AUD THEO - CHAPT 1

Types of Assertions (when ur testing a specific account)

1. Occurence
- all transaction recognized in fs has occurred relating to the company
2. Completeness
- lahat ng transactions are recorded and recognized in fs, walang kulang
3. Accuracy
- recorded accurately with the proper amounts (transposition error) mathematical
accuracy
4. Cut off
- all transactions are recognized in the proper acctng period, related in the current
period, accounted properly - accrued and prepaid exp.
5. Classification
- transactions are classified fairly, correctly.
Systematic Process of Auditing

-requests of documents, review of these documents, relationship of assertions and

established criteria (pfrs, pas), discussed to mgt.
Four phases/activities in Auditing (should be in order)
1. Pre-engagement activities
- nagkakaroon ng client, agreement, how much would it be, scheduling ng budgeting,
draft of engagement letter (negotiation of fees, period (gaano katagal audit ng isang
company), client inquiries
2. Risk assessment.
- kick off meeting, actual meeting (partners, bosses, engagement managers,
president, plans documents needed, 1-2hrs), understanding of entity and
environment
(1. recurrent client-reconfirmation, palaging client) , interview, changes sa process,
materiality (depends on ur industry, certain percentage na gagamitin then multiply to
the total assets to get the materiality-how to get the percentage depends on the audit
firm) ... now a client will give u TB, accnts that are equal and above the materiality
*Internal Control
3. Substantive testing
- Tama ba bilang (Testing of inv) (testing of bank reconciliation) (testing of cash)
making analytical, procedures, more on documentation, movement of a certain
account (increase decrease)
4. Completion
- closing meeting, finalization (acceptable ba mga findings) during the substantive
testing nadiscuss mo na ung findings para aware ang mgt like major findings, review
of fs, audit if tama amounts and disclosures.

Types of Audit
1. FS Audit
- focus in assertions, representation made by the mgt in accordance with the
framework (focus ito ng discussion)
 2. Compliance Audit
- audit by the govt unit like bir, issue loa to open books to audit
3. Operational/Performance Audit
- to assess or measure the performance of an entity (internally), effectiveness and
efficiency.
Types of Auditors
1. External Auditors
- CPAs in public practice, who works in audit firms, external because appointed sila
ng companies
2. Internal Auditors
- employed ng company. to assist improvement
3. Govt Auditors
- employee of govt
Assurance provided by the auditor (REASONABLE)
Using of Sampling data Testing
1. Sampling Testing
-we dont audit 100% population, inaalam mo muna ung laman
2. Specific Identification
3. Random Sampling
- such applications are used. maraming transactions pero maliliit lahat
4. 100% Population
Nature of Evidence
1. Persuasive
- power to influence or persuade auditors na tama ung nakuha nilang supporting
document (75% - 25% inherit limitation)
2. Conclusive

AUD THEO- CHAPT 2

Why do this auditing standards matter?
-provides minimums guidance, to determine the audit steps na gagawin and iapply to achive
objective in a specific accnt
Objectives?
-accuracy, completeness etc.
-yardstick, sukatan kung gaano kaganda ung quality of auditing
-itong standard pinaka criteria for auditors
Guidelines of PSA
- not mandatory but prescriptive or suggested na sundin at the minimum
Req for GAAS
List fo 10 Standards
1. General standards
-TIP
-Technical Training and Proficiency (adequate, requirement of gaas is the u should
 be cpa)
-Independence (mental attitude in all matter relating to audit, aside from being in
public practice, as a distinct in the private practice sa company na inaaudit mo)
-Professional Care (concerns what the independent auditor does, how well he or she
does it. should possesses the degree of skill commonly possesses by other auditors,
exercise them with a reasonable care-due professional care)

2. Standards of fieldwork
- PIE
-Planning (adequate
-Internal Control Consideration (sufficient understanding of the entity or the client and
its environment including the interna control because it is the auditor’s objective to
assess the risk of material of fs or the fs. either there's an existing error or maybe
due to fraud) - nature ng company or the client
-Evidential Matter (through inspection, observation, inquiries and confirmations)
(sufficient and appropriate audit evidence -appropriateness - measure of the quality
of the evidence, is it relevant? is it reliable? and it must be both so that evidence to
be appropriate

3. Standards of reporting
- DOGI /GIDO
-GAAP fs is in the accordance of gaap)
-Inconsistency (consistency from the prior period to the current period, principles
should be consistent from pp to cp) (2019 vs 2020)
-Disclosure (notable disclosure should be mentioned in the fs, disclosed either sa
note 1 or sa audit report, major disclosures)
-Opinion

Types of Opinion
1. Unqualified
- clean report, lahat ng inaudit mo are below materiality threshold, walang material na
misstatement or pagkakamali sa balances, nagkaroon ng reasonable assurance na
tama ang laman ng fs na inaudit mo

2. Qualified
- di siya confident sa specific process or transaction na naencounter na prevented
him/her to issue clean report

3. Disclaimer
- minemention na ang auditor which distance him/herself from providing an opinion
sa vuong fs as a whole, parang may sinasabi lang siya na ito lang may opinion kami
na pwedeng pagrelyan, ito lang ang nagkaroon kami ng confidence at naaudit namin
ng tama

4. Adverse opinion
- totally di nasastify ang auditors where they may discover high level na material na
misstatement or irregularities or anomaly where you dont want to be associated in
that kind of risk since its not only ur reputation but also the audit firm. may iniingatan
na brand reputation.
Adoption of International Standards Council
- to promulgate auditing standards, practices or procedures sa buing mundo
- each country kailangan nakaalign sa international standard na ito

Structure of Auditing and Assurance Standard Council

2 Frameworks / Pronouncements
1. Framework for Assurance ENGAGEMENTS
- audit (the auditors must corroborate the ending balances in the clients’ accounts
and disclosures) (falls to examinations of source documents, third
party.confirmstions, physical inspection, dust of internal controls and other
procedures)
- review ( auditor conducts inquiries, performs analytical procedures-why kagi
tanong, wag kang magtatanong ng yes or no ang sagot palgi dapat may explanation)
(limited level of assurance-to say that fs presented do not require material
modifications)
- other assurance engagements

2. Related Services
-agreed upon procedures engagements (usually no opinion given, but the client
receives a final report, hindi siya audit opinion, provides details and results of the
procedures na pinaperform ng client)
-compilation engagement (requires auditor to simply present the fs based on the
representations made by the mgt) ( no effort to verify this information) (objective is to
assist mgt in presenting fs w/o undertaking to provide any assurance)

Level of assurance
-the level of assurance of the fs of tbe client are fairly presented is at its highest for an audit
-lowest ung sa compilation (pinakamababa or wala tlaga)
-review, somewhere in bw the audit and compilation
Reliance on management
-all three engagements, the auditors begin with the account balances provide by the mgt
however
-audit requires a significant amount of corroboration, where you verify info based on the
account balances or trial balances
-a review naman requires some testing of the information
-a compilation almost entirely nagrerely sa prinesent ng mgt, kinocompile mo lang,
prinepresent mo lang
Understanding of internal control
- auditor only tests the internal control of a client in an audit - for review and compilation no
need for internal control testing
Work Perform (gaano kabigat)
-auditor requires a significant hour to complete ung audit since sobrang daming audit
procedures each account
-review requires substantially, fewer hours
-compilation, sobrang minor ng effort, parang bookkeeping, pinakamura na bayad
Price
-audit pinakamahal
-review mas mahal sa compilation
-compilation pinakamura
System of Quality Control
-when u audit in a yr di pa tapos yon, in audit after ikang weeks or months after, kami naman
ang iauaudit ng international counterpart namin.
-ung quality of our audit irereview ng auditor from other countries
-Planning - Risk Assessment - Substansive Testing-Completion
-Pag di nakapasa ng quality control based on international standards in auditing, meron ka
rating na need for improvement or fail
-if nakapasa, passed or satisfactory -ung quality ng audit natin, inaaudit din yan
Ethical Principles/Requirements
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional Behavior
5 Elements of Quality Control
1. Independence, Integrity, and Objectivity (Independence)
-Ind -ur need to be impartial bw sa mgt or company and tyaka sa users, dapat wala
kang pinapanigan
-Int - ur required to be honest, and candid with the constraints of client confidentiality,
u cant divulge information about the client kung kani kanino lang, u cant share sa
labas
-Obj - the principle imposes the obligation to be impartial, not bias, and also
intellectually honest, free of conflict of interest.
-these three are interchangeably in meaning

2. Personal Mgt (Human Resource and Assignment)

-Hiring, Assigning personnel into engagements or audit engagement, Professional
Devt and Advancement Activities
-Recruitment, Perf eval, compensation and promotion, capabilities and competence,
career devt, assignment of engagement teams
-sufficient personnel with the capabalities, competence, and commitment to ethical
principles necessary to perform engagement.
-appropriate capabilities, competence and time to perform tha audit engagement in
accordance wjth prof standards and regulatory and legal requirements
-because ur bringing the id of the firm -trainings about audits, updates of standards,
sa bir
-asset ng firm ang nga tao kaya need maginvest sila doon
- Hiring - those hired should possess the appropriate characteristics, then able to
perform competently
- Assignment - work is assigned to a erson having a high technical degree of training,
di ka pwedeng magaudit pag di ka cpa
 - Prof Devt - participate in general and industry specific continuing prof education
(updates in standards)
-Advancement - training in abroad, planning, di ka basta basta ipapadala don, u need
to perform well, prove yourself, top performer

3. Acceptance and Continuance of Clients and Engagements

-undertake or continue relationships engagements where it

 Has considered INTEGRITY OF THE CLIENT

 COMPETENT to perform the engagement, has capabilities and time and
resources to do so
 can comply with ETHICAL REQUIREMENTS
-ginagawa during planning, before you start the audit, you need to have acc and con
check
-if naaudit na before then magpapaaudit ulit the ff year then nasa continuance ka
-but if bago, or newly client, acceptance ang gagawin niyo -acceptance and
continuance has criteria
-ito bang firm ba toh diba tayo malalagay sa kahihiyan, diba tayo masasama sa
masamang reputation nila, such as if they are involved in a scandal, because
somehow ung liabilities nila mapasa satin -in acceptance, sobrang laki ng client, wala
pala tayong competent na tao for the engagement
-u only undertake engagements that the firm can reasonably expect to be completed
with prof competence -appropriately considers the risks associated with providing
prof services
-questionable conduct should be considered to be a risk so as to accept or continue
engagement with a client
4. Engagement Performance
-that engagement are performed in accordance with prof standards, regulatory and
legal reqs -audit report issud is appro in circumstances
-engagement partner shoukd take resp for:
 Direction
 Supervision
 Review
 Overall Performance
-dapat covered ung policies and procedures about sa planning, performing,
supervising, reviewing, documentinv and communicating the results of each
engagement (marerelate sa 4 phases of audit : Planning, Risk assessment,
Substantive Testing and Completion)
-dapat maestablished ang consulation of the team members for timely basis within
and outside the firm (sample if di ganon gets ung tax, nagcoconsult sa tax team, or if
advisory related, nagcoconsult sa advisory services)
-Acctng firm offers audit and advisory services and some are bookkeeping services
-ung indi na kinoconsult mo is may appropriate levels of knowledge, competent
judgement and authority.
5. Monitoring
-key point: ongoin cosideration and evaluation nung relevance nung policies and
procedures ng audit firm
-appropriate pa ba ung materials used, should be monitored
 -prof devt actuvities, is it effective? naapply ba sa engagements -continued adequaxy
and operational effectiveness of quality control policies and procedures
Renewal fo Cert of Accreditation
-cpa's or indi or has cpa firms is required to renew their cert of practice every three years
sa BOA in coordination with PRC

AUD THEO – CHAPT 3

Responsibilities and Functions of the Independent Auditor
Distinction bw the responsibility of the auditor and resp of the mgnt
The auditor has the responsibility to:
1. Plan and perfom /design the audit to obtain reasonable assurance about whether the
fs are free from material misstatements whether caused by error or fraud
2. Auditor is resp to express opinion regarding the fs
 can suggest or draft of specific disclosures, sample new standards (Auditors cannot
be held responsible with the prevention of error and fraud - Inherent Limitation)
 Nature of Evidence and characteristics of fraud, auditors can only obtain reasonable
but not absolute assurance that the material misstatements are detected
The mgnt responbility:
1. The fs are the management responsibility
2. for adopting sound acctng policies and for establishing and maintaining internal
control including initiation, recording, processing and recording of transactions. (and
ofc transactions are consistent with the assertions)
3. Fair presentation of the fs should be aligned or with conformity with the GAAP
Goal of auditors:
detect the material misstatements caused by error, fraud or non-compliance with laws and
regulations not necessarily e, f or nc Material Misstatements may come from:
1. Error
-unintentional, may nakalikutan ilagay or sobra nalagay
-mathematical or clerical mistakes (transposition error, typo error(incorrect acctng
estimates used
- mali computation for allowance doubtful acctnts, depreciation na ginamit or
pagkuha ng fair value of inv, other intangible assets)
-mistakes in applying acctng policies (inv valuation-fifo, consolidate of parent and
subsidiary) (policies may vary to company to company, but should comply with
GAAP)

2. Fraud
-intentional
-one or more than one employees usually from top levels, charge with governance,
third party that has direct control or r-ship in the company ( ceo, president, coo, cfo,
acctng managers, dept heads)
-mgnt -sila ung nagcocontrol ng functioning of the org, under the charge with
governance
-charged with governance - nagcocontrol ng functioning of mgnt (BOD, Audit
 Committee) higher level
- fraud takes place when u find evidence of intent to mislead (use of deception, illegal
advantage)
- auditors primarily concern sa nagcause ng misstatements

3. Non Compliance with Laws and Regulations

- acts of omission - either intentional or unintentional
- like tax evasion, violation of environmental protection laws, inside trading securities
- it is the mgnt responsibility to have compliance im the laws and regulations, they
need to prevent and detect the non-compliance
- auditors resp - cant be expected to detect non-compliance but we should recognize
non-compliance if pag may nakita tayo
- auditors also review the income tax computation of the client, and also sa
disclosures ng fs portions that are related to basic income tax computations, it should
be tied up

Two Types of Fraud

1. Misstatements on Company Financial Reports (BS, IS, Equity, Cashflows, Disclosures

2. Misappropriation of Company Assets (stolen)

"if employees perceive their company's fraud controls to be weak and they think that their
mgnts is only giving lip service.meaning light lang di sineseryoso ang ethical behavior then
fraud is inevitable"
Best Example for Fraud: Enron Scandal 2001
- faking profits, mark to market acctng, ung cost ng isang investment nila 10 tas mafket value
is 15, 15-10 = 5 gain which is unrealized, to make profits look higher. Bumagsak din ang
arthur and anderson audting services. and maraming nakasuhang officials. ilang yrs nila
inaudit tas di nila napansin
Missappropriation of Asset Example:
1. Embezzling Receipts
-happens when an employee fakes a receipt or billing pars yun ang bayaran ng
company then use it for personal interest

2. Lapping of AR
-happens when an employee edits or revise or alters AR records to hid the cash
stolen (done by diverting a payment from one customer, hiding a theft by diverting
cash from another customer to offset the receivable from the first customer

3. Stealing of Entity's Asset: Cash, Inventory

Planning phase Testing Phase in relation to Errora and Fraud

- we do conduct interviews with the mgnt and with those charged with governance such as
directors, presidents, ceo, cfo
- we do inquiries, interviews - we consider asking acctng data entry, IT personnel whether
they have observed unusual entries during the acctng period
- sample of inquiries to m and c:
1. ano ano po ung sources of significant debuts and credits example sa revenue accnt (
is the accnt posted automatically as a normal part of transaction processing or is it
posted directly through a journal entry) (may tinatawag na automatic jes and manual
jes, usually ang fraudulent jes nannggagaling sa manual, hindi niyo pinapadaan sa
module na automatic, kumbaga naka general module, pwede ka gumawa ng manual
entry) (iniisip agad na testing ni auditor is look for entries na posted from unexpected
sources, unexpected je posted such as accrual since sa manual siya pinapasok)

2. who has the ability to make manual je or other adjustments? such as entries from
unauthorized persons (we will look for information to be opportunity within the fraud
triangle framework, look for incentives, and the ability to rationalize ung related sa
same indivi that are not authorized to do manual entries

3. who is responsible for initiating je? si maker dapat,then checker then final approver
(tas pag ceo, cfo nagentry, red flag din agad)

4. what are the approvals required for the je and adjustments? (kapag may binabanggit
na apprvers other than the indicated in their matrix, unapproved dapat ung
transactions na yon)

Fraud Triangle Framework/ Fraud risk Factor

-commonly used in auditing firm -it explains the motivation behind the employee's decison to
commit fraud
-Three components:
1. Opportunity
- it means there's a circumstance that allowed the fraud to occur examples:
 weak internal controls
-lack of supervision, poor documentation like pwede imanipulate or alter ung
documents/process
 poor (upper mgnt and the bod, hindi nila masyadong sinusunod ung mga
ethical policies ng company)
 inadequate acctng policies
- refers to items in the fs being recorded, if the acctng policy is not in
accordance with the framework PFRS, andyan ung opportunity to manipulate
ung numbers

2. Incentives
- pressure to increase revenues or lower the expenses to have bigger profit, mindset
to do fraud to have incentives
- examples:
 investor and to analyst expectations, they need to meet or exceed the analyst
expectations
 overstate sales, declaring things na hindi oa naman nabenta just to have
bigger sales
 personal incentives
 3. Rationalization
- jinajustify mo ang isang mali na tama, u show a mistake like its correct, palabasin
na tama pero malintalaga siya
-examples:
 they treated me wrong, to do revenge
 upper mgnt is doin it and so i can do it
 last resort just to not lost my job, or an upper, or higher position to him direct
him to do fraud If the auditor believes that theres a misstatement but the
effect is:
1. immaterial
- u need to inform the mgnt but depends who made it, if the mgnt did it maybe
u have to inform the ceo, u inform the higher level from the person who
commited it (refer to appropriate level)
2. material
- there are fraud thst are material that are not directly affecting the fs bu
operations - inform the higher level (appropriate level)
- if doubtful, can suggest magconsult ng legal counsel about sa implication
nadetect na fraud, if mayron lang silang nadetect, mga obvious talga

Completion Phase related in fraud

-auditor should obtain mgnt representations letter ( includes the discussion about then error
or fraud na dapat responsibility ni mgnt, sila ang umaako) (binibigay after audit or nirirelease
ang audit report) (inaacknowledge nila na sila ang responsible in implementation and
operations of the acctng and internal control that are design to prevent and detect error and
fraud
-attached sa mgnt representation letter or summary of such items that are uncorrected fs
misstatements aggregated are immaterial, both individually or aggregate combined
(immaterial misstatements where na pagpinagsamasama or tinotal di lalagpas sa materiality
threshold. it uncorrected fs misstatements)
-imention din ni mgnt sa letter na dinisclose nila lahat kay auditor lahat ng fraud related or
suspected fraud related transactions na naging aware si mgnt
-imention na nagdisclose sila kay auditor ng assessment results of those related sa fraud
that are risk assessment.
How to Consider the effect the errors or fraud sa auditors report natin?
-if the auditor believes that the material misstatement from error or fraud exists then
nirequest si mgnt to adjust or revise ung ganito amount or disclosure and pagdi pumayag si
mgnt either u qualify opinion (u have exceptions) or adverse opinion ( if sobrang extensive
ng material misstatement)
-if the auditor unable to evaluate the effect of fraud, because ur not given additional
documents to check if existing ba takaga ung error na un (inherent limitation) , we can issue
qualified or disclaimer opinion If it is find out after the audit, it is not fault of the auditor simply
because auditor follows the proper procedures, basic principles of PSA (it depends om the
magnitude of error like enron)

Planning Phase of Non-compliance

-need to have general understanding of the framework of the regulatory or legal ng company
(don mo malalaman anong requiremnts niya as a company)
Testing Phase
- almost the same sa effect like in error and fraud
Completion Phase
- same u need the mgnt representation letter
- nakapagdisclose si mgnt sa auditor ng possible or actual non-compliance
- consideration nung effect sa audit report lile u ask them to adjust and they dont want, either
qualify, adverse