Fundamentals Of Auditing And Assurance Services

Auditing and Assurance Services MODULE ONE:

FUNDAMENTALS OF AUDITING AND ASSURANCE SERVICES

Overview to Module 1 

1.1 Introduction to assurance engagements Nature, objective, and elements Types of assurance engagements Assurance service vis-à-vis attestation services



1.2 Introduction to auditing Nature, philosophy, and objectives Types of audit ○ According to nature of assertion / data ○ According to types of the auditor

1.1 Introduction to assurance engagements

Nature 



Assurance defined

The auditor’s satisfaction as to the reliability of an assertion being made by one party for use by another party.

Assurance engagement defined

“Assurance engagement “ 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. -from Phil. Framework for Assurance Engagements

Objective 

… for a professional accountant to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about the subject matter.

Elements 

A three party relationship involving: A practitioner; A responsible party; and Intended users.

   

An appropriate subject matter; Suitable criteria; Sufficient appropriate evidence; A written assurance report.

Types of assurance engagements 

REASONABLE ASSURANCE (High Level) OBJECTIVE:

Reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement. PRACTITIONER’S CONCLUSION: Positive



LIMITED ASSURANCE (Moderate Level) OBJECTIVE: Same

as in reasonable assurance but where that risk is greater than for a reasonable assurance engagement. PRACTITIONER’S CONCLUSION: Negative

Forms of conclusions 

POSITIVE 

“In our opinion, internal controls are effective, in all material respects, based on XYZ criteria."

NEGATIVE

“Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria.”

Classification of Assurance Engagements 

According to level of assurance  Reasonable

assurance  Limited assurance 

According to structure  Assertion based

engagement (Attestation)  Direct reporting engagement

According to structure 

Assertion based (Attestation)  The evaluation or

measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to the intended users.



Direct reporting  The practitioner either directly performs the evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not directly available to the intended users. The subject matter information is provided to the intended users in the assurance report.

Comprehensive Example Proven oil reserves Co. 1

5,200

Co. 2

725

Co. 3

3,260

Co. 4

15,000

Co. 5

6,700

Co. 6

39,126

Co. 7

345

Co. 8

175

Co. 9

24,135

Co. 10

9,635

Total

104,301



ASSERTION BASED  Each company measures its

reserves and provides an assertion to the firm and to intended users.  An entity other than the companies measures the reserves and provides an assertion to the firm and to intended users.

Comprehensive Example  Proven oil reserves

 Each company measures its

Co. 1

5,200

Co. 2

725

Co. 3

3,260

Co. 4

15,000

Co. 5

6,700

Co. 6

39,126

Co. 7

345

Co. 8

175

Co. 9

24,135

Co. 10

9,635

Total

DIRECT REPORTING

104,301

reserves and provides the firm with a written representation and measures its reserves against the established criteria for measuring proven reserves. The representation is not available to the intended users.  The firm directly measures the reserves of some of the companies.

Assurance vs Attestation vs Audit 

Assurance o



Three party contracts in which an assurer reports on (or improves) the quality of information

Attestation  Type of assurance service

in which an attestor (an independent accountant) offers assurance about a subject matter (e.g. compliance with debt covenants) that is the responsibility of another party.



Audit  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 those assertions and established criteria and communicating the results to interested users.

ASSURANCE ENGAGEMENTS

ASSERTION BASED ENGAGEMENTS AUDIT

DIRECT REPORTING

Related Services

ASSURANCE

(Non-assurance services)

Audit Others

Review

• Examination of prospective FS • CPA performance review • CPA Risk Advisory

• • • • • •

Agreed upon procedures Compilation Preparation of tax returns Tax consulting Management consulting Other advisory services

• Review of FS • Review of interim information



Other Assurance Services Business Performance Measurement

Provides assurance about whether financial and non financial information being reported from the

entity’s performance measurement system (e.g. balanced scorecard) is reliable and whether the performance measures being used are accurately leading the entity toward meeting its strategic goals and objectives. 

Health Care Performance Measurement Involves the evaluation of the quality of health care, medical services and outcome.



Elder Care Plus An evaluation designed to provide assurance to the elderly and their relatives about the quality of

care being provided by various care givers by comparing their specific objectives in providing care with actual services rendered. 

Risk Assessment Services Identifies a set of risks that affect the organization and involves the study of the link between risks

and the organization’s vision, mission, objectives, and strategies and development of new and relevant measures to address these risks. 

CPA Web Trust WebTrust is a seal of assurance service developed jointly by AICPA and CICA which enables

consumers and businesses to purchase goods and services over the Internet with the confidence that the Web site business meet high standards of business practice. 

Information Systems Reliability Involves evaluating whether financial and non financial information systems provide reliable

information for operating and financial decisions by an entity’s management.

Comparison of Auditing, Review, and Related Services Aspect of Comparison Auditing Nature of service Audit Level of assurance High, but not absolute provided Report provided

Procedures

Features

Review Review

Related Services Agreed Upon Compilation

Moderate

None

None Identification of information compiled

Positiveassurance Negative assurance on assertion(s) on assertion(s) Select from all available procedures any combination that Inquiry and analytical procedures designed can limit audit risk to anappropriately to review reliability of an assertion. low level.

Factual findings procedures

Reduce detailed data to a Procedures agreed manageable and upon with the understandable specified user(s) form

Audit skills& techniques applied Auditor's opinion enhances credibility but accounting & internal control of FS; absolute assurance nonsystems not assessed. attainable.

Accounting, not auditing expertise, used; benefits Recipientsof the derived by users report from their arise from the own conclusions; service that was report is restricted rendered with due to the parties in the professional skill contract. and care. 17

Note: When to accept assurance engagements  

Relevant ethical requirements, such as independence & competence, is satisfied. Engagement circumstances exhibits ALL of the following: Subject matter is appropriate. Criteria to be used are suitable and are available

to the intended users. Practitioner has access to sufficient appropriate evidence to support his conclusion. Practitioner’s conclusion is to be contained in a written report. Practitioner is satisfied that there is a rational purpose for the engagement.

1.2 Introduction to auditing

Independent Auditor Following a systematic process

Objectively obtains & evaluates evidence Establishes degree of correspondence between ASSERTIONS

ESTABLISHED CRITERIA

Communicates results to interested users

Role of management and independent auditor Management

Independent Auditor

Prepares FS

Unaudited FS

Evaluates FS

Audited FS

Audit Report on FS Users of Financial Statements



Will an audit guarantee dependable financial statements?

NO. An audit conducted in accordance with PSAs is designed to provide only reasonable assurance (NOT ABSOLUTE) that the FS as a whole are free from material misstatements.



If it does not guarantee dependability, why is there a need for independent FS audit?



The need for an independent FS audit stems from the following: Conflict of interest

between management and users of FS. Expertise Remoteness Financial consequences Information risk Cost of capital



Because of the ffg LIMITATIONS: The use of testing /

Sampling risk Error in application of judgment / Non-sampling risk Reliance on management’s representation Inherent limitations of the client’s accounting and internal control systems Nature of evidence

Why can an audit NOT provide absolute assurance?!

Objective of an audit 

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared in all material respects, in accordance with applicable financial reporting framework. -Philippine Standards on Auditing (PSA) 200

Types 

According to nature of assertion / data  Financial statement audit  Operational audit  Compliance audit



According to types of auditor

 External independent FS audit  Internal audit  Government audit

Financial Audit Assertion s made by auditee Establishe d criteria Content of auditor’s report Auditors who generally perform

FS are fairly presented.

Compliance Audit Organization has complied with laws, regulations or contracts.

Operational Audit Organization’s activities are conducted efficiently & effectively.

Financial reporting standards or other financial reporting framework.

Laws, regulations, and contracts.

Objectives set by the board of directors.

Opinion whether FS are fairly presented in conformity with an identified financial reporting framework.

Degree of compliance with applicable laws, regulations & contracts.

Recommendations or suggestions on how to improve operations.

External auditors

Government auditors

Internal auditors

-END OF MODULE 1-

Three party relationship Practitioner

Broader than the “term” auditor.

Responsible party

May or may not be the engaging party (the party who engages the practitioner).

Intended Users

The person, persons or class of persons for whom the practitioner prepares the assurance report.

Subject matter 

An “appropriate subject matter” is: Identifiable, and capable of consistent

evaluation or measurement against the identified criteria. Can be subjected to procedures for gathering sufficient appropriate evidence to support a reasonable assurance or limited assurance conclusion, as appropriate.

Subject Matter

Subject matter information

Financial performance or conditions

Historical or prospective financial position, financial performance, cash flows

Recognition, measurement, presentation and disclosure represented in financial statements

Non financial performance or conditions

Performance of an entity

Key indicators of efficiency and effectiveness

Physical characteristics

Capacity of a facility

Specifications document

Systems and processes

An entity’s internal control An assertion about or IT system effectiveness

Behavior

Corporate governance, compliance with regulation, human resource practices

A statement of compliance or a statement of effectiveness

Subject matter

Financial position, financial performance, and cash flows of an enterprise

Subject matter information

The financial statements of the enterprise

Responsible party

Client or entity management

Responsible for

Sample assurance engagement

Subject matter information only

A government organization engages a practitioner to perform an assurance engagement regarding a report about a private company’s sustainability practices that the organization has prepared and is to distribute to intended users.

Subject matter and subject matter information

An entity engages a practitioner to perform assurance engagement regarding a report it prepared about its own sustainability practices.

Suitable criteria 





Criteria are the benchmarks used to evaluate or measure the subject matter including, where relevant, benchmarks for presentation and disclosure. Can be formal or less formal (i.e. PFRS vs internal code of conduct or agreed level of performance). May be: Established criteria

 

Are those embodied in laws or regulations, or issued by authorized or recognized bodies or experts that follow a transparent due process.

Specifically developed criteria

 

Those designed for the purpose of the engagement.



Characteristics:

CNUR2  Completeness  Neutrality  Understandability  Reliability  Relevance

Sufficient appropriate evidence

Written assurance report 

Must be in the form appropriate to a reasonable assurance engagement or a limited assurance engagement.