USPF College of Accountancy

Topic: Introduction to Assurance, Auditing and Related Services

Part I. Preface to Standards on Auditing, Review, Other Assurance and Related Services

STANDARDS APPLICATION RELATED PRACTICE

STATEMENTS
1. Philippine Standards on Auditing • Audit of Historical Financial Information • Philippine Auditing Practice
(PSAs) Statements (PAPSs)

2. Philippine Standards on Review • Review of Historical Financial Information • Philippine Review

Engagements (PSREs) Engagement Practice
Statements (PREPSs)
3. Philippine Standards on Assurance • Assurance Engagements dealing with • Philippine Assurance
Engagements (PSAEs) subject matter other than historical Engagement Practice
financial information Statements (PAEPSs)
4. Philippine Standards on Relates • Compilation engagements • Philippine Related Services
Services (PSRSs) • Agreed-upon procedures Practice Statements
• Other related services specified by AASB (PAEPSs)

1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASB’s Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the AASB’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.

NOTE: The Authority Attaching to Practice Statements Issued by the AASB

1. Philippine Practice Statements are issued to:
✓ Provide interpretive guidance and practical assistance o professional accountants in implementing Philippine Standards; and
✓ Promote good practice
2. Professional accountants should be aware of and consider Practice Statements applicable to the engagement.
3. A professional accountant who does not consider and apply the guidance included in a relevant Practice Statements should be
prepared to explain how the basic principles and essential procedures in the AASB’s Engagement Standard(s) addressed by the
Practice Statement have been complied with.

Part II. Excerpt to Philippine Framework for Assurance Engagements

The Philippine Framework for Assurance Engagements defines and describes the elements and objectives of an assurance
engagement and identifies engagements to which Philippine Standards on Auditing (PSAs), Philippine Standards on Review
Engagements (PSREs), and Philippine Standards on Assurance Engagements (PSAEs) apply.

1. The Framework does not itself establish standards or provide procedural requirements for the performance of assurance
engagements.
2. In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance engagements are governed by:
✓ The Philippine Code of Ethics for Professional Accountants; and
✓ Philippine Standards on Quality Control (PSQCs)

Part III. Discussion on Assurance Engagements performed by Accountants in Public Practice

Assurance engagements performed by professional accountants 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, thereby improving the likelihood
that the information will meet the needs of an intended user.

The level of assurance provided by the professional accountant’s conclusion conveys the degree of confidence that the intended user
may place in the credibility of the subject matter. Below are the two (2) types of assurance enaggements:

1. Reasonable assurance engagement – the objective 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. Example: Audit
2. Limited assurance engagement – the objective is a reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement, as a basis for a negative
form of expression of the practitioner’s conclusion. Example: Review

Components of Assurance engagement risk:

1. The risk that the subject matter information is materially misstated. This consists of:
a. Inherent risk – the susceptibility of the subject matter information to a material misstatement, assuming that there are no
related controls, and
b. Control risk – the risk that a misstatement that could occur will not be prevented, or detected and corrected, on a timely basis
by related internal controls.
2. Detection risk – the risk that the practitioner will not detect a material misstatement that exists.

An assurance engagements should have the following elements:

1. A three-party relationship involving:
a. a professional accountant
b. responsible party
c. intended users
2. A subject matter
3. Suitable criteria
4. Sufficient appropriate evidence
5. A written assurance report
According to the Philippine Framework for Assurance Engagements, an assurance engagement’s subject matter may include the
following:

• Financial performance or conditions, such as 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 a facility
• Systems and processes, for example, an entity’s internal control or IT system
• Behavior, such as corporate governance, compliance with regulation and human resource practices.

Criteria are the standards or benchmarks used to evaluate or measure the subject matter of an assurance engagement. These are
important because they establish and inform the intended user of the basis against which the subject matter has been evaluated or
measured in forming the conclusion.

For example, in an audit of financial statements, the auditor provides asssurance as to whether the financial statements present fairly,
in all material respects, an entity’s financial position, results of operations and cash flows by using the financial reporting framework to
evaluate their preparation and presentation.

According to the Philippine Framework for Assurance Engagements, suitable criteria should have the following characteristics:

1. Relevance
• Relevant criteria contribute to conclusions that assist decision-making by the intended users
2. Completeness
• Criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of the
engagement are not omitted.
• Complete criteria include, where relevant, benchmarks for presentation and disclosure.
3. 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.
4. Neutrality
• Neutral criteria contribute to conclusions that are free from bias.
5. Understandability
• Understandable criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly
different interpretations.

The Framework states that criteria can either be established or specifically developed. Established criteria are those that are
embodied in laws or regulations, or issued by authorized or recognized bodies. Specifically developed criteria are those designed for
the purpose of the engagement.

The responsible party is the one responsible for the subject matter of an assurance engagement. For example, an entity’s
management is responsible for the preparation and presentation of financial statements or the establishment and implementation of
internal control.

The responsible party may or may not be the party who engages the professional accountant.

According to the Framework, the responsible party is the person (or persons) who:

• In a direct reporting engagement, is responsible for the subject matter; or

• In an assertion-based engagement, is responsible for the subject matter information, and may be responsible for the
subject matter.

The term “subject matter information” is used in the Framework for Assurance Engagements to mean the outcome of the evaluation or
measurement of a subject matter. According to the Framework, it is the subject matter information about which the practitioner gathers
sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report.

In assertion-based assurance engagements, the evaluation or measurement of the subject matter against criteria is performed by the
responsible party and the subject matter information (outcome) is in the form of an assertion by the responsible party that is made
available to the intended users.

The intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or
purpose.

The intended user may be established by agreement between the practitioner and the responsible party or those engaging or
employing the practitioner.

Sufficiency is the measure of the quantity of evidence. The quantity of evidence needed is affected by the quality of such evidence
(the higher the quality, the less may be required). However, merely obtaining more evidence may not compensate for its poor quality.

Appropriateness is the measure of the quality of evidence, that is, its relevance and reliability. The reliability of evidence is influenced
by its source and by its nature.

NOTE: A proposed assurance engagement can be accepted when the practitioner’s preliminary knowledge of the engagement
circumstances indicates that the relevant ethical requirements such as independence and professional competence will be met and the
engagement exhibits all of the following characteristics:
1. The subject matter of the engagement is appropriate.
2. The criteria to be used are suitable and are available to the intended users.
3. The practitioner has access to sufficient appropriate evidence to support the conclusion.
4. The conclusion is to be contained in a written report.
5. There is a rational purpose for the engagement.

According to the Framework, an unqualified conclusion is not appropriate for either reasonable or limited assurance engagement in the
case of a material limitation on the scope of the practitioner’s work, whether imposed by the engagement circumstances or the
engaging party or the responsible party.

The subject matter and related criteria of some assurance engagements may include aspects requiring specialized knowledge and
skills in the accumulation and evaluation of evidence. According to the standard, the practitioner, in these situations, may engage
persons from other professional disciplines, referred to as experts.

In an audit engagement, the auditor provides a high, but not absolute level of assurance that the financial statements are free of
material misstatement. This is expressed positively in the audit report as reasonable assurance.

In a review engagement, the practitioner provides a moderate level of assurance that the information subject to review is free of
material misstatement. This is expressed in the form of a negative (also called limited) assurance.

Part IV. Objective and General Principles Governing and Audit of Historical Financial Statements

What is Auditing?

An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and
events to ascertain degree of correspondence between the assertions and established criteria, and communicationg the results to
interested users.

Types of Audits:

I. As to objective, criteria and subject matter:

Types Objectives Examples Subject Matters Criteria

FS Audit Conducted to determine Annual audit of Globe’s Financial Statements Applicable Financial
whether the FS are FS reporting Framework
stated in accordance with (i.e IAS, PFRS and
the specified criteria. GAAP in general)
Operational/Performance Evaluates the efficiency Evaluate whether the Company’s operation Company standards
Audit and effectiveness of any newly deployed on its payroll system
part of an organization’s computerized payroll and related evidences.
Often subclassifed into operating procedures system is operating
two types: and methods. effectively and efficiently.
1. Econonmy and
Efficiency Audit Evaluate whether the
(Management marketing spending of a
Audit) company has
2. Effectiveness Audit corresponding proof of
(Program results) performance.
Compliance AuditState Conducted to determine Check on government Government official’s BSP rules and othe
Audit whether the auditee is spending of fund spending and bank relevant laws.
following specific accounts. operations’s
procedures, rules, or compliance
regulationhs set by some Check whether local
higher authotity. banks are in compliance
with BSP regulations.

I. As to auditors
a. External (independent) auditor
b. Internal Auditors
c. Government or state auditors

Key Points:

1. 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 applicable financial reporting framework.
2. The auditor should comply with relevant ethical requirements relating to audit engagements.
3. The auditor should conduct the audit in accordance with PSAs.
4. “Scope of an audit” refers to the audit procedures that, in the auditor’s judgment and based on PSAs, are deemed appropriate in the
circumstances to achieve the objective of the audit.
5. The auditor should plan and perform an audit with an attitude of PROFESSIONAL SKEPTICISM recognizing that circumstances may
exist that cause the financial statements to be materially misstated.
6. In forming the audit opinion, the auditor obtains sufficient appropriate evidence to be able to draw conclusions on which to base that
opinion.
7. The auditor’s opinion enhances the credibility of financial statements by providing a high, but not absolute, level of assurance.
8. Absolute assurance in auditing is not attainable as a result of such factors as:
a. The need for judgment;
b. The use of testing;
c. The inherent limitations of any accounting and internal control systems; and
d. The fact that most of the evidence available to the auditor is persuasive, rather than conclusive, in nature.
9. While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for the
preparation and presentation of the financial statements in accordance with the applicable financial reporting framework is that of the
entity’s MANAGEMENT, with oversight from those charged with governance.
Part V. Engagements to Review Financial Statements

1. The objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not
provide all the evidence that would be require in an audit, anything has come to the practitioner’s attention that causes the practitioner
to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting
framework (negative assurance)
2. A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review the reliability of an assertion that is the
responsibility of one party for use by another party.
3. A review 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, which are procedures
ordinarily performed during an audit.
4. The level of assurance provided in a review report is less that that given in an audit report.

Part VI. Discussion on Non-Assurance Engagements performed by Accountants in Public Practice

Services performed by professional accountants that are not assurance engagements include the following:
1. Agreed-upon procedures
2. Compilation of financial or other information
3. Preparation of tax returns where no conclusion is expressed, and tax consulting
4. Management consulting
5. Other advisory services

Assurance services differ from consulting services in that they:

1. Focus on enhancing the credibility of information rather than providing advice.
2. Typically involve situations in which one party wants to monitor another
Consulting services are usually two-party arrangements that focus on providing advice on how to use the information for better
outcomes.

The Philippine Standards on Related Services (PSRSs) are to be applied to non-assurance engagements such as compilation, agreed-
upon procedures engagements and other related services engagements as specified by the Auditing and Assurance Standards Council
(AASB).

A compilation engagement 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.

However, the accountant’s involvement provides some benefit to users of compiled financial information because the work has been
performed with due professional skill and care.

According to PSRS 4410 (Engagements to Compile Financial Information), “The accountant should obtain a general knowledge of the
business and operations of the entity and should be familiar with the accounting principles and practices of the industry in which the
entity operates and with the form and content of the financial information that is appropriate in the circumstances.” The standard further
provides that, “The accountant ordinarily obtains knowledge of these matters through experience with the entity or inquiry of the entity’s
personnel.”

PSRS 4410, par. 13, provides that 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

According to PSRS 4410 (Engagements to Compile Financial Information), the financial information compiled by the accountant should
contain a reference such as:

• Unaudited;
• Compiled without Audit or Review; or
• Refer to Compilation Report

NOTE: on each page of the financial information or on the front of the complete set of financial statements.

In an agreed-upon procedures engagement, the auditor simply provides a report of the factual findings and expresses no
assurance in his/her report. Users of the report make an assessment of the procedures and findings reported by the auditor and draw
their own conclusions from the auditor’s work.

NOTHING FOLLOWS

“If you want something you’ve never had before then you’ve got to do something that you’ve never done before”