INTRODUCTION: FUNDAMENTAL PRINCIPLES OF

ASSURANCE SERVICES

WHAT IS ASSURANCE?
➔​ It refers to the practitioner's satisfaction with the reliability of an assertion being made by one party for use by
another entity.
Simply stated: it means how sure the practitioner is that the representation made by a particular party is reliable.

ASSURANCE ENGAGEMENT/SERVICES:
ASSURANCE SERVICES:
➔​ Independent professional services in which a practitioner issues a written communication that expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible party about the
outcome of evaluation or measurement of subject matter against criteria.

INDEPENDENCE- is required whenever a professional accountant performs assurance services.

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 subject matter
against criteria.
SIMPLY:
❖​ Three-party contracts in which assurers report on the quality of information.
❖​ Enhance the credibility of information about the subject matter by evaluating whether it conforms in all material
respects with suitable criteria.

OBJECTIVE OF ASSURANCE ENGAGEMENT, IN GENERAL:

★​ Performed by professional accountants are intended to enhance the credibility of information about the outcome of the
evaluation or measurement of a subject matter against criteria.
★​ Thereby improving the likelihood that the information will meet the needs of an intended user.
★​ Enhance the degree of confidence of the user because the quality of information for decision making is improved.

ELEMENTS OF ASSURANCE ENGAGEMENTS:

Not all engagements performed by practitioners are assurance engagements. An assurance engagements must have the following
elements: T-A-S-S-W

❖​ Three party relationship

a.​ PRACTITIONER
●​ Is a broader term than “auditor” as used in PSAs and PSREs.
●​ Which relates only to practitioners performing audit and review engagements concerning historical financial
information.
●​ Must be independent of both the responsible party and the intended users.
●​ Governed by ethical requirements regarding the conduct of engagement.
●​ They may use the work of other persons from other professional disciplines.
●​ Responsible for determining the nature, timing, or extent of procedures required by the engagement.
Distinguished the terms:
●​ Professional Accountant- CPA engaged in any scope of practice of accountancy.
●​ Practitioner- CPA rendering professional services (assurance or non-assurance)
●​ Auditor- a practitioner rendering audit and review services.
THEREFORE: Practitioners are those with professional competence engaged with the assurance engagement. The “auditor” is
the practitioner in performing audits.

b.​ RESPONSIBLE PARTY

●​ The person responsible for subject matter, assertion (subject matter information), or both.
●​ May or may not be the engaging party to the practitioner.
●​ May or may not be from the same organization as the intended users.
●​ May be one of the intended users, but should not be the only one.
 c.​ INTENDED USERS
●​ Person, persons, or class of persons for whom the practitioners prepares the assurance report;
●​ They are the users to whom the practitioner usually addresses the report.
●​ It may be limited to major stockholders with significant and common interest, in case it has a broader range.
●​ It may be identified by agreement between the practitioner and the responsible party or engaging party, by law.

❖​ Appropriate subject matter

➢​ SUBJECT MATTER- refers to the information to be evaluated or measured against the criteria.
➢​ SUBJECT MATTER INFORMATION- the outcome of the evaluation or measurement of a subject matter against the
criteria.
➢​ It is for which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for
expressing conclusion in an assurance report.
Characteristics of SM to be considered appropriate:
★​ Identifiable
★​ Capable of consistent evaluation and measurement against that identified criteria.
★​ In the form that can be subjected to procedures for gathering evidence to support that evaluation or measurement.
Degree of SM:
●​ Qualitative versus quantitative
●​ Objective vs. subjective
●​ Historical vs. prospective
●​ Relates to a point in time or covers a period

Affects the:
a.​ Precision for which SM can be evaluated or measured against criteria.
b.​ Persuasiveness of available evidence

❖​ SUITABLE CRITERIA

WHAT IS CRITERIA?
➔​ The standard or benchmark used for evaluation or measurement of a subject matter of an assurance engagement,
including, where relevant benchmarks for presentation and disclosure.
➔​ PURPOSE: Required for reasonably consistent evaluation or measurement of subject matter within the context of
professional judgment.
➔​ Otherwise: Without frame of reference, any conclusion is open to individual interpretation and misunderstanding.

CHARACTERISTICS OF SUITABLE CRITERIA: (RUN CR)

a.​ 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.
b.​ Understandability- contribute to clear, comprehensive conclusions, and not subject to significantly different
interpretations.
c.​ Neutrality- contributes to conclusions that are free from bias.
d.​ Completeness- criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of
the engagement circumstances are not omitted.
e.​ Relevance- contribute to conclusions that assists decision-making by the intended users.

TYPES OF CRITERIA:
Formal The COSO Framework is a system used to establish internal controls to
●​ PFRS - preparation of FS be integrated into business processes. Collectively, these controls provide
●​ Established internal control framework (COSO) reasonable assurance that the organization is operating ethically,
transparently and in accordance with established industry standards.
●​ Applicable laws, regulations, or contracts

Less Formal
●​ Internally developed code of conduct (entity’s by laws)
●​ Agreed level of performance

Established criteria
 ●​ Those embodied in laws or regulations or issued by authorized or recognized body of experts that follow a transparent
due process.

Specifically developed
●​ Those designed for engagement
●​ Associated with less formal criteria.

COMMUNICATION OF CRITERIA TO INTENDED USERS:

●​ Criteria need to be available to the intended users to allow them to understand how the SM has been evaluated or
measured. Communicated through:
○​ Publicly
○​ Inclusion in the presentation of the SMI
○​ Inclusion in the assurance report
○​ By general understanding
SPECIFIC PURPOSE: When criteria are made available only to specific intended users or relevant to specific purpose, the use of
the report should be restricted to those users or for that purpose.

❖​ SUFFICIENT APPROPRIATE EVIDENCE

➔​ The practitioner shall plan and perform the engagement with an attitude of professional skepticism to obtain sufficient
appropriate evidence that the assertion is free of material misstatements.

Considerations in Planning and Performing the Engagement: (determining the nature, timing, and extent of
evidence-gathering procedure).

●​ Quantity of evidence (Sufficiency)

●​ Quality of evidence (Appropriateness)
●​ Materiality
●​ Assurance engagement risk
●​ Cost-benefit consideration
●​ Professional skepticism

a.​ Professional skepticism- an attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of audit evidence.
b.​ Evidence- refers to the information obtained by the practitioner in arriving at the conclusions on which the conclusion is
based.
c.​ Sufficiency- refers to the measure of the quantity of evidence. The evidence needed is affected by the
i.​ Risk of the SM: the greater the risk the more evidence is likely required, and
ii.​ Quality of such evidence: the higher the quality, the less may be required.
d.​ Appropriateness (called competence)- the measure of the quality of evidence and that is its relevance and its
reliability.

Note:
●​ Sufficiency and appropriateness may be interrelated.
●​ However, obtaining more evidence may not compensate for its poor quality.
●​ It shall be determined by the practitioner using his professional judgment and by exercising professional skepticism.
●​ It is generally more difficult to obtain assurance about SMI covering a period than about SMI at a point in time.
●​ Conclusions provided on processes ordinarily limited to the period covered by engagement.
●​ Provides no conclusion as to whether the process will continue at specified manner in the future.
Ways to generalize about the reliability of evidence:
a.​ External vs. Internal source
Evidence is more reliable when it is obtained from independent sources outside the entity.

b.​ Effective internal control

Evidence generated internally is more reliable when the related controls are effective.

c.​ Directly or indirectly obtained by the practitioner

Evidence directly obtained is more reliable than indirectly obtained by inference.

d.​ Written vs. oral representation

Writing is more reliable such as electronic, paper, or other media.

e.​ Original vs. reproduce

Original document is more reliable than the document reproduction.

OBJECTIVE OF ASSURANCE ENGAGEMENTS:

According to the Philippine Framework for Assurance Engagements, an assurance engagement is conducted:

❖​ To provide a high level of assurance that the subject matter conforms in all material respects with identified suitable
criteria; or
❖​ To provide a moderate level of assurance that the subject matter is plausible in the circumstances.

TYPES OF ASSURANCE ENGAGEMENTS AND THEIR OBJECTIVES:

AS TO LEVEL OF ASSURANCE
●​ Reasonable assurance engagements- engagements that provide a high, but not absolute, level of assurance.
○​ Also called high-level engagements.
○​ The objective of RAE is a reduction in assurance engagement risk to an acceptably low level as the basis for a
positive form of expression of the practitioner’s conclusion.
○​ Absolute assurance is not attainable:
In assurance engagement, absolute assurance is not generally attainable because of such factors as:
●​ Use of judgment
●​ Use of testing
●​ Inherent limitation of internal control
●​ Most evidence available to the practitioner is persuasive rather than conclusive.
●​ In some cases, the characteristics of the subject matter.

●​ Limited assurance engagements- engagements that provide only a “moderate” or “limited” level of assurance.
○​ The objective of LAE is reduction in assurance engagement risk to an acceptable level as a basis for a negative
form of expression of the practitioner’s conclusion.
○​ Thus, the risk in LAE is greater than for a RAE.
★​ For assurance engagements regarding historical financial information in particular, LAE are called Review
engagements.

WHAT IS ASSURANCE ENGAGEMENT RISK?

 ➔​ The risk that the practitioner expresses inappropriate conclusions when the subject matter information is materially
misstated.

Components of AER:

Risk of Material Misstatement

★​ Inherent Risk (SMI)- susceptibility of the SMI to a material misstatement, assuming that there is no related control.
★​ Control Risk (Internal Control)- the risk that the material misstatement could occur will not be prevented, detected, and
corrected, on a timely basis by related IC.
Risk of Non-detection
★​ Detection Risk (AE)- risk that the practitioner will not detect the material misstatement that exists.

PROFESSIONAL SKEPTICISM
●​ Recognizing the circumstances may exist that cause the SMI to be materially misstated.
●​ The practitioner makes a critical assessment, with a questioning mind, of the validity of the evidence obtained
●​ Alert to the evidence that contradicts or brings into the question the reliability of documents or representations of the
responsible party.
●​ The more practitioners exhibit this attitude, the more procedures will be required.

Ways of exercising Professional Skepticism:

1.​ Vitality of professional skepticism:
●​ It it necessary throughout the engagement process, to reduce;
○​ Overlooking suspicious circumstances
○​ Over-generalizing when concluding observations
○​ Using faulty assumptions
2.​ Authentication of documentation
●​ Rarely involved in authenticating the documentations.
●​ However, practitioners consider the reliability of information to be used for evidence.
3.​ Consistency of information from different sources
●​ Gain greater assurance from consistent evidence obtained from different sources or of different nature than from
evidence obtained individually.

PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS:

MORE COMMON IS ATTESTATION ENGAGEMENT: Management (as the responsible party) are responsible for their business,
and therefore should be in the position to present relevant assertions in the SMI. Better position to understand who would use
the information, what users wants to see, in what format, and for what purpose.
➢​ Direct Engagement/Direct-Reporting Engagement-
➔​ The practitioner either directly performs the evaluation or measurement of the subject matter himself or;
➔​ Obtains a representation from the responsible party that has performed the evaluation or measurement, where such
evaluation is not disclosed or is not available to the intended users by responsible party.
➔​ Then measurement of SM will be provided by the practitioner in his assurance report to intended users.

OTHER ASSURANCE ENGAGEMENTS:

➔​ Business performance Measurement
➔​ Health Care Performance Measurement
➔​ Elder care plus
➔​ Risk assessment services
➔​ CPA Web Trust
➔​ Information System Reliability

NON-ASSURANCE ENGAGEMENTS:

●​ Agreed-upon procedures - no conclusion is expressed

●​ Compilation if financial or other information - no conclusion is expressed.
●​ Some tax services- non-assurance if tax returns are prepared with no conclusion expressed. Tax consulting services are
two-party contracts.
●​ Management consulting and other advisory services- Two-party contracts that recommend uses for information.
NON-ASSURANCE ENGAGEMENTS AND RELATED SERVICES:

a.​ REVIEWS OF HISTORICAL FINANCIAL INFORMATION

REVIEW OF INTERIM FINANCIAL INFORMATION:
EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION:

PRESENTATION AND DISCLOSURE OF PROSPECTIVE FINANCIAL INFORMATION.

MODIFIED REPORTS ON PROSPECTIVE FINANCIAL INFORMATION:

AGREED-UPON PROCEDURES:
COMPILATION OF FINANCIAL INFORMATION:
https://aasc.org.ph/new_std_sept2016/PSRS%204410%20(Revised)%20_compilation%20engagements.pdf
TAX SERVICES:

MANAGEMENT ADVISORY (CONSULTING) SERVICES:

LEVELS OF ASSURANCE FOR AUDIT, REVIEW, AGREED-UPON PROCEDURES, AND
COMPILATION:ENGAGEMENTS AND LEVEL OF ASSURANCES:

REPORTS ON NON-ASSURANCE ENGAGEMENTS: