ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

CHAPTER 1 ASSURANCE SERVICES, AUDITING AND RELATED SERVICES

LEARNING OBJECTIVES:
Explain the preface to Philippine standards on quality control, auditing,
review, other assurance and related services.
Discuss the Philippine framework for assurance engagements.
Learn the objective and general principles governing an audit of financial
statements (PSA 200 [amended as a result of PSA 700 (revised).
Understand the PSQC1 quality control for firms that perform audits and
reviews of historical financial information, and other assurance and related
services.
Discuss the PSA 220 (revised) quality control for audits of historical financial
information.
Discuss the PSA 210 [amended by PSA 700 (revised)] terms of audit
engagements.

The Authority Attaching to Philippine Standards Issued by the AASC

STANDARDS APPLICATION
1. Philippine Standards on Auditing  Audit of historical financial
(PSAs) information
2. Philippine Standards on Review  Review of historical financial
Engagements (PSREs) information
3. Philippine Standards on Assurance  Assurance engagements dealing
Engagements (PSAEs) with subject matters other than
historical financial information
4. Philippine Standards on Related  Compilation engagements
Services (PSRSs)  Engagements to apply agreed-upon
procedures to information
 Other related services
engagements as specified by the
AASC

1
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s
Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services
falling under the AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.

The Authority Attaching to Practice Statements Issued by the AASC

1. Philippine Practice Statements are issued to:
 Provide interpretive guidance and practical assistance o professional
accountants in implementing Philippine Standards; and
 Promote good practice
2. Professional accountants should be aware of and consider Practice Statements
applicable to the engagement.
3. A professional accountant who does not consider and apply the guidance
included in a relevant Practice Statements should be prepared to explain how the
basic principles and essential procedures in the AASC’s Engagement
Standard(s) addressed by the Practice Statement have been complied with.

PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

1. The Framework does not itself establish standards or provide procedural
requirements for the performance of assurance engagements.
2. In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who
perform assurance engagements are governed by:
 The Philippine Code of Ethics for Professional Accountants; and
 Philippine Standards on Quality Control (PSQCs)

ASSURANCE ENGAGEMENTS

1. “Assurance engagement” means an agreement in which a particular expresses a

conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria.
2. “Subject matter information” refers to the outcome of the evaluation or
measurement of a subject matter.

2
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

3. In some assurance engagements, the evaluation or measurement of the subject I

performed by the responsible party, and the subject matter information is in the
form of an assertion by the responsible party that is made available to intended
users (assertion-based engagements).
4. In other assurance engagements, the practitioner either 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 in the assurance report (direct
reporting engagements)

TWO TYPES OF ASSURANCE ENGAGEMENT

1. Reasonable assurance engagement – the objective is a reduction in assurance
engagement risk to an acceptably low level in the circumstances of the
engagement as the basis for a positive form of expression of the practitioner’s
conclusion.
2. Limited assurance engagement – the objective is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the
engagement, but where the risk is greater than for a reasonable assurance
engagement, as a basis for a negative form of expression of the practitioner’s
conclusion.

SCOPE OF THE FRAMEWORK

The following are non-assurance engagements and therefore are not covered by the
Framework:
1. Engagements covered by the PSRSs such as agreed-upon procedures
engagements and compilations of financial or other information.
2. The preparation of tax returns where no conclusion conveying assurance is
expressed.
3. Consulting (or advisory) engagements, such as management and tax consulting.

ELEMENTS OF AN ASSUARANCE ENGAGEMENT

1. A three-party relationship involving:
 A practitioner;
 A responsible party; and
 Intended users.
2. An appropriate subject matter;
3. Suitable criteria;
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.

3
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL

STATEMENTS

1. The OBJECTIVE of an audit of financial statements is to enable the auditor to

express an opinion whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework.
2. The auditor should comply with relevant ethical requirements relating to audit
engagements.
3. The auditor should conduct the audit in accordance with PSAs.
4. “Scope of an audit” refers to the audit procedures that, in the auditor’s judgment
and based on PSAs, are deemed appropriate in the circumstances to achieve the
objective of the audit.
5. The auditor should plan and perform an audit with an attitude of
PROFESSIONAL SKEPTICISM recognizing that circumstances may exist that
cause the financial statements to be materially misstated.
6. In forming the audit opinion, the auditor obtains sufficient appropriate evidence to
be able to draw conclusions on which to base that opinion.
7. The auditor’s opinion enhances the credibility of financial statements by providing
a high, but not absolute, level of assurance.
8. Absolute assurance in auditing is not attainable as a result of such factors as:
 The need for judgment;
 The use of testing;
 The inherent limitations of any accounting and internal control systems;
and
 The fact that most of the evidence available to the auditor is persuasive,
rather than conclusive, in nature.
9. While the auditor is responsible for forming and expressing an opinion on the
financial statements, the responsibility for the preparation and presentation of the
financial statements in accordance with the applicable financial reporting
framework is that of the entity’s MANAGEMENT, with oversight from those
charged with governance.

4
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS

1. The objective of a review of financial statements is to enable a practitioner to

state whether, on the basis of procedures which do not provide all the evidence
that would be require in an audit, anything has come to the practitioner’s
attention that causes the practitioner to believe that the financial statements are
not prepared, in all material respects, in accordance with an identified financial
reporting framework (negative assurance)
2. A review comprises INQUIRY and ANALYTICAL PROCEDURES which are
designed to review the reliability of an assertion that is the responsibility of one
party for use by another party.
3. A review does not ordinarily involve an assessment of accounting and internal
control systems, tests of records and of responses to inquiries by obtaining
corroborating evidence through inspection, observation, confirmation and
computation, which are procedures ordinarily performed during an audit.
4. The level of assurance provided in a review report is less that that given in an
audit report.

ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING

FINANCIAL INFORMATION
1. In an engagement to perform agreed-upon procedures, an auditor is engaged to
carry out those 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.
2. The recipients of the report must form their own conclusion from the report of the
auditor.
3. The report is restricted to those parties that have agreed to the procedures to be
performed since others, unaware of the reasons for the procedures, may
misinterpret the results.

ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION

5
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

1. In a compilation engagement, the accountant is engaged to use accounting

expertise as opposed to auditing expertise to collect, classify, and summarized
financial information.
2. It ordinarily entails reducing detailed data to manageable and understandable
form without a requirement to test the assertions underlying that information.
3. The procedures performed are not designed and do not enable the accountant to
express any assurance on the financial information.
4. Users of compiled financial information derived some benefit as a result of the
accountant’s involvement because the service has been performed with due
professional skill and care.

SUMMARY
Nature of Audit Review Agreed-upon Compilation
service Procedures
Level of High, but not Moderate No assurance No assurance
Assurance absolute assurance
Provided assurance
Report Positive Negative Factual findings Identification of
provided assurance on assurance on of procedures information
assertion(s) assertion(s) compiled
(Audit Report) (Review (Compilation
Report) Report)

PSQC 1
1. The firm should establish a System of Quality Control to provide it with
reasonable assurance that:
a. The firm and its personnel comply with professional standards and
regulatory and legal requirements; and
b. The reports issued by the firm or engagement partners are appropriate
in the circumstances.
2. Elements of a System of Quality Control

6
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

a. Leadership responsibility for quality within the firm

b. Ethical requirements
c. Acceptance and continuance of client relationships and specific
engagements.
d. Human resources
e. Engagement performance
f. Monitoring

PSA 220 (Revised)

1. The engagement team should implement quality control procedures that are
applicable to the individual audit engagement.
2. The engagement partner should
a. Take responsibility for the overall quality on each audit engagement to
which that partner is assigned.
b. Consider whether members of the engagement team have complied
with ethical requirements.
c. Be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and specific audit engagements
have been followed, and that conclusions reached in this regard are
appropriate and have been documented.
d. Be satisfied that the engagement team collectively has the appropriate
capabilities, competence and time to perform the audit engagement in
accordance with professional standards and regulatory and legal
requirements, and to enable an auditor’s report that is appropriate in
the circumstances to be issued.
e. Take responsibility for the direction, supervision and performance of
the audit engagement in compliance with professional standards and
regulatory and legal requirements, and for the auditor’s report that is
issued to be appropriate n he circumstances.
f. Be satisfied that sufficient appropriate audit evidence has been
obtained to support the conclusions reached and for the auditor’s
report to be issued.

PSA 210 [AMENDED BY THE PSA 700 (REVISED)]

1. The purpose of this standard is to establish standards and provide guidelines on:
a. Agreeing the terms of the engagement with the client; and
b. The auditor’s response to a request by a client to change the terms of
an engagement to one that provides a lower level of assurance.
2. Audit Engagement Letters

7
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

 It is in the interest of both client and auditor that the auditor sends an
engagement letter, preferably before the commencement of the engagement, to
help in avoiding misunderstandings with respect to the engagement.

 Principal Contents
An engagement letter would generally include reference to:
 The objective of the audit of financial statements.
 Management’s responsibility for the financial
statements.
 The financial reporting framework adopted by
management in preparing the financial statements.
 The scope of the audit, including reference to
applicable legislation, regulations or pronouncements
of professional bodies to which the auditor adheres.
 The form of any reports or other communication of
results of the engagement.
 The fact that because of the test nature and other
inherent limitations of an audit, together with the
inherent limitations of any accounting and internal
controls system, there is an unavoidable risk that
even some material misstatement may remain
undiscovered.
 Unrestricted access to whatever records,
documentation and other information requested in
connection with the audit.
3. Acceptance of a Change in Engagement
1. An auditor who, before the completion of the engagement, is requested
to change the engagement tone which provides a lower level of
assurance, should consider the appropriateness of doing so.
2. A request from the client for the auditor to change the engagement
may result from:
a. A change in circumstances affecting the need for the service;
b. A misunderstanding as to the nature of an audit or related
service originally requested; or
c. A restriction on the scope of the engagement, whether imposed
by management or caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for
requesting a change in the engagement)
3. A change would not be considered reasonable if it appeared that the
change relates to information that is incorrect, incomplete or otherwise
unsatisfactory.

8
 ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

4. Before agreeing to change an audit engagement to a related service,

an auditor would also consider any legal or contractual implications of
the change.
5. If the auditor concludes that there is reasonable justification to change
the engagement and if the audit work performed complies with the
PSAs applicable to the change engagement, the report issued would
be that appropriate for the revised terms of the engagement.
6. In order to avoid confusing the reader, the report would not include
reference to:
a. The original engagement; or
b. Any procedures that may have been performed by the original
engagement, except where the engagement is changed to
undertake agreed-upon procedures.
7. Where the terms of the engagement are changed, the auditor and the
client should agree in the new terms.
8. The auditor should not agree to a change of engagement where there
is no reasonable justification for doing so.
9. If the auditor is unable to agree to a change of engagement and is not
permitted to continue the original engagement, the auditor should
withdraw and consider whether there is any obligation, contractual or
otherwise, to report to other parties, such as the board of directors or
shareholders, the circumstances necessitating the withdrawal.

Reference:
Compilation of Lecture Notes by Dean Rene Boy R. Bacay, CPA, MBA, FRIAcc

For further discussion please refer to the link provided:

Philippine framework for assurance engagements- [Link]

Introduction to Auditing and Related Services- [Link]

Quality Control and Quality Audit (PSQC 1 and PSA 120)-[Link]