(Auditing and Assurance Principles)

(Bachelor of Science in Accountancy III)

Learning Objectives

By engaging successfully with this module the students will be able to:
1. Discuss and critically assess the role of auditing;
2. Critically explore the operation and effectiveness of assurance services;
3. Determine the different types of assurance services;
4. Identify the types of assurance engagements and non-assurance engagements;
5. Identify and discuss the elements of an assurance engagement; and
6. Have an introductory knowledge about audit engagement.

Key Concepts

Audit & Other Assurance Services

“The Role of Auditing”

ASSURANCE SERVICES

ASSURANCE SERVICES are independent professional services that improve the quality of information, or
its context, for decision makers.
ASSURANCE refers to the auditor’s satisfaction as to the reliability of an assertion being made
by one party for use by another party.
First concept is making a good decision which requires quality of information, which can be
financial or non-financial.
 Second concept relates to improving the quality of information, or its context, which increase
confidence in the information reliability and relevance. Context can be improved via the format
in which information is presented.
Third concept is independence which is the hallmark of the profession.
Last concept is professional services which encompasses the application of professional
judgment.

The OBJECTIVE OF ASSURANCE ENGAGEMENT is for a professional accountant to

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

An assurance engagement should exhibit ALL of the following:

(Elements of an assurance engagement)
• A three party relationship involving:
 A professional accountant/CPA
 A responsible party
 An intended user
• A subject matter
• Suitable criteria
• Sufficient appropriate evidence
• Conclusion contained within a written assurance report

There are three types of assurance engagements:

• AUDITS – provides HIGH level of assurance

Example: FINANCIAL STATEMENTS AUDIT is an assurance engagement to provide high level of

assurance that the financial statements are free of material misstatement.

• REVIEWS – provides a moderate level of assurance

Example: REVIEW OF FINANCIAL STATEMENTS involves limited investigation of much narrower

scope than an audit and is undertaken for the purpose of providing limited (moderate)
assurance that the statements are presented in accordance with identified suitable criteria.

• OTHER ASSURANCE SERVICES

Limitation of assurance engagements:

ABSOLUTE ASSURANCE is generally NOT ATTAINABLE as a result of the following factors:
• The use of selective testing
• The inherent limitations of control systems
• The fact that much of the evidence available to the professional accountant is persuasive rather
than conclusive
• The use of judgment
Note: The limitation of an audit engagement applies to assurance engagements.
ATTESTATION SERVICES
• Attestation engagement is one in which the professional accountant 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.

EXAMPLES
• Examination of FS
 FS were prepared using other comprehensive basis of accounting.
• Review engagements
 Limited assurance whether financial statements conform to GAAP

RELATIONSHIP Between ATTESTATION & ASSURANCE SERVICES

• Assurance services encompass attestation services.
• That is, all attestation and audit services are assurance services.
• The overriding principles and any rules that derive from them also apply to attestation services.
• However, additional detailed standards apply to attestation services. They are contained in the
statement on standards for attestation services.
• Assurance services evolve naturally from attestation services which in turn, evolved from audits.
• The roots of all three are in “independent verification”.
• The form and content of the services differ.
• External audit services are highly structured to the greatest number of users.
• The newer ones are more customized and targeted services intended to be highly useful in more
limited circumstances.

DEFINITION OF AUDITING
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.

• Systematic Process - audits are organized and structured activities

• Objectively - free from bias
• Obtaining and Evaluating Evidence - allows the auditor to determine the support for the
representations provided by the client’s management.
• Assertions about Economic Actions and Events - describes the subject matter of the audit
• Degree of Correspondence & Established Criteria - the closeness of assertion to the criteria
promulgated by the ASC/FRSC.
• Communicating the Results - written report (AUDIT REPORT) about whether the FS is fairly
presented in all material respects in accordance with identified financial reporting framework for
all interested users.

AUDITING FIRMS
• Exercise of profession.
• Public accounting firms offers attestation & audit.
• Professional staff are certified public accountants
• Organized as Partnerships
FINANCIAL STATEMENT AUDIT
• Performed by certified public accountants
• Auditor offers assurances about management’s financial statement assertions

INFORMATION RISK MODEL

• Definition: risk that information is materially misstated
• Interested parties rely on information in decision making
• Audit provides assurance about quality of financial statement information
• Assurance offsets information risk

DEMAND/VALUE OF AUDIT
• Reduces information risk to interested parties
 Investors, creditors, employees, suppliers, regulatory agencies, tax agencies, etc.
• Reduces cost of capital to company
• Unbiased monitor reduces information risk
 Reports on quality of financial statement information

FINANCIAL STATEMENTS / SUBJECT MATTER

• Representations of management
 Responsible for assertions embodied in financial statements
• Examined by auditor

WHO IS AUDIT CLIENT?

• Board of directors
 Auditor is engaged by board of directors
• Board of directors
 Elected by shareholders
 Represents shareholder interests

UNDERSTANDING THE AUDIT PROCESS

• Investigation
 Gathering, investigating evidence
 Using scientific method of inquiry

• Report
 Issue opinion whether management’s financial statement assertions correspond in all
material respects to IFRF

SCIENTIFIC METHOD OF INQUIRY vs Auditing

Scientific Method Auditing
1. Observe problem 1. Opinion on fair presentation of financials
2. Formulate hypothesis 2. Financial statements are fairly presented
3. Gather evidence 3. Assess risk design procedures
4. Evaluate evidence 4. Evaluate evidence to support or refute hypothesis
 And conclude

AUDITING DESCRIBED
• Auditing is analytic, not constructive; it is critical, investigative, concerned with the basis for
accounting measurements and assertions. Auditing emphasizes proof, the support for financial
statements and data. Thus auditing has its principal roots, not in accounting which it reviews,
but in logic on which it leans heavily for ideas and methods.

THEORETICAL FRAMEWORK OFAUDITING

• Audit function operates on the assumption that all financial data are VERIFIABLE.
• The auditor should always maintain INDEPENDENCE with respect to the financial statements
under audit.
• There should be NO LONG-TERM CONFLICT between the auditor and the client management.
• EFFECTIVE ACCOUNTING AND INTERNAL CONTROL SYSTEMS reduces the possibility of errors and
fraud affecting the financial statements.
• Consistent application of GAAP or financial reporting standards results in FAIR PRESENTATION
OF FINANCIAL STATEMENTS.
• What was held true in the past will continue to hold true in the future in the absence of known
conditions to the contrary.
• An audit BENEFITS THE PUBLIC.

GENERAL PRINCIPLES GOVERNING AUDIT OF FS

• Comply with the Code of Ethics for CPAs.
 Independence,
 Integrity,
 Objectivity,
 Professional competence and due care,
 Confidentiality,
 Professional behavior,
 Technical standards.
• Conduct the audit in accordance with PSAs.
• Plan and perform the audit with an attitude of PROFESSIONAL SKEPTICISM
• Exercise professional judgment in planning and performing an audit of financial statements.
• Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

RELATIONSHIP OF ACCOUNTING & AUDITING

• Hypothesis: financial statements are fairly presented in accordance with GAAP
 FRSC writes accounting standards that become part of GAAP
 COA writes accounting standards for governmental accounting
 GAAP standards are criteria for fair presentation

OTHER TYPES OF AUDIT SERVICES

• Operational audits
 Assess effectiveness & efficiency of operations
• Compliance audits
  Assess whether entity has complied with applicable laws & regulations
 Mostly for Not-for-Profit/Gov’t organizations

OTHER ASSURANCE SERVICES: EXAMPLES

• Business valuation
• Financial planning
• Litigation support
• Information system design & processing
• Forecasts & projections

RELATED 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 to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings.
- The recipients 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
- 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 a manageable and understandable form
without a requirement to test the assertions 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
service has been performed with due professional skill and care.

LIST OF NON – ASSURANCE ENGAGEMENTS:

• Agreed upon procedures
• Compilation of financial or other information
• Preparation of tax returns where no conclusion is expressed
• Tax consulting
• Management consulting
• Other advisory services

SUMMARY
References

• O.R. Whittington, K. Pany. Principles of auditing and other Assurance Services.

https://www.mhhe.com
• R.K. Mautz & H.A. Sharaf. The Philosophy of Auditing. Sarasota: AAA, 1961, p. 14