Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City
FUNDAMENTALS OF ASSURANCE SERVICES
Accounting 151
NATURE OF ASSURANCE ENGAGEMENTS
Assurance engagements are those engagements in
which a practitioner expresses a conclusion designed to
enhance the degree of confidence that intended users
can have about the evaluation or measurement of a
subject matter that is the responsibility of a party, other
than the intended users or the practitioner, against
criteria.
A. Assurance services are independent
professional services intended to enhance or
improve the credibility or quality of information
to meet the needs of an intended user, i.e.,
decision making.
B. Assurance refers to the practitioner’s
satisfaction as to the reliability of an assertion
being made by one party for use by another
party. It is the degree of certainty the practitioner
has attained and wishes to convey to intended
users.
C. Subject matter information is used to mean
the outcome of the evaluation or measurement
of 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.
Objective of Assurance Engagements
The objective of an assurance engagement is 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 a conclusion
that provides the intended user with a level of assurance
about that subject matter. An assurance engagement is
conducted:
A. To provide a high level of assurance that the
subject matter conforms in all material respects
with identified suitable criteria; or
B. To provide a moderate level of assurance that the
subject matter is plausible in the circumstances.
ELEMENTS OF AN ASSURANCE ENGAGEMENT
An assurance engagement should exhibit the following
elements:
A. A three party relationship involving a
practitioner, a responsible party and
intended users.
Assurance engagements always involve three
separate parties:
 Practitioner – the person who provides
the assurance to intended users about a
subject matter that is the responsibility
of another party. This is the CPA in public
practice that performs the assurance
engagement.
The term practitioner is broader than
the term auditor as used in professional
standards which only refer to practitioner
performing audit or review engagements
with respect to historical financial
information.
 Responsible party – the person or
persons who are responsible for the
subject matter in a direct reporting
engagement or the subject matter
information and may be the subject
matter in an assertion-based
engagement.
 Intended users – are the person,
persons or class of persons for whom the
practitioner prepares the assurance
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report. They are the users to whom the
practitioner usually addresses the report.
Important Notes:
 The responsible party and the intended
user will often but not necessarily be
from separate organizations.
 The practitioner may be engaged by the
responsible party or the intended user.
 The responsible party can be one of the
intended users but not the only one.
 The intended user may be established by
agreement between the practitioner and
responsible party or those engaging or
employing the practitioner.
 In some circumstances, the intended
user may be established by law.
B. An appropriate subject matter.
The subject matter refers to the information to be
evaluated or measured against the criteria. The
subject matter and the subject matter
information of an assurance engagement can
take many forms, such as:
 Financial performance or conditions
(for example, historical or prospective
financial position, financial performance
or cash flows) for which the subject
matter information may be the
measurement, presentation and
disclosure represented in the financial
statements.
 Non-financial performance or
conditions (for example, the
performance of an entity) for which the
subject matter information may be key
indicators of effectiveness and efficiency.
 Physical characteristics (for example,
capacity of a facility) for which the
subject matter information may be a
specifications document.
 Systems and processes (for example,
an entity’s internal control or IT system)
for which the subject matter information
may be an assertion about effectiveness.
 Behavior (for example, corporate
governance, human resource practices
and compliance with regulation) for
which the subject matter information
may be a statement of compliance or a
statement of effectiveness.
For a subject matter to be considered
appropriate, it must be identifiable, capable of
consistent evaluation or measurement against
suitable criteria and in a form that can be
subjected to procedures for gathering evidence
to support that evaluation or measurement.
C. Suitable criteria.
Criteria are the benchmarks used to evaluate or
measure the subject matter, including where
relevant, benchmarks for presentation and
disclosure. Without frame of reference provided
by suitable criteria, any conclusion is open to
individual interpretation and misunderstanding.
Criteria can be formal as in the case of Philippine
Financial Reporting Standards or less formal as in
an internally developed code of conduct. Criteria
can also be established or specifically developed.
 Established criteria – those embodied
in laws or regulations or issued by
authorized or recognized bodies of
 experts that follow a transparent due
process.
 Specifically developed – those
designed specifically for the purpose
of the engagement.
Suitable criteria exhibit the following
characteristics:
 Relevance – relevant criteria
contribute to conclusions that assist
decision making by the intended
users.
 Completeness – criteria are
sufficiently complete when relevant
factors that could affect the
conclusions in the context of the
engagement circumstances are not
omitted.
 Reliability – reliable criteria allow
reasonably consistent evaluation or
measurement of the subject matter
when used in similar circumstances
by similarly qualified practitioners.
 Neutrality – neutral criteria
contribute to conclusions that are
free from bias.
 Understandability – authentication of documentation, nor is the
understandable criteria contribute to
conclusions that are clear,
comprehensive and not subject to
significantly different interpretations.
The evaluation or measurement of a subject
matter merely on the basis of the
practitioner’s own expectations, judgments
and individual experience would not
constitute suitable criteria.
Suitable criteria are context sensitive, that
is, relevant to the engagement
circumstances. Even for the same subject
matter there can be different criteria.
Whether established or specifically
developed, criteria need to be available to
the intended users to allow them to
understand how the subject matter has been
evaluated or measured. Criteria are made
available to the intended users in one or
more of the following ways:
 Publicly.
 Through inclusion in a clear manner
in the presentation of the subject
matter information.
 Through inclusion in a clear manner
in the assurance report.
 By general understanding, for
example the criterion for measuring
time in hours and minutes.
Criteria may also be available only to
specific intended users, for example the
terms of a contract, or criteria issued by an
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industry association that are available only
to those in the industry.
D. Sufficient appropriate evidence.
The practitioner plans and performs an
assurance engagement with an attitude of
professional skepticism to obtain sufficient
appropriate evidence about whether the
subject matter information is free from
material misstatement. Evidence refers to
the information obtained by the practitioner
in arriving at the conclusions on which the
conclusion is based.
The practitioner also considers materiality,
assurance engagement risk and the quality
and quantity of available evidence when
planning and performing the engagement.
Professional Skepticism
An attitude of professional skepticism
means the practitioner makes 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. An
assurance engagement rarely involves the
practitioner trained as or expected to be an
expert in such authentication.
Sufficiency and Appropriateness of
Evidence
Sufficiency is the measure of the quantity
of evidence. The quantity of evidence is
affected by the risk of the subject matter
information being materially misstated (the
greater the risk, the more evidence is to be
required) and the quality of such evidence
(the higher the quality, the less may be
required).
Appropriateness is the measure of quality
of evidence, that is, its relevance and
reliability. The reliability of evidence is
influence by its source and by its nature.
The sufficiency and appropriateness of
evidence are interrelated. However, merely
obtaining more evidence may not
compensate for its poor quality.
Generalizations on Reliability of
Evidence
The following generalizations about the
reliability of evidence may be useful, though
exceptions to these generalizations may
exist:
 Evidence is more reliable when it is
obtained from independent sources
outside the entity.
  Evidence that is generated internally
is more reliable when the related
control is effective.
 Evidence obtained directly by the
practitioner is more reliable than
evidence obtained indirectly or by
inference.
 Evidence is more reliable when it
exists in documentary form, whether
paper, electronic or other media.
 Evidence provided by original
documents is more reliable than
evidence provided by photocopies or
facsimiles.
The practitioner ordinarily obtains more
assurance from consistent evidence
obtained from different sources or of a
different nature than from items of evidence
considered individually.
Cost-Benefit Considerations
The practitioner considers the relationship
between cost of obtaining evidence and the
usefulness of the information obtained.
However, 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.
Assurance Engagement Risk and
Materiality
The risk that the practitioner expresses an
inappropriate conclusion when the subject
matter information is materially misstated is
referred to as the assurance engagement
risk. The higher the assurance engagement
risk is, the more extensive the evidence
gathering procedures are.
Assurance engagement risk has the
following components:
 Risk of material misstatement –
the risk that the subject matter is
materially misstated. It consists of:
a. Inherent risk – the
susceptibility of the subject
matter information to a
material misstatement,
assuming that there are no
related controls.
b. 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 controls.
 Detection risk – the risk that the
practitioner will not detect a material
misstatement that exists.
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Materiality is relevant when the
practitioner determines the nature, timing
and extent of evidence gathering procedures
and when assessing whether the subject
matter information is free of material
misstatement. When considering materiality,
the practitioner understands and assesses
what factors might influence the decisions of
the intended users. Assessing materiality is
a matter for practitioner’s judgment.
E. A written assurance report in the form
appropriate to a reasonable assurance
or limited assurance engagement.
The practitioner provides a written report
containing a conclusion that conveys the
assurance obtained about the subject matter
information. In addition, the practitioner
considers other reporting responsibilities,
including communicating with those charged
with governance when it is appropriate to do
so.
In reasonable assurance engagements, the
practitioner expresses the conclusion in the
positive form, for example:
“In our opinion internal control is effective,
in all material respects, based on XYZ
criteria.”
In limited assurance engagement, the
practitioner expresses the conclusion in the
negative form, for example:
“Based on our work described in this report,
nothing has come to our attention that
causes us to believe that internal control is
not effective, in all material respects, based
on XYZ criteria.”
Not all conclusions are unqualified
conclusions or those with no categorization
in the expression of the practitioner’s
conclusions.
Cause Conclusion
If material but not
Auditor is prevented
pervasive, qualified
from obtaining sufficient
conclusion. If both
appropriate evidence
material and pervasive,
(scope limitation)
disclaimer of opinion.
If material but not
Assertion or subject pervasive, qualified
matter information is conclusion. If both
materially misstated material and pervasive,
adverse opinion.
Criteria are unsuitable or If material but not
subject matter is pervasive, qualified
inappropriate thus conclusion. If both
misleading users of material and pervasive,
information adverse opinion.
Important Notes:
 The reason for differing levels of
assurance lies in the nature, extent
 and timing of procedures to gather
evidence as a basis for the
practitioner’s conclusion.
 Whenever practical, the assurance
report is addressed to all the
intended users, but in some cases
there may be other intended users.
In cases where the practitioner may
not be able to identify all intended
users, the intended users may be
limited to major stakeholders with
significant and common interests.
 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.
TYPES OF ASSURANCE ENGAGEMENTS – LEVEL
OF ASSURANCE
According to the Framework for Assurance
Engagements, there are two types of assurance
engagements that a practitioner is permitted to
perform as follows:
A. Reasonable assurance engagements –
also known as high level engagements, aim
to reduce the 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.
These engagements provide a high, but not
absolute, level of assurance. This is also
known as reasonable assurance which is
achieved if the assurance engagement risk
is reduced to an acceptably low level, that is,
close to zero.
Example: Independent financial statement
audits.
B. Limited assurance engagements – aim to
reduce assurance engagement risk to an
acceptable level in the circumstances of the
as the basis for a negative form of
expression of the practitioner’s conclusion.
Thus, the assurance engagement risk in a
limited assurance engagement is greater
than for a reasonable assurance
engagement.
These engagements provide a moderate
level of assurance. This is also known as
limited assurance which is achieved if the
assurance engagement risk is reduced to an
acceptable level.
Example: Review of financial statements.
ABSOLUTE ASSURANCE IN ASSURANCE
ENGAGEMENTS
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Reducing assurance engagement risk to zero is very
rarely attainable or cost beneficial as a result of
factors such as the following:
A. The use of judgment in gathering and
evaluating evidence and forming conclusions
based on that evidence.
B. The use of selective testing.
C. The inherent limitations of internal control.
D. The fact that much of the evidence available
to the practitioner is persuasive rather than
conclusive.
E. In some cases, the characteristics of the
subject matter when evaluated or measured
against the identified criteria.
TYPES OF ASSURANCE ENGAGEMENTS –
STRUCTURE
A. Assertion-based engagements – those
that involve the evaluation or measurement
of the subject matter by the responsible
party and the subject matter information in
the form of an assertion by the responsible
party is made available to the intended
users. The practitioner’s conclusion can be
worded in terms of the responsible party’s
assertion. These are also known as
attestation engagements.
B. Direct reporting engagements – those
where 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.
RANGE OF ASSURANCE ENGAGEMENTS
There is a broad range of assurance engagements,
which includes any combination of the following:
A. Engagements to report on a broad range of
subject matters covering financial and non-
financial information.
B. Engagements intended to provide high or
moderate level of assurance.
C. Attest and direct reporting engagements.
D. Engagements to report internally and
externally.
E. Engagements in private and public sector.
NATURE OF ATTESTATION SERVICES
Attestation services are a type of assurance
service in which a practitioner is engaged to issue a
written communication that expresses a conclusion
about the reliability of a written assertion that is the
responsibility of another party. Attestation
generally refers to an expert’s written
communication of a conclusion about the reliability
of someone else’s assertions.
The following characteristics are what separate
attestation services from other assurance services a
CPA may provide:
A. There must be a written assertion being
made by one party, the reliability of which is
of interest to another party.
B. There must be agreed upon and objective
criteria that can be utilized to assess the
accuracy of assertion.
C. The assertion must be amenable to
verification by an independent party.
D. The accountant should prepare a written
conclusion about the reliability of the
assertion.
Auditing, Attestation and Assurance Services
Though the services encompass the same decision
process, the three services differ in the scope of
their service. Assurance services are broader in
scope and in concept than either auditing or
attestation. Attestation and audit services are
subsets of assurance services.
Attestation services, on the other hand, are broader
than audit services. Audit, particularly a financial
statement audit, involves the examination of a
historical financial statement in accordance with
GAAP. Attestation goes beyond historical financial
statements. They cover even non-GAAP financial
statements.
Valued Added to
Service Provided
Information
Reliability, credibility,
Assurance engagements relevance and timeliness
Attestation engagements Reliability and credibility
Audit engagements Reliability and credibility
EXAMPLES OF ASSURANCE ENGAGEMENTS
A. Audit – the most predominant type of
assurance engagement that the professional
accountant may be involved in is the
independent audit, primarily that of financial
statements. In conducting an audit of
financial statements, the auditor’s overall
objectives are:
 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 accordance with an
applicable financial reporting
framework.
 To report on the financial statements
and communicate as required by the
PSAs in accordance with the auditor’s
findings.
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Audits require greater scrutiny of the
financial statements.
B. Reviews – involve limited investigation of
much narrower scope than an audit and
undertaken for the purpose of providing
limited assurance that the statements are
presented in accordance with identified
financial reporting standards. Reviews may
also involve other type of information aside
from historical financial information.
The objective of a review of financial
statements is to enable a practitioner 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 practitioner’s attention that
causes the practitioner to believe that the
financial statements are not prepared in
accordance with an identified financial
reporting framework (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 does not ordinarily involve
an assessment of accounting and
internal control systems, tests of
records and of responses to inquiries
by obtaining corroborative evidence
through inspection, observation and
confirmation, which are procedures
ordinarily performed during an audit.
 The level of assurance provided in a
review report is less than that given
in an audit.
C. Other assurance services – designed to
provide assurance on other types of
information other than historical financial
information. These services include
examination of prospective financial
statements, reporting on compliance with
laws, rules and regulations and the
following:
 Business performance
measurement – an engagement
that provides assurance whether
financial and non-financial
information being reported from the
entity’s performance measurement
system is reliable and whether the
performance measures being used are
accurately leading the entity toward
meeting its strategic goals and
objectives.
 Healthcare performance
measurement – an evaluation of the
quality of health care, medical
services and outcome. It looks into
 the health care delivery system, the
medical services provided and quality
attributes associated with those
services.
 Elder care plus – an evaluation
designed to provide assurance to the
elderly and their relatives about the
quality of care being provided by
various care givers by comparing
their specific objectives in providing
care with actual services rendered.
 Risk assessment services
identifies a set of risks that affect the
organization by studying the link
between risks and organization’s
vision, mission, objectives and
strategies and development of new
and relevant measures to address
these risks.
 CPA Web Trust service – a seal of
assurance service developed by
AICPA and CICA that enables
consumers and businesses to
purchase goods and services over the
Internet with the confidence that the
website business meet high
standards of business practice as set
forth in the CPA web trust principles
and criteria.
 Information systems reliability –
involves evaluating whether financial
and non-financial information systems
provide reliable information for
operating and financial decisions by
an entity’s management.
NON-ASSURANCE ENGAGEMENTS
Not all engagements performed by practitioners are
assurance engagements. Other frequently
performed engagements do not meet the definition
of an assurance engagement are called non-
assurance services, which are those that do not
result in the expression of a conclusion that provides
a level of assurance. The practitioner does not
convey to the intended users any assurance as to
the reliability of an assertion. Non-assurance
engagements could be:
A. Related services – are non-assurance
engagements that are ordinarily performed in
connection with an entity’s financial
statements just like an audit. Related services
include agreed-upon procedures
engagements, compilation of financial and
other information and other engagements as
specified by the AASC.
B. Other non-assurance engagements – are
non-assurance engagements that are not
ordinarily performed in connection with an
entity’s financial statements such as
management advisory services and some tax
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services like income tax return preparation
where no assurance is provided.
Agreed-upon Procedures Engagements
A. The objective is for an auditor 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.
B. The recipients of the report must form their
own conclusion from the report of the
– auditor.
C. The report must be restricted to those
parties that have agreed to the procedures
to be performed since others, unaware of
the reasons for the procedures, may
misinterpret results.
D. The report needs to describe the purpose
and the agreed-upon procedures of the
engagement in sufficient detail to enable the
users of the report to understand the nature
and extent of the work performed.
Compilation of Financial or Other Information
Engagements
A. The objective is for the accountant to use
accounting expertise as opposed to auditing
expertise to collect, classify and summarize
financial information.
B. Compilations ordinarily entail reducing
detailed data to manageable and
understandable form without a requirement
to test the assertions underlying that
information. They ordinarily include the
preparation of financial statements.
C. The procedures performed are not designed
and do not enable the accountant to express
any assurance on the financial information.
D. Users of compiled financial information
derive some benefits as a result of the
accountant’s involvement because the
service has been performed with due
professional skill and care.
E. When performing a compilation
engagement, the accountant is not ordinarily
required to:
 Make any inquiries of management
to assess the reliability and
completeness of the information
provided.
 Assess internal controls.
 Verify any matters and explanations.
F. The accountant’s compilation report should
identify the financial statements compiled
and should clearly indicate that no
assurance is provided on the financial
statements.
G. In addition, the financial information
compiled by the accountant should contain a
reference such as, “Unaudited”, “Compiled
without Audit or Review” or “Refer to
 Compilation Report” on each page of the A. Implying compliance with the Framework for
financial information or on the front of the Assurance Engagements and the assurance
complete set of financial statements. engagement standards (PSAs, PSREs and
Tax Services PSRSs).
B. Inappropriately using the words,
Individuals and business leaders turn to CPAs for
“assurance”, “audit”, or “review”.
advice on income tax and business tax strategies. A
C. Including a statement that could reasonably
CPA can develop tax strategies to help taxpayers
be mistaken for a conclusion designed to
legally reduce their tax liability. Moreover, a CPA is
enhance the degree of confidence of
considered qualified to prepare corporate individual
intended users about the outcome of the
tax returns for both audit and non-audit clients.
evaluation or measurement of a subject
Ordinarily, CPAs render two types of tax services as
matter against criteria.
follows:
A. Tax compliance includes the preparation of ACCEPTING AN ASSURANCE ENGAGEMENT
tax returns for individuals, corporations, A practitioner accepts an assurance engagement
estates, trusts and others. only where the practitioner’s preliminary knowledge
B. Tax planning determines the tax of the engagement circumstances indicates that
consequences of planned or potential relevant ethical requirements such as independence
transactions and suggests desirable course will be satisfied and that the engagement exhibits all
of action to minimize the tax liability while of the following characteristics:
achieving the client’s objectives. A. The subject matter is appropriate.
Management Advisory Services B. The criteria to be used are suitable and are
available to the intended users.
Management advisory services are professional
C. The practitioner has access to sufficient
services that employ the practitioner’s technical
appropriate evidence to support the
skills, education, observations, experiences and
practitioner’s conclusion.
knowledge of the analytical approach and
D. The practitioner’s conclusion, in the form
procedures used in a consulting engagement.
appropriate to either a reasonable assurance
Advisory services may include the design and
engagement or a limited assurance
installation of accounting systems, computer risk
engagement, is to be contained in a written
management and corporate finance. A pervasive
report.
characteristic of a CPA’s role in a consulting services
E. The practitioner is satisfied that there is a
engagement is that of being an objective advisor
rational purpose for the engagement. If
on the use of information.
there is a significant limitation on the scope
Assurance Services Consulting Services of the practitioner’s work, it may be unlikely
that the engagement has a rational purpose.
To recommend uses for
To improve quality or context information designed to Specific engagement standards may include
of information by enhancing improve client’s condition additional requirements that need to be satisfied
its credibility directly prior to accepting an engagement.
Intended to improve decision Designed to improve client’s Association with a Subject Matter
maker’s condition only condition directly through A practitioner is associated with a subject matter
indirectly through the use of findings, conclusions and when:
high-quality information recommendation
A. The practitioner reports on information
Three-party contracts Two-party contracts about that subject matter.
B. Consents to the use of the practitioner’s
Focus is on decision makers name in a professional connection with that
and information used for Focus is on outcomes subject matter.
optimum decisions
If the practitioner is not associated in this manner,
Results and third parties can assume no responsibility of the
Results are communicated recommendations are practitioner. If the practitioner learns that a party is
through a written report communicated either inappropriately using the practitioner’s name in
written or orally
association with a subject matter, the practitioner
Competing interests may should:
exist between the responsible No competing interests A. Requires the party to cease doing so.
party and the intended users B. Considers what other steps may be needed,
such as informing any known third party.
REPORTS ON NON-ASSURANCE ENGAGEMENTS C. Seek legal advice if necessary.
So as not to confuse users, a report that is not an
assurance report avoids the following:

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 COMPARISON AMONG THE DIFFERENT TYPES OF SERVICES

ASSURANCE SERVICES RELATED SERVICES

POINT OF
DISTINCTION Agreed-upon
Audit Reviews Compilation
Procedures
To report whether To perform audit To assist the client in
anything has come to procedures agreed on preparing financial
To express an opinion
the auditor’s attention with the client and any statements by using
Objective on the fairness of
that causes to believe appropriate third accounting expertise as
financial statements
that the financial parties identified in the opposed to auditing
statements are not fair report expertise

Evidence Risk assessment

Reading of the financial
procedures, tests of Limited to inquiry and
gathering control and substantive analytical procedures
Procedures as agreed statements for obvious
procedures misstatements
procedures
Level of
Reasonable or high but Moderate or limited
assurance not absolute assurance assurance
No assurance No assurance
provided
An audit report An review report
A compilation report
containing a positive containing a negative A factual findings of
Report provided form of assurance on form of assurance on procedures
which identify
information compiled
assertion assertion
Skills used Audit skills Audit skills Audit skills Accounting skills
Recipients of the report Users derive benefit
Audit opinion enhances Substantially less in must form their own because the service
Other
the credibility of scope of procedures conclusions and the has been performed
Characteristics financial information than audit report is restricted to with due professional
contracting parties skill and care