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    Auditing Theory 2018 Chapter 12

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    Auditing Theory 2018 Chapter 12

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    Auditing Theory 2018 Chapter 12

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    Joseph Salido

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    Chapter 12 ASSURANCE ENGAGEMENTS and RELATED SERVICES accountant provides, There are four types of services that are normally performed in connection with the entity’s financial statements, These are Audit e = Review ¢ Compilation © — Agreed-upon Procedures @ Audit of Financial Statements As discussed in the preceding chapters, an audit of financial statements is conducted primarily to enable the auditor to express an opinion on the entity’s financial statements. In this type of engagement, the auditor provides the uscrs with a high level of assurance (reasonable assurance) that the financial statements are free from material misstatements. The specific audit procedures to be pesformed shall be determined by the auditor. These audit procedures should enable the auditor to gather sufficient appropriate audit evidence to be able to express aa-opinion (positive assurance) about the fair preserrmtion of the financial statements. sme eicPccomilenaire nme ga aS el ERM esyelra Cael ai) ¢ Review of Financial Statements ify the benefits that dit may not justify t a tee oe from it. Consequently, small entities ug entities may ional services of the auditors to provide fessi _ fee iin level of assurance about the reliability of the financial statements ctive of a review of financial statements is to enable en to state whether, on the basis of procedures which fo not provide all the evidence that would be required in an audit, anything has come to the auditor's attention that causes the auditor to betieve that the financial statements ate not prepared, in all material respects, in accordance with an identified financial reporting framework. ty Level of Assurance Because of the limited procedures performed whea reviewing financial statements, the auditor does not provide the same level of assurance as provided on audit engagements. A review engagement can only provide moderate level of assurance that the information subject to review is free of material misstatements. This moderate assurance is expressed in the review repost in the form of negative assurance by using the negative words such as “Nothing came to my attention. ” or “Tam not aware of any material modifications. ” Procedures to be performed A review of financial statements consists principally of inquiry and analytical procedures.’ While a revie™ involves the application of audit skills and techniques it gathering evidence, it does not ordinarily involve assessment of accounting and internal control syste™ tests of records and of responses to inquiries by obtaining corroborating evidence thtough inspection, observatio® confirmation and computation: 'B: Digital Accounting Books PH able to express negative assurance or to confirm that a modified report is required. Reporting Responsibility The teview report should contain a clear written expression of negative assurance. The auditor should seview and assess the conclusion drawn from the evidence obtained as the basis for the expression of negative assurance. The Unmodified Review Report An unmodified review teport is issued when the auditor believes, based on the evidence obtained, that there are no material modifications that should be made to the financial statements in order for these financial statements to be in conformity with PFRS. A format of the unmodified review report is presented below: a ele INDEPENDENT PRACTITIONER'S REVIEW REPORT [Appropsiate Addressee] ‘We have reviewed the accompanying financial statements of ABC Company that ‘comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changesin equity and statement of cash flows for the year then ended, and a summary of significant accounting Policies and other explanatory information. Eee All rights belongs to respective aut Management: Respousbility jor the Financial Statenrents Mumia is. Soa the preparation and fair presentation of these financia] statements in accordance with Philippine Financial Reporting Standards, and for such intemal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether duc io fraud or etror. Practitioner's Responsibility . ‘Our eesponsibiltyis to express a cenclusion on the accompanying financial starements based on our review We conducted our review in accordance with Philippine Standard ‘on Review Engagements (PSRE) 2400, Engagements to Review Historical Financial Statements, PSRE 2400 requires us te conclude whether anything has come to our attention that causes us to believe that the financial statements, taken asa whole, are not prepared in all material respects in accordance with the applicable financial reporting framework, This Standard also requires us to comply with relevant ethical seqjirements. A review of financial statements in accordance with PSRE 2400 consists primarily of making inquiries of management and others within the entity involved in financial and accounting matters, applying aralytical procedures, and evaluating the sufficiency and appropriateness of evidence obtained A review also requires performance of additional procedures when the practitioner becomes aware of ‘matters that cause the practitioner to believe the financial statements as 2 whole may be materially misstated. ‘We believe that the evidence we have obtained in our review is sufficient and appropriate to provide a basis for our conclusion. “The procedures perfonmed in a review are substantially less than those performed in an audit conducted in accordance with Philippine Standards on Auditing, Accordingly, swe do not express an audit opinion on these financial statements. © Conchesion Based on our seview, nothing has come to our attention that causes us to believe that these financial statements do not present fairly, in all material respects, the financial position of ABC Company as at December 31, 20X1, and its financial performance and cash flows for the year then ended, in accordance with Philippine Financial Reporting Standards. Practitioner's signature] [Date of the practitioner's report] [Prctitioner’s address} 578 'B: Digital Accounting Books PH Fl der buying the origina All rights belongs to oe aN authors * Modification of the Review Report Material Misstatements If matters have come to the auditor's attention that indicates the financial Statements contain material misstatements, the teport should desctibe those matters that impait a fair presentation of the financial statements, including, unless impracticable, a quantification of the Possible effect(s) on the financial statements, and either "express a qualification of the negative assurance; or when the effect of the matter is material and Pervasive to the financial statements that the auditor concludes that a qualification is not adequate to disclose the misleading or incomplete nature of the financial statements, give an adverse statement that the financial statements are not presented fairly, in all, matetial respects, in accordance with PFRS. Scope Limitation If there has been a material scope limitation, the report should desctibe the limitation and either: * express a qualification of the negative assurance regarding the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed; or «when the possible effect of the limitation is material and pervasive that the auditor concludes that no level of assurance can be provided, the auditor should not provide any assurance. IFB: Digital Accounting Books PH All rights belongs to Sais) LU Eeeaeed buying the original cop i ty Compilation of financial stateme’ «can employ fall time accountant to prepare tall entities ae creerments for them. Asa result, most of these enti, 5 untants to assist them in ¢}, 0 professional accor fe cae sane and presentation of their financial Statements, Pe gement is known as compilation engagement. ‘The objective of « compilation engagement is for the accountant 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. A compilation engagement would ordinarily include the prepatation of financial statements (which may or may not be a cornplete set of financial statements) but may also include the collection, classification and summarization, of other financial information. ry Level of Assurance ‘The procedures employed in a compilation engagement ate not designed and do‘not enable the accountant to express any assurance on the financial information However, users of the complied financial information derive some benefit as a result of the accountant’ involvement because the service has been performed with professional competence and due care. s £2 Procedures to be performed The accountant should read the compiled information and consider whether it appeats to be appropriate in for and free from obvious material misstatements FB: Digital Accounting Books PH All rights belongs to ee aN etal yasy buving the original cop + The accountant is Rot ordinarily required to: (a) fake Any inquiries of management to assess the reliability and completeness of the information Provided; () assess internal controls (©) verify any mattets; of (@) verify any explanations, 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 to Provide additional information. If management refuses to provide additional information, the accountant should withdraw from engagement, informing the entity of the reasons for the withdrawal. Tf the accountant becomes aware of Mmisstatements, the accountant should try to agree appropriate amendments with the entity, If such amendments are not made and the financial information is considered to be misleading, the accountant should withdraw from the engagement. Reporting Responsibility The accountants compilation report should identify the financial statements compiled and should ‘clearly indicate that no assurance is provided on the financial statements. An example of a report on an engagement to compile financial statements is presented below: B: Digital Accounting Books PH pe PRACITEIONER'S COMPILATION REPORT [To Management of ABC Company] We have compiled the accompanring financial statements of ABC Company based on information you have provided. These financial statements comprise the statement of financial position of ABC Company as at December 31, 20X1, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, anda surumary of signficantaccounting policies and other explanacory information We performed this compilation engagement in accordance with Philppine Standard on Related Services 4410 (Revised), Compiler Engagements \We have applied our expertise in accounting and financial reporting to assist you in the preparation and presentation of these financial statements in accordance with Philippine Financial Reporting Standards ‘We have complied with relevent ethical xequizemeats, including principles of integrity, objectivity, professional competence and due care, ‘These financial statements and the accuracy and completcacss of the information used to compile them ate your responsibility. Since 2 compilation engagement is not an assurance engagement, we are notrequited to very the accuricy or completeness ofthe information you provided to us to compile these financial statements...Accordingly, ‘we do aot express an auiit opinion or a review conclusion on whether these Gnancialstarements are prepued in accordaace with PFRS, [Practitioner's signature] [Date of practitioner's report] [Practitioners address} eereeersen Sol ‘The financial information compiled by the accountant abit contain a reference such as “Unaudited”, ‘Compiled without Audit ot Review” or “Refer to Compilation Report” on each page of the financial ‘atormation or on the front of thé a ne ie complete set of B: ye Accounting Books PH All rights belongs to Sera) rie £3 Modification of the compilation report Material Misstatemenis I f there are ‘material misstatemen; statements, the a ts in the financial If the accountant feels that the modification of the report mot sufficient to describe the significant departure from PERS and the client is not willing to correct these deficiencies, the’ accountant may withdraw from the engagement. Scope Limitation Scope limitations will normally cause the accountant to withdraw from the engagement @ Agreed- upon Procedures Engagement An auditor may be engaged to apply agreed-upon procedures on specific account or element of a financial statement. This type of engagement may be accepted provided: the client takes full responsibility for the adequacy of the procedures to be performed; and 4 the distribution of the report is limited only to those parties who have agreed about the procedures to be performed. The objective of an agreed-upon procedures engagement is for the nadia to easy out procedues ofan audit nature 1 which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. a Assurance proreenie as simply provides a report of the factucl findings of agreed-upon procedures, MO assurance jg expressed. Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw theit own conclusions from the auditor's work. Restrictions on the distribution of report “The report is restricted to those patties that have agreed to the procedures to be petformed since others, unaware of the reasons for the procedures, may misinterpret the results. Terms of the Engagement The auditor should ensute with representatives of the entity and, ordinarily, other specified parties who will receive copies of the report of factual findings, that there is a clear understanding regarding the agreed procedures and the conditions of the engagement. Procedures and Evidence ‘The auditor should carry out the procedures agreed upon and use the evidence obtained as the basis for the report of factual findings. These are also audit procedures but usually applied only to specific accounts or elements of a financial statement. These procedures may include: Inquiry and analysis @ Recomputation, comparison and other clerical accuracy checks. Observation. e e > Inspection. Obtaining confirmations. | Accounting Books PH FeTTo gz Reporting Responsibility The report on an agreed-upon procedures engagement needs to describe the purpose and the agrced-upon procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed, Presented below is an illustration of the comparison among audit and these telated services, Nature of ed-upon sie Audit Review "Fcc Complain Objective Toexpressan “‘ToenabletheCPA To carryout To assist the opinion on to seport whether audit chent in the the financial anything has come procedures preparation of Statements tohis attention —_agresdon _the financial that would indicate with the client statements. thatthe financial and any statements are not appropriate presented fairly thitd parties sdentifed in the report, Laelef — High/ Moderate/limited None None assurance Reasonable Assurance (provided by assurance the CPA Type of Positive Negative assurance Description Identification port» assurance of procedures of financial innwed (opinion) performed information znd factual compiled findings * Baie Risk Inquiry and analytical Asagreed Assemble FS Procedures assessment —_ procedures. It based on the procedures, does not include client data. tests of assessing control controlsand stk, test of substantive records and of tests responses to requiries by obtaining corroborating evidence. : h nagaiad Required Not required Not required requirement 'B: Digital Accounting Books PH hts belongs to Seay elles} ASSURANCE ENGAGEMENTS [Asa response to growing demands in the financial community, the accounting profession has widened the scope of auditing Auditors now a days do not only provide assurance about the reliability of financial information but they

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