COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City
COLLEGE OF BUSINESS, MANAGEMENT AND ACCOUNTANCY
1st Semester A.Y. 2020-2021
Auditing and Assurance Principles (Pr E 1)
Module 1
Introduction to Assurance Engagements
A. Assurance Engagement
- are services provided 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 the criteria. It may be:
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1. Assertion-based Engagements – are engagements where 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.
2. Direct Reporting Engagements – are engagements where the practitioner either directly performs the
evaluation or measurement of the subject matter, or obtains 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.
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Elements of an Assurance Engagement
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Types of Assurance Engagements
1. Reasonable Assurance Engagement – Its objective is to reduce 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.
2. Limited Assurance Engagement – Its objective is to reduce 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 a basis for a negative form of expression of the practitioner’s conclusion.
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1. A three-party relationship involving
a. A professional accountant/practitioner – refers to the CPA or professional accountant
who performs an assurance engagement.
b. A responsible party
 In a direct reporting engagement, is responsible for the subject matter.
 In an assertion-based engagement, is responsible for the subject matter information
(assertion), and may be responsible for the subject matter.
c. Intended users – for whom the practitioner prepares the assurance report.
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2. An appropriate subject matter
Subject Matter
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 Financial
performance or
conditions
 Non-financial
performance or
condition
 Physical
characteristics
 Systems and
processes
 Behavior
Examples
Subject Matter Information
Historical or prospective financial
statements
Performance of an entity
Recognition, measurement, presentation and
disclosure
represented in financial statements
Key indicators of efficiency and effectiveness
Capacity of a facility
Specification Document
Entity’s internal control or IT
system
Corporate governance,
compliance with regulation,
human resource practices
Assertion about effectiveness
Statement of compliance or a statement of
effectiveness
Subject matter information – the outcome of the evaluation or measurement of a subject matter.
3. Suitable Criteria (Established (PFRS)/Specifically/internally developed) are standards or benchmarks
used to evaluate the subject matter including, where relevant, benchmarks for presentation and disclosure.
Course Facilitator: Alberth Justine de la Cruz Balgos, CPA
COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City
a. Relevance – It contributes to conclusions that assist decision making by the intended users.
b. Reliability – It results in reasonably consistent evaluation or measurement on the subject matter
including, where relevant presentation and disclosure, when used in similar circumstances by similarly
qualified practitioners.
c. Neutrality – It contributes to conclusions that are free from bias.
d. Understandability – It contributes to conclusions that are clear, comprehensive, and are not subject to
significantly different interpretations.
e. Completeness – It exists when relevant factors that could affect conclusions in the context of the
engagement circumstances are not omitted.
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4. Sufficient appropriate evidence
The practitioner should gather sufficient appropriate evidence in which to base his conclusion. Sufficiency is
the measure of the quantity of evidence. Appropriateness, on the other hand, is the measure of the quality
(relevance and reliability) of evidence
5. A written assurance report in the form appropriate to a reasonable assurance engagement or a limited
assurance engagement.
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Reasonable assurance – a concept relating to accounting evidence necessary for the practitioner to
conclude in relation to the subject matter information taken as a whole. In the context of an audit of financial
statements, it refers to a high, but not absolute, level of assurance.
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Assurance Engagement Risk is the risk that the practitioner expresses an inappropriate conclusion when
the subject matter information is materially misstated. It is represented by the following components:
a. The risk that the subject matter information is materially misstated, which in turn consists of:
 Inherent risk is the susceptibility of the subject matter information to a material misstatement,
assuming that there are no related controls.
 Control risk is the risk that a material misstatement that could occur will not be prevented, or
detected and corrected, on a timely basis, by related internal controls.
b. Detection risk is the risk that the practitioner will not detect a material misstatement that exists.
Obtaining absolute assurance, that is reducing assurance engagement risk to zero, is rarely attainable
because of the following factors/inherent limitations:
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a. The use of selective testing or sampling.
b. The inherent limitation of internal control.
c. The fact that much of the evidence available to practitioner is persuasive rather than conclusive
d. The use of judgement in gathering and evaluating evidence and forming conclusion based on the
evidence.
e. The characteristics of the subject matter when evaluated or measured against the identified criteria.
Common Types of Assurance Engagements
1. Audits - Philippine Standards on Auditing (PSAs)
2. Review - Philippine Standards on Review Engagements (PSREs)
3. Other Assurance Services - Philippine Standards on Assurance Engagements (PSAEs)
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Non-Assurance Engagements
1. Engagements covered by Philippine Standards on Related Services (PSRSs), such as agreed-upon
procedures (AUP) and compilation of financial or other information.
2. Preparation of tax returns where no conclusion conveying assurance is expressed.
3. Consulting or Advisory engagements, such as management and tax consulting.
Engagement
Level of Assurance
Audit
Reasonable
(High, but not absolute)
Limited (Moderate)
Negative
No Assurance
Findings
No Assurance
Identification of
Information compiled
Review
Agreed-upon
procedures
Compilation
Form of Conclusion
Positive
Course Facilitator: Alberth Justine de la Cruz Balgos, CPA
COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City
Contents of Written Assurance Report
The practitioner’s written assurance report should contain a conclusion that conveys the assurance obtained
about the subject matter. It should have a title, an addressee, a description of the engagement and
identification of the subject matter, a statement that identifies the responsible party, and describe the
practitioner’s responsibilities, identification of the parties to whom the report is restricted and the purpose of
the preparation when the report is for restricted purpose, identification of the standards under which the
engagement was conducted, identification of the criteria, the practitioner’s conclusion, the report date, the
name of the practitioner (or the firm), and the place of issue of assurance report.
The contents of the practitioner’s conclusion in an assurance engagement may depend on whether the
engagement is an “assertion-based engagement” o a “direct reporting engagement”.
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In an assertion-based engagement, the practitioner’s conclusion relates to the responsible party’s
assertions. The assertion is the responsible party’s conclusion about the subject matter based on identified
suitable criteria. The practitioner can express a conclusion about the assertion by the responsible party, such
as:
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“In our opinion, the responsible party’s assertion that internal control is effective, in all material
respects, based on XYZ criteria, is fairly stated…”
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Alternatively, the practitioner can provide a conclusion about the subject matter and the criteria in a form
similar to the assertion made by the responsible party. In this case, the assurance isprovided because the
practitioner’s conclusion on the subject matter supports the assertion by the responsible party. The
conclusion is worded as:
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“In our opinion, internal control is effective, in all material respects, based on XYZ criteria…”
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In a direct reporting engagement, the practitioner expresses a conclusion directly on the subject matter and
the criteria, regardless of whether the responsible party has made a written assertion on the subject matter,
such as:
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“In our opinion, internal control is effective, in all material respects, based on XYZ criteria…”
…End of topic…
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References:
Chen, Harvey S. (2018) Auditing Theory vol. 1
Iloilo City, Philippines.
Course Facilitator: Alberth Justine de la Cruz Balgos, CPA