Auditing Theory (AT-13)

CKC- BSA 3

REPORTS – OTHER ASSURANCE AND RELATED SERVICES

ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS

(Based on PSRE 2400)

1. The objective of a review of financial statements is to enable an auditor to state whether,

on the basis of procedures which do not provide all the evidence that would be required in
an audit, anything has come to the auditor’s attention that causes the auditor to believe
that the financial statements are not prepared, in all material respects, in accordance with
Philippine Financial Reporting Standards (negative assurance).

2. For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate audit evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.

3. A review engagement provides a moderate level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of negative
assurance.

4. In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entity’s organization, accounting
systems, operating characteristics and the nature of its assets, liabilities, revenues, and
expenses.

5. Procedures for the review of financial statements will ordinarily include:

 Obtaining an understanding of the entity’s business and the industry in which I
operates.
 Inquiries concerning the entity’s
 Accounting principles and practices.
 Procedures for recording, classifying, and summarizing transactions, and accumulating
information for disclosures.
 Actions taken at meeting of stockholders, the board of directors, and committees.
 Analytical procedures designed to identify relationships and individual items that
appear unusual. Examples:
 Comparison of the financial statements with those from prior periods.
 Comparison of the statements with anticipated results, such as previously prepared budgets
or forecasts.
 Study of the relationships of elements of the financial statements that are expected to form a
predictable pattern.
 Reading the financial statements to consider, on the basis of information coming to
the auditor’s attention, whether the financial statements appear to conform to basis
of accounting indicated.
 Obtaining reports from other auditor’s, if any if considered necessary, who have been
engaged to audit or review the financial statements of components of the entity.
 Inquiries of persons having responsibility for financial and accounting matters
concerning, for example:
 Whether all transactions have been recorded.
 Whether the financial statements have been prepared in accordance with the basis of
accounting indicated.
 Changes in the entity’s business activities and accounting principles and practices.
 Matters as to which questions have arisen in the course of applying the foregoing procedures.
 Obtaining written representations from managements when considered appropriate.
 6. If the auditor has reason to believe that the information subject to review may be
materially misstated, the auditor should carry out additional or more extensive procedures
as are necessary to be able to express negative assurance or to confirm that a modified
report is required.

EXAMPLE OF AN UNQUALIFIED REVIEW REPORT

We have reviewed the accompanying balance sheet of AAA Company at December 31, 19XX, and the related
statements of income, changes in equity and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements
based on our review.

We conducted our review in accordance with the Philippines Standards on Review Engagements 2400. This
Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial
statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and
analytical procedures applied to financial data and thus provide less assurance than an audit. We have not performed
an audit an accordingly, we do not express an audit opinion.

Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial
statements are not presented fairly, in all material respects in accordance with Philippine Financial Reporting
Standards.

ENGAGEMENTS TO PERFORM AGRRED-UPON PROCEDURES

REGARDING FINANCIAL INFORMATION (Based on PSRS 4400)

1. An engagement to perform agreed-upon procedures may involve the auditor in performing

certain procedures concerning:
 Individual items of financial data (for example, accounts payable, accounts receivable, purchases from
related parties and sales and profits of a segment of an entity).
 A financial statement (for example, a balance sheet).
 A complete set of financial statements.
2. The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings.

3. As the auditor simply provides a report of the factual findings of agreed-upon procedures,
no assurance is expressed. Users of the report assess for themselves the procedures and
findings reported by the auditor and draw their own conclusions from the auditor’s work.

4. The report is restricted to those parties that have agreed to procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.

5. Independence is not a requirement for an agreed-upon procedures engagement.

REPORTING

6. The report on an agreed-upon procedures engagement needs to describe the purpose and
the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.

7. The report of factual findings should contain:

 Title;
 Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon procedures);
 Identification of specific financial or non-financial information to which the agreed-upon procedures
have been applied;
 A statement that the procedures performed was those agreed upon with the recipient;
 A statement that the engagement was performed in accordance with the Philippine Standard on
Related Services applicable to agreed upon procedures engagements;
 A statement that the auditor is not independent of the entity if such is the case;
 Identification of the purpose for which the agreed-upon procedures were performed;
 A listing of the specific procedures performed;
  A description of the auditor’s factual findings including sufficient details of errors and exceptions found;
 A statement that the procedures performed does not constitute either an audit or a review and, as such,
no assurance is expressed;
 A statement that had the auditor performed additional procedures, an audit or a review, other matters
might have come to light that would have been reported;
 A statement that the report is restricted to those parties that have agreed to the procedures to be
performed;
 A statement (when applicable) that report relates only to the elements, accounts, items, or financial and
non-financial information specified and that it does not extend to the entity’s financial statements taken
as a whole;
 Date of the report;
 Auditor’s address; and
 Auditor’s signature.

ENGAGEMENTS TO COMPLETE FINANCIAL INFORMATION (Based on PSRS 4410)

1. A compilation engagement would ordinarily include the preparation of financial

statements (which may or may not be a complete set of financial statements) but may also
include the collection, classification, and summarization o other financial information.

2. The objective of a compilation engagement is for the accountant to use accounting

expertise, as opposed to auditing expertise, to collect, classify and summarize financial
information.

3. The procedures employed are not designed and do not enable the accountant to express
any assurance on the financial information.

4. Independence is not a requirement for a compilation engagement. However, where the

accountant is not independent, a statement to that effect would be made in the
accountant’s report.

5. The accountant should obtain a general knowledge of the business and operations of the
entity and should be familiar with the accounting principles and practices of the industry in
which the entity operates and with the form and content of the financial information that
is appropriate in the circumstances.

6. The accountant is not ordinarily required to:

 Make any inquiries of management to assess the reliability and completeness of the
information provided;
 Assess internal controls;
 Verify any matters;
 Verify any explanations.

If the accountant becomes aware that information supplied by management is incorrect,

incomplete, or otherwise unsatisfactory, the accountant should consider performing the
above procedures and request management to provide additional information.

If management refuses to provide additional information, the accountant should

withdraw from the engagement, informing the entity of the reasons for the withdrawal.

7. The accountant should read the compiled information and consider whether it appears to
be appropriate in form and free from obvious material misstatements.

8. The accountant should obtain an acknowledgement from management of its

responsibility for the appropriate presentation of the financial information and of its
approval of the financial information.

9. The financial information compiled by the accountant should contain a reference such as
“Unaudited’, “Compiled without Audit or Review,’ or “Refer to the Compilation report’ on
 each page of the financial information or on the front of the complete set of financial
statements.

Example of a report on an engagement to compile financial statements

On the basis of information provided by the management we have compiled, in accordance with the Philippine
Standard on Related Services applicable to compilation engagements, the balance sheet of XXX Company as of
December 31, 19XX and statements of income, changes in equity and cash flows for the year then ended.

Management is responsible for these financial statements. We have not audited or reviewed these financial
statements and accordingly express no assurance thereon.

THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION

(Based on PSAE 3400)

1. “PROSPECTIVE FINANCIAL INFORMATION” means financial information based on

assumptions about events that may occur in the future and possible actions by an entity. It
can be in the form of a forecast, a projection, or a combination of both, for example, a one
year forecast plus a five year projection.

2. A “FORECAST” means prospective financial information prepared on the basis of

assumptions as to future events which management expects to take place and the actions
management expects to take as of the date the information is prepared (best-estimate
assumptions).

3. A “PROJECTION” means prospective financial information prepared on the basis of:

 Hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or are
considering a major change in the nature of operations; or
 A mixture of best-estimate and hypothetical assumptions.

4. Prospective financial information can include financial statement or one or more elements
of financial statements and may be prepared:
 As an internal management tool, for example, to assist in evaluating a possible capital
investment; or
 For distribution to third parties.

5. Management is responsible for the preparation and presentation of the prospective

financial information, including the identification and disclosure of the assumptions on
which it is based.

6. In an engagement to examine prospective financial information, the auditor should obtain

sufficient appropriate evidence as to whether:

 Management’s best-estimate assumptions on which the prospective financial

information is based are not unreasonable and, in the case of hypothetical
assumptions, such assumptions are consistent with the purpose of the information.
 The prospective financial information is properly presented and all material
assumptions are adequately disclosed, including a clear indication as to whether they
are best-estimate assumptions or hypothetical assumptions; and
 The prospective financial information is prepared on a consistent basis with historical
financial statements, using appropriate accounting principles.

7. The auditor should not express any opinion as to whether the results shown in the
prospective financial information will be achieved.

8. When reporting on the reasonableness of management’s assumptions, the auditor

provides only a moderate level of assurance.
 9. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective
financial information will be inappropriate for its intended use.

10. The auditor should obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of significant
management assumptions and management’s acceptance of its responsibility for the
prospective financial information.

Example of an unmodified report on a forecast

We have examined the forecast (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance
with Philippine Standard on Assurance Engagements applicable to the examination of prospective financial
information. Management is responsible for the forecast including the assumptions set out in Note X on which it is
based.

Based on our examination of the evidence supporting the assumptions the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.

Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in
accordance with Philippine Financial Reporting Standards.

Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected
and the variation may be material.

Example of an unmodified report on a projection

We have learned the projection (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the projection including the assumptions set out in Note X on which it is based.

This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection has been
prepared using a set of assumptions that include hypothetical assumptions about future events and management’s
actions that are not necessarily expected to occur. Consequently, readers are cautioned that this projection may not
be appropriate for purposes other than that described above.

Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which
causes us t believe that these assumptions do not provide a reasonable basis for the projection, assuming that (state
or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the basis of
the assumptions and is presented in accordance with Philippine Financial Reporting Standards.

Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still
likely to be different from the projection since other anticipated events frequently do not occur as expected and the
variation may be material.

 When the auditor believes that the presentation and disclosure of the prospective information is
not adequate, the auditor should express a qualified or adverse opinion or withdraw from the
engagement as appropriate.

 When the auditor believes that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information, the auditor should either express an adverse
opinion or withdraw from the engagement as appropriate.

 When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw from
the engagement or disclaim the opinion describe the scope limitation in the report on the
prospective financial information.
11.