REVIEW OF FINANCIAL
STATEMENTS
There are four types of services that are normally
performed in connection with the entity’s financial
statements. These are:
➢ Audit
➢ Review
➢ Compilation; and
➢ Agreed-upon Procedures
The types of procedures to be performed and the
amount of evidence needed will depend primarily on
the nature of services rendered and the level of
assurance that the professional accountant provides.
AUDIT OF FINANCIAL
STATEMENTS
An audit of financial statements is conducted
primarily to enable auditor to express an opinion on
the entity’s FSs.
The auditor provides the users with a high level of
assurance (reasonable assurance) that the FSs are
free from material misstatements.
Auditor shall determine the specific audit procedures
to be performed which enables him to gather
sufficient appropriate audit evidence to be able to
express an opinion (positive assurance) about the fair
presentation of the FSs.
Small entities usually request the professional
services of the CPAs to provide them with certain
level of assurance about the reliability of the FSs.
OBJECTIVE
To obtain limited assurance, primarily by
performing inquiry and analytical procedures, about
whether the FSs as a whole are free from material
misstatement, thereby enabling the CPA practitioner
to express a conclusion on whether anything has
come to the CPA’s attention that causes him to
believe the FSs are not prepared, in all material
respects, in accordance with an applicable financial
reporting framework.
LEVEL OF ASSURANCE
A review engagement (limited procedures
performed) can only provide moderate level of
assurance or limited assurance that the information
subject to review is free of material misstatements.
Expressed in the review report in the form of
negative assurance by using negative phrase such as
“Nothing has come to my attention that causes me to
believe that the financial statements do not present
fairly…”
UNDERSTANDING THE ENTITY AND ITS
ENVIRONMENT
As a basis for designing procedures, the
practitioner should understand the entity and its
environment, and of the applicable financial
reporting framework.
This is a continual dynamic process of gathering,
updating, and analyzing information throughout the
engagement, and the practitioner’s understanding is
updated as changes in conditions and circumstances
occur.
PROCEDURES TO BE PERFORMED
Review principally consists of making
inquiries of management and others within the
entity and applying analytical procedures.

While it involves application of audit skills and

techniques in gathering evidence, it 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.

Philippine Standards on Review Engagements (PSRE)

requires the practitioner to make appropriate
inquiries and apply relevant analytical procedures
on:

➢ All material items in the FSs

➢ Areas of high risk of material misstatements
➢ Related party relationships and transactions
➢ Fraud and non-compliance with laws and regulations;
and
➢ Entity’s ability to continue as a going concern

If practitioner believes that the information subject

to review may be materially misstated, he should
carry out additional or more extensive procedures.

REPORTING RESPONSIBILITY
Review report should contain a clear written
expression of negative assurance.

Auditor should review and assess the conclusion

drawn from the evidence obtained as basis for the
expression of an appropriate conclusion.

The Unmodified Conclusion Modification of the Review Report

It is expressed when the practitioner has
obtained limited assurance to be able to conclude
that nothing has come to the practitioner’s
attention…
Material Misstatements
If it comes to the auditor’s attention that the FSs
contain material misstatements, the report should
describe those matters that impair a fair presentation
of the FSs, including unless impracticable, a
quantification of the possible effect (s) on the FSs,
and either:
➢ Express a qualified conclusion; or
➢ Effect of the matter is material and pervasive,
express an adverse conclusion that the FSs
are not presented fairly, in all material
respects, in accordance with the applicable
financial reporting framework.
Scope Limitation
If there has been a material scope limitation, the
report should describe the limitation and either:
➢ Express a qualified conclusion regarding the
possible adjustments to the financial
statements that might have been determined
to be necessary had the limitation not
existed; or
➢ When the possible effect of the limitation is
material and pervasive such that the
practitioner concludes that no level of
assurance can be provided, the practitioner
should disclaim a conclusion on the FSs.
COMPILATION OF FINANCIAL
STATEMENTS
Compilation Engagement
Since not all entities can employ full-time
accountants to prepare their FSs, they turn to
professional accountants to assist them in the
preparation and presentation of their FSs, in
accordance with the applicable financial reporting
framework.
May or may not be a complete set of FSs.
OBJECTIVE
Objective is for the CPA to use accounting
expertise, as opposed to auditing expertise, to
collect, classify and summarize financial information.
Ordinary entails reducing detailed data to a
manageable and understandable form without a
requirement to test the assertions underlying that
information.
LEVEL OF ASSURANCE
Procedures employed are not designed and
do not enable the CPA to express any assurance (no
assurance) on the financial information.
However, users of the complied financial information
derive some benefit as a result of the CPA’s
involvement because the service has been
performed with professional competence and due
care.
UNDERSTANDING THE ENTITY
The CPA should obtain an understanding of the
following matters to be able to perform compilation
engagement:
➢ Entity’s business and operations, including
the entity’s accounting system and
accounting records (ongoing process that
occurs throughout the compilation
engagement); and
➢ The applicable financial reporting framework,
including its application in the entity’s
industry
PROCEDURES TO BE PERFORMED
Since a compilation engagement is not an assurance
engagement, it does not require a CPA practitioner to
verify the accuracy or completeness of the
information provided by the management. The CPA
is NOT ordinarily required to:
➢ Make any inquiries of management to assess the
reliability and completeness of the information
provided
➢ Assess internal controls
➢ Verify any matters; or
➢ Verify any explanations
Prior to completion of the compilation engagement,
the CPA should read the compiled financial
information.
If in the course of the engagement, the CPA becomes
aware that information provided by the management
are incomplete, inaccurate, or otherwise
unsatisfactory, the CPA should bring that to the
attention of management and request the additional
or corrected information.
REPORTING RESPONSIBILITY
The CPA’s compilation report should identify
the financial statements compiled and should clearly
indicate that no assurance is provided on the
financial statements.
MODIFICATION TO THE COMPILATION
REPORT
Material Misstatements
The compiled financial statements are
materially misstated or misleading, the practitioner
should propose the appropriate amendments to
management
If management declined, or does not permit
the practitioner to make the proposed amendments,
the CPA practitioner should withdraw from the
engagement and inform management and those
charged with governance of the reasons for
withdrawing.
Scope Limitation
If the CPA is unable to complete the
engagement because management has failed to
provide information as requested, the CPA should
withdraw from the engagement and inform
management and those charged with governance of
the reasons for withdrawing.
AGREED-UPON PROCEDURES
ENGAGEMENT
This type of engagement may be accepted provided:
• The client takes full responsibility for the
adequacy of the procedures to be performed;
and
• The distribution of the report is limited only
to those parties who have agreed about the
procedures to be performed.
Involves the application of certain procedures
concerning individual items of financial data, for
example, A/P, A/R, purchases from related parties
and sales and profits of a segment of an entity.

OBJECTIVE
For the auditor to carry out 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.
LEVEL OF ASSURANCE
Since auditor only provides report of the
actual findings, no assurance is expressed. Instead,
users of the report assess for themselves the
procedures and findings reported by the auditor and
draw their own conclusions from the auditor’s work.
RESTRICTIONS ON THE DISTRIBUTION
OF REPORT
Restricted to those parties who have agreed
to the procedures to be performed since others,
unaware of the reasons for the procedures, may
misinterpret the results.
The main difference is that, in the agreed upon
procedures, the client is the one responsible for
determining the nature, timing, and extent of
procedures to be performed and not the auditor.
REPORTING RESPONSIBILITY
An agreed upon procedure report does not include
an opinion or any form of assurance about the FSs.
Instead, it should describe in detail the three (3)
below, to enable the readers to understand the
nature and the extent of the work performed.
• The purpose of the engagement
• The procedures performed; and
• The auditor’s factual findings
Independence is not a requirement for agreed-upon
procedures engagements; however, PSRE states that
where the auditor is not independent, a statement to
that effect should be made in the report of factual
findings.

TERMS OF THE ENGAGEMENT ILLUSTRATIVE COMPARISON OF THE

Auditor should ensure with representatives AUDIT, REVIEW, COMPILATION, AND
of the entity and other specified parties who will AGREED UPON PROCEDURES
receive copies of the report of factual findings, that ENGAGEMENTS
there is clear understanding regarding the agreed
procedures and the conditions of the engagement.

PROCEDURES TO BE PERFORMED
Agreed upon procedures may include:

• Inquiry and analysis

• Recomputation, comparison, and other clerical
accuracy checks
• Observation
• Inspection; or
• Obtaining confirmations

These procedures are the same procedures

performed by auditors when auditing FSs and the
evidence obtained is the basis for the report of
factual findings.

ASSURANCE ENGAGEMENTS
Auditors nowadays do not only provide assurance
about the reliability of financial information but they
also perform services to improve the quality of the
information for decision makers.
Philippine Standards on Assurance Engagements
(PSAE) states that assurance engagements are
intended to enhance the credibility of information
about a subject matter by evaluating whether the
subject matter conforms in all material respects with
suitable criteria.
TYPES OF ASSURANCE ENGAGEMENTS
Two levels of assurance engagement a practitioner
may perform:
• A reasonable assurance engagement (audit
engagement)
• A limited assurance engagement (review of
financial statements)
Whether a particular engagement is an assurance
engagement will depend upon whether it exhibits all
the following elements:
• A three-party relationship
• An appropriate subject matter
• Suitable criteria
• Sufficient appropriate evidence; and
• A written assurance report.
THREE PARTY RELATIONSHIP
Assurance engagements involve three separate
parties:
• An independent and competent professional
accountant who adheres to the fundamental
principles required by the Code of Ethics
• The party responsible for the subject matter
of the assurance engagement; and
• The intended users to whom the professional
accountant usually addresses the report.
The responsible party and intended user will often be
from separate organizations but need not be. They
may be both within the same organization.
SUBJECT MATTER
It may take any forms such as:
• Data (financial and non-financial information)
• Systems and processes (internal controls
• Behavior (entity’s compliance with laws and
regulations); or
• Physical characteristics (capacity of a plant
facility)
To be considered appropriate, the subject matter
must be:
• Identifiable
• Capable of consistent evaluation and
measurement against suitable criteria; and
• In a form that can be subjected to procedures
for gathering evidence to support that
evaluation or measurement
Evaluation or measurement of the subject matter:
Performed by the responsible party and the
outcome is in the form of an assertion by the
responsible party that is made available to the
intended users.
Assertions-based engagements is the assertion about
which the practitioner gathers sufficient appropriate
evidence to provide a reasonable basis for expressing
a conclusion on the assurance report.
Direct reporting engagements is when 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 made available to users in the
assurance report.
CRITERIA
The standards or benchmark used to evaluate or
measure the subject matter of an assurance
engagement. Criteria must be suitable to enable
reasonable consistent evaluation or measurement of
the subject matter within the context of professional
judgment.
EVIDENCE
The practitioner should plan and perform the
engagement to obtain sufficient appropriate
evidence to determine whether the assertions are
free of material misstatement.
ASSURANCE REPORT
The professional accountant’s conclusion provides
either high or moderate level of assurance about the
subject matter.
Other engagements frequently performed by
professional accountants that are not assurance
engagements include:
• Agreed-upon procedures
• Compilation of financial or other information
• Preparation of tax returns when no
conclusion is expressed, and tax consulting
• Management consulting; and
• Other advisory services
Reports on Prospective Financial Information
Auditors may be asked to examine and report on
prospective financial information to enhance its
credibility whether it is intended for use by third
parties or for internal purposes.
Prospective financial information is based on
assumptions about events that may occur in the
future and possible actions of the entity.
Two general types of prospective financial
information:
• Forecasts – prepared on the basis of the
assumptions as to future events which
management expects to take as of the
date the information is prepared (best-
estimate assumptions)
• Projection – prepared on the basis of
hypothetical assumption or a mixture of
best-estimate and hypothetical
assumptions
AUDITOR’S RESPONSIBILITY
Auditor should evaluate the completeness and
reasonableness of the underlying assumptions which
requires the auditor to obtain sufficient knowledge of
the client’s business as well as the entity’s process for
preparing financing information.
When examining prospective financial information,
according to PSAE 3400, auditor should obtain
sufficient appropriate evidence that:
• Management’s best-estimate assumptions
are reasonable and, in the case of
hypothetical assumptions, such as
 assumptions are consistent with the purpose
of the information;
• The prospective financial information is
properly prepared on the basis of the
assumptions;
• The PFI is properly presented and all material
assumptions are adequately disclosed; and
• The PFI is prepared on a consistent basis with
historical financial statements.

The auditor is not in a position to express an opinion

as to whether the results shown in the PFI will be
achieved.

When reporting on the reasonableness of

management’s assumptions, the auditor normally
provides only a moderate level of assurance.