Assurance Engagements It is a type of assignment that professional practitioners undertake. It involves the expression of an opinion by the practitioner regarding a provided subject matter. Practitioners use suitable criteria to evaluate the subject matter. During this process, they collect sufficient and appropriate evidence. Once they have done so, they provide an opinion regarding their findings. Nature of Assurance Engagements 1. A three party relationship 2. An appropriate subject matter 3. Suitable Criteria 4. Sufficient appropriate evidence; and 5. A written assurance report 1. Three Party Relationship ▪ Professional accountant who adheres to the fundamental principles required by the Code of Ethics. ▪ The party responsible for the subject matter of the assurance engagements. ▪ The intended users to whom the professional accountant usually addresses the report. 2. Subject Matter ▪ ▪ ▪ ▪ Data Systems and Processes Behavior Physical Characteristics 3. Criteria - Standards or benchmark used to evaluate or measure the subject matter of an assurance engagement. 4. Evidence – The practitioner should plan and perform the engagement to obtain sufficient appropriate evidence to determine whether the assertions are free of material misstatement. 5. Assurance Report – The professional accountant’s conclusion provides either high or moderate level of assurance about the subject matter. Objective of Assurance Engagements 1. Expressing an Opinion For most assurance engagements, the primary objective is to express an opinion. As mentioned, a practitioner evaluates the subject matter to establish their views. They do so against suitable criteria and gather sufficient appropriate audit evidence. 2. Providing Assurance Giving assurance related to the subject matter. Usually, practitioners provide this assurance to the users defined in the three-party relationship for each assurance engagement. These involve reasonable and limited assurance. 3. Enhancing Confidence By providing assurance to the intended users, assurance engagements enhance their confidence in the subject matter and responsible party. As mentioned, this confidence will be higher for reasonable assurance engagements than limited assurance. Similarly, there are other factors that contribute to how the assurance enhances the intended users’ trust. 4. Reducing Engagement Risk While all of the above objectives relate to other parties, reducing engagement risk is one of the objectives of an assurance engagement for practitioners. By gathering sufficient appropriate audit evidence, practitioners can lower this risk to an acceptably low level. Regardless of the type of assurance they provide, this objective will be the same. Range of Assurance Engagements 1. Attestation In an attestation (also known as assertion-based engagement), the responsible party carries out the measurement or evaluation of the subject matter and reports the information. This subject matter information contains the responsible party’s assertion (for example: "The subject matter information is fairly stated as of date/month/year"). The work the practitioner performs is to give an assurance conclusion on this assertion. 2. Direct Reporting In a direct (direct reporting) engagement, the responsible party does not present the subject matter information in a report in a direct engagement. Instead, the practitioner reports directly on the subject matter and provides the intended users with an assurance report containing the subject matter information. TYPES OF ASSURANCE ENGAGEMENTS Assurance engagements can be classified according to the level of assurance that the practitioner gives to parties who may rely on his/her report. Under the present standards, the two levels of assurance engagements that a practitioner may perform are: a. Reasonable Assurance Engagement - the objective is a reduction in assurance engagement risk to an acceptably low level in circumstances of the engagement as the basis for a positive form of expression of the practitioner's conclusion Example: Financial statement audit. According to the auditor's opinion, in conformity with the relevant financial reporting standards, the financial statements provide a truthful and fair representation. b. Limited Assurance Engagement - the objective is a reduction in assurance engagement risk to a level that is acceptable in circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement, as a basis for a negative form of expression of the practitioner's conclusion. FIVE ELEMENTS OF AN ASSURANCE ENGAGEMENTS 1. Three-Party Relationship Parties Practitioner/Auditor Responsible party/ management and those charged with governance Intended users/ uses of FS Responsibilities ✓ Expression of an opinion on the financial statement ✓ Compliance with ethical requirements ✓ Determining the scope of audit in accordance with PSAs and other applicable regulations of professional bodies ✓ Preparation and presentation of financial statements in accordance with the applicable financial reporting framework ✓ Prevention and detection of fraud and error ✓ Adoption and implementation of adequate accounting and internal control systems ✓ Use the audit report which contains the opinion expressed by the auditor 2. Appropriate subject matter Adequate supporting records and documents should be available in order for the financial statements prepared by management to be considered appropriate subject matter of an audit engagement 3. Suitable criteria Criteria used in audit generally includes Philippine Financial Reporting Standards (PFRS), Generally Accepted Accounting Principles (GAAP) and other applicable financial reporting framework. 4. Sufficient appropriate evidence Evidence is all the information used by the practitioner in arriving at the conclusions on which the assurance report is based which should be sufficient and appropriate in forming an opinion. An assurance engagement rarely involves the authentication of documentation, nor is the practitioner trained as or expected to be an expert in such authentication. • • Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure of the quality of evidence; that is its relevance and its reliability. 5. A written assurance report or conclusion The practitioner provides a written report containing a conclusion that conveys the assurance obtained about the subject matter information. In addition, the auditor considers other reporting responsibilities including communication with those charged with governance. ASSURANCE SERVICES The name assurance services are used to describe the broad range of information enhancement services performed by a certified public accountant (CPA) that are designed to enhance the degree of confidence in the information. In general, assurance services consist of two (2) types: (a) those that increase the reliability of information and (b) those that involve putting information in a form or context that facilitates decision making. A significant portion of the assurance services provided by CPAs is referred to as attestation services. To attest to information means to provide assurance as to its reliability. In an attestation engagement, CPAs provide a report on subject matter or an assertion about that subject matter. One of the most sought-after attestation services is the examination or audit of historical financial statements. Examples of Common Assurance Engagements: Attestation ▪ Audit ▪ Review ▪ Other Attestation Services Other Services ▪ Performance Review ▪ Examination of Forecasts ASSURANCE ENGAGEMENTS AS TO STRUCTURE 1. Attestation Engagements 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. Main Characteristics: ▪ In an attestation, the responsible party carries out the measurement or evaluation of the subject matter and reports the information. ▪ The subject matter information contains the responsible party’s assertion. Example: The financial statements of ABC Company are fairly stated as of December 31, 2023. ▪ The practitioner’s main task is to provide assurance through the expression of a conclusion on this assertion. Example: “In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ABC Company as at December 31, 2023, and its financial performance and its cash flows for the period ended December 31. 2023, in accordance with the Philippine Financial Reporting and Standards (PFRSs). • Also known as Assertion-Based Engagements. These are assurance engagements that which 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. COMMON TYPES OF ATTESTATION ENGAGEMENTS a. Audit Engagement – an engagement in which the auditor provides a reasonable (but not absolute) level of assurance that the subject matter is free from material misstatements. b. Review Engagement – an engagement in which the auditor provides a moderate level of assurance that the information subject to the engagement is free of material misstatement. 2. Direct Engagements A residual definition of assurance engagement as to structure. In a direct (direct reporting) engagement, the responsible party does not present the subject matter information in a report in a direct engagement. Instead, the practitioner reports directly on the subject matter and provides the intended users with an assurance report containing the subject matter information. An example of a direct engagement would be an engagement to report on the effective control over the financial reporting process. A direct assurance conclusion would be constructed as follows: "In our opinion the company maintained, in all material respects, effective internal control over financial reporting as of date/month/year, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)." NON-ASSURANCE ENGAGEMENT Not all engagements performed by CPAs are assurance services. Nonassurance services lack one or more of the elements of assurances engagements. NON-ASSURANCE SERVICES Agreed-upon procedures In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out those procedures of an audit nature which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. The recipient of the report must form their own conclusions from the report by the auditor. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results. Compilation of Financial or Other Information In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial information. This ordinarily entails reducing detailed data to manageable and understandable form without a requirement to test the assertion underlying that information. The procedures employed are not designed and do not enable the accountant to express any assurance on the financial information. However, users of the compiled financial information derive some benefit as a result of the accountant’s involvement because the services have been performed with due professional skill and care. Some tax services, such as preparation of tax returns where no conclusion is expressed, and tax consulting. Individuals and business leaders look to CPAs for advice on income tax and business tax strategies. A CPA can develop tax strategies to help individuals or businesses legally minimize their tax liability. Tax services save clients money and worry. Non-assurance tax services also include assistance in preparing tax returns; and presentation of clients to tax authorities. Management Consulting and Other Advisory Services Technically, “Management consulting refers to both industry and the practice of helping organizations improve their performance, primarily through analysis of existing business problems and development of plans for improvement.” Some examples of areas where CPAs can offer advice are: 1. 2. 3. 4. 5. 6. Small business management Cash management Compensation plan evaluations Growth planning Purchasing or selling a business Measuring the performance of a business This table summarizes the non-assurance services, together with the elements of assurance engagement that are missing from each one: Agreed-upon procedures No Conclusion is expressed by the practitioner. Compilations No Conclusion is expressed by the practitioner. Non-assurance if tax returns are prepared with no Some tax services conclusion expressed. Tax consulting services are two-party contracts. Management consulting and other advisory services. Two-party contracts that recommend uses for information.
