4 The Elements of An Assurance Engagement (CREST):

ASSURANCE  Three-Party relationship

 Appropriate Subject Matter
ENGAGEMENT  Suitable Criteria
 Sufficient Appropriate Evidence
 Written Assurance Report (Conclusion)

â THREE-PARTY RELATIONSHIP
DEFINITION OBJECTIVE RESPONSIBLE PARTY INTENDED USERS PRACTITIONER
P Person/s responsible for P Person/s whom the P Must be INDEPENDENT to
the: practitioner prepares both the responsible party and
 SUBJECT MATTER the assurance report intended users
A practitioner expresses a For the practitioner to evaluate or P May be identified by P Responsible for determining
 SUBJECT MATTER
conclusion designed to enhance measure a subject matter which is INFORMATION the agreement the nature, timing and extent
the degree of confidence of the the responsibility of another party  Or BOTH between practitioner of procedures
intended users other than the against identified suitable criteria and responsible P Governed by ethical
responsible party about the and EXPRESS A CONCLUSION that party or engaging requirements
P MAY or MAY NOT be the
outcome of the evaluation or provides intended users with a party or by law. P May use the work of persons
engaging party to the Once identified,
measurement of a subject matter level of assurance about that from other professional
practitioner
subject matter. report is restricted disciplines.
against criteria P MAY or MAY NOT be from to parties identified.
the same organization P Users may be limited
with the intended users NOTE:
to major
P MAY be the intended  PROFESSIONAL ACCOUNTANT
ELEMENTS OF AN ASSURANCE ENGAGEMENT stockholders with
users, but cannot be the - CPA engaged in ANY area of
significant and
ONLY ONE accountancy
common interests—
if the readers are
RESPONSIBLE PARTY
Written broad.  PRACTITIONER
Responsible Assurance Intended P Generally, but may - CPA rendering professional
Practitioner not be, the
Party Report Users services (assurance or non-
addressee of the assurance)
DIRECT professional
REPORTING accountants report.
 AUDITOR
ENGAGEMENT
- Practitioner rendering audit
and review services
P Materiality RESPOSIBLE FOR:
Sufficient P Assurance engagement risk
Appropriate Suitable P Subject Matter
Appropriate P Cost-Benefit Constraint
Subject Matter Criteria
Evidence
P Professional skepticism
ASSERTION-BASED
ENGAGEMENT

RESPOSIBLE FOR:
P Subject Matter
Information
P May be: Subject Matter
  Communication of criteria to intended users:
- Needs to available to intended users to allow them to understand how the subject matter was
â APPROPRIATE SUBJECT MATTER
evaluated or measured
- Can be made available through:
1. Publicly
2. Through inclusion in a clear manner in the presentation of the subject matter information
3. Through inclusion in the assurance report
4. By general understanding

4 SUFFICIENT APPROPRIATE EVIDENCE

- Pertains to all information gathered by the practitioner in evaluating the subject matter against
criteria on which the conclusion is based
- Without evidence, practitioner will not be able to attain the objective of an assurance
engagement which is to express a conclusion

 Consideration when planning and performing the engagement:

- Determining the nature, timing and extent of evidence gathering procedure
a. Sufficiency (Quantity of evidence)
b. Appropriateness (Quality of evidence)
c. Materiality
d. Assurance engagement risk
 CHARACTERISTICS OF SUBJECT MATTER TO BE CONSIDERED APPROPRIATE e. Cost-benefit consideration
1. Identifiable and capable of consistent evaluation or measurement against identified criteria f. Professional Skepticism
2. It can be subjected to procedures for gathering sufficient appropriate evidence
A. SUFFICIENCY/ APPROPRIATENESS
 SUFFICIENCY
- Measurement of the quantity of evidence
4 SUITABLE CRITERIA
- Affected by:
- Benchmarks used to evaluate or measure the subject matter
1. RISK – of the subject matter information being materially misstated
(Greater risk= More evidence)
 CRITERIA CAN BE: 2. QUALITY – of such evidence (High quality = Less Evidence)
Formal Less Formal Established Specifically developed
P PFRS P Entity’s By-laws P Those embodied in P Designed for the  APPROPRIATENESS (previous: COMPETENCE)
P Established P Agreed level of laws and regulations purpose of the - Measure of quality -> RELEVANCE and RELIABILTY
internal control performance or issued by engagement NOTE:
framework (e.g. authorized bodies P Associated to less It is more difficult to obtain assurance about a subject matter information covering a period of
COSO) P Associated to less formal time than a point in time
P Applicable laws, formal criteria
regulations and
contracts B. MATERIALITY
P Taken into consideration in the context of both qualitative and quantitative factors
P It is a matter of professional judgement
 CHARACTERSITICS OF A SUITABLE CRITERIA: P Requires understanding and assessment of the factors that might influence the
Reliability consistent evaluation or measurement of the subject matter when used in decision of the intended users
similar circumstances with other practitioners
Understandability Clear, comprehensive and not subject to significantly different interpretations
Neutrality Conclusions that are free from bias
Completeness When relevant factors are not omitted
Relevance Contributes to conclusions that assist decision-making by the intended users
C. ASSURANCE ENGAGEMENT RISK  In the event that practitioner has exhausted all possible means for the differences but still there’s are
- Risk that the practitioner expresses an inappropriate conclusion when the subject matter is items unaccounted, the ff. generalization about evidence may be used:
materially misstated a. External VS. Internal Source – More reliable: Independent sources outside the entity
b. Effective Internal Control – More reliable: When the internal contols are effective
c. Directly VS. Indirectly obtained by the practitioner – More reliable: Evidence obtained by
practitioner
ASSURANCE ENGAGEMENT RISK d. Written VS. Oral – More reliable: Exists in documentary form (Written)
e. Original VS. Reproduced- More reliable: Original

4 WRITTEN ASSURANCE REPORT (CONCLUSION)

RISK OF NON-DETECTION OR - A written report containing a conclusion or opinion that shows the assurance obtained in the
RISK OF MATERIAL MISSTATEMENT
DETECTION RISK subject matter information
P The risk that the subject matter
P The risk that the practitioner will
information is materially
not detect a material
misstated  TYPES OF OPINION
misstatement that exists

TYPE COMMON PHRASE USED

1. UNMODIFIED/UNQUALIFIED Present fairly in all material respect
2. QUALIFIED Except for
3. ADVERESE Do not present fairly, in all material respect
4. DISCLAIMER OF OPINION We do not express a conclusion

D. COST-BENEFIT CONSIDERATION

P The benefits that will be derived from obtaining the evidence should not exceed the cost of obtaining it
P The matter of difficulty or expense is not a valid basis for omitting an evidence gathering procedures for
which there is no alternative

 In case there is significant evidence-gathering procedure but it involves high cost and there is no
alternative:
1. Identify and perform alternative procedures
2. In the absence of alternatives, still required to perform the procedures

E. PROFESSIONAL SKEPTICISM

P Practitioner plans and performs assurance engagement with an attitude of professional skepticism
P Realizing that circumstances may exist that cause the subject matter information to be materially
 misstated
P Practitioner must make a critical assessment with a questioning mind of the validity of the evidence
obtained.

LEVELS AND FORMS OF ASSURANCE As to AVAILABILITY and NON-

AVAILABILTY of the assertions - Assurance engagements performed by the responsible
party and the subject matter information is in the form of
As to LEVEL of a. Reasonable Assurance Engagement assertion by the responsible party that is made available
Assurance to the users
provided: EXAMPLE: “In our opinion, internal control is effective, in all - Commonly used: ATTESTATION ENGAGEMENTS
material respects, based on XYZ criteria.”

b. Limited Assurance Engagement

- Practitioner either performs directly the evaluation or
EXAMPLE: “Based on our work described in this report, measurement of the subject matter
nothing has come to our attention that causes us to believe - Obtains representation from the responsible party not
that the internal control is not effective in all material available to intended users
respects, based on XYZ criteria. - Commonly used for: DIRECT ENGAGEMENTS
REASONABLE VS. LIMITED ASSURANCE ENGAGEMENTS
REASONABLE LIMITED
4 NON-ASSURANCE ENGAGEMENTS
Levels of assurance REASONABLE or HIGH, but LIMITED or  AGREED-UPON PROCEDURES
provided not absolute MODERATE - Auditor engaged to carry out procedures of audit nature in which the auditor and the
Form Positive Negative entity and any 3rd parties have agreed to report the factual finding
- Recipients of the report must form their own conclusions from the report
Example Audit Review
- Report restricted to parties who agreed to the procedures
Procedures P Inquiry P Inquiry
P Analytical procedures P Analytical
P Observation procedures  COMPILATION OF FINANCIAL AND OTHER INFORMATION
- Accountant is engaged to collect, classify and summarize financial information
P Inspection
- Accountant will not express any assurance on financial information
P Confirmation
P Reperformance
 TAX SERVICES where no conclusion is expressed and tax consulting
As to  Management Consulting and other advisory services
a. Direct Engagements A residual definition
STRUCTURE  Testifying in legal proceedings
 Professional opinion not intended as an assurance report
b. Attestation engagements
SUMMARY DIFFERENCES BETWEEN ASSURANCE AND NON-ASSURANCE ENGAGEMENT
A practitioner is engaged to issue a written communication ASSURANCE ENGAGEMENT NON-ASSURANCE ENGAGEMENT
that expresses a conclusion about the reliability of a written P To improve the quality or enhance credibility of P To provide comments, suggestions or
assertion which is the responsibility of another party the subject matter recommendations on how to use the
information
EXAMPLES AUDIT ENGAGEMENT P Should be provided by independent professional P Independence NOT REQUIRED
 P EXAMPLES: P EXAMPLES:
- Auditor provides a reasonable (not
 Audit  Agreed-upon procedures
absolute) assurance that the subject is
free from material misstatement  Review  Compilation
 Examination of prospective financial  Preparation of tax returns
information  Management advisory services
P Three-party contract P Two-party contract
- Auditor provides moderate level of P OUTPUT: Assurance in the form of opinion or P OUTPUT: Recommendation on how to use the
assurance that the subject is free from conclusion information
material misstatement

4 GLOBAL ORGANIZATIONS AND STANDARD SETTING BOARDS OF THE ACCOUNTANCY PROFESSION 4 STANDARDS GOVERNING PROFESSIONAL SERVICES BY CPA’S IN THE PHILIPPINES

IFAC STANDARDS RELATED PRACTICE STATEMENTS APPLICATION OF STANDARDS

(International Federation of Accountants) PSA – Philippine Standards on PAPS – Philippine Auditing Practice AUDIT of historical financial
Auditing Statements information
ROLE: Serves the public interest by PSRE- Philippine Standards on PREPS – Philippine Review REVIEW of historical financial
enhancing relevance, reputation and value Review Engagements Engagement Practice Statements information
of the global accountancy profession
PSAE – Philippine Standards on PAEPS – Philippine Assurance ASSURANCE ENGAGEMENT
Assurance Engagements Engagement Practice Statements dealing with subject matter other
than historical financial
information
PSRS – Philippine Standards on PREPS – Philippine Related Services AGREED-UPON PROCEDURES and
Related Services Practice Statements OTHER RELATED SERVICES
engagements as specified by AASC
IPSAB PSQC- Philippine Standards on ALL SERVICES falling under the
IAASB IESBA
IAESB (International Public Quality Control AASCs engagement standards
(International (International Ethics
(International Sector Accounting
Auditing and Standard Board of
Accounting Education Standards Board)
Assurance Board) Accountants)
Standards Board)  All of these standards are issued by AASC (Auditing and Assurance Standards Council)
ROLE: To improve
ROLE: To set high ROLE: To set high
ROLE: To set high- public sector
quality standards for quality, international
quality international financial reporting
auditing, assurance appropriate ethics
standards that shape for use by 4 ADOPTION OF PHILIPPINE STANDARDS AND PRACTICE STATEMENTS
and quality control standards for
the quality of government and
professional
accountancy other public sector
PRONOUNCEMENT: accountants 1 2 3 4 5
education. entities
P Handbook of including auditor
International independence
PRONOUNCEMENT: PRONOUNCEMENT: AASC members are Preparation of Exposed to the Comments, Final Approval and
Quality Control, requirements
P Handbook of P Handbook of assigned to Exposure drafts Public Suggestions, Effectivity
Auditing, Review,
International International workgroups Revisions and Final
Other Assurance PRONOUNCEMENT:
Education Public Sector Draft
and Related P Handbook of the  Majority of the  Exposure period:
Pronouncements Accounting
Services International Code council should
Pronouncements
of Ethics for approve before  Requires approval
Not > 90 days for
Professional exposure of at least ten (10)
each exposure
Accountants AASC members
draft

 Interpretations if
 issued by AASC
need not be
exposed for
comment

NOTES:
DEFINITION:

AUDITING P Is a systematic process P FS AUDIT

P Compliance Audit Uses: Established Criteria P Internal Audit Uses: Specifically developed criteria
(American Accounting P Of objectively obtaining and evaluating evidence
Association) regarding assertion about economic actions and events
P To ascertain the degree of correspondence between P FS Audit
assertions and established criteria P Internal Audit: Assists members of the organization
P Compliance Audit Caters: External Users
P And communicating the results to intended users in the effective discharge of their responsibilities
4 COMPARISON OF THE DIFFERENT TYPES OF AUDIT (Nature of assertion or data)
FINANCIAL STATEMENT AUDIT OPERATIONAL AUDIT COMPLIANCE AUDIT P Internal Audits are part of the organization. With this they cannot render FS Audit

Assertion P FS are fairly presented
Suitable P GAAP or other identified
Criteria financial reporting
framework
Report P An opinion whether the FS
presented fairly in
conformity with an identified
Generally P EXTERNAL AUDITORS
performed
by
Purpose P Type of audit pertaining to
the gathering of evidence on
the assertions embodied in
the FS of an entity to
determine whether the FS
are fairly presented in
accordance with GAAP or
other financial reporting
framework
Types of P EXTERNAL AUDIT
Audit  Performed by
independent or external
P Operations are conducted
efficiently and effectively
P Objective set by
management
P Report on the efficiency
and effectiveness
P Includes recommendation
to improve operations
P INTERNAL AUDITORS
P Type of audit involving a
systematic review of the
organization’s activities in
relation to specified
objectives for the purpose
of assessing the
performance, identifying
opportunities for
improvement and
developing
recommendation
P INTERNAL AUDIT
 Primary objective: Assist
all members of the
P Activities complied with
applicable laws, rules,
regulations, contracts or 4 FINANCIAL STATEMENT AUDIT
management policy
P Applicable contract,
rules, regulations, laws or
management policy
FINANCIAL STATEMENT AUDIT
P Degree of compliance
with applicable laws,
rules, regulations or
management policy
P GOVERNMENT AUDITORS
P Type of audit involving the
review of organizations
procedures to determine
whether the organization
has adhered to specific
procedures and rules set
down by some higher
authority
PGOVERNMENT AUDIT
 Primary objective:
1. Whether funds are
 CPAs on a contractual organization in the handled properly
basis effective discharge of in compliance with
 It emphasizes auditor their responsibilities existing laws
must not be a member of  Can perform: 2. Whether programs
the entity being audited P Operational Audit are being
 Can provide: P Compliance Audit conducted
P FS Audit  To establish efficiently and
P Operation Audit independence: They are effectively
P Compliance Audit required to be  Can perform:
independent of the P FS Audit
different operating units P Operational Audit
P Compliance Audit
4 REVIEW OF ELEMENTS OF FS AUDIT Nature of matter giving rise to the Auditor’s judgement about the pervasiveness of the effects or possible
modification (What is the reason effects on the financial statements
as to why we need to change the MATERIAL but NOT PERVASIVE MATERIAL and PERVASIVE
audit opinion
Financial Statements are QUALIFIED OPINION ADVERSE OPINION
Management Audit Report materially misstated
and Those and Other Financial
Inability to obtain sufficient QUALIFIED OPINION DISCLAIMER OF OPINION
Charged with Auditor Reporting Statement
appropriate audit evidence
Governance Responsibilities User

4 REASONABLE ASSURANCE AND THE INHERENT LIMITATIONS OF AN AUDIT

- An auditor cannot obtain absolute assurance because of the factors such as the ff:
1. Use of selective testing (exposure to SAMPLING RISK)
2. Inherent limitations of internal control (exposure to CONTROL RISK)
3. Fact that most audit evidence is persuasive rather than conclusive
IFRS/GAAP/Other Sufficient P Materiality 4. Work undertaken by the auditor to form opinion is permeated by judgement (exposure to
Assertions in financial P Assurance engagement risk
Appropriate NON-SAMPLING RISK)
FS framework P Cost-Benefit Constraint
Evidence 5. Nature/characteristics of assertions (exposure to INHERENT RISK)
P Professional skepticism
Due to this, all FS Audit are exposed to risk termed as: AUDIT RISK

Risk that the auditor gives an inappropriate audit opinion when the FS are materially misstated
 THREE-PARTY RELATIONSHIP

PARTIES RESPONSIBILITIES
AUDITOR P Formation and expression of an opinion of the FS DEMAND FOR FS AUDIT
(Practitioner) P Compliance with ethical requirements (e.g. Independence and
Competence)
P Determining the scope of audit in accordance with PSA and other
applicable regulations of bodies
MANAGEMENT AND THOSE P Presentation and preparation of the FS in accordance with the
CHARGED WITH GOVERNANCE applicable financial reporting framework
(Responsible Party) P Prevention and detection of fraud and error
P Adoption and implementation of adequate accounting and internal
control systems
USERS OF FS P Use of audit report which contains the opinion expressed by the
(Intended Users) auditor
NOTE:
P Audit statements does not relieve management and those charged with governance of their
responsibilities
P Auditor cannot be held responsible for fraud and error. But because of the procedures, it may act as a
deterrent
P “AUDITABILITY” – adequate supporting records and documents should be available
P To warrant the issuance of an UNMODIFIED OPINION, the auditor shall conclude that there are no:
a. MATERIAL LIMITATION ON THE SCOPE of the auditor’s work (QUALIFIED OR DISCLAIMER OF
OPINION)
- There is limitation if: It is unable to gather sufficient audit evidence
b. MATERIAL DISAGREEMENT WITH MANAGEMENT (QUALIFIED OR ADVERSE)
- Regarding the acceptability of the accounting policies, method of their application or
adequacy of FS Disclosures
4 ADDITIONAL CONDITIONS CREATING THE NEED FOR FS AUDIT
1. Confict of interest
2. Expertise
3. Remoteness of users
4. Financial consequence

4 REGULATORS REQUIREMENTS
- Some regulators require the submission of audited FS

1. GENERAL FINANCIAL REPORTING REQUIREMENTS

ENTITY
Stock Corporation
Non-Stock Corporation
Branch offices/Representative offices of
STOCK FOREIGN CORPORATIONS
Branch offices/Representative offices of
NON-STOCK FOREIGN CORPORATIONS
Regional Operating Headquarters of
FOREIGN CORPORATIONS
THRESHOLD
Total Assets or Total Liabilities > P600,000
Total Assets or Total Liabilities > P600,000
Assigned Capital > P1,000,000
Total Assets > P1,000,000
Total Revenues > P1,000,000

NOTE: Corporations that do not meet the threshold may submit their Annual FS with duly notarized Treasurer’s
Certification only (rather than Auditor’s Report)

2. TAX COMPLIANCE REQUIREMENTS

ENTITY THRESHOLD
Corporations, companies, partnerships or Gross annual SALES, EARNINGS, RECEIPTS or
persons OUTPUTS > P3,000,000

4 VALUE OF FS AUDIT
1. Audit reduces information risk that may lead to lower cost of capital
2. Audit may be used to deter inefficiency and fraud
3. Audit may be used to enhance systems of internal controls.