AUDITING THEORY

Summary #1
FUNDAMENTALS OF AUDITING AND ASSURANCE SERVICES
Source: PSA

INTRODUCTION TO ASSURANCE ENGAGEMENTS Illustrate:

1. Outcome = representations of FS
Philippine Framework for Assurance Engagements Criteria = PFRS
Subject matter = FS
- Provides a framework for that defines and
describes the elements of an assurance 2. Outcome = effectiveness of internal control
engagement. Criteria = Integrated Framework for IC(Coco)
- Identifies also the engagement to which PSA, Subject matter = internal control
PSRE and PSAE apply
- Also this provide a frame of reference to: Subject matter information – outcome of the evaluation
or measurement of the subject matter
1. Practitioners when performing assurance - It can be misstated to a material extent, this can
engagements. Accountants in public sector occur if the subject matter does not reflect the
or public practice or not in either of the two application of the criteria
should also consider the Framework when
performing assurance engagements Types of Engagements with regards to Subject matter
Note: The word “independent” are information
restricted from its title and purposes. Should
also refer PSA, PSRE and PSAE in their report Assertion-based engagements – the evaluation or
if the Framework is used measurement of the subject matter is done by the
responsible party and the subject matter information is
2. Others involved in an assurance services, in the form of an assertion that is made available to
including intended users and responsible users
party
Direct-reporting engagements – the practitioner either
3. The development of ISA, ISRE and ISAE and directly performs the evaluation of subject matter or
the ASPC by IAASB and the adoption of the obtains the representation from the responsible party
said standard in the Philippines that has performed the evaluation or measurement not
yet available for users
- Provided by the use of assurance report
- It does not itself establish standards or provide
procedural requirements for the performance of
Two types of assurance engagement that the
assurance engagements
practitioner is permitted to perform

Definition and Objective of Assurance Engagement

Reasonable assurance engagement
Objective:
Definition of Assurance Engagement
1. Reduction of the assurance engagement risk
- This is an engagement wherein a practitioner
to an acceptable low level
expresses an opinion to enhances the degree of
2. Positive form of conclusion
confidence of the intended users with regard to
the outcome of evaluation or measurement
Limited assurance engagement
with the establish criteria.
Objective:
1. Reduction of the assurance engagement risk
Outcome = results from applying the criteria to
to a level acceptable to the engagement
the subject matter
circumstances in which the risk is greater 1. Relevance ethical requirement is satisfied
than reasonable assurance engagement 2. Engagement exhibits:
2. Negative form of conclusion o Subject matter is appropriate
o Suitable criteria
Engagement circumstances are event, conditions and o Access to SAAE
transactions that may have a significant effect with the o Conclusion (limited or reasonable) is to
engagement be contained in the written report
o Rational purpose of engagement
Scope of the Framework
- If the possible engagement cannot be accepted
- Not all engagements performed by practitioners because it does not meet the criteria, another
are not assurance engagement engagement may be determined by the
engaging party.
Examples of engagements not covered by PFAE:

1. Engagement covered by PSRS e.g agreed-upon Example:

procedures and compilation of FS or other 1. The original criteria is not suitable, an
information assurance engagement can still be
2. Preparation of income tax return performed if:
3. Consulting or advisory services o Can identify an aspect of the original
subject matter for which criteria, then
- Can form part of a larger engagement the practitioner can perform assurance
engagement with respect to that
Engagements need not be performed under this PFAE
subject matter. But the assurance report
1. Engagement to testify to legal proceedings should specify that it does not relate to
2. Engagements that includes professional opinion, the entirety of the original subject
wordings or views which the users may derived matter
from some assurance, if these apply: o Alternative criteria can be selected or
o Accidental developed
o Restricted use 2. Request alternative assurance engagement
o Written understanding (not assurance)
o Not represented
- After accepting the practitioner cannot change
Reports on Non-assurance engagements
it for example from assurance to non-assurance
- To clearly distinguish assurance to non- or from reasonable or limited assurance
assurance engagement the report should avoid: engagement without justifiable reason
1. Implying compliance with PFAE, PSA, PSRE
and PSAE
Example of justifiable reason
2. Inappropriate use of words audit, assurance
and review Circumstances that affects the intended users’
3. Include a statement that enhances the requirements or a misunderstanding concerning the
degree of confidence of users to the subject nature of the engagement but should not disregard the
matter evidence that was obtained prior to change
If there is an agreement between the responsible party Elements of an assurance engagement
and the practitioner to use the principles of PFAE but for
the use only of the responsible party. A statement A. 3 party relationship
restricting the use to responsible party should be added B. Appropriate subject matter
C. Suitable criteria
Engagement Acceptance D. Sufficient appropriate evidence
E. Written assurance report
- Practitioner should accept engagement if:
The 3 Party Relationship - Could include statement of restrictions for use
of specific purpose
- Practitioner, responsible party and intended
users Subject Matter
- Responsible party and intended users may come
Can be:
from the same or different entity
1. Financial performance
Practitioner 2. Non-financial performance
3. Physical characteristics
- Broader than auditor which audit and review 4. System and process
engagements only 5. Behavior
- Wide range of subject matter, which reference
to his competence and can be accomplished - It has different characteristics and can affect
through the use of experts the:
o Precision with which the subject matter
Responsible Party(management)
be evaluated against the criteria
- Direct reporting – responsible for subject matter o Persuasiveness of available evidence
- Assertion-based – responsible for subject - An appropriate subject matter is:
matter or for subject matter information 1. Identifiable and capable of consistent
evaluation or measurement against a
Example: criteria
1. Both Subject matter and subject matter 2. Can be subjected to procedures to help
information – engages to a practitioner to gather sufficient appropriate evidence
perform assurance engagement about its own Criteria
sustainability practices
2. Subject matter information but not subject - Benchmarks used to evaluate or measure the
matter – government organization that engages subject matter
with practitioner to perform assurance - Can be formal (PFRS) or less formal (internally
engagement about a private organization developed code of conduct)
- There can a different criteria for the same
- Ordinarily provides a written representation but subject matter
in direct reporting the practitioner may obtain a
Characteristics of Suitable Criteria
written representation
1. Relevance – assists in decision making
Intended users 2. Completeness – not omitted
- Persons or group of persons for which the 3. Reliability – consistent evaluation or
report is prepared to. The responsible party can measurement
be one 4. Neutral – free from bias
5. Understandability – not subject to different
- The assurance report is addressed to all
interpretations
intended users but there can be other users
- Due to many intended users to address,
- Determination of a suitable criteria is based on
sometimes limited to stakeholder of a company
professional judgement
- They are involved in the determining the
- Can be established(laws) or specifically
requirement for the engagement but regardless
developed(specially designed)
of which the practitioner:
- Available to intended user; publicly, cleared in
o Is responsible for determining nature,
subject matter information or in the assurance
timing and extent of procedures
report
o Is required to pursue any matter that
- By general understanding
makes him aware of that leads him to
question whether modification is to
made to subject matter information
Example:
Evidence In a direct reporting engagement that the
- Obtain sufficient appropriate evidence with subject matter information is only included in
professional skepticism the practitioners conclusion which he concludes
that the subject matter in all material respects
Professional Skepticism conform to the criteria.
- can recognize circumstances may exists that
- Not included in assurance engagement risk
cause the subject matter be misstated
1. Risk of inappropriate conclusion from not
- Critical assessment
materially misstated
- Authenticity should be assessed by the
2. Risk from litigation
practitioner or by the expert
3. Risk from adverse publicity
Sufficient Appropriate Evidence 4. Risk from events arising in connection with
subject matter reported on
Sufficiency – quantity
- For all assurance engagement, assurance
 Which is affect by the risk of the
engagement risk is composed of:
subject matter (greater risk,
1. Inherent risk – susceptibility of subject
greater evidence)
matter to misstatement where no controls
Appropriateness – quality (relevant and reliable) exists
2. Control risk – controls do not prevent,
 Higher quality less is required detect and correct misstatement
- Sufficiency and appropriateness are interrelated 3. Detection risk – the practitioner does not
- Affect by source and nature;
detect misstatement that exists
Generalizations about reliability; - These are affected by nature of subject matter
and type of assurance
1. Independent outside sources
2. Internal if control is effective Nature, timing and extent
3. Directly obtained
- Infinite variations in evidence-gathering
4. Documentary form
procedures are possible
5. Original documents
Reasonable assurance – accumulating necessary
- More difficult to obtain assurance in subject evidence to relate subject matter information as a
matter information for a period than for a point whole
of time
- Consider cost-benefit relationship, and can be a - Systematic process to gather reasonable
valid basis for omitting evidence gathering assurance:
procedure provided there are no alternative 1. Obtain an understanding of subject matter
2. Assess the risk of the subject matter
Materiality 3. Respond to the assessed risk
4. Perform further procedures
- Important when the practitioner determines the
5. Evaluate sufficient appropriate evidence
nature, timing and extent of gathering - It is less than absolute assurance
procedures and assessing subject matter
information is free from misstatement Limitations to obtain absolute assurance:
- Professional judgement
o Selective testing
Assurance engagement risk o Inherent limitations of controls
o Evidence are persuasive than conclusive
- Risk that practitioner expresses an o Use of judgement
inappropriate conclusion when subject matter is
materially misstated Quantity and Quality of Evidence
- It is affected by: - If the practitioners is not associated with subject
1. Characteristics of the subject matter matter, third parties can assume no
responsibility from him
Example: less objective when information is
- If it does, he should require the party to cease
future oriented than historical
doing so or seeking legal advice.
2. Circumstances that evidence are not
available Example of Assurance Engagement
- Unqualified conclusion is not appropriate if
there is a material limitation on the 1. Audit – provides reasonable assurance that the
practitioners’ scope: circumstances prevent or FS is free of material misstatement
responsible party sets a restriction o Lends credibility to the FS

Assurance Report 2. Review – lesser assurance than audit

- Conclusion regarding the subject matter o Consists of primarily of procedures of
- Consider other responsibilities inquiry and analytical procedure
o Same materiality considerations as
Assertion-based engagement audit
o Judgement to materiality is in reference
- It be either:
a. Responsible party assertion (“In our opinion, to the reporting information and to the
the responsible party’s assertion that the needs of relying with the information
internal controls are effective, in all material not the level of assurance provided
o Judgement in determining NTE of
respect with regards to XYZ criteria”)
b. Directly in terms of the subject matter and procedures
criteria (“In our opinion internal control is
3. Other Assurance Engagement
effective, in all material respects, with regards
to XYZ criteria”)

Reasonable assurance engagement Examples of Non-Assurance Engagement (PSRS)

Positive form: “In our opinion internal control is 1. Agreed upon procedures – engaging party or
effective, in all material respects, with regards to intended users determines procedures
XYZ criteria” o Nature of procedures performed is
audit procedures
Limited assurance engagement
o Intended users forms the conclusion
Negative form: “Based on our work described in this from the report of auditor
report, nothing has come to our attention that
Element of Report on factual proceedings
causes us to believe that the internal control is not
effective with regard to XYZ criteria” o Identification of specific financial or
non-financial information to which
- Expresses a qualified or disclaimer opinion
agreed upon procedures applied
when depending how material or pervasive
o List of specific procedures performed
limitation is. Which he can consider withdrawal
o Description of the auditor’s factual
from engagement
findings
- After acceptance and the practitioner discover
- Restricted to those parties who have agreed to
that the criteria is not suitable or the subject
the procedures to be performed
matter is not appropriate for an assurance 2. Compilation – uses accounting expertise in
engagement should expresses; collecting, classifying and summarizing financial
a. Qualified or adverse conclusion
information
b. Qualified or disclaimer conclusion
o Not independent and can issue a
Inappropriate use of Practitioner’s Name compilation report
3. Management Advisory Services – provides
advice and technical assistance that will enable
a client to conduct its business more effective
4. Consulting Services – two-party contracts
involving services that recommend uses for
information
5. Tax return preparation – prepares tax return to
clients