MODULE 1: AUDIT, ATTESTATION AND ASSURANCE – AN OVERVIEW

I. Description
This module discusses Assurance and Audit Engagement and their relationship. It discusses
its definition, the different types of audit and auditors and their roles in an organization. This
also gives an overview on the independent audit of financial statements.

II. Objectives
After completing the module, the students are expected to:

 Understand the nature and objective an assurance engagement.

 Identify and explain the types of assurance engagements.
 Know and explain the non-assurance services.
 Understand the auditor’s responsibilities and approach on engagements involving
review of financial statements.
 Describe the responsibilities and approach on engagements involving review of
financial statements.
 Understand and perform engagements involving compilation of financial statements
 Understand and perform engagements involving compilation of financial statements

III. Duration
Start: Week 2
End: Week 2

IV. Learning Contents

PART 1: Auditing, Attestation and Assurance

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 the assertions and established criteria and communicating the results to interested
users.

By: American Accounting Association committee on basic auditing concepts.

Assurance Services

Although auditing refers specifically to expressing an opinion on financial statements and

attestation refers more generally to expressing an opinion on any type of information or
subject matter that is the responsibility of another party (such as sustainability measures),
assurance services includes an even broader set of information, including nonfinancial
information.

Assurance means confidence. In an assurance engagement, an assurance firm is engaged

by one party to give an opinion on a piece of information that has been prepared by another

ACCTG 109 – AUDITING AND ASSURANCE PRINCIPLES 1

Desiree D. Cemefrania, CPA
party. The opinion is an expression of assurance about the information that has been
reviewed. It gives assurance to the party that hired the assurance firm that the information
can be relied on.

1. Reasonable Assurance - the auditor provides a high level of assurance regarding

their works by performing very thorough procedures and obtaining sufficient
appropriate evidence to be able to draw reasonable conclusions.

2. Limited Assurance - the auditor only provides a moderate or a low level of

assurance regarding their work since only a fewer procedures are followed in
obtaining sufficient appropriate evidence to draw limited conclusions.

Elements of an Assurance Engagement

1. Three Party Relationship

a. Practitioner
b. Responsible party
c. Intended users

2. Appropriate Subject Matter

3. Suitable Criteria
4. Sufficient appropriate evidence
5. Conclusion

Attestation Engagement - An engagement in which a practitioner is engaged to issue a

report on subject matter or an assertion about subject matter that is the responsibility of
another party.

1. Audit of Financial Statements

2. Review of Financial Statements (See Part 2)
3. Internal Control Over Financial Reporting
4. Others

ACCTG 109 – AUDITING AND ASSURANCE PRINCIPLES 2

Desiree D. Cemefrania, CPA
In short, auditing is a type of attestation engagement, and all attestation engagements are a
type of assurance service. An audit lends credibility to a company's financial statements.
Attestation lends credibility to any assertions made a company's management. This
includes, but is not limited to, a company's financial statements.

PART 2: REVIEW OF FINANCIAL STATEMENTS

Philippine Standards on Review Engagements (PSREs)

OBJECTIVE

The objective of a review of financial statements is to enable an auditor to state whether, on

the basis of procedures which do not provide all the 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 generally
accepted accounting principles in the Philippines (negative assurance).

GENERAL PRINCIPLE OF A REVIEW ENGAGEMENT

1. Independence;
2. Integrity;
3. Objectivity;
4. Professional competence and due care;
5. Confidentiality;
6. Professional behavior; and
7. Technical standards.

The auditor should conduct a review in accordance with this PSRE.

The auditor should plan and perform the review with an attitude of professional skepticism
recognizing that circumstances may exist which cause the financial statements to be
materially misstated.

For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to
be able to draw conclusions.

SCOPE OF A REVIEW

The procedures required to conduct a review of financial statements should be determined

by the auditor having regard to the requirements of this PSA, relevant professional bodies,
legislation, regulation and, where appropriate, the terms of the review engagement and
reporting requirements.

MODERATE ASSURANCE

ACCTG 109 – AUDITING AND ASSURANCE PRINCIPLES 3

Desiree D. Cemefrania, CPA
A review engagement provides a moderate level of assurance that the information subject to
review is free of material misstatement, this is expressed in the form of negative assurance.

Negative assurance is a determination by an auditor that a particular set

of facts is believed to be accurate since no contrary evidence has been
found to dispute them.

TERMS OF ENGAGMENT

The auditor and the client should agree on the terms of the engagement. The agreed terms
would be recorded in an engagement letter or other suitable form such as a contract.

 The objective of the service being performed.

 Management's responsibility for the financial statements.
 The scope of the review, including reference to this Philippine Standard on Auditing.
 Unrestricted access to whatever records, documentation and other information
requested in connection with the review.
 A sample of the report expected to be rendered.
 The fact that the engagement cannot be relied upon to disclose errors, illegal acts or
other irregularities, for example, fraud or defalcations that may exist.
 A statement that an audit is not being performed and that an audit opinion will not be
expressed. To emphasize this point and to avoid confusion, the auditor may also
consider pointing out that a review engagement will not satisfy any statutory or third
party requirements for an audit.

PLANNING

The auditor should plan the work so that an effective engagement will be performed. In
planning a review of financial statements, the auditor should obtain or update the knowledge
of the business including consideration of the entity's organization, accounting systems,
operating characteristics and the nature of its assets, liabilities, revenues and expenses.

DOCUMENTATION

The auditor should document matters which are important in providing evidence to support
the review report, and evidence that the review was carried out in accordance with this PSA.

PROCEDURES AND EVIDENCE

The auditor should apply judgment in determining the specific nature, timing and extent of
review procedures.

The auditor should apply the same materiality considerations as would be applied if an audit
opinion on the financial statements were being given.

ACCTG 109 – AUDITING AND ASSURANCE PRINCIPLES 4

Desiree D. Cemefrania, CPA
Procedures may be performed through:
 Inquiries and analysis
 Analytical procedures
 Recomputation, comparison and other clerical accuracy checks.
 Observation
 Inspection
 Obtaining confirmations

CONCLUSIONS AND REPORTING

The review report should contain a clear written expression of negative assurance. The
auditor should review and assess the conclusions drawn from the evidence obtained as the
basis for the expression of negative assurance

The report on a review of financial statements should contain the following basic elements,
ordinarily in the following layout:

1. Title
2. Addressee
3. opening or introductory paragraph
a. identification of the financial statements on which the review has been
performed; and
b. a statement of the responsibility of the entity's management and the
responsibility of the auditor;
4. scope paragraph, describing the nature of a review
5. statement of negative assurance;
6. date of the report;
7. auditor's address; and
8. auditor's signature

PART 3: AGREED-UPON PROCEDURES

Philippine Standards on Related Services 4400

OBJECTIVES

The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the 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. Instead, users of the report assess for themselves the procedures
and findings reported by the auditor and draw their own conclusions from the auditor’s work.

ACCTG 109 – AUDITING AND ASSURANCE PRINCIPLES 5

Desiree D. Cemefrania, CPA
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.

GENERAL PRINCIPLES OF AGREED-UPON PROCEDURES

1. 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.

a. Independence;
b. Integrity;
c. Objectivity;
d. Professional competence and due care;
e. Confidentiality;
f. Professional behavior; and
g. Technical standards.

2. The auditor should conduct an agreed-upon procedures engagement in accordance

with this PSA and the terms of the engagement.

PROCEDURES

Procedures may be performed through:

 Inquiries and analysis

 Analytical procedures
 Recomputation, comparison and other clerical accuracy checks.
 Observation
 Inspection
 Obtaining confirmations

PART 4: COMPILATION ENGAGEMENT

Philippine Standards on Related Services 4410

OBJECTIVES

The objective of a compilation engagement is for the accountant to use accounting

expertise, as opposed to auditing expertise, to collect, classify and summarize financial
information.

This ordinarily entails reducing 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 accountant to express any assurance on
the financial information. However, users of the compiled financial information derive some

ACCTG 109 – AUDITING AND ASSURANCE PRINCIPLES 6

Desiree D. Cemefrania, CPA
benefit as a result of the accountant's involvement because the service has been performed
with professional competence and due care.

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.

V. References

 Auditing Theory by J. Salosagcol, Tiu and Hermosilla

 Philippine Standards on Related Services-4410-previously-PSA-930
 Philippine Standards on Review Engagements-2400 Review Engagement
 Philippine Standards on Related Services-4400-previously-PSA-920

ACCTG 109 – AUDITING AND ASSURANCE PRINCIPLES 7

Desiree D. Cemefrania, CPA