‘An outs systematic proces of abil obtining ond evatng evidence regoring esetons about ‘economic actions and events to ase ttc ond cormunkoting the results to interested users” ~AASE Types of Audit 1, Financial Statement Audit - audit conducted te determine whether the F5s of an entity are fairly presented with an identified financial reporting framework. (Conducted by EXTERNAL AUDITORS) 2, Compliance Audit - 2 review of an organization's pracedures to determine whether the organization adhered tospecific procedures, rules, contracts, or regulations, (Conducted usually by GOVERNMENT AUDITORS) 3. Operational Audit ~study ofa specific unit of the organization fr the purpose of measuring its performance. (Conducted usually by INTERNAL AUDITORS) The Independent Financial Statement Audit + MANAGEMENT is responsible for preparing and presenting the Fs in accordance with the financial reporting framework +The AUDITOR'S RESPONSIBILITY isto form and express an opinion on the F&s based on his audit. + An audit conducted writh PSA is designed to provide only REASONABLE ASSURANCE that the FSs taken as a whole are free from materlal misstatements, Limitations of an Aucit 1. Sampling Risk/ Use of Testing 4. Inherent Limitations of the Cient’s Accounting. 2. Error in Application of Judgment/ Non sampling ‘and Internal Control Systems risk 5. Nature of Evidence 3. Reliance cn Management's Representation General Principles Governing the Audit of Financial Statements 1, Coxe cf Professional Ethics 3. Attitude af Professional Skepticism 2. Philippine Standardson Auditing (PSA) ‘Need for an Independent Financial Statement Audit 1. Confliceof interest 2. Expertise 3, Remoteness 4, Financial Consequences, Theoretical Framework of Auditing (Assumptions or ideas that Support the Audit Function) 1. Financial Data are Verifiable 2. Independence 3, No Long-Term Conflict 4, Effective Internal Cantal 5. Consistent application of GAAP/PFRS 6 Continuity 7. Benefits the PublicTHE PROFESSIONAL STANDARDS Genorally Accopted Auditing Standards (GAAS) It represents measures of the quality of auditor's performance, These standards should be looked 3 MINIMUM STANDARD of performance that ausitors should fallow. General Standards Standards of Fieldwork ‘Standards of Reporting ‘Technical Training.and Proficleney Planning GAAP Independence Interval Control Consideration Inconsistency Professional Care Evident matter Disclosure Opinion PHILIPPINE STANDARDSON AUDITING (PSA) ‘Tha Philippine Standard on Auditing (PSA) establishes the independent suditor’s overall responsibilities wen conducting an audit of financial statements in sceordance with PSAs. these are issued by AASC as interpretations to GAAS, Practice Statements - are additions to these standards to provide practical assistance ta auditors in implementing the standards and to promote good practice inthe accountancy profession. SYSTEM OF QUALITY CONTROL ‘Quality controls are policies and procedures adopted by CPAs to provide reasonable assurance of conforming to professional standards in performing audit and related services, Elements of Quality Control {°SA 220) 1, Leadership Responsibilities for Quality on Audits 2. Ethical Requirements (Integrity, Qnjectivity, Prolessional Competence & Oue Care, Confidentiality, Professional Behavior) 3, Independence 4, Acceptance and Continuance of Client Relationships S, Hume Resources and Assignment (Recruitment, Performance evaluation, Copabilies, Career Dev't, Engagement Teem Assignment) ‘6 Engagement Performance (Direction, Supervision, Review, Consultation, Engagement Quality Control Review, Differences of Opinion) 7. Monitering QUALITY CONTROL REVIEW ‘Tne government thru the Professional Regulatory Board of Accountancy [BOA) has required all CPA firms and individual (CPA firms and individual CPAs in public practice to obtain a certificate oF accreditation to practice public accountancy. Quality Review Committee (QRC|~ created by PRC which shall conduct @ quality review on applicants for registration to practice public accountancy,AUDITOR’S RESPONSIBILITY The audlitar’s responsibility is ta design the audit to provide reasonable assurance of detecting material rmisstatementsin the Fis, These misstatements may emanate from: = enor © Froud ‘= Noncampliance with Laws and Regulations ERROR ~ refers to unintentional misstatements in the financial statements Examples: Mathematical or crical mistates, incorrect accounting estimates, mistake in application st aecourting paicies FRAUD ~ refers tointentional act by one oF more individuals among managernent, employees or third parties which results in imisreoresentation of financial statements ‘Types of Fraud 4. Management Fraulf Fraudulent Financial Reporting ~ involves intentional misstatements or omissions af amount ‘or disclosures usually dane by members of management ar those charged with governance. Examples: manipulation af documents or records, misrepresentation of effects of transactions, recording of transactions w/asubstance,intentignalappliation of axeourting pales 2. Employce Fraud/ Misappropriation of assets - fraud that is accomponied by false or misleasing records inorder to rnnevalthe fact that asiesare misting. Examples: emberzling receipts. stealingentty’s assets, Iaaping of AR RESPONSIBILITY OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE (PSA. 240) Management ~ (9 establish # conval envinmest ard wo implement intemal conte polices designed to ensure the CTECTION AND PREVENTION of fraud and ear. Individualscharged with governance ~ loeme theiniegily of entity satseurting and financial parting spstems ‘AUDITOR'S RESPONSIBILITY: ‘The auditor is not and eannat be held responsible for the prevention of fraud and error. The auciter’s respemsibiity is ta ‘design the audit te obtain reasonable assuranee thet the are free from material msstatements whether caused by error or fraud) PLANNING PHASE TESTING PHASE COMPLETION PHASE 1. Make inquiries of | | 3. Perform procedures necessary to | | 5. The auditor should obtain a written ‘management about | | det ‘whether —onatevial | | representation from the client's afrisstatement || misstatements east Management 2. Assess the risk that fraudjemor may cause the |] % Consider whether such a] | 6, When the auditor believes. that FS. to contain material | | Misstatement resulted fram erroror } | material exrorffraud exists, he should misstatements. fraud. (Errors will only result ta adjustment of FS but freud may have ther impllestions on an audit) request the mgmt, tarevise the FS 4, Ifthe aucitar is unable to evaluate the effect of fraud en FS, the auditor should elther qualify or diselaim his opinion on the FS.FRAUD RISK FACTORS RELATING TO MISSTATEMENTS RESULTING FROM FRAUD FRAUDULENT FINANCIAL REPORTING (MISAPPROPRIATION OF ASSETS (MANAGEMENT FRAUD) {EMPLOYEE FRAUD) 1. Management's Characteristics and Influence Over Control Environment ‘= These fraud risk factors pertain to Smgmt.'s abilities, pressures, styles, and attitude relating to internal control and financial 1 Susceptibility of Assets to Misappropriation reporting process, (Ex: large amount of cash on hand, inventory (Ex: non-financial Smgmt. participates excessively, high turn- characteristics, easily convertible assets, ete.) over of Smgmt... ete.) += These fraud risk factors pertain to the nature of an entity's assets and the degree to which ‘they are subject to theft. 2 industry Conditions ‘© These fraud risk factors involve the economic and regulatory ‘environment in which the entity operates. (x: new accounting/statutory rea, that impairs financial stability of the entity) 3. Operating Characteristics and Financial Stability ‘These fraud ris factors pertain to the nature and complexity of the entity and its transactions, the financial condition, and profitability. (Ex: inability to generate cashflows while reporting earnings) 2. Controls = These fraud risk factors involve the lack of controls designed to prevent or detect, misappropriation of assets. (Gx: lack of appropriate Smgmt. oversight, inadequate record keeping of assets, poor physical safeguards, lack of timely documentation for transactions) NONCOMPLIANCE WITH LAWS AND REGULATIONS — refers to acts or commission by the entity being audited, either intentional or intentional, which are contrary to the prevai laws or regulations. Examples: Tax evasion, violation of environmental protection laws, inside trading of securities, violation of SEC requirements MANAGEMENT'S RESPONSIBILITY (PSA 250) ~ to ensure that the entity's operations are conducted in accordance with laws, {and regulations. The responsibility for the prevention and detection of noncompliance rests with management. AUDITOR'S RESPONSIBILITY: An audit cannot be expected to detect noncompliance with all laws and regulations . Nevertheless, the auditor should recognize that noncompliance by the entity with laws and regulations may materially affect the FS. 1. Obtain =a general understanding of the legal and regulatory framework applicable to entity 2. Design procedures to help identity instances of noncompliance with laws and regulations 3. Design audit procedures to obtain sufficient appropriate audit evidence about compliance with laws and regulations 4. When the auditor is aware concerning instanceof noncompliance, evaluate the possible effect on the FS. 5. When the auditor believes there maybe noncompliance, the auditor should document the findings, discuss them with mgmt. and consider the implication on other aspects of the audit. 6. The auditor should obtain a written representation from the client's ‘management. 7. When the auditor believes that there is noncompliance, the auditor should request ‘the mgmt. to revise the FS. Otherwise, qualified or adverse opinion will be issued. . If a scope limitation has precluded the auditor from obtaining sufficient appropriate evidence, the auditor should express a qualified opinion or a disclaimer of opinion. ~ Auditors are primarily concerned with the noncompliance what will have a direct and material effect in the FS, ‘¢ Noncompliance may involve conduct designed to conceal it such as collusion, forgery, senior Smemt. override of controls, fallure to record transactions, or intentional misrepre sentations being made to auditor.THE AUDIT PROCESS — ACEEPTING AN ENGAGEMENT FINANCIAL STATEMENT ASSERTIONS ‘Assertions about classes of | Assertions about account balances at transactions and events for the | the period end: ‘Assertion’ about presentation and disclosure: | period under aust ‘© Completeness ‘© Rights and Obligations Completeness © Occurrence + Baistence Occurrence and rights and * Gutolt © Completeness obligations © Accuracy ‘Valuation and allocation © Gassification and © Clasifiation Lnderstandabilty ++ Accuracy and valuation ‘AUDIT PROCEDURES. ‘The procedures selected should enable the auditor to gather sufficient appropriate evidence about a particular assertion, records. Inspection = involves examining of records, documents, or tangible assets. Observation ~ consists of looking a process or procedure being performed by others. Inquiry ~ consists of seeking information from knowledgeable persons inside or outside the entity. Confirmation = consists of the response to an inquiry to corroborate information contained in the accounting ‘© Computation ~ consists of checking the arithmetical accuracy of source documents and accounting records of performing independent calculations. ‘+ Analytical Procedures ~ consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate {rom particular amounts. ‘Audit evidence ~ refers to the information obtained by the auditor in arriving at the conclusions on which the audit ‘opinion is based. Audit evidence will comprise source documents and accounting records underlying the financial statements and corroborating information from other sources.ACCEPTING AN ENGAGEMENT In deciding whether to accept or reject an engagement, the firm should consider: 2. Competence ~ acquired through 2 combination of education, training, and experience. The auditor should obtain a preliminary knowledge of client’s business and industry ta determine whether the auditor has the degree of competence required by the engagement. 2. Independence ~ the auditor should consider whether there are threats to audit team's independence and objectivity and, if so, whether adequate safeguards can be satisfied. 3. Ability to serve the client property ~ An engagement should not be accepted if there are no enough qualified personnel to perform the audit. PSA 220 suggests that the audit work should be assigned to personnel who have the appropriate capabilities, competence, and time to perform the audit enga gement in accordance with professional standards. 4. Integrity of the management ~ PSA 220 requires the firm to conduct a background investigation of the ‘Prospective client in order to minimize the likelihood of association with clients whose mgmt. lacks integrity. This involves: ‘© Making inquiries of appropriate parties in the business community ‘* Communicating with the predecessor auditor RETENTION OF EXISTING CLIENTS ‘Clients should evaluate at least once a year or upon occurrence of major events such as changes in mgmt, ‘ownership, nature of client's business, etc. ‘+ In general, conditions that would cause the firm to reject the prospective client may also lead to decision of terminating an audit engagement. ENGAGEMENT LETTER ‘© This serves as the written contract between the auditor and the client. Ths letter sets forth: ‘The objective ofthe audit of FS which is to express an opinion on the FS. ‘The mgmt.'sresponsibility forthe far representation of the FS, ‘The scope of the audit. ‘The forms or any reports or other communication that the auditor expects to issue. ‘The fact that because of limitations of the audit, there is an unavoidable risk that material misstatements may remain undiscovered. ‘The responsibility ofthe client to allow the auditor to have unrestricted access to whatever records, toidentity areas that may represent specific sks in using analytical procedures as a planning tool, if the difference between recorded balances in FS and expectations significant the auditor must design mare extensive substantive test (or vice versa) + Asa substantive test to obtain corroborative evidence about particular assertions related to account balance or transaction class '* Asan overall review of the financial statements in the completion phase of the audit © toidentify unusual fluctuations that were not identified in the planning and testing phases of the audit ‘to confirm conclusions reached w/ respect to the fairness of the FS ‘Documenting the Audit Plan ~ the final step in planning process is the documentation of the audit planning process by preparing: ‘Audit plan — the overview of the expected scope and conduct of the audit. it sets out in Broad terms the nature, timing, and extent of the audit procedures to be performed. ‘+ Audit program ~ it sets out in detail the audit procedures to be performed in each segment of the audit. Time budget ~ is an estimate of the time that it wil spent in executing the audit procedures listed in the audit program.CONSIDERATION OF INTERNAL CONTROL PSA 315 states that INTERNAL CONTROL is the process designed and effected by those charged ‘with governance, management, and other personnel to provide reasonable assurance about the ‘achievement ofthe entity's objectives with regard to reliability of EINANCIAL REPORTING, effectiveness and efficiency of operations ond compliance with applicable laws and regulations, '* Inthe audit of FS, the auditor is only concerned with those policies and procedures within the accounting and internal control systems that are relevant to the financial statement assertions. * Components of internal Control: 2. Control Environment ~ includes the atthuses, awareness. and actions ofthe mgmt, and those charged with {governance concerning the entity's IC and its importance the entity > ntegrity and ethical values > Commitment in competence > Mgmt. philosophy and operating style > Personnel policies and procedures > Active participation of those charged w/ Assignment of responsibilty and authority/ ‘governance Organizational Structure ‘2 RiskAssessment ~ mgmt. should adopt policies and procedures that are designed to identify and analyze ‘business risks. For audit purposes, the auditor is only concerned with risks that are relevant to preparation of reliable financial statements. > Businessrisk ~ isthe risk thatthe entity's business objectives will not be attained as a result of internat and external factors such as technological developments, changes in customer demand, et. 3. Information and Communication Systems ‘An information system encompasses methods and records that: ‘identify and record al valid transactions, describe on a timely basis the transactions in sufficient detail to permit proper classification, ‘measure transactions in their proper monetary value, determine the time period to permit recording of transactions in proper accounting period, and ‘present property the transactions and disclosures in FS. ‘Communication involves providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting. 4, Control Activities ~ are policies and procedures that help ensure that mgmt. directives are carried aut, ‘Specific control procedures that are relevant to FS audit would include: > Performance reviews ~ review and analysis of actual performance vs. budgets, forecasts, and PY's > Information Processing ~to check accuracy, completeness, and authorization of transactions. > Physical Controls ~ physical security of assets, authorization for access to programs and data files, ‘periodic counting and comparison w/ amounts shown on control records > Segregation of Duties - assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. ‘5. Monitoring the process of assessing the quality of internal control performance over time. + Auditors are not responsible for establishing and maintaining an entity’s accounting and internal control systems: that isthe responsibility of the management. ‘STEPS IN CONSIDERATION OF INTERNAL CONTROL 1. OBTAIN UNDERSTANDING OF THE INTERNAL CONTROL ‘© Evaluating the design of a control > Thiscanbe obtained by: maklaginquiies of appropriate individuals, Insaecting documents and records, ond ghsecving entity's activities and operations + Determining whether ithas been implemented > This can be accomplished by performing a WALK-THROUGH TEST. This involves tracing one or two transactions through the entire accounting systems, from their initial recording at source to their final destination as a component of an account balance in the FS. vvvyy2. DOCUMENT THE UNDERSTANDING OF ACCOUNTING AND INTERNAL CONTROL SYSTEMS ‘© Thisdocumentation need not be in particular form. Some commonly used forms are: narrative description, flowchart and diagrams of flow of transactions, internal control questionnaire providing mgmt. responses 3. ASSESS THE LEVEL OF CONTROL RISK * IfICS related to a particular assertion is not effective, the auditor may assess the control risk at high level. «Ifthe auditor concludes that it is more efficient to rely on entity’ IC, the auditor would plan to assess control risk at less than high level. ‘4, PERFORM TEST OF CONTROLS LTEST.OF CONTROLS = are performed to obtain evidence about the effectiveness of the: + Designof the accounting and internal control systems; or * Operation ofthe internal control through the period ‘+ According to PSA, the auditor should obtain audit evidence through test of control te support any assessment cof control risk at less than high level. The lower assessment of control risk, the more support the auditor should obtain that the ICs suitably designed and operating effectively. + Nature of Test of Controls * Inquiry -searching for appropriate information about the effectiveness of internal control from. knowledgeable persons inside or outside the entity. Observation ~ refers to looking atthe process being performed by others. Inspection ~ involves examination of documents and records to provide evidence of reliability depending ‘on their nature and source and the effectiveness of IC aver their processing © Repertormance-- involves repeating the activity performed by the cllent to determine whether proper results were obtained. + Timing of tests of controls: auditors usually perform tests of controls during an interim visit, in advance of period end, However, auditors cannat rely anit w/o considering the need to obtain further evidence on the remainder of the period. In determining whether or not to test the remaining period, these must be considered: the cesults of the interim sests, the length of the cemaining pesiag, and whether changes have occurred in accounting and internal control systems during the remaining period, ‘© Extent of test of controls: The auditor cannot examine all transactions related to certain control procedures. in ‘audit, the auditor should examine the size of a sample sufficient to support the assessed level of control tisk + Operating effectiveness. Implementation ‘When obtaining audit evidence of implementation by performing risk assessment procedures, the auditor determines that the seleyant controls exist and the entity is using them. ~ When performing tests of the operating effectiveness of controls, the auditor obtains audit evidence that controls operate effectively. This includes obtaining evidence about how controls were applied at relevant times during period under audit, the consistency which they were applied, and by whom or by what means they were applied. ‘+ Documenting the assessed level of control risk * Mfthe contro! risk is assessed at high level, the auditor should document his canclusian that the control risk {sat high level = ifthe control risk is assessed at less than high level, the auditor should document his ganelusian that contro! risk s less than high level and the hasis for the assessment (basis is actually the results of TOC). ‘+ Communication of internal Control Weaknesses = Auditor is required to report the matter to the appropriate level of mgmt. material weaknesses in the design or operation of the accounting and IC systems. ~ Auditors are not required to search for and/or identity material control weaknesses. = Internal control weaknesses are documented in a formal management letter.AUDITING IN A COMPUTERIZED ENVIRONMENT Characteristics of Computerized Information Systems (CIS) 1. Lack of Visible Transaction Trails 5. Systems Generated Transactions 2. Consistency of Performance 6. Vulnerability of Data and Program Storage 3. Ease of Access to data and Computer Programs Media 4. Concentration of Duties Internal Control ina CiS Environment ‘A. General Controls — are control polices and procedures that relate to the overall computer information system. 11. Organization controls ~ clear assignment of authority and responsibility ‘& Segregation b/w CIS dept. and user dept. b._ Segregation of duties w/in the Cis dept. 1S Director juror corto ne pesto 7 ‘Systems Development Operations Other Functions ee — ae aie lecteur se rare init, iomwomndertmantaaate perm) beeen mine maton Sree vee ented tne ‘Systems development and documentation controls ~ to facilitate use of program as well as changes that ‘may be introduced to system ‘Access controls — adequate security controls, such as use of passwords Data recovery controls ~ provides maintenance of back-up files and off-site storage procedures. Monitoring controls ~ to ensure that CIS controls are working effectively as planned. 8. Application Controls ~ are those policies and procedures that relate to the specific use of the system. 1. Controls over Input ~ designed to provide reasonable assurance that data submitted for processing are ‘complete, properly authorized and accurately translated into machine readable form, ‘& Key verification ~ this requires data to be entered twice to provide assurance that there are na key entry ‘errors committed ‘© Field check «this ensures thatthe input data agree with required field format. £: $$$ number must contain 10 digits. An input of SSS number w/ more oc less than 10 digits will be rejected © Validity check ~ info entered are compared with valid info inthe master file to determine the authenticity of the input. x: Employees’ master file may contain two valid codes to indicate the employee's gender “1" for male and "2" forfemale. Acode of "3" is invalid and willbe rejected. & Sellchecking digit ~ this s mathematically calculated digit w/c is usualy added to a document number to ‘detect common transpositional errors in data submitted for processing. ‘© Limitcheck ~ ar reasonable checks designed to ensure that data submitted for processing do not exceed 3 predetermined or reasonable amount. Control totals - these are totals computed based on the data submitted for processing. Control totals ensure ‘the completeness of data before and after they are processed. Financial totals~ sum total of the peso amount in the documents 7 Hash totals ~ sum total of the control numbers in the documents Record count - total number of the documents 2. Controls over Processing designed to provide reasonable assurance that input data are processed accurately, and that data is nat lost, added, excluded, duplicated, oF improperly changed. 4 Almost al of input controls mentioned above are also part of processing controls. 3. Controls over Qutaut ~ designed to provide reasonable assurance that the results of processing are complete, accurate, and that these outputs are distributed only to authorized personnel, vee onTest of Control ina CIS Environment '* The auditor's objectives and scope of the audit do not change in a CIS environment. ‘+ Testing the reliability of general controls may include: Observing client's personnel in performing their duties + Inspecting program documentation * Observing security measure in force ‘+ intesting application controls, the auditor may either: * Audit around the computer Simitar to testing control in 2 manual control structure in that it involves examination of documents and reports to determine the reliability ofthe system. When using this approach, the auditor ignores the client's data processing procedures, focusing solely on the INPUT documents and the CIS OUTPUT. Can be used only if there are visible input documents and detailed output that will enable the auditor to trace individual transactions back and forth, ¥_Thisis also known as “black box approach”. + Use Computer-Assisted Audit Techniques (CAATS) ‘Are computer programs and data which the auditor uses as part of the audit procedures to PROCESS data of audit significance contained in an entity’s information systems. Used when computerized accounting systems performs tasks w/c no visible evidence is available. Consequently, the auditor will have to audit directly the client's computer program using CAATS. This is also known as “white box approach”. ¥ Commonly used CAATS: 1. Test Oata ~ Designed to test the effectiveness of the internal control procedures w/c are incorporated in the client's computer program. ~ The objective of this technique is to determine whether the client's computer programs can correctly handle valid and invalid conditions as they rise. 2. Integrated Test Facility (ITF) = the auditor creates dummy or fictitious employee, or other appropriate unit for testing within the entity's computer system. + ITF integrates the processing of test data w/ the actual processing of ordinary transactions w/o mgmt. being aware of the testing process. - ITF provides assurance that the program tests by the auditor is the same program used by the client in the processing of transactions (unlike test data approach). 3. Parallel Simulation ~ requires the auditor write a program that simulates key features or processes of the ‘program under review. = The simulated program is then used to reprocess transactions that were previously processed by the client's program. + Can be accomplished by using: 1. Generalized auditing software — composed of generally available computer packages w/c has been designed to perform common audit tasks 2. Purpose-written programs ~ designed to perform audit tasks in specific circumstances. ¥ Other CATS 4. Snapshots ~ taking a picture of a transaction as it flows through the computer systems. 2. System control audit review files (SCARF) — embedding audit software modules within an application system to provide continuous monitoring of the systems transactions. The information is collected into a special computer file that the auditor can examine.PERFORMING SUBSTANTIVE TESTS ‘Substantive Tests - ore audit procedures designed to substantiate the account balances orto detect. ‘material misstatements nthe financial statements. ‘The decision about w/c procedures to use is based on the auditor’ judement about the expected effectiveness and efficiency of such [procedures in satisfying the audit objective. ¥ Analytical procedures applied as substantive tests enable the auditor to obtain corroborative evidence about a particular account. 7 When intending to perform analytical procedures as substantive tests, the auditor should focus on those accounts that are predictable. The following generalizations may be helpful in assessing the predictability of those accounts: * Income statement accounts are more predictable compared to balance sheet accounts. *+ Accounts that are not subject to management discretion are generally predictable. * Relationships in a stable environment are more predictable than those in a dynamic or unstable environment. 2. Test of Details ¥ Itinvolves examining the actual details making up the various account balances. This approach may take the form of: = Test of details of balances ~ involves direct testing of the ending balance of an account ‘This will be used when account balances are affected by large volume of relatively immaterial transactions. 1+ Test of details of transactions - involves testing the transactions which give rise to the ending balance of the account. '* This s useful if account balances are comprised of a smaller volume of transactions representing, ‘relatively material amounts.Effectiveness of Substantive Test [Nature of substantive test: relates to quality of evidence; high quality of evidence is preference, yet itll involve ‘AUDIT EVIDENCE high cost ‘Timing of substantive test: the higher the risk of material misstatement, the more likely itis that the auditor may decide to perform ST closer to year-end, Extent of substantive test: the auditor ordinarily increases the extent of ST as the risk of material misstatement increases. Relationship between Substantive Test and Test of Control ‘Test of control provide evidence that indicates a misstatement is likely to occur. Substantive test on the other hand, provide evidence about the existence of misstatement in an account balance. It refers to the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. It consists of: > Underlying accounting data — refers to accounting records underlying in the FS. This includes books of accounts, related accounting manuals, worksheet supporting cost allocations and reconciliations prepared bby the client personnel. » Corroborating information ~ supporting the undertying accounting data obtained from client and other sources. This includes documents such as invoices, bank statements, POs, contracts, checks, etc. © Qualities of Evidence > When performing tests of control, audit evidence must support the assessed level of control risk > When performing substantive tests, audit evidence must support the acceptable level of detection risk, > When obtaining audit evidence, the auditor should consider the: Sufficiency ~ refers to the amount of evidence that the auditor should accumulate. ‘The auilitor uses his judgment to determine the amount of evidence needed to support the opinion on the FS. The following factors may be considered in evaluating the sufficiency of the audit evidence: competence of evidence, materiality of item being examined, the risk involved in a particular amount, ‘experience gained during the previous audit. Appropriateness~ is the measure of the quality of audit evidence and its relevance to a particular assertion and its reliability. Relevance relates the timeliness of evidence and its ability to satisfy the audit objective. Reliability relates to the objectivity of evidence and is influenced by its source and by its nature. While reliability of audit evidence is dependent on individual circumstance, the following generalizations ‘could help the auditor in assessing the reliability of audit evidence: Audit evidence obtained from independent outside sources is more.reliable than that generated internally. Audit evidence generated internally is more reliable when the related accounting and internal ‘sontcol systems are effective. ¥ Audit evidence obtained directly by the auditor is more reliable than that obtained by the entity. Audit evidence in the form of documents and written representations is morereliable than oral representations. ‘+ Cost/benefit consideration when obtaining evidence > Ordinarily, the auditor finds it necessary to rely on audit evidence that is persuasive rather than conclusive innature. ‘AUDIT DOCUMENTATION/ WORKING PAPERS ‘Working papers are records kept by the auditor that documents the audit procedures applied, information ‘obtained and conclusions reached. PSA230 requires the auditor to document matters that are important to support an opinion on FS, and evidence that the audit was conducted in accordance with PSA.Functions of the Working Papers: ‘Support the auditor's opinion on FS ‘= Planning future audits ‘Support the auditor's representation as to ‘= Providing information useful in rendering other compliance with PSA. services (MAS or tax consultancy) Assist the auditor in the planning, performance, = Providing adequate defense in case of litigation review and supervision ofthe engagement Form, Content, and Extent of Audit Documentation + Indeciding on these, the auditor should consider what would enable an experienced auditor, having no Brevious connection with the audit to understand: a. The nature, timing, and extent of the audit procedures to comply with PSAs and applicable legal and regulatory requirements b. The results of the audit procedures and the audit evidence obtained. ¢. Significant matters during the audit and the conclusions reached thereon. Classification of Working Papers > Permanent file — contains information of continuing significance to the auditor in performing recurring, audits. This file would most likely include: copies of articles of incorporation and by-laws, major contracts, engagement letter, org. chart, analyses of long-term accounts, etc. > Current file ~ contains evidence gathered and conclusions reached relevant to the auelt ofa particular year. This file includes: copy of F5, audit program, working TB, lead schedules, correspondence w/ other parties Ownership of working papers Working papers are the property of the auditor and the client has no right to the working papers prepared by the auditor. > Working papers may sometimes serve as reference source forthe client but they should not be consideced aipactocasa substitute forthe cients ceconds, Confidentiality of working papers: > Although the working papers are the personal property of the auditor, these working papers cannot be ‘shown to third parties w/o client's permission, except: © When disclosure is required by law or when the working papers are subpoensed at court. ‘= When there isa professional right to disclose information such 3s when the auditor uses his working papers to defend himself when sued by client for negligence. Retention of working papers. Working papers should be retained by the auditor for a period of time sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements of record retention. Guidelines for the preparation of working papers. ‘The re techniques may be used by the auditor: ‘heading (to be properly identified with such information such as cent name, type of working paper, Content description, period covered) * indexing (use of lettering or numbering system to identity accounts), + sc03s-indexing/cmss referencing (to provide a trail in reviewing), * fick marks (symbols to describe the audit procedures performed). AUDITING ACCOUNTING ESTIMATES PSAS40 defines ‘accounting estimate’ is an approximation of the amounts of an item in the absence of a precise means of measurement. The risk of material misstatement is greater when accounting estimates are involved. ‘Management is responsible for making accounting estimates included in the financial statements. ‘The auditor's responsibility is to obtain sufficient appropriate evidence as to whether: ‘* Accounting estimate is property accounted for and disclosed ‘+ Accounting estimate is reasonable in the circumstances.> Imaddition, the auditor may use one or a combination of the following approaches: 1. Review and test the process used by mgmt. to develop the estimate. 2. Make an independent estimate 3. Review subsequent events which confirm the estimate made. RELATED PARTIES ~ refers to persons or entities that may have dealings w/ one another in which one party as the ability ‘to exercise significant influence or control over the other party in making financial and operating decisions, ‘Management's Responsibility: Mgmt. is responsible for the identification and disclosure of related parties and transactions with such parties. Auditor's responsibility: The auditor should obtain and review information provided by the directors and mgmt. Identifying the names ofall known related parties and related party transaction. + Anaudit cannot be expected to provide assurance that all related party transactions will be discovered. USING THE WORK OF AN AUDITOR'S EXPERT An experts a person or firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing. * PSA620 identifies two kinds of experts: ‘Auditor's Expert ~ an expert, whose wark in his/her field of specialization, is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. ‘+ Management's Expert ~ an expert, whose work in his field of expertise, is used by the entity to assist in preparing the financial statements, > Not all engagements would require the help of an expert. When determining the need of use of the work of an ‘expert the auditor would consider: whether the mgmt. has used a mgmt.’s expert in preparing FS, the nature ‘and significance of the matter, the risk of material misstatement in the matter, and expected nature of procedures to respond to identified risks Effect of the Reliance on Expert’s Work on the Auditor's Report ‘+ The auditor has sole responsibility for the audit opinion expressed and that responsibility is not feduced by the auditor's use of the work of an expert. Thus, the auditor should not refer to the work of an auditor's expert in an auditer’s report containing an unmodified opinion ‘* When an auditor's report contains a. modified opinion. the auditor can make reference to the expert's ‘work if the auditor believes that such reference is necessary in order for the readers to understand the reason of expressing a modified opinion. When this happens, the auditor should indicate in his report that such reference does not reduce the auditor's responsibility for that opinion. CONSIDERING THE WORK OF INTERNAL AUDITORS Internal auditing is an aparaisal activity established within an entity as a service to the entity. Considering the work of internal auditor involves two important phases: 1, Making a preliminary assessment of internal auditing (considering the competence, objectivity, due professional care, and scope of function of internal auditors) 2. Evaluating and testing the work of internal auditing ~ to confirm its adequacy for the external auditor's purposes. ‘= The external auditor may also request the assistance of the internal auditors in performing routine or mechanical audit procedures.AUDIT SAMPLING PSA $20 defines audit sampling as, “the opplication of audit procedures to less than 100% of the iterns within {an account balance or class of transactions such that all sampling units have o chance of selection Risks in Sampling. 1, Samplingrisk ~refers to the possibilty that the auditor's conclusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedures. This exists because the sample selected for testing may not be truly representative of a population. Alpha Risk ~ results in an auditor pertorming audit procedures more than what is necessary, thus affecting audit. ey. Beta Risk - results in an auditor performing audit procedures less than what is necessary, Risk of overreliance Risk of incorrect acceptance Risk of underreliance Risk of incorrect rejection thus affecting audit effectiveness. > The only way to eliminate sampling risk is to examine the whole population, yet itis not feasible to do so > Controlling Sampling Risk: This can be done by: ‘Increasing the sample sie ‘© Using an appropriate selection method 2. Non-samplingrisk ~ refers tothe risk that the auditor may draw incorreet conclusions about the account balance or class of transactions because of human errors. > Non-sampling isk Is something that cannot be eliminated even if the auditor examines the population. » Controlling Non-sampling Risk: This can be done by proper planning, adequate direction, review, and supervision of the audit team. General Approaches to Audit Sampling 1. Statistical sampling — is a sampling approach that uses random based selection of sample and uses the law of probability to measure sampling risk and evaluate sample results 2. Non-statistical sampling - i a sampling approach that purely uses auditor’ judgment in estimating sampling risk, determining sample sie, and evaluating sample results Audit Sampling Plans . Attribute Sampling Estimate the frequency of occurrence | Test of Controls to estimate the rate ‘of acertain characteristic in a of deviations. population. 2 Variable Sampling Estimate @ numerical measurement | Substantive Tests to estimate the ‘of 3 population such as peso value. amount of misstatements.‘Steps in Audit Sampling: 1. Define the objective ofthe test. | Specify the control tobe selected. | Specify the purpose ofthe test and its relationship tothe financial statement assertions. 2 Determine the proceduresto | Determine the appropriate audit | Determine the appropriate audit bbeperformed. procedures to satisfy the objective. | procedures to satisty the objective. Define the population and the Detine the population and its sample deviation rate is greater than tolerable deviation rate ~ means that sample results do not support the planned degree of reliance on IC. Control risks will be assessed at high level and more extensive ST will be performed. > sample deviation rate is less than tolerable deviation rate ~ consider the allowance for sampling risk (the possibility that these sample results could have occurred even ifthe actual population deviation rate is higher than TO} a. IfSD is considerably lower than TD (Ex. SO at 2% vs. TD of 10%) the sample results supported the planned degree of reliance on 'C. 'b. fSD is barely lower than TD (Ex: SD at 8% vs. TD of 10%) - there is high possibilty thatthe actual deviation ‘ate will exceed the TD rate. (Other Sampling Applications: Sequential sampling/ stop-or-go sampling — used when an auditor expects very few deviations within the ‘population. Under this method, the auditor does not use fixed sample size. 2. Discovery sampling — this form of attribute sampling is most appropriate when no deviations are expected in the population. This s normally used when the auditor suspects that an irregularity might have been committed. Evaluating the Results for Substantive Tests (Step 6): 3. Project the misstatements in the population. uses population and sample size > Difference estimation ~ uses number of customers on the population and number size 4. Compare projected misstatements together with tolerable misstatements and draw an overall conclusion. > if projected misstatement is greater than tolerable misstatements ~ the auditor will conclude that the account balance is materially misstated. > if projected misstatement is Jess than tolerable misstatements - consider the allowance for sampling risk. > In some circumstances, the auditor may encounter anomalous errors. These are errors or misstatements that arise from isolated event that has not recurred other than specifically identifiable occasions and are therefore not representative to the population.COMPLETING THE AUDIT AND POST AUDIT RESPONSIBILITIES COMPLETING THE AUDIT ‘After the fieldwork is almost complete, a series of procedures are generally carried out to complete the audit. These procedures include: 1. Identifying subsequent events that may affect the FS under audit. '¢ Subsequent events are those events or transactions that occur subsequent to the balance sheet date and may affect the financial statements and the auditor's report. it may be classified as: > Requiring Adjustment — those that provide further evidence of conditions that existed at the BS date > ‘Requiring Disclosure those that are indicative of conditions that arose subsequent to the 8S date. ‘¢ PSA S60 states that “The auditor should perform procedures designed to obtain sufficient appropriate evidence that all events up to the date of the auditor's report that may require adjustment of, or disclosure in the financial statements have been identified.” ‘+ Subsequent events occurring after the report date but before the FS are issued. > The auditor does not have any responsibilty to perform procedures to identify subsequent events after the date of the auditor's report. > ifthe auditor becomes aware of an event occurring after the report date but before the FS issuance date, he ‘should take the necessary actions to ascertain whether such event is has been properly accounted for and disclosed in the notes to FS. > Failure on the part of the client to make amendments to the FS, where the auditor believes they need to be amended, will cause the auditor to issue either QUALIFIED OR ADVERSE OPINION, ‘+ Effect of subsequent events on the date of report. > if-a material SE requiring adjustment to the FS occurs after the date of auditor's report but before the FS issuance, the FS should be adjusted and the auditor’s report should BEAR THE ORIGINAL DATE OF ‘REPORT (date of completion of audit procedures). > Wa SE requiring disclosure occurs after the date of auditor's report but before the FS issuance, the auditor should consider the adequacy of the disclosure and the date the report either: 'Y-_-Asof the date of the subsequent event hen this used by the autor, the responsi forthe Sf extended) 1 Dual date of the report (used when the autor does not want to extend the procedures that original date of report and the date of the specie event occurred eg: March 25, 2008 except for Note 12 dated Mach 31,2018) 2. Identifying contingencies such as litigations, claims and assessment. '* PSAS01 requires the auditor to carry out procedures in order to become aware of any litigation and claims involving the entity which may have a material effect on the FS. ‘¢ Mgmt. Is the primary source of information for L.CA. The auditor corroborates info obtained from mgmt. to lawyers by asking the client to send letters of audit inquiry. © tLmemt. refuses to give the auditor permission to communicate w/ the entity's lawyer.or lawver refuses.to reply, this would be considered a scope limitation that would require the auditor to issue either a QUALIFIED ‘OR DISCLAIMER OF OPINION, + if there is uncertainty because the lawyer is unable to estimate the likelihood of an unfavorable outcome Including the potential loss on one outcome, the auditor should consider an EMPHASIS OF MATTER PARAGRAPH TO AN UNMODIFIED OPINION, 3. Obtaining written management reoresentation. ‘© PSA S80 requires an auditor to obtain sufficient appropriate audit evidence that the entity's mgmt. has ‘acknowledged thot hos fulfilled its responsibility for the preparation and presentation of fair FS and has ‘approved the FS ~ such evidence can be obtained using 3 WRITTEN cearesentatian from the mgmt. (can be ‘requested from CEO and CFO or other equivalent officers) ‘* Mgmt. written representations complement the audit evidence the auditor accumulates, but they do not substitute for the performance of audit procedures. ‘+ Written representation should be addressed to the auditor and the date shail be as near as practicable to, but not after the date of auditor's report.‘¢ When mgmt. does not provide written representation or the auditor concludes that there is sufficient doubt on the integrity of the mgmt., the auditor should consider these as scope limitation that would warrant a ‘DISCLAIMER OF OPINION. |. Performing wrap-up procedures. ‘© Wrap-up procedures are procedures done at the end of the audit that generally cannot be performed before the other audit work is complete. These include: 2. Final analytical procedures > PSAS20 states that the auditor should apply analytical procedures at or near the end of the audit. > Analytical procedures applied in completion phase should focus on: identifying unusual fluctuations that were not previously identified and assessing the validity of the conclusions reached and ‘evaluating the overall FS presentation. Evaluation of the entity's ability to continue as 2 golng.concern > The auditor's responsiblity is to consider the appropriateness of mgmt. use of GC assumption (consider whether there are event s that cast a significant doubt on entity’s ability to continue as {going concern and evaluate mgmt.’s assessment of the entity's ability to continue as GC) > When evaluating the entity's GC assumption, the auditor should remember that the conditions and ‘events that may indicate significant doubt about entity’s continued existence may be mitigated by ‘other factors (alternatives such as disposal of assets, obtaining additional capital, etc) > Effect on the auditor's report: lf there is reasonable assurance that the entity is going concem, the auditor should express an UNMODIFIED OPINION, vit there is uncertainty and is adequately disclased that the entity is going concern, the auditor ‘should express an UNMODIFIED OPINION WITH EMPHASIS OF MATTER PARAGRAPH - If there is uncertainty and is.not adequately disclosed that the entity is going concern, the ‘auditor should express EITHER QUALIFIED OR ADVERSE OPINION. If the GC assumption is not appropriate, the FS should be prepared using other appropriate basis. Otherwise the auditor should issue an ADVERSE OPINION, & Evaluating audit findings and preparing a list of potential adjusting entries. YH mgmt. accepts all adjusting entries proposed by the auditor, an UNMODIFIED OPINION is issued. _ifim@mt. refuses to correct the FS, 9 QUALIFIED OR AN ADVERSE OPINION will be issued. POST AUDIT RESPONSIBILITIES (Events after the FS have been issued) ‘+ Ordinarily, the auditor does not have any responsibility to perform additional procedures after the FS are {ssued, unless the auditor is aware that the audit report issued may be Iagnaranriate (he must take steps to prevent future reliance on such report). 7 Subsequent discovery of facts 1. Discuss the matter w/ the appropriate level of mgmt. and consider whether the FS needs revision. 2. Advise mgmt. to take steps to ensure the users of the previous issued FS are informed of the situation. ¥ if memt. makes appropriate revisions and disclosures, the auditor should issue a new audit ‘eport that includes an EMPHASIS OF MATTER PARAGRAPH. If mgmt. refuses to revise the FS 0 to inform the users about the new info, the auditor should notify the persons ‘responsible for the refusal and intent to prevent reliance to the audit report. > Subsequent discovery of omitted procedures 1. Assess the importance of the omitted procedures to the auditor's ability to support his opinion 2. Undertake to apply the omitted procedures or the corresponding alternative procedures. ¥ fomission impairs the current ability to support his opinion, apply the procedures. Y If, after applying the omitted procedures, it makes the report inappropriate, discuss this ‘matter with mgmt. to take steps to prevent reliance in the report.THE AUDITOR'S REPORT ON FINANCIAL STATEMENTS PSA 700 requires an auditor's report to contain a clear expression of the auditor’s opinion on the FS, THE UNMODIFIED REPORT ‘This is issued when the auditor concludes that based on the audit evidence obtained, that the FS is fairly presented, in all material aspects in accordance with the applicable financial reporting framework. Basic Elements of the Unmodified Report: 1. Title {to emphasize the independence of the auditor and to distinguish the report from others) Addressee (report should be addressed to those parties for whom the report is prepared such as shareholders, 600, third parties) 3. Introductory Paragraph (name of enty, FS aucted le of each FS inching date covered by FS, summary of signet counting poles and notes) 4. Management's Responsibility for the FS (descibes responsi fr the preportin and fr presentoton of FS and for dexign unplementation and masntenance of IC) 5. Auditor's Responsibility (stating tht the resperibity ofthe auditors to express an opinion on the FS, thatthe bust ws conducted i ocordonce with PSA, ant give a gener description of the oud) 6. Auditor's Opinion 7. Other Reporting Responsibilities: 8. Auditor's Signature (name of act frm andthe persona name ofthe ator) 9. Date of Report (date 2s of the completion of all essential audit procedures) 10. Auditor's Address (locaton the rsacton where the auditor maatans hoe) MODIFICATION TO THE OPINION MODIFICATION TO THE OPINION MATERIAL MISSTATEMENT SCOPE LIMITATION ‘Inappropriate accounting policy selected (adie unable a pete recesary aut procedure sur '* Misapplication of selected accounting ‘Penn a Se es = See = -vaneneneen ome =o + Unantions imposed by management >| Disclaimer of Opinion See Basis of Modification Paragraph (placed immediately efare the Opinion Paragraph) > For MM, it should include: a description of nature of misstatements and a quantification ofits financial effects. > For SL, it should explain the reason of inability to obtain sufficient appropriate audit evidence,Piecemeal Opinion > (tis an unmodified opinion expressed on one or more components of the FS while expressing an adverse or disclaimer of opinion as.a whole. PSA 705 does not allow this practice. EMPHASIS OF MATTER PARAGRAPH (placed after Auditor's Opinion Paragraph) EMPHASIS OF MATTER {co give emphasis on an important matter affecting the FS or the auditors report; these does not negate the auditor's unmodified opinion} 1. Uncertainties* 2. Going Concern** Adequately 3. Early Application of New Accounting Standards disclosed in the 4. Major Catastrophe '5. Subsequent Discovery of Facts 6. Special Purpose FS notes to the FS ‘Mutiple uncertainties may cause the nuitor to sue » DISCLAIMER OF OPINION ‘Only GC uncertainty adeauatetydiscosed Wit wos not adequately disclosed, the auditor wit niwe 9 QUALIEED OR ADVERSE OPINION. 1 the GC assumtion is Imappemerate and the entity insists o use GC princile, the auctor wil sve an ADVERSE OPINION, (OTHER MATTER PARAGRAPH (OTHER MATTER 10 communicate a matter other than those that are presented or disclosed in the FS) REPORTING ON COMPARATIVE INFORMATION 1734710 ert ta amawor on omoarate norman 1 Comparative FS = amounts and disclosures forthe preceding period ae not part of current FS 2. PFS were audited by » continuing auditor (state the fct of different updated opinion report date of PY report. type of PY pinion, reason of changing opinion) 1b. PFS were audited by another auditor (may ether rxisue aradecessar BPES or successor stil make nlstence on predecessors report) ‘& _PPFS were not audited (revise PPFS Is materially misstated, then i mgmt. refused to revise FS, the auditor wil issue a QUALIFIED OR ADVERSE OPINION) 2. Corresponding Figures - amounts and diclosures fr the preceding perod are part of current FS (comparatives are not specially Mentiied because the opinion s only on the current period FS only) [MATERIAL INCONSISTENCIES ~ exists when the otherinformation® contradicts the information contained in the audited FS. FINANCIAL STATEMENTS [PREPARED USING MORE THAN ‘ONE FINANCIAL FRAMEWORKS. LUMITING THE USE OF THE AUDITOR'S | | SUBSEQUENT DISCOVERY REPORT (OF FACTS (Indicate in Other Matter Paragraph that auditor's report is intended solely for {Refer to post-audit Intended users) responsibilities) {include in other matter paragraph the frameworks are acceptable)‘OTHER INFORMATION ACCOMPANYING FINANCIAL STATEMENTS. * PSA 720 states that the auditor has no responsiblity to corroborate the ather info (such asin annual reports), but he should read the other info to determine that itis not materialy inconsistent with the FS and whether the other information needs to be amended) fan amendment is necessary in the FS, and the entity refuses to make an amendment, the auditor wil sue elther 3 ‘QUALIFIED OR ADVERSE OPINION, Y ifan amendment is necessary in the other information, and the entity refuses to make an amendment, the auditor should ‘consider making an Other Matter paragraph indicating the material inconsistency. withhold the auditors coinion. oF withdraw from the engagement (MATERIAL MISSTATEMENT OF FACTS: This exists when other information, not related to matters appearing to FS, is incorrectly resented. the auditor concludes that there is 2 material misstatement of fact and the mgmt. refuses to correct the other Jnformation, the auditor should notify the audit committee and if necessary, obtain legal advice. ‘AUDIT OF GROUP FINANCIALSTATEMENTS ¥Agroup auditor is the auditor with responsibility for reporting the FS of an entity when those FS include Sinancial information of one or more components audited by another auditor, Ifthe group auditor has not become satisfied about the professional competence and the independence of the ‘component, the group auditor should obtain sufficient appropriate audit evidence relating to the financial Information of the entity by auditing the FS of the component. Auditor's report on group financial statements shall not refer to 3 component auditor. [REPORTS ON SPECIAL PURPOSE FINANCIAL STATEMENTS ¥ _SPFS are made by entities that are complying with a special financial reporting framework designed to meet the needs of specific users (PSA 800). Examples include other comprehensive basis of accounting like cash basis accounting, financial reporting framework established by SEC, IC, or BSP, and financial reporting provisions of a ‘contract such as bond indenture, loan agreement or a project grant. Audit report of SPFS should include an EMPHASIS OF MATTER PARAGRAPH, ‘AUDIT OF SINGLE FINANCIAL STATEMENT OR SPECIFIC ELEMENT OF A FINANCIAL STATEMENT “These are engagements that requested to express an opinion on a single FS or one of components of a FS. This type of engagement does not result to an expression of an opinion on FS taken as a whole. When accepting this type of engagement: the auditor may need to examine other related accounts, materiality should be related to the specific account, and auditor's report on a component of FS should not accompany the FS of the entity. When the auditor undertakes an engagement to report on a single FS or on a specific element of aFS, the ‘auditor should express 2 separate opinion for each engagement. Incase the auditor expresses an adverse or disclaimer of opinion as a whole but the auditor consider it appropriate to express an unmodified opinion on the single F5/specific element (which is a piecemeal opinion), the auditor shall only do sof: 1. the auditors not prohibited by law or regulation, 2. the report on the element isnot published together with the auditors report on the complete FS, and 3. the specific element does not constitute a major portion of the entity's complete FS. REPORTING ON SUMMARY FINANCIAL STATEMENTS ¥- Summary financial statements are derived only from the complete set of FS (to highlight the entity's financial position and results of operation). The auditor's report on the audited FS should express an opinion about whether the summary FS are consistent \with the audited FS or whether the summary FS are a fair summary of the audited FS.ASSURANCE ENGAGEMENTS AND RELATED SERVICES ‘There are four types of services that are normally performed in connection with the entity’s FS, These are: 1. Audit 3. Compilation 2. Review -Agreed-Upon Procedures Objective | Toexpress.an Toenable the CPA to report | Tocarry out audit To assist the client in pinion on the FS | whether anything has come | procedures agreed on | the preparation of the tohisattention that would | with the client and any | FS indicate the FS are not ‘appropriate thir parties presented fairly identified in the report Level of Wigh/ Reasonable | Moderate/Limited None None Assurance provided by the cPA Type of Report | Positive assurance | Negative assurance Description of identification of Issued (opinion) procedures performed | financial information and actual findings | compiled ‘Basie Risk assessment | Inquiry and analytical ‘As agreed ‘Assemble FS based on Procedure | procedures, test of | procedures. It does not client's data controls, and include assessing control substantive tests | risk, test of records and of responses to inquiries by obtaining corroborating evidence. Independence | Required Required Not Required Not Required Requirement [ASSURANCEENGAGEMENTS PSA 3000 states that assurance engagements are intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria, Types of assurance engagement: reasonable assurance engagement (audit) and limited assurance engagement (review). Elements of Assurance Engagements: ‘Three-party relationship Appropriate subject matter 1 2 3. Suitable criteria 4, Sufficient appropriate evidence 5. Written assurance report REPORTS ON PROSPECTIVE FINANCIAL INFORMATION Prospective financial information is financial information based on assumptions about events that may occur in the future and possible actions of the entity. There are two types: 2. Forecast - PFI prepared on the basis of the assumptions as to future events which mgmt. sxpects to take as of the date the information is prepared (best-estimate assumptions) 2. Projections PFI prepared on the basis of hypothetical assumptions or a mixture of best-estimate and hypothetical PSA 3400 states that the auditor, when examining PFI, should obtain sufficient appropriate evidence that PFI are reasonable, properly prepared and presented, and on consistent basis. When reporting on the reasonableness of mgmt. assumptions, the auditor normally provides onlymoderate level of assurance,THE CODE OF ETIHICS AND REPUBLIC ACT 9298 THE CODE OF ETIHICS ‘THE CODE OF PROFESSIONAL ETHICS - standards of conduct that embody and demonstrate integrity, objectivity, and concern for the public interest. The Code of Ethics for Professional Accountants in the Philippines is based on the IFAC Code of Ethics for Professional ‘Accountants. ‘The International Federation of Accountants (IFAC) serves the public interest by contributing to the development of strong and sustainable organizations, markets, and economies. It advocates for transparency, accountability, and comparability of financial reporting: helps develop the accountancy profession; and communicates the importance and value of accountants to the global financial infrastructure. ts of "The Code of Ethics for Professional Accountants” * Part A—General Application of the Code ‘+ Part Professional Accountants in Public Practice * Part C—Professional Accountants in Business Conceptual Framework Approach: (a) Identify threats to compliance with the fundamental principles; (0) Evaluate the significance of the threats identified; and (c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. Threats (0) Selfnterest threat ~ is the threat that financial or other interest will inappropriately influence the professional accountant’s judgment of behavior. {b) Setf-eview threat ~ is the threat that a professional accountant will nat objectively evaluate the results of the ‘acevious judgment made or service provided in forming a conclusion about the subject matter of the engagement. {€) Advocacy threat ~is the threat that a professional accountant will promote a client’s or employer's position to the point that the professional accountant’s objectivity is compromised. {d) Familiarity threat ~ occurs when, by virtue of close relationship with a client, its directors, etc. becomes too sympatheticto the client's interests. {e) intimidation threat ~ is the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. Safeguards (a) Safeguards created by the profession, legislation or regulation; and {(b) Safeguards in the work environment. + Firm-wide safeguards ‘+ Engagement specific safeguards ‘+ Safeguards within the client's systems and procedures PART A~GENERAL APPLICATION OF THE CODE ‘+ Section 100 introduction and Fundamental Principles + Section 120 integrity ~ not merely honesty but fair dealing and truthfulness. + Section 120 Objectivity ~to be far, intellectually honest, and free of conflicts of interest + Section 130 Professional Competence and Due Care ~ Professional competence means he/she should continually strive to improve his knowledge and skills to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation, and techniques. It is divided into two phases: attainment and maintenance¥ Due professional care encompasses the responsibility to perform professional services in accordance with technical and professional standards. Section 140 Confidentiality ~ he/she should not use or disclose any such information w/o proper and specific authority or unless: permitted by the client or employer, required by law, there is a professional duty to disclose information ROFESSIONAL ACCOUNTANTS IN Section 200 introduction Section 210 Professional Appointme Section 220 Conflicts of interest Section 230 Second Opinions Section 250 Marketing Professional Section 260 Gifts and Hospitality Section 270 Custody of Client Assets Section 280 Objectivity—All Section 290 independence—Audit a PUBLICPRACTICE nt Section 240 Fees and Other Types of Remuneration Services ind Review Engagements Section 291 Independence—Other Assurance Engagements Section 150 Professional Behavior ~ he/she should comply with relevant laws and regulations Independence of mind - is the auditor's perception of his own independence. Independence in appearance ~ refers to the public perception of the professional accountant’s independence. ¥ Non-audit (not restricted) Independence Requirements of Different Assurance Engagements: Yes Yes ‘No ‘Non-audit (restricted) ‘material financial interest (direct or indirect) Yes Note: Additional requirement is that the firm should not have any No No ¥ Financial interest Independence interpretations and Rulings ¥ Direct financial interest (material or immaterial Material indirect financial interest ‘Loans and guarantees 7 | Close Business Relationships (oan to @ financial institution, provided that the loan is Amumaterial to bath and made my normal lending circumstances ¥ Loan to an assurance client that is not a financial institution Considered as an indirect financial | Interest, must be material to impair independence Family and Personal Relationships Past employment with an assurance client ‘Member of assurance team is an immediate family member of the assurance client | ‘Member of assurance team had served in position to influence the subject matter of the engagement ‘Serving a8 an officer or director on | ¥ 'AS an honorary member, that he Serves as an officer or a director‘does not participate in the mgmt. | on the board of an assurance client ‘or operations of the client Lead engagement partners must be rotated at least once every 5 years (for listed companies) ¥ Provision of services to an audit client hat is 8 public interest entity clients Provision of taxation services to « | assurance cients Provision of legal services to | 7 Advisoryservices | 7 nareser seins assurance clients Corporate finance services Recruiting Senior Management, ¥ Recruited for ultimate hiring | ¥ Recruited for consulting services. decision Fees overdue At the time of issuing the assurance report, the PY professional fees due from client is unpaid Contingent Fees v 7 Fees that are fixed by court of ‘other public authority, fees determined based on the results of judicial or govt’ agency proceedings Gifts and Hospitality Zz ‘Actual or threatened litigation < PART C—PROFESSIONAL ACCOUNTANTS IN BUSINESS, Section 300 Introduction Section 310 Potential Conflicts Section 320 Preparation and Reporting of Information Section 330 Acting with Sufficient Expertise Section 340 Financial interests Section 350 inducements ‘REPUBLIC ACT NO. 9298: THE PHILIPPINES ACCOUNTANCY ACT OF 2004 Overview of RA 9298 and its IRR ‘The Republic Act No. 9298, including its implementing rules and regulations, consists of: 2. five Articles (Rules); © hasthree Annexes; and with 44 Sections; © was enacted into law on May 13, 2004. Article| Rule} = Act shall govern & provide for: © Regulation of education © Examination for CPA © Supervision, control and regulation of practice = Scope of practice: © Public accountancy © Education © Commerce & industry © Government = Definition of termsArticle | Rule Professional Regulatory Board = Chairman & 6 members = APO should submit its nominees not later than 60 days = Qualifications: ‘© Natural born Filipino. © Of good moral character © Registered CPA w/ 10 years © Not have any pecuniary interest experience © Not adirector or officer of APO. ~ Term: 3 years; no person shail serve in the Board for more than 12 years ~ Receive compensation & allowances + Powers & function ‘© Monitor conditions (© Adopt official seal © Supervise registration, licensure & © Investigate violations practice (© Punish for contempt © Prescribe & adopt rules (© Prepare/Amend syllabi for (© Conduct oversight into quality examinations (© Issue, suspend, revake or reinstate © Exercise other powers provided by the registration haw ~ Submit a report @ close of each yeor ~ _ FRSC composed of 15 members with a chairman and 14 representatives ~ ARSC composed of 15 members with a chairman and 14 representatives ~ Educational Technical Council (ETC) composed of 7 members with a chairman and 6 representatives with the functions of: ‘© Determine a min standard curriculum (© Establish teaching standards © Monitor progress of program ‘© Evaluate performance of educational institutions ~ Board is under supervision of the Commission ~ May remove/suspend members of the board when: Neglect of duty Violation of the Act Final judgment of crimes involving moral turpitude Manipulation ocoo Article 3 | Rule ti Examination, Registration & Licensure = Qualifications for examinations: © Filipino citizen (© Good moral character © BSA degree (© Not convicted of any crime involving moral turpitude = Documents submitted to support requirements: © NSO © College Diploma © NBI Clearance ~ Scope of exam: © TOA o aT © Business Law & Tax o AP © MAS 0 PRACI&2 ~ _ Rating: general average of 75% w/ no grades lower than 65%