FAM

Introduction

 8 Fundamental Auditing Principles of Level 3

1. Ethics and independence

2. Professional judgment, due care and skepticism
3. Quality control
4. Audit team management and skills
5. Audit Risk
6. Materiality
7. Documentation
8. Communication

General Auditing
COA’s existing policy and application of the
Principle Principle explanation in ISSAI 100
principles in this Manual

Ethics and Auditors should comply with relevant COA has adopted the Revised Code of Conduct and Ethical
independence ethical requirements and be independent. Standards for COA Officials and Employees under Resolution
No. 2018-010 dated February 1, 2018.
Professional Auditors should maintain an appropriate This is emphasized under Section 1 (Preliminary Engagement
judgment, due care professional behavior by applying Activities) of this Manual and throughout the entire audit
and skepticism professional skepticism, professional process.
judgment and due care
throughout the audit.
Quality control Auditors should perform the audit in The audit tools to assist and guide Auditors in ensuring the
accordance with professional standards on quality of audit are prescribed in the Manual. The Auditors’
quality control. compliance with the Manual will be assessed using the
Quality Control Documents prescribed under Section 5 of this
Manual.

Audit team Auditors should possess or have access to The training of Auditors is a continuous activity. They will be
management and the necessary skills. trained on the use of audit tools prescribed in the Manual and
skills subsequent issuances to keep them updated on international
standards.

Audit risk Auditors should manage the risks of The adoption of the Manual will address this concern.
providing an inappropriate report in
the circumstances of the audit.
Materiality Auditors should consider The determination of materiality threshold is discussed under
materiality throughout the audit process. Section 2 Part III.A. of this Manual.

Documentation Auditors should prepare audit The auditor shall be guided by the step by step procedures
documentation in sufficient detail to provided in Section 3 Part I.C. of this Manual.
provide a clear understanding of
work performed, evidence obtained and
conclusions reached.
Communication Auditors should establish effective The auditors maintain open communication with the auditees
communication throughout the which is also defined in the Audit
audit process. Terms of Engagement proposed in the Manual.
COA Audit Framework

 Audit Streams
1. Financial Audit
2. Compliance Audit
3. Performance Audit

 COA Audit Framework

- The orange box displays the Strategic Audit Planning and Risk Identification comprising
the
1. Preliminary Engagement
2. Planning
3. Execution and
4. Reporting.

- The blue box displays the four stages of the audit giving important consideration on quality
control encompassing all four stages.
Overview of the Financial Audit Manual

A. Objectives of Financial Audit

- express an opinion whether the financial statements (FS) have been prepared, in all material
respects, in accordance with the applicable financial reporting framework

- The audit mandate, or obligations for public sector entities, arising from legislation,
regulation, ministerial directives, government policy requirements, or resolutions of the
legislature may result in additional objectives.

- may include audit and reporting responsibilities, for example, relating to reporting whether
public sector auditors found any instances of non-compliance with authorities including
budgets and accountability frameworks, and/or reporting on the effectiveness of internal
control.

B. The Financial Statements Audit Process

 Audit Activities by Phase

C. Applying the INTOSAI Financial Audit Guidelines (ISSAI 1000-2999)

- The ISSAI 1700 (Revised) notes that depending on the standards applied, the public sector
auditors may refer to relevant auditing standards in one of the following ways:

a) in accordance with national standards, which are based on [or consistent with] the
Fundamental Auditing Principles (ISSAIs 100-999) of the International Standards of
Supreme Audit Institutions (refer to ISSAI 200.12);
b) in accordance with international standards (ISSAIs 1000-2999) (refer to ISSAI 200.13a);
c) in accordance with ISAs (refer to ISSAI 200.13b)

- COA has adopted the INTOSAI Financial Audit Guidelines under COA Resolution Nos.
2013-007, 2014-011, and 2016-007.
Section 1

Preliminary Engagement Activities

I. Ensuring Engagement Team’s Independence and Compliance with the Ethical Standard
 Purpose of an FS audit - to enhance the degree of confidence of intended users in FS

 How? – Achieved by the expression of an opinion by the Auditor on whether the FS are
prepared, in all material respects, in accordance with an applicable FRF

 An audit conducted in accordance with the standards and relevant ethical requirements
enables the auditor to form that opinion, which is required under ISSAI 1200

 The audit team is also required under ISSAI 1220 to implement quality control procedures at
the engagement level to have a reasonable assurance

a) The audit complies with professional standards and applicable legal and regulatory
requirements; and
b) The auditor’s report issued is appropriate in the circumstances.

 Auditor’s Declaration of Independence and Compliance with Other Ethical Standards

(Appendix 1-1)
 Execute by the SA/RSA, ATL and Audit Team Members
 confirmed by the CD/RD

 Throughout the audit engagement, the CD/RD shall ensure that:

a) There are no threats to the independence of the audit engagement and that members of
the engagement team comply with relevant ethical standards.

Threats to independence may take the form of:

i. Conflict of interest;
ii. Individual values system; or,
iii. Familiarity with key management officials.

b) The engagement team collectively possesses appropriate competence and capabilities to:

i. perform the audit engagement in accordance with professional standards and

applicable legal and regulatory requirements; and

ii. issue an auditor’s report that is appropriate in the circumstances.

c) Due professional care is exercised.

 Due professional care – requires the auditor to exercise professional skepticism.
 Professional Skepticism - an attitude that includes a questioning mind and a critical
assessment of audit evidence and to use the knowledge, skill, and ability called for by
the profession of public accounting
II. Defining the Terms of Audit Engagement
A. Establishing the Terms of Audit Engagement
 The terms of the audit engagement required under ISSAI 1210
- shall be established before the commencement of the audit of a certain financial period

 The audit engagement letter (Appendix 1-2) or other suitable form of written engagement
shall include:
a) the objective and scope of the audit of the financial statements;
b) the responsibilities of the auditor;
c) the responsibilities of management;
d) identification of the applicable financial reporting framework which is PPSAS or PFRS,
for the preparation of the financial statements;
e) reference to the expected form and content of any reports to be issued by the auditor;
and,
f) a statement that there may be circumstances in which a report may differ from its
expected form and content.

 This letter shall also specify

a) the required disclosures for inclusion in the Notes to FS, particularly, Related Parties,
Claims and Litigations and Segment Accounting, if these exist;
b) the performance review to be done on the financial accounting and reporting practices of
the auditee;
c) the deadline for the submission of a final Management written representation and
d) the requests for copies of specific reports and appointments for interview.

 Written representation is a written statement provided by management, and where

appropriate, those charged with governance to confirm certain matters or support other
audit evidence. It also contains management’s representation that:

a) It has fulfilled its responsibilities for the preparation and fair presentation of FS in
accordance with applicable FRF;
b) It has provided the auditors with all relevant information and access as required in the
Engagement Letter. The management’s responsibility as discussed in the Engagement
Letter shall be included in the written representation;
c) All transactions have been recorded and are reflected in the FS; and,
d) Other concerns such as propriety of selection and application of accounting policies,
compliance with applicable frameworks in terms of recognition, measurement and
presentation of accounts and disclosures, and specific assertions in the FS.

 The Management Representation Letter

- should be issued as near as practicable to, but not after, the date of the auditor’s report on
the FS.
- The written representations shall be for all FS and period(s) referred to in the auditor’s
report (ISSAI 1580, par. 14).
- The MRL format, for management’s reference, is attached to the Engagement Letter.

 If the auditor did not receive the requested written representation or doubts the competence,
integrity, ethical value or diligence of management, or its commitment to, or enforcement
thereof, in particular, if written representations are inconsistent with other audit evidence,
and the matter remained unresolved despite additional audit procedures performed, the
auditor shall determine the effect that such concerns or non-submission thereof, may have
on the reliability of oral or written representations and audit evidence in general.

 For foreign assisted projects, the engagement letter will consider the requirements of the
foreign lending/grantor institution.

B. Communicating the Terms of Engagement

 The engagement letter shall be issued to management or to those charged with governance.
- This is being issued to formally inform the auditee of the audit requirements, including
the responsibilities of the auditor and the auditee, and as a matter of professional
courtesy and engagement direction.
- After the engagement letter is formally acknowledged as received, the Audit Team shall
arrange for an entrance conference taking into consideration the availability of
management, to discuss the conditions cited in the terms of engagement.
- There is no need to seek conformity by the auditees with the terms of engagement
because COA is constitutionally and legally mandated to audit all government agencies.
- However, the auditee’s cooperation and assistance should be sought specifically on their
responsibilities under the terms of engagement, such as submission of required
documents or schedules, and availability in meetings or interviews on dates agreed upon
during the entrance conference or meeting.
Section 2
Planning Phase
- Under ISSAI 1300, planning is not a discrete phase of an audit but rather a continual and iterative
process that often begins shortly after the completion of the previous audit and continues until the
completion of the current audit.

- Planning activities involve the following steps:

I. Preparing the Overall Audit Strategy

II. Conducting Preliminary Risk Assessment
A. Defining risks
B. Understanding the Audit Entity
- Updating information base for financial audit and conducting preliminary risk
assessment
- Assessing other matters for consideration
1. Understanding Fraud Risks
2. Understanding risks from non-compliance with laws, rules and regulations
- Assessing related parties
C. Summarizing the results of preliminary identification of risks

III. Conducting Final Risk Assessment

A. Determining the materiality threshold
B. Assessing risks and determining risk responses
- Performing Risk assessment
- Determining Risk responses

IV. Preparing the Audit Engagement Plan

A. Updating the Overall Audit Strategy
B. Preparing the Audit Program
C. Preparing the Engagement Planning Memorandum
I. Preparing the Overall Audit Strategy
- involves setting the scope, timing and direction of the audit towards the development of
an Audit Engagement Plan

- ISSAI 1300 identifies these concerns

a) Identify the characteristics of the engagement that define its scope;

b) Ascertain the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required;

c) Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts;

d) Consider the results of preliminary engagement activities and, where applicable,

whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant; and,

e) Ascertain the nature, timing and extent of resources necessary to perform the
engagement.

- The overall audit strategy is prepared by the ATL, reviewed by the SA/RSA and
approved by the CD/RD
- The auditor may need to modify the overall audit strategy as the circumstances arise
because of unforeseen events, changes in conditions, or audit evidence obtained
from the results of audit procedures which require significant changes in strategy.

- These changes, while allowable, must be approved by the CD/RD upon the
recommendation of the SA/RSA.

- Frequent changes should be avoided as these indicate poor planning.

- The overall audit strategy template is attached as Appendix 2-1 of this Section.
II. Conducting Preliminary Risk Assessment

A. Defining risks

 Risk – the probability of an act or event occurring that would have an adverse effect in
the achievement of an agency’s objectives.

 Agency risk – the threat that an event, action or inaction will adversely affect the
agency’s ability to successfully achieve its mandate and objectives and execute its
strategies

 Audit risk – the risk that the auditor may express an inappropriate opinion on the FS

 Although audit risks and agency risks are dissimilar in nature, it is often the case that
identification of significant agency risks lead to the detection of audit risks.

 Three components of audit risks

1. Inherent risk is the susceptibility of an assertion, about a class of transaction, account

balance or disclosure to a misstatement that could be material, either individually or
when aggregated with other misstatements, before consideration of any related controls.
(IRRBAM, par. 2.6.1 (b))

2. Control risk is the risk that a misstatement that could occur in an assertion about a class
of transaction, account balance or disclosure and that could be material, either
individually or when aggregated with other misstatements will not be prevented, or
detected and corrected, on a timely manner by the entity’s internal control. (IRRBAM,
par. 2.6.1 (c))

3. Detection risk is the risk that the auditor’s procedures will not detect a misstatement
that exists in an assertion that could be material, individually or when aggregated with
misstatements. (RBFAM, par. 1.6.1)

 The factors that may affect inherent risk assessment are:

a. Judgment – a high degree of judgment is involved in business transactions.

i. Degree of subjectivity
ii. Competence and experience of agency personnel

b. Estimates – significant estimates are included in transactions, which make it more likely
that an estimation error will be made.
i. Susceptibility to material misstatement
ii. Variations from expected amounts
iii. Transactions not subjected to routine processing

c. Complexity – the transactions in which a business engages are highly complex, and so
are more likely to be completed or recorded incorrectly.
i. Size and composition
ii. Effects of external factors
iii. Completion of unusual/complex transactions at or near period-end

 The preliminary assessment of control risk is based on the following:

a. Evaluation of the design of controls done in Understanding the Process activity;

b. Information obtained from prior periods’ engagements, if available; and
c. Information obtained from the results of walkthrough procedures in Understanding the
Process activity.
 For a given level of audit risk, the acceptable level of detection risk bears an inverse
relationship to the assessed risks of material misstatement (inherent risk plus control risk)
at the assertion level.
- For example, the greater the risk of material misstatement the auditor believes exists,
the less the detection risk that can be accepted and, accordingly, the more persuasive
the audit evidence required by the auditor. (ISSAI 1200, par. A44)

 Detection risk relates to the nature, timing and extent of the auditor’s procedures that are
determined by the auditor to reduce audit risk to an acceptably low level.
- It is therefore a function of the effectiveness of a procedure and of its application by the
auditor.
- Matters such as:
(a) adequate planning;
(b) proper assignment of personnel to the engagement team;
(c) the application of professional skepticism; and
(d) supervision and review of the audit work performed,

 would help enhance the effectiveness of an audit procedure and of its

application, and
 reduce the possibility that an auditor might select an inappropriate audit
procedure,
 misapply an appropriate audit procedure, or
 misinterpret the audit results. (ISSAI 1200, par. A45)
B. Understanding the Audit Entity
- The resident auditors assigned in their respective agencies perform, among others, financial
and compliance audits.

- Thus, auditors have practically broad knowledge of agency operations which should be
summarized in the UTA Template attached as Appendix 2-2.

- The UTA template may include the following:

a) A general overview of the entity’s organization and operations;

b) The agency’s main activities and critical processes;
c) Projects/Programs/Activities;
d) Results of previous audit;

- Auditor’s notes on any component that may be significant to the conduct of financial audit.

- To enhance Auditor’s understanding of the audit entity, the following steps shall be
undertaken:

a) Updating information base for financial audit and conducting preliminary risk
assessment;
b) Assessing other matters for consideration; and,
c) Assessing Related Parties transactions

a. Updating information base for financial audit and conducting preliminary risk assessment

- Given the extent and quality of information available to COA Auditors, the sources of
financial information to be used as basis for the preliminary risks assessment review are
categorized as:

Category Sources Information to be

obtained
1. COA  Financial, compliance and performance audit  Possible causes of
informat reports; cash examination reports; fraud audit misstatements due
io n reports; project audit reports; to errors, fraud;
base  Bank Statements and Bank Reconciliation Statements;  Financial
 Property and personnel accountability audits statements
 Notice of Suspensions, Notice of Charges and Notice accounts which
of Disallowances, Notice of Finality of Decisions, may be misstated;
COA Order of Execution;  Inherent risks for
 Evaluation/investigation reports/emerging issues specific accounts
from newspaper accounts; particularly cash,
 Financial Reports such as Reports of Checks Issued PPE, expenditures;
and Report of Collections and Deposit  Possible controls
 Disbursement Vouchers which need to be
 Recommendation Tracking Sheet tested;
 UTA Template and Financial Accountability  Possible risk areas
LogFrame
2. Auditees  Charter or mandate;  Adequacy of
and other  Organizational Chart/Functional Chart; internal control
offices  Manual of operations; over financial
 Internal audit reports; reporting;
 Minutes of meetings and conferences with the agency;  Risks posed
 Official directives, new laws and regulations affecting affecting specific
the agency; financial
 Appropriations/annual budget and other financial statements
and project reports accounts;
 Agency’s primary
functions;
 Limits of authority
  Operations flow in
relation to internal
control
3.Generate  General Accounting Plan;  Adequacy of
d based  Financial Statement Analysis; internal control;
on audit  Agency-level Controls Checklist  Risks posed
analysis affecting financial
perform statements
ed accounts;
 Risks on assertions
related to
presentation and
disclosure

- Analysis of information under categories 1 and 2 may assist the audit team in identifying
accounts with possible material misstatements.

- The activities and information that can be gathered under Category 3 are discussed
below

a.1 Updating the Understanding of the Agency’s Internal Control System (AICS)

a. Internal Control is an integral process that is effected by an agency’s management and

personnel, and is designed to address risks and provide reasonable assurance that in
pursuit of the agency’s mission, the general objectives are being achieved.

b. Internal Control should provide reasonable assurance regarding the achievement of

agency’s objectives in the following categories:

 Effectiveness and efficiency of operations;

 Reliability of financial reporting;
 Compliance with applicable laws and regulations; and,
 Safeguarding of assets.

c. The preliminary assessment of the Internal Control System of the agency is based on
the five components of the internal control:

 Control Environment – sets the tone of an organization, influencing the control

consciousness of its staff. It is the foundation for all other components of internal
control, providing discipline and structure.

 Risk Assessment – process of identifying and analyzing relevant risks to the

achievement of the agency’s objectives and determining the appropriate response.

 Control Activities – The policies and procedures established to address risks and to
achieve the agency’s objectives. The procedures that an organization puts in place
to treat risk.

 Information & Communication – effective processes and systems that identify,

capture and report operational, financial and compliance-related information in a
form and timeframe that enable people to carry out their responsibilities.

 Monitoring – the process that assesses the quality of the internal control system’s
performance over time.

d. The principles of internal control

 Components Principles
Control 1) Management and staff demonstrate personal and professional integrity
Environment and ethical values;
2) Management sets the “tone at the top” (i.e. management’s philosophy
and operating style);
3) Management establishes an appropriate government organizational
structure;
4) Management and staff exhibit commitment to competence; and,
5) Management establishes human resource policies and practices.
Risk 6) Management identifies and defines appropriate objectives and risk
Assessment tolerance in specific and measurable terms;
7) Management identifies, evaluates and assesses agency’s risks; and,
8) Management determines appropriate response to the identified,
evaluated, and assessed agency’s risks.

Control 9) Management designs control activities which are appropriate, function

Activities consistently according to plan throughout the period, cost effective,
comprehensive, reasonable and directly relate to the control objectives
and to address risks;
10) Management develops control activities which include a range of
diverse policies and procedures; and,
11) Management develops an effective information technology control
activities.
Information & 12) Management develops and maintains reliable and relevant financial
Communication and non- financial information;
13) Management communicates information throughout the agency; and,
14) Management communicates information with external parties.
Monitoring 15) Management establishes and operates activities to monitor the internal
control system and evaluates the results; and,
16) Monitoring activities ensure that audit findings and recommendations
are adequately and promptly resolved.

e. An effective internal control system requires that:

 Each of the five components of internal control are present and functioning.
 The five components are operating together in an integrated manner.

f. For the evaluation of Internal Control Structure, the ALCC template attached as
Appendix 2-3 will be used. (Culled from the Internal Control Standards for
Philippine Public Sector 2017 (ICSPPS) under COA Resolution No. 2018-007 dated
February 1, 2018.)

g. Upon the completion of the ALCC template, the generated answers shall be
evaluated and the results of the evaluation shall be summarized. The summary of the
evaluation shall form part of the preliminary assessment of the Internal Control
System. The auditor should be able to identify which areas of internal control
activities must be tested as a result of the preliminary evaluation. To guide the
auditor in evaluating the critical internal control processes to be tested, the
procedures can be designed in the form of a checklist questionnaire. An example of a
checklist questionnaire for cash receipts is attached as Appendix 2-3A.

h. Test of Internal Control Design (Effectiveness and Operating Effectiveness)

In selecting controls to test, key controls must be considered. Important or key

controls address the risk of a material misstatement. Testing internal control design
determines whether the control is designed in a way that would prevent or detect an
error or fraud.
 In testing internal control design, the auditor should only test those controls that are
important to the auditor’s conclusion about whether the controls of the
Agency/Unit/Corporation/Project sufficiently address the assessed risk of
misstatement to each relevant assertion.

There might be more than one control that addresses the assessed risk of
misstatement to a particular relevant assertion; conversely, one control might address
the assessed risk of misstatement to more than one relevant assertion. It is neither
necessary to test all controls related to a relevant assertion nor necessary to test
redundant controls, unless redundancy is itself a control objective.

The auditor should test the design effectiveness of controls by determining whether
the Agency/Unit/Corporation/Project controls satisfy the
Agency/Unit/Corporation/Project’s control objectives and can effectively prevent or
detect errors or fraud that could result in material misstatements in the financial
statements.

An example of a control being designed well is a journal entry recording and

approval where one person prepares and another one reviews and approves,
irrespective of whether they are actually following such rule.

The auditor should test the operating effectiveness of a control by determining

whether the control is operating as designed and whether the person performing the
control possesses the necessary authority and competence to perform the control
effectively.

In the previous example of journal entry recording and approval, although there are
two different individuals preparing, and reviewing and approving the journal entry,
the design may not be operating effectively, if the one preparing and/or the one
reviewing and approving, or both, do not have the necessary authority and
competence to do their respective responsibilities.

The Control Design may be tested in the following manner:

i. Inquiring – ask appropriate people;

ii. Observing – watch them do the operation or do the particular steps; and,

iii.Inspecting relevant documents – get a copy of the report, look through the pages or
items and the comments that the reviewer made.

i. Two types of controls

There are two types of controls, preventive controls and detective controls.

i. Preventive Controls are designed to discourage errors or irregularities from

occurring. Examples of preventive controls are:

o Segregation of Duties – Duties are segregated among different people to reduce

the risk of error or inappropriate action;

o Approvals, Authorizations, and Verifications– Management authorizes

employees to perform certain activities and to execute certain transactions within
limited parameters; and,

o Security of Assets (Preventive and Detective) – Access to equipment,

inventories, securities, cash and other assets is restricted; assets are periodically
counted and compared to amounts shown on control records.
 ii. Detective Controls are designed to find errors or irregularities after they have
occurred. Examples of detective controls are:

o Review of Performance – Management compares information about current

performance to budgets, forecasts, prior periods, or other benchmarks to measure
the extent to which goals and objectives are being achieved and to identify
unexpected results or unusual conditions that require follow-up;

o Reconciliations – An employee relates different sets of data to one another,

identifies and investigates differences, and takes corrective action, when
necessary;

o Physical Inventories – Annual or Semi-annual;

o Audits – Internal or External

j. External Auditor, in this case COA Auditors, can also use the works of Internal
Auditors, when they have determined that the internal audit function is likely to be
relevant to the audit. The guidance on the use of the works of Internal Auditors and in
assessing their objectivity is provided under ISSAI 1610.

k. The internal auditor may be presumed to be objective if the following criteria are met
and the internal auditor’s function is established by legislation or regulation:

 The internal auditor is accountable to top management and to those charged with
governance;
 The internal auditor reports the audit results both to top management and those
charged with governance;
 The internal audit unit is located organizationally outside the staff and management
function of the unit under audit;
 The internal auditor is sufficiently removed from political pressure to conduct audits
and report observations, opinions, and conclusions objectively without fear of
political reprisal;
 The top management permits internal auditors to audit operations for which they
have previously been responsible for to avoid any perceived conflict of interest; and,
 The internal auditor has access to those charged with governance.1

l. Irrespective of the degree of autonomy and objectivity of the internal audit function,
such function is not independent of the entity as required of the external auditor when
expressing an opinion on financial statements. The external auditor has sole
responsibility for the audit opinion expressed, and that responsibility is not reduced by
the external auditor’s use of the work of the internal auditors.

a.2 Testing Compliance with the General Accounting Plan (GAP)

- The GAP shows the overall accounting system of the agency/unit including the standard
source documents, the flow of transactions and recording in the books of accounts, and
their conversion into financial information/data presented in the financial reports.

- The general flow of transaction as well as the possible source documents, books of
accounts and monitoring reports generally required by affected accounts using the GAM
for national government agencies as guide, is illustrated in Appendix 2-4.

- The actual flow of transactions of a particular subsystem as well as the existence of the
documents and books of accounts can be established through a walkthrough analysis
using sample transactions pertaining to the subsystem being analyzed.
 - The Auditors are advised to prepare the GAP indicating only the specific source
documents and reports by account applicable to their respective agencies which should be
used in the walkthrough analysis.

a. 3 Financial Statements Analysis

- There are two types of financial analysis that can be applied by the Auditor.

a. One is variance analysis where the Auditor can compare the latest set of FS and the
corresponding period of the preceding year's FS balances. The results of the analysis
will provide an initial indication about whether a risk of material misstatement exists.
An example of variance analysis is presented in Appendix 2-5.

b. Another form of FS analysis is a tie-in analysis. The Auditor compares the figures of
the accounts or group of accounts or contra accounts in the FS and reported in the
Notes to FS. A tie-in analysis will show whether the figures presented and disclosed
are reliable and properly presented.

i. Figures of accounts in the SFPos are compared against those reported in other
statements and in the Notes to FS. For instance, the Cash balance of the SFPos
should agree with the ending balance figure of the SCF and Notes to FS.
Differences indicate mathematical errors or omissions.

ii. The amount reflected in the budget and actual amounts columns in the SCBAA
should match the figures reflected in the various registries maintained and
financial accountability reports prepared by the Budget Division/Unit.

iii. The Auditors should have a good knowledge of the chart of accounts, account
description, contra-accounts, accounts that shall no longer be appearing in the year
end SFPos such as Cash-MDS, Regular, and accounts that are for exclusive use of a
particular agency or groups of agencies to be able to perform extensive tie-in-
analysis of accounts within a specific financial statements, and between and among
financial statements.

b. Assessing Other Matters for Consideration b.1.Understanding Fraud Risks

b.1 Consideration b.1.Understanding Fraud Risks

- Misstatements in the FS can arise from either fraud or error. The distinguishing factor
between fraud and error is whether the underlying action that results in the
misstatements of the FS is intentional or unintentional.

- Although fraud is a broad legal concept, the auditor is concerned with fraud that
causes a material misstatement in the FS. Two types of intentional misstatements are
relevant to the auditor; misstatements resulting from fraudulent financial reporting
and misstatements resulting from misappropriation of assets. Although the auditor
may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not
make legal determinations of whether fraud has actually occurred.

- The Auditor, though, should obtain evidence on management processes of addressing

fraud risks from identification to responding and to monitoring compliance with
management processes by those charged with governance.

- The following are examples of circumstances that may indicate the possibility that the
FS may contain a material misstatement resulting from fraud.
 a. Discrepancies in the accounting records, including:

i. Transactions that are not recorded in a complete or timely manner or are

improperly recorded as to amount, accounting period, classification or entity
policy;
ii. Unsupported or unauthorized balances or transactions;
iii. Last-minute adjustments that significantly affect financial results;
iv. Evidence of employees’ access to systems and records inconsistent with that
necessary to perform their authorized duties; and,
v. Tips or complaints to the auditor about alleged fraud.

b. Conflicting or missing evidence, including:

i. Missing documents;
ii. Documents that appear to have been altered;
iii. Unavailability of documents other than photocopied or electronically
transmitted documents when documents in original form are expected to
exist;
iv. Significant unexplained items or reconciliations;
v. Unusual balance sheet changes, or changes in trends or important FS ratios or
relationships – for example, receivables growing faster than revenues;
vi. Inconsistent, vague, or implausible responses from management or
employees arising from inquiries or analytical procedures;
vii. Unusual discrepancies between the entity’s records and confirmation replies;
viii. Large number of credit entries and other adjustments made to accounts
receivable records.
ix. Unexplained or inadequately explained differences between the accounts
receivable sub- ledger and the control account, or between the customer
statements and the accounts receivable sub-ledger; and,
x. Missing or non-existent cancelled checks in circumstances where cancelled
checks are ordinarily returned to the entity with the bank statement.

- The Auditor should be guided with the requirements under ISSAI 1240 in relation to
fraud in the audit of financial statements.

b.2.Understanding Risks from Non-compliance with Laws, Rules and Regulations

- Non-compliance by the entity with laws and regulations may result in a material
misstatement of the FS. Detection of non-compliance, regardless of materiality, may
affect other aspects of the audit including, for example, the auditor’s consideration of
the integrity of management or employees.

- Transactions which are non-compliant with existing laws and regulations are
considered illegal and irregular and, thus, disallowed in audit as required under
existing COA regulations. Notices of Disallowance issued to entities for non-
compliance with laws, rules and regulations are not yet taken up in the books until a
Notice of Finality of Decision has been issued in accordance with Rules and
Regulations on Settlement of Accounts. There is a financial error or misstatement in
the event that the management failed to record disallowances which are final and
executory.

- The Auditor should be guided with the requirements under ISSAI 1250 in their
consideration of compliance with laws and regulations. Furthermore, where there are
specific statutory reporting requirements, it may be necessary for the audit plan to
include appropriate tests for compliance with these provisions of the laws and
regulations.
 - As discussed in ISSAI 1250, non-compliance shall be reported in the Auditor’s Report
on the Financial Statements in the following manner:

 If the auditor concludes that the non-compliance has a material effect on the FS,
and has not been adequately reflected in the FS, the auditor shall, in accordance
with ISSAI 1705, express a qualified opinion or an adverse opinion on the FS.

 If the auditor is precluded by management or those charged with governance

from obtaining sufficient appropriate audit evidence to evaluate whether non-
compliance that may be material to the FS has or is likely to have occurred, the
auditor shall express a qualified opinion or disclaim an opinion on the FS on the
basis of a limitation on the scope of the audit in accordance with ISSAI 1705.

 If the auditor is unable to determine whether non-compliance has occurred

because of limitations imposed by the circumstances rather than by management
or those charged with governance, the auditor shall evaluate the effect on the
auditor’s opinion in accordance with ISSAI 1705.

c. Assessing related parties

- Related Parties pertain to (i) persons or other entities that have control or significant
influence, directly or indirectly through one or more intermediaries, over the
reporting entity, (ii) entities over which the reporting entity has control or significant
influence, directly or indirectly through one or more intermediaries, and (iii) other
entities under common control with the reporting entity through having common
controlling ownership and common key management.

- Entities that are under common control by a state, (that is, a national, regional or local
government) are not considered as related unless they engage in significant
transactions or share resources to a significant extent with one another. (par. 10,
ISSAI 1550)

- The objectives of assessing related parties is to obtain an understanding of related party

relationships and transactions sufficient to be able:

a. To recognize fraud risk factors, if any, arising from related party relationships and
transactions that are relevant to the identification and assessment of the risks of
material misstatement due to fraud; and,
b. To conclude, based on the audit evidence obtained, whether the FS, insofar as they are
affected by those relationships and transactions:

i. Achieve fair presentation (for fair presentation frameworks); or

ii. Are not misleading (for compliance frameworks)
C. Summarizing the results of preliminary identification of risks
- In summarizing the information gathered, focus is on conditions which will facilitate
identification of risk of misstatements due to errors or fraud on the FS as a whole or to
specific accounts at the assertion level during the risk assessment process.

- Appendix 2 of ISSAI 1315 lists conditions and events that may indicate risks of material
misstatements

- For ease in analysis, the potential misstatements may be grouped into three categories
considering the following assertions:

Category Assertion Conditio

n
Transaction level Occurrence All recorded transactions and events actually took place.
assertions Completeness All transactions and events that should be recorded have been
recorded.
Accuracy Full amounts of all transactions and events were recorded without
error.
Cutoff All transactions and events were recorded within the correct
reporting period.
Classification All transactions have been recorded in the correct accounts in the
general ledger.
Account balance Existence All account balances exists for assets, liabilities, and equity.
assertions Rights and The entity holds or controls the rights to assets, and liabilities are
obligations the obligations of the entity.
Completeness All reported asset, liability, and equity balances have been fully
reported.

Category Assertion Conditio

n
Accuracy, Assets, liabilities, and equity interests have been included in the
valuation financial statements at appropriate amounts and any resulting
valuation or allocation adjustments have been appropriately
and allocation recorded.
Classification Assets, liabilities and equity interests have been recorded in the
proper accounts.
Presentation and Presentation For account balances, assets, liabilities and equity interests are
Other appropriately aggregated or disaggregated and clearly described,
disclosures and related disclosures are relevant and understandable in the
context of the requirements of the applicable financial reporting
framework.

For transactions and events, they are appropriately aggregated or

disaggregated and clearly described, and related disclosures are
relevant and understandable in the context of the requirements of
the applicable financial reporting framework.

Understandability The information included in the financial statements has been

appropriately presented and is clearly understandable.
Accuracy All information disclosed is in the correct amounts, and which
reflect their proper values.
Completeness All transactions that should be disclosed have been disclosed
Rights and Disclosed rights and obligations actually relate to the reporting
obligations entity.
Occurrence Disclosed transactions have indeed occurred.

- The preliminary assessment should also include account/s covered by Specific Audit
Instructions issued by the concerned Supervising Auditor. The results of the preliminary
assessment will be summarized to include the FS accounts affected; possible risk identified
from the information gathered and the type of risk in terms of assertion. Additional
 information required to firm up the assessments should also be indicated so that the
necessary documents or appointments for interviews with officials concerned are obtained.
A sample Summary Report on the Preliminary Identification of Risks and other matters is
attached as Appendix 2-6.

- The SRPIR becomes the initial basis for conducting further risk assessment and updating the
overall audit strategy. Materiality considerations will be discussed as part of the conduct of
final risk assessment.
III. Conducting Final Risk Assessment
A. Determining the materiality threshold

- Materiality threshold pertains to the amount of materiality set as benchmark to evaluate the
significance of misstatements or omissions noted during audit.

- ISSAI 1320 explains that misstatements and omissions are considered to be material if they,
individually or in aggregate, could reasonably be expected to influence the economic
decisions of users of the FS. The users are considered as a group of users of FS rather than as
individual users.

- The concept of materiality is applied both in planning and performing the audit, and also in
evaluating the effect of identified misstatement in the FS.

o It is also based on the concept that items of little importance do not require to be audited
since these will not affect the judgment or action of a reasonable FS user.
o While materiality is primarily based on the auditor’s professional judgment, such
judgment should consider both qualitative and quantitative aspects to reduce the risk of
audit decisions which are either overly liberal or conservative.

- Items of little importance are considered trivial.

o Clearly trivial as mentioned in ISSAI 1450, par. A2 does not mean “not material.”
o Misstatements that are clearly trivial will be of wholly different (smaller) order of
magnitude, or of a wholly different nature than those that would be determined to be
material, and will be misstatements that are clearly inconsequential, whether taken
individually or in the aggregate and whether judged by any criteria of size, nature or
circumstances.

- ISSAI 1320 describes qualitative considerations specific to determining materiality levels in

the public sector: When determining whether a particular class of transactions, account balance,
disclosure, or other assertion which is part of the financial reporting framework, is material by virtue
of its nature, public sector auditors take into account qualitative aspects such as:

a) The context in which the matter appears; for example, if the matter is also subject to compliance
with authorities, legislation or regulations, or if law or regulation prohibits overspending of
public funds, regardless of the amounts involved;
b) The needs of the various stakeholders and how they use the financial statements;
c) The nature of the transactions that are considered sensitive to users of the financial statements;
d) Public expectations and public interest, including emphasis placed on the particular matter by
relevant committees in the legislature, such as a public accounts committee, including the
necessity of certain disclosures;
e) The need for legislative oversight and regulation in a particular area; and
f) The need for openness and transparency; for example, if there are particular disclosure
requirements for frauds or other losses.

- Quantitative materiality thresholds or the maximum errors are established at three levels:

a. Overall materiality (for the FS as a whole) is an amount set to establish whether or not
the financial statements can be regarded as materially misstated.
• Misstated, individually or in aggregate, above this threshold is considered
significant enough to influence the decision of users and thus, considered the FS
materially misstated.
• This can be changed during the audit depending on the information received by the
Auditor. This is used to determine the level of performance materiality and specific
materiality.

b. Performance materiality is the amount set at less than the overall materiality
 - to lower the risk of not being able to detect uncorrected and undetected
misstatements which in the aggregate, may be considered material for the overall
financial statements.

- Some known advantages of setting performance materiality include:

i. Providing some assurance that the undetected and uncorrected misstatements

will not accumulate to reach an amount that would cause the FS to be
materially misstated;
ii. Serving as a guide to the Auditor to require adjustment in the FS, aggregate
errors reaching this amount;
iii. Assessing the risks of material misstatement and determining the nature,
testing and extent of further audit procedures; and
iv. Serving as the assertion testing level/threshold to identify high value items or
as sampling interval when selecting items for testing or calculating sample size.
The audit has to cover all items or transactions or accounts above the value set
as performance materiality.

c. Specific materiality refers to the amount or amounts set at less than overall materiality
for particular classes of transactions, account balance or disclosures which may
reasonably be expected to influence the economic decisions of users taken on the basis of
FS.

- Specific Materiality could relate to sensitive areas such as particular note disclosures
(that is, management remuneration or entity key-specific data), compliance with
legislation or certain terms in a contract, or transactions upon which remunerations
are based. It could also relate to the nature of a potential misstatement such as an
illegal act, non-compliance with loan covenants and statutory/regulatory reporting
requirements.

- Some of the disclosures that would normally be subject to a Specific Materiality level
are:

i.Related party transactions and balances;

ii.Significant management estimates or valuations;
iii.Non-compliance with legislation or terms in a contract;
iv. Significant events and important changes in operations (e.g., expansion or
discontinued operations, new services);
v. Significant accounting policies or changes in accounting policies; and,
vi. Sensitive income and expense accounts such as management fees and research
and development costs.

- The Audit Team Leader shall determine the materiality thresholds particular to the audited
entity, subject to the review of the Supervising Auditor and to the approval of the
Cluster/Regional Director concerned.

- In an audit of the financial statements of stand-alone agencies (not a

component/regional/head office), the Audit Team Leader shall determine and use the
overall materiality, performance materiality, specific materiality (if applicable), and testing
threshold throughout the audit.

- In an audit of a consolidated/combined FS of groups with components or agencies with

regional offices:

i. The Audit Team Leaders in the head/component/regional office preparing ML/ SAOR
(whichever may be applicable) shall determine and compute the overall materiality,
 performance materiality, specific materiality and testing threshold using their respective
FS. In case of separate FS for each type of fund (e.g., General Fund, Special Education
Fund, Trust Fund), the auditor shall compute materiality thresholds using the specific
FS for each fund.

ii. The Supervising Auditor (head of audit group) preparing the CAAR and issuing the
IAR shall determine the overall materiality, performance materiality, specific materiality
and testing threshold (if applicable) based on the consolidated/combined financial
information of the whole group/agency. The computed overall materiality will be used
in determining whether the consolidated/combined FS is misstated or not, and in
determining the type of audit opinion to be issued on the consolidated/combined FS.

B. Assessing risks and determining risk responses

a. Performing Risk assessment

- As discussed in the preliminary risk assessment, the SRPIR becomes the initial basis for
further risk assessment. The Auditor shall conduct final risk assessment on each of the
relevant assertions in the SRPIR.

- Risk assessment involves

 the identification of sources of risk and

 assessment as to whether information obtained could result in a material
misstatement in the financial statements.

 Risk of material misstatement at the assertion level (risk that the financial statements
are materially misstated prior to audit) consists of
 inherent risks and
 control risks which were discussed earlier. (ISSAI 1003)

- The Auditors should, however, not limit their evaluation on the risks identified during
Preliminary Assessment as there could be intervening events or circumstances that may
need equal attention.

 This include material items in the FS even if initially, they have no risk as these should
eventually be included in the audit plan.

- The ISSAI Implementation Handbook – Financial Audit relative to ISSAI 1315 enumerates
the steps involved in a risk assessment as:

a. Inherent risk identification;

b. Inherent risk assessment;
c. Identification of significant risk;
d. Understanding internal control;
e. Evaluating internal control design and implementation of internal controls; and,
f. Final risk assessment.

Step 1. Inherent Risk Identification

- There are two major classifications of inherent risk: agency risk and fraud risk. Agency
risk results from significant conditions, events, circumstances, actions that could
adversely affect the entity’s ability to achieve its objectives and exercise its strategies.
Fraud risk is related to events or conditions that indicate an incentive or pressure to
commit fraud.

- For identifying risks, the auditor considers: factors like the nature of the operation,
 accounting policies, agency objectives and strategies and financial implications,
review of financial performance, relevant controls to mitigate risks at the agency and
transactional levels, and laws and rules applicable for the audited entity.

Step 2. Inherent Risk Assessment

- The Auditor needs to assess the identified risks and determine their importance for
the audit of the financial statements before considering any internal control that might
mitigate such risks. Risk assessment involves consideration of two attributes about
inherent risks: (i) the likelihood of a misstatement occurring as a result of the risk with
the probability rated as high, moderate or low.; (ii) the magnitude (monetary impact)
if the risk would occur.

- The auditor should gather information from the concerned management officials
about their risk assessment process and as to how risks are identified and managed.
The SRPIR (Appendix 2-6) may be updated as the need arises or when additional
information is obtained.

- Significant risks or pervasive risks affecting the FS as a whole are segregated. These
risks will be considered in all the financial statements accounts. In the case of inherent
risks on FS accounts, these are sorted by FS account and summarized to reflect the
final conditions and assertions identified.

Step 3. Identification of Significant Risks

- A significant risk is where the assessed risk of material misstatement is so high that in
the auditor’s judgment, it will require special audit consideration as in these cases:

a. large non-routine transactions;

b. matters requiring judgment or management intervention such as changes in
accounting impairment policies;
c. error or fraud is high;
d. non-compliance with laws and regulations; or,
e. unreliable internal control.

- For significant risks, the auditor should: evaluate internal control over these risks,
such as control activities and indirect (pervasive) internal controls; design an audit
response to obtain audit evidence with high reliability including tests of controls and
substantive procedures. Substantive analytical procedures alone are not sufficient and
are not considered as an appropriate response.

- Significant risks will include unqualified accounting staff; lack of values formations
training, accounting and procurement training of concerned staff; fraudulent project
transactions; non-routine large transactions; and non-compliance with laws and
regulations. These risks are considered in all of the accounts affected, usually all FS
accounts.

Step 4. Understanding Internal Control

- Since not all control activities are relevant to the audit, an understanding of the
controls related to the risk of misstatement is necessary to ensure that the relevant
control is identified. This is initially undertaken during the preliminary risk
identification (Appendices 2-2 to 2-6 for initial assessment). Only controls related to
the risk of material misstatement should be identified.

- Based on the understanding of control activities and the determination as to whether

 they are likely to achieve the control objectives, the auditor reassesses control risk to
decide whether to test controls.

Step 5. Evaluation of Internal Control Design and Implementation of Internal Controls

- This means that significant risks are identified as to whether they are pervasive or
specific; controls are identified to mitigate them; and controls are tested, observed or
inspected to ensure that these are implemented and functioning.

- Significant risks are considered pervasive if these are not confined to specific
elements, accounts or items of the financial statements. If so confined, the affected
account represents or could represent a substantial proportion of the financial
statements. The level of control risks is assessed as to high, moderate or low based on
the results of tests. (Appendices 2-2 to 2-6 for initial assessment)

- The operating effectiveness of internal control design can be tested in the following
manner, among others:

a. Identifying appropriate controls to be tested.

b. Deciding on the appropriate testing technique.
c. Determining the appropriate documents to be tested.
d. Determining the level of test (period to be covered, representative sample,
extent).
e. Examining evidence/documents to determine whether controls have been
properly implemented.
f. Summarizing and documenting the results of evaluation.

Step 6. Final Risk Assessment

- The final step in the risk assessment phase of the audit is to review the results of the
risk assessment procedures performed, and assess the risks of material misstatements
at the FS level and the assertion level for classes of transactions and disclosures guided
by the Risk Decision Table.

b. Determining Risk responses

- Responses to the results of the risk assessment are based on the decision model setting the
nature of audit procedure/s and extent of audit to be performed given the results of a
risk assessment and depending on the level of risk of material misstatement established
for specific audit objectives, accounts and assertions.

- To summarize, the risk responses to be adopted may be:

a. When both inherent and control risks are low, the overall RMM is also low. Hence,
further testing of controls is performed to firm up the audit conclusion reached
together with a low level of substantive tests.
b. When the inherent risk is low but the control risk is moderate, a low overall RMM is
established. Hence, the extent of tests of controls is moderate with a low level of
substantive tests.
c. When inherent risk is low but control risk is high, the RMM is moderate. As such,
there is no need to perform tests of controls as these cannot be relied on anyway. Since
inherent risk is low, a moderate level of substantive tests is required.
d. When inherent risk is moderate and control risk is low, the RMM is low. More tests of
controls are performed to firm up the audit conclusion, with a low level of substantive
tests.
e. When both inherent and control risks are moderate, the RMM is also moderate.
 Hence, the levels of tests of controls and substantive tests to be performed are also
moderate.
f. When inherent risk is moderate and control risk is high, the RMM is high. Hence no
reliance is placed on controls meaning, no tests of controls are necessary. A high level
of substantive tests is however needed.
g. When inherent risk is high and control risk is low, the RMM is moderate. Hence a
high reliance is placed on tests of controls and a moderate level of substantive tests is
required.
h. When inherent risk is high and control risk is moderate, RMM is high. No reliance is
placed on control hence no need to test controls but a high level of substantive tests is
required.
i. When both inherent and control risks are high, RMM is high. No reliance is placed on
control hence no need to test controls but a high level of substantive tests is required.

- These risk responses are summarized in the Risk Decision Table

IR CR RMM (IR + Preliminary

CR) Audit Strategy
Low Low Low High reliance on controls and a low level of substantive tests.
Moderate Low Moderate reliance on controls and a low level of substantive
tests.
High Moderate No reliance on controls and a moderate level of substantive
tests.
Moder Low Low High reliance on controls and a low level of substantive tests.
ate
Moderate Moderate Moderate reliance on controls and a moderate level of
substantive tests.
High High No reliance on controls and a high level of substantive tests.
High Low Moderate High reliance on controls and a moderate level of substantive
tests.
Moderate High No reliance on controls and a high level of substantive tests.
High High No reliance on controls and a high level of substantive tests.

- Following the risk decision table, tests of controls are performed when control risks are
low to moderate. No tests of controls are needed when control risk is high because there is
no point testing controls which are absent or cannot be relied upon.

- The result of the test of controls will determine the nature, extent and timing (net) of the
substantive tests that will be performed. Substantive tests are procedures performed by
the auditor to detect material misstatement or fraud related to transactions or account
balances.

- The resulting test of assessed risks will form the foundation for the next audit phase
which is to determine how to respond to the assessed risks through the design of audit
procedures. The results of risk assessment at the assertion level is illustrated in Appendix
2-8. A duly filled out sample of Appendix 2-8 is attached as Appendix 2-8A for guidance.
IV. Preparing the Audit Engagement Plan

- The fundamental elements in preparing the audit engagement plan are: (a) updating the overall
audit strategy; (b) preparing the audit program; and (c) preparing the engagement planning
memorandum

A. Updating the Overall Audit Strategy

- The overall audit strategy prepared during the preliminary risk assessment need to be
updated to consider the results of final risk assessments.

- ISSAI 1450 requires the auditor to revise the overall audit strategy if: (a) the nature of
identified misstatements and the circumstances of their occurrence indicate that other
misstatements may exist that, when aggregated with misstatements accumulated during the
audit, could be material; or (b) the aggregate misstatements accumulated during the audit,
approaches the materiality level determined in accordance with ISSAI 1320.

- The overall audit strategy for COA purposes should consider the key activities from the Risk
Assessment Process to the Reporting Phase. Moreover, there are audit activities or
requirements which no longer form part of the risk assessment process but must be included
in the Strategy. These pertain to, among others:
a. Special considerations: Related Parties; Litigation and Claims; Segment Reporting and
Subsequent Events with procedures discussed in Section 3, Execution Phase;
b. Other accounts determined falling within the performance materiality level not covered
in the risk assessment;
c. In the case of nationwide audits, the Strategy should consider synchronization of
timelines for group planning, execution and reporting; setting materiality thresholds in a
uniform manner; scheduling of audit inspections; confirmations from external parties,
among others.

B. Preparing the Audit Program

- An audit program contains the audit procedures to be performed for a specific audit
objective for the financial account and the risks identified by assertion. Audit Program for
each audit areas included in the overall audit strategy should be prepared.

- The audit program saves time and labor; increases efficiency; controls the work performed;
maintains uniformity and continuity; identifies responsibilities; helps to maintain continuity;
and, facilitates presentation of evidence.

- The auditor may use standard audit programs relevant to the risks identified or to the audit
areas. An audit program template is provided as Appendix 2-9.

C. Preparing the Engagement Planning Memorandum

- The final activity of the Planning Phase is preparing the EPM. As a planning tool, EPM sets
out the objectives of the audit and spells out how the auditor aims to achieve these
objectives. As a supervision and monitoring tool, it tracks the progress of the audit and
promotes high quality and professional audit work.

- This Memorandum contains the following:

Part 1 – Audit Coverage, Objective and Methodology

a. Audit Scope/coverage- should be clearly described;

b. Audit objectives -should be clearly defined; and,
c. Audit methodology- should be clearly established supported with audit programs.

Part 2 - Significant contents of the Overall Audit Strategy

A brief narration of the major activities to be performed supported by the final overall audit
strategy updated brought about by new conditions, unforeseen events, or audit evidence
obtained from the results of audit procedures which includes the following, among others:

a. Materiality thresholds;
b. The number of staff to conduct the audit;
c. The major timelines: entrance conference, exit conference, securing management
representation letter, audit report issuance;
d. Coordination activities relative to a nationwide audit;
e. Inspections to be conducted; and,
f. External confirmations to be performed.

Part 3 – Summary of major accounts and assertions for audit considerations

a. Accounts and Assertions with high risks of material misstatements and

significant risks identified in the final risk assessment template. (Appendix 2-8)
b. Other Material Accounts (OMA) refer to financial statement accounts above or equal to
the performance materiality but were not considered as significant based on the results
of the Final Risk Assessment.
c. Special Considerations: Related Parties, Litigation and Claims, Segment Reporting and
Subsequent Events

Part 4 – Audit Program (Appendix 2-9)

- The EPM serves as the “blueprint” of the financial audit after the Planning Phase and
contains the detailed audit procedures to be performed in response to the results of the
risk assessment and the procedures for audit areas which no longer had to pass through
a risk process but are required to be performed. It must be prepared by the Audit Team
Leader, reviewed by the SA/RSA and approved by the CD/RD. Template of EPM
(Appendix 2-10) and other related appendices are attached to elaborate on certain facts as
considered necessary.
Section 3

Audit Execution Phase

- During this Phase, the audit activities contained in the approved EPM and the Audit
Programs are pursued to ensure that audit procedures are performed as planned and on
time. The steps to be taken follow:

I. Execute Audit Tests

A. Determining the nature, timing and extent of audit procedures
B. Performing audit procedures
C. Gathering audit documentation and evidence
D. Addressing risk areas that need specific considerations
E. Summarizing proposed audit adjustments and evaluating effects in the audit opinion

II. Summarize Audit Observation and Recommendation and Communicate with Those
Charged with Governance
A. Areas for consideration in summarizing audit observations
B. Elements of audit observation
C. Performing review of overall audit work
D. Tracking status of prior years’ recommendation

III. Conduct Exit Conference

I. Execute Audit Tests
A. Determining the nature, timing and extent of audit procedures

 The nature, timing and extent of the audit procedures

- should be based on and be responsive to the assessed risks of material misstatement at
the assertion level.

 The nature of an audit procedure

- refers to the purpose of the audit and the type of audit procedures to be performed.

1. test of controls or
• Inspection
• Observation
• Inquiry
• Confirmation

2. substantive procedure
• reperformance
• recalculation and
• analytical procedures.

- Substantive procedures can either be

1. analytical procedures or
2. test of details.

 Timing of an audit procedure

- refers to when the audit procedure is performed,
- or the period or date to which the audit evidence applies.

a. The auditor may perform audit procedures at an

i. interim date or
ii. at period end.

b. The higher the risk of material misstatement

- more effective to perform substantive procedures nearer to, or at, the period end
rather than at an earlier date, or
- to perform audit procedures unannounced or at unpredictable times.

c. This is particularly relevant when considering the response to the risks of fraud.
- perform audit procedures before the period end so the auditor can identify
significant matters at an early stage of the audit, and consequently resolve them
with the assistance of management or by developing an effective audit approach to
address such matters.

d. Certain audit procedures can be performed only at or after period end, for example:

i. Reconciling the FS with the accounting records;

ii. Examining adjustments made during the course of preparing the FS; and

iii. Performing procedures to respond to a risk that, at period end, the entity may have
entered into improper contracts or transactions that may not have been finalized.

 Extent of an audit procedure

- refers to the quantity of audit procedures to be performed,
- sample size of population to be tested, or
- the number of observations of a control activity.
 a. The extent of necessary audit procedures is determined after
• considering the materiality threshold,
• the assessed risk, and
• the degree of assurance the auditor plans to obtain.

b. In general, the extent of audit procedures increases as the risk of material

misstatement increases.
• To cite an example, in response to the assessed risk of material misstatement due
to fraud, increasing sample sizes or performing substantive analytical procedures
at a more detailed level may be appropriate.

c. However, increasing the extent of an audit procedure is effective only if the audit
procedure itself is relevant to the specific risk.

d. The use of CAATs may enable more extensive testing of electronic transactions and
account files, which may be useful when the auditor decides to modify the extent of
testing, say, in responding to the risks of material misstatement due to fraud. Such
techniques can be used to select sample transactions from key electronic files, to sort
transactions with specific characteristics, or to test an entire population instead of a
sample.

B. Performing audit procedures

 The following steps should be undertaken:

a. Determining the extent of tests to be performed;

b. Selecting the sample items;
c. Performing the planned procedures in the selected items; and,
d. Evaluating the sample results and establishing conclusion.
Step 1. Determining the Extent of Tests to be Performed

 In determining the extent of tests to be performed, the auditor may apply non-
sampling or sampling technique. In case of sampling technique, either statistical or
non-statistical sampling may be adopted.

a. Non-sampling is applied when all the items in an audit population are to be

audited. To illustrate:

i. Audit objective: to determine the causes for material changes in financial

statement account balances as of end of the year under audit compared
with the past year balances.

ii. Items covered: all financial statement accounts.

b. Audit sampling, as defined by ISSAI 1530, is the application of audit

procedures to less than 100 percent of items within a population of audit
relevance providing a reasonable basis on which to draw conclusions about the
entire population. When designing an audit sample, the auditor’s
consideration includes the specific purpose to be achieved and the
combination of audit procedures that is likely to best achieve that purpose.
Consideration of the nature of the audit evidence sought and possible
deviation or misstatement conditions or other characteristics relating to the
audit evidence will assist the auditor in defining what constitutes a deviation
or misstatement and what population to use for sampling. Sampling as an
approach may either statistical sampling or non-statistical sampling.

i. Statistical sampling is an approach with two characteristics: random

selection of the sample items and the use of probability theory to evaluate
sample results including measurement of sampling risks (par. 5(g) of
ISSAI1530). Statistical based formulas/tables are used to determine sample
size considering population, confidence level, precision; and expected rate
of error considered acceptable. Statistical sampling is used in the following
instances:

 to determine the sample size especially in auditees with very large

volume of homogenous transactions; and
 when the sampling results are likely to be included in the audit report
to support an adjustment or qualification.

c. Statistical sampling following the procedures described in Appendix 1 of ISSAI

1530 provides that:

 Audit efficiency may be improved if the auditor stratifies a population by

dividing it into discrete sub-populations which have an identifying
characteristic. The objective of stratification is to reduce the variability of items
within each stratum and therefore allow sample size to be reduced without
increasing sampling risk.

 When performing tests of details, the population is often stratified by

monetary value. This allows greater audit effort to be directed to the larger
value items, as these items may contain the greatest potential misstatement in
terms of overstatement. Similarly, a population may be stratified according to
a particular characteristic that indicates a higher risk of misstatement, for
example, when testing the allowance for doubtful accounts in the valuation of
accounts receivable, balances may be stratified by age.
  The results of audit procedures applied to a sample of items within a stratum
can only be projected to the items that make up that stratum. To draw a
conclusion on the entire population, the auditor will need to consider the risk
of material misstatement in relation to whatever other strata make up the
entire population. For example, 20 percent of the items in a population may
make up 90 percent of the value of an account balance. The auditor may decide
to examine a sample of these items. The auditor evaluates the results of this
sample and reaches a conclusion on the 90 percent of value separately from the
remaining 10 percent (on which a further sample or other means of gathering
audit evidence will be used, or which may be considered immaterial).

 If a class of transactions or account balance has been divided into strata, the
misstatement is projected for each stratum separately. Projected misstatements
for each stratum are then combined when considering the possible effect of
misstatements on the total class of transactions or account balance.

ii. Non-statistical sampling is an approach where samples are not drawn

randomly but rather judgmentally and where probability is not applied.
Samples are selected based on the auditor’s informed assessment of how
many samples will be required to yield a reasonably reliable result. Samples
may be carried out: (a) systematically (every nth item say beginning with
the number 3); (b) unsystematically (pulling files from a cabinet without any
selection criteria); or (c) according to the auditor’s judgment (picking large
or unusual items from a computer report). Non-statistical sampling is used
when any of these conditions exist:

 the line item/account is not material;

 the risk of material misstatement is low;
 the analytical procedures are effective; and,
 when the sample size needed is small so that the use of
statistical sampling becomes very costly.

Step 2. Selecting the Sample Items

 ISSAI 1530 recommends the following in selecting the sample items:

a. When designing an audit sample, the auditor shall consider the purpose of the
audit procedure and the characteristics of the population from which the
sample will be drawn.
b. The auditor shall determine a sample size sufficient to reduce sampling risk to
an acceptably low level.
c. The auditor shall select items for the sample in such a way that each sampling
unit in the population has a chance of selection.
d. When designing a sample, the auditor uses the tolerable misstatement arrived
at when computing for the materiality thresholds discussed in the previous
Section.

 Examples of factors influencing sample size for tests of details are appended in the
tables presented in Appendix 2 of ISSAI 1530.

 The Auditor should be conscious of the sampling risks. The risk that the Auditor’s
conclusion based on a sample may be different from the conclusion if the entire
population were subjected to the same audit procedure.

Step 3. Performing the Planned Procedures on the Selected Items

 For performing audit procedures on selected items, ISSAI 1530 provides that:
a. The auditor shall perform audit procedures, appropriate to the purpose, on
each item selected.
b. If the audit procedure is not applicable to the selected item, the auditor shall
perform the procedure on a replacement item.
c. If the auditor is unable to apply the designed audit procedures, or suitable
alternative procedures, to a selected item, the auditor shall treat that item as a
deviation from the prescribed control, in the case of tests of controls, or a
misstatement, in the case of tests of details.

Step 3.1. Performing Test of Controls

 A sample of test of control working paper is presented in Illustration 5. The

illustration shows the tests of internal controls on accounts payable for the audit
of Agency XXX’s 20xx FS. A sample size of 78 accounts payable voucher packets
has been selected for the test of internal controls on the accounts payable
system. The sample size is designed to provide high level of assurance (or
confidence) that a control is operating effectively so long as one or fewer control
deviations is observed for each control activity tested (see WP 1). The first 74
voucher packets have already been tested by other staff members and no errors
have been found.

 The auditor shall evaluate the results of the sample and consider that an
unexpectedly high sample deviation rate may lead to an increase in the assessed
risk of material misstatement, unless further audit evidence substantiating the
initial assessment is obtained.

Step 3.2. Performing Substantive Procedures

 Under the Audit Execution Phase, audit procedures listed in the Audit Program
attached to the EPM shall be pursued/conducted. To reduce audit risk to
acceptable level, the auditor should conduct substantive procedures in order to
detect material misstatements in the assertion level. These comprise of tests of
details and analytical procedures.

Step 3.2.1. Test of Details

 The auditor shall evaluate the results of sampling using the test of details.
An unexpectedly high misstatement amount in a sample may cause the
auditor to believe that a class of transaction or account is materially
misstated, in the absence of further evidence that no material misstatement
exists.
 Tests of details are categorized into two types:
(a) test of transactions; and
(b) test of details of account balances and disclosures.

Step 3.2.1 (a) Test of Transactions

 This requires substantive test of transactions to test errors or fraud in
individual transactions and is used to verify the monetary value of
transactions and to obtain reasonable assurance that the accounting
records are accurate, reliable, complete, properly classified and
presented, actually took place, and recorded within the correct reporting
period.

 The auditor’s approach in substantive tests of transactions is to inspect

underlying documents, to trace the flow of transactions through the
system and to recompute for mathematical accuracy. The direction of
 the trace determines the objective to be satisfied. For example, tracing
from a source document to the accounting record provides evidence of
completeness of the accounting records, that is, it detects errors of
understatement.

 Tracing from the accounting record to the source document (commonly

called vouching) provides evidence of occurrence, that is, it detects
errors of overstatement. Usually some tests are made in both directions.

 The extent of testing in a particular direction depends on the auditor’s

judgment of the likelihood of error. When an error is detected, the
auditor needs to consider the cause of the error and determine whether
any change is called for in the planned nature and extent of testing.

Step 3.2.1 (b) Test of Details of Account Balances and Disclosures

 This requires substantive testing of the ending balance of a general ledger

to provide reasonable assurance of the completeness, existence, rights
and obligations, accuracy, valuation and allocation, classification and
presentation of accounts.

 To complete the test of details, the following steps should be performed:

a. Determining the sample size

To select the items for testing, the auditor must consider what
represents the population for testing in the circumstances. It can be
the entire population of an account balance, class of transactions or
disclosures; or specific items composed of high value or unusual
items, or selecting sample from the whole population.

b. Selecting the sample items

c. Performing the planned procedures in the selected items
d. Evaluating the sample results and establishing conclusion

 External confirmation is one of the procedures adopted in substantive

tests. This procedure is used to address assertions associated with
account balances and their elements and to confirm terms of
agreements, contracts, or transactions between an agency and other
parties. In preparing confirmation requests, the following factors should
be considered, among others (ISSAI 1505):

a. The specific risks and assertion/s being addressed

b. Layout and presentation of confirmation requests - The auditor may

request the respondent only to indicate whether he or she agrees with
the information stated on the request. In other positive forms,
referred to as blank forms, the amount (or other information) is not
stated on the confirmation request, and instead, the recipient is
requested to fill in the balance or furnish other information.

c. Prior experience on the sending of confirmations in previous audits:

response rates, knowledge of misstatements identified during prior
years' audits, and any knowledge of inaccurate information on
returned confirmations. For example, if the auditor has experienced
poor response rates to properly designed confirmation requests in
prior audits, the auditor may instead consider obtaining audit
 evidence from other sources.

d. Method of communications—by mail, email or personal service

e. Management’s authorization or encouragement to the confirming

parties to respond to the auditor

f. The ability of the intended confirming party to confirm or provide the

requested information. When designing confirmation requests, the
auditor should consider the types of information respondents will be
readily able to confirm, since the nature of the information being
confirmed may directly affect the competence of the evidence
obtained as well as the response rate. For example, certain
respondents' accounting systems may facilitate the confirmation of
single transactions rather than of entire account balances. In addition,
respondents may not be able to confirm the balances of their
installment loans, but they may be able to confirm whether their
payments are up-to-date, the amount of the payment, and the key
terms of their loans.

 In case no replies were received, the Auditor shall apply alternative

procedures to the non- responses to obtain the evidence necessary to
reduce audit risk to an acceptably low level.

a. For accounts receivable, this may include examination of subsequent

cash receipts (including matching such receipts with the actual items
being paid), shipping documents, or other client documentation to
provide evidence for the existence assertion.

b. For accounts payable, this may include examination of subsequent

cash disbursements, correspondence from third parties, or other
records to provide evidence for the completeness assertion.

 The auditor should evaluate the combined audit evidence provided by

the confirmations and the alternative procedures to determine whether
sufficient audit evidence has been obtained about all the applicable
financial statement assertions. In performing that evaluation, the auditor
should consider (a) the reliability of the confirmations and alternative
procedures; (b) the nature of any exceptions, including the implications,
both quantitative and qualitative, of those exceptions; (c) the audit
evidence provided by other procedures; and (d) whether additional
audit evidence is needed.

 If the combined audit evidence provided by the confirmations,

alternative procedures, and other procedures is not sufficient, the auditor
should request additional confirmations or extend other tests, such as
tests of details or analytical procedures.

 Situations where external confirmation procedures may provide relevant

audit evidence in responding to assessed risks of material misstatement
include:

a. Bank balances and other information relevant to banking

relationships;
b. Accounts receivable balances and terms;
c. Inventories held by third parties at bonded warehouses for processing
or on consignment;
d. Property title deeds held by financiers for safe custody or as security;
 e. Investments purchased from stockbrokers but not delivered at the
reporting date;
f. Amounts due to lenders, including relevant terms of repayment and
restrictive covenants; and,
g. Accounts payable balances and terms.

 There are some assertions for which external confirmations provide less
relevant audit evidence, such as relating to the recoverability of accounts
receivable balances, than they do for their existence.

 The auditor may determine that external confirmation procedures

performed for one purpose provide an opportunity to obtain audit
evidence about other matters. For instance, confirmation requests for
bank balances often include requests for information relevant to other
financial statement assertions. Such considerations may influence the
auditor’s decision about whether to perform external confirmation
procedures.

 Factors that may assist the auditor in determining whether external

confirmation procedures are to be performed as substantive audit
procedures include:

a. The confirming party’s knowledge of the subject matter;

b. The ability or willingness of the intended confirming party to

respond:

i. May consider responding too costly or time consuming;

ii. May have concerns about the potential legal liability resulting
from responding;
iii. May account for transactions in different currencies; or,
iv. May operate in an environment where responding to confirmation
requests is not a significant aspect of day-to-day operations. In
such situations, confirming parties may not respond, may respond
in a casual manner or may attempt to restrict the reliance placed
on the response.

c. The objectivity of the intended confirming party such that if the

confirming party is a related party of the entity, responses to
confirmation requests may be less reliable.

Step 3.2.2. Analytical Procedures

 Analytical procedures is defined in the ISSAI 1520 as the means of

evaluating financial information through analysis of plausible
relationships among both financial and non-financial data.
Analytical procedures also encompass such investigation necessary
to identify fluctuations or relationships that are inconsistent with
other relevant information or that differ from expected values by a
significant amount.

 These are used to obtain evidential matter about particular assertions

related to account balances or classes of transactions. In some cases,
analytical procedures can be more effective or efficient than tests of
details for achieving particular substantive testing objectives.

 Following are examples of sources of information for the conduct of

 analytical procedures:

a. Financial information for comparable prior period(s) giving

consideration to known changes;
b. Anticipated results—for example, budgets, or forecasts including
extrapolations from interim or annual data;
c. Relationships among elements of financial information within the
period;
d. Information regarding the industry in which the client operates—
for example, gross margin information; and,
e. Relationships of financial information with relevant non-financial
information.

 The most common types of analytical procedures conducted are

trend analysis, ratio analysis, and reasonableness testing.

a. Trend analysis is the analysis of changes in an account over time.

b. Ratio analysis is the comparison across time or to a benchmark of

relationships between financial statements accounts and a non-
financial data. Examples are contribution margin, current ratio,
days sales in inventory, accounts receivable turnover, debt ratio,
debt to equity ratio, inventory turn-over ratio, payable turn-over
ratio, among others.

c. Reasonableness testing is the audit technique used to assess the

reasonableness of accounting transactions or events recorded in
the FS by using two or more different sources of data or
information to predict accounting transactions or event. This
means testing the validity of financial information provided
through analysis of accounts or changes in accounts between
accounting period involving development of a model to form an
expectation based on financial data, non-financial data or both.
Examples are: i) matching the estimated payroll costs based on
the number of employees multiplied by fixed pay rates with the
actual payroll costs incurred; ii) comparing the balances of loans
payable with the related interest expenses for the period; iii)
comparing the total rental contracts with the recorded rental
income; and, iv) comparing the total reported application for
passports and the like with the recorded income.

 When designing and performing substantive analytical procedures,

either independently or in combination with tests of details, the
auditor shall:

a. determine the suitability of particular substantive analytical

procedures for given assertions, taking account of the assessed
risks of material misstatement and tests of details, if any, for
these assertions;

b. evaluate the reliability of data from which the auditor’s

expectation of recorded amounts or ratios is developed, taking
account of source, comparability, and nature and relevance of
information available, and controls over preparation;

c. develop an expectation of recorded amounts or ratios and

evaluate whether the expectation is sufficiently precise to identify
 a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be
materially misstated; and,

d. determine the amount of any difference of recorded amounts

from expected values that is acceptable.

 Substantive analytical procedures are conducted when the auditor

considers the use of these procedures as more effective and efficient
than tests of details in reducing the risk of material misstatements at
the assertion level to an acceptably low level.

 If analytical procedures performed identify fluctuations or

relationships that are inconsistent with other relevant information or
that differ from expected values by a significant amount, the auditor
shall investigate such differences by: (a) inquiring from management
and obtaining appropriate audit evidence relevant to management’s
responses; and (b) performing other audit procedures as necessary in
the circumstances.

Step 4. Evaluating the Sample Results and Establishing Conclusion

 As provided in ISSAI 1530, the auditor shall evaluate whether the use of the
audit sampling has provided a reasonable basis for conclusions about the
population that has been tested. If the auditor concludes that audit sampling
has not provided a reasonable basis for conclusions about the population
that has been tested, the auditor may:

a. Request management to investigate misstatements that have been

identified and the potential for further misstatements and to make any
necessary adjustments; or,
b. Tailor the nature, timing and extent of those further audit procedures to
best achieve the required assurance. For example, the auditor might
extend the sample size, test an alternative control or modify related
substantive procedures.

 Relationship of the results of substantive analytical procedures with the

conclusion of the audit

- The auditor shall design and perform analytical procedures near the end
of the audit as guide when forming an overall conclusion as to whether
the financial statements are consistent with the auditor’s understanding
of the entity.

a. The conclusion drawn from the results of analytical procedures designed

and performed are intended to corroborate conclusions formed during
the audit of individual components or elements of financial statements.
This assists the auditor to draw reasonable conclusions on which to base
the auditor’s opinion. (ISSAI 1520, par. A17)

If evaluation of the result of substantive analytical procedures discloses

significant variances that may lead to material misstatements, the
auditor’s reasonable conclusion may be affected which necessitates
rendering a modified opinion.

b. The results of such analytical procedures may identify a previously

 unrecognized risk of material misstatement. In such circumstances, ISSAI
1315 (Revised) requires the auditor to revise the auditor’s assessment of
risks of material misstatement and modify the further planned audit
procedures accordingly. (ISSAI 1520, par. A18)

 Relationship of test of controls with substantive tests

a. Tests of controls and substantive tests of details of transactions and

balances are both tests involving transactions; in many instances
transactions selected for examination are tested for compliance with
controls as well as determining whether monetary errors have occurred,
giving rise to the concept of dual-purpose testing.

b. Tests of controls and substantive tests of transactions are both usually

performed for major classes of transactions that are repetitive and large in
volume. Tests of controls detect departures from prescribed controls but
do not directly measure monetary error in accounting records.
Substantive tests must be performed to determine whether monetary
errors have occurred based on the result of tests of controls, determines
the extent of substantive tests considered necessary. In a true dual-
purpose test, different procedures are performed to satisfy different
objectives, but they are performed using the same documents at
approximately the same time.

c. Substantive tests of transactions and substantive tests of balances - If the

account balance is affected by many relatively small transactions, the
auditor designs substantive tests of balances directed to selected items
(e.g. individual customers, inventory items) which aggregate to create the
ending balance. This commonly occurs for the accounts receivable and
inventory balances. To illustrate: If the auditor verifies the PhP250,000.00
ending balance of a receivable due from a debtor through confirmation
procedures, this is a substantive test of balances. If the auditor verifies
the peso value of the individual transactions comprising the
PhP250,000.00 (such as by verifying sales invoices and remittance advices
associated with cash receipts transactions), this is a substantive test of
transactions.

d. Substantive tests of balances of statement of financial position accounts

are generally preferred because there are fewer items in the ending
balance than there are transactions that affect the balance, and there is
generally more persuasive evidence available to support the ending
balance.

e. Note also that the substantive tests of balances of statement of financial

position accounts indirectly test the statement of financial performance
account balances (sales and expenditure). For example, the testing of
accounts receivable will verify the sales that gave rise to this asset.

 In the extremely rare circumstances when the auditor considers a

misstatement or deviation discovered in a sample to be an anomaly, the
auditor shall obtain a high degree of certainty that such misstatement or
deviation is not representative of the population. The auditor shall obtain
this degree of certainty by performing additional audit procedures to obtain
sufficient appropriate audit evidence that the misstatement or deviation
does not affect the remainder of the population.
C. Gathering audit documentation and evidence

C.1 Audit Documentation

 The audit documentation serves as sufficient and appropriate record of the

auditor’s basis for a conclusion about the achievement of the overall objectives of
the auditor. It also functions as evidence that the audit was planned and
performed in accordance with ISSAIs and applicable legal and regulatory
requirements.

 Paragraph 3 of ISSAI 1230 also states that: ”Audit documentation serves a number of
additional purposes, including the following:

a) Assisting the engagement team to plan and perform the audit.

b) Assisting members of the engagement team responsible for supervision to direct and
supervise the audit work, and to discharge their review responsibilities in accordance
with ISSAI 1220.
c) Enabling the engagement team to be accountable for its work.
d) Retaining a record of matters of continuing significance to future audits.
e) Enabling the conduct of quality control reviews and inspections in accordance with
ISQC 1 or national requirements that are at least as demanding.
f) Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.”

 The WPs may be in the form of paper, tapes, films, and other reliable storage and
shall be maintained in two copies (one for the office file and one for the ATL, as
back-up copy). The audit team’s custodian of the WPs shall be responsible for the
updating/upgrading of the audit files and providing a back-up copy for the ATL.

 In the case of electronic files, the file naming standards of COA shall be adopted, if
any, otherwise, the Audit Team shall devise its own. Backup copies of all electronic
WPs shall be maintained by the Audit Team and stored separately from the
original copies. Fraud investigation WPs shall not be saved in the network
common drive.

C.1.1 Organization of Working Papers

 Working papers should be properly titled, referenced and cross-referenced to

supporting evidence and signed by the preparer and the reviewer. To prove that
the audit responded to the assessed risks of material misstatements, audit
procedures actually performed are summarized on the main audit working
papers of each FS account. Deviations to the planned audit procedures in terms
of the nature, extent and timing of audit procedures must be fully explained
with the SA/RSA acknowledging acceptability of the changes done upon
signing the working papers as reviewer.

 The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit file on a
timely basis after the date of the auditor’s report. (ISSAI 1230, par. 14). An audit
file may be one or more folders or other storage media, in physical or electronic
form, containing the records that comprise the audit documentation for a
specific engagement.

 An audit file may be classified into two types: current audit file and permanent
audit file. Current Audit File (CAF) contains working papers relating to a single
audit engagement.2 Permanent Audit File (PAF) is a set of records that serves
as an ongoing reference for successive audit. The information in the PAF,
 which should be regularly updated, is intended to be accessed repeatedly to
assist the audit team in the conduct of their tasks.

 Listed below are the contents of CAF and PAF, among others, which shall be
shall be systematically organized/arranged to facilitate supervisory review,
exhibiting a consistent structure thru the use of a logical or easy-to-follow index
code, agreed upon by the Auditor and his/her Supervisor during the planning
phase of each audit, to promote efficient cross-referencing system, convenience
and ease in locating these WPs when circumstances demand for its use. The
Auditor shall avail of the use of databases, word processing search facilities and
other software packages, when necessary, to assist in information storage and
retrieval.

Current Audit File Permanent Audit File

Preliminary Activities
1. Engagement Letter
2. Auditor’s Declaration of
Independence and Compliance
with Ethical Standards
3. Management Representation
Letter
Planning Phase
1. Engagement
Planning
Memorandum
2. Audit Program
3. Summary of other audit
activities Overall Audit
Strategy
4. Specific Audit Instructions
5. Results of Risk Assessment
at the Assertion Level
6. Materiality Template
7. Summary Report on the
Quality Control Review Documents
Preliminary Identification
of Risks
8. UTA Template and
Financial Accountability
LogFrame
9. Agency-level Controls
Checklist Template
10. General Accounting
Plan/Walkthrough Analysis
11. Prior Years’ AOM, NS, ND,
NC, AM, WP on Financial
Analysis (Trend Analysis,
Ratio Analysis, Reasonableness
Testing)
12. Agency Action Plan and Status
of Implementation
13. Action Plan Monitoring Tool
14. Recommendation Tracking
Sheet
15. Variance Analysis of FS
16. Tie-in Analysis
Execution Phase 1. Charter or mandate;
1. Summary of Proposed 2. Manual of operations;
Audit Adjustments 3. Internal audit reports;
2. Working Papers (WPs) by
4. Minutes of meetings and
account with top schedule conferences of agency
and sub schedule supported officials;
with audit evidence
5. Organizational
3. Current Year’s AOM, NS, ND, Chart/ Functional
NC, AM, WP on Financial Chart;
Analysis (Trend Analysis, Ratio
Analysis, Reasonableness
6. Official directives, new laws
and regulations affecting the
Testing)
agency;
4. Bank Statements and
Bank Reconciliation
7. Appropriations/annual
budget and other financial
Statements
and project reports;
5. Reports of Checks Issued
and Disbursement
8. Property and personnel
Vouchers accountability audits;
6. Minutes of exit conference
Reporting Phase 9. Notices of Suspensions,
1. Final AAR and Charges and Disallowances,
signed Notices of Finality of
IAR/Management Decisions (NFD), COA Order
Letter of Execution (COE); Financial,
compliance and performance
2. Summary of
audit reports; cash
Uncorrected
examination reports; fraud
Misstatements
audit reports; project audit
3. Summary of Audit reports;
Observations and
10. Evaluation/investigation
Recommendations
reports/emerging issues from
4. Management Comments newspaper accounts
11. Financial Reports
5. Duly signed Financial
Management
Performance Rating
6. Completion
Compliance
Checklist
7. Auditee Feedback Survey
8. Director’s Evaluation Form
 17. WP on Preliminary Data
Analysis
18. Test of Internal Control Design

 The ATL is primarily responsible for the timely assembly of the final audit file
within 60 days from receipt of transmittal of the audit report (AAR/ML) by the
audited agency, in accordance with Section A21 of ISSAI 230. As a general rule,
the WPs shall be kept under lock and key.

C.1.2 Characteristics of Working Paper

 Working papers should be complete and accurate, and must support

observations, testing, conclusions, and recommendations. It should also show
the nature and scope of the work performed. Working papers should also be
clear and understandable without supplementary oral explanations.

 The structure of the working paper should be in a logical format that clearly
shows the purpose/objective of the test (risk being tested), a description of the
test, extent of testing performed, results, conclusion arrived at i.e. any control
weaknesses identified, and potential process improvements, and positive
change opportunities. Where working papers are hand written they should be
neat and legible. If working papers are not clear they may lose their worth as
documented evidence.

 Each top schedule of the accounts presents the Audit Conclusion: whether the
audit objective was met or not and the reason thereof; whether the Main
Account audited (e.g. Cash, Receivables, Inventory, etc.) is considered as fairly
stated and presented

 All WPs shall be dated, signed by the preparer and reviewer, and clearly
referenced using the standard tickmarks developed by the audit teams.

 The WPs shall be cross-referenced to the appropriate source, complete with no

unanswered questions or other evidence of unfinished work. Cross-referencing
of documents shall also be made to provide a link between pages of the WPs
which are interrelated and allow the reader/reviewer of the WPs easy access to
the data.

 All pages in the WPs shall be indexed except in the case of a set of document
with several pages, wherein only the cover page shall be given an index
number. The indexing of the files shall be aligned with the order of presentation
in the Table of Contents. The index code shall be indicated at the right top
portion of the WP or on the lower center of the page of the WP and when
numbering a given area, consecutive numbers shall be used (i.e., 2-1, 2-2, 3-1, 3-
2, etc.). WPs shall be indexed according to the Audit Working Paper Checklist
agreed by the ATL and the SA or the concerned Cluster/office.

C.2 Audit Evidence

 The SA/RSA and ATL ensure that all evidence is documented properly in audit
working papers. Audit evidence refers to information used by the auditor in
arriving at the conclusions on which the auditor’s opinion is based. It includes both
information contained in the accounting records underlying the financial
statements and information obtained from other sources. (ISSAI 1500)

 The auditor can obtain evidence in many different ways, such as:

a. Inspection or observation evidenced by photographs, inspection reports; formal

 analysis performed by expert/s, and even the object or a portion of the object
itself such as substandard materials.

b. Evaluation of records, reports and documents including disbursement vouchers

to prove certain facts noted in the course of the audit. For instance, proof of a
cash shortage in a cash examination report; one proof of noncompliance with
specific terms would be the contract itself; proof of payments made are the
official receipts, and proofs that payments made are valid are the delivery
reports, sales invoices and purchase orders.

c. Interviews/inquiries evidenced by signed interview sheets or a recording of a

conversation with the interviewees; confirmation replies received from banks,
debtors and creditors; emailed replies to queries made from a client or another
department. To strengthen evidence through interviews; other forms of
evidence are obtained, say an inspection performed to prove interviewees’
contention that certain assets are missing.

d. Study, comparison, and evaluation of relationships among financial and non-

financial data at a point in time and the trend in those relationships over a
period.

e. Questionnaires with a list of questions on a particular area or function may be

developed to obtain information relating to the audit objective. The
questionnaire should be short and answerable by “yes” or “no” only, to
facilitate collation and analysis. For this to be considered as audit evidence, the
Auditor should request for copy of related documents, records or reports or
results of questionnaire used to conduct alternative procedures.

f. Flowcharts showing the flow of activities through a process. They help to

visualize the process and therefore facilitate an analysis of the operation and
assist in identifying inefficiencies, overlaps and duplications/missing
procedures and control weaknesses. Flowcharts are valuable when
documenting a complicated flow of documents or process such as cash receipts,
cash disbursements, and procurement, among others. Completed flowcharts
should be discussed with the interviewee to ensure correctness.

g. Walkthroughs to document the audited entity’s processes. This activity involves

following one or two transactions or activities step-by-step through the process
from beginning to end. A walkthrough test helps to confirm the accuracy of the
auditor’s documentation of the process and ensure that it is understood.
Walkthroughs are more effective in understanding the audited entity’s
processes than a general review of manuals and operating procedures, as they
provide a faster and more effective identification of weaknesses and potential
problem areas.

h. Re-computation or verifying the mathematical accuracy of figures. The value of

this procedure as evidence is limited as the reliability of the evidence obtained
depends on the validity of the source documents.

i. Reperformance or Auditor’s independent execution of procedures or controls

that were originally performed as part of the entity’s internal control, either
manually or through the use of CAATs. For example, reperforming the aging of
accounts receivable or comparing the price on an invoice to that reflected in an
approved purchase order.

 Audit evidences can be obtained either in the form of:

a. Physical - through inspection or observation
b. Documentary - records, reports and documents
c. Testimonial - from third parties
d. Analytical - study, comparison, and evaluation of relationships among financial and
non- financial data
D. Addressing risk areas that need specific considerations

 Audit evidence obtained for these areas/issues and requirements should consider the
following:

a. Inventory in the public sector is often held for use rather than for resale. As such,
property audits go beyond the usual observations of physical inventories conducted
during year-end and cover year round activities. Violations to property related
regulations especially those included in the State Audit Code, are reported as part of
the auditor’s observations and recommendations.

b. Litigation and claims

i. These conditions need to be disclosed in the Notes to FS. In addition, audit

procedures may have to be performed to identify litigation and claims which may
give rise to the need to recognize a contingent asset or liability in the FS.

ii. Contingent liability refers to a possible obligation that arises from past events, and
whose existence will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the entity; or a
present obligation that arises from past events, but is not recognized because: (i) it is
not probable that an outflow of resources embodying economic benefits or service
potential will be required to settle the obligation; or (ii) the amount of the obligation
cannot be measured with sufficient reliability.

iii. Contingent asset refers to a possible asset that arises from past events whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity.

iv. Audit procedures for these areas may include:

 Obtain from management and/or from its internal Legal Counsel a description
and evaluation of litigation, claims, and assessments that existed at the date of
the balance sheet being reported on, and during the period from the balance
sheet date to the date the information is furnished, including an identification of
those matters referred to legal counsel. The ISSAI recognizes that public sector
auditors such as COA auditors have the right to communicate directly with the
agency’s external legal counsel without need for management permission.

 Examine documents in the client's possession concerning litigation, claims, and

assessments, including correspondence and invoices from lawyers.

 Review of legal expense account if this exists and if management denies having
any litigation and claim related issues.

Evaluate the likelihood of an unfavorable outcome and its estimate of the

amount or range of potential loss. Assess if the potential loss will affect the
reliability of the FS and require disclosure in the Notes to FS.
c. Segment information - presentation and disclosure of specific segment information
discussed in the ISSAI are not applicable in the Philippines except for certain public
sector entities. However, there may be information similar to segment information
requiring disclosure.

i. This is in the case of foreign assisted projects funded by the World Bank;
European Union; USAID; United Nations Development Programme and the ADB
where stand-alone audit reports are submitted to the funding organizations. This
can be presented in the following manner:
 Note 10. Audit of Loans and Grants from the Asian Development Bank
A separate special purpose financial audit was performed on government and ADB funds for
Project 12345 “Project on Climate Change” included in this 20xx financial statements for the
Agency. The COA rendered an unmodified audit opinion on the fairness in presentation of the
financial statements and on the Project’s compliance with ADB requirements particularly on SOE
and imprest account procedures prescribed in the Loans Disbursements Handbook; and on the use
of the funds for the purposes intended.

ii. The materiality of misstatements on the overall FS in separate audits will have to
be evaluated.

d. Related party transactions – persons or other entities that have control or significant
influence, directly or indirectly through one or more intermediaries, over the reporting
entity; entities over which the reporting entity has control or significant influence,
directly or indirectly through one or more intermediaries; or, other entities under
common control with the reporting entity through having common controlling
ownership, owners who are close family members, and common key management.
The auditor is required to examine the documents (minutes of meetings, bank and
legal confirmations, such other documents provided) supporting the transaction/s;
establish whether these transactions are properly accounted for and identify possible
misstatements or errors due to fraud by the very nature of the transactions. In
addition, material transactions should be confirmed with related parties identified and
appropriate background research should be conducted as necessary.

i. The Notes to FS should disclose related party transactions, business rationale and
effects of the transactions on the FS. Key terms, conditions, or other important
elements of the transactions necessary for understanding them should also be
disclosed.

ii. Examples of transactions which may qualify as related party transactions in the
Philippines are:

 fund transfers to the agency for projects which are not related to the mandate
or objective of the agency;
 fund transfers to the agency and subsequent transfers of the same amounts to
non- government agencies;
 material cash advances, fund transfers or loans released by the agency to
persons or non-government agencies or parties;
 guarantees and guarantor relationships;
 agreements for the provision of services to certain parties under terms and
conditions outside the agency’s normal course of business;
 complex equity transactions such as corporate restructurings or acquisitions;
 transactions with offshore entities in jurisdictions with weak corporate laws;
 leasing of premises or the rendering of management services by the agency to
another party if no consideration is exchanged;
 sales transactions with unusually large discounts or returns;
 transactions with circular arrangements such as sales with commitment to
repurchase; and,
 transactions under contracts whose terms are changed before expiry.

iii. Auditors should be guided by the requirements of ISSAI 1240 in case of intentional
non- disclosure by management of related party transactions. The auditor may also
consider the need to re-evaluate the reliability of management’s responses to audit
inquiries and the management’s representations to the auditor.

e. Accounting estimates are an approximation of monetary amount in the absence of a

 precise means of measurement.

i. In the public sector these pertain to:

 Programs: social insurance; governmental employee pension; health care;

veterans’ benefits, environmental liabilities; tax revenue and receivables and
certain property and equipment such as specialized military equipment and
heritage assets.

 Activities with high estimation uncertainty: outcome of litigation; derivative

financial instruments not publicly traded; fair value accounting estimates for
which a highly specialized entity developed model is used such as employees
benefit pension fund which requires the estimation of an actuary.

 Situations where accounting estimates may be required: inventory

obsolescence; warranty obligations; depreciation method or asset useful life;
share-based payments; property or equipment held for disposal; goodwill or
intangible assets; non-monetary exchange of plant facilities.

ii. The nature and reliability of information to support the accounting estimates may
affect the risks of material misstatement of accounting estimates including the
susceptibility to unintentional or intentional management bias.

iii. For accounting estimates that give rise to significant risks, the auditor obtains
appropriate evidence of management’s decision to recognize or not to recognize
accounting estimates in the financial statements. The auditor then evaluates
reasonableness of such estimates and adequacy of disclosures.

iv. The disclosures should include the assumptions used, the method of estimation,
including any applicable model, the basis for selection of the method of
estimation, the effect of any changes to the method of estimation from prior period
and the sources and implications of estimation uncertainty.

f. Subsequent Events pertain to events which occur after the date of the FS but which: i)
provide evidence of conditions that existed at the date of the FS and ii) those that
provide evidence of conditions that arose after the date of the FS.

i. Accruing expenses paid during the ensuing year but pertaining to transactions
which should have been recognized during the year under audit, under accrual
accounting is an example of adjustments made resulting from a subsequent events
analysis.

ii. The auditor should inquire from management whether any subsequent events
that might affect the financial statements have occurred. Specific inquiries about
the following matters should be made about these transactions reported after the
date of the FS:

 New commitments, borrowings, or guarantees entered into

 Sales, acquisitions or assets
 Increases in capital or issuances of debt instruments such as issuance of new
shares or debentures or an agreement to merge or liquidate has been made or
planned
 Assets appropriated by government or destroyed by fire or flood
 Developments regarding contingencies such as claims or litigations
 Unusual accounting adjustments made or contemplated
 Events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the FS, such as going concern
 issues
 Events that have occurred relevant to the measurement of estimates or
provisions made in the FS
 Events that have occurred that are relevant to the recoverability of assets

iii. The terms of audit engagement should include the obligation of management to
inform the auditor of facts that may affect the FS of which management may
become aware during the period from the date the FS are approved for issuance to
the date of the auditor’s report. During this period, the auditor is responsible for
matters that may occur regardless of the lack of disclosure by management. The
lack of disclosure by management may be addressed by performing applicable
audit procedures to obtain sufficient appropriate audit evidence that all
subsequent events have been identified. Such subsequent matters, if material, may
affect the audit opinion to be rendered.

iv. For example, way before the end of the reporting period, a debtor of the agency/unit/
corporation/project with a substantial account already displays inability to pay its
obligation. Management did not adjust the corresponding allowance for impairment on
the account of such debtor despite the circumstances. Two months after the approval of the
issuance of the year-end financial statements and before the issuance of the auditor’s
report, the debtor- client declared bankruptcy. This is an adjusting subsequent event. The
auditor, having knowledge of the situation, recommended for an adjustment for the
increase of allowance for impairment on the account of the bankrupt client. However,
Management refused to make the adjustment. In such a case, the auditor’s opinion is
modified on the matter depending on the materiality of the account’s amount.

v. The auditor is not responsible for subsequent matters that occur after the
date of the auditor’s report which management purposely did not divulge
to him/her.

g. Audits of Group Financial Statements (including work of Component Auditors)

ISSAI 1600 provides the guidance for Group FS. In COA, Group FS refer to
consolidated FS prepared by the head office of a department/agency.

i. The auditors assigned at the head office (group auditor) and field operating
offices (component auditor) conduct the audit of the FS of their respective
auditees and prepare an ML or SAOR, whichever is applicable.

ii. The component auditor transmits the ML/SAOR to the respective auditees,
a copy thereof furnished to the CD through the RD.

iii. The group auditor prepares the CAAR based on the ML/SAOR issued by
the component auditors, and the result of reviews of the Group Financial
Statements.

iv. The group auditor is responsible for the issuance of group audit opinion
taking into consideration the materiality threshold established for the
Group FS. When the opinion is modified because of inability to obtain
sufficient appropriate audit evidence in relation to the financial information
of one or more components, the reasons for that inability shall be discussed
in the Basis for Modification paragraph in the IAR on the group FS. The
group auditor may refer the matter to the component auditor as deemed
necessary for an adequate explanation of the circumstances.

v. After review of the CAAR, the report is then transmitted to the

department/agency.
vi. For consistency of audit focus and area, the group auditor issues Specific
Audit Instructions for compliance by the component auditors down to the
provincial/division level. The component auditors are, however, not
constrained to look into areas considered of significant risks at their level.
E. Summarizing proposed audit adjustments and evaluating effects in the audit opinion

 Whenever necessary, proposed audit adjustments of the Audit Team are forwarded to the
Chief Accountant for action. Once the audit is completed, the Audit Team Leader prepares
a list of all audit adjustments indicating the actions taken by the Chief Accountant

 The auditor shall analyze and evaluate whether the unrecorded audit adjustment will
affect the audit opinion to be issued considering the final and/or revised overall and
specific materiality thresholds established, the size, nature and particular circumstance of
misstatement, both in relation to the particular classes of transaction, account balance, or
disclosure, and to the FS as a whole.
II. Summarize Audit Observation and Recommendation and Communicate with Those
Charged with Governance

A. Areas for consideration in summarizing audit observations

 Upon completion of the Execution Phase but before the conduct of an Exit conference, an
audit summary should be prepared to summarize the work done and conclusions reached
(Appendix 3-1). All uncorrected misstatements accumulated during the audit shall be
included in the summary.

 Misstatement pertains to a difference between the reported amount, classification,

presentation, or disclosure of a financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the
applicable financial reporting framework.

 A misstatement may not be an isolated occurrence. Evidence that other misstatements

may exist include, for example, where the auditor identifies that a misstatement arose
from a breakdown in internal control or from inappropriate assumptions or valuation
methods that have been widely applied by the entity. (Guidance on the determination of
projected misstatements and evaluation of the results is set out in ISSAI 1530.9
Consideration of Identified Misstatements as the Audit Progresses)

 The determination of whether a misstatement(s) in a qualitative disclosure is material, in

the context of the applicable financial reporting framework and the specific circumstances
of the entity, is a matter that involves the exercise of professional judgment. Examples
where such misstatements may be material include:

a. Inaccurate or incomplete descriptions of information about the objectives, policies and

processes for managing capital for entities with insurance and banking activities.
b. The omission of information about the events or circumstances that have led to an
impairment loss (e.g., a significant long-term decline in the demand for a metal or
commodity) in an entity with mining operations.
c. The incorrect description of an accounting policy relating to a significant item in the
statement of financial position, the statement of financial performance, the statement
of changes in net assets/equity, statement of comparison of budget and actual
amounts, or the statement of cash flows.

 The circumstances related to some misstatements may cause the auditor to evaluate them
as material, individually or when considered together with other misstatements
accumulated during the audit, even if they are lower than materiality for the FS as a
whole. Circumstances that may affect the evaluation include the extent to which the
misstatement:

a. Affects compliance with regulatory requirements;

b. Affects compliance with debt covenants or other contractual requirements;
c. Relates to the incorrect selection or application of an accounting policy that has an
immaterial effect on the current period’s FS but is likely to have a material effect on
future periods’ financial statements;
d. Masks a change in earnings or other trends, especially in the context of general
economic and industry conditions;
e. Affects ratios used to evaluate the entity’s financial position, results of operations or
cash flows;
f. Affects segment information presented in the FS (for example, the significance of the
matter to a segment or other portion of the entity’s business that has been identified as
playing a significant role in the entity’s operations or profitability);
g. Has the effect of increasing management compensation, for example, by ensuring that
the requirements for the award of bonuses or other incentives are satisfied;
 h. Is significant having regard to the auditor’s understanding of known previous
communications to users, for example, in relation to forecast earnings;
i. Relates to items involving particular parties (for example, whether external parties to
the transaction are related to members of the entity’s management);
j. Is an omission of information not specifically required by the applicable FRF but
which, in the judgment of the auditor, is important to the users’ understanding of the
financial position, financial performance or cash flows of the entity; or,
k. Affects other information to be included in the entity’s annual report (for example,
information to be included in a “Management Discussion and Analysis” or an
“Operating and Financial Review”) that may reasonably be expected to influence the
economic decisions of the users.

These circumstances are only examples; not all are likely to be present in all audits nor is
the list necessarily complete.

 Significant related party matters arising during the audit shall be communicated to
management such as:

a. Non-disclosure of related parties or significant related party transactions by

management
b. Significant related party transactions that have not been appropriately authorized and
approved giving rise to suspected fraud
c. Disagreement with management regarding the accounting for and disclosure of
significant related party transactions in accordance with the applicable FRF
d. Non-compliance with applicable law or regulations prohibiting or restricting specific
types of related party transactions

 As discussed in ISSAI 1240 in relation to ISSAI 1450, the result of fraud will be considered
in relation to other aspects of the audit, even if the size of the misstatement is not material
in relation to the FS. Depending on the circumstances, misstatements in disclosures could
also be indicative of fraud, and, for example, may arise from:

a. Misleading disclosures that have resulted from bias in management’s judgments; or

b. Extensive duplicative or uninformative disclosures that are intended to obscure a
proper understanding of matters in the FS.
B. Elements of audit observation

 The cumulative effect of immaterial uncorrected misstatements related to prior periods

may have a material effect on the current period’s FS and should also be reviewed.

 The working paper supporting the summary should include the conclusions reached
containing the elements of audit observation. The required COA format for an audit
summary should be followed.

 The elements of audit observation are explained as follows

a. criteria - pertains to the standard or the benchmark. This is usually a policy, circular,
directive or a law.

b. condition – explains whether the criteria were followed or not based on evidence
gathered.

c. cause – the reason/s for the existing conditions and unmet criteria.

d. effect – adverse result of the failure to meet criteria which is expressed in terms of
losses, wastage, inability to perform ones tasks or meet client expectations among
others.

 Recommendations should address both causes and effects of the observation and may
consider inputs from management.

C. Performing review of overall audit work

 The auditor shall consider the following:

a. Affirmation of Audit Team’s independence

Before reporting, the SA/RSA shall affirm that the Team is still independent of the
auditee. (Appendix 3-2)

b. Consider subsequent events

Sufficient evidence should be gathered to ensure that all events occurring between the
date of the FS and the date of the Auditor’s Report that require adjustment or
disclosure are identified. Subsequent events are more relevant under accrual
accounting.

c. Update lead schedule and perform final analytical review

Should there be any changes in the FS, the schedules shall be updated and additional
procedures documented.

d. Consider the adequacy of work performance

The audit team shall make conclusion on whether all planned audit works have been
performed or there are other activities to be undertaken before closing the audit or
reporting.
D. Tracking status of prior years’ recommendation

 In addition to existing COA regulation requiring the submission of AAPSI and APMT, the
audit team shall prepare an RTS.

 All audit issues with unimplemented recommendations per SIPYAR (Part III of the AAR)
should be reiterated in Part II (Findings and Observations) of the current year’s audit report
if the existing condition still exists that affects the audit opinion. However, the reasons for
the failure of the management to implement recommendation should be assessed to
determine if there is a need to revise or refocus the recommended action. In such case, the
status of affected recommendation in the RTS should be considered “closed for having been
revised”.

 If the audit issues intended to be addressed by the unimplemented recommendation are

no longer existing due to, among others, closing of the project, or adoption of new
accounting system, or implementation by management of control measures other than the
Audit Team’s recommended course of action, the status of such recommendation in the
RTS can be considered closed.

 All unimplemented recommendations considered closed/closed for having been revised shall
be recommended by the SA/RSA for approval of the CD/RD, and once approved, the
same shall be deleted from the SIPYAR of the succeeding year.

 If considered necessary, the Head of the audited agency should be formally informed of
the unimplemented recommendations and possible action to be taken by COA for
continued inaction. Non-implementation of recommendations for no valid reason and
without any alternative action taken to address the problem is a criterion for decreasing
the performance rating of an agency as discussed in Section 5 of this FAM.

 The format of the RTS to be maintained by the concerned Audit Team Leader and the
Office of the Director for each agency is shown in Appendix 3-3.

 There are factors preventing the Auditee to implement the agreed upon actions, such as
competing priorities; funding issues and lack of staff to implement the recommendations.
One other reason for non-implementation of recommendations is that the recommendation
is not practical and doable. Recommendations should be:

a. Specific – target a specific area for improvement.

b. Measurable – quantify or at least suggest an indicator of progress.
c. Assignable – specify who will do it.
d. Realistic – what results can realistically be achieved, given available resources.
e. Time-related – specify when the result(s) can be achieved.
III. Conduct Exit Conference

 The Audit Team Leader prepares the audit highlights as basis for an exit conference with
management subject to the approval of the SA/RSA.

 Points for discussion are:

a. The misstatements identified and the adjustments which the Chief Accountant failed to
take up;
b. The effect of failure to take up adjustments as far as the audit opinion is concerned;
c. Additional disclosures or explanations for inclusion in the Notes to FS;
d. Audit observations and tentative audit recommendations using the audit summaries as
basis;
e. Deadline for submission of management comments;
f. Pending issues and requests such as related parties, litigation and claims, if remained
unsubmitted as of exit conference;
g. Submission of the MRL, if remained unsubmitted as of exit conference;
h. Unimplemented audit recommendations and its impact on the FS; and,
i. Other matters included in the Engagement Letter which have not been addressed.
Section 4

Reporting Phase

- After sufficient and appropriate audit evidence has been obtained, the auditor is now ready
to prepare the independent auditor’s report on the audit of the financial statements of the
Agency/Local Government Unit/Corporation. This phase comprises the following:

I. Write the independent auditor’s report

A. Forming an audit opinion
A.1. Evaluating audit evidence obtained
A.2. Considering materiality of uncorrected misstatements
A.3. Evaluating financial statements prepared using the appropriate financial
reporting framework
B. Forms of independent auditor’s report
B.1. Unmodified auditor’s report
B.2. Modified auditor’s report
B.2.1. Matters affecting the Auditor’s unmodified opinion
B.2.2. Matters not affecting the unmodified opinion
B.3. Auditor’s report on consolidated financial statements
B.4. Auditor’s report on comparative financial statements

II. Specific Elements of the Independent Auditor’s Report

A. Title
B. Addressee
C. Report on the audit of the financial statements
C.1. Opinion section
C.2. Basis for opinion
C.3. Key audit matters
C.4. Emphasis of matter
C.5. Other matter
C.6. Other information
C.7. Responsibilities of management for the financial statements
C.8. Auditor’s responsibilities for the audit of the financial statements
D. Report on other legal and regulatory requirements
E. Name of the engagement partner
F. Signature of the auditor
G. Auditor’s address
H. Date of the independent auditor’s report

III. Comparative information

A. Corresponding figures and Comparative Financial Statements
A.1.Corresponding Figures
A.2.Comparative Financial Statements

IV. Special Considerations – Audits of Financial Statements Prepared in Accordance

with Special Purpose Frameworks

V. Types of Audit Report

I. Write the independent auditor’s report

 Paragraph 17.1 of the Guide to Using International Standards on Auditing in the Audits of
Small- and Medium-sized Entities, Third Edition, Volume 2 – Practical Guidance, 2011 (Guide
2011) states that the final step in the audit process is to
- evaluate the audit evidence obtained,
- consider the impact of misstatements identified,
- form an audit opinion, and
- prepare an appropriately worded audit report.

 In a similar way, Chapter 9, Audit Reporting of the Financial Audit ISSAI Implementation
Handbook (Handbook 2018) states that the
- audit report is the final product of the entire audit process, which is prepared
based on sufficient appropriate audit evidence gathered by auditors through
performing audit procedures.

- In this regard, according to ISSAI 1700, the objectives of the auditor are
 to form an opinion on the financial statements, based on an evaluation of
the conclusions drawn from the audit evidence obtained; and
 to express clearly that opinion through a written report that also describes
the basis for that opinion.

A. Forming an audit opinion

- ISSAI 1700 (Revised), paragraphs 10 to 13 provide that the auditor shall form an opinion on
whether the FS are prepared, in all material respects, in accordance with the applicable
FRF. In order to form that opinion, the auditor shall conclude as to:

a. whether sufficient appropriate audit evidence has been obtained;

b. whether uncorrected misstatements are material, individually or in aggregate; and
c. whether the FS are prepared in accordance with the requirements of the applicable and
appropriate FRF.

- The applicable and appropriate FRF for National Government Agencies (COA Resolution
No. 2014- 003 dated January 24, 2014), LGUs (COA Resolution No. 2014-003), and Non-
GBEs under the CGS (COA Circular No. 2015-003 dated April 16, 2015) is the PPSAS, while
that for GBEs, CGS is the PFRS (COA Circular No. 2015-003 dated April 16, 2015).

A.1. Evaluating audit evidence obtained

- ISSAI 1700 (Revised), paragraphs 10 to 13 provide that the auditor shall form an opinion on
whether the FS are prepared, in all material respects, in accordance with the applicable
FRF. In order to form that opinion, the auditor shall conclude as to:

a. whether sufficient appropriate audit evidence has been obtained;

b. whether uncorrected misstatements are material, individually or in aggregate; and
c. whether the FS are prepared in accordance with the requirements of the
applicable and appropriate FRF.

- The applicable and appropriate FRF for National Government Agencies (COA Resolution
No. 2014- 003 dated January 24, 2014), LGUs (COA Resolution No. 2014-003), and Non-
GBEs under the CGS (COA Circular No. 2015-003 dated April 16, 2015) is the PPSAS, while
that for GBEs, CGS is the PFRS (COA Circular No. 2015-003 dated April 16, 2015).
a. the assessment of the risks of material misstatement at the assertion level are
appropriate; and
b. sufficient evidence have been obtained to reduce the risks of material misstatement
(RMM) in the financial statements to an acceptably low level.” (Guide 2011)
- Further, to address such objectives, the important questions to ask and consider under
evaluating audit evidence are:

a. Has sufficient appropriate audit evidence been obtained?

b. Are the accounting estimates made by management reasonable?

- Did the analytical procedures performed at or near the end of the audit corroborate
conclusions formed during the audit? (Paragraph 17.3 Forming the Opinion, Guide 2011)

- It is essential that the auditor has to determine that sufficient appropriate audit evidence
has been obtained, and no additional work is required. Otherwise, the auditor should
undertake additional risk assessment to address such matters as:
a. those that affect the original audit plan;
b. those that have material impact on the auditor’s report;
c. those changes that affect the overall materiality threshold arrived at in the planning
phase; and,
d. those which necessitates application of additional audit procedures.

- Audit evidence represents information used by the auditor in arriving at the conclusions as
basis for the auditor’s opinion. Audit evidence includes both information contained in the
accounting records underlying the FS and information obtained from other sources (ISSAI
1500-Audit Evidence, par. 5(c)). Examples of the latter are confirmation replies from the
Agency’s/Unit’s/Corporation/Project’s depository banks, debtors, or creditors.
Information from third parties is considered to be more reliable as they have the
impartiality that documents obtained from management lacks.

- Sufficiency is the measure of quantity of audit evidence. The quantity of audit evidence
needed is affected by the auditor’s assessment of the risks of misstatement (the higher the
assessed risks, the more audit evidence is likely to be required) and also by the quality of
such audit evidence (the higher quality, the less may be required). Obtaining more audit
evidence, however, may not compensate for its poor quality. (ISSAI 1500, par. A4.)

- Audit evidence does not have to be copious. As long as the audit is well documented, and
the procedures manifested in such documents attained the audit objectives, the auditor
may conclude that sufficient evidence is obtained which can support the conclusions made.
For example, a working paper (top schedule and sub-schedules) showing how the cash balance is
arrived at in the statement of financial position, with corresponding tick marks to show the audit
procedures undertaken – vouching (accuracy and/or occurrence), verification of bank reconciliation
statements (completeness and/or accuracy), confirmation (existence, disclosure and/or valuation),
cash examination (existence and/or accuracy), workback of cash flow statement (accuracy) – to
address the risks identified supported with duly validated bank reconciliation statements, cash
examination reports and bank confirmation replies is sufficient enough audit evidence.

- Appropriateness is the measure of the quality of audit evidence; that is its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.
The reliability of evidence is influenced by its source and by its nature, and is dependent on
the individual circumstances under which it is obtained. (ISSAI 1500, par. A5.)

- The auditor must make sure that sources of audit evidence are reliable, those that can be
trusted in terms of authenticity and truthfulness. For example, contracts properly signed by
contracting parties duly witnessed and notarized by a notary public; bank statements
obtained directly by management from depository banks; official receipts with complete
information.
- The evaluation of audit evidence obtained would address the following matters (Section
21.1, Guide 2011):
a. Materiality

i. If the amounts established for overall and performance materiality are still
appropriate in the context of the entity’s actual financial results
ii. If a lower overall materiality (for the financial statements as a whole) than that
initially determined is appropriate, the auditor is required to determine:
 whether it is necessary to revise performance materiality; and,
 whether the nature, timing and extent of the further audit procedures remain
appropriate.

b. Risk

In light of the audit observations, assessments of risks of material misstatement at the

assertion level are still appropriate. If not, the risk assessments would be revised, and
further planned audit procedures would be modified.

c. Misstatements

The effect on the audit of identified misstatements and uncorrected misstatements,

and the reason for misstatements/deviations has been considered. These may indicate
an unidentified risk or a significant deficiency in internal control.

Revision of the overall audit strategy and the audit engagement plan applies when:

i. the nature of identified misstatements and the circumstances of their occurrence

indicate that other misstatements may exist that, when aggregated with
misstatements accumulated during the audit, could be material; or
ii. the aggregate of misstatements accumulated during the audit approaches
materiality.

Additional audit procedures shall be performed to determine whether misstatements

remain (in classes of transactions, account balance, or disclosures) where management
was asked to correct misstatements.
A.2. Considering materiality of uncorrected misstatements

 Pertinent paragraphs of ISSAI 1450-Evaluation of Misstatements Identified

during the Audit that guides the evaluation of the effect of misstatements are:

a. Paragraph 3. The objective of the auditor is to evaluate:

i. The effect of identified misstatements on the audit; and

ii. The effect of uncorrected misstatements, if any, on the FS.

b. Paragraph 5. The auditor shall accumulate misstatements identified

during the audit, other than those that are clearly trivial.

c. Paragraph 6. The auditor shall determine whether the overall audit

strategy and audit plan need to be revised if:

i. The nature of identified misstatements and the circumstances of their

occurrence indicate that other misstatements may exist that, when
aggregated with misstatement accumulated during the audit, could be
material;
ii. The aggregate of misstatements accumulated during the audit
approaches materiality determined in accordance with ISSAI 1320-
Materiality in Planning and Performing an Audit.

d. Paragraph 10. Prior to evaluating the effect of uncorrected misstatements,

the auditor shall reassess materiality determined in accordance with ISSAI
1320 to confirm whether it remains appropriate in the context of the
entity’s actual financial results.

e. Paragraph A.21. Circumstances that may affect the evaluation include the
extent to which the misstatement:

i. Affects compliance with regulatory requirements;

ii. Affects compliance with debt covenants or other contractual requirements;
iii. Relates to the incorrect selection or application of an accounting policy
that has an immaterial effect on the current period’s FS but is likely to
have a material effect on future periods’ FS;
iv. Masks a change in earnings or other trends, especially in the context of
general economic and industry conditions;
v. Affects ratios used to evaluate the entity’s financial position, results of
operations or cash flows;
vi. Affects segment information presented in the FS (for example, the
significance of the matter to a segment or other portion of the entity’s
business that has been identified as playing a significant role in the
entity’s operations or profitability);
vii. Has the effect of increasing management compensation, for example,
by ensuring that the requirements for the award of bonuses or other
incentives are satisfied;
viii. Is significant having regard to the auditor’s understanding of known
previous communications to users, for example, in relation to forecast
earnings;
ix. Relates to items involving particular parties (for example, whether
external parties to the transaction are related to members of the
entity’s management);
x. Is an omission of information not specifically required by the
applicable FRF but which, in the judgment of the auditor, is important
to the users’ understanding of the financial position, financial
 performance or cash flows of the entity; or,
xi. Affects other information to be included in the entity’s annual report
(for example, information to be included in a “Management Discussion
and Analysis” or an “Operating and Financial Review”) that may
reasonably be expected to influence the economic decisions of the
users of the financial statements. ISSAI 1720 (Revised) deals with the
auditor’s responsibilities relating to other information.

 Before the auditor evaluates the results of performing procedures and any
misstatements arising therefrom, the first step is to reassess the amounts
established for overall and performance materiality. This is necessary because
the initial determination of materiality will often be based on estimates of the
entity’s financial results, and the actual results may be different. Factors that
would lead to a change include:

a. Initial determination of materiality is no longer appropriate in the context

of the entity’s actual financial results;
b. New information becomes available (such as user expectations) that
would have caused the auditor to determine a different amount (or
amounts) initially; and,
c. Unexpected misstatements that may cause the materiality amount for that
particular class of transactions, account balance, or disclosure to be
exceeded. (Item 21.2, par. 1, Guide 2011)

 Whenever revisions to materiality is necessary, the auditor is required to

consider and document the impact on the nature, timing and extent of further
audit procedures required. (Item 21.2, par. 2, Guide 2011)

 During the execution stage, Management may be unwilling to correct or

adjust its accounting records on misstatements determined by the Auditor
that affect the fair presentation of its FS for some reason or another. The
Auditor summarizes these uncorrected misstatements (Illustration 11), and
evaluates whether such uncorrected misstatements are material, individually
or in aggregate and whether these will affect the opinion to be rendered.

 For agencies/corporations with FOUs with complete sets of books, the FOU
Team Leader submits to the RSA, the Summary of Uncorrected Misstatements
for consolidation and submission to the SA at the Head Office.
A.3. Evaluating financial statements prepared using the appropriate financial reporting
framework

 Before determining what appropriate opinion to render, the Auditor must also
evaluate if:
a. Financial statements are prepared in accordance with the applicable FRF, either
PPSAS or PFRS. These accounting standards serve as guide in the preparation of
the FS:
i. the appropriate presentation and classification of individual and group of
accounts – for example, current and non-current distinction of accounts; real
accounts are correctly presented in the SFPos, nominal accounts in the SFPer;

ii. a complete set of FS that comprises: a statement of financial position, a

statement of financial performance/statement of comprehensive income, a
statement of changes in net assets/equity, a cash flow statement, a separate
statement of comparison of budget and actual amounts or a budget column in
the FS (for PPSAS users only), and notes, comprising a summary of significant
accounting policies and other explanatory notes (PPSAS 1- Presentation of
Financial Statements, par. 21/PAS 1-Presentation of FS, par. 1.10);

iii. minimum required disclosure in the FS and/or in the notes to FS – the

standards require disclosures presented in the FS and/or in the Notes to FS
information for each classification or sub-classification of accounts. For
example, minimum disclosure required for property, plant and equipment includes
the initial and subsequent measurements-either cost or revaluation models;
recognition criteria-probable future economic benefit and reliable measurement of
either cost or fair value; treatment of transfers; acquisitions and disposals.

b. Accounting policies are appropriate and are consistent with PPSAS/PFRS – for
example, the adopted accounting policy on measurement of inventory is the lower of cost
and net realizable value which is aligned with paragraph 15 of PPSAS 12/PAS 2-
Inventories.

c. There are adequate disclosure of significant accounting policies – minimum

disclosure of a summary of significant accounting policies includes:

i. the measurement basis/bases used in preparing the financial statements;

ii. the extent to which the entity has applied any transitional provisions in any
PPSAS (PFRS); and,
iii. other accounting policies used that are relevant to an understanding of the FS
(PPSAS/PFRS 1).

d. There is reasonable use of accounting estimates – the assumptions underlying the

accounting estimates must be reasonable, or practical and rational. For example,
the estimated useful life of a motor vehicle of five to 15 years depending on the utility of
the vehicle is considered reasonable in computing for depreciation charges on such an
asset.

e. There is relevant, reliable, comparable and understandable presentation of

information – the user must be able to compare the information in the FS with
other agencies/units/corporations/ projects within the industry or business it
operates; the information in the FS must be easily comprehensible to the user to
avoid misconceptions and misunderstanding; such information must also be
dependable, pertinent and appropriate.

f. There is adequate disclosure of information conveyed in the FS – sufficient

disclosure for every account considered as significant is required to avoid
misinterpretation and to help the user arrive at an informed judgment/decision.
 g. There is appropriate use of terminologies – terms and words in the FS and the
notes must be correct and proper to be more understandable to all kinds of users.

 The auditors shall use as guide in the evaluation of Management’s disclosure in the
Notes to FS, the disclosure requirements of each of the PPSAS/PFRS. For National
Government Agencies, a disclosure checklist is provided in the GAM.
B. Forms of independent auditor’s report
 There are two forms of auditor’s report,

1. unmodified and
2. modified auditor’s report

B.1. Unmodified auditor’s report

 An unmodified auditor’s report is rendered when the auditor concludes that the FS
are free from material misstatements and are prepared in accordance with the
applicable and appropriate FRF (PPSAS or PFRS).

 The contents of the opinion paragraph in an unmodified report are:

Opinion

We have audited the financial statements of (Agency/Unit/Corporation/Project) which

comprise the statements of financial position as at December 31, 20X1 and 20X0, statements
of financial performance/profit or loss/comprehensive income, statements of cash flows,
statements of comparison of budget and actual amounts (for PPSAS users) for the years
then ended, and notes to the financial statements, including a summary of significant
accounting policies.

In our opinion, the accompanying financial statements of (Agency/Unit/Corporation/Project)

are prepared in all material respects, in accordance with Philippine Public Sector Accounting
Standards or Philippine Financial Reporting Standards.

B.2. Modified auditor’s report

 A modified auditor’s report is rendered if the auditor: (a.1) concludes that the FS are
not free from material misstatements; or (a.2) is unable to obtain sufficient
appropriate audit evidence to conclude that the FS as a whole are free from material
misstatement. The auditor’s opinion in a modified auditor’s report is considered
modified if he/she issued qualified or adverse opinion or disclaim an opinion.

a. Qualified Opinion - The auditor shall express a qualified opinion when:

i. The auditor, having obtained sufficient appropriate audit evidence, concludes

that misstatements, individually or in the aggregate, are material, but not
pervasive, to the FS; or,
ii. The auditor is unable to obtain sufficient appropriate audit evidence on which
to base the opinion, but the auditor concludes that the possible effects on the FS
of undetected misstatements, if any, could be material but not pervasive.

b. Adverse Opinion - The auditor shall express an adverse opinion when the auditor,
having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are both material and pervasive to
the FS. Misstatements are considered pervasive if in the auditor’s judgment: (a)
they are not confined to specific elements, accounts or items of the FS; (b) if so
confined, they represent or could represent a substantial proportion of the FS; or
(c) in relation to disclosures, they are fundamental to users’ understanding of the
FS.

c. Disclaimer of Opinion - The auditor shall disclaim an opinion when the auditor is
unable to obtain sufficient appropriate audit evidence on which to base the
opinion, and the auditor concludes that the possible effects on the FS of undetected
misstatements, if any, could be both material and pervasive. A disclaimer is also
 rendered when, in extremely rare circumstances involving multiple uncertainties,
the auditor concludes that, notwithstanding having obtained sufficient appropriate
audit evidence regarding each of the individual uncertainties; it is not possible to
form an opinion on the FS due to the potential interaction of the uncertainties and
their possible cumulative effect on the FS.

B.2.1. Matters affecting the Auditor’s unmodified opinion

 The auditor may disagree with Management about certain matters such as the
acceptability of accounting policies selected, the method of their application,
or the adequacy of disclosures in the FS resulting in the misstatement of the
FS. If such disagreements are significant to the FS, the auditor shall express a
qualified or an adverse opinion.

 Examples of material misstatements due to disagreements with Management

are:

a. Acceptability of accounting policies – for example, policy of using the cost

model to recognize property, plant and equipment, lower of cost and net realizable
value to recognize inventory, amortized cost for loans and receivables are
acceptable. Deviation from such policy may result in material misstatement;

b. Method of application – accounting policies must be used consistently from

period to period to attain comparability of FS. For example, if Management
adopts in the current year the cost model of recognizing property, plant and
equipment, and presenting in the FS, it shall apply the same model for the asset for
the next year. Inconsistent application of the policy may lead to a material
misstatement;

c. Adequacy of disclosures – for example, Management discloses the initial and

subsequent measurements of transportation equipment, the year’s acquisitions and
disposals, depreciation charges, accumulated depreciation and allowance for
impairment and other important matters relating to the asset. Anything less
would be inadequate, thus, may result in material misstatement.

 When the auditor is unable to perform necessary audit procedures or the

auditor is unable to gather sufficient appropriate evidence, limitations on the
scope of the audit arise. Such limitations may be imposed by the entity or
imposed by circumstances. The inability to obtain sufficient appropriate audit
evidence will result to either a qualified or a disclaimer of an opinion.

 Scope limitation imposed by the entity takes the form of Management not
providing access to accounting records or the status of the entity’s records (is
incomplete, etc.), not allowing or limiting the conduct of interview with key
personnel, sanctioning the undertaking of inspection of projects or deliveries.

 Limitations to the scope of the audit should never arise from impositions by
the auditor, as this constitutes deviation from audit engagement protocol and
demonstrates unprofessionalism.

 Whenever the auditor expresses a modified opinion, a clear description of all

the substantive reasons should be included in the report and, unless
impracticable, a quantification of the material uncorrected misstatements.

B.2.2. Matters not affecting the unmodified opinion

 There are matters that do not affect the auditor’s unmodified opinion but
discussed in the Emphasis of Matter and Other Matter paragraphs in the IAR.

B. 2.2.1 Emphasis of Matter Paragraph

 Emphasis of Matter refer to matters appropriately presented or

disclosed in the Notes to FS that, in the auditor’s judgment, are of
such importance that it is fundamental to users’ understanding of the
FS. (ISSAI 1706) The inclusion of an Emphasis of Matter paragraph
does not affect the auditor’s opinion.

 These are uncertainties, going concern uncertainties, justifiable

PPSAS/PFRS departure, and inconsistencies that are adequately
disclosed in the Notes to the FS. These result in an unmodified
opinion with an addition of emphasis of matter paragraph. Lack of
disclosure of such matters significant to the FS would result in either
a qualified or adverse opinion, not just the addition of emphasis of
matter paragraph.

 An uncertainty is a matter whose outcome depends on future actions

or events not under the direct control of the entity but that may affect
the FS. When there are significant uncertainties that are adequately
accounted for and disclosed in the Notes to the FS, the auditor should
consider modifying the report by adding an explanatory paragraph to
the unmodified report to emphasize the material uncertainty.

 The auditor should evaluate information gathered during the audit to

determine whether there is substantial doubt about the entity’s ability
to continue as a going concern. If there is a significant doubt about
such an ability to continue as a going concern for a reasonable period
of time, the auditor should consider whether the going concern
problems are adequately disclosed in the Notes to FS.

 In extreme cases, such as situations involving multiple uncertainties

that are significant to the FS, the auditor may consider it appropriate
to issue a disclaimer of opinion instead of adding an emphasis of a
matter paragraph.

 Changes affecting accounting principles and estimates may result in

inconsistency of FS presentations. For example, in prior year, the
Agency/Unit/Corporation/Project adopted the straight line method of
depreciating its assets. In the current year, because of some valid reasons, it
has changed its policy to declining balance method. When this arises,
Management cannot present depreciation using two different methods for
prior and current years, as this is tantamount to inconsistent FS.
Management may either restate the prior year FS to use the declining
balance method for that year and for the current year to achieve consistency.

 Management may judge it necessary to depart from financial

reporting standards in order to come up with a fair presentation of FS.
If the reasons are adequately disclosed and the auditor believes that
such a departure is justified the auditor should express an
unmodified opinion and disclose the departure in a separate
paragraph of the report. Examples of instances of acceptable
departure from financial reporting standards are, new legislation or
evolution of a new form of business transaction.
B. 2.2.2 Other Matter Paragraph

 This refers to a matter other than those presented or disclosed in the

financial statements that, in the auditor’s judgment, is relevant to
user’s understanding of the audit, the auditor’s responsibilities or the
auditor’s report (ISSAI 1706). Instances where this paragraph is
included are:

a. the law, regulation or accepted practice require or permit

elaboration on matters to explain the auditors
responsibilities in the audit;

b. where FS intending for a specific purpose/user is

prepared in accordance with a general purpose
framework such as for the ADB. In such case, the auditor
may consider inclusion of an Other Matter paragraph
stating that the auditor’s report is intended solely for the
intended users, and should not be distributed to or used
by other parties.

c. In accordance with ISSAI 1720 (requirements, paragraph

10) “Material inconsistencies identified in other
information obtained prior to the date of the auditor’s
report”: if the revision of other information is necessary
and Management refuses to make the revision, an Other
Matter paragraph describing the material inconsistency is
included.

d. When the prior year audit opinion is different from the

current year audit opinion, the change shall be
communicated in the Other Matter paragraph. This
applies to audit opinion using comparative FS approach.

If during our current audit we became aware of

events/circumstances that affect the FS of a prior period,
we shall consider such matter when updating our report
on the FS of the prior period.

If in an updated report, we express an opinion different

from our previous opinion on the FS of a prior period, we
shall disclose all the substantive reasons for the different
opinion in the Other Matter paragraph of our report. Also,
if the updated opinion on the prior period FS is other than
unmodified, we shall include in the opinion paragraph an
appropriate modification with a reference to the Basis for
Opinion paragraph.

If we have previously modified our opinion on FS of a

prior period because of disagreement with management
(departure from PFRS/PPSAS, uncorrected
misstatements, inadequate disclosure) and prior period FS
are restated in the current period to conform with
PFRS/PPSAS, our report on the FS of the prior period
shall indicate that the FS have been restated and shall
express an unmodified opinion with respect to the
restated FS or to that matter/s presented which were the
 subject of prior period modification.

 Summary of modifications of the Independent Auditor’s Report

Matters Effect on the Financial Statements

that:
A. Affect the Unmodified Opinion Material but not Material and
pervasive Pervasive
1. Disagreement with Management
Qualified Adverse
2. (FS are materially misstated)
3. Scope Limitation Qualified Disclaimer
B. Do NOT affect the Unmodified Opinion
1. Uncertainties
If disclosed in the Notes to
2. Going Concern Uncertainties
FS, Unmodified opinion
3. Inconsistencies
with Emphasis of Matter
4. Justifiable departure from PPSAS/PFRS
Paragraph
5. Further explanation on auditor’s
responsibilities in the audit
6. Financial statement intended for specific
purpose but prepared in accordance If not disclosed in the Notes to
with FS, Unmodified opinion with
general purpose framework Other Matter Paragraph
7. Material inconsistency in other
information not issued to management
8. Updating of prior year modified
opinion
to unmodified opinion
B.3. Auditor’s report on consolidated financial statements

 For consolidated FS where auditors are required to render an auditor’s report, the
wordings on the auditor’s report are the same except in the title and opinion
paragraph where it is specifically stated that the FS and the Notes to FS are
consolidated.

 Consolidated financial statements are the FS of a group presented as those of single

economic entity (PFRS 10-Consolidated Financial Statements). It is presented by the
parent corporation in which it consolidates its FS with its investments in subsidiaries
in accordance with PFRS 10.

 Following is an example of the opinion paragraph of an unmodified auditor’s report

for consolidated FS:

Report on the Audit of the Financial Statements

Qualified Opinion

We have audited the financial statements of the Agency/Unit/Corporation/Project and its

subsidiaries (the Group), which comprise the statement of financial position as at December 31,
20X1 and 20X0, and the statement of financial performance, statement of changes in net
assets/equity and statement of cash flows for the years then ended, and notes to the financial
statements, including a summary of significant accounting policies.

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
section of our report, the accompanying financial statements present fairly, in all material respects,
the financial position of the Group as at December 31, 20X1 and 20X0, and their financial
performance and cash flows for the years then ended, and notes to the financial statements, in
accordance with Philippine Public Sector Accounting Standards or Philippine Financial Reporting
Standards/Philippine Financial Reporting Standards.

B.4. Auditor’s report on comparative financial statements

 The Auditor is required to render an auditor’s report on comparative

information. PPSAS 1, par. 53 states that Management must disclose
comparative information in respect of the previous period for all amounts
reported in the FS. Comparative information shall be included for narrative and
descriptive information when it is relevant to an understanding of the current
period’s FS.
II. Specific Elements of the Independent Auditor’s Report
 The IAR prescribed in ISSAI 1700 (Revised) shall be adopted. The elements are enumerated as
follows:

A. Title

 The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor. (Ref: ISSAI 1700 (Revised) par. 21)

B. Addressee

 The auditor’s report is normally addressed to those for whom the report is prepared, often
either to the shareholders or to those charged with governance of the entity whose FS are
being audited. (Ref: ISSAI 1700 (Revised) par. A21)

C. Report on the audit of the financial statements

 The title, Report on the Audit of Financial Statements, is included to distinguish the following
sections form the other reports required to be contained in the IAR.

C.1. Opinion section

 The opinion section should also report:

a. The agency audited;

b. The FS audited, identify the title of each statements;
c. The Notes to FS, including the summary of significant accounting policies; and,
d. The date of or period covered by each FS.

Opinion (for unmodified opinion)

We have audited the accompanying financial statements of the (Agency/Unit/Corporation/

Project), which comprise the statements of financial position as at December 31, 20X1 and 20X0,
and the statements of financial performance/profit or loss/comprehensive income, statements of
changes in net assets/equity, statements of comparison of budget and actual amounts and
statements of cash flows for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements present fairly, in all material respects, the
financial position of (Agency/Unit/Corporation/Project) as at December 31, 20X1 and 20X0, and
its financial performance, cash flows, changes in net assets/equity, and comparison of budget and
actual amounts for the year then ended in accordance with Philippine Public Sector Accounting
Standards/Philippine Financial Reporting Standards.

C.2. Basis for opinion

 The auditor’s report shall include a section, directly following the opinion section the
“Basis for Opinion”.

 This section shall:

a. States that the audit was conducted in accordance with ISSAI;

b. Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the auditing standards;
c. Includes a statement that the auditor is independent of the entity in accordance
with the relevant ethical requirements relating to the audit and has fulfilled the
 auditor’s other responsibilities under those ethical requirements. The statement
shall identify the jurisdiction of origin of the relevant ethical requirements; and,
d. States whether the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor’s
Basis for Opinion (for unmodified opinion)

We conducted our audits in accordance with International Standards of Supreme Audit

Institutions (ISSAI). Our responsibilities under those standards are described in the
Auditor’s Responsibilities for the Audit of the Financial Statements section of our
report. We are independent of the Company in accordance with the Revised Code of Conduct
and Ethical Standards for Commission on Audit Officials and Employees (Code of Ethics)
together with the ethical requirements that are relevant to our audit of the financial statements
in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with
these requirements and the Code of Ethics. We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our opinion.
opinion.

 In case of modified opinion, this section shall state the basis for modification as the
first paragraph.

Basis for Qualified Opinion (for Qualified Opinion – same qualification for both years)

The Agency’s inventories are carried in the statement of financial position at Pxxx and Pxxx
as at December 31, 20X1 and 20X0, respectively. Management has not stated the inventories
at the lower of cost and net realizable value but has stated them solely at cost, which
constitutes a departure from PPSAS/PFRS. The Agency’s records indicate that, had
management stated the inventories at the lower of cost and net realizable value, an amount of
Pxxx and Pxxx as at December 31, 20X1 and 20X0, respectively, would have been required to
write the inventories down to their net realizable value. This resulted in the understatement as
at December 31, 20X1 and 20X0, respectively, of cost of sales by Pxxx and Pxxx and
overstatement of income tax by Pxxx and Pxxx, net income by Pxxx and Pxxx, and
stockholders’ equity by Pxxx and Pxxx.

We conducted our audits in accordance with International Standards of Supreme Audit

Institutions. Our responsibilities under those standards are described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Agency in accordance with the Revised Code of Conduct and Ethical
Standards for Commission on Audit Officials and Employees (Code of Ethics) together with
the ethical requirements that are relevant to our audit of the financial statements, and we have
fulfilled our other ethical responsibilities in accordance with these requirements and the Code
of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our qualified opinion.
C.3. Key audit matters

 These are matters that, in the auditor’s professional judgment, are of most significant in
the audit of FS of the current period. These matters are addressed in the context of the
audit of the FS as a whole.

 ISSAI 1701 applies to audit of complete sets of general purpose FS of listed entities, thus
making this section a requirement for listed entities only.

 The purposes of reporting on KAM in the audit report are to:

a. Increase transparency about the audit that was performed. Communicating KAM
provides additional information to intended users of the FS to assist them in
understanding those matters that, in the auditor’s professional judgment, were of
 most significance in the audit of the FS of the current period.
b. Focus users of the FS on areas in the FS that are subject to significant management
judgment and significant auditor attention, which may assist the users in better
understanding the entity and FS, and the outcome of the audit as reflected in the
auditor’s opinion.
c. Provide users a basis to further engage with management and those in charge of
governance, about certain matters related to the entity, the audited FS, or the audit
that was performed.

 Communicating KAM in the auditor’s report is not:

a. A substitute for disclosure in the Notes to FS that the applicable FRF requires
Management to make, or that are otherwise necessary to achieve fair presentation;
b. A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with ISSAI 1705
(Revised);
c. A substitute for reporting in accordance with ISSAI 1570 (Revised) when a material
uncertainty exists relating to event or condition that may cast significant doubt on
an entity’s ability to continue as a going concern; or,
d. A separate opinion on individual matters.

 When communicating KAM, auditors should consider laws and regulations that restrict
the reporting of such information by imposing confidentiality requirements. The need
for confidentiality may be based on the mandate of the SAI or legislation related to
official secrets or privacy. Auditors should identify such laws and regulations and
should consider confidentiality requirements when determining the KAM to
communicate.

 The Auditor is prohibited under ISSAI 1705 (Revised) from communicating KAM when
the Auditor disclaims an opinion on the FS, unless such reporting is required by law or
regulations.

 The Auditor shall describe each KAM, using an appropriate subheading, in a separate
section of the Auditor’s Report under the heading “Key Audit Matters”. The
introductory language shall state that:

a. KAMs are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the FS for the period; and,
b. Those matters were addressed in the context of the audit of FS as a whole, and in
forming the auditor’s opinion thereon; the auditor does not provide a separate
opinion on those matters.
 Key Audit Matters

(For unmodified opinion - 1st paragraph)

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters. For each
matter below, our description of how our audit addressed the matter is provided in that
context.

(For qualified opinion – 1st paragraph)

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements. These matters were addressed in the
context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. In addition to the matter
described in the Basis for Qualified Opinion section, we have determined the matters
described below to be the key matters to be communicated in our report.

We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the
Audit of the Consolidated Financial Statements section of our report, including in
relation to these matters. Accordingly, our audit included the performance of procedures
designed to respond to our assessment of the risks of material misstatement of the
consolidated financial statements. The results of our audit procedures, including the
procedures performed to address the matters below, provide the basis for our audit opinion on
the accompanying consolidated financial statements.

C.4. Emphasis of matter

Emphasis of Matter

(For unmodified opinion)

We draw attention to Note X of the financial statements, which describes the effects of a fire in
the agency’s facilities. Our opinion is not modified in respect of this matter.

(For qualified opinion)

We draw attention to Note 30 to the Financial Statements which describes the contingent
liabilities for lawsuits or claims filed by third parties against (Agency/Unit/Corporation/
Project) which are either pending in courts or under negotiation, and cases filed by
(Agency/Unit/Corporation) against the (concerned agencies) which are pending before the
Supreme Court, Court of Appeals and the Local Board of Assessments of the Local Government
Unit. Our opinion is not modified in respect of these matters.

(For adverse of opinion)

We draw attention to Note X to the financial statements which describes the uncertainties
related to pending cases in several courts involving various claims against the Agency.
Because of the significance of the matters described in the Basis for Adverse Opinion
paragraph, it is appropriate to, and we do not, express an opinion on the information referred
to above.
C.5. Other matter

Other matter

In our report dated March 1, 20X1, we expressed an opinion that the 20X0 financial
statements did not fairly present the financial position, results of operations, and cash flows of
Agency/Unit/Corporation/Project in accordance with the PPSAS or PFRS because of two
departures from such principles: (1) Agency/Unit/Corporation/Project carried its property,
plant, and equipment at appraisal values, and provided for depreciation on the basis of such
values, and (2) Agency/Unit/Corporation/Project did not provide for deferred income taxes
with respect to differences between income for financial reporting purposes and taxable income.
The Agency/Unit/Corporation/Project has changed its method of accounting for these items
and restated its 20X0 financial statements to conform with the PPSAS or PFRS. Accordingly,
our present opinion on the restated 20X0 financial statements, as presented herein, is different
from that expressed in our previous report.

C.6. Other information

 ISSAI 1720 (Revised), The Auditor’s Responsibilities Relating to Other Information,

requires reporting on other information, financial or non-financial information
included in an entity’s annual report.

 The auditor shall read the other information and, in doing so shall:

a. Consider whether there is a material inconsistency between the other information

and the FS. As the basis for this consideration, the auditor shall, to evaluate their
consistency, compare selected amounts or other items in the other information
(that are intended to be the same as, to summarize, or to provide greater detail
about, the amounts or other items in the FS) with such amounts or other items in
the FS; and,

b. Consider whether there is a material inconsistency between the other information

and the auditor’s knowledge obtained in the audit, in the context of audit
evidence obtained and conclusions reached in the audit.

 While reading the other information, the auditor shall remain alert for indications
that the information not related to the financial statements or the auditor’s knowledge
obtained in the audit appears to be materially misstated.

 A separate section in the auditor’s report is used to identify the other information,
describe the auditor’s responsibilities in relation thereto, and, if applicable, report on
any material misstatement of the other information in “Other Matter” paragraph

 Some examples of other information to be disclosed are listed below:

a. Liquidity and capital resource information, such as cash, cash equivalents and
marketable securities; dividends; and debt, capital lease and minority interest
obligations
b. Amounts involved in guarantees, contractual obligations, legal or environmental
claims, and other contingencies
c. Financial measures or ratios, such as gross margin, return on average capital
employed, return on average shareholders’ equity, current ratio, interest coverage
ratio and debt ratio. Some of these may be directly reconcilable to the FS
d. Explanations of critical accounting estimates and related assumptions
e. Identification of related parties and descriptions of transactions with them
f. Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management’s
 qualitative assessments of the entity’s related exposures
g. Management’s qualitative assessments of the impacts of new financial reporting
standards that have come into effect during the period or in the following period,
on the entity’s financial results, financial position and cash flows

C.7. Responsibilities of management for the financial statements

 The auditor’s report shall include a section with a heading using the appropriate term
to describe those responsible for the preparation of the FS. This heading need not
refer specifically to “Management,” but may also refer to “Those Charged with
Governance” or such term that is appropriate in the context of the legal framework in
the particular jurisdiction.

 This section shall describe management’s responsibility for:

a. Preparing the FS in accordance with the applicable FRF, and for such
internal control as management determines is necessary to enable the
preparation of FS that are free from material misstatements whether due
to fraud or error; and,

b. Assessing the entity’s ability to continue as a going concern and whether

the use of the going concern basis of accounting is appropriate as well as
disclosing, if applicable, matters relating to going concern. The
explanation of management’s responsibility for this assessment shall
include a description of when the use of the going concern basis of
accounting is appropriate.

 Those responsible for the oversight of the financial reporting process, if different from
those responsible for preparing the FS shall also be identified in this section.

Responsibilities of Management and Those Charged with Governance for the Financial
Statements

Management is responsible for the preparation of the financial statements in accordance with the
Philippine Public Sector Accounting Standards or Philippine Financial Reporting Standards and
for such internal control as management determined is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management’s responsibility for assessing the agency’s
ability to continue as a going concern, disclosing as applicable, matters related to going concern
and using the going concern basis of accounting unless management either intend to liquidate the
agency or to cease operations, or has no alternative but to do so.

Those charged with governance are responsible for overseeing the agency’s financial reporting
process.
C.8. Auditor’s responsibilities for the audit of the financial statements

 The auditor’s report shall state that:

a. The objectives of the audit are to: (i) Obtain reasonable assurance about whether
the FS as a whole are free from material misstatement, whether due to fraud or
error; and, (ii) Issue an IAR that includes an opinion.

b. Reasonable assurance is a high level of assurance, but is not a guarantee that an

audit conducted in accordance with ISSAIs will always detect a material
misstatement when it exists;

c. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these FS;

d. The auditor exercises professional judgment and maintains professional

skepticism throughout the audit;

e. The Auditor’s responsibilities are:

i. To identify and assess the risks of material misstatements of the FS, whether
due to fraud or error; to design and perform audit procedures responsive to
those risks; and to obtain audit evidence that is sufficient and appropriate to
provide a basis for his opinion. The risk of material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override
of internal control.

ii. To obtain an understanding of internal control relevant to the audit in order to

design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the agency’s
internal control.

iii. To evaluate the appropriateness of accounting policies used and the

reasonableness of accounting estimates and related disclosures made by
management.

iv. To conclude on the appropriateness of management’s use of the going concern

basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the agency’s ability to continue as a going concern. If he
concludes that a material uncertainty exists, he is required to draw attention in
the auditor’s report to the related disclosures in the FS or, if such disclosures
are inadequate, to modify his opinion. His conclusions are based on the audit
evidence obtained up to the date of the auditor’s report. However, future
events or conditions may cause the agency to cease to continue as a going
concern.

v. To evaluate the overall presentation, structure and content of the FS, including
the disclosures, and whether the FS represent the underlying transactions and
events in a manner that achieves fair presentation.

f. The Auditor communicates with those charged with governance regarding,

among other matters, the planned scope and timing of the audit and significant
audit observations, including any significant deficiencies in internal control that
he identifies during the audit.
 g. The Auditor provides those charged with governance with a statement that he has
complied with relevant ethical requirements regarding independence, and
communicate with them all relationships and other matters that may reasonably
be thought to bear on his independence, and where applicable, related
safeguards.

h. From the matters communicated with those charged with governance, the auditor
determines those matters that were of most significance in the audit of the FS of
the current period and are therefore the key audit matters.

i. In cases of group audits where ISSAI 1600, paragraph 14 applies, the auditor’s
responsibilities in group audit are: i.1) To obtain sufficient appropriate audit
evidence regarding the financial information of the entities and business activities
within the group to express an opinion on the group FS; i.2) For the direction,
supervision and performance of the group audit; and (i.3) To remain solely
responsible for the auditor’s opinion.

Auditor’s Responsibilities for the Audit of Financial Statements

(For unmodified, qualified, and adverse opinion)

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISSAI will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.

As part of an audit in accordance with ISSAIs, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:

 Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.

 Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Agency/Unit/Corporation/Project’s internal control.

 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.

 Conclude on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Agency/Unit/Corporation/Project’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor’s report to the related disclosures in the financial statements or,
if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Agency/Unit/Corporation/Project to cease to continue as a going concern.

 Evaluate the overall presentation, structure and content of the financial statements, including
the disclosures, and whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit observations, including any significant
deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where applicable,
related safeguards.

From the matters communicated with those charged with governance, we determine those matters
that were of most significance in the audit of the financial statements of the current period and are
therefore the key audit matters. We describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences
of doing so would reasonably be expected to outweigh the public interest benefits of such
communication.

(The last paragraph is not included if there is no KAM to report)

(For disclaimer of opinion)

Our responsibility is to conduct an audit of the Agency/Unit/Corporation/Project’s financial

statements in accordance with ISSAI and to issue an auditor’s report. However, because of the matter
described in the Basis for Disclaimer of Opinion section of our report, we were not able to obtain
sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated
financial statements.

We are independent of the Agency/Unit/Corporation/Project in accordance with the ethical

requirements that are relevant to our audit of the financial statements in Code of Ethics, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
D. Report on other legal and regulatory requirements

 This refers to other reporting responsibilities not addressed under the reporting
responsibilities required by the ISSAIs as part of the report. (ISSAI 1720)

 The Auditor is required to report on other regulatory requirements, such as the entity’s
inclusion in the Notes to FS information on taxes, duties and license fees paid or accrued
during the taxable year. It may also include applicable requirements from other regulatory
bodies.

E. Name of the engagement partner

 “COMMISSION ON AUDIT”, placed before the signature and name of the Supervising
Auditor.

F. Signature of the auditor

 The IAR shall be signed by the Supervising Auditor or duly authorized signatory.

G. Auditor’s address

 This represents the official address of the Auditor. It is usually a part of the letterhead
hence, no need to include this after the signature of the Auditor.

H. Date of the independent auditor’s report

 It shall be dated not earlier than the date when the auditor has obtained sufficient
appropriate audit evidence, usually after fieldwork or after the exit conference if there are
still procedures to be undertaken as a result of what has been discussed, as basis of the
auditor’s opinion on the FS.
III. Comparative information

 ISSAI 1710 – Comparative Information deals with the auditor's responsibilities relating to
comparative information in an audit of FS. The nature of the comparative information that is
presented in an entity's FS depends on the requirements of the applicable FRF. Comparative
information refers to the amounts and disclosures included in the FS in respect of one or more
prior periods in accordance with the applicable FRF.

A. Corresponding figures and Comparative Financial Statements

 There are two different broad approaches to the auditor's reporting responsibilities in respect
of such comparative information: corresponding figures and comparative FS. Under the
corresponding figures approach, the amounts and other disclosures for the prior period
included as an integral part of the current period FS, are intended to be read only in relation to
the amounts and other disclosures relating to the current period (referred to as “current period
figures”). The level of detail presented in the corresponding amounts and disclosures is
dictated primarily by its relevance to the current period figures.

 The objectives of the auditor are:

a. To obtain sufficient appropriate audit evidence about whether the comparative

information included in the FS has been presented, in all material respects, in accordance
with the requirements for comparative information in the applicable FRF; and,
b. To report in accordance with the auditor’s reporting responsibilities.

 The auditor shall determine whether the FS include the comparative information required by
the applicable FRF and whether such information is appropriately classified.

 For this purpose, the auditor shall evaluate whether:

a. The comparative information agrees with the amounts and other disclosures presented in
the prior period or, when appropriate, have been restated; and,
b. The accounting policies reflected in the comparative information are consistent with those
applied in the current period or, if there have been changes in accounting policies,
whether those changes have been properly accounted for and adequately presented and
disclosed.

A.1. Corresponding Figures

 Under ISSAI 1710, when corresponding figures are presented, the auditor’s opinion
shall not refer to the corresponding figures except in the circumstances described
below:

a. If the auditor’s report on the prior period, as previously issued, included a

MODIFIED opinion and the matter which gave rise to the modification is
unresolved, the auditor shall modify the auditor’s opinion on the current
period’s FS. In the “Basis for Modification” paragraph in the auditor’s report, the
auditor shall either:

i. Refer to both the current period’s figures and the corresponding figures in
the description of the matter giving rise to the modification when the effects
or possible effects of the matter on the current period’s figures are material;
or,
ii. In other cases, explain that the audit opinion has been modified because of
the effects or possible effects of the unresolved matter on the comparability
of the current period’s figures and the corresponding figures.
 b. If the auditor obtains audit evidence that a material misstatement exists in the
prior period financial statements on which an unmodified opinion has been
previously issued, and the corresponding figures have not been properly restated
or appropriate disclosures have not been made, the auditor shall express a
qualified opinion or an adverse opinion in the auditor’s report on the current
period financial statements, modified with respect to the corresponding figures
included therein.

c. If the prior period financial statements were not audited, the auditor shall state in
an Other Matter paragraph in the auditor’s report that the corresponding figures
are unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect the current period’s
financial statements.

d. When the auditor’s report on the prior period, as previously issued, included a
MODIFIED opinion (qualified, disclaimer, or adverse) and the matter which gave
rise to the modified opinion is resolved and properly accounted for or disclosed
in the FS in accordance with the applicable FRF, the auditor’s opinion on the
current period need not refer to the previous modification.

A.2. Comparative Financial Statements

 When comparative FS are presented, the auditor’s opinion shall refer to each period
for which FS are presented and on which an audit opinion is expressed.

 When reporting on prior period FS in connection with the current period’s audit, if
the auditor’s opinion on such prior period FS differs from the opinion the auditor
previously expressed, the auditor shall disclose the substantive reasons for the
different opinion in an Other Matter paragraph in accordance with ISSAI 1706.

 If the prior period FS were not audited, the auditor shall state in an Other Matter
paragraph that the comparative FS are unaudited. Such a statement does not,
however, relieve the auditor of the requirement to obtain sufficient appropriate audit
evidence that the opening balances do not contain misstatements that materially
affect the current period’s FS.

 Government entities adopt the PPSAS or PFRS as their FRF. These standards require
that comparative information shall be disclosed in respect of the previous period for
all amounts reported in the FS.

IV. Special Considerations – Audits of Financial Statements Prepared in Accordance with Special
Purpose Frameworks

 When forming an opinion and reporting on special purpose FS, the auditor shall apply the
requirements of ISSAI 1700 (Revised). The Auditor’s Report shall describe the purpose for
which the FS are prepared and if necessary, the intended users or refer to a note in the special
purpose FS that contains that information.

 If management has a choice of FRFs in the preparation of such FS, the explanation of
management’s responsibility for the FS shall also make reference to its responsibility for
determining that the applicable FRF is acceptable in the circumstances.

 The auditor’s report shall include an Emphasis on Matter paragraph (ISSAI 1720) alerting users
that FS are prepared in accordance with a special purpose framework and that, as a result, the
FS may not be suitable for another purpose. The auditor shall include this paragraph under an
appropriate heading.
V. Types of Audit Report
 The audit report considers the management’s comments during the exit conference which
should be reduced in writing and formed part of documentation. This may be in the form of:

a. Annual Audit Report (AAR) – a report prepared at year-end on the results of audit on the
accounts and operations of an Agency/Unit/Corporation/Project. It is composed of the
IAR and discussion on observations with corresponding recommendations. In case the
audited agency failed to submit the FS for audit, no IAR can be issued. The auditor instead
will issue ML containing only the observations with corresponding recommendations. For
an Agency/Corporation with regional/branch offices and FOUs, the AAR shall be the
consolidated report on the results of audit of the head office, and the
regional/division/district/field offices of such Agency/Corporation. This report is
transmitted to the Agency Head by the CD/RD. In the case of GOCCs, the AAR is also
transmitted to the governing board.

b. Management Letter (ML) – an audit report on the results of audit of the regional/branch
offices, FOUs, staff bureau and line office with complete set of books of accounts. This is
addressed to the Regional/Branch/Office Head and transmitted by the SA/RSA.

c. Summary of Audit Observations and Recommendations (SAOR) – a report/matrix that

summarizes the audit observations, recommendations, management comments and
auditor's rejoinder. This is the required year-end audit report for regional/field office
agency with incomplete set of books of accounts and national high schools with complete
set of books of accounts. This report is transmitted to the Agency Head by the SA/RSA.
The SAOR shall be the basis/input for the consolidation of ML/AAR.

 The audit observations and recommendations are reviewed by the SA/RSA and CD/RD to
ensure that the same are based on the results of audit and duly documented, and all material
issues and concerns noted during the audit are included in the report and/or cleared by the
CD/RD.

 The guidelines on the preparation of audit report including the transmittal of reports and
requirements for the agency to submit the financial statements and documents are prescribed
under pertinent COA Issuances.
Section 5

Quality Control Review

 Quality control provides reasonable assurance that the audit engagement is performed in
compliance with professional standards and applicable legal and regulatory requirements,
and the audit report is appropriate in the circumstances. (The definition and discussions
are covered by ISSAI 1220).

I. Quality Control versus Quality Assurance

 While Quality Control and Quality Assurance are used interchangeably, there is a clear
difference. Quality control involves policies and procedures through which a SAI ensures
that the audit is carried out in compliance with the SAI auditing standards, rules and
procedures in line with the best international practices while quality assurance is a process
through which a SAI monitors and ensures that quality control is working effectively. Both
Quality Control and Quality Assurance operate within the Quality Management approach
implemented by the SAI to ensure that audit results as well as the means to achieving
them, are within the desired level of quality.

II. Responsibility for Quality Control System and Quality Control Procedures

 The SAI has an obligation to establish and maintain a system of quality control to provide
reasonable assurance that: (a) The SAI and its personnel comply with professional
standards and applicable legal and regulatory requirements; and (b) Reports issued by the
Auditors are appropriate in the circumstances. Quality controls are established in all
phases of the audit.

 Within the context of the SAI’s system of quality control, the audit teams are responsible
for implementing quality control procedures that are applicable to the audit engagement
and provide the SAI with relevant information to ensure that quality controls relating to
independence are functional. The SA/RSA is responsible for the overall quality of each
audit engagement.

 The elements of quality control follow (ISQC 1):

a. Leadership responsibilities for quality – Engagement partner shall take responsibility

for the overall quality of audit.
b. Relevant ethical requirements – Fundamental principles of professional ethics are
integrity, objectivity, professional competence and due care, confidentiality, and
professional behavior.
c. Acceptance and continuance of client relationships and specific engagements –
Information affecting conclusion include integrity of those charged with governance,
competence of the engagement team, compliance with relevant ethical requirements,
and significant matters that have arisen during the current or previous audit
engagements.
d. Human resources – The audit team must have appropriate competence and capabilities
such as experience with audit engagements of a similar nature, understanding of
professional standards and applicable legal and regulatory requirements, technical
expertise, and ability to apply professional judgment.
e. Engagement performance – Direction of the engagement team involves discussion with
all members of the team, appropriate teamwork and training, and supervision.
f. Monitoring – Quality control policies and procedures are relevant, adequate, and
operating effectively.

III. Quality Control Review Process in COA

 The responsibility for the quality of an audit and resulting Audit Report rests with the
 CD/RD and SA/RSA. Following the Revised Guidelines in the Implementation of the
Unified Audit Approach, there are three levels of quality control review implemented in
all the phases of the audit. These are summarized below:

Table 11. Levels of Quality Control Review

Outputs Prepared by Reviewed and Signed
by
ATM ATL
ATL SA/RSA
SA/RSA CD/RD

 At the first level, ATLs are responsible for the initial review of the working papers
prepared/obtained by the ATMs, namely, results of evaluation and validation of controls
over identified risks, substantive work reducing residual audit risks to acceptable levels,
supporting documents for the audit report, draft audited FS; and other working papers.

 At the level of SA/RSA, review should sufficiently satisfy the requirements that the audit
documentation contains adequate evidence of the work done and conclusions reached, and
provide a reasonable basis for an opinion.

 The SA/RSA is responsible for:

a. Determining whether the overall presentation of the FS, including the related
disclosures, is in accordance with the applicable FRF. (This aspect is discussed in
Section 4)
b. Ensuring that all necessary audit procedures have been completed, reviewed, and
sufficiently and appropriately documented.
c. Monitoring compliance by the audit team with auditing standards, laws, regulations
and ethical requirements.
d. Reviewing audit conclusions, recommendations, and professional judgments made by
the audit team.
e. Ensuring that all significant changes made to the audit strategy and audit plan are
justified and appropriately documented and approved.
f. Monitoring Management compliance with the requirements included in the
Engagement Letter, and action on deficiencies requiring corrections in the final FS.

IV. Quality Control Documents

 Auditor’s Declaration of Independence and Compliance with Other Ethical Standards -

At the Preliminary Engagement Phase, the Auditor’s Declaration of Independence and
Compliance with Other Ethical Standards signed by all members of the team, confirmed
by the SA/RSA during the Execution Phase and concurred by the CD/RD serves as an
assurance that the audit is performed by a team composed of competent and professional
auditors.
 Engagement Letter - COA formally informs the Auditee of its audit requirements well
ahead of time as a matter of professional courtesy and engagement direction.

 Engagement Planning Memorandum is not only a planning tool but also serves as
supervision and monitoring tool for the SA/RSA and the CD/RD. The progress of work
by the team members, the audit procedures performed and the timing of audit activities
can be kept track through the Plan. Deviations to activities approved in the Plan need to be
approved by the SA/RSA before these are effected. Otherwise, the ATL will be required to
formally explain why certain procedures were skipped, why budgeted time for each
objective was exceeded, among others. This Plan will then serve as a gauge of how well
each member in the team performed.

V. Quality Control Review Documents

 Completion Compliance Checklist (Appendix 5-1)- This Checklist enables the SA/RSA
and the CD/RD to check that all the required key, sign-off and quality control procedures
from the Preliminary Engagement Phase to the Reporting Phase were performed. The
accomplished checklist serves as basis for the CD/RD in rating the performance of the
audit team along with the Auditee performance rating on the audit team.

 An Auditee Feedback Sheet (Appendix 5-2) is designed to assess audit team’s

performance in the field. It should be sent directly by the CD/RD to the Auditee. This
serves as a tool to ensure COA’s commitment to quality service through quality staff. This
Sheet should be addressed to the Agency Head who is requested to respond within a given
timeframe. The feedback results especially for audit teams receiving negative feedback
should be acted upon by the CD/RD.

a. It is important to seek explanation of the audit team on negative feedback to make

them aware of actions considered unprofessional and/or unethical by the Auditee.
b. The CD/RD shall ensure that a report of all feedback results and actions taken by the
CD/RD is submitted to the Assistant Commissioner for his/her information after
transmittal of all the annual audit reports.

 Director’s Evaluation Form (Appendix 5-3)

a. The Audit Team’s performance including that of the SA/RSA will be assessed based
on the Completion Compliance Checklist and the Auditee Feedback Sheet by the
CD/RD with the assessment evaluation to the Assistant Commissioner concerned.
b. This quality control review tool allows the CD/RD and the Assistant Commissioner to
have a reasonable basis for taking appropriate action to ensure the quality of financial
audit performed by the audit teams.

 Financial Management Performance Rating (Appendix 5-4)

a. This quality control review tool assesses the quality of an Auditee’s financial
management performance using the results of the audit performed, including internal
control review.
b. When necessary, the results may be provided to the Department of Budget and
Management as one of the bases for reviewing the Auditee’s performance.