Nicodemus, Daena D.

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Journal 1: Internal Auditing (Auditing and Assurance Principles)

1. What is “Assurance”? Explain the value we obtain from lay man’s

assurance.

Assurance, as defined by Merriam-Webster.com Dictionary (n.d.), is a

pledge or a guarantee. It is also stated there that an assurance is the act of

which someone of something is assured, in which there is confidence of mind, as

well as security. It was also described by the dictionary as an insurance of some

sort. Therefore, when you say assurance, it means that there is confidence in a

certain person, entity, or thing, wherein you need not to worry or doubt, and you

feel secured for whatever it is. You need not feel anxious or uncertain because

there is confidence with what is at hand. Furthermore, the value that we obtain

with this lay man’s assurance is that there are no more doubts and no more fears

for what is to occur. With assurance, we have security.

2. What is an Assurance Engagement?

Assurance engagement, according to the Auditing Standards and

Practices Council (2004), is a certain engagement wherein a practitioner gets to

express a conclusion in which the main purpose is to establish the confidence of

the users in the outcome of a measurement or an evaluation of a certain matter

with accordance to a specific criteria.

An assurance engagement is an engagement in which a practitioner

expresses opinion on a subject matter’s measurement against a certain criteria in

which the practitioner’s expression raises the users confidence (Fazan, n.d.).
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This means that with assurance engagement, the practitioner who is a

professional like an auditor examines the performance of a responsible party

according to a criteria that is right and appropriate to the subject, and assesses it

thoroughly wherein the information obtain and/or the conclusions formulated are

to be used by a party other than the responsible party to establish assurance and

security.

3. Why do we conduct Assurance Engagements? Why is it an essential

function in the practice of our profession?

Assurance engagements are conducted in the sense that the information

gathered are outcomes of these engagements where the evaluation is done

against a certain criteria. Examples given of such are: following the International

Financial Reporting Standards for the recognition, measurement, presentation,

as well as the disclosure of financial statements and the effectivity of an entity’s

internal control. (International Auditing and Assurance Standards Board, 2005).

Most, if not all companies follow a certain standard or criteria when it comes to

specific work activities. There are even some activities that require following

national or even international standards such as accounting. With that,

assurance engagements are important to ensure that these standards are being

followed by the responsible parties for the security and the confidence of the

intended users which are usually the owners of the company in cases of internal

auditing.
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It was also mentioned by the International Auditing and Assurance

Standards Board that there are times when the information to be examined that

is the subject matter may fail to follow the criteria, or may be misstated in which

the error will have an impact to the entity or the related parties. With such

scenario, it is important to conduct assurance engagements to ensure that there

are no errors and that the standards are being complied with properly and strictly.

Audits are significant because they give the users of the audit information

confidence as they prove the credibility of the financial statements which in turn

helps the company with its internal control (Why are Audits important?, n.d.). In

corporate governance, internal audit plays a vital role as it helps monitor the risks

in the organization and the processes in the organization are ensured to be

efficient and there is also effective control (IIA, 2003 as stated in Isa et al., 2012).

Overall, in the accounting field, or simply in business and finance,

assurance engagements through the forms of internal audit help the owners of

the companies or the shareholders, maintain control with the management of the

finances and the inflow and outflow of resources of the entity. With internal audit,

there is an examination of the credibility of the financial statements to make sure

that they follow the criteria in which this is a means to ensure that the interests of

the responsible party is in line with the interests of the shareholders. Since the

subject matter is financial information through the financial statements and it

corresponds to financial resources which are really vital in an entity’s operations,

there must always be assurance that what is reported follows the standards to
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make sure that no fraud occurs and that there is internal control with the workflow

in the company’s operations.

4. Differentiate the following:

a) Reasonable Assurance Engagement and Limited Assurance

Engagement

According to Cabrera, M. and Cabrera, G. (2020), a reasonable

assurance engagement is a kind of engagement whose objective is to

lower the risk of assurance engagement until it reaches a really low level.

In contrast, the objective of limited assurance engagement is to reduce the

risk of assurance management to an acceptable level in which the risk is

greater in reasonable assurance engagement than in limited assurance

engagement. Reasonable assurance engagement usually involve direct

engagements with financial statements while limited assurance

engagement is involves non-financial aspects.

Additionally, a reasonable assurance engagement is an

engagement where there are analytical procedures involved to respond to

possible risks of misstatements or mistakes that are material which have

to be as precise as possible. On the other hand, a limited assurance

engagement is an engagement in which there are also analytical

procedures but they are directed towards supporting expectations related

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to relationships and trends instead and not towards identifying material

misstatements (Levels of assurance explained, n.d.).

In Reasonable vs Limited Assurance Engagement (2011), it was

stated that a reasonable assurance engagement gives a positive

assurance as to if the financial statements are prepared in accord to the

standards while a limited assurance engagement gives a negative

assurance report such as if there have been no reasons to believe that

there are anomalies with regards to the preparation of the financial

statements also with accordance to the standards.

The difference between the two is simple. With reasonable

assurance engagement, the assessment is more thorough and direct

while in limited assurance engagement, like the name itself, the manner of

examination, the process of gathering evidence itself, and the items that

are subject for evaluation are really limited. Furthermore, in limited

assurance engagement, the auditor only gives an indirect opinion on the

subject matter with limited resources.

b) Assertion-based Engagements and Direct Reporting Engagements

Assertion-based engagements or attestation is when the reporting

party reports the information to “attest” to the subject matter for it to be

evaluated and measured. There are times when a third party who is an

assurance practitioner becomes involved to measure or evaluate the

subject matter. Both of these assessments will be submitted to be

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available to the users where there is the attestation of the reporting party,

the assessment of the assurance practitioner, and the conclusion of the

assurance practitioner on the attestation if they are indeed true and fair

(Institute of Chartered Accountants in England and Wales, n.d.).

Consequently, also according to the Institute of Chartered Accountants in

England and Wales, direct reporting engagements are explained as

engagements wherein the responsible party is not involved in the

assessment and only the third party assurance practitioner reports on the

subject matter directly.

5. What are the Elements of an Assurance Engagement? Give and

explanation and include why such element is necessary in the completion

of such engagement.

The elements of an assurance engagement, as stated by Cabrera, M. and

Cabrera, G. (2020) are the following:

a. Three Party Relationship

This indicated that in an assurance engagement, there are

separate parties involved. A three party relationship involves the

following:

1) A practitioner – The practitioner is the person who does the

auditing with whatever it is that needs to be examined. The

practitioner is the one who “assures” and makes conclusions on

the performance of the responsible party to be presented to the

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intended users for decision making and for management control

as well.

2) A responsible party – The responsible party is the person who

has responsibility over the subject matter that the third party

practitioner examines in the assurance engagement process. In

case of an assertion-based engagement, the responsible party

also has responsibility over the subject matter information or the

attestation report that it will present to the intended users to

prove truthfulness and fairness of the subject matter.

3) Intended users – Lastly, the intended users are the ones for

whom the practitioner prepares the assurance report for. The

responsible party may be one of the intended users.

b. Appropriate Subject Matter – The subject matter may be in form of

financial conditions or performance of the entity presented through

financial statements; physical characteristics, like the capacity of a

facility; non-financial conditions like the performance of the entity;

behavior of the employees which can be evidenced by statements of

compliance and effectiveness; and systems and processes which are

measured on how effective they are to the entity. Since these subject

matters vary, they have different characteristics as well such as some

of the information are presented quantitatively while others are more of

qualitative in nature which affects the measurement and evaluation.

Additionally, for a subject matter to be considered appropriate, it has to

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be identifiable and consistent, and capable of being subject to the

evidence gathering process.

c. Suitable Criteria – There must be benchmarks for when the subject

matter is evaluated. The criteria may be formal or informal. Suitable

criteria must be reliable, complete, neutral, relevant, and

understandable.

d. Sufficient Appropriate Evidence – This means that in assurance

engagement, the practitioner plans and obtains evidence thoroughly. In

doing so, the practitioner practices professional skepticism in which he

critically questions the evidence at hand to be able to draw the right

conclusions. The practitioner also obtains sufficient evidence and

ensures that this evidence is appropriate to be actually reliable and

relevant. The evidence must also be material in which it is timely and is

substantial to the subject matter. There is also assurance engagement

risk which depends on the type of assurance engagement whether

reasonable or limited. Thus, the practitioner must be critical to make

appropriate conclusions with these risks: control risk, inherent risk, and

detection risk at hand.

e. Assurance report – Finally, the practitioner writes a report which

contains the conclusions of the assurance engagement that has been

conducted. The practitioner then communicates the assurance report

to its intended users.

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6. What are Non-assurance services? Give examples and explain.

Non-assurance services are engagements that do not meet the criteria of

assurance services. These are services that are not related to audit

engagements in which there is no evaluation, and conclusion making involved to

enhance the confidence of users against a criteria on a certain subject matter

(International Ethics Standards Board for Accountants, 2018).

Here are examples of non-assurance services which are other services

that are also related to accounting, banking, and finance but are not necessarily

about auditing or assurance engagements (Cabrera, M. & Cabrera, G., 2020):

1. Agreed-upon Procedures Services – With agreed-upon procedures services,

the accountant still gives an assessment of some sort with a financial report

but the report is not designed to provide assurance to the intended user.

2. Compilation of Financial or Other Information – With compilation services,

financial information is not just collected but also classified and summarized.

3. Tax Services – As Certified Public Accountants (CPAs) are qualified to

prepare tax returns, they provide tax services. Basically, CPAs give services

for the preparation of tax returns or tax planning services to plan transactions

to possibly minimize the tax liabilities of the client.

4. Management Consulting/Advisory Services – With these services, the

accountant gives consultancy or financial advice to the client about a variety

of financial topics depending on what the client needs whether it may be

about accounting systems, businesses, tax, and others.

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5. Accounting and Data Processing or Information Technology System Services

– With these kinds of services, bookkeeping services are being offered. There

is journalizing that occurs manually or computerized. Preparing financial

statements is also an example of these kinds of services.

References:

Assurance. (n.d.). In Merriam-Webster.com dictionary. https://www.merriam-

webster.com/dictionary/assurance

Auditing Standards and Practices Council. (2004). Philippine Framework for Assurance

Engagements. https://aasc.org.ph/downloads/PSA/publications/PDFs/Philippine-

Framework-for-Assurance-Engagements.pdf

Cabrera, M. E. B. & Cabrera, G. A. B. (2020). Principles of Auditing and Assurance

Services (2020-2021 ed.). GIC Enterprises & Co., Inc.

Fazal, H. (n.d.). What is an Assurance engagement in auditing? Pak Accountants.

https://pakaccountants.com/assurance-engagements-meaning-auditing/

Institute of Chartered Accountants in England and Wales. (n.d.). Attestation vs direct

reporting. https://www.icaew.com/archive/technical/audit-and-

assurance/assurance/process/scoping/assurance-decision/attestation-vs-direct-

reporting

International Auditing and Assurance Standards Board. (2005). International

Framework for Assurance Engagements.

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https://www.ifac.org/system/files/downloads/b003-2010-iaasb-handbook-

framework.pdf

International Ethics Standards Board for Accountants. (2018). Non-assurance Services:

Exploring Issues to Determine a Way Forward.

https://www.ifac.org/system/files/publications/files/Non-assurance-Services-

Roundtable-Briefing-Note.pdf

Isa, T., Ana, M., & Ayhan, G. (2012). The Importance of the Financial Audit Perception

in the Internal Control Structure to Prevent the Financial Crises: Evidence from

Romania. WEI International European Academic Conference Proceedings.

https://www.researchgate.net/publication/261831163_THE_IMPORTANCE_OF_

THE_FINANCIAL_AUDIT_PERCEPTION_IN_THE_INTERNAL_CONTROL_ST

RUCTURE_TO_PREVENT_THE_FINANCIAL_CRISES_EVIDENCE_FROM_RO

MANIA

Levels of assurance explained. (n.d.). Clean Energy Regulator.

http://www.cleanenergyregulator.gov.au/Infohub/Audits/Pages/Forms%20and

%20resources/Audit%20determination%20handbook/Levels-of-assurance-

explained.aspx#:~:text=In%20a%20limited%20assurance%20engagement%2C

%20on%20the%20other%20hand%2C%20analytical,in%20a%20reasonable

%20assurance%20engagement.

Reasonable vs Limited Assurance Engagement. (2011, July 6). The Audit & Assurance

Blog. http://iaasb.blogspot.com/2011/07/reasonable-vs-limited-
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assurance.html#:~:text=The%20auditor%20is%20essentially%20giving,a

%20moderate%20level%20of%20assurance.

Why are Audits important? (n.d.). Plus Accounting.

https://www.plusaccounting.co.uk/knowledge/blog/why-are-audits-

important/#:~:text=An%20audit%20is%20important%20as,company's%20internal

%20controls%20and%20systems.