INTRODUCTION TO ASSURANCE ENGAGEMENTS

(1) What is ______________________________?

________________ refers to the auditor’s satisfaction as to the reliability of an assertion of one party for the use
by another party.

(2) What is an _____________________________?

______________________________ refers to an engagement where a practitioner expresses a conclusion

designed to enhance the credibility or degree of confidence that intended users can place on the evaluation and
measurement of a subject matter (that is the responsibility of a party, other than the intended users or the
practitioner) against a criteria.

(3) What is the Philippine Framework for Assurance Engagements (PFAEs)?

PFAEs have the following objectives:

a. Provides a framework of reference for the practitioner and other involved in an assurance engagement

b. Describes the objectives and elements of an assurance engagement intended to provide a high or medium level
of assurance

(4) What are the objectives of an assurance engagement according to PFAEs?

a. To evaluate and measure the subject matter that is the responsibility of a party, other than the intended users
or the practitioner, against a suitable criteria

b. To express a conclusion that provides the intended user a level of assurance about a subject matter

(5) What do you mean by level of assurance?

The level of assurance conveys the degree of confidence that the intended users can place with regard to the
credibility of the subject matter.

(6) What are assertion-based engagements and direct reporting engagements?

A/an ___________________________ is an assurance engagement wherein the responsible party has performed
the measurement or evaluation of subject matter and the subject matter information is in the form of an assertion
by the responsible party that is made available to the intended users. For example, audit of financial statements.

On the other hand, a/an ____________________________ is an assurance engagement wherein the practitioner
directly performs the evaluation or measurement of the subject matter or obtains a representation from the
responsible party that has performed the evaluation or measurement that is not available to the intended users.

The main difference between an assertion-based engagement and a direct reporting engagement is on who has
performed the evaluation and measurement of a subject matter.
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(7) What are reasonable assurance engagements and limited assurance engagements?

A ___________________________ is an engagement where the practitioner aims to reduce the assurance

engagement risk to an acceptably low level in the circumstances of the engagement as a basis of positive form of
conclusion.

On the other hand, a _________________________ is an engagement where the practitioner aims to reduce the
assurance engagement risk to an acceptable level in the circumstances of the engagement but where the risk is
greater than that of a reasonable assurance engagement as a basis for a negative form of conclusion.

(8) What are the two types of assurance services?

a. An ___________________________________, synonymous to external audit, provides a high level of

assurance that the financial statements prepared by management are free from material misstatement

The objective of a financial statement audit is to enable an auditor to express whether the financial statements
are presented fairly, in all material respects, in accordance with an acceptable identified financial reporting
framework (basis for positive form of conclusion).

b. A ____________ is a limited investigation of a much narrower scope than an audit and is undertaken for the
purpose of providing limited assurance that the subject matter under review is presented in accordance with
an identified financial reporting framework (basis for negative form of conclusion).

Items that can be subjected to a review can be any of the following:

1. Historical financial statements

2. Interim financial statements (as it may be needed by regulatory bodies or other parties)
3. Prospective financial statements (include forecasts and projections)

The procedures performed in a review are mainly __________________________ and

__________________________.

(9) How do you express a ____________ form of conclusion (in the case of a financial statement audit) and a
____________ form of conclusion (in the case of a review)?

_____________ form of conclusion:

“In our opinion, the financial statements present fairly, in all material respects, the financial position of ABC
Company as of December 31, 2018, and its financial performance and cash flows for the year ended December
31, 2018, in accordance with the Philippine Financial Reporting Standards.”

_____________ form of conclusion:

“In our opinion, nothing has come to the auditor’s attention that causes the auditor to believe that the financial
statements of ABC Company are not prepared, in all material respects, in accordance with the Philippine
Financial Reporting Standards.”
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(10) What is an attestation service?

An attestation service is an engagement in which a practitioner issues a written communication that expresses a
conclusion about the reliability of a written assertion that is the responsibility of another party.

Question:

1. Are all assurance engagements example of an attestation engagement?

2. Are all attestation engagements example of an assurance engagement?

(11) What are non-assurance services and what are examples of this type of service?

Non-assurance services are referred as such because they are not covered by PFAE.

Non-assurance services can be in the form of the following:

a. An ______________________ is an engagement where audit procedures are determined by the engaging (or
otherwise known as contracting) party and the practitioner. The procedures are to be performed by the
practitioner and he/she shall provide a report on factual findings as a result of undertaking those procedures.

The report shall only be for the reference of the engaging party and other intended users covered by the
engagement. Should it be read by a party outside of the engagement, there is a risk that that party shall make
a different conclusion about the report.

b. A _______________________ is an engagement involving the compilation of financial and/or non-financial

information that is to be presented in the form of financial statements that is the representation of management.
The practitioner does not express any assurance on the financial statements as the practitioner only uses his/her
accounting expertise, not audit expertise, to collect, classify and summarize financial information.

c. ____________________ can be in the form of tax compliance (preparation of tax returns for individuals,
corporations, estates, trusts, etc.) or tax planning (determining the tax consequences of planned or potential
transactions with the intention of minimizing the client’s tax liability).

d. ___________________ are professional services that employ the practitioner’s technical skills, education,
professional observations, experiences, and knowledge of analytical approaches and procedures in a
consulting engagement.

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(12) When can a practitioner accept an assurance engagement?

A practitioner can only accept an assurance engagement when, based on his/her preliminary knowledge, the
engagement circumstances indicate the following:

a. Relevant ethical requirements such as independence and professional competence will be satisfied;

b. The engagement exhibits the following characteristics:

1. Appropriate subject matter

2. Suitable and available criteria
3. Practitioner’s access to sufficient appropriate evidence to support his/her conclusion
4. Appropriate form of practitioner’s conclusion, either on a reasonable assurance engagement (positive
form) or a limited assurance engagement (negative form)

If there a significant limitation on the scope of the practitioner’s work or it is likely that the engaging party will
use the practitioner’s name in an inappropriate manner, it is unlikely that the engagement has a rational purpose,
and therefore, the practitioner should refrain from accepting such engagement.

(13) What are the elements of an assurance engagement?

The elements of an assurance engagement, in summary, are as follows:

a. _______________________________________________________________________________________
______________________________
b. _______________________________________
c. _______________________________________
d. _______________________________________
e. _______________________________________

(14) Who are the parties to an assurance engagement?

a. A ________________ is a person who provides assurance to the intended users about a subject matter that is
the responsibility of another party.

He gathers evidence to obtain assurance and provides a conclusion to the intended users about whether the
subject matter, that is the responsibility of a party other than the practitioner or the intended users, conforms
in all material respects in accordance with an identified criteria.

Further, he/she must adhere to the following principles:

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behavior
6. Ability to apply technical standards
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b. The scope of responsibility by the ________________________ will depend on whether it is a direct reporting
engagement or an assertion-based engagement.

In a direct reporting engagement, the responsible party is the one responsible for the subject matter. On the
other hand, in an assertion-based engagement, the responsible party is the one responsible for the subject
matter information and may also be responsible for the subject matter itself.

c. __________________ is/are person/s for whom the practitioner prepares the assurance report.

a. Can the responsible party and the intended user may be from the same entity? Different entities?

b. Can a responsible party also become an intended user?

c. Can the intended user may be identified by an agreement between the practitioner and the responsible
party or by virtue of law?

Whenever practical, the intended user/s should be involved in the determination of the requirements of the
engagement.

Regardless of the level of involvement of the three parties to an assurance engagement:

a. Who is responsible for determining the nature, timing and extent of procedures to be performed?

b. Who is required to pursue any matter that he/she becomes aware of that leads him/her to question whether
a material modification should be made to the subject matter information?

c. When engagements are designed for specified intended users or for a specific purpose, who shall consider
including a restriction in the report that limits its use those intended users?

(15) What is a subject matter?

A subject matter can be any of the following:

a. Financial performance or conditions

b. Non-financial performance or conditions
c. Physical characteristics
d. Systems and processes
e. Behavior

The subject matter should be capable of consistent evaluation or measurement against suitable criteria, it should
be identifiable, and it should be in a form that can be subjected to procedures for evidence-gathering.

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(16) What is a criteria?

A criteria are benchmarks or standards used to evaluate or measure the subject matter including, where relevant,
standards for presentation and disclosure. Examples of criteria are as follows:

a. For financial statement audit, ____________________________________________________

b. For operational audits, _________________________________________________________
c. For compliance audits, _________________________________________________________

A criteria is considered ___________ when it results to a reasonably consistent evaluation of a subject matter
within the context of professional judgment.

A criteria is considered ____________ when it is embodied in laws and regulations or issued by authorized or
recognized bodies of experts that follows a transparent due process.

A criteria may also be specifically designed for the purpose of a particular engagement.

(17) What are the characteristics of a suitable criteria?

A suitable criteria encompass the following characteristics:

a. ______________ or a criteria that contributes to a conclusion that assists decision-making by the intended
users.

b. ______________ or where relevant factors that can affect the conclusion, in the context of the engagement
circumstances, is not omitted.

c. ______________ or a criteria that allow consistent evaluation or measurement of the subject matter.
Moreover, it allows similarly qualified practitioners to use this criteria under similar circumstances.

d. ______________or a criteria that is free from bias.

e. ______________ or a criteria that can provide clear, comprehensive conclusions and are not subject to
significant differing interpretations.

(18) How can the criteria in an assurance engagement be made available to the parties of the engagement?

The suitable criteria to be used in an assurance engagement can be made available to the parties of the engagement
in the following ways:

a. Publicly
b. Inclusion in a clear manner in the presentation of the subject matter information
c. Inclusion in a clear manner in the assurance report
d. By general understanding between the parties to the engagement

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(19) What are the elements of evidence?

The elements of evidence, in relation to an assurance engagement, are as follows:

a. Professional skepticism on the part of the practitioner in which circumstances may exist that may cause the
subject matter information to be materially misstated.

As such, the practitioner makes a critical assessment, with a questioning mind, of the validity of the evidence
obtained and is alert to evidence that contradicts or brings into question the reliability of the documents or
representations provided by the responsible party.

b. _____________ and ____________ of evidence

_______________ is a measure of quantity of evidence obtained by the practitioner.

_______________ refers to the quality of evidence, including its relevance and reliability.

1. The sufficiency of evidence is affected by the following factors:

(a) Risk that the subject matter information may be materially misstated (e.g. the greater the risk involved,
the more evidence is likely required)

(b) Quality of evidence (e.g. the higher the quality of evidence, the lesser evidence is likely required)

2. The appropriateness of evidence is influenced by its source and nature and is dependent on the
individual circumstances under which it is obtained

______ reliable sources ______ reliable sources

Obtained from independent sources outside the Obtained from sources within the entity
entity
Generated internally when internal controls are Generated internally when internal controls are less
effective effective (if not effective, evidence is not reliable at
all)
Obtained by the practitioner based on his own Obtained indirectly or by influence of entity
efforts (e.g. through observation and other direct
methods of obtaining evidence)
Evidence exists in documentary form Oral representations
Original documents (e.g. authentic documents) Photocopied or facsimiled documents

Further, evidence that are consistently obtained from different sources or methods is _____ reliable than
evidence obtained individually.

As a practitioner, he/she should consider the relationship between the cost of obtaining evidence and the
usefulness of the evidence obtained. However, the difficulty or expenses involved in obtaining evidence
are not itself a valid basis for omitting an evidence-gathering procedure for which there is no given
alternative.

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c. In terms of materiality, it aids the practitioner to determine the nature, timing and extent of evidence-
gathering procedures and when assessing whether the subject matter information is free from material
misstatement.

d. _________________ is a risk that the practitioner may express an inappropriate conclusion when the subject
matter is materially misstated. Stated differently, it is also the risk of expressing an inappropriate opinion
when the subject matter is not materially misstated.

It also includes the risk of loss on litigation, adverse publicity or unfavorable events in connection with the
subject matter reported on (e.g. impact of inappropriate conclusion on the financial statements and over-all
reputation of the entity being audited)

The components of overall audit risk are as follows:

1. ________________ or the susceptibility of subject matter information to material misstatement assuming

there are no related controls. In layman’s terms, these risks are natural probabilities that an error will occur
in any process or activity.

For example, human error arises as a result of people’s natural tendency to make mistakes due to lack of
competence or pressures. Another example is the complexity and volume of transactions which may result
to the inappropriate application of accounting information.

2. ________________ is the risk where a material misstatement that could occur will not be detected,
prevented or corrected on a timely basis by related internal controls.

For example, in a small business, most of the functions (e.g. authorization, recording, custody) are
confined in one or few persons; hence, there is a risk that the assigned persons may deliberately misstate
the subject matter information and may not be corrected on a timely basis.

3. ________________ is the risk that the practitioner will not be able to detect a material misstatement on
the subject matter information.

Under a risk-based approach to audit, the practitioner cannot reduce the _____________ and _____________
risks as it is determined by the circumstances surrounding the entity. However, he/she can assess the level of these
risks and determine the appropriate level of _____________ risk. The arithmetical approach to determine the
overall audit risk are as follows:

Overall audit risk = (_____________) x (_____________) x (_____________)

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To illustrate, if the impact of _____________ and _____________ risks are high, to reduce the overall audit risk
to an acceptably low level, the practitioner should set a low level of _____________ risk; hence, more audit
procedures may likely be done and more evidence may be obtained, and vice-versa.

e. The nature, timing, and extent of evidence-gathering procedures depends upon the professional judgment
of the practitioner and may vary for different engagements.

Evidence-gathering procedures involve the following steps:

1. Understand the subject matter and other engagement circumstances (e.g. understand the client’s business,
its accounting system, and its internal control processes)

2. Assess the overall audit risk that the subject matter information may be materially misstated

3. Respond to the assessed risk by developing an overall audit approach by determining the nature, timing
and extent of audit procedures.

4. Perform the audit procedures to reduce the assessed risk to an acceptably low level

5. Evaluate the sufficiency and appropriateness of evidence obtained from the audit procedures performed

The sufficient appropriate evidence obtained during the engagement should be enough to provide reasonable
assurance that the subject matter information is free from material misstatement.

Question:

Why assurance engagements (e.g. an audit) do not provide absolute assurance? The answer lies on the limitations
of the assurance engagement such as:

1. The use of sampling (sampling risk)

2. The use of judgment in gathering and evaluating evidence and forming a conclusion based on the evidence
obtained (non-sampling risk)

3. The practitioner’s reliance on management assertions in the conduct of the engagement

4. The nature of evidence obtained by the practitioner. Since the practitioner only needs to be satisfied that
he has obtained sufficient appropriate evidence on which his/her conclusion will be based, the evidence
he/she obtained is persuasive, rather than conclusive.

5. Limitations inherent to the entity and in its internal control activities/processes

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f. The quantity and quality of available evidence are affected by the following:

1. Characteristics of the subject matter and its underlying information

2. Circumstances of the engagement

Provided that the practitioner has obtained sufficient appropriate evidence that will lead him/her to conclude that
the subject matter information is free from any material misstatement, then an unqualified opinion (clean, without
any exceptions) is appropriate.

However, there may be instances when the entity, due to its own actions, or the circumstances of the engagement
provide material limitations on the scope of the work to be done by the practitioner such as restrictions that prevent
the practitioner from obtaining the required evidence that will reduce the engagement risk to an acceptably low
level. In this case, the practitioner may not express an opinion on the fairness of the subject matter information.

(20) What is an assurance report?

An assurance report conveys the practitioner’s conclusion about the subject matter information.

Again, provided that the practitioner has obtained sufficient appropriate evidence that will lead him/her to
conclude that the subject matter information is free from any material misstatement, then an unqualified opinion
(clean, without any exceptions) is appropriate.

However, the modification of the practitioner’s unqualified opinion is appropriate when:

a. Certain subject matter information may be misstated but not material enough to make the entire subject
matter misstated in accordance with the identified criteria.

In this case, the practitioner may issue a qualified opinion wherein the subject matter is presented fairly,
in material respects, in accordance with the identified criteria, except for certain subject matter
information that may be misstated.

b. The subject matter information is materially misstated in accordance with the identified criteria.

In this case, the practitioner shall issue an adverse opinion stating that the subject matter is not presented
fairly, in all material respects, in accordance with the identified criteria.

In cases when the entity, due to its own actions, or the circumstances of the engagement provide material
limitations on the scope of the work to be done by the practitioner such as restrictions that prevent the practitioner
from obtaining the required evidence that will reduce the engagement risk to an acceptably low level. In this case,
the practitioner may not express an opinion on the fairness of the subject matter information and may consider
withdrawing from the engagement.

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(21) When can a practitioner’s name be used?

The entity can use or refer the name of the practitioner if:

a. The practitioner issued a report on the entity’s subject matter information

b. The practitioner consents to the use of his/her name in a professional undertaking (e.g. in connection with the
subject matter information he/she reported on)

If the practitioner learns that a party is inappropriately using his/her name in a subject matter:

a. The practitioner may require the party to cease from doing so;

b. The practitioner shall inform any known third party users on the inappropriate use of his/her name

c. The practitioner may seek legal advice. (end)

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