CHAPTER ONE

FUNDAMENTALS OF ASSURANCE SERVICES

I. THE CONCEPT OF ASSURANCE

 The relevance and reliability of information is critical for making the best
decision in a given situation.
 There is a need for reliable information – information that is fairly stated,
information that presents a true and fair view of what it purports to represent.
 Decisions depend in the info they see in FS.
 Users generally do not have the training or expertise to verify technical
information, such as those contained in FS. They turn to CPAs – provide
assurance that they need – assurance that the audited info is indeed fairly
stated.
 According to Webster, to assure means “to give confidence or conviction.”
In the auditing sense, it refers to auditor’s satisfaction as to the reliability of
an assertion being made by one party for use of another party.

II. ASSURANCE SERVICES

Nature and Objective
Assurance Services (Assurance Engagements)
Three-party contracts in which assurers (such as a CPA) reports
-
on the quality of information.
- Intended to enhance the credibility of information about a subject
matter (such as FSs) by evaluating whether the subject matter
conforms in all material respects with suitable criteria.
 Examples of Assurance Engagements:
o Audits of FSs of listed and non-listed entities
o Assurance on the balloting of contests (such as Academy
Awards)
o Reporting on compliance with laws, rules & regulations

III. ELEMENTS OF ASSURANCE ENGAGEMENTS

The following are the elements of assurance engagements: (3SCER):
1. 3-party relationship (practitioner, responsible party, intended users)
2. (appropriate) subject matter
3. (suitable) criteria
 4. (sufficient appropriate) evidence
5. (Written) assurance report (in the form appropriate to a reasonable
assurance engagement or a limited assurance engagement)

IV. THREE PARTY RELATIONSHIP (PRI)

** The RP and IU may be from different or same entities. Their relationship
must be viewed within the context of a specific engagement and may differ
from more traditionally defined lines of responsibility.

1. PRACTITIONER (P)
- Broader than the term “auditor”
o Auditor = relates only to practitioners performing audit or
review engagements with respect to historical financial
information
- Performs assurance services
- In some cases, the ethical requirement regarding professional
competence can be satisfied by the practitioner using the work of
persons from other disciplines, referred to as experts.

2. RESPONSIBLE PARTY (RP)

- Person/s responsible for the subject matter or the subject matter
information (ASSERTION) in the assurance engagement
- The Philippine Framework for Assurance Engagements
provides the examples of situations when the RP is responsible for
the subject matter info only, and when such responsibility is
extended to the subject matter itself.
- Provides the practitioner with a written representation that
evaluates or measures the subject matter against an identified
criteria, whether or not it is made available as an assertion to the
intended users.
- EX:
 subj matter = financial position, financial performance, CFs of
enterprise
 subj matter info = FS
 responsible party = client or entity mgmt.
o extent of responsibility of RP
 subj matter info only (gov’t >> entity’s info)
 subj matter and subj matter info (own info)

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 3. INTENDED USERS (IU)
- Persons for whom the practitioner prepares the assurance report.
- The RP can be one of the IU, but not the only one.
- IU may be identified in different ways, for example, by agreement
between the P and RP or engaging party, or by law (???)
**** PARTIES INVOLVED IN DETERMINING ENGAGEMENT
REQUIREMENTS
- The P is responsible for determining the nature, timing, and extent
of procedures to be performed in the engagements.
- In addition, the P is required to pursue any matter which the
practitioners becomes aware of where such matter may lead to a
material adjustment or modification to the subject matter
information. For example, where material errors are found in an
FS audit, the auditor is required to determine the effect of these
errors on the FS and the type of report to be issued.
**** ASSURANCE ENGAGEMENTS FOR A SPECIFIC PURPOSE
- In some cases, IU (ex: banks, regulators) impose a requirement on,
or request the RP (or engaging party, if different) to arrange for,
an assurance engagement to be performed on a specific purpose.
- The P considers including a restriction in the assurance report that
limits its use to those users or that purpose.

V. SUBJECT MATTER
- An appropriate subject matter is identifiable and capable of
consistent evaluation or measurement against the identified
criteria and capable of being subjected to procedures for gathering
sufficient appropriate evidence to support a reasonable assurance
or limited assurance conclusion, as appropriate.
- Subject matters have different characteristics: (relates precision w/
subj matter)
o Quali vs quanti
o Obj vs subjective
o Historical vs prospective
o A period of time vs a point in time

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FORM SUBJ MATTER SUBJ MATTER INFO
Financial Historical or prospective Recognition, measurement,
performance financial position, financial presentation and disclosure
performance, and CFs represented in FS
Non-fin perf Performance of an entity Key indicators of efficiency
or conditions and effectiveness
Physical Capacity of a facility Specifications document
characteristics
Systems and Entity’s internal control or IT As assertion about
processes system effectiveness
Behavior Corporate governance, Statement of compliance or a
compliance with regulations, statement of effectiveness
human resource practices

VI. SUITABLE CRITERIA

- Benchmarks used to evaluate or measure the subject matter

including, where relevant, benchmarks for presentations and
disclosures.
- Can be formal or less formal. (example of less formal: internally
developed code of conduct or an agreed level of performance)
Assurance Engagement Applicable Criteria
Audit of FS PFRS
Assurance on internal control Established internal control framework
(ex: COSO) or individual control
objectives specifically designed for the
engagement
Compliance audits Applicable law, regulation and contract

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 - The P assesses the suitability of criteria based on some
characteristics:
o Relevance – assist decision making
o Completeness – circumstances are not omitted
o Reliability – reasonable consistent presentation and disclosure in
similar circumstances by similarly qualified practitioners
o Neutrality – free from bias
o Understandability – clear, comprehensive, not subj to significantly
different interpretations
*** ESTABLISHED CRITERIA AND SPECIFICALLY DEVELOPED
CRITERIA
Established Criteria are those embodied in laws or regulations, or issued by
authorized or recognized bodies of experts that follow a transparent due process.
Specifically developed criteria are those designed for the purpose of the engagement.
Criteria are made available to the intended users in one or more of the following
ways:
1. Publicly
2. Through inclusion in a clear manner in the presentation of the subject matter
information
3. Through inclusion in a clear manner in the assurance report
4. By general understanding, for example the criterion for measuring time in
hours and minutes
When identified criteria are available only to specific intended users, or are relevant
only to a specific purpose, use of the assurance report is restricted to those users or
for that purpose.

VII. SUFFICIENT APPROPRIATE EVIDENCE

The P should perform assurance engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence about whether the subject matter
information is free from material misstatement.
Professional skepticism
- Recognizing that circumstances may exist that cause the subject
matter info to be materially misstated.
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 - P should make a critical assessment, with a questioning mind, of
the validity of evidence obtained and is alert to evidence that
contradicts or brings into question the reliability of documents or
representations by the responsible party
- Example:
 Evidence is inconsistent w/ other evidence obtained
 Info that calls into question the reliability of documents and
responses to inquiries to be used as evidence
 Circumstances that suggest the need for procedures in
addition to those required by relevant Assurance Standards
 Conditions that may indicate likely misstatement
Sufficiency and Appropriateness of Evidence
a. Sufficiency
is the measure of the quantity of evidence
-
b. Appropriate
- is the measure of the quality of evidence (relevance and reliability)

**** merely obtaining MORE evidence may NOT compensate for its poor quality

Generalizations about the reliability of evidence

Even when evidence is obtained from sources external to the entity, circumstances
may exist that could affect the reliability of the info obtained.
MORE RELIABLE:
a. if obtained outside
b. ang internally generated if related controls are effective
c. directly by practitioner > indirectly or by inference
d. document form (paper, electronic, other media)
e. original docus > photox, fax

Cost-Benefit Considerations
More difficult to obtain assurance about subject matter info covering a period of time
than a point in time
P should consider cost of obtaining evidence & usefulness of the info obtained.

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The matter of difficulty or expense involved is not in itself a valid basis for omitting
an evidence-gathering procedure for which there is no alternative.

Materiality
- relevant when practitioner determines the nature, timing, extent of
evidence gathering procedures, and when assessing whether the
subject matter information is free of misstatement.
- Matters for the P’s judgment

Assurance Engagement Risk

Assurance Engagement Risk
- Risk that the practitioner expresses an inappropriate conclusion
when the subject matter info is materially misstated.

VIII. ASSURANCE REPORT

Two levels of assurance:
1. Reasonable level = high level of assurance
2. Limited level = = moderate level of assurance
Forms of conclusion:
1. Positively
2. Negatively
Positive form:
“In our opinion, the entity has complied, in all respects, with XYZ law.”
Negative form:
“Based on the procedures performed and evidence obtained, nothing has come to
attention that causes us to believe that the entity has not complied, in all respects,
with XYZ law.”

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User’s comfort: (+) > (-)
The more extensive the data-gathering procedure = the higher level of assurance
Short form – basic elements
Long form - with explanations and other info not intended to affect P’s conclusion.
 Example of add’l info: criteria being used, finding relating to
particular aspect of engagement, details of qualification &
experience of practitioner, others involved w/ the
engagement, disclosure of materiality levels,
recommendations
o If criteria is unsuitable or subject matter is inappropriate,
may disclaimer dapat ng conclusion depending on how
material or pervasive the matter is. (or minsan
nagwiwithdraw nalang sa engagement)

IX. CLASSIFICATION OF ASSURANCE ENGAGEMENTS

A. Accdg to Level of Assurance

1. Reasonable Assurance Engagement

Objective: reduce 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.
Example: audit of historical FS
2. Limited Assurance Engagement
Objective: reduce assurance engagement risk to 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 practitioner’s conclusion

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 B. Accdg to Structure

1. Attestation Engagement
Measurer or Evaluator – who is NOT a practitioner – measures/evaluates the
underlying subject matter against the criteria, the outcome of which is the
subject matter information.
Objective: to obtain sufficient & appropriate evidence that the subj matter info
is free from material misstatement (Attest nga)
2. Direct Engagement
P mismo measures
P’s conclusion is part of (or is) the subject matter information
X. ATTESTATION ENGAGEMENTS
- 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.

FOUR BASIC CONDITIONS na iba sa other services by CPAs (ACEC)

1. There must be a written assertion being made by one party, the reliability of
which is interest to another party. (may be expressly stated or kahit implied
lang)
2. There must be agreed-upon or 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. May
evidence, ganon.
4. The accountant should prepare a written conclusion abt the reliability of
assertion.
*** examples:
1. Independent audit engagement - reasonable
2. Review engagement – limited

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XI. OTHER ASSURANCE SERVICES
AICPA formed the Special Committee on Assurance Services (Chaired by
Robert K. Elliot, a KPMG partner)
 Business performance measurement
- Reliable ba yung performance measuremt system (ex: balanced
scorecard)
 Healthcare performance measurement
- Evaluation on healthcare delivery system
 Elder Care Plus
- On care givers
 Risk Assessment Services
- Identifies set of risks that affect the org
 CPA WebTrust
- AICPA and CICA (Canada, chartered acctnts)
 Information Systems Reliability
- If reliable fin and nonfinancial info sys

XII. LIMITATIONS OF ASSURANCE ENGAGEMENTS

Highest level na maattain w/ todo push na: Reasonable level (below absolute)
Reducing assurance engagement risk to ZERO is very RARELY ATTAINABLE
or cost beneficial as a result of the factors of the following:
1. The use of selective testing
2. The inherent limitations of internal control.
3. The fact that much of the conclusions available to P is rather
PERSUASIVE THAN CONCLUSIVE
4. The use of judgment in gathering and evaluating evidence and forming
conclusions based on that evidence.
5. The characteristics of subject matter (in some cases)

XIII. NON-ASSURANCE SERVICES

Not all engagements performed by CPAs are assurance services.
Non-assurance services lack one or more of the elements of assurance
engagements.
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Here are some examples na common:

1. AGREED-UPON PROCEDURES
 May napagusapang procedures na tapos yung users na bahala
magbigay ng conclusion. Ingat lang sa user na di alam yung
kakaibang procedure
 NO CONCLUSION from practitioner

2. COMPILATION OF FINANCIAL OR OTHER INFORMATION

 Reducing detailed data to understandable forms
 NO CONCLUSION from practitioner

3. SOME TAX SERVICES (PREPARATION OF TAX RETURNS WHERE

NO CONCLUSION IS EXPRESSED; TAX CONSULTING)
 Save tax money hahahaha

4. MGMT CONSULTING AND OTHER ADVISORY SERVICES

 Analysis of business probs and development of plans for
improvement
 Pagod na ako e

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