Chapter 1- Fundamentals of Assurance Services

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

Assure - to give confidence or conviction

In auditing, assurance refers to the auditors satisfaction as to the reliability of an

assertion being made by one party for use by another party.

Assurance is expressed through an opinion.

Assurance Services - three party contracts in which assurers report on the quality
of information

-intended to enhance the credibility of information about a subject

matter by

evaluating whether the subject matter conforms in all material respects with
suitable criteria.

Elements of Assurance Engagements 3SECC

1. Three Party Relationship (Practitioner, Responsible Party, Intended User)

2. Appropriate Subject Matter
3. Sufficient Appropriate Evidence
4. Suitable Criteria
5. A written assurance report or conclusion

Three Party Relationship

The responsible party and the intended user can be from different or the same
entity

Practitioner

CPA- Public Accountant; Practitioner CPA engaged in public practice; Auditor-

Practitioner rendering in audit and review engagements

Practioner will provide primary output, express opinion.

- Required to be independent from responsible party and intended user(of

mind, in appearance) *in non assurance, independence is not required
- Observe competence (kapag di kaya, can accept provided that he will
acquire necessary skills, kapag di pa rin kaya, withdraw and state reasons
and/or refer)
- Compliance of ethical requirements
- Responsible for the determination of nature, timing and extend for
procedures to be performed (exclusive)
Responsible Party

RP - Person or persons responsible for the subject matter or the subject information
(assertion) in an assurance engagement.

The rp may or may not be the party who engages the practitioner.

Mas nagbebenefit sir rp. Can be the engaging party

Intended Users

IU Person, persons or class of persons for whom the practitioner prepares the
assurance report.

The rp can be one of the iu but not the only one.

Subject Matter

-Identifiable

-Capable of consistent evaluation or measurement against identified criteria

-capable of being subjected to procedures for gathering sufficient appropriate

evidence.

Pwedeng physical characteristic. Kahit anong mageexpress ka ng opinion

Subject matter- primary assertion

Sm info- outcome of the sunj matters, items.

Suitable Criteria

Criteria are the benchmarks used to evaluate or measure the subject matter

Characteristics of Suitable Criteria

1. Reliability
2. Understandability
3. Neutrality
4. Relevance
5. Completeness

Established Criteria (Formal) Those embodied in laws or regulations or issued by

authorized or recognized bodies of experts

Specifically Developed Criteria- (Less Formal) Designed for the purpose of the
engagement

Criteria need to be available to intended users.

 1. Publicly
2. Inclusion in a clear manner in the presentation of the subject matter
information
3. Inclusion in a clear manner in the assurance report
4. By general understanding

Sufficient Appropriate Evidence

Evidence Gathering

1. Inquiry
2. Observation- looking at a process
3. Inspection of records, assets
4. Analytical Procedures - circumstances
5. Confirmation directed towards outsider and more formal
6. Recalculation- checking mathematical accuracy
7. Re-performance- auditors independent

Evidence is gathered for basis on opinion, by procedures

Sufficiency-quantity; Appropriateness- quality(competence)

They are interrelated. The higher quality, lesser quantity but quantity will not
compensate poor quality. Pag low quality, look for another one.

Relevance- influential; Reliable- source and nature

Not required to gather everything as long as it is enough/ sufficient

Generalizations about the reliability of evidence

1. More reliable if obtained from independent sources outside entity

2. More reliable of internal related controls ( process that helps overall
attainment of objective) are effective
3. More reliable if directly gathered by practitioner
4. More reliable if in a documentary form
5. Original

Factors affecting evidence gathering

1. Cost Benefit Considerations

- Benefit should be bigger than cost.
- If cost exceeds benefit, look for other alternatives, if there is. If none, yes.
- Same with level of difficulty.
- Standard emphasizes effectiveness- attainment of objective, than efficient .
2. Materiality
- An item is material if its omission will cause an intended users decision to
change.
- Matter of professional judgment.
- If materiality threshold is raised, procedures will be less (inverse)
 3. Assurance Engagement Risk
- It is the risk that the practitioner expresses an inappropriate conclusion when
the subject matter information is materially misstated
- Mathematical equation complement is the assurance level. If you want to
have a higher assurance level, more procedures.
4. Professional Skepticism
- Critical assessment with a questioning mind.
- More skeptic, more procedures

Assurance Report

Kinds of Opinion

1. Unmodified/Unqualified- Not changing the primary representation of the

responsible party. Favorable to the client and auditor

Modified Opinions

2. Qualified- except for

3. Adverse completely negate the assertion made. Most unfavorable to
client
4. Disclaimer of Opinion where no opinion is expressed. Most unfavorable
to auditor

Disagreement as to the application for the criteria. Either Qualified (material) or

Adverse (material and pervasive- so significant that it affects other aspects of
the audit)(highly material)

Scope Limitation refers to procedure to be performed. Either Qualified or DoO

Levels of Assurance

1. High but not absolute- Reasonable

2. Moderate- Limited

Forms of Conclusion

1. Positive Form directly stating the conclusion

2. Negative Form - indirect

Classification of Assurance Engagement

According to Level

1. Reasonable Assurance Engagement- Audit

2. Limited Assurance Engagement- Review (mataas ang risk na hindi makikita
and misstatement)

According to structure
 1. Attestation Engagement- 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

Four basic conditions that distinguish an attestation engagement from other

services an accountant may provide
a. There must be a written assertion
b. Agreed upon and objective criteria
c. The assertion must be amenable to verification by an independent party
d. Accountant must prepare a written conclusion

Assertion Based written assertion will be made available to users

Example of Attestation Engagements

A. Audit Engagements
B. Review Engagement

2. Direct Engagement (applicable to other assurance engagements)

Written report only.

Difference between assurance, attestation and audit is scope.

Non Assurance doesnt have opinion, result is comments suggestions and

recommendations.

Agreed Upon Procedures (Due Diligence)

No element of surprise, thus not qualified to express opinion

Restrict report

Compilation

Tax services

MAS

Chapter 2 Audits of Financial Statements

Auditing systematic process of objectively obtaining and evaluating evidence

regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and
communicating the results to interested users(written adit report) AAA

Auditing encompasses two processes: the investigative process and reporting

process
Accounting process of recording, classifying, and summarizing economic events in
logical manner for the purpose of providing financial information for decision
making.

Auditing is different in accounting by the act of obtaining evidence

Assurance - assurance-based-audit (scope of services)

Assertions - representation of management embodied in financial information.

Types of Audit

As to Subject Matter

1. Financial Statement Audit

Compliance with PFRS (Applicable financial reporting framework) and GAAP
-fairness
2. Operational Audit
-About effectiveness and efficiency of organizational activities
- source of evidence operational policies and achievements related to
objectives
3. Compliance Audit
-adherence to laws and regulations
- generally reported to a specific user

FS AND COMPLIANCE BECAUSE OF CRITERIA

As to type of auditor

1. External Audits
- Performed by CPAs who are independent of the organization being audited
- Usually do fs audits but can do compliance and operational
2. Internal Audits
- Independent appraisal function established within an organization to examine
and evaluate its activities as a service to the organization.
- Reports to the audit committee, bod, president or another high executive
- Operational and compliance
- Pwedeng internal purpose sa fs audit
3. Government Audits
- COA audits NGA
- Also from different regulators

External and Government, renders all type of audit as to assertions, and both
independent of company

SH BOD (makes audit committee, member sof the board not active)
Management Team (gets audited) ( no repertoire responsibility in one being
audited, reports to higher level)

Financial Audits
 3SECC

Auditor- expression of opinion, determination of n t and e of audit procedures,

Audit Client-Clients management- (entire fs)financial statement is fairly stated,
all systems that produce the subj matter is the responsibility, detection and
prevention of fraud and error, users of fs

Users of FS

1. Customers
2. Government
3. Employees
4. Lenders
5. Investors
6. Public
7. Suppliers

Primary Users Creditors, Potential and Existing Investors

Other Users

Subject Matter

Records and documents supporting fs

Suitable Criteria

PFRS

Conclusion

Audit report high but not absolute

Inherent limitations of Audit

1. Use of selective testing sampling risk- the risk that the conclusion reached
from the sample examined from the conclusion that will be reached if the
whole population is examined.
2. Use of judgement- nonsampling risk human error
3. Nature of evidence is persuasive rather than conclusive
4. Nature of Assertions
5. Inherent limitations of internal control
A. Cost benefit consideration
B. Management Overriding the controls
C. Circumvention through collusion among employees( CAR) (B and C,
caused by other people)
D. Changes in Circumstances and Conditions
E. Human error or weaknesses
F. Anticipated or routinary transactions
Need for FS Audit (FREC)

- Reduce information risk

a. Let the fs be audited
b. Let the user verify the info
c. Users share responsibility/ consequence with management
1. Conflicts of Interest
2. Expertise
3. Financial or economic consequence
4. Remoteness of information

Governing Principle (CPP)

1. Auditor should comply with ethical req

2. Audit should be conducted in accordance with PSA
3. Professional skepticism

Theoretical Framework (VICBIGT)

1. All data are verifiable two independent people can come up with almost
similar conclusion
2. Auditor must always maintain independence
3. There should be no long term conflicts regarding of application and
performance in resolving, auditor should be satisfied
4. Benefit the public
5. Effective internal control reduced the possibility of fraud and error
6. Consistent application of GAAP
7. What was held true in the past will continue to hold true in the future in the
absence of any evidence to the contrary.