CHAPTER 12: Assurance Engagements and Related Services
INTRODUCTION limited assurance
expressed in the form of negative
professional accountant associated with
assurance in the review report
FSs
EXAMPLE:
must perform certain procedures
"Nothing has come to my attention that
nature of services rendered and the level of causes me to believe the financial
assurance provided statements do not present fairly."
o influence the procedures and amount of
evidence required 3. Understanding the Entity and its Environment
Four Key Services Performed in Relation to to understand the entity, its environment, and
Entity's Financial Statements the applicable financial reporting framework
o to design procedures to address areas
1. Audit
where material misstatements may arise
2. Review
in the FSs
3. Compilation o understanding: updated as changes in
4. Agreed-upon Procedures
conditions and circumstances occur
I. AUDIT OF FINANCIAL STATEMENTS process: dynamic and ongoing throughout the
engagement
responsibility of the auditor
provides a high level of assurance 4. Procedures to be Performed
(reasonable assurance) that the financial
review of financial statements
statements are free from material
inquiries of management and other within the
misstatements
entity
determines the specific audit procedures to
application of analytical procedures
be performed
using audit skills and techniques to gather
II. REVIEW OF FINANCIAL STATEMENTS evidence
o less extensive than audit
cost of an audit may not justify the benefits not usually assessing the accounting and
certified public accountants (CPAs) internal control system
provides professional services to small no testing of records or obtaining corroborating
entities instead of a full audit evidence through inspection, observation,
provide a certain level of assurance on the confirmation, or computation
reliability of the financial statements for
small entities Key Inquiries and Analytical Procedures
Required by PSRE for CPA Practitioners
1. Objective of a review of FSs
NOTE: Philippine Standards on Review Engagements (PSRE)
to obtain limited assurance 1. all material items in the financial statements
to perform inquiry and analytical procedures 2. areas of high risk of material misstatements
to assess whether the financial statements are 3. related party relationships and transactions
free from material misstatements 4. fraud and non-compliance with laws and
to express a conclusion if the FSs are not regulations
prepared in accordance with the applicable 5. the entity's ability to continue as a going
financial reporting framework concern
2. Level of Assurance
If the practitioner suspects material
review engagement misstatement under review,
limited procedures than audit perform additional procedures
lower level assurance apply more extensive procedures as
necessary
5. Reporting Responsibility A review of financial statements in accordance with
PSRE is a limited assurance engagement. The
review report practitioner performs procedures, primarily
contains clear written expression of consisting of making inquiries of management and
negative assurance others within the entity, as appropriate, and
review and assess the conclusions drawn applying analytical procedures, and evaluates the
from the evidence gathered evidence obtained
The Unmodified Conclusion The procedures performed in a review are
issued when obtains limited assurance substantially less than those performed in an audit
conducted in accordance with Philippine Standards
no indication of material misstatements
on Auditing. Accordingly, we do not express an
Sample Format of the Unmodified Review audit opinion on these financial statements.
Report
Conclusion
INDEPENDENT PRACTITIONER'S REVIEW
Based on our review, nothing has come to our
REPORT [Appropriate Addressee]
attention that causes us to believe that these
We have reviewed the accompanying financial financial statements do not present fairly, in all
statements of ABC Company, which comprise the material respects, the financial position of ABC
statement of financial position as at December 31, Company as at December 31, 20X1, and its
20X1, and the statement of comprehensive income, financial performance and cash flows for the year
statement of changes in equity and statement of then ended, in accordance with the Philippine
cash flows for the year then ended, and a summary Financial Reporting Standard for Small and
of significant accounting policies and other Medium-sized Entities.
explanatory information.
[Practitioner's signature]
Management Responsibility for the Financial
[Date of the practitioner's report]
Statements
[Practitioner's address]
Management is responsible for the preparation of
these financial statements in accordance with the
Philippine Financial Reporting Standards for Small
and Medium-sized Entities and for such internal Modification of the Review Report
control as management determines is necessary to Identification of Material Misstatements
enable the preparation of financial statements that
are free from material misstatement, whether due the report
to fraud or error. describes the issues
includes a quantification of the possible
Practitioner's Responsibility
effect(s) on the financial statements, if possible
Our responsibility is to express a conclusion on the expresses:
accompanying financial statements. We conducted 1. qualified conclusion: not pervasive issue
our review in accordance with Philippine Standard 2. adverse conclusion: material and
on Review Engagements (PSRE). PSRE 2400 pervasive issue; not fair presentation of
(Revised) requires us to conclude whether anything FSs; a qualification is not adequate to
has come to our attention that causes us to believe disclose the misleading or incomplete
that the financial statements, taken as a whole; are nature of the financial statements
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.
Scope Limitation an ongoing process during the compilation
engagement
the report
provides a frame of reference for the CPA to
describes the limitation
exercise professional judgment in compiling
expresses: financial information
1. qualified conclusion: possible adjustments
that might have been necessary without the 4. Procedures to be Performed
limitation
to assemble financial information using records,
2. disclaimer of conclusion: material and
documents, explanations, and other information
pervasive limitation; no level of assurance
can be provided on FSs provided by management
to include significant judgments made by
III. COMPILATION OF FINANCIAL STATEMENTS management
not requisite: to verify the accuracy or
compilation engagement
completeness of the information provided by
entities seeking assistance from management
professional accountants
not all entities hire full-time accountants to NOTE: A compilation engagement is not an
prepare FSs assurance engagement.
1. Objective The CPA is NOT ordinarily required to:
to use accounting expertise, not auditing 1. make any inquiries of management to
expertise, of CPAs assess the reliability and completeness of
to collect, classify, and summarize financial the information provided
information 2. assess internal controls
to simplify detailed data into a manageable 3. verify any matters
and understandable form 4. verify any explanations
no requirement to test the assertions underlying Prior to Completion of the Compilation
the financial information Engagement
includes the preparation of financial statements,
which may be a complete or partial set, based to review the compiled financial information
on the applicable financial reporting framework based on their understanding of the entity's
business and operations and the applicable
2. Level of Assurance financial reporting framework
not allow to express any assurance on the to inform management if the provided
financial information information is incomplete or inaccurate and
to benefit the users from the compiled financial request any necessary additional or corrected
information due to: information
1. the CPA's professional competence 5. Reporting Responsibility
2. due care in performing the service
to add credibility to the financial information by CPA's compilation report
a CPA, even without assurance to identify the financial statements compiled
to clearly indicate that no assurance is
3. Understanding the Entity provided on the financial statement
to obtain understanding of: SAMPLE:
1. the entity's business and operations,
including its accounting system and PRACTITIONER'S COMPILATION REPORT
records
[To Management of ABC Company]
2. the applicable financial reporting
framework and its application within the We have compiled the accompanying financial
entity's industry statements of ABC Company based on information
you have provided. These financial statements
comprise the statement of financial position of ABC to inform management and those charged
Company as at December 31, 20X1, the statement with governance about withdrawal
of comprehensive income, statement of changes in
equity and statement of cash flows for the year then IV. AGREED-UPON PROCEDURES
ended, and a summary of significant accounting ENGAGEMENT
policies and other explanatory information. to apply agreed-upon procedures to a specific
We performed this compilation engagement in account or element of a FS
accordance with Philippine Standard on Related accepted if:
Services. We have applied our expertise in 1. the client takes full responsibility for the
accounting and financial reporting to assist you in adequacy of the procedures
The client must acknowledge that they are responsible for deciding
the preparation and presentation of these financial whether the agreed-upon procedures are sufficient for their purposes.
The auditor does not give an opinion or assurance but performs the
statements in accordance with Philippine Financial specific tasks requested.
Reporting Standards for Small- and Medium-sized 2. the report's distribution is limited to parties
Entities (PFRS for SMEs). We are complied with who agreed on the procedures
relevant ethical requirements, including principles The resulting report can only be distributed to the people or entities
who were involved in agreeing on the procedures. It is not meant for
of integrity, objectivity, professional competence a broader audience because it’s tailored to the specific needs of the
and due care. parties who requested the procedures.
to focus on specific financial data items
These financial statements and the accuracy and to apply to limited individual elements specified
completeness of the information, used to compile by the client
them are your responsibility.
EXAMPLES:
Since a compilation engagement is not an
assurance engagement, we are not required to 1. accounts payable
verify the accuracy or completeness of the 2. accounts receivable
information you provided to us to compile these 3. purchases from related parties
financial statements. Accordingly, we do not 4. sales and profits of a specific segment of
express an audit opinion or a review conclusion on the entity
whether these financial statements the prepared in
1. Objective
accordance with PFRS for SMEs
to perform audit-like procedures agreed upon
[Practitioner's signature]
by the auditor, the entity, and relevant third
[Date of practitioner's report] [Practitioner's parties
address] to report on the factual findings from these
procedures
6. Modification to the Compilation Report
2. Level of Assurance
Identification of Material Misstatements
to provide a report of factual findings from
to propose the appropriate amendments to
agreed-upon procedures
management
to express no assurance or opinion
to withdraw from the engagement and inform
users of the report
management and those charged with
to evaluate the procedures and findings on
governance
their own
o if management declines to allow
amendments to the compiled financial to draw their own conclusions based on the
information auditor’s work
Scope Limitation 3. Restrictions on the Distribution of Report
management's failure to provide requested to limit to the parties who agreed to the
information procedures
to withdraw from the engagement to prevent others from misinterpreting the
results
to not allow other parties misunderstand the ASSURANCE ENGAGEMENTS
purpose or context of the procedures
to improve the credibility of information about a
4. Terms of the Engagement subject matter
to provide assurance on the reliability of
to confirm the agreed procedures with the
financial information
entity’s representatives
to perform services to enhance the quality of
to coordinate with other specified parties who
information for decision-maker
will receive the report
to evaluate whether the subject matter
to establish a clear understanding of the
conforms materially with suitable criteria
procedures and conditions of the engagement
by all parties involved Types of Assurance Engagements
5. Procedures to be Performed classified based on the level of assurance
provided by the practitioner
to perform the procedures agreed upon with the
theoretically range from very low to absolute
client and third-party users
levels
to use the evidence gathered during these
1. reasonable assurance engagement
procedures as the basis for the report of factual
like an audit engagement
finding
2. limited assurance engagement
to follow the client's instructions but does not
like a review of financial statements
take responsibility for selecting the procedures
Criteria for Classifying an Engagement as an
The agreed upon procedures may include Assurance Engagement
1. Inquiry and analysis; 1. a three-party relationship
2. Recomputation, comparison and other 2. an appropriate subject matter
clerical accuracy checks; 3. suitable criteria
3. Observation; 4. sufficient appropriate evidence
4. Inspection; or 5. a written assurance report
5. Obtaining confirmations.
1. Three Party Relationship
similarity: procedures in an agreed-upon a. independent and competent professional
procedures engagement and in a financial accountant
statement audit adheres to the fundamental principles
key difference: in an agreed-upon procedures required by the Code of Ethics
engagement, the client determines procedures: b. responsible party
1. nature for the subject matter of the assurance
2. timing engagement
3. extent c. intended users
6. Reporting Responsibility to whom the professional accountant
usually addresses the report.
agreed-upon procedures report responsible party and intended user
to not provide an opinion or assurance on USUALLY: separate organizations
the financial statements SOMETIMES: same organization
to describe in detail: EXAMPLE: A governing body may seek
1. the purpose of the engagement assurance about information from a
2. the procedures performed component within that organization.
3. the auditor's factual findings
to enable the readers to understand the
nature and the extent of the work performed
2. Subject Matter 4. Evidence
a. data (for example, financial and non- practitioner
financial information) to plan the engagement effectively
b. systems and processes (for example, to perform to obtain sufficient appropriate
internal controls) evidence
c. behavior (for example, entity's compliance to determine whether the assertions are free
with laws and regulations) of material misstatement
d. physical characteristics (for example,
capacity of a plant facility) 5. Assurance Report
professional accountant
for an assurance engagement, the subject
expresses a conclusion on the conformity of
matter must be:
the subject matter with suitable criteria
1. identifiable.
provides a high or moderate level of
2. capable of consistent evaluation and
assurance
measurement against suitable criteria.
3. in a form that allows for evidence-gathering NOTE: Not all engagements performed by
procedures. professional accountants are assurance
in assertions-based engagements: engagements.
the responsible party performs the
Non-Assurance Engagements Commonly
evaluation or measurement
Performed by Professional Accountants
the outcome is an assertion made available
to intended users agreed-upon procedures
the practitioner gathers sufficient compilation of financial or other information
appropriate evidence to support their preparation of tax returns when no conclusion is
conclusion in the assurance report expressed, and tax consulting
in direct reporting engagements: management consulting
the practitioner directly performs the other advisory services
evaluation or measurement
alternatively, the practitioner obtains a REPORTS ON PROSPECTIVE FINANCIAL
representation from the responsible party INFORMATION
the subject matter information is included in auditor services
the assurance report for users auditing historical financial statements
3. Criteria ALSO: work with future-oriented financial
statements
the standards or benchmarks used to evaluate examine and report on prospective financial
or measure the subject matter in an assurance information to enhance its credibility
engagement prospective financial information
provide a frame of reference to avoid individual based on assumptions about future events
interpretation and misunderstanding of and possible actions of the entity
conclusions
in an assurance engagement, criteria must be Two General Types of Prospective Financial
suitable for: Information
1. enabling reasonably consistent evaluation
1. forecasts
or measurement
prepared based on best-estimate
2. allowing the application of professional
assumptions about future events that
judgment within the context of the
management expects to occur
engagement
2. projections
prepared based on hypothetical
assumptions or a mix of best-estimate and
hypothetical assumptions
Responsibility of Auditor EXAMPLE OF AN UNMODIFIED REPORT ON A
FORECAST
to evaluate the completeness and
reasonableness of the underlying assumptions We have examined the forecast in accordance with
in prospective financial information Philippine Standards on Assurance Engagements
to obtain sufficient knowledge of the client's applicable to the examination of prospective
business financial information. Management is responsible
to understand the entity's process for preparing for the forecast including the assumptions set out in
financial information Note 1 to the financial statements.
PSAE 3400: Requirements for Auditors When Based on our examination of evidence supporting
Examining Prospective Financial Information the assumptions, nothing has come to our attention
which causes us to believe that these assumptions
management's best-estimate assumptions do not provide a reasonable basis for the forecast.
reasonable Further in our opinion, the forecast is properly
in the case of hypothetical assumptions, prepared on the basis of the assumptions and is
o consistent with the purpose of the presented in accordance with generally accepted
information accounting principles in the Philippines.
prospective financial information
Actual results are likely to be different from the
properly prepared on the basis of the
forecast since anticipated events frequently do not
assumptions
occur as expected and the variation may be
o supporting evidence: generally
material.
future-oriented and speculative
properly presented and all material
assumptions are adequately disclosed
prepared on a consistent basis with
historical financial statements
Limitations on Auditor's Opinion Regarding
Prospective Financial Results
the auditor cannot express opinion
REASONS: difficult to obtain sufficient
assurance that the assumptions are free of
material misstatement
The nature of prospective financial information makes it difficult for the
auditor to gather enough reliable evidence to fully verify the accuracy of the
assumptions used. Since assumptions are based on future events and
uncertainties, there is a higher risk that they may contain material
misstatements. As a result, the auditor may struggle to provide a high level
of assurance that these assumptions are free of significant errors or biases.
RESULT: a moderate level of assurance
reporting on the reasonableness of
management's assumptions
SUMMARY
Nature of Agreed-Upon
Audit Review Compilation
Service Procedures
Objective To express an To enable the To carry out the To assist the
opinion on the CPA to report audit procedures client in the
fair presentation whether has agreed upon preparation of
of the FSs come to his with the client the FSs
attention that and any
would indicate appropriate third
that the FSs are parties identified
not presented in the report
fairly
Level of high reasonable moderate or none none
Assurance assurance limited
assurance
Report positive negative description of identification of
assurance assurance procedures financial
(opinion) performed and information
factual findings compiled and a
clear statement
that no
assurance is
provided
Basic risk assessment inquiry and as agreed assemble FS
Procedures procedures, test analytical based on the
of controls, and procedures information
substantive test provided by
management
Required sufficient to sufficient to sufficient to sufficient to
Knowledge assess the risk identify areas in apply the agreed compile the FS
of material the FS where upon procedures
misstatements material
misstatements
are likely to
occur
Independence required required not required not required
of Requirement
Standards PSA PSRE PSRS PSRS
