Chapter 12:

Assurance
Engagements
and
Related Services
Reporters:
Gonzales, Hingpit and Monera
 Topics to be discussed:

01 02
Review of Financial Agreed-upon
Statements Procedures
Engagement

03 04
Compilation of Financial Assurance
Statements Engagements
Audit of Financial Statements
As discussed in the preceding chapters, an audit of financial statements
is conducted primarily to enable the auditor to express an opinion on the
entry's financial statements In this type of engagement, the auditor
provides the users with a high level of assurance (reasonable assurance)
that the financial statements are free from material misstatements.

The specific audit procedures to be performed shall be determined by

the auditor. These audit procedures should enable the auditor to gather
sufficient appropriate audit evidence to be able to express an opinion
(positive assurance) about the fair presentation of the financial statements.
 Review of Financial
Statements
The cost of the audit may not to justify
the benefits that other entities may derive
from it. Consequently, small entities usually
request the professional services of the CPAs
to provide them with certain level of
assurance about the reliability of the
financial statements.
Objective

The objective of a review of financial statements is to

obtain limited assurance, primarily by performing inquiry and
analytical procedures, about whether the financial statements
as a whole are free from material misstatement, thereby
enabling the CPA practitioner to express a conclusion on
whether anything has come to the CPA's attention that causes
the him to believe the financial statements are not prepared,
in all material respects, in accordance with an applicable
financial reporting framework
 Level of
Because of the limited Assurance
procedures performed when
reviewing financial statements, the CPA practitioner does not
provide the same level of assurance as provided on audit
engagements. A review engagement can only provide moderate
level of assurance or limited assurance that the information subject
to review is free of material misstatements. This limited assurance is
expressed in the review report in the form of negative assurance by
using negative phrase such as "Nothing has come to my attention
that causes me to believe that the financial statements do not
present fairly...
 Understanding the entity and its
environment
As a basis for designing procedures to address areas in the
financial statements where material misstatements are likely to
arise, the practitioner should obtain an understanding of the
entity and its environment, and of the applicable financial
reporting framework.
This is a continual dynamic process of gathering, updating
and analyzing information throughout the engagement, and
the practitioner's understanding is updated as changes in
conditions and circumstances occur.
 Procedures to be
performed
A review of financial statements consists principally of
making inquiries of management and others within the entity
and applying analytical procedures. While a review involves
the application of audit skills and techniques in gathering
evidence, it does not ordinarily involve an assessment of
accounting and internal control systems, tests of records and
of responses to inquiries by obtaining corroborating evidence
through inspection, observation, confirmation and
computation.
In particular, PSRE requires the CPA practitioner to make
appropriate inquiries and apply relevant analytical
procedures on:

•All material items in the financial statements,

•Areas of high risk of material misstatements,
•Related party relationships and transactions;
•Fraud and non-compliance with laws and regulations, and
•The entity's ability to continue as a going concern.
 If the practitioner has reasons to
believe that the information subject to
review may be materially misstated,
the practitioner should carry out
additional or more extensive
procedures as are necessary to be able
to express a conclusion about the fair
presentation of the financial
statements.
Reporting Responsibility

The review report should contain a

clear written expression of negative
assurance. The auditor should review
and assess the conclusion drawn from
the evidence obtained as the basis for
the expression of an appropriate
conclusion.
 The Unmodified
Conclusion
An unmodified conclusion is expressed when the
practitioner has obtained limited assurance to be able to
conclude that nothing has come to the practitioner's
attention that causes the practitioner to believe that the
financial statements are not prepared, in all material
respects, in accordance with the applicable financial
reporting framework.
Modification of the Review
Report
Material Misstatements

If matter has come to the auditor's attention that

indicates that the financial statements contain material
misstatements, the report should describe those matters
that impair a fair presentation of the financial statements,
including, unless impracticable, a quantification of the
possible effect(s) on the financial statements, and either:
• Express a qualified conclusion; or

• When the effect of the matter is material and pervasive to

the financial statements such that the auditor concludes that a
qualification is not adequate to disclose the misleading or
incomplete nature of the financial statements, express an
adverse conclusion that the financial statements are not
presented fairly, in all material respects, in accordance with
the applicable financial reporting framework.
Scope Limitation

If there has been a material scope limitation, the report should describe the
limitation and either:

• Express a qualified conclusion regarding the possible adjustments to the

financial statements that might have been determined to be necessary
had the limitation not existed, or

• When the possible effect of the limitation is material and pervasive such
that the practitioner concludes that no level of assurance can be
provided, the practitioner should disclaim a conclusion on the financial
statements.
 Compilation of financial statements
Not all entities can employ full time accountants to
prepare statements for them As a result, most of these entities
turn to professional accountants to assist them in the preparation
and presentation of their financial statements. This engagement
is as compilation engagement financial known
• Objective
The objective of a compilation engagement is for the CPA to use accounting
expertise, as opposed to auditing expertise, to collect classify and summarize
financial information. This ordinarily entails reducing detailed data to a manageable
and understandable form without a requirement to test the assertions underlying
that information a compilation engagement would ordinarily include the
preparation of financial statements (which may or may not be complete set of
financial statements) in accordance with the applicable financial reporting
framework

• Level of Assurance
The procedures employed in a compilation engagement are not designed and do
not enable the CPA to express any assurance on the financial information However,
users of the complied financial information derive some benefit as a result of the
CPA's involvement because the service has been performed with professional
competence and due care
• Understanding the Entity
The CPA should obtain an understanding of the following
matters sufficient to be able to perform the compilation
engagement:

1. The entity's business and operations, including the entity's

accounting system and accounting records, and

2. The applicable financial reporting framework, including its

application in the entity's industry.
Procedures to be performed

The CPA should assemble the financial information

based on the records, documents, explanations and other
information, including significant judgments, provided by
management. Since a compilation engagement is not an
assurance engagement, a compilation engagement does
not require the CPA practitioner to verify the accuracy or
completeness of the information provided by management.
The CPA is not ordinarily required to:
(a) Make any inquiries of management to assess the reliability and
completeness of the information provided,
(b) Assess internal controls,
(c) Verify any matters, or
(d) Verify any explanations.

Prior to completion of the compilation engagement, the CPA

should read the compiled financial information in light of the CPA's
understanding of the entity's business and operations, and of the
applicable financial reporting framework.
 Reporting Responsibility
The CPA's compilation report
should identify the financial statements
compiled and should clearly indicate
that no assurance is provided on the
financial statements. An example of a
report on an engagement to compile
financial statements is presentednext
slide:
PRACTITIONER'S COMPILATION REPORT
[To Management of ABC Company]
We have compiled the accompanying financial statements of ABC Company based on information you
have provided. These financial statements comprise the statement of financial position of ABC
Company as at December 31, 20X1, the statement of comprehensive income, statement of changes in
equity and statement of cash flows for the year then ended, and a summary of significant accounting
policies and other explanatory information
We performed this compilation engagement in accordance with Philippine Standard on Related
Services We have applied our expertise in accounting and financial reporting to assist you in the
preparation and presentation of these financial statements in accordance with Philippine Financial
Reporting Standards for Small- and Medium-sized Entities (PFRS for SMEs). We have complied with
relevant ethical requirements, including principles of integrity, objectivity, professional competence
and due care
These financial statements and the accuracy and completeness of the information used to compile
them are your responsibility
Since a compilation engagement is not an assurance engagement, we are not required to
verify the accuracy or completeness of the information you provided to us to compile
these financial statements. Accordingly, we do not express an audit opinion of a review
conclusion on whether these financial statements are prepared in accordance with PFRS
for SMEs

[Practitioner's signature]
[Date of practitioner's report]
[Practitioner's address]
 Modification to the compilation report

Material Misstatements

• If the CPA practitioner becomes aware during the course of the engagement
that the compiled financial statements are materially misstated or misleading,
the practitioner should propose the appropriate amendments to management.

• If management declines, or does not permit the practitioner to make the

proposed amendments to the compiled financial information, the CPA
practitioner should withdraw from the engagement and inform management
and those charged with governance of the reasons for withdrawing
 Scope
Limitation

Similarly, if the CPA is unable to complete the engagement

because management has failed to provide records,
documents, explanations or other information, including
significant judgments, as requested, the CPA should withdraw
from the engagement and inform management and those
charged with governance of the reasons for withdrawing.
 Agreed upon procedures
engagement
An auditor may be engaged to apply agreed-upon procedures
on specific account or element of a financial statement this type
of engagement may be accepted provided:

1. The client takes full responsibility for the adequacy of the

procedures to be performed; and

2. The distribution of the report is limited only to those parties

who have agreed about the procedures to be performed.
 Objective

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.
Level of Assurance

As the auditor simply provides a

report of the factual findings of agreed-
upon procedures no assurance is
expressed in stead users of the report as
assessed for themselves the procedures
and findings reported by the auditor and
grow their own conclusions from the
auditor's work.
 Restrictions on the distribution of report
The report is restricted to those parties who have agreed to the
procedures to be performed since others unaware of the reasons for the
procedures name is interpret the results.
Terms of Engagement

The auditor should ensure with representatives of the entity and

ordinarily other specified parties who will receive copies of the report of
factual findings that there is a clear understanding regarding the agreed
procedures and the conditions of the engagement.
 Procedures to be Performed
The auditor should carry out the procedures agreed on with the client and
third-party users of the report; and use the evidence obtained as the basis for the
report of factual findings.

• Inquiry and analysis;

• Recomputation, comparison and other clerical accuracy checks;
• Observation
• Inspection or
• Obtaining confirmations
 Reporting Responsibility

An agreed upon procedures report does not include an

opinion or any form of assurance about the financial
statements. Instead, the agreed-upon procedures report
should describe in detail:

• The purpose of the engagement;

• The procedures performed; and
• The auditor's factual findings
Nature of Service AUDIT REVIEW Agreed-upon Compilation
Procedures

Objective To express an opinion To enable the CPA to To carry out audit To assist the client in
on the fair report whether procedures agreed the preparation of
presentation of the anything has to on with the client the financial
financial statements come to his attention and any appropriate statements
that would indicate third parties
that the financial identified in the
statements are not report
presented fairly

Level of Assurance High or Reasonable Moderate or Limited NONE NONE

Assurance Assurance

Report Positive Assurance Negative Assurance Description of Identification of

(Opinion) procedures financial information
performed and compiled and a clear
factual findings statement that NP
assurance is
provided

Basic Procedures Risk assessment Inquiry and analytical As agreed Assemble FS based
procedures, test of procedures on the information
controls and provided by the
substantive tests management
Nature of AUDIT REVIEW Agreed-upon Compilation
Service Procedures

Required Sufficient to Sufficient to Sufficient to apply Sufficient to

Knowledge of assess the risk of identify areas in the agreed upon compile the FS
the entity material the FS where procedures
misstatements material
misstatements
are likely to occur

Independence Required Required Not required Not required

requirement

Standards PSA PSRE PSRS PSRS

ASSURANCE ENGAGEMENTS

As a response to growing demand in a financial community

the accounting profession has widen the scope of auditing.

PSAE 3000 states that assurance engagements are intended

to enhance the credibility of information about a subject matter
by evaluating whether the subject matter conforms in all
material respects with a suitable criteria.
1. Types of assurance engagement

Assurance engagement can be classified according to the level

of assurance that the practitioner gives two parties relay on
his/her report.

2 (two) levels of assurance engagement:

✓ a reasonable assurance engagement (like audit engagement)

✓ a limited assurance engagement (like a review of financial
statements)
Elements of assurance engagement:

• A 3-party relationship;

• An appropriate subject matter;

• Suitable criteria;

• Sufficient appropriate evidence;

• A written assurance report.

 THREE-PARTY RELATIONSHIP
✓ Professional accountant
✓ Party responsible for subject matter
✓ Intended users

2. Subject matter

• Data (for example, financial and non-financial information)

• System and processes (for example, internal controls)
• Behavior (for example, entities compliance with laws and regulations)
• Physical characteristics (for example, capacity of a plant facility)
 Assertions-based engagements

The assertion about which the practitioner gathers sufficient appropriate evidence to provide a
reasonable basis for expressing a conclusion on the assurance report.

Direct reporting engagements

the subject matter information is made available to users in assurance report.

3. Criteria
Are the standards on breach mark used to evaluate or
measure the subject matter of an assurance engagement.

4. Evidence
The practitioner should plan and perform the engagement to
obtain sufficient appropriate evidence to determine whether
the assertions are free of material misstatement.
5. Assurance report

You do professional account that express conclusion that

provides a level of assurance as to whether the subject matter
confirms in all material respects with identifiable suitable
criteria.

NOTE: Not all engagements performed by professional

accountants are assurance engagements. Other engagements
frequently performed by professional accountants that are not
assurance engagements include:
 • Agreed-upon procedures;
• Compilation of financial or other information;
• Operation preparation of tax returns no conclusion is expressed,
and tax consulting;
• Management consulting, and
• Other advisory services.

Reports on perspective financial information

- to enhance its credibility whether it is intended for use by third
parties or for internal purposes.
-means financial information based on assumptions about events
that may occur in the future and possible actions of entity.
2 General Types

1. Forecast- prospective financial information prepared on the basis of

the assumptions as to future events which management expectst to take
as the date the information is prepared (best-estimate assumptions)

2. Projection- financial information prepared on the basis of

hypothetical assumptions or a mixture of best-estimate and hypothetical
assumptions.
6. Auditor's responsibility
- The auditor's should evaluate the completenes and
reasonableness of the underlying assumptions as disclosed
in a prospective financial information.

PSAE 3400
Auditor should obtain sufficient appropriate evidence that:
• Managements best-estimate assumptions are reasonable,
and in the case of hypothetical assumptions, such
assumptions are consistent with the purpose of the
information;
• The prospective financial information is properly prepared on
the basis of the assumptions;
• The prospective financial information in it properly presented
and all material assumptions are adequately disclosed; and
• The prospective financial information is prepared on a
consistent basis with historical financial statements.

NOTE: When reporting on a reasonableness assumptions, the

auditor normally provides only moderate level of assurance.
EXAMPLE OF AN UNMODIFIED REPORT ON A FORECAST

We have examined the forecast in accordance with philippine standards on assurance

engagement applicable to the examination of prospective financial information.
Management is responsible for the forecast including the assumptions set out in Note 1
to the financial statements.

Based on our examination of evidence supporting 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. Father in our opinion, the forecast is properly prepared
on the basis of the assumptions and is presented in accordance with generally accepted
accounting principles in the Philippines.

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