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QUESTION 1: AUDITING, ASSURANCE & THE PROFESSION

You work in the audit division of BOD, a large professional services firm. You have been approached for advice by Campbell Kirkby, who has been running a small business, successfully for a number of years. He tells you that:

I decided it was time I started enjoying the results of all my hard work, so I sold 40% of the shares in the business to some friends who thought it a good investment. At our first shareholders meeting, we all agreed to appoint a general manager in my place to run the business and a finance manager to handle accounting, tax and financial matters. We also agreed that we would like to appoint a firm like yours to check our financial statements on an annual basis, to give us some assurance that the new managers are running the business properly.

Campbell is excited about this new phase for his business. He tells you he would like to know more about the business environment, accounting and assurance as these may affect him in the future. Parts of the Required below reflect what he has asked you to clarify.

Required: 1.1 Researchers seeking to explain the demand for assurance have developed a number of theories or hypotheses. State and explain which theory best explains Campbells reason for requiring annual assurance? (3 marks)

1.2 Explain to Campbell what an assurance engagement entails. Your explanation should: a) Identify the elements of an assurance engagement and relate these to Campbells circumstances; (7 marks) b) State what two levels of assurance can be offered to Campbell and his fellow shareholders and identify the type of engagement associated with each of these levels; (2 marks)

1.3 Explain to Campbell what the External Reporting Board is, with reference to its two sub-boards and what each of these is responsible for doing.

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