LESSON: CONCEPT OF AUDIT AND OTHER ASSURANCE ENGAGEMENTS part 1

ASSURANCE ENGAGEMENTS AND RELATED SERVICES

When a professional accountant is associated with the financial statements. Some procedures must be performed in
connection with those statements. The type of procedures to be performed and the amount of evidence aded will depend
primarily on the nature of services rendered and the level of assurance that the professional accountant provides.

There are four types of services that are normally performed in connection with the entity's financial statements. These are
 Audit
 Review
 Compilation 
 Agreed-upon Procedures

Audit of Financial Statements

As discussed in the preceding chapters, an audit of financial statements is conducted primarily to enable the auditor to
express an opinion on the entity's financial statements. In this type of engagement, the auditor provides the users with a
high level of assurance (reasonable assurance) that the financial statements are free from material misstatements.

The specific audit procedures to be performed shall be determined by the auditor. These audit procedures should enable
the auditor to gather sufficient appropriate audit evidence to be able to express' an opinion
about the fair presentation of the financial statements.

Review of Financial Statements

The cost of the audit may not justify the benefits that other entities derive from it. Consequently, small entities usually
request the professional services of the auditors to provide them with certain level of assurance about the reliability of the
financial statements.

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.

Level of Assurance
Because of the limited procedures performed when reviewing financial statements, the auditor does not provide the same
level of assurance as provided on audit engagements. A review engagement can only provide a moderate level of
assurance that the information subject to review is free of material misstatements. This moderate assurance is expressed
in the review report in the form of negative assurance by using the negative words such as "Nothing came to my
attention.......” or “ I am not aware of any material modifications ........."

Procedures to be performed
A review of financial statements consists principally of inquiry as analytical procedures. While a review involves the
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.

If the auditor has reason to believe that the information subject to review may be materially misstated, the auditor should
carry out additional or more extensive procedures as are necessary to be able to express negative assurance or to
confirm that a modified report is required.

Reporting Responsibility
The review report should contain a clear written expression of negative assurance. The auditor should review and assess
the conclusion drawn from the evidence obtained as the basis for the expression of negative assurance. 
The Unmodified Review Report
An unmodified review report is issued when the auditor believes, based on the evidence obtained, that there are no
material modifications that should be made to the financial statements in order for these financial statements to be in
conformity with PFRS. A format of the unmodified review report is presented below:

INDEPENDENT PRACTITIONER'S REVIEW REPORT

(Appropriate Addressee]

We have reviewed the accompanying financial statements of ABC Company that comprise statement of financial position as at December 31, 20X1,
and the statement of comprehensive income, statement of changes in equity and statement of cash flows for then ended, and a summary of significant
accounting policies and other explanatory,

Management's Responsibility for the Financial Statements

Management 

s in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Practitioner's Responsibility 
Our responsibility is to express a conclusion on the accompanying financial statements based on our review. We conducted our review in accordance
with Philippine Standards on Review Engagements (PSRE) 2400, Engagements to Review Historical Financial Statements. PSRE 2400 requires us to
conclude whether anything has come to our attention that causes us to believe that the financial statements, taken as a whole, are not prepared in all
material respects in accordance with the applicable financial reporting framework. This Standard also requires us to comply with relevant ethical
requirements. A review of financial statements in accordance with PSRE 2400 consists primarily of making inquiries of management and others
within the entity involved in financial and accounting matters, applying analytical procedures, and evaluating the sufficiency and appropriateness of
evidence obtained. A review also requires performance of additional procedures when the practitioner becomes aware of matters that cause the
practitioner to believe the financial statements as a whole may be materially misstated.

We believe that the evidence we have obtained in our review is sufficient and appropriate to provide a basis for our conclusion.

The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with Philippine Standards on
Auditing. Accordingly, we do not express an audit opinion on these financial statements.

Conclusion 
Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not present fairly, in all material
respects, the financial position of ABC Company as at December 31, 20X1, and its financial performance and cash flows for the year then ended, in
accordance with Philippine Financial Reporting Standards.

[Practitioner's signature] 
[Date of the practitioner's report] 
[Practitioner's address]

Modification of the Review Report

Material Misstatements
If matters have come to the auditor's attention that indicates financial statements contain material misstatements, the
auditor should describe those matters that impair a fair presentation of the financial statements, including, unless
impracticable, a quantification of the possible effect(s) on the financial statements, and either:
 express a qualification of the negative assurance; or 
 when the effect of the matter is material and pervasive to the financial statements that the auditor concludes that
a qualification is not adequate to disclose the misleading or incomplete nature of the financial statements, give an
adverse statement that the financial statements are not presented fairly, in all, material respects, in accordance
with PFRS.

Scope Limitation 
If there has been a material scope limitation, the report should describe the limitation and either:
 express a qualification of the negative assurance 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 that the auditor concludes that no level of
assurance can be provided, the auditor should not provide any assurance.
Compilation of financial statements
Not all entities can employ full time accountants to prepare financial statements for them. As a result, most of these
entities turn to professional accountants to assist them in the preparation and presentation of their financial
statements. This engagement is known as compilation engagement.

The objective of a compilation engagement is for the accountant to use accounting expertise, to collect, classify and
summarize financial information. This ordinarily entails reducing data to a manageable and understandable form without a
requirement to test the assertions underlying the information. A compilation engagement would ordinarily include the
preparation of financial statements (which may or may not be complete set of financial statements) but may also include
the collection, classification and summarization of other financial information

Level of Assurance 
The procedures employed in a compilation engagement are not designed and do not enable the accountant to express any
assurance on the financial information. However, users of the compiled financial information derive some benefit as a
result of the accountant's involvement because the service has been
performed with professional competence and due care.

Procedures to be performed
The accountant should read the compiled information and consider whether it appears to be appropriate in form and free
from obvious material misstatements. The accountant is not ordinarily required to:
a. make any inquiries of management to assess the reliability and completeness of the information provided; 
b. assess internal controls; 
c. verify any matters; or 
d. verify any explanations.

If the accountant becomes aware that information supplied by management is incorrect, incomplete, or otherwise
unsatisfactory, the accountant should consider performing the above procedures and request management to provide
additional information. If the management refuses to provide additional information, the accountant should withdraw from
engagement, informing the entity of the reasons for the withdrawal.

If the accountant becomes aware of misstatements, the accountant should try to agree appropriate amendments with the
entity. If such amendments are not made and the financial information is considered to be misleading, the accountant
should withdraw from the engagement.

Reporting Responsibility
The accountant's compilation report should identify the financial statements compiled and should clearly indicate that no
assurance is provided on the financial statements. An example of a report on an engagement to compile financial
statements is presented below:

PRACTITIONER'S COMPILATION REPORT:

[To Management of ABC Company]

We have compiled the accompanying financial statements of ABC Company based on information you have provided. These financial statements
comprise the statement of financial position of ABC Company as at December 31, 20X1, the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory
information 

We performed this compilation engagement in accordance with Philippine Standard on Related Services 4410 (Revised), Compilation Engagements.

We have applied our expertise in accounting and financial reporting to assist you in the preparation and presentation of these financial statements in
accordance Philippine Financial Reporting Standards. We have complied with relevant ethical requirements, including principles of integrity,
objectivity, professional competence and due care,

These financial statements and the accuracy and completeness of the information used to compile them are your responsibility.
Since a compilation engagement is not an assurance engagement, we are not required to verify the accuracy or completeness of the information you
provided these financial statements. Accordingly, we do not express an opinion or a review conclusion on whether these financial statements are
prepared in accordance with PFRS.

[Practitioner's signature]
[Date of practitioner's report]
[Practitioner's address]

The financial information compiled by the accountant should contain a reference such as "Unaudited", "Compiled without
Audit or Review” or “Refer to Compilation Report” on each page of the financial information or on the front of the
complete set financial statements.

Modification of the compilation report 

Material Misstatements 
If there are material misstatements in the financial statements, the accountant should disclose the nature of the
misstatement in a separate paragraph of the report, although their effects do not have to be quantified.

If the accountant feels that the modification of the report is not sufficient to describe the significant departure from PFRS
and the client is not willing to correct these deficiencies, the accountant may withdraw from the engagement.

Scope Limitation 
Scope limitations will normally cause the accountant to withdraw from the engagement.

Agreed-upon Procedures Engagement

An auditor may be engaged to apply agreed-upon procedures to a specific account or element of a financial statement.
This type of engagement may be accepted provided:
 the client takes full responsibility for the adequacy 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.

The objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an audit nature to
which the auditor and the entity and any appropriate third parties to report on factual findings.

Level of Assurance
As the auditor simply provides a report of the factual findings of agreed-upon procedures, 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 

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.

Terms of the Engagement

The auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive copies
of the report of factual findings, that there is a clear understanding regarding the agreed procedures and the conditions of
the engagement.

Procedures and Evidence.

The auditor should carry out the procedures agreed upon and use the evidence obtained as the basis for the report of
factual finding. These are also audit procedures but usually applied only to specific accounts or elements of a financial
statement. These procedures may include:
 Inquiry and analysis 
 Observation Recomputation, comparison and other derical accuracy checks.

 Inspection
 Obtaining confirmations
Reporting Responsibility
The report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-upon procedures of
the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed.

LESSON: CONCEPT OF AUDIT AND OTHER ASSURANCE ENGAGEMENTS part 2

Presented below is an illustration of the comparison among audit and these related services.

Nature of service Audit Review Agreed-upon Compilation

procedures

Objective To express an To enable the CPA to report To carry out audit To assist the client
opinion on the whether anything has come to procedures agreed on in the preparation
financial his procedures attention that with the client and any of the financial
statements would indicate that the financial appropriate third parties statements.
statements are not presented identified in the report.
fairly.

Level of High/ Reasonable Moderate/ limited Assurance None None

assurance assurance
provided by the
CPA 

Type of report Positive assurance Negative assurance Description of Identification of

issued (opinion) procedures performed financial
and factual findings information
compiled

Basic procedures Risk assessment Inquiry and analytical As agreed Assemble FS based
procedures, tests procedures. It does not include on the client's data.
of controls and assessing control risk, test of
substantive tests records and of responses to
inquiries by obtaining a
corroborating evidence.

Independence Required Required Not required Not required

requirement

ASSURANCE ENGAGEMENTS
As a response to growing demands in the financial community, the accounting profession has widened the scope of
auditing. 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. PSAE 3000 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

Assurance engagements can be classified according to the level of assurance that the practitioner gives to parties who may
rely on his/ her report. In theory, it is possible to provide an infinite range of assurance from a very low level to an
absolute level. But under the present standards, there are two levels of assurance engagement a practitioner may perform:
a reasonable assurance engagement (like audit engagement) and a limited assurance engagement (like 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 that adheres to the fundamental principles required by the
Code Ethics. 
 The party responsible for the subject matter of the assurance engagement.
 The intended users to whom the professional accountant usually addresses the report.

The responsible party and the intended user will often be from separate organizations, but need not be. A responsible party
and an intended user may both be within the same organization. For example, a governing body may seek assurance about
information provided by a component of that organization. The relationship between the responsible party and the
intended user needs to be viewed within the context of a specific engagement

Subject Matter
The subject matter of an assurance engagement may take many forms such as:
 Data (for example, financial and non-financial information)
 Systems and processes (for example, internal controls)
 Behavior (for example, entity's compliance with law regulations)
 Physical characteristics (for example, capacity of a plant facility)

To be considered appropriate, the subject matter of an assurance engagement, must be identifiable, capable of consistent
evaluation and measurement against suitable criteria, and in the form that can be subjected to procedures for gathering
evidence to support that evaluation or measurement.

In some assurance engagements, the evaluation or measurement of the subject matter is performed by the responsible
party and the outcome of such evaluation or measurement is in the form of an assertion by the responsible party that is
made available to the intended users. It is the assertion about which the practitioner gathers sufficient åppropriate
evidence to provide a reasonable basis for expressing a conclusion on the assurance report. These engagements are called
"assertions-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 made available to users in the assurance report. These
engagements are called “direct reporting engagements”.

Criteria
Criteria are the standards or benchmark used to evaluate or measure the subject matter of an assurance engagement.
Without the frame of reference provided by these criteria, any conclusion is open to individual interpretation and
misunderstanding. In an assurance engagement, criteria must be suitable to enable reasonably 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 expresses a conclusion that provides the level of assurance as to whether the subject matter
conforms in all material respects with identifiable suitable criteria. The professional accountant's conclusion provides
either a high or moderate 1evel of assurance about the subject matter.

Not all engagements performed by professional accountants are assurance engagements. 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.

Although the majority of the services performed by auditors involves audit of historical financial statements, auditors may
also be associated with future oriented financial statements. 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 means financial information based on assumptions about events that may occur in the
future and possible actions of the entity. There are two general types of prospective financial information: forecasts and
projections.

A forecast is a prospective financial information 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). A projection on
the other hand is a prospective financial information prepared on the basis of hypothetical assumptions or a mixture of
best-estimate and hypothetical assumption.

Auditor's responsibility
The auditor should evaluate the completeness and reasonableness of the underlying assumptions as disclosed in the
prospective financial information. This requires the auditor to obtain sufficient knowledge of the client's business as well
as the entity's process for preparing financial information.

When examining prospective financial information, according to PSAE 3400, the auditor should obtain sufficient
appropriate evidence that:
 Management's best-estimate assumptions are reasonable and, in the case of hypothetical assumptions, such
assumptions are consistent with the purpose of the information; 
 The prospective financial information is properly prepared on the basis of the assumptions; 
 The prospective financial information is properly presented and all material assumptions are adequately disclosed;
and 
 The prospective financial information is prepared on a consistent basis with historical financial statements.

While evidence may be available to support the assumptions on which the financial information is based, such evidence is
itself generally future oriented and speculative in nature. The auditor is, therefore, not in a position to express an opinion
as to whether the results shown in the prospective financial information will be achieved.

Further, given the types of evidence available in assessing the assumptions on which the prospective financial information
is based, it may be difficult for the auditor to obtain a level of satisfaction sufficient to express an opinion that the
assumptions are free of material misstatement. Consequently, when reporting on the reasonableness of management
assumptions, the auditor normally provides only a moderate level of assurance.

The following is an example of an unmodified report on a forecast:

We have examined the forecast in accordance with Philippine Standards on Assurance Engagements applicable to the
examination of prospective financial information. Management is responsible for the forecast including the assumptions
set out in Note 1 to the financial statements.

Based on our examination of evidence supporting the assumptions, nothing has come to our attention which causes us to
believe that these assumptions do not provide a reasonable basis for the forecast. Further in our opinion, the forecast is
properly prepared on the basis of the assumptions and is presented in accordance with generally accepted accounting
principles in the Philippines.

Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected and
variation may be material.