Non-audit Engagements: Procedures and Reports

Non-audit Engagements:Procedures and ReportsExamination of Prospective Financial InformationEngagements to Review Financial StatementsEngagements to Perform Agreed-upon procedures regarding Financial InformationEngagements to Compile Financial InformationExamination of Prospective Financial Information (PSAE 3400)Examination of Prospective Financial Information (PSAE 3400)Prospective Financial Informationfinancial information based on assumptions about events that may occur in the future and possible actions of the entity.

2 General types of Prospective Financial Information

Forecasts( Best-estimate assumptions) prepared on the basis of the assumptions as to future events which management expects to take as of the date the information is prepared.

Projection( Hypothetical assumptions) prepared on the basis of hypothetical assumptions or a mixture of best estimate and hypothetical assumptions. Examination of Prospective Financial Information (PSAE 3400)General Guidelines:

Acceptance of Engagementsthings to consider before accepting an engagement to examine prospective financial information

intended use of the informationwhether the information will be for general or limited distributionnature of the assumptions, that is whether they are best-estimate or hypothetical assumptionselements to be included in the informationperiod covered by the information

when assumptions are clearly unrealistic or when auditor believes that prospective financial information will be inappropriate for its intended use. auditor should not accept, or should withdraw from an engagementExamination of Prospective Financial Information (PSAE 3400)Nature and Purpose of Prospective Financial Information

Naturecan include financial statements or one or more elements of financial statements and may be prepared:as an internal management toolfor distribution to third parties

Management responsible for the preparation and presentation of the prospective financial information, including the identification and disclosure of the assumptions on which it is based.

Purposeenhance its credibility whether it is intended for third parties or for internal purposes.Examination of Prospective Financial Information (PSAE 3400)Approach and Assurance Regarding Prospective Financial Information

when examining prospective financial information, according to PSAE 3400, the auditor should obtain sufficient appropriate evidence that:

Managements best-estimate assumptions are reasonable, and in the case of Hypothetical Assumptions, such assumptions are consistent with the purpose of the information;

Prospective financial information is properly prepared on the basis of the assumptions;

Prospective financial information is properly presented and all material assumptions are adequately disclosed.

Prospective financial information is prepared on a consistent basis with historical financial statements.Examination of Prospective Financial Information (PSAE 3400)While evidence may be available to support the assumptions on which the financial statements is based, such evidence is itself generally future oriented and speculative in nature.

The auditor is, therefore, not in a position to express an opinion as to whether the results shown in the prospective financial information will be achieved.

when reporting on the reasonableness of managements assumptions, the auditor normally provides only a moderate level of assurance.

Knowledge of the businessauditor should obtain sufficient level of knowledge of the business to be able to evaluate whether all significant assumptions required for the preparation of the prospective financial information have been identified.Examination of Prospective Financial Information (PSAE 3400)Examination Proceduresauditor should obtain written representations from the management regarding the

intended use of the prospective financial information

completeness of significant management assumptions

managements acceptance of its responsibility for the prospective financial information.

Presentation and Disclosurein addition to the specific requirements of any relevant statutes, regulations, or professional standards, the auditor will need to consider whether:Page 1085 a-f

Report

Engagements to Review Financial Statements (PSRE 2400)Engagements to Review Financial Statements (PSRE 2400)Nature of Service Review limited investigations of much narrower scope than an audit and undertaken for the purpose of providing limited (negative) assurance that the statements are presented in accordance with PFRS.

Objective of a Review engagementto enable the CPA to report whether anything has to come to his attention that would indicate that the financial statements are not presented fairly.

Level of AssuranceModerate that the information subject to review is free of material misstatementsexpressed in the form of negative assurance

Engagements to Review Financial Statements (PSRE 2400)General Principles of a Review engagementsauditor should comply with the Code of Ethics for professional accountants in the Philippines

auditor should plan and perform with an attitude of professional skepticism.

Scope of Reviewreview procedures deemed necessary in the circumstances to achieve the objective of the review

Terms of engagementauditor and client should agree on the terms of the engagementagreed terms would be recorded in an engagement letter or other suitable form such as a contract.

Planningshould plan the work so that an effective engagement will be performed.knowledge of the business.

Engagements to Review Financial Statements (PSRE 2400)Procedures to be performedconsists primarily of inquiry and analytical procedures.it does not include assessing control risk, test of records and of responses to inquiries by obtaining corroborating evidence.

if an auditor has reason to believe that the information subject to review may be materially misstated, the auditor should carry out additional or more extensive procedures as are necessary to be able to express negative assurance or to conform that a modified report is required.

Reporting Responsibilityreview report should contain a clear written expression of negative assurance.

auditor should review and assess the conclusion drawn from the evidence obtained as the basis for the expression of negative assurance.Engagements to Review Financial Statements (PSRE 2400)The Unqualified Review Reportissued when the auditor believes, based on the evidence obtained, that there is no material modifications that should be made to the financial statements in order for these financial statements to be in conformity with PFRS.

Modification of the Review Report

Departure from PFRSif matters have come to the auditors attention that indicates the financial statements do not conform to PFRS, the report should describe those matters that impair a fair presentation of the financial statements, including, unless impracticable, a quantification of the possible effects on the financial statements, and either;

Express a qualification of the negative assurance provided

When the effect of the matter is so material and pervasive to the financial statements that the auditor concludes that a qualification is not adequate to disclose the misleading or incomplete nature of financial statements, give an adverse statement that the financial statements are not presented fairly; in all material respects, in accordance with PFRS. Engagements to Review Financial Statements (PSRE 2400)Scope Limitationif there has been a material scope limitation, the report should describe the limitation and either:

Express a qualification of the negative assurance provided regarding the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed.

when the possible effect of the limitation is so significant and pervasive that the auditor concludes that no level of assurance can provided, the auditor should not provide any assurance.Engagements to Perform Agreed-Upon Procedures regarding financial information (PSRS 4400)Engagements to Perform Agreed-Upon Procedures regarding financial information (PSRS 4400)An auditor may be engaged to apply agreed-upon procedures on specific account or element of a financial statements.

may be accepted provided:client takes full responsibility for the adequacy of the procedures to be performed.

the distribution of the report is limited only to those parties who have agreed about the procedures to be performed.

Objectivefor the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.

Restrictions on the distribution of reportreport is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results.

Engagements to Perform Agreed-Upon Procedures regarding financial information (PSRS 4400)General Principles of an Agreed-upon procedures engagementauditor should comply with the Code of Ethics for Professional Accountants in the Philippines

Level of AssuranceNo Assurance is expressed.Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditors work.

Terms of the engagementa clear understanding regarding the agreed procedures and the conditions of the engagement.Engagements to Perform Agreed-Upon Procedures regarding financial information (PSRS 4400)Procedures and Evidenceauditor should carry out the procedures agreed upon and use the evidence obtained as the basis for the report of factual findings.

these are also audit procedures but usually applied only to specific accounts or elements of a financial statements.

procedures may include:Inquiry and analysisRecomputation, comparison and other clerical accuracy checksObservationInspectionObtaining confirmations

Reporting Responsibility report on agreed-upon procedures engagement needs to describe the purpose and the agreed-upon procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed.IV. Engagement to Compile Financial Information (PSRS 4410)Engagement to Compile Financial Information (PSRS 4410)Nature of service

Compilationpreparation of financial statement from the accounting records and other representation of the client.

Purposeorganize the clients representations into the format of financial statements.

Objective of a Compilation EngagementTo assist the client in the preparation of the financial statements.May also include the collection, classification and summarization, of other financial information.Engagement to Compile Financial Information (PSRS 4410)General Principles of a Compilationaccountant should comply with the Code of Ethics for Professional Accountants in the Philippines

Defining the Terms of the engagementclear understanding between the client and the accountant regarding the terms of the engagement.

Proceduresaccountant should read the compiled information and consider whether it appears to be appropriate in form and free from obvious material misstatements.

the accountant is not ordinarily required to :Make any inquiries of management to assess the reliability and completeness of the information provided.

Assess internal control Verify any matters, or Verify any explanationsEngagement to Compile Financial Information (PSRS 4410)If the accountant becomes aware that information supplied by management is incorrect, incomplete, or otherwise unsatisfactory.

accountant should consider performing the above procedures and request management to provide additional information.

If management refuses to provide additional information the accountant should withdraw from engagement, informing the entity of the reasons for withdrawal.

If the accountant becomes aware of misstatementsaccountant should try to agree appropriate amendments with the entity.

If such amendments are not made and the financial information is considered to be misleadingaccountant should withdraw from the engagement

Engagement to Compile Financial Information (PSRS 4410)Responsibility of Managementaccountant should obtain acknowledgement from management of its responsibility for the appropriate presentation of the financial information and of its approval of the financial information.

Reportingaccountants compilation report should identify the financial statements compiled and should clearly indicate that no assurance is provided on the financial statements.

financial information compiled should contain a reference such as Unaudited, Compiled without Audit or Review, or Refer to Compilation Report on each page of the of the financial information or on the front of the complete set of financial statements.