Assurance services are three-party contracts in
which assurers (such as CPA) reports on the
quality of information. Assurance engagements
performed by CPAs are intended to enhance
the credibility of information about a subject
matter ( such as financial statements) by
evaluating whether the subject matter
conforms in all material respects with suitable
criteria.
(a) A three party relationship involving a
practitioner, a responsible party, and
intended users;
(b) An appropriate subject matter;
(c) Suitable criteria;
(d) Sufficient appropriate evidence; and
(e) A written assurance report in the form
appropriate to a reasonable assurance
engagement or a limited assurance
engagement.
Assurance engagements involve three separate
parties: a practitioner, a responsible party and
intended users.
Practitioner - The term “practitioner” as used
here is broader than the term “auditor” as
used in professional standards, which relates
only to practitioners performing audit or
review engagements with respect to historical
financial information.
A practitioner may be requested to perform
assurance engagements on a wide range of
subject matters. Some subject matters may
require specialized skills and knowledge
beyond those ordinarily possessed by an
individual practitioner.
The responsible party is the person (or
persons) who:
(a) In a direct reporting engagement, is
responsible for the subject matter; or
(b) In an assertion-based engagement, is
responsible for the subject matter information
(the assertion), and may be responsible for the
subject matter.
The intended users are the person, persons
or class of persons for whom the practitioner
prepares the assurance report. The
responsible party can be one of the intended
users, but not the only one.
The subject matter, and subject matter
information, of an assurance engagement can
take many forms, such as:
Form Subject Matter Subject Matter
Information
Financial Performance historical or the recognition, measurement,
or conditions prospective presentation and
financial position, disclosure represented in
financial performance financial statements
and cash flows)
Non-financial performance of an key indicators of
performance or entity efficiency and effectiveness
conditions
Physical characteristics capacity of a facility) a specifications document
Criteria are the benchmarks used to evaluate or
measure the subject matter including, where
relevant, benchmarks for presentation and
disclosure.
Criteria can be formal, for example in the
preparation of financial statements, the criteria
may be Philippine Financial Reporting
Standards;
When reporting on internal control, the criteria
may be an established internal control
framework or individual control objectives
specifically designed for the engagement;
When reporting on compliance, the criteria may
be the applicable law, regulation or contract.
Suitable criteria exhibit the following
characteristics:
Relevance: relevant criteria contribute to
conclusions that assist decision-making by
the intended users.
Completeness: criteria are sufficiently
complete when relevant factors that could
affect the conclusions in the context of the
engagement circumstances are not omitted.
Suitable criteria exhibit the following
characteristics:
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.
Neutrality: neutral criteria contribute to
conclusions that are free from bias.
Suitable criteria exhibit the following
characteristics:
Understandability: understandable criteria
contribute to conclusions that are clear,
comprehensive, and not subject to
significantly different interpretations.
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 misstatement.
Professional Skepticism
An attitude of professional skepticism means the
practitioner makes a critical assessment, with a questioning
mind, of the validity of evidence obtained and is alert to
evidence that contradicts or brings into question the
reliability of documents or representations by the
responsible party.
Sufficiency and Appropriateness of Evidence
Sufficiency is the measure of the quantity of
evidence.
Appropriateness is the measure of the quality
of evidence; that is, its relevance and its
reliability.
Detection Risk
Appropriateness (Quality of Evidence) Sufficiency (Quantity
of Evidence)
Relevance (What Reliability (Can the
Does Evidence Tell Auditor Trust the
the Auditor?) Evidence?)
2-16
Related to quantity (number of transactions
or components examined)
Influenced by effectiveness of entity’s internal
control
Effective internal Lower level of
control control risk Evaluate less evidence
Ineffective internal Higher level of Evaluate more evidence
control control risk
2-17
Effective internal Lower level of Use less effective
control control risk substantive procedures
Ineffective internal Higher level of Use more effective
control control risk substantive procedures
2-18
Materiality
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.
Assurance Engagement Risk
Assurance engagement risk is the risk that the
practitioner expresses an inappropriate
conclusion when the subject matter
information is materially misstated.
The practitioner provides a written report
containing a conclusion that conveys the
assurance obtained about the subject matter
information.
Reasonable assurance engagement - the
practitioner expresses the conclusion in the
positive form, for example: “In our opinion internal
control is effective, in all material respects, based
on XYZ criteria.”
Limited assurance engagement -the practitioner
expresses the conclusion in the negative form, for
example, “Based on our work described in this
report, nothing has come to our attention that
causes us to believe that internal control is not
effective, in all material respects, based on XYZ
criteria.”
