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Auditing and Assurance Services

MODULE ONE:

FUNDAMENTALS OF
AUDITING AND
ASSURANCE SERVICES

Overview to Module 1

1.1 Introduction to assurance engagements


Nature, objective, and elements
Types of assurance engagements
Assurance service vis--vis attestation services

1.2 Introduction to auditing


Nature, philosophy, and objectives
Types of audit
According to nature of assertion / data
According to types of the auditor

1.1 Introduction to
assurance
engagements

Nature

Assurance defined

The auditors satisfaction as


to the reliability of an
assertion being made by
one party for use by
another party.

Assurance engagement defined

Assurance engagement means


an engagement in which a
practitioner expresses a
conclusion designed to enhance
the degree of confidence of the
intended users other than the
responsible party about the
outcome of the evaluation or
measurement of a subject
matter against criteria.
-from Phil. Framework for Assurance
Engagements

Objective

for a professional accountant to


evaluate or measure a subject matter
that is the responsibility of another
party against identified suitable
criteria, and to express a conclusion
that provides the intended user with a
level of assurance about the subject
matter.

Elements

A three party relationship involving:


A practitioner;
A responsible party; and
Intended users.

An appropriate subject matter;


Suitable criteria;
Sufficient appropriate evidence;
A written assurance report.

Types of assurance engagements

REASONABLE
ASSURANCE (High
Level)
OBJECTIVE:

Reduction in
assurance
engagement risk to an
acceptably low level in
the circumstances of
the engagement.
PRACTITIONERS
CONCLUSION:
Positive

LIMITED
ASSURANCE
(Moderate Level)
OBJECTIVE: Same

as in reasonable
assurance but where
that risk is greater
than for a reasonable
assurance
engagement.
PRACTITIONERS
CONCLUSION:
Negative

Forms of conclusions

POSITIVE

In our opinion, internal


controls are
effective, in all
material respects,
based on XYZ
criteria."

NEGATIVE

Based on our work


described in this report,
nothing has come to
our attention that
causes us to believe
that internal control is
not effective, in all
material respects,
based on XYZ criteria.

Classification of
Assurance Engagements

According to level of
assurance
Reasonable

assurance
Limited assurance

According to
structure
Assertion based

engagement
(Attestation)
Direct reporting
engagement

According to structure

Assertion based
(Attestation)
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 the
intended users.

Direct reporting
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
directly available to the
intended users. The subject
matter information is provided
to the intended users in the
assurance report.

Comprehensive Example
Proven oil
reserves
Co. 1

5,200

Co. 2

725

Co. 3

3,260

Co. 4

15,000

Co. 5

6,700

Co. 6

39,126

Co. 7

345

Co. 8

175

Co. 9

24,135

Co. 10

9,635

Total

104,301

ASSERTION BASED
Each company measures its

reserves and provides an


assertion to the firm and to
intended users.
An entity other than the
companies measures the
reserves and provides an
assertion to the firm and to
intended users.

Comprehensive Example

Proven oil
reserves

Each company measures its

Co. 1

5,200

Co. 2

725

Co. 3

3,260

Co. 4

15,000

Co. 5

6,700

Co. 6

39,126

Co. 7

345

Co. 8

175

Co. 9

24,135

Co. 10

9,635

Total

DIRECT REPORTING

104,301

reserves and provides the


firm with a written
representation and measures
its reserves against the
established criteria for
measuring proven reserves.
The representation is not
available to the intended
users.
The firm directly measures
the reserves of some of the
companies.

Assurance vs Attestation vs Audit

Assurance
o

Three party contracts in


which an assurer reports on
(or improves) the quality of
information

Attestation
Type of assurance service

in which an attestor (an


independent accountant)
offers assurance about a
subject matter (e.g.
compliance with debt
covenants) that is the
responsibility of another
party.

Audit
Auditing is a systematic

process of objectively
obtaining and evaluating
evidence regarding
assertions about
economic actions and
events to ascertain the
degree of correspondence
between those assertions
and established criteria
and communicating the
results to interested
users.

ASSURANCE ENGAGEMENTS

ASSERTION
BASED
ENGAGEMENTS
AUDIT

DIRECT
REPORTING

Related
Services

ASSURANCE

(Non-assurance
services)

Audit
Others

Review

Examination of prospective FS
CPA performance review
CPA Risk Advisory

Agreed upon procedures


Compilation
Preparation of tax returns
Tax consulting
Management consulting
Other advisory services

Review of FS
Review of interim
information

Other Assurance
Services
Business Performance Measurement

Provides assurance about whether financial and non financial information being reported from the

entitys performance measurement system (e.g. balanced scorecard) is reliable and whether the
performance measures being used are accurately leading the entity toward meeting its strategic
goals and objectives.

Health Care Performance Measurement


Involves the evaluation of the quality of health care, medical services and outcome.

Elder Care Plus


An evaluation designed to provide assurance to the elderly and their relatives about the quality of

care being provided by various care givers by comparing their specific objectives in providing care
with actual services rendered.

Risk Assessment Services


Identifies a set of risks that affect the organization and involves the study of the link between risks

and the organizations vision, mission, objectives, and strategies and development of new and
relevant measures to address these risks.

CPA Web Trust


WebTrust is a seal of assurance service developed jointly by AICPA and CICA which enables

consumers and businesses to purchase goods and services over the Internet with the confidence
that the Web site business meet high standards of business practice.

Information Systems Reliability


Involves evaluating whether financial and non financial information systems provide reliable

information for operating and financial decisions by an entitys management.

Comparison of Auditing, Review, and Related Services


Aspect of
Comparison
Auditing
Nature of service Audit
Level of
assurance
High, but not
absolute
provided
Report provided

Procedures

Features

Review
Review

Related Services
Agreed Upon
Compilation

Moderate

None

None
Identification of
information
compiled

Positiveassurance Negative assurance


on assertion(s)
on assertion(s)
Select from all
available
procedures any
combination that
Inquiry and analytical
procedures
designed
can limit audit risk
to anappropriately to review reliability of
an assertion.
low level.

Factual findings
procedures

Reduce detailed
data to a
Procedures agreed manageable and
upon with the
understandable
specified user(s)
form

Audit skills&
techniques
applied
Auditor's opinion
enhances credibility but accounting &
internal control
of FS; absolute
assurance nonsystems not
assessed.
attainable.

Accounting, not
auditing expertise,
used; benefits
Recipientsof the
derived by users
report from their
arise from the
own conclusions; service that was
report is restricted rendered with due
to the parties in the professional skill
contract.
and care.
17

Note: When to accept assurance


engagements

Relevant ethical requirements, such as


independence & competence, is satisfied.
Engagement circumstances exhibits ALL of
the following:
Subject matter is appropriate.
Criteria to be used are suitable and are available

to the intended users.


Practitioner has access to sufficient appropriate
evidence to support his conclusion.
Practitioners conclusion is to be contained in a
written report.
Practitioner is satisfied that there is a rational
purpose for the engagement.

1.2 Introduction to
auditing

Independent Auditor
Following a systematic process

Objectively obtains & evaluates evidence


Establishes degree of correspondence between
ASSERTIONS

ESTABLISHED
CRITERIA

Communicates results to interested users

Role of management and independent


auditor
Management

Independent
Auditor

Prepares FS

Unaudited FS

Evaluates FS

Audited FS

Audit Report
on FS
Users of Financial Statements

Will an audit
guarantee
dependable
financial
statements?

NO.
An audit conducted
in accordance with
PSAs is designed
to provide only
reasonable
assurance (NOT
ABSOLUTE) that
the FS as a whole
are free from
material
misstatements.

If it does not
guarantee
dependability, why is
there a need for
independent FS
audit?

The need for an


independent FS audit
stems from the
following:
Conflict of interest

between management
and users of FS.
Expertise
Remoteness
Financial consequences
Information risk
Cost of capital

Because of the ffg


LIMITATIONS:
The use of testing /

Sampling risk
Error in application of
judgment / Non-sampling
risk
Reliance on
managements
representation
Inherent limitations of the
clients accounting and
internal control systems
Nature of evidence

Why can an audit


NOT provide
absolute
assurance?!

Objective of an audit

The objective of an audit of financial


statements is to enable the auditor to
express an opinion whether the financial
statements are prepared in all material
respects, in accordance with applicable
financial reporting framework.
-Philippine Standards on Auditing (PSA) 200

Types

According to nature of
assertion / data
Financial statement audit
Operational audit
Compliance audit

According to types of auditor

External independent FS audit


Internal audit
Government audit

Financial Audit
Assertion
s made
by
auditee
Establishe
d criteria
Content of
auditors
report
Auditors
who
generally
perform

FS are fairly
presented.

Compliance Audit
Organization has
complied with
laws, regulations
or contracts.

Operational Audit
Organizations
activities are
conducted efficiently
& effectively.

Financial reporting
standards or other
financial reporting
framework.

Laws, regulations,
and contracts.

Objectives set by
the board of
directors.

Opinion whether FS
are fairly presented
in conformity with an
identified financial
reporting framework.

Degree of
compliance with
applicable laws,
regulations &
contracts.

Recommendations
or suggestions on
how to improve
operations.

External auditors

Government
auditors

Internal auditors

-END OF MODULE
1-

Three party relationship


Practitioner

Broader than the term auditor.

Responsible party

May or may not be the engaging party


(the party who engages the practitioner).

Intended Users

The person, persons or class of persons for whom the


practitioner prepares the assurance report.

Subject matter

An appropriate subject matter is:


Identifiable, and capable of consistent

evaluation or measurement against the


identified criteria.
Can be subjected to procedures for
gathering sufficient appropriate evidence to
support a reasonable assurance or limited
assurance conclusion, as appropriate.

Subject Matter

Subject matter
information

Financial performance or
conditions

Historical or prospective
financial position,
financial performance,
cash flows

Recognition,
measurement,
presentation and
disclosure represented in
financial statements

Non financial
performance or
conditions

Performance of an entity

Key indicators of
efficiency and
effectiveness

Physical characteristics

Capacity of a facility

Specifications document

Systems and processes

An entitys internal control An assertion about


or IT system
effectiveness

Behavior

Corporate governance,
compliance with
regulation, human
resource practices

A statement of
compliance or a
statement of
effectiveness

Subject matter

Financial position, financial


performance, and cash flows of an
enterprise

Subject matter information

The financial statements of the


enterprise

Responsible party

Client or entity management

Responsible for

Sample assurance engagement

Subject matter information only

A government organization engages


a practitioner to perform an
assurance engagement regarding a
report about a private companys
sustainability practices that the
organization has prepared and is to
distribute to intended users.

Subject matter and subject matter


information

An entity engages a practitioner to


perform assurance engagement
regarding a report it prepared about
its own sustainability practices.

Suitable criteria

Criteria are the benchmarks


used to evaluate or measure
the subject matter including,
where relevant, benchmarks for
presentation and disclosure.
Can be formal or less formal
(i.e. PFRS vs internal code of
conduct or agreed level of
performance).
May be:
Established criteria

Are those embodied in laws or


regulations, or issued by authorized
or recognized bodies or experts that
follow a transparent due process.

Specifically developed criteria

Those designed for the purpose of


the engagement.

Characteristics:

CNUR2
Completeness
Neutrality
Understandability
Reliability
Relevance

Sufficient appropriate evidence

Written assurance report

Must be in the form


appropriate to a
reasonable assurance
engagement or a
limited assurance
engagement.