FUNDAMENTALS OF

AUDITING AND ASSURANCE

SERVICES
PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
Overview

 1.1 Introduction to assurance engagements

 Nature, objective, and elements
 Types of assurance engagements
 Assurance service vis-à-vis attestation
services
 1.2 Introduction to auditing
 Nature, philosophy, and objectives
 Types of audit
○ According to nature of assertion / data
○ According to types of the auditor
1.1 INTRODUCTION TO
ASSURANCE ENGAGEMENTS
NATURE, OBJECTIVE, AND
ELEMENTS
Nature Practitioner
Person responsible
for the assertion Assertion

Assurance, defined

The practitioner’s
satisfaction as to the
reliability of an assertion
being made by one party
for use by another party.

Users of the assertion

Nature

 Assurance engagement, defined

“Assurance engagement “ means an

engagement in which a
practitioner expresses a
conclusion designed to enhance
the degree of confidence of
the intended users other than
the responsible party about
the outcome of the evaluation
or measurement of a subject
matter against criteria.

-from Phil. Framework for

Assurance Engagements
Objective

▪ … for a professional accountant to

evaluate or measure a subject matter that
is the responsibility of another party
against identified suitable criteria, and
to express a conclusion that provides the
intended user with a level of assurance
about the subject matter.
Elements
1. A three party relationship
involving:
a. A practitioner;
b. A responsible party; and
c. Intended users.
2. An appropriate subject matter;
3. Suitable criteria;
4. Sufficient appropriate evidence;
5. A written assurance report.
1. Three party relationship

Practitioner Broader than the “term” auditor.

May or may not be the engaging party

Responsible party (the party who engages the practitioner).

Intended Users The person, persons or class of persons for whom the
practitioner prepares the assurance report.
2. Subject matter

 An “appropriate subject matter” is:

 Identifiable, and capable of consistent
evaluation or measurement against the
identified criteria.
 Can be subjected to procedures for
gathering sufficient appropriate
evidence to support a reasonable
assurance or limited assurance
conclusion, as appropriate.
 Subject Matter Subject matter information

Financial performance or conditions Historical or prospective financial position, Recognition, measurement, presentation
financial performance, cash flows and disclosure represented in financial
statements

Non financial performance or conditions Performance of an entity Key indicators of efficiency and
effectiveness

Physical characteristics Capacity of a facility Specifications document

Systems and processes An entity’s internal control or IT system An assertion about effectiveness

Behavior Corporate governance, compliance with A statement of compliance or a statement

regulation, human resource practices of effectiveness
Subject matter Financial position, financial performance, and
cash flows of an enterprise

Subject matter information The financial statements of the enterprise

Responsible party Client or entity management

Responsible for Sample assurance engagement

Subject matter information only A government organization engages a practitioner to perform
an assurance engagement regarding a report about a private
company’s sustainability practices that the organization has
prepared and is to distribute to intended users.

Subject matter and subject matter information An entity engages a practitioner to perform assurance
engagement regarding a report it prepared about its own
sustainability practices.
3. Suitable criteria

 Criteria are the benchmarks used  Characteristics: CNUR2

to evaluate or measure the subject
matter including, where relevant,
benchmarks for presentation and

 Completeness
disclosure. 

Neutrality
Understandability
 Reliability
Relevance
 Can be formal or less formal (i.e.
PFRS vs internal code of conduct
or agreed level of performance).

 May be:
Established criteria
Are those embodied in laws or
regulations, or issued by authorized or
recognized bodies or experts that follow a
transparent due process.

Specifically developed criteria

Those designed for the purpose of the
engagement.
4. Sufficient appropriate evidence
4. Sufficient appropriate evidence
Things to consider

A. Professional Skepticism
B. Sufficiency and Appropriateness of
Evidence
C. Cost-Benefit Considerations
D. Materiality
E. Assurance Engagement Risk
F. Quantity and Quality of available
evidence
A. Professional skepticism

▪ An attitude of professional skepticism

means the practitioner makes a critical
assessment, with a questioning mind, of
the validity of evidence obtained and is
alert to evidence that contradicts or
brings into question the reliability of
documents or representations by the
responsible party.

▪ The auditor must always conduct the audit

with a questioning mind.
B. Sufficiency and Appropriateness

▪ Sufficiency ▪ Appropriateness
▫ Quantity ▫ Quality
▫ The greater the ▫ The better the
RISK, the higher quality, the
the QUANTITY of lesser evidence
evidence is needed
▫ Relevance +
Reliability
Sufficiency and Appropriateness

▪ RELIABILITY:
▫ External vs internal documents
▫ If internal, controls should be
effective
▫ Direct vs indirect / by inference
▫ Documentary vs oral/verbal
▫ Original vs photocopy/facsimile
C. Cost-benefit considerations

▪ REMEMBER: The matter of difficulty or

expense involved is NOT in itself a valid
basis for omitting an evidence-gathering
procedure for which there is no
alternative.
D. Materiality

▪ Determined by practitioner’s professional

judgment
E. Assurance Engagement Risk

▪ This is the risk that the practitioner

expresses an INAPPROPRIATE conclusion
when the subject matter information is
materially misstated.
▪ The more extensive the evidence-gathering
procedures, the lower the chances of an
inappropriate conclusion, and the higher
the level of assurance that a
practitioner can provide.
Assurance Engagement Risk

▪ Assurance engagement risk consists of the

following:
I. 1. INHERENT RISK
- Susceptibility of the subject matter
information to a material
misstatement, assuming NO related
controls exist.
2. CONTROL RISK
- Risk that a material misstatement will NOT be
prevented or detected or corrected in a timely
basis.
II. DETECTION RISK
- risk that the practitioner will not
detect a material misstatement that
exists.
F. Quantity and Quality of
Available Evidence
▪ Ordinarily, available evidence will be
PERSUASIVE rather than CONCLUSIVE
5. Written assurance report

▪ Must be in the
form appropriate
to a reasonable
assurance
engagement or a
limited assurance
engagement.
Types of assurance engagements
 REASONABLE  LIMITED ASSURANCE
ASSURANCE (High
Level)
 OBJECTIVE: Reduction
in assurance
engagement risk to
an acceptably low
level in the
circumstances of the
engagement.
 PRACTITIONER’S
CONCLUSION: Positive
(Moderate Level)
 OBJECTIVE: Same as
in reasonable
assurance but where
that risk is greater
than for a
reasonable assurance
engagement.
 PRACTITIONER’S
CONCLUSION: Negative
Forms of conclusions

▪ POSITIVE ▪ NEGATIVE

“Based on our work

“In our opinion, internal described in this
controls are effective, report, nothing has come
in all material to our attention that
respects, based on XYZ causes us to believe
that internal control is
criteria." not effective, in all
material respects, based
on XYZ criteria.”
TYPES OF ASSURANCE
ENGAGEMENTS
Classification of Assurance Engagements

▪ According to ▪ According to
level of structure
assurance ▫ Assertion based
▫ Reasonable engagement
assurance (Attestation)
▫ Limited assurance ▫ Direct reporting
engagement
According to structure
▪ Assertion based (Attestation) ▪ Direct reporting
▫ The evaluation or
measurement of the subject
matter is performed by the
responsible party, and the
subject matter information
is in the form of an
assertion by the
responsible party that is
made available to the
intended users.
▫ The practitioner either
directly performs the
evaluation or measurement
of the subject matter, or
obtains a representation
from the responsible party
that has performed the
evaluation or measurement
that is not directly
available to the intended
users. The subject matter
information is provided to
the intended users in the
assurance report.
Comprehensive Example

Proven oil reserves

Co. 1 5,200▪ ASSERTION BASED
Co. 2 725
▫ Each company measures
Co. 3 3,260
its reserves and
provides an assertion
Co. 4 15,000
to the firm and to
Co. 5 6,700 intended users.
Co. 6 39,126 ▫ An entity other than
Co. 7 345 the companies measures
Co. 8 175 the reserves and
Co. 9 24,135
provides an assertion
Co. 10 9,635
to the firm and to
intended users.
Total 104,301
Comprehensive Example

Proven oil reserves

▪ DIRECT REPORTING
Co. 1 5,200
▫ Each company measures its
Co. 2 725 reserves and provides the
Co. 3 3,260 firm with a written
Co. 4 15,000
representation and measures
its reserves against the
Co. 5 6,700 established criteria for
Co. 6 39,126 measuring proven reserves.
Co. 7 345
The representation is not
available to the intended
Co. 8 175 users.
Co. 9 24,135 ▫ The firm directly measures
the reserves of some of the
Co. 10 9,635
companies.
Total 104,301
Assurance vs Attestation vs Audit
Assurance

Three party contracts in which
o
an assurer reports on (or
improves) the quality of
information
 Attestation
 Type of assurance service
in which an attestor (an
independent accountant)
offers assurance about a
subject matter (e.g.
compliance with debt
covenants) that is the
responsibility of another
party.
 Audit
 Auditing is a systematic
process of objectively
obtaining and evaluating
evidence regarding
assertions about economic
actions and events to
ascertain the degree of
correspondence between
those assertions and
established criteria and
communicating the results
to interested users.
ASSURANCE VIS-À-VIS
ATTESTATION SERVICES
 ASSURANCE ENGAGEMENTS

ASSERTION BASED
DIRECT REPORTING
ENGAGEMENTS

AUDIT
 Related Services
ASSURANCE
(Non-assurance
services)

Audit

Others Review •Agreed upon procedures

•Compilation
•Preparation of tax returns
•Tax consulting
•Management consulting
•Other advisory services

•Examination of prospective FS
•CPA performance review •Review of FS
•CPA Risk Advisory •Review of interim information
 Other Assurance Services
▪ Business
▫ Provides
Performance Measurement
assurance about whether financial and non financial information being reported
from the entity’s performance measurement system (e.g. balanced scorecard) is reliable and
whether the performance measures being used are accurately leading the entity toward
meeting its strategic goals and objectives.
▪ Health
▫ Involves
Care Performance Measurement
the evaluation of the quality of health care, medical services and outcome.
▪ Elder
▫ An Care Plus
evaluation designed to provide assurance to the elderly and their relatives about the
quality of care being provided by various care givers by comparing their specific
objectives in providing care with actual services rendered.
▪ ▫ Risk Assessment Services
Identifies a set of risks that affect the organization and involves the study of the link
between risks and the organization’s vision, mission, objectives, and strategies and
development of new and relevant measures to address these risks.
▪ ▫ CPA Web Trust
WebTrust is a seal of assurance service developed jointly by AICPA and CICA which enables
consumers and businesses to purchase goods and services over the Internet with the
confidence that the Web site business meet high standards of business practice.
▪ Information
▫ Involves Systems Reliability
evaluating whether financial and non financial information systems provide
reliable information for operating and financial decisions by an entity’s management.
 Aspect of Auditing Review Related Services
comparison
Nature of service Audit Review Agreed upon Compilation
procedures
Level of High, but not absolute Moderate None None
assurance
provided

Report provided Positive assurance on Negative assurance on Factual findings Identification of

assertions assertions information compiled

Procedures Select from all available Inquiry and analytical Procedures agreed Reduce detailed data
procedures any procedures designed to upon to a manageable and
combination that can review reliability of an understandable form
limit audit risk to an assertion
appropriately low level.

Features Auditor’s opinion Audit skills and Recipients of the Accounting, not
enhances credibility of techniques applied, but report must form their auditing, expertise
FS accounting and internal own conclusions; used
control systems not report may be 37
assessed restricted
Note: When to accept assurance
engagements
 Relevant ethical requirements, such
as independence & competence, is
satisfied.
 Engagement circumstances exhibits
ALL of the following:
 Subject matter is appropriate.
 Criteria to be used are suitable and are
available to the intended users.
 Practitioner has access to sufficient
appropriate evidence to support his
conclusion.
 Practitioner’s conclusion is to be
contained in a written report.
 Practitioner is satisfied that there is a
rational purpose for the engagement.
1.2 INTRODUCTION TO
AUDITING
 Independent Auditor

Following a systematic process

Objectively obtains & evaluates evidence

Establishes degree of correspondence between

ESTABLISHED
ASSERTIONS
CRITERIA

Communicates results to interested users

Role of management and
independent auditor
Independent
Management
Auditor

Prepares FS

Unaudited FS Evaluates FS

Audit Report
Audited FS
on FS

Users of Financial Statements

 Will an audit NO.
guarantee An audit conducted in
dependable accordance with PSAs
is designed to provide
financial only reasonable
statements? assurance (NOT
ABSOLUTE) that the
FS as a whole are free
from material
misstatements.
 If it does not  The need for an
guarantee independent FS audit
dependability, why is stems from the
there a need for following:
independent FS audit?  Conflict of interest
between management and
users of FS.
 Expertise
 Remoteness
 Financial consequences
 Information risk
 Cost of capital
 Why can an audit
 Because of the ffg NOT provide
LIMITATIONS:
 The use of testing /
absolute

Sampling risk
Error in application of
assurance?!
judgment / Non-sampling
risk
 Reliance on management’s
representation
 Inherent limitations of
the client’s accounting
and internal control
systems
 Nature of evidence
Objective of an audit

▪ The objective of an audit of financial

statements is to enable the auditor to
express an opinion whether the financial
statements are prepared in all material
respects, in accordance with applicable
financial reporting framework.
-Philippine Standards on Auditing (PSA) 200
Types

▪ According to ▪ According to types

nature of of auditor
assertion / data

▫ Financial ▫ External independent

statement audit FS audit
▫ Operational audit ▫ Internal audit
▫ Compliance audit ▫ Government audit
 Financial Audit Compliance Audit Operational Audit
Organization has Organization’s activities are
Assertions FS are fairly presented.
complied with laws, conducted efficiently &
made by regulations or contracts. effectively.
auditee
Financial reporting Laws, regulations, and Objectives set by the
standards or other contracts. board of directors.
Established financial reporting
criteria framework.

Opinion whether FS are fairly Degree of compliance Recommendations or

Content of
presented in conformity with with applicable laws, suggestions on how to
auditor’s report
an identified financial regulations & contracts. improve operations.
reporting framework.

Auditors who Government auditors Internal auditors

External auditors
generally
perform
-end-
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