NATURE of AUDITING, ATTESTATION AND ASSURANCE SERVICES
Let us understand a few terminologies before going further in the discussion of the details of auditing and assurance since these terms will be used often throughout the text. Auditing, attestation and assurance services are often used interchangeably because they encompass the same decision-process: defining the decision problem, defining the alternative choices, identifying and obtaining information relevant to the decision problem, evaluating the alternatives in light of available information, and selecting the best option.
AUDITING is a systematic process of objectively obtaining and evaluating evidence regarding selected 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. This broad definition identifies key elements: Systematic process — audits are structured activities;
Objectivity — freedom from bias;
Obtaining and evaluating evidence — allows the auditor to determine the support for assertions or representations; Assertions about economic actions and events — describes the subject matter of an audit; representations by management comprising internal control assertions and financial statement assertions Degree of correspondence … established criteria — the purpose of the audit is to determine conformity with some specified criteria; degree of correspondence refers to the closeness with which the assertions can be identified with established criteria such as applicable financial reporting framework (Philippine Accounting Standards/Philippine Financial Reporting Standards), Philippine Standards on Auditing, specific rules and regulations established by a legislative body or those set by management Communicating results — the results must be communicated to interested parties through a written report which could either enhance or weaken the credibility of the representations made by another party Interested users – stakeholders (both internal and external users) who rely on the auditor’s findings Auditing should be done by a competent, independent person
The auditor must be qualified to understand the criteria used and must be competent to know the types and amount of evidence to accumulate to reach the proper conclusion after the evidence has been examined. The competence of the individual performing the audit is of little value if he or she is biased in the accumulation and evaluation of evidence. In the Philippines, a CPA in Public Practice needs to be accredited by the Professional Regulation Commission/Board of Accountancy prior to engaging in external or independent audits.
Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria (for example, the financial reporting framework in a financial statement audit or rules and regulations in a compliance audit). Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period. Accordingly, the auditor must have a thorough understanding of the entity and its environment. The final stage in the auditing process is preparing the Audit Report, which is the communications of the auditor’s findings to users.
ATTESTATION generally refers to an expert’s written communication of a conclusion about the reliability of someone else’s assertions. It occurs when 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. Ordinarily, attestation focuses on a specific assertion that is made in writing. Assertions, however, need not be quantitative to be subject to attestation. Qualitative assertions can be the used as long as objective criteria exist for evaluating the accuracy of the assertion. For example, compliance with safety standards can be assessed because of an independent set of guidelines such as those embodies in government laws and regulations.
Attestation service is a type of assurance service whose subject matter (both financial and non-financial in nature) is the responsibility of another party. Attest services offering some level of assurance about management’s assertions include audits and reviews. Other examples of subject matter of
attest services are: 1. Future-oriented financial information (PSAE 3400 ‘The Examination of Prospective Financial Information)
2. Management’s discussion and analysis
3. The effectiveness of internal control
4. Compliance with statutory, regulatory and contractual obligations
ASSURANCE SERVICES are designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. They pertain to independent professional services designed to improve the quality of information, or its context, for decision making. Assurance services are broader in scope than either auditing or attestation. The following are broad categories of services, which are not intended to be all-inclusive, that may be provided by CPAs under the umbrella of assurance services.
1. Risk assessment – provide independent assessments of the likelihood of adverse events and how these events may affect the entity’s ability to achieve its objectives. Risks can include environmental risks, business process and asset risks, and information risks. These services would benefit the owners, managers, and board of directors of companies susceptible to the risks.
2. Information system reliability – provide assurance that information systems are designed and operating to provide reliable information to the entity. These services provide benefits to both the organization itself as well as those who rely on information provided by the entity.
3. Adequacy of security over Electronic commerce transactions, electronic documents, and support systems. These services would benefit all participants in Electronic commerce activities.
4. Effectiveness of Health care performance measurement systems for the benefit of health care recipients and their representatives.
5. Reliability and relevance of Business performance measurement. For entities without existing performance measurement systems, CPAs can identify relevant performance measures and assist in the design and implementation of a performance measurement system.
In addition, the Special Committee on Assurance Services has identified the following areas that represent the largest market potential for the next decade: Assisting organizations in identifying, measuring, assessing, and managing risks. Identifying and communicating improved methods of measuring and communicating organizational performance. Developing criteria and communicating assurance about the integrity and reliability of transactions performed through electronic means. Identifying better measurement techniques to quantify and communicate the quality of health care services provided to a particular constituency.
Figure 1.1 presents the universe of CPA services encompassing assurance and related services, which are also termed as non-assurance services. The basic concepts pertaining to this array of services are introduced in this chapter.
Figure 1.1. The Universe of CPA services
Assurance services evolve naturally from attestation services, which in turn evolve from audit. The root of all three is in independent verification. However, the form and content of the services differ. Earlier, highly structured services considered to be relevant to more users. The newer services are more customized and targeted since these are intended to be highly useful in more limited circumstances. Even when assurance services do not deal with traditional accounting data, they are consistent with the concept of certified public accounting.
Auditing services are a subset of assurance services. Specifically, auditing services address assertions of management. More specifically, we tend to think of auditing services as audits of a company’s financial statements in which management asserts that the financial statements accurately portray
the company’s financial results. However, as indicated in the above figure, auditing services are not necessarily confined to financial statements. Assurance services do not necessarily evaluate assertions, but are aimed at improving the quality of information for decision making.
Presented in the next page is the structure of the services covered by the pronouncements of the International Auditing and Assurance Standard Board (IAASB). In the Philippine setting, the same structure is adopted and this will be expanded in succeeding sections and chapters.
Figure 1.2 Service Covered by IAASB Pronouncements
CONSULTING SERVICES are professional services that provide advice and assistance concerning an entity’s organization, personnel, finances, operations, systems or other activities. Also called management advisory services, the professional accountant employs technical skills, education, observations, experiences, and knowledge of analytical approach and procedures used in the consulting engagement.
The consulting process is an analytical process that typically involves some combination of activities relating to: (a) objective-setting, (b) fact-finding, (c) definition of problems or opportunities, (d) evaluation of alternatives, (e) development of recommendations including actions, (f) communication of results, and sometimes (g) implementation and (h) follow-up.
Reports (if issued) are generally written in a narrative (or “long form”) style. Generally the work performed is only for the use and benefit of the client. The nature and scope of work is determined by agreement between the professional accountant and the client. Any service that meets the definition of an assurance engagement (explained in subsequent sections) is not a consulting engagement but an assurance engagement. The areas of consulting services and the related professional accountant’s function are listed below. 1. Consultations – provide counsel in a short time frame