AUDITING AND

ASSURANCE: CONCEPTS
AND APPLICATIONS 2
AUDIT PROCESS
Performing Substantive Tests

2
 Substantive Tests

Audit Procedure to Substantiate the account

SUBSTANTIVE TESTS balances or to detect material misstatements in
the FS

Analytical Procedures Test of Details

Is the difference
significant?
Test of Test of
NO YES Details of Details of
Balances Transactions
Accept the Conduct
account as further
reasonable investigation Large volume Small volume
of relatively of relatively
More applicable to large volumes of immaterial material
transactions that tend to be predictable transactions transactions 3
over time
Effectiveness of Substantive Tests

▰ Nature – Nature of substantive tests relates to the

quality of evidence
▰ Timing – Relates to the period of performing substantive
tests it can be on interim dates or at year end.
▰ Extent – Relates to the amount of evidence needed to
satisfy a particular objective

4
Relationship of Substantive Tests and Tests of
Control

▰ Test of Controls provides evidence that indicates a

misstatement is likely to occur
▰ Substantive tests – provides evidence about the
existence of misstatements in an account.

5
Audit Evidence

▰ Refers to information obtained by the Auditor in arriving

at the conclusions on which audit opinion is based.
▰ Consist of underlying accounting data and
corroborating information.
▰ Two consideration on Audit Evidence
▰ Sufficiency
▰ Appropriateness
6
Audit Documentation

▰ Working Papers – Records kept by the auditor that documents the audit
procedures applied, information obtained and conclusions reached.
▰ Consideration for Making a Working Paper: Enabling an experienced
auditor having no previous connection with the audit to understand the:
▰ Nature, timing and extent of audit procedures
▰ Results of the Audit procedures and the Audit Evidence Obtained
▰ Significant Matters

7
Classification of Working Papers

▰ Permanent Files – Contains information of continuing significance to the auditor in performing recurring audits

▰ Articles of Incorporation

▰ Major Contracts

▰ Engagement Letters

▰ Organizational Charts

▰ Internal Control Analysis

▰ Current Files – Contains evidence gathered and conclusions reached relevant to the audit.

▰ Financial Statements

▰ Audit Program

▰ Detailed Schedules

▰ Correspondence
8
Preparation of Working Papers

▰ Heading
▰ Indexing
▰ Cross – indexing/cross referencing
▰ Tick marks

9
Using the Work of an Expert

▰ Auditor’s Expert – An individual or organization possessing expertise in a

field other than accounting or auditing, whose work in that field is used by
the auditor to assist the auditor in obtaining sufficient appropriate
audit evidence
▰ Management’s Expert - An individual or organization possessing
expertise in a field other than accounting or auditing, whose work in that
field is used by the entity to assist the entity in preparing financial
statements

10
Considering the work of Internal Auditors

▰ Making a preliminary assessment of internal auditing; and

▰ Evaluating and testing the work of internal auditing

11
AUDIT PROCESS
Audit Sampling

12
 Considering the work of Internal Auditors

Audit Sampling – The application of audit procedures to less than 100% of the items within an
account balance or class of transactions such that all sampling units have a chance of selection

SAMPLING RISK
ALPHA RISK

1) Test of Controls Conclusion: Not Effective/ Reliable Risk of Under reliance

Actual: Effective/ Reliable
2) Substantive Test Conclusion: Existence of Material Misstatement Risk of Incorrect
Actual: No Material Misstatement Rejection
BETA RISK

1) Test of Controls Conclusion: Effective/ Reliable Risk of Over reliance

Actual: Not Effective/Reliable
2) Substantive Test Conclusion: No Material Misstatement Risk of Incorrect
Actual: Existence of Material Misstatement Acceptance
13
 Considering the work of Internal Auditors

AUDIT SAMPLING

Statistical Sampling Non - Statistical Sampling

Attribute Sampling Variable Sampling

Estimate the Estimate a

frequency of numerical
occurrence. measurement of a
population
14
AUDIT PROCESS
Completing the Audit and Post Audit
Responsibilities
15
Completing the Audit

▰ Identifying subsequent events that may affect the financial statements

under audit;
▰ Requiring Adjustment (EXISTING at FS DATE)
▰ Requiring Disclosure (AFTER FS DATE)
▰ Identifying litigation and claims;
▰ Obtaining written management representation; and
▰ Performing wrap – up procedures

16
 Subsequent Events

Date of Auditors Date of Issuance of

FS DATE Auditors Report
Report

Dec. 31, 2019 Mar. 31, 2020 April. 14, 2020

17
Identifying litigations and claims

▰ Auditor is responsible to carry out procedures in order to become aware of

litigation and claims involving the entity which may have a material effect
on the FS.
▰ Auditor should request management to provide written representations that
all known actual or possible litigation and claims have been disclosed to
the auditor and the the effects have been properly accounted for and
disclosed.
▰ Auditor may also opt to send letter of inquiry to external counsel. Conduct
of meeting may also be conducted with prior permission of the client.

18
Written Management Representation

▰ Has acknowledge that it has fulfilled its responsibility for the preparation
and presentation of fair financial statements; and
▰ Has approved the financial statements.

Basic Elements of a Written Management Representation

▰ Should be addressed to the auditor;
▰ Date of written representation shall be as near as practicable to, but not
after, the date of the auditors report;
▰ Shall be sign by the appropriate level of management who has the primary
responsibility for the financial statements. ( CEO & CFO)
19
Wrap – up Procedure

▰ Final Analytical Procedures;

▰ Evaluation of the entity’s ability to
continue as a going concern; and
▰ Evaluating audit findings and obtaining
clients approval for the proposed
adjusting entries.

20
Final Analytical Procedure

▰ Assessing the validity of the conclusions

reached and evaluating the overall
financial statement presentation; and
▰ Identifying unusual fluctuations that
were not previously identified.

21
Going Concern

▰ If properly and adequately disclosed

– may issue unmodified opinion with a
separate section “Material Uncertainty
Related to Going Concern”
▰ If NOT properly and adequately
disclosed – Should express qualified or
adverse opinion

22
 Evaluating audit findings and obtaining clients approval for the
proposed adjusting entries.

Completed Audit Procedures

Discovery of material FS is Fairly stated

misstatements without any material
misstatements

Proposed Adjusting Journal MANAGEMENT

Entries

NO – QUALIFIED OR ADVERSE
YES – UNMODIFIED OPINION
OPINION
23
Post Audit Responsibilities

▰ If Auditor becomes aware that the report

issued in connection with the FS may be
inappropriate, the auditor must take
steps to prevent future reliance
If Management makes If Management refuses to make
appropriate revisions and appropriate revisions and
disclosures: disclosures:
Auditor shall issue a new Auditor’s Auditor shall notify those persons
report that includes an EMPHASIS ultimately responsible for the
OF A MATTER PARAGRAPH direction of the entity and

24
AUDIT PROCESS
Auditors Report on Financial
Statements
25
 Going Concern

AUDITOR’S REPORT ON FINANCIAL STATEMENTS

Unmodified Modification Emphasis of Key Audit Report on Special

Report of Opinion Matter & Matters and Group FS Purpose FS
Other Matter Other
Paragraphs Information

26
Elements of Audit Report

▰ Title
▰ Addressee
▰ Auditor’s Opinion
▰ Basis for Opinion
▰ Responsibilities for the FS
▰ Auditor’s responsibilities for the Audit of the FS
▰ Other Reporting Responsibilities
▰ Auditor’s Signature
▰ Auditor’s Address
▰ Date of Report
27
Unmodified Audit Report

▰ UNMODIFIED OPINION – Auditor Concludes , based on

audit evidence obtained, that the Financial Statements are
presented fairly, in all material respects in accordance with
the applicable financial reporting framework.
▰ FS have been prepared in accordance with applicable
financial reporting framework such as PFRS; and
▰ Auditor was able to conduct the audit in accordance
with PSA

MODIFIED REPORT

28
Modified Audit Report

MODIFIED REPORT
MATERIAL MISSTATEMENT SCOPE LIMITATION

Material but Material and Material but Material but

not Pervasive Pervasive not Pervasive not Pervasive

Qualified Adverse Qualified Disclaimer of

Opinion Opinion Opinion Opinion

29
Qualification due to Material Misstatement

▰ Use the heading “Qualified Opinion”

▰ State that, in the auditor’s opinion, except for the effects of
the matter described in the basis for Qualified Opinion
section, the financial statements present fairly, in all material
respects, the financial position and financial performance of
the entity in accordance with the applicable financial
reporting framework

30
Qualification due to Scope Limitation

▰ Use the heading “Qualified Opinion”

▰ State that, in the auditor’s opinion, except for the possible
effects of the matter described in the basis for Qualified
Opinion section, the financial statements present fairly, in all
material respects, the financial position and financial
performance of the entity in accordance with the applicable
financial reporting framework

31
Adverse Opinion

▰ Use the heading “Adverse Opinion”

▰ State that, in the auditor’s opinion, because of the
significance of the matter described in the basis for
Adverse Opinion section, the financial statements do not
present the financial position and financial performance of
fairly in accordance with the applicable financial reporting
framework.

32
Disclaimer of Opinion

▰ Use the heading “Disclaimer of Opinion”

▰ State that the Auditor does not express an opinion on the
financial statements.
▰ State that because of the significance of the matter
described in the basis for Disclaimer Opinion section, the
Auditor has not been able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion on the
financial statements;
▰ Amend the Opening statement which indicates that the
auditor has audited the financial statements, to state that the
auditor was engaged to audit the financial statements.

33
SlidesCarnival icons are editable shapes.

This means that you can:

● Resize them without losing quality.
● Change line color, width and style.

Isn’t that nice? :)

Examples:

34