ASSURANCE AND

AUDITING PRINCIPLES
CHAPTER 1
TEXTBOOK
AUDIT ASSURANCE PRINCIPLE 2017 EDITION
BY: JOSE M. IRENEO, SHIRLEY C. IRENEO, GEORGE R. JAMES
NATURE AND OBJECTIVE

• Assurance services (or assurance engagements) are three-party contracts in which

assurers (such as a CPA) reports on the quality of information.
• Assurance engagements performed by CPAs are intended to enhance the credibility of
information about a subject matter (such as financial statements) by evaluating whether
the subject matter conforms in all material aspects with suitable criteria.
• 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 regulation.
EXAMPLE

• ABC Corp prepares annual FS 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.
EXAMPLE

• The CPA’s report contains assurance that the financial statements are fairly stated.
• It was the financial statement users free from the fear that they will make the wrong
decisions because of wrong information.
ELEMENTS OF ASSURANCE ENGAGEMENTS

1. A three party relationship involving a practitioner (CPA), a responsible party, and

intended users.
All of the five elements must be present in an
2. An appropriate subject matter. engagement for the engagement to be classified
as an assurance engagement.
3. Suitable criteria.
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.
THREE-PARTY RELATIONSHIP

1. Practitioner
The term practitioner 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.
A practitioner may be requested to perform assurance engagements on a wide range of
subject matters. Some subject matters may require specialized skills and knowledge beyond
those ordinarily possessed by an individual practitioner.
THREE-PARTY RELATIONSHIP

1. Practitioner
In this situation, the practitioner should not accept an engagement if preliminary
knowledge of the engagement circumstances indicates that ethical requirements regarding
professional competence will not be satisfied.
THREE-PARTY RELATIONSHIP

2. Responsible Party
The responsible party is the person (or persons) responsible for the subject matter or
the subject matter information (the assertion) in an assurance engagement.
The Philippine Framework for Assurance Engagements provides examples of situations
when the responsible party is responsible for the subject matter information only, and when
such responsibility is extended to the subject matter itself.
THREE-PARTY RELATIONSHIP

3. Intended Users
These 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.
Intended users may be identified in by agreement between the practitioner and the
responsible party or engaging party, or by law.
SUBJECT MATTER

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.
SUITABLE CRITERIA

• Criteria are the benchmarks used to evaluate or measure the subject matter including,
where relevant, benchmarks for presentation and disclosure.
• Suitable criteria are required for reasonably consistent evaluation or measurement of a
subject matter within the context of professional judgement.
• Without the frame of reference provided by suitable criteria, any conclusion is open to
individual interpretation and misunderstanding.
• Suitable criteria are context-sensitive, that is, relevant to the engagement circumstances.
EXAMPLES OF ASSURANCE ENGAGEMENTS AND
APPLICABLE FORMAL CRITERIA
ASSURANCE ENGAGEMENT APPLICABLE CRITERIA
Audit of financial statement PFRS
Established internal control framework (e.g.,
Assurance on Internal Control COSO) or individual control objectives
specifically designed for the engagement
Compliance Audits Applicable law, regulation or contract
ESTABLISHED CRITERIA AND SPECIFICALLY
DEVELOPED CRITERIA
• Established criteria are those embodied in laws or regulations, or issued by authorized or
recognized bodies of experts that follows a transparent due process.
• Specifically developed criteria are those designed for the purpose of the engagement.
• Whether established or specifically developed, criteria need to be available to the
intended users to allow them to understand how the subject matter has been evaluated or
measured.
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.
PROFESSIONAL SKEPTICISM

• 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.
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, its relevance and its
reliability.
• The quantity of evidence needed is 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).
GENERALIZATIONS ABOUT THE RELIABILITY OF
EVIDENCE
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).
GENERALIZATIONS ABOUT THE RELIABILITY OF
EVIDENCE
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.
COST BENEFIT CONSIDERATIONS

• The practitioner considers the relationship between the cost of obtaining evidence and the
usefulness of the information obtained.
• However, the matte of difficulty or expense involved is not in itself a valid basis for
omitting an evidence-gathering procedure for which there is no alternative.
• The practitioner uses professional judgement and professional skepticism in evaluating
the quantity and quality of evidence, and thus its sufficiency and appropriateness, to
support the assurance report.
MATERIALITY

Materiality is 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.
When considering materiality, the practitioner understands and assesses what factors might
influence the decisions of the intended users.
The assessment of materiality and the relative importance of quantitative and qualitative
factors in a particular engagements are matters for the practitioner’s judgment.
ASSURANCE ENGAGEMENT RISK

It is the risk that the practitioner expresses an inappropriate conclusion when the subject
matter information is materially misstated.
It is considered when determining the nature, timing and extent of evidence-gathering
procedures.
The more extensive the evidence-gathering procedures, the lower the chances of an
inappropriate conclusion (assurance engagement risk), and the higher the level of assurance
that a practitioner can provide.
ASSURANCE REPORT

The practitioner provides a written report containing a conclusion that conveys the
assurance obtained about the subject matter information.
A practitioner normally can express two levels of assurance: a reasonable (but not absolute)
level of assurance, and a limited level of assurance.
Professional engagement standards establish basic elements for assurance reports.
In addition, the practitioner considers other reporting responsibilities, including
communicating with those charged in the governance of the entity when it is appropriate to
do so.
FORMS OF CONCLUSION

The conclusion in an assurance engagement may be expressed positively or negatively,

depending on the level of assurance being provided.
There are two level of assurance that may be provided by a practitioner: reasonable
assurance (also known as high level of assurance) and limited assurance (also known as
moderate level of assurance)
In a reasonable assurance engagement, the practitioner expresses the conclusion in the
positive form, for example
FORMS OF CONCLUSION – REASONABLE

In our opinion, the entity has complied, in all material aspects, with XYZ law.
In our opinion, the financial statements present fairly, in all material respects, the financial
position of the entity as at [date] and its financial performance and its cash flows for the
year then ended in accordance with XYZ framework.
In our opinion, the [appropriate party’s] statement that the entity has complied with XYZ
law is, in all material respects, fairly stated,” or
In our opinion, the [appropriate party’s] statement that the key performance indicators are
presented in accordance with XYZ criteria is, in all material respects, fairly stated.
FORMS OF CONCLUSION – LIMITED

“Based on the procedures performed and evidence obtained, nothing has come to our
attention that causes us to believe that the entity has not complied, in all material respects,
with XYZ law.”
CLASSIFICATION OF ASSURANCE
ENGAGEMENTS
• According to level of Assurance
1. Reasonable Assurance Engagement – the objective of 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 of expression of the practitioner’s conclusion.
An example of this type of engagement would be an audit of historical financial
statements.
CLASSIFICATION OF ASSURANCE
ENGAGEMENTS
• According to level of Assurance
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 from of expression of the practitioner’s
conclusion.
An example of this type of engagement would be a review of financial statements.
CLASSIFICATION OF ASSURANCE
ENGAGEMENTS
• According to structure
1. Attestation Engagement – the measurer or evaluator, who is not the practitioner,
measures or evaluates the underlying subject matter against the criteria, the
outcome of which is the subject matter information.
The role of the practitioner in an attestation engagement is to obtain sufficient
appropriate evidence in order to express a conclusion about whether the subject matter
information, as prepared by the measurer or evaluator, is free from material
misstatement.
CLASSIFICATION OF ASSURANCE
ENGAGEMENTS
• According to structure
2. Direct Engagement – 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 addresses 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.
ATTESTATION ENGAGEMENTS

• 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.
ATTESTATION ENGAGEMENTS

The definition implies four basic conditions that distinguish an attestation engagement from
other services an accountant may provide:
1. There must be a written assertion being made by one party, the reliability of which is of
interest to another party.
An assertion is a representation or statement, which may be expressly stated or
implied by the responsible party.
ATTESTATION ENGAGEMENTS

The definition implies four basic conditions that distinguish an attestation engagement from
other services an accountant may provide:
2. There must be agreed-upon and objective criteria that can be utilized to assess the
accuracy of the assertion. All parties must agree as to how the assertion is to be
evaluated using a common unit of measure and measurement technology.
The measurement approach should be refined enough to allow different individuals to
arrive at conclusions that are not materially different,
ATTESTATION ENGAGEMENTS

The definition implies four basic conditions that distinguish an attestation engagement from
other services an accountant may provide:
3. The assertion must be amenable to verification by an independent party.
That is, the accountant must be able to obtain adequate, diagnostic evidence to
support or refute the assertion being made.

4. The accountant should prepare a written conclusion about the reliability of the
assertion(s).
EXAMPLES OF ATTESTATION ENGAGEMENTS

There are two common attestation engagements in practice today: audit engagements and
review engagements:
1. An independent audit engagements one that provides a reasonable (but not absolute)
level of assurance that the subject matter (such as financial statements) is free of
material misstatement.
2. A review engagement involves a limited investigation of much narrower scope than an
audit and undertaken for the purpose of providing limited assurance that the subject
matter is presented in accordance with identified suitable criteria.
EXAMPLES OF ATTESTATION ENGAGEMENTS

Audits require greater scrutiny of the financial statements, while reviews consist of making
inquiries and performing analytical procedures on the statements.
Consequently, audits provide a higher level of assurance as compared to reviews.
EXAMPLES OF ATTESTATION ENGAGEMENTS

Audits require greater scrutiny of the financial statements, while reviews consist of making
inquiries and performing analytical procedures on the statements.
Consequently, audits provide a higher level of assurance as compared to reviews.
LIMITATIONS OF ASSURANCE ENGAGEMENTS

• Despite the performance of an assurance engagement, the highest level of assurance that
bay be provided is reasonable assurance.
• Reasonable assurance is less than absolute assurance.
• Reducing assurance engagement risk to zero is very rarely attainable or cost beneficialas
result of factors such as the following:
1. The use of selective testing.
2. The inherent limitations of internal control
LIMITATIONS OF ASSURANCE ENGAGEMENTS

• Reducing assurance engagement risk to zero is very rarely attainable or cost beneficialas
result of factors such as the following:
3. The fact that much of the evidence available to the practitioner is persuasive rather than
conclusive.
4. The use of judgement in gathering and evaluating evidence and forming conclusions
based on that evidence
5. The characteristics of the subject matter (in some cases)
NON-ASSURANCE SERVICES

• Not all engagements performed by CPAs are assurance services.

• Non-assurance services lack one or more of the elements of assurance engagements.
• Examples of common non-assurance services are:
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.
NON-ASSURANCE SERVICES

Agreed-upon procedures
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
report.
NON-ASSURANCE SERVICES

Compilation of Financial or Other Information

In the compilation engagement, the accountant is engaged to use accounting expertise
as opposed to auditing expertise to collect classify and summarize financial information.
The procedure employed are not designed and do not enable the accountant to express
any assurance on the financial information.
NON-ASSURANCE SERVICES

Some tax services, such as preparation of tax returns where no conclusion is expressed, and
tax consulting
Individuals and business leaders look to CPAs for advice on income tax and business
tax strategies.
A CPA can develop tax strategies to help individuals or businesses legally minimize
their tax liability.
MANAGEMENT CONSULTING AND OTHER
ADVISORY SERVICES
• To improve performances through the thorough analysis of existing business problems
• Development of plans for improvement
1. Small business management
2. Cash management
3. Compensation plan evaluations
4. Growth planning
5. Purchasing or selling a business
6. Measuring the performance of a business
7. Disaster recovery planning