AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE AUDIT ~ AN OVERVIEW ‘THE PROFESSIONAL STANDARDS ‘THE AUDITOR'S RESPONSIBILITY ‘THE AUDIT PROCESS — ACCEPTING AN ENGAGEMENT AUDIT PLANNING CONSIDERATION OF INTERNAL CONTROL AUDITING IN AN COMPUTERIZED ENVIRONMENT PERFORMING SUBSTANTIVE TESTS. AUDIT SAMPLING COMPLETING THE AUDIT AUDIT REPORTS ON FINANCIAL STATEMENTS ASSURANCE AND RELATED SERVICES ‘THE CODE OF ETIHICS AND REPUBLICACT 9298,AUDIT —AN OVERVIEW “An aut is 0 sytematle proces of ableciiely obeining end evolucting evidence regarding everions about conomic actions and events fo certain the degree of coxespondence between the assertions oad established | era onl communicating the results to Interested ere AASC “Type of Aut nancial Statement Audit ~ auc conducted to determine whether the FSe of an enity are fay presented with anidertified financial reporang famewor, Condicted by EXTERNALAUOTORS) 2. Compllance Audit ~ 3 rovew ofan organization's procedures to determine wh=ther the organization adhered {speci procedures, rules, contacts or regulations. (Conducted uly by GOVERNMENT AUDITORS) Operational Audit~ study of 3 specie una the erganiation fr the purpose ef messuting is performance. (on ccted usually by INTERMAL AUOFTORS} ‘The Independent Financial Statement Audit + MANAGEMENT is responsible for preparing and presenting the FSe in acordance with the fans reparting Iramewerk ‘+The AUDITOR'S RESPONSIBILTY ito frm and express an opnionon the Fsbssed ons aut, ‘+ An aut conducted with P34 s designed to rouse only REASONABLE ASSURANCE tht the Fs taken as 3 ‘whale ae ree tram materi mtaterents, LUmitatons ofan Aust 1 Sampling Rit Use of Teseng 4 Inherent Umkations ofthe Clian’'s Accounting 2 Erorin Apseaion of kegrent/ Non-samsliog 3nd internal Contel Systems ak 5. Notwrect Evicence 3. Relanceon Maragement’sReptesentation ‘General Principles Governing the Audi of Financia Statements 1. Code of Professional tice 3. Attitude of ProtenionalSkeptisim 2. Philippine Standard on Auting (SA) ‘Need foran Independent Financial Statement Audit 1. Confit of interest, 2 experse 3. Reroteness 4 Financial Consequences ‘Theoretical Framework of Austing (Assumations or ideosthat Supper the Aut Function) Final Dataare Veriile Independance No Long-Term Confkt lecive nteral Conta} {Consistent application of GAAP/PFRS Benettsthe Pub‘THE PROFESSIONAL STANDARDS Generally accepted Austin Standards (GAAS) Ie represents meatures of the qualty of audtor's performance. These standards should be looked 2¢ MINIMUM STANDARD of performance that auditors snculd fll. General standards Standardsot Fieldwork Standardsof Reporting Techni Training and Preficency Ponning ove Independence Internal Conta Comiderstion Inconsistency Proesiona Care [dential mater Diclosre pinion PHIUPANE STANDAROS ON AUDITING (°SA) The Philippine Standard on Auditing (PSA) estsblaher the Independent auckor’s overall resporsiities when ondcting an aut of Financial statement n accordance wih PSAs. These are laud by AASC as Inerpretations to caus. Practice Statements are additions to these standards to prod practical asitance to aud tors In Fnperenting the stondardsand to promate goed practice nthe accountancy profest.on SYSTEM OF QUALITY CONTROL, ‘Quatty controls ae policies and procesures adopted by CPAS to provide reasonable assurance of conforming to profesional standards performing audit ana rested series, Elements of Gualty Control (PSA220) 4. Leadership Responses fr quatty on Audits 2 Ethical Resulrements (integriy, Objet, Professional Competence & Due Care, Cenfidentily, Professional Behavir) Independence ‘Acceptance and Continuance of Cent Relatonshipe Maman Resources. and Asignment (Recrutrient, Performance evslustion, Capabltes, Career Dev. Engagement Team Asvenment) Engagement Performance (Orecion, Supervision, Review, Consutstion, Engagement Quslty Contra Review. Differences of Opiion} 1 Monitoring 2 ‘ 5 ‘QuaurryconrRoLReviEW “The government that Prfessiens Regulatory Board of Accountancy (80A) has required all CPA firs and individual [PAfrms and ndvduaCPAGin pubic practice to obtain acerca of acreiation to practice puble seeountarcy Quality Review Committee (QRC)~ crested by PRC which shall condita quay review on apsheans for reistration to procice public accountancy,‘AUDITOR'S RESPONSIBILITY ‘The auditor's vesponsiilty & to decign the audit to provide reatanabe assurance of detecting material iisstatementsin the 85. These misstatements ay emanate rom + ror + Fw ‘+ Noncomplance with Laws and Regulstons {ERROR rsierto unintentional mitatements inthe financial statements xamplas: Motteratiealorconcal makes, ncrtectaccourtingstimstes, rita in appation a ccouing pallet ‘AUD ~refo1st terion actby one or mote indwduns mony manstement employees, hrs partis which een riepoentton of franc statements, Type of Frau: 1 Management Frau Fraudulent Financ! Reporting = Invlies imenconal misstatements er omésion of aunts dstsurs, tuly done by mentors of marayerantorinose charged wy gevemance- Taampes: manpuion of coments or records, mitopreventvon of eects cf Wankctons, recording of anit w/osubstance, sentra sapleaton of aceauntingslcies 2 tmployee Fraud/ Misappropriation of assets fraud at accompanied ty fake ce mileasing recor in order 0 cancel the oe that atte are re Teamplesertenting ees tesingenth' ae ang ot AR RESPONSIBILTY OF MANAGEMENT AND THOSE CHARGED WH GOVERNANCE (PSA 240} Management ~ to esabin 2 contol envionment and 1 Implement intra contra! pales designed to erste the DETECTION AND PREVENTION oad ae eer Ind dal charged wit governance ~T0ensre tently ent 'saceoumtng and nari eporg systems AUOTOR'S RESPONSIBLITY: ‘The aur not and cannot be hel responsible for he preventlon of fraud and eror. The ausio’s responsi ito ‘designe aut tecbtaln reasonable assurance hat the FS ae om mater mlataterents nether cased by ef 2? frau PLANNING PHASE ess Pse COMPLETION PHASE 1 Make Inquiries of |[ 3 Perform procedures necessary ta | [ 5. The audtor should obtain a wekten management about || cetermine whether material | | representation from the clents possinityof mistaterent || misstatements exist management 2 Assess the rik that Teoud/oeor may cause the || 4 Conder whether such a] | 6 When the auditor beleves that 15, to. conta. materal || Mstaterent resulted rom errr or | | materi eroriaud exits, he should nbsttemers fraud. Exr15 wll only rest to | | raquestthemamtto revise the FS adjustment of Stat aud may have ‘ther implcntonscon an aut) 7 the autor unable to evatuate the fect of fraud on FS, the auditor should ‘ther Quay o disci his oplaion on thers.FRAUD RISK FACTORS RELATING TO MISSTATEMENTS RESULTING FROM FRAUD TRAUDULENT ANANCAL REPORTING (MANAGEMENT FRAUD). TAISAPPROPWATIONOF AEETS eP1oree FRAUD) 1, Managements Characteristics and nlaence Over Conred These audi actors pertain wa Sms abies, pressures, styles, and attitude relsungte ntl corel and fine reporting process. {Ex:non finan! Same. prtcpotesexcesowey, heh ur ver otsmemt. et T Suscepibiy of Assetsto tsappropration "thet loud ak lctars pertain othe matre ‘ofanentity’s assets andthe degre owhich they ae subject tothe [Ex lrge amount of our on hand ueetory hracterbtes, easy converible ists, ei) Z ineusryContions ‘These aud isk factors vo the economic andreglatory trvvonment a whieh the ently operates. lexsnew accouming/stautaryre, that imps final sabe ef the ns) 3. Operating Characteristics and Finacial Sabi + Theve aed rik actors pertain to the mature and complex of {he enty ands transactions, hein condition ond proftabiay Fes nob togeneratecash tows whlereporing exmings} | These aud nk fetrsinvshe the lack of onto designed 9 prevent or detect ‘appropriation afassets [Exc bcket appropriate Sgt versie, Inadequate record beep a5, poo” pPhysal safeguards ake rely #oturentato for vansaetins) NONCOMPUANCE WITH LAWS AND REGULATIONS — refers to acts er commission by the entity bemg audited, ether inceinalrletatianal, whicharecortrary tothe prevailing laws cr amples: Tax evan, wolaton of ehvtormeral protection lw, Ine tating ef secs, wolstlon of SEC requirments MANAGEMENTS RESPONSIILITY (SA 260 ~ 0 onsire th he en erations are conducted in aceondaree wh ows hdveulations. Th sponsor the prevention and geteton of moncemelance rests wh manacement. ‘AUDITOR'S RESPONSIOLITY: ‘an aude cannot be expected te detect nencomplance with al ws and regions. Nevertheless, the autor shoul ‘ecogie tat eancomal ance bythe erty witha an egua ors may ater let ne Fs PLANNING PHASE TESTING PHASE [COMPLETION PHASE fh. obcin a general] [ 4. whan the autor i aware] [/& The ouclior should obtain» written Lnderstanding of the tegal | | concerning instance ot | | repeesemation from the len’ and regulatory framework | | noncompliance, evaluste the | | management sppleablera entity 2 Desan procedures to help pessbleetfecton ther, 5. When the autor boloves 7. When the autor beleves tht there Is roncomplance, the auditor should request as mr sult praceduves te 2 Mf a scope limitation has precluded the 3. Desigr mgmt. and consider the ¥ rr a obtain sulicent spprepnate Implication on other aspects of auditor trom obtaining suffer: sppropiste aed evidence about | | evidence, the autor should express a ammgtance wth ws and | | Seale _Ualfied opinion ora dscimer ef opin. equations > haar ar primary Cencemed withthe novearnca wha wil havea dct and maori een Re FS { Nancemlisnce may involve conduct dxiged to coneel sucha olson, forgery, senior rant overt of comal, flare "cond reactions, antennal isepreseestions belg made ao.‘THE AUDIT PROCESS — ACEEPTING AN ENGAGEMENT FINANCIAL STATEMENT ASSERTIONS 7iseriors about chases of | Aseions about aazount balances at] Assrions about presentllon and transactions and. events for the | th period end ‘icone perl under aut + Completeness = Wentsand Obes + Completeness 2 Omireme 2 baitene Occurrence and rights and + caeft + completenes cblgations Accuracy + Vatatlon and station + Csitlatlon ond + catsiieavon understandabiey + nccursy 203 vlwven “AUDITPROCEOURES The procedures selected should enable the autor to gather suficlant appropriate evidence about 2 austin. cur ‘= nspecton Involve examining of records, documents, or tangible ase 1 Observation conssts af lolang a processor procedure bang performect>y others + Inquiry= consists of seeking information rom krowiedgeablepersonsinsideorautsde the enty. © Contrmation = consists ofthe fesponse to an inguly te earrberate infermation cantained in the aceounting records Computation ~ consists of checking the arthmetical accuracy of source documents and accounting records oF perfermingindapendent calls. ‘+ Anatyieal Procedures ~ consst of the analysis of slnfcant rates and ends ineuding the resting Investigation of Fuctatins ad relauorshipe th are leanssvent with other relevan Informston or vite from panieulse amount, ‘Audit evidence ~ refers tothe information obtained by the autor in arin at the concistons cm which the sult ‘opinion is bated, Rudt evidence wll comorse source documents and aecmting records undeiine the fare Statements and corroborating information from other sources. count AT snmneceoet en kK ‘Sty tha the eaderce gathred hcnstnt PearoRmuna suastantive TESTS ‘OVERVIEW OF THE AUDITPROCESS. ‘bag endonararg ef en/na spears and aes ee fear ri avo PENNING ‘nccepting aetRGacemen | Sebinnesate siatiy[ACCEPTING AN ENGAGEMENT Indeciting whether to accent or reject an engagement, the frm should consis 11 Competenceacquredtvougha combration of eduction, training and experience. The suitor syd bts prebinaty knowledge of cient’ business and ngusey a determine whether he auditor has the degree of competence regaled by He engagement. Independence the stor should consider whether there are threats to aud team's iicperdence and cobjectnty ard 50, whether adequate safeguards can be satisfied, 3. Ablitytoservethe cent property Anengsgsient should rot be accepted if here aren enaugh qualified personnel ta perform the audit. PSA220 upgess hae the aut work shouldbe assed to persmel who have the aporoprite capabilities, competence, an reo perform the aut engagement in accordance with prefessioralstandards. 4 neat of the management ~PSA 220 reauies he 2 conduct 2 bacgvound investigation of the rorpectvechent ia oder to minimize the Nelinood of ezacation wth cents whe met. teks inter This nvalies: ‘Making nguesof appropriate paris n the bushes community 1+ Communicating with the predecemr autor RETENTION OF EXISTINGCLENTS. Ghent should evluate at east ance a year or upon ocurrence of major events suchas changesin emt. ‘ownership, rifure af ents bie, ete + Imgeneral,conditons that would cause te firm torejectthe prospective cent may als lead to decison of {eeminating anauditengagement ENGAGEMENT LETTER ‘+ Theseresarthe written contractbetweenthe auditor and the cent, This Iter sets forth 1+ The objective ofthe ait of FS whichis > expresranopiion on tne FS. + Themamt/srerponaity for thesitepracensston ofthe FS, + Thescopeo the audit ‘+ thefarmscrany report or ethercommuncston thatthe aor expects et, 1 Thefact that becaute of lnitations ofthe aul, heres an anaweidae k that mate misstatements may remain und scovered ‘+ Theresponsibitty othe dient to allow the autor to have unrestricted acess whatever aco, documentation, and ater information requested connection wih the aud Biting srargerrents 1 Expectations af receiving mgmt representation ets 1+ rerangemerts concerning te involvement of others experts ctheraudtos, eral auditors, ec} 4 Request forthe cent aco the terra the engagement 4+ importance ofthe engagement eter ~(1) ro void misunderstanding wth respect tothe amt and 2) scument an cen the auto's accestance of he appcinenent + Recuting audits the auctor does snot normally sendnew engagement iter avery yea, unas (lon misunderstand the objective ard scope of aut (2) ewsed or special terms of he engagement (3) recent change of enor mgmt, (2 sgnfcan change nature or sz of business [5 legal nc 22 pronouncements + Aitolcompanents~the suite wil cone he fctors whether they wilaenda septate ter ‘component (1) whe appoints the suds of component, {2} whether a separate audit reports tobe issued on the component, legal sequerets, (he exten of any werk performed other autor (5) degree of ‘ounershpby parent, (6 degres af ndspendence ofthe component's memtAUDIT PLANNING “ua planning = rvcles developing general audit strategy and a detailed approach for he expected conduct of the avait. The auditor's main obectwein planning the audit determine the scope ofthe aut procedures to Be performed 'PSA325 recurs the auctor a ebtan sufficont understanding ofthe ent adits envronmentincusing the tert onal. Suehunderstanaing mwas obtarung nowedge of ety: ‘+ ndstry. eplatry and other exer factors, including Financial reporting framework + Nature ofthe entity {Objectives adatrategies and the related rss that msy resulta materia mastatement ofS + Measrementand review oF enttysperormance 2 intemal control ‘Additonal Consideration on New Engagements 'PsaSIOeequres the auctor to ostansuficent eppropie au evdence that + Theopening balances do nat concn mastatmarts tht mater affect the current year's FS + Theprr penoe's dosing balances have been correctly baught forward tothe curent period e, when paroprate, have been restates + Ansropnate sourcing oli ate consitemly apples or ena accounted fr ar oroperydicosed in aceountna gotces have been property Developing an Overall Audit Strategy “The best strategy she approach that resus in he most elfient aud that is an elective aut performed a the least posible cost An aust pan should be made garding “+ How and when thi shou be done When developing an aust strategy, the asitar runt consider carefully the appropriate level of materia aed audi tik ‘+ “Informations materia ts omission cr mistatement oul influence the economic decrion of wees” {+ Inaeseningan audi lan he autor shod make a preliminary estimate of meray, 1 Mareraity maybe viewed 3s: (1 the largestamount of misstatement thot the auditor coultleatein the FS fr [2 the smallest agzregate amount that could misstate the Fs ‘+ thotesaninueseselstiashin between materiality and evidence + Use of matey (in the planzing tag, to determine the scope of the audit an (2) nthe gampletion ‘sage, to evaluate theeffectof misstatements in he FS ‘Using materality eval: Step, Determine the Overall Mater y~finanosl Statement Level* Step2. Determine the Tolerable Misstatement~ Account Balance Level** Perform audit procedures TCOMPLETIONSTAGE [{Step3. Campare the apareqate amount of mastatementswith everllateiaty PUNNINGSTAGE ‘common method of existing atsesity a levels statement bat tra acs sles, ee) erin +" Ako known as performance matey. The prcesss & Mghiv subjective and requires the exer of reat deslof auditors fadament 1 Bares that canbe sod te catermina mars lve: aerate for annua SHfnotavalable~anruslued snlenonSpeioc4sac 85, budsted 5 forthe cugtentysarAvorrsx ‘+ AUDILRISN refers toe sk thatthe autor eves an inaparopulte audit opinion onthe FS. Ths curs beeise the austr believes thatthe Fare fat state when infact the FSare materially misstated. + mut Rik ede “Audit Rick = inherent Risk Conta sk * Detection ik + AMEALIE ats ie he once ofan aeceun lane Or bs OT WanTaaloNsToa material mititerent ‘rnuming ht there are norelated intemal conios- SABES requis the sudr to sisess herent rsk at level and account balance/tarsaction evel Factors thot alec the ek ef miartatement 3 FSlevel clude: Management nest 1 Management Characters (¢g agtesve atetude toward nara reporting) 1 Qperaung characterise, profRabity ofthe entity relive Rs cust) 1 inestry Charterite fe nduaty Ie expeniencing a are noof buns falures) Factor afecting inherent rikat the aecount Balance level inci: 1 Sutcepaty ofthe account t thet * Complenty a seutions elated to account 1 Thecompleaty underynetansetons and othe event. 1 Thedegree of cement nveved in eterminng secount blorees + Asthe asesed level of INHERENT AISKINCREASES, the aut should design MORE EFFECTIVE SUBSTANTIVE PROCEDURES. + CONTADLAISE the sk tha the material misstatement that could occur in an account balance or ass of Itarsoct on will nt be prevented or detected on 3 ney bai by accounting and control systems. + Control niki roated to the eflecuveness ofthe cents interna onto {+ ifthe enry’s itera cates effec, ve assesed level of contol tk decreases (and vice vrs. 1+ Aathe ited level of SONTAOLAISKINCREASES the auto should deslen MORE EFFECTIVE SUBSTANTIVE ‘PROCEDURES. ‘+ DETECTION AISK!s the ek that an auditors sbstontive procedure wil not detect» matenal mastatement {tection isk function of the effectiveness af the audio ststantve procedures + Asthe aceptatle lve of DETECTION RISK DECREASES, the ASSURANCE DIRECTLY PROVIDED FROM SUBSTAMTIVETESTSINCREASES. Hence, the auclor shuld design more effective audit procedur “chive the detird level af asurance ‘+ Unt herent and contrel risk, THE AUDITOR CAN CONTROL THE LEVELOF DETECTION RISKS by performing mote effecive subst procedures 4 steps imusing the sual sk model: Step 1 Sethe desired level of aud rsk* Se ‘Step Assessthe level of inherent sk. ‘Lstep3. Assess the lev of contro sk. penvomane suastaoe wats] [3°94 Deermine tne aceptble level of detetoneak **+* Step. Dep substantive ests ein ik mm Teen * Conroe order ta Act Bn at tmetteshtatinpenden ——_teahen sateRELATIONSHIP BETWEEN MATERIALITY AND RISK ‘theresa INVERSE RELATIONSHP between MATERIALITY andthe LEVEL OE AUDILRISK. Ble planning for specie sus procedure, te suitor determines that he aceplable materia levels lower ait ink kere auc The autor would compensate fr thi by ether: Reducing the assena eveLofcontraisk where ths posuble, nd supporting the duced ive by cayng out extended or addtional testst contrl: cr 4 Reduclagdeteciontisk by molying he nature, Liming, and extent of planned substantive procedures. RISKASSESSMENT PROCEDURES - the procedures zeformes by suitors to obtal an understand gof the erty and itserwronmentineuding tsinernal controland ta asses theisksof material miatatements inthe FS. These inode: ‘+ Ingres of management and others wthintheenity ‘+ Anahfticalsrocedures ‘+ Observtenandinspection AANALYTICALPROCEDURES~nvoives ara of slenfcantratosand ends ncn the resulting vesteaon cf flucustions and relationships that arelgconsistent with other rlevart Information or eit fam partir amounts. M520 requires the auctor to use analyte procedures in he pring ard veral stages fe aud + Stmin Appling Aral Procedures Prior yea?sinancalstatements Artiipated results such as budgets and forecasts {Industry averages FS ether ens epercting w/t the same industry) Nomerancalsferation Typealallonhin aang FS accurt balances Step2. Comgare expectations wih the FS une au Step3, investigate serfican unexpected ferences (unusual fluctuations to determine whether contain imateriimstatements Uses of anaftcal Procedures ‘+ Asaplanningtoo,to determine the nature, timing, and extent of her auditing procedures 1 toundestand the chen Business 1 eoldenuyareas that may represent specie riko musing siya! procedures os planning toc. ttre aierence between recorded balances In and expectation is sanlican the aud tor must design more extensive substantive test (or vice vers) ‘+ Avatubtantivetert to obtain corroborative evidence about portlet aiertions related to account balance oF transaetlon ase + Asan overaleevow of the financial statementsin the completion phase ef the aut + toldenty unital fuessatons mat were nat ise rtiied nthe planning rd esting phates of he aust ta confirm conchstons reaches w/ respect the faiess of he FS Documentingthe Audit lan = eFinalstep in planing prces the docurertaton ofthe audit planning process by preparing ‘Audit pantie overview of the expected scape and conduct af the audit. sets out /n broad terms the ature mire, and extent othe aust procedures tobe pefomed 1 Audit program itsets ou indetal te att procedures tobe performed in each segment of the audi Time budget isan estimate of the ime tat tul spent inexeesting she mic procedres sted the autCONSIDERATION OF INTERNAL CONTROL SA 315 sates hal INTERNAL CONTROL isthe process designed and effectedby those charged with goverance, management, and other personneia provide reaserable assurance about the ‘eehievement ofthe entity abjectveruth egord ta rebut of BANCIALREEORTING, stfectivenessond lfciencr af operations ond comallance withopolcabelaws and reaulations, ‘Inthe aud of FS, he aud sony conzemed with there poles ad procedures withn the accounting and Inceralconvolsysters that are relevant the fngneal statement assertions + Componentsotinternal Control AL ControlEntronment—neludes the attudes. waren. andartonsofhemgint nd those charged wth agsverrance concerning the enteys I and ts importance an thee > inearty and ethical sles > Commitment competence > Mert philosophy and operating sive > Personnel polices and procedures 1 nciwe saniepation ef those craecd wf 1 Rssgrment of respons and authors? sovernsnee Organizations Sucre 2 Rbskassessment mgt should adopt policies and procedures that are deslgnedto deny ad analyse tuaners rete, For audit purposes, the auditors only concerned with risks that are relevant to preparation of elible ‘mandalsatements. 2 wasiness 6K the rk thatthe ents busines objectives wi not be ataed 3 rei of inter and externa factors sucha techreleeal developments, changes in cusiamer demand, et 3 Information and Communication Systems An infemationsyitem encompasses methods nd ec tht: eemfyand record at valid ranaeton, desenbe on time bass the wamsactionsiawlf.clentdetalto permit properelassifestion, measure transactions inthe proper monetary vale, determin the time pened to permit recording ol ransatlons in proper accaunting peed, and resent propery ins transaeeons and lores in FS ‘Sommuniationirvelves proving an understanding of Indual roles and responsilities pertaining to internal conto over financial poring Contra Actives are pls ard pocedresthot help ensure thot maint. iretves are caed gu Specte central pretegure that are relevant to 3 auc would includes 2 Periermance revews~revew ant analyz of actual performance vs, budgets, forecasts, and P's 2» formation Processing te check accuse, completeness and authorization ef ansactens. 2 Physi Coneols~ physial security of ase, authoriatlon for acces to prorams and dota fs, eslodic counting and comps rac w/ amounts showman consolrecotde Sepregaton of Dues assgning eitferent people the response of authoring transactions, tecording uansscions, and maintaining custocc assets, 5. Monitoring~dhe races of assesing the quality of internal enol performance ovr tine. ‘+ ‘Rudtors ae notrespomibe for estashing and maltainng an entity's accounting and internal contzo stems ‘hats the responsibly ofthe management 1 OSTAIN UNDERSTANDING OF THE INTERWALCONTROL 1 aluating the design ofa contrat ~ Tisconbe obtained by mabislam of prose nda, spertinedacumests and records, and ahiering ecards ae operations ‘Determining whether thas been pleased % This an be accomplsied ty performing. a WALK-THROUGHIEST. This involves tracing one or two leansacdons through the ete accounting ste, fom their ini recording at cure to tha ral estinaon as a component of an acount balance inthe FS.2. DOCUMENT THE UNDERSTANDING OF ACCOUNTING AND INTERNAL CONTROL SYSTEMS + Thedocurentation need nat be in parte frm. Some commonly uted forse: narrative eset, ‘fowehare and aera ol fow of transactions, nemal conve) queslonnaie proving mam. repones |. ASSESS THE LEVELOF CONTROLRISK if ceralsed 02 parca assaron inet effective, the autor may aess he concoct high evel «+ fereauetorccncuses that ts moreefcent a relyon eottyC the autor woul plan to assess control rk sclessthan hghlevel. 4, PERFORM TESTOF CONTROLS "TEST.QE CONIRDLS=ore performed a obtain evidence obout the effectiveness ofthe: + Deslonof the accountng and internal corirasstems ar + Operationof the internal control trough the period 1+ Aceatding to PS, the sudor shoud obtain auth evderce through test of contol tosupport any assessment ‘ofcontralrskatior than Nigh level The owerasressment of controls, the more support the audor should obtain the the Cs sutablydesgned ard opestingeffetvay. Nature of test of Controls, ‘= Inguiry~searching for approprioe Information abou the effectienees of nterna conta fram Inowedgeablepersons de or out he entty ‘Observation refers tleohing atthe process benz performed by others. inspection nvoies examination of documents and records prone evidence of relly depending ‘ontharnarureand sauce sre elle nes of Cover thee processing + Reperformance-velves repeating the setty perormed by the cent to determine whethes proper results were cbtaned. 4 Timing of tests of conros: auditors way perform tet of controls during an interim vi, in advance of ‘ered end. However, auditors cannot rely omit we consicrng the need ebeae unher evidence on he ‘eainer ofthe period tn determining whether or not ee the remaining perc these rust be considered: the results theft tests, he length the remain ng period, nd whether changes have occured accounting snd niermal conve sisters dating the emai prio, 1+ Extent of teste controls: The ausitor cana examin al transactons rested te eetain eantol procedures. In naudt the auctor should examine thesiee of sample sulfidento support the assesed level f cnt ak 1+ Operating efectivenessvs. implementation + When obtaning audit evidence of implementation by performing nsk assessment peocedies, the autor determines that the gsegant cates els and the ent ising ther + When performing testsol ss operating efetiveness of contcls, the audtor obtains aut evidence that comrals operate ellectively- Tl ncludes obtaining evdence about how controls were applied at evant times durin period under au, the consistency which hey wee apple nd by whom ot by what means they were aped + Documenting the asestedlevela control rk Wine contra nskisassessed a high level, the auditor should dacurent hs canlusan thatthe conte rik tsathighleva ine contro nsksassesied ates tha high level, the audtar should document he gandusin that contre risks es than igh eel athe has for the asesieront ban actualy the eat of TOC), ‘+ Communication internat Control Weaknesses ‘Auditors reulredtoreport the matte tothe appropriate level ef mgt. materia weakness inthe Sesgn or operation ofthe scourtne and yates, + Auditors are motrequleed 1 search forana/or identity material control weskenss. + cera contol weaknesses ae dacumertedin 9 formal management eter.AUDITING IN A COMPUTERIZED ENVIRONMENT characteristics of Computerized information ystems (C5) Tack Viable Tansacion Tal 2. Constancy ofPertorance 4, Spstems Generated Transactions 6 Vulnerbiy of Osta ane Program Storage 3. Ease of Acessto data ard Computer Programs Med 4 Concenvation of Dis IntemalContolina GSEnvicoement 'A. Genaral Contos ~ econral poles and procedures tht relate tothe overall computerinformation item. 1 Oqantation contol - ler ssinment of ovr and esponsty B_Sepngation of duties win the CS ep 2 Sepregavon bf C5 dept and user det. 1S Dior mmnereermcacent Operations ther Functions AOE ee, Sect nt een, a 4 5 Tyatems development and docuveration controle ~ ta ReMaTe se program as wall as changesthat may invodueed wo seer decesscontobs~ssequate secu controls suchas uso passwords Data ecoverycontals— proves maintenacs of backup fs and offsite storage procedres ‘Nontoringcontrle=to ensure thn CiScomols are wer ra eectiely a planned 1B. pplication Contre are thou pols and proce dutes tha relate to he specific ue ofthe system, u ‘antes ver na degre oprowderestonble aufero: data submited fr ‘Sig. ueevaubnciedanc acute csteaka acne zeae om, Sruscomntied + Fksebeat te ene nat ep tae with reed fel foot fxtsSenuiber materia lOwis Aniperalcrcnberw/ moreeristhan IDG at wilberiectes 4 Val chacnfoceed compare ith ain there ef eterane hs ate ot tonne Enslones matr e may coi oa css oie torte Avade fF uisid ad wa orgs 1 Setetedngigtete ws mathemati atatdsy way 28610 cet ember to ‘tte conentanipeshonal annie data usritedto groceuung 4 lah cvs csaed roe ta name cig ot exces ‘he camarenc fatal on ae ey ae cea Controls over Ercesag~ despre to prove easonabi aaurance hang ata are proceed Securstey and Wot data no ot, aed, excluded, dupeatd or moropecharaed ‘ Alnost ao nput contol mentioned above afe asa puto preening onto ‘como ove taut ~ desed prone earonbiesizurance tat he rests processing rt complete acetate and that theo outputs are sre ony tauthoized persenea, casing are lor rocesing Contr tcah ensureTestef contralin aC Enveonment "+ Theauctor'sebjecives and scope ofthe ait donot change in aS environment 4 Testingthee ability of general contre may ince: "Observing cent’ personel i perfrming thoi dules 1 Inspecting proaram documentason + ObserunsSecurty measure force ‘+ tntestngaplleatloncontss, the autor may ether: Audit around the computer “7 Simlarotesing corral m2 manual eantral structure nthatit inves examination of documents and roportsta determine the ela ofthe sem ‘When uting ik aperoach the auditor gnores the cients data processing procedures, focusing sale on the BPUT documents and the C15 OUTPUT ¥ Cambe used oniyifthere revise input documents and detailed output tha enable the uae racendicin|taneartens bck and forth ¥ This also nouns “back boxapproseh + ecomputerAaed Audi Tectniqes (CAAT) he computer programs and dats which ie aor ures a part ofthe aut procedures 10 PROCESS data cf sud sigifieance contahed in an ents iformation sytem + Use wen computerised accounting esters perfor asks w/c ne ube eidenes is avaiable. Consequently, te auctor wllhave tout directly the cents computer program wing CATs ~ Thist ako know as “white box approach”. ¥ commen used CAAT: 4 TestOata Designed so test the effectiveness of the ntera eontel procedures ware incorporated inthe chen’ computer prerar. ‘The objective of hsteniqueis te determine whether the dents cometer rosa can eorrecty handle valid andinvalid conditions ae hey see, 2 ogres rest rai (17) ‘the autor creates dummy or Ftitiousemployee, or ether appropriate writ or tesnguitin ite ents computer stem, + ATF integrates the processing of est data w/ the actual processing af ordinary Iwarsactionswformgmt besngaware al he esting proces. IF prov desassurarce thot the progrartest by the uo she same prosram tused by the dient nthe processing transaction (ul ks test data approach 3. Parallel simcltion * requles ihe auctor we 3 program that simulates key features or processes of the program under review, +The snulatd program then used to reproces transactions hat vee previously processed by the liens rogram, + Came aecompishedby sing 3, Generalized auditing software ~comsosecof generally valable computer octages w/chas been designed to perform common audit tasks 2. Purpore writen programs= designe perform audit ass n specific ¥ o1nercants 3 Snapshots~taking a pkture ofa transaction 3 flaws through the computer stem 12 System contotausitreview ies (SCARF) ~ embedding aud software moduley vain an applcavonsystemta prewde continous mor tring of he systems transactions, The Information scolecie ies spedatcorsputer file thatthe auditor ean examinePERFORMING SUBSTANTIVE TESTS Substontve Tests ore audit erocedures designed to substantiate the ccount baloney adetect, ‘material misstatements the fang! statements. Types of Substantive Teste 1. Anahtial Procedures 2 Tervol dere The decision about w/c procedures touse based onthe avo sudamentsbout ne expected eftectivenessandefcency of such [procedures in atlying the ai ceive. 1. Analkal Procedures Asia procedurs applied substantive tests enable the aor to obtain corroborative evidence about parteiar account ‘USING ANALYTICAL PROCEDURES AS SUBSTANTIVE TESTS abou tne FS z ‘Compare th FS withthe Expectations Oeveloped no. conduc farther Investistion vs ‘When intending parton analiza] procedsrer a aubrantve eats he ater sou Tons on those ‘account that ate predictable. The flowing generaizzvensmaybe helpluin anesthe predtablty ‘of thote accounts: + Incomestatement accounts ae more predictable compared io balance heel account + Accounts tht are not subject to management dlscetion ae generaly predict 1 Rlationshipsinestableenvronment are mote predetable tha those na dynamic or unetable 2, Testot betas ‘involves examining the actual deta making up the varous account balance, This aparoach may take theormat 1+ Testot detaict balancer~imoles dec testing ofthe ending balance ofan account * This al be se when acount balances ae lfected by age volume of este immateris| ‘Testo details of transactions involves testing the transactions which se othe ending balance oftneaeaunt ‘Thsis well if account balances are comprised of» smaller volume of ransctons preset relatvey matelal amount,Effectiveness f Substantive Test ature of substantive test high cost + Timingofsubstantive test: he higher the isk of materia misstatement, the more ely i ray decide > perform sT doserto yearend. + Extentof substantive tat the autor ordinary increases the extent of ST asthe seo material rmisstatementinreates, ‘Relationship between Substantive Test and Tet of Contre! ‘Testol control provide evdence tal ndeates a misstatements ely to occu, Substantive txt onthe sther hand, prowde eeence about he existence of miasatement nan ez0untBadnes ‘AUDIT EVIDENCE ‘+ teeferstothe Information ata ine by the auditor in arvineat the conlusiont on whieh the aut oainlan|s based Neonat of 2 Undetving accounting data ~ refers vo accounting records undoing inthe FS Tis incudes books of accounts, rated accounting manual, worlshee supporung cst allocations and teconcllatiors prepared bythe cient personnel corroborating information ~ supporting the underlying accounting data obtaned fom cent and other Sources. This inclades documents sh 3s Invakees, bank sateen, POs conrarts, cheeks, et + Qualities oEudence {> When performing tects of contel audit evidence must spac the assess level of control sk. 5 Wen performing substantive tests, aut evience must suppor the sceptable level of detection ak, > When obtaning aude ovence, te autor should consider the ‘Sufi ney~ refers tothe amount of evidence thatthe audtor shou aceumulate ‘he audit’ uses hs judgment to dterine the aun of evidence needed support the opinion on the 5, The ollwing factors sy be caneiered in evaluating th rlfeney of the suit evidence Competence t evidence, materiaky of em brig examinee, theriak involved na parveuar amount, saperience gained dunn the prevois aut 1+ Rpproprateness—ssthe measure ofthe quality of aut evidence ands relevance to particular crervon ait eb Relevance relates he pitlines of eeidence and its bly 1 sts ahe au blac Reliab relates to the icc af evitance and ilveced by source ad by Hs mature. White felobiityof ute evdenes te dependent on inaindval rcumtane, the folowing eneraz306n5 oui ely the auditor in asessing ne relly of aut evidence °d hui evidence obtained ram Independent ouside sources mate able than that generated internal, sit eviance generated Internally is more eable when the elated acouniog and itera sonal oatems ate cllctve dat evidence obtains directly bythe auditor sae celiable than that obtained bythe emt. 7 ud evidence nthe formof docementsand writen representations is maerelable than orl ‘+ cost/benett consideration wien obtalaing evidence * Ordinrit the autor nds ie necenary trey en aut evidence hat is persuasive rather than conch AUDIT DOCUMENTATION WORKING PAPERS, Working papers are racrds kept by he autor that documents the suit procedures spied formation ‘ltaines and oneanens reached + P5A230 requires the aud er to document raters th ‘hat he audit was Conducted in aecordance with PSA ates equality evdenee; high quatty of evidences peterence, yeti involve thot the alee are nsortantto supper an apron en FS, nd evidenceFunctlonsof the Working Papert Support the sult’ pinion on FS Phang future suits Suppor the suitors repesenttien sto Provdnginformatian well nrendering other compliance wth PSA serdces (MAS tan consultancy) ‘Asst the auctor inthe planing pevoemance, Provide adecuate delenie mens of ition revew and wasennsion athe engagement Form, Content and Extent of Audit Documentation 7 Indeciding on these, the audits should canter what wou enable an excenenced suitor having no ‘revous connection wih the aud, to understand 3. Thessature, timing and extent of the audit procedures to comcly wih PSAs and applicable lea and regulatory requirements . Theresuttsf the aud procedures andthe audit evidence obtained Significant matters dunngsha suit andthe comduslon ached thereon \dausitcation cf Working Papers 2 Permanentile~ contains formation f continuing significance tothe autor n peformingrecutting suits isle woul mos hy nude: copies of races of meorporation an bylaws, major eantea, engagement ter, org. chart, rales of lng term acrount, ee 2 urtent ie ~ contin evidence gathered ard conclusions reached relevant tothe aud of apart yon, ‘ts eas: copy of 5, aut program, wrk TB, lod sthed les, coresponcence w/ ether partes, Gwmershipot working papers 7 Werking papers are the property ofthe auditar andthe lant has na ight tothe working papers prepares byte autor > Working pasersmay sometimes sera reference soute forthe ent but they shuld nat be considered ‘Aopartacasa aut forthe liens snccrs. Confidentiality af working papers > Althoven the working papers re the persona property ofthe autor, these working paper cannot be shown tothied parties w/o en's permisson, exept ‘When dlosure srequted by lw or when the working papers ae subpoenaed at cout. When there professional right tadlstlore information suchas when tre auditor anes his working paper todefendFimse when sued by elent for ne gence, Retention of working papers. Working papers shoul be retained by the aude for aperod cf time sutficlent tameet the needs of hs practice and to saisty any pertinent egal requrementset recorerstention Gideties forthe preparation ot working papers. he flowing techr ques may be vied by the sudor *sading tbe propery ented wh uth information such a elent name, ype working pope, ‘content descrizton, pened covered} Indering (ue of ettering or nurbenng system to identify accounts), ‘tosrindexingcrssceterencng (0 prowide tral in rewenine) Aickmatks (ombolsto describe the mudi procedutes performed AUOTING ACCOUNTING ESTIMATES SAD dete ‘a¢counting estimates an aproximaton othe amcunts ofan em Inthe absence of a Drecse means of measrerent. The rsk of materia misstatements peater when secourtng estimates ae involved ‘Management response for making accounting estimates incl inthe han statements The auditors responsibilty to cbtainsuliknt appropiate evidence sto wherner, 1 Accounting exo mates properly aeeounted for and cloned * Accounting esate is easonable inthe cumstances.> Imadtion, the autor ray use one cr 3 combination ofthe flowing appre aches 1. Rewew ard este process used by mgt. to develop the estima 2. Make an independent estimate 3. Review ubsequent events which confirm the extimate mode, [RELATED PARTS refers to persons or eties that may have desing w/ ane another Inwhich one party asthe ay twexerise significant influence or eantrol over the ote prt a making firsneal and operating decions Managements Responsibility: Mgmt is esponibe forthe Menticaion and closure of elated partis and ‘Audits responstilty: The autor should obtan and review information provided by the decors and mgmt. lenutying the names ofl kaw nflated partes and related party tansacion. ~ "Anaua cannot be expected to provide assurance that alfeluied sry wansaetions wile dieovered, USING THE WORK OF AN AUDITOR'S EXPERT 1 Amespertisa persona postessng special sl Rnowledge and experience ina parte field ther thn 1 B8A.620 denis so hinds of experts: "Auditor stxpert~an-espers, whose work Inhfher eld of speciation, used bythe autor to 2st eau on obtalningsuident approplate audit evidence '+ Management's Expert an expert, whose workin i field of experts, le used by the ent asst n preparing the ancl statements 1 Notall engagements would requre ths help of an expert. When determining the need of we the work of an exper, the autor would conser: whether the memt-hasuseda mgmt expert in reparing FS, the ature Aandslenificanes ofthe mater, the sk a mater misstatement inthe matter, and expected nature of proceduresto respond telcentied ns 1 EHfectt the Reliance on Exper’s Workon the Auditor’ Report. * The ausitorhassoleresponibityfor the aust opinion expressed and tha resus: nat seine be the utara othe wacolsnexsee Thus, the suds should nt refer the work of an ators excen na autor separ containing aa uneadifed cpio. ‘+ Winen an audter'srepartcontainsa modifi opinion, the auctor can make reference tothe expe'c’s ‘works the audio belver that sh references necesnryin orde forthe fears to understand the ‘Semon cfespresong a mat fied opinion, When ns Rappens the anit should indate is reaset ab uchefesence does ot esis the auto's respansbite for tat epnion. CCONSIOERING THE WORK OF INTERNAL AUDITORS. {ntemal auditing an apa actvay etalaned within an enya sence to the entity Considering the work of Interna! air invales two moran phases: Making a preliminary esesement of intemal auditing (cosderrg the competence object, due rofeztonsleare, and scope of fucllon of intemal audios) 2 Evaluating and testing the work internal auding~io confi Ite adequacy forthe enteenal autor’ + the extemal suchtor may al request the aucstance ofthe lternal au tors in pelorsng routine or mechanical ui procedures.AUDIT SAMPLING PSA530detines auaitsampliag ws, the appltion of audit raceaures ta less than 10030 hes within ‘an account bolnceor css of tromartions such tht a rmping tnitshave@ chance of ection isksin Sampling 41. Sampling ish rsfors to th pony that the airs canton, based on a sample maybe iene re the concuson reached teenie population ware subjected tthe some aut procedures. Ths xs because the sample selected for testing may nat be tray representative of a population. Tyee Ro ST ‘Alpha Ask results nan auctor performing suas procecuresmore than what snecessary, | Rukofunderrelonce | kof correct reecion th tfecting 9. fie eta Rsk resem an autor poTormIne audi procedurestesthan what necessary, | Rkofoverelance | hk oflncorrectocceptonce thus allecing sud elleeivenees. > The ontywoy to elmnate sapling rake to examine the whsle population yet Ric nt feasible oda so. > Contoling Sampling Rsk: Th canbe done by: > increasing the sample sce + Unie on appropriate tlection method 2. Non-samplingrisk—refers othe nh that the sudtr may draw ineoreet canclusons about the azcunt bokinee or clas transactions Because of uM eror. 2 on samping rk issomething that canna be eliminated even the autor examines he popuation > ControlingNor-sampling Rsk: Ths can be dane by proper panning, adea.ate diction, review, and supersson ef the aut tear ‘General Asproachesto Audit Sampling 1. Statistical sampling ea srpine approach that ures random bared selection of sample and usesthe lof probabity 1 measure sompng risk and evaluate sample resus. 22. Mon-statticalsampling- Sahn approach that purely uses auto's judgment in estimating sampling rik, determining same se and evaluating sample esa. ‘Audit SamplinePans FZ res Used 1. AtttbuteSampling | Esttrate the fequency of eceurence | Testof Controls toestimatetherate ofa eortan chaacteniveina ol deviations. population, “E_variabesampling | Eivatea numerical measorement | Substantive Testo esumate the ‘ofa popution such ae peso vale aroun of misstatements,1 Delinethe objective ofthetest. | Specty theconraltobe selected. | Specty the purpoe ofthe est ands retstionsip tote financement suertions Z_Daterminetieprocedaresto [Determine thesproprate aaah | Determine He approprat= au be perform procedurestosaisty the cbjetive, | procedures to stisy the objective Define the population an the Define the popu ancits condtionsthateanstutesevition, | chaneterstes. 3 Determine thesamplesies [Cons cers elect ofthe following | Corser ‘he effects of he aowine factorsindeterminingthe sample | factrsindetermining ne sare ‘© Acceptable sampling rie ‘© Acceptable sampling (verse (inverse) 4 Telerable deviation ate 4 Tolerate mietaterent (inverse (verse) + Expected population deviation | «Expected mstatement and rate(avet, population aration eet Sectthe ample Tie aryl the folowingtedinaues | Use any af the folowing technics Random numer selection | andstaniy he population, when Systematic slecton appropriate f Hishatard election (appies |» Random number selection conv tenon sata Systematic seection srplng) + Haphanard election (aplion onlyto non statist! sampine) + Value wesprted seaction "5 Reply the audit procedures. | Appiyihe aut pravedurestothe | Apply ihe audit precedes othe samaleners some tems, & Gralatethesampte resis. — | Decide whetherthereniRevupparid | Decide whether to accept acount the planned degreectreliance on | balances farly tated orto requre incerna conto further action Tics toe enphaseed at steps, 2, 5, and 6 wil be perTormed whether the auhor uses auctor sampling orl Factors in Determination of Sample Sze of Lest. Contos (Seo 3) 1L. Aeceprablesamping isk Theres 3n inverse elatonshi bw the acentable sampling tk nd samlesize. 2. Tolerable deviation at. thi the maxmum rate of deviations the auditor wiling to cept 4 Expected deviation rate This the rate of davatons he auditor expect to ind athe population before tors in Detention of Sarnle Sc of SubatatineTeats [Step 3: 1 Acceptable smping sk Ther san inverse elatonship bf the accectable sagt nd samclesize 2. Tolersbleminsaterent Thais the mssimur at a wxstate ent the uditor will permit inthe population ard be wiling ta conclude that the account blac aise 3. Expectedmistatement.Iis the amount of mitatement the audtor believes exists inthe popuation. {Variation inthe population sehen wang tas sampling. ix meanued by standard deaton