COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic

 Fundamental Principles of Assurance Services

-Definition
-Objective
-Elements
-Types
 Non-assurance Services
 Global Organizations and standard-setting boards of the accountancy profession

Learning Outcomes:

After studying this module, the student should able to:

 Comprehend the definition of assurance engagements

 Discuss the elements of assurance engagements
 Classify assurance engagements according to structure and according to level of assurance provided
 Identify examples of non-assurance engagements and describe each one briefly.

Introduction (With Core Values Integration):

An auditor reviewing a company's financial statement is responsible and legally liable for any misstatements
or instances of fraud. Accountability forces an accountant to be careful and knowledgeable in their
professional practices, as even negligence can cause them to be legally responsible. Nothing in life can be
carried out to the fullest without accountability. It means living in integrity, with all your thoughts, words, and
actions are consistent with one another. When one is accountable, he or she accepts responsibility for his or
her actions and the results of his or her choices in life. Your actions always have consequences, whether good
or bad. It is your choice to make sure your thoughts, words, and actions are working synergistically together in
a positive way to manifest the results you desire to create with yourself. The key is taking ownership for your
part in the process, being accountable for what you can control, and accepting what you cannot.

Body:

Everyday, people make decisions: what time to wake-up, what clothes to wear, what breakfast to eat, how you
get to work, what time to go home – the list of decisions to be made is virtually endless. Decision making will
always be part of our daily lives.

Consider the following situations:

1. Your professor tells you that your book in accounting is obsolete and must be replaced.
2. A political campaign shows that Mr. Ronald Pump is the “man for the people, the best choice for
president”
All of the situations above require you to make decisions. Your decision to get a new book, or to vote for Ronald
Pump will depend on what you know about each alternative. Your decisions and actions will surely be
affected/influenced by the information available to you.

The relevance and reliability of information is critical for making the best decision in a given situation.

The reliability of information depends on the credibility of the source of the information and the ability to verify
its accuracy or fairness. People avoid biased or misleading information because misinformation can lead to less
effective decisions.

In business, financial statements contain the information used by the investors, creditors, and other interested
parties in making economic decisions.

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 engagement (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 measurement of a subject matter against criteria.

 Assurance services are three-party contracts in which assurers report on (or improve) the
quality of information. It is used to describe the broad range of information enhancement
services that are provided by CPAs.

These services are performed by an independent professional designed to improve the quality or enhance the
credibility of the subject matter of the engagement.

Objective of assurance engagement

The objective of an assurance engagement is for a practitioner to evaluate or measure a subject matter that is
the responsibility of another party against identified suitable criteria and express a conclusion that provides
the intended user with a level of assurance about that subject matter.

Example:

ABC Corporation prepares annual financial statements for its investors, creditors, the government, and other
users. These users have doubts as to whether the statements will meet their need for fairly stated information. By
engaging the. services of an independent CPA, the statements will be audited and checked against generally
accepted accounting principles (GAAP). A report (signed by the CPA) will be attached to these statements. Users
rely on audited financial statements because these statements have credibility - they can be relied upon.
The CPA's report contains assurance that the financial statements are fairly stated. It sets the financial
statement users free from the fear that they will make the wrong decisions because of wrong information.

Examples of assurance engagements include audits of financial statements of listed and non-listed entities,
assurance on the balloting of contests, such as the Academy Awards, and reporting on compliance with laws,
rules and regulations.

Elements of Assurance Engagements (3SECC)

1. A three-party relationship involving a practitioner, a responsible party, and intended users;

2. An appropriate Subject matter;
3. Suitable Criteria;
4. Sufficient appropriate Evidence; and
5. A written assurance report (Conclusion) in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.

Three-party relationship

1. Practitioner

The term 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.

2. The responsible party

It is the person (or persons) responsible for the the subject matter or the subject matter information
(the assertion) in an assurance engagement.

3. Intended Users

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.
Whenever practical, the assurance report is addressed to all the intended users, but in some cases,
there may be other intended users.

The practitioner may not be able to identify all those who will read the assurance report, particularly
where there are large numbers of people who have access to it. In such cases, particularly where
possible readers are likely to have a broad range of interests in the subject matter, intended users may
be limited to major stakeholders with significant and common interests. Intended users may be
identified in different ways, for example, by agreement between the practitioner and the responsible
party or engaging party, or by law.
Subject Matter

The subject matter, and subject matter information, of an assurance engagement can take many forms.
Subject matters have different characteristics, including the degree to which information about them
is qualitative versus quantitative, objective versus subjective, historical versus prospective, and relates
to a point in time or covers a period. Such characteristics affect the precision with which the subject
matter can be evaluated or measured against criteria and the persuasiveness of available evidence. In
any case, the assurance report notes characteristics of particular relevance to the intended users.

An appropriate subject matter is identifiable, and capable of consistent evaluation or measurement

against the identified criteria and capable of being subjected to procedures for gathering sufficient
appropriate evidence to support a reasonable assurance or limited assurance conclusion, as
appropriate.

Suitable Criteria

Criteria are the benchmarks used to evaluate or measure the subject matter including, where relevant,
benchmarks for presentation and disclosure. Criteria can be formal or less formal.

Sufficient Appropriate Evidence

The practitioner’s plans and performs an assurance engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence about whether the subject matter information
free of material misstatement. The practitioner considers materiality, assurance engagement risk, and
the quantity and quality of available evidence when planning and performing the engagement, in
particular when the nature, timing and extent of evidence-gathering procedures.

Professional Skepticism

The practitioner plans and performs an assurance engagement with an attitude of professional
skepticism recognizing that circumstances may exist that cause the subject matter information to be
materially misstated. 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.

For example, an attitude of professional skepticism is necessary throughout the engagement process-
for the practitioner to reduce the risk of overlooking suspicious circumstances, of over generalizing
when drawing conclusions from observations, and of using faulty assumptions in determining the
nature, timing and extent of evidence gathering procedures and evaluating the results thereof.
An assurance engagement rarely involves the authentication of documentation, nor is the practitioner
trained as or expected to be an expert in such authentication. However, the practitioner considers the
reliability of the information to be used as evidence, for example photocopies, facsimiles, filmed,
digitized or other electronic documents, including consideration of controls over their preparation and
maintenance where relevant.

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 relevance and its reliability. The quantity of evidence needed affected by the risk of
the subject matter information being materially misstated (the greater the risk, the more evidence is
likely to be required and also by the quality of such evidence (the higher the quality, the less may be
required). Accordingly, the sufficiency and appropriateness of evidence are interrelated. However,
merely obtaining more evidence may not compensate for its poor quality.

The reliability of evidence is influenced by its source and by its nature, and is dependent on the
individual circumstances under which it is obtained.

Generalizations about the reliability of evidence

Generalizations about the reliability of various kinds of evidence can be made; however, such
generalizations are subject to important exceptions. Even when evidence is obtained from sources
external to the entity, circumstances may exist that could affect the reliability of the information
obtained. For example, evidence obtained from an independent external source may not be reliable if
the source is not knowledgeable. While recognizing that exceptions may exist, the following
generalizations about the reliability of evidence may be useful:

1. Evidence is more reliable when it is obtained from independent sources outside the
entity.
2. Evidence that is generated internally is more reliable when the related controls are
effective.
3. Evidence obtained directly by the practitioner (for example, observation of the
application of a control) is more reliable than evidence obtained indirectly or by
inference (for example, inquiry about the application of a control).
4. 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).
5. Evidence provided by original documents is more reliable than evidence provided by
photocopies or facsimiles.

The practitioner ordinarily obtains more assurance from consistent evidence obtained from different
sources or of a different nature than from items of evidence considered individually.
 In addition, obtaining evidence from different sources or of a different nature may indicate that an
individual item of evidence is not reliable.

For example, corroborating information obtained from a source independent of the entity may
increase the assurance the practitioner obtains from a representation from the responsible party.
Conversely, when evidence obtained from one source is inconsistent with that obtained from another,
the practitioner determines what additional evidence-gathering procedures are necessary to resolve
the inconsistency.

Written Report (Conclusion)

The practitioner provides a written report containing a conclusion or an opinion that conveys the
assurance obtained about the subject matter information. In addition, the practitioner considers other
reporting responsibilities, including communicating with those charged with governance.

Type Common phrase used

1. Unmodified/Unqualified Present fairly, in all material respect

2. Qualified Except for

3. Adverse Do not present fairly, in all material respect

4. Disclaimer of opinion We do not express a conclusion

Levels and forms of assurance

The levels (high or moderate) and forms (positive or negative) of assurance provided by the
practitioner is dependent on the type of assurance engagement being rendered.

The following are types of assurance engagement as to level of assurance provided:

 Reasonable assurance engagement - the objective 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. Such form conveys "reasonable
assurance".

Example of expressing an opinion in reasonable assurance engagement:

"In our opinion internal control is effective, in all material respects, based on XYZ
criteria."
  Limited assurance engagement the objective is a reduction in assurance engagement risk to a
level that is acceptable in circumstances of the engagement, but where the risk is greater than
for a reasonable assurance engagement, as a basis for a negative form of expression of the
practitioner's conclusion. This form conveys "limited assurance"

Example of expressing an opinion in limited assurance engagement:

"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."

Assurance Engagements as to structure

The following are the assurance engagements according to Structure.

A. Attestation engagements

Attestation engagement 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. Common types of attestation engagements are:

 Audit engagement is an engagement in which the auditor provides a reasonable (but not
absolute) level of assurance that the subject matter is free from material misstatements.

 Review engagement is an engagement in which the auditor provides a moderate level of

assurance that the information subject to the engagement is free of material misstatement.

B. Direct engagements

Direct engagement is a residual definition of assurance engagement as to structure.

Furthermore, assurance engagements may be classified further depending on the availability or non-
availability of the assertions to the intended users. This classification will include the following:

 Assertion-based engagements are assurance engagements that 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. This is commonly used for attestation engagements.

 Direct reporting engagements are assurance engagements that the practitioner either directly
performs the evaluation or measurement of the subject matter, or obtains a representation
from the responsible party that has performed the evaluation or measurement that is not
available to the intended users in the assurance reports. This is commonly used for direct
engagements.
 NON-ASSURANCE ENGAGEMENTS

Non-assurance engagements lack one or more of the elements of assurance engagements. Common
examples include:

A. Agreed-upon procedures
 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 the factual
findings
 recipients of the report must form their own conclusions from the report by the auditor
 report is restricted to those parties who have agreed to the procedures to be performed

B. Compilation of financial and other information

 accountant is engaged to use accounting expertise as opposed to auditing expertise to
collect, classify and summarize financial information
 ordinarily entails detailed data to a manageable and understandable form
 accountant will not express any assurance on the financial information
 intended users derived some benefits as a result of the accountant's involvement
C. Some tax services where no conclusion is expressed, and tax consulting
 Practitioner provides advice on income tax and business strategies
 Develop tax strategies to minimize businesses' tax liability and worries

D. Management consulting and other advisory services

 Practitioner provides advice or recommendations for the improvement of client's use of its
capabilities and resources to achieve the objective the client's organization

Needless to say, non-assurance engagements provide no assurance to intended users.

GLOBAL ORGANIZATIONS AND STANDARD-SETTING BOARDS OF THE ACCOUNTANCY PROFESSION

The International Federation of Accountants (IFAC) is the global organization for the accountancy profession.
The organization was founded in 1977 and is comprised of more than 175 member and associate organizations
in 130 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 namely:

1. International Auditing and Assurance Standards Board

2. International Accounting Education Standards Board (IAESB)
3. International Ethics Standards Board for Accountants (IESBA)
4. International Public Sector Accounting Standards Board (IPSASB)
Summary

An assurance engagement is important as it provides credibility to a set of financial statements and gives the
shareholders confidence that the accounts are true and fair. It can also help to improve a company's internal
controls and systems.

References

Escala and Bercasion (2021). Auditing and Assurance Services: Theory and Principles. 2021 Ed. Escala
Publishing House

Salosagcol, Tiu, and Hermosilla (2018). Auditing Theory: A Guide In Understanding the Philippine Standards
on Auditing. 2018 Ed. GIC Enterprises&Co.,Inc.

https://christophersalem.com/why-being-accountable-is-important/
https://www.plusaccounting.co.uk