Professional Documents
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Auditing Theory CPAR
Auditing Theory CPAR
Auditing
Theory
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the
AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.
ASSURANCE ENGAGEMENTS
1. “Assurance engagement” means an agreement in which a particular expresses a conclusion
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.
2. “Subject matter information” refers to the outcome of the evaluation or measurement of a
subject matter.
3. In some assurance engagements, the evaluation or measurement of the subject I performed by
the responsible party, and the subject matter information is in the form of an assertion by the
responsible party that is made available to intended users (assertion-based engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that
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has performed the evaluation or measurement that is not available to the intended users in the
assurance report (direct reporting engagements)
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3. A review does not ordinarily involve an assessment of accounting and internal control systems,
tests of records and of responses to inquiries by obtaining corroborating evidence through
inspection, observation, confirmation and computation, which are procedures ordinarily
performed during an audit.
4. The level of assurance provided in a review report is less that that given in an audit report.
SUMMARY
Nature of service Audit Review Agreed-upon Compilation
Procedures
Level of Assurance High, but not Moderate No assurance No assurance
Provided absolute assurance
assurance
Report provided Positive assurance Negative Factual findings of Identification of
on assertion(s) assurance on procedures information
(Audit Report) assertion(s) compiled
(Review Report) (Compilation
Report)
PSQC1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL
FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES
PSA 220 (REVISED)
QUALITY CONTROL FOR AUDITS OF HISTORICAL FINANCIAL INFORMATION
PSA 210 [AMENDED BY PSA 700(REVISED)]
TERMS OF AUDIT ENGAGEMENTS
PSQC 1
1. The firm should establish a System of Quality Control to provide it with reasonable assurance
that:
a. The firm and its personnel comply with professional standards and regulatory and
legal requirements; and
b. The reports issued by the firm or engagement partners are appropriate in the
circumstances.
2. Elements of a System of Quality Control
a. Leadership responsibility for quality within the firm
b. Ethical requirements
c. Acceptance and continuance of client relationships and specific engagements.
d. Human resources
e. Engagement performance
f. Monitoring
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2. The engagement partner should
a. Take responsibility for the overall quality on each audit engagement to which that
partner is assigned.
b. Consider whether members of the engagement team have complied with ethical
requirements.
c. Be satisfied that appropriate procedures regarding the acceptance and continuance
of client relationships and specific audit engagements have been followed, and that
conclusions reached in this regard are appropriate and have been documented.
d. Be satisfied that the engagement team collectively has the appropriate capabilities,
competence and time to perform the audit engagement in accordance with
professional standards and regulatory and legal requirements, and to enable an
auditor’s report that is appropriate in the circumstances to be issued.
e. Take responsibility for the direction, supervision and performance of the audit
engagement in compliance with professional standards and regulatory and legal
requirements, and for the auditor’s report that is issued to be appropriate n he
circumstances.
f. Be satisfied that sufficient appropriate audit evidence has been obtained to support
the conclusions reached and for the auditor’s report to be issued.
It is in the interest of both client and auditor that the auditor sends an engagement
letter, preferably before the commencement of the engagement, to help in avoiding
misunderstandings with respect to the engagement.
Principal Contents
An engagement letter would generally include reference to:
The objective of the audit of financial statements.
Management’s responsibility for the financial statements.
The financial reporting framework adopted by management in
preparing the financial statements.
The scope of the audit, including reference to applicable
legislation, regulations or pronouncements of professional
bodies to which the auditor adheres.
The form of any reports or other communication of results of
the engagement.
The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent limitations of
any accounting and internal controls system, there is an
unavoidable risk that even some material misstatement may
remain undiscovered.
Unrestricted access to whatever records, documentation and
other information requested in connection with the audit.
3. Acceptance of a Change in Engagement
1. An auditor who, before the completion of the engagement, is requested to change
the engagement tone which provides a lower level of assurance, should consider the
appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result
from:
a. A change in circumstances affecting the need for the service;
b. A misunderstanding as to the nature of an audit or related service originally
requested; or
c. A restriction on the scope of the engagement, whether imposed by
management or caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for requesting a
change in the engagement)
3. A change would not be considered reasonable if it appeared that the change relates
to information that is incorrect, incomplete or otherwise unsatisfactory.
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4. Before agreeing to change an audit engagement to a related service, an auditor
would also consider any legal or contractual implications of the change.
5. If the auditor concludes that there is reasonable justification to change the
engagement and if the audit work performed complies with the PSAs applicable to
the change engagement, the report issued would be that appropriate for the revised
terms of the engagement.
6. In order to avoid confusing the reader, the report would not include reference to:
a. The original engagement; or
b. Any procedures that may have been performed by the original engagement,
except where the engagement is changed to undertake agreed-upon
procedures.
7. Where the terms of the engagement are changed, the auditor and the client should
agree in the new terms.
8. The auditor should not agree to a change of engagement where there is no
reasonable justification for doing so.
9. If the auditor is unable to agree to a change of engagement and is not permitted to
continue the original engagement, the auditor should withdraw and consider
whether there is any obligation, contractual or otherwise, to report to other parties,
such as the board of directors or shareholders, the circumstances necessitating the
withdrawal.
2. The auditor should perform the following activities at the beginning of the current audit
engagement:
Perform procedures regarding the continuance of the client relationship and the specific
audit engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.
Planning Activities
3. The auditor should establish the overall audit strategy for the audit. The overall audit strategy sets
the scope, timing and direction of the audit, and guides the development of the more detailed
audit plan
4. The establishment of the overall audit strategy involves:
a.) Determining the characteristics of the engagement that define its scope;
b.) Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communication required; and
c.) Considering the important factors that will determine the focus of the engagement team’s
efforts.
5. The auditor should develop an audit plan for the audit in order to reduce audit risk to an
acceptably low level.
6. The audit plan is more detailed than the overall audit strategy and includes the nature, timing and
extent of audit procedures to be performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
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A description of the nature, timing and extent of planned further audit procedures at the
assertion level for each material class of transactions, account balance, and disclosure, as
determined under PSA 330, “The Auditor’s Procedures in Response to Assessed Risks,”; and
Such other procedures required to be carried out for the engagement in order to comply with
PSAs
Changes to Planning Decisions during the Course of the Audit
The overall audit strategy and the audit plan should be updated and changed as necessary during the
course of the audit.
Direction, Supervision and Review
1. The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review their work.
2. The nature, timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including:
3. The auditor plans the nature, timing and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement.
Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.
1. The auditor may discuss elements of planning with those charged with governance and the entity’s
management.
2. Discussions with those charged with governance ordinarily include the overall audit strategy and
timing of the audit, including any limitations thereon, or any additional requirements.
3. When discussion of matters included in the overall audit strategy or audit plan occur, care is
required in order not to compromise the effectiveness of the audit.
The auditor should perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
2. Communicate with the previous auditor, where there has been a change of auditors, in compliance
with relevant ethical requirements.
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT
1. The auditor should obtain an understanding of the entity and its environment, including its internal
control, sufficient to identify and assess the risks of material misstatement of the financial
statements whether due to fraud or error, and sufficient to design and perform further audit
procedures.
2. The auditor should perform the following risk assessment procedures to obtain an understanding
of the entity and its environment, including its internal control:
a.) Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
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b.) Nature of the entity, including the entity’s selection and application of accounting policies.
c.) Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
d.) Measurement and review of the entity’s financial performance.
e.) Internal control.
INTERNAL CONTROL
1. Internal control is the process designed and effected by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of the
entity’s objectives with regard to:
Reliability of financial reporting;
Effectiveness and efficiency of operations; and
Compliance with applicable laws and regulations.
The control environment includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management concerning the entity’s
internal control and its importance in the entity.
The auditor should obtain an understanding of the entity’s risk assessment process, i.e., the entity’
process for identifying business risks relevant to financial reporting objectives and deciding about
actions to address those risks, and the results thereof.
The auditor should obtain an understanding of the information system, including the related
business processes, relevant to financial reporting, including the following areas:
The classes of transactions in the entity’s operations that is significant to the financial
statements.
The procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed and reported in the financial statements.
The related accounting records, whether electronic or manual, supporting information, and
specific accounts in the financial statements, in respect of initiating, recording, processing
and reporting transactions.
How the information system captures events and conditions, other than classes of
transactions that are significant to the financial statements.
The financial reporting process used to prepare the entity’s financial statements, including
significant accounting estimates and disclosures.
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Control activities are the policies and procedures to help ensure that management directives are
carried out. Examples of control activities include those relating to the following:
Authorization
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Monitoring of controls involves assessing the design and operation of controls on a timely basis
and taking the necessary corrective actions modified for changes in conditions.
1. The auditor should identify and assess the risks of material misstatement at the financial
statements level, and at the assertion level for classes of transactions, account balances, and
disclosures.
2. The auditor:
Identifies risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
Relates the identified risks to what can go wrong at the assertion level;
Considers whether the risks are of a magnitude that could result in a material
misstatement of the financial statements; and
Considers the likelihood that the risks could result in a material misstatement of the
financial statements
PSA 330
THE AUDITOR’S PROCEDURES IN REPONSE TO ASSESSED RISKS
Overall responses
1. The auditor should determine overall responses to address the risks of material misstatement at
the financial statement level. Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism n
gathering and evaluating audit evidence
Assigning more experienced staff or those with special skills or using experts
Providing more supervision
Incorporating additional elements of unpredictability in the selection of further
audit procedures to be performed
Making general changes to the nature, timing or extent of audit procedures
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The nature of the specific controls used by the entity and in particular whether
they are manual or automated
Whether the auditor expects to obtain audit evidence to determine if the
entity’s controls are effective n preventing, or detecting and correcting, material
misstatements
2. Considering the nature, timing and extent of further audit procedures
Timing refers to when audit procedures are performed or the period or date to which the audit
evidence applies.
TESTS OF CONTROLS
1. The auditor is required to perform tests of controls when:
a. The auditor’s risk assessment includes an expectation of the operating effectiveness
of controls; or
b. When the substantive procedures alone do not provide sufficient appropriate audit
evidence at the assertion level
2. Tests of the operating effectiveness of controls are performed only on those controls that
the auditor has determined are suitably designed to prevent, or detect and correct, a
material misstatement in an assertion
3. Testing the operating effectiveness of controls includes obtaining evidence about:
a. How controls were applied at relevant times during the period under audit;
b. The consistency with which they were applied; and
c. By whom or by what means they were applied.
SUBSTANTIVE PROCEDURES
1. Substantive test procedures are performed in order to detect material misstatements at the
assertion level, and include:
Tests of details of classes of transactions, account balances, and disclosures; and
Substantive analytical procedures
2. The auditor’s substantive procedures should include the following audit procedures related to
the financial statement closing process:
Agreeing or reconciling the financial statements with accounting records; and
Examining material journal entries and other adjustments made during the
course of preparing the financial statements
3. The auditor should perform audit procedures to evaluate whether the overall presentation of
the financial statements, including the related disclosures, are in accordance with the applicable
financial reporting framework.
Documentation
1. The auditor should document:
The overall responses to address the assessed risks of material misstatement at
the financial statement level and the nature, timing, and extent of the further
audit procedures;
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The linkage of those procedures with the assessed risks at the assertion level;
and
The results of the audit procedures
2. If the auditor plans to use audit evidence about the operating effectiveness of controls obtained
in prior audits, the auditor should document the conclusions reached with regard to relying on
vcfsuch controls that were tested in a prior audit.
3. The auditor’s documentation should demonstrate that the financial statements agree or
reconcile with the underlying accounting records.
PSA 320
AUDIT MATERIALITY
1. Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements
2. There is an inverse relationship between materiality and the level of audit risk
3. In evaluating whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework, the auditor should assess whether
the aggregate of uncorrected misstatements that have been identified during the audit is
material.
4. If the auditor concludes that the aggregate of uncorrected misstatements may be material, the
auditor needs to consider:
Reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements for the
misstatements identified
5. If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should consider the appropriate modification to the
auditor’s report.
6. If the auditor has identified a material misstatement resulting from error, the auditor should
communicate the misstatements to the appropriate level of management on a timely basis, and
consider the need to report it to those charged with governance.
PSA 520
ANALYTICAL PROCEDURES
1. “Analytical procedures” means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or which deviate from predicted amounts.
2. Analytical procedures also include consideration of comparisons of the entity’s financial
statements:
a. Comparable information for prior periods
b. Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation
c. Similar industry information
3. Analytical procedures also include consideration of relationships:
a. Among elements of financial information that would be expected to conform to a
predictable patter based on the entity’s experience, such as gross margin
percentages.
b. Between financial information and relevant no-financial information, such as payroll
costs to numbers and employees
4. The auditor should apply analytical procedures at the planning stage to assist in understanding
the business and in identifying areas of potential risk. Analytical procedures in planning the use
both financial and non-financial information.
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5. The auditor should apply analytical procedures at or near the end of the audit when performing
an overall conclusion as to whether the financial statements as a whole are consistent with the
auditor’s knowledge of the business.
6. The application of analytical procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the contrary. The presence of
these relationships provides audit evidence as to the completeness, accuracy and validity of the
data produced by the accounting system
7. The extent of reliance that the auditor places on the results of analytical procedures depends on
the following factors:
a. Materiality of the items involved
b. Other audit procedures directed toward the same audit objectives
c. Accuracy with which the expected results of analytical procedures can be predicted.
8. When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should investigate and obtain adequate explanations and appropriate corroborative
evidence.
9. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by:
a. Corroboration of management responses; and
b. Consideration of the need to apply other audit procedures based on the results of
such inquiries, if management is unable to provide an explanation or if the
explanation is not considered adequate.
PSA 550
RELATED PARTIES
1. Management is responsible for the identification and disclosure of related parties and
transactions with such parties.
2. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and the
effect of related party transactions that are material to the financial statements. However, an
audit cannot be expected to detect all related party transactions.
3. The auditor needs to have a sufficient understanding of the entity and its environment to enable
identification of the events, transactions and practices that may result in a risk of material
misstatement regarding related parties and transactions with such parties.
4. When obtaining an understanding of the entity’s internal control, the auditor should consider
the adequacy of control activities over the authorization and recording of related party
transactions.
5. In examining the identified related party transactions, the auditor should obtain sufficient
appropriate audit evidence as to whether these transactions have been properly recorded and
disclosed.
6. The auditor should obtain a written representation from management concerning:
a. The completeness of information provided regarding the identification of related
parties; and
b. The adequacy of related party disclosures in the financial statements
7. The auditor is unable to obtain sufficient appropriate audit evidence concerning related parties
and transactions with such parties or concludes that their disclosure in the financial statements
is not adequate; the auditor should modify the audit report appropriately.
PSA 610
CONSIDERING THE WORK OF INTERNAL AUDIT
1. The external auditor should obtain a sufficient understanding of internal audit activities to
identify and assess the risks of material misstatement of the financial statements and to design
and perform further audit procedures.
2. The external auditor should perform an assessment of the internal audit function when internal
auditing is relevant to the external auditor’s risk assessment.
3. When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the important criteria are:
a. Organizational status
b. Scope of the function
c. Technical competence
d. Due professional care
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4. When planning to use the work of internal auditing, the external auditor will need to consider
internal auditing’s tentative plan for the period and discuss it as early a stage as possible.
5. Where the work of internal auditing is to be a factor in determining the nature, timing and
extent of the external auditor’s procedures, it is desirable to agree in advance the timing of such
work, the extent of audit coverage, materiality levels and proposed methods of sample
selection, documentation of the work performed and review and reporting procedures.
6. A liaison with internal auditing is more effective when meetings are held at appropriate intervals
during the period.
7. When the external auditor intends to use specific work of internal auditing, the external auditor
should evaluate and perform audit procedures on that work to confirm its adequacy for the
external auditor’s purposes.
8. The evaluation of specific work of internal auditing involves consideration of the adequacy of
the scope of the work and related programs and whether the preliminary assessment of the
internal auditing remains appropriate.
9. The nature, timing and extent of audit procedures performed on the specific work of internal
auditing will depend on:
The external auditor’s judgment as to the risk of material misstatement of the
area concerned;
The assessment of internal auditing; and
The evaluation of the specific work by internal auditing.
10. The external auditor would record conclusions regarding the specific internal auditing work that
has been evaluated and the audit procedures performed on the internal auditor’s work.
PSA 620
USING THE WORK OF AN EXPERT
1. “Expert’ means a person or firm possessing special skill, knowledge and experience in a
particular filed other than accounting and auditing.
2. An expert may be:
a. Contracted by the entity;
b. Contracted by the auditor;
c. Employed by the entity; or
d. Employed by the auditor.
3. When determining the need to use the work of an expert, the auditor would consider:
a. The materiality of the financial statement item being considered;
b. The risk of misstatement based on the nature and complexity of the matter being
considered; and
c. The quantity and quality of other audit evidence available
4. When planning t use the work of an expert, the auditor should evaluate the professional
competence and objectivity of the expert.
5. The risk that an expert’s objectivity will be impaired increases when the expert is:
a. Employed by the entity; or
b. Related in some other manner to the entity.
6. The auditor should obtain sufficient appropriate audit evidence that the scope of the expert’s
work is adequate for the purposes of the audit. Audit evidence may be obtained through a
review of the terms of reference which are often set out in written instructions from the entity
to the expert.
Such instructions to the expert may cover matters such as:
a. The objectives and scope of the expert’s work
b. A general outline as to the specific matters the auditor expects the expert’s report
to cover
c. The intended use by the auditor of the expert’s work, including the possible
communication to third parties of the expert’s identity and extent f involvement
d. The extent of the expert’s access to appropriate records and files
e. Clarification of the expert’s relationship with the entity, if any.
f. Confidentiality of the entity’s information
g. Information regarding the assumptions and methods intended to be used by the
expert and their consistency with those used in prior periods.
7. The auditor should evaluate the appropriateness of the expert’s work as audit evidence
regarding the financial statement assertion being considered. This will involve assessment of
whether the substance of the expert’s findings is properly reflected in the financial statements
or supports the financial statement assertions, and consideration of:
a. Source data used.
b. Assumptions and methods used and their consistency with prior periods
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c. Results of the expert’s work in the light of the auditor’s overall knowledge of the
business and of the results of other audit procedures.
8. When considering whether the expert has used source data which is appropriate in the
circumstances, the auditor would consider the following procedures:
a. Making inquiries regarding any procedures undertaken by the expert to establish
whether the source data is sufficient, relevant and reliable.
b. Reviewing or testing the data used by the expert
9. If the results of the expert’s work do not provide sufficient audit evidence or if the results are
not consistent with other audit evidence, the auditor should resolve the matter. This may
involve:
a. Discussions with the entity and the expert
b. Applying additional audit procedures
c. Including possibly engaging another expert; or
d. Modifying the auditor’s report
10. When issuing an unmodified auditor’s report, the auditor should not refer to the work of an
expert. Such a reference might be misunderstood to be a qualification of the auditor’s opinion
or a division of responsibility, neither of which is intended.
11. If as a result of the work of an expert, the auditor decides to issue a modified auditor’s report, in
some circumstances it may be appropriate, in explaining the nature of the modification, to refer
to or describe the work o the expert (including the identity of the expert and the extent of the
expert’s involvement). In these circumstances, the auditor would obtain the permission of the
expert before making such a reference. If permission is refused and the auditor believes a
reference is necessary, the auditor may need to seek legal advice.
PSA 500(REVISED)
AUDIT EVIDENCE
1. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion
2. “Audit Evidence” is all the information used by the auditor in arriving at the conclusions on
which the opinion is based, and includes the information contained in the accounting records
underlying the financial statements and other information
3. Accounting records generally include:
The records of initial entries and supporting records, such as checks and records
of electronic fund transfers;
Invoices
Contracts
The general and subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in formal journal entries; and
Records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures
4. Other information that the auditor may use as audit evidence includes:
Minutes of the meetings
Confirmations from third parties
Analysts’ reports
Comparable data about competitors (benchmarking)
Control manuals
Information obtained by auditors from such audit procedures as inquiry,
observation, and inspection; and
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Other information developed by, or available to, the auditor that permits the
auditor to reach conclusions through valid reasoning
CATEGORIES OF ASSERTIONS
a. Assertions about classes of transactions and events for the period under audit:
1. OCCURRENCE - transactions and events that have been recorded have
occurred and pertain to the entity
2. COMPLETENESS - all transactions and events that should have been recorded
have been recorded.
3. ACCURACY - amounts and other data relating to recorded transactions and
events have been recorded appropriately
4. CUTOFF - transactions and events have been recorded in the correct
accounting period
5. CLASSIFICATION - transactions and events have been recorded in the proper
accounts
b. Assertions about account balances at the period end:
1. EXISTENCE -assets, liabilities, and equity interests exist
2. RIGHTS AND OBLIGATIONS - the entity holds or controls the right to assets,
and liabilities are obligations of the entity
3. COMPLETENESS - all assets, liabilities, and equity interests that
should have been recorded have been recorded
4. VALUATION AND ALLOCATION - assets, liabilities and equity interests are
included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded
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c. Assertions about presentation and disclosure:
1. OCCURRENCE AND RIGHTS AND OBLIGATIONS
Disclosed events, transactions, and other matters have occurred and
pertain to the entity
2. COMPLETENESS
All disclosures that should have been included in the financial
statements have been included
3. CLASSIFICATION AND UNDERSTANDABILITY
Financial information is appropriately presented and described and
disclosures are clearly expressed
4. ACCURACY AND VALUATION
Financial and other information are disclosed fairly and at appropriate
amounts
3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include analytical review
procedures and tests of details
PSA 501
AUDIT EVIDENCE – ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
1. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable.
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2. If unable to attend the physical inventory count on the date panned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an alternative date
and, when necessary, perform tests of intervening transactions.
3. Where attendance is impracticable, due to factors such as the nature and location of the
inventory, the auditor should consider whether alternative procedures provide sufficient
appropriate audit evidence of existence and condition to conclude that the auditor need not make
reference to a scope limitation.
4. In planning attendance at the physical inventory count or the alternative procedures, the auditor
would consider:
The nature of the accounting and internal control systems used regarding inventory.
Inherent, control, and detection risks, and materiality related to inventory.
Whether adequate procedures are expected to be established and proper instructions issued
for physical inventory counting.
The timing of the count.
The locations at which inventory is held.
Whether an expert’s assistance is needed.
6. To obtain assurance that management’s procedures are adequately implemented the auditor
would observe employee’s procedures and perform test counts.
7. The auditor would also consider cutoff procedures including details of the movement of inventory
just prior to, during, and after the count so that the accounting for such movements can be
checked at a later date.
8. The auditor would test the final inventory listing to assess whether it accurately reflects actual
inventory counts.
9. When inventory is under the custody and control of a third party, the auditor would ordinarily
obtain direct conformation from the third party as to the quantities and condition of inventory
held on behalf of the entity. Depending on the materiality of this inventory, the auditor would
consider:
The integrity and independence of the third party.
Observing, or arranging for another auditor to observe, the physical inventory count.
Obtaining another auditor’s report on the adequacy of third party’s accounting and internal
control systems for ensuring that inventory is correctly counted and adequately safeguarded.
Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts, or obtaining confirmation from other parties when such inventory has been pledged
as collateral.
1. The auditor should carry out procedures in order to become aware of any litigation and claims
involving the entity, which may have a material effect on the financial statements.
2. When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should seek direct communication with the entity’s lawyers.
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3. The letter, which should be prepared by management and sent by the auditor, should request the
lawyer to communicate directly with the auditor. When it is considered unlikely that the lawyer
will respond to a general inquiry, the letter would ordinarily specify:
A list of litigation and claims.
Management’s assessment of the outcome of the litigation or claim and its estimate of the
financial implications, including costs involved.
A request that the lawyer confirms the reasonableness of management’s assessments and
provides the auditor with further information if the list is considered by the lawyer to be
incomplete or incorrect.
4. The auditor considers the status of legal matters up to date of the audit report.
5. If management refuses to give the auditor permission to communicate with the entity’s lawyers,
this would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of
opinion.
1. When long-term investments are material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding their valuation and disclosure.
2. Audit procedures ordinarily include considering evidence as to whether the entity has the ability
to continue to hold the investments on a long-term basis and discussing with management
whether the entity will continue to hold the investments as long-term investments and obtaining
written representations to that effect.
3. Other procedures would ordinarily include considering related financial statements and other
information, such as market quotations, which provide an indication of value and comparing such
values to the carrying amount of the investments up to the date of the auditor’s report.
Segment information
1. When segment information is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its disclosure in accordance with the applicable
financial reporting framework.
2. The auditor considers segment information in relation to the financial statements taken as a
whole, and is not ordinarily required to apply auditing procedures that would be necessary to
express an opinion on the segment information standing alone.
3. Audit procedures regarding segment information ordinarily consist of analytical procedures and
other audit test appropriate in the circumstances.
4. The auditor would discuss with management the methods used in determining segment
information, and consider whether such methods are likely to result in disclosure in accordance
with GAAP and test the application of such methods.
PSA 505
EXTERNAL CONFIRMATIONS
1. External confirmation is the process of obtaining and evaluating audit evidence through a direct
communication from a third party in response to a request for information about a particular item
affecting assertions made by management in the financial statements.
2. A positive external confirmation request asks the respondent to reply to the auditor in all cases
either by indicating the respondent’s agreement with the given information, or by asking the
respondent to fill in the information.
3. A negative external confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request.
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4. Negative confirmation requests may be used to reduce the risk of material misstatement to an
acceptable level when:
The assessed risk of material misstatement is lower.
A large number of small balances are involved.
A substantial number of errors are not expected.
The auditor has no reason to believe that respondents will disregard these requests.
5. When performing confirmation procedures, the auditor should maintain control over the process
of selecting those to whom a request will be sent, the preparation and sending of confirmation
requests, and the responses to those requests.
6. The auditor should perform alternative procedures where no response is received to a positive
external confirmation request. The alternative audit procedures should be such as to provide the
evidence the evidence about the financial statement assertions that the confirmation request was
intended to provide.
7. When the auditor forms a conclusion that the confirmation process and alternative procedures
have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should
undertake additional procedures to obtain sufficient audit evidence.
8. The auditor should evaluate whether the results of the external confirmation process together
with the results from any other procedures performed, provide sufficient appropriate audit
evidence regarding the assertion being audited.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
FRAUD refers to an intentional act by one party or more individuals among management, those charged
with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal
advantage
Fraud involves:
Incentive or pressure to commit fraud
A perceived opportunity to act or to do so
Some rationalization of the act
Management fraud - fraud involving one or more members of management or those charged with
governance
Employee fraud - fraud involving only employees of the entity
(In either case, there may be collusion within the entity or with third parties outside of the entity)
2. MISAPPROPRIATION OF ASSETS
Involves the theft of an entity’s assets and is often perpetrated by employees in
relatively small and immaterial amounts
Can also involve management who are usually more able to disguise or conceal
misappropriations in ways that are difficult to detect
Often accompanied by false or misleading records or documents in order to conceal the
fact that the aspects are missing or have been pledged without proper authorization
Can be accompanied in a variety of ways including:
o Embezzling receipts
o Stealing physical assets or intellectual property
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o Causing an entity to pay for the goods and services not received
o Using an entity’s assets for personal use
Responsibilities of Those charged with Governance and of Management
1. The primary responsibility for the prevention and detection of fraud rests with both those
charged with governance of the entity and with management
2. It is important management, with the oversight of those charged with governance, place a
strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place,
and fraud deterrence, which could persuade in individuals not to commit fraud because of the
likelihood detection and punishment
3. It is the responsibility of those charged with governance of the entity to ensure , through
oversight of management, that the entity establishes and maintains internal control to provide
reasonable assurance with regard to reliability of financial reporting, effectiveness and efficiency
of operations and compliance with applicable law and regulations
4. It is the responsibility of management, with oversight from those charged with governance, to
establish a control environment and maintain policies and procedures to assist in achieving the
objective ensuring, as far as possible, the orderly and efficient conduct of the entity’s business
3. The risk of the auditor not detecting a material misstatement resulting from management fraud
is greater than for employee fraud, because management is frequently in a position to directly
or indirectly manipulate accounting records and present fraudulent financial information
4. The subsequent discovery of a material misstatement of the financial statements resulting from
fraud does not, in and of itself, indicate a failure to comply with PSAs
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4. Considers other information that may be helpful in identifying the risks of material
misstatement due to fraud.
Responses to the risks of material misstatement due to fraud
1. The auditor should determine overall responses to address he assessed risks of material
misstatement due to fraud at the financial statement level and should design and perform
further audit procedures whose nature, timing and extent are responsive to the assessed risks at
the assertion level
2. In determining overall responses to address the risks of material misstatement due to fraud at
the financial statement level the auditor should:
Consider the assignment and supervision of personnel
Consider the accounting policies used by the entity; and
Incorporate an element of unpredictability in the selection of the nature, timing
and extent of audit procedures
3. Audit procedures responsive to risks of material misstatement due to fraud at the assertion
level
The auditor’s responses may include changing the nature, timing, and extent of audit
procedures in the following ways:
a. The nature of audit procedures to be performed may need to be changed to obtain
audit evidence that is more reliable and relevant to obtain additional corroborative
information
b. The timing of substantive procedures may need to be modified. The auditor may
conclude that performing substantive testing at or near the period end better addresses
an assessed risk of material misstatement due to fraud
c. The extent of the procedures applied reflects the assessment of the risks of material
misstatement due to fraud. For example, increasing sample sizes or performing
analytical procedures at a more detailed level may be appropriate
4. To respond to the risk of management override of controls, the auditor should design and
perform audit procedures to:
a. Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in the preparation of the financial statements
b. Review accounting estimates for biases that could result to material misstatement due
to fraud
c. Obtain an understanding of the business rationale of significant transactions that the
auditor become aware of that are outside the normal course of the business for the
entity, or that otherwise appear to be unusual given the auditor’s understanding of the
entity and its environment
Management representations
The auditor should obtain written representations from management that:
a. It acknowledges its responsibility for the design and implementation of internal control to
prevent and detect fraud
b. It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud
c. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity
involving:
i. Management
ii. Employees who have significant roles in internal control
iii. Others where the fraud could have a material effect on the financial statements
and
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d. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected
fraud, affecting the entity’s financial statements communicated by the employees,
former employees, analysts, regulators or others
Documentation
1. The documentation of the auditor’s understanding of the entity and its environment and the
auditor’s assessment of the risks of material misstatement should include:
a. The significant decisions reached during the discussion among the engagement
team regarding the susceptibility of the entity’s financial statements to material
misstatement due to fraud
b. The identified and assessed risks of material misstatement due to fraud at the
financial statement level and at the assertion level
2. The documentation of the auditor’s responses to the assessed risks of material misstatement
should include:
a. The overall responses to the assessed risks of material misstatement due to fraud at
the financial statement level and the nature, timing and extent of audit procedure,
and the linkage of those procedures with the assessed risks of material
misstatement due to fraud at the assertion level
b. The results of the audit procedures, including those designed to address the risk of
management override of controls
3. The auditor should document the communications about fraud made to management, those
charged with governance, regulators and others
4. When the auditor has concluded that the presumption that there is a risk of material
misstatement due to fraud related to revenue recognition is not applicable in the circumstances
of the engagement, the auditor should document the reasons for that conclusion
PSA 250
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
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1. “Noncompliance” as used in PSA 250 refers to acts of omission or commission by he entity being
audited, either intentional and unintentional, which are contrary to the prevailing laws and
regulations
2. Noncompliance does not include personal misconduct (unrelated to the business activities of
the entity) by the entity’s management or employees
3. When planning and performing audit procedures and in evaluating and reporting the results
thereof, the auditor should recognize that noncompliance by the entity with laws and regulation
may materially affect the financial statements
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c. When the repetitive nature of a calculation or other process performed by a
computer information system makes a 100% examination cost effective
AUDIT SAMPLING
1. “Audit Sampling” involves the application of audit procedures to less than 100% of items with an
account balance or class of transactions
2. Sampling may be statistical or nonstatistical.
I. Statistical sampling means any approach t sampling that has the following
characteristics:
a. Random selection of a sample
b. Use of probability theory to evaluate sample results
Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application. In
aids an auditor I forming conclusions about one r more characteristics or either a particular class of
transactions or a particular account balances
1. ATTRIBUTE SAMPLING
Applicable to tests of control
Used to test an entity’s rate of deviation (also called rate of occurrence) from a
prescribed control procedure
2. VARIABLES SAMPLING
Applicable to substantive test
Most commonly used to test whether recorded account balances are fairly stated
SAMPLING RISK
1. It arises from the possibility that the auditor’s conclusion, based on a sample may be different
from the conclusion reached if the entire population were subjected to the same audit
procedures
2. The confidence level (also called reliability level) is the mathematical complement of the
applicable sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level
when developing the sampling design
4. For tests of control, it has the following aspects:
a. Risk of assessing control risk too low (Risk of Overreliance)
The risk that the auditor would conclude that the control risk is lower
than it actually is
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of assessing control risk too high (Risk of under reliance)
The risk that the auditor would conclude that control risk is higher than
actually is
It affects audit efficiency as it would lead to additional work to establish
that initial conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
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The risk that the auditor would conclude that a material error exists
when in fact it does
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of incorrect rejection
The risk that the auditor would conclude that a material error exists
when in fact it does not
It affects audit effectiveness as it would lead to additional work to
establish that initial conclusions were incorrect
NONSAMPLING RISK
It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related
to the size of the sample. For example, most audit evidence is persuasive rather than conclusive, the
auditor might use inappropriate procedures, or the auditor might misinterpret evidence and fail to
recognize an error.
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It is appropriate for both statistical and nonstatistical sampling
b. Systematic selection
The number of sampling units in the population is divided by the sample size to give a
sample interval, for example 50, and having determined the starting point within the
first 50, each 50th sampling unit is hereafter selected
Although the starting point may be determined haphazardly, the sample is more likely
to be truly random if it is determined by use of a computerized random number
generator or random number tables
When using systematic selection, the auditor would need to determine that sampling
interval corresponds with a particular pattern in the population
d. Haphazard selection
The auditor selects a sample without following a structured technique
It is not appropriate when using statistical sampling
e. Stratification
This involves subdividing the population into subpopulations or strata, i.e., a group of
sampling units which have similar characteristics (often monetary value)
The strata must be explicitly defined so that each sampling unit can belong to only one
stratum
This method enables the auditor to direct his efforts towards the items he considers
would potentially contain the greater monetary error
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Appropriate when the expected deviation rate is near zero and when the auditor’s
objective is to find at least one deviation in a sample if the actual population deviation
rate exceeds or equals a predetermined critical rate (tolerable deviation rate)
B. Difference estimation
It is a classical variables sampling technique that uses the average difference between
audited amounts and individual recorded amounts to estimate the total audited amount of a
population and an allowance for sampling risk.
C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited amounts to
recorded amount in the sample to estimate the total amount of the population and an
allowance for sampling risk
Ratio estimation is more appropriate when he differences are nearly proportional to book
values.
Difference estimation is more appropriate when there is little or n relationship between the
absolute amounts of the differences and the book values.
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PPS is only useful for TESTS OF OVERSTATEMENTS (e.g., assets) since the sample selection
method dictates that the larger the transaction or amount, the more likely that it will be
selected.
PPS is inappropriate for testing liabilities because understatement is the primary audit
consideration
1. A CIS environment exists when a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit, whether the computer is operated
by the entity or by a third party
2. The overall objective and scope of an audit does not change in a CIS environment
3. A CIS environment may affect:
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a. The procedures followed in obtaining a sufficient understanding of the accounting
and internal control systems
b. The consideration of the inherent and control risk
c. The design and performance of tests of controls and substantive procedures
4. The auditor should have sufficient knowledge of the CIS to plan, direct, and review the work
performed
5. If specialized skills are needed, the auditor would seek the assistance of a professional
possessing such skills, who may be either on the auditor’s staff or an outside professionals
6. In planning the portions of the audit which may be affected by the client’s CIS environment, the
auditor should obtain an understanding of the significance and complexity of the CIS activities
and the availability of data for use in the audit
7. When the CIS are significant, the auditor should also obtain an understanding of the CIS
environment and whether it may influence the assessment of inherent and control risks
8. The auditor should consider the CIS environment in designing audit procedures to reduce audit
risk to an acceptably low level. The auditor can use either manual audit procedures, computer-
assisted audit techniques, or a combination of both to obtain sufficient evidential matter
Organizational Structure
Characteristics of a CIS organizational structure includes:
a. Concentration of functions and knowledge
Although most systems employing CIS methods will include certain manual operations,
generally the number of persons involved in the processing of financial information is significantly
reduced.
b. Concentration of programs and data
Transaction and master file data are often concentrated, usually in machine-readable
form, either in one computer installation located centrally or in a number of installations distributed
throughout the entity.
Nature of Processing
The use of computers may result in the design of systems that provide less visible evidence than
those using manual procedures. In addition, these systems may be accessible by a larger number of
persons.
System characteristics that may result from the nature of CIS processing include:
a. Absence of input documents
Data may be entered directly into the computer system without supporting document
In some on-line transaction systems, written evidence of individual data entry
authorization (e.g., approval for order entry) may be replaced by other procedures, such
as authorization controls contained in computer programs (e.g., credit limit approval)
b. Lack of visible audit trail
The transaction trail may be partly in machine-readable form and may exist only for a
limited period of time (e.g., audit logs may be set to overwrite themselves after a period of time or
when the allocated disk space is consumed)
c. Lack of visible output
Certain transactions or results of processing may not be printed or only summary data
may be printed
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incorporated into the system. On the other hand, a computer program that is not correctly programmed
and tested may consistently process transactions or other data erroneously
b. Programmed control procedures
The nature of computer processing allows the design of internal control procedures in
computer programs
c. Single transaction update of multiple or data base computer files
A single input t the accounting system may automatically update all records associated
with the transaction
d. Systems generated transactions
Certain transactions may be initiated by the CIS itself without the need for an input
document
e. Vulnerability of data and program storage media
Large volumes of data and the computer programs used to process such data may be
stored on portable or fixed storage media, such as magnetic disks and tapes. These media are vulnerable
to theft, loss, or intentional or accidental destruction.
CIS APPLICATION CONTROLS – to establish specific control procedures over the application systems in
order to provide reasonable assurance that all transactions are authorized, recorded and are processed
completely, accurately and on a timely basis. CIS application controls include:
a. Controls over Input – designed to provide reasonable assurance that:
Transactions are properly authorized before being processed by the computer
Transactions are accurately converted into machine readable form and recorded in the
computer data files
Transactions are not lost, added, duplicated or improperly changed
Incorrect transactions are rejected, corrected and, if necessary, resubmitted on a timely
basis.
b. Controls over processing and computer data files – designed to provide reasonable assurance
that:
Transactions, including system generated transactions, re properly processed by the
computer
Transactions are not lost, added, duplicated or improperly changed
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Processing errors (i.e., rejected data and incorrect transactions) are identified and
corrected on a timely basis
c. Controls over output – designed to provide reasonable assurance that:
Results of processing are accurate
Access to output is restricted to authorized personnel on a timely basis
Output is provided to appropriate authorized personnel on a timely basis
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These same transactions are added to a transaction file for subsequent
validation and updating of the master file on a batch basis
d. On-line/ inquiry
Restricts users at terminal devices to making inquiries of master file
Master files are updated by other systems, usually on a batch basis
e. On-line downloading/ uploading processing
On-line downloading refers to the transfer of data from a master file to
an intelligent terminal device for further processing by a user
NETWORK ENVIRONMENT
1. A network environment is a communication system that enables computer users to share
computer equipment, application software, data, and voice and video transmissions
2. A file server is a computer with an operating system that allows multiple users in a network to
access software applications and data files
3. Basic types of networks
a. Local area network (LAN)
b. Wide area network (WAN)
c. metropolitan area network (MAN)
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12. TERMINALS – CRT devices or microcomputers used for input/output (communication) with the
CPU
13. POINT-OF-SALE DEVICES – a terminal connected to a computer. It takes the place of a cash
register or similar devices which allows instant recording and is capable of keeping perpetual
inventory
14. MODEM – a device for interfacing communications equipment within communication networks
Software consists of computer programs which instruct the computer hardware to perform the desired
processing.
ELECTRONIC DATA INTERCHANGE (EDI) – the electronic exchange of transactions, from one entity’s
computer to another entity’s computer through an electronic communications network. In electronic
fund transfer (EFT) Systems, for example, electronic transactions replace checks as a mean of payment.
EDI controls include:
a. Authentication – controls must exist over the origin, proper submission, and proper delivery
of EDI communications to ensure that the EDI messages are accurately sent and received to
and from authorized customers and suppliers.
b. Encryption – involves conversion of plain text data to cipher text data to make EDI messages
unreadable to unauthorized persons
c. VAN controls – a value added network (VAN) is a computer service organization that
provides network, storage, and forwarding (mailbox) services for EDI messages
AUDIT APPROACHES
1. Auditing around the computer – the auditor ignores or bypasses the computer processing
function of an entity’s EDP system
2. Auditing with the computer – the computer is used as an audit tool
3. Auditing through the computer – the auditor enters the client’s system and examines directly
the computer and its system and application software
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3. Flowcharting software – used to produce a flowchart of a program’s logic and may
be used both in mainframe and microcomputer environments
4. Program tracing and mapping – program tracing is a technique in which instruction
executed is listed along with control information affecting that instruction. Program
mapping identifies sections of code which may be potential source of abuse
5. Snapshot – this technique “takes a picture” of the status of program execution,
intermediate results, or transaction data at specified processing points I the
program processing
II. Program testing – involves the use of auditor-controlled actual or simulated data
1. Historical audit techniques – test the audit computer controls at a point in time
a. Test data
A set of dummy transactions specifically designed to test the control
activities that management claims to have incorporated into the
processing programs
Shifts control over processing to the auditor by using the client’s
software to process auditor-prepared test data that includes both valid
and invalid conditions
It embedded controls are functioning properly, the client’s software
should detect all the exceptions planted in the auditor’s test data
Ineffective if the client does not use the software tested
b. Base case system evaluation (BCSE)
Develops test data that purports to test every possible condition that an
auditor expects a client’s software will confront
Provides an auditor with much more assurance than test data alone, but
expensive to develop and therefore cost-effective only in large
computer systems
c. Integrated test facility (ITF)
A variation of test of data whereby simulated data and actual data are run simultaneously
with the client’s program and computer results are compared with auditor’s predetermined
results
It provides assurance that the software tested is actually used to prepare financial reports
d. Parallel simulation
It involves of processing client’s live (actual) data utilizing an auditor’s generalized audit
software
If an entity’s control have been operating efficiently, the client’s software should generate the
same exceptions as the auditor’s software
It should be performed on a surprise basis, I possible
e. Controlled reprocessing
A variation of parallel simulation, it involves processing of actual client data through a copy of
the client’s application program
2. Continuous audit techniques – test the audit computer controls throughout a
period.
a. Audit modules – programmed audit routines incorporated into an
application program that are designed to perform an audit function such as
a calculation, or logging activity
b. Systems control audit review files (SCARFs) – log that collect transaction
information for subsequent review and analysis by the auditor
c. Audit hooks – “exists” in an entity’s computer program that allows an
auditor to insert commands for audit processing
d. Transaction tagging – a transaction record is tagged and then traced
through critical control points in the information system
e. Extended records – this technique attaches additional audit data which
would not otherwise be saved to regular historic records and thereby helps
to provide a more complete audit trail
III. Review of operating system and other system software
1. JOB ACCOUNTING DATA/ OPERATING SYSTEM LOGS – these logs that track
particular functions, include reports of the resources use by the computer system.
The auditor may be able to use them to review the work processed, to determined
whether unauthorized applications were processed and to determine that
authorized applications were processed properly
2. LIBRARY MANAGEMENT SOFTWARE – this logs changes in programs, program
modules, job control language, and other processing activities
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3. ACCESS CONTROL AND SECURITY SOFTWARE – this restricts access to computers to
authorized personnel through techniques such as only allowing certain users with
“read-only” access or through use of an encryption
COMPUTERIZED AUDIT TOOLS
1. AUDIT SOFTWARE – computer programs used to process data of audit significance from the
client’s accounting system
a. Package programs (generalized audit software)
1. Reading computer files
2. Selecting samples
3. Performing calculations
4. Creating data files
5. Printing reports in an auditor-specified format
b. Purpose written programs (special purpose or custom designed programs)
c. Utility programs – they are generally not designed for audit purposes
2. Electronic spreadsheets – contain a variety of predefined mathematical operations and
functions that can be applied to data entered into the cells of a spreadsheet
3. Automated work paper software – designed to generate a trial balance, lead schedules, and
other reports useful for the audit. The schedules and reports can be created once the auditor
has either manually entered or electronically imported through using the client’s account
balance information into the system
4. Text retrieval software – allow user to view any text that ia available in an electronic format. The
software program allows the user to browse through text files much as a user would browse
through books.
5. Database management systems
6. Public databases
7. Word processing software
Factors to consider in using CAAT
1. Degree of technical competence in CIS
2. Availability of CAAT and appropriate computer facilities
3. Impracticability of manual tests
4. Effectiveness and efficiency
5. Timing of tests
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RELATED PARTY TRANSACTIONS
Identifying transactions with related parties
The following procedures may identify material transactions with known related parties or indicate the
existence of previously unknown related parties:
1. Provide personnel performing all segments of the audit with the names of known related parties
2. Review the minutes of meetings of the board of directors and committees
3. Review filings with SEC and other regulatory agencies
4. Review conflict-of-interest statements obtained from the client’s management
5. Review business transacted with major customers, suppliers, borrowers, and lenders for
indications of undisclosed relationships
6. Consider whether unrecognized transactions are occurring, such as receiving or providing
accounting, management, or other services at no charge
7. Review accounting records for large, unusual, or nonrecurring transactions or balances,
especially those near the end of the period
8. Review invoices from law firms
9. Review confirmations of loan receivable and payable for guarantees.
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c. A statement that management’s list of pending or threatened claims is complete, or
identification of any omissions
4. The attorney’s refusal to reply to the audit inquiry is a SCOPE LIMITATION that may affect the
audit report
5. In the case of unasserted claims which the client has not disclosed, the lawyer is not required to
note them in his or her reply to the auditor. However, the lawyer is generally required to inform
the client of the omission and to consider withdrawing if the client fails to inform the auditor
The representation letter is provided in connection with your audit of the financial statements of ABC Company for
the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial
statements present fairly, in all material aspects, the financial position of ABC Company as of December 31, 20X1
and of the results of its operations and its cash flows for the year time ended in accordance with (indicate relevant
financial reporting framework).
We acknowledge our responsibility for the fair presentation of the financial statements in accordance with
(indicate relevant financial reporting framework).
We confirm to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may include:
There have been no irregularities involving management or employees who have a significant role in
the accounting and internal control systems or that could have a material effect on the financial
statements
We have made available to you all the books of account and supporting documentation and all minutes
of meetings and shareholders and BOD (namely those held on (dates) respectively)
We confirm the completeness of the information provided regarding the identification of related
parties
The financial statements are free of material misstatements, including omissions
The company has complied with all aspects of contractual agreements that could have a material effect
on the financial statements in the event of noncompliance. There has been no noncompliance with
requirements of regulatory authorities that could have a material effect on the financial statements in
the event of noncompliance.
We have no plans or intentions that may affect or alter the carrying value or classification of asset and
liabilities reflected in the financial statement
(no plans regarding the inventory abandonment or no inventory were stated in an amount in excess of
net realizable value)
Indicate that there are no events subsequent to period which require adjustments in the statements
Indicate that the claim is settled in a specific amount and there are no other litigations are expected to
be received
Indicate that there are no formal or informal compensating balance arrangements with any of the cash,
except those that are disclosed
Indicate that you have recorded material regarding the capital per se
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1. The auditor should evaluate if the entity is going to continue as a going concern
2. The auditor should consider:
The process followed
Assumptions that are being based on
Management’s plans for future action
3. When doubting events with regards to its “going concern assumption”, the auditor should:
Review the plans of the management
Gather sufficient evidence that indicates a company will not be able to carry out the
business anymore, consider the effect of any plans and other mitigating factors
Seek written representations from the management regarding its future plans
4. Events and conditions that may cast doubt about the going concern assumption:
FINANCIAL
Net (current) liability position
Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment
Financial debtors indications of withdrawal
Negative operating cash flows
Adverse key financial ratios
Substantial operating loss or deterioration of assets
Arrears of dividends
Inability to pay creditors on time
Inability to comply with loan terms and agreements
Conversion of cash to credit when in delivery
Inability to obtain financing for essential investments
OPERATING
Loss of key management personnel without replacement
Loss of major franchise, supplier etc.
Labor and shortages of important supplies
OTHER
Non compliance with capital or other statutory requirements
Pending legal or regulatory proceedings against the entity
Changes in the legislation or government policy that may affect the entity
[Appropriate addressee]
We have audited the accompanying financial statements of ABC Company which comprise a balance
sheet as at date December 31, 20X1, and the income statement, statement of changes in equity and
cash flow statement for the year ended, and a summary of significant accounting policies and other
explanatory notes.
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and applying appropriate accounting policies; and making accounting estimates that are reasonable in
circumstances.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that
we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the financial statements are free from material misstatement. An audit involves performing
procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend upon the auditor’s judgment, including the assessment of the risks of
material misstatements on the financial statements whether due to fraud or error. In making those risk
assessments; the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal
control of the entity. An audit also includes evaluating the appropriateness of the accounting policies
used and the reasonableness of accounting estimates made by the management, as well as evaluating
the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the financial statements fairly, in all material respects, the financial position of ABC
Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then
ended in accordance with the Philippine Financial Reporting Standards.
[Auditor’s signature]
[Date of Auditor’s report]
[Auditor’s address]
Without qualifying our opinion, we draw attention to Note X in the financial statements which
indicates that the Company incurred a net loss of P_____ during the year ended December 31,20X1 and,
as of date, the company’s current liabilities exceeded its total assets by P_____. These conditions, along
with other matters, as set forth in Note X, indicate the existence of a material uncertainty which may
cast significant doubt about the Company’s ability to continue as a going concern.
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Matters that affect the auditor’s opinion
If the following circumstances exists that the auditor may not be able to conclude an
unqualified judgment and the effect of the matter is or may be material to the financial
statements:
There is a limitation on the scope of the auditor’s work. – could lead to a
qualified opinion or a disclaimer of opinion
A disagreement with the management regarding the acceptability of the
accounting policies selected the method of their application on the
adequacy of financial statement disclosures. Could lead to a qualified
opinion or an adverse of opinion.
Qualified opinion
Should be expressed when the auditor concludes that the unqualified opinion cannot be
expressed but that the effect of any disagreement with management, or limitation on
scope is not so material and pervasive as to require an adverse opinion or a disclaimer
of opinion.
A qualified opinion should be expressed as being “except for” the effects of the matter
to which the qualification relates.
Adverse opinion
Should be expressed when the effect of the disagreement is so material and pervasive
to the financial statements that the auditor concludes that a qualification of the report
is not adequate to disclose the misleading or incomplete nature of the financial
statements.
Disclaimer of Opinion
Should be expressed when the possible effect of a limitation on the scope is so material
and pervasive that the auditor has not been able to obtain sufficient appropriate audit
evidence and accordingly is unable to express an opinion on the financial statements.
REPORT MODIFICATIONS
Limitation on scope
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
We did not observe the counting of the physical inventories as of December 31, 20X1, since that
date was prior to the time we were initially engaged as auditors for the company. Owing to the
nature of the company’s records, we were unable to satisfy ourselves as to inventory quantities
by other audit procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements fairly presents, in all material respects … (opinion paragraph)
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statement of changes in equity and cash flow statement for the year ended, and a summary of
significant accounting policies and other explanatory notes.
(The paragraph discussing the scope of the audit would either be omitted or amended according
to the circumstances)
We were not able to observe all physical inventories and confirm accounts receivables due to
limitations placed on the scope of our work by the company)
Because of the significance of the matters discussed in the preceding paragraph, we do not
express an opinion on the financial statements.
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
As discussed in the Note X to the financial statements, no depreciation has been provided in the
financial statements which practice, in our opinion, is not in accordance in PFRS. The provision
for the year ended December 31, 20X1, should be xxx based on the straight-line method of
depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly,
the fixed assets should be reducedby accumulated depreciation of xxx and the loss for the year
and accumulated deficit should be increased by xxx and xxx, respectively.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements fairly presents, in all material respects … (opinion paragraph)
4. DISAGREEMENT ON ACCOUNTING POLICIES – INADEQUATE DISCLOSURES
QUALIFIED OPINION
We have audited … (remaining words are the same as in the introductory page)
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
On January 31,20X2, the Company issued debentures in the amount of… for the purpose of
financing plant expansion. The debenture agreement restricts the payment of future cash
dividends to earnings after December 31,19X1, which restrictions was not disclosed in the
company’s financial statements. Disclosure of this is required by the PAS 1, Presentation of
financial statements.
In our opinion, except for the omission of the information included in the preceding paragraph,
the financial statements present fairly, in all material respects… (opinion paragraph)
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Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the
financial statements do not present fairly, in all material respects, the financial position of ABC
Company as of December 31,19X1, and of its financial performance and its cash flows for the
year then ended in accordance with PFRS… (Opinion paragraph)
Facts discovered after the date of the auditor’s report but before the financial statements are
issued
4. During the period from the date of the auditor’s report to the date the financial
statements are issued:
o The responsibility to inform the auditor of facts which may affect the financial
statements rests with management
o When the auditor becomes aware of the facts that will materially affect the
financial statements, the auditor should:
Consider whether the financial statements needed amendment
Discuss the matter with the management
Take the action appropriate in the circumstances
5. When the management amends the financial statements, the auditor would carry out
the procedures necessary in the circumstances and would provide management with a
new report on the amended financial statements
6. The new auditor’s report would be dated not earlier than the date the amended
financial statements are signed or approved and, accordingly, the procedures to identify
subsequent events would be extended to the date of the new auditor’s report
7. When management does not amend the financial statements but the auditor believes
they need to be amended and the auditor’s report has not been released to the entity,
the auditor should express a qualified opinion or an adverse opinion.
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Would be dated earlier than the date the revised financial statements are
approved
The auditor is permitted to restrict the audit procedures regarding the
revised financial statements to effects of the subsequent event that
necessitated the revision.
11. It may not be necessary to revise the financial statements and issue a new auditor’s
report when issue of the financial statements for the following period is imminent,
provided appropriate disclosures are to be made in such statements
5. Division of responsibility
o When the principal auditor bases the audit opinion on the financial statements
taken as a whole solely upon the report of another auditor regarding the audit of
one or more components, the principal auditor’s report should state this fact
clearly and should indicate the magnitude of the portion of the financial
statements audited by the other auditor.
CORRESPONDING FIGURES
o For the prior periods, these are an integral part of the current period financial
statements and have to be read in conjunction with the amounts and other
disclosures relating to the current period.
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o These are not presented as complete financial statements capable of standing
alone
o The auditor should obtain sufficient appropriate audit evidence that the
corresponding figures meet the requirements of GAAP in the Philippine
o The auditor should assess whether:
Accounting policies used for the corresponding figures are consistent
with those of the current period or whether appropriate adjustments
and/or disclosures have been made
Corresponding figures agree with the amounts and other disclosures
presented in prior period or whether appropriate adjustments and/or
disclosures have been made
COMPARATIVE FINANCIAL STATEMENTS
These comparative financial statements for the prior period(s) are considered separate
financial statements.
These are presented for comparison with the financial statements of the current period,
but do not form part of the current period financial statements
The auditor should obtain sufficient appropriate evidence that the comparative financial
statements meet the requirements of GAAP in the Philippines
The auditor should assess whether:
o Accounting policies of the prior period are consistent with those of the current
period or whether appropriate adjustments and/or disclosures have been made
o Prior period figures presented agree with the amounts and other disclosures
presented in the prior period or whether appropriate judgments and disclosures
have been made
3. When the incoming auditor decides to refer to the predecessor auditor’s report, the
incoming auditor’s report should indicate:
a. That the financial statements of the prior period were audited by another
auditor
b. Type of report issued by the predecessor auditor and, if the report was modified,
the reasons therefore;
c. Date of that report
4. When the prior period financial statements were not audited, the incoming auditor
should state that the corresponding figures are unaudited.
5. If the incoming auditor identifies that the corresponding figures are materially
misstated, the auditor should request management to revise the corresponding figures
or if management refuses to do so, appropriately modify the report
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CONTINUING AUDITOR
1. The auditor may express adverse or qualified opinion, disclaim an opinion, or include an
emphasis of paragraph with respect to one or more financial statements for one or
more period, while issuing a different report on the other financial statements
2. When finding the connectivity of the prior period financial statements with the current
financial statements, if the opinion on such prior period is different from the opinion
previously expressed, the auditor should disclose the substantive reasons for the
different opinion in an emphasis of matter paragraph
INCOMING AUDITOR
When the financial statements of the prior period were audited by another auditor,
The predecessor auditor may reissue the audit report on the prior period with the
incoming auditor only reporting on the current period; or
The incoming auditor’s report should state that the prior period was audited by another
auditor and the incoming auditor’s report should indicate:
o That the financial statements of the prior period was audited by another auditor
o The type of report issued by the predecessor auditor, and if the report was
modified, the reasons; therefore
o Date of the report
1. An entity ordinarily issues on an annual basis a document which includes its audited
financial statements together with the auditor’s report thereon, also called “annual
report”.
Material inconsistencies
2. This exists when the other information contradicts information contained in the audited
financial statements
3. If, on reading the other information, the auditor identifies material inconsistency, the
auditor should determine whether the financial statements need to be amended
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should express a qualified or adverse opinion
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should consider including in the auditor auditor’s
report an emphasis of matter paragraph.
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(BASED ON PSA 800)
1. Special purpose audit engagements include:
a. Financial statements prepared in accordance with a comprehensive basis of
accounting other than GAAP in the Philippines
b. Specified accounts, elements of accounts, or terms in a financial statement
c. Compliance with contractual agreements
d. Summarized financial statements
2. The auditor should assess and review the conclusions drawn from the audit evidenced
obtained during the special purpose audit engagement as the basis for an expression of
opinion. The report should contain a clear written expression of opinion
3. Before undertaking a special purpose audit engagement, the auditor should ensure
there is agreement with the client as to the exact nature of the engagement and the
form and content of the report to be issued
4. The auditor’s report on a special purpose audit engagement, except for a report on
summarized financial statements, should include the following basic elements,
ordinarily in the following layout:
Title
Addressee
Opening or introductory paragraph
o Identification of the financial information audited
o A statement of the responsibility of the entity’s management and the
responsibility of the auditor
A scope paragraph
o Reference to the PSAs applicable to special purpose audit engagements
o Description of the work the auditor performed
Opinion paragraph containing an expression of opinion on the financial
information
Date of the report
Auditor’s address
Auditor’s signature
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2. The report should state whether, in the auditor’s opinion, the entity has complied with
the particular provisions of the agreement
2. For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate audit evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.
3. A review engagement provides a moderate level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of negative
assurance.
4. In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entity’s organization, accounting
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systems, operating characteristics and the nature of its assets, liabilities, revenues, and
expenses.
6. If the 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 confirm that a modified
report is required.
We have reviewed the accompanying balance sheet of AAA Company at December 31, 19XX, and the related
statements of income, changes in equity and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements
based on our review.
We conducted our review in accordance with the Philippines Standards on Review Engagements 2400. This
Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial
statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and
analytical procedures applied to financial data and thus provide less assurance than an audit. We have not performed
an audit an accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial
statements are not presented fairly, in all material respects in accordance with Philippine Financial Reporting
Standards.
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A complete set of financial statements.
2. The objective of an agreed-upon procedures engagement is for 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.
3. As the auditor simply provides a report of the factual findings of agreed-upon procedures,
no assurance is expressed. Users of the report assess for themselves the procedures and
findings reported by the auditor and draw their own conclusions from the auditor’s work.
4. The report is restricted to those parties that have agreed to procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.
REPORTING
6. The report on an 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.
3. The procedures employed are not designed and do not enable the accountant to express
any assurance on the financial information.
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4. Independence is not a requirement for a compilation engagement. However, where the
accountant is not independent, a statement to that effect would be made in the
accountant’s report.
5. The accountant should obtain a general knowledge of the business and operations of the
entity and should be familiar with the accounting principles and practices of the industry in
which the entity operates and with the form and content of the financial information that
is appropriate in the circumstances.
7. The accountant should read the compiled information and consider whether it appears to
be appropriate in form and free from obvious material misstatements.
9. The financial information compiled by the accountant should contain a reference such as
“Unaudited’, “Compiled without Audit or Review,’ or “Refer to the Compilation report’ on
each page of the financial information or on the front of the complete set of financial
statements.
On the basis of information provided by the management we have compiled, in accordance with the Philippine
Standard on Related Services applicable to compilation engagements, the balance sheet of XXX Company as of
December 31, 19XX and statements of income, changes in equity and cash flows for the year then ended.
Management is responsible for these financial statements. We have not audited or reviewed these financial
statements and accordingly express no assurance thereon.
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Hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or are
considering a major change in the nature of operations; or
A mixture of best-estimate and hypothetical assumptions.
4. Prospective financial information can include financial statement or one or more elements
of financial statements and may be prepared:
As an internal management tool, for example, to assist in evaluating a possible capital
investment; or
For distribution to third parties.
7. The auditor should not express any opinion as to whether the results shown in the
prospective financial information will be achieved.
9. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective
financial information will be inappropriate for its intended use.
10. The auditor should obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of significant
management assumptions and management’s acceptance of its responsibility for the
prospective financial information.
We have examined the forecast (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the forecast including the assumptions set out in Note X on which it is based.
Based on our examination of the evidence supporting the assumptions the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.
Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in
accordance with Philippine Financial Reporting Standards.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected
and the variation may be material.
We have learned the projection (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
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Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the projection including the assumptions set out in Note X on which it is based.
This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection has been
prepared using a set of assumptions that include hypothetical assumptions about future events and management’s
actions that are not necessarily expected to occur. Consequently, readers are cautioned that this projection may not
be appropriate for purposes other than that described above.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which
causes us t believe that these assumptions do not provide a reasonable basis for the projection, assuming that (state
or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the basis of
the assumptions and is presented in accordance with Philippine Financial Reporting Standards.
Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still
likely to be different from the projection since other anticipated events frequently do not occur as expected and the
variation may be material.
When the auditor believes that the presentation and disclosure of the prospective information is
not adequate, the auditor should express a qualified or adverse opinion or withdraw from the
engagement as appropriate.
When the auditor believes that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information, the auditor should either express an adverse
opinion or withdraw from the engagement as appropriate.
When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw from
the engagement or disclaim the opinion describe the scope limitation in the report on the
prospective financial information.
CODE OF PROFESSIONAL ETHICS FOR CPAs
is based on the International Code of Ethics for professional accountants developed by the
International Federation of Accountants.
Is mandatory for all CPAs and is applicable to professional services performed in the
Philippines on or after January 1, 2004.
Is divided into three parts:
Part A - applies to all professional accountants unless otherwise specified
Part B - applies only to those professional accountants in public practice
Part C - applies to employed professional accountants, and may also apply, in
appropriate circumstances, to accountants employed in public practice
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a. Attainment of professional competence- requires initially a high standard of general
education followed by specific education, training, and examination in professionally
relevant subjects and a period of work experience.
b. Maintenance of professional competence– requires a continuing awareness of
development in the accountancy profession including relevant national and
international pronouncements on accounting, auditing, and other relevant regulations
and statutory requirements
3. CONFIDENTIALITY
a. Professional accountants have an obligation to respect the confidentiality of information
about a client’s or employer’s affairs acquired in the course of professional services.
b. The duty of confidentiality continues even after the end of the relationship between the
professional accountant and the client or employer.
4. TAX PRACTICE
a. The professional accountant should ensure that the client or the employer are aware of
the limitations attaching to tax advice and services so that they do not misinterpret an
expression of opinion as an assertion of fact.
b. A professional accountant should not be associated with any return or communication
in which there is reason to believe that it:
1. Contains a false or misleading statement;
2. Contains statements or information furnished recklessly or without any real
knowledge of whether they are true or false; or
3. Omits or obscure information required to be submitted and such omission or
obscurity would mislead the revenue authorities.
c. When a professional accountant learns of a material error or omission in a tax return of
a prior year, or the failure to file a required tax return, he/she has a responsibility to:
1. Promptly advise the client or employer of the error or omission and recommend
that disclosure be made to the revenue authorities.
2. If the client or employer does not correct the error, he/she:
a. Should inform the client or the employer that it is possible to act for them in
connection with that return or other related information submitted to the
authorities; and
b. Should consider whether continued association with the client or employer in
any capacity is consistent with professional responsibilities.
When a professional accountant performs services in a country other than the home
country and differences on specific matters exist between ethical requirements of the two
countries, the following provisions should be applied:
1. When the ethical requirements of the country in which the services are being
performed are LESS STRICT than the Philippine Code of Ethics, then our code should be
applied.
2. When the ethical requirements of the country in which the services are being
performed are STRICTER than our code, then the ethical requirements in the country
where services are being performed should be applied.
3. When the ethical requirements of the Philippines are mandatory for services performed
outside the Philippines and are stricter than that set out in (1) and (2) above, then the
ethical requirements of the Philippines should be applied.
6. PUBLICITY
In the marketing and promotion of themselves and their work, professional accountants
should:
a. Not use means which brings the profession into disrepute.
b. Not make exaggerated claims for the services they are able to offer, the qualifications
they possess, or experience they have gained; and
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c. Not denigrate the work of other accountants.
INDEPENDENCE
a. Independence requires:
1. Independence of mind – The state of mind that permits the provision of an opinion
without being affected by influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism.
2. Independence in appearance – The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all
relevant information, including safeguards applied, would reasonably conclude a
firms, or a member of the assurance team’s integrity, objectivity or professional
skepticism had been compromised.
b. Members of assurance teams, firms, and network firms should identify THREATS to
independence, evaluate the significance of those threats, and, if the threats are other
than clearly insignificant, identify and apply SAFEGUARDS to eliminate the threats or
reduce them to acceptable level, such that independence of mind and independence in
appearance are not compromised. In situations when no safeguards are available to
reduce the threat to an acceptable level. The only possible actions are to:
1. Eliminate the activities or interest creating the threat; or
2. Refuse to accept or continue the assurance engagement.
Network firm – an entity under common control, ownership or management with the firm or any entity
that a reasonable and informed third party having knowledge of all relevant information would
reasonably conclude as being part of the firm nationally or internationally
Financial interest – an interest in equity or other security, debenture, loan or other debt instrument of
an entity including rights and obligations to acquire such an interest and derivatives directly related to
such interest
THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a financial interest
in, or other self-interest conflict with, an assurance client. Examples:
a. A direct financial interest or material indirect financial interest in an assurance client
b. A loan or guarantee to or from an assurance client or any of its directors or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
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f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements
2. SELF-REVIEWTHREAT
Occurs when:
a. Any product or judgment of a previous assurance engagement or non-assurance
engagement needs to be reevaluated in reaching conclusions on the assurance engagement
or;
b. When a member of the assurance team was previously a director or officer of the assurance
client, or was an employee in a position to exert direct and significant influence over the
subject matter of the assurance engagement
3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to
promote, an assurance client’s position or opinion to the point that objectivity may, or may be
perceived to be compromised
4. FAMILIARITY THREAT
Occurs when, by virtue of a close relationship with an assurance client, its directors, officers or
employees, a firm or a member of the assurance team becomes too sympathetic to the client’s
interests.
5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting objectively and
exercising professional skepticism by threats, actual or perceived, from the directors, officers or
employees of an assurance client
SAFEGUARDS
1. When the threats are identified, other than those that are clearly insignificant, appropriate
safeguards should be identified and applied to eliminate the threats or reduce them to an
acceptable level. This decision should be documented
2. When the safeguards are available are insufficient to eliminate the threats to independence or
to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or
interest creating the threat, the only course of action available will be the refusal to perform, or
withdrawal from, the assurance engagement
CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firm’s own systems and procedures
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d. Internal policies and procedures to monitor compliance with firm policies and procedures as
they relate to independence
e. Policies and procedures that will enable the identification of interests or relationships between
the firm or members of the assurance team and assurance client
f. Policies and procedures to monitor and, if necessary, mange the reliance on revenue received
from a single assurance client
g. Using different partners and teams with separate reporting lines for the provision of non-
assurance service to an assurance client
h. Policies and procedures to prohibit individuals who are not members of the assurance team
from influencing the outcome of the assurance engagement
i. Timely communication of a firm’s policies and procedures, and any changes thereto, to all
partners and professional staff, including appropriate training and education thereon
j. Designating a member of senior management as responsible for overseeing the adequate
functioning of the safeguarding system
k. Means of advising partners and professional staff of those assurance clients and related entities
from which they must be independent
l. A disciplinary mechanism to promote compliance with policies and procedures; and
m. Policies and procedures to empower staff to communicate to senior levels within the firm any
issue of independence and objectivity that concerns them; this includes informing staff of the
procedures open to them
Safeguards within the firm’s own systems and procedures may include ENGAGEMENT SPECIFIC
safeguards such as the following:
a. Involving an additional professional accountant to review the work done or otherwise advise as
necessary. This individual could be someone from outside the firm or network firm, or someone
with the firm or network firm who was not otherwise associated with the assurance team
b. Consulting a third party, such as a committee of independent directors, a professional
regulatory body or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged with governance,
e. Disclosing to audit committee, or others charged with governance, the nature of services
provided and extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client
g. Involving another firm to perform or re-perform part of the assurance engagement
h. Involving another firm to re-perform the non-assurance service to the extent necessary to
enable to take responsibility for that service; and
i. Removing an individual from the assurance team, when that individual’s financial interest or
relationships create a threat to independence
ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of the assurance client
during the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the assurance services and
ends when the assurance report is issued, except when the assurance engagements is of a
recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance engagement ends
with the notification by either party that the professional relationship has terminated or the
issuance of the final assurance report, whichever is later
4. In the case of an audit engagement, the engagement period includes the period covered by the
financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by the financial
statements that the firm will report on, the firm should consider whether any thretas to
independence may be created by:
a. Financial or business relationships with the audit client during or after the period
covered by the financial statements, but prior to the acceptance of the audit
engagement; or
b. Previous services provided to the audit client
Similarly, in the case of an assurance engagement that is not an audit engagement, the firm
should consider whether any financial or business relationships or previous services may create
threats to independence.
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