FUNDAMENTAL PRINCIPLES Types of Assurance AS TO LEVEL AND FORMS

REASONABLE LIMITED
Elements of Assurance Engagement [3SECC] Assurance High/Reasonable Limited/Moderate
 Three-party relationship Form Positive Negative
 Practitioner Example Audit engagement Review engagement
↳ governed by professional competence Inquiry Inquiry
↳ may use works of other experts Analytical Procedures Analytical Procedures
 Responsible party Observation
↳ responsible for subject matter and subject matter Procedures Inspection
information or both Confirmation
 Intended users Reperformance
↳ must be identified by agreement. Recalculation

 Subject matter Types of Assurance AS TO STRUCTURE

 Nature of the assertion  Attestation Engagement
↳ Subject matter information – outcome of the  issues written communication about the reliability of
evaluation of the subject matter against a a written assertion
 aka. assertion-based engagement

es
criteria
ex. SM: SFP, SCI, SCF; SMI: FS ↳ Responsible party
 Characteristics ► Subject matter
↳ Qualitative, objective, historical ► Suitable criteria ➡ SMI ➡ Users
► Affects precision (able to evaluate) and ↳ Practitioner

ul
persuasiveness of evidence ► Evidence ➡ Report ➡ Users
► Identifiable  Direct Engagement
► Can be subjected to procedures  Responsible party does not present SMI. Practitioner
 Evidence [sufficient and appropriate] reports directly with SMI

rc
Cannot attain objectives if no evidence ↳ Responsible party
 Sufficiency (Quantity) ► Subject matter
↳ Greater risk, more evidence ↳ Practitioner
↳ Higher quality of evidence, less required ► Suitable criteria ➡ SMI ➡ Report

e
 Appropriateness (Quality) ► Evidence ➡ Report ➡ Users
↳ Relevance and reliability
LE H
! Merely obtaining more evidence may not compensate of
its poor quality
 Materiality – professional judgement
Non-Assurance Engagements
 Agreed-upon procedures
 Reports findings
 Assurance engagement risk  Users form their own conclusions
↳ ⬆ Assurance ⬇ Risk  Report is restricted to agreed parties
SA by
↳ Inherent risk  Compilation
► High volume transactions  Collect, classify, summarize financial information
► Cash transactions  Entails detailed data in manageable form
► Large amounts of estimates  Accountant WILL NOT EXPRESS any assurance
► Complex transaction  Users derive some benefits
► Economy  Tax services (with no conclusion) and tax consulting
 Advice on tax and business strategies
↳ Control risk
R te

 Management consulting and advisory

► IC not designed and operating effectively
 Improvement of client’s capabilities and resources
► IC don’t exist for specific assertion
► Testing IC is not efficient
ASSURANCE NON-ASSURANCE
↳ Detection Risk
FO nu

Improve quality or enhance Provide comments or

credibility recommendations
RoMM Detection Substantive
Independent professional Independence not required
Testing*
Audit, review, examination Agreed-upon, compilation, tax,
Inherent Risk
(inverse to (prospective) management advisory
RoMM) Three-party contract Two-party
i

Control Risk
Output: Opinion Output: Recommendation
O M

*Confirmation, Footing, Recalculation, Inspection, Tracing,

Vouching, Observation
International Standard-Setting Boards
 Professional skepticism – attitude of questioning mind
 International Federation of Accountants (IFAC)
↳ Necessary throughout the engagement
 Serves public interest – enhance relevance, reputation,
N st

↳ Reduce risk of overlooking suspicious events

value of global profession
↳ Evidence [more reliable if:]
↳ International Auditing and Assurance Standards
► Obtained from outside
Board (IAASB)
► Generated internally – if IC is effective
► Sets high-quality standards - strengthen public
La

► Directly obtained
confidence in global profession
T

► Written/Documentary form
↳ International Accounting Education Standards
► Original rather than
Board (IAESB)
 Facsimiles - exact copy
► Shape quality of accountancy educatino
 Photocopy - less reliable
↳ International Ethics Standards Board for
Accountants (IESBA)
 Criteria [benchmarks]
 Characteristics [RUN CR] ► Appropriate ethics including independence
↳ Reliability – allows evaluation ↳ International Public Sector Accounting Standards
Board (IPSASB)
↳ Understandability – not subject to different
interpretation ► Improve public sector financial reporting – use by
governments and public sectors
↳ Neutrality – free from bias
↳ Completeness – criteria is sufficiently complete,
Philippine Standards [engagement standards]
factors are not omitted
 Philippine Standards on Auditing (PSAs)
↳ Relevance – assist in decision-making
 Philippine Standards on Review Engagements (PSREs)
 Philippine Standards on Assurance Engagements (PSAEs)
 Conclusions [written assurance reports]
 Philippine Standards on Related Services (PSRSs)
Unmodified/Unqualified - Present fairly, in all material respect  Philippine Standards on Quality Control (PSQCs)
Qualified - Except for
↳ not an engagement standard
Adverse - Do not present fairly, in all M respect
Disclaimer of Opinion - Don not express a conclusion
Practice Statements – interpretive guide and practical
assistance to implement related engagement standard.
 INTRODUCTION TO FS AUDIT 4. Substantive Testing [Evidence-gathering]
↳ Either analytical procedures or test of details (Bal or Tran)
 A systematic process, obtaining and evaluating evidence ↳ Ascertain degree of correspondence between FS and FRF
about assertions 5. Completing the Audit
 Degree of correspondence – assertion vs. criteria ↳ Conclusions are reached and reviewed, opinions: formed
↳ Assess whether conclusion is consistent with evidences
Theoretical Framework for Financial Statement Audit 6. Issuance of Report
 Verifiable data ↳ Communicate results to users
 Independence of auditor 7. Post-audit responsibilities [Areas for improvement]
 No long-term conflict – Auditor and Management ↳ Evaluate the quality of services by the engagement team
 Effective IC ➡ more reliable FS
 Consistent application of acctg policies ➡ more reliable FS PRELIMINARY ENGAGEMENT ACTIVITIES
 Public benefit Accept a new engagement or continue a recurring
engagement.
Demand for FS Audit
 Business and Information risk Considerations
 Conflict of interest – responsible party and intended users  Auditor’s competence, capabilities, time and resources

es
 Expertise  Auditor’s independence
 Remoteness of users ↳ Independence in mind – expressing conclusion
 Financial consequence without compromising influence
 Regulation ↳ Independence in appearance – avoidance of facts
that will lead an informed party to conclude that

ul
SEC Requirements the integrity of the firm or entity is compromised
Stock and non-stock TA and TL = P 600,000 or more  Evaluate auditability
Branch – stock foreign corp Assigned capital = P 1M or more ↳ Client’s information should be available to auditor
Branch – non stock foreign ↳ Absence of documents raises significant doubt
TA = P 1M or more

rc
corporation  Client management’s integrity
ROHQs – foreign corp. Total Revenues = P 1M or more ↳ Communication with the predecessor auditor
► Reasons for change in auditor
BIR Requirements ► Audit committee prior communications (fraud, etc.)

e
Persons, Partnerships, Gross annual sales, receipts = ► Integrity of the management
Corporations P 3M or more [aka. if vatable] ► Disagreements
LE H
Assertions
Transaction and Account Balances Presentation and
* should seek permission from the client and document the
matters. Auditor may decline the engagement if denied.

Events [IS] [BS] Disclosures [Notes] Accepting the Engagement

 Audit Pre-conditions
SA by
TOCCAC ACERV PORCACUV ↳ Agreements with the management/TCwG
Completeness Completeness Occurrence ► Use of applicable financial reporting framework
Occurrence Existence Rights & Obligations ► Internal controls are free from error
Classification Rights & Obligations Completeness
► Provide auditor with
Accuracy Valuation and Accuracy
 Access to all relevant information
Cutoff allocation Classification
 Additional requested information
Understandability
 Unrestricted access to persons within the entity
R te

Valuation
*DO NOT ACCEPT a limited engagement as an audit
engagement if the management imposes a limitation that will
Inherent Limitations result into disclaiming an opinion, unless required by law.
 Selective testing [sampling risk]
FO nu

 Use of judgement [non-sampling risk]  Agreement to Terms

 Limitations on internal control
↳ Engagement Letter - Written agreement in the best
 Cost-benefit consideration
interest for both parties to avoid misunderstandings
 Management override
► Objectives and scope
 Collusion
► Responsibilities of auditor and management
 Human errors [control risk]
i

 Evidence is persuasive [rather than conclusive] ► Identification of applicable framework

O M

 Characteristics of subject matter [inherent risks] ► Reference to forms and contents

Audit Procedures [TRIFECTA - IOI] – performed throughout
 Inquiry – inside or outside the entity
 Observation – looking at process performed by others
N st
*NO NEED to record the terms if the law already prescribes in
sufficient and detailed, unless the management accepts.
Recurring Audits – new engagement letter not required
 Considerations for the need of a new engagement letter:

 Inspection – examining records, documents, tangibles

Plus: Analytical procedures – investigation of fluctuations ↳ Misunderstandings in audit objectives and scope
↳ Revision of special terms
Financial Statements/Accounting Records ↳ Change in BOD or management ownership, nature or size,
La

legal requirements, FRF, other reporting requirements

T

RACING ↳ Appointment, legal requirements, degree of ownership,

Completeness Existence/Occurence separate report, degree of independence
Understatement Overstatement
Liabilities, Expenses Assets, Income Acceptance of a Change in Engagement
 Accept only if there is reasonable justification
OUCHING ↳ REASONABLE:
Supporting Documents/Invoices ► Change in circumstance the requires the need
► Misunderstandings to the nature of original audit
OVERVIEW OF THE AUDIT PROCESS ↳ NOT REASONABLE:
► Restriction of scope, unable to obtain evidence
Audit Process ► Relates to incorrect, incomplete information
1. Preliminary Engagement Activities
↳ accept new client or continue an existing *If the auditor disagreed with the change, and is not permitted
↳ minimize the likelihood of associating with a client whose by the management to continue the original audit, the auditor:
management lacks integrity ↳ Shall withdraw where possible under laws/regulations
2. Planning an Audit ↳ See if there is any obligation to report the circumstance.
↳ Obtaining more knowledge about the client
↳ Assess different risk to determine NTE for FAP Is there a reasonable justification?
3. Study and Evaluation of Internal Control  YES: stop performing and referring to the old engagement,
↳ RAP: Design and implementation except agreed-upon procedures are involved. Start new
↳ ToC: Operating effectiveness  NO: Continue the original. If prohibited, withdraw. It is
↳ Basis of reliance on IC necessary to communicate it to appropriate party.
 PLANNING AN AUDIT Inherent Limitations: [COCCHA]
 Cost-benefit consideration – cost must not exceed benefits
PSA 300: The auditor plans the audit so that it will be  Override of the management – abuse of control responsibility
performed in an effective manner.  Collusion – circumvention of controls with in/outside parties
 Change in conditions – procedures may become inadequate
Benefits of Planning  Human error – carelessness, distraction, judgement mistakes
 Coordination of work done  Anticipated transactions – addresses ONLY routinary or usual
 Assignment of work allocations
 Facilitating the direction and supervision, and review of work Corporate Governance – system of stewardship and control
 Helping the auditor for Effective and efficient audit ↳ Guides the conduct of people and the organization itself to:
 Problems are identified and resolved in a timely basis ► Fulfill long-term economic success, moral, legal, social obli
 Attention to important (risky) areas of the audit ► Maximize success and create sustainable value to shrhldrs

Factors Affecting the Nature and Extent of Audit Plan Roles and Responsibilities
Less Extensive More Extensive  BOD [TCwG] – exercise corporate powers, oversight policies
Size Small entity Large entity  Management – execution of daily risks operations
Simple transactions Involves judgement
Complexity Components of Internal Control [CRIME]
(ex. depreciation) and estimates

es
Experience Recurring audits New/Initial audits  Indirect Controls – pervasive; FS Level of risk [FSL]
Circumstances Little or no changes Significant changes ↳ Control Environment
Timing After year-end Before year-end ► internal culture, attitude and awareness to IC
► overall foundation – influences control consciousness

ul
Planning phase: Pre-engagement, Assessment of Risk, Risk Response, Conclusion ► Elements: [IM CPA HO]
Previous Audit Current Audit
 Integrity, Management style, Competent individuals,
P A R C P A R C Participation of TCwG, Assignment of authority, HR
policies & procedures, Organizational structure

rc
Outputs of Audit Planning
 Overall Audit Strategy – Scope, Timing, Extent ↳ Risk Assessment [I AM]
 Detailed Audit Plan – NTE of RAP and FAP ► Identify business risks (only those relevant to FS)
 Audit Program – Detailed audit procedures ► Assess significance and likelihood of risks

e
*The audit program executes the overall audit strategy/plan
► Manage those risks
*Should be updated and changed throughout, as necessary.
*auditor is not responsible to identify ALL business
LE H risks. Business risk is broader than RoMMs
Identifying and Assessing RoMMs
 Financial Statement Level – risks relate pervasively to the
↳ Monitoring of Internal Control System
financial statements as a whole and potentially affect
► Assessing the quality of IC performance over time.
many assertions
► Assessing design and operations, timely-corrective acts.
 Determine if FS level risks affects assertion level risks
SA by
 Ongoing: [daily transactions] by same line functions
↳ Evaluate the nature and extent of pervasiveness
 Separate: [periodic] done by internal/external auditors

 Assertion Level – risks affect only certain assertions toward  Direct Controls – precise, supported by indirect controls, [AL]
account balances, classes of transactions, and disclosures
↳ Information and Communication System [PIISO]
 Determine risks in assertions [Significant, high, low risk]
► How entity initiates, records, processes its transactions
↳ Plan test of controls?
► People, Input/Data, Infrastructure, Software, Output
► YES – Assess control risks [Internal control topic]
R te

► NO – then RoMM is equal to inherent risk because

↳ Control Activities – mitigate risks, preventive and detective
control risk is assessed at maximum level
► Includes information processing and general IT controls
► Control activities: [PRAVS]
Materiality and Procedures
FO nu

 Physical/Logical Controls – asset security/access

MATERIALITY AUDIT RISK AUDIT PROCEDURES
 Reconciliation – comparing data, identify differences
Low High More extensive
 Authorization and Approval – for valid transactions
High Low Less extensive
 Verification – follow up action in did not match in policy
*Materiality vs. audit risk and procedures ➡ INVERSE
 Segregation of Duties [ICARE]; [CAR – minimum]
*Audit risk and audit procedures ➡ DIRECT ↳ Independent checks or internal audit, Custody of
i

assets, Authorization, Recording, Execution

O M

Inherent Risk and Control Risk *when understanding controls – the auditor should focus on
Control Risk design and implementation, not on effectiveness.
Inherent Risk HIGH MEDIUM LOW
HIGH Lowest Lower Medium Areas of Control
MEDIUM Lower Medium Higher Administrative Control Accounting Control
N st

LOW Medium Higher Highest ↳ Authorizations of transactions ↳ Safeguarding of assets

CONSERVATIVE: IR and CR are at high levels, so then the ↳ For operational efficiency ↳ Reliability of financial records
DR is at lowest to maintain acceptable level of audit risk. ↳ Adhere to managerial policies ↳ Internal audits
La

Detection Risk, Audit Procedures and Materiality Implementation of Control

T

LOWER DR HIGHER DR Entity-wide controls Transaction controls

Nature More effective Less effective ↳ Control ineffectiveness may ↳ Operates only at certain level
Timing Closer to year-end Interim or several dates have pervasive effects or department. May not have
Extent Larger sample size Smaller sample size across the whole entity pervasive effect as a whole
Materiality Lower materiality Higher materiality
↳ Management override, RAP, ↳ Periodic inventory counts,
Materiality and DR: DIRECT Monitoring of operations, risk bank recon, three-way
management policies match, customer contracts
Materiality, Risk and Audit Procedures
Audit/Substantive Procedures Internal Control Procedure
RoMM [Inherent & control risk] DIRECT Evaluate Design and Implementation of Controls
Detection risk Inverse
Materiality Inverse Preliminary Assessment of Control Risk [CR]
CR IS HIGH CR IS LESS THAN HIGH
INTERNAL CONTROL Perform Test of Controls [ToC]

 Design & Implementation – varies on entity size, complexity Operating effectively?

 A process established by management – staff will comply. NO YES
 Has DIRECT relationship with objectives. CR at MAX Level CR at MAX Level CR below MAX Level
 An effective IC reduces possibility of error and fraud. Then perform substantive testing
 An effective IC produces reliable evidence, leading to less High CR: IC is not effective, evaluation is not efficient, rely
extensive FAP. Thus, improves audit EFFICIENCY without heavily on substantive testing. “No reliance approach”
compromising audit EFFECTIVENESS. Less than high CR: Plan to perform ToC “Reliance approach”
 Test of Control – evaluate operating effectiveness in Test of Details
preventing, detecting, correcting MMs at assertion level  Test of Transactions [Income statement accounts]
↳ Substantive procedures alone cannot provide sufficient ↳ Focus on movements to particular account balance
appropriate evidence at assertion level ↳ More effective than ToB as ToT examine more details
↳ Procedures: [IOI] + Reperformance ↳ Impractical to account with voluminous transactions
► Inquiry alone is not sufficient ↳ Small volumes (konti lang), relatively material amounts
► Inquiry + inspection or reperformance = more assurance ► PPE, Intangibles, Bonds Payable, Shareholders’ Equity
than inquiry + observation
↳ ToC for recurring audit: inquiry + observation / inspection  Test of Balance [Balance sheet accounts]
► If there are changes: test the controls in current audit ↳ Focus on ending balances of accounts
► If no changes: test SOME controls once in every 3rd audit ↳ Large volumes, relatively immaterial amounts
► Cash, AR, AP, Inventories
Evidence provided [based on volume of transactions]
TOC + Substantive Analytics Substantive Testing Detection Risk, Audit Procedures and Materiality
HIGH volume MORE Persuasive Less Persuasive LOWER DR HIGHER DR
LOW volume Less Persuasive MORE Persuasive Nature More effective Less effective
Timing Closer to year-end Interim or several dates

es
Reassessment of Control Risk Extent Larger sample size Smaller sample size
Remains less than HIGH Changed to HIGH Materiality Lower materiality Higher materiality
Rely on ToC Do not rely on ToC *nature – quality of evidence to obtain; extent – quantity
Effect ↳ Less effective procedures ↳ More effective procedures *NTE (Audit Procedures) – cause; DR - effect
on ↳ Interim testing ↳ Near or at year-end

ul
ST ↳ Smaller sample size ↳ Larger sample size Specific Procedures
 Trifecta [Inquiry, Observation, Inspection]
 Recalculation, Analytical Procedures, and:
Documentation [no particular form required]  Confirmation:

rc
 Flowcharts: graphical, better understand business process, ↳ External: Direct written, from third party [hard or soft copy]
save time on identifying risks, deficiency, inefficiency. POSITIVE CONFIRMATION NEGATIVE CONFIRMATION
Enhance supervisory review, provide methods of recording Response
 Narrative Descriptions: supplement to flowcharts, not ↳ Agree or disagree, expects ↳ confirming party responds only if

e
effective tool for process description. Lengthy, difficult to response and exceptions they disagree
review, not user-friendly. ↳ “Please kindly confirm the ↳ “If you agree, no reply is
 Internal Control Questionnaires: carefully structured,
LE H amount given below” needed. Provide if u disagree”
logically sequenced. Highlights control gaps, strengths and Availability
weaknesses. Easy to understand, simplify control evaluation. ↳ Necessary when evidence is ↳ Within and outside the entity
only available outside
*Basis of CR assessment – not required if CR is HIGH [Max] Risk of Material Misstatement
SA by
↳ Entity's AIS, IC are unreliable ↳ Normally used if RoMMs is low
SUBSTANTIVE TESTING ↳ Management override prevents ↳ Expects few or no exceptions
evidence from IC
EVIDENCE Characteristics of Items
 Without it, auditor may not be able to express an opinion ↳ Small number of large account↳ Large number (madami) of small
 Persuasive rather than conclusive because of: balances homogenous accounts
↳ The need to complete the audit [time and cost]
R te

↳ Nature of evidence [not perfectly reliable] Others

 Source – naturally cumulative (obtained during the audit) ↳ More effective as negative ↳ Auditor has no reason to believe
 Cost-benefit and Difficulty – cost vs. usefulness. But approach rarely provides that recipients will disregard the
difficulty and expense in not a basis to omit a procedure explicit evidence in case of non- confirmation
FO nu

there is no other alternative of obtaining evidence. response

*the management should prepare and sign the request.
CLASSIFICATIONS *the auditor determines what, where, whom to request,
↳ Accounting data – support or contradict assertions design of the request, send, follow-up, and receive response.
► Accounting entries, checks, invoices, contracts, etc.
i

↳ Corroborating Information – others Management refusal to allow the auditor

► Obtained during audit, minutes, confirmations, etc.  Is the refusal reasonable?
O M

*accounting data – not sufficient, shall also obtain other data.
PERSUASIVENESS – “sufficient and appropriate evidence”
↳ Sufficiency [Quantity]
► Affected by RoMMs [IR,CR], and quality of evidence
N st
↳ YES – are there alternative procedure?
► YES – Do it
► NO – Assess possible effects on auditor’s opinion*
↳ NO - Assess possible effects on auditor’s opinion*

*scope of limitation – modify opinion – qualified or disclaimer

↳ Appropriateness [Quality]
► Relevance – if it relates to assertion [Tracing-Vouching] Substantive Analytical Procedures
 Affects COMPLETENESS and ACCURACY. Examples: “Analytical procedures”
↳ Inspection of collection of receivables - Existence,
La

 Analysis of plausible relationships

T

valuation, but not cut-off  FINANCIAL and NON-FINANCIAL data

↳ Physical examination of tangible assets - Existence,
condition, but not rights & obligations
↳ Testing documents –
 Existence - Confirmation of AR, cut-off test of credit
sales after year-end
 Valuation – Inquiry for pledged AR, credit risks,
labor/overhead rates for inventories
 Completeness - Credit approval, audit of payables,
cut-off test of purchases before year-end
► Reliability – if it is dependable to the state of assertion
 Influenced by SOURCE and NATURE
~ Concepts of evidence can be found: FUNDAMENTALS OF AUDITING [3SECC] ~
PERFORMANCE
 Designed to detect material misstatements – assertion level
 Types:
↳ Test of Details – primary response to RoMMs
↳ Substantive Analytics – optional [less effective]
► As to which – matter of judgement after risk
assessment and audit planning
 Investigation – identified fluctuations or relationships
↳ inconsistent with expected values
↳ significant amounts
↳ Planning phase - Required
↳ Substantive testing phase - NOT REQUIRED
↳ Overall review phase - Required
 Used in Substantive Testing – obtain relevant and reliable
↳ Determine suitability of procedures to assertions
↳ Develop estimates/expectations
↳ Evaluate reliability of data
↳ Aggregate the misstatements to check if material
↳ Determine differences from recorded items vs. expectations
► If there are significant fluctuations/inconsistencies:
 Investigate: Inquire to management for appropriate
evidence or perform other procedures.
 Used in Overall Review – overall conclusion - consistency
 Corroborate conclusions formed during audit
 Draw reasonable conclusions to base the auditor’s opinion
 COMPLETING THE AUDIT  1Going concern: appropriate: are required disclosures made?
↳ YES - UNQUALIFIED with EoM – material uncertainty
Wrap-up Procedures ↳ NO - Qualified or Adverse
1. Identify liabilities not given appropriate treatment ↳ Multiple material uncertainties – Disclaimer of Opinion
 Search for unrecorded liabilities - Greater concern with
COMPLETENESS. Companies tend to understate liabilities.  2Going concern: not appropriate: FS prepared alternatively?
► Review subsequent cash disbursements [after year-end] ↳ YES – UNQUALIFIED with Emphasis on Other Matter prgrph
↳ Liabilities exist at year-end but not recognized ↳ NO – Adverse
↳ Obtain disbursement list, evaluate PO-RR-VI (3-way)
↳ Subsequent period is a professional judgement  Subsequent events
↳ Evaluate if liability is properly included/excluded ► Accounting purpose – adjusting/non-adjusting
► Unapproved invoices or open purchase orders [POs] ► Auditing purpose – events/facts
↳ (same as review of subsequent payments)
↳ Obtain unprocessed invoices or open POs, PO-RR-VI EVENTS FACTS
► Analytical procedures Date of FS FS Approval Auditor’s FS and Auditor’s
for Issuance Report Date Report Issuance
(latest period
↳ Formulate expected payable balances based on historical coverage)

↳ Use current year changes in purchases, payments, credits

es
Adjusting Non-adjusting
 Litigations and claims – required material disclosures
► Inquiry – in-house legal counsel (within the entity)
► Review of minutes of the meetings with TCwG [BoD] ► Auditor’s Responsibilities
► Examine legal expense accounts ↳ EVENTS
 Gather sufficient and appropriate evidence that all
► Direct inquiry to external legal counsel - INQUIRY

ul
events up to date of auditor’s report that may
↳ Use of letter of inquiry
require adjustment and disclosures are identified.
 General – if aware of cost/financial implications
 Obtain written representation from the management
 Specific – if unlikely to respond
 Read minutes of the meetings after FS date

rc
↳ Meet to discuss significant risks and disagreements
 Read latest subsequent interim financial statements
↳ FACTS – GR: NO RESPONSIBILITY
Conclusions and Reporting
XPN: relevant to the financial statements and auditor’s report
 Management - refused to allow auditor to
Qualified or

e
communicate with entity’s external legal counsel
Disclaimer Conclusions and Reporting
 Entity’s legal counsel – no appropriate response
 FACTS existed as of auditor’s report date?
LE H ↳ YES – discuss with management and TCwG
2. Addressing required disclosures [using disclosure checklist]
 Consider if FS needs amendment
 Related parties – control or significant influence
 Inquire how management intends to address matters
► Auditor awareness of existence and transactions of RPs
↳ NO – auditor has no further obligation
↳ GAAP disclosure requirements
↳ Source of audit evidence – assessment of reliability
SA by
If the management AMENDS the financial statements:
► Unusual transactions, unidentified related parties may ► Before FS issuance
exist ↳ Carry out necessary audit procedures
↳ Abnormal terms of trade [unusual prices, interest rates] ↳ Issue new auditor’s report
↳ Not logical business reasons/transaction – OCCURENCE ► After FS issuance (same with before, but has to:)
↳ Difference between substance vs. form ↳ Review steps taken by the management to inform anyone
↳ High volume/significant transactions compared w/ others who received the FS and auditor’s report
R te

► Audit procedures [Substantive testing] – OCCURRENCE

↳ Bank confirmation of liabilities – guarantor relationships Management is UNWILLING to AMEND:
↳ Review of investments – equity interests, joint venture ► Before FS issuance: Auditor’s report is: [to Mgt and TCwG]
↳ Review of accounting records – large/unusual transaction ↳ Not yet issued - Qualified or Adverse [benggahin mo na]
FO nu

► Audit procedures – COMPLETENESS
↳ Review – prior working papers – names of known RPs
↳ Review of minutes, tax returns, predecessor audit inquiry
↳ Inquiry – affiliation of directors and officers
↳ Shareholder records – names, listing of share register
i
↳ Already issued – notify Mgt and TCwG not to issue
If issued otherwise: seek legal advice to prevent reliance
► After FS issuance - notify the management and TCwG of the
auditor’s intent to seek legal advice - prevent reliance on FS
If mgt and TCwG does not take actions, seek legal advice

Conclusions and Reporting Discovery of Omitted Procedures:

O M

 Unable to obtain evidence
 Inadequate disclosure
 Transactions not properly accounted for
 Going concern
N st
Qualified or Disclaimer Assess the importance/relevance to FS or Auditor’s Report
Qualified or Adverse  Auditor’s opinion compromised?
Qualified or Adverse ↳ YES – perform the omitted procedure or the alternative
 Consult legal counsel if client does not allow
↳ NO – edi wow

► Management responsibilities
↳ Specific assessments –going concern ability atleast 12mos Analytical Procedures
↳ Disclose all material uncertainties as going concern Pupose Level Required?
Risk assessment - Preliminary Obtain understanding FS level Yes
► Auditor’s Responsibilities
La

Risk Response - ToC or ToD/ST Detect MMs Assertion NO

T

↳ Consider management’s assessment of going concern Conclusion - Reporting Conclude on FS FS level Yes
↳ Inquire for material disclosures about going concern
 Additional procedures if conditions are identified: Concluding Analytics
i. Obtain and review management representation of  Recorded amounts vs. Auditor’s expectations
plans for future actions  If there are significant differences, investigate further by
ii. Gather evidence to confirm or dispel (doubt) the ↳ Inquiry with the management
existence of material uncertainties ↳ Do necessary procedures (review of audit procedures)

Conclusions and Reporting Use of Work of Experts

 Did management made proper assessment?
↳ YES – Evaluate the assessment
↳ NO – Request to assess, if not: Qualified or Disclaimer
 Any events to cast significant doubt to going concern?
↳ YES – Evaluate if it represents material uncertainty
↳ YES – evaluate if management has mitigating plans
↳ YES - Going concern is appropriate1: DISCLOSE!
↳ NO - Going concern is NOT appropriate2
↳ NONE - UNQUALIFIED :)
↳ NONE – Going concern is appropriate: UNQUALIFIED :)
 Auditor should assess his professional competence and
the appropriateness of his work
 The specialist should have understanding of auditor’s use
 Client should have understanding on expert’s nature of work
The auditor may refer the auditor’s report from the specialist:
 For adding explanatory paragraphs to an unqualified opinion
 Even the expert is related to the entity
 Becomes aware of conditions causing substantial doubts
regarding entity’s going concern
The auditor may identify the specialist:
 If the findings result to an adverse opinion
 COMMUNICATION AND DOCUMENTATION AUDIT REPORTING
Management Representation Letter (Written Representation) GENERAL PURPOSE REPORTING
 Used to confirm certain matters
 Supports other audit evidence Standard Auditor’s Report [TAOB MA SAD]
 A source of evidence, but not as  Title – “Report of an Independent Auditor” – distinguishes
 A substitute for other audit procedures the report from other reports
 Sole source of evidence (it is like an inquiry)  Addressee – should not be addressed to a specific officer
 Issues may exist if not provided ↳ Corporations – Shareholders, TCwG or intended users
↳ Partnerships – Either partnership or both with partners
SOURCE: ↳ Unincorporated Joint Venture – Participant or venturers
↳ Chief Executive Officer and Chief Financing Officer ↳ Sole Proprietorship – proprietor
↳ Owner, or the manager for small entities ↳ Third-party – engaging party [investor, creditor, court]
↳ Those charged with governance, if appropriate  Opinion – refer to notes including summaries
 Basis of Opinion – Auditor’s Responsibility paragraph
WHEN IS IT PROVIDED? ↳ States - the audit was conducted in accordance with PSA
↳ As near as practicable, but not after auditor’s report  Management & TCwG Responsibilities to Financial Statement

es
↳ Done normally same date as the auditor’s report ↳ Preparation and presentation of financial statements
↳ Internal controls
TYPES OF WRITTEN REPRESENTATION: ↳ Assessing and disclosures of going concern matters
GENERAL* SPECIFIC  Auditor’s Responsibilities for the Audit [MEAL CO]
What for? ↳ Preparation of FS ↳ On auditors request on  May be presented within the body of auditor’s report;

ul
↳ Recognition, specific items  Within the appendix to the auditor’s report; or
measurement, and  Reference to a website containing the responsibilities
disclosures ↳ Materiality; Exercise of professional judgement and
↳ Subsequent events skepticism; Audit process and procedures, Level of

rc
↳ Completeness of assurance; Causes of misstatements (fraud or error);
information provided to
Overall objectives of the auditor
auditors
 Signature and Name of the Auditor
When to ↳ In all audits (required) ↳ Only when PSA requires
↳ If does not intend to include his name, discuss to TCwG

e
obtain? ↳ When necessary to to inform the likelihood and severance of personal
support other evidence security threat
obtained?
LE H
If not ↳ Disclaimer of Opinion ↳ Qualified or Disclaimer

*General written representation: a management responsibility

 Address of the Auditor – jurisdiction where he practice
 Date of Auditor’s Report – on or after obtaining evidence

Determining the Types of Opinion

Management Representation vs. Management Letter UNQUALIFIED QUALIFIED ADVERSE DISCLAIMER
SA by
Written Representation Management Letter “Presented fairly
Prepared “Does not “We do not
By appropriate level [CEO,CFO] By the auditor in all material
and signed presented fairly express an
respects” “Except for...”
To whom? Auditor Management in all material opinion or
“Give a true and
Required? YES No respects” conclusion”
fair view....”
When? Same with the auditor’s report As timely as practicable  Fairly presented  Material  Disclosures  Describe the
Confirmation of matters Internal control issues in accordance to limitation in ↳ Quantitative scope
Content Support to other audit evidence Recommendations for
R te

reporting scope ↳ Qualitative  No reference

Management responsibilities improvement framework  Material  Nondisclosure to Auditor’s
To remind the management for Encourage better non- Responsibility
Importance ↳ Discuss with
its primary responsibility for FS auditor-client relationship compliance  No statement
TCwG the
Audit evidence only when it is Other suggestions (tax, to framework that evidence
Other use omitted
the only evidence available management services)
FO nu

procedures has been

↳ Include if obtained
Audit Documentation [Working Papers] prohibited by  No KAMs
↳ Record of the basis of conclusions law/regulation  No other infos
↳ Evidence that audit was planned and performed under PSA
↳ Less accurate if done after the audit work is performed Modifications
i

↳ May be used as reference to reconstruct clients accounting Matter Material Material and Pervasive
O M

records, but not as substitute for entity records  FS is materially

misstated (departure Qualified Adverse
CONTENTS OF AUDIT DOCUMENTS from framework)
to help experienced auditor with no previous connection  Inability to obtain
Qualified Disclaimer
↳ Nature, timing, and extent of audit procedures evidence (scope)
 Inability due to i. Withdraw*
N st

↳ Results of audit procedures, and evidences obtained

↳ Significant matters and conclusions reached imposed limitations ii. Disclaimer if not
Qualified
► Selection, application, consistency of accounting principles practicable (may
include Other Matter)
► Results of audit procedures – MM, revision of assessments
La

*Before withdrawing, first consider:

► Difficulties in applying audit procedures
T

 Requesting the management to remove limitations

► Findings that could result in modification of opinion
 If refused, communicate to TCwG and determine alternatives
► Audit adjustments
► How the auditor addressed contradictions/inconsistencies Additional Communications
Key Audit Matters [KAM] Emphasis of Matter [EoM] Other Matter [OMP]
Departure from PSA Most significant matters A paragraph in the Paragraph in auditor’s
↳ Reasons for departure and alternative procedures performed selected and discussed auditor’s report that report that refers to a
↳ How alternatives achieve the aim of PSA requirement with TCwG refers to a matter matter other than
presented and disclosed those presented and
“we draw attention to...” disclosed
Current Working Papers Permanent Working Papers
Key Audit Matters – required for listed entities
Copy of financial statements AoI and by-laws
Overall audit strategy, audit Copies of minutes, legal docs ↳ Higher/significant RoMMs – requires auditor’s attention
plan, audit program, working Copies of communications ↳ High estimation uncertainties
trial balance, audit memo, Results of analytical procedures ↳ Effect of significant events or transaction
reconciliations, lead schedules from previous years’ audits Emphasis of Matter Paragraph – if matter is not a KAMs
↳ Included if the auditor is not required to modify an opinion
 Indexing: lettering, numbering; aids cross-referencing ↳ [GUESTS]: Going concern with material uncertainty;
 Cross-indexing/referencing: trail for working paper review Uncertain litigation result; Early application of new standard;
 Tickmarks: symbols - describes audit procedures performed Subsequent discoveries; Tragedies; Special purpose FS
Other Matter Paragraph – if matter is not a KAMs
 Ownership of the auditor ↳ [CRIMiRS]: Comparative information; Restriction on use of
 Should be completed within 60 days after auditor’s report report; Inability to withdraw; Material inconsistency;
 Retention: PSQC and PSA 230: Atleast 5 yrs; SEC: 10 years Reporting on more than one set of FS; Subsequent discovery
 Other Information – financial or non-financial (other than FS
and Auditor’s Report) included in entity’s annual report
AUDITOR’S RESPONSIBILITIES - Consider and respond to
Material Inconsistencies and Material Misstatement of Fact
MI in Financial Qualified or Adverse – if management refuses
Statement to correct the material misstatements
MI in Other Qualified – since FS are fairly presented
information OMP – discuss the material inconsistencies
Request the management to consult to a
qualified third party – entity’s legal counsel
MMs of Facts
↳ Refuses to correct – take further actions,
notifying TCwG, then obtain legal advice
AUDITOR’S RESPONSIBILITIES - On Comparative Information
Example: Statement of Financial Position as of 2024 and 2025
Comparative Statement
GR: Auditor is prohibited from issuing an unmodified
opinion for Single FS or Specific Element of it - if he issues an
adverse or disclaimer in the complete set FS.
XPN: Not prohibited by law; reports are published
separately; elements are not major portion of complete FS
Reporting on Summary Financial Statements
► Summary FS – historical; derived from Audited FS; less
detailed; management uses applied criteria
*the auditor of AFS should be also the auditor of SFS.
Audit Report on Summary of FS [TAO WaR MASAD]
 Title – “Report of an Independent Auditor”
 Addressee – evaluate appropriateness if the addressee of
the SFS is not the same as the AFS
 Opinion – is SFS consistent with the AFS?
YES – Unqualified opinion NO – Adverse
 Warning – “SFS do not contain all disclosures as in the AFS”

es
Minimum Requirement for Presenting Comparative Statement ↳ “SFS is not a substitute for reading AFS and Audit Report”
PRFS – 2 years - complete set of FS [SFP, SCI, SCF, SCE]  Reference to Audit Report
SRC 68 – 2 years – SFP ↳ State that AFS includes the following opinions:
3 years – SCI, SCF, SCE ↳ Basis for qualified opinion

ul
↳ Matters referred to in the EoM, OMP, MUrGC, KAMs
Corresponding Figures “Current figures” - AR for 2025 only ↳ Disclose uncorrected MMs in the other information
Corresponding Current Type of  Management Responsibilities
Reference to Corresponding
2024 2025 Opinion  Auditor’s Responsibilities – whether SFS are consistent in all

rc
Fairly stated Fairly stated Unqualified No reference material respects with [or in fair summary] the AFS
Misstated Corrected Unqualified No reference  Signature
Qualified Reference 2024 since it was the  Address of the Auditor
Misstated Unresolved
or adverse cause of misstatements
 Date of Auditor’s Report
Fairly stated May include an OMP that 2024

e
(Audited by Fairly stated Unqualified (corresponding figures) are audited
predecessor) by predecessor Examination of Prospective Financial Information
LE H May include an OMP that 2024 is Forecast Projection
Unaudited Fairly stated Unqualified
unaudited ► Based on historical conditions► Based on range of possible
Unaudited ?
See initial
Include an OMP to inform users and actions conditions and actions
discussions ► Best-estimate assumptions ► Hypothetical assumptions
► What management expects to ► What may happen depending
Comparative Figures – Auditor’s Opinion for both years happen on range of possible
SA by
Prior Period Current Type of scenarios (sensitivity, what
What to report
2024 2025 Opinion if analysis)
Fairly stated Fairly stated Unqualified No reference from prior year
► If assumptions are reasonable ► If assumptions are consistent
Qualified /
Opinion B OMP - Disclose the substantive
Opinion A Adverse /
(different) reasons for difference in opinion  Engagement - consider the intended use; nature of
Disclaimer
Is the predecessor’s opinion assumption; elements; period covered
Fairly stated
R te

reissued? ↳ Do not accept; or should withdraw if:

(Audited by Fairly stated Unqualified
YES – no reference from prior year ► Assumptions are clearly unrealistic
predecessor)
NO – Refer from 2024 with an OMP
► Auditor believes PFI will be inappropriate for its use
- Successor should communicate
 Evidence – speculative in nature; future-oriented
the misstatement to the
FO nu

management and TCwG  Level of Assurance – moderate level only

Fairly stated Misstated Qualified ↳ Auditor is not in position to express whether results
- Do not refer from 2024 if the
(Predecessor) (Successor) or Adverse
predecessor agrees to issue a new shown in PFI will be achieved
auditor’s report for 2024. Report ↳ May express positive assurance if appropriate level of
only for 2025 (current). satisfaction is obtained
i

SPECIAL PURPOSE ENGAGEMENTS

OTHER RELATED SERVICES
O M

For the needs of specific users:

AUDIT AUDIT-RELATED SERVICES
 Tax Authorities – tax basis
 Creditors – cash receipts and disbursement basis AUDIT REVIEW AGREED-UPON COMPILATION
 Regulators – based on regulations High assurance Limited
No assurance No assurance
 Contracting parties – bond indenture, loan agreements but not absolute (Moderate)
N st

Independent Review Report on Findings Compilation

Required Acknowledgements: to achieve fair presentation Auditor’s Report Report of Procedures Report
Fair Presentation Framework Compliance Framework
Review of Financial Statements
La

Supplementary Disclosures Requires strict compliance with  Performed through inquiry and analytical procedures
T

To provide disclosures beyond framework requirements  Extent is substantially less than an audit
those specifically required
(explicitly or implicitly) Agreed-Upon Procedures
Departure from Framework No required acknowledgements  Carry-out predetermined procedures and test
Only in extremely rare cases for disclosures or departure  Save time, cost, effort of entity, instead of doing it themselves
(explicitly)  The effectiveness of this engagement depends on entity’s
capacity to identity key areas or matters
An opinion may be expressed only on:  Auditors are not required to be independent
► For Single FS – SFP, SCI, SCIE, SCF, Notes [Summary of  Restricted to the parties who agreed with the procedures to
significant accounting policies and other explanatories] be performed
► For Specific element – Schedule of receivables, external
assets, net tangible assets, disbursements, inventories Compilation of Financial Statements
 Practitioner applies accounting and financial expertise to
Auditing both the Complete Set and Single FS/Element assist the management in preparing and presenting
- The auditor shall express a separate opinion for each financial information in accordance to reporting framework
- Auditor’s report should include [KEMO MU]:  Practitioners do not express an opinion or review conclusion
 Key Audit Matters  Practitioner acts as the preparer of subject matter
 Emphasis of Other Matters paragraph  Not required to verify the accuracy or completeness of the
 Modified opinion, information provided by the management
 Other Matters paragraph  The report is not a vehicle to express an opinion in any form
 Material uncertainties regarding going concern
 Uncorrected material misstatements of other information
 THE ACCOUNTANCY PROFESSION
RA 9298 - Philippine Accountancy Act of 2004
Objectives:
↳ Standardization and regulation of accounting education
↳ The examination for registration of CPAs
↳ The supervision, control, and regulation of the practice of
accountancy in the Philippines
Enforcement:
↳ Professional Regulation Commission & Board of Accountancy
► Primary duty for enforcing and implementing provisions
↳ Other law enforcement agencies
► Assistance in enforcing the provisions of RA 9298
↳ Secretary of Justice
► Legal adviser to PRC and BOA
Issuance
 COR – lifetime until withdrawn, suspended or revoked
 ID - Renewable every three (3) years
Special or Temporary Permit
May be issued by BOA subject to approval of PRC, and payment
of fees to the following: FOREIGN CPA
 Consultation, professor, lecturer [teaching only] essential to
accountancy education in the Philippines
 Internationally recognized expert or with specialization for the
advancement of accountancy in the Philippines
Death, Withdrawal or Resignation of a Partner
 Surviving partner may continue to practice under the
partnership name for the period of not more than two
(2) years. Shall change the name to an individual CPA
or new name of firm
Certificate of Accreditation – Public practice

es
Major Areas or Accountancy  Should have 3 meaningful years in any areas
↳ Auditing ↳ Management Consultancy ↳ Significant involvement
↳ Taxation ↳ General Accounting ↳ Atleast 1 year as audit assistant and atleast 2 years
auditor in charge
Scope of Practice  Valid atleast 1-3 years untill birth month/SEC registration

 Public Practice
↳ Independent professional services to clients on a fee basis
↳ Representing clients before government agencies
↳ Client-service provider relationship
ul
 Renewal
↳ Filed within 3 years after expiry – reckoned from the
approval until birth month/SEC registration
↳ Filed more than 3 years after expiry – deemed as

rc
 Commerce and Industry initial application
↳ Involve in decision-making (accounting)
↳ Representing employer before government agencies RA 10912 - Continuing Professional Development Act of 2016
↳ Paid-up capital > P5,000,000.00 and/or

e
Revenues > P10,000,000.00 CPD: Atleast 120 CPD units → Accreditation
 Government Accounting
LE H min 20 units a year
↳ Accounting professional group in government or GOCCs 15 CPD units → Renewal of license
↳ Coordinating with COA (or representing COA in ↳ Excess units cannot be ↓
government audits) carried over for next 3 XPN: 65 years old
 Education / Academe periods. not required
↳ Teaching of accounting, auditing, MAS, finance, business ↳ XPN: Masteral, Doctoral
SA by
law, taxation, and other technically related subjects
↳ BSA Program – dean/department chair/program chair Minimum units under competency areas:
must be a CPA ↳ Technical Competence 30
↳ Members of IBP (lawyers) may teach business law and ↳ Professional skills 5
taxation subjects ↳ Professional values, ethics, attitude 5
↳ Flexible (any of the three) 80
R te

Professional Regulatory Board of Accountancy

Composition Organizations
 Chairman + 6 members  FRSC: [includes BIR]
 Vice-chairman with term of 1 year ↳ RA 9298: Chairman + 14 members
 Four sectors in the practice of accountancy shall as ↳ BOA: Adds Insurance Commission (Chairman + 15)
FO nu

much as possible be equitably represented  AASC: [no BIR included]

↳ RA 9298: Chairman + 14 members
Appointment ↳ BOA: Chairman + 17 members
 APO/PICPA (5 nominees) – not later than 60 days ► Includes additional from small and medium sized
 PRC (3 recommendations to the president) practitioners. Adds Insurance Commission
i

 President (1 appointee as the chairman)  Educational Technical Council: Chairman + 6 members

O M

 Quality Review Committee: Chairman + 6 members

Qualifications of Members  CPD Council: Chairman + 2 members
 Natural-born citizen and resident of the Philippines
 10 years work experience in any scope of practice
FRAUD, ERROR AND NOCLAR
 Good moral character
 Must not have any pecuniary interest in any school,
N st

FRAUD ERROR
college, or review centers
Fraudulent financial Misappropriation of Unintentional
 Must not be a director or officer of PICPA statement reporting assets
To deceive FS users To conceal assets without ex. rounding,
Term of Office
La

authorization transposition, etc.

 3 years, renewable for another
T

Management override Theft of assets Mistake

 1 year cool off period after 2 successive years of term
 Filling unexpired term ≠ complete term Impact on Audit Procedures
 Must not exceed 12 years NATURE More extensive Less extensive
TIMING Close to year-end Interim
Suspension and Removal: by the President through PRC EXTENT More samples and procedures Less
 Neglect of duty or incompetence
 Violation or toleration of violation – RA 9298, IRR, etc. Other Types of Fraud
 Final judgement of crimes involving moral torpitudes  Management Fraud – commonly associated with FS fraud.
 Manipulation or rigging of CPALE ↳ Can involve employees. Has GREATER RISK
 Employee Fraud – commonly associated with MoA.
CPALE Rating ↳ Can involve management – more able to disguise fraud.
A SUBJECT BELOW 65%? ↳ Unlikely to detect if through collusion [nagtulungan eh]
YES NO Fraud Risk Factors [Fraud Triangle]
 Incentive and Pressure
Gen Ave. atleast 75%? ↳ incentive/pressure to commit fraud from top management
↳ pressure of meeting loan covenants
NO YES  Opportunity
Majority (4 subjects) atleast 75%?
↳ Absence of control/weak controls, nature of transactions
YES NO ↳ Management experience and competency, history of fraud
CONDITIONAL FAILED PASSED  Rationalization/Attitude
↳ Culture, character, ethical values, governance
 Responsibilities to Fraud
 Management and TCwG – prevention and detection
↳ Prevention – reduce fraud opportunities
↳ Deterrence – persuade not to commit fraud (punishment)
 Auditor – basic responsibilities
↳ Identify and assess RoMMs due to fraud
↳ Obtain evidence thru design and implementing response
↳ Response to identified or suspected fraud
► Report to appropriate level of management as soon as
possible, even minor fraud or irregularities
► Report to TCwG either writing or orally
↳ When management is involved in fraud
↳ Significant deficiency to controls came to attention
*if the integrity and honesty of the management and TCwG is
doubted, SEEK LEGAL ADVICE to determine proper action.
Non-Compliance with Laws and Regulations [NOCLAR]
HAS DIRECT EFFECT ON FS NO DIRECT EFFECT ON FS
↳ Affects forms and content, ↳ Affects operations, going
accounting issues, accrual concern
and recognition.
↳ ex. taxation, pension laws ↳ ex. operating license,
solvency requirements,
environmental regulations
↳ auditor should obtain ↳ specific audit procedures to
evidence (ex. positive identify non-compliance (ex.
confirmation) negative confirmation)
Respond appropriately in case of non-compliance
e
Responsibilities to NOCLAR
 Management – operations are conducted in accordance and
compliance to laws and regulations.
LE H
↳ with oversight of those charged with governance [TCwG]
↳ prevention and detection – BOTH management and TCwG
 Auditor – NOT and CANNOT be held responsible for
preventing non-compliance. Annual audit may however
SA by
act as a deterrent (persuade them to comply).
↳ Has responsibility to detect material effects on FS
↳ Inherent limitations:
► Many laws and regulations do not have material effect
to financial statements; not relevant to audit
► Management override, misrepresentations
► It is a matter of legal determination by a court of law
R te
Auditor’s Response of NOCLAR:
 TcWG – report when management is involved and NOCLAR
has come to the attention of auditor
FO nu
 Audit Committee or Supervisory - if BOTH management
and TCwG is involved [next higher authority]
 Legal Advisor – if unsure whom to report to, or there is no
next higher authority
 Regulatory and Enforcement Agencies
↳ When auditor is REQUIRED to report under laws or ethics
i
► Management failed to take corrective actions
O M
↳ When auditor is HAVE THE RIGHT to report
 Other Auditors – audit of GROUP financial statements
 Proposed Auditor – upon inquiry from proposed (next)
auditor whether to accept engagement. Needs permit.
N st
Auditor’s Report
NOCLAR has not adequately reflected
Qualified or Adverse
in financial statements
The auditor is precluded by the
La
Qualified or Disclaim
management to obtain evidence
T
Unable to determine - limitations Evaluate modification
Entity does not take remedial action Consider withdrawal
TRANSACTION CYCLES
Means through which an accounting system process
transaction of related activities.
Auditor’s Objectives
 Determine the reliability of financial statements
 Determine fairness of presentation
General Objectives
 Promote segregation of duties
 Provide safeguards to entity resources [assets]
Concepts
 The department who initiated the process:
↳ Should approve the form
↳ Accountable for unused forms (restricted)
↳ Shall forward notification of forms [soft or hard copy]
↳ Retain a copy for filing [initiated, received, processed]
Categories of Business Processes
 OPERATING: core activities, voluminous recurring intervals
1. Revenue and Receipt Process
↳ ORDER TO CASH [Sales and Collection]
a) Customer – send purchase order [external file]
b) Sales Department – SALES PROCESS STARTS
► Locate, negotiate, accept orders from customers
► Prepares sales order [an internal file], forward copies
to customers, credit, shipping, billing, then retain
copies.
► Monitor and update status of order.
 Has exclusive communication with customers
 Maintain a list of authorized customers – minimize
exposure to high risk customers.
 Maintain a range of selling prices
c) Credit Department – credit review and investigation
► Receive sales order from sales department
► Approves credit – mark “Approved” or issue memo
es
► Notify the sales department if approved or not
► Forward approved sales order to inventory control
 Independence from sales department
 Issues list of authorized customers
ul
d) Inventory control [Warehouse Department]
► Review and approved sales order from credit dept.
► Monitor availability of goods ordered
► Authorize issuance of goods to shipping department
rc
► Forward sales order to shipping department
 Control in-and-out of inventories
 Monitor inventory levels
 Report slow-moving or damages items
 Provides access to sales dept to inventory levels
e) Shipping Department – all are authorized and billed
► Compare sales order with goods approved
► Complete shipping document, prepare for shipment
► Release the goods to carries, obtain receipt
► Notify sales department that goods are shipped
► Forward shipping docs and sales order to billing
 Shipping documents are pre-numbered
 Billings are in periodic basis
f) Billing department – billings are shipped
► Compare sales orders from sales and shipping dept.
► Prepare sales invoice and send to customer
► Prepare remittance advice to customers via carrier
 Pre-numbered SOs, shipping docs are present
g) Accounting Department – Billing Function
► Verify sequence of transactions
► Record invoices from billing department
► Updates subsidiary ledgers – customer accounts
 Accounts receivable department – send
monthly statements to all customers
 Write-offs – approved by management
independent of record-keeping (ex. treasurer)
h) Reception/Mailroom – COLLECTION STARTS
► Receives remittance advise and customer checks
► Prepare list of receipts, endorse to treasury dept.
► Also endorse to accounts receivable department
i) Treasury – Update cash record, do deposit slips
► Send cash summaries to accounts receivable, and
accounting, then retain a copy
► Daily deposit of collections to the bank – imprest
2. Expenditure and Disbursement Process
↳ PURCHASE TO PAY
a) User Department – prepare requisition slip, forward
to purchasing and accounts payable department
b) Purchasing Department – AUTHORIZATION
► Meet needs at lowest possible cost
c) Receiving Department – CUSTODY
► Received goods are based on approved purchases
► Count and check goods upon receipt
d) Inventory/Warehouse – RECORDING
► Security, physical controls
e) Accounts Payable Department – RECORDING
► Payments will only be made to shipments received
► File voucher package [ReqS, PO, RR, VI, voucher]
by due date - take advantage of discounts.
► Three-way matching [PO-RR-VI]
 Vendor’s Invoice should be accompanied by a
Receiving Report before preparing the voucher
f) Treasury – reviews voucher package
► Prepare the check – maked as “paid” or “canceled”
► Dual signature [usually for large payments]
g) General Accounting – update CDJ and AP
► Monthly bank reconciliation
► Segregation of duties – Check signing, recording
accounts payable, custody of cash
 ↳ HIRE TO RETIRE [Payroll Cycle]
a) User Department – Monitor time records
► Time records should represent actual hours worked
► Computerized system – approval of exceptions
b) HR Department – prevent ghost employees
► Forwards payroll matters to payroll department
[salaries, wage rate, bonus, OT, deductions]
► Notify payroll department of a terminated employee
– avoid inclusion in payroll
c) Payroll Department – payroll calculation is valid
► Prepare payroll register
► Payroll – reviewed by non-payroll personnel
► Should be segregated from HR and Treasury
d) Treasury [Disbursement] – prepares paycheck
► Cash disbursements are based upon recognized
liabilities or actual service rendered
► Separate bank account for payroll
AUDIT SAMPLING
 Attempt to gather sufficient evidence, cost-efficient way.
 Sampling is not involved in:
1. Inquiry, observation, analytical procedures
2. Undocumented test of controls, untested balances
Application of Sampling
 Test of Controls – leaves audit trails
↳ Conclusions –effective or ineffective
 Substantive Testing – applies test of details
↳ Conclusions – fairly stated or requires more procedures
Sampling Risk – complement of confidence or reliability level
↳ Conclusion for sample ≠ conclusion for population
↳ Can be eliminated by 100% testing
↳ Sample Size ⬆ Sampling Risk ⬇
 Test of Control

es
► Distribute paycheck on surprise basis to identify TYPE 1 RISK | ALPHA RISK | UNDER-RELIANCE
ghost/fictitious employees. Unclaimed checks Auditor said: But actually:
should be redeposited CR is assessed at Maximum [100%] Below [<100%]
► Supervisor – AUTHORIZATON, not distribution Internal control Do not rely Reliable
e) Accounting Department Extent of ST More procedures Less are required

ul
► Classify, record - correct and appropriate amounts
► Record inventoriable costs TYPE 2 RISK | BETA RISK | OVER-RELIANCE
Auditor said: But actually:
↳ ACQUIRE TO RETIRE – PPE: acquire, use, dispose CR is assessed at Below [<100%] Maximum [100%]

rc
a) User Department – CUSTODY Internal control Reliable Do not rely
► Initiates acquisition – increase capacity, replace old Extent of ST Less are required More procedures
► Purchase - BOD, etc. - AUTHORIZATION
b) PPE Department – RECORDING  Substantive Testing

e
► Depreciation, improvements, estimates [useful life, TYPE 1 ERROR|ALPHA ERROR|INCORRECT REJECTION
residual values, impairment] Auditor said: But actually:
LE H Material misstatement EXISTS! Fairly stated :)
► Tracks physical location of PPE
► Pre-numbered PPE tags for inspection Audit procedures EXTEND! No further :)
► Disposal – removal from PPE subsidiary ledger
TYPE 2 ERROR|BETA ERROR|INCORRECT ACCEPTANCE
► Computation of gains and losses from disposal
Auditor said: But actually:
SA by
Material misstatement Fairly stated :) EXISTS!
↳ PLAN TO INVENTORY [Conversion Cycle] - valuation
Audit procedures No further :) EXTEND!
a) Production Department
! Alpha risk and error affects efficiency – leads to more work
► Follows production plan from planning committee
↳ Initial conclusions are incorrect
► CUSTODY of materials and labor documents
! Beta risk and error affects effectiveness – greater concern
► Physical count, control, reconciliation
↳ Leads to inappropriate audit opinion
► Auditor – count, resolve variances
R te

► AUTHORIZE normal production runs Non- Sampling Risk – residual definition [Human error]
b) Board of Directors
↳ Inappropriate audit procedures
► AUTHORIZE special production runs
↳ Misinterpretation of audit rest results
c) Cost Accounting - RECORDING
↳ Can never be eliminated
► DM, DL, OH cost accumulation/assignment
FO nu

↳ Managed thru planning, training, directing, supervision

d) General Accounting – RECORDING
► General journal & ledger
Selection Methods
► Perpetual inventory for larger items  Random Selection – uses Random Number Generator
 Year-end if IC is weak [CR is high]
↳ Units have same probability of being selected
i

↳ Documents or items should be pre-numbered

 ADMINISTRATIVE: specifically approved transactions
 Systematic Selection – uses interval
O M

1. Finance and Investment Process

↳ Population ÷ Sample [applied on surprise basis]
↳ FINANCING – capital budgeting
 Haphazard Selection – non-structured, non-statistical
a) Unissued equity and debt certificates - CUSTODY
 Value-weighted Selection – Monetary unit sampling
► Internal officer [ex. corporate secretary]; or
↳ Higher amount, higher probability of selection
► Independent external custodian – issued & outstdg
↳ Every single peso = sampling unit, usually done in ToD
N st

► Audit – direct inquiry to custodians

 Block/Clustered Selection – rarely used, structured
b) Board of Directors – AUTHORIZATION
↳ Exposed to high sampling risk, least desirable method
► Audit - review minutes of the meeting
 Statistical – sampling risk is measured quantitatively
c) General Accounting - RECORDING
↳ Uses probability, random selection, mathematical model
La

► Settlement of securities previously issued –

T

 Non-statistical – sampling risk is measured qualitatively

canceled through perforation (defaced) to
avoid duplicate payments
► Competency and reconciliation
► Recomputation of accruing interests from debts
Factors affecting sample size:
↳ INVESTING – excess funds for profit
a) CUSTODY – confirmation request to custodians
► Negotiable certificates – brokerage accounts
► Real estate titles – safe or bank safe deposit box
 DUAL CONTROL or JOINT CUSTODY – atleast 2
high-ranking officials
b) AUTHORIZATION – minutes of the meetings
► Approval by the board of directors
c) RECORDING – competence, reconciliation
► General accounting – transactions; or
► Treasury – subsidiary ledgers
2. Record to Report Process
↳ General Journal – non-routinary, adjusting, closing
↳ Special Journals – specific/recurring transactions
a) Sales, Purchases, Receipts/disbursements, Payroll
↳ Subs Ledger – group-based AR, AP, Inventory, Payroll
↳ General Ledger – summary of journals and ledgers
↳ Uses judgement, informal model
Attribute Sampling – used during test of controls
Sample Size
RoMMs [specifically control risk] Inverse
Acceptable Beta Sampling Risk Complementing: Inverse
Confidence Level Total: 100% DIRECT
Total Deviation Rate (TDR) No TOC if: Inverse
Expected Deviation Rate (EDR) EDR > TDR DIRECT
Large Population Negligible
Small Population Sampling is inefficient
 Sample Deviation Rate – best estimate of deviation rate
↳ if SDR > EDR = asses CR at maximum
↳ if SDR < EDR = check Estimtd Maximum Rate of Deviation
 if EMRod > TDR = asses CR at maximum
 SDR = Number of deviations ÷ Sample size
 EMRoD = SDR + Allowance for Sampling Risk [TDR-EDR]
 TDR = EDR + Allowance for Sampling Risk
Other Approaches:
 Sequential (Stop-or-Go) – no fixed sample size, continuous testing
 Discovery (Accept/Reject) – only if occurrence rate of errors are
very low (expect almost zero), one deviation = ineffective control
 Variable Sampling – used during substantive testing ↳ Input Controls – incorrect transactions are rejected,
Factors affecting sample size: Sample Size corrected, or resubmitted. Transactions are authorized
RoMMs [IR and CR] DIRECT before being processed.
Alternative Procedures at same assertions Inverse ► Limit test – uses upper-lower limit [reasonableness]
Acceptable Beta Sampling Risk Inverse ► Validity test – data comparison against master file [accuracy]
Confidence Level DIRECT ► Self-checking digit – detect transposition error [accuracy]
Tolerable Misstatement Inverse ► Missing data check – process will not continue unless all data
Expected Misstatement DIRECT required are supplied [completeness]
Stratification (subpopulation) Inverse [lower variablity of pop] ► Control total – total of a field or batch
Large Population Negligible  Item (record) count – number of items
Small Population Sampling is inefficient  Financial total – amount of all items
 Ratio Estimation – use when difference is nearly  Hash total – total of a field, no intrinsic meaning
proportional to book values (audited value ÷ book value) ↳ Processing Controls - transactions are processed accurately
 AV = (Audited Value ÷ Bbook Value) x BV Population ► Items are not lost, added, excluded, duplicated, changed
 PM = |AV - BV Population|
► Processing errors are identified and corrected on time
AV: audited value; PM: projected misstatement
↳ Output Controls – Processing results are complete, accurate
 Difference Estimation – use when little or no relationship
► Output is distributed to authorized personnel only
between difference and book values (AudV - BookV)

es
 PM = (AudV - BookV) ÷ Sample size x Population size
Audit Procedures
 Mean-per-unit
Automated controls – more reliable than manual; cannot be
 AV Pop = (Audited Value ÷ No. Sample Size) x No. of pop’n
easily by-passed, ignored or overridden, less prone to simple
 PM = |AV Pop - BV Pop|
errors and mistakes.
↳ if PM + SM < TM = fairly presented

ul
 Prevent, detect, correct errors in a high volume of recurring
SM: sample misstatement; TM: tolerable misstatement
transactions
Voided or Missing Samples
Testing the General IT Controls [GITCs]
 Properly voided? (approved, documented, follows IC)

rc
Provides consistent operation of an automated control as such,
↳ YES – replace the item
it is tested instead of the automated control itself.
↳ NO – consider as deviation or misstatement
 MISSING: any alternative procedure to verify assertion?  Auditing around the computer [Black box Approach]
↳ YES – do alternatives

e
↳ More appropriate approach. Uses IOI (external ToC)
↳ NO – consider as deviation or misstatement ↳ Focuses on input and output only
LE H ↳ Potential of computers as an audit tool is not utilized
Audit Sampling Process
 Auditing through the computer [Crystal/Whitebox Approach]
I. Determine: Purpose of test (ToC or ToD/ST)
↳ Done by entering the client’s system
II. Define : Deviation/misstatement
↳ View and test the logic of calculation procedures
III. Consider : Population
IV. Define : Sampling unit/Single Peso ↳ To understand and verify the input-output process
SA by
V. Determine: Sampling approach ↳ Uses computer-assisted auditing techniques [CAATs]
VI. Determine: Sample size ↳ Factors before applying CAATs [TITA DECC]
VII. Select : Sample items ► Technical competence in an IT environment
VIII. Gather : Evidence from samples ► Impracticability of manual testing
IX. Evaluate : Results from testing ► Timing of test
X. Document: Audit procedures, Working papers ► Availability of CAATs and appropriate facilities
► Data security
R te

AUDITING IN CIS ENVIRONMENT ► Effectiveness and efficiency

(Filtered and Compressed) ► Complexity of the IT environment and level or risks
► Cost-benefit constraints
IT Application IT Infrastructure IT Processes
FO nu

↳ Set of programs ↳ Network ↳ Managing IT Test of Controls using CAATs

↳ Data warehouses ↳ Operating systems environment  Program analysis – understanding of program’s behavior
↳ Report writers ↳ Databases and their ↳ Manage IT ↳ Code review – analysis of program’s process logic
related hardware and operations ↳ Comparison program – compare computerized files
softwares ↳ Program changes ↳ Flowcharting – flowchart of programs logic
i

↳ Program tracing – executions are listed along with controls

O M

IT Controls ↳ Program mapping – recognize sequence or sections that

may be a potential source of abuse
IT Environment1
↳ Snapshot – edi screenshot. lam mo na yan
IT Applications3  Program testing – use actual or simulated data
↳ Test data–dummy transactions to test control effectiveness
N st

► Use client’s software with valid and invalid transactions

IT Infrastructure
► Usually done in a surprise basis
↳ Integrated test facility (ITF) – inserts dummy transactions
using fictitious data together with actual data during
La

the live transactions.

T

1
Entity-level IT Controls – designed to define strategic
direction and establish organizational framework
Risk assessment activities; Assurance Quality; Policies and
procedures; Internal audit and monitoring; Strategies and
plans; Training; Segregation of duties
2
General IT Controls [COA] – supports continuous operation
↳ Changes in IT controls – oversight function over the
development methodology
↳ Operation controls – provide reasonable assurance that
operations and process are functioning effectively as intended
► Job scheduling and monitoring, backup and recovery, etc.
↳ Access controls - provide reasonable assurance that access
is limited only to authorized personnel.
► Authentication, authorization, privileged access, physical
access, security configuration controls
2
Application Controls [IPO] – found within the software
programs to prevent or detect unauthorized or erroneous
transactions. Supports authorization, completeness, accuracy
and validity of IPO transactions.
► Without the management’s knowledge, auditor
compares the output with the expected results
↳ Base case system evaluation (BCSE) – tests every possible
conditions that the client’s software will confront
► More assurance than test data, but time consuming
► Expensive, only cost-effective for large systems
↳ Parallel simulation – use actual client data through the
auditor’s generalized audit software program.
► If the client’s software is effective, it should generate
the same exceptions as the auditor’s software.
► Done in surprise basis, and the limitations are:
 Time-consuming to build the exact duplicate system
 Time-consuming to process large quantities of data
 Incompatibility of the auditor and client’s system
 Tracing the differences is difficult
↳ Controlled reprocessing – uses a copy of client’s system
 Continuous/concurrent testing – utilizes electronic data
interface (EDI). Captures audit data as transactions flow.
 Review of operating systems – uses logs and user-written
programs to perform controls for computer systems. Uses
System logs, library management software, job accounting
data log, access controls and security software.
 QUALITY MANAGEMENT FOR FS AUDIT
The design of the firms system of quality management (SQM)
varies depending in its complexity and formality.
PSQM 1 [HEAL ME] PSQM 2 [EPIGR2AM]*
Leadership Governance and Leadership1
Risk Assessment Process
Relevant Ethical Requirements Relevant Ethical Requirements
Acceptance and Continuance Acceptance and Continuance
Engagement Performance Engagement Performance
Human Resources Resources2
Information and Communication
Monitoring Monitoring and Remediation
*Effective: December 15, 2022
1
Includes Financial Resources “blood of the business”
2
Human, Technological, Intellectual, Service Organization
Firm’s System of Quality Management
 The firm is the ultimate responsible for SQM
 The attainment of quality objectives heavily depends on the
firm’s internal culture.
 The firm shall undertake periodic performance
evaluations of the individuals to promote accountability
 The responsible individual shall perform an evaluation and
remediate any deficiencies atleast annually.
Governance and Leadership
↳ The firm demonstrates commitment to quality
↳ Appropriate organizational structure and assignment of roles
↳ Resources are planned, obtained, allocated, consistent with
e
the commitment to quality
LE H
Risk Assessment Process
↳ Firm’s SQM shall incorporate a risk-based approach
↳ Quality risk – possibility of adversely affecting the
achievement of one or more quality objectives
↳ Specified responses – required to be performed by the firm
SA by
► Compliance with ethics and reporting breaches
► Annual independence declaration from those firm
personnel who are required to be independent
► Addressing complaints and allegations about failure or
non-compliance to firm’s policies
► Changes in client acceptance or continuance decisions
R te
► Communication with TCwG about how the firm’s SQM
supports consistent performance of quality audit
engagement [only for listed entities]
► Communication with external parties about firm’s NTE
FO nu
Relevant Ethical Requirements
↳ To provide SQM with reasonable assurance and its personnel
fulfill their responsibilities in accordance with professional
standards and applicable regulatory requirements.
i
Acceptance and Continuance of Client Relationships
O M
↳ Integrity and Values of the Client – firm should have a
proper screening process to assess client’s integrity
► Nature, complexity, management structure of the client
► Nature of operations and business practice
► Attitude of owners, key management and TCwG
N st
► If the client is aggressively concerned with maintaining
fees as low as possible
► Indications of client-imposed limitations in scope of work
► Indications that client might be involved in criminal acts.
La
► Reasons for the appointment of the firm and
T
non-reappointment of the previous firm
► Identity and business reputation of the related parties
Engagement Performance
↳ Engagement teams understand, fulfilled their responsibilities
↳ NTE of direction and supervision of the engagement teams
↳ Exercise of professional judgement and skepticism
↳ Consultation on difficult matters are undertaken and the
conclusions agreed are implemented
↳ Difference of opinion are brought to attention and resolved
↳ Documentation is assembled on a timely basis and retained
► Deadline [PSA, PSAE]: 60 days after the report date
► Retention [PSA, PSAE]: 5 years from the report date
► Retention [SRC 68]: 10 years or longer until the final
judgement of a pending litigation
Resources
↳ Human resources – competence to perform quality audit
↳ Technological resources – IT application, infra, processes
↳ Intellectual resources – documentation of firm policies
↳ Service providers – use of other resources by a provider
Information and Communication
↳ Information system maintains relevant and reliable
information that supports SQM, from in/external sources
↳ The firm’s culture recognizes and reinforces the personnel
responsibility to communicate from one firm to another
Monitoring and Remediation Process
↳ Design and perform monitoring activities, atleast annually
↳ Evaluate findings and deficiencies
↳ Respond to identified deficiencies
↳ Communicate monitoring and remediation related matters
Engagement Quality Review (EQR)
Objective evaluation of the significant judgements made by
the engagement team and the conclusions reached.
Mandatory Engagement Quality Review
 Audits of financial statements of listed entities
es
 Required by law
 Audit or other engagement which firm determines EQR is an
appropriate response to quality risks
ul
Appointment of engagement quality reviewer:
i. Firm assigns personnel responsible for appointment
ii. The assigned personnel appoints eligible EQ Reviewer
iii. EQ Reviewer takes overall responsibility of performing EQR
rc
*2-year cool-off period or longer - if the EQ Reviewer has
previously served as a partner of the engagement.
*May use assistants who are experts on the subject matter if
the engagement under review requires relevant expertise
CODE OF ETHICS FOR CPAs
(Filtered)
A distinguishing mark of the accountancy profession is its
acceptance of responsibility to the public.
Structure of the Code of Ethics
PART 1 – Fundamental Principles and Conceptual Framework
PART 2 – Professional Accountants in Business [PAIB]
PART 3 – Professional Accountants in Public Practice [PAPP]
PART 4A – Independence for Audit and Review Engagements
PART 4A – Independence for Other Assurance Engagements
Glossary
Purpose of the Code
Fundamental Principles [COBID]
Confidentiality; Objectivity, Professional Behavior, Integrity,
Professional Competence and Due Care
Conceptual Framework [HER]
 Compliance with fundamental principles
 Identify, evaluate, and address threats to compliance
International Independence Standards
Established for audit, review, and other assurance engagement
regarding threats to independence
PART 1: Fundamentals & Conceptual Framework
Compliance (What should prevail?)
 Code of Ethics vs. Laws and Regulations - Laws and Regulations
 Conflicting requirements of countries - Stricter ethical provisions
Breaches of the Code
 Evaluate the significance and impact of the breach
 Take whatever actions to address the consequence
 Determine whether to report the breach to relevant parties
Fundamental Principles [COBID]
To respect the confidentiality of information as a
Confidentiality
result of professional and business relationship.
A Professional Accountant shall not take an activity that
Objectivity
will unduly influence the professional judgement.
Behave in a manner consistent with the profession’s
Professional
responsibility to act in the public interest. Avoid any
Behavior
conduct that will discredit the profession.
Integrity To be straight forward and honest professionally.
Professional Attain and maintain professional knowledge and
Competence skill at a required level.
To act diligently in accordance with technological and
Due Care
professional standards.
Conceptual Framework: Compliance with fundamentals [HER]
Have an inquiring mind Open and alert to a need for further action
Applying relevant training, knowledge, and
Exercise professional
experience in decision-making. Consult
judgement
experts or regulatory bodies when needed.
Reasonable an informed A person who weighs all relevant facts that
third party test the accountant knows, or expected to know
 Conceptual Framework: The Three-Step Approach
Identify the Threats [I-FASS]
PA will be deterred from acting objectively because of
Intimidation actual or perceived pressure, including attempts to
exercise undue influence over the accountant.
Due to long or close relationship, a PA will be too
Familiarity
sympathetic to interest or too accepting of their work
That a PA will be promote or employ a client’s position
Advocacy
and the accountant’s objectivity is compromised.
Self-interest Financial or other interest will influence judgement.
PA will not appropriately evaluate the results of a
Self-review
previous judgement made by within or another PA.
Evaluate the Threats
Evaluate at an acceptable level using the reasonable and informed
third party test
Address the Threats
↳ Eliminate the factors (interest, relationships) that create threats.
↳ Availability bias – Placing more weight on information that
immediately come to mind than those that are not.
↳ Confirmation bias - Placing more weight on information that
corroborates an existing belief than those that casts doubt.
↳ Groupthink – the group discourages individual creativity
without considering alternatives or critical reasoning.
↳ Overconfidence – overestimating own ability for accuracy
↳ Representation bias – basing an understanding on an
experience or belief pattern, assumed to be representative
↳ Selective perception – one’s expectations affects his views
Additional Requirements:
Independence
↳ of Mind – expressing conclusions without being affected by
influences that compromise judgement, allowing to act
with integrity, objectivity and professional skepticism
↳ of Appearance – avoidance of facts and circumstance that

↳ Apply safeguards to reduce threats to an acceptable level.
↳ Decline or end a specific professional activity.
Bias
↳ Anchoring bias – To use an initial information as an anchor
es
a reasonable and informed third party would conclude
that the firm’s or member’s integrity, objectivity or
professional skepticism has been compromised.
Professional skepticism – peyborit mo to diba - questioning

against an inadequately assessed subsequent information
↳ Automation bias – To favor an automated output even
when human reasoning raises questions.
ul
mind, being alert to conditions that indicates misstatements
due to fraud or error, and critical assessment of evidence.
FAQ: auditor thinks NEITHER the client is honest or dishonest

rc
Part 2: Professional Accountants in Business [PAIB]
Threats Fundamental
Circumstance [CPA FIRB]
Created Principles Affected
Conflict of Interest – professional activity where the interests of two or more parties, or the I-FASiS COBID

e
professional accountant in business and the party are in conflict.
► Identify the Conflict – the nature of interests and relationships of the parties; the activity and
LE H
it’s implication for relevant parties Self-interest Objectivity
► Safeguards to threats – restructure or segregate duties; obtain oversight or supervision
► Disclosures – nature of conflicts and how it was addressed; consent to apply safeguards
Preparation and Presentation of Information – PAIB shall observe fair presentation; and I-FASiS COBID
beware of risks of bias
SA by
► Use of Discretion – PAIB shall not exercise discretion to mislead or influence the outcomes Intimidation ALL
► Relying on Work of Others – Exercise professional judgement to determine what steps to take Self-interest
► Addressing misleading information – discuss and consult with superior for actions to resolve
Acting without Sufficient Expertise I-FASiS COBID
► PAIBs, shall act with sufficient expertise to avoid self-interest threat and creating misleading an Professional
employer as to the level of expertise he possess. Self-interest Competence and
Due Care
R te

► Determine whether to decline or perform the duties, communicate the reasons for declining.
Financial Interest, Compensation and Incentives – PAIB shall not manipulate or use I-FASiS COBID
confidential information for personal gain or for others
► Direct financial interest – (1) owned directly or under the control of an individual or entity; (2)
beneficially owned through a collective investment in which the entity has control or influence Confidentiality
FO nu

► Indirect financial interest - beneficially owned through a collective investment, estate, trust, or Self-interest
other intermediary in which the individual or entity has no control or influence Objectivity
↳ Immediate family – spouse (or equivalent) or dependent [asawa’t anak]
↳ Close family – parent, child, or sibling [magulang, kapatid, saka step child yata yon]
Inducements, Gifts, Hospitality – ANY MEANS to influence, but not necessarily intentional I-FASiS COBID
i

► Prohibited by law – PAIB shall comply with the requirements

O M

► Inducement with intent – just don’t accept okay? Intimidation Objectivity

► Inducement with no intent – may accept if trivial or inconsequential FAQ: sports ticket offered
↳ Actions to eliminate threats: decline the inducement; transfer the responsibilities Familiarity Professional Behavior
↳ Safeguards – transparency with employer’s senior management or TCwG; return or
reimburse as soon as possible, or; donate to charity and disclose the donation Self-interest Integrity
N st

↳ Immediate/close family member – advise them not to accept or offer the inducement
Responding to NOCLAR – intentional or unintentional omission or commission of illegal acts I-FASiS COBID
► Committed by: the entity [who employed the PAIB]; its management, TCwG or other employees
↳ The management/TCwG should: ensure compliance, identify and assess NOCLAR
La

↳ All PAIBs should: obtain understanding, consider existing protocols; inform the Intimidation Professional Behavior
T

immediate superior or the next higher level if the superior is involved.

↳ SENIOR PAIBs should: obtain understanding and assess the consequences; discuss with Self-interest Integrity
immediate superior, communicate with TCwG, rectify, remediate, mitigate the NOCLAR,
reduce the risk of re-occurrence, assess the appropriateness of superior’s response
Pressure to Breach the Fundamental Principles – PAIBs shall: I-FASS COBID
► Not allow pressure from others to breach the fundamental principles
► Not place the pressure on others who will likely to breach the fundamental principles Intimidation ALL

Part 3: Professional Accountants in Public Practice [PAPP]

Threats Fundamental
Circumstance [CPAS FIRC]
Created Principles Affected
Conflict of Interest – same in PAIBs Self-interest Objectivity
Professional Appointments– acceptance of new client or changes in existing engagement I-FASS COBID
► Client and Engagement Acceptance – competencies should be acquired by the PAPPs
► Changes in Professional Appointment – reasons for not accepting engagement (replacement of PA)
► Changes in Audit or Review Appointment – rules in communicating with predecessor auditors ALL ALL
► Client Engagement and Continuance – for recurring audits, periodic review whether to continue
► Using the Work of an Expert – determine whether the use is warranted (necessity and reliability)
Second Opinions – PAPPs might be asked for a second opinion on applying standards and principles I-FASiS COBID
regarding (1) specific circumstance or (2) transactions by or on behalf of non-existing clients Profssnl Competence
► Facts might not be the same, so: obtain permission to communicate with the predecessor Self-interest and Due Care
 Fees and Remunerations I-FASiS COBID
► Level of Fees – adjust if the fees are quoted so low that it will lead to self-interest threats Professional
► Contingent Fees – usually in non-assurance services; have a reviewer who is not involved with Self-interest Competence and
 Purchase or sale of firm; fees established by courts are not contingent fees Due Care;
► Referral Fees and Commissions – obtain and disclose written agreements as to basis of fees Objectivity
Inducements, Gifts, Hospitality – same in PAIBs (but involves clients instead of employers) I-FASiS COBID
Responding to NOCLAR – rules on consideration of fraud, error, and NOCLAR I-FASiS COBID
Custody of Client Assets – holding client assets creates self-interest I-FASiS COBID
► Before taking custody – do not assume custody unless permitted; make inquiries about the
source of the assets; consider legal and regulatory obligations Intimidation Objectivity
► After taking custody – Comply with laws and regulations; separate it from personal or firm Self-interest Professional Behavior
assets; use the assets only for intended use; be ready to account the assets and its income.

Part 4A: Independence for Audit and Review Engagements

Required Period of Independence

Coverage of FS Period

es
Start of FS Period Start of Audit End of FS Period Audit Report Date
Engagement Period

Identify [I-
Circumstance Evaluate [Relevant Factors] Address [Safeguards/Actions]
FASS]

ul
Fees and Remunerations
Relative:  Firm’s operating structure  Increase the client base in the firm to
To the total fees of the  Well established or new reduce dependence on audit client
firm  Quanti/qualitative significance of the firm

rc
Self-interest
To the revenue of a  Quanti/qualitative significance of the client  Increase the partner’s or client base
partner  Manner of partner’s compensation  Have an appropriate reviewer
Intimidation
Client is a PEI for 2  Consider whether post-issuance review is  Disclose to TCwG
years; and fees from the not sufficient  Discuss and apply pre and post issuance

e
client is more than 15% review
of total fees
LE H
Overdue Fees Self-interest *See Loans and Guarantees*  Obtain partial payment; have a reviewer
Contingent fees A firm shall not charge directly or indirectly any contingent fee for an audit engagement

Compensation and Evaluation Policies

Audit team member is  What proportion of the evaluation or  Revise the policy
SA by
evaluated or compensation is based on that sale  Remove the individual from the audit team
Self-interest
compensated for selling  Role of the individual in the team
non-assurance services  Whether sale influences his/her promotion

Gifts and Hospitality – a firm, network firm, or audit member shall not accept unless (may accept) trivial or inconsequential [PART 3]
R te

Actual or Threatened Litigation

Litigation with the client Self-interest  Materiality of the litigation  Have an appropriate reviewer
occurs or likely to occur Intimidation  Whether litigation relates to prior audit  Remove that individual from the audit team

Loans and Guarantees

FO nu

With an audit client Not permitted unless immaterial

With a bank or its likes Not permitted unless the loan or guarantee is made under normal terms, conditions, and procedures
Not a bank or its like Not permitted unless immaterial

Business Relationships
i

Between a firm/member
O M

Not permitted unless any financial interest is immaterial and business relationship is immaterial
and client/management
Not permitted unless:
Common interest in
 The business relationship is insignificant to the firm, or individuals, or the client
closely held entites
 The financial interest is immaterial and does not give the ability to control to the investor
Buying goods or service Does not create a threat if: in the normal trade of business and at arm’s length
N st

Family and Personal Relationships

An engagement team  The individual’s responsibility to the team  Remove the individual from the audit team
Self-interest
member has a family or  The individual’s role as a family member  Restructure the audit team - to prevent the
La

Familiarity
personal relationship with or the closeness of the relationship audit team from dealing with the personal
T

Intimidation
the client relationship matters.

Recent Service with Audit Client

Service during the period The audit team shall not include the individual in the engagement
Self-interest
covered by the audit
report
Self-review
Service before the period  The position the individual held  Have an appropriate reviewer
covered by the audit  Length of time since leaving the client  Review the work performed
Familiarity
report  Role of the audit team member
 As a director or officer: Not permitted
Serving in the company  As a company secretary: Not permitted unless: permitted by the law, professional rules or practice; the
management makes relevant decisions; the duties performed are limited to routinary and administrative

Employment with Audit Client

 The position the individual has taken at  Modifying the audit plan
the client [his/her new position]  Assign the audit team members who have
A former partner or Familiarity  Any involvement that the individual will sufficient experience relative to the
member has joined the have with the audit team individual who joined the client [yung mga
client Intimidation  Length of time since the partner/member nakakakilala dun sa lumipat na member]
was an audit team  Have an appropriate reviewer
 Former position of the individual  Review the work of the former member
 Temporary Personnel Assignments
Self-review  Nature and scope of work performed by  Conduct additional review
An engagement team the personnel  Do not include the loaned member as an
member was loaned to Advocacy audit team member
an audit client (hiniram)  Do not give the audit responsibility to the
Familiarity loaned personnel

Holding Financial Interests Part 4B – Independence for Other Engagements

 Direct financial interest, or;
 Material indirect financial interest in the client
Shall not be held by:
↳ A firm or network firm,
↳ Audit team member or individual’s immediate family
↳ Partner in connection with the engagement; and that
partner’s family*
↳ Partner or managerial employee who provides non-
*same as the previous provisions*
Keys to FAQs – Code of Ethics for Professional Accountants
 Advertising – communication to public as to service or skills
 COA – not explicitly a source of technical standards
 Code of Ethics – mandatory for all CPAs
 Commemoration – done only in every 5 years of celebration
 Contingent fees – prohibited for assurance services

audit service, except for minimal involvement; or family*
*an immediate family member may hold direct or material
indirect financial interest provided:
 The family received the financial interest as an
employment right and the firm addresses the threat
es
 Continuing education – safeguards to eliminate threats to
independence
 Court resolutions – not a contingency fee
 Disclosure to BIR – not a duty or right to disclose
 Distinguishing mark – why is it deemed essential

 The family member disposes or forfeits the financial
interest as soon as practicable.
Long Association Provisions – Audit and Review
ul
 Emphasis on positive activities – advantage of general
statements of ideal conduct over specific rules of behavior
 Fee based on net income – violation under professional fee
 Grandfather – example of an indirect ownership interest

Rules on Rotation
 Non-PIE – determine an appropriate period
 Public Interest Entities – 7 year time-on period
↳ Key audit partner [KAP] roles are not allowed for
rc
 Honorary member – least likely to impair independece
 Inducement – includes any means (gifts, treatment, etc.)
 Information request of a SH – violation to confidentiality
 Objectivity – maintaining an impartial attitude

e
more than 7 CUMMULATIVE years
 Publicity – not designed for deliberate promotion
Cooling-off Periods
LE H  Purchase of goods – least likely to create selfinterest threat
5 years – Engagement Partner [EP]  Solicitation – offering professional services
3 years – Engagement Quality Control Reviewer [EQCR]  A CPA may issue to a non-client an unsolicited request –
2 years – Other key audit partner roles (1) factual and objective (2) directory of names & address
 Advertising and publicity are not generally unacceptable
*5 consecutive years - combination of KAP and served as  Difference between auditor and other professionals – most
SA by
EP for 4 or more years. professionals are not concerned about independence
*The 7 year time-on period is cummulative  Fees cannot be drawn from client’s money without notice
*The 7-year time-on period takes into account the years  Partner’s checking account, fully insured by PDIC held at a
before and entity became a PIE [kasama] financial institution – unlikely a violation of independence
XPN: to 7-year time-on period  Prof fees must be paid before issuance of audit report
↳ Up to 1 more year  Professional Competence three phases – incorrect statement
 The period of rotation of a lead engagement partner from 5
► KAPs continuity is important to audit quality
R te

to 7 years – not an IFAC modification

► Concurred by TCwG – permitted to serve 1 more year
 Threats to referral fees – objectivity, professional behavior
► Independence threats are eliminated or reduced
 See the order of Conceptual Framework Approach [IEA]
↳ Up to 2 more years  See immediate and close family
► KAP served for 6 or more years when the client
FO nu

 See independence [mind and appearance]

becomes a PIE  See the order of Conceptual Framework Approach [IEA]
► Concurrence by the TCwG  See kind of threats
 See rotation and cooling-off periods
i

~End of Auditing Theories~

O M

I studied so hard the way my life depends on it. I prayed so much - as everything depends on Him.

“Never limit your prayers because you think

You’re sinful or undeserving. You are not praying
N st

Because of who you are – you are praying

Because of who He is.”
-19/01/23-
La

“Today’s struggles
T

Are part of tomorrow’s

Success story.”
-10/02/23-

“Trust your prayers”

-11/02/23-

“Trust in the Lord with all your heart

And not lean on your own understanding.
In all your ways, acknowledge Him,
And he shall direct your paths.”
-14/02/23-

“My Father, please help me. I need you, always.”

-17/04/23-

“God has no faithful servant

Whom he has forsaken.”
-20/04/23-

Certified Public Accountant 2023

 FREQUENTLY ASKED QUESTIONS
Fundamentals of Auditing
 Agreed-upon procedures – report on factual findings
 Assertions – management as to fairness of FS
 Assertions are fairly stated – primary goal in attestation
 Compilation – does not express opinion, no assurance
 Detection risk – controllable by the practitioner
 Effectiveness and efficiency – most difficult criteria
 Exposure period – 3 months each exposure draft
 GAAP – auditor’s judgement on overall fairness [not GAAS]
 Governmental audit – can be done even to private entities
 Governmental audit – extends to compliance
 Independence – improves reliability of reports
 Independent audit – lends credibility to economic data
 Independent director – retired executive (other company)
 Internal auditing – encompasses financial and operational
 Operational audit – waste reduction through control
 Professional fees – not an element of assurance
 Professional skepticism – neither honest or dishonest
 Program results audit – established by legislative body
 Scope – distinguishes auditing, attestation, and assurance
 Subject matter – nature of assertion (financial or non)
 Subject matter information – outcome of evaluation
 All attestations are assurance, all audit involve attestation
 Auditing standards - applied uniformly, procedures may vary
 Auditor owes primary allegiance to SHs, creditors, investors
 Compliance and Independent audit are most similar types
 See materiality relationships
 See reasonable vs. limited assurance
 See assurance vs non-assurance
e
Introduction to Auditing / Preliminary Engagement
LE H
 Audit plan – least likely considered in pre-engagement
 Auditability – adequacy of documentation
 Classification – not in account balances assertion
 Cutoff – not in account balances assertion
 Engagement letter – responsibilities of audit and client
SA by
 Existence – not in presentation and disclosure assertion
 Gross sales – required to be audited by CPAs, exceeds 3M
 Short term and long term conflict may exist between auditor
and the management throughout the engagement
 See requirements for an audit by a CPA
 See classes of assertions
R te
Audit Planning / Risk Assessment
 Annualized interim – best for preliminary materiality
 Audit planning memorandum – summarize overall audit
strategies [documentation of strategies]
FO nu
 Corp. governance – not encompassed by understanding
 Expenses – benchmark of materiality for start-up entities
 Forecast of year-end FS – for preliminary materiality
 Fraud – required to be explicitly assessed
 Inventory – low level of defalcation (inherent risk)
 Lack of oversight – risk at FS level (pervasive)
i
 Materiality at planning level – may be disaggregated into
O M
smaller tolerable misstatements for various accounts
 Three-way matching – not considered in risk assessment
 Audit plan may be modified if ToC ≠ initial assessment
 Client should not have understanding of the nature of work
to be performed by an expert (work of others)
N st
 Client’s extensive use of NR and NP, not a red flag for InRisk
 Management domination of operating and financing
decisions is not considered as audit risk factor
 Management disregard of responsibility – CPA not accept
La
 Reduction of retained earnings caused by large dividend
T
payout is not an indicator of financial failure (good thing)
 Significant is considered material, not the other way
 See outputs of audit planning
 See risk, materiality, NTE relationship tables
Internal Controls
 AIS – consists of people, infrastructure and software
 Control environment – most important, foundation
 Design deficiency – control is missing / not formulated
 Operating deficiency – not operating as intended
 Detection risk – not a control environment factor
 Every third audit – operating effectiveness of controls
 Flowchart – visual depiction, diagrammatic representation
 Key control absence – not a concern if there is alternative
 Monitoring – are separate evaluations (not everyday)
 RoMMS on IC – assessed at BOTH FS and assertion level
 Safeguarding – protection from loss thru unauthorized use
 Segregation of duties – tested thru inquiry & observation
 Significant risk – requires special audit consideration
 Top-to-Down Approach – done in understanding the IC
 Budgets, forecast, identifying variances from expectations
could improve management’s ability to supervise
Substantive testing [Evidence]
 Appropriateness – both valid and relevant
 Blank positive confirmation – if CR is at maximum
 Closer to year-end – evidence is more persuasive
 Competent evidence – relevant, objective free-from-bias
 Confirming major segments – not a procedure
 Disaggregation – increases reliability of expectations
 Ending balances – audited thru ToB+Analytical Procedures
 External confirmation – most costly, effective and reliable
 Facsimiles – more reliable than photocopies
 Income statement accounts – most predictable for AP
 Inquiry alone - does not provide apprprt & suffcnt evidence
 Interest expense – highest level of evidence- relationships
 Letter of audit inquiry – a corroborating evidence
 Prior year data – least effective in verifying completeness
 Procedures at year-end – decreases misstatements
 Recalculation – most effective and reliable, least costly
 Sample size – n/a to substantive analytics, only to ToD
es
 SEC reporting – no effect in the amount of evidence
 Small volume, small amounts – best use negative form
 Substantive analytics – not required, but still reliable
 Test of balance – most costly, because ST is costly
 Testing authorization – use test of balances
ul
 Unreturned negative request – rarely provides evidence
 Comprises [1] towards assertions, [2] corroborating (other)
 Criticism against observation – auditor is not qualified
 Evidence is more persuasive if obtained:
rc
 Evidence is obtained throughout the audit
↳ Interim basis - for income statement accounts
↳ Near or at year-end - for balance sheet accounts
 See difference of test of balances vs transactions
 See evidence concepts
 See vouching and tracing illustration
Substantive Testing [Audit Sampling]
 100% examination – not used in test of controls
 100% examination – used - CAATs (computer automated)
 Anomalous error – not a representative
 Attribute sampling – EDR of 3% < TDR of 5%
 Attribute sampling – employee time cards for approval
 Block selection – least desirable
 Dual purpose – larger size designed for two purposes
 Incorrect acceptance – relates to effectiveness
 Incorrect rejection – efficiency
 Modify CR - if SDR exceeds tolerable rate (6%+2%) vs 7%
 Population size – little or no effect on sample size
 PPS – auditor controls risk of incorrect acceptance
 Projecting an error rate – not an analytical procedure
 Quantitative evaluation – advantage of statistical to nonst
 Ratio analysis – for NON PUBLIC entities - relationships
 Ratio estimation – audit value= proportional to book value
 Regression Analysis: most common statistical technique
 Sequential sampling – does not use fixed sample size
 Stratification – decreases the effect of variance
 Stratification of disbursements – for unusual large cash
 Systematic sampling – best if forms are not prenumbered
 Systematic sampling –destroys sample randomness
 Value-weighted – completeness for small amounts
 Value-weighted – existence/occurrence for large amounts
 Variable sampling – numerical measurement, peso value
 No sampling method is required – professional judgement
 Randomly chosen sample may not be a representative - best
 Skip ToC if expected misstatements exceeds tolerable
 See voided and missing samples
 Test counts⬆ Records⬇ = unrecorded sales returns/purchase
 Test counts⬇ Records⬆ = unrecorded sales/purchase returns
Using the Work of Others
 Auditor’s expert – assist the auditor in evidence
 Competence & objectivity – work done by internal auditor
 Efficiency – not a qualification for internal auditor reliance
 Expert engaged by third party – cannot be engaged
 Internal audit – affects scope of ST of the external auditor
 Internal audit – established within an entity as a service
 Management’s expert – assist entity in preparing FS
 Opening balance – confirm in predecessor’s working paper
 Quality of working paper – technical competence
 Resolve the matter – if expert’s work are not consistent
 Source data – consideration if finding is properly reflected
 If the auditor intends to use the work of an expert:
↳ Do not refer to indicate division of responsibility
↳ Additional procedures are still needed
↳ Objectivity of the expert is in concern
↳ Do not just simply rely on his assumptions and methods
 Auditor may refer even the expert is related to the entity
 Internal auditors cannot determine the extent of the audit
procedures that the external auditor will employ
 Completing the Audit
 Audit of goodwill – recomputation
 Fair value – do not disregard even no active market
 Fair value disclosure – NTE not needed in understanding
 General risk – does not require disclosure
 Held-to-maturity investments – fair value not applies
 Invoices from lawyers – to assess legal ramifications
 Major fallacy – by only looking at deposit slips
 Management representation
↳ Should coincide with auditor’s report date
↳ Obtained for contractual agreements
↳ Does not apply materiality limits to minutes of meetings
↳ Includes completeness and availability of minutes
↳ Obtained from both companies under comparative FS
↳ Can be used as complements but does not replace ST
↳ Usually signed by CEO and CFO
 Notes payable – easiest to detect in related party trnsctns
 Refusal by lawyer – qualified or disclaimer, not ADVERSE
 Subsequent receipts– altrntv to confirm year-end balance
 Verbal assurance – not relevant in assessing fair value
 Average exceptions – forecasting ToC, ST + AP results
 Management letter - not examined in early phase
 The use of representation letter (it is like an inquiry) as
other procedures violates the professional standards
 In auditing the fair values of assets and liabilities:
↳ Valuation issues arise at initial and subsequent recording
↳ Confirming valuations with audit committee – least likely
 Procedures concerning related party transactions
↳ Reviewing confirmations for indications of guarantees
↳ Obtain understanding of its purpose if RPTs occurred
e
↳ Disclosures are the primary emphasis of the auditor
 Issues in entity’s going concern
↳ When unusual trade credit from suppliers is denied
LE H
↳ Postpone R&D expenditures – a mitigating factor
↳ Operating cash flows are negative – an indicating factor
 Evidence gathering for subsequent events
↳ Investigate changes in long-term debt after year-end
SA by
↳ Inquire for occurrence of unusual adjustments
Audit Documentation
 60 days – required to complete assembly of audit files
 Analyses of share capital – usually included
 Audit program – basic tool to control audit,review progress
 Client schedules – least likely to include in documentation
R te
 Current audit files – single period
 Inappropriate working paper – all forms are included
 Income statement accounts – least likely reviewed in WP
 Internal audit program – not generally included
FO nu
 Narrative descriptions of IC – a permanent file
 Organized working papers – advantage of indexed WPs
 Permanent audit file – recurring audits, updated
 Second wrap-up review – for fair presentation of FS
 Standardized working papers – for efficiency
 Statutory period – minimum retention period of WPs
i
 Superseded drafts – not included in documentation
O M
 Type of opinion – no effect in the form and content of WP
 Working trial balance – reclassifications and adjustments
 Lead schedules
↳ major components of reported amounts
↳ eliminates voluminous details in working trial balance
N st
↳ combine similar general ledger accounts
 Working papers
↳ Property of the auditor
↳ Supports audit opinion
La
↳ May be obtained by third parties – relevant litigation
T
 Not substitute to entity’s accounting records
 Not developed for operating staff development
 Should not be submitted to clients
 Do not support client’s financial statements
Audit Reporting
 Addressee – shareholders, BoD or both
 Date of AR – not later than signing/approving FS
 Emphasis of OM – ordinarily refer to unqualified opinion
 Opinion – identifies FRF basis and expresses an opinion
 Preclude an unqualified opinion – management refuses
to furnish a management representation letter
 Reasonable assurance – the possibility of MMs still exist
 Title – distinguishes the report form other reports
 Adverse –FS has no conformity with PFRS
 Adverse not appropriate – substantial doubt on going
concern as an only major issue
 Adverse or Disclaimer
↳ Inventory records after physical inventory count are not
sufficiently reliable
↳ Only when condition is highly material
 Disclaimer not appropriate – failure to disclose RPTs
 Disclaimer of opinion
↳ imposed restriction/limitation
↳ severe scope limitation
↳ non-independent relationship between client and auditor
↳ has an option but not required for MUrGC
↳ extreme cases of multiple uncertainties
 Qualified not appropriate – a doubt more than substantial
 Qualified opinion
↳ Major inadequacy in computerized accounting records
prevents auditor from applying necessary procedures –
qualification on possible effects in FS
↳ Lack of sufficient and appropriate evidence
↳ Restriction on the scope of the audit
↳ Departure from PFRS, lack of consistency, scope limitation
↳ Must use the term “except for” in the opinion paragraph
↳ Only if auditor believes that overall FS are fairly stated
es
↳ Effects or possible effects are material but not pervasive
 Qualified or Disclaimer
↳ Failure to disclose PRFS disclosure requirements
↳ Amounts associated with illegal acts
 Qualified or Adverse – least like for scope limitation
ul
 Qualified and EoM – Change in applying GAAP is justified
 Unqualified / Unqualified standard report
↳ Violates PFRS for immaterial item
↳ Realistic change in estimates
rc
↳ Significant loss (because not recurring) for last 3 years
↳ No emergency back-up but catastrophe is remote
↳ Unable to obtain AFS for investment in foreign subsidiary
↳ Client makes test counts on a basis of statistical plans
↳ Confirmation of AR is ineffective but other procedures
are satisfied as to reasonableness
↳ “Without qualifying our opinion, we draw attention...”
 Unqualified and EoM – least likely on scope limitation
 Most likely to add an emphasis of matter paragraph:
A: Substantial doubt as to entity’s ability as going concern
 Why an independent auditor is asked to express an opinion?
A: Company may not be objective to its own FS
Other Reporting Issues
 Comparative FS – not presented as complete, but integral
 Annual Report – issued by entity including FS and AR
 Uniformity – means of promoting credibility of the report
 Two-year (comparative) FS– 1 audit report on both years
 PSA 800 – special purpose financial statements
↳ Does not apply to audit of FS in accordance with PFRS
 Accrual basis – not considered in special purpose FS
 Special report – cannot be issued to entity with a limited
scope of audit of financial statements
 Summarized financial statements
↳ does not contain all information required by the FRS for
the AFS
↳ engagement may be accepted provided auditor has
audited the basic FS where SFS is derived
 Other information
↳ auditor’s responsibility does not extend beyond the
financial information identified in the report
↳ auditor has no obligation to corroborate but should read it
to determine if it is materially inconsistent with the FS
↳ best course of action is the manner of presentation
 Material misstatement of fact – not related to matters,
other information are incorrectly stated/presented
 Material inconsistency
↳ Other information contradicts Audited FS
↳ If client refuses to revise or eliminate, revise the auditor’s
report to include a separate paragraph
 Unqualified with OMP – refusal to amend AFS
 Adverse opinion – if not presented with the prescribed basis
 Modified cash basis – acceptable provided the CPA states
in the audit report that the fairness was evaluated within
the framework of the modified cash basis rather than PFRS
Other Engagements
Review
 Assessing control risk – not in review engagements
 Attestation standards – other than historical FS standards
 Audit has greater detection risk than review – not true
 Client’s IC – not expected to be understood for publicly-held
 Compilation – no analytical procedures
 Change from audit to review engagement - Additional
efforts to complete, reason for change
 Confirm cash balances – not appropriate for interim review
 Context – improves by assurance services
 CPA is not familiar with specialized industry - May still
accept all: compilation, review, audit
 Examination – similar terms of audit of HistFS assurance
 Failure to follow GAAP (review) – disclosure only
  Highest to lowest assurance – audit, review, compilation
 Honor the client request - Examination of FS (non-public)
and changed to a review of FS because of cost issues
 Inquiry & analytical procedures – review of unaudited FS
 Inquiry to RPTs – normally included in review engagements
 Limited scope – makes it impossible to issue a review report
 Material modifications w/ GAAP – basis of interim review
 Material scope limitation (review) – qualified (negative) or
no assurance
 Material weaknesses of IC – not considered in a review of
non-public entity
 More than one level of service – issue the highest level
 Negative assurance – “not aware of material modification”
 Negative assurance for AFS – violation of standards
 Objectives of interim review – basis for reporting to BoD
 Reasonableness of estimates – not included in a review
 Review of non-public entity
↳ Inquiries for recording and summarizing transactions
↳ Reading minutes of the BoD’s meeting
 Scope of procedures – major diff between Review vs AFS
 Signed representation letter – more important in review
than in a compilation
 Substantive Testing – least like done in a review
 Review engagement of non-public entity where the CPA has
direct immaterial interest – not independent, do not issue
a review report
Financial Forecast/Projection
 Achievability of forecast – not included in the report
 Exam report on financial forecast – conforms to GAAP
 Exam report on financial projection – appropriate to
e
distribute to a bank which entity has a loan
 Forecast – what management expects to take-best estimate
LE H
 Projection – hypothetical assumptions, belief
 Management – responsible for assumptions
 Modify or withdraw – disclosures are inadequate
 Prospective FS – either for general or limited use
 Qualified/adverse – fails to disclose significant assumption
SA by
 Written representation – still needed for Prospective FS
Agreed-upon Procedures
 Agreed-upon procedures – report on factual findings
↳ May be accepted, state the lack of independence
↳ Carry out procedures of an audit nature
↳ May perform IOI, Analysis, Confirmation
R te
↳ Always include restrictions on its distribution
↳ Should state limitations on the use of the report
 Enumerating procedures – not appropriate in AUP
 May be accepted for AUP of prospective FS, provided that
FO nu
the distribution is restricted to specified users involved
 Negative assurance – not included (non-assurance nga eh)
Compilation
 Accounting – one of the types of compilation
i
 Compilation report – no independence, assurance required
 Compilation of reports to Prospective FS – independence
O M
is required to allow from being issued
 Compilation service – compete w/ computer service business
 Compilation – accounting expertise as opposed to auditing
↳ Reading the FS to consider whether free of obvious
mistakes in the application of accounting principles
N st
↳ An accounting service rather than an examination
↳ Provides “notice to reader”
 Computation – most likely done in a compilation
 Issuance of a report – not required in compilation
La
↳ Required: Agreement, planning, use of audit expertise
T
 Resign – if the preparer feels it will mislead the client’s FS
 Withdraw – incomplete information, management refused
 “Complied without audit or review” – on each page or front
of the complete set of FS compiled by an accountant
Transaction Cycles / Audit of Business Processes
 Audit of inventories – unlikely to verify whether on hand
 Authenticity – not a concern for marketable securities
 Bank statements – best if received directly from banks
and reviewed by the internal auditor
 Bill of lading – for testing failure to invoice shipments
 Billing dept – match shipping, sales orders, daily summary
 Billing function – accounting department
 Confirming accounts payable – not for loss contingencies
 Existence – cutoff test of credit sales made before year end
 Fictitious sales in next period – decrease in AR turnover
 Goods for cash – least concern in authorization
 Inactive accounts – for receivable confirmation
 Incompatible terms – collection and maintenance of AR
 Inflated sales – detected by sales cut-off
 Offsetting sales and writeoffs – credit-granting ≠ sales
 Open accounts – lapping by the cashier
 Perpetual inventory system – use for different products
 Reconciliation – for large purchases recorded twice
 Remittance listing – immediately upon receipt of cash
 Schedules made by client – least persuasive document
 Separation of payroll duties – best reason to observe
paychecks distribution
 Special bank account – unclaimed cash payroll
 Unrecorded sales – decrease in gross profit ratio
 Valuation – assertion for credit approval before shipments
 Inspect shipping records at year-end for accounts receivable
if the auditor did not receive replies on second request
 Test counts⬆ Records⬇ = unrecorded sales return/purchases
Accountancy Profession
 AASC – 11 from APO [PICPA], one from the rest
 FRSC – 8 from APO [PICPA], one from the rest
 AASC – 9 representatives from public sector of PICPA
 AASC – auditing standard setting body created by BoA
es
 APO chairman – 60 days for documentation of nomination
 BIR – not in AASC
 CPA certificate – evidence of basic competence
 CPE council – shall choose a chairperson among themselves
 Death or disability of a partner – not later than 30 days
ul
 Fictitious name – may be used for practice
 Firm – engaged in practice of public accounting
 Intolerance of violation – not a ground for removal
 PRC and BOA – enforcement of RA 9298 and its IRR
rc
 President – appoints PRBoA members
 Public practice – most represented in AASC
 Quality review – power of BoA to conduct oversight
 Residence – not a qualification for Boa member
 Revoked certificate – 2 years at BoA’s discretion
 Unsound mind – no CoR, no Professional ID
 Upper portion – name of the CPA or firm
 Middle portion - CPA
 Lower portion – Registration number
 Meaningful experience
↳ Commerce – significant involvement in accounting, tax,
auditing, budgeting, representing ER before agencies
↳ Government - – significant involvement in accounting,
tax, auditing, budgeting, liaison of COA
↳ Education – atleast 3 trimesters or 2 semester subjects;
accumulated teaching experience atleast 3 school years
 Chairman and members shall receive comparable
compensation and allowance as of the other Boards
 Development and improvement of accounting standards –
not an objective of Philippine Accountancy Act of 2004
 Not a valid ground for suspension or removal – being sued
(should be a final judgement/convicted)
 Qualification of a BOA member – atleast 10 years of ANY
 See qualifications of the chairman and members of BoA
 See required number of members of regulating bodies
PSQM – Quality Management for CPAs
 Annually/12months – communicating the results of
monitoring the quality control system
 Engagement partner – responsible for forming a
conclusion on compliance with independence
 External peer review – done by other employees and
partners of a CPA firm to a CPA firm.
 Hot review – undertaken by a more experienced member
 Inquiries of previous auditor – to pursue quality control
 Inspection – evidence of compliance of engagement team
 Inspection cycle – no more than 3 years
 Monitoring – ongoing consideration of firm’s SQC
 Quality control – evaluates personnel advancement exp
 Subcontracting work – not a quality control in large firms
 Technical skills and objectivity – eligibility of EQCR
 The firm’s decision – basis of documentation to provide
evidence of the operation of each element of its QC
 DO NOT continue the engagement after being declined early
 EQC review is required to be performed – immediately after
reassessing the control risk
 Inspection on a cyclical basis – atleast one engagement for
each partner over an inspection cycle
 Review engagement working papers and report – to meet
the firm’s standards of quality
Auditing in CIS Environment
 Access controls – a concern in a distributed data process
 Analytical procedures – not a major reason for
maintaining audit trails for a computer system
 Assess computer CR – least likely to use computer software
 Batch processing – collects data into groups for
convenient and efficient processing
 Check digit – original value has not been altered
  Compiler – a program that converts procedure oriented
language to a machine language
 Computerized clock cards – part of audit trail is lost
 Computerized payroll system – discover invalid EE ID No.
 Control group – initial debugging of a computer program
 Controls appear adequate – not a reason to omit ToC
 Credit limits – develop a program to compare credit limits
 Data processing - facts are not organized in a meaningful
manner
 Database management system – reduce data redundancy
 EDI systems – auditors need to plan ahead to capture data
 EDI systems – preventive than detective
 Enter invalid numbers – to test if controls are functioning
 Erroneous source document preparation – less risk in CIS
 Error listing – unique to CIS
 General controls – developing, maintaining, modifying
 General controls – initially focus when CR is at low level
 General ledger – for lead schedules in a work paper software
 Kiting – coverage of cash shortage by means of unrecorded
check drawn on another account
 Lapping – practice of withholding receipts and applying it to
a later date
 Material fraud – advice the shareholders [TCwG], or to the
next higher level of authority [ex. SEC]
 Material misstatement – material error, material fraud
and certain illegal acts
 Professional skepticism – auditor assumes that the
management is NEITHER honest or dishonest
 Reportable conditions – significant deficiencies in IC
 Risk criterion – giving greater attention to suspicion of fraud
 Subsequent discovery – of MMs does not mean that
planning, performance, and judgement is inadequate
 Substantial emphasis – heighten a concern about risk
 Susceptibility of asset misapp – not a fraud risk factor
 Theft of inventories – more likely to be detected by audit

 Hardware controls – machine instructions are executed
 Ineffective IC – computer personnel originates changes in
master files
 Integrated tests – allow fictitious and real data together
 Key control – separation of developmnt & operations group
es
 Unqualified or disclaimer – if fraud is not revised
 Analytical procedures – detect material peso errors
 Diversion by employee or outsiders of transactions – a fraud
with intent to benefit a company

 Loss of confidentiality – not a typical risk of outsourcing
 Machine readable form – performed in IT department
 Magnetic tape systems – grandfather-father-son approach
 Manual system combined by computer software –
ul
 Errors require adjustment in accounting records
 Fraud that involves senior management should be reported
directly to the audit committee regardless of amount
 Greater risk for management fraud than employee fraud

prevents unapproved revisions to existing software
 Microcomputers – WP documents - not readily observable
 Numbers in alphanumeric fields – not an error in test data
 Online, real-time – used by large savings bank accounts
rc
 Illegal acts by clients often relate to operations rather than
accounting – why the auditor cannot bring all illegal acts
 Report the matter to appropriate representatives even the
fraud is immaterial

e
 Parallel simulation – CAATs on auditor-controlled program  The auditor’s responsibility to detect errors and fraud are
 Real-time processing – performed concurrently basically the same
LE H
 Real-time system – online files, input from users, network
 Significant deficiency – operators are closedly supervised
by programmers
 When the client does not take remedial actions – withdraw
 When there is fraud that has material effect, do not
 Snapshot – auditor wishes to capture an entity’s data discuss it with the level of management:
 Strong controls – to compensate lack of SoD in an computer ↳ Consider the implications for other audit aspects
SA by
 Systems analyst – designing new/improved data processing ↳ Obtain evidence as to materiality and effect of fraud
 Terminal audit key – can be strengthened by requiring ↳ Have the client to consult with legal counsel
manual rather than online recording of all transactions  See fraud risk factors
 Test data –processed by client program, controlled by auditor  See auditor’s responsibilities
 Test of input-output (black) – not detect program errors
 Top to bottom, left to right – normal sequence of flowchart
 Uncomplicated process – can be audited without IT testing
R te

 Utility programs – routine processing; sorting and merging

 Computerized accounting system
↳ Disadvantages
► Does not leave a thorough audit trail
FO nu

► Easier for unauthorized access and alteration of files

↳ Common difficulty – data can be erased with no evidence
 Auditor must have at minimum, a sufficient knowledge of
the computer information system
 Conversion of revenue cycle from manual processing to an
online, real-time process – reduces segregation of duties
i

 Data processing cycle – collection, refinement, processing,

O M

maintenance, output [COReP MO]

 Review GCIS/GITCs before application controls
 Systematic error is greater in manual process than in
computerized processing
N st

Fraud, Error, NOCLAR

 Abstraction of bank funds – any illegal misappropriation
of bank accounts; pocketing a portion of receipts
La

 Accounting estimates – auditor is required to communicate

T

with the audit committee

 Accrual and billing of improper amounts – an illegal act
where an audit should be designed to detect
 Annual audit - may act as a deterrent to prevent NOCLAR
 Audit in accordance with PSA – determined by adequacy
of the audit procedures
 Collusion of employees – unlikely to be uncovered in audit
 Departure from GAAP – auditor’s responsibility to detect
error or fraud
 Disagreements – should be reported to the audit committee
 Dominated management – not an indication of NOCLAR
 Error of commission – posting errors, incorrect calculation
 Fraud risk factor – often observed where fraud has occurred
 Illegal political contributions – reconsider the degree of
reliance to management representation letter
 Independence and objectivity – constructive working
relationship between the auditor and TCwG
 Indirect effect of fraud – no assurance to be provided
 Intent – distinguishes fraud from error