AUDITING THEORY

 REPORTS – OTHER ASSURANCE AND RELATED SERVICES

ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS (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 it
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 meetings 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 the 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 with the
basis of accounting indicated.
 Obtaining reports from other auditors, if any and if considered necessary, who have
been engaged to audit or review the financial statements or 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.

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  Obtaining written representations from management 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, 20XX, 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 Philippine Standard 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 provides less assurance than an audit.
We have not performed an audit and, 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 ON AGREED-UPON PROCEDURES (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 the 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);

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  identification of specific financial or non-financial information to which the agreed-
upon procedures have been applied;
 a statement that the procedures performed were 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 do 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 the 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 COMPILE FINANCIAL INFORMATION (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 of 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; or
 verify any explanations.

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 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 acknowledgment 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 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, 20XX 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 (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 statements 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.

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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, 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 examined 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 to 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.

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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.

MULTIPLE CHOICE QUESTIONS

1. Financial statements of an entity that have been reviewed by an accountant should be

accompanied by a report stating that a review
A. Provides only limited assurance that the financial statements are fairly presented.
B. Includes examining, on a test basis, information that is the representation of
management.
C. Consists principally of inquiries of company personnel and analytical procedures
applied to financial data.
D. Does not contemplate obtaining corroborating evidential matter or applying certain
other procedures ordinarily performed during an audit.

2. An accountant’s report on a review of the financial statements of an entity should state

that the accountant
A. Does not express an opinion or any form of limited assurance on the financial
statements.
B. Conducted the review in accordance with the Philippine Standard on Review
Engagements.
C. Obtained reasonable assurance about whether the financial statements are free of
material misstatements.
D. Examined evidence, on a test basis, supporting the amounts and disclosures in the
financial statements.

3. Financial statements of an entity that have been reviewed by an accountant should be

accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the accountant has
not been restricted.
B. The financial statements are the responsibility of the company’s management.
C. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.

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4. An accountant who reviews the financial statements of an entity should issue a report
stating that a review
A. Provides less assurance than an audit.
B. Provides negative assurance that internal control is functioning as designed.
C. Provides only limited assurance that the financial statements are fairly presented.
D. Is substantially more in scope than a compilation.

5. When compiling the financial statements of an entity, an accountant should

A. Review agreements with financial institutions for restrictions on cash balances.
B. Understand the accounting principles and practices of the entity's industry.
C. Inquire of key personnel concerning related parties and subsequent events.
D. Perform ratio analyses of the financial data of comparable prior periods.

6. When compiling an entity's financial statements, an accountant would be LEAST likely

A. Perform analytical procedures designed to identify relationships that appear to be
unusual.
B. Read the compiled financial statements and consider whether they appear to
include adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for the financial
statements.
D. Plan the work so that an effective engagement will be performed.

7. Which of the following should NOT be included in an accountant's report based upon
the compilation of an entity's financial statements?
A. A statement that a compilation of the company's financial statements was made in
accordance with the Philippine Standard on Related Services applicable to
compilation engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or reviewed the statements.
D. A statement that the accountant does not express an opinion but provides only
negative assurance on the statements.

8. Negative assurance may be expressed when an accountant is requested to report

agreed- upon procedures to specified
Elements of a Accounts of a
Financial Statement Financial Statement
A. Yes Yes
B. Yes No
C. No No
D. No Yes

9. An accountant may accept an engagement to apply agreed-upon procedures that are

not sufficient to express an opinion on one or more specified accounts or items of a
financial statement provided that
A. The accountant's report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting principles.
C. Distribution of the accountant's report is restricted.
D. The accountant is also the entity's continuing auditor.

10. Given one or more hypothetical assumptions, a responsible party may prepare, to the
best of its knowledge and belief, an entity's expected financial position, results of
operations, and cash flows. Such prospective financial statements are known as
A. Pro forma financial statements C. Partial presentations
B. Financial projections D. Financial forecasts
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11. A financial forecast consists of prospective financial statements that present an entity's
expected financial position, results of operations, and cash flows. A forecast
A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
C. Unlike a projection, may contain a range.
D. Is based on assumptions reflecting conditions expected to exist and courses of
action expected to be taken.

12. When an accountant examines prospective financial statements, the accountant's report
should include a separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are properly
prepared on the basis of the assumptions and are presented in accordance with
generally accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year
after the report's date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the
prospective financial statements.

13. A 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) is known
as
A. Forecast C. Projection
B. Hypothetical financial information D. Best-estimate projection

14. The following statements relate to the examination of prospective financial information.
Which is false?
A. The auditor should express an opinion as to whether the results shown in the
prospective financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the
auditor should consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine
prospective financial information when the assumptions-are clearly unrealistic.
D. When in the auditor's judgment an appropriate level of satisfaction has been
obtained, the auditor is not precluded from expressing positive assurance regarding
the assumptions.

15. Which of the following is prospective financial information for general use upon which
an accountant may appropriately report?
A. Financial projection C. Pro forma financial statement
B. Partial presentation D. Financial forecast

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