Chapter 1

Introduction to
ASSURANCE
ENGAGEMENTS
 ASSURANCE based on
Philippine Framework for
Assurance Engagements:
- auditor’s satisfaction as to the
reliability of an assertion being made
by one party for use by another party

- To provide such assurance, the auditor

assesses the evidence collected as a
result of procedures conducted and
expresses a conclusion.
ASSURANCE ENGAGEMENTS
- an engagement in which a practitioner
expresses a conclusion designed to enhance
the degree of confidence that intended users
can have about the evaluation or
measurement of a subject matter that is the
responsibility of a party, other than the
intended users or a practitioner, against
criteria.
 Examples of conclusion:
Example # 1: The recognition,
measurement, presentation
and disclosure represented
in the financial statements
(outcome) result from
applying a financial
reporting framework for
recognition, measurement,
presentation and
disclosure, such as
Philippine Financial
Reporting Standards,
(criteria) to an entity’s
financial position, financial
performance and cash flows
(subject matter)
subject matter
Example # 2:
An assertion about the
effectiveness of
internal control
(outcome) results from
applying a framework
for evaluating the
effectiveness of
internal control,
(criteria) to internal
control, or a process
(subject matter)
 Subject matter
This term will be used to mean the outcome
of the evaluation or measurement of
subject matter. 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.
 Philippine Framework for
Assurance Engagements
(1)provides a frame of reference for
practitioners and others involved with
assurance engagements
(2) describes the objectives and elements of
assurance engagements intended to
provide either a high or moderate level of
assurance.
 Objective of an Assurance
Engagement
for a professional accountant to evaluate or
measure a subject matter that is the
responsibility of another party against
identified suitable criteria, and to express a
conclusion that provides the intended user
with a level of assurance about that
subject matter. (e.g. Independent Auditor’s Report)
degree of confidence that the intended
CREDIBILITY
user may place in the credibility of the
subject matter.
 Assertion-Based Engagements vs.
Direct Reporting Engagements
Assertion-based engagements Direct reporting engagement
- assurance engagements that - Engagements where the
involve the evaluation or practitioner either directly
measurement of the subject performs the evaluation or
matter by the responsible party measurement of the subject
and the subject matter information matter, or obtains a
in the form of an assertion by the representation from the
responsible party is made responsible party that has
available to the intended users. performed the evaluation or
measurement that is not
available to the intended users.
 Types of Assurance Engagements

Reasonable assurance Limited assurance

- an engagement that aims to - one that aims to reduce the

reduce the assurance risk to an assurance engagement risk to
acceptably low level in the a level that is acceptable in the
circumstances of the circumstance of the
engagement risk to an engagement but where that
acceptably low level in the risk is greater than for a
circumstances of the reasonable assurance
engagement as the basis for a engagement as a basis for a
positive form of expression of negative form of expression of
the practitioner’s conclusion. the practitioner’s conclusion.
 Examples of Reasonable Assurance Engagements
1. Independent Financial Statement Audit 2. Review of Prospective Financial
Statement Audit
 Examples of Limited Assurance Engagements

1. Review of non-financial
performance indicators
such as:

a. Capacity of a facility and

review of human resource
practices
b. Review of internal
control
c. Review of IT systems Limited assurance
d. Review of corporate
governance
e. Review of the
compliance with regulation
 Types of Assurance Services

a) Audits
b) Reviews
c) Other Services (e.g., CPA Web trust,
eldercare Plus, Business Performance
Measurement Services, Information
Reliability Services)
 AUDITS (Independent financial statements
audit engagement)
It is an assurance
engagement to provide
a high level of
assurance that the
financial statements
are free of material
misstatement

Its objective is to enable the

auditor to express an opinion
whether the financial
statements are prepared, in all Not absolute
material respects, in The evidence obtained
are “persuasive”,
accordance with an identified rather than
financial reporting framework. “conclusive“ , in nature
 Persuasive evidence
- influential, convincing, believable

- It is different from conclusive evidence

because conclusive means definite,
certain or final.
 REVIEWS
It involves limited investigation of
much narrower scope than an
audit and undertaken for the
purpose of providing limited or
moderate (negative) assurance
that the statements are presented
in accordance with identified
Financial Reporting Standards.

The FS may be historical

(covering one whole accounting
period or an interim period) or
prospective (forecasts and The FS presented
projections) is on a historical
basis.
Its objective is to enable an auditor to state
whether on the basis of procedures which do
not provide all the evidence required in an
audit, nothing has come to the auditor’s
attention than causes the auditor to believe
that the financial statements are not
prepared, in all material respects, in
accordance with an identified reporting
framework.
Another example of a REVIEW of the
forecast/projections of a company
moderate or limited assurance

Its objective is to enable an auditor to

state whether on the basis of
procedures which do not provide all the
evidence required in an audit, nothing
has come to the auditor’s attention than
causes the auditor to believe that the
financial statements are not prepared, in
all material respects, in accordance with
an identified reporting framework.
 Examples of Other Review engagements
1. A financial institution may require debtors to engage
CPAs to provide assurance about the debtor’s
compliance with certain covenant provisions stated in the
loan agreement.

2. CPAs may also provide assurance about the

effectiveness of a client’s internal controls over financial
reporting.

3. Review of investment performance statistics for

organizations such as mutual funds and computer
software review.
 Other Assurance Services
1. Assurance Services on Information Technology
a. Assurance over website controls
b. Assurance about information system reliability and electronic
commerce assurance services.

2. CPA Web Trust Service

The CPA’s electronic Web Trust seal is affixed to the web site.
This seal assures the user that the web site owner has met
established criteria related to business practices, transaction
integrity and information processes.
Web Trust is an attestation service.
Web Trust seal is a symbolic representation of the CPA’s report on
management assertions about its disclosure of electronic
commerce practices.
 Other Assurance Services
(continued…)
3. Assurance Services on Other Types of Information
The Special Committee on Assurance Services of the AICPA has
developed other assurance services designed to enhance the
relevance of information. Examples of these services are

a) Business Performance Management

b) Health Care Performance Measurement
c) Risk Assessments
d) Eldercare Plus
 Business Performance Measurement Services
A CPA can provide assurance
about whether financial and
nonfinancial information being Activity: Watch a video on
“Improving Business
reported from the entity’s
Performance with Ease – Part 1”
performance measurement system (6:17)
(e.g., balanced scorecard) is
reliable and whether the
performance measures being used
are accurately leading the entity
toward meeting its strategic goals
and objectives.
 Health Care Performance Measurement
Assurance service involves
evaluation of the quality of
health care, medical services
and outcome. It looks into the
health care delivery system, the Activity: Watch a video on “What
medical services provided, and the heck is an Accountable Care
the quality attributes associated Organization?” (5:16)
with those services.
 Risk Assessment Eldercare Plus
This assurance service focuses on the
Assurance on risk assessment needs of the elderly and whether
identifies a set of risks that caregivers are providing services that
affect the organization. It also meet specified objectives or at an
involves the study of the link acceptable level. This service might
include periodic reporting to family
between risks and members about the degree to which
organization’s mission, vision, caregivers are complying with the
objectives and strategies and contracted level of care as supervising
development of new and the investment and accounting for the
elderly individual’s estate.
relevant measures.

Activity: Watch a video on

Activity: Watch a video on
“Eldercare Services Los Angeles”
“Assessing Control Risk”
(0:56)
(3:44)
 Other Assurance Services Examples

Annual environmental audit Controls over and risks related to

investments, including policies related
to derivatives

Assessment of risks of Fraud and illegal acts risk

accumulation, distribution, and assessment
storage of digital information

Compliance with trading Mystery shopping

policies and procedures

Compliance with entertainment ISO 9000 certifications

royalty agreements
 Annual Assessment of risks of
environmental audit accumulation, distribution, and
storage of digital information

Assessing whether the Assessing physical and on-

company policies line security risks and
effectively ensure the related controls surrounding
company’s compliance data and other information
with environmental stored electronically,
standards and laws including the adequacy of
back-up and off-site storage
Activity: Watch a video on “J &
G Environmental: Waste Audit”
(2:56)
 Compliance with
Compliance with trading entertainment royalty
policies and procedures agreements

Examining transactions Assessing whether

between trading partners royalties paid to artists,
to ensure that the authors, and others are
handling of the in accordance with
transactions complies royalty agreement
with the terms of the provisions
trading agreement or
contract, including the
identification of risks
surrounding the trade
agreement.
 Controls over and risks Fraud and illegal
related to investments, acts risk
including policies related assessment
to derivatives
Assessing the processing Developing fraud risk
surrounding a company’s profiles and assessing
investment activities to the adequacy of
identify risks and to company systems and
determine the policies in preventing and
effectiveness of those detecting fraud and
processes in meeting the illegal acts.
company’s investment
policies
 ISO 9000
Mystery shopping
certifications

Performing anonymous Certifying a company’s

shopping to assess compliance with ISO
sales personnel 9000 quality control
interactions with standards, which help
customers and ensure company
procedures performed products are of high
by sales personnel quality

Activity: Watch a video on Activity: Watch a video on “What

“Mystery Shopper at a Fast ISO standards mean for you?”
Food Restaurant” (2:58) (2:05)
 Assurance Services Relationship with
Attestation Services
An attestation service is an engagement in which a
practitioner is engaged to issue, or does issue, a
written communication that expresses a
conclusion about the reliability of a written
assertion that is the responsibility of another
party.

All attestation and audit services are assurance

services.
 Non-assurance Services (PSRS 4400; 4410)

Not all engagements performed by professional

accountants are assurance engagements. This
does not mean that professional accountants do
not undertake such engagements, only that
these engagements are not covered by the
Philippine Framework on Assurance
Engagements. Other engagements frequently
performed by professional accountants are not
assurance engagements or non-assurance
engagements
 Examples of Non-assurance Services

• Agreed-upon procedures
• Compilation of financial or other information
• Preparation of tax returns where no
conclusion is expressed, and tax consulting
• Management consulting
• Other advisory services
 Agreed-upon procedures
The party engaging the
professional accountant or the
intended user determines the
procedures to be performed and
the professional accountant
provides a report of factual findings
as a result of undertaking those
procedures.

While the intended user of the

report may derive some assurance
from the report of factual findings,
the engagement is not intended to
provide, nor does the professional
accountant express, a conclusion
that provides a level of assurance.
Rather, the intended user
assesses the procedures and
findings and draws his or her own
conclusions.
Compilation of financial or other information

-presenting in the form of

financial statements that is the
representation of management
(owners) without undertaking to
express any assurance on the
statements. [PFRS 4410
(formerly PSA 930)]

The objective of a compilation

is for the CPA to use accounting
expertise, as opposed to
auditing expertise, to collect,
classify and summarize
financial information.
 Preparation of tax returns where no
conclusion is expressed, and tax consulting
A CPA is considered qualified to prepare corporate and individual
tax returns for both audit and non-audit clients.

Types of Tax Services:

1. Tax compliance
- includes preparation of tax returns for individuals, corporations,
estates and trusts, and others.

2. Tax planning
- determines the tax consequences of planned or potential
transactions and suggests the desirable course of action to
minimize the tax liability while achieving the client’s objective.
 Tax Services
Example of Tax Compliance: Example of Tax Planning:

Based on the audited financial

Annual Income Tax Return
Batch Control Sheet (BCS) No./Item No.: ________________________________
BIR Form No. statements, if the company provide
For Corporation, Partnership and Other Non-Individual Taxpayer 1702
November 2011 (ENCS) additional employees’ benefits, those
TO BE FILED IN THREE (3) COPIES: (1) BIR FILE COPY (2) BIR ENCODING COPY (3) TAXPAYER FILE COPY
Amended Return?
Yes
x No
4 Short Period Return?
Yes
x No
5 Alphanumeric Tax
Code (ATC)
IC 055 Minimum Corporate Income Tax (MCIT) x will be subjected to fringe benefit
5 3 7 - 0 0 0
Background Information

0
7 RDO Code
0 2 4
8 Date of Incorporation
(MM/DD/YYYY)
taxes which adds to the burden of
A N D I N D U S T R I A L C O R P O R A T I O N paying huge taxes. Instead of
mber/Floor) (Building Name) declaring these as employees’
1 4 5 V I N C H Y S T R E E T
Phase Number

/Village)
S I O N
Building Number)
G E N . T . D E L
(Street Name)
E O N
(Barangay)
benefits, it is much better to request
y/City)
Y
E-mail Address
(Province) (Zip Code) the employees to submit official
14 Method of Deduction receipts representing
X Itemized Deduction Optional Standard Deduction (OSD)

No Yes
Exempt
If yes, fill out spaces below:
Special Rate Regular/Normal Rate (Special Tax Relief)
reimbursements of expenses in the
15A
15C
15F
15B
15D
15G
15E
15H
amount equal to the benefits they
15K
15I • %

15L
15J • %

15M
will receive. This way, the payment of
15N
Computation of Tax
15O 15P
additional benefits will be treated as
Exempt Special Rate Regular/Normal Rate
16A
17A
•
•
16B
17B
•
•
16C
17C
1 1 3 8 9 7 7 3 • 0 0
1 0 6 7 2 5 4 1 • 0 0
other company expenses which will
18A 18B 18C
19A
20A
•
•
•
19B
20B
•
•
•
19C
20C
7 1 7 2 3 2 • 0 0
4 5 0 3 4 0 • 0 0
1 1 6 7 5 7 2 • 0 0
not be subjected to taxes and will
21A • 21B • 21C • become part of deductions from the
22A 22B 22C

Legal Basis
• • 1 5 1 8 7 9 8 • 0 0
gross income.
23A • 23B • 23C •
23D • 23E • 23F •
24A • 24B • 24C •
 Management consulting
Consulting services are professional services that
employ the practitioner’s technical skills,
observations, experiences, and knowledge of
the analytical approach and procedures used in
a consulting engagement.
Those procedures may involve determining client
objectives, fact-finding, definition of problems or
opportunities, evaluation of alternatives,
formulation of proposed action, communication
of results, implementation, and follow-up.
 Other advisory services
Many accounting firms frequently provide
accounting services to small clients with
limited accounting staff. These services
include doing manual or automated
bookkeeping, and posting adjusting entries
or preparing (or compiling) financial
statements. This is also called
“outsourcing”.
 Assurance Engagement Acceptance

A practitioner accepts an assurance engagement only where he

practitioner’s preliminary knowledge of the engagement
circumstances indicates that:

(a) Relevant ethical requirements, such as independence and

professional competence will be satisfied; and
(b) The engagement exhibits all of the following characteristics:
(i) the subject matter is appropriate;
(ii) the criteria to be used are suitable and are available to the
intended users;
(iii) The practitioner has access to sufficient appropriate evidence to
support the practitioner’s conclusion;
 Assurance Engagement Acceptance
(continued…)

(iv) The practitioner’s conclusion, in the form appropriate to either a

reasonable assurance engagement or a limited assurance
engagement, is to be contained in a written report; and

(v) The practitioner is satisfied that there is a rational purpose for the
engagement. If there is a significant limitation on the scope of the
practitioner’s work, it may be unlikely that the engagement has a
rational purpose. Also, a practitioner may believe the engaging party
intends to associate the practitioner’s name with the subject matter
in an inappropriate manner.
 If the assurance engagement does not meet the previous
characteristics, the engaging party may be able to identify a
different engagement that will meet the needs of intended
users. For example:
(a) If the original criteria were not suitable, an assurance engagement
may still be performed if:
(i) The engaging party can identify an aspect of the original subject
matter for which those criteria are suitable, and the practitioner could
perform an assurance engagement with respect to that aspect as a
subject matter in its own right. In such cases, the assurance report
makes it clear that it does not relate to the original subject matter in
its entirety; or
(ii) Alternative criteria suitable for the original subject matter can be
selected or developed.
(b) The engaging party may request an engagement that is not an
assurance engagement, such as consulting or an agree-upon
procedures engagement.
 Elements of Assurance Engagement

(a)A three party relationship

(b)An appropriate subject matter
(c) Suitable criteria
(d)Sufficient appropriate evidence
(e)A written assurance report in the form
appropriate to a reasonable assurance
engagement or a limited assurance
engagement.
 A three party relationship involves
PRACTITIONER RESPONSIBLE PARTY INTENDED USERS

-the person who provides the -is a person (or persons) - the person, persons or
assurance to the intended users who: class of persons for
about a subject matter that is the (a) In a direct reporting whom the practitioner
responsibility of another party. engagement, is prepares the assurance
responsible for the report. The responsible
Part A of the Revised Code of subject matter; or party can be one of the
Ethics for Professional (b) In an assertion-based intended users, but not
Accountants in the Philippines sets engagement, is the only one.
out that all professional responsible for the
accountants are required to subject matter
observe the following: information (the
assertion), and may
(a) Integrity; be responsible for the
(b) Objectivity; subject matter.
(c) Professional competence and
due care;
(d) Confidentiality; and
(e) Professional behavior
Identify the three party relationship in the
following engagements:
Subject matter of an assurance engagement
can take may forms, such as:
• Financial performance or conditions for which the subject matter
information may be the recognition, measurement, presentation and
disclosure represented in financial statements.
• Non-financial performance or conditions for which the subject matter
information may be key indicators of efficiency and effectiveness.
• Physical characteristics for which the subject matter information may
be specifications document.
• Systems and processes for which the subject matter information
may be an assertion about effectiveness.
• Behavior for which the subject matter information maybe a
statement of compliance or a statement of effectiveness.
 Criteria
Suitable criteria exhibit the following
Criteria are the benchmarks
characteristics:
used to evaluate or measure
(a) Relevance: relevant criteria contribute to
the subject matter including,
conclusions that assist decision-making by
where relevant, benchmarks
the intended users.
for presentation and
(b) Completeness: criteria are sufficiently
disclosure.
complete when relevant factors that could
affect the conclusions in the context of the
Examples:
engagement circumstances are not omitted.
•PFRS in the preparation of FS
(c) Reliability: reliable criteria allow reasonably
•Established Internal Control
consistent evaluation or measurement of the
Framework when reporting on
subject matter.
internal control
(d) Neutrality: neutral criteria contribute to
•Applicable law, regulation or
conclusions that are free from bias.
contract when reporting on
(e) Understandability: understandable criteria
compliance
contribute to conclusions that are clear;
comprehensive, and not subject to
significantly different interpretations.
 Examples of the application of suitable
criteria in rendering a conclusion:
Example #1: Answer # 1: Using the criteria with the
SAXOPHONE COMPANY acquires characteristic of RELEVANCE &
a new manufacturing equipment on UNDERSTANDABILITY….
January 1, 2009, on installment
basis. The deferred payment PAS 16 (Property, Plant and Equipment) states
contract provides for a down that the cost of an item of PPE is its cash price
payment of P300,000 and an 8-year equivalent. If payment is deferred beyond normal
note for P3,104,160. The note is to credit terms, the difference between the cash
be paid in 8 equal annual price equivalent and the total payment is
installment payments of P388,020, recognized as interest expense over the credit
including 10% interest. The term unless such interest is capitalized in
payments are to be made on accordance with PAS 23.
December 31 of each year,
beginning December 31, 2009. The Therefore, the PPE should be measured at its
equipment has a cash price cash price which is P2,370,000.00.
equivalent of P2,370,000.
Saxophone’s financial year-end is
December 31. What is the
acquisition cost of the equipment?
 Examples of the application of suitable
criteria in rendering a conclusion: (continued…)
Example # 2: Answer # 1: Using the criteria with the
characteristic of COMPLETENESS &
On November 1, 2010, 69 passengers on UNDERSTANDABILITY…
CANYON AIRLINES Flight No. 143 were
injured upon landing when the plane
skidded off the runway. Personal injury suits Under PAS 37: Provisions, Contingent Liabilities,
for damages totaling P10,000,000 were filed and Contingent Assets, a provision shall be
on January 2, 2011, against the airline by 21 recognized when:
injured passengers. The air-line carries no a. an entity has a present obligation (legal or
insurance. Legal counsel has studied each constructive) as a result of a past event;
suit and advised Canyon that it can b. it is probable that an outflow of resources
reasonable expect to pay 70% of the
damages claimed. The financial statements
embodying economic benefits will be required
for the year ended December 31, 2010, to settle the obligation; and
were authorized for issue on February 12, c. A reliable estimate can be made of the amount
2011. During the past decade, the company of the obligation.
has experienced at least one accident per Therefore, the loss contingency of P7,000,000
year and incurred average damages of should be accrued because the cause for
P4,100,000. What liability due to the risk of litigation occurred before the end of the
loss from lack of insurance coverage should
Canyon Airlines record or disclose? (Ignore
reporting period and an unfavorable outcome is
the November 1, 2010, accident.) both probable and reasonably estimable.
 Examples of the application of suitable criteria in
rendering a conclusion: (continued…)

The following generalizations about RELIABILITY of evidence may be useful:

• Evidence is more reliable when it is obtained from independent sources
outside the entity.
• Evidence that is generated internally is more reliable when the related
controls are effective.
• Evidence obtained directly by the practitioner (for example, observation of
the applicant of a control) is more reliable than evidence obtained indirectly
or by inference (for example, inquiry about the application of a control).
• Evidence is more reliable when it exists in documentary form, whether
paper, electronic, or other media (for example, a contemporaneously written
record of a meeting is more reliable than a subsequent oral representation
of what was discussed).
• Evidence provided by original documents is more reliable than evidence
provided by photocopies or facsimiles.
 Types of Criteria

1. Established criteria
- those that are embodied in laws or regulations, or issued by
authorized or recognized bodies.
Examples: PFRS, PAS, Revenue Regulations

2. Specifically developed criteria

- those designed for the purpose of the engagement
Examples: internally developed code of conduct, internal control
framework or individual control objectives specifically designed for
the engagement
 Criteria are made available to the intended
users in one or more of the following ways:
(a) Publicly;
(b) Through inclusion in a clear manner in the presentation of the
subject matter information.
(c) Through inclusion in a clear manner in the assurance report.
(d) By general understanding, for example the criterion for measuring
time in hours and minutes.

The practitioner plans and performs an assurance engagement with an

attitude of professional skepticism to obtain sufficient
appropriate evidence about whether the subject matter information
is free of material misstatements.
means the practitioner makes a critical
assessment, with a questioning mind, of
the validity of documents or
representations by the responsible party.
 Sufficient appropriate evidence

Sufficiency is the measure of the quantity of evidence.

Appropriateness is the measure of the quality of the evidence; that is,

its relevance and its reliability.

Materiality is relevant when the practitioner determines the nature,

timing and extent of evidence-gathering procedures, and when
assessing whether the subject matter information is free of
misstatement. When considering materiality, the practitioner
understands and assesses what factors might influence the
decisions of the intended users. The materiality of evidence
depends upon the practitioner’s judgment.
 Sample application of judgment whether the
evidence obtained is sufficient and appropriate:
The Accounts Receivable balance will be
audited. Evidence obtained from the
client company is the AR outstanding
balance of P505,000. To support this
amount, the company provided an aging
of Accounts Receivable which also tied
up with the balance of the AR
outstanding.

Based on the evaluation of the aging of

accounts receivable, there is a
reasonable assurance that the balance
is correct since the internal control is
effective. But since the practitioner must
exercise professional skepticism, he
must obtain evidence to corroborate the
subject matter through additional
procedures such as inspection of
documents, confirmation, inquiry, etc.
 After the evaluation, the practitioner must
come up with the following answer:
Accounts receivable per general ledger P 505,000
AA. Co. – Delayed issuance of credit memo (23,000)
CC. Corp. – Damaged merchandise credited to II Company (40,000)
DD, Inc. – Double billing (10,000)
FF, Inc. – Collection not recorded (31,000)
GG Co. – Erroneous posting of credit for HH Corp. 10,000
HH corp. – Payment credited in error to GG Corp. (10,000)
II Company – Credit for CC Corp. erroneously posted to II Company 40,000
Adjusted balance of accounts receivable P441,000
 Assurance Engagement Risk
Assurance risk is the risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is materially misstated.

Components of Assurance Engagement Risk:

(a) The risk that the subject matter information is materially misstated, which
in turn consist of:
(i) Inherent risk: the susceptibility of the subject matter information to a
material misstatement, assuming that there are no related controls; and
(ii) Control risk: the risk that a material misstatement that could occur will
not be prevented, or detected and corrected, on a timely basis by related
internal controls.

(b) Detection risk: the risk that the practitioner will not detect material
misstatement that exists.
 Nature, Timing and Extent of Evidence-
Gathering Procedures
The exact nature, timing and extent of evidence-gathering procedures
will vary from one engagement to the next.

“Reasonable assurance” is a concept relating to accumulating evidence

necessary for the practitioner to conclude in relation to the subject
matter information taken as a whole.
To be in a position to express a positive conclusion, it is necessary
for the practitioner to obtain sufficient appropriate evidence as part
of a systematic engagement process involving:

(a) Obtaining an understanding of the subject matter and other

engagement circumstances which, depending on the subject matter,
includes obtaining an understanding of internal control;
 Nature, Timing and Extent of Evidence-
Gathering Procedures (continued…)
(b) Based on that understanding, assessing the risks that the subject
matter information may be materially misstated;

(c ) Responding to assessed rick, including developing overall

responses, and determining the nature, timing and extent of further
procedures;

(d) Performing further procedures clearly linked to the identified

risks, using a combination of inspection, observation, confirmation,
recalculation, reperformance, analytical procedures and inquiry.

(e) Evaluating the sufficiency and appropriateness of evidence.

 Inspection
Inspection involves the examination of records, documents, or
tangible assets. Records and documents are inspected to provide
audit evidence of varying degrees of reliability depending on their
nature and source and the effectiveness of internal controls over their
processing.

Documentation, also referred to as vouching, is the auditor’s

examination of the client’s documents and records to substantiate the
information that is or should be included in the financial statement.
Documents could either be internal or external.

Internal document is one that has been prepared and used

within the client’ s organization and is retained without its ever going
to an outside party such. Examples are purchase requisition,
employees’ time reports, inventory receiving reports, etc.

External document is one that has been in the hands of

someone outside the client’s organization who is a party to the
transaction being documented that which is either currently in the
hands of the client or readily accessible. Examples are vendor’s
invoices, insurance policies, etc.
 Inspection of Tangible Assets

Inspection or physical examination of

tangible assets provides reliable audit
evidence with respect to their
existence but not necessarily as to
their ownership or value.

The inspection or count by the auditor

of a tangible asset to determine its
existence and qualitative characteristic
is considered one of the most reliable
and useful types of audit evidence.
This is applicable in the verification of
inventory, cash, fixed tangible assets,
securities and notes receivable.
 Observation
Observation consists of looking at a process
or procedure being performed by others.

For example, the tour of the client’s plant will

enable the auditor to obtain a general
impression of the client’s facilities;
observation of inventory-taking will enable
him to determine if there are obsolete items
or he may watch personnel perform
accounting duties to determine whether the
person assigned a responsibility is actually
doing it.

Observation provides audit evidence about

the performance of a process or procedure,
but is limited to the point in time at which the
observation takes place and by the fact that
the act of being observed may affect how the
process or procedure is performed.
 Confirmation
Confirmation, which is a specific type of inquiry, is
the process of obtaining a representation of
information or of an existing condition directly
from a third party. For example, the auditor may
seek direct confirmation of receivables by
communication with debtors.

A positive external confirmation requests asks

the respondent to reply to the auditor in all cases
either by indicating the respondent’s agreement
with the given information, or by asking the
respondent to fill in information.

A negative external confirmation request asks the

respondent to reply only in the event of
disagreement with the information provided in the
request. However, when no response has been
received to a negative confirmation request, the
auditor remains aware that there will be no explicit
evidence that intended third parties have received
the confirmation requests and verified that the
information contained therein is correct.
 Recalculation
Recalculation consists of checking the
mathematical accuracy of source
documents and accounting records or
of performing independent calculations.
They can be performed through the
use of information technology, for
example, by obtaining an electronic file
from the entity and using CAATs to
check the accuracy of the
summarization of the file.

Testing of mathematical accuracy

involves rechecking a sample of the
computations and transfers of
information made by the client during
the period under audit.
 Reperformance
Reperformance is the auditor’s
independent execution of
procedures or controls that were
originally performed as part of the
entity’s internal control, either
manually or through the use of
CAATs, for example , reperforming
the aging of accounts receivable.
 Analytical Procedures
Analytical procedures consist of
evaluations of financial
information made by a study of
plausible relationships among
both financial and non-financial
data.

Analytical procedures also

encompass the investigation of
identified fluctuations and
relationships that are inconsistent
with other relevant information or
deviate significantly from
predicted amounts.
 Inquiry
Inquiry involves seeking information
both financial and nonfinancial of Activity: Watch a
knowledgeable persons inside or video on “Audit
outside the entity. Inquiries may
include formal written inquiries Evidence” (16:41)
addressed to third parties to
informal oral inquiries addressed to
persons inside the entity.

Inquiry is the obtaining of written or

oral information from the client in
response to questions from the
auditor. Evidence obtained from the
client through inquiry usually cannot
be considered conclusive because it
is not from an independent source
and may be biased in the client’s
favor.
Factors affecting the reduction of assurance
engagement risk for cost beneficial
• The use of selective testing
• The inherent limitations of internal control
• The fact that much of the evidence available to the
practitioner is persuasive rather than conclusive
• The use of judgment in gathering and evaluating
evidence and forming conclusions based on that
evidence
• In some cases, the characteristics of the subject matter
when evaluated or measured against the identified
criteria
 Quantity and Quality of Available Evidence
The quantity and quality of available evidence is affected by:

(a) The characteristic of the subject matter and subject matter

information. For example, less objective evidence might be
expected when information about the subject matter is failure
oriented rather than historical; and

(b) Circumstances of the engagement other than the characteristics of

the subject matter, when evidence that could reasonably be
expected to exist is not available because of, for example, the
timing of the practitioner’s appointment, an entity’s document
retention policy, or a restriction imposed by the responsible party.
 Assurance Report
The practitioner provides a written report containing a conclusion that conveys
the assurance obtained about the subject matter information.

In assertion-based engagement, the practitioner’s conclusion can be worded

either:

(a) In terms of the responsible party’s assertion (for example: “In our opinion
the responsible party’s assertion that internal control is effective, in all
material respects, based on XYZ criteria, is fairly stated”); or

(b) Directly in terms of the subject matter and the criteria (for example: “In
our opinion internal control is effective, in all material respects, based on our
XYZ criteria”). In a direct reporting engagement, the practitioner’s
conclusion is worded directly in terms of the subject matter.
Activity: Watch a video on “Recap of Assurance
Engagements” (9:55)
Inappropriate Use of the Practitioner’s Name
A practitioner is associated with a subject matter when the
practitioner reports on information about that subject
matter or consents to the use of the practitioner’s name
in a professional connection with that subject matter. If
the practitioner is not associated in this manner, third
parties can assume no responsibility of the practitioner. If
the practitioner learns that a party is inappropriately
using the practitioner’s name in association with a
subject matter, the practitioner requires the party to
cease doing so. The practitioner also considers what
other steps may be needed, such as informing any
known third party users of the inappropriate use of the
practitioner’s name or seeking legal advice.
 References:
• Assurance Principles, Professional Ethics and
Good Governance – E.B. Cabrera
• CPA examination reviewer Auditing Problems –
Gerardo S. Roque
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