Pinnacle Auditing Theory PDF

OVERVIEW OF AUDIT AND ENGAGEMENT STANDARDS ✓ Inherent limitations of internal control. REFERENCES: ✓ Most evidence available to the practitioner is...

OVERVIEW OF AUDIT AND ENGAGEMENT STANDARDS ✓ Inherent limitations of internal control. REFERENCES: ✓ Most evidence available to the practitioner is persuasive rather than conclusive. ▪ PSA 120: Framework of Philippine Standards on Auditing ✓ In some cases, the characteristics of the subject matter. ▪ PAS 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in o Limited assurance engagements – engagements that provide accordance with Philippine Standards on only a “moderate” or “limited” level of assurance. Auditing The objective of a limited assurance engagement is a ▪ PSRE 2400: Engagement to Review Financial reduction in assurance engagement risk to an acceptable Statements level as the basis for a negative form of expression of the practitioner’s conclusion. Thus, the risk in limited ▪ PSAE 3400: The Examination of Prospective assurance engagement is greater than for a reasonable Financial Information assurance engagement. ▪ PSRS 4400: Engagements on Agreed-Upon ✓ For assurance engagements regarding historical Procedures financial information in particular, limited assurance engagements are called review ▪ PSRS 4410 Compilation Engagements engagements. Assurance Services/Engagements: Assertion-based and Direct Reporting Engagements: o Assurance services – independent professional services in o Assertion based engagements – evaluation or measurement of which a practitioner issues a written communication that the subject matter is performed by the responsible party, and expresses a conclusion designed to enhance the degree of the subject matter information is in the form of an assertion by confidence of the intended users other than the responsible the responsible party that is made available to the interested party about the outcome of the evaluation or measurement users. of a subject matter against criteria. Assertion-based engagements are also known as ✓ Independence is required whenever a professional attestation engagements. accountant performs assurance services. Examples of assertion-based engagements: o Assurance engagement – an engagement in which a practitioner expresses a conclusion designed to enhance the ✓ Audit engagements degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or ✓ Review engagements measurement of a subject matter against criteria. o Direct reporting engagements – the practitioner either directly Objective of an Assurance Engagement, In General: performs the evaluation or measurement of the subject matter o Assurance engagements performed by professional accoun- or obtains a representation from the responsible party that has tants are intended to enhance the credibility of information performed the evaluation or measurement that is not available about the outcome of the evaluation or measurement of a to the intended users. subject matter against criteria, thereby improving the likelihood that the information will meet the needs of an Elements of Assurance Engagements: intended user. Assurance engagements enhance the degree o Not all engagements performed by practitioners are assurance of confidence of the intended user because the quality of engagements. An assurance engagement must have the information for decision making is improved. following elements: ✓ Three party relationship (involving a practitioner, a Objective of Assurance Engagements: responsible party and intended users) o According to the Philippine Framework for Assurance ✓ Appropriate subject matter Engagements, an assurance engagement is conducted: ✓ Suitable criteria ✓ Sufficient appropriate evidence ✓ To provide a high level of assurance that the subject matter ✓ Written assurance report in the form appropriate to a conforms in all material respects with identified suitable reasonable assurance engagement or a limited criteria; or assurance engagement ✓ To provide a moderate level of assurance that the subject Three Party Relationship: matter is plausible in the circumstances. o Practitioner – CPA in public practice who performs the assurance engagement. The term practitioner is broader than Types of Assurance Engagements and their Objectives: the term “auditor” as used in professional standards, which o Reasonable assurance engagements – engagements that only refers to practitioner performing audit or review provide high, but not absolute, level of assurance. engagements with respect to historical financial information. Also called high-level engagements. o Responsible party – person/s who is responsible for the The objective of a reasonable assurance engagement is a subject matter or the assertion (subject matter information). reduction in assurance engagement risk to an acceptably For example, an entity’s management is responsible for the low level as the basis for a positive form of expression of preparation and presentation of financial statements or the the practitioner’s conclusion. establishment and implementation of internal control. Absolute assurance is not attainable: o Intended user/s – person, persons or class of persons for In assurance engagements, absolute assurance is whom the practitioner prepares the assurance report; they generally not attainable because of such factors as: are the users to whom the practitioner usually addresses the ✓ Use of judgment. report. ✓ Use of testing. This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 1  Appropriate Subject Matter: o The practitioner shall plan and perform the engagement with o Subject matter refers to the information to be evaluated or an attitude of professional skepticism to obtain sufficient measured against the criteria. Subject matter information appropriate evidence that the assertions are free of material means the outcome of the evaluation or measurement of a misstatements. subject matter. ✓ Professional skepticism – an attitude that includes a o Requirements for subject matter to be considered appropriate: questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and ✓ Identifiable a critical assessment of evidence. ✓ Capable of consistent evaluation and measurement against suitable criteria ✓ Evidence – refers to the information obtained by the ✓ In the form that can be subjected to procedures for practitioner in arriving at the conclusions on which the gathering evidence to support that evaluation or conclusion is based. measurement. ✓ Sufficiency – refers to the measure of the quantity of o Forms of subject matter of an assurance engagement: evidence. ✓ Financial performance or conditions (for example, historical or prospective financial position, financial ✓ Appropriateness – refers to the measure of the quality performance and cash flows) for which the subject of evidence, that is, its relevance and its reliability. matter information may be the recognition, measurement, presentation and disclosure represented Written Assurance Report: in the financial statements. o A written assurance report should be in the form appropriate to a reasonable assurance engagement or a limited assurance ✓ Non-financial performance or conditions (for example, engagement. performance indicators of an entity) for which the subject matter information may be key indicators of Attestation Services: efficiency and effectiveness. o An attestation service is a type of assurance service in which a practitioner is engaged to issue a written communication that ✓ Physical characteristics (for example, capacity of a expresses a conclusion about the reliability of a written facility) for which the subject matter information may be assertion that is the responsibility of another party. a specifications document. Attestation generally refers to an expert's written communication of a conclusion about the reliability of ✓ Systems and processes (for example, entity’s internal someone else's assertions. control or IT system) for which the subject matter information may be an assertion about effectiveness. Relationships among Auditing, Attestation, and Assurance Services: ✓ Behavior (for example, corporate governance, compliance with regulation, human resource practices) o Similarity: These services are often used interchangeably for which the subject matter information may be a because they encompass the same decision-process statement of compliance or a statement of effectiveness. o Main difference/distinction: Scope of services Suitable Criteria: ✓ “Assurance services” is broader in scope and in concept o Criteria refer to the standard or benchmark used to evaluate than either auditing or attestation. It encompasses both or measure the subject matter of an assurance engagement, audit and attestation services. including, where relevant, benchmarks for presentation and disclosure. ✓ “Attestation services” is broader than audit because attest function is beyond historical FS. Attestation o Five characteristics of suitable criteria: services cover even non-GAAP FS. ✓ Relevance – relevant criteria contribute to conclusions ✓ Auditing, particularly FS audit, is a type of assurance and that assist decision-making by the intended users. attestation service that involves examination of historical FS prepared in accordance with GAAP. ✓ Completeness – criteria are sufficiently complete when Non-assurance Engagements: relevant factors that could affect the conclusions in the o Not all engagements are assurance engagements. Non- context of the engagement circumstances are not assurance engagements are those that do not result in the omitted. practitioner’s expression of a conclusion that provides a level of assurance, whether negative assurance or other form of ✓ Reliability – reliable criteria allow reasonably consistent assurance. The practitioner does not convey to the intended evaluation or measurement of the subject matter when users any assurance as to the reliability of an assertion. used in similar circumstances by similarly qualified practitioners. o Examples of non-assurance engagements: ✓ Neutrality – neutral criteria contribute to conclusions ✓ Related services, such as: that are free from bias. Agreed-upon procedures engagements, and Compilations of financial or other information ✓ Understandability – understandable criteria contribute engagements. to conclusions that are clear, comprehensive, and not subject to significantly different interpretations. ✓ Tax services (such as the preparation of tax returns where no conclusion conveying assurance is expressed). o Two types of criteria: ✓ Established criteria – those criteria that are embodied in ✓ Consulting (or advisory) engagements, such as laws or regulations or issued by authorized or recognized management and tax consulting. bodies of experts that follow a transparent due process. Agreed-upon Procedures Engagements: ✓ Specifically developed criteria – those criteria o Objective of agreed-upon procedures engagements: For the specifically designed for the purpose of the engagement. auditor to carry out procedures of an audit nature as agreed by the auditor and the entity and any appropriate third parties Sufficient Appropriate Evidence: and to report on factual findings. This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 2  AASC Engagement Applications Related Practice o No assurance is expressed in the report: The users/recipients Standards Statements of the report assess for themselves the procedures and Philippine Philippine Auditing findings reported by the auditor and form their own FS audit Standards on Practice Statements engagements conclusions from the report by the auditor. Auditing (PSAs) (PAPSs) Philippine o Distribution of report is restricted: The report on agreed upon Philippine Review Standards on procedures engagement is restricted to those parties that have Review Engagement Review agreed to the procedures to be performed since others who engagements Practice Statements Engagements are unaware of the reasons for the procedures may (PREPSs) (PSREs) misinterpret the results. Other assurance Philippine Philippine engagements Compilation of Financial or Other Information Engagements: Assurance Standards on dealing with o Objective of compilation engagements: For the accountants to Engagement Assurance subject matters use accounting expertise, as opposed to auditing expertise, to Practice Statements Engagements other than collect, classify and summarize financial information. (PAEPSs) (PSAEs) historical financial information o No test of assertions. Philippine Philippine Related Standards on Services Practice o No assurance is expressed in the report. Related services Related Services Statements (PSRSs) (PRSPSs) Tax Services: o Tax compliance – includes the preparation of tax returns (for o Other pronouncements: individuals, corporations, estates and trusts, and other entities) ✓ Philippine Standards on Quality Control (PSQCs) – to be and acting as client’s representative to tax authorities or in tax applied for all services that fall under the AASC’s litigations. engagement standards, namely, audit, review, other assurance, and related services. o Tax planning – includes the determination of the tax consequences of planned or potential transactions (legally ✓ Philippine Framework for Assurance Engagements – to minimizing client’s tax liability) followed by making suggestions be applied for assurance engagements. on the most desirable course of action. Philippine Framework for Assurance Engagements: Management Consulting: o Defines and describes the elements and objectives of an o Management advisory (consulting) services – refers to the assurance engagement. function of providing professional advisory (consulting) services, the primary purpose of which is to improve client’s use of its o Identifies engagements to which assurance engagement capabilities and resources to achieve the objectives of the standards (PSAs, PSREs, and PSAEs) apply. organization. o Provides frame of reference for: Levels of Assurance for Audit, Review, Agreed-upon Procedures and Compilation ✓ Practitioners who perform assurance engagements (such as audit and review engagements). o Assurance refers to the practitioner’s satisfaction as to the ✓ Others involved with assurance engagements (such as the reliability of an assertion being made by one party for use by intended users and the responsible party). another party. The level of assurance is the degree of the ✓ The International Auditing and Assurance Standards Board practitioner’s satisfaction or degree of certainty the (IAASB) in its development of assurance engagement practitioner has attained and wishes to convey to intended standards which will be adopted by the AASC for users. Such level or degree of assurance depends on the application in the Philippines. procedures performed and the evidence collected by the practitioner. o Distinguishes assurance engagements and non-assurance engagements (non-assurance engagements are not covered by o Engagements and level of assurance: the Framework). ✓ Audit: The auditor provides a reasonable (high, but not absolute) level of assurance that the information subject o Sets out characteristics that must be exhibited before a to audit is free of material misstatement. This is practitioner can accept an assurance engagement. expressed positively in the audit report as reasonable assurance. In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance engagements are ✓ Reviews: The auditor provides a moderate/limited level governed by: of assurance that the information subject to review is free of material misstatement. This is expressed in the The Code of Ethics for Professional Accountants in form of negative assurance. the Philippines. The Philippine Standards on Quality Control ✓ Agreed-upon procedures: No assurance is expressed. (PSQCs). The auditor simply provides a report of the factual findings. Users of the report assess for themselves the The Framework does not itself establish standards or provide procedures and findings reported by the auditor and procedural requirements for the performance of assurance draw their own conclusions from the auditor's work. engagements. ✓ Compilation: Although the users of the compiled Reports on Non-Assurance Engagements: information derive some benefit from the accountant's involvement, no assurance is expressed in the report. o Should not use the words “assurance”, “audit” or “review”. o Should not imply compliance with assurance engagement Pronouncements on Assurance Engagements: standards (PSAs, PSREs or PSAEs). o The following are the forms of pronouncements of the Auditing o Should not include a statement that may be misinterpreted as and Assurance Standards Council (AASC): assurance engagements. - - END - - This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse. Page | 3