Professional Documents
Culture Documents
Assertions - Representations by management, explicit or otherwise, that are embodied in the financial statements.
Types:
1. Internal control assertions-that internal control procedures are effective as to both their design and operation
2. Financial statement assertions
a. Existence/Occurrence/Validity: Only valid or authorized transactions are processed.
b. Completeness: All transactions are processed that should be.
c. Rights and obligations: Assets are the rights of the organization and the liabilities are its obligations as of a given date.
d. Valuation: Transactions are valued accurately using the proper methodology, such as a specified means of computation or
formula.
e. Presentation and disclosure: Accounts and disclosures are properly described in the financial statements of the
organization.
Assurance services:
- Independent professional service that improves the quality of information for decision makers.
- The term “subject matter information”, will be used to mean the outcome of the evaluation or measurement of a subject matter.
- It is the subject matter information about which the practitioner gathers sufficient appropriate evidence to provide a reasonable
basis for expressing a conclusion in an assurance report.
Assertion-based engagements
-when the responsible party is the one who evaluates or measures the subject matter and the subject matter information in the form
of an assertion, is made available to intended users.
Ex. Independent FS audit, AE about a report that the responsible party had evaluated like a report on sustainability practices
b. Responsible party
a. In a direct reporting engagement, is the one responsible for the subject matter
Ex. An entity engages a practitioner to perform an AE regarding a report the entity prepared about its own sustainability practices
b. In an assertion-based engagement, is the one responsible for the subject matter information (outcome), and may be responsible
for the subject matter.
Ex. A government agency engages a practitioner to perform an AE regarding a report about a company’s sustainability practices that
the govt agency prepared and will distribute to intended users. The responsible party may or may not be the party who engages the
practitioner.
c. Intended users
- person, or class of persons for whom the practitioner prepares the assurance report. The responsible party can be one of the
intended users, but not just the only one.
- When engagements are designed for specific intended users or a specific purpose, the practitioner considers including a restriction
in the assurance report that limits its use to those users or that purpose
2. Appropriate Subject Matter – anything within the company that can be consistenly verified or measured against suitable criteria.
An appropriate subject matter is:
1. Identifiable and capable of consistent evaluation or measurement against identified criteria
2. Can be subjected to procedures for gathering sufficient appropriate evidence to support a reasonable (high,not absolute) assurance
or limited (moderate) assurance conclusion.
Ex. Financial performance, non-financial performance, physical characteristics, systems and processes, behaviour,
Subject matter: Financial performance or conditions (ex. historical or prospective FS)
Subject matter information (outcome): recognition, measurement, presentation and disclosure in the FS
Subject matter: Systems and Processes (ex. Entity’s internal control system)
Subject matter information (outcome): Assertion about internal control effectiveness
Subject matter: Behavior (ex. Corporate governance, compliance with regulation, HR practices)
Subject matter information (outcome): Statement of compliance or effectiveness
3. Suitable Criteria - Criteria are the benchmarks used to evaluate or measure the subject matter.
Suitable criteria has the ff.characteristics
1. Relevance – contribute to conclusions that assist decision-making by intended users
2. Completeness – criteria are sufficiently complete when relevant factors that could affect the conclusions are not omitted
3. Reliability – Allow consistent evaluation or measurement of the subject matter, including, presentation and disclosures if relevant.
4. Neutrality – neutral criteria contributes to conclusions that are free from bias
5. Understandability – understandable criteria contribute to conclusions that are clear, comprehensive and not subject to significantly
different interpretations
5. ASSURANCE REPORT
- The practitioner provides a written report containing a conclusion that conveys the assurance obtained about the subject
matter information
A. Assurance Services
1. Independent Financial Statement Audit - an assurance engagement (AE) to provide a high level of assurance that the financial
statements are free of material misstatement. Absolute assurance is not attainable because of factors such as need for judgement,
use of testing, inherent limitations of any accounting and internal control systems and because most evidence available to the auditor
is persuasive rather than conclusive in nature.
2. Reviews - an AE wherein the evidence supports a moderate level of assurance that the information subject to review is free of
material misstatement.
- Review involves limited investigation of much narrower scope than an audit and undertaken for the purpose of providing limited
(negative) assurance that the statements are presented in accordance with identified Financial Reporting Standards.
- The FS may be historical (1 whole accounting period or interim) or prospective (forecasted/projected)
- The objective is to enable the auditor to state whether on the basis of procedures which do not provide all the evidence required in
an audit, nothing has come to the auditor’s attention that causes the auditor to believe that the FS are not prepared, in all material
aspects, in accordance with an identified financial reporting framework.
- This is referred to as negative assurance.
- 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.
-A review involves the ff:
B. Non-Assurance Services
1. Agreed Upon Procedures - The 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 .
- The recipients of the report must form their own conclusions from the report by the auditor. 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.
- The party engaging the professional accountant or the intended user, determines the procedures to be performed and the
professional accountant provides a report of factual findings as a result of undertaking those procedures
- The intended user may derive some assurance from the report of factual findings, but the engagement is not meant to provide any
assurance. The professional accountant does not express a conclusion that provides a level of assurance. The intended user assesses
the procedures and findings and draws his/her own conclusions.
2. Compilation - The accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and
summarize financial information
- entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying
that information.
- procedures employed are not designed and do not enable the accountant to express any assurance on the financial information
- users of the compiled financial information derive some benefit as a result of the accountant's involvement because the service has
been performed with due professional skill and care.
- Presenting in the form of FS that is the representation of management without undertaking to express any assurance on the
statements
- The objective is for the CPA to use accounting expertise to collect, classify and summarize financial information.
- Compilation improves the quality of information by displaying in Financial Accounting and Reporting standards format and the
practitioner’s identification of obvious errors.
NOTE: It falls within the definition of assurance service despite the fact that no assurance is explicit in the practitioner’s report
because it somehow enhances the information which was compiled by the professional accountant
3. Tax - CPA is considered qualified to prepare corporate and individual tax return for both audit and non-audit clients. For smaller
accounting firms, tax services provide a large portion of revenue.
-CPAs render 2 kinds of tax services
1. Tax compliance – tax returns for individuals, corporations, estates and trusts, etc
2. Tax planning – determines tax consequences of planned or potential transactions and suggests course of action to minimize tax
liability
4. Management consultancy/advisory services - -Employs the practitioner’s technical skills, education, observations, experiences and
knowledge of the analytical approach and procedures used.
Ex. Design and installation of accounting system, computer risk management, corporate finance, tax services, e-business, etc
5. Accounting and data processing - -provide accounting services (manual or automated bookkeeping, journalizing and posting
adjusting entries or preparing/compiling FS) to small clients with limited accounting staff.
-The accounting firms acts as substitute or supplement the lack of accounting personnel of the client.
- A form of attestation, where attestation refers to an expert’s communication about the reliability of someone else’s
assertion. Attestation may also refer to a written communication that expresses a conclusion about the reliability of a
written assertion that is the responsibility of another party
- A systematic process by which a competent, independent person objectively obtains and evaluates evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between those assertions and
established criteria and communicating the results to interested users (American Accounting Association)
1. Systematic process – has structured, logical and organized series of steps and procedures. Has series of sequential steps that
include information testing system and testing of transactions and balances
2. Competent, independent person – the auditor must be qualified to understand the criteria used and the competence to know how
and what evidence to accumulate to reach a proper conclusion
3. Objectively obtains and evaluates evidence –examining the bases for assertions and evaluating the results without bias for or
against the individual (or entity) making the assertions
4. Assertions about economic actions and events – these are the representations made by the individual or entity that comprise the
subject matter. Includes information in the FS, internal operating reports, and tax returns.
5. Degree of correspondence –refers to the closeness with which the assertions can be identified with established criteria. The
expression of correspondence may be quantified, such as the amount of a shortage, or it may be qualitative, such as the fairness of
the FS
6. Established criteria – Standards against which the assertions are judged. May come from specific rules prescribed by a legislative
body, budgets and other measures of performance set by management or financial reporting standards.
7. Communicating the results –Often referred to as attestation. The final stage of audit process is the audit report, where the results
of audit are communicated. By attesting the degree of correspondence with established criteria, the auditor enhances (or weakens)
the credibility of the representations made by another party.
8. Interested users – persons who use or rely on the auditor’s findings. Includes stockholders, management, creditors, government
agencies and the public.
- is a structured process that:
a) Involves the application of analytical skills, professional judgement and professional skepticism
b) Is usually performed by a team of professionals directed with managerial skills
c) Uses appropriate forms of technology and adheres to a methodology
d) Complies with all relevant technical standards
e) Complies with professional ethics or required standards
a.2 Objectives:
PSA 120 (Framework of Philippine standards on auditing) – The objective of an audit of financial statements is to enable the auditor
to express an opinion on whether the financial statements are prepared in all material respects, in accordance with an identified
financial reporting framework. The phrase used to express the auditor’s opinion is “present fairly in all material respects”. A similar
objective applies to audit of financial or other information prepared in accordance with appropriate criteria.
PSA 200 (Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Philippine Standards on
Auditing)
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the PSAs, in accordance with the auditor’s findings.
SCOPE OF INDEPENDENT AUDIT– Refers to audit procedures necessary to achieve the objectives of the audit. Includes critical and
systematic examination of the statements and related documents, records, procedures and controls. Audit evidence is gathered to
enable the auditor to substantiate the representations in the FS. Internal controls will be evaluated for effectiveness since they affect
the reliability of financial records.
Through inquiry, observation, confirmation and inspection, the auditor can test the existence and validity of assets, liabilities and
overall reasonableness of other account balances in the FS.
Advantages Disadvantages
User verifies information 1.User obtains information desired. 1.High cost of obtaining information.
2.User can be more confident of the 2.Inconvenience to the person providing
qualifications and activities of the the information because large number of
person getting the information. users would be on premises.
Users share information 1.No audit costs incurred. 1.Users may not be able to collect on
risk with management losses.
Audited financial 1.Multiple users obtain the information. 1.May not meet needs of certain users.
statements are prepared 2.Information risk can usually be 2.Cost may be higher than the benefits in
reduced sufficiently to satisfy users at some situations, such as for a small
reasonable cost. company.
3.Minimal inconvenience to
management by having only one
auditor.
B. Internal audit – independent, objective assurance and consulting activity designed to add value and improve an
organization’s operations. Brings a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control and government processes
- A business with internal audit department, has more value than those without
Objective – to assist all members of management in the effective discharge of their responsibilities by furnishing them with
analyses, appraisals, recommendations and pertinent comments concerning activities reviewed
Attainment of objective includes the ff:
- Review and appraisal of accounting, financial and other operational controls and promoting effective internal control at
reasonable cost.
- Ascertain the extent of compliance with established policies, plans and procedures
- Ascertain the extent to which company assets are accounted for and safeguarded from losses of all kinds (custody,
maintenance, insurance)
- Ascertain the reliability of management data developed within the organization (information systems)
- Appraise the quality of performance in carrying out assigned responsibilities
- Recommend operating improvements
C. Government audit – determine whether government funds are being handled properly and in compliance with existing laws
and whether the programs are being conducted efficiently and economically
- Audit of government receipts and disbursements
- Led to development of internal audit staff (COA) which report to highest official within their governmental bodies
Scope of government audit:
1. Financial and Compliance audit – determines whether financial operations are properly conducted, whether financial
reports are presented fairly, and whether the entity has complied with applicable laws and regulations.
2. Economy and Efficiency Audit – Determines whether the agency is managing and utilizing its resources (personnel, property,
space) economically and efficiently, determines the causes of inefficiencies or uneconomical practices and whether the
agency has complied with laws and regulations regarding economy and efficiency
3. Program Results – determines if desired results and benefits are achieved, if the objectives established are being met and
if the agency considered alternatives which yield lower cost.
2. Compliance Audit - determine compliance with criteria, standards, or rules set by an authoritative body
3. Management Audit- examination and evaluation of activities of management
4. Performance Audit – analysis of organization’s structure, internal systems, work flow and managerial performance
5. Comprehensive Audit – components of compliance, performance and financial statement audits
6. Operational Audit – effectiveness or efficiency of an organization’s operating activities
7. Internal Audit – independent, objective assurance and consulting activity designed to add value to and improve operations
8. Environmental Audit – covers environmental matters which may have an impact on the financial statements
9. Forensic Audit – examination of evidence regarding an assertion to determine correspondence to established criteria carried out
in a manner suitable to the court. It is a specialist area of auditing that focuses on unearthing the truth, providing evidence in
legal/financial disputes and/or irregularities (fraud).
Users of Audit Report Different groups for Authority setting down procedures, Management of organization
different purposes – many internal or external
outside entities.
Nature Highly standardized Not standardized, but very specific and Highly nonstandard; often
usually objective very subjective
Performed by:
CPAs Almost universally Occasionally Frequently
COA Auditors Occasionally Frequently Frequently
BIR Auditors Never Universally Never
Internal Auditors Frequently Frequently Frequently