Auditing in Practice: Understanding the Most Common Types of Engagements
Auditing in Practice: Understanding the Most Common Types of Engagements
Auditing plays a vital role in the financial life of any organisation. It builds trust in financial statements, ensures compliance with legislation, and helps management make informed decisions. But auditing is not a single, uniform task – it can take many forms depending on its purpose, scope, and intended users. This article provides an overview of the most common types of audit and assurance engagements in New Zealand and how they differ in practice.
What Does Auditing Really Mean?
The word audit comes from the Latin audire, meaning “to hear.” In modern practice, it refers to the independent examination of an organisation’s financial information to determine whether it is accurate and fairly presented. An auditor acts as an impartial professional who protects shareholders, investors, and the public from errors, fraud, and misrepresentation.
However, auditing is not only about control. It can also be advisory and developmental – a tool for improving processes, strengthening internal controls, and supporting better decision-making.
The Statutory Audit
The most well-known form of audit is the statutory audit. Under the Companies Act 1993 and the Financial Reporting Act 2013, certain New Zealand companies are required to have their financial statements audited. This typically applies to large companies, public entities, and some overseas-owned businesses that exceed specific thresholds for revenue, assets, or ownership structure.
In a statutory audit, the auditor examines the entire set of financial statements and assesses whether they present a true and fair view of the organisation’s financial position. This involves:
- reviewing accounting records, supporting documents, and internal procedures
- evaluating accounting policies and estimates
- testing key balances such as inventories, receivables, and liabilities
- issuing an independent auditor’s report that accompanies the financial statements
The purpose is to provide shareholders, regulators, and other stakeholders with reasonable assurance that the financial statements can be relied upon.
Review Engagement – Limited Assurance
A review engagement provides a lower level of assurance than a full audit. Instead of performing detailed testing, the auditor primarily relies on analytical procedures and inquiries of management. The goal is to determine whether anything has come to the auditor’s attention that suggests the financial statements are materially misstated.
Review engagements are often used by small and medium-sized entities that are not legally required to have an audit but still want an external check for lenders, investors, or governance purposes. The resulting report provides limited assurance – enough to give confidence, but at a lower cost and with less disruption than a full audit.
Agreed-Upon Procedures Engagements
In an agreed-upon procedures (AUP) engagement, the auditor performs specific procedures that have been agreed with the client or a third party, such as a bank or funding agency. The auditor does not express an opinion or provide assurance but simply reports the factual findings.
Examples include verifying grant expenditure, checking compliance with loan covenants, or confirming certain balances. Because the scope is narrowly defined, AUP engagements are flexible and can be tailored to meet particular needs.
Compilation Engagements
A compilation engagement (sometimes called assistance with financial statement preparation) involves the accountant helping management prepare financial statements in accordance with the applicable reporting framework, such as NZ GAAP or special-purpose reporting standards. The accountant does not perform audit or review procedures and does not provide any assurance on the accuracy of the information.
This type of engagement is common among small businesses and not-for-profit organisations that need professionally prepared financial statements for tax filing, governance, or funding purposes but do not require an audit or review.
Other Assurance Engagements
Beyond financial statement audits and reviews, auditors in New Zealand also perform a range of special-purpose assurance engagements, such as:
- assurance reports on non-financial information, including sustainability or greenhouse gas emissions reporting
- compliance audits for regulatory or contractual requirements
- due diligence reviews in mergers, acquisitions, or investment processes
- trust account audits for lawyers, real estate agents, and other regulated professions
These engagements are often tailored to specific circumstances and require the auditor to adapt their approach and reporting accordingly.
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Choosing the Right Type of Engagement
The choice of engagement depends on several factors: the size and complexity of the organisation, legal requirements, stakeholder expectations, and cost considerations. As a general rule, the greater the need for confidence in the financial information, the higher the level of assurance required.
It is advisable to discuss the options with a qualified auditor or chartered accountant. They can help balance the need for assurance with the available resources and recommend the engagement that provides the most value.
Auditing as a Tool for Improvement
Although auditing is often associated with compliance, it can also be a powerful tool for improvement. Through their work, auditors gain insight into an organisation’s systems, risks, and controls – and can offer valuable recommendations for strengthening governance and efficiency.
A good auditor is therefore not just a checker of numbers but a trusted advisor who helps the organisation become more transparent, resilient, and well-managed.
A Matter of Trust
Regardless of the type of engagement chosen, the essence of auditing remains the same: trust. Trust that the numbers are reliable, that the organisation is managed responsibly, and that decisions are based on sound information. In practice, auditing is not only about financial statements – it is about credibility, transparency, and professional integrity.
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