Professional Documents
Culture Documents
What is Auditing?
It is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users.
An audit involves obtaining and evaluating evidence regarding assertions about economic actions and events
Assertions are representations made by an auditee about economic actions and events. An auditor determines whether these assertions are valid.
ascertain the degree of correspondence between these assertions and established criteria
Established criteria are needed to judge the validity of the assertions. These criteria are important because they establish and inform the users of the basis against which the assertions have been evaluated or measured.
Principle (Shareholders)
Information asymmetry and conflict of interest lead to information risk for the principle Director is accountable to Principle; provides financial reports.
Directors
Auditor
Directors hires audit to report on the fairness of manager financial statements. Risk information asymmetry of principle reduce.
Assurance Engagements
Performed to enhance the credibility of information
Assurance Services
Audit
- performed to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in accordance with identified financial reporting framework (e.g. Philippine Financial Reporting Standards)
Assurance Services
Review
- involves investigations of limited scope than an
audit and are undertaken for the purpose of expressing LIMITED ASSURANCE that the statements are presented in accordance with GAAP.
Trivia Question
The review of a companys financial statements by a CPA firm: a. Is substantially less in scope of procedures than an audit b. Requires detailed analysis of the major accounts c. Is of similar scope as an audit and adds similar credibility to the statements d. Culminates in issuance of a report expressing the CPAs opinion as to the fairness of the statements
Non-Assurance Engagements
Engagements that do not provide any assurance
Non-assurance Services
Related services
- include agreed-upon procedure engagements
compilation
of
financial
or
other
Related services
Agreed-upon procedures (AUP)
- the CPA is engaged to carry out those
procedures to which he and the client entity and any appropriate third parties have agreed and to report on factual findings.
Compilation
- the CPA is engaged to collect, classify and summarize information.
Agreed-upon Procedures
Agreed-upon Procedures
Compilation
Trivia Question
Which of the following engagements is covered by the Framework for Assurance Engagements? a. Consulting engagements b. Preparation of tax returns c. Independent financial statements audit d. Agreed-upon procedures engagement
defines and describes the elements and objectives of an assurance engagements - although the framework serves as a basis for the standards, it DOES NOT itself establish standards or provide procedural requirements for the performance of assurance engagements.
ASSURANCE
Parties to the contract Purpose Three To lend credibility to the subject matter provided by management in the eyes of the intended users.
CONSULTING
two To be used by the client in improving the matter subjected to consultancy.
Trivia Question:
Who has the primary responsibility for the fairness of the representations made in the financial statements? a. clients management b. Audit committee c. Independent auditor d. Board of accountancy
Trivia Question
Assurance engagements should exhibit the following elements except: a. Subject matter b. Suitable criteria c. An engagement process d. Appropriate professional fees
Assertion-based engagements
Engagements where the evaluation or measurement of the subject matter is performed by the responsible party and the subject matter information is in the form of an assertion by the responsible party that is made available to the intended users. ASSERTION responsible partys conclusion about the subject matter based on identified suitable criteria Example: In our opinion, the responsible partys assertion that the internal control is effective, in all material respects, based on XYZ criteria, is fairly stated.. Or : In our opinion, internal control is effective, in all material respects, based on XYZ criteria.
Trivia Question
The level of assurance provided by a professional accountant on an audit report is: a. low b. reasonable c. moderate d. absolute assurance
engagement risk to an acceptably low level to be able to express a positive form of conclusion. - The practitioner uses extensive evidence to support his conclusion. - high but not absolute assurance
Remember these..
Engagement Audit Level of Assurance High, but not absolute assurance Limited Form of Conclusion Positive
Review
Negative
No assurance
Findings
No assurance
Important Considerations
Ethical considerations
a practitioner should comply with the requirements of the Code of Ethics for Professional Accountants(to be thoroughly discussed in the next chapters to follow) Engagement Acceptance
-
- a practitioner should accept an engagement only if the subject matter is the responsibility of another party. - acknowledgement by the responsible party in written form is secured to form part of the documentation
Important Considerations
Engagement Acceptance (cont.)
- a practitioner should accept an engagement only if the subject matter is identifiable and in a form that can be subjected to evidence gathering procedures and the practitioner is not aware of any reason for believing that a conclusion about the subject matter based on suitable criteria cannot be established Planning - a practitioner should plan and conduct the assurance engagement in an effective manner to meet the objective of the engagement - the practitioner should plan and conduct an assurance service engagement with an attitude of professional skepticism
Important Considerations
Planning - a practitioner should obtain knowledge of the engagement sufficient to identify and understand the events, transactions, and practices that may have a significant effect on the subject matter and engagement - a practitioner should assess whether the criteria are suitable to evaluate the subject matter - a practitioner should consider materiality and engagement risk when planning and conducting an assurance engagement in order to reduce the risk of expressing an inappropriate conclusion that the subject matter conforms in all material respects with suitable criteria
Engagement risk
It is the risk that the practitioner will express an inappropriate conclusion that the subject matter conforms in all material respects with suitable criteria.
(i)Inherent risk: the susceptibility of the subject matter information to a material misstatement, assuming that there are no related controls; and (ii) 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. When control risk is relevant to the subject matter, some control risk will always exist because of the inherent limitations of the design and operation of internal control; and (iii) Detection risk: the risk that the practitioner will not detect a material misstatement that exists.
Other factors:
Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a result of factors: The use of selective testing. The inherent limitations of internal control. The fact that much of the evidence available to the practitioner is persuasive rather than conclusive. The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence. In some cases, the characteristics of the subject matter when evaluated or measured against the identified criteria.
Materiality
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 misstatement 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 or documents or representations by the responsible party.
Important Considerations
Subsequent events - a practitioner should consider the effect of subsequent events up to the date of the practitioners report. Using the work of an expert - the practitioner and the expert, on a combined basis, possess adequate knowledge and proficiency pertaining to the subject matter - things to consider by the practitioner:
a. professional competence of the experts b. reasonableness of assumptions used, methods and data c. reasonableness and significance of the experts findings in relation to the objective of the engagement and the conclusion on the subject matter
Trivia Question
An assurance engagement should involve three separate parties. Which of the following statements concerning these parties is incorrect? a. The responsible party and intended users may be from different entities or the same entity. b. The term practitioner as used in the Framework for Assurance Engagements is broader than the term auditor as used in PSAs and PSREs. c. In an assertion based engagement, the responsible party is responsible for the subject matter information (the assertion) and may be responsible for the subject matter d. An entitys senior management (the responsible party) may engage a practitioner to perform an assurance engagement on a particular aspect of the entitys activities that is the immediate responsibility of a lower level of management (the intended user)
Trivia Question
In an assurance engagement, the person or class of person for whom the professional accountant prepares the report for a specific use or purpose is the a.Intended user b.Responsible party c.Management d.client
Trivia Question
What type of assurance engagement is involved when the practitioner expresses a positive form of conclusion? a.Limited assurance engagement b.Positive assurance engagement c.Reasonable assurance engagement d.Absolute assurance engagement
Trivia Question
In assertion-based assurance engagements, the evaluation or measurement of the subject matter against criteria is performed by the a.Intended users b.Responsible party c.Practitioner d.AASC
Trivia Question
Which of the following standards are to be applied, as appropriate, in the audit of historical financial information? a.PSREs b.PSAEs c.PSRSs d.PSAs
Trivia Question
Which of the following standards are to be applied to compilation engagements, engagements to apply agreed-upon procedures to information and other related services engagements as specified by the AASC? a.PSRSs b.PSAs c.PSAEs d.PSREs
Trivia Question
These statements are issued by the AASC to provide interpretative guidance and practical assistance to auditors in the implementation of PSAs and to promote good practice a.PREPSs b.PAPSs c.PAEPs d.PRSPSs
Trivia Question
What assurance is provided by the auditor in an agreed-upon procedures engagement? a.Reasonable b.Absolute c.Moderate d.No assurance
Trivia Question
Which of the following least likely indicate an objective of an assurance engagement?
a.It is intended to enhance the credibility of information about a subject matter b.It is intended to prevent the issuance of materially misleading information c.It is intended for a professional accountant to express a conclusion that provides the intended users with a level of assurance about the subject matter. d.It is intended to provide a level of assurance to be issued by a professional accountant about the information of being in conformity, in all material respects, with suitable criteria.
Trivia Question
Which of the following statements are correct?
I. The subject matter of an assurance engagement may take any forms. II. Internal control may be the subject matter of an assurance engagement. a. b. c. d. I only II only Both I and II Neither I nor II
Trivia Question
Which of the following statements is false?
a. Evidence is more persuasive when items of evidence from different sources or of different nature are consistent. b. In case of evidence from different sources that are consistent, the practitioner may obtain cumulative degree of confidence that is higher than from items of evidence considered individually c. When evidence obtained from one source is inconsistent with that obtained from another, the practitioner refrains the gathering of further evidence. d. It is generally more difficult to provide assurance on subject matter covering a period of time than on subject matter covering a point in time.
Trivia Question
Which of the following statements is true?
a. The extent of documentation is not within the discretion of the practitioner. b. It is neither necessary nor practical to document every matter the practitioner considers. c. It is necessary but not practical to document every matter the practitioner considers. d. Documentation includes a record of the practitioners reasoning on all matters considered by the practitioner.
Trivia Question
The following should be included in the practitioners report except one:
a. Identification of the parties to whom the report is restricted b. A statement to identify the responsible party and described the practitioners responsibilities c. Report date d. Name of the firm or the practitioner
Trivia Question
Which of the following statements is true?
a. A practitioner should assume that the responsible party is dishonest. b. The practitioner should assume that the responsible party has unquestioned honesty c. Both A and B d. Neither A nor B