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Assurance Engagements

Assurance Engagements

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Published by Jayson Demdam

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Published by: Jayson Demdam on Jun 26, 2012
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The Philippine Framework for Assurance Engagements directs that a practitioner can enter into twotypes of assurance engagements or, effectively, provide two levels of assurance on any particular type of assurance engagement. These two types of assurance engagements are reasonable assuranceengagements and limited assurance engagement. The difference between these types of assurance isreflected in the nature of the work performed, the level of engagement risk and the type of conclusionprovided.The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to anacceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner's conclusion. Practitioners aiming to obtain reasonable assurance mustobtain sufficient evidence in order that they may give a positive conclusion. To do this, they must reducethe assurance engagement risk to an acceptably low level. The audit opinion as currently expressed inaudit report reflects a reasonable assurance conclusion.
TABLE 1.1Expression of Conclusion in Reasonable Assurance Engagements and Limited Assurance Engagements
Reasonable Assurance Engagements Limited Assurance Engagements
“In our opinion
internal control is effective, in allmaterial respects, based on XYZ criteria.""Based on our work described in this report,nothing has come to our attention that causes usto believe that internal control is not effective, inall material respects, based on XYZ criteria."On the other hand, the objective of a limited assurance engagement is a reduction in assuranceengagement risk to a level that is acceptable in the circumstances of the engagement, but where thatrisk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner's conclusion. In a limited assurance engagement, the assuranceengagement risk is greater than for a reasonable assurance engagement and hence, a negativeconclusion is provided. An interim review of the financial statements of listed companies is an exampleof a limited assurance engagement.Table 1.2 summarizes the differences between reasonable assurance engagements and limitedassurance engagements.
TABLE 1.2Differences Between Reasonable Assurance Engagements and Limited Assurance EngagementsType of Engagement Objective Evidence-gatheringprocedureThe assurance report
ReasonableAssuranceEngagementsA reduction inassuranceengagement risk toan acceptably lowlevel in thecircumstances of theengagement, as thebasis for a positiveform of expression of the member'sconclusion.Sufficient appropriateevidence is obtained as partof a systematic engagementprocess that includes:-Obtaining an understandingof the engagementcircumstances;-Assessing risks;-Responding to assessedrisks;-Performing furtherprocedures using acombination of inspection,observation, confirmation,recalculation,reperformance, analyticalprocedures and inquiry. Suchfurther procedures involvesubstantive procedures,including, where applicable,obtaining corroboratinginformation, and dependingon the nature of the subjectmatter, tests of theoperating effectiveness of controls; and-Evaluating the evidenceobtainedDescription of theengagementcircumstances and apositive form of theexpression of theconclusion.Limited AssuranceEngagementsA reduction inassuranceengagement risk to alevel that isacceptable in thecircumstances of theengagement butwhere the risk isgreater than for areasonable assuranceengagement, as thebasis for a negativeform of expression of the member'sconclusion.Sufficient appropriateevidence is obtained as partof a systematic engagementprocess that includesobtaining an understandingof the subject matter andother engagementcircumstances, but in whichprocedures are deliberatelylimited relative to areasonable assuranceengagement.Description of theengagementcircumstances and anegative form of theexpression of theconclusion.
In some assurance engagements, the evaluation or measurement of the subject matter is performed bythe responsible party (the preparer of the information), and the subject matter information is in theform of an assertion by the responsible party that is made available to the intended users. Theseengagements are called "assertion-based engagements."In other assurance engagements, the practitioner either directly performs the evaluation ormeasurement of the subject matter, or obtains a representation from the responsible party that hasperformed the evaluation or measurement that is not available to the intended users. The subjectmatter information is provided to the intended users in the assurance report. These engagements arecalled "direct reporting engagements."It is necessary to distinguish between an assertion-based assurance engagement and a direct reportingassurance engagement. An assertion-based assurance engagement requires that auditor to issue anopinion on written assertions made by others. On the other hand, direct-reporting assuranceengagement requires the auditor to provide assurance on an accountability matter on which theresponsible party has not made a written assertion.For example, an audit report could be issue on the adequacy of internal control. Where managementdoes not issue a report on the adequacy of internal control, and therefore the auditor is required toreport directly on its adequacy, the engagement is classed as direct reporting assurance engagement. If,however, management has stated an opinion on the adequacy of internal control and the auditor isrequired to attest to this statement, it is an assertion-based assurance engagement.
Acceptance decisions are crucially important, because new clients and/or engagements can pose threatsto objectivity, or create risk exposure to the firm, which must be carefully evaluated. The practitioner(auditor or assurance provider) accepts an assurance engagement only where the practitioner'spreliminary knowledge of the engagement circumstances indicates that:1. The relevant ethical requirements, such as independence and professional competence will besatisfied. The Code of Ethics for Professional accountants requires firm to investigate potential client, itsowners and business activities in order to evaluate whether there are any questions over the integrity of the potential client which may create unacceptable risk. Also, the firm's competence to perform thepotential work should be evaluated, especially if the potential client operates in a specialized industry,or if the client has a complex structure. Practical matters such as the resources needed to perform the

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