What are the Five Elements of an Assurance Engagement?

Assurance engagement normally involves three parties and consists of five important elements. Those five elements include criteria, report, evidence, subject matter, and three-party relationship. Here is the detail:

1) Criteria:

What are the criteria for the engagement?

For example, if the engagement is the audit of financial statements, then the criteria would be the standards or principle that management use to prepare the financial statements.

Let’s say, IFRS is the standard that management uses to prepare financial statements.

In this case, the auditor will perform their audit by using the international standard on auditing to review if the financial statements being audited are prepared based on IFRS or not.

2) Report:

The result of the work performed by the practitioner should be reported to the predetermined users of the reports. For example, in the audit engagement, auditors are issued reports by expressing their opinion based on the result of their work.

The opinion that they express should be based predetermined set of objectives. Their work should also be performed independently from management who is responsible for preparing the subject matter.

For example, the auditor should be independent of management or entity. That means the conflict of interest should be minimized to a level that could not impair the quality of the audit opinion.

3) Evidence:

Strong support from entity management is required to help auditors perform their work and obtain the evidence.

Evidence is very important to the quality of the report. The practitioner has to obtain sufficient and appropriate evidence to support its opinion in the reports.

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The auditor should follow the auditing standards if the evidence cannot be obtained or if there is intervention from management that they could not obtain the evidence.

4) Subject matter:

Assurance engagement should have a clear subject matter.

For example, if the entity engaging the audit firm to perform their assurance services like an audit of financial statements, or review of financial statements as well as due diligence, then the engagement should have a very clear subject matter.

Like, For that is the engagement objective, in which period the services will be covered (scope from 01 January 2017 to 31 December 2017).

5) Three parties relationship:

Normally, in the engagement, there are three parties involved. The first one is the intended users, as the users of audit reports.

These groups of people are the management of the entity, shareholders, the board of directors, and the government body.

The second is the responsible party for the subject matter that is being examined by the practitioner. For example, an entity that is an engaging practitioner as well as management of the entity. Management is responsible for preparing financial statements.

The third party in the engagement is the practitioner. This practitioner is normally the professional audit firm that audits the financial statements or provides others limited assurance services.


The Five Elements of an Assurance Engagement:

  1. Criteria:
    • Refers to the standards or principles used to prepare the subject matter.
    • In the context of financial statement audits, if the management prepares the financial statements using IFRS, the auditor will use the international standard on auditing to check its adherence.
  2. Report:
    • The outcome of the practitioner’s work is communicated to specified users.
    • In audit engagements, this refers to the report where auditors express their opinion.
    • The opinion must align with a predetermined set of objectives and be executed independently, ensuring no conflict of interest with the management responsible for the subject matter.
  3. Evidence:
    • Crucial to the report’s quality, the evidence provides backing for the practitioner’s opinion.
    • The practitioner should collect sufficient and suitable evidence to validate their opinion.
    • If evidence cannot be gathered due to certain obstacles, the practitioner must adhere to auditing standards.
  4. Subject matter:
    • The clear focus of the assurance engagement.
    • Examples include auditing financial statements or conducting due diligence.
    • The engagement should clearly define its objective and the time span it covers, such as a specific fiscal year.
  5. Three-party relationship:
    • This engagement involves three distinct parties: a. Intended users: Typically include management, shareholders, board of directors, and government bodies who rely on the audit reports. b. The responsible party: This pertains to the party responsible for the subject matter being scrutinized, usually the management that prepares financial statements. c. The practitioner: Usually a professional audit firm tasked with auditing the financial statements or offering other limited assurance services.
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