Direct Engagement

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21 Aug, 2024

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Direct Engagement is a form of review engagement where a practitioner evaluates subject matter against criteria, ensuring independent verification of information for stakeholders’ informed decisions. The purpose of a direct engagement audit is to ensure, by independently verifying and validating the underlying subject matter, that it aligns with the relevant criteria.

Unlike other assurance engagements, it excludes management’s evaluation. The practitioner independently assesses progress, reports progress directly, and gathers evidence to issue a written direct assurance report. This approach streamlines the reporting channel to include only the practitioner and intended users, enhancing efficiency in conveying reliable information.

Direct Engagement Definition

Direct engagement refers to an assurance engagement where the practitioner directly evaluates and reports on a specific subject matter.
It involves independently performing or obtaining the measurement of the subject matter without relying on assertions from the responsible party.
The practitioner then communicates this measurement directly in the assurance report to the intended users.
This approach contrasts with attestation engagements, where affirming the responsible party’s assertions is a central element of the process.

Direct Engagement Explained

Direct engagement entails an auditor scrutinizing a company’s financial statements after their preparation and verification for material misstatements. Unlike a comprehensive audit, the review offers users limited assurance regarding the accuracy of the financial statements. Notably, this process is less intensive than a full audit, and practitioners refrain from asserting the fairness of the financial records.

During a review engagement, auditors thoroughly examine the financial statements and deliver a negative assurance report. This report moderately assures users that no significant flaws or errors were detected in the financial statements. Usually, companies carry out performance and compliance audits for direct engagement since these audits offer relevant information with sufficient evidence for intended users.

Additionally, it communicates whether the financial statements adhere to accounting standards or deviate from them. The focus is on providing a cautious level of assurance without the exhaustive examination characteristic of a complete audit.

Examples

Let us look at some examples of the direct engagement model to understand the concept better:

Example #1

Imagine Stellar Inc. is a retail company specializing in electronics. In the fiscal year 2022, the management of Stellar Inc. compiled financial statements, seeking a direct engagement audit from a practitioner. The practitioner, in turn, produced a negative assurance report based on their examination. The report might include an observation such as:

The management has asserted that all revenue recognition is in accordance with the applicable accounting standards. The review identified no material discrepancies in revenue recognition. Apart from this, nothing has come to the attention that would lead to doubt the accuracy of the accompanying financial statements, providing a true and fair view per the International Accounting Standards.

Example #2

Emergent Health Corp. announced its engagement with BF Borgers CPA PC, a PCAOB-qualified auditor, to conduct a two-year audit of the company’s financial statements ending December 31, 2022, in accordance with Generally Accepted Accounting Principles (GAAP). This move followed Emergen’s recent execution of an engagement letter with Boustead Securities LLC., marking a strategic step towards a planned corporate financing transaction, including pre-IPO financing and a $10 million IPO for its subsidiary PharmaZu, focused on e-commerce products and services for the Pet Community. PharmaZu had intended to acquire a compounding pharmacy in West Palm Beach, FL, after the IPO, using the raised capital for business expansion and acquisitions.

Boustead Securities, LLC, an investment banking firm, played a crucial role in advising Emergent on the financial transaction. BF Borgers CPA PC, based in Lakewood, Colorado, was tasked with auditing the financial statements to ensure compliance with SEC-adopted GAAP standards. The engagement with these firms underscored Emergent’s commitment to a thorough financial evaluation and strategic planning for the benefit of its shareholders.

Direct Engagement vs Attestation Engagement

The differences between direct engagement and attestation engagement are as follows:

Direct Engagement	Attestation Engagement
The practitioner either measures the subject matter or obtains the measurement from the responsible party, who did not disclose it to intended users.	The measurement of subject matter is provided by the responsible party (e.g., management).
The practitioner directly provides the measurement of the subject matter in the assurance report to intended users.	The practitioner affirms assertions made by the responsible party regarding the measurement of the subject matter.

Frequently Asked Questions (FAQs)

1. What is direct reporting engagement?

In a direct reporting engagement, the practitioner independently performs or obtains the measurement of subject matter, unaided by the responsible party’s assertions. The practitioner then directly provides this measurement in the assurance report to the intended users, offering a distinct approach compared to attestation engagements where affirming assertions is the focus.

2. What is direct engagement in marketing?

Direct engagement in marketing refers to engaging with your prospects directly and gaining feedback from them. Some of the most common strategies are social media engagement, email marketing, content marketing, offline marketing, etc.

3. What is direct engagement to report on compliance?

In a direct engagement to report on compliance, the practitioner independently assesses an entity’s adherence to specific criteria or regulatory requirements. Unlike attestation engagements, the practitioner in a direct reporting engagement directly evaluates the compliance status and communicates the findings to the intended users.