AUDITING THEORY

TOPIC 3: FUNDAMENTALS OF ASSURANCE SERVICES

ASSURANCE ENGAGEMENTS

INTRODUCTION ASSURANCE

OBJECTIVE

BASIC COMPARISON OF
ASSURNACE AND NON-
ASSURANCE 3 PARTY
RELATIONSHIP

APPROPRIATE
SUBJECT MATTER

ELEMENTS OF
SUITABLE CRITERIA
ASSURANCE
ENGAGEMENTS
FUNDAMENTALS
SUFFICIENT
OF ASSURANCE
APPROPRIATE
SERVICES
EVIDENCE

SUMMARY OF SERVICES WRITTEN

PERFORMED BY ASSURANCE
PRACTITIONERS REPORT
(CONCLUSION)

STANDARDS GOVERNING
PROFESSIONAL
SERVICES BY CPAS

DEFINITION
Assurance Engagement (or services) – 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.

Assurance – auditor's satisfaction as to the reliability of an assertion being made by one party for use by another party.

OBJECTIVE – express a conclusion that provides the intended users with a level of assurance about the subject matter.

BASIC COMPARISON OF ASSURANCE AND NON – ASSURANCE

ASSURANCE ENGAGEMENT NON – ASSURANCE ENGAGEMENT
 OUTPUT: Assurance in the form of opinion  OUTPUT: Recommendation on how to use the information
 Designed to improve the quality or enhance the  Provide comments, suggestions, or recommendations on
credibility of the subject matter how to use the information
 Three-party contract  Two-party contract
 Provided by an independent professional  Independence is not required
 Examples:  Examples:
o Audit o Agreed – upon procedures
o Review o Compilations
o Examination of prospective financial information o Preparation of tax returns
o Management advisory services

ELEMENTS OF ASSURANCE ENGAGEMENT (3SECC)

1. THREE PARTY RELATIONSHIP

PRACTITIONER RESPONSIBLE PARTY INTENDED USERS

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2. APPROPRIATE SUBJECT MATTER
Subject matter 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.

Characteristics of a Subject Matter to be considered appropriate

a. Identifiable, and capable of consistent evaluation or measurement against the identified criteria
b. Information can be subjected to procedures for gathering SAE to support a reasonable assurance or limited
assurance conclusion.
FORM SUBJECT MATTER SUBJECT MATTER INFORMATION
Historical or prospective financial Recognition, measurement,
Financial Performance or
position, financial performance and presentation and disclosure
Conditions
cash flows represented in financial statements
Non-financial Key indicators of efficiency and
Performance of an entity
performance or conditions effectiveness
Physical characteristics Capacity of a facility Specifications document
System and processes An entity's internal control or IT system Assertion about effectiveness
Corporate governance, compliance with Statement of compliance or a
Behavior
regulation, human resource practices statement of effectiveness

3. SUITABLE CRITERIA – used to evaluate or measure the subject matter

CRITERIA MAY BE COMMUNICATION OF CRITERIA TO INTENDED USERS
a. Formal a. Publicly.
b. Less Formal b. Through inclusion in a clear manner in the presentation of the subject matter
c. Established information.
d. Specifically Established c. Through inclusion in a clear manner in the assurance report.
d. By general understanding, for example the criterion for measuring time in hours
and minutes.

Characteristics of SUITABLE CRITERIA (RUNCR)

a. RELEVANCE – contribute to conclusions that assist decision-making by the intended users
b. COMPLETENESS – include relevant benchmarks for presentation and disclosure
c. RELIABILITY – allow reasonably consistent evaluation or measurement of the subject matter
d. NEUTRALITY – contribute to conclusions that are free from bias
e. UNDERSTANDABILITY – contribute to conclusions that are clear, comprehensive, and not subject to
significantly different interpretations

4. SUFFICIENT APPROPRIATE EVIDENCE – performs the engagement with an attitude of professional skepticism to
obtain sufficient appropriate evidence.

Consideration when planning and performing the engagement

a. SUFFICIENCY AND APPROPRIATENESS
 Sufficiency – measure of the quantity of evidence
 Appropriateness – measure of the quality of evidence (relevance and reliability)

b. MATERIALITY – determines the nature, timing, and extent of evidence gathering procedures
c. ASSURANCE ENGAGEMENT RISK – practitioner expresses an appropriate conclusion when the subject
matter information is materially misstated.
 Inherent Risk – the susceptibility of the subject matter information to a material misstatement,
assuming that there are no related controls
 Control Risk – the risk that a material misstatement that could occur will not be prevented, or
detected and corrected, on a timely basis by related internal controls
 Detection Risk – the risk that the practitioner will not detect a material misstatement that exists

d. COST – BENEFIT CONSIDERATION

“The benefits that will be derived from obtaining the evidence should exceed the cost of obtaining
it.”

e. PROFESSIONAL SKEPTICISM
The practitioner makes a critical assessment, with a questioning mind, of the validity of evidence
obtained and is alert to evidence that contradicts or brings into question the reliability of documents or
representations by the responsible party.

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 Generalizations about reliability of evidence may be useful
1. External > Internal
2. Effective Internal Control > Ineffective Internal Control
3. Directly Obtained > Indirectly Obtained
4. Written Presentations > Written Representations
5. Original Documents > Photocopies, Facsimiles

5. WRITTEN ASSURANCE REPORT (CONCLUSION) – practitioner provides a written report containing a conclusion
or an opinion that conveys the assurance obtained about the subject matter information.
TYPE COMMON PHRASE USED LEVELS & FORMS OF ASSURANCE
1. Unmodified/Unqualified Present Fairly, in all material respect The levels (high or moderate) and
forms (positive or negative) of
2. Qualified Except for assurance provided by the practitioner
3. Adverse Do not present fairly, in all material respect are dependent on the type of
4. Disclaimer of Opinion We do not express a conclusion assurance engagement being
rendered.
TYPES OF ASSURANCE ENGAGEMENT AS TO LEVEL OF ASSURANCE
A. ATTESTATION ENGAGEMENTS – practitioner is engaged to issue a written communication that
expresses a conclusion about the reliability of a written assertion
a. Assertion – Based Engagements – made available to the intended users
b. Direct Reporting Engagements – not made available to intended users

B. DIRECT ENGAGEMENTS – assurance engagement as to structure

STANDARDS GOVERNING PROFESSIONAL SERVICES BY CPAS (AASCs)

STANDARDS RELATED PRACTICE STATEMENTS APPLICATIONS OF STANDARDS
Philippine Standards on Auditing Philippine Auditing Practice Statement Audit of historical financial
(PSAs) (PAPs) information
Philippine Standards on Review Philippine Review Engagements Review of historical financial
Engagements (PSREs) Practice Statements (PREPSs) information
Philippine Standards on Assurance Philippine Assurance Engagement Assurance engagements dealing with
Engagements (PSAEs) Practice Statements (PAEPSs) subject matter other than historical
financial information
Philippine Standards on Related Philippine Related Services Practice Agreed-upon procedures information
Services (PSRSs) Statements (PREPs) and other related services
engagements as specified by AASC
Philippines Standards on Quality All services falling under AASCs
Management (PSQM) Engagement Standards

SUMMARY OF SERVICES PERFORMED BY PRACTITIONERS

ASSURANCE ENGAGEMENTS NON-ASSURANCE ENGAGEMENTS
Agreed-upon Compilation
Audit Review
procedures engagement
References PSAs and PAPS PSREs ad PREPs PSRSs and PRSPS PSRSs and PRSPS
Express an opinion Express a conclusion Perform procedures Use accounting
whether the FS are whether material as agreed upon with expertise to collect,
Objectives prepared in accordance modifications are to the client and third classify and
with PFRS be made to the FS to parties and report on summarize FS
conform with PFRS factual findings
Independence + Independence + Fundamental ethical Fundamental ethical
Ethical
fundamental ethical fundamental ethical principles principles
Requirement
principals principals
Level of High but not absolute Moderate (limited) No assurance No assurance
Assurance (reasonable)
Procedures are Exclusively by the auditor Exclusively by the Agreed-upon by May or may not be
determined by auditor parties agreed by parties
Independent Auditor’s Review Report Report on Factual Compilation Report
Report provided
Report (positive form) (negative form) Findings
Availability of To all users To all users For limited use only To all users
report