Technological Institute of the Philippines

College of Business Education

Auditing Theory Review A dela Cruz

REPORTS
(Other Assurance and Related Services)

A. Engagement to Review Financial Statements (PSRE 2400)

The overall objective of a review of a financial statements is to enable the auditor to state whether the basis for the
procedure, which does not necessarily provide all the evidence that would be required in an audit and anything that
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 Philippine Financial Reporting Standards. This is what we called as a negative
assurance. A review engagement provides a moderate level of assurance that the information subject to review is from
material misstatement.

The auditor to be able to express a negative assurance in the review report should also obtained appropriate audit evidence
primarily through inquiry and analytical procedures that will be basis for drawing his conclusions.

During the planning state, the auditor should obtain or update the knowledge of the business which includes but is not limited
only to consideration of the entity organization, its accounting system, the nature of its assets, liabilities, revenues and
expenses. The procedures for the review will include the following:
a. Obtain an understanding of the entity’s business and industry to which it belongs;
b. Inquire concerning the entity’s:
1. Accounting policies and practices;
2. Actions taken at meetings of stockholders, board of directors and committees
c. Analytical procedures designed to identify relationship of individual items that are unusual:
1. Comparative review of the financial statements;
2. Comparison of financial statements with anticipated results (budgets or forecast)
3. Study of the relationship of the elements of the financial statements that are expected to form a
predictable pattern
d. Read the financial statements to consider on the basis of the information coming to the auditor attention whether
such conform to the basis of reporting framework.
e. Obtain reports of other auditor who was likewise engaged to audit or review the financial statements
components
f. Inquire of persons who have responsibility for financial and accounting matters concerning:
a. Completeness of the transactions
b. Compliance with reporting framework
c. Changes in accounting principles and practices
d. Matters as to which questions have arisen in the course of applying the foregoing procedures
e. Obtaining written representation from management when considered appropriate
g. If the auditor has reason to believe that the information subject to review may be materially misstated, the
auditor should carry out additional or more extensive procedures as are required or necessary to be able to
express a negative assurance or to conform that a modified report is required.

B. Engagement on Agreed Upon Procedures

The objective of an agreed upon procedures is for the auditor to carry out 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. As the auditor simply
provides a report of the factual findings of agreed upon procedures, there is however no assurance is expressed. Users of the
report normally assess for themselves the procedures and findings reported by the auditor and draw their conclusions from
the auditor work. The distribution of the report however is restricted only to those parties who have agreed to the
procedures to be performed. Independence however is not required in this type of engagement.

The auditor in order to perform agreed upon procedures may involve the auditor in performing certain procedures:
a. Individual items of financial data
b. A financial statements
c. Complete set of financial statements

The report needs to describe the purpose and the agreed upon procedures of the engagement in sufficient details to enable
the reader to understand the nature and extent of the engagement. The report may necessarily include the following:
a. Title
b. Addressee
c. Identification of specific financial or non-financial information to which the agreed upon procedures have been
applied
d. A statement that the procedures performed were those agreed upon
e. Statement that the engagement was performed in accordance with Philippine Standards on Related Services
applicable to agreed upon procedures engagement
f. Statement that the auditor is not independent
g. Identification for the purpose for which agreed upon procedures were performed
h. Listing of specific procedures performed

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 i. Description of the auditor factual findings including sufficient details of error and exceptions
j. Statement that the procedure performed do not constitute either an audit or a review and as such, no assurance is
expressed
k. Statement that the auditor performed additional procedures, an audit or a review, other matters might have come
to light that would have been reported
l. Statement that the report is restricted to those parties who agreed upon the procedures
m. A statements (if applicable) that the report relates only to the elements, accounts, items or financial or non-
financial information specified and that it does not extend to the entity’s financial statement taken as a whole
n. Date of the report
o. Auditor address and signature

C. Engagement to Compile Financial Statements (PSRS 4410)

The objective of a compilation engagement is for the accountant to use accounting expertise as oppose to auditing expertise,
that is to collect, classify and summarize financial information. The procedures employed are not designed and does not able
to express any assurance on the financial information. This however, will not require independence. However, where the
accountant is not independent, a statement to that effect would be made in the accountant report. A compilation engagement
ordinarily includes the preparation of financial statements but may also include the collection, classification and
summarization of other financial information.

The accountant should obtain a general knowledge of the business and operations of the entity and should be familiar with
the accounting principles and practices of the industry in which the entity operates and with the form and content of the
financial information that is appropriate. The accountant however 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/

However, if the accountant becomes aware that information supplied by management is incorrect, incomplete or otherwise
unsatisfactory, the accountant should consider performing the above procedures and request management of additional
information. If management refuses to provide, the accountant consider withdrawing from the engagement, informing the
entity for the reason of such withdrawal.

The accountant should obtain acknowledgement from management of its responsibility for the appropriate presentation of the
financial information and of its approval of the financial information. The accountant should read and compiled
information and consider whether it appears to be appropriate in form and free from obvious material misstatement.

The report compiled by the accountant should contain a reference such as “Unaudited”, “Compiled without Audit or
Review”, or “Refer to the Compilation Report” on each page of the financial information or on the front of the complete set
of financial statements.

D. Examination of Prospective Financial Information (PSAE 3400)

Prospective financial information means any financial information based on assumptions about events that may occur in
the future and possible actions by an entity. It can be in the form of a forecast or projection, or a combination.

Forecast means prospective financial information prepared on the basis of assumptions as to future events which
management expects to take place and the actions management expects to take as of the date the information is prepared
(sometimes known as best estimate assumption).

Projection means prospective financial information prepared on the basis of

1. Hypothetical assumption about future events and management actions which are not necessarily expected to
take place, and
2. A mixture of best estimates and hypothetical assumptions.

A prospective financial information may include financial statements or one or more elements of financial statements and
may be prepared as an internal management tool or for distribution to third parties.

It is management responsibility as to preparation and presentation of the prospective financial information, the auditor
however should obtain sufficient appropriate evidence as to whether management best estimate assumptions on which the
financial information is based are reasonable and in the case of hypothetical assumption, such assumptions are consistent
with the purpose of the information, and that the prospective financial information is properly presented and all material
assumptions are adequately disclosed and that it is prepared on a consistent basis with historical financial statements using
appropriate accounting principles.

The auditor is or should not express any opinion as to whether the result shown in the prospective financial information will
be achieved, however, when reporting on the reasonableness of management assumption; the auditor provides only a
moderate level of assurance.

The auditor should not accept or should withdraw from an engagement when the assumption is clearly unrealistic or when
the auditor believes that the prospective financial information will be inappropriate for its intended use. Also, the

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 auditor should obtain written representation from management regarding the intended use of the prospective financial
information, the completeness of significant management assumptions and management acceptance of its responsibility for
the prospective financial information.

Also, when the auditor believes that the presentation and disclosure of the prospective information is not adequate, the
auditor should express a qualified or adverse opinion or withdraw from the engagement as appropriate, If the auditor believes
that one or more significant assumptions do not provide a reasonable basis for the prospective financial information, the
auditor should either express an adverse opinion or withdraw from the engagement.

When the examination is affected by conditions that preclude application of one or more procedures considered necessary in
the circumstances the auditor should either withdraw from the engagement or disclaim the opinion describe the scope
limitation in the report on the prospective financial information.

The End!!

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