July 26, 2019

• The audit engagement letter should be sent directly to the audit committee of the auditee, so that the
independence requirement and the integrity of the management could be somehow preserve or prove by
the auditor.
• If there will be a change in the terms of the engagement, is it allowed by PSA 210?
(Sa umpisang agreement nyo magau-audit ka, then at the middle of the engagement sabi niya review na
lang ang i-perform o kaya naman other assurance or non-assurance engagement)
✓ Yes, it is allowed. Provided that there is reasonable justification.
✓ Take note always of the legal and contractual application of such change.
• Kapag hindi mo na-meet yung pre-conditions of the audit, automatically you can withdraw. As long as,
you are not violating any laws and regulations. But there are exceptions, and these are more on legal or
requirements of the law.
• Kung ayaw mong mag-withdraw, pwede mo namang i-change yung engagement. Provided that it has
been resulte from “any” of these 3 (page 12 ppt).
• GENERAL RULE:
✓ If the change is from LOWER to HIGHER level of audit engagement: even if these 3 are not present
as long as you have meet the conditions
Review → Audit = ALLOWED
✓ If the change is from HIGHER to LOWER level:
Audit → Review = NOT RECOMMENBALE
But if it is being required by the law or it has been resulted from any of these 3, you can change it.
Kasi habang tumataas ang audit engagement mo, mas marami kang gagawin. Unlike, pag marami kang ginawa
tapos sasabihin doon ka na lang sa konting gagawin, parang hindi siya magandang tingnan. Because it might
compromise your competence and also your professional behaviour as an auditor.
• Once you have accepted the change in the engagement, na-settle mo na yung issue with regards to the
conditions, factors affecting the change. Ano ang dapat mong gawin?
(a) Kapag ikaw ay nag change ng engagement for example: from review to audit. Wag mo nang sabihin
na dating kang nagreview because it will just create misconceptions, and could mislead the users of
the new reports that we are going to perform.
EXCEPT: When the new engagement is an AGREED- UPON PROCEDURE
(b) Pag hindi pumayag or nag agree, withdraw. Nagbago nga kayo ng engagement, pumayag ka kaso si
client ayaw pumayag sa bagong terms ng engagement, withdraw na lang.
• We are planning because we want to know the nature, time and extent of the audit.
3 main reasons of audit planning:
(1) To obtain sufficient appropriate evidence for the circumstances
(2) To know if the benefits from the audit that we are going to have will be greater than its costs
(3) To avoid any disagreements and misunderstandings that may happen between the auditor and the
client
• While you are understanding the general environment of the client, you are also gaining understanding
of the entity’s internal control.
• Are all business risks should be assessed?
*Business risks = factors that could affect the attainment of the objectives of an entity. It is the
overall risks of the company
• Is analytical procedure always required in the audit planning or can I just skip the procedure?
• You must notice that part of audit planning is understanding internal control, and assessing the risks
pertaining to the internal control. And that is after the initial audit plan has been prepared.
“Audit planning will not end unless and until you have given your audit opinion.”
So along the way, even if you are performing procedures pertaining to audit or the audit procedures
itself, you could modify your audit plan.
• Factors that are needed to be considered by the auditor in understanding the client’s Business and
Industry
(1) Industry and external environment of the entity
- Nagkakaroon ng environmental scanning ang auditor. Inaassess mo, what are the factors, what
are the entities that could affect the company as far as the financial reporting is concern. So
nandyan yung competitors, laws and regulations, etc. You need to do that because it is part of
knowing if there is an acceptable financial reporting from the entity.
(2) Business operations and processes
- That is part of the company’s internal control. You want to know if the the company has an
accounting information system, or if it expanding already certain accounting standards.
NOTE: In planning, you are just KNOWING and you are not yet computing. You might inquire, visit, review
their financial statements, get information from the employees. BUT you are not computing yet any
amount.
(3) Management and governance
- You are bounded by Professional Code of Ethics, you must be dependent to them. Kung
napalampas mo na hindi mo malaman kunware na may kamag-anak ka sa company, that is a
question to your competence. You did not perform or the procedures you have done is
insufficient.
(4) Objectives and strategies
(5) Measurment and performance
- By means of analytical procedure
• You need to understand the company’s environment, so that you may able to determine the risks that
could affect the company from which is not on the control of the company nor the auditor.
- Inherent risks: automatic risks, you cannot do anything because it is already there. It is always
present whether the company wants it or not.
• You need to understand the company’s environment because there are automatic risks for those specific
industries kahit ayaw nila. For us to be able to consider that in your audit.
• Unique accounting requirements ng company, kailangan mong malaman yon

Business Operations and Processes

(slide 19 and 20 may kinalaman silang lahat sa financial)
• Hindi lahat ng business risks kailangan mong i-assess, because there are business risks that are not
affecting the audit.
• Tour the Plant and Offices
- To observe and must be known by the management
- That can be done after you already have your engagement letter
Ex: Obserbahan ang mga empleyado ng UE. Pag pasok sa accounting office ng 8am, isa pa lang ang
tao sa sampung nandoon- isa-isa silang dumadating kasi maraming late.
✓ That is an observation that could affect the audit and the procedures. That will modify the audit
plan. Tapos yung mga late na yon buo pa ang sweldo, that will affect the financial statement.
Pwedeng iba yung nakikita sa FS doon sa actual na nangyayari sa environment. Pwedeng maganda yung FS
theoretically, pero procedurally panget.

• Identify related parties

- Most commonly kapag nagaudit ng may parent and subsidiary relationship. Kailangan malaman
kasi the subsidiary’s FS is to be reported or consolidated to the parent company.
Management and Governance
• The auditor needs to know it so that the he will gain understanding of the entity’s policies and
procedures or in short ‘internal control’ of the entity.
• Pinapakealaman mo rin kung ano ang attitudes, values, and activities ng Board of Directors a because it
could be a threat or risk to your audit and to the audit committee as well.
• To check, you can check their (slide 23, bullets)

Client Objectives and Strategies

• Strategies- deterrents (safeguards) to any risks pertaining to the organizational objectives. These are the
things that they do to minimize the entity’s risks. Kasi kung maganda ang strategies nila, yung risk na
magkakamali ang opinion mo sa pagaudit ng kanilang FS ay mamiminimize din.

Kapag maganda ang process sa loob ng company, mababa ang chance na mali yung mga reports or
information na kukunin mo sa company or not in conformance with the financial reporting framework.

Ang dami-dami munang paghahanda na gagawin para masiguro na ang opinion na ibibigay ng auditor ay
appropriate in the circumstances. So there are things that needed to be done before saying that your opinion
is appropriate in the circumstances.
Client’s Objectives- Internal Control Objectives (slide 24)
(1) Accuracy ng financial statement- if the FS really follows the financial principles
(2) Management of the resources of the companys- gusto mong makita if there are no fraud happening with
the utilization of these resources and if there are no indication that the operation of the business could
materially affect the financial statement
(3) Compliance with laws and regulations

The most important thing that the auditor should look into is the ‘Financial Reporting Reliability’. Dahil ang
pineperform ay FS Audit kaya dito naman talaga nakafocus.
Business risk- risk that the client will fail to achieves its objectives
• Hindi naattain ng client yung kanyang objectives or some of it because
(a) The client is so silent. Tahimik siya in the sense that hindi sya gumagawa ng paraan para iminimize
yung risk na ito. Or may ginagawa man, insufficient yon. Kasi there are conditions, events,
circumstances, or actions that could adversely affect the to achieve the entity’s objectives
(b) Or walang appropriate strategies para iapply doon sa naanticipate nyong mga risks. Na kahit na
inherent risk siya, you can think of possible solutions to minimize effect of the risk
• Are all business risks should be assessed by the auditor?
✓ No, only those risks that could materially affect the financial statements
• Risks which are the primary concern of the auditor:
(1) Risk pertaining to FS:
Management or Business Risk → Risk of Material Misstatement (RMM)
(a) Inherent Risk
uncontrollable by the auditor, inverse relationship with detection risk
(b) Control Risk
* Ina- assess lang niya yung level ng mga risk na yan para makapag adjust siya ng detection risk
(2) Detection risk or combined risk- galing kay auditor, base doon sa mga business risk kung anong
klase ng detection risk ang ilalagay niya
-controllable by the auditor
• Risk Assessement Procedure (RAP)- Identifying and assessing RMM
• Audit of FS = Risk-Based Approach, kasi nakasalalay sa assessement ng risk kung anong klaseng
procedure ang gagawin mo or kung anong klaseng testing ang gagawin mo
• AR= IR x CR x DR

Risk assessement procedure to obtain understanding para malaman mo if yung mga risks ay galing ba sa fraud
or error:
(1) Inquiry
(2) Review
(3) Observation
(4) Tour the plant of the company
• Identify first the RMM
• Estimate and assess the signifance of the risk- in numbers or descriptions
• Your action will affect your detection risk, kaya ayon ang huling ina- identify mo

Significant Risk = RMM

• Analytical Procedures
- The auditor determines the plausible (probable) relationship among data
- Determining relationship between data and most of the time quantitative
- Mas makakadetermine ng risk kapag may comparison ng dalawang FS
- Ex:FS Analysis
- Base on expectation
 Objectives:

Nature, Time & Extent of audit procedure:

Test of control and substantive test
Planning Stage required

Application of Understand entity

Analytical
Substantive Test
Procedure not required Gather evidences
Procedure

Validate auditor’s assessment of FS-

Completion Stage required
consistency of conclusion

Substantive Test Analytical Procedure not required

Procedure
Test of Details required

• Walang significance yung pagkuha mo ng mga ratio sa FS analysis if not compared sa industrry
averages
• Extent of Reliance on the Analytical Procedure
- Because your analytical procedure is just base on estimates, there is a limited reliance on the
Analytical Procedure
- Aside from analytical procedure, you should perform other procedures that will help you to
understand the company including its internal control