CHAPTER 1

Fundamental Principle of Assurance Services

Learning Objectives:
1. Understand the concept and objective of assurance services.
2. Identify the key elements and classifications of assurance engagements.
3. Differentiate assurance from non-assurance engagements.
4. Recognize the roles of global organizations in setting standards for assurance
practices
Introduction
Part of mankind’s daily lives is to make a decision whether big or small, from
choosing what to eat for breakfast to where to take your earnings from your first
job. Simply saying, decision-making has been vividly seen to be part of anyone’s
life, and these decisions were surely a factor that will be affecting their lives. In
application to business, decision-makers who are part of the organization typically
faces lots of decision-making process too.
To achieve a favorable outcome, these decision-makers rely on information provided
by a person or by an organization. However, oftentimes the interest of the data
provider diverges or opposes the interest of the party using the information creating
major conflict on reliability of information which then, results to a more extensive
evaluation.
In the point of view of business, reliable information is core aspect taking part on
the decision-making process. Gathering this type of information which are relevant
and appropriate helps the users in coming up to a economic decision.

USERS ECONOMIC DECISION

Potential and existing investors  To decide when to buy, hold or
dell an equity investment
 To assess the stewardship or
accountability of management
 For BOD, to determine
distributable profits and
dividends
Lenders and other creditors  To assess the security for
amounts lent to the entity
Employees  To assess the ability of the entity
to pay and provide other benefits
to its employees
Government  To determine taxation policies
 To prepare and use national
income statistics
 To regulate the activities of entity
The situations above need CPA that are equipped with knowledge and skills are
expected to provide reasonable assurance as to the fairness of preparation and
presentation of FS. Such assurance will be expressed in a form of opinion or
conclusion which is communicated in assurance report later on the audit process.

ASSURANCE

Refers to the practitioner’s satisfaction as to the reliability of an assertion being

made by one party for use by another party.

Simply stated, assurance means how sure the practitioner is that the presentation
made by a particular party is reliable

ASSURANCE ENGAGEMENT

Assurance engagement news and engagement in which a practitioner expresses a

conclusion designed to enhance the degree of confidence of the intended users
other the responsible party the outcome of this evaluation are measurements of a
subject matter against criteria

ELEMENT OF ASSURANCDE ENGAGEMENT

1. Three-party Relationship
Involves:
a. Practitioner
 Broader than the term auditor used by PSA and PSRE which relates
only to performing audit and review engagements concerning
historical and financial information

Professional accountant CPA engaged in any area of

accountancy
Practitioner CPA rendering professional services
(assurance and non-assurance)
Auditor A practitioner rendering audit and
review services.

 Must be independent both responsible party and the intended user

 Governed by ethical req regarding conduct of engagements
 May use the work of person from other professional disciplines,
refereed to experts for engagements requiring specialized skills and
knowledge beyond those processed by individual practitioner
 Responsible for determining nature, timing, or extent of procedures
req by engagement
 b. Responsible Party
 Is the person responsible for the subject matter or the subject
matter information(assertion) or both
 May or may not be engaging party to the practitioner
 May or may not be from the same organization as the intended user
 May be one of the intended users, but should not be only one

c. Intended user
 Are the person whom the practitioner prepares the assurance report
(shall be addressed to al assurance whenever practical)
 Broad range of interest; may be limited to major stockholders and
significant and common interest
 May be identified by agreement between the practitioner and
responsible party or engaging party or y law.
 Once Identified and issued; issued must be restricted only to parties
identified

2. Appropriate Subject Matter

 Is the nature of ascension the practitioner gathers sufficient evidence
 Subject matter information (outcome of eval or measurement of subj
matter against criteria)- gathers sufficient appropriate evidence to
provide reasonable basis for conclusion in assurance report

Underlying subject criteria subject matter

matter information
(outcome)
entity's financial applicable financial financial statements
position, financial reporting framework
performance, in the (e.g. PFRS)
cash flow
effectiveness of an relevant internal statement about the
Entity’s internal control framework effectiveness of
control process (e.g. COSO internal control
framework)
Various aspects of relevant Entity-specific
performance measurement performance
methodologies measures
Entity’s greenhouse Recognition, Greenhouse gas
emission measurement, and statement
presentation
protocols.
compliance by an law and regulations statement about
Entity compliance
3. Suitable Criteria
 Benchmark used to evaluate or measure the subject matter include,
relevant, benchmark for presentation and disclosure.
 Characteristics (RUN CR):
a. Reliability- allows reasonably consistent evaluation for
measurement of the subject matter including, where relevant,
presentation and disclosure when used in similar circumstances by
similarly qualified practitioners.
b. Understandability-contributes to clear, comprehensive
conclusions, and not subject to significantly different
interpretations.
c. Neutrality- contribute to the conclusion that are free from violence
d. Completeness-criteria are sufficiently complete when relevant
factors that could affect the conclusion in the context of the
engagement Circumstances are not omitted. Complete criteria
include, where relevant, benchmark for presentation and disclosure.
e. Relevance- relevant criteria Contribute to conclusion that assist
decision making by the intended users
 Classification:
a. Formal
 PFRS- prep of the FS
 Established internal control framework (COSO) or internal
control obj specifically design for the management reporting
on internal controls
 Applicable law, regulations, or contracts – reporting
compliance
b. Less Formal
 Internally developed code of conduct (by-laws)
 Agreed level of performance
c. Established
 Embodied in laws or regulations or issued authority or
recognize bodies of experts that follows a transparent due
process
 Associated with formal criteria
 Can be made available to the intended users in one or more 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
by in hours and minutes

4. Sufficient Appropriate Evidence(SAE)

  All information gathered by the practitioner in evaluating the subject
matter against the criteria, on which conclusion is based
 Engagement with an attitude of professional skepticism obtains SAE
about whether information is free from material misstatement
 Without the evidence, objective of assurance engagement not attained

Consideration in Planning and Performing the Engagement

A. Quantity of evidence (sufficiency)
B. Quality of evidence (appropriateness)

Sufficiency Appropriateness
Measure of quantity of evidence Measure of quality of evidence
Affected by quality(higher Relevance and reliability
quality=lesser evidence required)
and risk(greater risk=more
evidence required)
Identified by practitioner’s professional judgement by exercising
professional skepticism

C. Materiality
 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. It involves
understanding and assessing the factors that might influence
decisions, allowing practitioners to focus on information that is most
relevant to stakeholders and decision-making processes.
D. Assurance engagement risk
 As defined by Escalla, 2022 assurance engagement risk is the risk that
the practitioner expresses an inappropriate conclusion when the subj
matter info is materially misstated
 scanned photo from Auditing Assurance Principles , Escala 2022
E. Cost-benefit consideration
 “benefits that will be derived from obtaining the evidence should
exceed the cost of obtaining it”
 Practitioner must consider the relationship of cost of obtaining and
usefulness of the information obtained.
 In case of high level difficulty and high cost:
(1)Identify and perform alternative procedures that can minimize the
associated cost of level difficulty.
(2)In the absence of alternative procedures, the practitioner is still
required to perform the procedures as long as he/she believes that
performance of it is necessary and beneficial to the entire engagement

F. Professional judgement
 The practitioner recognizing that there may be situations that result in
the subject matter information being materially misstated, plans and
execute interaction with a professional skeptical attitude.
 The practitioner makes a critical assessment with a question in
mind of validity of evidence obtained; questions reliability of
document or representations by the responsible party.
 Generalization about reliability of evidence may be useful:
a. External vs Internal Source
 more reliable when obtained from independent source outside
entity
b. Effective Internal Control
Evidence that is generated internally is more reliable when the
related controls are effective
c. Directly vs Indirectly obtained by the practitioner
Directly( observations, application) are more reliable than
Indirectly( inquiry)
d. Written vs Oral Representation
Documentary are more reliable (e.g.written record of meeting)
e. Original vs Reproduced Copies
Original are more reliable than facsimiles/photocopies

5. Written report (Conclusion)

A written report is prepared to convey the assurance, containing the practitioner's conclusion
or opinion. The practitioner also considers other reporting obligations, such as communicating
with individuals in charge of governance.

The written report may include the following:

scanned photo from Auditing Assurance Principles , Escala 2022

Classification of Assurance Engagements

According to Level of Assurance
1. Reasonable Assurance Engagement
The objective this engagement is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for a
positive form of expression of the practitioner's conclusion. An example of this type
of engagement would be an audit of historical financial statements.

2. Limited Assurance Engagement

The objective of this engagement is a reduction in assurance engagement risk to a
level that is acceptable in the circumstances of the engagement, but where that risk
is greater than for a reasonable assurance engagement, as the basis for a negative
form of expression of the practitioner's conclusion. An example of this type of
engagement would be a review of financial statements.

According to Structure
1. Attestation Engagement
Also known as assertion-based engagements, this engagement involves a measurer
or evaluator, who is not the practitioner, examines the underlying subject matter
against the criteria. The role of the practitioner in an attestation engagement is to
obtain sufficient appropriate evidence in order to express a conclusion about the
reliability of a written assertion that is the responsibility of another party. In an
attestation, both the subject matter information including the responsible party’s
assertion and the practitioner’s assurance report are made available together to the
intended users.
Types of Attestation Engagements
a. Audit Engagement – auditor provides a reasonable level of assurance about
the reliability of written assertion.
b. Review Engagement – auditor provides a moderate level of assurance
about the reliability of information from the written assertion.
2. Direct Engagement
Also known as direct reporting engagement, unlike in attestation engagement,
responsible party does not present the subject matter information. The practitioner
measures or evaluates the underlying subject matter against the criteria and
presents the resulting subject matter information as part of or accompanying the
assurance report. The practitioner’s conclusion in a direct engagement addressees
the reported outcome of the measurement or evaluation of the underlying subject
matter against the criteria. In some direct engagements, the practitioner’s
conclusion is, or is part of, the subject matter information.
An example of a direct engagement would be an engagement to report on the
effective control over the financial reporting process.

Non-Assurance Engagement
It lacks one or more of the elements of assurance engagements. It involves only
two-party contract and designs to provide comments, suggestions or
recommendations on how to use the information. Therefore, Independence is not
required. It includes:
1. Agreed-upon procedures
An auditor is engaged to carry out those procedures of an audit nature to which the
auditor and the entity and any appropriate third parties have agreed and to report
on factual findings. The recipients of the report must form their own conclusions
from the report by the auditor. The report is restricted to those parties that have
agreed to the procedures to be performed since others, unaware of the reasons for
the procedures, may misinterpret the results.
2. Compilation of financial and other information
The accountant is engaged to use accounting expertise as opposed to auditing
expertise to collect, classify and summarize financial information. This ordinarily
entails reducing detailed data to a manageable and understandable form without a
requirement to test the assertions underlying that information. The procedures
employed are not designed and do not enable the accountant to express any
assurance on the financial information. However, users of the compiled financial
information derive some benefits as a result of the accountant’s involvement.

3. Some tax services, where no conclusion is expressed, and tax consulting

The practitioner provides advice on income tax and business strategies. It involves
developing tax strategies to minimize businesses’ tax liability and worries legally.

4. Management consulting and other advisory services

The practitioner provides advice or recommendations for the improvement of the
client’s use of its capabilities and resources to achieve the objective of the client’s
organization.

Global Organizations and Standard-Setting Boards of the Accountancy

Profession
The International Federation of Accountants (IFAC) is a global organization for the
accountancy profession. The organization was founded in 1977 and is comprised of
180 member and associate organizations in 135 countries and jurisdictions,
representing nearly 3 million professional accountants. It supports the development,
adoption, and implementation of high-quality international standards.
To pursue its purpose, it supports four independent standard setting boards:

Standard Board Role Pronouncement Website

1. International To set a high- Handbook of https://www.iaasb.org/
Auditing and quality International
Assurance international Quality Control,
Standards Board standards for Auditing, Review,
(IAASB) auditing, Other Assurance,
assurance, and and Related
quality control Services
that strengthen Pronouncements
public
confidence in
 the global
profession.
2. International To set high- Handbook of https://www.iaesb.org/
Accounting quality International
Education internation Education
Standards Board standards that Pronouncements
(IAESB) shape quality
accountancy
education.
3. International To set high- Handbook of the https://
Ethics Standards quality, International Code www.ethicsboard.org/
Board for internationally of Ethics for
Accountants appropriate Professional
(IESBA) ethics Accountants
standards for
professional
accountants,
including
auditor
independence
requirements.
4. International To improve Handbook of https://www.ipsasb.org/
Public Sector public sector International Public
Accounting financial Sector Accounting
Standards Board reporting Pronouncements
(IPSASB) worldwide
through the
development
high-quality
standards for
use by
governments
and other
public sector
entities around
the world.

Standards Governing the Professional Services of CPAs in the Philippines

These standards are issued by the Auditing and Assurance Standards Council
(AASC, which is formerly known as Auditing Standards and Practices Council -
ASPC). AASC pronounces are generally based on practice statements issued by the
IAASB. To address the issues not covered by those pronouncements, country-
specific standards and practice statements are developed.
 Standards Related Practice Application of Standards
Statements
1. Philippine Standards on Philippine Auditing Audit of historical
Auditing (PSA) ** Practice Statements financial information
(PAPSs)
2. Philippine Standards on Philippine Review Review of historical
Review Engagements Engagement Practice financial information
(PSREs) ** Statements (PREPSs)
3. Philippine Standards on Philippine Assurance Assurance engagements
Assurance Engagements Engagement Practice dealing with subject
(PSAEs) ** Statements (PAEPSs) matter other than
historical financial
information
4. Philippine Standards on Philippine Related Agreed-upon procedures
Related Services (PSRSs) Services Practice information and other
** Statements (PRSPSs) related services
engagements as specified
by AASC
5. Philippine Standards on All services falling under
Quality control (PSQCs) the AASCs Engagement
Standards

** = PSAs, PSREs, PSAEs, and PSRSs are considered as engagement standards.

Practice Statements – issued to provide interpretive guidance and practical

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

Adoption of Philippine Standards and Practice Statements

To align international pronouncements to Philippines-specific needs, Auditing and
Assurance Standards council (AASC) reviews existing international pronouncements
and those that may be issued in the future to make adjustments for local use.
These adaptations are made clear in the AASC exposure draft and final Philippine
Standards or Practice Statements.

AASC Working Procedures

1. AASC members are assigned to Each workgroup has a designated
workgroups leader

2. Preparation of exposure drafts Each workgroup is assigned specific

international standard and practice
statement, or IAASB’s exposure drafts
to review on the proposed PH Standard
or practice statement for consideration
by the AASC (majority of the council
should approve before exposure) en
banc.
3. Exposed to the public The draft is published in the PICPA
Accounting Times and ACPAPP Bulletin
to give it further exposure (generally,
not shorter than 90 days for each
exposure draft to be considered)
4. Comments, suggestions, revisions AASC receives the comments and
and final draft suggestion and the exposure draft is
revised as appropriate. When the
revised draft is approved by at least 10
members of AASC, it is issued as a final
PH Standard or PS.
5. Final approval and effectivity Through Board of Accountancy, each
final PH
Standards and practice statement,
interpretation, if deemed appropriate,
shall be submitted to the Professional
Regulation Commission.

Publication to Official Gazette:

The pronouncement shall be published
in the official gazette and becomes
operative from the effective date stated
therein