AUDITING THEORIES 3.

Suitable criteria
• Benchmarks used to evaluate or measure
Introduction to Assurance and Audit Engagements
the subject matter.
Assurance Engagements • RUNCR
o Reliability
➢ An engagement in which a practitioner expresses o Understandability
a conclusion designed to enhance the degree of o Neutrality
confidence of the intended users other than the o Completeness
responsible party about the outcome of the o Relevance
evaluation or measurement of a subject matter • Formal and less formal (internal criteria)
against criteria.
• Established and specifically developed
➢ We are expressing the level of satisfaction on the
• How is it communicated?
reliability of the information that is the
o Publicly
responsibility of the other party
o In the Subject Matter Information
➢ PFAE – Philippine Framework for Assurance
o In the assurance report
Engagements
o General understanding
➢ 5 Elements of the Assurance Engagements
1. 3 party relationship
4. Sufficient and appropriate evidence
• Practitioner
• Sufficient - is the evidence or information
• Responsible party
given by the responsible party enough to
• Intended User conduct and assurance. It is about the
quantity of data given.
2. Appropriate subject matter
• Appropriate - the marriage of relevance
• Identifiable and reliability. We look at the quality of
• Measurable against criteria the information given to us.
• Testable
Subject Matter – nature of the assertion
Subject Matter Information – outcome of the
5. Written conclusion
evaluation/measurement of the Subject
• Quantity and Quality
Matter.
o How do we know that the evidence
Responsible Party? is reliable?
Management Management ▪ We can determine the evidence
Subject Matter
Subject Matter
Information
is reliable mainly by its source.
Financial Historical or Recognition, Where it came from; external
performance or prospective measurement, and internal evidences.
conditions financial position, presentation and
▪ We can say that evidences that
financial disclosure
performance, cash representation in only came from internal source
flows financial is reliable depending on the
statements internal control of the
Non financial Performance of an Key Indicators of
performance or entity efficiency and company. If the internal control
conditions effectiveness has a strong system, then the
Physical Capacity of a Specifications evidence is most likely reliable.
characteristics facility document
Systems and An entity’s internal An assertion about
o How do we know that the evidence
processes control or IT system effectiveness is relevant?
Behavior Corporate A statement of ▪ If it is able to address the
governance, compliance or a
assertion we would like to test.
compliance with statement of
regulation, human effectiveness ▪ Completeness
resource practices
• Materiality ➢ Assurance Engagements
o Materiality is subjective depending • Assertion Based (Attestation)
on the entity. - In an attestation, the subject matter
o If the material amount can affect the information is available even without
decision and assurance that will be the practitioner.
concluded. - We are able to make financial
• Assurance Engagement Risk = Risk of statements even without an auditor.
Material Misstatement x Detection risk* o Audit
(AER = RMM x DR*) • Direct Reporting
o The Risk of Material Misstatement is o
uncontrollable by the auditor. ➢ Non Assurance Engagements
o The only risk controllable by the i. Agreed upon procedures
auditor is the Detection risk. This is ii. Compilation
the acceptable level of detection iii. Tax return preparation
risk. iv. Consultation
▪ Risk tolerance of the auditor or
materiality of the entity
Introduction to Audit Engagements
*The Assurance Engagement Risk Model is
➢ A systematic process of objectively obtaining and
just the same with the Audit Risk Model.
evaluating evidence regarding assertions about
The only difference is, when it is generic,
economic transactions and events to ascertain the
then it is an Assurance Engagement Risk
degree of correspondence between these
Model. Terminologies lang ang different
assertions and established criteria and
• Cost benefit communicating the results thereof.
o The expense and difficulty in itself
is not a valid basis to omit a
Financial Compliance Operational
procedure Audit Audit Audit
• Professional skepticism Assertions FS are fairly Organization Organization’s
made by presented. has complied activities are
o The auditor conducts the audit
auditee with laws and conducted
with a questioning mind. regulations. efficiently and
o Everything we need should be effectively.
given with evidence. It reminds us Established Financial Laws, Objectives set
criteria reporting regulations, by the board of
to be alert to the fact that the standards or and contracts. directors.
evidences given to us may have a other financial
risk of misstatements. reporting
framework.
o Alert through information risk. Content of Opinion Degree of Recommen-
auditor’s where FS are compliance dations or
• Reasonable Assurance Engagement report fairly with applicable suggestions on
presented in laws, how to improve
o Level: Reasonable/High conformity regulations and operations.
o Form: POSITIVE with an contracts.
o Example: Audit identified
financial
- You will have an unlimited choice of framework.
procedures to choose from to come to Auditors External Government Internal
an audit conclusion. who auditors auditors Auditors
generally
• Limited Assurance Engagement perform
o Level: Limited/Moderate
o Form: NEGATIVE
o Example: Review
 ➢ FS Audit Objective:
• To obtain reasonable assurance about
whether the financial statements as a whole
are free from material misstatement,
thereby enabling the auditor to express and
opinion.
➢ What drives the demand for FS audit?
1. Conflict of interest between management
and users of FS
2. Expertise
3. Remoteness
4. Financial consequences
5. Information risk
6. Cost of capital
➢ Theoretical Framework
1. Data are verifiable
2. Auditor is independent
3. No long term conflict
▪ They should be concerned about the
fairness of the financial statements
4. Audit benefits the public
5. Effective internal control system

Audits only give reasonable assurance given the inherent

limitations associated with evidences such as:

➢ Inherent limitations:
1. Sampling risk
2. Non sampling risk
3. Inherent limitations of internal control
4. Nature evidence
5. Nature of assertions