AUDIT AND ASSURANCE PRINCIPLES

Lesson 1: Introduction

 Auditing and Assurance Standards Council (AASC)

a. Has its mission to promulgate the auditing standards, practices and procedures which shall be generally
accepted by the accounting profession in the Philippines.
b. Has approved the adoption of the International Standards on Auditing (ISA), International Standards on
Assurance Engagements (ISAEs), International Standards on Review Engagements (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) to facilitate the preparation by the AASC of its
pronouncements and to attain uniformity of those pronouncements with international auditing standards.
c. Created by the Professional Regulation Commission upon the recommendation of the Board of Accountancy
(BOA) to assist the BOA in the establishment and promulgation of auditing standards in the Philippines.
d. Replaced the Auditing Standards and Practices Council (ASPC) which was established by the Philippine Institute
of CPAs (PICPA) and the Association of CPAs in Public Practice (ACPAPP) and previously set generally accepted
auditing standards in the Philippines.

 Pronouncements of the Auditing and Assurance Standards Council (AASC)

 Philippine Standards on Quality Control (PSQCs)

 Philippine Standards on Auditing (PSAs)
 Philippine Standards on Review Engagements (PSREs)
 Philippine Standards on Assurance Engagements (PSAEs)
 Philippine Standards on Related Services (PSRSs)

 Philippine Auditing Practice Statements (PAPSs)

 Philippine Review Engagement Practice Statements (PREPs)
 Philippine Assurance Engagement Practice Statements (PAEPSs)
 Philippine Related Services Practice Statements (PRSPSs)

 Exposure period for the proposed Philippine Standard or Practice Statement is generally not shorter than 90
days. Exposure draft is widely distributed to interested organizations and persons for comments. The exposure
draft shall also be published in the PICPA Accounting Times and ACPAPP Bulletin to give it further exposure.
 Issuance of exposure drafts requires approval by a majority of the members of the Council; issuance of the
Philippine Standards and Practice Statements, as well as interpretations, requires approval of at least ten (10)
members.
 Each final Philippine Standard and Practice Statement, as well as interpretations, if deemed appropriate, shall be
submitted to the PRC through the BOA for approval after which the pronouncements shall be published in the
Official Gazette.
 After publication, the AASC pronouncement becomes operative from the effective date stated therein.
 Numbering of Philippine Standards and Practice Statements with suffix “Ph” as follows:
o For Philippine Standards – starting from 100Ph
o For Philippine Practice Statements – starting from 1000Ph

 The Authority Attaching to Philippine Standards issued by the AASC

Standards Application
Philippine Standards on Auditing (PSAs) Audit of historical financial statements
Philippine Standards on Review Engagements (PSREs) Review of historical financial statements
Philippine Standards on Assurance Engagements Assurance engagements dealing with subject
(PSAEs) matter other than historical information
Compilation engagement, agreed-upon procedures
Philippine Standards on Related Services (PSRSs) to information and other related services
engagements as specified by the AASC
All services falling under AASC’s Engagement
Philippine Standards on Quality Control (PSQCs)
Standards

 The nature of the Philippine Standards issued by the AASC requires professional accountants to exercise
professional judgment in applying them. In some circumstances, a professional accountant may judge it to
 depart from a basic principle or essential procedure of an Engagement Standard to achieve more effectively the
objective of the engagement. When such situation arises, the professional accountant should be prepared to
justify the departure.

 The Authority Attaching to Practice Statements issued by the AASC

Issued to provide interpretative guidance and practical

Philippine Auditing Practice Statements (PAPSs) assistance to professional accountants in implementing
PSAs and to promote good practice
Issued to serve the same purpose for the
PREPSs, PAEPSs and PRSPSs implementation of PSREs, PSAEs and PSRSs,
respectively.

 The professional accountants should be aware of and consider Practice Statements applicable to the
engagement.

 Philippine Framework for Assurance Engagements

 The framework does not itself establish standards or provide procedural requirements for the performance of
assurance engagements.
 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 Engagement, as defined

 An engagement in which a practitioner 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.

 Objective of an Assurance Engagement

 For a professional accountant to evaluate or measure a subject matter that is the responsibility of another party
against identified suitable criteria, and to express about the subject matter.
 Assurance engagements performed by professional accountants 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, thereby improving the likelihood that the information will meet the needs of an intended
user.
 Assurance services are designed to improve the quality of decision making by improving confidence in the
information on which decisions are made.

 Types of Assurance Engagements

1. According to Assurance Level

a. Reasonable assurance engagement – the objective of this, 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 conclusions

b. Limited assurance engagement – the objective of this, is a reduction in assurance engagement risk to a level
that is acceptable in the circumstances of the engagement, but where that risk is greater than for a
reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s
conclusion.

2. According to Structure

a. Assertion-based Engagement (Attestation) – the evaluation or measurement of the subject matter is

performed by the responsible party, and the subject matter information is in the form of assertion by the
responsible party that is made available to the intended users.

Example:
 Independent audit engagement
 Review engagement
 b. Direct-reporting engagement – 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. The subject matter is provided to the
intended users in the assurance report.

 Elements of an Assurance Engagement

1. Three-party Relationship
2. Appropriate subject matter
3. Suitable criteria
4. Sufficient Appropriate Evidence
5. Written Report

 Three-party Relationship

a. A practitioner
b. A responsible party
c. Intended users – are person, persons or class of persons for whom the practitioner prepares the assurance
report and can be any one of the intended users, but not the only one.

 Appropriate Subject Matter

 Identifiable, and capable of consistent evaluation or measurement against the identifiable criteria, and
 Such that information about it can be subjected to procedures for gathering sufficient appropriate evidence
support a reasonable assurance or limited assurance conclusion, as appropriate.
 “Subject matter information” refers to the outcome of the evaluation or measurement of a subject matter.

Forms of subject matter:

1. Financial performance or conditions
2. Non-financial performance or conditions
3. Physical characteristics (e.g. capacity of a facility)
4. Systems and processes (e.g. an entity’s internal control or IT system)
5. Behavior (e.g. corporate governance, compliance with regulation, human resource practices)

 Suitable Criteria

 The benchmarks used to evaluate or measure the subject matter including, where relevant, benchmarks for
presentation and disclosure.
 Required for reasonably consistent evaluation or measurement of a subject matter within the context of
professional judgment.
 Criteria are made available to the intended users in one or more of the following ways:
o Publicly
o Through inclusion in a clear manner in the presentation of the subject matter information
o Through inclusion in a clear manner in the assurance report
o By general understanding, for example the criterion for measuring time in hours and minutes

Characteristics of Suitable Criteria

a. Relevance – contribute to conclusions that assist decision-making by the intended users.
b. Completeness – no omissions of relevant factors that could affect the conclusions in the context of the
engagement circumstances.
c. Reliability – allow reasonably consistent evaluation or measurement of the subject matter.
d. Neutrality – contribute to conclusions that are free from bias.
e. Understandability – contribute to conclusions that are clear, comprehensive, and not subject to significantly
different interpretations.

 Sufficient appropriate evidence

Sufficiency – is the measure of the quantity of evidence.

Appropriateness – is the measure of quality of evidence that is relevance and its reliability.

 Generalization about the reliability of evidence:

o Evidence is more reliable when it is obtained from independent sources outside the entity.
 o Evidence that is generated internally is more reliable when the related controls are effective.
o Evidence obtained directly by the practitioner is more reliable than evidence obtained indirectly or by
inference (inquiry).
o Evidence is more reliable when it exists in documentary form.
o Evidence provided by original documents is more reliable than evidence provided by photocopies or
facsimiles.

 A Written Report

 In a reasonable assurance engagement, the practitioner expresses the conclusion in the positive form.

For example: “In our opinion internal control is effective, in all material respects, based on ABC established
criteria.”

 In a limited assurance engagement, the practitioner expresses the conclusion in the negative form.

For example: “Nothing has come to our attention that causes us to believe that the internal control is not
effective, in all material respects, based on ABC established criteria.”

 Limitations of Assurance Engagements

a. The use of selective testing

b. The inherent limitations of internal control
c. The nature of evidence. (persuasive rather than conclusive)
d. The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence.
e. The characteristics of the subject matter when evaluated or measured against the identified criteria.

 Engagements Provided by Practitioners

Assurance Engagements
1. Audits
2. Reviews
3. Other assurance services (CPA Web Trust; SysTrust; Eldercare Plus; Business Performance Measurement
Services; Corporate Sustainability Reporting).

Non-Assurance Engagements
1. Agreed-upon procedures
2. Compilation of financial or other information
3. Preparation of Tax Returns and Tax Consulting
4. Management Consulting and other advisory services

 Assurance Engagement Risk

 The risk that the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.

 In general, assurance engagement risk can be represented by the following components, although not all of
these components will necessarily be present or significant for all assurance engagements:

a. The risk that the subject matter information is materially misstated, which in turn consists of:

Inherent Risk – the susceptibility of the subject matter information to a material misstatement,
assuming that there are no related controls, and

Control Risk – the risk that a material misstatement that could occur will not be prevented, or detected
and corrected, on a timely basis by related internal control.

Detection Risk – the risk that the practitioner will not detect a material misstatement that exists.