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PrE7 01 Introduction

Class Code: PrE 7 will be held on Saturday from 8:00-11:00. The class covers Auditing and Assurance in Specialized Industries. The document discusses the fundamentals of auditing and assurance services, including the nature, objective and scope of assurance engagements. It also covers the classification of assurance engagements according to level of assurance and structure, and defines the types of assurance engagements including audit, review, agreed-upon procedures, and compilation engagements.

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36 views

PrE7 01 Introduction

Class Code: PrE 7 will be held on Saturday from 8:00-11:00. The class covers Auditing and Assurance in Specialized Industries. The document discusses the fundamentals of auditing and assurance services, including the nature, objective and scope of assurance engagements. It also covers the classification of assurance engagements according to level of assurance and structure, and defines the types of assurance engagements including audit, review, agreed-upon procedures, and compilation engagements.

Uploaded by

Beelze Balilis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Class Code: PrE 7

Subject: Auditing and Assurance – Specialized Industries


Schedule: Saturday, 8:00-11:00

I. Fundamentals of Auditing and Assurance Services


Accounting and Auditing are integral parts of a business.
Accounting is concerned with the preparation of financial statements that are used by many
users to help them in their decisions.
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 those assertions and established criteria, and communicating the results to intended
users.

• Types of Audits
1. Financial Statement Audit
A financial statement audit is conducted to determine whether the financial statements of an
entity are presented fairly in accordance with applicable financial reporting framework.
2. Compliance Audit
Involves a review of an organization’s procedures to determine whether the organization has
adhered to specific procedures, rules, or regulations (e.g., examination conducted by BIR
personnel to determine whether entities comply with tax rules and regulations).
3. Operational Audit/Performance Audit/Management Audit
Study of a specific unit of an organization for the purpose of measuring its performance. The
main objective is to assess entity’s performance, identify areas for improvements and make
recommendations to improvement performance.

Financial Audit Compliance Audit Operational Audit


Assertions made by The financial The organization has The organization’s
the auditee statements are complied with laws, activities are
presented fairly. regulations or conducted effectively
contracts. and efficiently.
Established criteria Financial Reporting Laws, regulations, Objective set by the
such as the Philippine and contracts. board of directors.
Reporting Standards
(PFRS).
Content of the An opinion whether Reports in the degree Recommendations or
auditor’s report the FS are presented of compliance with suggestions on how
in conformity with the the applicable laws, to improve
applicable financial regulations and operations.
reporting framework. contracts.
A. Nature, Objective and Scope of Assurance Engagements

I. Nature
Assurance is the state of being sure or certain about something or a strong feeling of confidence
about something.
Assurance (Business definition) refers to the auditor’s satisfaction as to the reliability of an
assertion being made by one party for use of another party.
Assurance Engagement is an engagement in which the 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.
II. Objective
The objective of assurance engagement is for a professional accountant or practitioner to
evaluate or measure a subject matter that is the responsibility of another party against identified
suitable criteria, and be able to express a conclusion that will provide the intended users with a
level of assurance about the subject matter.
III. Scope
Not all engagements are assurance engagements such as (a) engagement covered by
Philippine Standards for Related Services; agreed-upon procedures, and compilation of financial
or other information, (b) preparation of tax returns where no conclusion conveying assurance is
expressed, and (c) consulting or advisory engagements (e.g., management and tax consulting.
Whether a particular engagement is an assurance engagement will depends whether it exhibits
all the following elements:
a. A three-party relationship;
b. An appropriate subject matter;
c. Suitable criteria;
d. Sufficient appropriate evidence; and
e. A written assurance report.

II. Classification of Assurance Engagements

A. According to Level of Assurance

1. Reasonable Assurance Engagement - The objective of this assurance is a reduction on


assurance engagement risk to an acceptably low level in the circumstances of the
engagement as the basis for positive form of expression of the practitioner’s conclusion.

2. Limited Assurance Engagement – The objective of this is a reduction in assurance of


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 basis for a
negative form of expression of the practitioner’s conclusion.
B. According to Structure
1. Assertion-based Engagement (Attestation) - In this type of engagement, 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 of
made available to the intended users.

2. Direct Reporting Framework - In this type of engagement 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 user. The subject matter information is provided to the intended
user in the assurance report.

III. Types of Assurance Engagements

A. Audit Engagement
The objective of an audit of financial statements is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework.
In forming the audit opinion, the auditor obtains sufficient appropriate audit evidence to be able to
draw conclusions on which to base that opinion.
The auditor provides a high but not absolute level of assurance that the information subject to
audit is free of material misstatement (positive form).
B. Review Engagement
The objective of review of financial statements is to enable an auditor to state whether, on the
basis of procedures which do not provide all the evidence that would be required in an audit,
anything has come to the auditor’s attention that causes the auditor to believe that the financial
statements are not prepared, in all material respects, in accordance with an identified financial
reporting framework.
The auditor provides a moderate level of assurance that the information subject for review is free
of material misstatement (negative form).
C. Related Services
C.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 party have agreed and to report on factual findings.
The auditor simply provides a report of the factual findings, no assurance is expressed.
Intended users or the report assess for themselves the procedures and findings reported by
the auditor and draw their own conclusions from the auditor’s work.
The report provided are factual findings of procedure.
C.2. Compilation Engagement
The practitioner 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.
No assurance is expressed in the report.
The report provided are information complied.

Nature of Audit Review Agreed-upon Compilation


Service procedures
Objective To express an
To enable the To carry-out To assist the
opinion on the
CPA to report audit procedures client in the
fair whether anything agreed on with preparation of
presentation of
has come to his the client and the FS.
FS. attention that any appropriate
would indicate third parties
that the FSs are identified in the
not presented report.
fairly.
Level of High or Moderate or None None
Assurance Reasonable Limited
Assurance Assurance
Report Positive Negative Description of Identification of
Assurance Assurance procedures financial
performed and information
factual findings. complied and a
clear statement
that no
assurance is
provided.
Basic Risk Inquiry and As agreed Assemble FS
Procedures assessment analytical base on the
procedures, procedures. information
test of controls provided by
and substantive management.
tests.
Required Sufficient to Sufficient to Sufficient to Sufficient to
knowledge of assess the risk identify areas in apply the agreed compile the FS.
the Entity of material the FS where upon procedures
misstatement. material
misstatements
are likely to
occur.
Independence Required Required Not Required Not required
Requirement
Standards PSA PSRE PSRS PSRS

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