PSA 200

 toenable the auditor to express an opinion

whether the financial statements are prepared,
in all material respects, in accordance with an
applicable financial reporting framework.
 Management is responsible for preparation
and presentation of financial statements
 With oversight from those charged with
governance.
 Audit does not relieve management or those
charged with governance of their
responsibilities
 The auditor’s responsibility is to form and
express an opinion on the financial
statements.
 The auditor should comply with the Code
of Professional Ethics
 The auditor should conduct an audit in
accordance with Philippine Standards on
Auditing
 The auditor should adopt the attitude of
professional skepticism
 Professional skepticism is an auditor’s tendency
not to believe management’s assertions without
sufficient corroboration.
 Anaudit conducted in accordance with PSA is
designed to provide only reasonable
assurance that the financial statements
taken as a whole are free from material
misstatements
 The use of testing.
 The inherent limitations of internal control
(for example, the possibility of management
override or collusion).
 The fact that most audit evidence is
persuasive rather than conclusive.
 Use of judgment
 Address Common needs (Gen. Purpose F/S)
 IFRS
 IAS
 Other authoritative pronouncements
 Specific needs (Special Purpose F/S)
( IN THE CASE OF COOPS,PHILIPPINE FINANCIAL
REPORTING FRAMEWORK FOR COOPERATIVES)
 AUDITOR’S RESPONSIBILITY
TO CONSIDER FRAUD, ERROR
AND NONCOMPLIANCE

Philippine Standards on
Auditing 240 and 250
ERROR refers to unintentional misstatement in financial
statements, including the omission of an amount or a
disclosure.

FRAUD refers an intentional act by one or more

individuals among management, those charged with
governance, employees, involving the use of deception to
obtain an unjust or illegal advantage.

NONCOMPLIANCE refers to acts of omission or

commission by the entity being audited, either intentional
or unintentional, which are contrary to the prevailing
laws or regulations.
• FRAUDULENT FINANCIAL REPORTING
• MISAPPROPRIATION OF ASSETS
When planning and performing audit procedures
and in evaluating and reporting the results
thereof, the auditor should recognize that
fraud, error and noncompliance with laws and
regulations may materially affect the financial
statements.
 MANAGEMENT- It is the responsibility of the
management to establish appropriate controls to
prevent and detect fraud, error and
noncompliance.

 THOSE CHARGED WITH GOVERNANCE- It is the

responsibility of those charged with governance to
oversee management to ensure that appropriate
controls are in place.
The auditor’s responsibility is to design
the audit to obtain reasonable assurance
that the financial statements are free
from material misstatements, whether
caused by error, fraud or noncompliance.
 Over reliance on client representations.
 Lack of awareness or failure to recognize
that an observed condition may indicate a
material fraud.
 Lack of experience.
 Personal relationships with clients.
 Fraud risk factors that relate to misstatements
resulting from fraudulent financial reporting:
 Management Characteristics
 Industry Conditions
 Operating Characteristics

 Fraud risk factors that relate to misstatements

resulting from misappropriation of assets:
 Susceptibility of assets to theft
 Condition of Internal Control
 The auditor should obtain a general
understanding of legal and regulatory
frameworkREPORTING NONCOMLIANCE

 The auditor should design procedures to help

identify instances of noncompliance.

 The auditor should design audit procedures

to obtain sufficient appropriate evidence
about compliance with laws and
regulations.
 Discussion of engagement personnel.
 Specific risks identified and auditor response.
 Communication to management, audit
committee, etc.
 Responsible for Must Communicate Findings?
Detection?

Material Immaterial Material Immaterial

Errors Yes No Yes No

Fraud Yes No Yes Yes

(One level above)

Illegal Acts Yes No Yes Yes

(One level above)
CONDUCTING AN AUDIT OF FINANCIAL
STATEMENTS
PREENGAGEMENT AUDIT INTERNAL
SUBSTANTIVE ISSUE
PROCEDURES PLANNING CONTROL
PROCEDURES REPORT
CONSIDERATION
1. Evaluate compliance with ethical
requirements (PSA 220)

2. Evaluate continuance of relationship with

existing clients (PSA 220)

3. Establish the terms of the engagement (PSA

210)
 Client selection and
retention
 Communication
between predecessor
and successor auditors
 Engagement letters
 Staff assignment
 Time budget
 Helps ensure that appropriate attention is
devoted to important areas of the audit
 Helps identify potential problems
 Assists in proper assignment and
coordination of audit work
 Helps ensure that the audit is conducted
effectively and efficiently
 Understand the entity and its environment
including the entity’s internal control
 Develop an overall audit strategy and
detailed approach (Risk, Materiality and
Analytical Procedures)
 Audit Planning Documentation.
1. Industry, regulatory and other external factors,
including the applicable financial reporting
framework
2. Nature of the entity, including the selection
and application of accounting policies
3. Objectives and strategies and the related
business risks
4. Measurement and review of the entity’s
performance
5. Internal control
 Audit risk (AR) is the risk (likelihood) that the
auditor may unknowingly fail to modify the
opinion on financial statements that are
materially misstated (e.g., an unqualified
opinion on misstated financial statements.)
 The AUDIT RISK MODEL decomposes overall audit
risk into three components: inherent risk (IR),
control risk (CR), and detection risk (DR):
AR = IR x CR x DR
 Internal Controls

Events, Accounting
Financial
Information
Transactions Statements
System Substantive
Procedures

INHERENT RISK
The likelihood that, CONTROL RISK DETECTION RISK AUDIT RISK
in the absence of The likelihood that an error The likelihood that The likelihood that
internal controls, or fraud will not get caught by the an error or fraud an error or fraud will occur,
an error or fraud client’s internal controls. will not be caught and not get caught
will enter the accounting by the auditor’s by either the internal controls
information system procedures. or auditor’s procedures.
 Detection Risk and the Nature, Timing,
and Extent of Audit Procedures

Lower Detection Risk Higher Detection Risk

Nature More effective tests. Less effective tests.

Timing Testing performed at year- Testing can be performed at
end. Interim.
Extent More tests. Fewer tests.
1. Inquiries of Management and others within
the entity

2. Analytical Procedures

3. Observation and Inspection

 RECORDED ESTIMATED
ACCOUNT ACCOUNT
BALANCE BALANCE

 Attention directing
 Identify potential problem areas
 An organized approach
 A standard starting place to start examining the financial statements
 Describe the financial activities
 Identify unusual changes in relationships in the data
 Ask relevant questions
 What could be wrong?
 What legitimate reasons are there for these results?
1. Develop expectations.
2. Compare them with the recorded amount.
3. Investigate significant differences.
 Analytic Procedures Sources of Information
Comparison of current-year account Financial account information for
balances to those of one or more comparable periods.
comparable periods

Comparison of the current-year account Company budgets and forecasts.

balances to anticipated results found in the
company’s budgets and forecasts.

Evaluation of the relationships of current- Financial relationships among accounts in

year balances to other current-year the current period (ratios).
balances for conformity with predicable
patterns based on the company’s
experience.

Comparison of the current-year account Industry statistics.

balances and ratios with similar industry
information.

Study of the relationships of current-year Nonfinancial information, such as production

balances with relevant nonfinancial statistics.
information (e.g., production statistics).
 Preliminary -- required
 Substantive testing -- optional
 Final Review -- required
 Information is material if its omission or
misstatement could influence the economic
decisions of users taken on the basis of the
financial statements.
 MATERIALITY IS A MATTER OF PROFESSIONAL
JUDGEMENT
 List of audit procedures to be performed.
 Each audit program is based, in part, on the
output of Audit Risk Model.
 Generally one for each major cycle or account.
 Signed off as procedures are performed.
1. Operational Objective

2. Compliance Objective

3. Financial Reporting Objectives

1. Collusion
2. Management Override
3. Human errors
4. Cost-benefit consideration
 Control Environment
Risk Control
Assessment Procedures
Information and
Communication
Monitoring
 Sets the tone of an organization, influencing the
control consciousness of its people.
 It is the foundation for all other components.
 The entity's identification and analysis of
relevant risks to achievement of its objectives.
 The
policies and procedures that help ensure
management directives are carried out.
 Information Processing
 Approvals and authorization
 Verifications and reconciliations
 Physical controls over the security of assets
 Segregation of duties
 Performance reviews
 The identification, capture, and exchange of
information in the form and time frame that
enables people to carry out their
responsibilities.
The process that assesses the quality
of the internal control's performance
over time.
 Phase 1: Understand and Document
 Understand the Client’s Internal Control
 Document the Internal Control understanding
 Internal Control questionnaire
 Narrative
 Accounting and Control System Flowcharts
 Phase 2: Assess Control Risk (Preliminary)
 Phase 3: Testing and Reassessment
 Perform Test of Controls Audit Procedures
 Re-Assess Control Risk
More Efficient More Effective
Substantive Testing

Substantive
Testing of Controls
Testing

Interim Year-end
Philippine Standard on Auditing 500
“Audit evidence” is all the information used by
the auditor in arriving at the conclusions on
which the audit opinion is based.
1. Source documents and accounting records
underlying the financial statements.
2. Other corroborating information
 Sufficiency is the measure of the quantity of
audit evidence.
 Appropriateness is the measure of the
quality of audit evidence.
The following factors should be considered
when evaluating the sufficiency of
evidence:
 Competence of Audit Evidence
 Materiality of the amount involved
 Risk of misstatement in the account
Appropriate evidence
 Must be relevant to a particular
assertion; and
 Must be reliable
 Relevance
• Testing what you want to test (e.g., direction of
testing)
 Reliability
• Independence of source
• Condition of internal control
• How the evidence was obtained
 Assertions about classes of transactions and
events for the period under audit

 Assertions about account balances at period

end

 Assertions about presentation and disclosure

 Existence

 Rights & Obligations

 Completeness

 Valuation and Allocations

 Procedures designed to obtain an
understanding of the entity and its
environment

 Procedures designed to test the operating

effectiveness of controls

 Procedures designed to detect material

misstatements