Chapter 1: Fundamentals of Auditing $ Assurance Services

Services offered by a CPA

1. Assurance engagements, agreement between the CPA Practitioner and an intended
information user.
 Uses pertinent criteria in the evaluation and measurement of a subject matter that is the
responsibility of another party; or the same responsible party.
 Expresses a conclusion designed to enhance the degree of confidence that the intended
user may have on the subject matter.

Nature of Assurance Engagement

Involves the expression of a practitioner’s satisfaction with the reliability of an assertion made by
one party.
 Subject matter – assertion made by one party
 Criteria – practitioner or auditor collects and assesses sufficient and appropriate evidence
against pertinent standards.
 After conducting applicable and appropriate procedures to provide reasonable basis for
his conclusion, the practitioner than expresses his conclusion on a high and moderate or
moderate level of assurance on the degree of confidence that the intended user may
place on the reliability of the subject matter.

Subject matter : Statements of financial Condition, Financial Performance and Cash Flows

Criteria : Philippine Financial Reporting Standards for recognition, measurement, presentation and
disclosure.

Conclusion: Outcome of the evaluation of the subject matter information on the level of
assurance that the practitioner provides in the assurance report.

Note : an assurance engagement may be characterized as consisting of:

1. party relationship involving:

 the practitioner
 A responsible party
 Intended user

2. Subject matter or an assertion

3. Criteria against which the subject matter is assessed
4. Evidence that is sufficient and appropriate basis to arrived at a conclusion; and a
5. Written assurance report expressing practitioner's conclusion

Objective of Assurance Engagements

Professional accountant’s expression of a conclusion that will provide intended users with a level
of assurance on the degree of confidence to place on the reliability and credibility of the subject
matter.

Range of Assurance Engagement

1. Assertion-based Engagement- performed to a responsible party on a subject matter or

assertion made by the same responsible party with the outcome also made available to the
intended user.

2. Direct-reporting Engagement- performed for the intended user on a subject matter that is
the responsibility of another party with the outcome directly provided to the intended user.
Types of Assurance Engagement

1. Audits, provide a high level of assurance that the subject matter has met the appropriate
criteria in all material respects.
1.1 External audit
1.2 Independent financial statement audit

2. Reviews, limited examination of the client’s FS performed for the purpose of providing a
limited assurance that the statements are presented in accordance with identified Financial
Reporting Standards. Evidences examined supports a moderate level of assurance that the
information reviewed is free of material misstatements.

3. Assurance Services and Attestation Services

3.1 Attestation service, a practitioner issues a written communication expressing a
conclusion on the reliability of an assertion that is the responsibility of another party.

There is a additional detailed standards in the Statement on Standards for Attestation Services.

Difference Between Assurance and Attestation Services and Audits

1. Attestation services is different from Assurance Services with additional detailed standards in
the Statement on Standards for Attestation Services.

2. Audits are highly structured and are geared to the need of a greater number of users.

3. Attestation and assurance services are more customized to the intended users needs and
are highly useful in more limited circumstances.

4. Other assurance Services

4.1 Assurance and risk Assesment
4.1.1 identifies the risks that affect an entity
4.1.2 studies link between risks and the entity’s mission, vision, objectives, strategies &
develop new and relevant measures.

4.2 Information System Reliability Service

4.2.1 provides assurance that information system generate reliable real-time
information.
4.2.2 Includes tests that the system protects against potential data defects.

4.3 Assurance on Sales Personnel-Customer Interaction, performs anonymous shopping to

observe and assess actual procedures done by sales personnel in their interaction with customers.

4.4 Annual Environment Audit

4.4.1 ensures that the entity’s policies effectively comply with environmental
standards
4.4.2 assesses compliance with the country’s existing environmental laws.

Non-Assurance Engagements

A CPA is not precluded from performing non-assurance engagements that are not covered by
the Philippine Framework for Assurance Engagements.

1. Agreed-upon Procedures Services

1.1 the intended user or the party who engages
the professional accountant determines the examination processes to be performed.
 1.2 upon accomplishing the required procedures the CPA submits the factual findings of
the results of his examination.

1.3 the intended user assesses the findings and

draws his own conclusions deriving some assurance from the report of the findings.

2. Compilation of Financial or Other Information

2.1 the intended users/client supplies the the
CPA with financial information.

2.2 the CPA classifies and summarizes and

presents financial statements format in conformance with Financial Accounting and Reporting
Standards.

2.3 no assurance is expressed in a compilation report but a level of assurance is provided as

the CPA identifies errors in the representations of client.

3. Tax Services
3.1 Tax services to both audit and non-audit
clients
3.2 representation of clients tax cases, tax planning and tax compliance.

4. Management Consulting and Advisory Services

4.1 Design and installation of accounting system
4.2 Corporate finance
4.3 Computer risk management and E-business.sss

Management Consulting and Advisory Steps

1. Determine client objectives
2. Define problems
3. Do fact-finding
4. Evaluate alternatives
5. Formulate proposals
6. Communicate results
7. Implement and follow-ups

5. Accounting & Data Processing or Information Technology System Services

5.1 outsourcing of accounting and data processing services
5.1.1 manual or automated bookkeeping
5.1.2 information system on tax
5.1.3 stock and transfer agency
5.1.4 internal auditing

Elements of an Assurance Engagement

1.Objectives
1.1. the purpose of the engagement
1.2 the intended user’s need of assurance
1.3 subject matter of the engagement

2. Ethical Requirements, fundamental principles of:

2.1 Independence
2.2 Integrity
2.3 Objectivity
2.4 Competence
2.5 Due care
2.6 Confidentiality
 2.7 Professional behavior
2.8 application of technical standards

3. Accepting the Engagement

3. 1 formal letter stating
3.1.1 audit fieldwork starting date
3.1.2 proposed professional fee
4. Agreeing to the Terms of the Engagement
4.1. CPA’s acceptance letter known as the engagement letter to be called engagement
contract when signed by client.

5. Quality Control, quality oriented internal culture stressed in

5.1 meetings, briefings and seminars
5.2 reports to be issued
5.3 work performed should be checked for compliance with regulatory standards and legal
requirements.

6. Planning & Conducting the Engagement

6.1 Plan, coordinate and schedule the activities.
6.2 Audit plan involves an overall audit strategy which is normally drafted prior to start the
work at the client’s office.

7. Evidence, all information the CPA uses in arriving at a conclusion

7. 1 Appropriate, sufficient and competent to provide basis for conclusion.
7.2 Audit evidence is more reliable when provided by original documents from sources
outside the entity.

8. Documentation
8.1 Significant computations and information gathered during the audit must be
documented.

9. Subsequent Event
9.1 Events that occur after audit date are studied and their effect on the subject matter is
determined.
9.2 Whether the event is material and needs disclosure or adjustment.

10. Using the Work of An Expert, possessing a special skill, knowledge and experience in a
particular field other than accounting and auditing.

10. 1 Valuation or replacement costs of assets

10.2 Actuary for the appropriateness of insurance loss reserves.

11. Reporting
11.1 upon completion of the examination, the practitioner evaluates his findings, formulates
an opinion and drafts the assurance report.
11.2 The audit report expresses the practitioner’s opinion on the level of confidence that
may be placed on the FS or subject matter of the engagement.
THE AUTHORITY ATTACHING TO PHILIPPINE STANDARDS ISSUED BY AASC

STANDARDS APPLICATION
 Audit of historical financial information
Philippine Standards on Auditing
(PSAs)
 Review of historical financial information
Philippine Standards on Review
Engagements (PSREs)
 Assurance engagements dealing with subject
Philippine Standards on Assurance matters other than historical financial information
Engagements (PSAEs)
 Compilation engagements
Philippine Standards on Related  Engagements to apply agreed-upon procedures
Services (PSREs) to information
 Other related services engagements as specified
by the AASC

 PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement
Standards.

 Philippine Standards on Quality Control (PSQC) are to be applied for all services falling under
the AASC’s engagement standards.
 Philippine Standards are applicable to engagements in the Public Sector.

1. Philippine Practice Statements are issued to:

 Provide interpretative guidance and practical assistance to professional accountants in
implementing Philippine Standards.
 Promote good practice.

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

the 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 Engagement Standard(s) addressed by the Practice Statement have
been complied with.

AASC BULLETING AND AASC ALERTS

 A regular publication issued by the AASC to provide guidance to auditors in the application of
PSAs.
 Not part of PSAs and do not change the requirements of relevant PSAs.

PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

 The Framework does not itself establish standards or provide procedural requirements for the
performance of assurance engagements.
 In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance
engagements are governed by:
> The Philippine Code of Ethics for Professional Accountants
> Philippine Standards on Quality Control (PSQCs).
ASSURANCE ENGAGEMENTS

 “Assurance Engagement” 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.
 “Subject matter information” refers to the outcome of the evaluation or measurement of a
subject matter.
 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).
 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
(direct reporting engagements).

Two types of Assurance Engagement

 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.
 Limited assurance engagement – the objective is a reduction in assurance engagement 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 a basis for a negative form of
expression of the practitioner’s conclusion.

Elements of an Assurance Engagement

 A three-party relationship involving
> A practitioner
> A responsible party
> Intended users
 An appropriate subject matter
 Suitable criteria
 Sufficient appropriate evidence
 A written assurance report in the form appropriate to a reasonable assurance engagement or
a limited assurance engagement.

OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN

ACCORDANCE WITH PSAs

 In conducting an audit of financial statements, the auditor’s OVERALL OBJECTIVES are:

> To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework
> To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.

The auditor shall:

 Comply with all PSAs relevant to the audit.
 Comply with relevant ethical requirements, including those pertaining to independence
relating to financial statement audit engagements.
 Plan and perform an audit with professional skepticism recognizing that circumstances may
exist that cause the financial statements to be materially misstated.
 Exercise professional judgment in planning and performing an audit of financial statements.
 Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptable low level.
ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS

 The objective of a review of financial statements is to enable a practitioner 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 practitioner’s attention that causes the practitioner to
believe that the financial statements are not prepared, in all material respects, in accordance
with an identified financial reporting framework (negative assurance).
 A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review the
reliability of an assertion that is the responsibility of one party for use by another party.
 A review 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.
 The level of assurance provided in a review report is less than that given in an audit report.

ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING FINANCIAL INFORMATION

 In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out

those 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.
 The recipients of the report must form their own conclusion from the report of the auditor.
 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.

ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION

 In a compilation engagement, the accountant is engaged to use accounting expertise as

opposed to auditing expertise to collect, classify and summarize financial information.
 It ordinarily entails reduing detailed data to manageable and understandable from without a
requirement to test the assertions underlying that information.
 The procedures performed are not designed and do not enable the accountant to express
any assurance on the financial information.
 Users of compiled financial information derive some benefit as a result of the accountant’s
involvement because the service has been performed with due professional skill and care.

SUMMARY:

Nature of Audit Reiew Agreed-upon Compilations

Service Procedures
Level of High, but not Moderate No Assurance No Assurance
Assurance absolute assurance
Provided assurance

Report Positive Negative Factual findings Identification of

Provided assurance on assurance on of procedures information complied
assertion(s) assertion(s) (compilation report)
(Audit Report) (Review Report)
Chapter 2: The Professional Standards

STANDARDS
 Measure the quality of performance of individuals and organizations.
> CPAs professional qualities;
> Judgement in the exercise of professional engagement;
> CPA firms quality control policies and procedures

AUDITING PROCEDURES
 Means used by the auditors in attaining the quality required by the standards.

GENERALLY ACCEPTED AUDITING STANDARDS

 Established required level of quality for performing financial statement audits.
 Measures the quality of auditor’s performance.
 Minimum standard of performance that auditors should follow.

GENERAL STANDARDS

1. The examination is to be performed by person or persons having adequate technical training

and proficiency as an auditor.

2. In all matters relating to an engagement, an independence in mental attitude is to be

maintained by the auditor.

3. Due professional care is to be exercised in the performance of the audit and in the preparation
of the report.

STANDARDS OF FIELDWORK

4. The work is to be adequately planned and assistants, if any, are to be properly supervised.

5. There is to be proper study and evaluation of internal control as a basis for reliance thereon and
for the determination of the resultant extent of the test to which auditing procedures are to be
restricted.

6. Sufficient competent evidential matter is to be obtained through inspection, observation,

inquiries and confirmation to afford a reasonable basis for an opinion regarding the financial
statements under examination.
STANDARDS OF REPORTING

7. The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.

8. The report shall identify those circumstances in which principles have not been consistently
observed in the current period in relation to the preceding period.

9. Informative disclosures are to be regarded as reasonably adequate unless otherwise stated in

the report.

10. The report shall either contain an expression of opinion regarding the financial statements,
taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an
overall opinion cannot be expressed, the reasons therefore should be stated . In all cases, where
an auditor’s name is associated with the financial statements, the report should contain a clear-
cut indication of the character of the auditor’s examination if any, & the degree of responsibility
he is taking.

PHILIPPINE STANDARDS ON AUDITING (PSAs)

 The Auditing and Assurance Standards Council (AASC) has been given the task to promulgate
auditing standards, practices and procedures which shall be generally accepted by the
accounting profession in the Philippines.

AUDITING ASSURANCE & STANDARDS COUNCIL (AASC)

 Undertakes a review of the standards and practices statements issued by the IAASB to
determine if these can be adopted in the Philippines with or without changes after
considering any local requirements imposed by law or practice.

ADOPTION OF INTERNATIONAL STANDARDS

 International Standards on Auditing (ISAs)

 International Standards on Assurance Engagements (ISAEs);
 International Standards on Review Engagements (ISREs);
 International Standards on Related Services (ISREs) issued by the International Auditing &
Assurance Board (IAASB) created by the International Federation of Accountants (IFAC)
QUALITY CONTROL
 Policies and procedures adopted by the CPA to provide reasonable assurance of conforming
with professional standards in performing audit and related services.

PHILIPPINE STANDARDS ON QUALITY CONTROL (PSQC)

1. The firm & its personnel comply with professional standards;

2. Comply with regulatory & legal requirements;
3. Report issued are appropriate in the circumstances.

SYSTEM OF QUALITY CONTROL

1. Implement quality control procedures that are applicable to audit engagements;

2. Provide the firm with relevant information to enable the functioning of that part of the firm’s
system of quality control relating to independence; &
3. Are entitled to rely on the firm’s systems unless information provided by the firm or other parties
suggest otherwise.

PSA 220

 Audit firm should implement polices & procedures designed to ensure that all audits are
conducted in accordance with PSAs.

ELEMENTS OF A SYSTEM OF QUALITY CONTROL

Factors to Consider
> Firm’s size
> Nature of its practice
> Cost benefit considerations

LEADERSHIP RESPONSIBILITIES FOR QUALITY CONTROL

 Engagement Partner is responsible for the overall quality of each audit engagement to which
the partner is assigned.

ETHICAL REQUIREMENTS

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour

INDEPENDENCE

1. Obtain relevant information to identify circumstances & relationships that creates threats to
independence.
2. Take appropriate safeguards to eliminate such threats or reduce them to an acceptable level;
3. Document conclusions on independence & the basis for such conclusion.

ACCEPTANCE & CONTINUANCE OF CLIENT RELATONSHIPS

1.Has considered integrity of the client;

2. Is competent to perform the engagement and has the capabilities, time and resources to do so;
3. Can comply with ethical requirements
HUMAN RESOURCES & ASSIGNMENT

 Recruitment;
 Performance evaluation, compensation & promotion;
 Capabilities & competence; &
 Assignment of engagement teams

ENGAGEMENT PERFORMANCE

 Performed in accordance with professional standards & other regulatory & legal requirements;
 Audit report issued is appropriate in the circumstances

Note:Direction, supervision, review & overall performance of the audit engagement is the
responsibility of the engagement partner.

DIRECTION
 Responsibilities
 Nature of the entity’s business
 Potential problems that may arise
 Detailed approach to the performance of the engagement

SUPERVISION
 Monitoring the progress of the audit
 Resolving accounting and audit issues
 Level of consultation appropriate for the engagement

REVIEW
 Audit procedures
 Evidence
 Documentation
 Appropriate to support the conclusion reached.

CONSULTATION
 Difficult and contentious matters
 At the appropriate level within & outside the firm
 Conclusions are documented & agreed with the party consulted
 Determine whether the conclusions resulting from consultations have been implemented.

ENGAGEMENT QUALITY CONTROL REVIEW

 Provides an OBJECTIVE EVALUATION of the SIGNIFICANT JUDGEMENTS made and

CONCLUSIONS reached in formulating the auditor’s report.

There should be policies & procedures setting out the:

1. Scope of the quality control review;
2. Criteria for the eligibility of the reviewer
3. Documentation of the quality control review

Note: There must be a reasonable assurance that the policies & procedures are UNDERSTOOD &
IMPLEMENTED.

REQUIREMENTS FOR THE ENGAGEMENT PARTNER

1. Determine that the engagement quality control review has been appointed;
2. Discuss significant matters arising during the audit engagements, including those identified
during the quality control review with the engagement quality control reviewer; &
3. Not to issue the auditor’s report until the completion of the engagement quality control review.
DIFFERENCES OF OPINION

 Follow the firm’s policies and procedures;

 Bring the matter to the attention of the engagement partner or others within the firm as
appropriate without fear of reprisals; &
 It must be resolved first before the issuance of the audit report.

MONITORING

 Policies and procedures must be adopted to provide reasonable assurance that the system of
quality control:
> Relevant
> Adequate; &
> Operating effectively

QUALITY CONTROL REVIEW

1. The Professional Regulatory Board of Accountancy (BOA) has required all CPA firms and
individual CPAs in public practice to obtain Certificate of Accreditation to practice public
accountancy;

2. CPA & CPA Firms to undergo a quality control review to ensure the compliance with
accounting & auditing standards & practices.

QUALITY CONTROL REVIEW COMMITTEE

 Conducts quality control review on applicants for registration to practice public accountancy