72, Which ofthe following if not one ofthe reasons that an 1 1. Provide reasonable, bt ot absolute assurance on the 4% The auditor commonly examines # stmple, ther than 4, este popuon of tanscdons counting presentations contain complex estimates ‘which iherend involve maceeing: Fraudvlently prepared faancial statements ate often difficult detect, Auditoes believe that reasonable assurance is suficent Jn the vast majoity of eases, Te erponsily forthe preparation ofthe Snanca sements andthe acompuyang foots ease ‘The auditor a — Nine rh mangemen: ad he audrey Management forthe stterents and the roe forthe peg ‘Which ofthe following surement is true wheat the CPA has ‘been engaged to do an audit engagement 4 The CPA fms engaged and paid by the chen; therefore, ‘he Ges Ima primary responsbiy to be an advocate ee the cine 'e_The CPA fim is engage and paid by che cen, but the Primary benefice of the audi ae the statement vere © Should sitston acse where there is ‘no convincing authoritative standaed avaible, and thee i choice of actions which could impact cents financial satemeats citer positively or negatively, the CPA i recto endorse the choice which iia the chants iarese, AS long as CPA firms are ‘competent, iis not requized that they remain unbinged 7 2 Chapter 2 ‘THE PROFESSIONAL STANDARDS When auditing financial statements an auditor assumes certain protessional rsponsbites Auditors opimon must be based on an ‘xamintion conducted in accordance with professional standards, Fale to comply with these standards exposes the auditor to risks sich as loos of public espect or even assessment of legal damages, ‘Standards are established to measure the quality of performance of individals and organizaons Standards eating othe accounting profession concern themselves with CPAs profesional qualities, Ute jnginent eared Uy the CPA i he peafonumance OF dit profesional engagement, and the CPA fr’s quality coatel polices td procedures ‘The Board of Accountancy promulgated ten Tai ase modanie mute fellowed by CPAe when auditing financial statements, Philippine Standards on Auditing (PSAs) ate sued to claify the ‘meaning of these ten GAAS. Aldi peocedues ate the means ‘sed by the auditors in ataining che qual eequied by the standards Generally Accepted Auditing Standards (GAAS) GAAS represent measures of the quality of the auditor’ petformunce: These standards should be looked as inant Honda of performance that auditors should follow. These tea GAAS sre grouped into gene, fieldwork and reporting standardAuditing Theory A Guide in Understanding the Philippine Standards on Auditing Jekell G. Salosagcol, CPA Michael F. Tiu, CPA Roel Hermosilla, CPA, MBA, LLB CRC-ACE REVIEW SCHOOL 3" Fir, Villaroman Building . Campa St. cor. Espana, Manila B 735-8901/ 735-9031acknowledge the effort of obr staf at CRC-ACE. ‘School who helped in rping and lay cuting the contents of ME bck, Tok tu be tal tren care ‘newest edition. ae = ‘Out sincere gratin is given tothe many faculty members and ‘viewers forthe overehelming support a wellas, tothe coutless COPA reviewees who have expressed their postive reception to the Preceding ediions: Your valuable appreciation has certainly ‘enhanced our inspiration and commitient to further advance the standard of sccouatancy education, ‘Special thanks go to many people who have given thee time, talent, ‘nspiction, encouragement and asitance for the compledon of this humble piece of work. Without you this work would not have been made possible Abore al, to God Almighy, we thank Yow for guiding ws o this ‘vocation and ging us flfilmen inthis profesional nision, Jebel G. Salosageol Michael F Tia Roel E. Hermosa Ee Ns an Sad da seal ree CONTENTS Chapter 1 AUDIT: An Overview 4 “Auditing defined “Types of Anite ‘Types of Auditors “The Independent Financial Satement Avett Chapter 2 The Professional Standards 3 Genetally Accepted Auditing Standards Philippine Stndards oa Auditing ‘Quality Control System Chapter 3 ‘The Auditor's Responsibility 8 a Feud Noncompliance with Laws and Regulations Chapter 4 “the Audit Process: Accepting 20. Engagement General Audit Approach ‘Overview of the Audit Poocess Accepting an Engagement Engagement Lever Chapter § Audit Plansing Understanding the Clentt Business and Tndstry Matec At Risk Analytical Procedures Planning Documentation wei ileal Chapter 6 Consideration of Internal Control 207 Nature of lateral Contzol Components of Intemal Control Consideration of Internal Control ‘Communication of Intersal Contol Weaknesses Chapter 7 Auditing in a Computerized Environment 257 CCharacetitics of CS Internal Contzol in 4 CIS envconment Auditng Arouad dhe Computer Computer Assisted Audie Techniques (CAATS) Performing Substantive Tests Analytical Procedues ‘Test of dew Audit Bridence Working Papers Related Parties Using che Wosk of an Auditors Expert Considering the Work of Internal Auditors Auditing Accounting Fstimates Chapter 8 Chapter 9 Audit Sampung 365 Sampling Ras Satstcal end Non Seatistical Sampling Basic Steps when Using Audit Sampling Sampling for Tests of Control ‘Sampling for Substancve exes Chapter 10 Completing the audit 23 Subeequent Events Litigtions, Cains and Asiessment Management Representation Leet Going concern Wrap-up Procedures 299 Chapter 11 Chapter 12 Chaprer 13 eo ee | The Uae Report odienion ote Repo opr on Cound Pans Steen eee Spel upon had Ege | ‘Assurance and Related Services, 375 oy! Review of Financial Statements [Agreed-upon Procedures Engagement Compilation of Financial Statements Aseotance Fagagements “The Code vf Ethics aud Republic ‘Act 9298 on ‘The Code of Ethics for Professional Accosatanss ‘The Philippine Accountancy Act of 2008Chapter 1 AUDIT: An Overview ‘Dependable financial information is ettenial co our society. We ‘often ely pon information provided by othersn making economic Aecisions. The need of vasious uses for more selable financial information has crested & demand for sa independent audit of fisancial statements “The primary function ofan independent audit is wo lend cxebilty to the financial statements peepated by an entity. The auditor's ‘opinion enhances the value and usefulness of the financial statements By attaching 2 sepor tthe financial statements, the ttoltor provides increased asnurance fo seers thatthe financial “fatements ate reliable, © Auditing Defined “The Phiippine Standards on Auditing (PSA) defines auditing by stating the objective ofa financial statement aud, chats, to-enable the auditor to express an opaion whether thé financial statements ate prepared. in all material espects, in accordance ‘vith an identified financial reporting framework “This definition confines the audit to examination of the Financial statements Although the great majoiy of audit work today desl with sud of faancial statements, operational and oop ending are becoming more and more important. ‘A more comprehensive defnton of auditing i given by the ‘American Accounting Associauon:a a aaieeinllel ‘This definition conveys the following thoughts 1. Auditing is systematic process Atiting proceeds by means of an ordered and sructred series of steps. 2 An audit involves obtaining and evaluating evidence about assertions regarding economic actions and events Alero ace representations made by an avditeesbout economic actions and events. The autors objective is {to determine whether these stetons ate valid To aify this objective, the andar peforms nut paaedare sathers evidence that corroborates or fefutes the 3. Am audit is conducted objectively ‘The auditor should conduct the audit without bas. {nopartil atitade must be maintained by the auditor when evaluating evidence and formulating hs ennrinsion 4. Auditors ascertain the degree of correspondence between assertions and established exter, Eitablsed atria ate needed to judge the validity of the assertions. These citeia are important because they ‘xablsh and inform the uses of the basis aginst which the assertions have been evaluated oe measured. In an sedis the audor determines the degree by which the assertions conform to the established criteria. For ‘example, when auditing financial statement, the mdr judges the fir presentation ofthe Enencal statements {auerton) by comparing the statements with a dented financial reporting farmework (oto) a Auditors communicate the audit results to various interested users ‘Apmtanbaamaleer he sao be st resnlm met he commited to intersted wer oa timely basi Figure 14. Iustrative Definition of Auditing Independent Andtor ‘Objecively obtains and evaluates evidence "Exabes the degree of comrespondence between Esablohed Criteria© Types of Audits ‘Based on primary audit objective, there ate theee majoe types of audit- financial, compliance and opeational susie 2 Financial statement audit ‘This is a anit conducted to determine whether the Financial statements of an entiy ate fly presented in accordance with an identified financial porting famework. This type of audit will be the focus of the discussion ia this ext. $= Compliance audit ‘Compliance aut involves a review of an orpanization’s Procedures to determune whether the organeation has adhered to specie proceduts, ules ot regulations The Performance of compliance audit is dependent upon the ‘existence of verifiable data and recognized criteria ‘stablshed by an authosiative body. A common example ofthis type of audit s the examination conducted by BIR examiners to determine whether entities comply with tax rules and segulatons, 12 Operational audit An operstional audit is a study of «specific unit of an ‘organization for the purpose of messucing itt performance. The main objective of this ype of sui it fo-assess entity’s performance, identify areas fot ‘improvements and make recommendations to impeone performance. This type of sudit ie also knowa a8 perfotmance auditor management suc It should be noted that, although there ate diferent ypes of sd all audits possess the same general charctssticn They A inolee: 1, Systematic examination ad evaluation of evidence which faze undertaken to ascertain whether asertions comply ‘with established exter and ‘ 2. Communication ofthe results of the examination, usally Ina writen eeport to the pasty by whom, oF on whose behalf the ator mis appointed Uatike compliance and financial statement audi, whee the crtsn are Usually defined, estes wed in operational sc to evaluate the effectiveners and efciency of operations ae ot een established. ‘Types of auditors Adicts can be casi according to thet sition wih the en being examined, 12 External auditors “These at independent CPAs who offer thei profesional serves to diferent cents ona conical ass Exel ‘ditors ae the ones who generally perfor financial ‘fatemeat andi. 1 Taernal auditors Tateraal auditors ate enti’ own employees who investigate ad appre the efecvenes and efcsency ‘of operons and intemal conuols The min fancson ‘of internal auditors is to ssiat the members of the organization in the effective discharge of their responsiblties. Internal auditors usually pesform ‘pecans! audits 2 Government auditors ‘These ze goverment employees whore min concern it to determine whether persons or enttes comply with govemment lw ind segulations, Government aidtots ‘ull conduct compliance suds| The Independent Financial Statement Audit ‘The objective of an audit of Enancial statements i to enable the auditor to express an opinion whether the financial statement age prepare, in all material respects in accordance ‘with an identified financial reporting famework or acceptable Easacal reporting nadaeda 12 Responsibility forthe Gnancial statements ‘The management is zesponsible for preparing and ‘resenting the financial statements in accordance with the financial reporting framework. 1 “The auditor esponsibility ieto form and expres an opion on these ancl statements based on his suc An aust ‘of bomncal rstements does not rekeve management of responsiites. Hence, ts managements responsi 0 scope and implement adequate accounting and inter ontol systems dat will lp ensure, among others, the ppspurason of telable Gnaacal atement {3 Assurance provided by the auditor "The auditor’ opinign onthe Gnancial statements is not a (jonantee that de Enancal statements ace depend ‘An audit conducted ia accordance with Philippine Standards on Auditing (PSAS) is designed to provide only reasonable asgurance (aot absolute assuraes) thatthe SSnancial statements taken at a whole ace fre {cor tmateal misttements. In every adit, there are aay inherent limitations that affet the auditor’ ability to detect matesal misstatements These limitations result fom sich factors as 1. The use of testing / Sampling risk For pec reatong soto donot examin all cvidece sable Many aut conchons are made By exmsng oa tmp of uence Whenever snp hen ee alee a posi tha he So « 7Aiferent from the concson that would have been ; fenagement and Independent Auditor reached if the auditor eamins the ene popuson miedo: Error in application of judgment /Non- =e eae re ee ‘Speman by fuga hans eka ‘ne audios to commic mistakes ia the appeason of audit procedies snd evakation of evidence 3. Reliance on managements eprsetaton ae Sex ec eit acl mene sa smust be obtained by obtaining oral or writen ‘epresentadons frm management, Foc examples i cule forthe auditor to dtesmie the prope Valuation of accounts receivable. wihoat managements honest assessment, TE the ‘management lacks inteaity management say Bae ges oe Oe ee er cae 4. Inherent limitations of the client's accounting Statements. ‘Statements ‘and internal contol systems. 7 Although the auditor pecforms procedures to detect | faterat misstatements wher andiang, Gasca statement, such procedures may not be effec in detecting masttement reslog fom cllion ‘uted ‘at Report among employees or managements chcamventon Finacial on Fania oie occ Statements Statements 5. Nature of evidence idence obtained by the auditor docs a0 consist of "hard fcr which prove oc dapaoye the secu) Sf the nancial statements Insend compas kets of information aad inpresions white a Edu accurasted ding the couse ofan eit fd which, whea taken together, persuade the fdr abou the ines of the Sane atereats Thus, anit evidence i general psec met Users of Financial Statements than conclusive in nature 5{2 General principles governing the audit of financial ‘The proceduzes required to conduct an aut in accordance with PSAs shouldbe determined by the actor having ‘regu to the requirements of PSAs, relevant profesronal bodies, legislations, regulations, and where approprate, the terme af the engagement and the soperiog equiemients PSA provides thefllowing guidlines whos suditing Snancal statements: 1. The auditor should comply with the “Code of Professional Ethics for Certified Public Accouatants” promulgated by the Bored of ‘Accountancy (BOA), In onder to retin public confidence in the credibility of the auditore' work, nudiwus unas adete standards of ethical conduct that embody acd it Objecvty, and concern For ok ‘than sel inex, 2. The auditor should conduct an aut in acondance wih Philippine Standards on Auditing ‘Basan cone tse pincer ana {steal procedures wich theater shoud fle ‘The stutdacde alo lade explanaty ad oes tnattale whieh, ther than being precip that is mandatory), isidesigned tonassist atidicorit? interpreting and applying the auditic 3. Theauditor should plan and perform the aut with an attitude of professional skepticism recognizing that circumstances may exit which may cae the Snancial statements to be materially misstated An atitude of profesional skepticism means the auditor makes 1 critical assessment, with a questioning mind, of the vaidty of audi evidence ‘obtained and is alert to audit evidence that contradicts of bring into questions the relay of documents or management sepeesentatons. In planning and performing an audit, the auditor ster sees ht the matapeent shot 208 tssumes unquestioned honesty. Thus, bene subsatue foe obtaining suffen appropriate ‘evidence to he able t draw reasonable conclasions Gn which fo base the act opimiod. 2 Need for an independent financial statement audit “The ned foranindepende suit of ancl stents stems from the following interrelated sources: 1. Conflict of interest between management and ‘seers of nancial statemes In seme, Goncl strentany bevewed #8 the report by management ato ow the ently pevformed under ter decton sod miperioa Nenege are feoenty placed in ossoas where they cn nat by peng cutie pres wh velop of re al silo uid pres, howerer, waot wake, saat fanend stcments, Recognizing thn inherent confit of intern, ser of franca statements have become SEefiil of uoveted financial 2. Expertise ‘The complexity of accounting and auditing requires expestise in verifying the quality of the financial Information. Since mort of the users of Gnaacal information are not equipped with the necessary skis and competence to determine whether the financial satements are reliable, qualified person is hired by users to vedifythe reliability /of the financial statements on dic behall