Audit and Assurance Principles CHAPTER ONE: FUNDAMENTALS OF ASSURANCE SERVICES Reference: Audit and Assurance Principles (2. Ireneo, S. Ireneo, & James, 2017) CONCEPT OF ASSURANCE ‘+ Therelevance and reliability of information is critical for making the best decision in a given situation. + To.assure means to give confidence or conviction. In the auciting sense, assurance refers ta the auditor's satisfaction as to the reliability of an assertion being made by one party for us by another party. ASSURANCE SERVICES ‘+ Assurance Services are three-party contracts in which assurers report on the quality of information. Assurance engagements performed by CPAs are intended to enhance the credibilty of information about a subject matter. ‘+ Elements of Assurance Engagements: All the following elements must be present fori tobe classified as an assurance engagement. ‘Three: party relationship (practitioner, responsibly party, and intended users) Subject matter Criteria Evidence Written assurance report ‘+ Three-party Relationship: 1. Practitioner: Broader than the term auditor. He may be requested to perform assurance engagements on & wide range of subject matters. In cases that specialized sklls beyond ordinarily possessed by practitioner are required, the Practitioner should nat accept the engagement if ethical requirements regarding his competence will not be satisfied. However, the practitioner may seek the help of experts so that ethical requirements on his competence can be satisfied, provided that the practitioner has an adequate level of involvement and understanding ofthe expert's work. Responsible Party: ’2._ Hes the one responsible for the subject matter or the subject matter information b._ He may or may not be the party who engages the practitioner. 3. Intended Users: '. Person/s or class of person for whom the practitioner prepares the assurance report. i The responsible party can be one, but cannot be the only one, of the intended users. © Reminders on Parties Involved: ‘+ Whenever practical, intended users or their representatives must be involved with the Practitioner and responsible party in determining requirements of the engagement. ‘The practitioners the sole responsible for determining the nature, timing, and extent of procedures to be performed in the engagement. + When engagements are designed for specified intended users or a specific purpose, Practitioner considers Including a restriction that limits its use to those users or that purpose. + Subject Matter: © An appropriate subject matter s identifiable and capable of consistent evaluation, and capable of being subjected to procedures for gathering suficient appropriate evidence to support a reasonable + Suitable criteria ‘These are benchmarks used to evaluate or measure the subject matter. © They can be formal or ess formal © Suitable criteria are required for reasonably consistent evaluation. Without the frame of reference, any Conclusion is open to Individual Interpretation and misunderstanding, © They are context-sensitive which means they are relevant to the engagement circumstances. © Assessment of the suitabilty of criteria includes considering whether they reflect the following characteristics: + Relevance: It contributes to conclusions that assist decision-making. + Completeness: No omission of relevant factors. + Reliability: It allows reasonably consistent evalustion or measurement of subject matter + Neutrality: Freedom from bias. + Understandability: Clear, comprehensive, and not subject to significantly different Interpretations ° Types of Criteria: ‘Established Criteria: Those embodied in laws or requltions. + Specifically Developed Criteria: Those designed for the purpose of the engagement. + Whether established or specifically developed, criteria need to be available to the intended Users which may be done through the following ways: 2. Publicity ._ Inclusion in the presentation of subject matter informationInclusion inthe assurance report d._ General understanding ‘+ Criteria may also be available only to specific Intended users, + When identified criteria are available only to specific intended users or for a specific purpose, Use of assurance report is restricted. ‘Sufficient Appropriate Evidence © Professional Skepticism: Atttude of determining whether the subject matter information free of material misstatement. ' Itvefers to recognition of cicumstances that may eaist which cause subject matter information to be materially misstated. + Itis an attitude that includes being alert to: a. Inconsistent evidences ._ Information calling questions of document reliability ©. Circumstances that suggest need for additional procedures 4d. Conditions indicating likely misstatement, + An assurance engagement rarely involves authentication of documentation nor is the practitioner trained as or expected to be an expert in such authentication. © Sufficiency and Appropriateness of Evidence: ‘+ Suffcieney is the measure of the quantity of evidence. a. The quantity of evidence may be affected by the sk ofthe subject matter information being materially misstated. 1b. The greater the risk the more evidence is kely to be required ‘+ Appropriateness is the measure of the quality of evidence (relevance and reliability). 2. Quantity of evidence may also be affected by its quality. b. The higher the quailty, the less may be required + Sufficiency and appropriateness are interrelated, However, merely obtaining mare evidence may nat compensate for its poor quality. © Generalizations on Evidence Reliability Circumstances may exist that could affect the reliability of the information obtained, + The following generalzations pertain to more relable evidence: a. Evidence obtained from independent sources outside the entity, b. Evidence generated internally when related controls are effective c. Evidence obtained directly by the practitioner 4d. Evidence existing In documentary form (paper, electronic, or other media) e. Evidence provided by original documents. ‘+ Practitioner obtains more assurance from consistent evidence obtained from different sources ‘or of a different nature, © Cost-Benefit Considerations ‘+ Ibis generally more difficult to obtain assurance about subject matter information covering @ period + Conclusions provided on processes ordinarily are limited to the period covered by the ‘engagement. Practitioner provides no conclusion about whether the process will continue to function in the future. ‘Practitioner considers relationship between cost of obtaining evidence and usefulness of the information. + However, matter of difficult or expense involved is notin itself a valid basis for omitting an ‘evidence-gathering procedure when there Is no alternative. © Materiality ‘+ Relevant when practitioner determines nature, timing and extent of evidence-gathering procedures, and when assessing whether the Subject matter information is free of misstatement. © Assurance Engagement Risk ‘+ tis the risk that the practitioner expresses an inappropriate conclusion when the subject matter is materially misstated. a idence aay merchanees of figherleetot gathering ==—MAPDOpNaRe ee trence Ronse ‘Assurance Report © Practitioner provides a written report containing a conclusion that conveys the assurance obtained ‘about the subject matter information. © Forms of Conclusion + Two Levels of Assurance 1) Reasonable 2) Umited Also known High level of assurance _| Moderate level of assurance Conclusion Positive form ‘Negative form + Reason for differing levels of assurance lies in the nature, extent, and timing of procedures to gather evidence as basis for practitioner's conclusion,Classification of Assurance Engagement According to Level of Assurance Reasonable Assurance Engagement: Has 2 Limited Assurance Engagement: Has a positive form of expression in reducing negative form of expression and whose risk is. ‘assurance engagement risk. greater than for a reasonable assurance engagement. According to Structure Attestation Engagement: The measurer of Direct Engagement: Practitioner measures or evaluator (who is not the practitioner) evaluates the underlying subject matter measures or evaluates the subject matter _against the criteria and presents the resulting against the criteria and the practitioner subject matter information as part of the ‘obtains sufficient evidence in order to express assurance report. ‘a conclusion about whether the subject matter information prepared by the measurer In some direct engagements, the practitioner's fF evaluator Is free from materlal Cconclusion's the subject matter information. misstatement. [Attestation Engagement is an engagement in which a practitioner is engaged to issue a written ‘communication that expresses conclusion on relabllty of a written assertion. 1 The assertion is responsibilty of another party Four basic conditions that distinguish an attestation engagement: ‘+ written assertion made by one party, reliability of which is of interest to another party, + An agreed-upon and objective criteria to asses assertion’s accuracy + Assertion is amenable to verification by an independent party + Accountant has a written conclusion on assertion’s reliability ‘Two Common Attestation Engagements: + Independent Audit Engagement is one which provides reasonable level of assurance, + Review Engagement involves a limited investigation of much narrower scope than an audit and undertaken for the purpose of providing limtied assurance. LIMITATIONS OF ASSURANCE ENGAGEMENTS ‘+ Reasonable assurance is less than absolute assurance. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial ue to the following factors: Selective testing Inherent imtatons of internal control Evidence available is persuasive rather than conclusive Use of judgment Characteristics of subject matter. NON-ASSURANCE SERVICES ‘An auditor and the entity and No conclusion expressed ‘Agreed-upon Procedures ‘any appropriate third parties have agreed and to report on factual findings. ‘Accountant is engaged to use No conclusion expressed ee Complain of Francia or Other Soon autre wuss © collec, classify, and summarize financial information ‘Advice on income tax and No conclusion expressed. Some Tax Services business tax Tax consultation involves two- parties only ene aan Helping organizations ImpraveTwo-party contracts which coneuearey their performance, recommend use of information