Assurance Engagements & Other Services of A Practitioner
Assurance Engagements & Other Services of A Practitioner
Assurance Engagements & Other Services of A Practitioner
RESPONSIBLE PARTY
INTENDED USERS
- Person or class of persons for whom CPA prepares the assurance report
- Responsible party can be the one of the intended users, BUT NOT THE ONLY ONE
- CPA considers restricting the assurance report if reporting for specified users
Qualitative or quantitative
Subjective or objective
Historical or prospective
SUBJECT MATTER INFORMATION – the outcome of evaluation/measurement of subject matter against criteria (ex. class
record)
3. Suitable Criteria
CRITERIA are benchmarks used to evaluate or measure the subject matter
Relevant
Understandable
Neutral
Complete
Reliable
BASIS OR FORM OF CRITERIA
Publicly
Included in subject matter information
Included in assurance report (ex. Includes criteria for intended user)
By general understanding
4. Sufficient Appropriate Evidence
Basis of CPAs conclusion
Application of professional skepticism
The practitioner considers materiality, assurance of engagement risk, and quantity and quality of evidence
MATERIALITY
- Quantity – Sufficiency
QUANTITY OF EVIDENCE
- Affected by risk of the SMI (higher risk = more evidence required)
- Affected by quality (higher quality = less may be required)
- Merely obtaining more evidence may not compensate for its poor quality
- Quality – Appropriateness/Competence of Evidence
QUALITY OF EVIDENCE
- Affected by relevance and reliability
- Relevance – ability of the evidence to address the objective of the
procedure
- Interrelated
- Effect on evidence ……….
TYPES OF CONCLUSION
UNQUALIFIED CONCLUSION MODIFIED CONCLUSION
The CPA believes that the subject information, in all material The CPA either believes that:
aspects, conforms with the criteria The subject matter/information is materially
misstated; or
The CPA was not able to obtain sufficient
appropriate evidence
ACCORDING TO STRUCTURE
ASSERTION BASED ASSURANCE ENGAGEMENT (ATTESTATION) DIRECT REPORTING ASSURANCE ENGAGEMENT
- Ex. Audit of FS
- Representation by responsible party that is made available to - No representation from responsible party
intended users - Representation by responsible party NOT made
available to intended users
- Evaluation/measurement performed by RESPONSIBLE PARTY - Evaluation/measurement performed by the
PRACTITIONER
- Responsible party is responsible for subject matter information and - Responsible party responsible for subject matter
may be responsible to subject matter ONLY
ATTESTATION ENGAGEMENTS
Selective testing
Judgement
Inherent limitations of internal control
Persuasive evidence rather than conclusive
Characteristics of subject matter
NON-ASSURANCE SERVICES
Agree-Upon Procedures – carrying out those procedures of an audit nature to which the practitioner and the entity and any
appropriate third parties have agreed and to report on factual findings
Compilation Engagement – engaged to use accounting expertise as opposed to auditing expertise to collect, classify, and
summarize financial information
Some Tax services
Management consulting
INTRODUCTION TO AUDIT & AUDIT STANDARD – SETTING PROCESS
Auditing 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 to
intended users.
ACCOUNTING AUDITING
Provide accounting information about economic entities that is Accumulating evidence to determine if the recorded accounting
useful in making economic decisions information properly reflects the economic events that occurred
during the period
ASSURANCE AUDITING
- Broader than auditing - Narrower than assurance
- Assurance encompass assertion-based engagements and - Auditing is under the umbrella of assurance services
assertion-based engagements encompass audits rendered by CPAs
TYPES OF AUDITS
AS TO OBJECTIVES
1. FINANCIAL STATEMENT AUDITS – expression of an opinion on the financial statements of an entity after the CPA is satisfied as
to the fairness of such financial statements, in all material respects, in accordance with applicable financial reporting framework
Ex. – statutory audit of an entity’s annual financial statements
Objective – determine the fairness of the financial statements
Criteria – applicable financial reporting framework (PFRS; Established Criteria)
2. OPERATIONS AUDIT – involves systematic review of an organization’s activity in relation to specified objectives for the purpose of
assessing performance
Focus – Efficiency and effectiveness of operations
Efficiency – Management Audit
Effectiveness – Program Results Audit
Ex. – audit of a company’s IT system
Objective – evaluate effectiveness and efficiency of IT system
Criteria – management’s standards on effectiveness and efficiency (Specifically developed criteria)
3. COMPLIANCE AUDIT – involves determination of whether a person or entity has adhered to laws, regulations, or contracts
Ex. – BIR Audit of company’s tax returns
Objective – determine company’s compliance with existing tax rules and regulations
Criteria – tax laws / regulations
AS TO AUDITORS
1. EXTERNAL AUDITORS – performed by auditors who are independent of the organizations whose assertions (representations) are
being audited. Auditors involved are called independent or external auditors. Ex. Independent Audits of Financial Statements
2. INTERNAL AUDITORS – an objective and independent assurance and consulting activity designed to ADD VALUE to the
organization.
Goes beyond the financial aspect of an entity and include areas in:
- Governance process
- Risk Management
- Control
INTEGRATED AUDIT
An auditor can give to opinions to companies under Sarbanes-Oxley Act; 1 Financial Statements 2 Internal Control
INFORMATION RISK – risk that the information is misstated or misleading, owing to:
Conclusion &
Risk Assessment Risk Response
Reporting
Financial
Statements Level Assertion Level
(Further Audit Procedures)
Test of Controls Substantive Test
***If reasonable assurance cannot be obtained and qualified opinion is not enough, the disclaim an opinion OR withdraw from the
engagement if permissible
AUDITOR’S OPINION formal statement of the auditor concerning the client’s company financial statements
1. Unmodified Opinion – financial statements are fairly presented
2. Modified Opinion – material misstatement; unable to obtain sufficient appropriate
Qualified Opinion – there is exception
Adverse Opinion – materially misstated
Disclaimer of an Opinion – never seen; no comment
MODIFIED OPINION
*If the inability to obtain sufficient appropriate evidence is due to scope limitation imposed by management, the auditor should try to
resign or withdraw from the engagement first, if such is not prohibited by law/regulation
BASIC CONCEPTS UNDERLYING AN AUDIT OF FINANCIAL STATEMENTS
ETHICAL REQUIREMENTS
PROFESSIONAL SKEPTICISM
– Recognize that circumstances may exist that cause the financial statements to be materially misstated
– The auditor neither assumes that the client is dishonest nor of unquestioned honesty
– Auditors may use their past experience to assess honesty and integrity of client management
– However, a belief that management is honest does NOT relieve the auditor the need to maintain professional skepticism
Professional Skepticism requires the auditor to be alert about:
– Evidence that contradicts other evidence obtained
– Info that brings into question the reliability of documents and responses to be used as evidence
– Conditions that may indicate possible fraud (fraud risks factors)
Maintaining Professional Skepticism reduces the risk of:
– Overlooking unusual circumstances
– Over-generalizing when drawing conclusions
– Using inappropriate assumptions in designing nature, timing, & extent of audit procedures and evaluating the results
PROFESSIONAL JUDGEMENT
o Hallmark of auditing
o Establishment of materiality and assessment of risks
o Nature, timing, and extent of procedures
o Sufficiency and appropriateness of evidence gathered
o Evaluation of management judgement and estimates
MATERIALITY
o Materiality is a relative concept
o Information is material if it affects the decisions of the users taken on the basis of the financial statements
Primary Users – investors, lenders and creditors
o The assessment of what is material is a matter of professional judgement of the auditor
AUDIT EVIDENCE – is all the information used by auditor in arriving at the conclusions on which audit opinion is based
o Includes (1) accounting records & (2) other information
o Auditors are not expected to address all information that may exist
o Cumulative in nature
MANAGEMENT ASSERTIONS
– Representations of management, explicit or implicit, about the recognition, measurement, presentation, clarification and disclosure
of various elements of financial statements & related disclosures
– Auditors assess the risks of material misstatement and design and perform tests of controls and substantive test based on these
assertions
AUDIT RISK
The likelihood or possibility that the auditor expresses:
1. An INAPPROPRIATE audit opinion
2. When the financial statements are materially misstated
Can be controlled
by the auditor
INHERENT RISK – the susceptibility of an assertion to a misstatement that could be material in the absence of the related internal
controls (publicly listed has higher inherent risk)
Nature of the item
Complex calculations
Amounts derived from accounting estimates
Business risk affecting inherent risk
CONTROL RISK – the likelihood that a misstatement that could occur in an assertion and that could be material and will NOT BE
PREVENTED, DETECTED, OR CORRECTED on a timely basis by the entity’s internal control
Human errors
Collusion/circumvention of controls
Override of controls
DETECTION RISK Effectiveness of the audit procedure and application by the auditor
– The likelihood that the auditor will not detect a misstatement that exist in the financial statements
– While Inherent and Control Risks are function of client’s accounts and systems, Detection Risk is a function of the AUDITOR’S
PROCEDURES
– Among the components of the audit risk, detection risk is the only component that the auditor can be control
– Thus, the auditor plans the nature, timing and extent of audit procedures to reduce the audit risk to an acceptably LOW level
AUDIT RISK MODEL
Corroborative information
FINANCIAL STATEMENT ASSERTIONS, AUDIT OBJECTIVES, AUDIT PROCEDURES & EVIDENCE
1. Risk Assessment Procedures – perform by the auditor to (1) understand the business of our client and (2) assess the risk of
material assessment
2. Further Audit Procedures – obtain sufficient appropriate audit evidence
3. Other Planned Audit Procedures –
TYPES OF AUDIT EVIDENCE
1. INQUIRY
6. INSPECTION
7. OBSERVATION
8. ANALYTICAL PROCEDURES
9. CONFIRMATION
10. RECALCULATION most reliable
SUMMARY
DIRECTION OF TESTING
AUDIT DOCUMENTATION
ENGAGEMENT LETTER
WHEN RELEVANT
AUDIT FEES
AUDIT OF COMPONENTS
CHANGING IN TERMS
SUMMARY