Acct 151

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Auditing and Assurance Principles
Fundamentals of Auditing and Assurance Services
Objectives:
1. Define assurance services/engagements and identify the types of assurance engagements.
2. Distinguish assurance services against non-assurance services.
3. List examples of non-assurance services. Compare and contrast.
4. Define auditing and identify the scope of an audit.
5. Discuss the purpose and limitations of an audit.
6. Identify the generally accepted auditing standards.
Introduction
the accounting
We are world’s answerinto
now stepping to the
the world
question "whoAuditing
of audit. watches isthe watchers?".
one of the fieldAuditors are theprofession.
of accounting accountants
who verify the accuracy of other accountants' work. On that note we can say that, there is nothing to audit if
there are no available accounting records.
Being in the auditing profession requires an in-depth knowledge of accounting. More than that, you
have to throw in a lot of knowledge in the standards as a matter of compliance, a constant attitude of
professional skepticism, an ethical mindset, and of course, it requires discipline to render your report on
time.
Before we go through the audit process, let us first study the core concepts of auditing and its salient
features. Brace yourself with a whole lot of readings.
Activity
1-1. CPAs become involved in a variety of types of engagements. For each of the following statements,
indicate whether it relates to an examination (E), review (R), or agreed-upon procedures (A)
engagement. If the statement does not relate to examinations, reviews, or agreed-upon procedures,
reply N.
Statement Type of Engagement

a. When financial statements are involved, this is referred to as an
audit.
b. The term “We are not aware of any material modifications that
should be made” is often included in the report.
c. The report issued provides a summary of procedures followed and
findings.
d. The report issued provides “reasonable assurance.”
e. The procedures involved are generally limited to inquiry and
analytical procedures.
f. The report issued provides “absolute assurance.”
g. The report issued provides “limited assurance.”
h. The procedures followed are agreed upon with the specified user
or users.
i. This type of engagement provides more assurance than a review.
j. The CPA need not be independent to perform this service.
1-2. Match the following definitions of the various types of services to the appropriate service. Each service
may be used once or not at all.
Agreed-upon procedures engagement

Assurance services
Attest engagement
Audit of financial statements
Compliance audit
Examination
Integrated audit
Operational audit
Review
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a. An attest engagement in which the CPAs agree to perform procedures for a specified party and issue a report
that is restricted to use by that party.
b. An engagement designed to express limited assurance relating to subject matter or an assertion.
c. An engagement in which the CPAs issue an examination, a review, or an agreed-upon procedures report
on subject matter or an assertion about subject matter that is the responsibility of another party (e.g.,
management).
d. An examination designed to provide an opinion that is the CPA’s highest level of assurance that the
financial statements follow generally accepted accounting principles, or another acceptable basis of
accounting.
e. As required by the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board, an audit
that includes providing assurance on both the fi nancial statements and internal control over financial
reporting.
f. Professional services that enhance the quality of information, or its context, for decision makers.
g. An attest engagement designed to provide the highest level of assurance that CPAs provide on an assertion.
1-1. Answers: E R A E R N R A E A
Analysis
1. Explain the objective of assurance engagement in general.

2. What are the elements of assurance engagements?
3. Identify the types of assurance engagements.
4. What is the difference between assurance services and audit?
5. What are the components of assurance engagement risk?
6. What are the responsibilities of an auditor and the management?
7. What is the scope of an audit?
8. Why is there a demand for audit?
9. Enumerate the general types of audit.
10. Explain the concept of reasonable assurance.
11. What are the Generally Accepted Auditing Standards?
12. Compare the standards of fieldwork and standards of reporting.
13. Differentiate GAAP and GAAS.
14. Analyze the nature and system of quality control.
15. What are the elements of the system of quality control?
Abstraction
APPLICABLE STANDARDS:
Assurance Services/Engagements:
✓ Glossary of Terms (December 2002)
• Assurance services – independent professional services in which a practitioner issues a written
✓ IAASB – Interim Terms of Reference (August 2004)
communication that expresses a conclusion designed to enhance the degree of confidence of the
✓ Philippine Framework for Assurance Engagement
intended users other than the responsible party about the outcome of the evaluation or measurement
✓ of
Preface to International
a subject Standards
matter against criteria and Philippine Standards
•✓ PSA 120 - Framework of Philippine
Assurance engagement – an engagement Standards
in on Auditing
which a practitioner expresses a conclusion designed
✓ to
Amendments to PSREs 2400 and 2410 - Amendments
enhance the degree of confidence of the intended users to PSRE 2400
other - Engagements
than to Review
the responsible party about the
Financial Statements, and PSRE 2410 - Review of Interim Financial Information
outcome of the evaluation or measurement of a subject matter against criteria Performed by
the Independent Auditor of the Entity
✓ PSRE• 2400
Assurance services
(previously 910)improve the quality
- Engagements of information
to Review Financial for decision-making.
Statements (previously PSA 910)
• Assurance refers to the practitioner’s satisfaction as to the reliability of an assertion being
✓ PSAE 3000 (Rev.) – Assurance Engagements Other Than Audits or Reviews of Historical
made by one party for use by another party; it is the degree of certainty the practitioner
Financial Statments
has attained and wishes to convey to intended users
• Independence is required whenever a professional accountant performs
assurance services.
Objective of an Assurance Engagement, In General:
Assurance engagements performed by professional accountants are intended to enhance the credibility
of information about the outcome of the evaluation or measurement of a subject matter against criteria,
thereby improving the likelihood that the information will meet the needs of an intended user. Assurance
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engagements enhance the degree of confidence of the intended user because the quality of information for
decision making is improved.
Objective of Assurance Engagements:
According to the Philippine Framework for Assurance Engagements, an assurance engagement is

conducted:
a. To provide a high level of assurance that the subject matter conforms in all material respects with
identified suitable criteria; or
b. To provide a moderate level of assurance that the subject matter is plausible in the circumstances.
Types of Assurance Engagements and their Objectives:
1. Reasonable assurance engagements – engagements that provide high, but not absolute, level of
assurance
• Also called high-level engagements
• The objective of a reasonable assurance engagement is a reduction in assurance engagement
risk to an acceptably low level as the basis for a positive form of expression of the
practitioner’s conclusion.
• Reasonable assurance is achieved if assurance engagement risk is reduced to an
acceptably low level (close to zero).
• For assurance engagements regarding historical financial information in particular,
reasonable assurance engagements are called audit engagements. An audit
engagement
is an assurance engagement to provide a high level of assurance that the financial
statements are free of material misstatement. This high level of assurance is expressed
positively in the audit report as “reasonable assurance”.
• Absolute assurance is not attainable:
In assurance engagements, absolute assurance is generally not attainable because of
such factors as:
→ Use of judgment
→ Use of testing
→ Inherent limitations of internal control
→ Most evidence available to the practitioner is persuasive rather than conclusive
2. Limited assurance engagements – engagements that provide only a “moderate” or “limited” level
of assurance
• The objective of a limited assurance engagement is a reduction in assurance engagement risk to
an acceptable level as the basis for a negative form of expression of the practitioner’s conclusion.
Thus, the risk in limited assurance engagement is greater than for a reasonable assurance
engagement.
• Moderate assurance is achieved if assurance engagement risk is reduced to an

acceptableRisk:
Assurance Engagement level.
• For assurance engagements regarding historical financial information in particular,
• limited
Assurance assurance
engagement engagements
risk is the risk are
thatcalled review engagements.
the practitioner expresses an inappropriate conclusion
when the subject matter information is materially misstated.
• Components of assurance engagement risk:
1. Risk of material misstatement − the risk that the subject matter is materially misstated
a. Inherent risk – the susceptibility of the subject matter information to a material misstatement,
assuming that there are no related controls
b. Control risk – the risk that a material misstatement that could occur will not be prevented, or
detected and corrected, on a timely basis by related internal controls
2. Detection risk – the risk that the practitioner will not detect a material misstatement that exists
Assertion-based and Direct Reporting Engagements:

1. Assertion based engagements – evaluation or measurement of the subject matter is performed by the
responsible party, and the subject matter information is in the form of an assertion by the responsible
party that is made available to the interested users
• Assertion-based engagements are also known as attestation engagements
• Examples of assertion-based engagements:
a. Audit engagements
b. Review engagements
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In an assertion-based engagement, the practitioner’s conclusion can be worded in terms

of the responsible party’s assertion. For example:
“In our opinion the responsible party's assertion that internal control is effective,
in all material respects, based on XYZ criteria, is fairly stated”
2. Direct reporting engagements – the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that has
performed the evaluation or measurement that is not available to the intended users
In a direct reporting engagement, the practitioner’s conclusion is worded directly

in
Range of Assurance Engagements:
terms of
a. Engagements to the subject
report on a matter and the
broad range criteria.matters
of subject For example:
covering financial and non-financial
information
“In our opinion internal control is effective, in all material respects, based on
b. Attest and direct reporting engagements
XYZ criteria”
c. Engagements to report internally and externally, and
d. Engagements in the private and public sector
Examples of Assurance Engagements:
1. Audits of financial statements

2. Examination of prospective financial statements
3. Reporting on compliance with laws, rules and regulations
4. Other assurance services:
a. CPA risk advisory
b. Business performance measurement services
c. Health care performance measurement services
d. Elder Care Plus
e. Risk Assessment Services
f. CPA Web Trust Service
g. Information Systems Reliability
Requirements before a practitioner can accept an assurance engagement:
Only where the practitioner’s knowledge of the engagement circumstances indicates that:
1. Relevant ethical requirements, such as independence and professional competence will be satisfied;
and
2. The assurance engagement exhibits all of the following characteristics:
a. The subject matter is appropriate
b. The criteria to be used are suitable and are available to the intended users
c. The practitioner has access to sufficient appropriate evidence to support the practitioner’s
conclusion;
d. The practitioner’s conclusion, in the form appropriate to either a reasonable assurance
engagement or a limited assurance engagement, is to be contained in a written report, and
e. The practitioner is satisfied that there is a rational purpose for the engagement.
Elements of Assurance Engagements:
Not all engagements performed by practitioners are assurance engagements. An assurance engagement
must have the following elements:
1. Three party relationship (involving a practitioner, a responsible party and intended users)
2. Appropriate subject matter
3. Suitable criteria
4. Sufficient appropriate evidence
5. Written assurance report in the form appropriate to a reasonable assurance engagement or a
limited assurance engagement
Three Party Relationship:

a. Practitioner – CPA in public practice who performs the assurance engagement.
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The term practitioner is broader than the term “auditor” as used in professional
standards,
which only refers to practitioner performing audit or review engagements with respect to
historical financial information.
b. Responsible party – person/s who is responsible for the subject matter or the assertion (subject
matter information)
For example, an entity’s management is responsible for the preparation and presentation of financial
statements or the establishment and implementation of internal control.
c. Intended user/s – person, persons or class of persons for whom the practitioner prepares the
assurance report; they are the users to whom the practitioner usually addresses the report
Responsible party and intended user:
• The responsible party and the intended users may be from different entities or
the same entity.
• The practitioner may be engaged by the responsible party or the intended user.
• The responsible party can be one of the intended users, but not the only one.
• Whenever practical, the assurance report is addressed to all the intended users,
but in some cases there may be other intended users. In cases where the CPA may
not be able to identify all intended users, intended users may be limited to major
stockholders with significant and common interests.
• In some circumstances, the intended user may be established by law.
• The responsible party may also be one of the intended users.
• The intended user may be established by agreement between the practitioner and
responsible party or those engaging or employing the practitioner.
Appropriate Subject Matter:
Subject matter refers to the information to be evaluated or measured against the criteria. Subject matter
information means the outcome of the evaluation or measurement of a subject matter.
Subject matter in an audit of financial statements:

Requirements for subject matter to be considered appropriate:
• Subject matter includes the financial position, financial performance and cash flows of
the entity
a. Identifiable
b. • Capable
Subject
of matter information
consistent evaluation is the
andset of financial statements
measurement against suitable criteria
c. • In the
Responsible
form thatparty
can beis subjected
the client/entity management
to procedures for gathering evidence to support that
evaluation or measurement.
Forms of subject matter of an assurance engagement:

1. Financial performance or conditions (for example, historical or prospective financial position,
financial performance and cash flows) for which the subject matter information may be the
recognition, measurement, presentation and disclosure represented in the financial statements
2. Non-financial performance or conditions (for example, performance indicators of an entity) for
which the subject matter information may be key indicators of efficiency and effectiveness
3. Physical characteristics (for example, capacity of a facility) for which the subject matter
information may be a specifications document
4. Systems and processes (for example, entity’s internal control or IT system) for which the subject
matter information may be an assertion about effectiveness
5. Behavior (for example, corporate governance, compliance with regulation, human resource
practices) for which the subject matter information may be a statement of compliance or a
statement of effectiveness
Suitable Criteria:
Criteria refer to the standard or benchmark used to evaluate or measure the subject matter of an
assurance engagement, including, where relevant, benchmarks for presentation and disclosure. Without
frame of reference provided by suitable criteria, any conclusion is open to individual interpretation and
misunderstanding.
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Five characteristics of suitable criteria:
a. Relevance – relevant criteria contribute to conclusions that assist decision-making by the

intended users
b. Completeness – criteria are sufficiently complete when relevant factors that could affect the
conclusions in the context of the engagement circumstances are not omitted. Complete criteria
include, where relevant, benchmarks for presentation and disclosure.
c. Reliability – reliable criteria allow reasonably consistent evaluation or measurement of the
subject matter when used in similar circumstances by similarly qualified practitioners
d. Neutrality – neutral criteria contribute to conclusions that are free from bias
e. Understandability – understandable criteria contribute to conclusions that are clear,
comprehensive, and not subject to significantly different interpretations
Two types of criteria:

1. Established criteria – are those criteria that are embodied in laws or regulations or issued by
authorized or recognized bodies of experts that follow a transparent due process Examples:
2. Specifically developed criteria – those criteria specifically designed for the purpose of the
engagement
Whether criteria are established or specifically developed affects the work that the
practitioner carries out to assess their suitability for a particular engagement.
Examples of suitable criteria:
• Applicable financial reporting framework which is the Philippine Financial

Reporting Standards (PFRS) – in case of audit of financial statements
• Applicable law or regulation or contract – in case of compliance audit
• Established internal control framework or stated internal control criteria – in case
of report on internal control
Availability of criteria to intended users:
Criteria need to be made available to the intended users in one or more of the following
ways:
a. Publicly
b. Through inclusion in a clear manner in the presentation of the subject matter
information
c. Through inclusion in a clear manner in the assurance report
d. By general understanding, for example, the criterion for measuring time in hours
Sufficient Appropriate Evidence:
The practitioner shall plan and perform the engagement with an attitude of professional skepticism to
obtain sufficient appropriate evidence that the assertions are free of material misstatements.
• Professional skepticism – an attitude that includes a questioning mind, being alert to

conditionsReport:
Written Assurance
which may indicate possible misstatement due to error or fraud, and a critical assessment
A written assurance report should be in the form appropriate to a reasonable assurance engagement or a
of evidence
limited •assurance engagement.
Evidence – refers to the information obtained by the practitioner in arriving at the conclusions
on which the conclusion is based
The• practitioner
Sufficiencyshould provide
– refers a writtenofreport
to the measure containing
the quantity a conclusion that conveys the assurance
of evidence
obtained about
Appropriateness – refers to the measure of the quality ofpractitioner
the subject matter information. In addition, the considers other reporting
• evidence, that is, its relevance and
responsibilities, including communicating with those charged with governance when it is appropriate to do
so.
Levels of assurance provided in the written report:
Type or level of Form of Example

assurance conclusions
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Reasonable Positive form of “In our opinion internal control is effective, in

assurance expression of the all material respects, based on XYZ criteria.”
practitioner’s
conclusion
Limited assurance Negative form of “Based on our work described in this report,
expression of the nothing has come to our attention that causes us to
practitioner’s believe that internal control is not effective, in all
conclusion material respects, based on XYZ criteria.”
Attestation Services:
An attestation service is a type of assurance service in which a practitioner is engaged to issue a written
communication that expresses a conclusion about the reliability of a written assertion that is the
responsibility of another party. Attestation generally refers to an expert's written communication of a
conclusion about the reliability of someone else's assertions.
The subject matter of attestation services include:
• Financial and non-financial in nature

• Future-oriented financial information (such as the examination of prospective financial information)
• Management's discussion and analysis
• Effectiveness of internal control
• Compliance with statutory, regulatory, and contractual obligations
Relationships among Auditing, Attestation, and Assurance Services:
a. Similarity: These services are often used interchangeably because they encompass the same
decision-process
b. Main difference/distinction: Scope of services
• “Assurance services” is broader in scope and in concept than either auditing or attestation. It
encompasses both audit and attestation services. Otherwise stated, attestation and audit services
are subsets of assurance services.
• “Attestation services” is broader than audit because attest function is beyond historical FS.
Attestation services cover even non-GAAP FS.
• Auditing, particularly FS audit, is a type of assurance and attestation service that involves
examination of historical FS prepared in accordance with GAAP.
Non-assurance Engagements:
Not all engagements are assurance engagements. Other engagements performed by practitioners that
do not meet the definition of assurance engagement are classified as non-assurance engagements or services.
Non-assurance engagements are those that do not result in the practitioner’s expression of a conclusion that
provides a level of assurance, whether negative assurance or other form of assurance. The practitioner does
not convey to the intended users any assurance as to the reliability of an assertion.
The practitioner’s primary purpose for performing non-assurance services is to provide advice and
technical assistance that will enable a client to conduct its business more effectively.
Examples of non-assurance engagements:
1. Related services, such as:

a. Agreed-upon procedures engagements, and
b. Compilations of financial or other information engagements
2. Tax services (such as the preparation of tax returns where no conclusion conveying assurance is
expressed)
3. Consulting (or advisory) engagements, such as management and tax consulting
Agreed-upon Procedures Engagements:

• Objective of agreed-upon procedures engagements: For the auditor to carry out procedures of an
audit nature as agreed by the auditor and the entity and any appropriate third parties and to report
on factual findings
• No assurance is expressed in the report: The users/recipients of the report assess for themselves
the procedures and findings reported by the auditor and form their own conclusions from the report
by the auditor.
• Distribution of report is restricted: The report on agreed upon procedures engagement is
restricted to those parties that have agreed to the procedures to be performed since others who are
unaware of the reasons for the procedures may misinterpret the results.
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• According to PSRS 4400, the report on an agreed-upon procedures engagement needs to describe
the purpose and the agreed-upon procedures of the engagement in sufficient detail to enable the users
of the report to understand the nature and extent of the work performed.
Compilation of Financial or Other Information Engagements:
• Objective of compilation engagements: For the accountants to use accounting expertise, as

opposed to auditing expertise, to collect, classify and summarize financial information. Compilation
engagements ordinarily include preparation of financial statements.
• No test of assertions: A compilation engagement ordinarily entails reducing detailed data to a
manageable and understandable form without a requirement to test the assertions underlying that
information.
• No assurance is expressed in the report: The procedures employed are not designed to enable
the accountant to express any assurance on the financial information.
• Benefit to users: Users of the compiled financial information derive some benefit as a result of the
accountant's involvement because the service has been performed with professional competence
and due care.
Tax Services:
1. Tax compliance – includes the preparation of tax returns (for individuals, corporations, estates and
trusts, and other entities) and acting as client’s representative to tax authorities or in tax litigations
2. Tax planning – includes the determination of the tax consequences of planned or potential transactions
(legally minimizing client’s tax liability) followed by making suggestions on the most desirable course
of action
Management Consulting:
Management advisory (consulting) services – refers to the function of providing professional advisory
(consulting) services, the primary purpose of which is to improve client’s use of its capabilities and resources
to achieve the objectives of the organization. Advisory (consulting) services are professional services that
provide advice and assistance to clients by improving their condition directly. Advice or assistance to clients
may cover the entity’s organization, operations, risk management, systems design and implementation,
process personnel, corporate finances, or other activities.
A pervasive characteristic of a CPA’s role in a consulting services engagement is that of being an

objective advisor on the use of information.
Assurance Services vs. Consulting Services:
Although assurance services and consulting services have basic similarities in terms of knowledge
employed and exercise of skills, they can be distinguished as follows:
Points of distinction Assurance services Consulting services
Primary purpose To improve quality or context of To recommend uses for

information by enhancing its information for better outcomes
credibility
Number of parties 3 parties 2 parties: the CPA and the client
Focus Decision makers and
information they used for
optimum decisions Outcomes
Output's objective Intended to improve decision Designed to improve client’s

maker’s condition only condition directly through
indirectly through the use of findings, conclusions and
high-quality information recommendations
Competing interests May exist between management No competing interests
and users of financial statements
Form of communication Written report Either written or oral
with the client communication
Comparative Examples of Assurance and Non-Assurance Services:

Categories of Services / Engagements
Assurance Services Non-Assurance Services
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Audit Review Other assurance
1. Audit of FS 1. Review of FS 1. Examination of 1. Agreed-upon procedures

prospective FS 2. Compilation of financial or other
information
2. Audit of internal 2. Review of interim 3. Preparation of tax returns when no
control over financial 2. CPA risk conclusion is expressed
financial reporting information advisory 4. Consulting or advisory services:
• Tax consulting
• Management consulting
• Other advisory services
Levels of Assurance for Audit, Review, Agreed-upon Procedures and Compilation
The basic distinction between audit, review and related services is the level of assurance provided by
the auditor in the engagement.
Assurance refers to the practitioner’s satisfaction as to the reliability of an assertion being made by one
party for use by another party. The level of assurance is the degree of the practitioner’s satisfaction or
degree of certainty the practitioner has attained and wishes to convey to intended users. Such level or
degree of assurance depends on the procedures performed and the evidence collected by the practitioner.
Engagements and level of assurance:

1. Audit: The auditor provides a reasonable (high, but not absolute) level of assurance that the
information subject to audit is free of material misstatement. This is expressed positively in the audit
report as reasonable assurance.
2. Reviews: The auditor provides a moderate/limited level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of negative assurance.
3. Agreed-upon procedures: No assurance is expressed. The auditor simply provides a report of the
factual findings. Users of the report assess for themselves the procedures and findings reported by
the auditor and draw their own conclusions from the auditor's work.
4. Compilation: Although the users of the compiled information derive some benefit from the
accountant's involvement, no assurance is expressed in the report.
Distinctions between Typical Assurance and Non-Assurance Services:
Non-Assurance Services
Point of Assurance Services (Related Services)

distinction
Audit Review Agreed-upon Compilation
procedures
Objective To express To report whether To perform audit To assist the client in

opinion on anything has come procedures agreed financial statements
fairness of to the auditor’s on with the client preparation by using
financial attention that causes and any accounting expertise
statement him to believe that appropriate third as opposed to
the financial parties identified auditing expertise
statements are not in the report
fair
Characteristics Audit opinion Substantially less in • Recipients of • Accounting

enhances the scope of procedures the report must expertise, rather
credibility of than audit form their own than auditing, is
financial conclusions used
statements from the report • Users derive
• Report is some benefit
restricted to because the
contracting service has been
parties performed with
due professional
skill and care
Evidence Risk assessment, Limited to: Reading of the FS for

gathering Tests of controls obvious
procedures and Substantive • Inquiry; and As agreed misstatements
• Analytical
tests
procedures
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(The auditor obtains

an understanding of
the entity and its
environment,
including internal
control, but no
evaluation of
internal control is
conducted.)
Level of Reasonable
assurance assurance
provided by Moderate (limited) No assurance No assurance
(High, but not assurance
the CPA
absolute,
assurance)
Report Audit Report Review Report Factual findings of Compilation Report

provided containing containing procedures which identify
positive information compiled
negative assurance
assurance on
assertion on assertion
Skills used by Audit skills Audit skills Audit skills Accounting skills
the auditor
Pronouncements on Assurance Engagements:
The following are the forms of pronouncements of the Auditing and Assurance Standards Council (AASC):
AASC Engagement Standards Applications Related Practice

Statements
a. Philippine Standards on Auditing FS audit engagements Philippine Auditing

(PSAs) Practice Statements
(PAPSs)
b. Philippine Standards on Review Review engagements Philippine Review

Engagements (PSREs) Engagement Practice
Statements (PREPSs)
c. Philippine Standards on Assurance Other assurance Philippine Assurance

Engagements (PSAEs) engagements dealing Engagement Practice
with subject matters other Statements (PAEPSs)
than historical financial
information
d. Philippine Standards on Related Related services Philippine Related Services

Services (PSRSs) Practice Statements
(PRSPSs)
Other pronouncements:
e. Philippine Standards on Quality Control (PSQCs) – to be applied for all services that fall under
the AASC’s engagement standards, namely, audit, review, other assurance, and related services
f. Philippine Framework for Assurance Engagements – to be applied for assurance engagements
PSAs, PSREs, PSAEs, and PSRSs are collectively referred to as the AASC's Engagement Standards.
Philippine Framework for Assurance Engagements:
The AASC issues Practice Statements to provide interpretive guidance and practical assistance to
The Framework:
practitioners in implementing the Engagement Standards and to promote good practice.
• Defines and describes the elements and objectives of an assurance engagement.
• Identifies engagements to which assurance engagement standards (PSAs, PSREs, and PSAEs) apply
• Provides frame of reference for:
a. Practitioners who perform assurance engagements (such as audit and review engagements)
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b. Others involved with assurance engagements (such as the intended users and the responsible
party), and
c. The International Auditing and Assurance Standards Board (IAASB) in its development of assurance
engagement standards which will be adopted by the AASC for application in the Philippines.
• Distinguishes assurance engagements and non-assurance engagements (non-assurance engagements
are not covered by the Framework).
• Sets out characteristics that must be exhibited before a practitioner can accept an assurance
engagement.
In addition
Reports to the Framework
on Non-Assurance and PSAs, PSREs and PSAEs, practitioners who perform assurance
Engagements:
engagements are governed by:
a. Should
• notCode
The use of
the words
Ethics for“assurance”,
Professional “audit” or “review”
Accountants in the Philippines
b. Should
• not imply compliance with assurance engagement
The Philippine Standards on Quality Control (PSQCs) standards (PSAs, PSREs or PSAEs)
c. Should not include a statement that may be misinterpreted as assurance engagements
The Framework
Practitioner's does
association not
with theitself establish
subject standards
matter: or provide
A practitioner procedural
is associated withrequirements for the when:
financial information
performance of assurance engagements.
a. The practitioner reports on information about that subject matter, that is, the practitioner attaches a
report to that financial information; or
b. The practitioner consents to the use of the his name in a professional connection with that subject
matter
If the practitioner is not associated in this manner, third parties can assume no responsibility of the
practitioner.
Remedies in case of inappropriate use of the practitioner's name by other party:
If the practitioner learns that a party is inappropriately using the practitioner’s name in association with
a subject matter, the practitioner should:
• Require the other party (i.e., management) to cease associating the practitioner with the subject
matter
• Consider what other steps may be needed, such as informing any known third party users of the
inappropriate use of the practitioner’s name
• Seek legal advice
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INTRODUCTION TO AUDITING
Auditing, Defined:
Auditing is “a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between those assertions
and established criteria and communicating the results to the interested users.”
Two processes of auditing:
a. Investigative process – involves the systematic gathering and evaluation of evidence as a basis for
determining whether assertions made by responsible person correspond with the established
criteria
b. Reporting process − involves communicating the audit opinion to interested users
Important Concepts:
1. Systematic process – auditing involves structured/logical series of sequential steps or

procedures known as the audit process
2. Objectively obtaining and evaluating evidence – auditing involves gathering and

evaluating sufficient appropriate audit evidence that will support the auditor’s opinion
• Objectivity refers to the combination of impartiality, intellectual honesty and freedom
from conflicts of interest.
• Audit evidence is the information obtained by the auditor in arriving at the conclusions
on which the audit opinion is based.
3. Assertions about economic actions and events – assertions are the subject matter of
auditing
• In the context of audit of financial statements, assertions are representations of
management, explicit or otherwise, that are embodied in the financial statements.
Assertions include the accounts, balances/amounts and disclosures appearing on the
face of the financial statements (and in the notes to financial statements) and which the
management claims to be free of misstatements.
• Audit evidence gathered and evaluated by the auditor may support or contradict the
assertions of management.
4. Established criteria – the standards or benchmarks that are needed to judge the validity
of the assertions on the financial statements
• In the context of audit of financial statements, the established criteria are the
applicable financial reporting framework (for example, the PFRS).
5. Ascertain the degree of correspondence between assertions and established criteria

– The auditor’s objective is to determine whether the assertions conform with established
criteria, that is, whether the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework (such as the PFRS).
6. Communicating the results to the interested users – The ultimate objective of audit is
the communication of audit findings/opinion on the fairness of the financial statements to
interested users.
• Communicating results is achieved through issuance of a written audit report which
contains the audit opinion (or disclaimer of opinion).
• Interested users are the wide variety of financial statements users who rely on the
auditor’s opinion such as the stockholders, creditors, potential investors and
creditors, management, government agencies, and the public (in general).
FS audit is an Assurance Engagement:
Financial statements audit engagement is an assurance engagement because it provides a reasonable

(high but not absolute) level of assurance that the subject matter conforms in all material respects with
identified suitable criteria. It has the elements of an assurance engagement as follows:
1. Three Party Relationship:

a. Practitioner: Independent or External auditor
b. Responsible party: Client’s management
c. Intended users: Users of financial statements
2. Subject matter: Assertions/Financial statements of the client company
3. Criteria: Applicable financial reporting framework / GAAP in the Philippines (PFRS)
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lOMoARcPSD|17330731
4. Sufficient appropriate evidence: Auditor obtains sufficient appropriate audit evidence as a basis
for audit conclusion/opinion
5. Written Assurance Report: Independent auditor’s report contains the audit conclusion/opinion
Need for Independent Audit of Financial Statements:
The primary economic reason for an audit of financial statements is the demand by external users for
reliable or fairly stated financial statements that they will use in making economic decisions. Thus, the market
for auditing services is driven by demand by external financial statements users.
An audit can help reduce information risk, that is, the risk that the financial statements that will be
used for decision-making are materially misleading, unreliable or inaccurate.
Four conditions/reasons that gave rise to a demand for independent audit of financial
statements:
a. Potential conflict of interest between users and preparers of the financial information
can result in biased information – Client management may not be objective in financial
reporting. It may provide impressive but biased, unrealistic, or misleading financial
statements to obtain benefits that it seeks. On the other hand, financial statement users
need unbiased, realistic, or reliable financial statements.
b. Remoteness of users – Users do not have access to entity’s records to personally verify the
reliability of the financial information.
c. Complexity of subject matter requires expertise – Expertise is often required for
information preparation and verification. Users of financial statements are not equipped
with the necessary skills, competence, and knowledge of complexities of accounting and
auditing to determine whether the financial statements are reliable.
d. Consequence for decision making – Financial statements are used for important decisions
that involve significant amount of money. If a decision is based on misleading financial
information, it could have substantial financial or economic consequences on decision
makers.
Another condition that gave rise to demand for audit of financial statements is the
stewardship or agency theory which means that management wants the credibility an
audit adds to the financial statement to enhance stewardship of the financial statement and
to lessen the owner’s mistrust of the management.
Elements of Theoretical Framework of Auditing:
Auditing concepts and standards are based on the following postulates and assumptions which form part
of the elements of theoretical framework of auditing:
1. An audit benefits the public. – the primary beneficiary of reliable financial statements are the wide
variety of users (intended users)
2. Financial data and statements to be audited are verifiable. – if financial statements are not
verifiable, there can be no audit
• Financial statements or data are verifiable if two or more qualified individuals, working
independently, each reach essentially similar conclusions.
3. The auditor should always maintain independence with respect to the client whose financial
statements are subject to audit. – audit opinion and the audit report would be of little or no value if
auditor is not independent
4. Effective internal control system reduces the possibility of errors and fraud affecting the financial
statements. – Internal control affects the reliability of the financial statements. The stronger the
internal control is, the lesser the possibility of errors and fraud, and consequently, the more reliance
on internal control can be placed or assurance that it can generate reliable accounting data and
financial statements.
5. There should be no long-term conflict between the auditor and the client management. – Short-
term conflicts may exist between the management who prepare the data and auditors who examine
the data but such conflicts must be resolve since both must be interested in fairness of the financial
statements.
6. Consistent application of GAAP results in fair presentation of FS. – The criterion in financial
statement audit is an identified or applicable financial reporting framework, which is usually the
PFRS.
7. What was held true in the past will continue to hold true in the future in the absence of known
conditions to the contrary. – Experience and knowledge accumulated from auditing a client in prior
years can be used to determine the appropriate audit procedures that need to be performed.
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Examples of Instances Requiring Independent Financial Statements Audit:
• Application for a bank loan

• Establishing credit worthiness for purchase of merchandise, equipment, or other assets
• Reporting financial position, operating results, and cash flows to absentee owners (stockholders or
partners)
• SEC requirements:
➢ Issuance of securities by a corporation
➢ Annual FS by a corporation with securities listed on a stock exchange or traded over the counter
• Sale of a business (such as merger) requires due diligence audit
• Termination of a partnership
• Preparation of income tax returns
• Establishing losses from fire, theft and burglary
• Bankruptcy and insolvency cases
Audit of Financial Statements:
Audit of financial statements is the objective examination of financial statements to enable the auditor to
express an opinion on whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
Synonyms:
Purpose of an Audit of Financial Statements:
Audit of financial statements is sometimes called:
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
• Independent audit because in an audit of financial statements the auditor is
Such purpose is achieved by the expression of an opinion by the auditor on whether the financial statements
independent of the client subject to audit.
are prepared, in all material respects, in accordance with an applicable financial reporting framework.
• External audit because it is performed by an external auditor who is not an employee
of of the Independent Auditor:
Overall Objectives
the client subject to audit.
a. To obtain
• reasonable
Financial auditassurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error.
• Reasonable assurance means high, but not absolute, level of assurance
Various descriptions:
• Reasonable assurance is the basis for the auditor’s opinion. Reasonable assurance is
achieved when
Independent the auditor
auditing has been has obtainedinsufficient
described a varietyappropriate audit evidence to
of ways, as follows:
reduce audit risk to an acceptably low level.
• It involves objective examination of and reporting on financial statements prepared
by management
b. To report on the financial statements and to communicate such report in accordance with the auditor’s
• It is a discipline which attests to the results of accounting and other functional
findings.
operations and data.
Auditor'sItopinion
• lends credibility to the
and reasonable financial statements.
assurance:
• It provides increased assurance to users as to the fairness of the financial statements.
The auditor's opinion, as expressed in the auditor’s report, enhances the credibility of the
• Its essence is to determine whether the client’s financial statements are fairly stated.
financial statements by providing a reasonable assurance that the financial statements are fairly
• It enhances the degree of confidence of interested users in the financial statements.
presented
• It or free from
provides material assurance
reasonable misstatement.
that the financial statements fairly reflect the
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lOMoARcPSD|17330731
Audit opinion is based on whether reasonable assurance is obtained:
1. When reasonable assurance is obtained: Auditor shall express an unqualified opinion

2. When reasonable assurance cannot be obtained: The auditor is required to:
a. Express a qualified opinion in the auditor’s report
b. If qualified opinion is insufficient in the circumstances:
• Disclaim an opinion or
• Withdraw from the engagement, where withdrawal is legally permitted
Audit Opinion and Audit Report:
Audit opinion:
• In a financial statement audit, the auditor obtains sufficient appropriate audit evidence to be able to
draw conclusions on which to base that opinion. The auditor’s opinion is on the fairness of the audited
• The auditor's opinion helps establish the credibility of the financial statements.
Auditor's report:
• the primary product of an audit engagement
• the end product of the audit process
• a written report that contains auditor’s opinion about the fairness of the FS
• the medium through which the auditor communicates the results of his or her work
Example of Standard Independent Auditor's Report (Refer to PSA F00; Memorize)

Importance of audit opinion/audit report:
• It lends credibility to the FS.

• It provides increased assurance (reasonable assurance) to users as to the fairness of the
FS. An FS audit is:
• NOT a certification or guarantee as to accuracy or fairness of the FS.

• NOT an assurance as to future viability of the entity.
• NOT an assurance as to efficiency or effectiveness of the client’s business operations.
• NOT attestation as to the financial strength of an entity, the wisdom of its management decisions,
or the risk of doing business with it.
Scope of an Audit of Financial Statements:
• The auditor’s opinion on the financial statements deals with whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework.
• The auditor’s opinion or the audit of financial statements is:
→ NOT an assurance as to future viability of the entity.
→ NOT an assurance as to efficiency or effectiveness with which client’s management has conducted
the affairs of the entity.
→ NOT attestation as to the financial strength of an entity, the wisdom of its management decisions,
or the risk of doing business with it.
→ NOT a certification or guarantee as to accuracy or fairness of the financial statements.
• When an applicable law or regulation requires an auditor to provide opinions on other specific
matters (such as the effectiveness of internal control, or the consistency of a separate management
report with the financial statements) the auditor would be required to undertake further work if he
had additional responsibilities to provide such opinions.
Financial Statements:
• Financial statements are a structured representation of historical financial information (including

related notes which comprise a summary of significant accounting policies and other explanatory
information), intended to communicate an entity’s economic resources or obligations at a point in
time or the changes therein for a period of time in accordance with a financial reporting framework.
• The term “financial statements” ordinarily refers to a complete set of financial statements, but can
also refer to a single financial statement.
End Products of Audit Engagement:
a. Independent auditor's report – the primary product of audit engagement
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lOMoARcPSD|17330731
b. Certain other communication and reports – other communication and reporting responsibilities to
users, management, those charged with governance, or parties outside the entity, in relation to
matters arising from the audit (as may be required by the PSAs or by applicable laws or
regulations) Examples:
• Communication with those charged with governance

• Auditor’s responsibilities relating to fraud in an audit of financial statements
Management Responsibility for the Financial Statements:
An audit in accordance with PSAs is conducted on the premise that management and, where
appropriate, those charged with governance have acknowledged and understand that they have
responsibility over the financial statements.
Management responsibility over the financial statements includes:
1. Responsibility for the preparation and presentation of the financial statements in accordance with the
applicable financial reporting framework which includes:
a. Identification of applicable financial reporting framework, in the context of any relevant laws or
regulations
b. Preparing the financial statements in accordance with that framework
c. Adequate description of that framework in the financial statements
d. Making reasonable accounting estimates
e. Selecting and applying appropriate accounting policies
2. Responsibility for designing, implementing and maintaining internal control that is relevant or
necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error, and
3. Responsibility to provide the auditor with:
a. All information (such as records, documentation and other matters) that are relevant to the
preparation and presentation of the financial statements
b. Any additional information that the auditor may request from management for the purpose of the
audit; and
c. Unrestricted access to persons within the entity from whom the auditor determines it necessary to
obtain audit evidence.
Auditor's responsibility vs. client management's responsibility:

Applicable Financial Reporting Framework:
• The client management, with oversight from those charged with governance, has the
Applicable responsibility for the
financial reporting preparation
framework meansandthepresentation of theframework
financial reporting financial adopted
statements
by in
accordance with the applicable financial reporting framework. In other
management (and, where appropriate, those charged with governance) in the preparation of the financialwords, the
management is primarily responsible for the fairness of the financial statements.
statements that is acceptable in view of the nature of the entity and the objective of the financial statements,
• Thebyauditor’s
or that is required responsibility for the financial statements is confined to the expression
law or regulation.
of opinion on them. The audit of the financial statements does not relieve
management
The applicable or those
financial reporting charged often
framework with encompasses
governance of their reporting
financial responsibilities over the
standards
established by:financial statements because the auditor merely audits the financial statements.
• However, an auditor may make suggestions on the form and content of financial
• An authorized or recognized
statements or may draftstandards setting organization (such as PFRSC)
statement.
• Legislative or regulatory requirements
Other sources of applicable financial reporting framework:
• The legal and ethical environment (including statutes, regulations, court decisions, and
professional ethical obligations in relation to accounting matters)
• Published accounting interpretations of varying authority issued by standards setting, professional or
regulatory organizations
• Published views of varying authority on emerging accounting issues issued by standards setting,
professional or regulatory organizations
• General and industry practices widely recognized and prevalent; and
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lOMoARcPSD|17330731
• Accounting literature
Where conflicts exist between the financial reporting framework and the sources from which
Financial reporting
direction on itsframeworks
applicationencompass primarily
may be obtained, or the financial
among reporting
the sources standards
that established
encompass by an
the financial
organization that framework,
reporting is authorizedthe
orsource
recognized
with to promulgate
the standards
highest authority to be used by entities for preparing
prevails.
general purpose financial statements are often designed to achieve fair presentation, for example,
International Financial Reporting Standards (PFRSs).
Basic Distinction between Auditing and Accounting:
• Auditing involves verification of FS and its fairness of presentation while accounting involves
preparation and presentation of FS
• Accounting precedes auditing because without FS there could be no FS audit.
• Auditing begins when accounting ends.
• The end product of the accounting process is a set of FS while the end product of the audit process is
an auditor’s report.
• An auditor must be proficient/expert in accounting (since the auditor will use GAAP in evaluating the
fairness of the FS) as well as in auditing (specifically in accumulation and interpretation of audit
evidence); an accountant need not be proficient in auditing
• Separate disciplines: Auditing is a separate discipline or field of study
• With different frameworks/foundations:
➢ Accounting – Framework for Preparation of FS
➢ Auditing – a) Philippine Framework for Assurance Engagements, and b) Framework of Philippine
Standards on Auditing
• Auditing – governed by GAAS; Accounting – governed by GAAP/PFRS
• Dissimilar bodies of knowledge (accounting – GAAP; auditing – GAAS)
Requirements Relating to an Audit of Financial Statements:

1. Relevant ethical requirements – The auditor shall comply with relevant ethical requirements, including
those pertaining to independence, relating to financial statement audit engagements.
Relevant ethical requirements ordinarily comprise:

a. Code of Ethics for Professional Accountants in the Philippines (the Code of Ethics)
promulgated by the Board of Accountancy
Compliance with the Code of Ethics is necessary in order to ensure the highest quality of
performance and to maintain public confidence in the profession and in the context of audit of
financial statements, maintain public confidence in the auditor’s work.
(1) Part A of the Code of Ethics – establishes the fundamental principles of professional ethics
relevant to the auditor when conducting an audit of financial statements and provides a
conceptual framework for applying those principles
The fundamental principles of professional ethics are:
a) Integrity
b) Objectivity
c) Professional competence and due care
d) Confidentiality, and
e) Professional behavior
(2) Part B of the Code of Ethics – illustrates how the conceptual framework is to be applied in
specific situations
(3) Independence
• It is in the public interest that the auditor be independent of the entity subject to
the audit.
• The auditor’s independence from the entity safeguards the auditor’s ability to
form an audit opinion without being affected by influences that might
compromise that opinion.
• Independence enhances the auditor’s ability to act with integrity, to be objective
and to maintain an attitude of professional skepticism.
Independence requirements comprise of both:
a) Independence of mind
b) Independence in appearance
b. National requirements that are more restrictive
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lOMoARcPSD|17330731
c. Philippine Standard on Quality Control (PSQC) – require the CPA firm to establish and
maintain its system of quality control designed to provide it with reasonable assurance that the
firm and its personnel comply with relevant ethical requirements, including those pertaining to
independence
2. Professional skepticism − The auditor shall plan and perform an audit with professional scepticism
recognizing that circumstances may exist that cause the financial statements to be materially misstated.
Professional skepticism is an attitude that includes a questioning mind, a critical assessment of

validity of audit evidence, and being alert to conditions which may indicate possible misstatement
due to error or fraud.
Professional skepticism is necessary to the critical assessment of audit evidence.
This includes:
a. Questioning contradictory audit evidence

b. Considering the reliability of documents and responses to inquiries and other information
obtained from management and those charged with governance
c. Considering the sufficiency and appropriateness of audit evidence obtained in the light of the
circumstances (for example, in the case where fraud risk factors exist and a single document, of
a nature that is susceptible to fraud, is the sole supporting evidence for a material financial
statement amount)
Professional skepticism includes being alert to:

3. Professional judgement – The auditor shall exercise professional judgment in planning and performing
an audit• of financial
Audit evidence that contradicts other audit evidence obtained.
statements.
• Information that brings into question the reliability of documents and responses
Professionaltojudgment
inquiriesistoessential
be used to
as the
audit evidence.
proper conduct of an audit. This is because interpretation of
relevant ethical requirements and the PSAs and thefraud.
• Conditions that may indicate possible informed decisions required throughout the audit
cannot •be made
Circumstances
without the that suggest the
application need forknowledge
of relevant audit procedures in addition
and experience to facts and
to the
those required by the PSAs.
circumstances.
Professional judgment
The auditor may acceptisrecords
necessary
and on decisionsasabout:
documents genuine unless the auditor has reason to
believe the contrary. In cases of doubt about the reliability of information or indications of Page | 18
• Materiality
possible fraud, the PSAs require that the auditor investigate further and determine what
• Audit risk
modifications or additions to audit procedures are necessary to resolve the matter.
• Nature, timing and extent of audit procedures used to meet the requirements of
the PSAs
Maintaining and gather
professional audit evidence
skepticism throughout the audit is necessary to reduce the risks of:
• Evaluating whether sufficient appropriate audit evidence has been obtained
• Evaluation
Overlooking ofunusual
management’s judgments in applying the entity’s applicable financial
circumstances.
• reporting framework.
Over generalizing when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing and extent of
the audit procedures and evaluating the results thereof.
The auditor cannot be expected to disregard past experience of the honesty and integrity of
the entity’s management and those charged with governance. Nevertheless, a belief that they
are honest and have integrity does not relieve the auditor of the need to maintain professional
skepticism in conducting the audit.

lOMoARcPSD|17330731
• Drawing of conclusions based on the audit evidence obtained (for example,

assessing the reasonableness of the estimates made by management in preparing
the financial statements)
The distinguishing feature of the professional judgment expected of an auditor is that it is

exercised by an auditor whose training, knowledge and experience have assisted in
developing the necessary competencies to achieve reasonable judgments.
The exercise of professional judgment in any particular case is based on the facts and
circumstances that are known by the auditor. Consultation on difficult or contentious matters
during the course of the audit, both within the engagement team and between the
engagement team and others at the appropriate level within or outside the firm assist the
auditor in making informed and reasonable judgments.
Professional judgment can be evaluated based on whether the judgment reached reflects
a competent application of auditing and accounting principles and is appropriate in the
light of, and consistent with, the facts and circumstances that were known to the auditor up
to the date of the auditor’s report.
Professional judgment needs to be exercised throughout the audit. It also needs to be

appropriately documented. In this regard, the auditor is required to prepare audit
documentation sufficient to enable an experienced auditor, having no previous connection
with the audit, to understand the significant professional judgments made in reaching
conclusions on significant matters arising during the audit. Professional judgment is not to be
used as the justification for decisions that are not otherwise supported by the facts and
circumstances of the engagement or sufficient appropriate audit evidence.
4. Sufficiency and appropriateness of audit evidence and audit risk – To obtain reasonable assurance,
the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low
level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's
opinion.
a. Sufficiency and appropriateness of audit evidence

Audit evidence includes information used by the auditor in arriving at the conclusions on
which the auditor’s opinion is based. Audit evidence includes both:
• Information contained in the accounting records underlying the financial statements and
• Other information
Sufficiency is the measure of the quantity of audit evidence. Sufficiency is influenced or

affected by:
(1) The auditor’s assessment of the risks of misstatement (the higher the assessed risks, the more
audit evidence is likely to be required) and
(2) The quality of such audit evidence (the higher the quality, the less may be required)
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.
Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an
acceptably low level, and thereby enable the auditor to draw reasonable conclusions on which
to base the auditor’s opinion, is a matter of professional judgment.
Note:
•
Audit evidence is necessary to support the auditor’s opinion and report. Page | 19
•
It is cumulative in nature and is primarily obtained from audit
procedures performed during the course of the audit.
• Audit evidence comprises both information that supports and corroborates
management’s assertions, and any information that contradicts such assertions.
• Most of the auditor’s work in forming the auditor’s opinion consists of obtaining
and evaluating audit evidence.
• The sufficiency and appropriateness of audit evidence are interrelated.
• Obtaining more audit evidence, however, may not compensate for its poor
quality.

lOMoARcPSD|17330731
Sources of audit evidence:
a. Primarily obtained from audit procedures performed during the course of the
audit
b. May be obtained from other sources such as:
• Previous audits (provided the auditor has determined whether changes have
occurred since the previous audit that may affect its relevance to the
current audit) or
• A firm’s quality control procedures for client acceptance and continuance
• The entity’s accounting records
• An expert employed or engaged by the entity
• In some cases, the absence of information (for example, management’s
refusal to provide a requested representation) is used by the auditor, and
therefore, also constitutes audit evidence.
b. Audit risk
Audit risk is the risk that the auditor expresses an inappropriate opinion when the financial
statements are materially misstated. Audit risk is a function of the risks of material misstatement
and detection risk.
Audit risk does not include the risk that the auditor might express an opinion that the
Risk of material
financial misstatements
statements is themisstated
are materially risk that the financial
when statements
they are are
not. Audit materially
risk misstated
is a technical
prior to audit.
term Risk
related to of
thematerial
processmisstatement
of auditing; itmay
doesexist
notatrefer
twotolevels:
the auditor’s business risks
such as loss from litigation, adverse publicity, or other events arising in connection with
1. Overall financial statement level – refer to risks of material misstatement that relate
the audit of financial
pervasively statements.
to the financial statements as a whole and potentially affect many assertions
2. Assertion level – refer to risks of material misstatement that relate to classes of transactions,
account balances, and disclosures
Risk of material misstatement at the assertion level has two components:

(a) Inherent risk – 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
(b) Control risk – 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 basis by the entity’s internal control
Control risk is a function of the effectiveness of the design, implementation and

maintenance
Risks of materialofmisstatement
internal control by management
at assertion to addressrisk
level (inherent identified risks risk)
and control that are the
entity’sthreaten theexist
risks; they achievement of theofentity’s
independently objectives
the audit relevant to
of the financial preparation
statements. of the
Such risks are
assessed in order
entity’s to determine
financial statements.theHowever,
nature, timing
internaland extent
control, noof further
matter howaudit
well procedures
necessary to obtain
designed and sufficient
operated, canappropriate audit
only reduce, butevidence. This risks
not eliminate, evidence enables the auditor
of material
to express an opinion
misstatement in on
the the financial
financial statements
statements, at an
because acceptably
of the inherentlow level ofofaudit risk.
limitations
The assessment of risksAccordingly,
internal control. is a matter of professional
some judgment,
control risk rather
will always than a matter capable of
exist.
precise measurement.
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
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lOMoARcPSD|17330731
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 an audit procedure and of its application by the auditor.
For a given level of audit risk, the acceptable level of detection risk bears an inverse
5. The auditor shall conduct
relationship an audit
to the assessed in accordance
risks with PSAs at the assertion level. For
of material misstatement
• PSAs contain basic audit principles and essential procedures
example, the greater the risks of material misstatement together
the auditor with related
believes exists, guidance
the in
theless
form of explanatory and other material which the auditor should follow
the detection risk that can be accepted and, accordingly, the more persuasive the audit
evidence required by the auditor.
An audit in accordance with PSAs includes:
a. Compliance with matters

The following PSAs relevant toenhance
assist to the auditthe effectiveness of an audit procedure and of its
1) application
Complianceandwith all PSAs
reduce therelevant to that
possibility the audit (a PSAmight
an auditor is relevant
select to
anthe audit whenaudit
inappropriate the PSA is
in effect and the circumstances addressed by the PSA exist)
procedure, misapply an appropriate audit procedure, or misinterpret the audit results:
• Adequate planning
Complying • with relevant
Proper requirements
assignment means to
of personnel thetheauditor shall comply
engagement team with each
Having •an understanding
2) requirement The application
of a PSA of
unless,ofin
the professional
theentire scepticism,
text of
circumstances a PSA and its application and other
(including
of the audit:
explanatory material) toand
• Supervision understand
review ofits theobjectives
audit work and to apply its requirements properly
performed
a. The entire
3) Prohibition from PSA is not relevant
the auditor (for example,
from representing if an entitywith
compliance doesPSAs
not have
in theanauditor’s report
internal audit function, nothing in PSA 610 is relevant)
when he has not complied with the requirements of PSAs relevant to the audit
b. ofThe
b. TheDetection
use requirement
therisk, however,
objectives iscan
statednotin
relevant
only because
be reduced,
relevant PSAs in it
notis conditional
and (implicit
eliminated,
planning because or
performing of the
the inherent
audit to
explicit)
limitations of and
an the
audit. condition
Accordingly,
achieve the overall objectives of the auditor.does not
some exist.
detection risk will always exist.
• In usingExamples of conditional
the objectives, the auditorrequirements:
is required to have regard to the interrelationships among
the PSAs. This is because the PSAs deal in some cases with general responsibilities and in
• The requirement to modify the auditor’s opinion if there is a limitation of
others with the application of those responsibilities to specific topics.
scope represents an explicit conditional requirement.
• The requirement to communicate significant deficiencies in internal
control identified during the audit to those charged with governance,
The auditorwhich
is required
dependsto use
on the
the objectives
existence of tosuch
evaluate whether
identified sufficient
significant appropriate
deficiencies;
audit evidenceand has been obtained in the context of the overall objectives of the
• The requirement to obtain sufficient appropriate audit evidence regarding Page | 21
the presentation and disclosure of segment information in accordance
with the applicable financial reporting framework, which depends on that

lOMoARcPSD|17330731
If as a result the auditor concludes that the audit evidence is not sufficient and
appropriate, then the auditor may follow one or more of the following approaches:
• Evaluate whether further relevant audit evidence has been, or will be,
obtained as a result of complying with other PSAs;
• Extend the work performed in applying one or more requirements; or
• Perform other procedures judged by the auditor to be necessary in
the circumstances.
c. In addition, the auditor should also consider Philippine Auditing Practice Statements (PAPSs).
PAPSs provide interpretative guidance and practical assistance to auditors in implementing the
PSAs and to promote good practice in the accountancy profession.
Contents/Structure of the PSAs
a. Objectives – each PSA contains one or more objectives which provide a link between the
requirements and the overall objectives of the auditor
The objectives in individual PSAs serve to focus the auditor on the desired outcome of the PSA.
b. Requirements (requirements are expressed in the PSAs using “shall”) – the requirements of the PSAs
are designed to enable the auditor to achieve the objectives specified in the PSAs, and thereby the
overall objectives of the auditor
c. Related guidance in the form of application and other explanatory material that are designed to
support the auditor in obtaining reasonable assurance
Application and other explanatory material:
• It provides further explanation of the requirements of a PSA and guidance for carrying them out
• It may explain more precisely what a requirement means or is intended to cover
• It may include examples of procedures that may be appropriate in the circumstances.
• While such guidance does not in itself impose a requirement, it is relevant to the proper
application of the requirements of an PSA.
• It may also provide background information on matters addressed in a PSA.
• It may include appendices which form part of the application and other explanatory material.
• When appropriate, it may include additional considerations specific to audits of smaller entities
and public sector entities.
PSAs may also contain:
• Introductory material – provides context relevant to a proper understanding of the PSA

Introductory material may include, as needed, such matters as explanation of:
a. The purpose and scope of the PSA (including how the PSA relates to other PSAs)
b. The subject matter of the PSA
c. The respective responsibilities of the auditor and others in relation to the subject matter of the
PSA
d. The context in which the PSA is set
• Definitions – a description of the meanings attributed to certain terms for purposes of the PSAs
→ Assist in the consistent application and interpretation of the PSAs
→ Not intended to override definitions that may be established for other purposes, whether in law,
regulation or otherwise
The Glossary of Terms relating to PSAs contains a complete listing of terms defined in the
PSAs. It also includes descriptions of other terms found in PSAs to assist in common and
consistent interpretation and translation.
Nature of the PSAs Page | 22
The PSAs, taken together, provide the standards for the auditor’s work in fulfilling the overall
objectives of the auditor. The PSAs deal with the general responsibilities of the auditor, as
well as the auditor’s further considerations relevant to the application of those
responsibilities to specific topics.

lOMoARcPSD|17330731
The scope, effective date and any specific limitation of the applicability of a specific PSA is
made clear in the PSA. Unless otherwise stated in the PSA, the auditor is permitted to apply
a PSA before the effective date specified therein.
In performing an audit, the auditor may be required to comply with legal or regulatory
requirements in addition to the PSAs. The PSAs do not override law or regulation that
governs an audit of financial statements. In the event that such law or regulation differs from
the PSAs, an audit conducted only in accordance with law or regulation will not automatically
comply with PSAs.
Departure from a relevant requirement in a PSA:
In exceptional circumstances wherein the auditor may judge it necessary to depart from a relevant
requirement in a PSA, the auditor shall perform alternative audit procedures to achieve the aim of that
requirement.
The need for the auditor to depart from a relevant requirement is expected to arise only where the
requirement is for a specific procedure to be performed and, in the specific circumstances of the audit, that
procedure would be ineffective in achieving the aim of the requirement.
The PSAs do not call for compliance with a requirement that is not relevant in the circumstances of the
audit.
b. As the basis for the auditor’s opinion, PSAs require the auditor to obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement, whether due to fraud
or error. To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw
reasonable conclusions on which to base the auditor’s opinion.
Considerations Specific to Smaller Entities

General Principles of Financial Statement Audit
1. The auditor should plan and perform the audit with an attitude of professional skepticism
For purposes of specifying
recognizing additional considerations
that circumstances to audits
may exist that may causeofthe
smaller
FS to entities, a “smaller
be materially entity”
misstated.
refers to an entity which typically possesses qualitative characteristics such as:
Because of the possibility that the FS may be materially misstated, the auditor should conduct the
1. audit with an attitude
Concentration of professional
of ownership skepticism.
and management in aFor example,
small numberthe auditor would
of individuals ordinarily
(often a expect
to single
find evidence to support management representations and not assume
individual – either a natural person or another enterprise that owns the entity they are necessarily
correct.
provided the owner exhibits the relevant qualitative characteristics); and
2. One or more of the following:
Attitude of professional skepticism: means the practitioner makes a critical assessment, with a
a. Straightforward or uncomplicated transactions;
questioning mind, of the validity of evidence obtained and is alert to evidence that contradicts or
b. Simple record-keeping;
brings
c. Fewintolines
question the reliability
of business of documents
and few products within or representations
business lines; by the responsible party. In
planning and performing
d. Few internal controls; the audit, the auditor neither assumes that the management is honest nor
assumes
e. Few unquestioned honesty. with responsibility for a broad range of controls; or
levels of management
f. Few personnel, many having a wide range of duties.
These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities, and Page | 23
smaller entities do not necessarily display all of these characteristics.
The PSAs refer to the proprietor of a smaller entity who is involved in running the entity on a day-to-day
basis as the “owner-manager.”

lOMoARcPSD|17330731
Concept of Reasonable Assurance:
Although an independent FS audit in accordance with PSAs lends credibility to the FS, such audit is
designed to provide only reasonable assurance, rather than absolute assurance, that the FS taken as a whole
are free from material misstatement, whether due to fraud or error. In other words, the level of assurance
provided by an audit of detecting a material misstatement is referred to as reasonable assurance.
Reasonable assurance means high, but not absolute, assurance.
Reasonable assurance refers to the gathering of the audit evidence necessary for the auditor to conclude
that there are no material misstatements in the FS, taken as a whole. This concept recognizes the existence
of audit risk.
Notes on reasonable assurance:
• Reasonable assurance relates to the conclusion of the auditor that there are no material misstatements
in the FS taken as a whole.
• Reasonable assurance is achieved when the auditor has reduced audit risk to an acceptably low
level by designing and performing audit procedures to obtain sufficient appropriate audit evidence
to be able to draw reasonable conclusions on which to base an audit opinion.
• Reasonable assurance relates to the whole audit process.
• Absolute assurance in audit of FS is not attainable. Accordingly, the audit opinion is not a guarantee
or certification that the financial statements are free from material misstatements.
When reasonable assurance cannot be obtained and a qualified opinion cannot be expressed, the
auditor should:
• Disclaim an opinion, or
• Withdraw from the engagement (if legally permitted)
As the basis for the auditor’s opinion, PSAs require the auditor to obtain reasonable assurance about whether
the financial statements as a whole are free from material misstatement, whether
The level of assurance provided by an audit of detecting a material misstatement is referred to as

Reasonable assurance.
Inherent Limitations of an Audit
A45. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud or error.
This is because there are inherent limitations of an audit, which result in most of the audit evidence on which
the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive. The
inherent limitations of an audit arise from:
a. The nature of financial reporting –

• The preparation of financial statements involves judgment by management in applying the
requirements of the entity’s applicable financial reporting framework to the facts and
circumstances of the entity.
• Many financial statement items involve subjective decisions or assessments or a degree of
uncertainty, and there may be a range of acceptable interpretations or judgments that may be
made
• Consequently, some financial statement items are subject to an inherent level of variability which
cannot be eliminated by the application of additional auditing procedures. For example, this is
often the case with respect to certain accounting estimates. Nevertheless, the PSAs require the
auditor to give specific consideration to whether accounting estimates are reasonable in the
context of the applicable financial reporting framework and related disclosures, and to the
qualitative aspects of the entity’s accounting practices, including indicators of possible bias in
management’s judgments.
b. The nature of audit procedures – there are practical and legal limitations on the auditor’s ability to
obtain audit evidence
For example:
• There is the possibility that management or others may not provide, intentionally or unintentionally,
the complete information that is relevant to the preparation of the financial statements or that has
been requested by the auditor. Accordingly, the auditor cannot be certain of the completeness of
information, even though the auditor has performed audit procedures to obtain assurance that all
relevant information has been obtained.
• Fraud may involve sophisticated and carefully organized schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an
Page | 24

lOMoARcPSD|17330731
intentional misstatement that involves, for example, collusion to falsify documentation which may
cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained
as nor expected to be an expert in the authentication of documents.
• An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not
given specific legal powers, such as the power of search, which may be necessary for such an
investigation.
• The need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
Timeliness of Financial Reporting and the Balance between Benefit and Cost
A48. The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an
audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than
persuasive. Appropriate planning assists in making sufficient time and resources available for the conduct of
the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time,
and there is a balance to be struck between the reliability of information and its cost. This is recognized in
certain financial reporting frameworks (see, for example, the IASB’s “Framework for the Preparation and
Presentation of Financial Statements”). Therefore, there is an expectation by users of financial statements
that the auditor will form an opinion on the financial statements within a reasonable period of time and at a
reasonable cost, recognizing that it is impracticable to address all information that may exist or to pursue every
matter exhaustively on the assumption that information is in error or fraudulent until proved otherwise.
A49. Consequently, it is necessary for the auditor to:
• Plan the audit so that it will be performed in an effective manner;

• Direct audit effort to areas most expected to contain risks of material misstatement, whether due
to fraud or error, with correspondingly less effort directed at other areas; and
• Use testing and other means of examining populations for misstatements.
A50. In light of the approaches described in paragraph A49, the ISAs contain requirements for the
planning and performance of the audit and require the auditor, among other things, to:
• Have a basis for the identification and assessment of risks of material misstatement at the financial
statement and assertion levels by performing risk assessment procedures and related
activities;21 and
• Use testing and other means of examining populations in a manner that provides a reasonable
basis for the auditor to draw conclusions about the population.
Other Matters that Affect the Inherent Limitations of an Audit
A51. In the case of certain assertions or subject matters, the potential effects of the inherent limitations
on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or
subject matters include:
• Fraud, particularly fraud involving senior management or collusion. See ISA 240 for further
discussion.
• The existence and completeness of related party relationships and transactions. See ISA 55023 for
further discussion.
• The occurrence of non-compliance with laws and regulations. See ISA 250.24 for further
discussion.
• Future events or conditions that may cause an entity to cease to continue as a going concern. See
ISA 570.25 for further discussion.
Relevant ISAs identify specific audit procedures to assist in mitigating the effect of the inherent limitations.
A52. Because of the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements may not be detected, even though the audit is properly planned and
performed in accordance with ISAs. Accordingly, the subsequent discovery of a material misstatement of
the financial statements resulting from fraud or error does not by itself indicate a failure to conduct an audit in
accordance with ISAs. However, the inherent limitations of an audit are not a justification for the auditor to be
satisfied with less than persuasive audit evidence. Whether the auditor has performed an audit in
accordance with ISAs is determined by the audit procedures performed in the circumstances, the
sufficiency and appropriateness of the audit evidence obtained as a result thereof and the suitability of the
auditor’s report based on an evaluation of that evidence in light of the overall objectives of the auditor.
Page | 25

lOMoARcPSD|17330731
Limitations of Financial Statements Audit: (Reasons why absolute assurance in auditing is not attainable
or why reducing audit risk to zero is not attainable)
Absolute assurance in auditing is not attainable because of inherent limitations in an audit that affect the
auditor’s ability to detect material misstatements. These limitations result from factors such as:
1. Need for Duditor's judgment
The auditor’s work requires exercise of professional judgment such in the following matters:
• Identifying and addressing risk factors

• Deciding what evidence to gather
• Making decisions about materiality and audit risk
• Gathering and evaluating audit evidence (for example, in deciding the nature, timing and extent
of audit procedures)
• Evaluating management’s judgments in applying the entity’s applicable financial reporting
framework.
• Assessing the sufficiency and appropriateness of audit evidence
• Drawing of conclusions based on the evidence gathered
• Forming an opinion (the phrase “in our opinion” in the auditor’s report is intended to inform that
auditors based their conclusions on professional judgment)
2. Use of testing / sampling risk − An audit is conducted on a test basis or by examining only sample of
less than 100% of a population. This may introduce some risk that a misstatement will not be detected.
3. Reliance on management representation − Some audit evidence must be obtained by obtaining oral
or written representations from management because many FS assertions cannot be audited.
4. Inherent limitations of accounting and internal control − Although the auditor performs audit
procedures to detect material misstatements, such procedures may not be effective in detecting
misstatements resulting from the possibility of:
• management override of controls
• circumvention of internal control
• collusion among employees
5. Nature of audit evidence available − This is the fact that most of the evidence available to the auditor
is persuasive, rather than conclusive, in nature.
6. Undetected fraud − Fraud is specifically designed not to be detected. Thus, there is always the
possibility that fraud will not be detected.
7. Availability of audit evidence − Insufficient support may be available for drawing absolute conclusions
on specific assertions such as fair value estimates.
8. Other limitations may affect the persuasiveness of audit evidence available to draw conclusions on
particular assertions (for example, transactions between related parties).
Not a limitation of audit: Physical limitations of auditors due to fatigue and stress.
Concept of Materiality and Audit Risk
1. Materiality: the magnitude of misstatement or omission; the ability to influence the economic
decision of reasonable FS user
The auditor obtains and evaluates audit evidence to obtain reasonable assurance about whether the
FS are fair or are presented fairly, in all material respects, in accordance with the applicable
financial reporting framework.
When is a misstatement or omission material? It is material if it could influence the economic decision
of FS users. If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then that information is material.
Meaning of the term "present fairly, in all material respects": The auditor considers only those matters
that are significant to the FS users; the phrase refers to the auditors expression of opinion
2. Audit Risk: the risk that audit opinion is inappropriate
• specifically, it is the risk that the auditor expresses an inappropriate (unqualified) audit opinion
when the FS are materially misstated
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lOMoARcPSD|17330731
• concept of reasonable assurance acknowledges the existence of audit risk
General Types of Audit:

1. According to objectives or nature of assertion
a. Financial statement audit – an audit conducted to determine whether the financial statements of
an entity are fairly presented in accordance with an identified financial reporting framework (or
PFRS)
• An of financial statements is the type of audit most frequently performed by CPAs (due to
the widespread use of audited financial statements) on a fee basis and for more than one
client.
• Financial audit is also called:
➢ External audit – because it is performed by external auditors, whether individual
CPAs or CPA firms, who are not employees of the client
➢ Independent audit – because the auditor is independent of the client subject to audit
➢ Financial audit
b. Compliance audit: a review of an entity’s degree of compliance with applicable laws and
rules/regulations or contracts; usually performed by government auditors
Examples: Examination conducted by:
i) BIR examiners: compliance of taxpayers with tax law, rules or regulations
ii) BSP examiners: compliance of banks with banking laws, rules or regulations
iii) COA auditors: compliance of government transactions/expenditures with the requirements
of applicable laws, rules or regulations
c. Operational audit involves a systematic review and evaluation of the specific operating units (or
procedures, methods or activities) of an organization in relation to specified objectives for the
purpose of measuring/assessing its performance in terms of efficiency and effectiveness of
operations, identifying opportunities for improvement and making recommendations to improve
performance (such as introduction of controls to reduce waste).
• Also called performance audit or management audit
• Example: Evaluation of a company’s computerized accounting system
• Usually performed by internal auditors
• Efficiency relates to use of its resources, while effectiveness relates to accomplishing objectives.
Internal auditor's responsibilities in operational audits:

In operational audits, the company's management is responsible for setting operating
standards. The internal auditor's responsibilities are to determine that:
a. Management has established such standards.
b. The standards are being met.
c. Deviations from established standards are being identified and corrected.
d. Corrective action has been taken.
Objective of operational auditing:
a. To assess performance in terms of efficiency and effectiveness of operations

(1) Effectiveness – To verify fulfillments of plans and sound business requirements
(2) Efficiency – To determine whether the entity is managing or utilizing its resources
economically and efficiently
b. To identify areas for improvement
c. To develop recommendations to improve performance (example of such as introduction of
controls to reduce waste)
Operational audit includes:
• Program or effectiveness audit: an audit to determine whether the entity has been effective
in achieving the desired results or benefits of the program or activity
• Economy audit: an audit to determine whether company objectives or goals are met at a
cost commensurate with the task
• Efficiency audit: whether company objectives or goals are met at the least or minimal costs
Major differences between financial and operational auditing:
• The financial audit is oriented to the past whereas an operational audit concerns
performance for the future.
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lOMoARcPSD|17330731
• The financial audit report is distributed to many readers whereas the operational audit
report goes to a few managers.
• Financial audits are limited to matters that directly affect the financial statements whereas
operational audits cover any aspect of efficiency and effectiveness.
2. According to types of auditor or their affiliation with the entity being examined:
a. External / Independent audit: performed by practitioners or independent CPAs who offer their
professional services for a fee to various clients on a contractual basis
• Independent or external auditors are not employees of the client
• External audit complements internal audit
b. Internal audit: audit performed by entity’s own employees known as internal auditors; internal
auditors investigate and apprise the effectiveness and efficiency of operations and internal
controls of the firm
Internal auditing is defined as "an independent, objective assurance and consulting activity
designed to add value and improve an organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes."
Internal auditing includes the audit of:

• Financial and operating information;
• Compliance with policies, plans, procedures, laws, regulations, and contracts;
• The means of safeguarding assets and verifying their existence;
• The economy and efficiency with which resources are employed; and
• Operations or programs to ascertain whether results are consistent with established objectives and
goals and whether they are being carried out as prescribed.
Internal auditing is an appraisal control that measures and evaluates other controls. The increased
complexity and sophistication of business operations have required management to rely on this appraisal
control.
Internal auditors review the adequacy of the company's internal control system primarily to
ascertain whether the system provides reasonable assurance that the company's objectives and goals
will be achieved efficiently and economically. Efficient performance implies the use of minimal
resources to meet the company's objectives and goals. Economical performance is the accomplishment
of objectives and goals at a cost commensurate with the task.
Internal auditors assist in the prevention of fraud by examining and evaluating the system of internal control.
Internal auditors are required to review the means employed by the company to safeguard its assets from
various types of losses such as those resulting from fire, theft, unscrupulous or illegal activities, and exposure to
the elements.
i) Internal auditing: An independent appraisal function or control or activity established

within an entity to examine and evaluate its activities or other controls as a service to the
entity. It is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. It helps an organization to accomplish its
objectives by bringing a systematic disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.
ii) Overall objective of internal auditing: to assist the members of the organization,
particularly management and board of directors, in the effective discharge of their
responsibilities; in short, to provide assistance to management or board of directors (it serves
the needs of management).
• Internal auditors usually perform operational audits

c. Government
• Internal auditing:
auditors usually
audit performed
focus on improving
by government
the efficiency
employeesand
whose
effectiveness
main concern
of their
is to
employer,
determine unlike
whether external
persons auditors
or entities (public
comply accounting
with firms)
government whose
laws, focus
rules and is the fairness
regulations
Scopeofofthe FS of their clients.
government audit: may extend beyond FS audit to include:
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lOMoARcPSD|17330731
i) FS audit
ii) Performance audit (includes (a) program results (effectiveness) audit and (b) economy and
efficiency audit)
iii) Compliance audit
A governmental audit is typically designed to determine whether the auditee has complied with
applicable laws and regulations.
The types of audits conducted by the Commission on Audit (COA) are financial audit and
performance audit. Performance audits include economy, efficiency, and program audits. Included in the scope
of financial and performance audits is determining whether the entity has complied with applicable laws and
regulations.
Government auditors are required to prepare a written report on the entity's internal control and
assessment of control risk made as part of a financial statement audit. The auditor's report should include the
following:
1. The scope of the auditor's work in obtaining an understanding of the entity's internal control and in
his/her assessment of control risk.
2. The entity's significant controls including those that are established to ensure compliance with laws
and regulations that have a material impact on the financial
statements.
3. The conditions, including the identification of material weaknesses, identified as a result of the auditor's
work.
The Government Auditing Standards require auditors to prepare a written report on the entity's
internal control. This report should include the conditions, including the identification of material weaknesses,
discovered as a result of the auditor's work. However, the report should not give any form of assurance on the
design and effectiveness of the entity's internal control.
Government auditors are required to obtain an understanding of the possible financial statement effects
of laws and regulations having direct and material effects on amounts reported. Also, they are required to
make an assessment whether management has identified such laws that might have such effects.
The audit of a government program involves obtaining information about the costs, outputs,
benefits, and effects of the program. Auditors attempt to measure the accomplishments and relative
success of the program based on the actual intent of the legislation that established the program.
Types of Auditors:
1. Independent auditors or external auditors – are CPA firms and individual practitioners who perform
audit services on contractual basis for more than one client
• Independent auditor – because the auditor is independent with respect to the client whose FS are
being audited; External auditor – the auditor is an outsider (not an employee of the client)
• Practitioners perform operational audits and compliance audits as part of consultancy services
2. Internal auditors – they are employed by the entity thus they are not independent. However, to
operate effectively, an internal auditor must be independent of the line functions of the entity. Internal
auditors perform operational and compliance audits.
3. Government auditors – employed in government agencies
• BIR examiners perform compliance audits
• BSP examiners perform compliance and operational audits
• COA auditors perform compliance and operational audits
The relationship between an external auditor and an internal auditor is that both of them use basically
an identical approach; however, there are differences in the application of auditing techniques.
The audit committee is composed of outside directors who are independent of management. The
primary purpose is to assure that the directors are exercising due care and external and internal
auditors are independent of management.
The following are some of the audit committee's functions:

• Select the external auditors.
• Review the external auditor's overall audit plan.
• Evaluate the results of external and internal audits.
• Review the internal auditing work schedule, budget, etc.
• Meet regularly with the internal auditing director.
• The above functions should increase public confidence on the fair presentation of the company's
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Acceptability of the Financial Reporting Framework
The auditor should determine whether the financial reporting framework adopted by management in
preparing the FS is acceptable. An acceptable financial reporting framework is what is referred to as the
“applicable financial reporting framework.” The auditor determines whether the financial reporting
framework adopted by management is acceptable in view of the nature of the entity (for example, whether it
is a business enterprise, a public sector entity or a not for profit organization) and the objective of the FS.
In FS audit, financial reporting frameworks that are acceptable as valid criteria include:
1. Philippine Financial Reporting Standards (PFRSs)

2. Philippine Accounting Standards (PASs)
3. International Accounting Standards (IASs)
4. Other authoritative basis
Financial statements need to be prepared in accordance with one, or a combination of the above-cited
financial reporting framework.
Distinction: Types of audit according to objectives or nature of assertion/data
Point of distinction FS Audit Compliance audit Operational audit
Primary objective To enable the auditor to To determine degree of To assess entity’s performance
express an opinion on the compliance (in terms of efficiency and
fairness of the FS effectiveness)
Subject matter Assertion that the FS are Assertion that the Assertion that the organization’s
(Assertion) presented in accordance with organization has activities/operations are
identified financial reporting complied with laws, conducted effectively and
framework (GAAP) regulations and specific efficiently in relation to
procedures specified objectives
Established criteria GAAP – Identified financial Applicable laws, Objectives (as set by the board
reporting framework (as by regulations and specific of directors)
standard setting bodies) procedures (as set by
authoritative bodies)
Sufficient appropriate Audit findings whether the FS Findings on degree of Findings on assessment
evidence / outcome are in accordance with compliance of performance /
Identified financial reporting operations
framework (GAAP)
Communication of Auditor’s report containing an Reports on the degree of Recommendations or

results to intended opinion whether the FS are compliance with suggestions on how to improve
users fairly presented in accordance applicable laws, operations
with identified financial regulations or specific
reporting framework (GAAP) procedures
Users of audit report Different groups for different Authoritative bodies that Management of the entity
purposes; wide variety of sets down the
users (both internal and regulations, rules and
external users) procedures
Type of auditor Independent / external Government auditors Internal auditors

performing the audit auditors – practitioners
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REVIEW, OTHER ASSURANCE SERVICES, AND RELATED SERVICES
APPLICABLE STANDARDS:
Review Engagements
The objective✓of Amendments
a review of FSsto PSREs 2400 and
is to enable 2410 - Amendments
a practitioner to PSRE on
to state whether, 2400
the- basis
Engagements to
of procedures
which do not provide Review Financial Statements,
that and PSRE
would be 2410 - Review
required in an of Interim
audit, Financial
anything has come to the
all the Performed by the Independent Auditor of the Entity
Information
practitioner’s attention that causes the practitioner to believe that the FSs are not prepared, in all material
✓ PSRE
respects, in accordance with2400 (previouslyfinancial
the applicable 910) - Engagements to Review Financial Statements
reporting framework
(previously PSA 910) (negative
✓ PSAE 3400 – The Examination of
A review engagement provides a moderate level of assurance.Prospective Financial Information (previously PSA
810)
The practitioner should
✓ PSRScomply
4400with the Code ofto Perform
– Engagements general principles,Procedures
Agreed-Upon such as: Regarding
Financial Information (previously PSA 920)
a) Independence; ✓ PSRS 4410 – Engagements to Compile Financial Information (previously PSA 930)
b) Integrity; ✓ Philippine Standard on Quality Control (PSQC) 1 (Redrafted) - Quality Controls for
c) Objectivity; Firms that Perform Audits and Reviews of Financial Statements, and Other
d) Professional competence
Assurance and
anddue care; Services Engagements
Related
e) Confidentiality;
f) Professional behavior; and
g) Technical standards.
The practitioner should conduct a review in accordance with PSRE 2400.
The practitioner should plan and perform the review with an attitude of professional skepticism.
Terms of engagement
The practitioner and the client should agree on the terms of the engagement.
Planning
The practitioner should plan the work so that an effective engagement will be performed. In planning a review
of financial statements, the practitioner should obtain or update the knowledge of the business.
Documentation
The practitioner should document matters which are important in providing evidence to support the review
report, and evidence.
Procedures and Evidence
The practitioner should apply judgment in determining the specific nature, timing and extent of review
procedures, which are primarily through inquiry and analytical procedures to obtain sufficient appropriate
evidence and to be able to draw conclusions.
The practitioner should apply the same materiality considerations as would be applied if an audit opinion
on the FSs were being given.
The practitioner should inquire about events subsequent to the date of the FSs that may require adjustment of
or disclosure in the FSs. The practitioner does not have any responsibility to perform procedures to identify
events occurring after the date of the review report.
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If the practitioner has reason to believe that the information subject to review may be materially misstated, the
practitioner should carry out additional or more extensive procedures as are necessary to be able to express
negative assurance or to confirm that a modified report is required.
Conclusions and Reporting
The review report should contain a clear written expression of negative assurance.
The report on a review of FSs should contain the following basic elements, ordinarily in the following layout:
a) Title;
b) Addressee;
c) Opening or introductory paragraph i
d) Scope paragraph
e) Statement of negative assurance;
f) Date of the report;
g) Practitioner’s address; and
h) Practitioner’s signature.
The review report should:
a) State that nothing has come to the practitioner’s attention based on the review that causes the
practitioner to believe the FSs are not presented fairly, in all material respects, in accordance with the
applicable financial reporting framework; or
b) If matters have come to the practitioner’s attention, describe those matters that impair a fair presentation,
in all material respects, in accordance with the applicable financial reporting framework, including, unless
impracticable, a quantification of the possible effect(s) on the FSs, and either:
i. Express a qualification of the negative assurance provided; or
ii. When the effect of the matter is so material and pervasive, give an adverse opinion; or
c) If there has been a material scope limitation, describe the limitation and either:
i. Express a qualification of the negative assurance; or
ii. When the possible effect of the limitation is so significant and pervasive that the practitioner
concludes that no level of assurance can be provided, not provide any assurance.
The practitioner should date the review report as of the date the review is completed.
SAMPLE UNQUALIFIED REVIEW REPORT

Examination of Prospective Financial Information
REVIEW REPORT
“Prospective TOinformation”
financial ..... means financial information based on assumptions about events that
We have reviewed the accompanying financial statements of ABC Company, which comprise the
may occur in the future and possible actions by an entity. It is highly subjective in nature and its preparation
statement of financial position as at December 31, 19XX, and the statement of comprehensive income,
requires the exercise
statement of considerable
of changes in equity andjudgment.
statementProspective financial
of cash flows information
for the year then can be inThese
ended. the form of:
financial
• statements
a forecast,are the responsibility of the Company’s management. Our responsibility is to issue a report on
these financial statements based on our review.
• a projection or
We conducted our review in accordance with the Philippine Standard on Review Engagements
• a combination of both, for example, a one year forecast plus a five year projection.
2400. This Standard requires that we plan and perform the review to obtain moderate assurance as to
whether the financial statements are free of material misstatement. A review is limited primarily to
inquiries of company personnel and analytical procedures applied to financial data and thus provides less
assurance than an audit. We have not performed an audit and, accordingly, we do not express anPage audit
| 32
opinion.
Based on our review, nothing has come to our attention that causes us to believe that the
accompanying financial statements are not presented fairly, in all material respects, in accordance with
Philippine Financial Reporting Standards (or Philippine Financial Reporting Standard for Small and
Medium- sized Entities).
PRACTITIONER
Date
Addre
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A “forecast” means prospective financial information prepared on the basis of assumptions as to future
events which management expects to take place and the actions management expects to take as of the date the
information is prepared (best-estimate assumptions).
A “projection” means prospective financial information prepared on the basis of:
a) Hypothetical assumptions about future events and management actions which are not necessarily expected
to take place, such as when some entities are in a start-up phase or are considering a major change in the
nature of operations; or
b) A mixture of best-estimate and hypothetical assumptions.
Such information illustrates the possible consequences as of the date the information is prepared if the
events and actions were to occur (a “what-if” scenario).
Management is responsible for the preparation and presentation of the prospective financial information,
including the identification and disclosure of the assumptions on which it is based. The auditor may be asked
to examine and report on the prospective financial information to enhance its credibility whether it is intended
for use by third parties or for internal purposes.
The Auditor's Assurance

When reporting on the reasonableness of management’s assumptions the auditor provides only a moderate
level of assurance. However, when in the auditor’s judgment an appropriate level of satisfaction has
been obtained, the auditor is not precluded from expressing positive assurance regarding the assumptions.
Acceptance of Engagement
Before accepting an engagement to examine prospective financial information, the auditor would consider,
amongst other things:
• The intended use of the information;

• Whether the information will be for general or limited distribution;
• The nature of the assumptions, that is, whether they are best-estimate or hypothetical assumptions;
• The elements to be included in the information; and
• The period covered by the information.
The auditor should not accept, or should withdraw from, an engagement when the assumptions are clearly
unrealistic or when the auditor believes that the prospective financial information will be inappropriate for its
intended use.
The auditor and the client should agree on the terms of the engagement.
Knowledge of the Business
The auditor should obtain a sufficient level of knowledge of the business to be able to evaluate whether all
significant assumptions required for the preparation of the prospective financial information have been
identified.
Period Covered
The auditor should consider the period of time covered by the prospective financial information. Since
assumptions become more speculative as the length of the period covered increases, as that period lengthens,
the ability of management to make best-estimate assumptions decreases.
Examination Procedures
When determining the nature, timing and extent of examination procedures, the auditor’s considerations
should include:
a) The likelihood of material misstatement;

b) The knowledge obtained during any previous engagements;
c) Management’s competence regarding the preparation of prospective financial information;
d) The extent to which the prospective financial information is affected by the management’s judgment; and
e) The adequacy and reliability of the underlying data.
Report on Examination of Prospective Financial Information
When the auditor believes that the presentation and disclosure of the prospective financial information is not
adequate, the auditor should express a qualified or adverse opinion in the report on the prospective financial
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information, or withdraw from the engagement as appropriate. An example would be where financial
information fails to disclose adequately the consequences of any assumptions which are highly sensitive.
When the examination is affected by conditions that preclude application of one or more procedures
considered necessary in the circumstances, the auditor should either withdraw from the engagement or
disclaim the opinion and describe the scope limitation in the report on the prospective financial information.
The following is an example of an extract from an unmodified report on a forecast:
We have examined the forecast in accordance with Philippine Standard on Assurance Engagements.
Management is responsible for the forecast including the assumptions set out in Note X on which it is based.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which
causes us to believe that these assumptions do not provide a reasonable basis for the forecast. Further, in our
opinion the forecast is properly prepared on the basis of the assumptions and is presented in accordance with
Philippine Financial Reporting Standards.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as
expected and the variation may be material.
The following is an example of an extract from an unmodified report on a projection:
We have examined the projection in accordance Philippine Standard on Assurance Engagements.

Management is responsible for the projection including the assumptions set out in Note X on which it is
based.
This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection
has been prepared using a set of assumptions that include hypothetical assumptions about future events and
management’s actions that are not necessarily expected to occur. Consequently, readers are cautioned that
this projection may not be appropriate for purposes other than that described above.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which
causes us to believe that these assumptions do not provide a reasonable basis for the projection, assuming that
(state or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on
the basis of the assumptions and is presented in accordance with Philippine Financial Reporting Standards.
Even if the events anticipated under the hypothetical assumptions described above occur, actual results are
still likely to be different from the projection since other anticipated events frequently do not occur as expected
and the variation may be material.
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Agreed-upon Procedures Engagements

The objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an
audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on
factual findings.
An engagement to perform agreed-upon procedures may involve the auditor in performing certain
procedures concerning individual items of financial data (for example, accounts payable, accounts receivable,
purchases from related parties and sales and profits of a segment of an entity), a financial statement (for
example, a balance sheet) or even a complete set of financial statements.
As the auditor simply provides a report of the factual findings of agreed-upon procedures, no assurance
is expressed. Instead, users of the report assess for themselves the procedures and findings reported by the
auditor and draw their own conclusions from the auditor’s work.
The report is restricted to those parties that have agreed to the procedures to be performed since others,
unaware of the reasons for the procedures, may misinterpret the results.
General Principles of an Agreed-Upon Procedures Engagement
The auditor should comply with the Code of Ethics general principles, such as:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality;
e. Professional behavior; and
f. Technical standards.
The auditor should conduct an agreed-upon procedures engagement in accordance with this PSRS and the
terms of the engagement.
Defining the Terms of the Engagement
Matters that would be included in the engagement letter include the following:
• A listing of the procedures to be performed as agreed upon between the parties.

• A statement that the distribution of the report of factual findings would be restricted to the specified parties
who have agreed to the procedures to be performed.
Planning
The auditor should plan the work so that an effective engagement will be performed.
Documentation
The auditor should document matters which are important in providing evidence to support the report of
factual findings, and evidence that the engagement was carried out in accordance with this PSRS and the terms
of the engagement.
Procedures and Evidence
The auditor should carry out the procedures agreed upon and use the evidence obtained as the basis for the
report of factual findings.
The procedures applied in an engagement to perform agreed-upon procedures may include the following:
• Inquiry and analysis.

• Recomputation, comparison and other clerical accuracy checks.
• Observation.
• Inspection.
• Obtaining confirmations.
Reporting
The report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-upon
procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent
of the work performed.
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Illustration of a Report of Factual Findings in Connection with Accounts Payable
REPORT OF FACTUAL FINDINGS
To (those who engaged the auditor)
We have performed the procedures agreed with you and enumerated below with respect to the accounts
payable of ABC Company as at (date), set forth in the accompanying schedules (not shown in this example).
Our engagement was undertaken in accordance with the Philippine Standard on Related Services. The
procedures were performed solely to assist you in evaluating the validity of the accounts payable and are
summarized as follows:
1. We obtained and checked the addition of the trial balance of accounts payable as at (date) prepared by
ABC Company, and we compared the total to the balance in the related general ledger account.
2. We compared the attached list (not shown in this example) of major suppliers and the amounts owing at
(date) to the related names and amounts in the trial balance.
3. We obtained suppliers’ statements or requested suppliers to confirm balances owing at (date).
4. We compared such statements or confirmations to the amounts referred to in 2. For amounts which did not
agree, we obtained reconciliations from ABC Company. For reconciliations obtained, we identified and
listed outstanding invoices, credit notes and outstanding checks, each of which was greater than Pxxx. We
located and examined such invoices and credit notes subsequently received and checks subsequently
paid and we ascertained that they should in fact have been listed as outstanding on the reconciliations.
We report our findings below:

a) With respect to item 1 we found the addition to be correct and the total amount to be in agreement.
b) With respect to item 2 we found the amounts compared to be in agreement.
c) With respect to item 3 we found there were suppliers’ statements for all such suppliers.
d) With respect to item 4 we found the amounts agreed, or with respect to amounts which did not agree,
we found ABC Company had prepared reconciliations and that the credit notes, invoices and
outstanding checks over Pxxx were appropriately listed as reconciling items with the following
exceptions:
(Detail the exceptions)
Because the above procedures do not constitute either an audit or a review made in accordance with Philippine
Standards on Auditing, we do not express any assurance on the accounts payable as of (date).
Had we performed additional procedures or had we performed an audit or review of the financial statements
in accordance with Philippine Standards on Auditing, other matters might have come to our attention that would
have been reported to you.
Our report is solely for the purpose set forth in the first paragraph of this report and for your information and is
not to be used for any other purpose or to be distributed to any other parties. This report relates only to the
accounts and items specified above and does not extend to any financial statements of ABC Company, taken
as a whole.
AUDITOR
Date
Address
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Compilation Engagements
A compilation engagement would ordinarily include the preparation of financial statements (which may or
may not be a complete set of financial statements) but may also include the collection, classification and
summarization of other financial information.
The objective of a compilation engagement is for the accountant to use accounting expertise, as
opposed to auditing expertise, to collect, classify and summarize financial information. This ordinarily
entails reducing detailed data to a manageable and understandable form without a requirement to test the
assertions underlying that information. The procedures employed are not designed and do not enable the
accountant to express any assurance on the financial information. However, users of the compiled financial
information derive some benefit as a result of the accountant's involvement because the service has been
performed with professional competence and due care.
General Principles of a Compilation Engagement
The accountant should comply with the Code of Professional Ethics general principles, such as:
a) integrity;
b) objectivity;
c) professional competence and due care;
d) confidentiality;
e) professional behavior; and
f) technical standards.
Defining the Terms of the Engagement
An engagement letter confirms the accountant's acceptance of the appointment and helps avoid
misunderstanding regarding such matters as the objectives and scope of the engagement, the extent of the
accountant's responsibilities and the form of reports to be issued.
Planning
The accountant should plan the work so that an effective engagement will be performed.
Documentation
The accountant should document matters which are important in providing evidence that the engagement was
carried out in accordance with this PSA and the terms of the engagement.
Procedures
The accountant requires a general understanding of the nature of the entity's business transactions, the form of
its accounting records and the accounting basis on which the financial information is to be presented
through experience with the entity or inquiry of the entity's personnel.
If the accountant becomes aware that information supplied by management is incorrect, incomplete, or
otherwise unsatisfactory, the accountant should consider performing the above procedures and request
management to provide additional information or if the accountant becomes aware of material misstatements,
the accountant should try to agree appropriate amendments with the entity. If such additional information or
amendments are not made and the financial information is considered to be misleading, the accountant should
withdraw from the engagement.
Responsibility of Management
The accountant should obtain an acknowledgment from management of its responsibility for the appropriate
presentation of the financial information and of its approval of the financial information.
Reporting on a Compilation Engagement
The financial information compiled by the accountant should contain a reference such as "Unaudited,"
"Compiled without Audit or Review" or "Refer to Compilation Report" on each page of the financial information
or on the front of the complete set of financial statements.
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EXAMPLE OF A REPORT ON AN ENGAGEMENT TO COMPILE FINANCIAL STATEMENTS
COMPILATION REPORT TO .....
On the basis of information provided by management we have compiled, in accordance with the Philippine
Standard on Related Services, the balance sheet of ABC Company as of December 31, 19XX and statements
of income, changes in equity and cash flows for the year then ended. Management is responsible for these
financial statements. We have not audited or reviewed these financial statements and accordingly express
no assurance thereon.
Accountant
Date
Address
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GENERALLY ACCEPTED AUDITING STANDARDS
Auditing Standards:
• Popularly known as the Generally Accepted Auditing Standards (GAAS)

• The general guidelin that the auditors must follow in conducting the audit.
• The minimum standards of auditor’s performance that must be achieved on each audit engagement
• The guidance for measuring the quality of the auditor’s performance
GAAP vs. GAAS:

THE 10 GENERALLY ACCEPTED AUDITING STANDARDS (GAAS):
• GAAP: the principles for the preparation and presentation of financial statements that are
GENERAL used by the auditor
STANDARDS as criteria in which
– standards/criteria determining
present the overall
guidance in fairness of the
the personal financial an
qualifications
statements; foundation of accounting
auditor must possess to undertake the audit engagement
• GAAS: standards/measures/guidance that the auditors must follow when conducting an
1. Adequate audit;technical
foundationtraining and proficiency: This standard refers to professional competence
of auditing
• Professional competence of the auditor is primarily met by having professional
education/training and practical experience in auditing
Auditing
• Standardscan
Competence vs.also
Auditing Procedures:
be acquired by the auditor through the following:
➢ Continuing professional development
a. Definition:
➢ Consulting others if additional technical information is needed
• Coaching
➢ Auditing by standards: the measures
more experienced staff of the quality or minimum standard of auditor’s
performance
➢ Research to obtain knowledge of client business and industry
• Auditing procedures: the means used (or the acts to be performed) by the auditor
• Competence does not include warranting the infallibility of the work performed.
to attain the quality or minimum standard of auditor’s performance
b. Basic difference: "auditing procedures" relate to acts to be performed, whereas
2. Independence: This standard requires that the auditor must be impartial when dealing"auditing with the client
standards"
or without bias deal
withwith measures
respect to theofclient
audit quality
entity. and
Thethe objectives
auditor musttobebeindependent
achieved in aninaudit.
fact and in
c. Relationship:
appearance. Every independent audit engagement involves both auditing standards
and auditingof procedures.
a. Independence From
mind – The state one engagement
of mind to expression
that permits the another engagement, auditing
of a conclusion without being
affected by influences that compromise professional judgment, allowing an individual to act
with integrity, and exercise objectivity and professional skepticism; this is also known as
“independence in fact” or “independence in mental attitude.”
b. Independence in appearance – The avoidance of facts and circumstances or situations that are so
significant that would lead a reasonable and informed third party or the public to believe or
conclude that the auditor is not In other words, independence in appearance
requires that activities or relationships that even suggest or imply a possible lack of
must be avoided by the auditor.
• Independence is often called the cornerstone of the profession since it is necessary

to add credibility to the auditor’s work.
• Auditor strives to achieve independence in appearance in order to: maintain
public confidence in the profession or to achieve public confidence. The audit
opinion and the audit report would be of little or no value if auditor is not
independent because of absence of public confidence.
• The auditor ultimately decides whether or not he/she is independent.
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Independence in mental attitude cannot be regulated.

However, to encourage independence in fact and to maintain the appearance of independence, the auditor can hav
• In addition, there can be through a mutual

no material fund. financial interest
indirect such as ownership
Toauditor cannot
ensure render an opinion on statements of one year until all fees from the prior year audit have been pai
independence,
To emphasize independence from management, audit committee of the board of directors.
Independence may be impaired by performing consulting services,
auditor especially
is usually those that involve
appointed by making managemen
3. Due professional care: This standard requires that an auditor, in fulfilling his duties, should act
diligently and carefully, exercise reasonable prudence, and apply judgment in a conscientious
manner, carefully weighing the relevant factors before reaching a
• Due professional care is often called the "average auditor" concept. The auditor
should do what the average auditor would do and never less, including review of
work performed by assistants and maintaining an attitude of professional skepticism.
• Due professional care does not mean/imply infallibility or exercise of error-free
judgment. The auditor is not and cannot be held responsible for losses because of
errors of pure judgment.
• Exercise of due professional care in the performance of the audit requires:
a. Observance of the standards of field work and reporting
b. Critical review of the audit work performed at every level of supervision
c. Degree of skill commonly possessed by others in the profession
d. Exercise of the same components of professional care as a reasonable
auditor would exercise
e. Exercise of professional
skepticism
STANDARDS OF FIELD WORK – the standards / criteria for planning and evidence-gathering
1. Adequate planning and proper supervision:

• Planning involves establishing the overall audit strategy for the engagement and developing
an audit plan. The auditor should also supervise the work of assistants.
Supervision is
because of assistants’ lack of experience.
• Audit programs are designed to enumerate and all work of staff auditors
appropriate
should be reviewed by a qualified Audit program is developed before substantive
testing to ensure that adequate planning has occurred.
2. Sufficient understanding of the entity and its environment, including internal control:
• As part of the planning activities , the auditor is required to obtain sufficient understanding
the entity and its environment. This means that the auditor should obtain a more
knowledge of the client's business and the environment/industry in which the entity operates.
• A sufficient understanding of internal control is to be obtained Appropriate
internal controls provide the to plan the
prevented or detected on a timely auditor
basis.with confidence that material misstatements will
➢ Strong internal control implies that the auditor will require less evidence.
➢ Weak internal control implies that the auditor will require more evidence.
3. Sufficient appropriate audit evidence:

• The auditor should obtain sufficient appropriate audit evidence
by performing
procedures to be able to draw reasonable conclusions on which to
base the
regarding the financial statements under
• Evidence gathering is sometimes called substantive testing. Any testing that confirms the ending balance of an
All specific audit work is performed in order to gather evidence.
•
•
The auditor.
quantity and quality of evidence to be gathered depends on the judgment of the
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• The decision as to how much evidence to be accumulated requires professional

judgment; not provided in the PSAs; the rule is, evidence must be sufficient to
afford a reasonable basis for opinion
STANDARDS OF REPORTING – standards on auditor’s expression of audit opinion through a medium

known as the auditor’s report
1. Whether the financial statements are in accordance with GAAP/PFRS: Conformity with
GAAP/PFRS is explicit in the auditor’s report
• Explicit statement means that the auditor should state whether or not the financial statements
subject to audit are prepared in accordance with GAAP/PFRS.
• When an overall opinion cannot be expressed, as where the auditor disclaims an opinion,
the reasons therefore should be stated.
2. Consistent application of GAAP/PFRS: Consistency is implicit in the auditor’s report

• If there is no material consistency as to application of GAAP/PFRS, no statement as to
consistency is required in the auditor’s report. However, if a material inconsistency exists,
auditor shall identify such inconsistency in the auditor’s report.
In short:
3. Adequacy of informative disclosures: Adequacy of disclosure is implicit in the auditor’s
• IfIf informative
report. GAAP/PFRSdisclosure
is consistently applied:
is adequate, no express as
no statement statement as to consistency
to adequacy of disclosure is
requiredisin the auditor’s report. However, if informative disclosure is inadequate, auditor must
necessary
state such because
inadequacy in theconsistency is implicit in the auditor’s report
auditor’s report.
• If GAAP/PFRS is not consistently applied: auditor shall identify in the auditor’s
• If disclosure is adequate: no statement as to adequacy of disclosure is
necessary because adequacy of disclosure is implicit in the auditor’s report
• If disclosure is inadequate: auditor must state in the audit report such
inadequacy
4. Opinion regarding the financial statements taken as a whole: expression of audit opinion is
explicit in the auditor’s report
Objective of 4th standard of reporting:
• To
indica the character of the and the degree of assumed by the
auditor. This would prevent FINANCIAL STATEMENTS use from misinterpreting the
of responsibility the auditor is assuming/taking.
• Reference to the expression in the fourth generally accepted auditing
standard of reporting means "taken as a
that financial
statements and to each individual the auditstatement.
opinion applies equally to a complete set of
Philippine Standards on Auditing (PSAs):
• The PSAs are interpretations of GAAS, meaning, they are intended to clarify the meaning
"generally accepted auditing standards."
• The PSAs contains basic audit principles and essential
together with related
guidance in the form of explanatory and other material which the auditor should follow when
conducting financial statements audit.
• Application of PSAs: PSAs apply to independent examination of (historical) financial statements of
any entity
conducted for the purpose of expressing an
• Compliance with PSA: . Compliance with
auditor should conduct an audit in accordance with
The PSAs means
application of basic audit principles and performance of essential audit
Compliance with relevant PSAs is mandatory. Only in exceptional instances where departure from
relevant PSA is allowed such as when the auditor believes that the:
➢ Amount involved is
insignifica ; or
➢ Requirement of the PSA is or
impractical to
➢ Requirement of the PSA is impossible to
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NATURE OF SYSTEM OF QUALITY
One of the recognized objectives of the accountancy profession is to

performanc attain the highest levels of
by CPAs area e. To achieve this objective, there is need for assurance that all professional provided
services
such need is provided through a system of quality control.
A system of quality control refers to quality control policies and procedures adopted by CPA
that are
designed to that the firm and its personnel comply with professional standards
provide reasonable
and regulatory and legal requirements and that reports issued by the firm or engagement partners are
appropriate in the circumstances.
System of Quality Control in an Audit Engagement: Policies and procedures to provide
reasonable assurance that all audits are conducted in accordance with PSAs and that audit
reports issued are appropriate in the circumstances
QC policies vs. QC procedures:

a. Quality control policies – are the
objectives and goals to be
b. Quality control procedures – are steps/
to be taken to:
• the policies adopted,
accompli with those policies
or
• implement and monitor
Mandatory requirement for CPA firms to establish SQC: Under Philippine Standard on Quality Control 1
(PSQC 1) CPA firms are required to establish and implement a system of quality
Nature and Extent of a System of Quality Control: The nature and extent of the SQC developed by
firms vary from firm to firm due to various factors such as:
a. Size of the CPA firm

b. Nature of its practice
c. Operating characteristics
d. Its organization
e. Geographical dispersion
f. Cost-benefit consideration
g. Whether it is part of a network
Elements of System of Quality Control: Although the nature and extent of the system of quality control
developed by CPA firms vary from one firm to another, a system of quality control must have the following
elements: (H A R L E M)
1. Leadership responsibilities for quality within the firm – The CPA firm should establish policies and
procedures that:
• Promote an internal based on recognition that quali is essential in the performan of the
engagements
• Require CPA firm’s leader (CEO/ managing board of partners or its equivalent), to assume ultimate
responsibility for the firm’s system of quality control.
2. Ethical requirements, including independence –
• The CPA firm should establish policies and procedures to that the
firm and it provide reasonable
s personnel comply with relevant ethical requirements (including
3. Acceptance and continuance of client relationships and specific engagements − The CPA firm
should establish policies and procedures to provide reasonable assurance that the CPA firm will only
undertake or continue relationships and engagements where it:
a. Has considered the client’s integrity
b. Is competent to perform the and has the ti and resources to do so; and
c. Can c capabilities,
omply with ethical
4. Human resources – The CPA firm should establish policies and procedures to provide reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment to ethical
principles necessary to perform the engagement.
5. Engagement performance – The CPA firm should establish policies and procedures to provide
reasonable assurance that engagements are performed in accordance with
standards and regulatory and legal requirements, and that the firm or engagement partner issue
reports that are appropriate in the circumstances.
6. Monitoring – The CPA firm should establish policies and procedures to provide reasonable
assurance that quality control are relevant, adequate and operating effectively and complied with in
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practice and should include an ongoing consideration and evaluation of the firm’s system of
control, including a periodic inspection of a selection of completed
The is to provide an
evaluationpurpose
of: of monitoring compliance with quality control policies and
a. Adheren to professional standards and regulatory and legal requirements;

b. Whether the quality control system has been appropriately designed and
implemented; and
c. Whether the firm’s quality control policies and procedures have been appropriately applied, so
that reports that are issued by the firm or engagement partners are appropriate in the
circumstances.
The following shall also be included in the CPA firm's SQC:

1. Complaints and Allegations: The firm should establish policies and procedures designed
to provide it with reasonable assurance that it deals appropriately with:
a. Complaints and allegations that the work performed by the firm fails to comply with
professional standards and regulatory and legal requirements; and
b. Allegations of non-compliance with the firm’s system of quality control.
2. Documentation: The firm should establish policies and procedures requiring appropriate
documentation to provide evidence of the operation of each element of its system of
quality
control.
Distinction between GAAS/PSA and SQC: GAAS/PSAs relate to eac h individual audit , whereas
SQC relates
QUALITY to all professional
REVIEW COMMITTEE: activities/services of the firms practice as a
• To ensure that CPAs work to the highest standards, the government thru the Professional
Regulatory Board of Accountancy (BOA) has required all CPA firms and individual CPAs in public
practice to obtain a certificate of accreditation to practice public . Such certificate is
for three (3) years and can be renewed after complying with the valid requirements of the BOA.
• As a condition to th e renewal of the certificate of accreditation to practice public , the BOA
requires individual CPAs and CPA firms to dergo a quality control review to ensure that these
un
comply with accounting and auditing standards and
• The BOA has created a Quality Review Committee which shall conduct a quality review on
applicants for registration to practice public accountancy.
Functions of the Quality Review Committee:
• Conducts quality review on applicants for registration, or renewal thereof, to practice public
accountancy
• Render a report on such quality review, which shall be attached to the application for registration
• Recommend to BOA revocation of registration and professional ID cards of CPAs for not observing the
SQC requirements
Quality review – an oversight into (or study or appraisal of) the quality of audit of FS through a review of
quality control measures established by CPA firms and individual CPAs in public practice
to
compliance with accounting and auditing standards and practices
Application/ Assessment
Instruction: Online quiz will be available on Moodle (Tentative). The quiz will be around 70-100 items.
The quiz will be available from 8AM to 8PM. However, you only have 2 hours to answer the quiz once started.
Tentative date: September 21, 2020, Monday.
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Auditing and Assurance Principles

Fundamentals of Auditing and Assurance Services

Statement Type of Engagement

Agreed-upon procedures engagement

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1. Explain the objective of assurance engagement in general.

Objective of an Assurance Engagement, In General:

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According to the Philippine Framework for Assurance Engagements, an assurance engagement is

Types of Assurance Engagements and their Objectives:

• Moderate assurance is achieved if assurance engagement risk is reduced to an

Assertion-based and Direct Reporting Engagements:

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In an assertion-based engagement, the practitioner’s conclusion can be worded in terms

In a direct reporting engagement, the practitioner’s conclusion is worded directly

Examples of Assurance Engagements:

1. Audits of financial statements

Requirements before a practitioner can accept an assurance engagement:

Elements of Assurance Engagements:

Three Party Relationship:

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Appropriate Subject Matter:

Subject matter in an audit of financial statements:

Forms of subject matter of an assurance engagement:

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Five characteristics of suitable criteria:

a. Relevance – relevant criteria contribute to conclusions that assist decision-making by the

Two types of criteria:

Examples of suitable criteria:

• Applicable financial reporting framework which is the Philippine Financial

Availability of criteria to intended users:

Sufficient Appropriate Evidence:

• Professional skepticism – an attitude that includes a questioning mind, being alert to

Levels of assurance provided in the written report:

Type or level of Form of Example

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Reasonable Positive form of “In our opinion internal control is effective, in

The subject matter of attestation services include:

• Financial and non-financial in nature

Relationships among Auditing, Attestation, and Assurance Services:

Examples of non-assurance engagements:

1. Related services, such as:

Agreed-upon Procedures Engagements:

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Compilation of Financial or Other Information Engagements:

• Objective of compilation engagements: For the accountants to use accounting expertise, as

A pervasive characteristic of a CPA’s role in a consulting services engagement is that of being an

Assurance Services vs. Consulting Services:

Points of distinction Assurance services Consulting services

Primary purpose To improve quality or context of To recommend uses for

Output's objective Intended to improve decision Designed to improve client’s

Comparative Examples of Assurance and Non-Assurance Services:

Assurance Services Non-Assurance Services

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Audit Review Other assurance

1. Audit of FS 1. Review of FS 1. Examination of 1. Agreed-upon procedures

Levels of Assurance for Audit, Review, Agreed-upon Procedures and Compilation

Engagements and level of assurance:

Distinctions between Typical Assurance and Non-Assurance Services:

Point of Assurance Services (Related Services)

Objective To express To report whether To perform audit To assist the client in