CHAPTER 1

FUNDAMENT
AL
PRINCIPLES
OF
ASSURANCE
SERVICES
 OBJECTIVES
THE CONCEPT AND IMPORTANCE OF
ASSURANCE 01

THE DEFINITION,OBJECTIVE OBJECTIVES,AND

ELEMENTS OF ASSURANCE ENGAGEMENT
02
THE CONSIDERATIONS IN PLANNING AND
PERFORMING ASSURANCE ENGAGEMENTS 03

THE ASSURANCE ENGAGEMENT RISK

04
AND ITS COMPONENT'S
THE TYPES OF ASSURANCE ENGAGEMENTS 05
AS TO THE LEVEL OF ASSURANCE
06
THE TYPES OF ASSURANCE ENGAGEMENTS AS 06
TO STRUCTURE
WHAT IS ASSURANCE?

refers to the practitioner’s satisfaction

as to the reliability of an assertion
being made by one party for use by
another party.
ASSURANCE
ENGAGEMENTS

Assurance engagements (or services ) means 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 measurements of a subject matter against
criteria
Assurance engagements or services are performed by an
independent professional designed to improve the quality
or enhance the credibility of the subject matter of the
engagement.
 ELEMENTS OF ASSURANCE
AGREEMENTS
written
Responsibl
Assurance
Intended
Practitioner
e users
Report
party

Materiality
Appropriate Sufficient Assurance engagement
Suitable Appropriate risk
Subject
Criteria Evidence Cost-benefit constraints
Matter
Professional skeptism
A.THREE - PARTY
RELATIONSHIP
THE PRACTITIONER
• is broader than the term auditor used in Phillpines standards
on auditing(PSA’s) and Philippines standards on review
engagements (PSRE’s),which relates only to practitioners
performing audit and review engagements concerning
historical
THE financial performance
RESPONSIBLE PARTY
• is the person’s responsible for the subject matter,the
subject matter information.

THE INTENDED USERS

• are the persons for whom the practitioner

prepares the assurance report.The assurance
report shall be addressed to all users whenever
practical.
 B. APPROPRIATE SUBJECT
The MATTER
subject matter is the nature of the assertion the practitioner
gathers sufficient evidence.On the other hand,subject matter
information pertains to the outcome of the evaluation or
measurement of the subject matter against criteria.

CHARACTERISTICS OF A SUBJECT MATTER TO BE CONSIDERED

APPROPRIATE: a.Identifiable,and capable of consistent evaluation or
measurement against the identified criteria,and
b.such that the information about it can be subjected to procedures for
gathering sufficient appropriate evidence to support a reasonable assurance
or limited assurance conclusion,as appropriate.
 C.CRITERIA
The benchmarks used to evaluate or measure the subject matter include,where
relevant, benchmarks for presentation and disclosure.
Criteria may be classified as follows:
a.Formal
• PFRS- preparation of the financial statement
• established internal control framework or internal control objectives
specifically designed for the engagement - reporting on internal controls
b. Less formal
• internally developed code of conduct( e.g entity’s by -laws)
• aggreed level of performance ( e.g. the number of times a particular
committee is expected to meet in a year)
c.Established
• those embodied in laws or regulations or issued by authorized and
recognized bodies of experts that follow a transparent due process
d. Specifically developed
• those designed for the engagement
• associated with less formal criteria
HARACTERISTICS OF SUITABLE CRITERIA:
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.
UNDESTANDABILIT
Y
contribute to clear,comprehensive conclusions,and not subject to
significantly different interpretations.
NEUTRALITY
contribute to conclusions that are free from
bias.
COMPLETENESS
criteria are suffficiently complete when relevant factors that could affect
the conclusions in the context of the engagement circumstances are not
omitted.
RELEVANCE
relevant criteria contribute to conclusions that assist decision- making
by the intended users.
 D.SUFFICIENT APPROPRIATE
EVIDENCE
SUFFICIENCY is the measure of the quantity of evidence.The
quantity of evidence needed is affected by the
1.risk of the subject matter information being materially
misstated(the greater the risk,the more evidence is likely to
be required),and
2.Quality of such evidence(the higher the quality,the less may
be required).

APPROPRIATENESS (previously called competence) is the

measure of the quality of 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 the assessing whether the subject matter information is
free of misstatement.
ASSURANCE ENGAGEMENT RISK
is the risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is
materiallymisstated.
COST BENEFIT CONSIDERATION
the practitioner is expected to observed cost-benefit
consideration.This means that “the benefits that will be
derived from obtaining the evidence should exceed the cost of
obtaining it.”
PROFESSIONAL SKEPTICISM
this 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.
 E. WRITTEN ASSURANCE REPORT
The practitioner provides a written report containing a conclusion or
an opinion that conveys the assurance obtained about the subject
matter information.The opinion to be expressed by the practitioner
may include either of the following:

TYPE COMMON PHRASE

USEDall material
Present fairly,in
1.Unmodified/
respects
unqualifiied
2.Qualifie Except for
d Do not present
3.Adverse
fairly,in all material
4.Disclaimer of opinion We dorespect
not express a
conclusion
 ASSURANCE
ENGAGEMENTS
AS TO STRUCTURE:
STRUCTURE
THE FOLLOWING ARE THE ASSURANCE ENGAGEMENTS ACCORDING TO THE

A. ATTESTATION ENGAGEMENTS 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. And it is also known as assertion based
engagements.
ASSERTION BASED- ENGAGEMENTS are assurance engagements that which
the evaluation or measurement of the subject matter is performed by the
responsible party,and the subject matter information is in the form of an assertion
by the responsible party that is made available to the intended users.
 B. DIRECT
ENGAGEMENTS
DIRECT ENGGAGEMENT is a
residual definition of assurance
engagement as to structure,the
responsible party does not present
the subject matter
information.Instead,the practitioners
reports directly on the subject
matter and provides the intended
users with an assurance report
containing the subject matter
information.
questio
ns
1. Which of the following statements is true?

a. The degree or level of assurance that may be provided by the practitioner is

inversely related to the scope of procedures performed and their results.
b. Assurance engagements do not require independence
c. The term “auditor” is broader in scope compared to the term “practitioner.”
d. Assurance engagements performed by professional accountants are intended to
enhance the credibility of information.
2 Which of the following is not an element of assurance engagements?
a. Subject matter
b. Evidence
c. Engagement process
d. Suitable criteria

3. In some assurance engagements, the evaluation or measurement of the subject

matter is performed by the responsible party, and the subject matter information is
in the form of an assertion by the responsible party that is made available to
intended users. These engagements are called
a. Recurring engagements
b. non-assurance engagements
c. Direct reporting engagements
d. Assertion-based engagements
 OBJECTIVES
The non-assurance services 01

The global organizations and standard- 02

setting boards of the accountancy
profession
The professional standards governing 03
assurance and non-assurance
engagements
06
 NON ASSURANCE ENGAGEMENTS
Non-assurance engagements lack one or more of the elements of
assurance engagements.
Common examples includes:

• Auditor is engaged to carry out those procedures of an

AGREED UPON
audit nature to w/c the auditor, the entity and any
PROCEDURES
appropriate third parties have agreed and to report the
findings

• use accounting expertise as opposed to auditing expertise

Compilation of
to collect, classify and summarize financial information
financial and other • ordinarily entails detailed data to a manageable and
information understandable form
• accountant will not express any assurance on the financial
information

Some tax services where no • Practitioner provides advice on income tax and business
conclusion is expressed and tax strategies
consulting • Develop tax strategies to minimize businesses' tax liability and
worries

Management consulting and • Practitioner provides advice or recommendations for the

other advisory services improvement of client's use of its capabilities and resources to
achieve the objective the client's organization.
DIFFERENCES BETWEEN ASSURANCE AND NON
ASSURANCE ENGAGEMENTS
 GLOBAL ORGANIZATIONS AND STANDARD-SETTING
BOARDS OF THE ACCOUNTANCY PROFESSION
The International Federation of Accountants (IFAC) was founded on 7 October 1977, in Munich,
Germany, at the 11th World Congress of Accountants. IFAC comprises 179 member and
associate member organisations in 130 countries, representing more than 3 million
accountants in public practice, education, government service, industry, and commerce.

International Public Sector

• Sets International Public Sector Accounting
Accounting Standards Board
Standards (IPSAS) for use by the public sector
(IPSASB)

International Auditing and A

ssurance Standards Board • Sets International Standards on Auditing, Assurance
(IAASB) Engagements and Related Services

International Accounting Ed
ucation Standards Board • Develops International Education Standards
(IAESB)

International Ethics Standa

• Develops the international Code of Ethics for
rds Board for Accountants
Professional Accountants
(IESBA)
 STANDARDS GOVERNING PROFESSIONAL SERVICES BY
IN THE PHILIPPINES

Below table lists the different professional standards containing basic principles and essential
procedures which are used by the CPAs as guidelines in rendering professional services. All
these standards are issued by the the Auditing and Assurance Standards Council (AASC;
formerly known Auditing Standards and Practices Council - ASPC).
 STANDARDS GOVERNING PROFESSIONAL SERVICES BY
IN THE PHILIPPINES

IMPORTANT NOTES:

a. PSAs, PSREs, PSAEs and PSRSs are known as engagement

standards.

b. These standards require professional accountants to exercise

professional judgment in applying them.

c. Practice Statements are issued to provide interpretive guidance

and practical assistance to professional accountants in implementing
the related engagement standards and to promote good practice.

d. A professional accountant shall be aware of and consider the

applicable practice statements to the engagements
CHAPTER 2

INTRODUCTION
TO AUDIT
SERVICES AND
FINANCIAL
STATEMENTS
AUDIT
 OBJECTIVES
THE CONCEPT AND IMPORTANCE OF 01
AUDIT SERVICES

THE DIFFERENT TYPES OF AUDIT

02
• AS TO THE NATURE OF ASSERTIONS

• AS TO TYPES OF AUDITORS

THE FINANCIAL AUDIT 03

a. The definition and key concepts
b. The objective of FS audit
06
c. The general principles of an FS audit
d. The theoretical framework of FS audit
e. The elements of FS audit
f. The assurance provided by FS audit
g. The demand for FS audit
h. The value of FS audit
 AUDITING

Definition
As defined by the American Accounting Association, an audit is
a systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between these
assertions and established criteria and communicating the
results thereof.
 The following are key concepts obtained from
the definition
a. A systematic process
of an audit:

b. It involves objectively obtaining and

evaluating evidence about assertions.

c. It ascertains the degree of correspondence

between assertions and established criteria

d. It includes communication of the results to

interested users
 Types of audit
In compliance with the syllabus in Auditing of the Philippine CPA Licensure
Examination,
the following are the types of audit.

1. Nature of a. Financial statement (FS)

assertion or data audit
b. Operational audit
c. Compliance audit

Financial statement (FS) audit

• gathering of evidence on the assertions embodied in the financial

statements of an entity to determine whether the financial statements are
fairly presented in accordance with GAAP principles or another
comprehensive and authoritative financial reporting framework

• the results of this type of audit is for the use of external users
 Types of audit
In compliance with the syllabus in Auditing of the Philippine CPA Licensure
Examination,
the following are the types of audit.
a. Financial statement (FS) audit
1. Nature of b. Operational audit
assertion or data c. Compliance audit

b. Operational audit

• Operational audit a type of audit involving a systematic review of the

organization's activities in relation to specified objectives for the purpose of
assessing the performance, identifying opportunities for improvement, and
developing recommendations for improvement or further actions

• also known as management audit or performance audit

 Types of audit
In compliance with the syllabus in Auditing of the Philippine CPA Licensure
Examination,
the following are the types of audit.
a. Financial statement (FS) audit
1. Nature of b. Operational audit
c. Compliance audit
assertion or data

c. Compliance audit

Compliance audit is type of audit involving the review of organizations

procedures to determine whether the organization has adhered to specific
procedures and rules set down by some higher authority
Types of audit
 Types of
a.External audit

auditors
• audit engagement performed by independent or external CPAs on a
contractual basis (rendered by CPAs engaged in public practice)
• auditor must not be a member of the entity being audited
• can provide financial statements, operational and compliance audits to
private entities

b.Internal audit
• an independent appraisal function established with an organization to examine and
evaluate its activities as a service to organizations
• assist all members of the organization in the effective discharge of their
responsibilities
c.Government audit
• to determine whether government funds are being handled properly
and in compliance with existing laws and

• whether programs are being conducted efficiently and effectively can provide financial
statements, operational and compliance audits to public entities including government
owned and controlled corporations (GOCCs)
questio
ns
4. Assurance engagement include the following, except

a. An engagement conducted to provide a high level of assurance that the

subject matter conforms in all material respects with identified suitable criteria.
b. An engagement conducted to provide a moderate level of assurance that the
subject matter is plausible
in the circumstances.
c. An engagement in accordance with the Philippine Standard on Assurance
Engagement(s).
d. An engagement to perform agreed-upon procedures.

5. The Philippine Standards on Review Engagements (PSREs) are to be applied in

a. The audit of historical financial information.

b. Assurance engagements dealing with subject matters other than historical
financial information.
c. The review of both historical and prospective financial information.
d. The review of historical financial information.
6. Which of the following standards are to be applied, as appropriate, in the
audit of historical financial information?
a. PSAEs
b. PSREs
c. PSAs
d. PSRSs

7.Which of the following types of audit uses as its criteria laws and regulations?

a. Operational audit
b. Compliance audit
c. FS audit
d. Internal audit
 FINANCIAL
STATEMENT
S AUDIT
Financial statements audit remains to be the
most common type of audit rendered by CPAs.
It involves the examination of the financial
statements of a particular entity to determine
whether or not they are presented in
accordance with a specified criterion. Financial
statements need to be prepared in accordance
with one, or a combination of:
 a. Accounting standards generally accepted
in the Philippines (Philippine Financial
Reporting Standards - PFRSs);

b. Internationally accepted accounting standards

(International Financial Reporting Standards -
IFRSs); and

C. Another authoritative and comprehensive financial

reporting framework which has been designed for use in
financial reporting and is identified in the financial
statements.
 OBJECTIVES OF FINANCIAL
STATEMENTS AUDIT
PSA 200 (Revised and Redrafted)
states that "in conducting an audit of
financial statements, the overall
objectives of the auditor are:

a. To obtain reasonable assurance about whether the financial

statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are
prepared, in all framework; and

b. To report on the financial statements, and

communicate as required by the PSAs, in
accordance with the auditor’s findings
From these statements, the following key
phrases were emphasized:

Expression of an Financial statements

opinion are taken as whole.

Reasonable In all material

assurance respects

Presence of Communication of the

criteria results
 GENERAL PRINCIPLES
OF A FINANCIAL
Whenever financial statements audits are conducted,
STATEMENTS AUDIT
the following principles must be observed by the
auditor:
Comply with the Code of Ethics for
Professional Accountants (see Chapter 17)

Conduct an audit in accordance with

Philippine Standards on Auditing (PSA)

Maintain an attitude of professional

skepticism

Exercise professional
judgment
Obtain sufficient and appropriate
evidence
 THEORETICAL FRAMEWORK OF A
FINANCIAL STATEMENTS AUDIT
Efforts had been made to formally create a conceptual
structure for auditing financial statements. To have a
favorable result, the conceptual structure includes conditions
that should exist whenever a financial statement audit is
conducted. The following are some of the assumptions,
postulates, or concepts included in this conceptual structure

Effective
All financial No long-term Internal
data are The auditor Conflict Audit control
Verifiable should always between the
through the Benefit system
maintain auditor and the reduces
existence Independen client's s the the
supporting ce management Public possibility
documents should exist of errors
and records and fraud
Review of elements of FS audit
An audit service is just a composition of a much wider assurance services. The
elements of the latter, as discussed in Chapter I, apply to that of the former.

To recall, the following are the elements of an assurance service and how it is
applied in an audit of financial statements.
 Review of elements of FS
audit
A. A three-party relationship

1.Auditor (represents the

practitioner)
✓ formation and expression of an opinion on the financial statements
✓ compliance with ethical requirements (e.g. independence and competence)
✓ determining the scope of audit in accordance with PSAs and other applicable
regulations of professional bodies

2. Management and those charged with governance (represents the

responsible party)
✓ preparation and presentation of the financial statements in accordance
with the
applicable financial reporting framework
✓ prevention and detection of fraud and error
✓ adoption of implementation adequate accounting and internal control
systems
3.Users of FS (represent the intended
users)
✓ use the audit report which contains the opinion expressed by the
auditor
 Review of elements of FS
audit
A. A three-party relationship

B. An appropriate subject matter

• For the financial statements to be appropriate subject matter of an audit engagement,

adequate supporting records and documents should be available.

C. Suitable criteria

• Criteria used in audit of financial statements generally include the PFRS, GAAP
and other applicable financial reporting criteria.

D. Sufficient appropriate evidence

• Concepts discussed in assurance engagements apply to audit engagements. Terms are

revised to specifically relate to audit engagements (e.g. assurance engagement risk is
changed to audit risk)
 Review of elements of FS
audit
E. A written assurance report or conclusion.

• The auditor provides a written report called “audit report” which contains the conclusion
or opinion conveying the assurance obtained about the financial statements. In addition, the
auditor considers other reporting responsibilities, including communicating with those
charged with governance.

The opinion to be expressed by the auditor depending on the evidence obtained may include either
of the following:
To warrant the issuance of an unmodified opinion, the auditor
determines whether there is

A. a limitation on the scope of the auditor’s work

(Qualified or Disclaimer of Opinion); or

B. a disagreement with management regarding the

acceptability of the accounting policies selected, the
method of their application or the adequacy of financial
statement disclosures. (Qualified or Adverse Opinion)
Assurance provided by the auditor

The auditor’s opinion is intended to enhance the credibility of

financial statements by providing a high, but not absolute, level
of assurance.
Reasonable assurance and the inherent limitations of
an audit:
Use of selective Work undertaken by the
auditor to form opinion is
testing permeated by judgment

Inherent limitations Nature/characteristics

of internal control of assertions

Fact that most of audit

evidence is persuasive
rather than conclusive
 THE DEMAND FOR FS
AUDIT
A. Management of the following:
1. Business
• to appropriately manage business risk, which is any event or activity that will
risk
prevent the entity in meeting its business objectives such as wealth and
profit maximization.
2. Information
risk risk the risk that the information prepared and presented by the
• Information
entity contains misstatement

Factors contributing to information risk

➢ Voluminous data
➢ Complexity of transactions
➢ Remoteness of information
➢ Conflicts of interest between the provider and users of
information
Ways of reducing information risk
➢ Verify the information
➢ Have the financial statements be audited
➢ Share information risk with the management
 THE DEMAND FOR FS
AUDIT
B. Additional conditions creating the need for FS
Audit

• Conflict of interest between the responsible party and the intended users of the
financial statements

• Expertise. Complexity of accounting and auditing requires expertise

• Remoteness of users. Users of information frequently are prevented from directly

assessing the quality of information

• Financial consequence. Misleading financial information could have substantial

economic consequences for a decision maker.
 REGULATORS'
Examples are the following:
REQUIREMENTS
I. General Financial Reporting Requirements (as stated in the Revised Securities
Regulation Code [SRC] Rule 68)
The following shall submit financial statements audited by an independent
Certified Public Accountant to the Securities and Exchange Commission:

Note: Corporations that do not meet the threshold above may submit
their Annual Financial Statements accompanied by a duly notarized
Treasurer's Certification only (rather than an Auditor's Report).
 REGULATORS'
REQUIREMENTS
Examples are the following:
2. Tax Compliance Requirements
The National Internal Revenue Code, as amended, states the requirement for
audited books of accounts under Section 232 (A) as follows:

For entities that meet the above threshold, they are required to
• Have their books of accounts audited and examined yearly by independent Certified
Public Accountants, and

• Their income tax returns accompanied with a duly accomplished Account Information
Form (AIF) which shall contain, among others, information lifted from certified balance
sheets, profit and loss statements, schedules listing income producing properties and
the corresponding income therefrom and other relevant statements.
 VALUE OF FS AUDIT
Based from the discussions of the demand for FS audit, the
following may be construed as the value of his assurance
engagements:
Audit reduces information risk that may lead
to lower cost of capital.

• Audit may be used to deter inefficiency

and fraud.

Audit may be used to enhance systems of

internal controls
questio
ns
 8. What level of assurance is provided by the auditor in an audit
engagement?
a. Positive level of assurance
b. High, but not absolute, level of assurance
c. Moderate assurance
d. High level of assurance
9.The main way(s) to reduce information risk include the following, except

a. To have the user verify the information

b. To have the financial statements audited
c. To have the management prepare the financial statements
d. To have the user share the information risk with management

10. Which of the following statements does not describe a condition that create
a
demand for auditing?
a. Conflict between an information preparer and a user can result in biased
information.
b. Information can have substantial economic consequences for a decision maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.
Thank
YOu