Chapter 1: Fundamentals of Assurance Services
Reliable information – information that is fairly stated,
information that presents a true and fair view of what it
purports to represent.
Certified Public Accountants (CPAs) – provide assurance that
the information audited is fairly stated.
Assurance services/Assurance engagements – are three-party
contracts in which assurers reports on the quality of
information; when performed by CPAs, intends to enhance the
credibility of information about a subject matter.
Parties Involved in Determining Engagement requirements
 Intended users: involved with the practitioner and the
responsible party in determining the requirements of
the engagement.
 Practitioner: responsible for determining the nature,
timing and extent of procedures to be performed in
the engagement.
Assurance Engagement for a Specific Purpose
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Elements of Assurance Engagements:
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2.
3.
4.
5.
A 3-party relationship involving a practitioner (CPA),
a responsible party, and intended users.
An appropriate subject matter
Suitable criteria
Sufficient appropriate evidence
A written assurance report in the form appropriate to
a reasonable assurance engagement or a limited
assurance engagement.
Subject matter
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Practitioner
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Broader than the term “auditor”
May be requested to perform assurance
engagements on a wide range of subject matters
Experts – persons from other professional disciplines
who are used by practitioners to satisfy ethical
requirements regarding professional competence.
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Criteria – are the benchmarks used to evaluate or
measure the subject matter including where relevant,
benchmarks for presentation and disclosure.
required for reasonably consistent evaluation or
measurement of a subject matter within the context
of professional judgment.
Characteristic
Is the person(s) responsible for the subject matter or
the subject matter information (assertion) in an
assurance engagement.
May or may not be the party who engages the
practitioner
Ordinarily provides the practitioner with a written
representation that evaluates or measures the
subject matter against the identified criteria, whether
it is to be made available as an assertion to the
intended users.
Intended users
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Is identifiable, and capable of consistent evaluation or
measurement against the identified criteria and
capable of being subjected to procedures for
gathering sufficient appropriate evidence to support
a reasonable assurance or limited assurance
conclusion.
Suitable criteria
Responsible partner
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When engagement are designed for specified
intended users/specific purpose, the practitioner
considers including a restriction in the assurance
report that limits its use to those users or that
purpose.
Are the person(s), class of persons for whom the
practitioner prepares the assurance report.
*responsible party can be one of the intended users,
but not the only one.
May be limited to major stakeholders with significant
and common interests.
Relevance
Explanation
Relevant criteria contribute to conclusions that assist decision-making
by the intended users.
Completeness
Criteria are sufficiently complete when relevant factors that could
affect the conclusions in the context of the engagement
circumstances are not omitted. Complete criteria include, where
relevant, benchmarks for presentation and disclosure.
Reliability
Reliable criteria allow reasonably consistent evaluation or
measurement of the subject matter including, where relevant,
presentation and disclosure, when used in similar circumstances by
siilary qualified practitioners.
Neutrality
Neutral criteria contribute to conclusions that are free from bias.
Understandability
Understandable criteria contribute to conclusions that are clear,
comprehensive, and not subject to significantly different
interpretations.
Established criteria – are those embodied in laws or
regulations or issued by authorized or recognized bodies of
experts that follow a transparent due process.
Specifically developed criteria – are those designed for the
purpose of the engagement.
Sufficient Appropriate Evidence
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practitioner plans and performs an assurance
engagement with an attitude of professional
skepticism
Professional skepticism – attitude where one 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.
Assurance Engagement Risk
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Assurance Report
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Sufficiency and Appropriateness of Evidence
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Sufficiency – is the measure of the quality of
evidence.
Appropriateness – is the measure of the quality of
evidence: relevance and reliability.
Greater risk = more evidence required
Higher quality = evidence required
More evidence may not compensate poor quality
Reliability of evidence is influenced by:
 Its source
 Its nature
Generalizations About the Reliability of Evidence
1.
2.
3.
4.
5.
Evidence is more reliable when it is obtained from
independent sources outside the entity.
Evidence that is generated internally is more reliable
when the related controls are effective.
Evidence obtained directly by the practitioner is more
reliable than evidence obtained indirectly or by
inference.
Evidence is more reliable when it exists in
documentary form, whether paper, electronic, or
other media.
Evidence provided by original documents is more
reliable than evidence provided by photocopies or
facsimiles.
Forms of Conclusions
1.
2.
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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.
Practitioner understands and assesses what factors
might influence the decisions of the intended users.
Positive (reasonable assurance/high level of
assurance)
Negative (limited assurance/moderate level of
assurance)
The ore extensive the evidence-gathering procedures, the
higher the level of assurance that a practitioner can provide.
Styles of reporting:
1.
2.
Short form – reports ordinarily include only the basic
elements.
Long form – reports include other information and
explanations that are not intended to affect the
practitioner’s conclusion.
Not all conclusions are unqualified conclusions.
Classification of Assurance Engagements
According to Level of Assurance
1.
Practitioner considers the relationship bet. the cost of
obtaining evidence and the usefulness of the
information obtained.
Materiality
Written report containing a conclusion that conveys
the assurance obtained about the subject matter
information.
2 level of assurance expressed by practitioner:
1. Reasonable (but not absolute) level of assurance
2. Limited level of assurance
Professional engagement standards – establish basic
elements for assurance reports.
Cost-Benefit Considerations
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Is the risk that the practitioner expresses an
inappropriate conclusion when the subject matter
information is materially misstated.
2.
Reasonable assurance engagement
 Its 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.
Limited assurance engagement
 Its objective 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 form of expression of
the practitioner’s conclusion.
According to Structure
1.
2.
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.
 Role of practitioner: to obtain sufficient
appropriate evidence to express a
conclusion about whether the subject
matter information, as prepared by the
measurer/evaluator, is free form material
misstatement.
Direct engagement
 The practitioner measures/evaluates the
underlying subject matter against the
criteria and presents the resulting subject
matter information as part of or
accompanying the assurance report.
Attestation Engagements
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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.
Four basic conditions:
1. There must be a written assertion made by one
party………..
2. There must be agreed-upon and objective criteria
that can be utilized to assess the accuracy of the
assertion.
3. The assertion must be amenable to verification
by an independent party.
4. The accountant should prepare a written
conclusion about the reliability of the
assertion(s).
2 common attestation engagements:
1. Independent audit engagements – one that
provides a reasonable (not absolute) level of
assurance that the subject matter is free from
material misstatements.
2. 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.
Other Assurance Services
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Business Performance Measurement
Health Care Performance Measurement
Elder Care Plus
Risk Assessment Services
CPA WebTrust
Information Systems Reliability
Limitations of Assurance Engagements
1.
2.
3.
4.
5.
The use of selective testing
The inherent limitation of internal control
The fact that much of the evidence available to the
practitioner is persuasive rather than conclusive.
The use of judgment in gathering and evaluating
evidence and forming conclusions based on that
evidence.
The characteristics of the subject matter.
Non-Assurance Services
Agreed-upon procedures – auditor in 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.
Compilation of Financial or Other Information – the
accountant is engaged to use accounting expertise as opposed
to auditing expertise to collect, classify and summarize
financial information.
Some tax services – a CPA can develop tax strategies to help
individuals or business legally minimize their tax liability.
Management Consulting and Other Advisory Services –
Management consulting – refers to both the industry, and the
practice of, helping organizations improve their performance,
primarily through analysis of existing business problems and
development of plans for improvement.
Non-assurance Services and Missing Assurance Engagement Elements
Agreed-upon procedures
No conclusion is expressed by the practitioner.
Compilations
No conclusion is expressed by the practitioner.
Some tax services
Non-assurance if tax returns are prepared with no conclusion
expressed. Tax consulting services are 2-party contracts.
Management consulting and
other advisory servicees
2-party contracts that recommend uses for information
Chapter 2: Audits of Financial Statements – An introduction
Auditing is “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”.
2 processes that auditing encompasses:
1.
2.
External Audits
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Internal Audits
Investigative process
Reporting process
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Investigation – involves the systematic gathering and
evaluation of evidence as a basis for determining whether
assertions/representations made by a responsible person in a
company’s financial statements, correspond with the
established financial reporting criteria.
Reporting – involves communicating an evaluation or opinion
in an audit report to interested users.
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Accounting
is the processs of recording, classifying, and
summarizing economic events in logica manner for
the purpose of providing financial information for
decision making
concerned with the determination of whther the
recorded accounting information for the entity
properly reflects the economic events that
occurred during the accounting period.
service activity
auditor must possess understanding accounting
rules
provide financial information qhich is quantitative auditor must possess an expertise in
in nature
accumulation and interpretation of audit evidence
accountants must have a thorough understanding
of the principle and rules to make sure that the
auditing begins where accounting ends
entity's economic events are properly recorded on
a timely basis and reasonable cost
Assurance Services an Audit Services DIstinguished
Service
Audit engagements
Assertion-based engagements (attestations)
Assurance engagements
Value Added to Information Reported On
Reliability, Credibility (narrowest, 1st)
Reliability, Credibility (2nd)
Reliability, Credibility, Relevance, Timeliness (broadest, 3rd)
TYPES OF AUDIT ACCORDING TO NATURE OF DATA OR ASSERTION BEING AUDITED
Type
Assertions
Criteria
Report
Financial statements Financial statements Identified financial Audit report on the fairness of
audit
are fairly presented reporting framework financial statements.
Operational audit
Operational or
performance data
Management
objectives
Report on efficiency and
effectiveness, including
constructive suggestions
Compliance audit
Compliance with
applicable laws and
regulations or
management policy
Laws, rules and
regulations or
management policy
Degree of compliance report.
A independent appraisal function established within
an organization to examine and evaluate its activities
as a service to the organization.
Not independent
Mainly operational & compliance audits
Government Audits
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Auditing and Accounting Distinguished
Auditing
Audits performed by CPAs who are independent of
the organizations whose assertions are being audited
Independent auditors/external auditors
Mainly financial statement audits
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Involves the determination of whether government
funds are being handled properly and in compliance
with existing laws and whether the government
programs of a particular agency are being conducted
efficiently and economically.
Commission on Audit (COA) – recognized as the
Supreme Audit Institution in the Republic of the
Philippines.
3 main divisions:
1. Compliance audit – the examination, audit and
settlement in accordance with laws and
regulations.
2. Financial audit – audit of the accounting and
financial system and controls to ensure reliability
of recorded financial data.
3. Performance audit – an objective examination of
the financial and operational performance of an
organization, program, activity or function and is
oriented towards opportunities for greater
economy, efficiency and effectiveness.
a. Economy and efficiency audit – also knowns
as management audit. This is the appraisal
of management performance from a least
cost point of view and the analysis of the
cost-benefit relationship.
b. Effectiveness audit – also known as program
results audit. This is the evaluation of
programs, projects and activities to
determine the extent of achievement of
previously set goals and objectives.
The objective and Scope of a Financial Statement Audit
Objective: the expression of an opinion on the fairness of
financial statements
Scope: auditor normally determines the scope of an audit with
the requirements of legislation, regulations or relevant
professional bodies.
Information Risk
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Risk that information is misstated or misleading.
7 factors that contributes to information risk:
1. Remoteness of information users from
information providers
2. Potential bias and motives of information
provider
3. Voluminous data
4. Complex exchange transactions
Reducing information Risk
1.
2.
3.
Allow users to verify information
User shares information risk with management
Have the financial statements audited
Audit report
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Is the means through which the auditor provides
reasonable assurance that the financial statements
are fairly stated.
Limitations of and Audit
1.
2.
3.
4.
The nature of financial reporting
The nature of audit process
Nature of audit evidence available
Timeliness of financial reporting
Chapter 3: The Professional Practice of Accounting
Sectors of Accounting Practice
1.
2.
3.
4.
Practice of Public Accountancy (public practice)
Practice in Commerce and Industry (private practice)
Practice in Education or the Academe
Practice in Government
A person who passes the CPA Board Licensure Examination
need not take the Civil Service Examination given by the Civil
Service Commission.
CPAs are allowed to practice in more than one sector, or
engage in two or more types of services at the same time,
provided that there is no impairment in the integrity,
objectivity, or independence of the CPA.
Regulation of the Accounting Profession
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2.
3.
4.
5.
Republic Act. No. 9298 or The Philippine Accountancy
Act of 2004 share provide and govern:
a. The standardization and regulation of accounting
education
b. The examination for registration of CPAs
c. The supervision, control, and regulation of the
practice of accountancy in the Philippines
Financial Reporting Standards and Engagement
Standards established by recognized standard-setting
bodies
Adoption of a Code of Ethics for CPAs in the
Philippines
Self-regulation through a system of quality control
Sanction/penalties against violators of the laws, rules
and regulations affecting the accounting profession
Organizations that Affect Accountancy Profession
Professional Regulation Commission (PRC): this agency
administers, implements and enforces the regulatory policies
of the Philippines Government with respect to the regulation
and licensing of various professions under its jurisdiction.
Professional Regulatory Board of Accountancy (PRBOA): this
agency is empowered to administer the implementation of RA
9298 or the Philippine Accountancy Act of 2004.
Commission on Audit (COA): this is the highest and final
authority in state auditing. Its jurisdiction and responsibility is
defined by the Constitution.
Bureau of Internal Revenue (BIR): this agency aims to raise
revenues for the government through the effective and
efficient collection of taxes, provide quality service to tax
payers, and enforce tax laws in an impartial and uniform
manner.
Insurance Commission (IC): its mandate is to regulate and
supervise the insurance industry for the promotion of the
national interest.
The Professional Regulatory Board of Accountancy
Professional Regulatory Board of Accountancy (PRBOA)
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Is the official government agency empowered to
enforce Republic Act No. 9298.
Under the Professional Regulation Commission (PRC)
Composition
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Chairman
6 members appointed by the Philippine President
Vice chairman form members (1year term)
Nomination and Appointment Process
Terms of Office
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Chairman – 3 years
No person who has served 2 successive complete
terms shall be eligible for reappointment until the
lapse of 1 year.
No person shall serve the board for more than 12
years
Councils Formed to Assist the Board of Accountancy
Educational technical Council (ETC): assist the BOA in
continuously upgrading accounting education in the
Philippines.
Quality Review Committee (QRC): created to conduct an
oversight into the quality of audits of financial statements
through a review of the quality control measures instituted by
individual CPAs, firms or partnerships.
PRC CPD Council: will assist the BOA in implementing its
Continuing Professional Development (CPD) program.
Financial Reporting Standards Council (FRSC)
Securities and Exchange Commission: this agency regulates
the registration and operations of corporations, partnerships,
and other forms of associations in the Philippines.
Auditing and Assurance Standards Council (AASC)
Bangko Sentral ng Pilipinas (BSP): the primary objective of this
agency is to maintain price stability conducive to a balanced
and sustainable economic growth.
International Auditing and Assurance Board (IAASB)
International Accounting Standards Board (IASB)
International
Federation
of
Accountants
(IFAC)
ASEAN Chartered Professional Accountant (ACPA)
ASEAN Chartered Professional Accountant Register (ACPAR)
National Accountancy Body (NAB)
Professional Regulatory Authority (PRA)
Philippine Institute of Certified Public Accountants (PICPA)