FUNDAMENTALS OF ASSURANCE professional competence will not be

SERVICES (Chapter 1) satisfied.

 Should have an adequate level of
Concept of Assurance involvement in the engagement and
“The relevance and reliability of information is understanding of the work for which any
critical for making the best decision in a given expert is used.
situation.”  Responsible Party- the ones responsible for
 It should be recognized that not all the subject matter information (the
information is accurate; some are assertion). The responsible party is
erroneous, and worse, some are fraudulent responsible for the subject matter information
(intentionally misstated). only, and when such responsibility is
 Reliable information- information that is extended to the subject matter itself.
fairly stated, information that presents a true  Ordinarily provides the practitioner with
and fair view of what it purports to present. a written representation that evaluates or
 The reliability if information depends on the measures the subject matter against the
credibility of the source of information and identified criteria, whether or not it is to be
the ability to verify its accuracy or fairness. made available as an assertion to the
 Users generally do not have the training intended users.
and expertise to verify technical information,  If subject matter information only- a
such as those contained in financial government organization engages a
statements. They turn to CPAs and they practitioner
provide the assurance they need-  If subject matter and subject matter
assurance that the information audited is information- an entity engages a
indeed fairly stated. practitioner
 Assurance- refers to the auditor’s  Intended Users- are the person, persons or
satisfaction as to the reliability of an class of persons for whom the practitioner
assertion being made by one party for use prepares the assurance report. The
by another party. responsible party can be one of the intended
users.
Assurance Services
 Assurance services (or assurance Parties Involved in Determining Engagement
engagements)- are three-party contracts in Requirements
which assurers reports on the quality of  Regardless of the involvement of other
information. however, the practitioner is responsible for
 Purpose of Assurance services- enhance determining the nature timing and extent of
the credibility of information about a subject procedures to be performed in the
matter (financial statements) by evaluating engagement.
whether the subject matter conforms in all  Practitioner is required to pursue any
material respects with suitable criteria. matter which the practitioner becomes
aware of where such matter may lead to a
Elements of Assurance Engagements material adjustment or modification to the
 Practitioner (CPA) subject matter information.
 Appropriate subject matter  Assurance Engagements for a Specific
 Suitable criteria Purpose- engagements designed for
 Sufficient and appropriate evidence specified intended users or a specific
 Written assurance report in the form purpose, the practitioners considers
appropriate to a reasonable assurance including a restriction in the assurance
engagement or a limited assurance report that limits its use to those users or
engagement. that purpose.

Three-Party Relationship Subject Matter- an appropriate subject matter is

 Practitioner- the ones performing audit or identifiable, and capable of consistent evaluation
review engagements with respect to or measurement against the identified criteria
historical financial information. and capable of being subjected to procedures
 Should not accept an engagement if for gathering sufficient appropriate evidence to
preliminary knowledge of the support a reasonable assurance or limited
engagement circumstances indicates assurance conclusion, as appropriate.
that ethical requirements regarding
Suitable Criteria  An assurance engagement rarely involves
 Are the benchmarks used to evaluate or the authentication of documentation, nor is
measure the subject matter including, the practitioner trained or expected to be an
where relevant, benchmarks for expert in such authentication.
presentation and disclosure.  Sufficiency- measure of the quantity of
 Are required for reasonably consistent evidence
evaluation or measurement of a subject  Appropriateness- measure of the quality of
matter within the context of professional evidence
judgement  The quantity of evidence needed is affected
 Are context-sensitive, that is, relevant to the by the risk of the subject matter information
engagement circumstances. being materially misstated and also by the
quality of such evidence. Sufficiency and
Characteristics of Suitable Criteria appropriateness are interrelated.
 Relevance- contribute to conclusions that  Reliability of evidence is influenced by its
assist decision-making by intended users. source and by its nature, and is
 Completeness- sufficiently complete, when independent on the individual
relevant factors that could affect the circumstances under which it is obtained.
conclusion in the context of engagement
circumstances are not omitted. Generalizations about the Reliability of
 Reliability- allow reasonably consistent Evidence
evaluation or measurement of the subject  Generalizations are subject to important
matter exceptions.
 Neutrality- contribute to conclusions that  Cost-Benefit Considerations-practitioner
are free from bias considers the relationship between the cost
 Understandability- contribute to of obtaining evidence and the usefulness of
conclusions that are clear, comprehensive, the information obtained. However, the
and not subject to significantly different matter of difficulty or expense involved is
interpretations. not itself a valid basis for omitting an
evidence-gathering procedure for which
Established Criteria and Specifically there is no alternative.
Developed Criteria  Materiality- is relevant when the
 Established Criteria- those embodied in practitioner determines the nature, timing
laws or regulations, or issued by authorized and extent of evidence-gathering
or recognized bodies of experts that follow procedures, and when assessing whether
a transparent due process. the subject matter information is free of
 Specifically Developed Criteria- those misstatements.
designed for the purpose of the  Assurance Engagement Risk- is the risk
engagement. that the practitioner expresses an
 Need to be made available to intended inappropriate conclusion when the subject
users to allow them to understand how matter information is materially misstated.
subject matter is evaluated or measured The more extensive the evidence-gathering
(publicly, inclusion in presentation of subject procedures, the lower the chances of an
matter, inclusion in assurance report, and inappropriate conclusion and the higher the
by general understanding.) level of assurance that a practitioner can
 When criteria are available only to specific provide.
intended users, or relevant only to a specific
purpose, use of the assurance report is Assurance Report
restricted to those users or for the purpose. The practitioner provides a written report
containing a conclusion that conveys the
Sufficient Appropriate Evidence assurance obtained about the subject matter
 Professional skepticism- the practitioner information. A practitioner normally can
makes a critical assessment, with express two levels of assurance: a reasonable
questioning mind, of the validity of evidence (but not absolute) level of assurance, and a
obtained and is alert to evidence that limited level of assurance.
contradicts or brings into question the
reliability of documents or representations
by the responsible party.
Classification of Assurance Engagements engagement risk to zero is very rarely
According to Level of Assurance attainable or cost beneficial as a result of
 Reasonable Assurance Engagement- factors
reduction in assurance engagement risk to
an acceptably low level in the Non-Assurance Services
circumstances of the engagement as the  Agreed-upon Procedures- an auditor is
basis for a positive form of expression of engaged to carry out those procedures of
the practitioner’s conclusion. an audit nature to which an auditor and the
 Limited Assurance Engagement- entity and any appropriate third parties have
reduction in assurance engagement risk to agreed and to report on factual findings.
a level acceptable in the circumstances of  Compilation of Financial or Other
the engagement where that risk is greater Information- accountant is engaged to use
than for a reasonable assurance accounting expertise as opposed to auditing
engagement as a basis for a negative form expertise to collect, classify and summarize
of expression of the practitioner’s financial information.
conclusion.  Some tax services and tax consulting-
According to Structure give advice on income tax and business tax
 Attestation Engagement- the measurer or strategies
evaluator is not the practitioner, measures  Management Consulting and other
and evaluates the underlying subject matter Advisory Services- both the industry, and
against the criteria. The role of the the practice, of helping organizations
practitioner is to obtain sufficient improve their performance, primarily
appropriate evidence in order to express a through analysis of existing business
conclusion above whether the subject problems and development of plans for
matter information, as prepared by the improvements.
measurer or evaluator, is free from material
misstatement.
 Direct Engagement- the practitioner
measures or evaluates the underlying
subject matter against the criteria and
presents the resulting subject matter
information as part of or accompanying the
assurance report.

Attestation Engagements
 Is an engagement in which practitioner is
engaged to issue, or does issue, a written
communication that expresses a conclusion
about the reliability of written assertion that
is the responsibility of another party.
 There must be an agreed-upon and
objective criteria that can be utilized to
assess the accuracy of the assertion.
 The assertion must be amendable to
verification by an independent party.
 Independent Audit Engagements-
provides a reasonable (but not absolute)
level of assurance
 Review Engagement- limited investigation
of much narrower scope than audit and
undertaken for the purpose of providing
limited assurance

Limitations of Assurance Engagements

 The highest level of assurance that may be
provided is reasonable assurance
 Reasonable assurance- is less than
absolute assurance. Reducing assurance
AUDITS OF FINANCIAL STATEMENTS Assurance Services and Audit Services
(Chapter 2) Distinguished
“Assurance services encompass assertion-
Auditing Defined based engagements, where a professional
 Auditing- is a systematic process of accountant will evaluate a subject matter that is
obtaining and evaluating evidence the responsibility of another party against
regarding assertions about economic suitable criteria,and expresses an opinion which
actions and events to ascertain the degree provides the intended users with a level of
of correspondence between these assurance about that particular subject matter.”
assertions and established criteria and
communicating the results ton interested
users.
Key Phrases and Meanings
 A Systematic Process- follows a logical
sequence of procedures
 Objectively obtaining and evaluating
evidence- combination of impartiality,
intellectual honesty and freedom from
conflicts of interest, a CPA cannot express
an opinion without supporting evidence to
back up the opinion.
 Degree of correspondence between
these assertions and established
criteria- using standards or benchmarks Service Value Added to Information
(criteria) for purposes of expressing an Reported On
opinion on the assertions of management.
Audit Reliability, Credibility
 Communicating the Results to
Engagements
Interested Users- after the audit is
Assertion- Reliability, Credibility
completed, CPA prepares a report which based
contains in writing, the opinion of the CPA. engagements
Auditing and Accounting Distinguished Assurance Reliability, Credibility,
Categories Auditing Accounting Engagements Relevance, Timeliness
1) Nature Concerned Process of
with the recording, Types of Audits
determinatio classifying  Financial Statement Audits – gathering of
n of whether and
evidence on the assertions embodied in the
the recorded summarizing
financial statements of an entity and using
accounting economic
information events in the evidence to determine whether the
for the entity logical assertions adhere to generally accepted
properly manner for accounting principles (GAAP) and requires
reflects the the purpose a CPA.
economic of providing  Operational Audits- a systematic review of
events that financial an organization’s activities in relation to
occurred information specified objectives for the purposes of
during the which is assessing performance. A future-oriented,
period quantitative systematic, and independent evaluation of
in nature to organizational activities. Primary sources of
help
evidence are operational policies and
management
achievements related to organizational
in decision
making. objectives.
Begins when  Compliance Audit- used to determine
accounting whether a person or entity has adhered to
ends laws and regulations
 External Audits- performed by CPAs who
are independent of the organizations when
assertions are being audited.
  Internal Audits- an independent appraisal  Potential bias and motives of
function established within an organization information provider: a conflict of interest
to examine and evaluate its activities as a may be assumed to exist between
service organization, comprise mainly of management and information users
operational audits and compliance audits. regarding the financial statements.
 Government Audits- determination of (information may be biased)
whether government funds are being  Voluminous data: as business grow, the
handled properly and in compliance with larger number of transactions processed
existing laws and whether the government daily which may lead to error in recording
programs of a particular agency are being and reporting.
conducted efficiently and economically.  Complex exchange transactions- certain
transactions are so complex and therefore
Three Main Divisions of Government Audit: more difficult to record properly.
 Compliance Audit- examination, audit and
settlement in accordance with laws and Reducing Information Risk
regulations.  Allow users to verify information-
 Financial Audit- audit of accounting and examine records and obtain information
financial system and controls to ensure about the reliability of the statement.
reliability of recorded financial data However, not all users of information are
 Performance Audit- an objective professionally competent to verify the
examination of the financial and operational information presented.
performance of an organization  Users share information risk with
 Economy and Efficient audit- management
management audit, appraisal of  Have the financial statements audited-
management performance from a least have an independent audit performed
cost point of view and analysis of cost- (common option selected)
benefit relationship.
 Effectiveness Audit- program results Aside from reducing information risk,
audit, evaluation of programs, project financial statement audits also act as a
and activities to determine the extent of deterrent to inefficiency and fraud
achievement of previously set goals
and objectives. Audit Report
Objective and Scope of a Financial “is the means though which the auditor
Statement Audit provides reasonable assurance that the
 Objective- expression of an opinion on the financial statements are fairly stated. (Uniform
fairness of such financial statements- format and suitably titled).”
auditor’s report is the medium through Limitations of an Audit
which he expresses his opinion or, if “an audit is not a guarantee of the exactness
circumstances require, disclaims an of assertions in the financial statements. It is
opinion. undertaken to enhance the degree of
confidence of intended users in the financial
 Scope- determined (normally) by auditor in
statements.”
accordance with the requirements of
Inherent Limitations of an Audit:
legislation, regulations or relevant
 Nature of financial reporting- preparation
professional bodies—necessary auditing
procedures in respective circumstances to of financial statements involves judgement
afford reasonable basis for the opinion. by management in applying the applicable
Information Risk financial reporting framework—a range of
“risk that information is misstated or misleading.” acceptable interpretations or judgement
 Nature of Audit Procedures- well-
Factors that contribute to existence of designed but will not detect every
Information Risk misstatement
 Remoteness of information users from  Nature of Audit Evidence- evidence tends
information provider: decision makers do to be persuasive in character rather than
not get first-hand knowledge about the persuasive.
business enterprise with which they do  Timeliness of Reporting- it is impracticable
business, not involved in day-to-day to address all information that may exist, or
operations or decisions. to pursue every matter exhaustively until
proven
THE PROFESSIONAL PRACTICE OF Regulation of the Accounting Profession
ACCOUNTING (Chapter 3)  Republic Act No. 9298 (The Philippine
Accountancy Act of 2004): (1)
Characteristics of a profession/ Accountancy Standardization and regulation of
Profession accounting education (2) examination for
 Mastery of a certain skill through training registration of CPAs (3) Supervision, control
and education (degree of bachelor’s in and regulation of the practice of
science in Accountancy and pass CPALE) accountancy in the Philippines
 Adherence to a common code of values  Financial Reporting Standards and
and conduct established by its Engagement Standards established by
administrating body (Code of Ethics) recognized standard-setting bodies
 Acceptance of a duty to a society as a  Adoption of a Code of Ethics for CPAs in
whole (public interest) the Philippines
 Self-regulation through systemin of quality
Sectors of Accounting Practice control
 Public Practice: member in an auditing  Sanctions and penalties against violators of
firm holding out himself/herself as one the laws, rules and regulations affecting the
skilled in the knowledge, science and accounting profession
practice of accounting, qualified person to
render professional services as a CPA, Organizations That Affect Accountancy
offering or rendering or both to more than Profession
one client on a fee basis  PROFESSIONAL Regulation
 Commerce and Industry Practice: Commission (PRC): administers,
constitute in a person involved in the implements and enforces the regulatory
decision-making requiring professional policies of the Philippine Government with
knowledge in the science of accounting and respect to the regulation and licensing of
aspects of finance and taxation, or when the various professionals under its
representing his or her employer before jurisdictions
government agencies on tax or other  Professional Regulatory Board of
related to accounting Accountancy (PRBOA): empowered to
administer the implementation of RA 9290
5 Million/10 Million Rule (Philippine Accountancy Act of 2004)
For a company in the private sector which  Commission on Audit: highest and final
has a paid-up capital of at least 5 million authority in state auditing
and or an annual revenue of at least 10
 Securities and Exchange Commission
Million, a CPA should occupy any position
which: (SEC): regulates the registration and
 Supervising the recording of financial operations of corporations, partnerships
transactions, preparation of financial and other forms of association in the
statements Philippines
 Coordinating with the external auditors  Bangko Sentral ng Pilipinas (BSP):
for the audit of such financial maintain price stability conducive to a
statements; and balanced and sustainable economic growth
 Other related functions  Bureau of Internal Revenue (BIR): aims to
raise revenues for the government through
the effective and efficient collection of
taxes, provide quality service to taxpayers,
 Education or the Academe Practice: and enforce tax laws in an impartial and
person in an educational institution which uniform manner
involve teaching of accounting, auditing,  Insurance Commission (IC): regulate and
management advisory services, accounting supervise the insurance industry for the
aspect of finance, business law, taxation promotion of the national interest
and other technical related subjects.
 Government Practice: a person who Standard-Setting Bodies
holds, or is appointed to, a position in an Local
accounting professional group in  Financial Reporting Standards Council
government- owned and or controlled (FRSC): formalizes the accounting
corporation, including those performing standard-setting function in the Philippines,
propriety functions
 replaces Accounting Standards Council
(ASC)
 Auditing and Assurance Standards
Council (AASC): formalizes the auditing
standard-setting function in the Philippines,
replaces Auditing Standards and Practices
Council (ASPC)

International
 International Accounting Standards
Board (IASB): international counterpart of
the FRSC, replaces International
Accounting Standards Committee (IASC)
 International Auditing and Assurance
Standards Board (IAASB): International
counterpart of the AASC, replaces
International Auditing Practices Committee
(IAPC)