• Fundamentals of Assurance Services and Introduction to Auditing

► Introduction to ASSURANCE Introduction to AUDITING

⋄ • Auditing
• Assurance services (engagement) - means an agreement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of
► Systematic process and a series of logical process
intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria
► Objectively obtaining and evaluating evidence about assertions
➣ • Assurance - refers to the practitioner satisfaction as to reliability of an assertion being made by one party for use by another party ► A certains the degree of correspondence between assertions and established criteria
• Basic comparisons of Assurance and Non-assurance services ► Includes communication of results to intended users
Assurance Non-assurance services • Types of Audit
► Output Assurance in the form of an OPINION recommendation on how to use the information • Elements of Financial Statement Audit
designed to improve the quality or enhanced credibility of the designed to provide comments, suggestions or
► Purpose
subject matter recommendations and how to use the information • The Demand for Financial Statements Audit
► Parties Three party relationship Two-party contract ► A. Management of:
► Independence should be provided by independent professional independence is not required ⋄ Business Risk - any event or activity that will present the entity in meeting its business objectives
► Common agreed- upon procedures compilation preparation of tax ⋄ Information Risk - information prepared and presented contains the statements
examples audit review examination of prospective financial information
returns management advisory services ➣ Factors contributing to information risk
⦿ voluminous data
• Elements of assurance engagement ⦿ complexity of transactions
► Three-party relationship ⦿ remoteness of information
► An appropriate subject matter ⦿ conflicts of interest between the provider and user of information
► Suitable Criteria ➣ Ways of reducing information risk
► Sufficient Appropriate Evidence; and ⦿ Verify information
► A Written Assurance Report (conclusion) in the form appropriate to a reasonable assurance engagement or a limited assurance engagement ⦿ Have the financial statements be audited
• Types of assurance engagements AS TO LEVEL OF ASSURANCE PROVIDED ⦿ Share information risk with the management
► Reasonable Assurance Engagement ► B. Additional Conditions
⋄ reduction of assurance engagement risk to an acceptably low level ⋄ conflict of interest between the responsible party and the intended users of FS
⋄ Positive form of conclusion ⋄ Expertise of Auditor
⋄ Procedures: Inquiry, Analytical Procedures, Observation, Inspection, Confirmation, Reperformance, and Recalculation ⋄ Remoteness of users
► Limited Assurance Engagement ⋄ Financial consequence
⋄ reduction of risk based on the circumstances but where the risk is higher than a reasonable assurance engagement ⋄ Reduction of cost of capital
⋄ Negative form of conclusion ► Value of FS Audit
⋄ Procedures: Inquiry, Analytical Procedures ⋄ Reduce information risk
• Types of assurance AS TO STRUCTURE ⋄ Used to deter in efficiency and fraud
► Attestation Engagement ► General Principles of an FS Audit
⋄ issues written communication about the reliability of a written assertion ⋄ the auditor should:
⋄ Assertion-based Engagement ➣ Comply with code of ethics
➣ Subject Matter ➣ audit in accordance of PSA
➣ Suitable Criteria » Subject Matter Information » Users ➣ plan and perform with professional skepticism
➣ Evidence » Report » Users ➣ exercise professional judgement
► Direct Engagement ➣ obtain sufficient and appropriate audit evidence
⋄ Responsible party DOES NOT PRESENT subject matter information. ► Theoretical Framework
⋄ Practitioner REPORTS DIRECTLY WITH subject matter information ⋄ all financial data are verifiable
➣ Subject Matter ⋄ auditors maintain independence
➣ Suitable Criteria » Subject Matter Information » Report ⋄ no long term conflict
➣ Evidence » Report » Users ⋄ benefits the public - protect public interest
► Non-assurance Engagements ⋄ effective internal control system
⋄ Agreed-upon Procedures - like magsusi lang sa unsay procedure or report na gusto makita sa mgmt like Testing IC for fraud prevention. ⋄ consistent application of GAAP
➣ reports findings ⋄ true in the past and future - in the absence of evidence to the contrary
➣ users form their own conclusions
➣ report is restricted to agreed parties • PSA 315 - Management Assertions
⋄ Compilation - ang auditor mag himo/format sa FS
➣ collect classify summarize financial information
➣ entails detailed data in manageable form
➣ accountant will not express any assurance
➣ users derived some benefits
⋄ Tax Services with no conclusion and Tax Consulting
➣ advice on tax and business strategies
⋄ Management Consulting and Advisory
➣ improvement of client's capabilities and resources
• Three-party Relationship
► Practitioner
⋄ Broader than the term auditor
⋄ Responsible for determining the Nature, Timing, or Extent of procedures required by the engagement
► Responsible Party
⋄ Responsible to the subject matter, the subject matter information, or both
► Intended Users
• Appropriate Subject Matter
► Subject Matter - nature of the assertion the practitioner gathers sufficient evidence
► Subject Matter Information - outcome of the evaluation or measurement of the subject matter
► Characteristics to be considered appropriate
⋄ Identifiable
⋄ capable of consistent evaluation or measurement
⋄ capable of being subjected to procedures
► Forms:
⋄ Financial Performance
⋄ Non-financial Performance
⋄ Physical Characteristics
⋄ Systems and Processes
⋄ Behavior
• Suitable Criteria
 ► BENCHMARK used to evaluate or measure a subject matter
⋄ Characteristics to be considered suitable (RUNCR)
➣ Relevance - assists in decision making
➣ Understandability - not subject to different interpretation
➣ Neutrality - free from bias
➣ Completeness - criteria is sufficiently complete, factors are not omitted
➣ Reliability - allows evaluation
⋄ Kinds of Criteria
➣ Established - embodied in laws are regulations
➣ Specifically Developed - designed for the specific purpose NOTES
• Sufficient Appropriate Evidence
►
Evidence - all information gathered by the practitioner in evaluating the subject matter against criteria, on which the conclusion is based

► Consideration When Planning And Performing The Engagement

⋄ Sufficiency (Quantity)
➣ Greater Risk, More Evidence
➣ higher quality of evidence, less required
⋄ Appropriateness (Quality)
➣ Relevance and Reliability
merely obtaining more evidence may not compensate of its poor quality
⋄ Materiality
➣ Professional Judgment
➣
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

⋄ Assurance Engagement Risk

➣
risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially miststated

➣ HIGH Assurance; LOW Risk

➣ Inherent Risk
⦿ high volume transactions
⦿ cash transactions
⦿ large amounts of estimates
⦿ complex transaction
⦿ economy
⦿ Desired level: LOW
➣ Control Risk
⦿ internal control not designed and operating effectively
⦿ internal control don't exist for specific assertion
⦿ testing internal control is not efficient
⦿ Desired level: LOW
➣ Detection Risk
⦿ risk that the practitioner will not detect a material misstatement that exist
⦿ Desired level: HIGH

➣ Cost Benefit Consideration

⦿
the auditor considers the relationship between the cost and the usefulness of the information obtained

➣ Professional Skepticism
⦿ questioning mind
► Generalization about Reliability of Evidence
⋄ external > internal
⋄ effective internal control > effective internal control
⋄ directly obtained > indirectly obtained
⋄ written representations > oral representations
⋄ original documents > reproduce documents
⋄ direct personal knowledge (Observation) > inferential (second hand) knowledge (Inquiry)

• Written Assurance Report

 ► Reasonable assurance and inherent limitations of an audit:
⋄ Use of Selective Testing - Sampling Risk
⋄ Inherent Limitations of Internal Control - Control Risk
⋄ Fact that most of audit evidence is persuasive rather than conclusive
⋄ Work undertaken by the auditor to perform opinion is permeated by judgement - might commit mistakes
⋄ Nature/characteristics of assertion - exposure to inherit risk

• SUMMARY OF SERVICES PERFORMED BY PRACTITIONERS

• STANDARDS GOVERNING PROFESSIONAL SERVICES BY CPAs

Examination of Prospective Financial Information

Prospective - FI based on assumptions about events that may occur in the future and possible actions by an entity
Forecast - prospective FI prepared on the basis of continuing assumptions as to future events which mgmt expectsbto take place
Projections - prospective FI prepared based on best estimates and hypothetical assumptions.
Only moderate level of assurance