COLEGIO DE LA PURISIMA CONCEPCION

School of the Archdiocese of Capiz

Roxas City

COLLEGE OF BUSINESS, MANAGEMENT AND ACCOUNTANCY

1st Semester A.Y. 2020-2021

Auditing and Assurance Principles (Pr E 1)

Module 1
Introduction to Assurance Engagements

A. Assurance Engagement
- are services provided 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 the criteria. It may be:

1. Assertion-based Engagements – are engagements where 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.
2. Direct Reporting Engagements – are engagements where the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains representation from the responsible party that has performed the
evaluation or measurement that is not available to the intended users. The subject matter information is provided to the
intended users in the assurance report.

Types of Assurance Engagements

1. Reasonable Assurance Engagement – Its objective is to reduce assurance engagement risk to an acceptably low
level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s
conclusion.
2. Limited Assurance Engagement – Its objective is to reduce assurance engagement risk to a level that is acceptable
in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as a
basis for a negative form of expression of the practitioner’s conclusion.

Elements of an Assurance Engagement

1. A three-party relationship involving

a. A professional accountant/practitioner – refers to the CPA or professional accountant
who performs an assurance engagement.
b. A responsible party
 In a direct reporting engagement, is responsible for the subject matter.
 In an assertion-based engagement, is responsible for the subject matter information (assertion), and
may be responsible for the subject matter.
c. Intended users – for whom the practitioner prepares the assurance report.

2. An appropriate subject matter

Subject Matter Examples Subject Matter Information

 Financial Historical or prospective financial Recognition, measurement, presentation and

performance or statements disclosure
conditions represented in financial statements
 Non-financial Performance of an entity Key indicators of efficiency and effectiveness
performance or
condition
 Physical Capacity of a facility Specification Document
characteristics
 Systems and Entity’s internal control or IT system Assertion about effectiveness
processes
 Behavior Corporate governance, compliance Statement of compliance or a statement of
with regulation, human resource effectiveness
practices

Subject matter information – the outcome of the evaluation or measurement of a subject matter.

3. Suitable Criteria (Established (PFRS)/Specifically/internally developed) are standards or benchmarks used to

evaluate the subject matter including, where relevant, benchmarks for presentation and disclosure.

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA

 COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City

a. Relevance – It contributes to conclusions that assist decision making by the intended users.
b. Reliability – It results in reasonably consistent evaluation or measurement on the subject matter including, where
relevant presentation and disclosure, when used in similar circumstances by similarly qualified practitioners.
c. Neutrality – It contributes to conclusions that are free from bias.
d. Understandability – It contributes to conclusions that are clear, comprehensive, and are not subject to significantly
different interpretations.
e. Completeness – It exists when relevant factors that could affect conclusions in the context of the engagement
circumstances are not omitted.

4. Sufficient appropriate evidence

The practitioner should gather sufficient appropriate evidence in which to base his conclusion. Sufficiency is the
measure of the quantity of evidence. Appropriateness, on the other hand, is the measure of the quality (relevance and
reliability) of evidence

5. A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance
engagement.

Reasonable assurance – a concept relating to accounting evidence necessary for the practitioner to conclude in relation
to the subject matter information taken as a whole. In the context of an audit of financial statements, it refers to a high,
but not absolute, level of assurance.

Assurance Engagement Risk is the risk that the practitioner expresses an inappropriate conclusion when the subject
matter information is materially misstated. It is represented by the following components:
a. The risk that the subject matter information is materially misstated, which in turn consists of:
 Inherent risk is the susceptibility of the subject matter information to a material misstatement, assuming that
there are no related controls.
 Control risk is the risk that a material misstatement that could occur will not be prevented, or detected and
corrected, on a timely basis, by related internal controls.
b. Detection risk is the risk that the practitioner will not detect a material misstatement that exists.

Obtaining absolute assurance, that is reducing assurance engagement risk to zero, is rarely attainable because of the
following factors/inherent limitations:

a. The use of selective testing or sampling.

b. The inherent limitation of internal control.
c. The fact that much of the evidence available to practitioner is persuasive rather than conclusive
d. The use of judgement in gathering and evaluating evidence and forming conclusion based on the evidence.
e. The characteristics of the subject matter when evaluated or measured against the identified criteria.

Common Types of Assurance Engagements

1. Audits - Philippine Standards on Auditing (PSAs)
2. Review - Philippine Standards on Review Engagements (PSREs)
3. Other Assurance Services - Philippine Standards on Assurance Engagements (PSAEs)

Non-Assurance Engagements
1. Engagements covered by Philippine Standards on Related Services (PSRSs), such as agreed-upon procedures (AUP)
and compilation of financial or other information.
2. Preparation of tax returns where no conclusion conveying assurance is expressed.
3. Consulting or Advisory engagements, such as management and tax consulting.

Engagement Level of Assurance Form of Conclusion

Audit Reasonable
Positive
(High, but not absolute)
Review Limited (Moderate) Negative
Agreed-upon
No Assurance Findings
procedures
Compilation Identification of
No Assurance
Information compiled

Contents of Written Assurance Report

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA

 COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz
Roxas City

The practitioner’s written assurance report should contain a conclusion that conveys the assurance obtained about the
subject matter. It should have a title, an addressee, a description of the engagement and identification of the subject
matter, a statement that identifies the responsible party, and describe the practitioner’s responsibilities, identification of
the parties to whom the report is restricted and the purpose of the preparation when the report is for restricted purpose,
identification of the standards under which the engagement was conducted, identification of the criteria, the
practitioner’s conclusion, the report date, the name of the practitioner (or the firm), and the place of issue of assurance
report.

The contents of the practitioner’s conclusion in an assurance engagement may depend on whether the engagement is an
“assertion-based engagement” o a “direct reporting engagement”.

In an assertion-based engagement, the practitioner’s conclusion relates to the responsible party’s assertions. The
assertion is the responsible party’s conclusion about the subject matter based on identified suitable criteria. The
practitioner can express a conclusion about the assertion by the responsible party, such as:

“In our opinion, the responsible party’s assertion that internal control is effective, in all material respects,
based on XYZ criteria, is fairly stated…”

Alternatively, the practitioner can provide a conclusion about the subject matter and the criteria in a form similar to the
assertion made by the responsible party. In this case, the assurance isprovided because the practitioner’s conclusion on
the subject matter supports the assertion by the responsible party. The conclusion is worded as:

“In our opinion, internal control is effective, in all material respects, based on XYZ criteria…”

In a direct reporting engagement, the practitioner expresses a conclusion directly on the subject matter and the criteria,
regardless of wheter the responsible party has made a written assertion on the subject matter, such as:

“In our opinion, internal control is effective, in all material respects, based on XYZ criteria…”

References:
Chen, Harvey S. (2018) Auditing Theory vol. 1
Iloilo City, Philippines.

…End of topic…

Course Facilitator: Alberth Justine de la Cruz Balgos, CPA