1.

0 Intended Learning Outcomes

Module 1: Fundamentals of Auditing and Assurance Services

At the end of the module, the students should be able to:
1.1 Discuss the nature, objective, and elements
1.2 Identify the types of assurance engagements (audits, reviews, other assurance
engagements)
1.3 Discuss the nature, philosophy, and objectives
1.4 Differentiate the types of audits
1.4.1 According to nature of assertion/data (financial statements audit, operational
audit, and compliance audit)
1.4.2 According to types of auditor (external independent financial statements
audit, internal audit, and government audit)
1.5. explain the importance of the Code of Ethics for CPAs

1.1. The Professional Practice of Accounting

Four Sectors in the Practice of Accountancy

Under R.A. 9298 also known as the “Philippine Accountancy Act of 2004” the
practice of accounting is sub-classified into the following:
1. The practice of Public Accountancy - involves the rendering of an audit or
accounting-related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to employment in the private
sector in a position that involves decision-making requiring professional
knowledge in the science of accounting and such position requires that the
holder thereof must be a CPA.
3. Practice in Education/Academe – employment in an educational institution
that involves the teaching of accounting, auditing, management advisory
services, finance, business law, taxation, and other technically related
subjects.
4. Practice in the Government – employment or appointment to a position in
an accounting professional group in the government or in a government-
owned and/or controlled corporation where decision making requires
professional knowledge in the science of accounting, or where civil service
eligibility as a CPA is a prerequisite.
click Revised RA 9298
The Three (3) Requirements to qualify to practice the Accountancy Profession, a
person must:
● be a holder of a Bachelor’s Degree in Accountancy
● pass the CPA Licensure Examination (CPALE) administered by the Board
of Accountancy.
○ The examination is given every May and November of each year.
○ with an average of 75%, with no grade lower than 65% in any
subject.
● be accredited by the Board of Accountancy to practice accounting upon
showing that such registrant has:
○ acquired a minimum of 3 years of meaningful experience in any of
the areas of public practice including taxation
○ completed the required 120 Continuing Professional Development
(CPD) credit units as mandated by RA 10912, the law
strengthening the CPD program for all regulated professions to
enhance the technical skills and competence of the CPA.

Regulatory Agencies and Standard Setting Bodies

Regulatory Government Agencies

Professional Regulations Commission (PRC)
● the body in charge of regulating and licensing the practice of accountancy
and other specialized professions.
● monitors the maintenance of professional standards and ethics and enforces
rules and regulations pertinent to the profession.
Board of Accountancy (BOA)
● The professional regulatory board was created under RA 9298 to supervise
the registration, licensure, and practice of accountancy in the Philippines.
● It consists of a chairperson and 6 members with a tenure of three (3) years.
Securities and Exchange Commission (SEC)
● empowered to regulate the registration and operation of corporations,
partnerships, and other forms of business organizations in the Philippines.
● authorized to specify reporting requirements and to establish rules for the
submission of audited financial statements.
Commission on Audit (COA)
● determines whether funds are handled properly and in compliance with
existing laws and whether programs and activities are conducted
economically by government agencies.
 ● formulates and develops programs, standards, and administrative techniques
for the implementation of auditing rules.
Accredited Professional Organizations of CPAs (APOs)
● the integrated national and sectoral professional organizations of CPAs
Philippine Institute of Certified Public Accountant (PICPA)
○ The national professional organization of CPAs in the Philippines having
the basic authority of setting up and implementing rules vital to the
accounting profession.
○ Accounting Associations under the wing of PICPA
■ NaCPAE -National Association of Certified Public Accountants in
Education
■ GACPA -Government Association Certified Public Accountants
■ ACPACI -Association of CPAs in Commerce and Industry
■ ACPAPP -Association of CPAs in Public Practice
Standard-setting Bodies
● international accounting bodies whose standards have been gradually
adopted in the country

International Accounting Bodies

1. International Federation of Accountants (IFAC)
● it is a non-profit, non-governmental, non-political organization of accountancy
bodies that represents the worldwide accountancy profession.
2. International Accounting Standards Board (IASB)
● the standard-setting body of the IFRS Foundation with the main objective of
developing and promoting global accounting standards.
3. International Auditing Practices Committee (IAPC)
● develops and issues on behalf of IFAC the International Standards on
Auditing.
● aims to improve the uniformity of practices in financial statement audits,
assurance, and other related services throughout the world.
4. International Standards of Accounting and Reporting (ISAR)
● organized by the UN with membership from different countries.
● analyzes and evaluates for international adoption the standards of accounting
and reporting of various nations.

Standard-setting Councils
(were created by the implementing Rules and Regulations (IRR) to RA 9298)
1. Financial Reporting Standards Council (FRSC)
● is the official accounting standard-setting body in the Phils.
● created under the Phil. Accountancy Act of 2004 (RA 9298).
● It is composed of a Chairman and 14 representative members.
2. Auditing Assurance Standards Council (AASC)
● is the body authorized to establish and promulgate generally accepted
auditing standards (GAAS) in the Philippines.
● At present, AASC pronouncements are mainly adopted from the standards
and practice statements issued by the International Auditing and Assurance
Standards Board (IAASB).
3. Educational Technical Council (ETC)
● assist the BOA in continuously upgrading the accountancy education in the
Philippines to be globally competitive.
● coordinates with CHED
● with seven (7) members including the chairman

○ Chairman - accounting practitioner from the Academe

○ BOA -1
○ ACPAPP -1
○ ACPACI -1
○ GACPA -1
○ NACPAE -2
Others
International Financial Reporting Interpretations Committee (IFRIC)
● the committee that prepares interpretations of how specific issues should be
accounted for under the application of the IFRS.
IFRS Advisory Council (IFRSAC)
● group of organizations and individuals with an interest in international
financial reporting.
Philippine Interpretations Committee (PIC)
● it has the role of reviewing the interpretations of the International Financial
Reporting Interpretations Committee (IFRIC) for approval and adoption of the
FRSC.
Bureau of Internal Revenue (BIR)
Association of Internal Auditors (AIA) – for all internal auditors
The Accounting/Auditing Firm
Services of a CPA in Public Practice
● Assurance Engagements
○ includes audits,
○ reviews and
○ other assurance engagements.
● Non-Assurance Engagements
○ agreed-upon procedures
○ compilation and other information
○ preparation of income tax returns
○ management consultancy and
○ other advisory services

Core Values required in the Public Accounting Profession

● Integrity
● Competence
● Lifelong learning
● Objectivity
● Commitment to excellence
● Relevance in the global marketplace

Core Competencies required in the Public Accounting Profession

● Communication Skills
● Leadership skills
● Critical thinking and Problem-Solving skills
● Anticipating and serving evolving needs
● synthesizing intelligence to insight
● Integration and collaboration

Establishment and Operation of a Public Accounting Practice

● maybe organized as a sole proprietorship (principal) or a General
Professional Partnership (partners)
● CPAs registration with BOA (public practice) and approved by PRC
○ 3 years of meaningful experience in the practice of accounting
including taxation.
● Obtain a business license or mayor's permit to operate a business
● pay the privilege tax, and get the Professional tax Receipt in the City or
Municipality where they reside practice public accountancy.
● Obtain a Certificate of Accreditation with the BIR.
 ● File a representation letter for the client with the SEC
● and abide faithfully within the bounds of RA 9298 and the Code of Ethics for
Professional Accountants in the Philippines.

Sources of Clients
● referrals from clients, financial and government institutions, and legal and
other professional firms.
● by joining civic and professional organizations and actively participating in
community activities and affairs.
● CPAs are not allowed to solicit clients but they may use appropriate
announcements in newspapers and magazines to announce a new practice
with bare statements of facts:

○ Name, business, and e-mail address; telephone and mobile

numbers.

Professional Fees
● Audit fees are arranged and agreed upon between the client and the auditor
before the start of the audit.
● based on the services performed to the client, considering the requirements
in terms of the skill, knowledge, level of training and experience, responsibility
entailed, and the time and rate of each personnel.
● Methods of Billing Clients:

○ per diem or actual time charged basis -computed at an actual

number of hours spent in the audit.
○ flat fee basis, including out-of-pocket cost - estimate of possible
charges.
○ retainer basis - the client is billed monthly or annually for the
various services the CPA has agreed to perform for the whole
period.

Organizational Structure of CPA Firms

1. Partners
● top-level authority
● select and hire the audit staff and plan the staff training, establish operational
policies, and obtain clients.
● determines the results of the audit are fair presentation and approves the
audit reports.
 ● discusses and approves billing with the clients, plans, and reviews all phases
of the audit engagement.
2. Manager
● acts as a liaison between the partner and the audit Staff.
● takes charge of the training program
● exercises direct supervision on seniors in-charge of the audit
● discusses material importance with the client
● reviews the working papers and drafts the audit reports
● discusses the results of the audit and the audit report and settles accounting
problems with the client.
3. Supervisors
● determine the audit procedures to be used in an audit.
● supervises the accountants.
4. Seniors
● in charge of the fieldwork of an audit engagement and is directly responsible
to the manager of the partner.
● responsible for the completion of the audit
● prepares the audit program for the specific engagement and plans the
assignment of the different phases of the audit work.
● reviews non-financial records such as the Articles and By-laws
● assembles working papers, drafts financial statements,
● investigates unusual variations from prior to the current year period
● prepares income tax returns and the original draft of the audit report
5. Semi-seniors
● member of the audit staff who may not yet possess the experience of a senior
but can work with minimum supervision.
6. Juniors
● staff accountant under the direct supervision of the senior.
● performs the detailed work of an audit.
● reports to the senior any error of unusual items.

The Big Four - Largest International Public Accounting Firms

● Deloitte Touche Tohmatsu Ltd.
● Price Waterhouse Cooper (PWC)
● Ernst and Young (EY)
● KPMG
The Top 6 Accounting /Auditing firms in the Philippines
● SGV and Co. (partner of Ernst and Young)
● Navarro Amper (partner of Deloitte)
● Isla Lipana and Associates (partner of PWC)
● Manabat, San Agustin and Co. ( partner of KPMG)
● Punongbayan Aurollo and Co. (partner Grant Thorton)
● Roxas, Cruz, and Tagle (BDO Global)

Acceptance and Retention of the Audit

● auditors' capabilities to handle the audit
● availability of the audit staff
● the reputation of the prospective client
● management integrity
● report of the predecessor auditor for the reason of change.

If the audit engagement is accepted by the practitioner, they will have to discuss the
terms of the engagement

Terms of the Audit Engagement

After the practitioner decides to accept a prospective client, he requests a conference

with the client to discuss the terms of the audit.
The client and the practitioner should reach an agreement as to:
● the specific services to be rendered
● cooperation expected from the client
● start and completion date of the audit
● scope of the audit
● any limitation of the audit work
Engagement Teams - composed of the engagement partner (lead/managing
partner/partner-in-charge) and the audit team members.

1.2. Introduction to Auditing

Auditing
● is the systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the
degree of correspondence between the assertions and established criteria
and communicating the results to interested users. (American Accounting
Association -AAA)
The Characteristics of an Audit
1. Auditing is a systematic process - that follows an ordered and structured series of
steps (audit procedures).
2. An audit involves obtaining and evaluating evidence about assertions ( eg. reliability
of the balances on the financial statements) regarding economic actions and events. To
determine if these assertions are valid.
3. An audit is conducted objectively - performed without bias or conflict of interest for
an impartial assessment.
4. Auditors ascertain the degree of correspondence between assertions and established
criteria (applicable financial reporting framework).
5. Auditors communicate the audit results (audit findings)to various interested users in
a timely manner - audit report.

Nature of Auditing
● an independent discipline that relies on the results of accounting and other
financial information.
● reports and reviews the propriety of management's communication of
financial statements.
● an assurance and attest function involving the objective examination of the
client's internal control, records, transactions, and underlying supporting
documents.

Purpose of an Audit
● to ascertain the fairness, integrity, authenticity, and reliability of the client's
FS that have been prepared in accordance with the Generally Accepted
Accounting Principles.
● to render an opinion on the fairness of the presentation of the FS.
● to guide future decisions of management in all matters involving control,
analysis, forecasting, and reporting for the improvement of financial
performance.

Scope of an Audit
● varies to fit the requirement of the engagement
● examination procedures are dictated by the professional accountant's:
○ thorough knowledge of principles and procedures
○ sound judgment
 ○ adequate education
○ proper training
○ open critical mind
○ understanding of the entire management information system

Ethical Case of Auditing

● Ethics- a composite of moral principles and self-discipline that is beyond the
ordinary expectation or requirement of law.
● The ethics of a professional accountant is his protection against involvement
in acts discreditable to the profession
● The practitioner's opinion is expressed without duress but independently as
dictated by professional integrity, competence, and due care.

The 2018 Code of Ethics for Professional Accountants in the Philippines

Part A (applicable to all CPAs)

1. Integrity
● A professional accountant should be straightforward and honest in all
professional and business relationships.
2. Objectivity
● A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments.
3. Professional Competence and Due Care
● A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in
practice, legislation, and techniques.
● Professional accountants should act diligently and by applicable technical and
professional standards when providing professional services.
4. Confidentiality
● A professional accountant should respect the confidentiality of information
acquired as a result of professional and business relationships and
● should not disclose any such information to third parties without proper and
specific authority unless there is a legal or professional right or duty to
disclose.
● Confidential information acquired as a result of professional and business
relationships should not be used for the personal advantage of the
professional accountant or third parties.
5. Professional Behavior
● A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
Philosophy of an Audit
● FS users see the independent auditor's report as an assurance of reliable
information not resulting from misrepresentations, irregularities, illegal acts,
fraud, and error.
● FS attested by the independent auditor would allow users to make well-
informed decisions.

The objective of Auditing ( Philippine Standard of Auditing-PSA 120)

● enable the auditor to express an opinion on whether the FSs are prepared in
accordance with an applicable financial reporting framework.

Types of Audit
1. Financial Statement Audit
● is the examination of an entity's financial statements and accompanying
disclosures by an independent auditor.
● The purpose of a financial statement audit is to add credibility to the
reported financial position and performance of a business ( fairly
presented in accordance with the applicable financial reporting framework)
● performed by external auditors (CPAs' of independent auditing firms)
2. Compliance Audit
● is a review performed to ascertain an enterprise's adherence to regulatory
guidelines (specific procedures, rules, and regulations).
● based on recognized criteria established by an authoritative body.
● performed by government auditors
3. Operational Audit
● is an examination of the manner in which an organization conducts
business, with the objective of pointing out improvements that will increase
its efficiency and effectiveness.
● assess entity's performance, identify areas for improvement (weaknesses in
the internal controls), and make recommendations for improvement.
● conducted by internal auditors.

Similar General Characteristics:

1. Systematic examination and evaluation of evidence to ascertain if the assertions
comply with established criteria.
2. Communication of the results of the examination is presented through a written
report (audit report)

Financial Audit Compliance Audit Operational Audit

Assertions Financial Compliance of the Organizational
Statements are organization to laws, activities are
fairly presented regulations, or contracts conducted effectively
or efficiently
The Conceptual Laws, rules, and Objectives set by the
Established Framework for regulations Board of the
Criteria Financial reporting, Directors (BOD)
PAS, PFRS
audit opinion reports on the degree of reports on the
Contents whether the compliance with weaknesses of its
of the financial applicable laws, operations, provide
statements are regulations, and recommendations to
Auditor's fairly presented in contracts. improve operations
Report conformity with the and gives an overall
applicable financial opinion as to the
reporting efficiency and
framework effectiveness of its
operations.
 Auditors External Auditors Government Auditors * Internal Auditors
(Practitioners)
CPAs employed by ● CPAs who
CPAs hired by a government agencies investigate and
business to such as: appraise the
perform an effectiveness and
examination of its ● COA Auditor - audit efficiency of
FS and express an of government operations and
opinion regarding agencies on how they internal controls.
its fairness. administer ● entity's own
government funds employees
● BIR Examiner -audit
of taxpayers'
compliance to tax
laws.
● Other Regulatory
Auditors
○ SEC, BSP,
Cooperative
Commission,
Insurance
Commission, and
other government
agency examiners
- check on the
solvency and
compliance to
appropriate laws
and regulations.

*Performance audit- audit of financial and operational performance of an

organization/program/activity or function
Let us watch the video below to understand better Auditing:
https://youtu.be/m2JPokgz6A4

1.3. Introduction to Assurance Engagements

The Universe of CPA Services
After the financial statements and other relevant reports of the business has been
prepared, the CPA is frequently asked to examine these financial reports and to
provide assurance that interested parties and other users may rely on the authenticity of
the information contained therein.

To provide a high or moderate level of assurance, the Philippine Framework for

Assurance Engagements
● provides a frame of reference for practitioners and others involved in
assurance engagements
Philippine Framework for Assurance Engagements (PFAE)
Overview
● The Framework defines and describes the elements and objectives of an
assurance engagement, and
● identifies engagements to which the:
○ Philippine Standards on Auditing (PSAs)
○ Links to an external site.
○ ,
○ Philippine Standards on Review Engagements (PSREs)
○ Links to an external site.
○ , and
○ Philippine Standards on Assurance Engagements (PSAEs)
○ Links to an external site.
○ apply.
● It provides a frame of reference for :
○ professional accountants in public practice (practitioners)
○ and others involved with assurance engagements, such as those
engaging a practitioner or the “engaging party” - intended users
of the report and the responsible party
○ the International Auditing and Assurance Standards Board
(IAASB)
○ Links to an external site.
○ in its development of ISAs, ISREs, and ISAEs and consequently,
○ the Auditing And Assurance Standards Council (AASC)
○ Links to an external site.
○ which replaced the Auditing Standards and Practices Council
(ASPC)
○
○ in its adoption of said standards for application in the Philippines.
Ethical Principles and Quality Control Standards
Practitioners who perform assurance engagements are governed by:
(a) The Code of Ethics for Professional Accountants in the Philippines (the
Philippine Code),
● which is adopted from the IFAC
● Links to an external site.
● Code of Ethics for Professional Accountants, and
● which establishes fundamental ethical principles for professional accountants;
and
Part A of the Code
● sets out the fundamental ethical principles that all professional accountants
are required to observe, including:
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care
(d) Confidentiality; and
(e) Professional behavior.
Part B of the Code,
● which applies only to professional accountants in public practice
(“practitioners”),
● includes a conceptual approach to independence that takes into account, for
each assurance engagement:
○ threats to independence,
○ accepted safeguards, and
○ the public interest.
● It requires firms and members of assurance teams:

○ to identify and evaluate circumstances and relationships that create

threats to independence and
○ to take appropriate action to eliminate these threats or to reduce
them to an acceptable level by the application of safeguards.

b)The Philippine Standards on Quality Control (PSQCs),

● which are adopted from the International Standards on Quality Control
(ISQC),
● which establish standards and provide guidance on a firm’s system of quality
control.
Services Offered by a Professional Accountant
● Assurance Engagements
● Non-Assurance Engagements

Assurance Engagements

Assurance Engagement
● an agreement between the CPA practitioner and an intended information
user.
● the practitioner :

○ uses pertinent criteria in the evaluation and measurement of the

subject matter that is a responsibility of another party; or the same
responsible party.
○ expresses a conclusion designed to enhance the degree of
confidence that the intended user may have on the subject matter.

Nature of Assurance Engagements

● involves the expression of a practitioner's satisfaction with the reliability of an
assertion made by one party for the use of another party.
○ subject matter - assertions made by one party
■ Statement of Financial Position, Financial Performance and Cash
Flows
○ criteria - pertinent standards where the practitioner assesses sufficient
and appropriate evidence collected by the auditor
■ PFRSs for recognition, measurement, presentation and disclosure.
○ conclusion- the practitioner expresses an opinion on a high or moderate
degree of confidence on the reliability of the subject matter (after
conducting applicable and appropriate procedures to provide a reasonable
basis)
■ the outcome of the evaluation or the subject matter information on
the level of assurance that the practitioner provides in the
assurance report.
Characteristics of an Assurance Engagement
a. a 3 party relationship
● the practitioner
● responsible party
● intended user
b. the subject matter or an assertion
 ● Statement of Financial Position, Financial Performance and Cash Flows
c. criteria against which the subject matter is assessed
● PFRSs for recognition, measurement, presentation, and disclosure.
d. evidence that is sufficient and appropriate basis to arrive at a conclusion.
e. written assurance report expressing the practitioner's conclusion
The objective of Assurance Engagements

● the professional accountant expression of a conclusion that will provide

intended users with a level of assurance on the degree of confidence to
place on the reliability and credibility of the subject matter.

Range of Assurance Engagements

● Assertion Based- performed by the practitioner for a responsible party

on a subject matter or assertion
● Direct reporting engagement- performed by the practitioner for the
intended user on a subject matter that is a responsibility of another
party.

Types of Assurance Engagements

○ Audit
■ aimed to provide a high level of assurance that the
subject matter has met the appropriate criteria in all
material aspects.
■ practitioner states his conclusion in a positive form.
(ex. We believe that the evidence obtained is
sufficient and appropriate as a basis for my audit
opinion)
○ Reviews
■ a limited examination of the client's FS, performed
for the purpose of providing limited assurance that
the statements are presented in accordance with
identified FRSs.
■ practitioner states his conclusion in a negative
form. (ex. On the basis of the procedures
performed, nothing has come to my attention to
make me believe that the FS is not in accordance
with the _____ or I am not aware of any material
 modification.....)

Assurance services VS Attestation services

■ assurance services- practitioner issues a written
communication expressing a conclusion on the
reliability of an assertion that is performed for a
responsible party on a subject matter or assertion.
■ attestation service - practitioner issues a written
communication expressing a conclusion on the
reliability of an assertion that is a responsibility of
another party. With additional detailed standards
in the Statement on Standards for Attestation
Services and highly customized to the intended
user's needs and highly useful for limited
circumstances.

○ Other assurance services

■ assurance on risk assessment
■ information system reliability service
■ assurance on sales personnel-customer interaction
■ annual environmental audit and
■ other assurance services.

Elements of an Assurance Engagement (possessed by high-level assurance

engagement)
○ Objective
■ the purpose of the engagement
○ Ethical Requirements
■ possessed and observed by the CPA
■ Integrity, Objectivity, Competence and due
care, confidentiality, professional behavior,
and application of the technical standards
○ Accepting the Engagement.
■ the practitioner is satisfied that the subject
matter is appropriate, criteria is suitable,
supporting evidence is available
■ notifies the client of his acceptance thru a
formal letter (an engagement letter), stating
his start date of fieldwork and his proposed
professional fee.
○ Agreeing to the terms of the engagement

■ acceptance letter (engagement contract),

wherein the client affix his signature below
the "Agreed or Conforme"
○ Quality Control

■ practitioners observe quality control

■ the work performed should be checked for
compliance with regulatory standards and
legal requirements.
○ Planning and Conducting the engagement
■ the practitioner should plan, coordinate and
schedule the activities to perform the
engagement in an effective manner
■ audit plan - overall audit strategy is normally
drafted before the start of the audit.
○ Evidence
■ information used in arriving at a conclusion
■ should be appropriate, sufficient, and
competent.
■ more reliable if documents come from outside
sources.
○ Documentation
■ computations and information gathered during
the audit must be documented.
○ Subsequent events
■ events that occur after the audit date are
studied as to their effect on the subject matter
if material -adjust/disclose.
○ Using the work of an expert
 ■ the practitioner consults an expert for the
valuation or replacement cost of asset; or an
actuary for the appropriateness of insurance
reserves.
○ Reporting
■ upon completion of the examination, the
practitioner:
■ evaluates his findings, formulates
an opinion, and drafts his assurance
report.
■ audit report - expresses the
practitioner's opinion on the level of
confidence that may be placed on
the FS or subject matter of the
engagement.

Non-Assurance Engagements

Non-Assurance Engagements
● engagements not covered by the Philippine Framework for Assurance
Engagements
● covered by the Philippine Standards on Related Services (PSRSs)

Types of Non-Assurance Engagements

● Agreed upon Procedure Services
○ the intended user determines the processes to be performed
○ the practitioner submits the factual findings to the intended user
○ the intended user evaluates the findings and draws his own
conclusions.
● Compilation Services

○ intended user supplies the professional accountant with the

financial information which he classifies and summarized in FS
format in conformance with the PFRS
○ the professional accountant identifies errors in the representation
of the client.
● Tax Services

○ CPA must be accredited by the PRC and the BIR

○ rendered to both audit and non-audit clients for tax cases, tax
planning, and tax compliance.
● Management Consulting and Advisory services
 ○ usual consulting and advisory services which include the design
and installation of the accounting system, corporate finance,
computer risk management, and E-business
● Accounting and Data Processing or Information Technology System
Services
○ if the business is small and with inadequate staff, they will resort to
"outsourcing" for manual or automated bookkeeping, information
system on tax, stock and transfer agency, and internal auditing.
Let us watch the video below to understand Assurance Engagements:

https://youtu.be/ZthN519IdaM

1.4. Fundamentals of Assurance and Non-assurance Engagements

●
● Fundamentals of Assurance and Non-assurance Engagements
Definition and Objective of an Assurance Engagement
An assurance engagement is an independent professional service that
improves the quality (credibility) of information for decision-makers.
In an assurance engagement, a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a
subject matter against criteria.
Assurance services are broad and can be done by CPAs or other
professionals.
Need for Unbiased Reporting and Independent Assurance
1. The demand for assurance services emanates from the following
reasons:
Potential bias in providing information
Remoteness between a user and the organization or trading
partner
The complexity of the transactions, information, or processing
systems
Investors need to manage their risk and thereby minimize financial
surprises as consequences to investors, and others, of relying on
inaccurate information can be quite significant
● Hence, assurance engagements reduce information risks of the subject
matter.
Types of Assurance Engagements
As to level of assurance:
Reasonable assurance engagement – 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. An example of
this type of engagement would be an audit of historical financial statements.
Limited assurance engagement – 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. An example of
this type of engagement would be a review of historical financial statements.
As to structure:
Assertion-based engagement – In this type of engagement, the evaluation or
measurement of the subject matter is performed by the responsible party, and
the subject matter information is in the form of assertion by the responsible
party that is made available to the intended users. Independent financial
statements audit normally falls under this type.
Direct reporting engagement – In this type of engagements, the 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 information is provided to the intended users in the assurance
report.
Elements of an Assurance Engagement
1. The following are the elements of an assurance engagement:
a. A three party relationship involving a practitioner, a responsible
party, and 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.
● Three-party Relationship
Assurance engagements involve three separate parties:
a. Practitioner – the person, who performs the engagement, and is broader than
the term “auditor” which relates only to practitioners performing audit or review
engagements with respect to historical financial information.
b. Responsible party – is the person responsible for
c. Direct reporting engagement – subject matter; or
d. Assertion-based engagement – a subject matter information (the assertion),
and may be the subject matter. The responsible party may or may not be the
party who engages the practitioner (the engaging party).
e. Intended users – for whom the assurance report is prepared. The responsible
party can be one of the intended users, but not the only one.
Appropriate subject matter
The subject matter, and subject matter information, of an assurance engagement
can take many forms, such as:
a. Financial performance or conditions (for example, historical or prospective
financial statements)
b. Non-financial performance or conditions (for example, performance key
indicators of efficiency and effectiveness of an entity)
c. Physical characteristics (for example, capacity of a facility)
d. Systems and processes (for example, an entity’s internal control or IT system)
e. Behavior (for example, corporate governance, compliance with regulation,
human resource practices)
An appropriate subject matter is:
a. Identifiable, and capable of consistent evaluation or measurement against the
identified criteria; and
b. 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.
Suitable criteria
Benchmarks used to evaluate or measure the subject matter.
Examples of formal criteria are the following:
a. In the preparation of financial statements, the criteria may be Philippine
Financial Reporting Standards;
b. When reporting on internal control, the criteria may be an established internal
control framework; and
c. 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).
Suitable criteria are required for reasonably consistent evaluation or
measurement of a subject matter within the context of professional judgment.
Without the frame of reference provided by suitable criteria, any conclusion is
open to individual interpretation and misunderstanding.
The criteria must have the following characteristics to be considered suitable:
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 criteria need to be available to the intended users to allow them to
understand how the subject matter has been evaluated or measured.
Sufficient appropriate evidence
Evidence is the information obtained by the practitioner in arriving at the
conclusions on which the opinion is based.
The practitioner plans and performs an assurance engagement with an attitude
of professional skepticism.
In addition, the practitioner recognizes the existence of assurance engagement
risk (synonymous to audit risk) – the risk that the practitioner expresses an
inappropriate conclusion when the subject matter information is materially
misstated.
Written assurance report
The practitioner provides a written report containing a conclusion that conveys
the assurance obtained about the subject matter information.
The practitioner’s conclusion can be worded depending on the type of assurance
engagement:
As to structure:
Assertion-based engagement, either:
In terms of the responsible party’s assertion (for example: “In our opinion the
responsible party’s assertion that internal control is effective, in all material
respects, based on XYZ criteria, is fairly stated”); or
Directly in terms of the subject matter and the criteria (for example: “In our
opinion internal control is effective, in all material respects, based on XYZ
criteria”).
Direct reporting engagement – directly in terms of the subject matter and the
criteria.
As to level of assurance:
Reasonable assurance engagement - positive form, for example: “In our opinion
internal control is effective, in all material respects, based on XYZ criteria.”
Limited assurance engagement - negative form, for example, “Based on our work
described in this report, nothing has come to our attention that causes us to
believe that internal control is not effective, in all material respects, based on
XYZ criteria.”
The conclusions above are examples of an “unqualified conclusion”. However,
not all conclusions are unqualified.
The following table summarizes conclusions other than unqualified depending on
the results of the engagement:

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Limitations of Assurance Engagements

The highest level of assurance that may be provided by the practitioner is
reasonable assurance (less than absolute) as a result of the following factors:
1. Use of selective testing;
2. Use of judgment;
 3. Inherent limitations of internal control;
4. Persuasive evidence rather than conclusive; and
5. Characteristics of the subject matter.
● Non-assurance Engagements
Professional accountants (practitioners) also perform non-assurance
engagements. Engagements are considered non-assurance engagements if
they lack one or more of the five elements of an assurance engagement.
Common examples of non-assurance engagements are:
1. Agreed-upon procedures engagement;
2. Compilations engagements;
3. Preparation of tax returns where no conclusion conveying
assurance is expressed;
4. Consulting (or advisory) engagements such as management and
tax consulting;
5. Engagements to testify in legal proceedings regarding accounting,
auditing, taxation or other matters; and
6. Engagements that include professional opinions not intended to be
an assurance report.
●

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●
Let us watch the video below to understand Assurance and Non-Assurance
Services
https://youtu.be/TD09E0YVDSI