CHAPTER 12

ASSURANCE ENGAGEMENTS AND RELATED SERVICES

Professional accountants involved with financial statements must follow specific

procedures. The extent of these procedures is influenced by the services provided and

the level of assurance offered. Generally, there are four primary types of services

associated with an entity's financial accounts: These are:

• Audit
With Assurance
• Review

• Compilation; and
Without Assurance

• Agreed-upon Procedures

Audit of Financial Statements

Four types of services:

1. Audit of Financial Statements

- enables the auditor to express an opinion on the entity's financial statements.

2. Review of Financial Statements

Limited assurance is provided by a review of the financial statements, which

determines that no significant changes are required to ensure conformity with the

financial reporting framework. It uses less, limited procedures than an audit. Based on

the auditor's evaluation of the evidence, the report expresses negative assurance.

The Unmodified Review Report

Modification of the Review Report

A review report may be modified due to:

A. Material Misstatements: If the financial statements contain significant errors or

misrepresentations.

B. Scope Limitation: If the auditor is unable to obtain sufficient appropriate evidence

to complete the review.

3. Compilation of Financial Statements

In a compilation of financial statements, entities rely on professional accountants to

assist in their preparation and presentation. The objective is to use accounting

expertise, rather than auditing, to collect, classify, and summarize financial

information. Since a compilation provides no assurance, the accountant's

procedures are limited to reading the compiled data to check for obvious material

misstatements. The report states that the financial statements were compiled but does

not provide any assurance. If there are material misstatements or scope

limitations, the compilation report may need to be modified.

The accountant is not ordinarily required to:

The accountant is not required to assess reliability, internal controls, or verify

matters and explanations.

4. Agreed-upon Procedures Engagement

In an agreed-upon procedures engagement, the auditor performs specific audit-

related procedures as agreed with the client and third parties, then reports factual
findings without assurance. The report is limited to those who agreed to prevent

misinterpretation. All engagement terms must be clearly understood. The report must

describe the purpose and procedures in detail to ensure readers understand the

nature and extent of the work performed.

 These audit procedures are applied to specific accounts or financial statement

elements and may include inquiry, analysis, recomputation, comparison,

accuracy checks, observation, inspection, and obtaining confirmations.

Assurance Engagements

Assurance engagements enhance the credibility of information by evaluating its

conformity with suitable criteria.

Types of Assurance Engagements

 Reasonable Assurance: The practitioner collects sufficient evidence to conclude

that the subject matter materially conforms to criteria, providing positive

assurance (e.g., "The financial statements comply with accounting standards.").

 Limited Assurance: The practitioner gathers evidence to determine if the subject

matter is plausible, providing negative assurance (e.g., "Nothing has come to

our attention that suggests non-compliance.").

An assurance engagement must have: a three-party relationship, an appropriate

subject matter, suitable criteria, sufficient evidence, and a written assurance

report.

An assurance engagement involves a three-party relationship: the professional

accountant, the responsible party, and the intended users. The subject matter can
include data, systems and processes, behavior, or physical characteristics.

Types of Assurance Engagements Based on Reporting Approach

Assertions-Based Engagements (Attestation Engagements): The practitioner

assesses and expresses opinions about the fairness of the assertions made by the

responsible party, who measures the subject matter.

Direct Reporting Engagements: In the assurance report, the practitioner measures

the subject matter or, if it is not revealed, receives it from the responsible party.

Criteria in Assurance Engagements

Criteria are standards or benchmarks used to evaluate the subject matter. Suitable

criteria ensure consistent and reliable measurement, allowing for professional

judgment in assessing compliance.Suitable criteria exhibit the following

characteristics: RUNCR

• Relevance • Understandability • Neutrality • Completeness • Reliability

Evidence

In order to gather enough relevant evidence on whether the subject matter information

is free of significant misstatement, the practitioner conducts and plans an assurance

engagement with a professional skepticism approach.

Assurance Report
The practitioner provides a written report with a conclusion reflecting the level of

certainty gained about the subject matter:

High certainty (Reasonable assurance) or moderate certainty (Limited assurance).

The practitioner also considers other reporting obligations, such as informing

governance when necessary.

• Agreed-upon procedures

• Compilation of financial or other information

• Preparation of tax returns when no conclusion is expressed, and tax consulting,

• Management consulting, and

• Other advisory services

Reports on Prospective Financial Information

- means financial information based on assumptions about events that may occur in

the future and possible actions of the entity.

Two general types of prospective financial information:

• forecasts (best-estimate assumptions)

• projections (hypothetical assumptions)

Auditor's Responsibility

PSAE 3400, the auditor should obtain sufficient appropriate evidence that:

• Management's best-estimate assumptions are reasonable and, in the case of

hypothetical assumptions, such assumptions are consistent with the purpose of the

information.

• The prospective financial information is properly prepared on the basis of

assumptions;

• The prospective financial information is properly presented and all material

• The prospective financial information is prepared on a consistent basis with

historical financial statements.