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AUDITING THEORY

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ASSURANCE ENGAGEMENTS AND RELATED SERVICES
AUDIT OF FINANCIAL STATEMENTS
OBJECTIVE: Is conducted primarily to enable the auditor to express an opinion on the entitys
financial statements.
LEVEL OF ASSURANCE: The auditor provides the users with a high level of assurance (reasonable
assurance) that the financial statements are free from material misstatements. The audit procedure
is enabling 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


OBJECTIVE: 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 auditors
attention that causes the auditor to believe that the financial statements are not prepared, in all
material respects, in accordance with an identified financial reporting framework. (PSRE 2400)
LEVEL OF ASSURANCE: Moderate level of assurance.
This assurance is expressed in the review report in the form of negative assurance by using the
negative words such as:
Nothing came to my attention..... or I am not aware of any material modifications....
PROCEDURES TO BE PERFORMED: Inquiry and Analytical procedures
It does not ordinarily involve an assessment of:
1. Accounting and internal control system
2. Test of records and responses to inquiries by obtaining corroborating evidence through
Inspection, Observation, Confirmation and Computation.
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
necessary to be able to express negative assurance or to confirm that a modified report is required.
The review report should contain a clear written representation of negative assurance. The auditor
should review and assess the conclusion drawn from the evidence obtained as the basis for the
expression of negative assurance.
UNQUALIFIED REVIEW REPORT issued when the auditor believes, based on the evidence
obtained, that there are no material modifications that should be made to the financial statements
in order for these financial statements to be in conformity with PFRS.
MODIFICATION OF THE REVIEW REPORT
If matters have come to the auditors attention that indicates the financial statements
do not conform to PFRS, the report should describe those matters that impair a fair presentation
of the financial statements, including, unless impracticable, a qualification of the possible effects on
the financial statements, and either:
Express a qualification of the negative assurance provided; or
When the effect of the matter is so material and pervasive to the financial statements that
the auditor concludes that a qualification is not adequate to disclose the misleading or
incomplete nature of the financial statements, give an adverse statement that the financial
statements are not presented fairly, in all, material respects, in accordance with PFRS.
Scope Limitation
The report should describe the limitation and either:

Express a qualification of negative assurance provided 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 so significant and pervasive that the auditor
concludes that no level of assurance can provided, the auditor should not provide any
assurance.

COMPILATION OF FINANCIAL SATEMENTS


OBECTIVE: is for the accountant 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. 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 of other financial information.
LEVEL OF ASSURANCE: The procedures employed in a compilation engagement are not designed
and do not enable the accountant to express any assurance on the financial information. NO
ASSURANCE provided.
PROCEDURES TO BE PERFORMED
The accountant should read the compiled information and consider whether is appears to be
appropriate in form and free from obvious material misstatements.
The accountant is not ordinarily required to:
a. Make any inquires 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.
If accountant becomes aware that information supplied by management is incorrect,
incomplete, or otherwise unsatisfactory, the accountant should consider performing:
1. a. Make any inquires 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.
2. Request management to provide additional information.
If management refuses to provide additional information, the accountant should withdraw
from engagement, informing the entity of the reason of withdrawal.
If accountant becomes aware of misstatement, the accountant should try to agree
appropriate amendments with the entity.
If amendments are not made and the financial information is considered to be
misleading, the accountant should withdraw from the engagement.
REPORTING RESPONSIBILITY
The Financial information compiled by the accountant should contain a reference such as:
Unaudited
Compiled without Audit or Review
Refer to compilation report
On each page of the financial information or on the front of the complete set of financial
statements.
MODIFICATION OF THE COMPILATION REPORT
DEPARTURE FROM PFRS
If there is a material departure from PFRS, the accountant should disclose the departure in a
separate paragraph of the report, although their effects do not have to be quantified.

If the accountant feels that the modification of the report is not sufficient to describe
the PFRS departures and the client is not willing to correct these deficiencies, the
accountant may withdraw from the engagement.
SCOPE LIMITATION
Will normally cause the accountant to withdraw from the engagement.

AGREED-UPON PROCEDURES ENGAGEMENT


OBJECTIVE: 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 factual findings.
This type of engagement may be accepted provided:
The client takes full responsibility for the adequacy of the procedures to be performed; and
The distribution of the report is limited only to those parties who have agreed about the
procedures to be performed.
LEVEL OF ASSURANCE
The auditor simply provides a report of the factual findings, no assurance is expressed.
Instead, users of the report assess for themselves the procedures and findings reported by the
auditor and draw their own conclusions from the auditors work.
RESTRICTIONS ON THE DISTRIBUTION OF REPORT
The report is restricted to those parties that have agreed to the procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.
TERMS OF THE ENGAGEMENT
That the Factual findings have clear understanding regarding the agreed procedures and the
conditions of the engagement.
PROCEDURE AND EVIDENCE
The auditor should carry out the procedures agreed upon and use the evidence obtained as
the basis for the report of factual findings. There are also audit procedures but usually applied only
to specific accounts or elements of financial statements. These procedures may include:
Inquiry and analysis
Recomputation, comparison and other clerical accuracy checks
Observation
Inspection
Obtaining confirmations.
REPORTING RESPONSIBILITY
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.

ASSURANCE ENGAGEMENTS
PSA 300 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
suitable criteria.
TWO TYPES OF ASSURANCE ENGAMENT
Reasonable assurance engagement = audit engagement
Limited assurance engagement = review engagement

ELEMENTS OF ASSURANCE ENGAGEMENTS


A three party relationship

An appropriate subject matter


Suitable criteria
Sufficient appropriate evidence
Written assurance report

THREE PARTY RELATIONSHIPS


1. Professional accountant independent and competent; adhere to the fundamental principles
required by the code of ethics.
2. Responsible party responsible for the subject matter of the assurance engagement.
3. Intended users to whom the professional accountant usually addresses the report
Responsible party and the intended user will often be from separate organizations but need not
be. A responsible party and an intended user may both within the same organization. The
relationship between the responsible party and the intended user needs to be viewed within the
context of a specific engagement.
SUBJECT MATTER
Data = financial and non-financial
Systems and processes = internal controls
Behavior = compliance of tax laws and regulations
Physical characteristics = capacity of plant facility.
To be considered appropriate, the subject matter of an assurance engagement must be
identifiable, capable of consistent evaluation and measurement against suitable criteria and in
the form that can be subjected to procedures for gathering evidence to support that evaluation
or measurement.
ASSERTIONS BASED ENGAGEMENTS
The evaluation or measurement of the subject matter is performed by the responsible
party and the outcome of such evaluation or measurement is in the form of an assertion
by the responsible party that is made available to the intended users.
Practitioner gathers sufficient appropriate evidence to provide a reasonable basis for
expressing a conclusion on the assurance report.
DIRECT REPORTING ENGAGEMENTS
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 available to intended users.
CRITERIA

Standards or benchmark used to evaluate or measure the subject matter of an


assurance engagement.
Must be suitable.

EVIDENCE
To determine whether the assertions are free of material misstatement.
ASSURANCE REPORT
The professional accountants conclusion provides either high or moderate level of
assurance about the subject matter.
Not all engagements performed by professional accountants are assurance engagements.
NOT AN ASSURANCE ENGAGEMENT:
Agreed upon procedures
Compilation of financial or other information
Preparation of tax returns when no conclusion is expressed, and tax consulting
Management consulting
Other advisory services

REPORTS ON PROSPECTIVE FINANCIAL INFORMATION


Auditors may be asked to examine and report on prospective financial information to enhance its
credibility whether it is intended for use by third parties or for internal purposes.
PROSPECTIVE FINANCIAL INFORMATION
Financial information based on assumptions about events that may occur in the future and possible
actions of the entity.
TWO TYPES:

FORECAST basis of the assumptions as to future events which management expects to


take as of the date the information is prepared (best estimate assumptions).

PROJECTION basis of hypothetical assumptions or a mixture of best estimate and


hypothetical assumptions.

AUDITORS RESPONSIBILITY
The auditor should evaluate the completeness and reasonableness of the underlying assumptions
as disclosed in the prospective financial information.
When examining prospective financial information, according to PSAE 3400, the 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 is properly presented and all material assumptions are
adequately disclosed; and
The prospective financial information is prepared on a consistent basis with historical financial
statement.
When evidence may be available to support the assumptions on which the financial information is based,
such evidence is itself generally future oriented and speculative in nature. The auditor is, therefore, not in
a position to express an opinion as to whether the results shown in the prospective financial information
will be achieved.
When reporting on the reasonableness of managements assumptions, the auditor normally provides only
a moderate level of assurance.