AT Notes

ASSURANCE ENGAGEMENTS & OTHER SERVICES OF A PRACTITIONER

Services of A Practitioner
Assurance Engagements Non-Assurance Engagements
1. Audit of Financial Statements 1. Agreed-Upon Procedures
2. Review of Financial Information 2. Compilation Services
3. Other Assurance Services 3. Management Consulting
4. Other Tax Services

Demand for Assurance Services

1. Bias of responsible party
2. Remoteness of users
3. Complexity of subject matter
4. Risk management – information risk reduction
5. Cost of capital reduction
Definition of 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 a subject matter against criteria
Elements of an Assurance Engagement
1. Three Party Relationship
 Practitioner, Responsible Party, and Intended Users
 Responsible party and intended users may be from different entities or the same entity
 The relationship between the responsible party and intended users NEEDS TO BE VIEWED WITHIN THE CONTEXT OF
SPECIFIC ENGAGEMENT
PRACTITIONER

- Broader than auditor

- May be engaged on wide range of subject matters
- Ethical Consideration: Should not accept engagements if professional competence is not satisfied
- Use of EXPERTS

RESPONSIBLE PARTY

- Responsible for the subject matter or subject matter information

- May or may not be the engaging party
- Ordinarily provides the CPA a written representation

INTENDED USERS

- Person or class of persons for whom CPA prepares the assurance report
- Responsible party can be the one of the intended users, BUT NOT THE ONLY ONE
- CPA considers restricting the assurance report if reporting for specified users

2. Appropriate Subject Matter

 Capable of being measured or evaluated, AND
 Evidence is available
SUBJECT MATTER – subject of evaluation or measurement from which the users wish to obtain information (ex. class
performance)

 Qualitative or quantitative
 Subjective or objective
 Historical or prospective
SUBJECT MATTER INFORMATION – the outcome of evaluation/measurement of subject matter against criteria (ex. class
record)

FORM SUBJECT MATTER SUBJECT MATTER INFORMATION

Financial performance or condition Historical or prospective financial Financial statements
information
 Non-Financial performance or condition Performance of sales personnel Sales report showing volume of sales
attained
Physical Characteristics Capacity of facility Specifications
Systems and processes Internal control/IT system Report on effectiveness
Behavior Corporate governance, compliance with Statement of Compliance/Effectiveness
regulation, HR practices

3. Suitable Criteria
CRITERIA are benchmarks used to evaluate or measure the subject matter

ASSURANCE ENGAGEMENTS APPLICABLE CRITERIA

Audit of FS PRFS / PFRS for SME / US GAAP
IT Audit COBIT / Control Objectives
Compliance Audit Laws and regulations
Capacity of Bridge Tonnage

CHARACTERISTICS OF A SUITABLE CRITERIA

 Relevant
 Understandable
 Neutral
 Complete
 Reliable
BASIS OR FORM OF CRITERIA

 Established criteria (FORMAL)

 Specifically developed (LESS FORMAL ex. KPI/Key Performance Indicators)
APPLICABLE CRITERIA should be clearly communicated to Intended Users

 Publicly
 Included in subject matter information
 Included in assurance report (ex. Includes criteria for intended user)
 By general understanding
4. Sufficient Appropriate Evidence
 Basis of CPAs conclusion
 Application of professional skepticism
 The practitioner considers materiality, assurance of engagement risk, and quantity and quality of evidence
MATERIALITY

- Helps CPA determine nature, timing, and extent of procedures

- Material Information – Misstatements, including omissions, are considered to be material if there is a substantial likelihood
that, individually or in the aggregate, they would influence the judgement made by a reasonable user based on the financial
statements
- Materiality is relative: depends on size and nature (no fix rule for size; nature will depend in consequence of misstatement)
- Professional Judgement

- Effect on evidence Materiality Gathering of evidence

ASSURANCE ENGAGEMENT RISK (Inherent Risk * Control Risk * Detection Risk)

- Inappropriate conclusion OF PRACTITIONER + subject matter information is materially misstated

- Effect on evidence
If assurance engagement risk is LOW then auditor is STRICT so EXTENSIVE evidence gathering
If assurance engagement risk is HIGH then auditor is CHILL so LESS extensive evidence gathering
QUANTITY AND QUALITY OF EVIDENCE

- Quantity – Sufficiency
QUANTITY OF EVIDENCE
- Affected by risk of the SMI (higher risk = more evidence required)
- Affected by quality (higher quality = less may be required)
- Merely obtaining more evidence may not compensate for its poor quality
 - Quality – Appropriateness/Competence of Evidence

QUALITY OF EVIDENCE
- Affected by relevance and reliability
- Relevance – ability of the evidence to address the objective of the
procedure
- Interrelated
- Effect on evidence ……….

GENERALIZATIONS ABOUT RELIABILITY

 More reliable if obtained from independent sources

 Internally generated evidence is more reliable when related controls are effective
 More reliable if obtained directly by the CPA than by inference
 More reliable if exists in documentary form than oral evidence
 More reliable if original documents
5. Written Assurance Report
 Communicate to users the conclusion reached by practitioners
 SHOULD be in writing
 Levels of Assurance
- Reasonable Assurance
 Limited Assurance (higher assurance engagement risk)

TYPES OF CONCLUSION
UNQUALIFIED CONCLUSION MODIFIED CONCLUSION
The CPA believes that the subject information, in all material The CPA either believes that:
aspects, conforms with the criteria  The subject matter/information is materially
misstated; or
 The CPA was not able to obtain sufficient
appropriate evidence

Classification of Assurance Engagement

ACCORDING TO LEVEL OF ASSURACE
REASONABLE ASSURANCE ENGAGEMENT LIMITED ASSURANCE ENGAGEMENT
HIGH BUT NOT ABSOLUTE level of assurance LIMITED level of assurance
SAAE – understanding, risk assessment, risk response, further SAAE – procedures are limited compared to reasonable
procedures assurance engagement
Level of engagement risk – LOW Level of engagement risk – greater than for a reasonable
assurance engagement
Basis of positive form of opinion (STRAIGHT TO THE POINT) Basis of negative form of opinion

LEVEL OF ASSURANCE AND ENGAGEMENT RISK

LEVEL OF ASSURANCE ENGAGEMENT RISK
Absolute 0%
High level of assurance Less than high
Moderate level of assurance High
No assurance 100%

ACCORDING TO STRUCTURE
ASSERTION BASED ASSURANCE ENGAGEMENT (ATTESTATION) DIRECT REPORTING ASSURANCE ENGAGEMENT
- Ex. Audit of FS
- Representation by responsible party that is made available to - No representation from responsible party
intended users - Representation by responsible party NOT made
available to intended users
- Evaluation/measurement performed by RESPONSIBLE PARTY - Evaluation/measurement performed by the
PRACTITIONER
- Responsible party is responsible for subject matter information and - Responsible party responsible for subject matter
may be responsible to subject matter ONLY

ATTESTATION ENGAGEMENTS

 Independent audit of financial statements

- Provides high but not absolute level of assurance that the financial statements are free from material misstatements
 Review engagement
 - Narrower scope than audit
- Provides limited assurance

OTHER ASSSURANCE SERVICES

 Business Performance Measurement

 Healthcare Performance Measurement
 Elder Care Plus
 Risk Assessment Services
 CPA Webtrust/Systrust
 Information Systems Reliability
LIMITATIONS OF ASSURANCE ENGAGEMENTS

 Selective testing
 Judgement
 Inherent limitations of internal control
 Persuasive evidence rather than conclusive
 Characteristics of subject matter
NON-ASSURANCE SERVICES

 Agree-Upon Procedures – carrying out those procedures of an audit nature to which the practitioner and the entity and any
appropriate third parties have agreed and to report on factual findings
 Compilation Engagement – engaged to use accounting expertise as opposed to auditing expertise to collect, classify, and
summarize financial information
 Some Tax services
 Management consulting
 INTRODUCTION TO AUDIT & AUDIT STANDARD – SETTING PROCESS
Auditing 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 to
intended users.
ACCOUNTING AUDITING
Provide accounting information about economic entities that is Accumulating evidence to determine if the recorded accounting
useful in making economic decisions information properly reflects the economic events that occurred
during the period
ASSURANCE AUDITING
- Broader than auditing - Narrower than assurance
- Assurance encompass assertion-based engagements and - Auditing is under the umbrella of assurance services
assertion-based engagements encompass audits rendered by CPAs

TYPES OF AUDITS
AS TO OBJECTIVES
1. FINANCIAL STATEMENT AUDITS – expression of an opinion on the financial statements of an entity after the CPA is satisfied as
to the fairness of such financial statements, in all material respects, in accordance with applicable financial reporting framework
Ex. – statutory audit of an entity’s annual financial statements
Objective – determine the fairness of the financial statements
Criteria – applicable financial reporting framework (PFRS; Established Criteria)
2. OPERATIONS AUDIT – involves systematic review of an organization’s activity in relation to specified objectives for the purpose of
assessing performance
Focus – Efficiency and effectiveness of operations
Efficiency – Management Audit
Effectiveness – Program Results Audit
Ex. – audit of a company’s IT system
Objective – evaluate effectiveness and efficiency of IT system
Criteria – management’s standards on effectiveness and efficiency (Specifically developed criteria)
3. COMPLIANCE AUDIT – involves determination of whether a person or entity has adhered to laws, regulations, or contracts
Ex. – BIR Audit of company’s tax returns
Objective – determine company’s compliance with existing tax rules and regulations
Criteria – tax laws / regulations
AS TO AUDITORS
1. EXTERNAL AUDITORS – performed by auditors who are independent of the organizations whose assertions (representations) are
being audited. Auditors involved are called independent or external auditors. Ex. Independent Audits of Financial Statements
2. INTERNAL AUDITORS – an objective and independent assurance and consulting activity designed to ADD VALUE to the
organization.
Goes beyond the financial aspect of an entity and include areas in:

- Governance process
- Risk Management
- Control

Cannot reach the same level of independence of external auditors

Independence can be maximized if internal auditors report to senior personnel NOT DIRECTLY INVOLVED IN MANAGING THE
ORGANIZATION. Ex. Audit Committee of the Board of Directors (BOD)
3. GOVERNMENT AUDITOR – involves determination of whether government funds are being handled properly and in compliance
with existing laws; and
Whether the government programs of a particular agency are being conducted efficiently and economically
Commission on Audit – recognized as Supreme Audit Institution in the Philippines
 Authority of COA is embodied in the Constitution
 Composed of 1 Chairman and 2 Commissioners collectively called the Commission Proper
 Members must be CPAs or Lawyers provided at any time the members must not be from one profession only
 Appointed by the President of the Philippines with consent of Commission on Appointments for a term of 7 years
RELATIONSHIPS AMONG TYPES OF AUDITS

AUDITS OF HISTORICAL FINANCIAL STATEMENTS

 OBJECTIVE: To express an opinion as to the fairness of the financial statements
 SCOPE
- The auditor determines the scope of the audit in accordance with the requirements of the legislation, regulations and relevant
professional buddies
- An auditor uses his professional judgement to determine the audit procedures to be performed in accordance with PSA

INTEGRATED AUDIT
An auditor can give to opinions to companies under Sarbanes-Oxley Act; 1 Financial Statements 2 Internal Control
INFORMATION RISK – risk that the information is misstated or misleading, owing to:

 Remoteness of users from providers of information

 Inherent bias of information providers
 Voluminous and complex transaction data
REDUCING INFORMATION RISK
1. Allow users to verify information
2. Users shares information risk with management
3. Have the financial statements audited – COST EFFECTIVE/PRACTICAL
FINANCIAL STATEMENT ASSERTIONS representations (stories/claims) made by management, whether express or implied, that are
contained in the financial statements
CLASSES OF TRANSACTIONS ACCOUNT BALANCES PRESENTATION AND DISCLOSURES
 Occurrence – recorded business  Existence – all account balances  Occurrence and Rights & Obligations
transactions actually took place exist for assets, liabilities, and equity  Completeness
 Completeness – all business events  Rights and obligation – the entity has  Classification and Understandability
to which the company was subjected the rights to the assets it owns and is (of Notes)
were recorded obligated under its reported liabilities  Accuracy and Valuation
 Accuracy – full amounts of all  Completeness – all reported assets,
transactions were recorded, without liability, and equity balances have
error been fully reported
 Classification – all transactions have  Valuation and allocation – all assets,
been recorded within the correct liability, and equity balances have
accounts in the general ledger been recorded at their proper
 Cutoff – all transactions were valuations
recorded within the correct
accounting period (FOB)
STANDARD-SETTING PROCESS (International Auditing and Assurance Standards Board; IAASB)
IAASB DUE PROCESS

*Exposure period is NO SHORTER THAN 90 DAYS

*Revision or proposed standard MUST meet the 2/3 of the IAASB Composition
Auditing and Assurance Standards Council (AASC) replaced Auditing Standards and Practices Council (ASPC)

 Philippine Standards on  Philippine Auditing

Auditing Practice Statement
 Philippine Standards on  Philippine Assurance
Assurance Engagement Practice Statement

 Philippine Standards on  Philippine Review

Review Engagement Practice Statement

 Philippine Standards on  Philippine Related

Related Services Services Practice
 Philippine Standards on Statement
Quality Control 
*RA9298 – compositions, terms of office of AASC
AASB DUE PROCESS (PHILIPPINE ADOPTATION)

*Exposure period is NO SHORTER THAN 90 DAYS

*Revision or proposed standard MUST meet the 10 out of 15 members of the AASB

RISK-BASED FINANCIAL STATEMENTS AUDIT, RESPONSIBILITIES & OBJECTIVES

PSA 200 (Revised and Redrafted), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
Philippine Standards on Auditing
THEORITICAL FRAMEWORK OF FINANCIAL STATEMENTS AUDIT
o Verifiable Data – when two or more qualified working independently can reach the same conclusion
o Independence
o No long-term conflict of interest between management and auditor
o Effective internal control
o Consistent compliance with GAAP = fair presentation
o Validity of prior information
o An Audit benefits the public

RISK-BASED AUDIT PROCESS

Conclusion &
Risk Assessment Risk Response
Reporting

Financial
Statements Level Assertion Level
(Further Audit Procedures)
 Test of Controls Substantive Test

Distinguishing features of risk-based audit

COMPLETE SET OF FINANCIAL STATEMENTS

1. Statement of Financial Position
2. Statement of Profit or Loss and Other Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes, compromising a summary of significant accounting policies and other explanatory notes
RESPONSIBILITIES OF THE MANAGEMENT & THOSE CHARGED WITH GOVERNANCE

OVERALL OBJECTIVE OF THE INDEPENDENT AUDITOR

The objective of an audit of financial statements is to enable the auditor TO EXPRESS AN OPINION whether the financial statement
are prepared, IN ALL MATERIAL ASPECTS, in accordance with an applicable financial reporting framework
To achieve the objective of the audit, the auditor should be able:
o To obtain reasonable assurance about whether the financial statement as a whole are free from material misstatements,
whether due to fraud or error
o To report on financial statements

***If reasonable assurance cannot be obtained and qualified opinion is not enough, the disclaim an opinion OR withdraw from the
engagement if permissible
AUDITOR’S OPINION formal statement of the auditor concerning the client’s company financial statements
1. Unmodified Opinion – financial statements are fairly presented
2. Modified Opinion – material misstatement; unable to obtain sufficient appropriate
 Qualified Opinion – there is exception
 Adverse Opinion – materially misstated
 Disclaimer of an Opinion – never seen; no comment
MODIFIED OPINION

*If the inability to obtain sufficient appropriate evidence is due to scope limitation imposed by management, the auditor should try to
resign or withdraw from the engagement first, if such is not prohibited by law/regulation
BASIC CONCEPTS UNDERLYING AN AUDIT OF FINANCIAL STATEMENTS

ETHICAL REQUIREMENTS

CONDUCT OF AN AUDIT IN ACCORDANCE WITH PASs

o The auditor shall comply with ALL PSAs relevant to the audit
o A PSA is relevant to the audit when the PSA is in effect & circumstances addressed by such PSA exists
o In exceptional circumstances, the auditor may judge it necessary to depart from a requirement in PSA which does not meet the
objective of the audit and perform alternative procedures
o If compliance with PSA cannot be achieved, the auditor shall modify his opinion or withdraw from the engagement

PROFESSIONAL SKEPTICISM
– Recognize that circumstances may exist that cause the financial statements to be materially misstated
– The auditor neither assumes that the client is dishonest nor of unquestioned honesty
– Auditors may use their past experience to assess honesty and integrity of client management
– However, a belief that management is honest does NOT relieve the auditor the need to maintain professional skepticism
Professional Skepticism requires the auditor to be alert about:
– Evidence that contradicts other evidence obtained
– Info that brings into question the reliability of documents and responses to be used as evidence
– Conditions that may indicate possible fraud (fraud risks factors)
Maintaining Professional Skepticism reduces the risk of:
– Overlooking unusual circumstances
– Over-generalizing when drawing conclusions
– Using inappropriate assumptions in designing nature, timing, & extent of audit procedures and evaluating the results
PROFESSIONAL JUDGEMENT

o Hallmark of auditing
o Establishment of materiality and assessment of risks
o Nature, timing, and extent of procedures
o Sufficiency and appropriateness of evidence gathered
o Evaluation of management judgement and estimates
MATERIALITY
o Materiality is a relative concept
o Information is material if it affects the decisions of the users taken on the basis of the financial statements
Primary Users – investors, lenders and creditors
o The assessment of what is material is a matter of professional judgement of the auditor

AUDIT EVIDENCE – is all the information used by auditor in arriving at the conclusions on which audit opinion is based
o Includes (1) accounting records & (2) other information
o Auditors are not expected to address all information that may exist
o Cumulative in nature

MANAGEMENT ASSERTIONS
– Representations of management, explicit or implicit, about the recognition, measurement, presentation, clarification and disclosure
of various elements of financial statements & related disclosures
– Auditors assess the risks of material misstatement and design and perform tests of controls and substantive test based on these
assertions

AUDIT RISK
The likelihood or possibility that the auditor expresses:
1. An INAPPROPRIATE audit opinion
2. When the financial statements are materially misstated

Can be controlled
by the auditor

INHERENT RISK – the susceptibility of an assertion to a misstatement that could be material in the absence of the related internal
controls (publicly listed has higher inherent risk)
 Nature of the item
 Complex calculations
 Amounts derived from accounting estimates
 Business risk affecting inherent risk
CONTROL RISK – the likelihood that a misstatement that could occur in an assertion and that could be material and will NOT BE
PREVENTED, DETECTED, OR CORRECTED on a timely basis by the entity’s internal control
 Human errors
 Collusion/circumvention of controls
 Override of controls
DETECTION RISK Effectiveness of the audit procedure and application by the auditor
– The likelihood that the auditor will not detect a misstatement that exist in the financial statements
– While Inherent and Control Risks are function of client’s accounts and systems, Detection Risk is a function of the AUDITOR’S
PROCEDURES

Cannot be reduced to ZERO Controls

 Sampling Risk Increase the sample size
Adequate Planning
Proper assignment of personnel
Non–Sampling Risk
Professional Skepticism
Supervision and review

– Among the components of the audit risk, detection risk is the only component that the auditor can be control
– Thus, the auditor plans the nature, timing and extent of audit procedures to reduce the audit risk to an acceptably LOW level
AUDIT RISK MODEL

Risk Assessment = Evidence Gathering

Risk Assessment inverse Acceptable Level inverse Evidence Gathering
Risk Assessment = Evidence Gathering
LIMITITATIONS OF AN AUDIT
1) Nature of financial reporting because of estimates
2) Nature of audit procedures
3) The need for the audit to be conducted within a reasonable period of time and at a reasonable cost
An audit is also limited by tis scope and objective. The auditor DOES NOT EXPRESS an opinion on such matter such as:
o Future viability of the entity
o Effectiveness or efficiency of the management
o Compliance with all laws and regulations

NATURE AND TYPE OF AUDIT EVIDENCE

PSA 230 (Redrafted) Audit Documentation
PSA 500 (Redrafted) Audit Evidence
AUDIT EVIDENCE

Corroborative information
FINANCIAL STATEMENT ASSERTIONS, AUDIT OBJECTIVES, AUDIT PROCEDURES & EVIDENCE

TYPES OF AUDIT PROCEDURES

1. Risk Assessment Procedures – perform by the auditor to (1) understand the business of our client and (2) assess the risk of
material assessment
2. Further Audit Procedures – obtain sufficient appropriate audit evidence
3. Other Planned Audit Procedures –
TYPES OF AUDIT EVIDENCE

1. INQUIRY
6. INSPECTION

7. OBSERVATION

8. ANALYTICAL PROCEDURES

9. CONFIRMATION
10. RECALCULATION most reliable

Computer Assisted Audit Tools and Techniques

11. REPERFORMANCE

SUMMARY
DIRECTION OF TESTING

AUDIT DOCUMENTATION

OWNERSHIP OF WORKING PAPERS

TYPES OF AUDIT FILES

ESSENTIAL ELEMENTS OF A WORKING PAPER

1. Audit procedures performed
2. Audit evidence obtained
3. Conclusions reached
OTHER ELEMENTS
1. Heading
2. Dates & initials of staff & reviewers
3. Indexing numbers & cross-referencing
4. Tick marks & legends
5. Statement of conclusions
SAMPLE WORKING PAPER

ASSEMBLY AND RETENTION

PRELIMINARY ENGAGEMENT ACTIVITIES

PSQC1 (Redrafted) Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and
Related Services Engagements
PSA 210 (Redrafted) Agreeing the terms of Audit Engagements
PSA 220 (Redrafted) Quality Control for an Audit of Financial Statements
RISK-BASED AUDIT PROCESS

PRELIMINART ENGAGEMENT ACTIVITIES

1. Client acceptance & continuance procedures – establishing the integrity of prospective client, determining if compliance can be
achieved

OTHER SOURCES OF INFORMATION

COMMUNICATION WITH PREDECESSOR AUDITOR

 SUMMARY

EVALUATING CONTINUING CLIENTS

12. Basis of engagement

PRECONDITIONS OF AN AUDIT
a. Applicability of financial reporting freamework

b. Obtain the agreement of management

RESPONSIBILITIES OF THE MANAGEMENT AND AUDITOR
TERMS OF AUDIT ENGAGEMENT

ENGAGEMENT LETTER

ENGAGEMENT LETTER – PRINCIPAL CONTENTS

WHEN RELEVANT
AUDIT FEES

AUDIT OF COMPONENTS

WHETHER TO SEND SEPARATE ENGAGEMENT LETTERS CONSIDER:

SEND NEW ENGAGEMENT

CHANGING IN TERMS

ACCEPTING THE CHANGE

REJECTING THE CHANGE

SUMMARY