Introduction to Assurance

Services and Engagements

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Supplemental Readings:
o Philippine Framework for Assurance Engagements (PFAE)
o PSAE 300 (Revised) – Assurance Engagements other than
Audits or Reviews of Historical Financial Information
o PSA Glossary of Terms

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Assurance Services

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 Definition of Terms Assurance service is an independent professional service, typically
provided by Chartered or Certified Public Accountants or Chartered
Certified Accountants, with the goal of improving information or the
context of information so that decision makers can make more
informed, and presumably better, decisions.

Assurance Services
it cannot be done by just
Assurance Services are independent
“ anyone

professional services that improve the quality

of the information or its context, for decision
makers” Assurance services are audit activities that provide an independent, objective
assessment of financial statements or compliance efforts.

- American
Institute of Certified Public Accountants (AICPA Special
Committee on Assurance Services
Kasi nagaavail ng assurance services para ma aasured na ang fs ay
factual no mistated at masabi na ang fs ay credible

Assurance focuses on analyzing the processes, controls, and operations of an

organization.
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decision makers ,

Assurance Engagement

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 Definition of Terms
Professional accountants in public practice (“practitioners”)

What is assurance?
giving assurance means: offering an opinion about
specific information so the users of that “..means an engagement in which a
information are able to make confident decisions
knowing that the risk of the information
being 'incorrect' is reduced.
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
The intended user - the person who wants the
report (e.g. Shareholders) or measurement of a subject matter
The responsible party - the person who provides
the subject matter (e.g. Directors) responsible for
against criteria.”
the information on which the practitioner is
engaged to give a conclusion.
- Philippine Framework for Assurance
The Practitioner - the person who reviews the
subject matter and provides assurance (e.g. Engagements
Auditors) subject matter - The material provided by the responsible party, which needs assurance on
ex: entity’s financial position, financial performance and cash flows (subject matter).

Criteria - Philippine Financial Reporting Standards, (criteria) suitable criteria against which to judge the reliability
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and accuracy of the subject matter/// Criteria are the benchmarks used to evaluate or measure the subject
Elements of an assurance engagement: a three party relationship, a subject matter, criteria, evidence and an assurance report.

The following elements of an assurance engagement are discussed in this section:

(a) A three party relationship involving a practitioner, a responsible party, and
intended users;
(b) An appropriate subject matter;
(c) Suitable criteria;
(d) Sufficient appropriate evidence; and - Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure
of the quality of evidence; that is, its relevance and its reliability. The quantity of evidence needed is affected by the risk of the
subject matter information being materially misstated (the greater the risk, the more evidence is likely to be required) and also by
the quality of such evidence (the higher the quality, the less may be required)

(e) A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement.
- Assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion when the subject matter
information is materially misstated.

Levels of assurance

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 Gathers sufficient appropriate evidence to be able to draw limited
conclusions;
Definition of Terms Concludes that the subject matter, with respect to identified suitable
criteria, is plausible in the circumstances; and
Gives a negatively worded assurance opinion.

What are levels of assurance?

absolute assurance means that there

1.Absolute Assurance is absolutely no misstatement in the

financial statement and thus financial
statements are absolutely reliable and
relevant for the user of financial
statements.

2.Reasonable assurance reasonable assurance is also a

high level of assurance but it
means that auditor has

3.Limited assurance
conducted the engagement in a
way that he is reasonably i.e. to
the best possible extent
provided the situation
circumstances he is reasonable
The reason why auditor is unable to obtain absolute assurance is not because auditor’s sure that financial statements
do not conduct audit engagements with enough care rather there are limitations and are free from material
these limitations restricts the auditor to obtain only reasonable assurance and even with misstatement but there might be
such limitations and restrictions auditor tries his best to provide some level of assurance some misstatements that go
to the users to reinforce their confidence in the financial statements. undetected.
Such limitations that restricts the auditor to gain absolute assurance are known as
Inherent limitations of an Audit.

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 Definition of Terms

What is reasonable assurance?

The practitioner needs to reduce the

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.
In a reasonable assurance engagement, the practitioner:
-Gathers sufficient appropriate evidence to be able to draw reasonable conclusions;
-Concludes that the subject matter conforms in all material respects with identified suitable criteria; and
-Gives a positively worded assurance opinion.
The greatest level of assurance auditors can provide is reasonable. The limitations of an audit mean that it is not possible to
provide 'absolute' assurance. These limitations include:

Financial information includes subjective and judgemental matters.

Inherent limitations of controls used as audit evidence.
Representations from management may have to be relied upon as the only source of evidence in some areas.
Evidence is often persuasive not conclusive; and auditors
Do not review 100% of the transactions and balances, they test on a sample basis. Page 9
 In a limited assurance assignment the practitioner:
Definition of Terms Gathers sufficient appropriate evidence to be able to draw limited
conclusions;
Concludes that the subject matter, with respect to identified suitable
criteria, is plausible in the circumstances; and
Gives a negatively worded assurance opinion.
What is limited assurance?

The practitioner needs to reduce the

assurance engagement risk to a level that is
acceptable in the circumstances of the
engagement, but where that risk is greater
than for a reasonable assurance, as the basis
for a negative form of expression of the
practitioner’s conclusion.
example of a limited assurance assignment is a review engagement. It is possible for small companies, who are not legally required
to have a full audit, to have a review of their financial statements to enable them to present their accounts to potential lenders.
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 required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that
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the financial statements are not prepared in accordance with the applicable financial reporting framework (ie negative/limited
assurance).
 Reasonable versus Limited

Objective Evidence- Assurance

gathering report
procedures
Reasonable Risk to an Obtaining the Positive form of
assurance acceptable low understanding of expression of the
level the engagement conclusion
Assessing risks
Responding to “… in our opinion,
risk the internal
Performing audit control is
procedures effective, in all
Evaluating material respects,
evidence based on XYZ
obtained criteria.”

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 Reasonable versus Limited
Objective Evidence- Assurance report
gathering
procedures
Limited assurance Risk to a level that Deliberately limited Negative form of
is acceptable, such as expression of the
where the risk is obtaining the conclusion
greater than for a understanding of
reasonable the subject matter “ Based on our
assurance work described in
this report, nothing
has come to our
attention that
causes us to
believe that
internal control is
not effective, in all
material respects,
based on XYZ
criteria.”
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 Definition of Terms TYPES OF ASSURANCE

What is assertion-based engagement?

The responsible party carries out the measurement

or evaluation of the subject matter and reports the
information which contains the responsible party’s
assertion. The work the practitioner performs is to
give an assurance conclusion on this assertion.
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 the
intended users. These engagements are called “assertion-based engagements.”

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 Definition of Terms

What is direct reporting engagement?

The responsible party does not present the subject

matter information in a report. Instead, the practitioner
performs the evaluation or measurement of the
subject matter information without any assertion by
the responsible party, or obtains representation from
the responsible party that it has performed the valuation
or measurement but the information is not available to
the intended users. 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 provided to
the intended users in the assurance report. These engagements are called “direct
reporting engagements.”
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 Assertion-based versus direct reporting

Assertion-based
The auditor issues an opinion on written assertions made by
others.

Direct reporting
The auditor provides assurance on an accountability matter
on which the responsibility party has not made a written
assertion.

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In an assertion-based engagement, is responsible for the subject matter information (the
assertion), and may be responsible for the subject matter.

An example of when the responsible party is responsible for both the subject matter information
and the subject matter, is when an entity engages a practitioner to perform an assurance
engagement regarding a report it has prepared about its own sustainability practices.

An example of when the responsible party is responsible for the subject matter information but not
the subject matter, is when 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. The responsible party may or
may not be the party who engages the practitioner (the engaging party).

Questions

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