CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9013

Manila
AUDITING THEORY CPA Review

REPORTS – OTHER ASSURANCE AND RELATED SERVICES

ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS (PSRE 2400 – Revised)

1. The objective of a review of financial statements is to enable an auditor to state whether, on

the basis of procedures which do not provide all the evidence that would be required in an
audit, anything has come to the auditor’s attention that causes the auditor to believe that the
financial statements are not prepared, in all material respects, in accordance with Philippine
Financial Reporting Standards (negative assurance).

2. For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate audit evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.

3. A review engagement provides a moderate level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of negative
assurance.

4. In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entity’s organization, accounting
systems, operating characteristics and the nature of its assets, liabilities, revenues, and
expenses.

5. Procedures for the review of financial statements will ordinarily include:

• Obtaining an understanding of the entity’s business and the industry in which it operates.
• Inquiries concerning the entity’s
▪ Accounting principles and practices.
▪ Procedures for recording, classifying, and summarizing transactions, and
accumulating information for disclosures.
▪ Actions taken at meetings of stockholders, the board of directors, and committees.
• Analytical procedures designed to identify relationships and individual items that appear
unusual. Examples:
▪ Comparison of the financial statements with those from prior periods.
▪ Comparison of the statements with anticipated results, such as previously prepared
budgets or forecasts.
▪ Study of the relationships of the elements of the financial statements that are
expected to form a predictable pattern.
• Reading the financial statements to consider, on the basis of information coming to the
auditor’s attention, whether the financial statements appear to conform with the basis of
accounting indicated.
• Obtaining reports from other auditors, if any and if considered necessary, who have been
engaged to audit or review the financial statements of components of the entity.
• Inquiries of persons having responsibility for financial and accounting matters concerning,
for example:
▪ Whether all transactions have been recorded.
▪ Whether the financial statements have been prepared in accordance with the basis of
accounting indicated.
▪ Changes in the entity’s business activities and accounting principles and practices.
▪ Matters as to which questions have arisen in the course of applying the foregoing
procedures.
▪ Obtaining written representations from management when considered appropriate.

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6. If the auditor has reason to believe that the information subject to review may be materially
misstated, the auditor should carry out additional or more extensive procedures as are
necessary to be able to express negative assurance or to confirm that a modified report is
required.

EXAMPLE OF AN UNMODIFIED REVIEW REPORT

We have reviewed the accompanying financial statements of ABC Company which comprise the statement
of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and a summary of significant
accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

Practitioner’s Responsibility
Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our
review in accordance with Philippine Standard on Review Engagements (PSRE) 2400 (Revised),
Engagements to Review Historical Financial Statements. PSRE 2400 (Revised) requires us to conclude
whether anything has come to our attention that causes us to believe that the financial statements, taken as
a whole, are not prepared in all material respects in accordance with the applicable financial reporting
framework. This Standard also requires us to comply with relevant ethical requirements.

A review of financial statements in accordance with PSRE 2400 (Revised) is a limited assurance
engagement. The practitioner performs procedures, primarily consisting of making inquiries of
management and others within the entity, as appropriate, and applying analytical procedures, and evaluates
the evidence obtained.

The procedures performed in a review are substantially less than those performed in an audit conducted in
accordance with Philippine Standards on Auditing. Accordingly, we do not express an audit opinion on
these financial statements.

Conclusion
Based on our review, nothing has come to our attention that causes us to believe that these financial
statements do not present fairly, in all material respects, the financial position of ABC Company as at
December 31, 20X1, and (of) its financial performance and cash flows for the year then ended, in
accordance with Philippine Financial Reporting Standards.

ENGAGEMENTS ON AGREED-UPON PROCEDURES (PSRS 4400)

1. An engagement to perform agreed-upon procedures may involve the auditor in performing

certain procedures concerning:
• Individual items of financial data (for example, accounts payable, accounts receivable,
purchases from related parties and sales and profits of a segment of an entity).
• A financial statement (for example, a balance sheet).
• A complete set of financial statements.

2. The objective of an agreed-upon procedures engagement is for the auditor to carry out
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.

3. As the auditor simply provides a report of the factual findings of agreed-upon procedures, no
assurance is expressed. Users of the report assess for themselves the procedures and
findings reported by the auditor and draw their own conclusions from the auditor’s work.

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4. 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.

5. Independence is not a requirement for an agreed-upon procedures engagement.

REPORTING

6. The report on an agreed-upon procedures engagement needs to describe the purpose and
the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.

7. The report of factual findings should contain:

• title;
• addressee (ordinarily the client who engaged the auditor to perform the agreed-upon procedures);
• identification of specific financial or non-financial information to which the agreed-upon procedures
have been applied;
• a statement that the procedures performed were those agreed upon with the recipient;
• a statement that the engagement was performed in accordance with the Philippine Standard on
Related Services applicable to agreed-upon procedures engagements;
• a statement that the auditor is not independent of the entity if such is the case;
• identification of the purpose for which the agreed-upon procedures were performed;
• a listing of the specific procedures performed;
• a description of the auditor’s factual findings including sufficient details of errors and exceptions
found;
• a statement that the procedures performed do not constitute either an audit or a review and, as
such, no assurance is expressed;
• a statement that had the auditor performed additional procedures, an audit or a review, other
matters might have come to light that would have been reported;
• a statement that the report is restricted to those parties that have agreed to the procedures to be
performed;
• a statement (when applicable) that the report relates only to the elements, accounts, items or
financial and non-financial information specified and that it does not extend to the entity’s financial
statements taken as a whole;
• date of the report;
• auditor’s address; and
• auditor’s signature.

COMPILATION ENGAGEMENTS (PSRS 4410 – Revised)

1. The practitioner’s objectives in a compilation engagement under PSRS 4410 (Revised) are to:
a) Apply accounting and financial reporting expertise to assist management in the
preparation and presentation of financial information in accordance with an applicable
financial reporting framework based on information provided by management; and
b) Report in accordance with the requirements of PSRS 4410 (Revised).

2. The practitioner shall obtain an understanding of the following matters sufficient to be able
to perform the compilation engagement:
a) The entity’s business and operations, including the entity’s accounting system and
accounting records; and
b) The applicable financial reporting framework, including its application in the entity’s
industry.

3. Prior to completion of the compilation, the practitioner shall read the compiled financial
information in light of the practitioner’s understanding of the entity’s business and operations,
and of the applicable financial reporting framework.

4. If the practitioner is unable to complete the engagement because management has failed to
provide records, documents, explanations or other information, including significant
judgments, as requested, the practitioner shall withdraw from the engagement and inform
management and those charged with governance of the reasons for withdrawing.

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5. If the practitioner becomes aware during the course of the engagement that:
a) The compiled financial information does not adequately refer to or describe the applicable
financial reporting framework;
b) Amendments to the compiled financial information are required for the financial
information not to be materially misstated; or
c) The compiled financial information is otherwise misleading,
the practitioner shall propose the appropriate amendments to management.

6. If management declines, or does not permit the practitioner to make the proposed
amendments to the compiled financial information, the practitioner shall withdraw from the
engagement and inform management and those charged with governance of the reasons for
withdrawing.

7. The practitioner shall obtain an acknowledgement from management or those charged with
governance, as appropriate, that they have taken responsibility for the final version of the
compiled financial information.

Practitioner’s report for an engagement to compile financial statements using a

general-purpose financial reporting framework. General purpose financial statements
required under applicable law that specifies that the entity’s financial statements are to be
prepared applying Philippine Financial Reporting Standards for Small-and Medium-sized entities
(PFRS for SMEs).

We have compiled the accompanying financial statements of ABC Company based on information you
have provided. These financial statements comprise the statement of financial position of ABC Company
as at December 31, 20X1, the statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and a summary of significant accounting policies and other
explanatory information.

We performed this compilation engagement in accordance with Philippine Standard on Related Services
4410 (Revised), Compilation Engagements.

We have applied our expertise in accounting and financial reporting to assist you in the preparation and
presentation of these financial statements in accordance with Philippine Financial Reporting Standards for
Small-and Medium-sized Entities (PFRS for SMEs). We have complied with relevant ethical requirements,
including principles of integrity, objectivity, professional competence and due care.

These financial statements and the accuracy and completeness of the information used to compile them are
your responsibility.

Since a compilation engagement is not an assurance engagement, we are not required to verify the accuracy
or completeness of the information you provided to us to compile these financial statements. Accordingly,
we do not express an audit opinion or a review conclusion on whether these financial statements are
prepared in accordance with PFRS for SMEs.

Source: Illustration 1, PSRS 4410 (Revised)

THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION (PSAE 3400)

1. “PROSPECTIVE FINANCIAL INFORMATION” means financial information based on

assumptions about events that may occur in the future and possible actions by an entity. It
can be in the form of a forecast, a projection, or a combination of both, for example, a one
year forecast plus a five year projection.

2. A “FORECAST” means prospective financial information prepared on the basis of assumptions

as to future events which management expects to take place and the actions management
expects to take as of the date the information is prepared (best-estimate assumptions).

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3. A “PROJECTION” means prospective financial information prepared on the basis of:

• hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or
are considering a major change in the nature of operations; or
• a mixture of best-estimate and hypothetical assumptions.

4. Prospective financial information can include financial statements or one or more elements of
financial statements and may be prepared:
• as an internal management tool, for example, to assist in evaluating a possible capital
investment; or
• for distribution to third parties.

5. Management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the assumptions on which it is based.

6. In an engagement to examine prospective financial information, the auditor should obtain

sufficient appropriate evidence as to whether:
• management’s best-estimate assumptions on which the prospective financial information
is based are not unreasonable and, in the case of hypothetical assumptions, such
assumptions are consistent with the purpose of the information;
• the prospective financial information is properly prepared on the basis of the assumptions;
• the prospective financial information is properly presented and all material assumptions
are adequately disclosed, including a clear indication as to whether they are best-estimate
assumptions or hypothetical assumptions; and
• the prospective financial information is prepared on a consistent basis with historical
financial statements, using appropriate accounting principles.

7. The auditor should not express any opinion as to whether the results shown in the prospective
financial information will be achieved.

8. When reporting on the reasonableness of management’s assumptions, the auditor provides

only a moderate level of assurance.

9. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective financial
information will be inappropriate for its intended use.

10. The auditor should obtain written representations from management regarding the intended
use of the prospective financial information, the completeness of significant management
assumptions and management’s acceptance of its responsibility for the prospective financial
information.

Example of an unmodified report on a forecast

We have examined the forecast (include name of the entity, the period covered by the forecast and provide
suitable identification, such as by reference to page numbers or by identifying the individual statements) in
accordance with Philippine Standard on Assurance Engagements applicable to the examination of
prospective financial information. Management is responsible for the forecast including the assumptions
set out in Note X on which it is based.

Based on our examination of the evidence supporting the assumptions, nothing has come to our attention
which causes us to believe that these assumptions do not provide a reasonable basis for the forecast. Further,
in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in
accordance with Philippine Financial Reporting Standards.

Actual results are likely to be different from the forecast since anticipated events frequently do not occur
as expected and the variation may be material.

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Example of an unmodified report on a projection

We have examined the projection (include name of the entity, the period covered by the forecast and provide
suitable identification, such as by reference to page numbers or by identifying the individual statements) in
accordance with Philippine Standard on Assurance Engagements applicable to the examination of
prospective financial information. Management is responsible for the projection including the assumptions
set out in Note X on which it is based.

This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection
has been prepared using a set of assumptions that include hypothetical assumptions about future events and
management’s actions that are not necessarily expected to occur. Consequently, readers are cautioned that
this projection may not be appropriate for purposes other than that described above.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention
which causes us to believe that these assumptions do not provide a reasonable basis for the projection,
assuming that (state or refer to the hypothetical assumptions). Further, in our opinion the projection is
properly prepared on the basis of the assumptions and is presented in accordance with Philippine Financial
Reporting Standards.

Even if the events anticipated under the hypothetical assumptions described above occur, actual results are
still likely to be different from the projection since other anticipated events frequently do not occur as
expected and the variation may be material.

• When the auditor believes that the presentation and disclosure of the prospective information
is not adequate, the auditor should express a qualified or adverse opinion or withdraw from
the engagement as appropriate.

• When the auditor believes that one or more significant assumptions do not provide a
reasonable basis for the prospective financial information, the auditor should either express
an adverse opinion or withdraw from the engagement as appropriate.

• When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw
from the engagement or disclaim the opinion describe the scope limitation in the report on
the prospective financial information.

MULTIPLE CHOICE QUESTIONS

1. Which of the following is an objective of a review engagement?

A. Expressing a positive opinion that the financial information is presented in conformity with
generally accepted accounting principles.
B. Expressing a limited assurance to users who have agreed as to procedures that will be
performed by the CPA.
C. Reporting whether material modifications should be made to such financial statements to
make them conform with generally accepted accounting principles.
D. Reporting that the financial statements, in all materials respects, fairly present the
financial position and operating results of the client.

2. Financial statements of an entity that have been reviewed by a practitioner should be

accompanied by a report stating that
A. A review provides only negative assurance that the financial statements are fairly
presented.
B. A review includes examining, on a test basis, information that is the representation of
management.
C. Does not contemplate obtaining corroborating evidential matter or applying certain other
procedures ordinarily performed during an audit.
D. The procedures performed in a review are substantially less than those performed in an
audit conducted in accordance with PSAs.

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3. A practitioner’s report on a review of the financial statements of an entity should state that
the practitioner
A. Does not express an opinion or any form of limited assurance on the financial statements.
B. Obtained reasonable assurance about whether the financial statements are free of
material misstatements.
C. Examined evidence, on a test basis, supporting the amounts and disclosures in the
financial statements.
D. Conducted the review in accordance with the Philippine Standard on Review
Engagements.

4. Financial statements of an entity that have been reviewed by a practitioner should be

accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the practitioner has not
been restricted.
B. Management is responsible for the preparation and fair presentation of the entity’s
financial statements.
C. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.

5. A practitioner who reviews the financial statements of an entity should issue a report stating
that a review
A. Provides negative assurance that internal control is functioning as designed.
B. Provides only limited assurance that the financial statements are fairly presented.
C. Is substantially more in scope than a compilation.
D. Is a limited assurance engagement.

6. If the practitioner determines that the financial statements are materially misstated, he/she
shall express a/an
A. Unmodified conclusion.
B. Qualified conclusion when the practitioner concludes that the effects of the matter(s)
giving rise to the modification are material, but not pervasive to the financial statements.
C. Adverse conclusion if the practitioner concludes that the possible effects on the financial
statements could be both material and pervasive.
D. Disclaimer of conclusion when the effects of the matter giving rise to the modification are
both material and pervasive to the financial statements.

7. What conclusion is appropriate when the practitioner has obtained limited assurance to be
able to conclude that nothing 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 the applicable financial reporting framework?
A. Unmodified conclusion. C. Modified conclusion.
B. Disclaimer of conclusion. D. Qualified conclusion.

8. Charlie, CPA, is performing a compilation service for Clean and Green Corporation. In the
course of performing compilation procedures, Charlie became aware that some of the
information provided by Clean and Green’s management are incomplete. Client management
refuses to comply with Charlie’s requests for additional information. In this case, Charlie
should:
A. Issue a qualified opinion on the financial statements compiled.
B. Issue an adverse opinion on the financial statements compiled.
C. Issue a disclaimer of opinion on the financial statements complied.
D. Withdraw from the engagement.

9. The procedures employed in doing compilation are:

A. Designed to enable the accountant to express a limited assurance.
B. Designed to enable the accountant to express a negative assurance.
C. Not designed to enable the accountant to express any form of assurance.
D. Less extensive than review procedures but more extensive than agreed-upon procedures.

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10. When performing a compilation engagement, the accountant is required to

A. Assess internal controls.
B. Verify matters and explanations.
C. Obtain a general knowledge of the business and operations of the entity.
D. Make inquiries of management to assess the reliability and completeness of the
information provided.

11. When compiling the financial statements of an entity, an accountant should

A. Review agreements with financial institutions for restrictions on cash balances.
B. Understand the accounting principles and practices of the entity’s industry.
C. Inquire of key personnel concerning related parties and subsequent events.
D. Perform ratio analyses of the financial data of comparable prior periods.

12. When compiling an entity’s financial statements, an accountant would be least likely to
A. Perform analytical procedures designed to identify relationships that appear to be unusual.
B. Read the compiled financial statements and consider whether they appear to include
adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for the financial
statements.
D. Plan the work so that an effective engagement will be performed.

13. Which of the following should not be included in an accountant’s report based upon the
compilation of an entity’s financial statements?
A. A statement that a compilation of the company’s financial statements was made in
accordance with the Philippine Standard on Related Services 4410 (Revised), Compilation
Engagements.
B. A statement that the financial statements and the accuracy and completeness of the
information used to compile them are management’s responsibility.
C. A statement that a compilation engagement is an assurance engagement.
D. A statement that the accountant does not express an audit opinion or a review conclusion.

14. Negative assurance may be expressed when an accountant is requested to report agreed-
upon procedures to specified
Element of a Accounts of a
Financial Statement Financial Statement
A. Yes Yes
B. Yes No
C. No No
D. No Yes

15. An accountant may accept an engagement to apply agreed-upon procedures that are not
sufficient to express an opinion on one or more specified accounts or items of a financial
statement provided that
A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s continuing auditor.

16. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of
its knowledge and belief, an entity’s expected financial position, results of operations, and
cash flows. Such prospective financial statements are known as
A. Pro forma financial statements. C. Partial presentations.
B. Financial projections. D. Financial forecasts.

17. A financial forecast consists of prospective financial statements that present an entity’s
expected financial position, results of operations, and cash flows. A forecast
A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
C. Unlike a projection, may contain a range.

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D. Is based on assumptions reflecting conditions expected to exist and courses of action

expected to be taken.

18. When an accountant examines prospective financial statements, the accountant’s report
should include a separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are properly
prepared on the basis of the assumptions and are presented in accordance with generally
accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year after
the report’s date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the
prospective financial statements.

19. The following statements relate to the examination of prospective financial information.
Which is false?
A. The auditor should express an opinion as to whether the results shown in the prospective
financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the auditor
should consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine
prospective financial information when the assumptions are clearly unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction has been obtained,
the auditor is not precluded from expressing positive assurance regarding the
assumptions.

20. Which of the following is a prospective financial information for general use upon which an
accountant may appropriately report?
A. Financial projection C. Pro forma financial statement
B. Partial presentation D. Financial forecast

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