CHAPTER 1

FUNDAMENTALS OF ASSURANCE SERVICE

 - correct taxes

- salaries and wages

- continuance of employment
GOVERNMENT
EMPLOYEES

- continuance of operation
- buy, hold, sell
- Dependence on products
- dividends

- ability to pay

SHAREHOLDER
CREDITORS
CUSTOMER
 Elects and votes BOD
Forms Audit Committee

SHAREHOLDERS
BOARD OF DIRECTORS
AUDIT COMMITTEE
Independent from BOD

Hires management
Hires external auditor

Responsible for day to day

operations
Prepares the financial
statements

AUDITOR
MANAGEMENT Checks fairness of financial statements
 ASSURANCE
• Lending of credibility to information
• The auditor’s satisfaction as to the reliability of an assertion made by
one party for use of another party
 ASSURANCE ENGAGEMENT
• An engagement conducted by a practitioner at the end of which
he/she expresses an opinion on the measurement of the subject
matter against a criteria.
• The opinion of the practitioner enhances the degree of confidence of
the intended users about the measurement of the subject matter.
ELEMENTS OF ASSURANCE ENGAGEMENTS
ELEMENTS OF ASSURANCE ENGAGEMENTS
3 PARTY RELATIONSHIP
- 3 party contract
PRACTITIONER – one lending credibility to the information
- must be independent both in MIND and in APPEARANCE
-i.e. a CPA Auditor or an Engineer

RESPONSIBLE PARTY – performs operations or provides information for the

benefit of intended users.
- responsible for the subject matter over which assurance is
sought
- may or may not be the party who engages the services
of the practitioner
-i.e. Management of the Entity
ELEMENTS OF ASSURANCE ENGAGEMENTS
3 PARTY RELATIONSHIP
INTENDED USER – the recipients of the information by provided by the
responsible party
- the responsible party can be one of the intended users but
not the only one

EMPLOYEES GOVERNMENT
SHAREHOLDER CREDITORS
ELEMENTS OF ASSURANCE ENGAGEMENTS
SUBJECT MATTER
Assertions or representations made by the responsible party
i.e in its SFP it presents cash at P1M
To be appropriate it must be capable of consistent
measurement against a suitable criteria and can be
subject to gathering of sufficient and appropriate
evidence
ELEMENTS OF ASSURANCE ENGAGEMENTS
SUITABLE CRITERIA
Criteria are benchmarks
i.e for FS -> PFRS, for taxes -> NIRC
Required for a reasonable consistent evaluation of subject matter
within the context of professional judgment
Characteristics: R –elevance: affects decision making
U –nderstandability: clear
N –eutral: free from bias
C –omplete: all relevant information are included
R –eliable: allows consistent evaluation
ELEMENTS OF ASSURANCE ENGAGEMENTS
SUFFICIENT APPROPRIATE EVIDENCE
EVIDENCE – use as basis of opinion to be issued by the practitioner
SUFFICIENT – quantity of evidence
APPROPRIATE – quality of evidence (Reliability and Relevance)
*Sufficiency and Appropriateness are interrelated.

*MATERIALITY – relative to the size of the entity

- determines the nature, timing and extent of the procedures
and evidences needed.

*PROFESSIONAL SKEPTICISM – recognize that circumstances may exist that

cause the subject matter information to be
materially misstated
- to have an inquiring and questioning mind
ELEMENTS OF ASSURANCE ENGAGEMENTS
SUFFICIENT APPROPRIATE EVIDENCE
GENERALIZATIONS ON RELIABILITY OF EVIDENCE
• More reliable if obtained from external sources
• Evidence gathered internally is more reliable if related controls are effective
• More reliable if obtained directly than indirectly
• More reliable if in documentary form
• More reliable if original docs than photocopy
 EXAMPLE 1
• Contractor Company builds and sells houses to clients. Mr. Buyer is
planning to buy one of the houses built by Contractor Company. But
to ensure the safeness of the house, Mr. Buyer hired the services of
Mr. Engineer to check the compliance of the house with the National
Building Code (NBC).

• Identify the elements of an assurance engagement

 EXAMPLE 1 ANSWER
• 3 PARTY: Practitioner: Mr. Engineer
: Responsible Party: Contractor Company
: Intended user: Mr. Buyer

• SUBJECT MATTER: House for sale

• SUITABLE CRITERIA: National Building Code
• EVIDENCE: House building plans and physical inspection of the house
• REPORT: House is in compliance with the requirement of the NBC and
is safe to live in
 EXAMPLE 2
• Mr. Hiram ask Bank Ko for a loan of P1M payable in 2 years. Before
Bank Ko lends the P1M it requests for an audited financial statement
of Mr. Hiram. Mr. Hiram hired the services of CPA to audit his financial
statements’ conformity with the International Financial Reporting
Standards (IFRS).

• Identify the elements of an assurance engagement

 EXAMPLE 2 ANSWER
• 3 PARTY: Practitioner: CPA
: Responsible Party: Mr. Hiram
: Intended user: Bank Ko

• SUBJECT MATTER: Financial statement of Mr. Hiram

• SUITABLE CRITERIA: IFRS
• EVIDENCE: receipts, contracts, general ledger, etc.
• REPORT: Financial statement of Mr. Hiram is in compliance with IFRS
 ASSURANCE REPORT
• A written report containing the opinion on the subject matter
• The opinion may be expressed in either Positive or Negative form

 POSITIVE – direct to the point

- used for REASONABLE/HIGH ASSURANCE opinion
- “In our opinion, the financial statements present fairly in all
material respects”
- “In our opinion, the financial statements is not presented fairly”

NEGATIVE – indirectly states opinion

- used for LIMITED/ MODERATE ASSURANCE opinion
- “Nothing has come to our attention that causes as to believe that
the entity has not complied, in all material respects”
 TYPES OF ASSURANCE SERVICES
ACCORDING TO LEVEL OF ASSURANCE
 TYPES OF ASSURANCE SERVICES
ACCORDING TO STRUCTURE
• ASSERTION/ATTESTATION BASED
- responsible party measures the subject matter against a suitable
criteria and reports this information to intended users. This subject
matter information contains the responsible party’s assertions.
- role of practitioner is to issue an opinion on the assertions.
- both the responsible party’s assertion and the practitioner’s
assurance report are available to intended users.

• DIRECT REPORTING
- responsible party does not present the subject matter information.
- the practitioner directly reports the subject matter and provides
the intended users with an assurance report containing the subject
matter information.
 LIMITATIONS OF ASSURANCE ENGAGEMENTS
• USE OF SAMPLING
- for efficiency and cost benefit. Since testing the whole
population would be costly and time consuming.
• INHERENT LIMITATIONS OF INTERNAL CONTROL
- example quality of evidence, management override
• USE OF JUDGEMENT BY AUDITORS
• PERSUASIVENESS OF EVIDENCE
- with room for error since not 100% is tested.
 NON ASSURANCE SERVICES
AGREED UPON
- only agreed upon procedures are to be performed
- reports actual findings (no opinion and no recommendations)
- report is restricted to parties that have agreed with the procedures
- independence of the practitioner is not required

SUBJECT MATTER AGREED UPON PROCEDURE

Payroll Checking evidence of employee existence
Fixed assets Vouching physical existence of assets
 NON ASSURANCE SERVICES
TAX SERVICES
- 2 party contract
- No opinion is issued by the practitioner
- TAX COMPLIANCE: preparation of tax returns
- TAX PLANNING: how to legally minimize amount of tax payments
 NON ASSURANCE SERVICES
CONSULTANCY /ADVISORY SERVICES
- a 2 party contract
- to improve the effectiveness and efficiency of a client’s operations
 NON ASSURANCE SERVICES
COMPILATION
- preparation and presentation of financial statements
- practitioner does not provide assurance about the financial
statements