Chapter 1

Fundamental Principles of Assurance

Services
 Chapter Overview and Objectives:
This chapter discusses the fundamental principles of assurance services. At the end of this chapter, readers should be able to discuss
1. The fundamental principles of assurance services.
2. The assurance services
a. Definition
b. Objectives
c. Elements
d. Types (as to level of assurance and as to structure)
e. Common examples
1. The non-assurance services
2. The global organizations and standards-setting boards of the accountancy profession
3. The professional standards governing assurance and non-assurance engagements
  
 Relevant references:
 PFAE – Philippine Framework for Assurance Engagements
 PSA 120 – framework of the Philippine Standards on Auditing
 Preface – Preface to the Philippine Standards on Quality Control, Auditing, Review, other assurance and related services
 Introduction to Assurance
 Decision-making has been a normal part of our lives. Countless number of decisions each and every day is made which can
significantly affect a life of every person and of every organization.
  
 What is Assurance?
 ASSURANCE refers to the practitioner’s satisfaction as to the reliability of an assertion being made by one party for use by
another party.
  
 ASSURANCE ENGAGEMENTS
- Assurance Engagement (or services) means an engagement in which 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.
  
 Objective of Assurance Engagement
- The objective of an assurance engagement is for a practitioner to evaluate or measure a subject matter that is the
responsibility of another party against identified suitable criteria and express a conclusion that provides the intended user
with level of assurance about the subject matter.
Consideration when planning and performing the engagement
The following are practitioner’s consideration when planning and performing the engagement
(determining the nature, timing and extent of evidence gathering procedures).
a. Quantity of evidence (sufficiency)
b. Quality of evidence (appropriateness)
c. Materiality
d. Assurance engagement risk
e. Cost-benefit consideration
f. Professional skepticism
Appropriateness Vs. Sufficiency
Appropriateness - (previously called competence) is the measure of the quality of the evidence; that is, its relevance and its reliability.
Sufficiency - is the measure of the quantity of evidence. The quantity of evidence needed is affected by the
Risk of the subject matter information being materially misstated (the greater the risk, the more evidence is likely to be required);
and
Quality of such evidence (the higher the quality, the less may be required)

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.
Assurance Engagement Risk
Is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated.
Managing Assurance Engagement Risk
The practitioner may reduce assurance engagement risk to a lower level by increasing the assurance level provided by the procedures
performed. To be meaningful, the level of assurance obtained by the practitioner is likely to enhance the intended user’s confidence
about the subject matter information to a degree that is clearly more than inconsequential.
Components
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. 
Cost-benefit Consideration
In performing evidence-gathering procedures, the practitioner is expected to observe cost-benefit consideration. This means that “the
benefits that will be derived from obtaining the evidence should exceed the cost of obtaining it”.
 Professional Skepticism
the practitioner plans and performs an assurance engagement with an attitude of professional skepticism recognizing that circumstances may exist that
cause the subject matter information to be materially misstated.
 
The following are examples of exhibiting professional skepticism:
 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 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 information to be used as evidence, for example, photocopies, facsimiles, filmed,
digitized overgeneralizing other electronic documents, including consideration of controls over their preparation and maintenance where relevant.
 
 When receiving contradicting information from different sources, the practitioner ordinarily performs procedures to identify the possible causes of
discrepancies (e.g. bank reconciliation, subsidiary, and general ledgers reconciliation, and inquiries with parties involved to account for the differences).
 
External vs. internal source
Evidence is more reliable when it is obtained from independent sources outside the entity.
Effective internal control
Evidence that is generated internally is more reliable when the related controls are effective.
Directly vs. indirectly obtained by the practitioner
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).
Written vs. oral representations
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).
Original vs reproduced copies
Evidence provided by original documents is more reliable than evidence provided by photocopies or facsimiles.
A. Written Assurance Report
 The practitioner provides a written report containing a conclusion or an opinion that conveys the assurance obtained
about the subject matter information. In addition, the practitioner considers other reporting responsibilities,
including communicating with those charged with governance. The opinion to be expressed by the practitioner may
include either the following:

Levels and Forms of Assurance

 The levels (high or moderate) and form (positive or negative) of assurance provided by the practitioner is dependent
on the type of assurance engagement being rendered.
  
1. Reasonable assurance engagement – the objective is reduction in assurance engagement risk to an acceptably low level
in the circumstances of the engagement as the basis for positive form of expression of the practitioner’s conclusion.
Such form conveys “reasonable assurance”.
2. Limited assurance engagement – the objective is reduction in assurance engagement risk to a level that is acceptable in
circumstances of the engagements, but where the risk is greater than for a reasonable assurance engagement, as a basis
for a negative form of expression of the practitioner’s conclusion. This form conveys” limited assurance”.
 NON-ASSURANCE ENGAGEMENTS
Lack one or more of the elements of assurance engagements. Examples include:
 Agreed-upon procedures
 auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report the factual findings.
 Recipients of the report must form their own conclusions from the report by the auditor.
 Report is restricted to those parties who have agreed to the procedures to be performed

 Compilation of financial and other information

 Accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and summarize
financial information
 Ordinarily entails detailed data in a manageable and understandable form
 Accountant will not express any assurance on the financial information
 Intended users derived some benefits as a result of the accountant’s involvement
 Some tax services where no conclusion is expressed, and tax consulting
 Practitioner provides advice on income tax and business strategies
 Develop tax strategies to minimize businesses’ tax liability and worries
 Management consulting and other advisory services
 Practitioner provides advice or recommendations for the improvement of the client’s use of its capabilities and resources
to achieve the objective of the client’s organization.
 STANDARDS GOVERNING PROFESSIONAL SERVICES BY CPA’s IN THE PHILIPPINES

STANDARDS RELATED PRACTICE STATEMENTS APPLICATION OF STANDARDS

Philippine Standards on Auditing (PSAs) Philippine Auditing Practice Statements Audit of historical financial information
(PAPSs)

Philippine Standards on Review Philippine Review Engagement Practice Review of historical financial information
Engagements (PSREs) Statements (PREPSs)

Philippine Standards on Assurance Philippine Assurance Engagements Practice Assurance engagements dealing with
Engagements (PSAEs) Statements (PAEPSs) subject matter other than historical financial
information

Philippine Standards on Related Services Philippine Related Services Practice Agreed-upon procedures information and
(PSRSs) Statements (PREPs) other related services engagements as
specified by AASC

Philippine Standard on Quality Control   All services falling under the AASCs
(PSQCs) Engagements Standards