PRELIM - AUDITAP

AUDITING THEORY: INTRODUCTION TO ASSURANCE, NON-

ASSURANCE AND AUDITING

Auditing Theory in CPA Board Exams

AUDITING AND ASSURANCE STANDARDS COUNCIL (AASC)

AASC is tasked to assist BOA to establish and promulgate

auditing standards in the Philippines.

AUDITING AND ASSURANCE STANDARDS COUNCIL (AASC)

Elements of Assurance Engagement

1. Three-party Relationship

Practitioner

- Is broader than the term auditor.

Standards Governing Professional Services by CPAs
In addition to the standards promulgated by AASC, practitioners
are also governed by the following:
Responsible Party
Philippine Framework for Assurance Engagements (PFAE)
Code of Ethics for Professional Accountants in the Philippines (COEPAP)
FUNDAMENTALS OF ASSURANCE SERVICES
Governing standards:
Intended Users
Philippine Framework for Assurance Engagements
Definition
Assurance Engagement (or Services)
- 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.
- must be independent
- is governed by ethical requirements (i e professional competence)
regarding the conduct of the engagements
- may use the work of experts
- responsible for determining the nature, timing or extent of procedures
required by the engagement.
- Is the person/s responsible to the subject matter, the subject matter
information, or both
- may or may not be the engaging party to the practitioner
- may or may not be from the same organization with the intended
users of the engagements
- may be one of the intended user
- are the person/s for whom the practitioner prepares the assurance
report
- in case of broad range of interests by the readers of assurance report,
intended user may be limited to major stockholders with significant
and common interests
- may be identified by agreement between the practitioner and the
responsible party or engaging party, or by law.

2. Appropriate Subject Matter

Assurance
Subject Matter
- Refers to the practitioner’s satisfaction as to the reliability of an
assertion being made by one party for use by another party. - Is the nature of the assertion the practitioner gathers
sufficient evidence

Subject Matter Information

 - Pertains to the outcome of the evaluation or measurement of the
subject matter It is for which the practitioner gathers sufficient
appropriate evidence to provide a reasonable basis for expressing a
conclusion in an assurance report.
- Identifiable, and capable of consistent evaluation or measurement
against the identified criteria and
- Can be subjected to procedures for gathering sufficient appropriate
evidence.
When is evidence considered sufficient and appropriate? IT IS A MATTER
OF PROFESSIONAL JUDGMENT.
Materiality
- Materiality is relevant when the practitioner determines the nature,
timing and extent of evidence gathering procedures, and when
assessing whether the subject matter information is free of
misstatement
- LOWER materiality level leads to obtaining MORE audit
evidence

Assurance Engagement Risk

- Assurance engagement risk is the risk that the practitioner

expresses an inappropriate conclusion when the subject matter
information is materially misstated
- LOWER acceptable level of audit risks, MORE evidence must be
obtained

Cost Benefit Consideration and Level of Difficulty

- Considers the relationship between the cost and the usefulness of

the information obtained
- “the benefits that will be derived from obtaining the evidence
should exceed the cost of obtaining it”

Professional Skepticism
3. Suitable Criteria
- The practitioner plans and performs an assurance engagement with
Criteria Definition an attitude of professional skepticism recognizing that
circumstances may exist that cause the subject matter information
- The benchmarks used to evaluate or measure the subject matter
to be materially misstated
including, where relevant, benchmarks for presentation and
- Auditor makes a CRITICAL assessment with questioning mind
disclosure.
of the validity of evidence obtained
Classification

 Formal
 Less formal
 Established
 Specifically developed

Characteristics of Suitable Criteria

 Reliability
 Understandability
 Neutrality
 Completeness
 Relevance

Communication to Intended Users 5. Written assurance report

- The practitioner provides a written report containing a conclusion
 Publicly or an opinion that conveys the assurance obtained about the subject
 Through inclusion in a clear manner in the presentation of the matter information
subject matter information
 Through inclusion in a clear manner in the assurance report
 By general understanding

4. Sufficient Appropriate Evidence

- All information used by the practitioner in arriving at the

conclusions on which the auditor’s opinion is based
- The practitioner performs the engagement with an attitude of
professional skepticism to obtain sufficient appropriate evidence
about whether the subject matter information is free from material
misstatement

Consideration when Planning and Performing the Engagement

 Quantity (SUFFICIENCY)and quality (APPROPRIATENESS) of

Levels and Forms of Assurance
evidence
 Materiality The levels (high or moderate) and forms (positive or negative) of
 Assurance engagement risk assurance provided by the practitioner are dependent on the type of assurance
 Cost-benefit consideration engagement being rendered.
 Professional skepticism
Types of Engagement as to Assurance Level

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 Such form
conveys “reasonable assurance”

Limited assurance engagement

The objective is a reduction in assurance engagement risk to a

level that is acceptable in circumstances of the engagement, but where the risk
is greater than for a reasonable assurance engagement, as a basis for a
negative form of expression of the practitioner’s conclusion This form
conveys “limited assurance”

Types of Engagement as to Structure

Attestation Engagements

Attestation engagement is an engagement in which a practitioner is

engaged to issue, or does issue, a written communication that expresses a
conclusion about the reliability of a written assertion that is the responsibility
of another party

Attestation engagement may further be classified depending on the

availability of the assertions made by the responsible party to intended users

Assertion based engagements

assurance

engagements that 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

Direct

reporting engagements

assurance

engagements that 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 in the assurance reports

Direct Engagements