PHILLIPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

Philippine Framework for Assurance Engagements provides the basic principles

and guidance with regards to the conduct of assurance engagements in the
Philippines. The Framework is divided into six major parts:
(1) Introduction,
(2) Definition and Objective of an Assurance Engagement,
(3) Scope of the Framework
(4) Engagement Acceptance
(5) Elements of an Assurance Engagement
(6) Inappropriate Use of the Practitioner's Name

I. INTRODUCTION

The framework provides a frame of reference for professional practitioners and others
involved in assurance engagements in the usage of assurance engagement standards
(Philippine Standards on Auditing (PSAs), Philippine Standards on Review
Engagements (PSREs), and Philippine Standards in Assurance Engagements (PSAEs))
and in determining which standard apply to a particular engagement.

The Framework also guides the International Auditing and Assurance Standards Board
(IAASB) in the development of these standards and in clarifications and interpretations
of standards.

The Framework in itself DOES NOT establish standards or provide procedural

requirements for the performance of assurance engagements. A practitioner must still
refer to relevant PSAs, PSREs or PSAEs in the conduct of assurance engagements.

In addition to this Framework and relevant practice standards (PSAs, etc), practitioners
performing assurance engagements are governed by the Code of Ethics for
Professional Accountants in the Philippines and Philippine Standards on Quality
Control (PSQCs).

The Code of Ethics sets out the fundamental ethical principles that all professional
accountants are required to observe. Philippine Standards on Quality
Control establish standards and provide guidance on a firm’s system of quality control
(systems to ensure that the firm's performance of each assurance
engagements complies with the minimum requirements set by the standards).

II. DEFINITION AND OBJECTIVE OF AN ASSURANCE ENGAGEMENT

An ASSURANCE ENGAGEMENT means an engagement in which a practitioner (1)

EXPRESSES A CONCLUSION designed to (2) ENHANCE THE DEGREE OF
CONFIDENCE of the intended users (3) OTHER THAN THE RESPONSIBLE PARTY
(4) about the OUTCOME OF EVALUATION OR MEASUREMENT of a subject matter
AGAINST CRITERIA.

An example of an assurance engagement is a financial statements audit in which the

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external auditor (the practitioner) reports on whether the company's financial position,
performance and cash flows (the subject matter) as expressed in its financial
statements (the outcome) is free from misstatements due to error or fraud in all material
respects (the expression of the conclusion) in accordance with PFRS (the criteria upon
which the subject matter is being evaluated) which is addressed to the company's board
of directors and/or government agencies (the intended users of the report other than the
responsible party which in this case is the company's management).

Assertion-based engagements vs Direct reporting engagements

Assertion-based engagements are assurance engagements wherein the responsible

party has performed the measurement or evaluation of subject matter and the subject
matter information is in the form of an assertion by the responsible party that is made
available to the intended users.

Direct reporting engagements are assurance engagements wherein the practitioner

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.

Assertion-based engagements differ from direct reporting engagement in terms of who

has performed the evaluation or measurement of a subject matter.

Reasonable assurance engagements vs Limited assurance engagements

The objective of a reasonable assurance engagement is a reduction in assurance

engagement risk to an acceptably low level in the circumstances of the engagement as
the basis for a positive form of expression of the practitioner’s conclusion.

The objective of a limited assurance engagement is a reduction in assurance

engagement risk to a level that is acceptable in the circumstances of the engagement,
but where that risk is greater than for a reasonable assurance engagement, as the basis
for a negative form of expression of the practitioner’s conclusion.

A reasonable assurance engagement differ from limited assurance engagement in the

confidence level being expressed in the practitioner's conclusion and hence,
conclusions of each engagement are different.

A reasonable assurance is less than absolute assurance. Achieving absolute

assurance is rarely attainable or cost beneficial due to:
1. Use of selective testing
2. Inherent limitations of internal control
3. Evidence available to practitioner is more likely to be persuasive rather than
conclusive
4. Use of judgment in planning, gathering and evaluating evidence and forming
conclusion.

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III. SCOPE OF THE FRAMEWORK

Not all engagements performed by practitioners are assurance engagements. Other

frequently performed engagements that do not meet the above definition (and therefore
are not covered by this Framework) include:

• Engagements covered by Philippine Standards for Related Services, such as agreed-

upon procedures engagements and compilations of financial or other information.

• The preparation of tax returns where no conclusion conveying assurance is

expressed.

• Consulting (or advisory) engagements, such as management and tax consulting.

When an assurance engagement is part of a larger consultancy engagement, this

Framework is relevant only to the assurance portion of the engagement.

The following engagements, which may meet the definition of an assurance

engagement, NEED NOT be performed in accordance with this Framework:

(a) Engagements to testify in legal proceedings regarding accounting, auditing, taxation

or other matters; and

(b) Engagements that include professional opinions, views or wording from which a user
may derive some assurance, if ALL of the following apply:
(i) Those opinions, views or wording are merely incidental to the overall engagement;
(ii) Any written report issued is expressly restricted for use by only the intended users
specified in the report;
(iii) Under a written understanding with the specified intended users, the engagement is
not intended to be an assurance engagement; and
(iv) The engagement is not represented as an assurance engagement in the
professional accountant’s report.

Reports on Non-assurance Engagements

A practitioner reporting on a non-assurance engagement (within the scope of this

Framework), clearly distinguishes that report from an assurance report.

This can be achieved by avoiding, for example:

• Implying compliance with this Framework, PSAs, PSREs or PSAEs.
• Inappropriately using the words “assurance,” “audit” or “review.”
• Including a statement that could reasonably be mistaken for a conclusion designed to
enhance the degree of confidence of intended users about the outcome of the
evaluation or measurement of a subject matter against criteria.

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When the practitioner and the responsible party agree to apply this Framework to an
engagement when the responsible party are the only intended users, the practitioner’s
report includes a statement restricting the use of the report to the responsible
party.

IV. ENGAGEMENT ACCEPTANCE

A practitioner accepts an assurance engagement ONLY where his/her preliminary

knowledge of the circumstances indicates that:
1. Relevant ethical requirements are met
2. Engagement exhibits ALL:
a. Subject matter is appropriate.
b. Criteria is suitable and available to intended users.
c. Practitioner has access to sufficient evidence to support his/her conclusion.
d. Conclusion is in the form appropriate to the engagement and is in a written report.
e. There is rational purpose for the engagement. Engagements with scope limitations
or negotiated in inappropriate manner is unlikely to have a rational purpose.

PSAs, PSREs and PSAEs include additional requirements which need to be satisfied
before accepting an assurance engagement.

When a potential engagement cannot be accepted as an assurance engagement, the

practitioner may still accept such as a consulting or agreed upon procedures
engagement.

The practitioner cannot change an assurance engagement to non-assurance or a

reasonable assurance to a limited assurance without reasonable justification. If such
change is made, evidence gathered is not disregarded.

V. ELEMENTS OF AN ASSURANCE ENGAGEMENT

1. Three-party relationship

An assurance engagement involves 3 separate parties - practitioner, responsible party

and intended users. The responsible party and intended users may be from same or
different entities. The responsible party in a direct reporting engagement is responsible
for the subject matter or in an assertion-based engagement is responsible for the
assertions.

Intended users are the persons to whom the report is being addressed. Practitioner is
responsible for determining the nature, timing and extent of procedures and is required
to pursue any matter in question whether material modification should be made to the
subject matter information.

When engagements are designed for specified intended users or a specific purpose, the

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practitioner shall consider including a restriction in the report that limits its use to those
users or purpose.

2. Appropriate subject matter

An appropriate subject matter identifiable and capable of consistent evaluation or

measurement against the criteria and can be subjected to procedures for gather
sufficient and appropriate evidence to support conclusion.

3. Suitable criteria

A criteria is suitable if it is relevant (can assists users in decision

making), complete (relevant factors that can affect a conclusion are not
omitted), reliable (allows for evaluation or verification), neutral (free from bias)
and understandable (comprehensive, clear and not subject to different interpretations).

Criteria need to available to intended users, either publicly, inclusion in presentation of

subject matter information, inclusion in the assurance report or by general
understanding, to allow them to understand how subject matter was measured or
evaluated.

4. Sufficient appropriate evidence

Practitioner plans and performs the engagement with professional skepticism to obtain
sufficient appropriate evidence about whether subject matter information is free from
misstatement. Practitioner considers materiality, assurance engagement risk and the
quality and quantity of available evidence when determining nature, timing and extent of
evidence-gathering procedures.

Professional skepticism means practitioner makes critical assessment, with a

questioning mind, of the validity of evidence obtained and is alert to anything that might
contradict or bring into question the reliability of the evidence.

Sufficiency of evidence is affected by the risk of the subject matter (i.e., more risk =
more number of evidence) or quality of the evidence (i.e., higher evidence quality =
lesser number of evidence).

Appropriateness of evidence is influenced by its reliability and relevance. In general,

evidence is more reliable if obtained from independent sources as compared to
internally-generated evidence, evidence obtained from internal process where controls
are effective are more reliable that those obtained from processes where controls are
not effective, evidence obtained directly by practitioner is more reliable than evidence
obtained indirectly or by inference, evidence in documentary form is more reliable than
those in oral representations, and evidence in original form are more reliable than
evidence provided by photocopies or facsimiles.

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5. Written assurance report in appropriate form

PSAs, PSREs and PSAEs establish basic elements for reports in a particular assurance
engagement. In addition, practitioner considers other reporting responsibilities when
appropriate. A practitioner does not express unqualified (clean) conclusion when these
circumstances exist and impact to the conclusion is material:
a. Scope limitation - practitioner expresses either qualified or disclaimer depending on
materiality of the limitation. In some cases, practitioner considers withdrawing from the
engagement.
b. Subject matter information or assertion is not fairly stated as against criteria -
practitioner expresses either qualified or adverse opinion.
c. When it is discovered after accepting the engagement that the criteria are unsuitable
or subject matter is inappropriate, the practitioner expresses qualified, adverse or
disclaimer of opinion depending on the pervasiveness of the issue. In some cases, the
practitioner considers withdrawing from the engagement.

VI. INAPPROPRIATE USE OF PRACTITIONER'S NAME

If the practitioner learns that a party is inappropriately using the practitioner's name in a
subject matter, he/she should require the party to cease doing so. Practitioner also
considers other steps needed such as informing third party users of the inappropriate
use or seeking legal advice.

Source: AASC's Philippine Framework for Assurance Engagements

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