Module #01: Fundamentals of Assurance Services

Financial Users
1. Employees
 Salaries and wages
 Continuance of employment
2. Government
 Correct Taxes
3. Shareholder
 Buy, hold, and sell dividends
4. Creditors
 Ability to pay
5. Customer
 Assurance of operation
 Dependence on products

Assurance
– Lending of credibility to information
– The auditor’s satisfaction as to the reliability of an assertion made by one party
(management) for use of another party (other users).

Assurance Engagement
– An engagement conducted by a practitioner at the end of which he/she expresses an
opinion (auditor’s report) of the subject matter (financial statement) against a criteria
(PFRS).
– The opinion of the practitioner enhances the degree of the confidence of the intended
user about the measurement of the subject matter.

Example of Assurance Services

Assurance Services Non-Assurance Services
Business risk Assessment Bookkeeping and Accounting
Information System Security Review Tax Services
Customer Satisfaction Survey Certain Management Consultancy
Internal Audit Outsourcing Other Management Consultancy
Accounts Receivable Review

Elements of Assurance Engagements

1. Three (3) Party Involvement
 A. Practitioner
 One lending credibility to the information
 Must be independent both in mind and in appearance
 Example: a CPA Auditor or an Engineer
B. Intended user
C. 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.
 Example: Management of the entity

2. Subject Matter
 E.g. financial statements, other financial data, systems
 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.
 Audit is a specific type of assurance engagement.

Quality Control Engagement uses PSA. Checks whether auditing is properly done

3. Suitable Criteria
 E.g. accounting standards
 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 - Relevance: affects decision making
U - Understandability: Clear
N - Neutral: Free from bias
C - Complete: All relevant information are included
R - Reliable: Allows consistent evaluation

4. Sufficient Appropriate Evidence

 Quality can offset quantity, but quantity cannot offset quality.

Evidence
 Use as the basis of opinion to be issued by the practitioner.

Rules in Reliability of Evidence

 Direct evidence is more reliable than indirect evidence.
 Documented evidence is more reliable than oral evidence.
 External evidence is more reliable than oral evidence.
  Evidence gathered from effective internal control structure is
more reliable than evidence gathered from ineffective internal
control structure.
 Original copy of evidence is more reliable than those with
photocopy.

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 evidence
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.

Framework of Assurance Engagement

5. Written Assurance Report

 Expressing a conclusion or opinion

Example 01:
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

Three Party Involvement:
 Practitioner: Mr. Engineer
Intended User: Mr. Buyer
Responsible Party: Contractor Company
Subject Matter: House for Sale
Suitable Criteria: National Building Code
Assurance Report: Whether the Houses is in compliance with the requirement
of the NBC and if safe to live in.

Example 02:
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

Three Party Involvement
Practitioner: CPA
Intended User: Bank Ko
Responsible Party: Mr. Hiram
Subject Matter: Financial Statements
Suitable Criteria: International Financial Reporting Standard (IFRS)
Assurance Report: Whether the Financial Statement 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"
 Higher assurance
 Procedure used: Audit

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"
 Procedure used: Review

Audit Procedures
 Inquiry
 Inspection
 Observation
 Reperformance
 Confirmation
 Recalculation
  Analytics

Review Procedures:
 Inquiry
 Analytics

Type of Assurance
According to Level of Assurance
Limited Assurance (Review)
 Moderate/lower level of assurance
 Conclusion expressed negativelyE.g. engagement to examine a forecast
 “Nothing has come to our attention which causes us to believe that these
assumptions do not provide a reasonable basis for the forecast."

Reasonable Assurance (Audit)

 High but not absolute level of assurance
 Opinion expressed positively
 E.g. audit of financial statements
 "In our opinion, the financial statements show a true and fair view.

Types of Assurance Services

According To Structure
Assertion/Attestation Based
o 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.
o role of practitioner is to issue an opinion on the assertions.
o both the responsible party's assertion and the practitioner's assurance report are
available to intended users.
o Audit is a specific type of attestation type service.

Direct Reporting
o responsible party does not present the subject matter information.
o the practitioner directly reports the subject matter and provides the intended
users with an assurance report containing the subject matter information.

Attestation Engagements
 An attestation engagement is an engagement in which a practitioner is engaged to issue,
or does issue, a written communication that expresses a conclusion about the reliability
of a written assertion that is the responsibility of another party.
1. There must be a written assertion being made by one party, the reliability of
which is of interest to another party.
2. There must be agreed-upon and objective criteria that can be utilized to assess
the accuracy of the assertion.
3. The assertion must be amenable to verification by an independent party.
4. The accountant should prepare a written conclusion about the reliability of the
assertion(s).

Other Assurance Services

1. Business Performance Measurement
 o Provides assurance about whether the financial and nonfinancial information
being reported is reliable.
o Provides assurance about whether the performance measures being used are
accurately leading toward meeting the strategic goals and objectives.
2. Health Care Performance Measure
o Involves the evaluation of the quality of health care, medical services and
outcome.
3. Elder Care Plus
o Provide assurance to the elederly and their relatives about the quality of care
being provided by various caregivers
4. Risk Assessment Services
o Identifies a set of risks that affect the organization
5. CPA WebTrust
o Seal of assurance developed jointly by AICPA and CICA.
o Enables consumers and businesses to purchase goods and services over the
Internet with the confidence that the Web site business meets high standards of
business practice.
6. Information Systems Reliability
o Involves whether financial and non- financial information systems provide
reliable information for operating and financial decisions by an entity’s
management

Limitations of Assurance Engagements

 The highest level of assurance that may be provided is reasonable assurance.
 Reasonable assurance is less than the absolute assurance
 Reducing assurance engagement risk to zero is very rarely attainable or cost- beneficial
as a result of factors such as the following:
1. Use of Sampling
o for efficiency and cost benefit. Since testing the whole population
would be costly and time consuming.
2. Inherent Limitations of Internal Control
o example quality of evidence, management override
3. Use Of Judgement by Auditors
4. Persuasiveness Of Evidence
o with room for error since not 100% is tested.

Non-Assurance Services
Agreed Upon (Report On Factual Findings)
o only agreed upon procedures are to be performed
o reports actual findings (no opinion and no recommendations)
o report is restricted to parties that have agreed with the procedures
o independence of the practitioner is not required

Subject Matter
o Payroll
o Fixed assets

Agreed Upon Procedure

o Checking evidence of employee existence
o Vouching physical existence of assets
 Tax Services
o 2 party contracts
o No opinion is issued by the practitioner
o CPAs can develop tax strategies to help individuals or businesses legally
minimize their tax liability
o Tax Compliance: preparation of tax returns
o Tax Planning: how to legally minimize amount of tax payments

Consultancy /Advisory Services

o a 2-party contract
o to improve the effectiveness and efficiency of a client's operations
o Helps organizations to improve their performance, primarily through the
thorough analysis of existing business problems and development of plans for
improvement.

Compilation
o preparation and presentation of financial statements
o practitioner does not provide assurance about the financial statements
o The accountant is engaged to use accounting expertise to collect, classify, and
summarize financial information.
o This ordinarily entails reducing detailed data to a manageable and
understandable form without a requirement to test the assertions underlying that
information.
o The procedures employed are not designed and do not enable the accountant to
express any assurance on the financial information.

NOTE: Non-assurance services lack one or more of the elements of assurance engagements.