UNIVERSITY OF LA SALETTE

AUDITING AND ASSURANCE PRINCIPLES

ATTY. JIMMY I. PERU, JD, MBM, MICB, CPA

Module 3:
PREFACE TO PSAs/FRAMEWORK/PSA 120/PSQM1

PREFACE TO PHILIPPINE STANDARDS ON QUALITY MANAGEMENT, AUDITING,

REVIEW AND OTHER ASSURANCE AND RELATED SERVICES

INTRODUCTION

This Preface to
1. Philippine Standards on Quality Management;
2. Auditing;
3. Review and Other Assurance; and
4. Related Services

is issued to facilitate understanding of the objectives and operating procedures of the

Auditing and Assurance Standards Council (hereinafter referred to as AASC or Council)
and the scope and authority of the documents issued by the council.

Mission of the AASC

“promulgation of auditing standards, practices and procedures which shall be generally

accepted by the accounting profession in the Philippines.

Pronouncements of AASC

Standards Statements
Philippine Standards on Quality
Management (PSQMs)
Philippine Standards on Auditing Philippine Auditing Practice
(PSAs) Statements (PAPSs)
Philippine Standards on Review Philippine Review Engagement
Engagements (PSREs) Practice Statements (PREPSs)
Philippine Standards on Assurance Philippine Assurance Practice
Engagements (PSAEs) Statements (PAEPSs)
Philippine Standards on Related Philippine Related Services Practice
Services (PSRSs) Statements (PRSPSs)

AUDITING AND ASSURANCE STANDARDS COUNCIL

Senior Practitioner (Auditing Firm) Chairman 1

ACPAPP Member 1
Board of Accountancy Member 1
SEC Member 1
Commission on Audit Member 1
PICPA
Public Practice Members 7
Academe Member 1
Commerce Member 1
Government Member 1
Total 15

THE AUTHORITY ATTACHING TO ENGAGEMENT STANDARDS

Engagement Standards contain basic principles and essential procedures together with
related guidance in the form of explanatory and other material that provide guidance for
their application.

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AT.1003
In exceptional circumstances, an auditor may judge it necessary to depart from a Standard
in order to more effectively achieve the objective of an engagement. When such a situation
arises, the auditor should be prepared to justify the departure.

Engagement standards need only be applied to material matters.

THE AUTHORITY ATTACHING TO PRACTICE STATEMENTS

Practice Statements are issued to provide practical assistance to auditors in implementing

the standards or to promote good practice. These Statements are not intended to have the
authority of the Standards.

PSA 120 FRAMEWORK OF

PHILIPPINES STANDARDS ON AUDITING AND
RELATED SERVICES

This Framework distinguishes audits from related services. Related services comprise
reviews, agreed-upon procedures and compilations.

Auditing ____Related Services__________

Agreed-
Nature of service Audit Review upon Compilation
Procedures

Comparative level
High, but not
of assurance Moderate No No
absolute,
provided by the assurance assurance assurance
assurance
auditor

Positive Negative Factual Identifica-

Report provided assurance on assurance on findings of tion of info.
assertion assertion procedure compiled

The Framework does not apply to other services provided by auditors such as taxation,
consultancy, and financial and accounting advice.

1. Audit

The objective of an audit of financial statements is to enable the auditor to express an

opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework. The phrase used to express
the auditor's opinion is “present fairly, in all material respects.”

The auditor's opinion enhances the credibility of financial statements by providing a high,
but not absolute, level of assurance.

Absolute assurance in auditing is not attainable.

2. Review

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 that would be required in
an audit, anything has come to the auditor's attention that causes the auditor to
believe that the financial statements are not prepared, in all material respects, in
accordance with an identified financial reporting framework.

A review comprises inquiry and analytical procedures.

3. Agreed-upon Procedures

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

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third parties have agreed and to report on factual findings. The recipients of the report
must form their own conclusions from the report by the auditor.

4. Compilations

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

opposed to auditing expertise to collect, classify and summarize financial information. This
ordinarily entails reducing detailed data to a manageable and understandable form without
a requirement to test the assertions underlying that information. The procedures employed
are not designed and do not enable the accountant to express any assurance on the
financial information.

PHILIPPINE FRAMEWORK FOR

ASSURANCE ENGAGEMENTS

Assurance Engagement

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.

Types of Assurance Engagement

1. Reasonable assurance engagement. The objective of a reasonable assurance

engagement 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.

2. Limited assurance engagement. The objective of a limited assurance engagement

is a reduction in assurance engagement risk, but where that risk is greater than for a
reasonable assurance engagement, as the basis for a negative form of expression of
the practitioners conclusion.

Scope of the Framework

Not all engagements performed by practitioners are assurance engagements. Other

frequently performed engagements that do not meet the above definition (and therefore are
not covered by this Framework) include:

• Engagements covered by International Standards for Related Services, such as agreed

–upon procedures engagements and compilations of financial or other information.
• The preparation of tax returns where no conclusion conveying assurance is
expressed.
• Consulting (or advisory) engagements such as management and tax consulting.

Elements of an Assurance Engagement (SWATS)

(a) Three party relationship

(b) Appropriate subject matter
(c) Suitable criteria
(d) Sufficient appropriate evidence
(e) Written assurance report

Three Party Relationship

Practitioner

The term “practitioner” as used in this framework is broader than the term “auditor” as used
in ISAs and ISREs, which relates only to practitioners performing audit or review
engagements which respect to historical financial information.

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Responsible Party

The responsible party is the person (or persons) who:

(a) In a direct reporting engagement, is responsible for the subject matter; or
(b) Is an assertion-based engagement, is responsible for the subject matter information
(the assertion), and may be responsible for the subject matter.

Intended Users

The intended users are the person, persons or class of persons for whom the practitioner
prepares the assurance report. The responsible party can be one of the intended users, but
not the only one.

Subject Matter
The subject matter, and subject matter information of an assurance engagement can take
many forms, such as:
• Financial performance or conditions (for example, historical or prospective financial
position, financial performance and cash flows)
• Non-financial performance or conditions (for example, performance of an entity)
• Physical characteristics (for example, capacity of facility)
• Systems and processes (for example, an entity’s internal control or IT system)
• Behavior (for example, corporate governance, compliance with regulation, human
resource practices)

Criteria

Criteria are the benchmarks used to evaluate or measure the subject matter including
where relevant benchmarks for presentation and disclosures.

Characteristics of Suitable Criteria (CURRN)

(a) Relevance: relevant criteria contribute the conclusions that assist decision making by
the intended users.

(b) Completeness: criteria are sufficiently complete when relevant factors that could affect
the conclusions in the context of the engagement circumstances are not omitted.
Complete criteria include where relevant benchmarks for presentation and disclosure.

(c) Reliability: reliable criteria allow reasonably consistent evaluation or measurement of

the subject matter including, where relevant, presentation and disclosure when used in
similar circumstances by similarly qualified practitioners.

(d) Neutrality: neutral criteria contribute to conclusions that are free from bias

(e) Understandability: understandable criteria contribute conclusions that are clear,

comprehensive, and not subject to significantly different interpretations.

Evidence

The practitioner considers materiality, assurance engagement risk, and the quantity and
quality of available evidence when planning and performing the engagement, in particular
when determining the nature, timing and extent of evidence-gathering procedures.

Nature, Timing and Extent of Evidence-Gathering Procedures

“Reasonable assurance” is a concept relating to accumulating evidence necessary for the

practitioner to conclude in relation to the subject matter information taken as a whole.

“Reasonable assurance” is less than absolute assurance. Reducing assurance

engagement risk to zero is very rarely attainable or cost beneficial as a result of factors
such of the following:
• The use of selective testing
• The inherent limitations of internal control
• The fact that much of the evidence available to the practitioner is persuasive rather than
conclusive.

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• The use of judgment in gathering and evaluating evidence and forming conclusions
based on that evidence.
• In some cases, the characteristics of the subject matter when evaluated or measures
against the identified criteria.

Assurance Report

The practitioner provides a written report containing a conclusion that conveys the
assurance obtained about the subject matter information. PSAs, PSREs and PSAEs establish
basic elements for assurance reports.

In an assertion-based engagement, the practitioner’s conclusion can be worded either:

(a) In terms of the responsible party’s assertion (for example: “In our opinion the
responsible party’s assertion that internal control is effective, in all material respects,
based on XYZ criteria, is fairly stated”); or
(b) Directly in terms of the subject matter and the criteria (for example: “In our opinion
internal control is effective, in all material respects, based on XYZ criteria”).

In a direct reporting engagement, the practitioner’s conclusion is worded directly in terms of

the subject matter and the criteria.

In a reasonable assurance engagement, the practitioner expresses the conclusion in the

positive form, for example: “In our opinion internal control is effective in all material
respects, based on XYZ criteria.”

In a limited assurance engagement, the practitioner expresses the conclusion in the

negative form, for example, “Based on our 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.”

PSQM1: QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF
HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED
SERVICES ENGAGEMENTS

Purpose of PSQC 1
To establish basic principles and essential procedures and to provide guidance regarding a
firm’s responsibilities for its system of quality control for:
1. audits of historical information
2. reviews of historical information
3. other assurance
4. related services engagements.

PSQC applies to all firms.

The firm should establish a system of quality control designed to provide it with reasonable
assurance that the

firm and its personnel comply with professional standards (CODE) and regulatory (BOA) and
legal (RA 9298) requirements, and that

reports issued by the firm or engagement partners are appropriate in the circumstances.

System of quality control consists of policies designed to achieve the objectives and the
procedures necessary to implement and monitor compliance with those policies.

Elements of a System of Quality Control (LEAHEM)

1. Leadership responsibilities for quality within the firm.
2. Ethical requirements.
3. Acceptance and continuance of client relationships and specific engagements.
4. Human resources.
5. Engagement performance
6. Monitoring.

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Leadership Responsibilities for Quality Within the Firm

The firm should establish policies and procedures designed to promote an internal culture
based on the recognition that quality is essential in performing engagements. Such policies
and procedures should require the firm’s chief executive officer (or equivalent), or if
appropriate, the firm’s managing board of partners (or equivalent), to assume ultimate
responsibility for the firm’s system of quality control.

Ethical Requirements

The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.

Independence

At least annually, the firm should obtain written confirmation of compliance with its policies
and procedures on independence from all firm personnel required to be independent by the
Philippine Code.

Acceptance and Continuance of Client Relationships and Specific Engagements

The firm should establish policies and procedures for the acceptance and continuance of
client relationships and specific engagements, designed to provide it with reasonable
assurance that it will only undertake or continue relationships and engagements where it:

(a) Has considered the integrity of the client and does not have information that would
lead it to conclude that the client lacks integrity
(b) Is competent to perform the engagement and has the capabilities, time and resources
to do so
(c) Can comply with ethical requirements

Human Resources

The firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence and
commitment to ethical principles necessary to perform its engagement in accordance with
professional standards and regulatory and legal requirements and to enable the firm or
engagement partners to issue reports that are appropriate in the circumstances.

Such policies and procedures address the following personnel issues: RP3C4
• Recruitment • Capabilities
• Performance Evaluation • Competence
• Promotion • Career
• Personnel Needs Development
• Compensation
Engagement Performance

The firm should establish policies and procedures designed to provide it with reasonable
assurance that engagements are performed in accordance with professional standards and
regulatory and legal requirements, and that the firm or the engagement partner issue
reports that are appropriate in the circumstances.

Supervision includes the following (TCAI)

• Tracking the progress of the engagement
• Considering the capabilities and competence of individual members of the engagement
team.
• Addressing significant issues arising during the engagement, considering their significant
and modifying the planned approach appropriately.
• Identifying matters for consultation or consideration by more experienced engagement
team members during the engagement.

PWC….ignacio…isu….ULS….Dean Cabuyao…..research….Dean Mateo…

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Consultation includes discussion, at the appropriate professional level, with individuals
within or outside the firm who have specialized expertise, to resolve a difficult or
contentious matter.

Differences of Opinion

The report should not be issued until the matter is resolved.

Engagement Quality Control Review

The firm should establish policies and procedures requiring, for appropriate engagements,
an engagement quality control review that provides an objective evaluation of the
significant judgments made by the engagement team and the conclusions reached in
formulating the report. Such policies and procedures should require engagement quality
control review for all audits of financial statements of listed entities

Nature of Engagement Quality Control Review

Engagement Quality Control Review (EQCR)

• involves discussion with the engagement partner
• review of the financial statements or other subject matter
• review of the report, whether if it is appropriate
• review of selected working papers

EQCR does not reduce the responsibilities of the engagement partner

Where the EQC Reviewer makes recommendations that the engagement partner does not
accept and the matter is not resolved to the reviewer’s satisfaction, the report is not issued
until the matter is resolved.

Criteria for the eligibility of Engagement Quality Control Review

The firm’s policies and procedures should address the appointment of engagement quality
control reviewers and establish their eligibility through:
(a) The technical qualification required to perform the role, including the necessary
experiences and authority; and
(b) The degree to which an EQC Reviewer can be consulted on the engagement without
compromising the reviewer’s objectivity.

Documentation of the EQCR

Policies and procedures on documentation of the EQCR should require documentation that:
(a) the procedures required by the firm’s policies on EQCR have been performed;
(b) the EQCR has been completed before the report is issued; and
(c) the reviewer is not aware of any unresolved matters that would cause the reviewer to
believe that the significant judgments the engagement team made and the conclusions
they reached were not appropriate.

Monitoring

The firm should establish policies and procedures designed to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are
relevant, adequate, operating effectively and complied with in practice.

At least annually, the firm should communicate the results of the monitoring of its quality
control system to engagement partners and other appropriate individuals within the firm,
including the firm’s chief executive office or, if appropriate, its managing board of partners.

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