Chapter

After studying this chapter, you should be able to

1. Understand the nature and objective of an assurance

engagement.

2. Distinguish between
• reasonable assurance engagement vs. limited
assurance engagement
• assertion-based engagement vs. direct reporting
engagement.

3. Enumerate and explain the elements of an assurance

engagement.

4. Describe the most-sought after type of assurance services such

as independent financial statement audit and review
engagements.
5. Enumerate and describe other assurance services that
could enhance the relevance of given information.
 6. Describe briefly four (4) non-assurance services performed
frequently by professional accountants.

CHAPTER 6
FUNDAMENTALS OF ASSURANCE SERVICES
ASSURANCE ENGAGEMENTS

Assurance Engagements
Although the recent focus of the auditing profession has been on the audit of financial
statements the concept of assurance services is much broader.

Assurance in the context of Philippine Framework for Assurance Engagements (2006)

refers to the auditor's satisfaction as to the reliability of an assertion being made by one
party for use by another party. To provide such assurance, the auditor assesses the
evidence collected as a result of procedures conducted and expresses a conclusion.
The degree of satisfaction achieved and, therefore, the level of assurance which may
be provided is determined by the procedures performed and their results.

Assurance engagement means an engagement in which a practitioner expresses.

conclusion designed to enhance the degree of confidence that intended have about
the—evaluation or measurement of a subject matter that—ethe responsibility of a
party, other than the intended users or the practitioner, against criteria. The outcome
of the evaluation or measurement of a subject matter is the information that results
from applying the criteria to the subject matter. For example:

• The recognition, measurement, presentation and disclosure represented in

the financial statements (outcome) result from applying a financial reporting
framework for recognition, measurement, presentation and disclosure, such as
Philippine Financial Reporting Standards, (criteria) to an entity's financial
position, financial performance and cash flows (subject matter) (e.g.,
 independent financial statements audit, review of prospective financial
statements).

• An assertion about the effectiveness of internal control (outcome) results

from applying a framework for evaluating the effectiveness of internal
control, such as COSO or CoCo (criteria) to internal control, a process
(subject matter). The term "subject matter information" will be used to
mean the outcome of the evaluation or measurement of subject matter. It is the
subject matter information about which the practitioner gathers
sufficient appropriate evidence to provide a reasonable basis for expressing a
conclusion in an assurance report (e.g., review of internal control).
OBJECTIVE OF AN ASSURANCE ENGAGEMENT

The objective of an 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 to express a conclusion that provides the
intended user with a level of assurance about that subject matter.

Assurance engagement performed by a professional accountant is intended to

enhance the credibility of information about a subject matter by evaluating
whether the subject matter conforms in all material respects with suitable criteria,
thereby improving the likelihood that the information will meet the needs of an
user.

In this regard, the level of assurance provided by the professional accountant's

conclusion conveys the degree of confidence that the intended user may place in
the credibility of the subject matter.

TYPES OF ASSURANCE ENGAGEMENTS

Under the Philippine Framework for Assurance Engagements there are two
types of assurance engagements that a practitioner is permitted to perform. These
are a reasonable assurance engagement and a limited assurance engagement.

A reasonable assurance engagement is an engagement that aims' to reduce the

assurance engagement risk to an acceptably lows level in the circumstances of
the engagement as the basis for a positive form of expression of the practitioner's
conclusion. Examples are engagement involving independent
financial statement audit and review of prospective financial statements.

2. A limited assurance engagement is one that aims to reduce the assurance

engagement risk to a level that is acceptable in the circumstance of the
engagement but where that risk is greater than for a reasonable assurance
engagement as a basis for a negative form of expression of the practitioner's
conclusion. Examples are engagements involving review of non-financial
performance indicators such as capacity of a facility and review of human
resource practices, internal control, IT systems, corporate governance,
compliance with regulation.
 Fundamentals Assurance Sérvice 155

Other Assurance Services

In addition to audits and reviews, other assurance services that may be provided
by the professional accountants include CPA Web Trust, Eldercare Plus,
Business Performance Measurement Services, Information Reliability Services.

ASSERTION-BASED ENGAGEMENTS VS.

DIRECT REPORTING ENGAGEMENTS

Assertion-based engagements are assurance engagements that involve the

evaluation or measurement of the subject matter by the responsible party and
the subject matter information in the form of an assertion by the responsible
party is made available to the intended users. Independent financial statement
audit is an example of this type of engagement. Another example is when an
entity engages a practitioner to perform an assurance engagement regarding a
report it has prepared about its own sustainability practices.

Direct-reporting •engagement are engagements where the L practitioner either

directly performs the evaluation or measurement of the subject matter, or obtains
a representation from the responsible party that has performed the evaluation or
measurement that is not available to the intended users. The subject matter is
provided to the intended users in the assurance report.

ELEMENTS OF AN ASSURANCE ENGAGEMENT

An assurance engagement should exhibit the following elements:

(a) A three-party relationship involving

(i) a practitioner;
(ii) a responsible party; and (iii) intended users.
(b) An appropriate subject matter;
(c) Suitable criteria;
(d) Sufficient appropriate evidence; and
(e) A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.
(a) Three Party Relationship
156 Chapter 6
Assurance engagements always involve three separate
parties:

The practitioner is the person who provides the assurance to the intended users
about au subject matter-that is the responsibility of another party. The practitioner
gathers evidence to obtain assurance and provide a conclusion to the intended users
about whether a subject matter that is the responsibility of a party other than the
intended users or the practitioner conforms in all material respects with identified
criteria.

The responsible party and the intended user will often but not necessarily be from
separate organizations. A responsible party and an intended user may both be within
the same organization, for example, the board of directors seeks assurance about
information provided by the accounting department of that organization.
(i) Practitioner

The term "practitioner" as used in the Philippine Framework for Assurance

Engagements is broader than the term "auditor" as used in PSAs and PSREs,
which relates only to practitioners performing audit or review engagements
with respect to historical financial information.

(ii) Responsible Party

The responsible party is the person (or persons) who:

(a) in a direct reporting engagement, is responsible for the subject matter;
or
(b) in a responsible for the subject matter information (the assertion),
and may be responsible for the subject matter. An example of when
the responsible party is responsible for both the subject matter
information and the subject matter is when an entity engages a
practitioner to perform an assurance engagement regarding a report
it has prepared about its own sustainability practices. An example
of when the responsible party is responsible for the subject matter
information but not the subject matter is when a government
organization engages a practitioner to perform an assurance
engagement regarding a report
 Fundamentals Assurance Sérvice 157

of
about a private company's sustainability practices that the organization has
prepared and is to distribute to intended users. The responsible party may or
may not be the party who engages the practitioner (the engaging party)

(iii) Intended Users

The intended users are the person, persons or class of persons for whom
the practitioner prepares the assurance report. The responsible party can
be one of the intended users, but not the only one.

In some cases, intended users '(for example, bankers and regulators)

impose a requirement on, or request the responsible party (or the engaging
party if different) to arrange for, an assurance engagement to be performed
for a specific purpose. When engagements are designed for specified
intended users or a ,specific purpose, 'the practitioner considers including
a restriction in the assurance report that limits its use to those users or that
purpose.

(b) Appropriate Subject Matter

The subject matter, and subject matter information, of an assurance

engagement can take any forms, such as:
• Financial performance or conditions (for example, historical or prospective
financial position, financial performance and cash flows) for which the subject
matter information may be the recognition, measurement, presentation and
disclosure represented in financial statements.

• Non-financial performance or conditions (for example, performance of an

entity) for which the subject matter information may be key indicators of
efficiency and effectiveness.

• Physical characteristics (for example, capacity of a facility) for which the

subject matter information may be a specifications document.

• Systems and processes (for example, an entity's internal control or IT system)

for which the subject matter information may be an assertion about
effectiveness.
• Behavior (for example, corporate governance, compliance with regulation,
human resource practices) for which the subject matter
159 6

information maybe a statement of compliance or a statement of effectiveness.

Subject matters have different characteristics, including the degree to which

information about them is qualitative versus quantitative, objective versus
subjective, historical versus prospective, and relates to a point in. time or
covers a period. Such characteristics affect the:
(a) Precision with which the subject matter can be evaluated or measured
against criteria; and
(b) The persuasiveness of available evidence. The assurance report notes
characteristics of particular relevance to the intended users.

An appropriate subject matter is:

(j Identifiable, and capable of consistent evaluation or measurement against the
identified criteria; and
Such that the information about it can be subjected to procedures for
gathering sufficient appropriate evidence to support a reasonable assurance
or limited assurance conclusion, as appropriate.

(c) Suitable Criteria

Criteria are the benchmarks used to evaluate or measure the subject matter
including, where relevant; benchmarks for presentation and disclosure. Criteria can be
formal, for example in the preparation of financial statements, the criteria may be
Philippine Financial Reporting Standards; when reporting on internal control, the
criteria may be an established internal control framework or individual control
objectives specifically designed for the engagement; and when reporting on
compliance, the criteria may be the applicable law, regulation or contract. Examples
of less formal criteria are an internally developed code of conduct or an agreed level
of performance (such as the number of times a particular committee is expected to

meet in a year).
o
Suitable criteria exhibit the following characteristics:
 160 Chapter 6
(a) Relevance: relevant criteria contribute to conclusions that assist decision-
making by the intended users.
(b) Completeness•. criteria are sufficiently complete when relevant factors that
could affect the conclusions in the context of the engagement circumstances
are not omitted. Complete criteria include, where relevant, benchmarks for
presentation and disclosure.

(c) Reliability: reliable criteria allow reasonably consistent evaluation or

measurement of the subject matter including, where relevant,
presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners.
(d) Neutrality: neutral criteria contribute to conclusions that are free from bias.
(e) Understandability: understandable criteria contribute to conclusions that are
clear, comprehensive, and not subject to significantly different
interpretations. The evaluation or measurement of a subject matter on the
basis of the practitioner's own expectations, judgments and individual
experience would not constitute suitable criteria.

Criteria need to be reliable to the intended users to allow them to understand

how the subject matter has been evaluated or measured. Criteria are made
available to the intended users in one or more of the following ways:
(a) Publicly;
(b) Through inclusion in a c ear manner in the presentation of the subject matter
information.
(C) Through inclusion in a clear manner in the assurance report.

(d) By general understanding, for example the criterion for measuring time in
hours and minutes.

(d) Sufficient Appropriate Evidence

The practitioner plans and performs an assurance engagement with an

attitude of professional skepticism to obtain sufficient appropriate evidence
about whether the subject matter information misstatement. The practitioner
considers materiality, assurance engagement risk, and the quantity and
quality of available evidence when planning and performing the engagement,
in particular when determining the nature, timing and extent of evidence-
gathering procedures.
(i) Professional Skepticism

The practitioner plans and performs an assurance engagement with an

attitude of professional skepticism recognizing that circumstances may
 Fundamentals Assurance Sérvice 161
exist that cause the subject matter information to be materially
misstated. An attitude of professional skepticism means the practitioner
makes a critical assessment, with a questioning mind, of the validity of
evidence obtained and is alert to evidence that contradicts or brings into
question the reliability of documents or representations by the
responsible party. For example, an attitude of professional skepticism is
necessary throughout the engagement process for the practitioner to
reduce the risk of overlooking suspicious circumstances, of over
generalizing when drawing conclusions from observations, and of using
faulty assumptions in determining the nature, timing and extent of
evidence gathering procedures and evaluating the results thereof.

An assurance engagement rarely involves the authentication of

documentation, nor is the practitioner trained as or expected to be an
expert in such authentication. However, the practitioner considers the reliability
of the information to be used as evidence, for example photocopies, facsimiles,
filmed, digitized or other electronic documents, including consideration of
controls over their preparation and maintenance where relevant.
162 Chapter 6

(ii) Sufficiency and Appropriateness of Evidence

Sufficiency is the measure of the quantity of evidence. Appropriateness is

the measure of the quality of evidence; that is, its relevance and its
reliability. The quantity of evidence needed is affected by the risk of the
subject matter information being materially misstated (the greater the rish,
the more evidence is likely to be required) and also by the quality of such
evidence
Accordingly, the sufficiency and appropriateness of evidence are
However, merely obtaining more evidence may not compensate for its poor
quality.

The reliability of evidence is influenced by its source and by its nature,

and is dependent on the individual circumstances under which it is
obtained. Generalizations about the reliability of various kinds of evidence
can be made; however, such generalizations are subject to important
exceptions. Even when evidence is obtained from sources external to the
entity, circumstances may exist that could affect the reliability of the
information obtained. For example, evidence obtained from an
independent external source may not be reliable if the source is not
knowledgeable. While recognizing that exceptions may exist, the
following may be
useful.

Evidence is more reliable when it is obtained from independent sources

outside the entity.
Evidence that is generated internally is more reliable when the related
controls are effective.
Evidence obtained directly by the practitioner (for example,
observation of the application of a control) is more reliable than evidence
obtained indirectly or by inference (for example, inquiry about the
application of a control).
Evidence is more reliable when it exists in documentary form,
whether paper, electronic, or other media (for example, a
contemporaneously written record of a meeting is more reliable
than a subsequent oral representation of what was discussed).

Evidence provided by original documents is more reliable than

evidence provided by photocopies or facsimiles.

 Fundamentals Assurance Sérvice 163

The practitioner ordinarily obtains more assurance from consistent evidence

obtained from different sources or: Of a different nature than from items of
evidence considered individually. In addition, obtaining evidence from different
sources or of a different nature may indicate that an individual item of evidence is
not reliable. For example, corroborating information obtained from a source
independent of the entity may increase the assurance the practitioner obtains
from a representation from the responsible party. Conversely, when evidence
obtained from one source is inconsistent with that obtained from another, the
practitioner determines what additional evidence-gathering procedures are
necessary to resolve the inconsistency.

The practitioner considers the relationship between the cost of obtaining

evidence and the usefulness of the information obtained. However, the
matter of difficulty or expense involved is not in itself a valid basis for
omitting evidence gathering procedure for which there is no alternative.
The practitioner uses professional judgment and exercises professional
skepticism in evaluating the quantity and quality of evidence, and thus its
sufficiency and appropriateness, to support the assurance report.

(iii) Materiality
Materiality is relevant when the practitioner determines the nature,
timing and extent of evidence-gathering procedures, and when assessing
whether the subject matter information is free of misstatement. When
considering materiality, the practitioner understands and assesses what
factors might influence the decisions of the intended users. For example,
when the identified criteria allow for variations in the presentation of the
subject matter information, the practitioner considers how the adopted
presentation might influence the decisions of the intended users.
Materiality is considered in the context of quantitative and qualitative
factors, such as relative magnitude, the nature and extent of the effect of,
these factors on the evaluation or measurement of the subject matter, and
the interests of the intended users. The assessment of materiality and the
relative importance of quantitative and qualitative factors in a particular
engagement are matters for the practitioner's judgment.

(iv) Assurance Engagement Risk

Assurance engagement risk is the risk that the practitioner expresses an
inappropriate conclusion when "the subject matter information is
materially misstated? In q; reasonable assurance engagement, the
practitioner reduces assurance engagement risk to an acceptably low level
in the circumstances of the engagement to obtain reasonable assurance as
the basis for a positive form of expression of the practitioner's conclusion.
 164 Chapter 6
The level of assurance engagement risk is higher in a limited assurance
engagement than in a reasonable assurance engagement because of the
different nature, timing or extent of evidence gathering procedures.
However, in a limited assurance engagement, the combination of the
nature, timing and extent of evidence gathering procedures is at least
sufficient for the practitioner to obtain a meaningful level of assurance as
the basis for a negative form of expression. To be meaningful, the level
of assurance obtained' by the practitioner is likely to enhance the intended
users' confidence about the subject matter information to a degree that is
clearly more than inconsequential.

In general, assurance engagement risk can be -represented by the

following components, although not all of these components will
necessarily be present or significant for all assurance engagements:

(a) The risk that the subject matter information is materially misstated, which in turn
consists of:

(i) Inherent risk: the susceptibility of the subject matter

information to a material misstatement, assuming that there are
no related controls; and

(ii) Control risk: the risk that a material misstatement that could
occur will not be prevented, or detected and corrected, on a
timely basis by related internal controls. When control risk is
relevant to the subject matter, some control risk will always
exist because of the inherent limitations of the design and
operation of internal control; and

(iii) Detection risk: the risk that the practitioner will not detect
material misstatement that exists.

The degree to which the practitioner considers each of these components is affected
by the engagement circumstances, in particular by the nature of the subject matter
and whether a reasonable assurance or a limited assurance engagement is being
performed.

(e) Assurance Report

The practitioner provides a written report containing a conclusion that conveys

the assurance obtained about the subject matter information. ISAS
ISREs and ISAEs establish basic elements for assurance reports. In addition,
the practitioner considers other reporting responsibilities, including
communicating with those charged with governance when it is appropriate to
do so.
 Fundamentals Assurance Sérvice 165
BRIEF DESCRIPTION OF THE ASSURANCE SERVICES

Independent Financial Statements Audit

The most predominant type of assurance engagement that the professional

accountant may be involved in is the independent financial statements audit, also
commonly referred to as external audit.

An independent financial statements audit engagement is an assurance

engagement to provide a high level of assurance that the financial statements
are free of material misstatement.

The objective of an audit of financial statements is to enable the auditor to express

an Opinion whether the financial statements are prepared, in all material respects,
in accordance with an identified financial reporting framework. The phrases used
to express the auditor's opinion are "give a true and fair view" or "present fairly,
in all material respects," which are equivalent terms. A similar objective applies
to the audit of financial or other information prepared in accordance with
appropriate criteria.

In forming the audit opinion, the auditor obtains sufficient appropriate audit
evidence to be able to draw conclusions on which to base that opinion. The auditor's
Opinion enhances the credibility of financial statements by providing a high, but not
absolute, level of assurance. Absolute assurance in auditing is not attainable as a
result of such factors as the need for judgment, the use of testing, the inherent
limitations of any accounting and internal control systems and the fact that most of
the evidence available to the auditor is persuasive, rather than conclusive, in nature.
 Fundamentals of

Israrance Set7Ee J 65

Review of Financial Statements —PSREs 2400 to 2410

Review involves limited investigation ofmuch narrower scope than an audit and
undertaken for the purpose -of providing limited (negative) assurance. that the
statements are presented in accordance with identified Financial Reporting
Standards. The financial statements me' be (covering one %hole accounting
period —or an- interim period) or and
projections).

The objective of the review is to enable an auditor to State whether on the basis of
procedures which do not provide all the evidence required in art audit, nothing 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 an
identified financial reporting framework. This is referred to as negative assurance.

Whereas in an audit, the CPA firm performs an extensive examination that

accumulates evidence sufficient to render a higher level of assurance about the
client's financial statement, in a review, the evidence supports a moderate level of
assurance that the information subject to review is fee of material misstatement.

Other Review Engagements

There are other engagements in which a practitioner is engaged to issue or does issue
a written communication that expresses a conclusion with respect to the reliability
of a written assertion that is the responsibility of another party. Examples are review
of investment performance statistics for organizations such as mutual funds and
computer software review, and review of clients internal controls over financial
reporting.

OTHER ASSURANCE SERVICES (PSAE 3000 REVISED)

Assurance Services on Information Technology

The growth of the Internet and electronic commerce has extensively affected the
demand for other assurance services. Concerns over privacy, security of information
and the reliability of processes generating information in a real-time format contributed
 Fundamentals ofAssurance Service 167

to an even greater demand for assurance about computer controls surrounding

information transacted electronically. CPAs can help provide assurance about these
functions. Examples of assurance services related to information technology are
assurance over website controls, assurance about
information system reliability and electronic commerce assurance services.

CPA Web Trust Service

Some CPA firms are licensed to perform this service to provide assurance to users
of web sites in the Internet. The CPA's electronic Web Trust seal is affixed to the
web site.' This seal assures the user that the web site owner has met established
criteria related to business practices, transaction integrity and information
processes. Web T rust is an attestation service and the Web Trust

seal is a symbolic representation of the CPA's report on management assertions

about its disclosure of electronic commerce practices.

Information System Reliability Service

In these engagements, CPAs provide assurance that an information system has

been designed and operated to produce reliable data including tests of the system to
determine whether the system protects against potential causes of data defects.
Whereas, the Web Trust assurance service is primarily designed to provide
assurance to third-party users of a web site, information systems reliability services
might be performed by CPAs to provide assurance to management, the board of
directors, or third parties about the reliability of information systems used to
generate real-time information.
Assurance Services on Other Types of Information

The Special Committee on Assurance Services of the AICPA has developed other
assurance services designed to enhance the relevance of information. Examples of these
services are:

(a) Business Performance Measurement

(b) Health Care Performance Measurement
(c) Risk Assessments
(d) Eldercare Plus
 168 Chapter 6

Business Performance Measurements Services

A CPA can provide assurance about whether financial and nonfinancial information
being reported from the entity's performance measurement system (e. g., balanced
scorecard) is reliable and whether the performance measures being used are accurately
leading the entity toward meeting its strategic goals and objectives.

Health Care Performance Measurement

Assurance service involves evaluation of the quality of health care, medical services
and outcome. It looks into the health care delivery system, the medical services provided,
and quality attributes associated with those services.

Risk Assessment
Assurance on risk assessments identifies a set of risks that affect the organization. It
also involves the study of the link between risks and organization's mission, vision,
objectives and strategies and development of new and relevant measures.

Eldercare Plus
This assurance service focuses on the needs of the elderly and whether caregivers
are providing services that meet specified objectives or at an acceptable level.
This service might include periodic reporting to family members about the
degree to which caregivers are complying with the contracted level of care as
supervising the investment and accounting for the elderly individual's estate.

BRIEF DESCRIPTION OF NON-ASSURANCE SERVICES

Agreed-upon Procedures Services

An agreed-upon procedures engagement, in which the party engaging the professional

accountant or the intended user determines the procedures to be performed and the
professional accountant provides a report of factual findings as a result of undertaking
those procedures, is not an assurance engagement. While the intended user of the report
may derive some assurance from the report of factual findings, the engagement is not
intended to provide, nor does the professional accountant express, a conclusion that
provides a level of assurance.

Rather, the intended user assesses the procedures and findings and draws his or her own
conclusions. However, a professional accountant may undertake an engagement that
 Fundamentals ofAssurance Service 169

is similar to an agreed-upon procedures engagement but which does result in the expression
of a conclusion that provides a level of assurance. Where; in the judgment of the
professional accountant, the procedures agreed to be performed are appropriate to support
the expression of a conclusion that provides a level of assurance on the subject matter, - and
the professional accountant intends to do so, then such an engagement becomes an
assurance engagement governed by4the Standard on Assurance Engagement.

Compilation of Financial or Other Information

Compilation service is defined as

"presenting in the form of financial statements that is the representation of

management (owners) without undertaking to express any assurance on the
statements." [PSRS 4410 (formerly PSA 930)]

The objective of a compilation engagement is for the CPA to use accounting expertise,
as opposed to auditing expertise, to collect, classify and summarize financial
information.

A compilation improves the quality of information by displaying in Financial

Accounting and Repotting Standards format and the practitioner's identification of
obvious errors. Accordingly, it falls within the definition of an assurance service despite
the fact that no assurance is explicit in the practitioner's report
.
Tax Services

A CPA is considered qualified to prepare corporate and individual tax returns for
both audit and non-audit clients. For smaller accounting firms, tax services provide
a large portion of third revenue. CPAs render two primary types of tax services: tax
compliance and tax planning. Tax compliance includes the preparation of tax
returns for individuals, corporations, estates and trusts, and others. Tax planning
determines the tax consequences of planned or potential transactions and suggests
the desirable course of action to minimize the tax liability while achieving the
client's objectives.
 170 Chapter 6

Management Consulting / Advisory Services

Consulting services are professional services that employ the practitioner's technical
skills, education, observations, experiences, and knowledge of the analytical approach
and procedures used in a consulting engagement. Those procedures may involve
determining client objectives, fact-finding, definition of problems or opportunities,
evaluation of alternatives; formulation of proposed action, communication of results,
implementation, and follow-up. Examples of consulting services are design and
installation of accounting system, computer, risk management, corporate finance, tax
services, E-business, IT Systems.

Accounting and Data Processing or Information Technology System Services

Many accounting firms frequently provide accounting services to, small clients
with limited accounting staff. These services include doing manual or automated
bookkeeping, journalizing, and posting adjusting entries or preparing (or compiling)
financial statements in performing accounting services, the firm serves as a
substitute for or supplement to the accounting personnel of the client.

For many years, clients have outsourced or contracted for outside services, to cut
their costs. Recently, large businesses have begun to see "outsourcing" as an
alternative for information system, tax, stock and transfer agency, and internal
auditing.
REVIEW QUESTIONS

Questions

l. What is meant by an assurance engagement?

2. What is the basic objective of an assurance engagement?

3. Give and explain briefly the most sought-after assurance services

among professional accountants.

4. Distinguish between consulting and assurance services.

 Fundamentals ofAssurance Service 171

5. Give examples ofassurance services on information technology.

6. Give and explain briefly three examples of non-assurance services by

professional accountants.

7. Explain the elements ofan assurance engagement.

8. Differentiate between assertion-based engagements and direct reporting

engagements.

9. What is meant by "criteria" in the context of assurance engagements? What

characteristics must professional accountants' posses for them to be
considered suitable?

10. Describe briefly four (4) non-assurance engagements performed frequently by

professional accountants.

11. Describe three (3) emerging consultancy services being offered by

professional accountants.

Multiple Choice Questions

Which of the following is false? Philippine Framework for Assurance

Engagements
a. describes the objective and elements of assurance engagements intended to
provide either a reasonable assurance or limited assurance.
b. identifies engagements to which Philippine Standards on Auditing,
Philippine Standards on Review Engagements, and Philippine
Standards on Assurance Engagements apply.
c. establishes standards or provides procedural requirements for the
performance of assurance engagements.

d. provides a frame of reference for the Auditing and Assurance Standards

Council in its adoption of International Standards on Auditing, International Standards
 172 Chapter 6

on Review Engagements and International Standards on Assurance Engagements for

application in the Philippines.

2. Which of the following is not an assurance engagement?

a. Compilation
b. Financial statements audit
c. Information reliability services
d. Reviews of prospective financial statements

3. Non-assurance engagements include all of the following except

a. agreed-upon procedures.
b. management consulting.
c. preparation of tax returns where no concluSion is expressed.
d. compliance audit.

4. Assurance engagements shpuld exhibit the following elements except

a. a subject matter.
b. suitable criteria.
c. an engagement process.
d. appropriate professional fees.

5. Which of the following forms may the subject matter of an assurance

engagement take?
a. Historical financial information c. Behavior
b. Systems-and processes d. All of the above

6. Which of the following is not a component of engagement risk?

a. Control risk c. Business risk

b. Inherent risk d. Detection risk

7. Engagement risk is influenced by the risks' associated with the following except

a. nature and form of the subject matter.

b. nature and form of the criteria applied to the subject matter.
c. nature and extent of the process used to collect and evaluate evidence.
d. unreasonably low professional fee.
 Fundamentals ofAssurance Service 173

8. An assurance engagement that provides a high level of assurance that the financial
statements are free of material misstatement is known as
a.. review.
b. compilation.
c. agreed-upon procedures
d. independent financial statements audit:

9. Which of the following is not an assurance engagement?

a. Information System Reliability Service
b. Business Performance Measurement
c. Risk Assessment Service
d. Management Consulting Service

10. When the professional accountant has obtained sufficient appropriate evidence to
conclude that the subject matter conforms in all material respects with identified
suitable criteria, he/she can provide

a. limited level of assurance. c. reasonable level of assurance.

b. absolute assurance. d. no assurance.
I l. A practitioner should plan and conduct the assurance engagement in an effective
manner to meet the objective of the engagement. Which of the following
matters need not be a concern of the practitioner in planning the work?
a. Criteria to be used
b. Engagement objective
c. Personnel and expertise requirements
d. Specific format of the assurance report

Cases

Case 1
Effective internal control is of significant concern to regulators, stockholders,
management, and other stakeholders in corporations. Therefore, CPAs are getting
significant requests to provide assurance about the effectiveness of internal control.

Required:
 174 Chapter 6

(a) Explain how providing assurance about internal control provides assurance about
the reliability of other information provided by the company.

(b) Describe the broad engagement activities that would be involved in performing
an examination of the effectiveness of internal control.

Case 2

Assume that you are a partner with the firm of Santos & Lopez LLP. You have been
asked by Gonzales, Inc., an industrial supply company, to provide assurance about
the change in existing customer satisfaction over the last three years. Gonzales'
management has indicated that the criteria it intends to use to evaluate customer
satisfaction are a combination of customer retention rate and increase in peso sales.
Gonzales' management will provide a schedule of the customer satisfaction measures
and a note that describes the criteria used.

Required:
(a) If Gonzales wants to provide the presentation and CPA's report for general use
by prospective customers, ' identify any available standards that provide
guidance for such a service and the type or types of services that your firm
could provide.

(b) Describe the factors that you should consider in determining whether

the criteria are suitable.

(c) Assuming that you conclude that the criteria are suitable, draft your firm's
report assuming that you perform an examination of the subject matter.