Preliminary Engagement Activities

SECTION 1
PRELIMINARY ENGAGEMENT ACTIVITIES:
INTRODUCTION

I. AVP - Audio Visual Presentation

Shortclip prayer through hillsong.
II. Greetings
To greet everyone before starting the lecture proper.
III. Ice-Breaker
A game where in everyone will participate and to know their prior knowledge about the
topic.
IV. Lecture Proper
Defining the Commission on Audit
History of COA
Duties and Responsibility of COA
V. Preliminary engagement activities will involve:
1. Ensuring Engagement Team's Independence and Compliance with Ethical Standards
Conducting an Audit in accordance with the Standards and Ethical requirements.
Auditor's Declaration of independence and Compliance with Other Ethical Standards.
Audit Team's Implementation of quality control procedures at engagement level to have
reasonable assurance.
Threats to independence:
Conflict of interest
Individual values system; or
Familiarity with key management officials
Appropriate Competence and Capabilities of the Engagement Team
Due Professional care is Exercised

Comparative analysis: The same with External Audit, in COA, an Audit is also conducted in
accordance with the Standards and Ethical requirements that enables the auditor to form his
audit opinion. On the other hand, in terms of independence, in external audit, a person that must
possess independence (Independence of mind and Independence in appearance) is the
engagement partner or a partner inorder for an engagement to be independent, however in COA,
all of COA stakeholders must fill-up a form of independence or the Declaration of
Independence and Compliance with Other Ethical Standards to be confirmed by CD/RD inorder
for them to have independence, and in the event that any other circumstances arises during the
course of their audit that might appear to impair their independence, they are responsible to
make timely written notification.
2. Defining the term of Audit Engagement
Establishing the term of Engagement:

Engagement Letter

I. Definition and Importance of Engagement Letter

An engagement letter is a written agreement between a client and a professional. The
purpose of the engagement letter is to clearly communicate the expectations of both
parties, and to minimize misunderstandings and conflicts that may arise during the course
of the engagement.
II. Content of Engagement Letter
1. Audit Objective
Express an opinion on whether your financial statements are fairly presented, in all
material respects, in accordance with Standards (PPSAS)/(PFRS).
Communicate whether the internal control,
Communicate the results of tests of compliance
2. Auditors Responsibility
Conduct our audits in accordance with International Standards
Perform procedures to obtain audit evidence about amounts and disclosures in the
financial statements.
Communicate in writing any significant deficiencies and material weaknesses
3. Agency Financial Management Performance
Assessment of agency's financial management performance.
4. Audit Limitation
It is not designed and cannot be relied upon to disclose all fraud, defalcations, or other
irregularities.
5. Management Responsibilities
The preparation and fair presentation of the financial statements including Statement of
Comparison of Budget and Actual Amounts and submission of the deadlines set by the
Commission on Audit
Making all financial records and reports, and related information available.
Issuing the Management Representation Letter (MRL)
Submitting status of any pending claims and litigation involving the Agency and
breakdown of related party transactions.
Management is encouraged to confer with the Auditor as to the required formats of the
financial Statements

6. Assistance from Management

Request assistance for the Assignment of focal person/s, Preparing schedules or analyses,
Access to the work of internal auditors and in facilitating requirements of the audit team/s
assigned.
7. Audit Timelines
Expectation to complete the audit and transmit the required audited financial statements
and report to management on or before (indicate the prescribed period).
8. Auditee’s Feedback on Audit Teams Performance
After completion of the audit, the COA Central Office will send a Feedback Sheet to
assess the team's performance.

Comparative Analysis: Both COA and external auditor engagement letters provide
information about the purpose and scope of the audit and the audit standards that will be used.
However, the external auditor engagement letter may also include information about fees and
expenses.

Written representations
1. Written Representations as Audit Evidence
Written representations are an important source of audit evidence
2. Management from whom Written Representations Requested
Written representations are requested from those responsible for the preparation of the
financial statements.
3. Written Representations about Management’s Responsibilities
Audit evidence obtained during the audit that management has fulfilled the
responsibilities is not sufficient without obtaining confirmation from management that it
believes that it has fulfilled those responsibilities
4. Other Written Representations
Additional Written Representations about the Financial Statements
Additional Written Representations about Information Provided to the Auditor
Written Representations about Specific Assertions
5. Date of and Period(s) Covered by Written Representations
Because written representations are necessary audit evidence, the auditor’s opinion cannot
be expressed, and the auditor’s report cannot be dated, before the date of the written
representations.
6. Form of Written Representations
Management may be required by law or regulation to make a written public statement
about its responsibilities.
7. Doubt as to the Reliability of Written Representations and Requested
Written Representations Not Provided
Doubt as to the Reliability of Written Representations
Written Representations about Management’s Responsibilities
 Content of the Management representation

1. Letterhead of the audited agency

Includes the date that is near but not after the date of auditor’s report
2. Heading
Includes the name of the agency head, receiver, and address
3. Subject
The name of the audited agency
Purpose of the representation letter
4. Statement of management’s responsibility for the financial statements
Affirmation of the management responsibility to prepare the financial statements in
accordance with standards
Affirmation that relevant information and records are provided and available
5. Specific affirmations pertaining to the financial statements provided to the
commission on audit
Responsibility on the financial statements:
Fair presentation
Estimates
Related party relationship
Subsequent events
Legal claims
Uncorrected misstatements
Accounting policies
Control over assets, liabilities, intentions, laws
Going concern
Responsibility on Internal Control
Effectiveness of internal controls
Deficiencies
Changes
Compliance
Compliance with laws
Interpretation of requirements
Contracts and agreements
Effective operations
Information required
Access to relevant information
 Additional information
Complete recording
Disclosed risk assessment
Fraud
Non-compliance
Identity of RPT
Signature
Provided by the head of the agency and head of the agency’s finance group

Comparative Analysis: Just like in COA’s representation letter, external audit also includes
the letterhead, date, and heading. Included as well is the purpose of the representation letter
and on what period it is for. Also, both includes the acknowledgement of responsibility on the
fair presentation of the financial statements and specifies these assertions and the sign of the
executive officer and the head financial officer.

Communicating the terms of Engagement

The engagement letter shall be issued to management or those charged with governance. This
being issued to formally inform the auditee of the audit requirements, including the
responsibilities of the auditor and the auditee and as a matter of professional courtesy and
engagement direction.
Comparative Analysis:
Acceptance and continuance of client relationship - External audit Considering the important
element of firm’s quality control policies and procedure s In COA, Public sector auditors may not
have the option to decline or withdraw from the audit. However, in cases where management or
the legislature imposes a scope limitation prior to the start of the engagement, the effect of which
may result in the auditor disclaiming the opinion on the financial statements.

Considering the Integrity of the auditee - PSA 220 requires firm to conduct a background
investigation of the perspective client in order to minimize the likelihood of association with
clients whose management lacks integrity. In COA, a review of Auditee’s professional and ethical
practices as the result cannot be use as basis for deciding whether to accept or not and/or continue
with the engagement under ISSA 1220.
 Multiple Choice Questions

1. The preliminary engagement activities include all of the following except?

a. Multiple Choice Ensure that the audit team is independent.
b. Ensure that there is an independent audit committee.
c. Ensure that the audit firm is independent.
d. Determine the audit engagement team requirements.
2. Which of the following statements is correct with regard to the predecessor-successor
communications?
a. The successor auditor should contact the predecessor regardless of whether the
prospective client authorizes contact.
b. The successor auditor has no responsibility to contact the predecessor auditor.
c. The successor auditor need not contact the predecessor if the successor is aware of all
available relevant facts.
d. The successor auditor should obtain permission from the entity before contacting the
predecessor auditor.
3. Which of the following statements best represents the reason why auditors prepare
engagement letters to be signed by their auditees?
a. They provide documentation of management’s responsibility for the financial statements.
b. They help to limit auditor liability in the event of misunderstandings.
c. They communicate and clarify the expectations and responsibilities of both the auditee
and the auditor.
d. They document the audit fees and deadlines that have been agreed upon.
4. When establishing an understanding with the entity regarding the terms of the engagement, all
of the following should be discussed, except?
a. The audit committee.
b. The engagement letter.
c. The agreed upon limits on auditor liability for an improper audit.
d. The internal audit function.
5. Which of the following factors most likely would cause a CPA to decide not to accept a new
audit engagement?
a. The CPA's inability to determine whether related party transactions were consummated on
terms equivalent to arm's-length transactions.
b. The CPA's lack of understanding of the prospective client's internal audit function's audit
plan.
c. Management's refusal to permit the CPA to perform substantive tests before the year-end.
d. The prospective client refuses to let the predecessor auditor respond to communication
from the successor auditor

Preliminary Engagement Activities

6. Under this Presidential Decree or the Government Auditing Code of the Philippines, the COA
operates under the audit residency approach where government auditors and COA-assigned
administrative staff have the legal right to hold office in COA resident audit offices based in the
audited agencies.
a. PD 1445
b. PD 1444
c. PD 1455
d. PD 1145
7. S1: COA audits are mandated by law and the auditee has discretion to refuse audit.
S2: Unethical practices constitute “corrupt acts” under Republic Act 3019
S3: The engagement terms, which are contained in a formal letter issued to the Agency (discussed
in this Section), must be explained during the entrance conference for easy understanding and
review by the agency.
S4: Residency Audits are justified by the multifarious audit and non-audit functions performed on
a year-round basis by the COA Auditors.
a. All statements are true
b. 3 statements are true
c. 2 statements are true
d. Only statement is true
8. If a representation by management is contradicted by other audit evidence, the auditor should:
a. Consider whether his risk assessment of that area is still appropriate
b. Consider whether additional audit procedures are needed
c. If he has concerns about the integrity of management, document those concerns and
consider withdrawing from the audit.
d. All of the above
9. A representation to support other audit evidence may be appropriate where more reliable forms
of evidence are not available. Examples include:
a. Whether the selection and application of accounting policies are appropriate
b. Specific assertions about classes of transactions, accounts balances and disclosures
requiring management judgement.
c. Both A&B
d. None
10. Which of the following statements is correct?
a. Written representations cannot be a substitute for more reliable evidence that should be
available and do not constitute sufficient appropriate evidence on their own, about any of
the matters with which they deal.
b. Written representations should only be sought to support other audit evidence.
c. Both A&B
d. None
Preliminary Engagement Activities
11.S1. The Supervising Auditor/Regional Supervising Auditor, Audit Team leader and Audit team
members shall execute their respective Auditor's Declaration of Independence and Compliance
with Other Ethical Standards.
S2. Engagement Team collectively possess appropriate competence and capabilities to issue an
auditor's report that is insufficient in the circumstances.
S3. Throughout the audit engagement, the Cluster Director/Regional Director shall ensure that Due
Professional care is exercised, and shall ensure that members of the engagement team comply with
relevant ethical standards.
a. All statemand are true
b. All statements are false
c. Two statements are true
d. Only 1 statement is true
12.Threats to independence may take the form of the following, except:
a. Conflict of Interest
b. Individual Value System
c. Objectivity of the public sector auditors
d. Familiarity with key management officials
13. Preliminary engagement activities where the engagement letter shall be issued to management
or those charge with governance.
a. Communicating the terms of Engagment
b. Establishing the terms of Audit Engagement
c. Ensuring Engagement Team's Independence and Compliance with Ethical Standards
d. None of the above
14. Written engagement shall include the following except:
a. A. Objective and scope of the audit of financial statements
b. Responsibilities of auditor
c. Identification of applicable financial reporting standards
d. All are correct
15. S1: The terms of the engagement shall be established before the commencement of audit for
the period. Review of auditee's professional amd ethical practices can be used as basis whether to
accept engagement or not.
S2: The auditor should update the auditor's declaration of independence and compliance with other
ethical standards when circumstances arise that might umpair his independence with the audit.
a. First statement is true
b. Second statement is true
c. Both statements are true
d. Both statements are false

Preliminary Engagement Activities