Overview of Auditing Process (Chapter 1 to 7)
The auditor’s main objective
Auditing – is a systematic process of objectively obtaining and evaluating
evidence regarding assertions and events to ascertain the degree of
correspondence between these assertions and established criteria and
communicating the results thereof.
Steps in Audit Process
ACCEPTING AN ENGAGEMENT
The first step in the audit process is to make a decision whether to accept or
reject an audit engagement. This process requires evaluation of the auditor’s
qualification as well as the auditability of the prospective client’s financial
statement.
Things that a firm should consider before accepting an engagement:
a) Competency to perform the engagement
b) Compliance with the relevant ethical requirements
c) Consideration of the integrity of the client or management
Retention of Existing Clients
The auditor’s evaluation of client is not a one-time consideration. Clients
should be evaluated once a year or upon occurrence of major events such as
changes in management, directors, ownership, nature of client’s business or
other changes that may affect the scope of the examinations. Many CPA firms
evaluate existing clients annually to determine whether there are reasons for
not continuing to do the audit, previous conflicts over such things as the
appropriate scope of the audit, the type of opinion to issue, or fees may cause
the auditor to discontinue association.
Engagement Letter
The engagement letter is an agreement between the auditor and the client
for the conduct of the audit and related services. This includes the
engagement objectives, the responsibility of the auditor and the management
and the engagements limitation.
Importance of the engagement letter:
1. Avoid misunderstandings with respect to the engagement.
2. Document and confirm the auditor’s acceptance of the appointment.
AUDIT PLANNING
Audit planning – involves developing a general audit strategy and a detailed
approach for the expected conduct of the audit.
in planning the audit is to determine the scope of audit procedures to be
performed through understanding the entity. It involves the establishment of
the overall audit strategy for the engagement and developing an audit plan, in
order to reduce audit risk to an acceptably low level.
Benefits of Audit Planning
a) It helps ensure that appropriate attention is devoted to important areas of
the audit.
b) It helps identify potential problems.
c) It allows the work to be completed expeditiously.
d) It assists in the proper assignment and coordination of work.
e) It helps ensure that the audit is conducted effectively and efficiently.
The Overall Audit Strategy
➢ Understanding the client
➢ Understanding the internal control
➢ Developing an overall audit strategy
Application of the Concept of Materiality to Audit
To reiterate the importance of the concept of materiality to audit, the definition
of materiality to audit, the definition of materiality in accordance with the
FRSC’s “Framework for the Preparation and Presentation of Financial
Statements” follows:
“Information is material if it’s omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements.
Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement. Thus, materiality provides a
threshold or cut-off point rather than being a primary qualitative characteristic
which information must have if it is to be useful.”
In designing an audit plan, PSA 320 requires the auditor to make a
preliminary estimate of materiality for use during the examination. The
concept of materiality recognizes that some matters are important for fair
presentation of financial statements while other matters are not. Auditors
make a preliminary assessment of materiality of the financial statements as a
whole by determining the amount by which they believe the financial
statement could be misstated without affecting the user’s decisions. This
amount is called preliminary judgment about materiality or planning
materiality.
Uses of materiality
➢ In planning phase: To determine the scope of audit.
➢ In completion phase: To evaluate the effect of misstatement on the
financial statements. The auditors should make a preliminary estimate of
materiality to assist them in determining the amount of evidence needed to
support their opinion.
Performance Materiality
Performance materiality – is used by the auditor to reduce the risk to an
appropriate low level that the accumulation of uncorrected and unidentified
misstatements exceeds materiality for the financial statements as a whole
(overall materiality), or materiality levels established for particular classes of
transactions, account balances, or disclosures (specific materiality).
Relationship between Materiality and Audit Risk
Audit Risk – refers to the risk that the auditor might give an inappropriate
audit opinion on the financial statements.
There is an inverse relationship between materiality and the level of audit risk.
The higher the materiality level, the lower the audit risk.
The lower the materiality level, the higher the audit risk.
Components of Audit-Risk Model
• Inherent Risk
• Control Risk
• Detection Risk
Steps in using the audit risk model
Step 1: Set the Acceptable Level of Audit Risk
Step 2: Assess the Level of Inherent Risk
Step 3: Assess the Level of Control Risk
Step 4: Determine the Acceptable Level of Detection Risk
Step 5: Design Substantive Tests
Materiality, Audit Risk, and Audit Procedures
Analytical Procedures
Analytical procedures involve analysis of significant ratios and trends,
including the resulting investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate from predicted
amounts.
Steps in Applying Analytical Procedures
Step 1 Develop expectations regarding financial statements.
Step 2 Compare the expectation with the financial statements under audit.
Step 3 Investigate significant unexpected differences to determine whether
financial statements contain material misstatements.
Uses of analytical procedures
• As a planning tool to determine the nature, timing, and extent of the auditing
procedures.
• As a substantive test to obtain corroborative evidence about particular
assertions related to the account balance or transaction class
• As an overall review of the financial statements in the completion phase of
the audit.
Documentation
The final step in the planning process is the documentation of the audit
process by `preparing overall audit plan, audit program, and time budget.
Audit plan – is an overview of the expected scope and conduct of the audit.
Audit program – executes the audit strategy.
Time Budget – is an estimate of the time that will be spent in executing the
audit procedures listed in the audit program.
CONSIDERATION OF INTERNAL CONTROL
In considering internal control, auditors are not responsible for establishing
and maintaining an entity's accounting and internal control system: that is the
responsibility of the entity's management. Nevertheless, the auditors should
give adequate consideration to these controls because the condition of the
entity's internal control system can have a significant impact on the audit.
Consideration of the entity's internal control systems involves the following
steps:
1. Obtaining understanding of the internal control;
2. Documenting the understanding of accounting and internal control systems;
3. Assessing the level of control risk;
4. Performing tests of controls; and
5. Documenting the assessed level of control risks
Understanding Internal Control
The auditor should obtain sufficient understanding of the components of the
entity's internal control relevant to the audit.
➢ evaluating the design of a control; and
➢ determining whether it has been implemented
An initial understanding of the design of the entity's internal control systems is
ordinarily obtained by:
✓ Making inquiries of appropriate individuals;
✓ Inspecting documents and records, and
✓ Observing of entity's activities and operations.
After obtaining sufficient knowledge about the design of the system, the
auditor should determine whether theses controls have been implemented.
This is accomplished by performing a “walk-through” test. This task involves
tracing one or two transactions through the entire accounting systems, from
their initial recording at source to their final destination as a component of an
account balance in the financial statements.
• Set Desired Level of Audit Risk
• Assess Inherent Risk
• Asses Control Risk
• Determining Acceptable Level of Detection Risk
Documenting the auditor's understanding of internal control
Subsequent to obtaining sufficient knowledge about the design and
implementation of the internal control, the auditor is required to document his
understanding of accounting and internal control systems. This
documentation need not be in any particular form. The extent of
documentation may vary depending on the size and complexity of the entity
and nature of the entity's internal control systems. Some commonly used
forms of documentation include:
➢ Narrative description of the entity's internal control;
➢ Flowchart that diagrams the flow of transactions and documents; and
➢ Internal control questionnaire providing management's responses to
questions about internal control.
Assessment of Control Risk
After obtaining and documenting the auditor's understanding of the
accounting and internal control systems, the auditor should make a
preliminary assessment of control risk, at the assertion level, for each material
account balance or class transactions. The auditor's preliminary assessment
of control risk may be at high level (100%) or less than high level. If the
auditor concludes that it is more efficient to rely on the entity's internal control
systems, the auditor would plan to assess control risk at less than high level.
For this purpose, the auditor should:
➢ Identify specific internal control policies or procedures that are likely to
prevent or detect and correct material misstatements relevant to financial
statements assertion; and
➢ Perform tests of control to determine the effectiveness of such policies or
procedures.
Performing tests of controls
Irrespective of how effective internal procedures may appear to be in
preventing material misstatements from occurring in the financial statements,
before the auditor can rely on them to reduce substantive tests, the auditor
must test these controls to obtain evidence that they are working effectively
as the preliminary assessment suggests. Test of controls are performed to
obtain evidence about the effectiveness of the:
➢ Design of the accounting and internal control systems; or
➢ Operation of the internal controls throughout the period. It is important to
note that the auditor will only tests the operating effectiveness of controls that
are likely to detect or prevent material misstatements. That is, the auditor will
only test those controls that he/she plans to rely upon.
According to PSA, the auditor should obtain audit evidence through tests of
control to support any assessment of control risk at less than high level.
The lower the assessment of control risk, the more support the auditor should
obtain that the internal control is suitably designed and operating effectively.
Thus, the greater the reliance the auditor plans to place on internal control,
the more extensive the tests of those controls that need to be performed.
*Based on the results of the tests of control, the auditor should evaluate
whether the internal controls are designed and operating as intended. The
conclusion reached as a result of this evaluation is called the assessed level
of control risk.
Documenting the assessed level of control risk
Control Risk at High Control Risk at Less than High
Level Level
Understanding of Internal
Required Required
Control
Conclusion Required Required
Not
Basis for the Conclusion Required
Required
If the control risk is assessed at a high level, auditor should document his
conclusion that control risk is at a high level. If the control risk is assessed at
less than high level, the auditor should document his conclusion that the
risks is less than high and the basis for that assessment.
Communication of Significant Deficiencies in Internal Control
As a result of the auditor's consideration of the accounting and internal control
systems, the auditor may become aware of significant deficiencies in the
entity's internal control systems. In this regard, the auditor is required to report
to the appropriate level of management and those charged with governance,
any significant deficiencies in the internal control systems, which have come
to the auditor's attention. This communication should be in writing and can
be done either before or after the auditor's report on the financial statements
is issued. Regardless of the timing of the written communication of significant
deficiencies, the auditor may communicate these orally. Doing so, however,
does not relieve the auditor of the responsibility to communicate the
significant deficiencies in writing. It is to be emphasized that the auditors
are not required to search for and/or identify internal control deficiencies. The
auditors must, however, communicate significant deficiencies in internal
control to the client when they come to their attention during the course of the
audit. These internal control deficiencies, together with other matters of
concern, are ordinarily communicated to the client in a formal report called
management letter.
PERFORMING SUBSTANTIVE TEST
Substantive tests are audit procedures design to substantiate the accounting
balance or to detect material misstatement in the financial statement. There
are two types of substantive test, namely analytical procedure and test of
details. The decision about which procedure to use is based on auditor’s
judgement about the expected effectiveness and efficiency of such procedure
in satisfying the audit procedure.
Analytical Procedure
it involves analysis of significant ratios and trends, including the resulting
investigation of fluctuation and relationship that are inconsistent with other
relative information or deviate from predicted amounts. A basic premise
underlying the use of analytical procedures is that plausible relationship
among data may reasonably be expected to exist and continue in the
absence of known condition to the contrary. Analytical procedure may be
used in the planning, testing and overall review stages of the audit. Analytical
procedure applied as substantive test enable the auditor to obtain
corroborative evidence about a particular account. This approach involves
comparison of financial information with the auditor’s expectation to determine
the reasonableness of an account balance reported in the financial statement.
When analytical procedures identify significant fluctuations, the auditor should
conduct further investigation to determine whether the financial statement are
materially misstated. This investigation ordinarily begins with the inquiries of
management followed by corroboration of management’s response and other
audit procedure based on the result on the other inquiries. When intending to
perform analytical procedures as substantive test the auditor should focus
on those accounts that are predictable.
Test of Details
Test of details involves examining the actual details making up the various
account balances. This approach may take the form of test of details of
balances or test of details of transaction.
Test of details of balances involves direct testing of the ending balance of
an account, while test of details of transaction involves testing the
transaction which give rise to the ending balance of an account.
Effectiveness of the Substantive Tests
The potential effectiveness of the auditor’s substantive test is affected by its
nature, timing, and extent.
• Nature of substantive test – it relates to the quality of evidence. The
auditor should determine the appropriate quality of the evidence needed to
support the desired level of detection risk.
• Timing of substantive test – it may be performed at interim date or at year
end. Interim procedures are considered less effective due to the incremental
audit risk involve when auditing interim balances. Performing audit procedure
at interim date assist the auditor in identifying significant matters at an early
stage of the audit, and consequently resolving them with the help of the
management or developing an effective audit approach to address such
matters.
• Extent of the substantive test – the extent of the substantive test relates to
the amount of evidence needed to satisfy a particular objective. The extent of
the substantive test is based on the auditor’s judgement after considering the
materiality, the assessed risk, and the degree of the assurance the auditors
plan to obtain.
Relationship between Substantive Test and Test of Control
Test of control provides the evidence that indicates the misstatement is likely
to occur. Substantive test, on the other hand, provide evidence about the
existence of misstatement in an account balance. In expressing an opinion
in the financial statement, the auditor relies on the effectiveness on the
internal control to prevent material errors in the accounting process, and on
substantive test to verify the amount on the financial statement. When
auditing financial statement, auditors would ordinarily perform test of control
simultaneously with the test of details of transaction in order to increase
efficiency in the application of audit tests. This is called dual-purpose testing.
Audit Evidence
The auditor should obtain sufficient appropriate evidence to be able draw
reasonable conclusion on which to base the audit opinion.
Evidence refers to the information obtained by the auditor in arriving the
conclusion on which the audit opinion is based. Audit evidence consist of
underlying accounting data and corroborating information.
• Underlying accounting data – refers to the accounting record underlying
the financial statement. These include books of accounts, related accounting
manuals, worksheet supporting cost allocation and reconciliation prepared by
the client personnel.
• Corroborating information – supporting the underlying accounting data
obtained from client and other sources. This includes documents such as
invoices, bank statement, purchase orders, contracts, check and other
information obtained or developed by the auditor through confirmation,
recalculation, observation and reconciliation.
Qualities of evidence
The auditor should consider the sufficiency and appropriateness of audit
evidence obtained. When performing test of control, audit evidence must
support the assessed level of control risk, when performing substantive test
audit evidence must support the acceptable level of audit risk. At the
conclusion of the audit, the auditor should evaluate whether the sufficiency
and appropriateness of the of evidence from substantive test and test of
control support the financial statement assertions.
• Sufficiency – refers to the amount of evidence that the auditor should
accumulate. Because of the cost/benefit consideration the auditor does not
examine all evidence available. The auditor uses his judgement to determine
the amount of evidence needed to support an opinion on the financial
statements. The following factors may be considered in evaluating the
sufficiency of evidence.
o The competence of evidence – the more competent the evidence, the
less amount of evidence is needed to support the auditor’s opinion.
o The materiality of the item being examined – the more material the
financial statement amount being examined, the more evidence will be
needed to support its validity. Conversely, if the account is not material to the
financial statements, the auditor does not have to perform procedure related
to that account.
o The risk involved in a particular account – the risk of misstatement in a
particular account increase, the more evidence will be needed.
o experience gained during previous audit may indicate the amount of
evidence taken before and whether such evidence was enough.
• Appropriateness – it is the measures of the quality of audit evidence and
its relevance to a particular assertion and its reliability.
o Relevance – it relates to the timeliness of evidence and its ability to
satisfy the audit objectives.
o Reliability – relates to the objectivity of evidence and is influenced by its
source and its nature.

The following generalization could help the auditor in assessing the reliability
of audit evidence:
1. Audit evidence Obtained from independent outside sources.
2. Audit evidence generated internally is more reliable when the related
accounting and internal control system are effective.
3. Audit evidence obtained directly by the auditor is more reliable than
obtained from the entity.
4. Audit evidence in the form of documents and written representation is
more reliable than oral presentation.
Cost/Benefit consideration when obtaining evidence
An auditor work on economic limits. The auditor’s opinion to be economically
useful must be formed within a reasonable period of time and based on
evidence obtained at a reasonable cost. As a guiding rule, there should be a
rational relationship between the cost of obtaining evidence and the
usefulness of the information obtained. Audit evidence does not have to be
conclusive to be useful. The auditor finds it necessary to rely on audit
evidence that is persuasive rather than conclusive in nature and will often
seek audit evidence from different sources or of a different nature to support
the same assertion.
Audit documentation / working papers
The sufficient appropriate evidence required by the professional standards
must be clearly documented in the auditor’s working papers. Working papers
are record kept by the auditor that documents the audit procedures applied,
information obtained, and conclusions reached. PAS 230 requires the
auditors to document matters that are important to support an opinion
on financial statements, and evidence that the audit was conducted in
accordance with PAS.
Functions of the working paper
Working papers are primarily to:
• Support the auditor’s opinion on financial statements.
• Support the auditor’s representation as to compliance with PAS.
• Assist the auditor in planning, performance, review and supervision of the
engagement.
Secondarily, working also assist the auditor in:
➢ Planning future audits.
• Providing information useful in rendering other services (MAS or tax
consultancy).
➢ Providing adequate defense in case of litigation.
Form, Content, and Extent of Audit Documentation
In deciding on these, the auditor should consider what would enable an
experienced auditor,having no previous connection with the audit, to
understand:
a. The nature, timing, and extent of the audit procedures to comply with
PSAs and applicable legal and regulatory requirements
b. The results of the audit procedures and the audit evidence obtained.
c. Significant matters during the audit and the conclusions reached
thereon.
Classification of Working Papers
1. Permanent file – contains information of continuing significance to the
auditor in performing recurring audits. This file would most likely include:
copies of articles of incorporation and by-laws, major contracts, engagement
letter, org. chart, analyses of long-term accounts, etc.
2. Current file – contains evidence gathered and conclusions reached
relevant to the audit of a particular year. This file include: copy of FS, audit
program, working TB, lead schedules, correspondence w/ other parties.
Ownership of working papers
• Working papers are the property of the auditor and the client has no right to
the working papers prepared by the auditor.
• Working papers may sometimes serve as reference source for the client but
they should not be considered as part or as a substitute for the client’s
records.
Confidentiality of working papers
Although the working papers are the personal property of the auditor, these
working papers cannot be shown to third parties w/o client’s permission,
except:
• When disclosure is required by law or when the working papers are
subpoenaed at court.
• When there is a professional right to disclose information such as when the
auditor uses his working papers to defend himself when sued by client for
negligence. Retention of working papers. Working papers should be retained
by the auditor for a period of time sufficient to meet the needs of his practice
and to satisfy any pertinent legal requirements of record retention.
Guidelines for the preparation of working papers.
The following techniques may be used by the auditor:
• heading (to be properly identified with such information such as client name,
type of working paper, content description, period covered)
• indexing (use of lettering or numbering system to identify accounts),
• cross-indexing/cross referencing (to provide a trail in reviewing), tick marks
(symbols to describe the audit procedures performed).
Auditing Accounting Estimates
PSA 540 defines ‘accounting estimate’ is an approximation of the amounts
of an item in the absence of a precise means of measurement.
• The risk of material misstatement is greater when accounting estimates are
involved.
• Management is responsible for making accounting estimates included in the
financial statements.
• The auditor’s responsibility is to obtain sufficient appropriate evidence as to
whether:
Accounting estimate is properly accounted for and disclosed
Accounting estimate is reasonable in the circumstances.
In addition, the auditor may use one or a combination of the following
approaches:
1. Review and test the process used by mgmt. to develop the estimate.
2. Make an independent estimate
3. Review subsequent events which confirm the estimate made.
Related Parties – refers to persons or entities that may have dealings w/ one
another in which one party as the ability to exercise significant influence or
control over the other party in making financial and operating decisions.
Using the Work of an Auditor’s Expert
An expert is a person or firm possessing special skill, knowledge and
experience in a particular field other than accounting and auditing.
PSA 620 identifies two kinds of experts:
➢ Auditor’s Expert – an expert, whose work in his/her field of specialization,
is used by the auditor to assist the auditor in obtaining sufficient appropriate
audit evidence.
➢ Management’s Expert – an expert, whose work in his field of expertise, is
used by the entity to assist in preparing the financial statements.
Effect of the Reliance on Expert’s Work on the Auditor’s Report
The auditor has sole responsibility for the audit opinion expressed and that
responsibility is not reduced by the auditor’s use of the work of an expert.
Thus, the auditor should not refer to the work of an auditor’s expert in an
auditor’s report containing an unmodified opinion. When an auditor’s report
contains a modified opinion, the auditor can make reference to the expert’s
work if the auditor believes that such reference is necessary in order for the
readers to understand the reason of expressing a modified opinion. When this
happens, the auditor should indicate in his report that such reference does not
reduce the auditor’s responsibility for that opinion.
Considering the Work of Internal Auditors
Internal auditing is an appraisal activity established within an entity as a
service to the entity. Considering the work of internal auditor involves two
important phases:
1. Making a preliminary assessment of internal auditing (considering the
competence, objectivity, due professional care, and scope of function of
internal auditors)
2. Evaluating and testing the work of internal auditing – to confirm its
adequacy for the external auditor’s purposes.
The external auditor may also request the assistance of the internal auditors
in performing
routine or mechanical audit procedures.
COMPLETING THE AUDIT
Procedures Included in completing the audit:
1. Identifying subsequent events that may affect the FS under audit.
2. Identifying contingencies such as litigations, claims and assessment.
3. Obtaining written management representation.
4. Performing wrap-up procedures.
 Identifying subsequent events that may affect the FS under audit
Subsequent events are those events or transactions that occur subsequent to
the balance sheet date and may affect the financial statements and the
auditor's report. It may be classified as:
I. Requiring Adjustment - those that provide further evidence of conditions that
existed at the balance sheet date.
II. Requiring Disclosure - those that are indicative of conditions that arose
after the balance sheet date.
PSA 560 states that "The auditor should perform procedures designed to
obtain sufficient appropriate evidence that all events up to the date of the
auditor's report that may require adjustment of/or disclosure in the financial
statements have been identified." These procedures would ordinarily include:
1. Inquiring of management as to the occurrence of subsequent events
2. Reviewing procedures management has established to ensure that
subsequent events are identified
3. Reading the minutes of board of directors and stockholder's meetings after
the financial statement date
4. Reading the latest available subsequent interim financial statements as
well as management reports such as budgets and forecasts
5. Inquiring of the entity's lawyers concerning litigations, claims, and
assessment
Subsequent Events Occurring After the Report Date but Before the Financial
Statements are issued.
• The auditor does not have any responsibility to perform procedures to
identify subsequent events after the date of the auditor's report.
• If the auditor becomes aware of an event occurring after the report date but
before the FS Issuance date, he should take the necessary actions to
ascertain whether such event is has been properly accounted for and
disclosed in the notes to FS.
• Failure on the part of the client to make amendments to the FS, where the
auditor believes they need to be amended will cause the auditor to issue
either QUALIFIED OR ADVERSE OPINION.
Effect of subsequent events on the date of report.
If a material subsequent events requiring adjustment to the FS occurs after
the date of auditor's report but before the FS issuance, the FS should be
adjusted, and the auditor's report should BEAR THE ORIGINAL DATE OF
REPORT(date of completion of audit procedures).
If a subsequent events requiring disclosure occurs after the date of auditor's
report but before the FS Issuance the auditor should consider the adequacy
of the disclosure and the date the report either:
1. As of the date of the subsequent events
2. Dual date of the report (e.g: February 14, 20x2, except for Note 12 dated
March 05,20x2)
 Identifying contingencies such as litigations, claims and assessment.
PSA 501 requires the auditor to carry out procedures in order to become
aware of any litigation and claims involving the entity which may have a
material effect on the financial statements. Some of the effective audit
procedures that can be performed to litigation and claims include:
 Inquiry of management
 Reading minutes of meetings and correspondence with lawyers
 Reviewing legal expense account
The entity's management is the primary source of information about litigation
and claims.
The auditor corroborates the information obtained from management by
sending a letter of audit inquiry to external legal counsel with whom the client
has consulted concerning those matters.
Refusal by the management to give the auditor permission to communicate
with the entity's lawyer or lawyer refuses to reply to the auditor's letter of
inquiry, would be considered a scope limitation that would result to either
QUALIFIED OR DISCLAIMER OF OPINION on the financial statements.
 Obtaining Written Management Representation
• PSA 580 requires an auditor to obtain sufficient appropriate audit evidence
that the entity's management:
 Has acknowledged that it has fulfilled it's responsibility for the preparation
and presentation of fair financial statements
 Has approved the financial statements
Such evidence is acquired by obtaining a written representations from
management. The auditor shall request written representations from
management with appropriate responsibilities for the financial statements and
knowledge of the matters concerned.
• Management written representations complement the audit evidence the
auditor accumulates, but they do not substitute for the performance of audit
procedures designed to obtain necessary evidence for the expression of an
opinion.
• The date of the written representations shall be as near as practicable to,
but not after, the date of the auditor's report
• When management does not provide written representations or the auditor
concludes that there is sufficient doubt about the integrity of management; the
auditor should consider these as scope limitation that would warrant a
disclaimer of opinion.
 Performing Wrap-up Procedures
Wrap-up procedures are those procedures done at the end of the audit that
generally cannot be performed before the other audit work is complete. These
include:
1. Final analytical procedures
2. Evaluation of the entity's ability to continue as a going concern
3. Evaluating audit findings and obtaining client's approval for the proposed
adjusting entries.
 Final Analytical Procedures
- The auditor should apply analytical procedures at or near the end of the
audit
- Analytical procedures applied in the completion phase of the audit should
focus on
1. Assessing the validity of the conclusions reached and evaluating the overall
financial statement presentation
2. Identifying unusual fluctuations that were not previously identified
 Evaluation of the Entity's Ability to Continue as a Going Concern
Management Responsibility - IAS 1 contains an explicit requirement for
management to make a specific assessment of the entity's ability to continue
as a going concern. This assessment should take into account all available
information for the foreseeable future, which should be at least, but is not
limited to, twelve months from the financial statement date.
Auditor's Responsibility - is to consider the appropriateness of management
use of the going concern assumption in the preparation of the financial
statements. For this purpose
1. The auditor should consider whether there are events or conditions which
may cast significant doubt on the entity's ability to continue as a going
concern
2. The auditor should evaluate management’s assessment of the entity's
ability to continue as a going concern.
EFFECT ON THE AUDITOR'S REPORT
• If the going concern assumption is appropriate and no material uncertainties
exist, the auditor may issue an unmodified opinion on the financial
statements.
• If there is material uncertainty about the entity's ability to continue as a
going concern, auditor's report will depend on whether this going concern
uncertainty is adequately disclosed. If the going concern uncertainty is
adequately disclosed, the auditor should issue an unmodified opinion with
separate section "Material Uncertainty Related to Going Concern"
• If the auditor believes that the going concern uncertainty is not adequately
disclosed, the auditor should express either qualified opinion or adverse
opinion.
• If going concern is not appropriate, the financial statements should be
prepared using other appropriate basis. Otherwise, the auditor should express
an adverse opinion.
III. Evaluating Audit Findings and Preparing a list of Potential Adjusting
Entries
If management accepts all the adjusting entries proposed by the auditor, an
unmodified report is issued on the financial statements. On the other hand, if
management refuses to correct the financial statements for these material
misstatements, the auditor should issue a qualified or an adverse opinion.
THE AUDITOR'S REPORT ON FINANCIAL STATEMENTS
The objective of an audit of financial statements is to enable the auditor to
express an opinion about whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting
framework.
 The Unmodified Report
The end product of the financial statements audit is an audit report that
contains the auditor's opinion about the fair presentation of the financial
statements. The most common type of auditor's report contains an unmodified
opinion. This type of opinion is issued when the auditor concludes, based on
audit evidence obtained, that the financial statements are presented fairly, in
all material respects in accordance with the applicable financial reporting
framework.
BASIC ELEMENTS OF THE UNMODIFIED REPORT
KINDS OF OPINION:
1. UNMODIFIED OR UNQUALIFIED OPINION
2. QUALIFIED OPINION
3. DISCLAIMER OF OPINION
4. ADVERSE OPINION
 Modification to the Opinion
The unmodified opinion is issued only when the auditor is satisfied that:
1. The financial statements have been prepared in accordance with the
applicable financial reporting framework such as PFRS
2. The auditor was able to conduct the audit in accordance with PSA.
Failure to meet any of the above requirements will cause an auditor to modify
the opinion on the financial statements.
MATERIAL MISSTATEMENTS / DEPARTURE FROM PFRS
Fair presentation of the financial statements is presumed to have been
achieved whenever the financial statements are presented in accordance with
the applicable financial reporting framework. Needless to say, any departure
from specific requirements of the reporting framework will cause the financial
statements to contain material misstatement.
A material misstatement of the financial statements may arise from:
1. Inappropriate accounting policy selected,
2. Misapplication of selected accounting policy
3. Inappropriate or inadequate disclosure
When the auditor uncovers material misstatements, the auditor should inform
the client of such misstatements and should insist that financial statements be
revised. If management refuses to correct the misstatements, the auditor
should express either a qualified or an adverse opinion depending on the
materiality and pervasiveness of effect of the misstatements on the financial
statements.
SCOPE LIMITATION
Scope limitation arises when the auditor is unable to perform the necessary
audit procedures required by PSA, or the auditor is unable to obtain sufficient
appropriate evidence about an assertion because of the restrictions imposed
by the management or because of limitations brought about by the
circumstances.
Failure to obtain sufficient appropriate evidence will cause the auditor to:
 Express a qualified opinion if the effect is material but not pervasive
 If the effect is both material and pervasive, the auditor may resign from the
engagement or disclaim an opinion on the financial statements.
EMPHASIS OF MATTER AND OTHER MATTER PARAGRAPHS
In some instances, it may be appropriate for the auditor to include additional
paragraphs in the report to emphasize important matters affecting the
financial statements or affecting the auditor's report.
Emphasis of Matter
An emphasis of matter paragraph is included in the audit report to draw the
reader's attention to a matter presented or disclosed in the financial
statements that, in the auditor’s judgement, is of such importance that it is
fundamental to the reader's understanding of financial statements.
Other Matter Paragraph
There are instances when the auditor considers it necessary to communicate
a matter that is not presented or disclosed in the financial statements but, in
the auditor’s judgement, is relevant to user's understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
AUDIT OF CASH AND CASH EQUIVALENTS
Introduction
▪ Cash is one of the most important assets of business
▪ Because of every nature of cash, it is considered a high-risk area or
most vulnerable to misappropriation than other assets
▪ It requires good internal controls and careful monitoring
▪ Due to its high degree of inherent risk, more audit time is devoted to
the audit of the account than is indicated by its peso amount
 Audit Objectives for Cash and Cash Equivalent • When confirming the cash in bank, materiality of the account
balance is not a consideration.
Assertions Audit Objectives • The auditor should also include for confirmation those bank
Existence All cash on the statement of financial position at a given date is accounts that have been closed during the period.
held by entity or by others (ex. a bank) for entity.
Completeness All cash owned by the entity at the reporting date is included on Cash Count Procedures
the statement of financial position. • Assertion addressed: Existence, Valuation and Rights
Valuation and Cash, including bank balances is stated at realizable value and • Performed for cash on hand (undeposited cash receipt, petty cash fund
Allocation agrees with supporting schedules. and change fund).
Rights and The entity owns, or has a legal right to, and has unrestricted • Conducted before or after the reporting date.
Obligation use on all the cash on the statement of financial position at the • Should cover all branches (and if possible, all custodians and tellers).
reporting date. Test of Bank Reconciliation
Presentation Cash, including bank balances, is properly classified,
• Primarily addresses the following assertions: Existence, Valuation,
and described, and disclosed in the financial statement, including
Completeness and Rights
Disclosure notes, in accordance with PFRS.
• Bank reconciliation is customarily prepared on a monthly basis by the
Lines of credit, loan guarantees, compensating balance
client as part of internal control over cash.
agreement, and other restrictions (liens) on cash balances are
• The auditor’s role is to obtain the copy of the bank reconciliation
appropriately identified and disclosed.
prepared by the client.
Tracing Bank Transfer
Audit Procedures for Cash
1. Sending confirmation to banks or financial institutions • It addresses the following assertions: Existence, Completeness,
2. Conducting surprise cash counts Rights.
3. Obtaining and testing bank reconciliation and if appropriate preparing • To detect Kiting. Concealing of cash shortage by taking advantage of
proof of cash the clearing period of checks.
4. Obtaining bank cut-off statement and tracing bank transfers Cash cut-off test
5. Performing cash cut-off test • It addresses the following assertions: Existence, Rights and
6. Checking appropriate valuation of cash Completeness
7. Performing analytical procedures to assess the reasonableness of • To detect the Window Dressing Scheme. (Desire to have a good
reported cash current ratio)
Bank Confirmations Cash Valuation
• Primarily addresses the following assertions: • It addresses the following assertions: Valuation, Presentation and
a. Rights and Obligations Disclosure
b. Existence • Auditor should test the valuation of cash (if there are foreign currencies)
• It also provides evidence about the gross valuation of cash in Determine whether cash is stated at its realizable value
bank.
• It also addresses the search for undisclosed liabilities and
commitments.
 Rights and The entity owns, or has a legal right to all the PPE reported
Analytical Procedures Obligations in the SFP at the reporting date.
• To obtain reasonableness of cash reported in the FS. Presentation PPE and related income accounts are properly classified,
• Compare the listing of cash accounts with those prior periods and and described and disclosed in the FS, including notes, in
investigate any unexpected changes (ex. Credit balances, unusual large disclosure accordance with the applicable PFRS.
balances, new accounts, closed accounts) or absence of expected
changes.
AUDIT PROCEDURES FOR PPE
• Review interest received or paid in relation to the average cash
1. Obtaining a summary analysis of changes in property owned and
balances.
reconcile with ledgers.
• Investigate unusual fluctuations/significant differences.
2. Vouching for additions and disposals (including retirements) of PPE
during the year.
PROPERTY, PLANT AND EQUIPMENT
3. Physical inspection of major acquisition of PPE during the year.
Introduction
4. Examining proof of ownership of PPE.
Property, Plant and Equipment (PPE) are one of the most significant portions
5. Analyzing lease, repair and maintenance expense accounts.
of an entity’s non-current asset; hence, before acquiring PPE, they should be
6. Testing for the accuracy and reasonableness for provision for
carefully planned and analyzed.
depreciation or depletion.
When planning the audit of PPE, the auditor should consider that the amounts
7. Investigating current and potential impairments of PPE.
for this PPE is material to the statement of financial position and expect that
8. Performing analytical procedures for reasonableness of PPE and related
the account balances do not necessary change significantly from year to
expense reported in financial statement.
year.
9. Evaluating financial statement presentation and disclosures for item of
The auditors normally assess control risk at a maximum level and perform
PPE including its related revenue and expense.
extensive substantive tests which emphasize the review of significant
additions and disposal, and analytical procedures to test the provisions for
RECONCILIATION OF SUBSIDIARY LEDGER AND GENERAL LEDGER
depreciation and depletion.
• The primary audit objectives: Valuation & Allocation and Completeness.
• Before doing the detailed analysis of additions, disposals, retirement or
AUDIT OBJECTIVES FOR PPE
any reclassification and depreciation of PPE including capitalized
leases, ensure to tie up the general ledger balances from subsidiary
ASSERTION AUDIT OBJECTIVES
ledger balance.
Existence All recorded PPE on the SFP including assets leased under
finance lease exists.
The reconciliation schedule should normally include:
Completeness All PPE owned and leased under finance lease by the entity 1. Asset description or asset classification.
at the reporting date are included on the SFP.
Valuation and PPE is carried at the appropriate amount taking into account 2. Cost of each asset or asset classification, including the opening
Allocation the requirements of PAS 16 PPE and PAS 36 Impairment of balances at the beginning of the year, any additions and disposals,
Assets. retirement and the balance at the end of the year (LAPSING
SCHEDULE see table 1).
 3. Accumulated depreciation, showing:
• Beginning balance of the year;
• Debts to accumulated depreciation due to transfers,
derecognition and reversals;
• Depreciated book value before the current year depreciation, if
the provision is based on the declining balance;
• Depreciation or depletion rate for each asset classification;
• Depreciation or depletion expense for the year; and
• Balance at the end of the year.
EXAMINATION OF ANY ADDITION OR DISPOSAL
• The primary audit objectives: Existence, Valuation and Rights
• After general and subsidiary ledger reconciliation, vouching of additions
and disposals including retirements should be performed.
• Vouching is one of the important substantive tests for PPE.
• Extent of vouching is dependent upon the auditor’s assessment of
control risk for the existence and valuation of PPE.
How to perform vouching for additions?
1. Check any additions by purchase.
2. Check for any construction of assets and its related costs that should be
capitalized (PAS 16 PPE and PAS 23 Borrowing Cost).
3. Addition from donations.
4. Generally, vouching is 100%.
What documents to check?
1. For acquisition of property, examine the capital expenditure
authorization and purchase agreement, contract deeds, cancelled
checks, and other important documentation. The auditor should ensure
all costs of acquisition are included in the PPE account.
2. For other additions, check the purchase orders, capital expenditure
authorization, contracts, architect’s certificates, legal correspondence,
supplier’s invoices, cancelled checks, etc.
3. For cost incurred related to PPE (ex. Land improvements, building
improvements, major repairs, etc.), the auditor should examine the
supporting invoices and check whether the acquisition represents capital
expenditures based on the capitalization policy of the entity.
4. For PPE under construction:
• Check that additions are properly approved and authorized.
• Verify the change in Construction in Progress (CIP) account by
examining contractor’s progress billings, labor charges, and other
important documents.
• Check that all costs incurred up to the reporting date and any
withholding payments have been properly recorded.
• Test calculation of capitalized borrowing costs (interest,
appropriate rate, amounts and capitalization periods used, and
whether these are in accordance with the entity’s capitalization
policy).
• Review and calculate the allocation of overhead charges
attributable to construction.
• Compare the total cost of self-constructed equipment with bids or
estimated purchase prices for similar equipment from outside
supplier, savings on construction should not be recognized.
• Trace transfers from the Construction in Progress (CIP) account
observing proprietary of classification.
5. For assets leased under Finance lease, the auditor should ensure that
the capitalized amount is in accordance with PFRS 16 Leases by
performing the following:
• Obtain a copy of the lease contract and examine the terms to
verify that the lease meets the criteria of finance lease;
• Recompute the PV of the minimum lease payments;
• Review the FV of assets leased;
• Check whether the capitalized value is the lower of the FV of the
leased asset and PV of the minimum leased payments.
DISPOSAL/RETIREMENT EXAMINATION
The main purpose of checking any disposal or retirement of PPE is to determine
whether any PPE has been:
• Replaced
• Sold
• Dismantled
• Abandoned
… without such being reflected in the accounting records.
The auditor typically includes the following procedures to discover
unrecorded retirements of disposals:
• Inquire of executives and supervisors of PPE retirements or disposals
during the year.
• For new additions, determine the status of old asset whether this
represents a replacement of old asset.
• When verifying PPE acquisitions, check for any trade-in credits received
and then check that the related asset trade-ins are recorded in the
disposals of the year.
• Analyze miscellaneous revenue account for cash proceeds from sale of
PPE.
PHYSICAL INSPECTION OF MAJOR ADDITIONS OF PPE
• The primary audit objectives: Existence and Completeness
• Ocular inspection
The number of PPE needs to be inspected will depend on:
a. Risk of material misstatement
b. Number of PPE consideration
• How to perform?
a. Floor-to-list procedure (completeness)
b. List-to-floor procedures (existence)
EXAMINE EVIDENCE OF LEGAL OWNERSHIP OF PPE
• The primary audit objectives: Rights and Obligations
• Check the proof of ownership such as:
a. Deeds of property, land/lot title (real estate)
b. Vehicle registration documents
• The auditor should also inquire with the management of any restriction
on this item of PPE as they may be used as collateral for loan.
ANALYZE LEASE, REPAIR AND MAINTENANCE EXPENSE ACCOUNTS
• The primary audit objectives: Valuation & Allocation, Completeness and
Classification
• This procedure is to ensure that all capital expenditure should have not
been included in the expense accounts
a. Lease expense – check the terms of the lease contracts
(operating lease).
b. Repairs and Maintenance expense – check the written
policy regarding capitalization of capital expenditures.
TEST THE PROVISION FOR DEPRECIATION OR DEPLETION
• The primary audit objectives: Valuation & Allocation and Accuracy
• Depreciation/ Depletion are examples of accounting estimate and PSA
540 requires that in evaluating accounting estimates, auditors first obtain
in understanding of the client’s process and controls in developing
accounting estimates.
• In auditing depreciation/depletion, the auditor’s objective is to obtain
sufficient appropriate evidence about whether:
a. Depreciation/Depletion are reasonable
b. Related disclosures are adequate
How to audit?
1. Review the company manuals discussing the depreciation policy.
2. Obtain or prepare a summary of analysis of accumulated depreciation:
a. Compare the beginning balances with the audited amounts in
last year’s working papers; and
b. Determine if the totals of Accumulated depreciation recorded
in the subsidiary ledger of PPE agrees with the general ledger
record.
3. Test the provision for depreciation
a. Assess the reasonableness of the depreciation methods and
rates by comparing it from last year and investigate any
material difference.
b. For assets acquired or disposed during the year, check
whether depreciation was provided based on the accounting
policy of the company.
c. Perform independent recalculation.
d. Compare credits to accumulated depreciation for the year with
the debits to depreciation expense.
4. Test deductions from accumulated depreciation for assets retired.
a. Trace deductions to the working paper analyzing retirements
of assets during the year; and
b. Test the accuracy of accumulated depreciation to date of
retirement.
 5. Perform analytical procedures
a. Compute the ratio of depreciation expense to total cost of PPE
compare with prior years.
b. Compare the percentage relationships between accumulated
depreciation and the related property accounts with those in
prior years.
c. Inquire with management any significant variations from the
normal depreciation.
EXAMINE IMPAIRMENTS OF PPE
• The primary audit objectives: Valuation & Allocation
• PAS 36 requires that an entity should review assets for impairment
whenever events pr changes in circumstances indicate that carrying
amount may not be recoverable.
• Management should recognize impairment loss if the carrying amount
of PPE is less than its recoverable amount.
How to perform?
1. Evaluate the appropriateness of the valuation model and assumptions
used;
2. Assess the reasonableness of management’s estimates; and
3. Evaluate the accuracy, completeness and the relevance of the important
data on which the estimates or measurements are based.
PERFORM ANALYTICAL PROCEDURES
• The primary audit objectives: Existence, Rights & Obligations,
Completeness and Valuation & Allocation
How to perform?
1. Ratio analysis
a. Total cost of PPE divided by annual output in pesos, pounds
or other units
b. Total cost of PPE divided by COGS
c. Total depreciation expense divided by total cost of PPE
2. Trend analysis
a. Comparison of repairs and maintenance expenses on a
monthly basis and from year to year;
b. Comparison of acquisitions for the current and previous year
c. Comparison of retirements for the current and previous year
EVALUATE THE FINANCIAL STATEMENT PRESENTATION AND
DISCLOSURE
• The primary audit objectives: Presentation and Disclosure
• Under PAS 16, the following each class of PPE should disclose the
following:
a. Basis for measuring carrying amount
b. Depreciation method used
c. Useful lives or depreciation rates used
d. Gross carrying amount and accumulated depreciation and
impairment losses at the beginning and end of the period
e. Reconciliation of the carrying amount at the beginning and
end of the period
f. Restrictions on title
g. Expenditures to construct PPE during the period
h. Commitments to acquire PPE
i. Compensation from third parties for items PPE that were
impaired, lost or given up that is include in P/L.
• The auditor should also be satisfied that any revaluation surplus should
be properly presented as part of “Other Comprehensive Income” in
the Statement of Comprehensive Income.
• Items of PPE are presented as noncurrent asset in a line item in the
SFP as “Property, Plant and Equipment”.
Accounting for agriculture
• Biological Assets – living animals and living plants (used/ related to
agricultural activities)
• Agricultural Produce- harvested products of an entity’s biological asset
✓ Harvest- detachment of produce from a biological asset or the cessation of
biological assets processes.
• Applicable standard (normally IAS 41 if biological assets)
o Agricultural Produce
▪ IAS 41: Agriculture- at the point of harvest and measured through FVLCTS
▪ IAS 2: Inventories- after harvest (reporting date), and measured through
(LCNRV)
• Examples of agricultural produce that become inventories
 agricultural Presentation of biological asset
Bio assets inventories
produce
Sheep wool yarn Non-current assets
Trees in plantation
felled trees logs/ lumber • Property, Plant and Equipment – would include bearer plants
forest
Dairy cattle milk milk/ cheese • Biological assets – would include all agricultural produce to be harvested
Pigs carcass sausage, ham more than 12 months from the reporting date, livestock to be held for more
IAS 41 IAS 41 AIS 2 than 12 months and trees cultivated for lumber and fruit.

Recognition (biological Assets) Current assets

IAS 41 specifies the usual tests in order that a biological asset or agricultural
produce be • Biological assets – would include produce to be harvested within 12
recognized on the statement of financial position, namely: months of reporting date, livestock to be slaughtered within 12 months and
✓ Control annual crops
o eg wheat, maize
✓ Value
• Inventories – includes the inventories produced from agricultural produce
✓ Measurement o eg the Tea to be sold, produced from the tea leaves
Measurement Specialized Industry
Biological assets should be measured at initial recognition, and at the end of • PAS 41 Agriculture/Biological assets are under on specialized industries
each • Specialized industry is not necessarily rare or even unusual
reporting period, at fair value less estimated costs to sell. • What makes agriculture specialized is that:
❖ Cost to sell (cost of disposal)- Incremental cost directly attributable to the a. They are likely either to have specific financial reporting standards
disposal of applicable to them, or;
the asset b. Have a distinct accounting policy which have been developed to account
o Commissions for specialized transactions and balances which are based on the normally-
o Tax (transfer tax and duty) applied financial reporting standard.
o Transport cost Examples: PAS 41 Agriculture (For Agricultural Sector), PFRS 6 Exploration
Excluded in cost to sell of Evaluation of Mineral Resources (For Mining Sector), and PFRS 17
× Finance cost Insurance Contracts (For insurance Company)
× Income tax
CHARACTERISTICS OF SPECIALIZED INDUSTRIES
IAS 41 does not apply to: • High Risk
• Agricultural Land • Strict and several compliances to law and government agencies and its
• Animals that are related to recreational activities regulations (For Agriculture, Department of Agriculture)
• Bearer plants • Complex accounting
 Illustrative Problem 2: Neil Company is engaged in raising dairy livestock.
AUDIT CONSIDERATIONS The entity provided the following information during the current year:

1. COMPETENCE Carrying amount on January 1 P 5,000,000

- Audit firm, Audit team, or Audit partner needed competence in handling audit Increase due to purchases 2,000,000
engagement Gain arising from change in FVLCTS attributable to price change 400,000
a. Knowledge of relevant industries and, Gain arising from change in FVLCTS attributable to physical change 600,000
b. Has experience with relevant regulatory or reporting requirements Decrease due to sales 850,000
c. The ability to gain the necessary skills and knowledge effectively Decrease due to harvest 200,000
What is the carrying amount of the biological assets on December 31?
3. AUDIT PLANNING CONSIDERATIONS a. 6,950,000 b. 6,000,000 c. 8,000,000 d. 7,150,000
- Identification of the risk of material misstatement in specialized
industry should be approached in the same way was as in any
other audit- by obtaining appropriate understanding of the business Fighting!!! GOODLUCK
and its environment. Please Finish Me Hahahahhhhh:>
- It is also important to remember that while there may be specific
Read and Understand Me Please:>>
risk of material misstatement relating to the industry-specific
balances and transactions, there must also be appropriate
consideration of the normal balances and transactions.
3. RELIANCE ON EXPERTS
- The auditor may plan to use and auditor’s expert to obtain audit
evidence.
- The audit firm may not have the necessary specific expertise in some
areas.

Illustrative Problem 1: Pepper Company provided the following assets in a

forest plantation and farm:

Freestanding Trees P 5,000,000

Land under trees 600,000
Road in forests 300,000
Animal related to recreational activities 1,000,000
Bearer Plants 1,500,000
Bearer Animals 2,000,000
What total amount of the assets should be classified as biological assets?
a. 7,000,000 b. 8,500,000 c. 5,000,000 d. 8,000,000