AUDITING AND ASSURANCE PRINCIPLES
MODULE 4
PROFESSIONAL STANDARDS AND ASSURANCE ENGAGEMENTS & RELATED SERVICES
THE PROFESSIONAL STANDARDS
Standards are established to measure the quality of performance of individuals and organizations.
The Board of Accountancy promulgated 10 generally accepted auditing standards (GAAS) that establish the required level
of quality for performing FS audits. To clarify the meaning of these 10 GAAS, the Philippine Standards on Auditing (PSAs)
are issued.
▪ GAAS - represent measures of the quality of the auditors performance; the minimum standard that auditor should
follow
- grouped into general, fieldwork, and reporting standards.
General Standards
1. The examination is to be performed by person/s having adequate technical training and proficiency as an auditor.
2. In all matters relating to an engagement, an independence in mental attitude is to be maintained by the auditor.
3. Due professional care is to be exercised in the performance of the audit and in the preparation of the report.
Standards of Fieldwork
4. The work is to be adequately planned and assistants, if any, are to be properly supervised.
5. There is to be a proper study and evaluation of existing internal control as a basis for reliance thereon and for the
determination of the resultant extent of the tests to which auditing procedures are to be restricted.
6. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and
confirmations to afford a reasonable basis for an opinion regarding the FS under examination.
Standards of Reporting
7. The report shall state whether the FS are presented in accordance with GAAP.
8. The report shall identify those circumstances in which principles have not been consistently observed in the current
period in relation to the preceding period.
9. Informative disclosures are to be regarded as reasonably adequate unless otherwise stated in the report.
10. The report shall either contain an expression of opinion regarding the FS, taken as a whole, or an assertion to the
effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons should be
stated. In all cases, where an auditors name is associated with the FS, the report should contain a clear-cut
indication of the character of the auditors examination if any and the degree of responsibility he is taking.
PHILIPPINE STANDARDS ON AUDITING
Auditing and Assurance Standards Council (AASC) - tasked to promulgate auditing standards, practices, and procedures
will shall be generally accepted in the Philippines.
- approved the adoption of the International Standards on Auditing (ISAs), International Standards on Assurance
Engagements (ISAEs), International Standards on Review Engagement (ISREs), and International Standards on Related
Services (ISRSs) issued by the International Auditing and Assurance Board (IAASB) created by the International Federation
of Accountants (IFAC).
- undertakes review of the standards and practices statements issued by IAASB to determine if these can be adopted
in the PH with or without changes, after considering any local requirements imposed by law.
SYSTEM OF QUALITY CONTROL
Audits are usually conducted by audit teams. It is only by implementing quality control policies and procedures that CPAs
can ensure that all members of the audit teams perform the same level of quality of work.
Quality controls - policies and procedures adopted by CPAs to provide reasonable assurance of conforming with
professional standards in performing audit and related services.
Under Philippine Standards on Quality Control (PSQC) 1, a firm has an obligation to establish a system of quality control to
provide reasonable assurance that the firm and its personnel
➢ comply with professional standards and regulatory and legal requirements; and
➢ that the reports issued by the firm are appropriate in the circumstances.
Elements of Quality Control Policies and Procedures
The quality control policies and procedures adopted by audit firms vary depending on the firm's size and nature of its
practice, cost benefit considerations, and other factors.
● Leadership Responsibilities
The engagement partner should take responsibility for the overall quality of each audit engagement to which the
partner is assigned.
● Ethical Requirements
Any issues involving engagement team member's non-compliance with ethical requirements must be properly
resolved and documented.
● Independence
The engagement partner should form a conclusion on compliance with independence requirements that apply to the
audit engagement.
● Acceptance and Continuance of Client Relationships
The firm should establish policies and procedures for the acceptance and continuance of client relationships and
specific engagements, designed to provide reasonable assurance that it will only undertake or continue relationships
and engagement where it:
➢ has considered the integrity of the client;
➢ is competent to perform the engagement and has the capabilities, time, and resources to do so; and
➢ can comply with ethical requirements.
● Human Resources and Assignment
The firm should establish policies and procedures designed to provide reasonable assurance that it has sufficient
personnel with the capabilities, competence, and commitment to ethical principles necessary to perform the
engagement.
● Engagement Performance
The engagement partner should take responsibility for the direction, supervision, review, and overall performance
of the audit engagement.
● Monitoring
The continued adequacy and operational effectiveness of quality control policies and procedures is to be monitored.
ASSURANCE ENGAGEMENTS AND RELATED SERVICES
There are 4 types of services that are normally performed in connection with the entity's FS.
➢ Audit;
➢ Review;
➢ Compilation; and
➢ Agreed-upon Procedures
1. AUDIT OF FINANCIAL STATEMENTS
In this type of engagement, the auditor provides the users with a high level of assurance (reasonable assurance) that the
FSs are free from material misstatements.
The specific audit procedures to be performed shall be determined and enable the auditor to gather sufficient appropriate
evidence (SAAE) about the fair presentation of the FS.
2. REVIEW OF FINANCIAL STATEMENTS
Small entities usually request the professional services of the CPAs to provide them with a certain level of assurance about
the reliability of the FS.
The objective of a review of FS is to obtain a moderate level or limited assurance, primarily by performing inquiry and
analytical procedures, about whether the FS as a whole is free from material misstatement. The limited assurance is
expressed in the review report in the form of negative assurance by using negative phrases such as "Nothing has come to
my attention that causes me to believe that the FS do not present fairly..."
While a review involves the application of audit skills and techniques in gathering evidence, it does NOT ordinarily involve
assessment of accounting and internal control systems.
PSRE requires CPA practitioner to make appropriate inquiries and apply relevant analytical procedures on:
● all material items in the FS;
● areas on high risk of material misstatements;
● related party relationships and transactions;
● fraud and non-compliance with laws and regulations; and
● the entity's ability to continue as a going concern.
3. COMPILATION OF FS
Not all entities can employ full-time accountants to prepare FS for them. As a result, most of these entities turn to
professional accountants to assist them in the preparation and presentation of their FS.
The objective of a compilation engagement is for the CPA to use accounting expertise, as opposed to auditing expertise to
collect, classify, and summarize financial information. The procedures employed in this engagement are NOT designed and
do NOT enable the CPA to express any assurance.
Since compilation engagement is not an assurance engagement, it does not require the CPA practitioner to verify the
accuracy or completeness of the information provided by the engagement. The CPA is NOT ordinarily required to:
a. make any inquiries 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.
4. AGREED-UPON PROCEDURES ENGAGEMENT
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.
The objective is 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. No assurance is expressed. Instead, the agreed upon procedures
report should describe in detail:
➢ the purpose of the engagement;
➢ the procedures performed; and
➢ the auditors factual findings
to enable the readers to understand the nature and the extent of the work performed.
The auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive copies of
the report of factual findings, that there is a clear understanding regarding the agreed procedures and the conditions of
the engagement.
ASSURANCE ENGAGEMENTS
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.
Types of Assurance Engagements
1. Reasonable Assurance Engagement
2. Limited Assurance Engagements
Whether a particular engagement is an assurance engagement will depend upon whether it exhibits all of the following
elements:
● three-party relationship;
● appropriate subject matter;
● suitable criteria;
● sufficient appropriate evidence; and
● written assurance report.
REPORTS ON PROSPECTIVE FINANCIAL INFORMATION
Auditors may be asked to examine and report on prospective financial information to enhanceits credibility whether it is
intended for use by third parties or for internal purposes.
a. Forecast - prepared on the basis of the assumptions as to future events which management expects to take as of the
date of information is prepared (best-estimate assumptions)
b. Projection - prepared on the basis of hypothetical assumptions or a mixture of best-estimate and hypothetical
assumptions.