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Auditing Theory, P1
Standards Application
1. Philippine Standards on Auditing (PSAs) Audit of historical information
2. Philippine Standards on Review Engagements Review of historical financial information
(PSREs)
3. Philippine Standards on Assurance Engagements Assurance engagements dealing with subject
(PSAEs) matters other than historical financial
information
4. Philippine Standards on Related Services (PSRSs) Compilation engagements
Engagements to apply agreed-upon
procedures to information
Other related services engagements as
specified by AASC
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASCs Engagement Standards.
2. Philippine Standards on Quality Control (PSQC) are to be applied for all services falling under the AASC’s
engagement standards.
3. Philippine Standards are applicable to engagements in the Public Sector.
2. Professional accountants should be aware of and consider Practice Statements applicable to engagement.
3. A professional accountant who does not consider and apply the guidance included in a relevant Practice Statement
should be prepared to explain how the basic principles and essential procedures in the AASC’s
1. The Framework does not itself establish standards or provide procedural requirements for the performance of
assurance engagements.
2. In addition to the Framework and PSAs, PSREs and PSAEs, practitioner who performs assurance engagements
are governed by;
the Philippine Code of Ethics for Professional Accountants; and
Philippine Standards on Quality Control (PSQCs).
ASSURANCE ENGAGEMENTS
2. “Subject matter information” refers to the outcome of the evaluation or measurement of a subject matter.
3. In some assurance engagements, 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 is
made available to intended users (assertion-based engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or measurement of subject
matter, or obtains a representation from the responsible party that has performed the evaluation or measurement
that is not available to the intended users. The subject matter information is provided to the intended users in the
assurance report (direct reporting engagements).
1. Reasonable assurance engagement – the objective is a reduction in assurance engagement risk to an acceptably
low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s
conclusion.
The objective of an assurance engagement is for a professional accountant to evaluate or measure a subject matter
that is the responsibility of another party against identifies suitable criteria, and to express a conclusion that
provides the intended user with a level of assurance about the subject matter.
An assurance engagement is 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, thereby improving the likelihood
that the information will meet the needs of an intended user.
Audit – Philippine Standards on Auditing (PSA) The objective of an audit of financial statement 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. The phrase use to express the auditor’s opinion
is “present fairly, in all material respects”.
The auditor should comply with relevance ethical requirements relating to audit engagements.
“Scope of an audit” refers to the audit procedures that, in auditor’s judgment and based on PSAs, are deemed
appropriate in the circumstances to achieve the objective of the audit.
The auditor should plan and perform an audit with an attitude of PROFESSIONAL SKEPTCISM recognizing
the circumstances may exist that cause the financial statements to be materially misstated.
In forming the audit opinion, the auditor obtains sufficient appropriate evidence to be able to draw conclusions
on which to base that opinion.
The auditor’s opinion enhances the credibility of financial statements by providing a high, but not absolute,
level of assurance.
In an audit engagement, the auditors provide a high, but not absolute, level of assurance, expressed positively
in the audit report as reasonable assurance, that the information subject to audit is free of material
misstatement.
Absolute assurance in auditing is not attainable as a result of such factors such as:
While the auditor is responsible for forming and expressing an opinion on the financial statements, the
responsibility for the preparation and presentation of the financial statements, in accordance with the
applicable financial reporting framework is that of the entity’s MANAGEMENT, with oversight from those
charged with governance.
2. Limited assurance engagement - the objective of a limited assurance engagement is a reduction in engagement
assurance risk to a level that is acceptable in the circumstances of the engagement, but where the risk is greater
than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s
conclusion.
Reviews – Philippine Standards on Review Engagements (PSAE) 2400. The objective of the review
engagement is to enable an auditor/practitioner to state whether, on the basis of procedures which do not
provide all 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.
In a review engagement, the practitioner provides a moderate level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of a negative (also called limited)
assurance.
Procedures. While a review involves the application of audit skills and techniques and the gathering of
evidence, (inquiry and analytical procedures), it does not ordinarily involve an assessment of accounting and
internal control systems, tests of records, and of responses to inquiries by obtaining corroborating evidence
through inspection, observation, confirmation, and computation which are procedures ordinarily performed
during an audit.
If the auditor/practitioner has reason to believe that the information subject to review may be materially
misstated, the practitioner should carry out additional or more extensive procedures as are necessary to be able
to express negative assurance or to confirm that a modified report is required.
Report. The review should contain a clear written expression of negative assurance. The auditor should review
and assess the conclusion drawn from the evidence obtained as the basis for the expression of negative
assurance.
Unqualified Review Report. Issued when the auditor believes, based on the evidenced obtained, that there
are no material modification that should be made to the financial statements to be in conformity with PFRS.
Based on our reviews, nothing has come to our attention that causes us to believe that the accompanying
financial statements are not presented fairly, in all material respects, in accordance with the Philippine
Financial Reporting Standards.
a. Departure from PFRS. If matters have come to the auditor’s attention that indicate the financial
statement do not conform to PFRS, the report should described those matters that impair a fair
presentation of the financial statements, including, unless impracticable, a quantification of the
possible effect(s) on the financial statements and either:
The following are non-assurance engagements and therefore are not covered by the Framework:
Engagements covered by PSRSs such as agreed-upon procedures engagements and compilations of financial or
other information.
The preparation of tax returns where no conclusion conveying assurance is expressed.
Consulting (or advisory) engagements, such as management and tax consuting.
An independent and competent professional accountant who adhere to the fundamental principles required by
the Code of Ethics.
The party responsible for the subject matter of the assurance engagement.
The intended users to whom the professional accountant usually addresses the report.
The responsible party and the intended user will often be from separate organization by need not be. A
responsible party and an intended user may both be within the same organization. The relationship between
the responsible party and intended users needs to be viewed within the context of a specific engagement.
2. Subject Matter. The subject matter of an assurance engagement may take many forms such as:
In some assurance engagements, the evaluation or measurement of the subject matter is performed by the
responsible party and the outcome of such evaluation or measurement is in the form of an assertion by the
responsible party that is made available to the intended users. It is the assertion about which the practitioner
gathers sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion on the
assurance report. These engagements are called “assertions-based engagements”.
In other assurance engagements, 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 users. The subject matter information is made available in
the assurance report. These engagements are called “direct reporting engagements”.
3. Criteria. Criteria are the standards or benchmark used to evaluate or measure the subject matter of an assurance
engagement. Without the frame of reference provided by these criteria, any conclusion is open to individual
interpretation and misunderstanding. In an assurance engagement, criteria must be suitable to enable reasonably
consistent evaluation or measurement of the subject matter within the context of professional judgment.
4. Evidence. The practitioner should plan and perform the engagement to obtain sufficient appropriate evidence to
determine whether the assertions are free from material misstatements.
5. Assurance Report. The professional accountant expresses a conclusion that provides a level of assurance as to
whether the subject matter conforms in all material respects with identifiable suitable criteria. The professional
accountant’s conclusion provides either high, or moderate level of assurance about the subject matter.
Non-Assurance Engagements
The auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive
copies of the report of factual findings, that there is a clear understanding regarding the agreed procedures
and the conditions of the engagement.
In agreed-upon procedures engagement, the practitioner simply provides a report of the factual findings and
expresses no assurance in his/her report. Users of the report make an assessment of the procedures and findings
reported by the practitioner and draw their own conclusions for the practitioner’s work.
Report. The report on an agreed-upon engagement needs to describe the purpose and agreed-upon procedures of
the engagement in sufficient detail to enable the reader to understand the nature and extent of the work performed.
Procedures. The accountant should read the compiled information and consider whether it appears to be
appropriate in form and free from obvious material misstatements. The accountant is not ordinarily required to:
a. make any inquiries of management to assess the reliability and completeness of the information provided;
b. assess internal controls;
c. verify any matters;
d. verify any explanations.
If the accountant becomes aware of that information supplied by management is incorrect, incomplete, or otherwise
unsatisfactory, the accountant should consider performing the above procedures and request management to
provide additional information. If management refuses to provide additional information, the account should
withdraw from the engagement, informing the entity of the reasons of withdrawal.
If the accountant becomes aware of misstatements, the accountant should try to agree appropriate amendments
with the entity. If such amendments are not made and the financial information is considered to be misleading, the
accountant should withdraw from the engagement.
Reports. The accountant’s compilation report should identify the financial statement compiled and should clearly
indicate that no assurance is provided on the financial statements:
On the basis of information provided by the management, we have compiled, in accordance with Philippine
Standard on Related Services applicable to compilation engagements, the balance sheet of X Company as
of December 31, 20XX and the statements of income and cash flows for the year then ended. The
management is responsible for these financial statements. We have not audited, or reviewed these financial
statements and accordingly express no assurance thereon.
Departure from PFRS. If there is a material departure from PFRS, the accountant should disclose the
departure in a separate paragraph of the report, although their effects do not have to be quantified.
If the accountant feels that the modification of the report is not sufficient to described the PFRS departures
and the client is not willing to correct these deficiencies, the accountant may withdraw from the engagement.
Scope Limitation. Scope limitation will normally cause the accountant to withdraw from the engagement.