Auditing Theory: Chapter 1 – Overview of Assurance Engagement

1. Audit (Reasonable Assurance

Attestation Engagement
Assertion-
Assurance based 2. Review (Limited Assurance
Engagement Engagement
s Direct-
Reporting
Public
Practioner
1. Agreed-upon
Non- 2. Compilation
Assurance
Engagement 3. Tax
4. Consultancy

1. PUBLIC PRACTITIONER, can offer

a. ASSURANCE ENGAGEMENTS
Assurance engagement means an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users, other the responsible
part, about the outcome of the evaluation or measurement of a subject matter against criteria

CRITERIA or ELEMENTS:
1. Three-party relationship (PIA):
● Practitioner – those parties who are ??? assurance service
● Intended User – those parties for whom the assurance report is prepared
● A responsible party – the party that is responsible for preparing and providing the
information or the assertion, for example, the management of a company

2. Appropriate subject matter – what is the practitioners are reporting on. Subject matter
refers to underlying matter of interest to intended users and subject matter information is
information that results from evaluating or measuring the subject matter.
Subject matter information – is the term used in the framework for Assurance
Engagements to mean the outcome of the evaluation or measurement of a subject
matter. According to the Framework, 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.
EXAMPLES OF SUBJECT MATTER:
a. Financial performance or condition (e.g., historical or prospective position, financial
performance and cash flows) for which the subject matter information may be the
recognition measurement, presentation and disclosure represented in the financial
statements.
b. Non-financial performance or condition (e.g., performance of an entity) for which the
subject matter information may be key indicators of efficiency and effectiveness.
c. Physical characteristics (e.g., capacity of a facility) for which the subject matter information
may be specifications document
d. Systems and process (e.g., an entity’s internal control or IT system) for which the subject
matter information may be an assertion about effectiveness
e. Behavior (e.g., corporate governance, compliance with regulations, human resource
practices) for which the subject matter information maybe a statement of compliance or a
statement of effectiveness.
 3. Suitable criteria – are the benchmarks used to evaluate of measure the subject matter
including, where relevant, benchmarks for presentation and disclosure.
Established criteria – are those that are embodied in laws or regulations, or issued by
authorized or recognized bodies.
● PFRS
● NIRC used by many
● DTI Regulations
Specifically-developed criteria – are those designed for the purpose of the
engagement.
o Policies of the company

According to the Philippines Framework for Assurance Engagements, suitable criteria

should have the following characteristics:
a. Relevance – relevant criteria contribute to conclusions that assist decision-making
by intended users.
b. Complete – criteria are sufficiently complete when relevant factors that could affect
the conclusions in the context of the engagement are not omitted.
c. Reliability – reliable criteria allow reasonably consistent evaluation or measurement
of the subject matter including, where relevant, presentation and disclosure.
d. Neutrality – contribute to conclusion that are free from bias
e. Understandability – criteria contribute to conclusions that are clear,
comprehensive, and not subject to significantly different interpretations.

4. Sufficient and appropriate evidence

5. A written assurance report Other Users;
Primary Users; 3. Management
Investor 4. Regulators
EXAMPLE: Creditor 5. The public

Responsible Party

Subject Matter (e.g., F/S) Intended User

Practitioner (e.g., Auditor) Written Report

Subject Matter (e.g., F/S) Criteria (e.g., PFRS, PAS)

Evaluation Evidence

1. Which of the ff. statements best describes the logical relationship among audits, attest
engagements, and assurance engagements?
a. All attest engagements are audits, but not all audits are attest engagements FALSE,
because all audits are attestation engagements
b. All assurance engagements, including audits, involve attestation FALSE, because
assurance engagements also involve direct reporting
 c. An audit provides assurance but does not involve attestation FALSE, because audit involve
attestation
d. All audits are attest engagements, but not all attest engagements are audits.

2. These are independent professional services that improve the quality of information for
decision-makers, such as management and external users.
a. Assurance services b. Audit services
c. Attestation services d. Management consulting

3. Which statement is correct regarding assurance engagements?

a. It is an engagement in which practitioner expresses a conclusion designed to
enhance the degree of confidence of the intended user other than the responsible
party about the outcome of the evaluation or measurement of a subject against
criteria.
b. All engagements performed by professional accountants are assurance engagements.
c. Whether a particular engagement is an assurance engagement will depend upon whether it
exhibits all the following elements: a three-party relationship, a subject matter, and suitable
criteria.
d. CPAs are the exclusive providers of assurance engagements as the subject matter of
assurance engagements is limited only to financial information of a business entity. FALSE,
CPA aren’t the exclusive providers of assurance engagements

4. Which of the ff is not an element of assurance engagements?

a. Subject matter b. Engagement process
c. Evidence d. Suitable criteria

5. The person, or class of persons, whether as individuals or representative of an entity,

responsible for the subject matter.
a. Professional accountant c. Intended users
b. Responsible party d. None of the answers

6. In assurance engagement, the responsible party and the intended users

a. Should be from different entities
b. Should be from same entities
c. May be from the same entity or different entity
d. Are both responsible for determining the nature, timing and extent of the procedures to be
performed

INTENDED USER
Banks
Potential
RESPONSIBLE PARTY
Inventors
Management Large
Small Shareholders
Shareholders
Regulators
Public
Elected as
BOD
 7. Criteria that are embodies in laws or regulations or issued by authorized or recognized bodies
of experts that follow a transparent due process are called
a. Suitable criteria c. Specifically developed criteria
b. Established criteria d. General criteria

8. The criteria against which the subject matter of the assurance engagement is to evaluated or
measured should possess which of the ff. characteristics?
Relevant Concise Neutral

a. Yes Yes Yes

b. No No No
c. Yes No Yes
d. No Yes No

REASON FOR THE NEED OF ASSURANCE ENGAGEMENT

A. Remoteness of information users from information providers

o Users of financial information are usually prevented from direct assessing the reliability
of the information. Most of the users do not have access to the entity’s records to
personally verify the quality of the financial information. Consequently, an independent
auditor is needed to assist them in verifying the reliability of the financial information

B. Conflict of interest between management and users of financial statements (Potential

bias)
o Financial statements may be viewed as the report by management as to how the entity
performed under their direction and supervision. Managers are frequently placed in
positions where they can benefit by providing outside parties with overly optimistic or
even false financial information. Outside parties, however, want unbiased, realistic
financial statements. Recognizing this inherent conflict of interest, users of financial
statements have become skeptical of unaudited financial statements.

C. Voluminous and complex exchange transaction

o Since most of the users of financial information are not equipped with necessary skills
and competence to determine whether the financial statements are reliable, a qualified
person is hired by users to verify the reliability of the financial statements on their
behalf.

D. Consequences

E. Cost of capital reduction

9. The need for assurance services arises for all of the ff reasons except:
a. Potential bias in providing information.
b. Closeness between user and organization.
c. Complexity of the processing systems.
d. Remoteness between a user and the organization.

1. Attestation Assertion-based (a.k.a. Assertion based engagement)

o the responsible party, (the preparer of the information; usually management)
carries out the measurement or evaluation of the subject matter and reports the
information (the subject matter information) which contains the responsible
 party’s assertion (e.g., “the subject matter information is fairly stated as of
date/month/year.”) The work the practitioner performs is to give an assurance
conclusion on this assertion.
Example: Scenario

Responsible Party Bro, our building is

Seller of Building compliant with National
structural code of Phil.

Subject Matter Intended User

(e.g., Building) (Buyer of Building)

Practitioner In my opinion
Written Report
(e.g., Engineer) He is saying the truth.

Subject Matter Criteria

(e.g., Building) (e.g., NSCP)
Evidence

Evaluation

1.1 Audit – Reasonable Assurance Engagement

1.2 Review – Limited Assurance Engagement

2. Direct-Reporting
o The responsible party does not present the subject matter information (is also
an assertion) in a report in a direct engagement. Instead, the practitioner
performs the evaluation or measurement of the subject matter information
without any assertion by the responsible part, or obtains representation from
the responsible party that it has performed the evaluation measurement but the
information is not available to the intended users. The practitioner reports directly
on the subject matter and provides the intended users with an assurance report
containing the subject matter information.
Example: Scenario

Responsible Party
Seller of Building

Subject Matter Intended User

(e.g., Building) (Buyer of Building)

Practitioner Bro, the building for sale

Written Report
(e.g., Engineer) is compliant with NSCP

Subject Matter Criteria

(e.g., Building) (e.g., NSCP)
Evidence

Evaluation
 Responsible Party
Seller of Building

Bro, our building is

Subject Matter Intended User
compliant with National
(e.g., Building) (Buyer of Building)
structural code of Phil.
Bro, according to the
seller the building is
Practitioner compliant with NSCP,
Written Report After my careful
(e.g., Engineer)
evaluation, in my
opinion. He is telling
Subject Matter Criteria the truth.
(e.g., Building) (e.g., NSCP)
Evidence

Evaluation

b. Non-Assurance Engagement
1. Agreed-upon
2. Compilation
3. Tax
4. Consultancy

2. PRIVATE (COMMERCE OR INDUSTRY)

3. ACADEME
4. GOVERNMENT