AUD : CH 1

Why do decision-makers need an objective evaluation of information provided by others?

Interests of information providers often contradict those of the users, requiring reliable, objective evaluation.

What is the primary goal of decision-makers before making economic decisions?

To gather relevant and reliable information to ensure favorable outcomes for their respective organizations.

What economic decisions do potential and existing investors make?

Deciding when to buy, hold, or sell equity investments and assessing management's stewardship.

How do the Board of Directors use financial information regarding investments?

They use the information to determine distributable profits and dividends for the entity's shareholders.

What is the primary economic decision for lenders and other creditors?

To assess the security and likelihood of repayment for amounts lent to the entity.

Why do employees need to evaluate an entity's financial information?

To assess the entity's ability to pay wages and provide other various employee benefits.

What are the primary uses of financial information by the government?

Determining taxation policies, preparing national income statistics, and regulating the activities of various entities.

Who is the independent professional equipped to evaluate financial information objectively?

An independent Certified Public Accountant (CPA) equipped with appropriate skills and specialized knowledge.

What is a CPA expected to provide regarding financial information?

Reasonable assurance as to the fairness of the preparation and presentation of financial information.

In what form is assurance expressed and communicated?

An opinion or conclusion communicated to users through a formal written assurance report.

What is the definition of assurance?

Practitioner's satisfaction regarding the reliability of an assertion made by one party for another.

Simply stated, what does assurance mean?

How sure the practitioner is that the representation made by a party is reliable.

What is the formal definition of an assurance engagement?

Engagement where a practitioner expresses a conclusion to enhance user confidence about a subject.

What are assurance services in the context of contracts?

Three-party contracts where assurers report on or improve the quality of information provided.

How are assurance services used to describe CPA work?

A broad range of information enhancement services provided by Certified Public Accountants.

Who performs assurance services and what is their design?

Independent professionals designed to improve quality or enhance credibility of the engagement’s subject matter.

What is the objective of an assurance engagement?

Practitioner evaluates a subject matter against criteria to provide users a level of assurance.

Whose responsibility is the subject matter in an assurance engagement?

The subject matter is the responsibility of a party other than the practitioner.

What are the five elements of an assurance engagement (3SECC)?

Three-party relationship, appropriate subject matter, suitable criteria, sufficient appropriate evidence, and written assurance report.

Who are the three separate parties involved in an assurance engagement?

The three parties involved are the practitioner, the responsible party, and the intended users.

How does the term practitioner differ from the term auditor?

Practitioner is broader, encompassing those performing engagements beyond just historical financial information audit or review.

What are the independence requirements for a practitioner?

The practitioner must be independent of both the responsible party and the intended users.

What governs the conduct of a practitioner during an engagement?

The practitioner is governed by ethical requirements, such as professional competence, regarding engagement conduct.

When can a practitioner use the work of experts from other disciplines?

When engagements require specialized skills and knowledge beyond those ordinarily possessed by an individual practitioner.

What is the practitioner’s responsibility regarding engagement procedures?

Responsible for determining the nature, timing, or extent of procedures required by the engagement.

What is the definition of a professional accountant?

A Certified Public Accountant engaged in any scope of practice of the accountancy profession.

What is the definition of a practitioner?

A Certified Public Accountant rendering professional services, which can be either assurance or non-assurance.

What is the definition of an auditor?

A practitioner who specifically renders audit and review services to their clients.

What is the role of the responsible party?

Person/s responsible for the subject matter, the subject matter information, or both.

Does the responsible party have to be the engaging party?

The responsible party may or may not be the engaging party to the practitioner.

Does the responsible party have to be from the same organization as users?

The responsible party may or may not be from the same organization as intended users.

Can the responsible party be an intended user?

They may be one of the intended users, but should not be the only one.

Who are the intended users in an assurance engagement?

Person/s for whom the practitioner prepares the assurance report, addressed to them whenever practical.

How are intended users identified if there is a broad range of interests?

Intended users may be limited to major stockholders with significant and common interests.

How are intended users identified and what is the restriction?

Identified by agreement or law; the report must be restricted only to parties identified.

What additional elements are depicted in Exhibit 1-1 besides the 3SECC?

Materiality, assurance engagement risk, cost-benefit constraint, and professional skepticism are also elements.

What are the five elements of an assurance engagement (3SECC)?

Three-party relationship, appropriate subject matter, suitable criteria, sufficient appropriate evidence, and written assurance report.

Who are the three separate parties involved in an assurance engagement?

The three parties involved are the practitioner, the responsible party, and the intended users.

How does the term practitioner differ from the term auditor?

Practitioner is broader, encompassing those performing engagements beyond just historical financial information audit or review.

What are the independence requirements for a practitioner?

The practitioner must be independent of both the responsible party and the intended users.

What governs the conduct of a practitioner during an engagement?

The practitioner is governed by ethical requirements, such as professional competence, regarding engagement conduct.

When can a practitioner use the work of experts from other disciplines?

When engagements require specialized skills and knowledge beyond those ordinarily possessed by an individual practitioner.

What is the practitioner’s responsibility regarding engagement procedures?

Responsible for determining the nature, timing, or extent of procedures required by the engagement.

What is the definition of a professional accountant?

A Certified Public Accountant engaged in any scope of practice of the accountancy profession.

What is the definition of a practitioner?

A Certified Public Accountant rendering professional services, which can be either assurance or non-assurance.

What is the definition of an auditor?

A practitioner who specifically renders audit and review services to their clients.

What is the role of the responsible party?

Person/s responsible for the subject matter, the subject matter information, or both.

Does the responsible party have to be the engaging party?

The responsible party may or may not be the engaging party to the practitioner.

Does the responsible party have to be from the same organization as users?

The responsible party may or may not be from the same organization as intended users.

Can the responsible party be an intended user?

They may be one of the intended users, but should not be the only one.

Who are the intended users in an assurance engagement?

Person/s for whom the practitioner prepares the assurance report, addressed to them whenever practical.

How are intended users identified if there is a broad range of interests?

Intended users may be limited to major stockholders with significant and common interests.

How are intended users identified and what is the restriction?

Identified by agreement or law; the report must be restricted only to parties identified.

What additional elements are depicted in Exhibit 1-1 besides the 3SECC?

Materiality, assurance engagement risk, cost-benefit constraint, and professional skepticism are also elements.

What is the definition of an appropriate subject matter?

The nature of the assertion for which the practitioner gathers sufficient evidence for evaluation.

What is the definition of subject matter information?

The outcome of the evaluation or measurement of the subject matter against identified criteria.

What is the subject matter information for an entity's financial position and performance?

The outcome for an entity's financial position and performance is the financial statements.

What criteria are used to evaluate the effectiveness of an entity's internal control?

A relevant internal control framework, such as the COSO Framework, is used as criteria.

What is the subject matter information regarding an entity's greenhouse emissions?

The subject matter information for greenhouse emissions is a formal greenhouse gas statement.

What are the different characteristics that subject matters can have?

Qualitative versus quantitative, objective versus subjective, historical versus prospective, and point in time.

How do subject matter characteristics affect the engagement process?

They affect the precision of evaluation and the persuasiveness of the available evidence.

What are the two primary characteristics of an appropriate subject matter?

Identifiable, consistently measurable, and capable of being subjected to evidence-gathering procedures.

What is the definition of criteria in an assurance engagement?

Benchmarks used to evaluate or measure the subject matter, including presentation and disclosure.

What are examples of formal criteria used in assurance?

Philippine Financial Reporting Standards, established internal control frameworks, and applicable laws or regulations.

What are examples of less formal criteria?

Internally developed codes of conduct or an agreed level of performance for an entity.

What is the definition of established criteria?

Benchmarks embodied in laws or issued by recognized bodies following transparent due process.

What is the definition of specifically developed criteria?

Benchmarks that are designed specifically for the needs of a particular assurance engagement.

Why are suitable criteria required in an assurance engagement?

For consistent evaluation within professional judgment to avoid individual interpretation and misunderstanding.

What does it mean that suitable criteria are context-sensitive?

They are relevant to engagement circumstances; different criteria may apply to one subject.

What are the characteristics of suitable criteria abbreviated as RUN CR?

Reliability, Understandability, Neutrality, Completeness, and Relevance are the characteristics of suitable criteria.

What is the definition of the reliability characteristic of criteria?

Criteria allowing consistent measurement by similarly qualified practitioners when used in similar circumstances.

How is the understandability of criteria defined?

Criteria contributing to clear conclusions that are not subject to significantly different interpretations.

What is the neutrality characteristic of suitable criteria?

Neutrality ensures that the criteria contribute to conclusions that are free from bias.

What constitutes the completeness of suitable criteria?

Not omitting relevant factors that could affect conclusions, including benchmarks for presentation.

How is the relevance of suitable criteria defined?

Criteria that contribute to conclusions that assist the decision-making of the intended users.

In what ways are criteria made available to intended users?

Publicly, in subject matter information, in the assurance report, or by general understanding.

When should the use of an assurance report be restricted?

When criteria are available only to specific users or relevant to a specific purpose.

What is the definition of evidence in an assurance engagement?

All information gathered by the practitioner to evaluate the subject matter against criteria.

With what attitude does a practitioner plan and perform the engagement?

An attitude of professional skepticism to determine if information is free from material misstatement.

What are the considerations when planning and performing evidence-gathering procedures?

Sufficiency, appropriateness, materiality, risk, cost-benefit consideration, and professional judgment are the considerations.

What is the definition of sufficiency regarding evidence?

Sufficiency is the measure of the quantity of evidence gathered by the practitioner.

What is the definition of appropriateness regarding evidence?

Appropriateness is the measure of the quality of the evidence gathered by practitioners.

How does the risk of material misstatement affect the quantity of evidence?

Greater risk of material misstatement requires a greater quantity of evidence to be gathered.

How does the quality of evidence affect the quantity required?

Higher quality evidence may reduce the total quantity of evidence required for the engagement.

What is the definition of appropriateness in the context of evidence?

Measure of evidence quality, specifically its relevance and its reliability for the engagement.

What is the relationship between the sufficiency and appropriateness of evidence?

These two characteristics are interrelated, but more evidence cannot compensate for poor quality.

How does a practitioner determine what evidence is sufficient and appropriate?

The practitioner determines this by using professional judgment and exercising professional skepticism.

How does the time frame of subject matter information affect evidence gathering?

Obtaining assurance for a period is generally more difficult than for a point in time.

What is the limitation of conclusions provided on processes?

Conclusions are limited to the covered period; no assurance is given for future functioning.

When is materiality relevant in an assurance engagement?

During planning of evidence-gathering procedures and assessing if information is free of misstatement.

How does a practitioner consider materiality regarding intended users?

By understanding and assessing factors that might influence the decisions of the intended users.

What determines the assessment of materiality and the importance of various factors?

These are matters for the practitioner's judgment involving both quantitative and qualitative factors.

What is the definition of assurance engagement risk?

Risk that the practitioner expresses an inappropriate conclusion when information is materially misstated.

How can a practitioner reduce assurance engagement risk to a lower level?

By increasing the level of assurance provided through the performance of additional procedures.

What must the level of assurance obtain to be considered meaningful?

It must enhance user confidence about subject matter information more than inconsequentially.

What is the definition of inherent risk?

Susceptibility of subject matter information to material misstatement, assuming no related internal controls.

What is the definition of control risk?

Risk that material misstatement is not prevented, detected, or corrected by internal controls.

What is the definition of detection risk?

The risk that the practitioner will not detect a material misstatement that exists.

What is the risk of material misstatement?

The risk that the subject matter information is materially misstated before the engagement.

What determines which components of assurance risk are considered by the practitioner?

Engagement circumstances, nature of subject matter, and the level of assurance being provided.