Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, City of Cabuyao

FUNDAMENTALS OF AUDITING AND ASSURANCE ENGAGEMENTS

The Authority Attaching to Philippine Standards Issued by AASC

Standards Application
1. Philippine Standards on Auditing (PSAs) • Audit of historical information
2. Philippine Standards on Review Engagements (PSREs) • Review of historical financial information
3. Philippine Standards on Assurance Engagements (PSAEs) • Assurance engagements dealing with subject
matters other than historical financial information
4. Philippine Standards on Related Services (PSRSs) • Compilation engagements
• Engagements to apply agreed-upon procedures to
information
• Other related services engagements as specified
by AASC

1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASCs Engagement Standards.
2. Philippine Standards on Quality Control (PSQC) are to be applied for all services falling under the AASC’s engagement
standards.
3. Philippine Standards are applicable to engagements in the Public Sector.

The Authority Attaching to Practice Statements Issued by the AASC

Philippine Standards on Auditing (PSA) Philippine Auditing Practice Statements (PAPS)

Philippine Standards on Review Engagements (PSREs) Philippine Review Engagements Practice
Statements (PREPs)
Philippine Standards on Assurance Engagements Philippine Assurance Engagement Practice
(PSAEs) Statements (PAEPSs)
Philippine Standards on Related Services Philippine Related Services Practice Statements
(PSRSs) (PRSPSs)

1. Philippine Practice Statements are issued to:

• provide interpretative guidance and practical assistance to professional accountants in implementing Philippine Standards;
and
• promote good practice.

2. Professional accountants should be aware of and consider Practice Statements applicable to engagement.

3. A professional accountant who does not consider and apply the guidance included in a relevant Practice Statement should be
prepared to explain how the basic principles and essential procedures in the AASC’s

PHILIPPINE FRAMEWORKS FOR ASSURANCE ENGAGEMENTS

1. The Framework does not itself establish standards or provide procedural requirements for the performance of assurance
engagements.

2. In addition to the Framework and PSAs, PSREs and PSAEs, practitioner who performs assurance engagements are governed
by;
• the Philippine Code of Ethics for Professional Accountants; and
• Philippine Standards on Quality Control (PSQCs).

ASSURANCE ENGAGEMENTS

1. “Assurance Engagements” 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.

2. “Subject matter information” refers to the outcome of the evaluation or measurement of a subject matter.

3. In some assurance engagements, 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 intended
users (assertion-based engagements).

4. In other assurance engagements, the practitioner either directly performs the evaluation or measurement of subject matter, or
obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to
the intended users. The subject matter information is provided to the intended users in the assurance report (direct reporting
engagements).
Two Types of Assurance Engagement

1. Reasonable assurance engagement – the objective is a reduction in assurance engagement risk to an acceptably low level
in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s conclusion.
The objective of an assurance engagement is for a professional accountant to evaluate or measure a subject matter that is the
responsibility of another party against identifies suitable criteria, and to express a conclusion that provides the intended user
with a level of assurance about the subject matter.
An assurance engagement is intended to enhance the credibility of information about a subject matter by evaluating whether
the subject matter conforms in all material respects with suitable criteria, thereby improving the likelihood that the information
will meet the needs of an intended user.
• Audit – Philippine Standards on Auditing (PSA) The objective of an audit of financial statement is to enable the auditor to
express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified
financial reporting framework. The phrase use to express the auditor’s opinion is “present fairly, in all material respects”.

• The auditor should comply with relevance ethical requirements relating to audit engagements.

• The auditor should conduct the audit in accordance with PSAs.

• “Scope of an audit” refers to the audit procedures that, in auditor’s judgment and based on PSAs, are deemed appropriate
in the circumstances to achieve the objective of the audit.

• The auditor should plan and perform an audit with an attitude of PROFESSIONAL SKEPTCISM recognizing the
circumstances may exist that cause the financial statements to be materially misstated.

• In forming the audit opinion, the auditor obtains sufficient appropriate evidence to be able to draw conclusions on which
to base that opinion.

• The auditor’s opinion enhances the credibility of financial statements by providing a high, but not absolute, level of
assurance.

• In an audit engagement, the auditors provide a high, but not absolute, level of assurance, expressed positively in the audit
report as reasonable assurance, that the information subject to audit is free of material misstatement.

• Absolute assurance in auditing is not attainable as a result of such factors such as:

o the need for judgment;

o the use of testing;
o the inherent limitations of any accounting and internal control systems; and
o the fact that most of the evidence available to auditor is persuasive, rather than conclusive in nature.

• While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for
the preparation and presentation of the financial statements, in accordance with the applicable financial reporting
framework is that of the entity’s MANAGEMENT, with oversight from those charged with governance.

• Special Purpose Audit Engagement (PSA 800)

a. Audit of Financial Statements Prepared in Accordance with a Comprehensive Basis of Accounting Other than
Philippine GAAP
b. Audit of A Component of Financial Statements
c. Reports on Compliance of Contractual Agreement
d. Reports on Summarized Financial Statements

• Philippine Standards on Auditing (PSAs) – for auditing of Historical Financial Statements

• Philippine Standards on Assurance Engagements (PSAEs) for assurance engagement other than Audits or Review
of Historical Financial Statements and Examination of Prospective Financial Information.

2. Limited assurance engagement - the objective of a limited assurance engagement is a reduction in engagement assurance
risk to a level that is acceptable in the circumstances of the engagement, but where the risk is greater than for a reasonable
assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion.
• Reviews – Philippine Standards on Review Engagements (PSAE) 2400. The objective of the review engagement is to
enable an auditor/practitioner to state whether, on the basis of procedures which do not provide all evidence that would
be required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial
statements are not prepared in all material respects, in accordance with an identified financial reporting framework.
• In a review engagement, the practitioner provides a moderate level of assurance that the information subject to review is
free of material misstatement. This is expressed in the form of a negative (also called limited) assurance.
• Procedures. While a review involves the application of audit skills and techniques and the gathering of evidence, (inquiry
and analytical procedures), it does not ordinarily involve an assessment of accounting and internal control systems, tests
of records, and of responses to inquiries by obtaining corroborating evidence through inspection, observation,
confirmation, and computation which are procedures ordinarily performed during an audit.
 • If the auditor/practitioner has reason to believe that the information subject to review may be materially misstated, the
practitioner should carry out additional or more extensive procedures as are necessary to be able to express negative
assurance or to confirm that a modified report is required.
• Report. The review should contain a clear written expression of negative assurance. The auditor should review and assess
the conclusion drawn from the evidence obtained as the basis for the expression of negative assurance.
• Unqualified Review Report. Issued when the auditor believes, based on the evidenced obtained, that there are no
material modification that should be made to the financial statements to be in conformity with PFRS.
Based on our reviews, nothing has come to our attention that causes us to believe that the accompanying financial
statements are not presented fairly, in all material respects, in accordance with the Philippine Financial Reporting
Standards.

Modification of Review Report

a. Departure from PFRS. If matters have come to the auditor’s attention that indicate the financial statement
do not conform to PFRS, the report should described those matters that impair a fair presentation of the
financial statements, including, unless impracticable, a quantification of the possible effect(s) on the financial
statements and either:

Ø Express a qualification of the negative assurance provided; or

Ø When the effect of the matter is so material and pervasive to the financial statement that the auditor
concludes that a qualification is not adequate to disclose the misleading or incomplete nature of
the financial statements, give an adverse statement that the financial statements are not presented
fairly, in all material respects, in accordance with PFRS.
b. Scope Limitation. If there has been material scope limitation, the report should described the scope limitation
and either:
Ø Express a qualification of the negative assurance provided regarding the possible
adjustments to the financial statements that might have been determined to be
necessary had the limitation not existed; or
Ø When the possible effect is so significant and pervasive that the auditor concludes that
no level of assurance can be provided, the auditor should not provide any assurance.

Scope of the Framework

The following are non-assurance engagements and therefore are not covered by the Framework:

• Engagements covered by PSRSs such as agreed-upon procedures engagements and compilations of financial or other
information.
• The preparation of tax returns where no conclusion conveying assurance is expressed.
• Consulting (or advisory) engagements, such as management and tax consulting.

Elements of an Assurance Engagement

1. A Three-Party Relationship. Assurance engagements involve three separate parties:

• An independent and competent professional accountant who adhere to the fundamental principles required by the Code
of Ethics.
• The party responsible for the subject matter of the assurance engagement.
• The intended users to whom the professional accountant usually addresses the report.

The responsible party and the intended user will often be from separate organization by need not be. A responsible party
and an intended user may both be within the same organization. The relationship between the responsible party and
intended users needs to be viewed within the context of a specific engagement.

2. Subject Matter. The subject matter of an assurance engagement may take many forms such as:

1. Data (for example, financial and non-financial information)

2. Systems and processes ( such as internal controls )
3. Behavior (entity’s compliance with laws and regulations)
4. Physical characteristics (capacity of a plant capacity)

To be considered appropriate, the subject matter of an assurance engagement must be identifiable, capable of consistent
evaluation and measurement against suitable criteria, and in form that can be subjected to procedures for gathering
evidence to support evaluation or measurement

In some assurance engagements, the evaluation or measurement of the subject matter is performed by the responsible
party and the outcome of such evaluation or measurement is in the form of an assertion by the responsible party that is
made available to the intended users. It is the assertion about which the practitioner gathers sufficient appropriate evidence
to provide a reasonable basis for expressing a conclusion on the assurance report. These engagements are called
“assertions-based engagements”.

In other assurance engagements, 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 available to the intended users. The subject matter information is made available in the assurance report. These
engagements are called “direct reporting engagements”.

3. Criteria. Criteria are the standards or benchmark used to evaluate or measure the subject matter of an assurance engagement.
Without the frame of reference provided by these criteria, any conclusion is open to individual interpretation and
misunderstanding. In an assurance engagement, criteria must be suitable to enable reasonably consistent evaluation or
measurement of the subject matter within the context of professional judgment.

4. Evidence. The practitioner should plan and perform the engagement to obtain sufficient appropriate evidence to determine
whether the assertions are free from material misstatements.

5. Assurance Report. The professional accountant expresses a conclusion that provides a level of assurance as to whether the
subject matter conforms in all material respects with identifiable suitable criteria. The professional accountant’s conclusion
provides either high, or moderate level of assurance about the subject matter.

Non-Assurance Engagements

1. Agreed-upon Procedures (Philippine Standards on Related Services 4410)– an engagement in which a practitioner is
engaged to carry out those procedures of an audit nature to which the practitioner and entity and any appropriate third parties
have agreed and to report on factual findings. As the auditor simply provides a report of the factual findings of agreed upon
procedures, no assurance is expressed. The recipient of the report must form their own conclusions from the report by the
practitioner. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware
of the reasons for the procedures may misinterpret the results.

The auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive copies of
the report of factual findings, that there is a clear understanding regarding the agreed procedures and the conditions of the
engagement.

In agreed-upon procedures engagement, the practitioner simply provides a report of the factual findings and expresses no
assurance in his/her report. Users of the report make an assessment of the procedures and findings reported by the practitioner
and draw their own conclusions for the practitioner’s work.

Report. The report on an agreed-upon engagement needs to describe the purpose and agreed-upon procedures of
the engagement in sufficient detail to enable the reader to understand the nature and extent of the work performed.

2. Compilation of Financial or Other Information (Philippine Standards on Related Services 4400)– an engagement in which
the practitioner is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and summarize
financial information.
A compilation engagement ordinarily entails reducing the detailed data to a manageable and understandable form without a
requirement to test the assertions underlying that information. The procedures employed are not designed and do not enable
the practitioner to express any assurance on the financial statement/information.
A compilation engagement would ordinarily include the preparation of financial statements (which may or may not be a complete
set of financial statements) but may also include the collection, classification, and summarization, of other financial information.
The procedures employed in a compilation engagement are not designed and not enable the accountant to express any
assurance on the financial information. However, users of the compiled financial information derived some benefit as a result
of the accountant’s involvement because the service has been performed with professional competence and due care.

Procedures. The accountant should read the compiled information and consider whether it appears to be appropriate in form
and free from obvious material misstatements. The accountant is not ordinarily required to:
a. make any inquiries of management to assess the reliability and completeness of the information provided;
b. assess internal controls;
c. verify any matters;
d. verify any explanations.

If the accountant becomes aware of that information supplied by management is incorrect, incomplete, or otherwise
unsatisfactory, the accountant should consider performing the above procedures and request management to provide
additional information. If management refuses to provide additional information, the account should withdraw from the
engagement, informing the entity of the reasons of withdrawal.

If the accountant becomes aware of misstatements, the accountant should try to agree appropriate amendments with the entity.
If such amendments are not made and the financial information is considered to be misleading, the accountant should withdraw
from the engagement.

Reports. The accountant’s compilation report should identify the financial statement compiled and should clearly indicate that
no assurance is provided on the financial statements:

On the basis of information provided by the management, we have compiled, in accordance with Philippine Standard on Related
Services applicable to compilation engagements, the balance sheet of X Company as of December 31, 20XX and the
statements of income and cash flows for the year then ended. The management is responsible for these financial statements.
We have not audited, or reviewed these financial statements and accordingly express no assurance thereon.

Modification of the compilation report.

• Departure from PFRS. If there is a material departure from PFRS, the accountant should disclose the departure in a
separate paragraph of the report, although their effects do not have to be quantified.

If the accountant feels that the modification of the report is not sufficient to described the PFRS departures and the client
is not willing to correct these deficiencies, the accountant may withdraw from the engagement.

• Scope Limitation. Scope limitation will normally cause the accountant to withdraw from the engagement.

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