For an engagement to be an assurance engagement five elements needs to be present which are as follows:
- Existence of three party relationship i.e. practitioner, responsible party and the intended users
- Subject matter
- Collecting sufficient appropriate audit evidence
- Expression of an opinion
- Financial position of the entity
- Financial performance of the entity
- Changes in cash flows of the entity
And if we remember from IAS 1 and Accounting Framework, it is these three aspects of the business about which users of financial statements really want to have the information. The reason is if you know about these three dimensions then you are in much better position to make economic decisions regarding entity.
It is management who is responsible to provide information regarding these three dimensions of the entity. And it is these three aspects which are in short termed as subject matter in assurance engagement.
However, the provision of information regarding these three aspects is unlike information provided in general. Preparation of financial statements basically involves critical evaluation of financial position, financial performance and cash flows of the entity (i.e. subject matter) in accordance with applicable financial reporting framework. In other words, a set of financial statements is an outcome of the evaluation of subject matter where such evaluation is conducted by the management and ultimately the same evaluation is presented to the users in the form of a report or statement which we call financial statements.
In all this, auditor’s responsibility is just to give his opinion whether the evaluation of subject matter is correct in the light of applicable financial reporting framework (criteria) and the actual financial position, financial performance and cash flows of the entity (subject matter).