, the auditor carries out activities in compliance with current standards and prepares an assurance report. This process is composed of five phases: Start-up, planning, execution, completion, and documentation.
- Start-up phase: The client delivers his/her demand of an assurance audit to an authorized audit firm through a letter of request involving the information about the regulation to be used for the audit, the targeted field of audit, expectations from the audit, contact person and confirmation by means of mail, e-mail, phone, or any kind of communication.
Upon the delivery of the request, the practitioner party gathers information related to the sector, operation, and management of requesting business. The practitioner party conducts conflict and independence check so that the recognizing the claim wouldn’t affect its independence. After this control, it prepares the proposal form and the process is initiated depending on the conditions.
- Planning Phase: After the preparation of assurance contract, a planning should be made about duration of assurance audit, its scope, and by whom and how it will be conducted. Contract conditions, subject of the audit, and the criteria that will be used by the auditor are of great importance for this process. In this phase, the scope of audit is clearly defined and can be updated since it contains the whole process.
- Execution Phase: This phase is about the implementation of audit procedures. Evidence gathering techniques such as investigation, observation, confirmation, recalculation, reimplementation, analytical procedures, and inquiry are used.
- Completion Phase : The practitioner completes the audit by requesting written statements from the management. Therefore, it prepares the assurance report and presents it to the client business by documenting the procedures conducted.
- Documentation Phase: The practitioner or auditor documents the procedures carried out during the audit. These documents are in the form of working papers, and their content and shape may vary depending on different factors. The working papers include the auditors name and surname, date, the goal of audit, and its scope. The content is composed of results of the procedures carried out, evidences, and assessments.
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Turkey through assurance audit standards published by Public Oversight, Accounting and Auditing Standards Authority.
Although independent audit and assurance audit seem to involve similar procedures, they are in fact different. The subject of audit is financial information in independent audit while it includes both financial and nonfinancial information in assurance audit. A reasonable assurance is provided for parties in independent audit while both reasonable and limited assurance are presented in assurance audit. In independent audit, the client is the management. However in assurance audit, a third party apart from the management can be the client in assurance audit. Both audits require a written contract. Independent audit requires dual party relation while assurance audit may involve triple party relation. Audit materials are similar. The duration of audit in independent audit is one year while it is less than one year in assurance audit. The findings are digitized in independent audit while nonfinancial information isn’t calculated in assurance audit. A single form of report is presented in independent audit while either a reasonable assurance or limited assurance report is presented in assurance audit. In assurance audit, there is triple party relation, and audit service begins with a demand, which can be made by service provider or service receiver.
The background of studies and practices in international area about assurance audit is much more comprehensive than the ones in Turkey. The practitioners and businesses in Turkey don’t have much information about this service. It is considered that dissemination of services in assurance audit and increasing the awareness about it will be beneficial since it is an important phenomenon in terms of the institutionalization of assurance audit, increase of quality and source efficiency, and gaining trust.
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