Financial Accounting and Reporting

Fundamentals of Auditing and

Assurance Services
 FUNDAMENTAL PRINCIPLES OF ASSURANCE SERVICES

PRACTICE AND REGULATION OF THE ACCOUNTANCY PROFESSION

PRE-ENGAGEMENT RISK ASSESSMENT RISK RESPONSE EVALUATE/CONCLUDE

Introduction to FS Evidence Completing the Audit

Audit Planning
Audit

Pre-engagement Consideration of Selecting Items for

Reporting
Activities Internal Controls/IT Testing (Sampling)

Transaction Cycles

FRAUD, ERROR AND NON-COMPLIANCE

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

QUALITY CONTROLS FOR AUDIT AND ASSURANCE FIRMS

 Choices or decisions should be
based on good information.

Information risk is the possibility

that the information upon which the
“decision” was made was
inaccurate.
ASSURANCE:
a third-party practitioner’s satisfaction as to the reliability of an assertion
being made by one party for use by another party.

ASSURANCE SERVICES:

independent professional services that improve the quality of information,

or its context, for decision-makers.
 Practitioner

Responsible Subject Intended

Party Matter Users

Objective of Assurance Services:

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 a level of assurance about the subject matter.
Increasing decision maker’s confidence in information is often beneficial to
both the decision maker and the information provider. Involvement of an
independent professional, such as a CPA trained in providing assurance
services and subject to professional and legal standards, can effectively
increase that confidence.
Question: Which of the following is not included in the elements of an
assurance engagement?

a. Appropriate underlying subject matter information.

b. Sufficient appropriate evidence.
c. Written report.
d. Professional fees.
 Written
Practitioner Assurance
Report
Sufficient
Suitable Criteria Appropriate
Evidence

Responsible Subject Intended

Party Matter Users

Elements of Assurance Services

• Three-party-relationship
• Subject Matter
• Criteria
• Evidence
• Report or Conclusion
 Written
Practitioner Assurance
Report
Sufficient
Suitable Criteria Appropriate
Evidence

Responsible Subject Intended

Party Matter Users

Subject Matter: the “nature” of the assertion the practitioner gathers sufficient
evidence.

Subject Matter Information: “outcome” of the evaluation or measurement of a

subject matter, “results” of applying the criteria to the underlying subject matter
Subject Matter vs. Subject Matter Information

Appropriate subject matter are verifiable (identifiable and capable of consistent evaluation or measurement
against identified criteria such that the information can be subjected to procedures for gathering sufficient
appropriate evidence to support reasonable assurance or limited assurance conclusion, as appropriate.)

Financial performance, non-financial performance, physical characteristics, systems and processes, and
behavior
Question: A suitable criteria exhibits the following characteristics,
except for:

a. Verifiable
b. Understandable
c. Neutrality
d. Completeness
Suitable Criteria

Underlying
Subject
Matter
Subject
Matter
Information
Suitable
Criteria

Reliable Understandable Neutral Completeness Relevant (RUN CR!)

Sufficient Appropriate Evidence

No evidence = No conclusion = No assurance

Evidence are information gathered by the practitioner in evaluating the subject matter against criteria, on
which the conclusion is based.
Question: The sufficiency and appropriateness of evidence are
interrelated. Which of the following statements incorrectly relates to
these concepts?

a. Sufficiency is the measure of the quantity of the evidence.

b. The higher the risks, the more evidence is likely to be required.
c. The higher the quality, the more evidence is likely to be required.
d. Obtaining more evidence may not compensate for its poor quality.
Materiality and Audit Evidence

Audit
Evidence
Materiality
Assurance Engagement Risk
Assurance engagement risk is the risk that practitioner expresses an inappropriate conclusion when the
subject matter information is materially misstated.
Professional Skepticism
An attitude that includes a questioning mind, being alert to conditions that may indicate possible
misstatement due to error or fraud, and a critical assessment of the evidence.
Question: Which of the following statements inappropriately relates to
professional judgment?

a. It is based on the facts and circumstances that are known by the

practitioner.
b. Professional judgment needs to be exercised throughout the
engagement.
c. Professional judgment serves as justification for decisions that are not
supported by facts and circumstances of the engagement.
d. Professional judgment is necessary for drawing appropriate conclusions
based on evidence obtained.
Generalizations of Reliability of Evidence

External vs Internal Source

Effective vs Ineffective Internal Control

Directly vs Indirectly Obtained

Written vs. Oral Representations

Original vs. Reproduced Documents

Written Assurance Reports
Reasonable Assurance Limited Assurance
Engagement Engagement
Assurance Engagement Acceptably low level Level that is acceptable
Risk in circumstances
(greater risk than
reasonable)
Assurance Level Reasonable or high Limited or moderate
Form Positive Negative

“The entity has “Nothing has come to

complied, in all material our attention that causes
respects, with XYZ law.” us to believe that the
entity has not complied,
in all material respects,
with XYZ law.”
Assurance Engagement as to Structure
Attestation (Assertion-Based) Engagements Direct Reporting Engagements
Responsibility Measure / Assure Responsibility Measure / Assure
Evaluate Evaluate

Practitioner Responsible
Responsible Party Practitioner
Party

Criteria Evidence Criteria Evidence

)

Underlying Subject Matter Assurance Underlying Subject Matter Assurance

Subject Matter Information Report Subject Matter Information Report

Users Users
Assurance Engagement as to Structure
Attestation (Assertion-Based) Direct Reporting Engagements
Engagements
Party responsible for subject Responsible Party Responsible Party
matter
Party who measures/evaluates the Responsible Party Practitioner
subject matter
Party who provides assurance Practitioner Practitioner
Availability of subject matter Available to Intended Users Availability to Intended Users

Examples Audit, Review Report on Effective Internal

Controls
Non-Assurance Services
Agreed-Upon Procedures
• 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
Compilation
• Use accounting expertise
as opposed to auditing,
expertise to collect, classify
and summarize financial
information
 Audit Review Agreed-upon Compilation
Procedures Engagement
Objective Express an opinion Express a conclusion Perform procedures Use accounting
whether the FS are whether material as agreed upon with expertise to collect,
prepared in modifications are to be the client and third classify and
accordance with made to the FS to parties and report on summarize FS
PFRS conform with PFRS factual findings
Ethical I + COBID* I + COBID* COBID* COBID*
requirement
Level of High but not absolute Moderate (Limited) No assurance No assurance
assurance
Procedures are Exclusively by auditor Exclusively by auditor Agreed-upon by May or may not be
determined by parties agreed by parties
Report provided Independent Auditor’s Review report Report on factual Compilation report
Report (positive (negative assurance findings of procedures which identifies the
assurance on on assertions) information compiled
assertions)
Availability of To all users To all users For limited use only To all users
report

*Competence, Objectivity, Professional Behavior, Integrity, Due Care

What is an Audit?
An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these assertions and
established criteria and communicating the results thereof.

Why is there an Audit?

Financial Objectives Operational Objectives Compliance Objectives

RISKS
Three Lines of Defense Model
Types of Audit
FS Audit
Assertions FS are fairly presented.
Suitable criteria GAAP or any other identified
financial reporting framework
Report An opinion whether FS are
fairly presented in conformity
with an identified financial
reporting framework
Generally performed by External auditors
Operational Audit
Operations are conducted
efficiently and effectively.
Objectives set by
management
Report on efficiency and
effectiveness (including
recommendations)
Internal Auditors
Compliance Audit
Activities complied with
applicable laws, rules and
regulations, contracts or
management policy
Applicable laws, rules and
regulations, contracts or
management policy
Degree of compliance report
Government Auditors
Financial Statements Audit
Responsibility Measure / Assure
Evaluate

Management and External

those charged with Auditor
governance

PFRS Audit evidence

Historical
Financial Audit Report
Financial
Statements
Information

Users
Objectives of Financial Statements Audit
• To obtain reasonable assurance about whether the FS as a whole are free from material misstatement,
whether due to fraud or error
• To enable an auditor to express an opinion as to whether the financial statements are prepared, in all
material respects, in accordance with applicable financial reporting framework.

Auditor’s Report

The auditor provides a written report called an “audit report” which contains the conclusion or
opinion conveying the assurance obtained about the financial statements.

In addition, the auditor considers other reporting responsibilities, including communicating with
those charged with governance.
Audit Assertions
Representations made by management, explicit or otherwise, that are embodied in the financial statements
as used by the auditor to consider the different types of potential misstatements that may occur.

Account Balances and related Disclosures Classes of Transactions and related

Disclosures
Completeness
Occurrence
Existence
Completeness
Rights and Obligations
Accuracy
Valuation and Allocation
Cut-Off
Classification
Classification
Presentation
Presentation
General Principles of Financial Statements Audit

Code of Ethics

Assurance Standards (PSA)

Professional Skepticism

Professional Judgment

Evidence
Engagement Standards in the Philippines