AUDIT T12 Reporting Responsibility
- review report should contain a clear written
Assurance Engagements And Related Services expression of negative assurance.
- auditor should review and assess the conclusion
(4) Four Types Of Services That Are Normally Performed drawn from the evidence obtained as the basis for
In Connection With The Entity's Financial Statements. the expression of negative assurance.
1. AUDIT OF FINANCIAL STATEMENTS Unmodified Review Report
- conducted primarily to enable the auditor to express an - issued when the auditor believes, that there are no
opinion on the entity's FS material modifications that should be made to the FS
- auditor provides users with (reasonable) high level of for them to be in conformity with PFRS.
assurance that FS are free from material misstatements
- auditor should determine the specific audit procedures Modification of the Review Report
- audit procedures should enable the auditor to gather - Material Misstatements
sufficient appropriate audit evidence to express an If it indicates the FS contain material misstatements,
opinion (positive assurance) about the fair presentation the report should describe those matters that impair a
of the FS. fair presentation of the FS, including, unless
impracticable, a quantification of the possible effect
2. REVIEW OF FINANCIAL STATEMENTS on the FS, and either:
- The cost of the audit may not justify the benefits that express a qualification of the negative assurance;
other entities may derive from it. give an adverse statement that the financial
statements are not presented fairly, in all,
Objective material respects, in accordance with PFRS.
- Obtain limited assurance; primarily by performing ( pervasive to FS/qualification isn’t adequate)
inquiry and analytical procedures , about whether the
FS are free from material misstatement. - Scope Limitation
- enabling the CPA practitioner to express a conclusion If there has been a material scope limitation, the
on whether anything caught his attention and causes report should describe the limitation and either:
him to believe the FS are not prepare accordingly. express a qualification of the negative
assurance regarding the possible adjustments to
Level of Assurance the FS that might have been determined to be
- due to limited procedures performed when reviewing necessary had the limitation not existed; or
FS, the auditor does not provide the same level of when the possible effect is material and
assurance as provided on audit engagements. pervasive that auditor concludes that no level of
- A review engagement can only provide moderate level assurance can be provided, the auditor should
of assurance that the information subject to review is not provide any assurance.
free of material misstatements.
- This moderate assurance is expressed in form of
Negative Assurance by using the negative words such 3. COMPILATION OF FINANCIAL STATEMENTS
as 'Nothing came to my attention.." or “I am not aware Compilation Engagement
of any material modifications..." - entities who cant employ full time accountants turn to
professionals to assist them in preparation and
Understanding The Entity And Its Environment presentation of their FS.
- a basis for designing procedures to address areas
where misstatement in FS are likely to arise Objective
- practitioner should obtain understanding of the entity - is for the accountant to use accounting expertise, as
and its environment and applicable standards opposed to auditing expertise to collect, classify and
summarize financial information. (reducing detailed data
Procedures To Be Performed to a manageable/ understandable. without requirement to
- A review of financial statements consists principally test assertions )
of inquiry and analytical procedures. - include the preparation of FS (may/not be a complete set)
- it does not ordinarily involve an assessment of but may also include the collection classification and
accounting and internal control systems, tests of summarization, of other financial information.
records and of responses to inquiries by obtaining
corroborating evidence through inspection, Level of Assurance
observation, confirmation and computation. - procedures in a compilation engagement are not
designed and do not enable the accountant to express
In particular, PSRE requires the CPA practitioner to make any assurance on the financial information.
appropriate inquiries and apply analytical procedures on: - users derive some benefit because the service has been
All material items in the FS performed with professional competence and due care.
Areas of high risk of material misstatement
Related party relationships and transactions Understanding the Entity
Fraud and non-compliance with laws/reg - CPA should obtain an understanding to ff, to perform a
Entity’s ability to continue as a going concern compilation engagement.
Entity’s business and operations, accounting system
If there’s reason to believe that the information and accounting records
subject to review may be materially misstated, auditor Applicable Financial Reporting Framework and
should carry out additional or more extensive procedures application to the entity’s industry
as are necessary to be able to express negative assurance or This is an ongoing process throughout , it establishes a
to confirm that a modified report is required. frame of reference which the CPA exercises professional
judgement in compiling the financial information.
Procedures To Be Performed Terms of the Engagement
- CPA should assemble the information based on the - The auditor should ensure with representatives of the
records, documents, explanations and other information, entity and, other specified parties who will receive
significant judgments provided by management. copies of the report of factual findings, that there is a
- a compilation engagement is not an assurance clear understanding regarding the agreed
engagement, does not require CPA to verify procedures and the conditions of the engagement.
completeness and accuracy
- prior to completion CPA should read the compiled Procedures and Evidence
information in light of his understanding of the entity’s The auditor should carry out the procedures
business and operations. agreed upon and use the evidence obtained as the basis
- if he becomes aware information provided are for the report of factual findings. These are also audit
incomplete, inaccurate or unsatisfactory, he should procedures but usually applied only to specific accounts
bring that to the attention of management and request or elements of a financial statement.
additional / corrected information.
These procedures may include:
The accountant is not ordinarily required to: Inquiry and analysis
a. make inquiries of management to assess reliability and Recomputation, comparison and other clerical accuracy
completeness of the information provided; checks.
b. assess internal controls; Observation.
c. verify any matters; or Inspection.
d. verify any explanations Obtaining confirmations.
Reporting Responsibility The above procedures are also procedures perform
- accountant's compilation report should identify the FS by auditor when auditing FS, the main difference is in
compiled and indicate that no assurance is provided Agreed - Upon Procedures Engagement, client is
responsible for determining the nature , timing and extent of
Modification of the compilation report procedures t be perform, not the auditor.
Material Misstatements
- if CPA becomes aware that the compiled information Reporting Responsibility
are materially misstated/misleading, he should propose - needs to describe the purpose and the agreed-upon
the appropriate amendments to management procedures of the engagement in sufficient detail to
- if management declines/ does not permit to make the enable the reader to understand the nature and the extent
proposed amendments, he should withdraw from the of the work performed
engagement and inform management and those charged Purpose of the engagement
with governance of the reasons for withdrawing Procedures performed
Auditor’s factual findings
Scope Limitation
- if CPA is unable to complete the engagement because
management failed to provide sufficient information, he
should withdraw and inform management and those
charged with governance of the reasons
4. AGREED-UPON PROCEDURES ENGAGEMENT
An auditor may be engaged to apply agreed-upon procedures
on specific account or element of a financial statement.
This type of engagement may be accepted provided:
1. Client takes full responsibility for the adequacy of the
procedures to be performed;
2. Distribution of the report is limited only to those parties
who have agreed about the procedures to be performed.
(An engagement to perform this involves the application of
certain procedures concerning individual items of financial
data (AR,AP,purchases from related parties )
Objective
- for auditor to carry out procedures of audit nature which
the auditor and entity and any appropriate third parties
have agreed and to report on factual findings.
Level of Assurance
- auditor simply provides a report of the factual findings of
agreed-upon procedures, no assurance is expressed.
- users of the report assess the procedures and findings
reported by the auditor and draw their own conclusions
Restrictions On The Distribution Of Report
- report is restricted to parties that agreed to the procedures
to be performed. (others, unaware of the reasons for the
procedures, may misinterpret the results.)
ASSURANCE ENGAGEMENTS subject matter, or obtains a representation from the
As a response to growing demands in the financial responsible party that has performed the evaluation or
community, the accounting profession has widened the scope measurement that is not available to the intended users. The
of auditing. Auditors nowadays do not only provide subject matter information is made available to users in the
assurance about the reliability of financial information but assurance report. These engagements are called <direct
they also perform services to improve the quality of the reporting engagements=.
information for decision makers. PSAE 3000 states that
assurance engagements are intended to enhance the Criteria Criteria are the standards or benchmark used to
credibility of information about a subject matter by evaluate or measure the subject matter of an assurance
evaluating whether the subject matter conforms in all engagement. Without the frame of reference provided by
material respects with suitable criteria. these criteria, any conclusion is open to individual
interpretation and misunderstanding. In an assurance
Types of Assurance Engagements Assurance engagement, criteria must be suitable to enable reasonably
engagements can be classified according to the level of consistent evaluation or measurement of the subject matter
assurance that the practitioner gives to parties who may rely within the context of professional judgment.
on his/ her report. In theory, it is possible to provide an
infinite range of assurance from a very low level to an Evidence The practitioner should plan and perform the
absolute level. But under the present standards, there are two engagement to obtain sufficient appropriate evidence to
levels of assurance engagement a practitioner may perform: a determine whether the assertions are free of material
reasonable assurance engagement (like audit engagement) misstatements.
and a limited assurance engagement (like review of financial
statements). Assurance Report The professional accountant expresses
Whether a particular engagement is an assurance engagement a conclusion that provides a level of assurance as to whether
will depend upon whether it exhibits all the following the subject matter conforms in all material respects with
elements: identifiable suitable criteria. The professional accountant's
A three party relationship An appropriate subject conclusion provides either high or moderate level of
matter; Suitable criteria; Sufficient appropriate assurance about the subject matter.
evidence; and A written assurance report.
Not all engagements performed by professional accountants
Three Party Relationship Assurance engagements involve are assurance engagements. Other engagements frequently
three separate parties: An independent and competent performed by professional accountants that are not assurance
professional accountant who adheres to the fundamental engagements include: Agreed-upon procedures;
principles required by the Code of Ethics The party Compilation of financial or other information; Preparation
responsible for the subject matter of the assurance of tax returns when no conclusion is expressed, and tax
engagement. The intended users to whom the professional consulting; Management consulting; and Other
accountant usually addresses the report advisory services
The responsible party and the intended user will often be
from separate organizations but need not be. A responsible Reports on Prospective Financial Information Although
party and an intended user may both be within the same majority of the services performed by auditors involves audit
organization. For example, a governing body may seek of historical financial statements, auditors may also be
assurance about information provided by a component of that associated with future oriented financial statements. Auditors
organization. The relationship between the responsible party may be asked to examine and report on prospective financial
and the intended user needs to be viewed within the context information to enhance its credibility whether it is intended
of a specific engagement. for use by third parties or for internal purposes.
Subject Matter The subject matter of an assurance
engagement may take many forms such as: Data (for Prospective financial information means financial
example, financial and non-financial information) information based on assumptions about events that may
Systems and processes (for example, internal controls) occur in the future and possible actions of the entity. There
Behavior (for example, entity's compliance with laws and are two general types of prospective financial information:
regulations) Physical characteristics (for example, capacity forecasts and projections.
of a plant facility)
A forecast is a prospective financial information prepared the
To be considered appropriate, the subject matter of an basis of the assumptions as to future events which
assurance engagement must be identifiable, capable of management expects to take as of the date the information is
consistent evaluation and measurement against suitable prepared (best estimate assumptions). A projection, the other
criteria, and in the form that can be subjected to procedures hand, is a prospective financial information prepare on the
for gathering evidence to support that evaluation or basis of hypothetical assumptions or a mixture of best-
measurement. estimate and hypothetical assumptions.
In some assurance engagements, the evaluation or Auditor's responsibility The auditor should evaluate the
measurement of the subject matter is performed by the completeness and reasonableness of the underlying
responsible party and the outcome of such evaluation or assumptions as disclosed in the prospective financial
measurement is in the form of an assertion by the responsible information. This requires the auditor to obtain sufficient
party that is made available to the intended users. It is the knowledge of the client's business as well as the entity's
assertion about which the practitioner gathers sufficient process for preparing financial information.
appropriate evidence to provide a reasonable basis for
expressing a conclusion on the assurance report. These When examining prospective financial information according
engagements are called "assertions-based engagements" to PSAE 3400, the auditor should obtain sufficient
appropriate evidence that:
In other assurance engagements, the practitioner either
directly performs the evaluation or measurement of the
Management's 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 statements.
While 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.
Further, given the types of evidence available in assessing
the assumptions on which the prospective financial
information is based, it may be difficult for the auditor to
obtain a level of satisfaction sufficient to express an opinion
that the assumptions are free of material misstatement.
Consequently, when reporting on the reasonableness of
management's assumptions, the auditor normally provides
only a moderate level of assurance.
The following is an example of an unmodified report on a
forecast:
We have examined the forecast in accordance with
Philippine Standards on Assurance Engagements applicable
to the examination of prospective financial information.
Management is responsible for the forecast including the
assumptions set out in Note 1 to the financial statements.
Based on our examination of 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 generally accepted
accounting principles in the Philippines.
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.