AUDITING AND ASSURANCE PRINCIPLES (M1)

Assurance, attestation, and audits are interrelated accounting activities with specific professional
guidance relating to each activity. The audit activity underlies attestation and assurance. It is the ethics
and competency of the accountant or auditor in executing the engagement, in accordance with the
professional guidance, that provides for a reliable attestation and level of assurance desired for an
engagement.

ASSURANCE ATTESTATION AUDIT

It is the state of being assured
such as being certain in the mind,
easy freedom from self-doubt and
uncertainty.
Attest is to affirm, to verify, to
authenticate (and anything similar)
pieces of information presented.
Attestation is the proving of the
existence or verifiability or
something with supporting
evidences.
It is a methodical review and an
objective formal examination of
an organization’s or an
individual’s accounts or financial
situations.

What is meant by Assurance in Auditing?

Assurance provides credibility and reduces the uncertainty of the recipient of the final derivable
(e.g. investors and other external users of financial statements). Attestation is a component of assurance,
an individual or an organization may provide assurance by attesting the outcome of a focused
engagement. Assurance services are independent professional services that improve the quality of
information or its context for decision-makers. It is needed in order to gain credibility because
organizations or companies make their own financial statements, although necessarily it is in accordance
with the Philippines Financial Reporting Standards, it may be labeled bias, unreliable, or viewed with
prejudice if not audited.

AUDIT AS DEFINED BY THE AMERICAN ACCOUNTING ASSOCIATION (AAA)

“A systemic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events ascertain the degree of correspondence between these assertions and
established criteria and communicating the results thereof.”

Elements of an Audit

 Audit is a systematic process.

 Objectively obtaining and evaluating evidence about assertions. An auditor must not be
subjective as to avoid bias and prejudice; Assertions are any representations made by the audit
client. An auditor must compare and contrast assertions to the given criteria in order to evaluate
whether it is adhered to the standards or not.
 It ascertains the degree of correspondence between assertions and established criteria.
 Communication of the results to interested users. Audit engagement without communicated
opinions of the practitioners is futile and irrelevant.

Different Types of Audits

The two major types of audits are (1) Nature of Assertions and (2) Types of Auditors.

Types of Audits as to Nature of Assertion/data

 Financial Statements Audit – fairness of presentation

 Operational Audit – operating effectiveness and efficiency (internal).
 Compliance Audit – to ascertain the degree of compliance to certain laws, rules, and regulations.
(e.g., BIR, SEC, etc. or more commonly referred to as regulators).

Types of Audits as to Types of Auditors

 Independent/External Audit – performed by CPAs in public practice and/or accounting firms;

independent from the audit client; commonly related to Financial Statements Audit (external
users); can perform all types of Audits as to Nature of Assertion.
 Internal Audit – Appraisal activity within the entity; commonly related to Operational Audit;
Although within the entity, an internal audit can establish independence by being independent
from other departments that he/she will audit (usually from the lower-level management);
Internal auditors are the implementing arms of the Audit Committee within the Board of
Directors who are not actively engaging in the management and operations of the business.
 Government Audit – Provided or being performed by government auditors (e.g., COA Auditors).

External Audit and Government Audit are both used for external purposes. The prior difference
between the two is their Audit Clients. External audit usually caters to private entities and companies
which opposes government audit for it audits for government owned and controlled
agencies/corporations.

Comparison of Different Types of Audit

FS AUDIT OPERATIONAL COMPLIANCE

AUDIT AUDIT
Assertions The financial Operations are Activities have
statements are fairly conducted effectively complied with
presented and efficiently applicable laws, rules
and regulations, as well
as contracts
Suitable Criteria PFRS, GAAP, or any Objective set by the Laws, rules and
other identified Board of Directors regulations, contracts,
financial reporting (BOD) management policy
framework
Report Expression of opinion Report on efficiency Degree of compliance
whether financial and effectiveness. This with above stated laws,
statements are fairly will also include the rules and regulations,
presented recommendations to contracts, and policies
improve operations
Generally Performed By External Auditors Internal Auditors External/ Government
Auditors
Audit vs Audit Assurance

An audit performs based on assurance services. In every engagement, auditing procedures must
be executed in order to reach a conclusion, thus providing an attestation with the said conclusion.
Providing assurance to the engagement results into the recipient’s information confidence regarding
reliability.
 Assurance engagements are engagements used by practitioners to enable a practitioner to express
an opinion about a measurement of subject matter against certain criteria. There are 2 classifications of
assurance engagements:

(1) Assertion Based Engagement – Subject matter has written assertions (e.g. audits, review of
financial statements); responsible for subject matter information.
(2) Direct Reporting Engagement – Subject matter may or may not have written assertions;
responsible for the subject matter itself.

2 types of assurance engagements:

(1) Reasonable Assurance Engagement – Uses a broad range of scope and procedures to
substantiate the genuineness of the information; Has a high but not absolute level of
assurance.
(2) Limited Assurance Engagement – Uses a limited range of scope and procedures compared
to the Reasonable Assurance Engagement; The risk is also greater compared to the former; It
has a moderate level of assurance;

Elements of Assurance Engagements

(1) A three-party relationship involving a practitioner (CPA), a responsible party, and its
intended users.
(2) An appropriate subject matter depending on the type of audit (e.g. financial statements
audit – numerical information or outcome of financial performance; performance audit –
audit of a function or activity); Adequate reporting records and documents should be
available.
(3) Suitable Criteria – PFRS/IFRS, GAAP, other financial reporting framework.
(4) Sufficient appropriate evidence

Characteristics of Suitable Criteria Applicable Formal Criteria

Relevance Relevant criteria contribute to
conclusions that assist decision-making.
Completeness Relevant factors that could affect
conclusions are not omitted.
Reliability Allow reasonably consistent evaluation
including presentation and disclosure
Neutrality Contribute to conclusions that are free
from bias opinions.
Understandability Contribute to conclusions that are clear,
comprehensive, and not subject to
different interpretations.

(5) A written assurance reports/ conclusion

Types of Opinion

 Unmodified/ Unqualified – Present fairly in all material respects; Clean report.

 Modified/ Qualified – Except for; Auditor is not confident about any specific processes or
transactions, that prevent them from issuing an unqualified report; Auditor could not gather
adequate evidence; Company did not present their financial statements in accordance with
GAAP.
  Adverse – Do not present fairly, in all material respects; disagreement with management (can also
be applicable to qualified opinion).
 Disclaimer of Opinion – Does not express a conclusion.

*in all material respects mean in all aspects that are relevant and essential to the subject matter.

Sufficient Appropriate evidence in correspondence to (4) Elements of Assurance

 Professional Skepticism – critical assessment with a questioning mind of the validity of the
evidence obtained and is alert to certain evidence that contradicts the reliability of the documents.
 Sufficiency – quantity of evidence (depending on the risk of the subject matter).
 Appropriateness – quality of evidence; reliability and relevance.
 Cost Benefit Considerations – consider the relationship between the cost of obtaining evidence
and the usefulness of information contained.
 Materiality – practitioner understands what factors might influence the decision of intended
users.
 Assurance Engagement Risk – risk that the practitioner expresses an inappropriate conclusion
when the subject matter is completely misstated.

Objective of Financial Statements Audit

According to Philippine Standards on Auditing (PSA) 120 “The objective of an audit is to

enable the auditor to express an opinion whether the financial statements are prepared, in all material
respects, in accordance with generally accepted accounting principles or other identified financial
reporting framework.”

According to the Philippines Standards on Auditing (PSA) 200 “In conducting an audit of
financial statements, the overall objectives of an auditor are: to obtain reasonable assurance whether the
financial statements as a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in
all material respects, in accordance with an applicable financial reporting framework; and

To report on the financial statements and communicate as required by the PSAs, in accordance
with the auditor’s findings.”

Key points regarding PSA 200:

 Expression of an opinion
 Financial Statements are taken as a whole
 Reasonable Assurance
 In all Material Respects
 Presence of Criteria
 Communication of the Results

Financial Statements Audit Three-Party Relationship

As per (1) in the Elements of Assurance Engagements

MANAGEMENT AND USERS OF THE FINANCIAL

AUDITOR THOSE CHARGED WITH STATEMENTS
 (Represents practitioner)
Formation and expression of
opinion regarding the financial
statements;
Compliance with ethical
requirements (e.g. independence
and competence);
Determining the scope of audit
in accordance with PSAs and
other applicable regulations of
professional bodies;
GOVERNANCE
(Represents responsible party)
Preparation and presentation of
the financial statements in
accordance with the applicable
financial reporting framework;
Prevention and detection of
fraud and error (because
management is responsible for
the fair presentation of FS);
Adoption and implementation of
adequate accounting and
internal control systems;
(Represents intended users)
2 Categories – Primary Users
(provide assets and resources of
the entity e.g. investors,
creditors) and Other Users;
Uses the audit reports which
contains the opinions expressed
by the auditor;