PSA 450 - Evaluation of Misstatements Identified During the Audit

Objectives is to evaluate the following:

1. Effect of identified misstatements on the audit
2. Effect of uncorrected misstatements on the FS

Requirements:
- Auditor shall accumulate misstatements identified during the audit, other than those that
are trivial
- When to revise the overall audit strategy and audit plan?
a. Nature of identified MM and circumstances of occurrence indicate that MM exist
b. Aggregate of MM accumulated during the audit approaches materiality
- Management examined a class of transactions, account balances or disclosures and
corrected misstatements? Auditor shall perform additional audit procedures to determine
if misstatements remain
- Communicate all misstatements accumulated during the audit on a timely basis with the
“appropriate level of management” unless prohibited by law or regulation.
- The appropriate level of management is the one that has responsibility and authority to
evaluate the misstatement and to take the necessary action.
- Auditor shall request management to correct misstatements found.
- Management refuses to correct? Auditor shall obtain an understanding of management’s
reasons, and take that into account when evaluating if the FS as a whole is free from
material misstatement

- In accordance with PSA 320, auditor shall reassess materiality to confirm if it remains
appropriate in the context of the entity’s actual financial results.
- Auditor shall determine whether the uncorrected misstatements are material, individual
or in aggregate. To do that:
a. Size and nature of the misstatements
b. Effect of the uncorrected misstatements related to prior periods on the classes of
transactions, account balances or disclosures, and the financial statements as a
whole.
- Auditor shall communicate with those charged with governance uncorrected
misststatements and its effect on the auditor’s report.
- Auditor’s communication shall identify material uncorrected misstatements individually,
and request them to be corrected.

- Auditor shall request a written representation from management and those charged with
governance whether they believ the effects of uncorrected misstatements are
immaterialto the FS as a whole.
- Auditor shall include in the audit documentation:
a. Amount which misstatements would be regarded as clearly trivial
b. All misstatements accumulated during the audit and whether they are corrected
 c. auditor’s conclusion whether uncorrected misstatements are material, and the
basis for that conclusion

- Misstatements may result from:

a. Inaccuracy in gathering or processing data
b. An omission of an amount or disclosure
c. An incorrect accounting estimate arising from overlooking/ misinterpretation of
facts
d. Judgements of managements concerning accounting estimates that the auditor
considers unreasonable that the auditor considers inappropriate
- Auditor MAY designated an amount below which misstatements would be clearly trivial
and would not need to be accumulated because those accumulation will have no
material effect on the FS.
- CLEARLY TRIVIAL NOT another expression of NOT MATEIRAL
- Clearly trivial is smaller order of magnitude than materiality.
- When there is an uncertainty about one or more items as clearly trivial, then it is not
clearly trivial.

DIFFERENCES BETWEEN factual, judgemental and projected statements

1. FACTUAL misstatements - misstattement about which there is no doubt
2. JUDGEMENTAL misstatements - differences arising from the judgements of
management concerning accounting estimates that the auditor considers unreasonable
or inappropriate
3. PROJECTED misstatements - auditor’s best estimate of misstatements in populations,
involving the projection of misstatemnets identified in audit samples to the entire
population from which the samples were drawn

- Misstatement MAY not be an isolated occurrence.

- Aggregate of misstatements accumulated during the audit approaches materiality =
greater than acceptably low level of risk that possible undetected misstatements could
exceed materiality.
- Undetected misstatemnets could exist because of sampling risk and non-sampling risk

- Law or regulation MAY restrict the auditor’s communication of certain misstatements to

management.
- Correction by management of all misstatements enables management to maintain
accurate accounting books and records, and reduces the risk of material misstatement in
the future FS.
- PSA 700 requires the auditor to evaluate whether the FS are prepared and presented in
all material respects, in accordance with the requirements of the applicable financial
reporting framework.

- Determination of Materiality? Based on 320 - estimated of the entity’s financial result

Circumstances where some Mistatements are considered material even if they are lower than
materiality for the FS as a whole:
a. Affects compliance with regulatory requirements
b. Affects compliance with debt covenants
c. Incorrect selection or application of accounting policy with immaterial effect on current
but material effect on the future
d. Masks a change in earnings
e. Affects ratios used to evaluate the entity’s financial position
f. Affects segment information presented in the FS
g. Effect of the increasing management compensation ‘
h. Significant having regard to the auditor’s understanding of known previous
communications to users
i. Relates to items involving particular parties
j. Omission of information not specifically required by the applicable financial reporting
framework
k. Affects other information that will be communicated in documents containing the audited
financial statements
l. Cumulative effect of immaterial uncorrected misstatements related to prior periods to
current periods

- In the case of public sector entity, the evaluation of misstatement is affected by the
auditor’s responsibilities established by law
- Issues such as public interest, accountability and probity may affect the assessment
whether an item is material by virtue of its nature

- If MM communicated to management and governance, they need not to communicate

again with the person who is both in management and governance.
- Large number of individual immaterial uncorrected? Auditor may communicate the
number and overall monetary effect of the uncorrected misttatements.

Summary:
- Management and Charged with governance adjust the FS to correct material
mistatements. The auditor si REQUIRED to request them to provide a written
representation about uncorrected mistatements.

Documentation
a. Aggregate effect of uncorrected misstatements
b. Evaluation of whether the materiality level exceeded
c. Evaluation of the effect of uncorrected misstatements on key ratios
PSA 580 - Written Representation

Summary:
- Audit Evidence is all the information used for the conclusions used in the audit opinion
- Written Representations “Provide necessary audit evidence” BUT do not provide
sufficient appropriate audit evidence on their own. It also does not affect the nature or
extent of other audit evidence that the auditor obtains about the fulfillment of
management’s responsibilities.

Objectives:
a. Obtain written representations from management (management believes that it has
fulfilled the fundamental responsibilities that constitute the premise on which an audit is
conducted)
b. Support other audit evidence relevant to the FS, or specific assertions in the FS by
means of written representations is determined necessary by the auditor
c. Respond appropriately to written representations provided by management or when
management does not provide the written representations requested.

Definitions
1. Written Representations - a written statement by management to confirm certain matters
or support other audit evidence. This does not include FS, assertions, or supporting
books and records.
2. Management - should be read as “management, and where appropriate, those charged
with governance” – responsible for the preparation and fair presentation of the FS.

Requirements:
- Auditor shall request WR from management – must include:
a. It has fulfilled its responsibility for the preparation and presentation of the FS
b. Provided the auditor with all relevant information agreed in audit engagements
and all transactions that are recorded and reflected
- Date of WR shall be near as practicable to, BUT NOT AFTER, the date of the auditor’s
report on the FS
- WR shall be in the form a representation letter addressed to the auditor

- Auditor has concerns about competence, integrity and ethical values of management?
Auditor shall determine the effect of these concerns on the reliability (oral or written) of
representations and audit evidence in general.
- Written Representations inconsistent with audit evidence? Auditor shall perform audit
procedures to attempt to resolve the matter.
- Matters still unresolved? Auditor shall reconsider the assessment of the competence,
etc. of the management and shall determine the effect on the reliability and aud evidence
- Auditor concludes that WR unreliable? Auditor shall take appropriate actions, including
determining the effect on the opinion in the auditor’s report.
 - Management won’t provide requested WR? Auditor shall discuss the matter with
management, reevaluate ang integrity of management, take appropriate actions like
determine if ano ang possible effect on the opinion in the auditor’s report (PSA 705)

- Auditor shall disclaim an opinion on the FS if there is sufficient doubt about the integrity
of management such that the WR
- Written WR, not oral, enhance the quality of the representations

- WR may be requested from the entity’s chief executive officer and chief financial officer
- Management are expected to have sufficient knowledge of the process followed by the
entity in preparing and presenting FS, and assertions on which to base the written
representations.

Specific Assertions
- Auditor may consider obtaining evidence about: entity’s past history in stated intentions,
entity’s reasons for choosing a particular course of action, entity’s ability to pursue a
specific course of action, and existence or lack of any other information that might have
been obtained during the course that may be inconsistent with the management’s
judgement

Communicating a Threshold Amount

- PSA 450 requires auditor to accumulate MM identified during the audit except those
clearly trivial. Auditor may determine or consider communicating to management a
threshold above which MM cannot be regarded as clearly trivial.

Date of Period(s) Covered by WR

- Mauna dapat ang date of the written representation before auditor’s opinion can be
expressed and auditor’s report can be dated.
- The WR are dated as near as practicable to, but not after, the date of the auditor’s report
on the FS
- WR are for all periods referred to in the auditor’s report because management needs to
reaffirm that the WR it previously made with respect to the prior periods remain
appropriate.
- Current management not present during all periods referred to in the audit report? This
persons may assert that they are not in the position to provide WR but this situation does
not diminish this person’s responsibilities for the FS as a whole. The request for the WR
still applies

Form of WR
- Written Representations are required to be included in a representation letter addressed
to the auditor.
- A formal statement of compliance with law or regulations would not contain sufficient
information for the auditor to be satisfied that all necessary representations have been
consciously made.
 - The WR shall be communicated to those changed with governance which the auditor
has requested from management.

Doubt as to Reliability of WR
- Inconsistencies of WE and obtained from another source? Auditor may consider whether
the risk assessment remain appropriate, and if not revise the risk assessment.
- Concerns about the competence and diligence of management? May cause for the
auditor to conclude that the risk of management misrepresentation causing for the audit
to not be conducted. Auditor may withdraw from the engagement unless those charged
with governance put in place corrective measures. – this measures however may not be
sufficient to enable the auditor to issue an unmodified audit opinion.

- A written representation that has been modified from that requested by the auditor does
not necessarily mean that management did not provide the written representation.

PSA 600

Definitions
1. Components - an entity or business activity for which group or component management
prepares financial information that should be included in the group FS
2. Component auditor - an auditor, at the request of the group engagement team, performs
work on FI related to a component for group audit
3. Component management - management responsible for preparing the FI of a
component
4. Component materiality - materiality level for a component determined by the group
engagement team.
5. Group - all the components whose FIs is included in the group financial statements.
6. Group audit - the audit of a group FS
7. Group audit opinion - the audit opinion of a group FS
8. Group engagement partner - partner or other person in the firm who is responsible for
the group audit engagement and its performance, and for the audit report on the group
FS that is issued on behalf of the firm.
9. Group engagement team - partners, including the group engagement partner, and staff
that establish the overall group audit strategy, communicate with component auditors,
perform work on the consolidation process and evaluate the conclusions drawn from the
audit evidence as the basis for forming an opinion on the group FS.
10. Group financial statements - financial statements that include the FI of more than
one component.
- Group Financial Statements = Combined Financial Statements aggregating
the financial information prepared by components that have NO PARENT
but are UNDER COMMON CONTROL
 11. Group management - management responsible for preparing and presenting group
financial statements
12. Group-wide controls - controls designed, implemented and maintained by group
management over group financial reporting
13. Significant component - a component identified by the group engagement team that (1)
of individual financial significance to the group and (ii) due to its nature, likely to include
significant MM to the group FS

- “APPLICABLE FINANCIAL REPORTING FRAMWORK” means financial reporting

framework that applies to the group FS.

Requirements:
- The group engagement partner is responsible for the direction, supervision dn
performance of the group audit engagement in compliance with professional standards
and legal requirements.
- AUDITOR’S REPORT shall not refer to a component auditor unless required.
- Group engagement partner concludes that it will not be possible for the GETeam to
obtain sufficient appropriate audit evidence and this inability will result in disclaimer of
opinion - Group engagement partner shall not accept the engagement/resign or disclaim
an opinion on the group FS
- Group engagement partner shall agree on the terms of group audit (PSA 210)

Overall Audit Strategy and Audit Plan

- Group engagement team SHALL establish an overall group audit strategy and audit plan
AND review the OAS and AP.
- Group engagement team SHALL enhance understanding of components, environments,
group-qide controls (controls of group management over group financial reporting); and
obtain an understanding of the consolidation process.
- Group engagement team shall obtain an understanding taht is sufficient to: confirm ro
revise its initial identification of components that are likely to be significant and assess
risks of MM on the group FS

- Group engagement team plans to request the work of a component auditor? Shall obtain
an understanding on:
a. Whether Component Aud understands and will comply with ethical requirements
b. Component auditor’s professional competence
c. Whether group engagement team will be able to be involved in the work of the
component auditor
d. Whether the component auditor operates in a regulatory environment that
actively oversees the auditor
 - CA does not meet the requirements above? Group engagement team shall obtain
sufficient appropriate audit evidence relating to the FI of the component without
component auditor.

Group engagement team shall determine:

- Component materiality or the materiality level for the group FS as a whole when
established overall group audit strategy
- Component materiality shall be lower than the materiality for the group financial
statements as a whole.
- Auditor is required to design and implement appropriate responses to address the
assessed risks of MM of the FS.
- Group engagement team shall determine the type of work to be performed by the group
engagement team or on the FI of the components
- Group engagement team shall also determine the nature, timing and extent of its
involvement in the work of the component auditors.

- For components that are not significant components, the group engagement team shall
perform analytical procedures at group level

- The group engagement team shall design and perform further audit procedures on the
consolidation process to respond to the assessed risks of material misstatement of the
group financial statements arising from the consolidation process
- The group engagement team shall evaluate the appropriateness, completeness and
accuracy of consolidation adjustments and reclassifications, and shall evaluate whether
any fraud risk factors or indicators of possible management bias exist.
- The group engagement team shall determine whether the financial information identified
in the component auditor’s communication is the financial information that is
incorporated in the group financial statements.

PSA 610 - Using the Work of Internal Auditors

Relationship between internal and external auditors

1. Role and objectives of the internal audit functions are determined by management and
charged with governance.
2. IA and EA objectives are different but achieving the objectives may be similar.
3. External auditors has sole responsibility for the audit opinion, that responsibility is not
reduced by the use of internal auditor’s work.

Objectives
1. External auditor determine whether, to what extent, to use specific work of the internal
auditors
 2. If the work of internal auditors is adequate for the purposes of the audit.

Definitions
1. Internal Audit function - an appraisal activity established or provided as a service to the
entity. Functions include examining, evaluating, and monitoring the adequacy and
effectiveness of internal control.
2. Internal auditors - individuals who perform the activities of the internal audit function.
MAY belong to an internal audit department or equivalent function.

Requirements
Objective 1: Determining whether and to what extent to use the work of the Internal
Auditor
- External auditor shall determine if adequate ba ang work of IA and if yes, what is the
effect on the nature, timing and extent o the external auditor's procedures.
- In order to find if ADEQUATE, shall evaluate:
1. objectivity of the internal audit function
2. technical competence of the internal auditors
3. work of the internal auditors is carried with due professional care
4. if there is an effective communication between internal auditors and external
auditors
- In order to find the EFFECT to nature, timing, and extent shall consider:
1. nature and scope of specific work performed and to be performed
2. assessed risk of MM at the assertion level
3. Degree of subjectivity involved in the evaluation of the relevant assertions.

2nd Objective: Work of Internal Auditors is Adequate

- To determine the adequacy of specific work performed by internal auditors, external
auditors shall evaluate:
1. Work of internal auditors have adequate “technical training and proficiency”
2. Work was “properly supervised, reviewed and documented”
3. Adequate audit evidence has been obtained to enable the internal auditors to
draw reasonable conclusions
4. Conclusions reached are appropriate; Reports prepared are consistent with the
result of teh work performed
5. Any exceptions or unusual matters are disclosed by internal auditors and
resolved.

Documentation
- External auditors shall document conclusions regarding the evaluation of the adequacy
of the work of internal auditors and the audit procedures performed by the external
auditor on that work.

Applications and other explanatory material

 - If Internal audit function responsibilities and activities are related to the financial reporting
- they are likely to be relevant to the audit. They use the work of the Internal auditor to
“modify the nature or timing” or reduce the extent of the audit procedures to be
performed.
- If dili na niya gamiton ang internal audits work, no need ang psa 610

Scope and Objectives of Internal Audit Function

1. Objectives of Internal Audit Functions vary due to size and structure of the entity and
requirements of management.
2. Activities of the Internal Audit Function (an appraisal activity):
- Monitoring of Internal Control
- Examination of financial and operating information
- Review of operating activities
- Review of compliance with laws and regulations
- Risk management.
- Governance

Factors that MAY affect the external auditor’s determination of whether the work of the internal
auditor is adequate:
1. Objectivity of the Internal Audit Function
2. Technical competence of the internal auditors
- Whether the IA members are professional bodies
- IA has adequate technical training, and the training has established policies for
hiring
3. Due Professional Care
- Activities are properly planned,supervised, reviewed and documented. With proof
of existence of the documents
4. Communication
- Communications between IA and EA may be most effective when the internal
auditors are free to communicate openly with EA.
- Meetings held at appropriate internals
- External auditor has access to relevant internal audit
- External auditor informs Internal auditor significant matters

- Where the work of the IA is to be a factor in determining the nature, timing or extent of
the EA, and may be useful to agree in advance these:
1. Timing of work
2. Extent of audit coverage
3. Materiality for the FS as a whole
4. Proposed methods of items selection
5. Review and reporting procedures
PSA 620 - Using the work of an Auditor’s Expert

Auditor’s Responsibilitie for the Audit Opinion

- Like in Internal Auditors work, the work of an Auditor’s Expert does not reduce the
responsibility of the auditor for the audit opinion expressed.

Objectives
1. To determine whether to use the work of an auditor’s expert
2. Whether auditor’s expert is adequate for the auditor’s purposes.

Definitions
1. Auditor’s expert - an individual or organization possessing expertise in a field other
than accounting or auditing, whose work in that field is used by the auditor to assist the
auditor in obtaining sufficient appropriate audit evidence. MAY BE auditor’s internal
expert or auditor’s external expert
2. Expertise - skills, knowledge, and experience in the field
3. Management’s expert - an individual or organization possessing expertise in a field
other than accounting or auditing, whose work in that field is used by the entity to assist
the entity in preparing the financial statements.

Requirements
- Nature, timing and extent of the auditor’s procedures will vary depending on the
circumstances.

To determine the NTE of those procedures, the auditor shall consider:

1. Nature of the matter to which the expert’s work relates
2. Risk of mm to experts work
3. Significance of the experts work in relation to the audit
4. Auditor’s knowledge of and experience with previous work performed by that expert
5. Whether that expert is subject to the auditor’s firms quality control policies and
procedures

- AUDITOR SHALL evaluate whether the auditor’s expert has competence, capabilities
and objectivity.
- Auditor SHALL obtain a sufficient understanding of the field of expertise of the auditor’s
expert.
- Auditor SHALL agree, in writing when appropriate, the matters of:
1. The nature, scope and objectives of that expert’s work
2. The respective roles and responsibilities of the auditor and that expert
3. Nature, timing and extent of communication between the auditor and that expert
4. Need for the auditor’s expert to observe confidentiality
 - Auditor SHALL evaluate the adequacy of the auditor’s experts work for the auditor’s
purposes including:
1. Relevance and reasonableness of the conclusions of expert, their significant
assumptions and methods, and accuracy of source data.

- Auditor Determined that the work of the auditor’s expert is NOT adequate, then they
SHALL agree with that expert on the nature and extent of further work to be performed.

- AUDITOR SHALL NOT refer to the work of an auditor’s expert in an auditor’s

report containing an unmodified opinion unless required by law or regulation to
do so.

- Auditor makes reference to the work of an auditors work? Auditor shall indicate in the
auditors report that such reference does not reduce the auditor’s responsibility for that
opinion.

APPLICATION AND OTHER EXPLANATORY MATERIALS

- It is necessary to apply judgment when the requirements of this PSA are affected by
whether the auditor’s expert is an individual or an organization.
- Auditors expert MAY need assistance in the following areas:
1. Obtaining an understanding of the entity and its environment
2. Identifying risks of MM
3. Determining and implementing overall responses to assessed risks at the FS
level
4. Designing and performing further audit procedures to respons to assessed risks
at the assertion level, comprising tests of controls or substantive procedures
5. Evaluating the sufficiency and appropriateness of audit evidence obtained in
forming an opinion on the FS

- RISK OF MM MAY INCREASE when expertise in a field other than accounting is needed
for management to prepare the FS.
- Preparation of FS involves the use of expertise in field other than accounting? Auditor
may not possess the necessary expertise to audit those FS.
- Engagement partner is required to be satisfied with the engagement team and auditor’s
experts.
- Auditor is required to ascertain the nature, timing and extent of resources necessary to
perform the engagement. – the NTE also varies depending on the circumstances:
1. Work of the auditor’s expert relates to a significant matter that involve subjective
and complex judgements
2. Auditor havent previously used the work of the auditor’s expert
3. Auditor’s expert is performing procedures taht are integral to the audit rather than
being consulted to provide advice on the matter
 4. The expert is an auditor’s external expert and not subject to the firms quality
control policies and procedures

- Auditor’s internal expert may be a partner or staff

- Auditor’s external expert is NOT a member of the engagement team and is NOT subject
to quality control policies and procedures - but law or regulation may require na auditor’s
external expert be treated as a member of the engagement team or professional
requirements

- engagement teams are entitled to rely on the firm’s system of quality control.
- Competence, capabilities and objectivity of an auditor;s expert are factors that
significantly affect whether the work of the auditor will be significantly adequate.

- COMPETENCE - relates to the nature and level of expertise of the auditor’s expert
- CAPABILITY - relates to the ability of the auditor’s expert to exercise that
competence.
- Objectivity - relates to the possible effects that bias, conflict of interest or the
influence of others may have on the professional or business judgement of the
auditor’s expert.

- CCO or compe, capa, and obj of the auditor’s expert include whether that expert’s work
is subject to technical performance standards or other professional or industry
requirements.
- A broad range of circumstances may threaten objectivity, such as self-interest, advocacy,
familiarity, self-review, and intimidation threats.
- SAFEGUARD MAY eliminate or reduce threats and may be created by external
structures or auditor’s expert’s work environment.

- The agreement between the auditor and an auditor’s external expert is often in teh form
of an engagement letter.
- No written agreement between auditor and auditor’s expert? Need og evidence of the
agreement such as planning memorada or the policies and procedures of the auditor;s
firm

- In the agreement of roles between auditor and auditor’s expert may include agreements
about working papers.
- Auditor’s external experts’ working papers are their own and DO NOT form part of the
audit documentation; while auditor’s expert that is a member of the engagement term’s
working paper are part of the audit documentation

- Auditor MAY test source data.

- Auditor concludes that the work of auditor’s expert is NOT adequate for the auditor’s
purposes – Auditor may express a modified opinion in the auditor’s report.
- Need to refer to the auditor’s expert in the auditor’s report containing modified opinion?
Auditor may need the permission of the auditor’s expert before making such reference.