PRACTICE AND REGULATIONS OF THE
ACCOUNTANCY PROFESSION
Republic Act No. 9298 (Philippine Accountancy Act
of 2004)
 regulatory act of practice
 Supersedes Presidential Decree No. 692 - Revised
Accountancy Law
Objectives:
 Standardization and Regulation of Accounting
Education
 Examination for registration of CPAs
 Supervision, control and regulation of practice
RA 9298 is PROSPECTIVE in application; not against the
prior rules before its effectivity.
PROFESSIONAL REGULATORY
BOARD OF ACCOUNTANCY
Composition: 7 overall (Chairman + 6 members
appointed by the President of the Philippines)
 Vice Chairman - elected from its members (1 year
term)
Appointment Process:
1) PICPA (APO) submits 5 nominees each to PRC;
within 60 days prior to retirement/replacement.
 PRC selects if PICPA did not
2) PRC will pick 3 from the nominees, ranks them,
then recommends it to the President
3) President will appoint 1
Qualifications - Members of the Board
 Natural-born Citizen and Resident
 CPA with AT LEAST 10 Years of Work Experience
in any scope of practice
 With Good Moral Character (not convicted)
 No Pecuniary interest (direct or indirect) in any
educational institution or review centers at the time
of appointment
 Not a Director/Officer of APO at the time of
appointment
Term of Office:
 3 years for 2 complete consecutive terms
 Can be appointed again AFTER 1 year
(cooling off period)
 Maximum of 12 years (cumulative)
 Substitution or Replacement is not considered as
complete term
COMPLETE TERM - No Substitution
3 3 x 3 3 x
COMPLETE TERM - With Substitution
1 3 3 x 3 2
POWERS AND FUNCTIONS
(Carry out Provisions and Seal)
ENTRANTS PRACTICE
Syllabus and Educational Accounting and Auditing
Institution (CHED) Standards
LECPA Oath-taking Codes of
Ethics
Certificate of Registration Investigations & Other Acts
Administrative Supervision: under PRC
 PRC - custodian of Records; secretariat services
Annual Report
 Submit report to the President thru PRC
 Detailed account of proceedings/accomplishments
Grounds for Suspension/Removal (by the President)
 Neglect of Duty/Incompetence
 Violation or tolerance of the Act
 Judgment/Commitment of Crimes
 Manipulation/Rigging of LECPA, disclose info
LECPA / CPALE
Qualifications:
 Filipino Citizen  BSA Graduate (CHED)
 Good Moral Character  Not CONVICTED
The examinations on or before October 2008 can be
taken even if not a BSA Graduate
Board Examinations:
 Passed - Ave. 75%, no grade lower than 65
 Conditional - at least 4 subjects is 75% & above
(usually with grades below 65) but regardless of
average.
 Conditional Subjects must be taken within 2
years.
 Failed - Ave. is below 75% and more than 2 is not
at least 75%.
 Limit: Failed 2 COMPLETE examinations. Must
take refresher course with 24 units.
**Syllabus can be changed every after 3 years.**
Report of Ratings: within 10 CALENDAR days
Oath-taking is required
Roster of CPAs: list of people who are CPAs with place
of Business
Certificate of Registration
 Issued to the ones who passed the exams and with
reciprocity (foreign country accepts Filipino CPAs to
practice in their country)
 States/Bears the Following:
 Full name and Registration Number
 Signature of PRC AND BOA
 Official Seal of PRC AND BOA
SPECIAL/TEMPORARY PERMIT
(Issued by BOA, Approved by PRC)
 Foreign CPAs that conducts ESSENTIAL/Specific
Purpose that advances the Accounting Field in the
Philippines (with reciprocity)
 Provided, NO Filipino CPAs can do so
x
PRC IDENTIFICATION CARD (PIC)
 It bears: Signature of PRC only
 Validity: 3 years (renewable on your birthday)
x
CPAs are required to indicate their registration numbers,
date of issuance, validity, professional tax number on the
documents they sign/issue.
Refusal to Issue Certificate of Registration: (GUMM)
 Guilty of immoral/ dishonorable conduct
Quality
Reviews
 Unsound mind
 Moral Turpitude (convicted)
 Misrepresentation
*Certificate of Registration is only given ONE TIME*
Death/Disability must be reported to BOA/PRC w/in 30 days
Reinstatement/ Reissuance/ Replacement of
Revoked Certificates (by the Board)
 AFTER 2 years; may, in its discretion, exempt such
from taking another examinations
 Petitioned, NOT automatic
SECTORS/SCOPE OF PRACTICE
1. Public Practice (ACPAPP) - offer/render services
on a fee basis.
 Corporations are NOT ALLOWED to practice.
 Auditing - attest function
2. Commerce and Industry (ACPACI) - employed
privately.
 For a LARGE company that has at least
Annual Revenue of 10M and Paid-up Capital
of 5M, the high position in relation to
accounting, tax, or auditing must be occupied
by a CPA.
 If the position is occupied by a non-CPA
before the Act, that person WILL NOT be
removed from that position. Once vacant,
the person replacing him/her should be a
CPA.
3. Academe (NACPAE) - provide instruction to
students on board examinations and other technical
subjects.
 Should be an accredited accounting teacher
(MBA; at least 3 years of Actual Accounting
Work; 12 units of education related subjects; at
least 120 CPD units).
 College of Accountancy - Dean = CPA
 College of Business and Accountancy (with
different course) - Dean is not required to be a
CPA but the head of the accountancy
department should be a CPA.
4. Government (GACPA) - employed with the
Government including GOCCs.
LIMITATION OF PUBLIC PRACTICE:
 NO Corporation is Allowed
 For Partnership: If there’s only 1 partner left after
dissolution, can use the name of partnership for 2
years (then rename or make new one)
MEANINGFUL EXPERIENCE:
a) Public Practice - 1 year audit assistant, 2 years
auditor in-charge of an audit engagement
b) Commerce/Industry and Government - significant
involvement (supervisory level)
c) Academe/Education - at least 3 trimesters (shall
not be less than 3 years)
Seal and Use of Seal
 All CPAs shall obtain and use a seal
prescribed by the Board; C.P.A.
 Reports shall be stamped with seal
 LOWER LEFT
OWNERSHIP OF WORKING PAPERS
 Completed within 60 days from audit report
 Retention as per SEC: 10 years (5 years hard copy;
5 years soft copy)
 Confidential, privileged, and property of the CPA
NAMES
 Individual - Name, CPA
 Sole Proprietorship - Name and Associates, CPA
 Partnership - Partners’ Surnames, CPA
 If secret, no name in the Firm (James, Abitago
and Company, CPAs)
 NOT FICTITIOUS; NO SPECIALIZATION; SHOULD NOT BE
MISLEADING AS TO THE FORM OF ORGANIZATION
FEES
 Based on the degree of responsibility assumed
(↑responsibility assumed, ↑fee)
 Referral Fees (Old - not allowed)
 New - allowed but WITH Safeguards (receiver
should not have control)
PENAL PROVISIONS:
 Fine: 50,000 or more
 Imprisonment: up to 2 years
 OR BOTH, at the discretion of the court
ENFORCEMENT OF THE ACT
 PRC and BOA’s primary duty
 Duly-constituted law enforcement agency/officers
Secretary of Justice - legal advisor/consultant
CONTINUING PROFESSIONAL DEVELOPMENT
Mandating and strengthening the continuing
professional development program; inculcation of
knowledge, skills, and ethical values.
REQUIRED CPE UNITS:
 Renewal - 15 units and a member in good standing
 Except for OFWs and newly licensed professional
for their FIRST renewal
 Accreditation - 120 units
 30 units - Technical Competence
 5 units - Professional Skills
 5 units - Professional Values, Ethics, Attitudes
 80 units - flexible
 Minimum Required CPE Units - 20 per year
OLD RULE:
For Accreditation - 60 units (15 units min. Per year)
Exception for Renewal: 65 years old
Temporary Exception: outside the Philippines for 2 years
prior to renewal
How to Earn CPE Units:
 Seminars/Workshops
 Academic Track
 Doctorate - 30 CPD units
 Self-directed/Life-long Learning
 Others as recommended by the CPD Council/BOA
Failed to renew license for 5 continuous years shall be
declared as delinquent and published after due notice.
ORGANIZATIONS CREATED THRU RA 9298
FSRSC, AASC, QRC, ETC with 3-year term (renewable)
Financial and Sustainability Reporting Standards
Council (FSRSC)
 Establishes GAAP
 Chairman - SENIOR practitioner in ANY scope
 16 individuals overall (BBB CAMSI)
BOA - 1 BSP - 1 BIR - 1 COA - 1
Accredited Insurance
Major Org.
NPOs - 2 per SEC - 1 Commission -
(Finex) - 1
sector 1
Auditing and Assurance Standards Council (AASC)
 Establishing and promulgating auditing standards
 Enhances reliability and uniformity of FS
 Chairman - SENIOR practitioner in PUBLIC
 18 individuals overall (BABCASI)
BOA - 1 Assoc./Public - 1 BSP - 1 COA - 1
Accredited NPOs - 9 public, SEC - 1 Insurance
NO gov’t Commission - 1
Quality Review Committee (QRC)
 Conduct an oversight into the quality of audit of FS
 Recommends the revocation of COR and PRC ID
of those in public practice
 Chairman - SENIOR practitioner in PUBLIC
 7 members overall
 1 BOA, 2 Public, and 1 for other sectors
Education Technical Council (ETC)
 Assist BOA in carrying out powers and functions in
the academe
 Assists to make Filipino CPAs globally competitive
 Chairman - SENIOR practitioner in ACADEME
 7 members overall
 1 BOA, 2 Academe (1 private, 1 public), and 1
for other sectors
OTHER RELATED ORGANIZATIONS
(Don’t focus here too much, just read)
 Philippine Institute of Certified Public Accountants
(PICPA)
 Reorganized by PRC as APO
 Established for the benefit & welfare of CPAs
 Only 15 national directors
 Membership is open to all registered CPAs
 Certificate of Accreditation - 3 years renewable
 Have 4 divisional chapters (Luzon, Visayas,
Mindanao, NCR)
 PRC CPE Council
 Assist in implementing CPE Program
 3 members overall (1 BOA - chairman, 1
PICPA, 1 NACPAE)
 Commission on Audit (COA)
 Supreme Audit Institution
 regulates government sector
 Decisions to any case - within 60 days
 CHAIRMAN - 10 years work experience and
AT LEAST 40 years old
 Securities and Exchange Commission (SEC)
 regulates private sector
 Regulates registration and operations of
associations
 Assists investors in providing reliable info
 Board of Accountancy (BOA)
 ONLY body that issues and may revoke CPA
certificates and grant license
 Bangko Sentral ng Pilipinas (BSP)
 Maintain price stability
 Promote and preserve convertibility of peso
 Bureau of Internal Revenue (BIR)
 Raises revenues for the government
 Gives additional requirements for audited FS
CODE OF ETHICS
Purpose: Reflect the recognition of public interest
(collective well-being) responsibility.
PROCESS OF CODE ADOPTION:
Discussion Papers Exposure Drafts Public
Exposure Period:
Majority vote
BOA for Approval Final Draft
FUNDAMENTAL PRINCIPLES: (COBID)
1. Confidentiality - no disclosures to 3rd parties
 EXCEPTIONS (SRP):
 Specific Authorization
 Required by Law
 Professional Right/Duty (Self-Defense)
2. Objectivity - neutral, impartial, without bias (no
evidence, no opinion)
3. Professional Behavior - do not discredit the
profession; maintain reputation. **Rules on
marketing of services.**
4. Integrity - honest and straightforward.
5. Professional Competence & Due Care - attain
and maintain a level of knowledge; being careful.
**Independence is NON-FUNDAMENTAL because
it is not always needed.**
THREATS - circumstances that might force an
individual to violate principles. (FASSI)
1. Familiarity - due to relationship, sympathetic.
2. Advocacy - promote or support client interest
over public interest.
3. Self-interest - materiality is IRRELVANT when it
is direct. Involves shares, money, employment
(even 1 share could be a threat to independence).
4. Self-review - danger that you re-evaluate about
a subject matter that you have created.
5. Intimidation - threat of replacement, harm;
pressures; undue influence; devalue.
HOW TO REDUCE THREATS? -- SAFEGUARDS
a) For Familiarity threat:
 Long Association with Client. Rotation of
senior practitioner. Rotation is every after 7
years with 2 years cooling off period. (Old
Rule: every 5 years).
 Former partner/member transfers to the
client with a position that can affect their
FS. End the engagement or pass it to
someone without familiarity threat.
 Gifts/Hospitality or Preferential Treatment. If
it is insignificant in value, you may accept.
Otherwise, not. If gifts is in the form of a
package, you can’t pick which is to accept or
not, thus, either accept all or decline all.
(Can also be Self-Interest or Intimidation).
 Engagement Specific Safeguards - per
engagement (like rotations).
 Firm-wide Safeguards - standard (policies and
procedures) across all groups.
 PART 1 - Applies to all Prof. Accountants (PAs)
PART 2 - Generally PART 3 - Applies to PAs
applies to PAs in in Public Practice
Business (Professional Services)
PART 4 - PAIPPs
(Assurance Services)
PART 4A PART 4B -
- PAIPPs PAIPPs
(Audit or (Other
Review) Services)
GLOSSARY - Applies to all PAs
**Controls are effective when it can prevent,
detect, or correct material misstatements in a
timely manner.**
Conflicting requirements of 2
Stricter provision
countries
Code in conflict with local laws Local law prevails
Independence of mind vs Independence of
Independence of Appearance Mind prevails (BUT
EQUALLY IMPORTANT)
FUNDAMENTALS OF ASSURANCE SERVICES
ASSURANCE
Attestation
FS Audits Direct
Reporting
(Non-written Assertions)
OPERATIONAL AUDITS
COMPLIANCE AUDITS
REVIEWS
 Difference: Scope
 ASSURANCE - engagement intended to
enhance credibility of information; subject matter
conforms with criteria.
 ATTESTATION - there is a written assurance/
reports/ communication/ assertion.
 AUDITS - performed using 7 procedures; more
evidence = higher/reasonable assurance.
 REVIEW - performed using 2 procedures (inquiry
and analytical); lesser evidence = moderate /
limited assurance.

INDEPENDENCE REQUIREMENT: engagement ELEMENTS OF ASSURANCE ENGAGEMENTS:

period and period covered by the FS. (3-SECC)
Independence of Mind - permits expression without  Three-party relationship
being affected by influences. (own evaluation)  Appropriate Subject Matter
Independence of Appearance - avoidance of  Sufficient, Appropriate Evidence
facts/circumstances that are significant because it  Suitable Criteria
usually occurs; “nakasanayan”. (other’s evaluation)  Conlusion / written assurance report (w/ opinion)

**CPAs should not make management decisions ASSURANCE NON-ASSURANCE

for the clients (give recommendations but don’t Form an opinion Recommend on how to
say which you think is the best one); only use information
assistance and advice.** Improve quality or Provide comments,
enhance credibility suggestions
CONCEPTUAL FRAMEWORK 3-STEP APPROACH 3-PARTY contract 2-PARTY contract
1) IDENTIFY threats to compliance By INDEPENDENT Independence is NOT
2) EVALUATE a) Significance of Threat professional REQUIRED
(Acceptable Level) (DARE) (CPAM)
b) Likelihood of occurrence -Due Diligence -Compilation
3) ADDRESS - Eliminate Circumstances -Audit -Preparation
- Apply Safeguards (reduce) -Review -Agreed-upon
- End/Decline Prof. Activity -Examination -Management

**If it is in normal capacity/process, there is NO **No Evidence, No Opinion**

threat; EXCEPT when it is stated that such is
material for them.** **The Framework is NOT the standards**

IN CONNECTION THREE-PARTY RELATIONSHIP (PRI)

YEAR: RELEASE?
WITH FEE  Practitioner - professional Accountant; must be
independent. Responsible for determining the
Issued report but still  - DON’T issue nature, timing, and extent of procedures required.
1
UNPAID audit report if both  Responsible Party - responsible for the subject
is still not paid. matter, its information, or both. May or may not
Ready for issue but be the engaging party, or from the same
2 fee for years 1 & 2 is  if either year is organization with users. (May be one of the
still UNPAID paid and collected intended users).
 Intended User - for whom the practitioner
prepares the assurance report. In case of broad
**Engagement ends either with a notification of range, may be limited to MAJOR stockholders
termination or upon issuance of the final WITH SIGNIFICANT and COMMON interests;
assurance report - whichever is LATER.** may be identified by agreement or by law.
**Anything can be a subject matter; provided, it is **PERSUASIVE RATHER THAN CONCLUSIVE**
not the responsibility of the auditor.**
**Independence is REQUIRED in all attestations**
APPROPRIATE SUBJECT MATTER
Characteristics of an Appropriate Subject Matter: **In the Philippines, agreed-upon procedures
 Identifiable and capable against criteria does not require independence; in the US, yes.**
 Information can be subjected to procedures for
gathering sufficient, appropriate evidence. CONCLUSION/WRITTEN ASSURANCE REPORT
 The practitioner provides a written report
 Subject Matter - nature of the assertion which containing a conclusion that conveys the
the PA gathers sufficient evidence (mas general). assurance obtained.
CAN BE:
 Ranking / rating; Capacity / Process TYPES OF OPINION COMMON PHRASES
 Behavior / Corporate Governance Presented Fairly, in all
 Subject Matter Information - outcome of the Unmodified/Unqualified material respects
evaluation or measurement of the subject matter (AGREE)
(supporting feature - specific items). Qualified Except for
 Sets of FS (SFP) - Subject Matter
Items in the FS (expenses) - Subject Matter Info. Do not present fairly, in all

Adverse material respect
SUFFICIENT AND APPROPRIATE EVIDENCE (COMPLETELY NEGATE)
Evidence - on which the conclusion is based; all We do not express a
information gathered in evaluating the subject matter conclusion (DOES NOT
Disclaimer of Opinion
against a criteria. (Based on AUDITOR’S Judgment) KNOW WHETHER TRUE
 Sufficiency - quantity/amount OR FALS
 Appropriate (competent) - quality
 RELEVANCE - the evidence is related to the POINTS OF REASONABLE LIMITED
assertions being examined.”RELATIONSHIP” DIFFERENCE ASSURANCE ASSURANCE
 RELIABILITY - Generalizations: Independence  
 Independent/External > Internal Source Consider Internal
 Internal Good Control > Weak Control  
Control
 Written > Oral Audit Procedures 7 2
 Direct/Personal > Inferential Evidence More Less
 Observation > Inquiry Level of High but not
 Original > Photocopies Moderate
Assurance absolute
Wording of the
**The poor quality of evidence CANNOT Positive Form Negative Form
Report
compensate for its volume**
PROCEDURES
SUITABLE CRITERIA AUDIT REVIEW
(I2 OA C RR)
Criteria - benchmarks used to evaluate or measure
Inquiry  
the subject matter, and for presentation/disclosures.
Inspection  
Criteria of FS Audit: PFRS/GAAP Observation  
Quality of an Audit Criteria: PSAs/GAAS Analytical  
Confirmation  
Suitable Criteria Characteristics: (RUN CR) Re-performance  
 RELEVANCE - helps/assist in decision-making; it Recalculation  
contributes in forming a conclusion
 UNDERSTANDABALITY - clear, comprehensive
STANDARDS APPLICATION
 NEUTRALITY - free from bias; NOT favor those
Auditing Audit of Historical Financial
who prepare the FS at the expense of the users.
Information
 COMPLETENESS - info from the start till the end
 RELIABLE - consistency/stability Review Engagements Review of Historical
Financial Information
**AUDIT VS ASSURANCE ENGAGEMENT RISK = Assurance Assurance engagements
look at the key words** Engagements OTHER THAN of Historical
AUDIT RISK ASS. ENG. RISK Financial Information
Auditor Practitioner Related Services Agreed-upon and other
related service engagements
Opinion Conclusion
Financial Statement Subject Matter
**Compilation WITH report but no opinion;
independence is NOT REQUIRED**
**HAVE TIME, COST, & QUALITY CONSTRAINTS**
 INTRODUCTION TO AUDITING
AUDITING - systematic process of objectively
obtaining and evaluating evidence to ASCERTAIN the
DEGREE OF CORRESPONDENCE between the
assertions and criteria, then communicating the
results thereof.
OBJECTIVE OF AN AUDIT: Expression of an
opinion on the fairness of the Financial Statements
(whether in accordance with GAAP or other basis) .
TYPES OF AUDIT
 Financial Statement Audit - audit on FS
 Opinion on Fair Presentation (PFRS./GAAP)
 Identify Internal Control Deficiencies + give
suggestions
 Operational Audit - subject matter is the
performance and operations of an entity
 Opinion on efficiency and effectiveness -
must set goals then compare to operations
 Identify areas for improvement + suggs.
 Compliance Audit - subject matter is the action
taken by the entity
 Opinion on adherence with laws, regulations
while using such as the criteria
 Identify non-compliance + recommend steps
to achieve compliance
Financial Statement Audit External Audit
Operational Audit Government Audit
Compliance Audit Internal Audit
 External Audit - own accounting/auditing firm
(CPAs in Public Practice)
 Applicable to all Types (FS Audit if silent)
 Government Audit - including GOCCs (COA
Auditors)
 Generally, applicable to Compliance; but can
be FS and Operational Audit, as well as
program results audit.
 Internal Audit - Generally, cannot perform FS
Audit due to lack of independence
 Applicable to Operational and Compliance
Program Results Audit
determine extent to which the desired results of an
activity are being achieved.
FINANCIAL STATEMENTS PREPARED IN
ACCORDANCE TO (in the ff. order of priority):
1. PFRS
2. IFRS
3. Other Authoritative Basis
Business Risk
Event or activity that will prevent the entity from
meeting its business objectives; such risk may
ultimately lead to failure.
Information Risk
Risk that the information prepared and presented
contains misstatements.
FINANCIAL STATEMENT AUDIT PROCESS:
(PAISAc-ArP)
I. Preliminary Engagement - SCREENING;
whether or not to accept a new client or continue
relationship with an existing one. Look at
auditor’s qualification AND integrity, as well as
the auditability of the client.
II. Audit Planning - EFFECTIVENESS;
development of an overall strategy, audit plan,
and audit program. Has obtained MORE
knowledge about the entity to understand
transactions and events.
III. Internal Control - EFFICIENCY; since it affects
the reliability of the FS, it is appropriate to study
and evaluate them.
IV. Substantive Testing (Evidence-Gathering) -
FOCUSED ON THE ITEMS IN THE FACE OF
FS; Using the information in planning and study
of internal controls, determine whether FS is
presented fairly. Either analytical procedures or
test of details. Always performed by the auditor.
V. Audit Completion - REVIEW PHASE; wrapping-
up procedures; conclusions are reviewed; overall
opinion is formed.
VI. Audit Report - Prepares and issues audit report
which describes the scope of the audit and the
conclusion regarding the fairness of FS.
VII. Post-Audit Responsibilities - Identify areas for
improvement for the current/future engagements.
Assertions - are representations by management
embodied in the FS, and used to consider different
type of potential misstatements.
5 CLASSIC ASSERTIONS (PERCV)
1. Presentation and Disclosure
a) Presentation - Current/Non-Current
(Aggregated and Dis-aggregated)
b) Disclosure - Notes to FS
2. Existence and Occurrence (in comparison to
Completeness, it is more into Overstatement)
a) Existence - Assets (if silent) and Liabilities
b) Occurrence - Income/Expense and Changes
in the Balance Sheet Accounts
3. Rights and Obligations
a) Rights - Assets
b) Obligations - Liabilities
4. Completeness (opposite of Existence - in
comparison to it, it is more into Understatement)
 Assets & Liabilities (if silent, more into Liabs.)
5. Valuation and Allocation
OTHER (NEW) ASSERTIONS: (CAC)
a. Cut-off - whether recorded in the proper period.
b. Accuracy - talks about AMOUNTS
c. Classification - talks about ACCOUNTS
RESPONSIBILITIES
Auditor Client
 Express an opinion on  Prepare/Present the
the FS Financial Statements
 Comply with PSAs  Comply with PFRS
 System of Quality  System of Internal
Management Control
 **If the client has a different treatment as PRE-ENGAGEMENT ACTIVITIES
compared to audit = misstatements**
BEFORE ACCEPTING AN ENGAGEMENT:
MISSTATEMENTS  Check professional competence
Management Fraud:  Industry
Fraudulent Financial Reporting - FS/  Your Capacity/Ability to serve
Intentional records are being manipulated  Check ethical requirements
(Fraud) Employee Fraud:  Independence
Misappropriation of assets (like theft);  Client Integrity/Reputation
assets taken but not recorded/adjusted  Check “auditability” of Financial Statements
Unintentional Omissions, oversights,  Check records/source documents
(Error) misinterpretations
Do a background check thru the predecessor auditor
TCWG Mgmt. Auditor (Communication - Required Procedure)
Prevent Fraud    BOTH the Client Effect
Detect Fraud    predecessor and Says:
*The “preventor” should also be the detector. successor YES no problem
**AUDITOR should detect fraud that is directly affecting the auditor should
and material to the FS. there’s a question of
ask permission NO integrity (might not
ETHICAL REQUIREMENTS: to client before accept engagement)
communication.
 Fundamental Principles (COBID)
 Independence
 Of Mind MATTERS TO DISCUSS WITH PREDECESSOR:
equal  Disagreements between client management and
 Of Appearance
predecessor auditor
STANDARDS  Reason for change of auditor
Minimum requirement or benchmarks on each and  Matters that bear on integrity of management
every audit
WHY CHECK PREVIOUS WORKING PAPERS?
Audits PSAs
 Look at BS accounts to compare continuity
Reviews PSREs
 Analysis of Contingencies
Other Assurance PSAEs
Agreed-Upon PRECONDITIONS OF AN AUDIT: (Both present)
PSRSs
Compilation  Management uses an acceptable standard in the
preparation of financial statements
SOURCES OF AUDIT EVIDENCE REGARDING FS:  Agreed to the terms of engagement
 Accounting Records
 Journals (including Special) **Once realized that you should have not accepted
 Ledgers (including Subsidiaries) the engagement, you should stop it already; then,
 Worksheets inform the client.**
 Adjusting Entries
 Other Sources After accepting the engagement thru screening, both
should agree on the terms of engagement that is
**Constraints of Audit Evidence: Time, Cost, normally documented in an engagement letter.
Quality**
**Engagement letter by itself is not required; what is
AUDIT PROCEDURES required is the documentation of agreement.**
 According to Nature: I2 OA C RR
 According to Purpose: PURPOSES OF ENGAGEMENT LETTER:
 Risk-assessment Procedures - obtain an 1. Provide a written record of the agreement to
understanding of the entity & its environment. minimize misunderstanding. (Primary)
 Test of Controls - evaluate the operating 2. Remind management that the primary
effectiveness of controls responsibility for the Financial Statement rests
 Substantive Tests - Detect Material with them. (Secondary)
Misstatements
 Tests of Details - of classes of CONTENTS OF AN ENGAGEMENT LETTER:
transactions, account balances and (DISUROT) With expectation to receive a representation letter
disclosures; MORE EFFECTIVE.  Division of responsibility  Report form
 Substantive Analytical Procedures -  Inherent Limitations  Objective of the Audit
looks at the plausibility of the  Scope of the Audit  Time table and Fees
movements of accounts.  Unrestricted access request
*should not include specific procedures to be performed
 In a recurring audit, there is NO NEED to send new During planning, recall:
engagement letter to the client; EXCEPT: (4Rs)  The objective of audit
Revised Terms Required by law  Express an opinion on the FS
Rewording Remind the client  Output: Audit Report
(needs to be changed for it is hard (Once the entity has changed in top  What is the basis of the opinion?
to understand) management, nature, size)
 Audit Evidence - records and others
 How is the evidence gathered?
CONSIDERATIONS IN SENDING A SEPARATE  Performing audit procedures
ENG. LETTER TO EACH COMPONENT (Branch, etc.):  Risk-assessment procedures
 Who appointed the auditor?  Test of Controls
 Is a need to issue separate reports?  Substantive Testing
 Legal Requirements  Remember constraints
 Degree of ownership and independence  Time, Cost, Quality
 Who will perform the procedures?
PROCESS IF THERE’S A CHANGE IN AN  Audit Team
ENGAGEMENT:  Engagerment Leader/Partner
If valid/justified reason:  Manager
 Stop original engagement  Senior Associates and Associates
Determine the  Agree on new terms
appropriateness of  Perform the new
the reason: **There must be proper communication thru
engagement (new report) directions, supervision, and review**
 Change in **Omit reference to the Original
circumstance Engagement**
 Client AUDIT PLANNING PROCESS: (PANO- reversed)
misunderstands If invalid/unjustified reason: 1. Obtain an understanding of the entity and its
the  Refuse to change the environment
engagement engagement  Aspects of understanding: (INOMIN)
 Restriction on  Continue the original i. Industry, Regulation, and other factors
scope (invalid) engagement (if unable to do ii. Nature of entity or Accounting Policies
so, withdraw with reporting) iii. Objectives, strategies, business risks
iv. Measures of performance
**Report to the 1) Management, 2) TCWG, & 3) Regulatory Authorities,
if necessary**
v. Internal Control
2. Determine the need for experts
**If auditor is charged with negligence, its defense a) Management’s Experts - help the client in
would be to prove compliance with PSAs.** preparing their FS
b) Auditor’s Experts - help the auditor in
CASH COUNT: evaluating evidences
The auditor performs it in front of the client. 3. Determine the Audit Strategy - approach to be
-------------------------------------------------------------------- taken in performing the audit. It sets the scope,
INVENTORY COUNT: timing, and direction of the audit; and guides the
The client counts it in front of the auditor. development of the audit plan.
AUDIT STRATEGIES
**Before withdrawing, consider reporting No Reliance With Reliance
responsibilities** (Substantive Approach) (Systems Approach)
Believe that the internal Believe that the internal
AUDIT PLANNING control system of the control system of the client
client is WEAK/MISSING MAY BE RELIABLE
PLANNING - involves developing an overall strategy (cannot detect, prevent, or (might detect, prevent, or correct
for the conduct and scope of the audit; thru this, the correct misstatements) misstatements)
audit will be performed in an effective manner. Expect more material Expects less material
misstatements in the FS misstatements in the FS
ROLES OF PLANNING: (CAFE PA) Plan to perform test of
Plan to perform more
 Coordination of work controls and less
substantive tests
substantive tests (if good)
 Assists in the selection of team
 Facilitate the direction, supervision and review 4. Prepare Audit Plan - document containing the
 Effectiveness and Efficiency nature, timing, and extent of all the procedures to
 Potential problems are identified/resolved timely be performed in the audit. *Has several chapters that
 Appropriate attention is devoted constitutes each audit process*

FACTORS AFFECTING NATURE/EXTENT: (SECTa) PRE- INTERNAL

PLANNING
ENGAGEMENT CONTROLS
 Size and Complexity of entity
 Experiences with the entity 2 Audit programs: If no reliance, more of study/ assessment
 Changes in circumstances during engagement T.O.C. AND
SUBSTANTIVE
 Timing of the appointment TEST If with reliance, + TEST OF CONTROLS
AUDIT PROGRAM - set of instructions and as a **There is a direct relationship between the
means to control and record the proper execution of controls and the objectives **
the work of the personnel involved in the service. (like
an action plan - usually with a column for persons LIMITATIONS OF CONTROLS: (CCC REM)
involved and their estimated and actual time)  Cost-benefit Consideration
 The objectives set relates primarily to assertions.  Circumvention thru Collusion - alliance
 Changing Circumstances
Assertion is relevant when it has an:  Routine Transactions - anticipation types
1. identified risk of material misstatement; and  Errors - mistake in judgment
2. made before consideration of related controls  Management Override

CONTENTS OF AN AUDIT PLAN: (CORNIK) OBJECTIVES OF INTERNAL CONTROL:

 Coordination, Direction/Supervision, and review  Fair financial reporting
 Other matters (Going Concern & Related Parties)  Efficient and Effective Operations
 Risk and Materiality**  Compliance with requirements
 Nature, timing, and extent
 Internal Control COMPONENTS OF INTERNAL CONTROL: (CRIME)
 Knowledge and Understanding  Control Activities
 Risk-assessment Process
Audit Inherent Control Detection  Information and Communication Systems
= X X
Risk Risk Risk Riskt  Monitoring of Controls
inappropriate Affected by Affected by Cannot  Control Environment - most important
opinion on
FS the nature of controls detect the
account; (if Good, lower misstatement CONTROL ACTIVITIES
control risk,
susceptibility otherwise,
(only risk auditors Actions that help management mitigate risks to
can control)
(liquidity, not.) ensure the achievement of objectives. They are also
routines, etc.)
policies and procedures designed to ensure that
*Detection risks involves sampling/non-sampling risk
management directives are carried-out.
**Detection Risk is the equalizer
AR IR CR DR
Examples of Control Activities - old (PAPIS)
Very Low  Performance Reviews - operating & non-
Low High High
(More ST) operating data is compared by the management
High  Authorization
Low High Very Low
(Less ST)  General (Routine Transactions)
 Specific (Non-routine Transactions)
Relationships between Risk and Materiality to ST  Physical Controls - safeguarding of assets
↑ Risk ↑ Substantive Test ↓ Materiality  Counts and Accountability
↓ Risk ↓ Substantive Test ↑ Materiality  Information Processing - ensure that transactions
direct indirect are authorized, accurate, and complete
indirect  Manual
 Automated (General and Application)
STUDY & EVALUATION OF INTERNAL CONTROL  Segregation of Duties (ICARE)
 Independent checks/Internal audit
 Custody of assets
INTERNAL CONTROL - process effected by ALL
 Authorization
levels of an organization. Additionally, they provide  Recording
reasonable assurance about the achievement of  Execution and reconciliations
company objectives.
Examples of Control Activities - new (PARVS)
CONTROLS: policies or procedures established to  Physical/Logical Controls
achieve control objectives.  Authorization and Approvals
 Policies - statement of what should, or should  Reconciliation
not, be done to effect control.  Verification
 Procedures - actions to implement policies  Segregation of Duties
Policy (idea or concept)
PROCESS
Procedure (Action-taken ) RISK ASSESSMENT PROCESS
Process for: (IAM)
 Direct Controls - precise to address RMMs at  Identifying
the ASSERTION LEVEL.  Assessing risks
 Indirect Controls - support direct controls; not  Managing
sufficiently precise to prevent, detect, or correct.
Something New = ↑ Risk
**Management is responsible for establishing and
maintaining a system of Internal Control**
INFORMATION AND COMMUNCATION SYSTEMS
Information. Goal: Provide high quality information
for the fairness of FS and operating decisions. It
consists of: (PISIO)
 People
 Infrastructure (Physical/Hardware components
 Software (Processes and Procedures)
 Input or data
 Output or meaningful information
Functions in an Accounting Information System
 Recording (identify and capture relevant data)
 Processing (editing, validating, summarizing, and
reconciling of data)
 Reporting (preparation of FS)
Communication. Informing employees of their roles
and responsibilities. It also involves the reporting of
exceptions.
MONITORING OF CONTROLS
Process of assessing the quality of internal control
performance over time. Thus, it is the responsibility of
the management to monitor the:
 Design of control
Check if EFFECTIVE
 Implementatioon
Types of Monitoring:
 Ongoing monitoring by persons within the SAME
LINE FUNCTION (routine transactions).
 Separate Evaluations by auditors, audit com.
 Combination of both
CONTROL ENVIRONMENT
Describes a set of standards, processes, etc that
provide basis for carrying out internal control.
Foundation on which inter control is built/operated.
 It involves governance & management functions
 Awareness
Importance of
 Attitudes
Internal Controls
 Action
**If strong, can look at other components;
otherwise set control risk at max level and
perform substantive tests**
Elements of Control Environment - old (CHAMPOI)
 Commitment to Competence
 Human Resources policies and procedures
 Assignment of Authority and Responsibility
 Management’s Philosophy
 Participation by TCWG
 Organizational Structure
 Integrity and ethical value communication and
enforcement (most important)
Elements of Control Environment - new (IM AAA)
 Independence of TWCGs from management and
exercise oversight of system of internal control.
 Management’s commitment to integrity and
ethical values
 Attraction/development of competent Individuals
 Assignment of Authority and Responsibility
 Accountability of individuals

FLOWCHART FOR INTERNAL CONTROL

↑control risk
NO = more ST
Understanding Should the
internal control auditor rely on
(including its
DOCUMENTATION
the internal Proven
components - CRIME)
control? unreliable
YES
Proven Reliable
(↓CR = less ST)

STEPS IN CONSIDERATION OF INTERNAL CONTROL

(Same color = can be done concurrently)

1.) Obtain an 2.) Make Prelim. assessment of 4.) Make Final assesment of CR
understanding of the Control Risk - when controls do not Preliminary Final
internal control system work when needed. Assessment Assessment
 Perform risk assessment  CR = High/Max ↑CR ↑CR
procedures  Missing/Unreliable Controls Proven Unreliable
 Unreliable Controls ↓CR = change to ↑CR
 Inquiry (Perform Test
 Inspection  May be reliable but not Proven Reliable =
of Controls)
 Observation efficient to test no change (↓CR)
**no analytical procedures in  CR = <High/Below Max
 Controls may be reliable
IC** 5.) Determine Nature, Extent,
 Check the design and and Timing of Substantive Test
the implementation (not 3.) Make Response to RAP ↑CR ↓CR
yet check the  Overall Response
N More Less
 ↑ prof. Skepticism experienced
effectiveness) Effective Effective
member, & unpredictability
 Should be documented  Specific Response E Larger Smaller
and verified by  If ↑CR = no TOC T Year-end YE + Interim
walkthrough procedures.  If ↓CR = perform TOC N.E.T. is directly related to CR.
 *NATURE* NETWORKS
 Local Area Network (LAN) - specific/defined
More Effective ↑Test of Details ↓Analytical Proc. geographic area
Less Effective ↓Test of Details ↑Analytical Proc.  Wide Area Network (WAN) - crossing country lines
and regions (Slower than LAN due to distance)
 Metropolitan Area Network (MAN) - 3 buildings
TESTS OF CONTROL - effectiveness of controls owned by the same is separated by a public road.
 Inquiry - weakest
All throughout
 Inspection - with docs. Data Base - 1 copy = multiple access
the period
 Observation - without docs. under audit Database Administrator - responsible for monitoring and maintaining
 Re-performance - strongest the database’s structure, integrity, security, and performance;
coordinate operations and provide guidance/support.

Prior year controls are Test for Changes REAL-TIME

effective No Changes = ↓TOC BATCH PROCESSING
PROCESSING
Collect transactions then Transaction/processing
If no segregation of duties but the owner is actively process occurs simultaneously
There’s time delay Minimal time delay
participating in operations = compensating control
More Costly (More
Less costly (Less Resources)
Resources)
**Control Risk is still LESS THAN HIGH** Numerous Printouts Minimal Printouts
Best for Slow-Moving Best for Fast-Moving
FAQs in testing controls: Accounts (Non-Current) Accounts (Current)
 Who did it? Is he qualified?
 Was it done properly? Consistently? ONLINE SYSTEMS:
 Online/Real-time System - has the capacity to
**Generally, control risk and detection risk has an accept INPUT, PROCESS, and produce OUTPUT.
inverse relationship**  Online/Batch System - collects then processes.
 Online/Memo Update and Subsequent Systems
AUDITING IN AN I.T. ENVIRONMENT - combination of real time and batch system.
 Online Inquiry Systems- Can only read or check
CIS Environment - exists when a computer is involved data; cannot edit/process.
in the processing of financial information to the audit by  Online Downloading, Uploading, Processing
any person/individual.
CONTROLS:
CHARACTERISTICS OF IT SYSTEMS:  General - affect the entire IT operations of the
(IT Systems do NOT change the objective of an audit; it only company; designed to ensure that the environment
affects specific procedures) is stable and well-managed (SAHOD Mo)
 Lack of visible transaction trail (paperless)  System Development/Documentation Controls
 It challenges the auditor in gathering evidence.  Access Controls
 Consistency of Performance  Hardware Controls
 Organizational Controls
 Either Properly or incorrectly consistent, that is why
 Data Recovery Controls
auditor should FOCUS on whether correct
 Monitoring Controls
instructions were provided.
 Ease of Access BUT easier to alter without visible  Application - specific use of the system; it
evidence processes completely, accurately, and timely. (IPO)
 Input
 auditor should check if the company has limited
 Process
access to controls - should be for authorized only.
 Output
 Concentration of Duties (Lack of Segregation)
 Can combine recording with execution and
reconciliation without any judgments and malice GENERAL CONTROLS
 In case of ordering between sellers and buyers, CIS System Development/Documentation Controls
can combine Authorization and Recording.  Requirements/Upgrades - initiated by USER
 System Generated Transactions (Automated) departments, NOT IT department, but approved by
 Can initiate transactions without input documents
management
 Vulnerability of Data/ Program Files (inc. Storage)
 Same location? Are there back ups?
 Proper documentation:
 Flowcharts Facilitates Program
 Source Codes Instructions and
MANUAL AUTOMATED  Developers Notes Making changes

Significant Human
Minimal Human Intervention Access Controls
Intervention
Inconsistency Consistent  Minimize unauthorized access/alterations
 Physical Controls (Secured Facility)
With Professional Judgment No Professional Judgment  Programmed Access Controls (Passwords)
Best for non-routine Best for recurring/routine
transactions transactions Hardware Controls
**NOT possible to have 100% automated systems  Built-in by the manufacturer
 Detect Equipment Failure (Echo Check)
Organizational Controls
 Clear assignment and Segregation of Duties
 Segregation within the CIS Department
 System Development and Operations MUST
be segregated. (Developers cannot use the
ones they have developed)
 Segregation of CIS and USER Departments
 Auditing WITH and THRU the computer (WHITE BOX)
 Complex Program/Logic
 Uses CAATs - inputting series of valid and invalid
combination of data (if invalid goes thru, the control
is ineffective )
 If input is correct and processing has a strong
control, then, OUTPUT is correct.

CIS DEPARTMENT COMPUTER-ASSISTED AUDITING TECHNIQUES (CAATs)

should not meddle with the ones who provide input data and to Program Analysis Program Testing
those who uses their output. (gain understanding of the client’s (use of actual/simulated data;
ONLY processing of transactions are their focus. program) provides direct evidence)
Continuous Testing Operating System Review
(Identify and capture data as (User-written programs to operating
Data Recovery Controls transaction occurs) systems monitoring)
 Maintenance of Back-ups
Test Data, Integrated Test Facility, Base-Case System
 Grandfather-father-son (Batch Processing) Evaluation, Parallel Simulation, Controlled Reprocessing
 Grandfather - OFFSITE (monthly)
 Father - LOCAL copy (weekly)
TRANSACTIONS/DATA PROGRAM USED
 Son - LOCAL copy (daily - incremental)
Auditor creates
 Snapshots - daily picture/copy of the data retained Copy of the Client’s
Test Data (NOT required to test all the
until after back-up. transactions; input valid and Program
invalid data)
Backups are NOT audit objective but rather a client objective Auditor creates
Integrated (Puts transactions to the Client’s Actual
 Offsite Facilities Test Facility program and creates an interim Program
 Hot Site - ALREADY INSTALLED; outside the report, then reverses it)
company; more costly (w/in the day - mins./hrs.) Comes from the Client
Parallel (Auditor creates a program that
 Cold Site - READY TO BE BROUGHT IN; inside Simulation simulates the program of client,
Auditor’s Program
the entity; less costly (takes days/weeks) then compare to client’s output)

Monitoring Controls BUSINESS PROCESSES

 Check the design/implementation of charts and Means through which an accounting system process related
controls, as well as their effectivity. transactions of related activities (TRANSACTION CYCLES)

APPLICATIONS CONTROL REVENUE AND RECEIPT CYCLE

Input Controls Step 1: Order Entry (Sales Department)
 Should be properly AUTHORIZED (PIN/Password)  Shall receive orders from customers
 Should be ACCURATE/VALID  Customer’s POV - Purchase Order
 Key Verification and Validity/Field/Limit/Missing  Seller’s POV - Customer Order
Data Check  Rewritten - Sales Order
 Should be COMPLETE (Redundancy Check)  ISSUES: Inventory Availability and timeliness
 SOLUTION: inventory monitoring
Processing Controls
Step 2: Credit Granting (Credit Department)
 Should be ACCURATE/VALID and COMPLETE
 Uses Sales order form
 Control Totals
 Indicate approval and rejection of order
 Item/Record Count
 ISSUES: Customers who could not pay and
 Financial Total
unauthorized/incorrect approval
 Hash Totals - NO intrinsic MEANING
 SOLUTIONS: segregation of duties, credit
standards/limits, and credit investigation
Output Controls
 AUTHORIZED Recipient (Encryption/Control Copies) Step 3: Segregation of Goods (Warehousing Dept.)
 Should be ACCURATE/COMPLETE (meaningful) and Delivery to Customer (Shipping Dept.)
 User re-check Control  Reconciliation/Comparison of:
 Burst Control - multiple copies  Sales Order Form
 Waste Control (digital wipe and shred)  Picking Ticket AND Packing List
 Should have Delivery Receipt or Bill of Lading
TABLE - Group of Records WORKSHEET - Group of Tables  ISSUES: Wrong quantity, product, or customer
 SOLUTIONS: pre-numbered, reconcile documents,
AUDIT PROCEDURES IN AN IT ENVIRONMENT recheck the details, and monitor delivery status (can
GENERAL CONTROLS: use RFID/Bar Code if AUTOMATED)
 Inquiry
 Observation of Personnel and Security Measures Step 4: Billing to Customer (Billing/Accounting Dept.)
 Inspection of Program Documents  Approved Sales Order is compared with Packing List and
Delivery Receipt/BoL
APPLICATION CONTROLS:  RESULT: Sales Invoice (with JE)
 Auditing AROUND the computer (BLACK BOX)  ISSUES: Failure to bill the customer, double billing,
 Simple Software/Logic wrong amount, and wrong customer (misposting)
 Can be only be used when there is visible input/  SOLUTIONS: pre-numbered document that is
output documents (reconciliation of input/output) reconciled; recomputation; recheck details (can use
 If input is correct and output is what is expected, RFID/Bar Code if AUTOMATED)
then, PROCESSING is right/correct.
 Every Shipping Document SHOULD be coupled with a Sales Invoice Step 4: Pay Amount Due (Treasury)
Shipping Document; Invoice = NO BILL  Most Important step; cashier CAN prepare check with VP
Invoice; Shipping Document = NO DELIVERY? upon approval/vouch of the Treasurer
 The check is signed by the Treasurer/Authorized Person
Step 5: Collection from Customer (Treasury - Cashier)  ISSUES: Paid what is NOT ordered, multiple payments,
 Official Receipt (with JE), Turn-around Document wrong amount, did not take the discount
(consists of Remittance Advice and Statement of Account)  SOLUTIONS: SOD, 3-way Test and compare with check
 ISSUES: Theft, lapping (delay in recording - difference in voucher, cancel/stamp documents when already paid,
actual vs records), wrong customer (misposting) schedule payments
 SOLUTION: direct to bank, segregation of duties
Account Payable xx
SPECIAL CASES Cash xx
a) Sales Returns and Allowances
 ISSUE: Authorization (communicated thru the Sales CUT-OFF TEST
Department) Existence/Occurrence
 SOLUTION: Company Policy Balance Sheet
 ISSUE: Return of the Goods (thru the receiving Date
department; warehouse department updates record) Completeness
 SOLUTION: receiving report and updating of
inventory ATTENDANCE (Overview)
 ISSUE: Recording (done by Accounting Department) Compensation is based on the clock card -- actual in and out of the
 SOLUTION: Both receiving report and credit premises/workplace (Bundy Clock/Biometrics), NOT on the job time
memo (with JE) should be present ticket - time that each job is completed.

b) Write-off (there should be aging of AR and should To maintain accurate inventory records, the perpetual records
always seek for TREASURER’s Authorization) should be updated/reconciled with conducted periodic counts.
 ISSUE: Authorization (thru Treasurer)
 SOLUTION: Company Policy PAYROLL CYCLE
 ISSUE: Recording (by the Accounting Department
HUMAN RESOURCES DEPARTMENT is concerned with:
 SOLUTION: Use Journal Voucher (with JE)
 Hiring, screening and recruitment
RISKS/ISSUES SOLUTIONS
DIRECTION OF TESTS:
Hiring those who are not  Proper screening
Every source docs/tangible assets, there should be entries/records
qualified  Multiple approvals
Source Documents --> Records = COMPLETENESS
Records --> Source Docs = EXISTENCE/OCCURRENCE  Labor Relations Contract
 Communicate about superiors/subordinates and talk
PURCHASING AND DISBURSEMENT CYCLE with them separately
Does NOT only include inventories but also operating  Authorize payroll rates
expenses and repairs and maintenance  Termination (End of Contract) WITH documented due
process and prenumbered termination notice
Step 1: Process Purchase Orders (Purchasing Dept.) RISKS/ISSUES SOLUTIONS
a) Request for goods thru Purchase Requisition Form that is Terminated employees  Look for existence
might still receive payroll  Properly accounted
made for company purposes
beyond contract period termination
 ISSUES: Unnecessary purchase or excessive items
 SOLUTIONS: SOD, Budget Controls with Approval
TIME KEEPING DEPARTMENT is concerned with:
b) Select Vendor/Provider thru an Authorized Vendor List
 Attendance: In/Out
 ISSUES: Fraud, Inflated Prices, Kickback
-Bundy Clock -Clock Card -Biometric -DTR
 SOLUTIONS: Accredited/ Authorized Vendors,
discourage or monitor related-party transactions  Work (Factory)
c) Prepare/Send Purchase Order -Job Time Tickets -Accomplishment Report -Labor Summary
 “NO Approval, NO PO” - PO is proof of authorization
RISKS/ISSUES SOLUTIONS
 Strong control
Step 2: Receive the Goods (Receiving Dept. with Blind copy Inaccurate time charges environment
of PO --NO quantity-- AND Warehousing Dept.)  Overtime Approvals
a) Receive Goods- check the PO (NO PO, do NOT receive)
 ISSUES: Did not order ACCOUNTING DEPARTMENT is concerned with:
 SOLUTIONS: Segregation of Duties (SOD),  Payroll Accounting
Inspection Process - Check orders, automate  Updated Alphalist (details of employee & its payroll)
b) Inspect the Goods - After, make a Receiving Report  Gross pay is based on the contract and their
 ISSUES: Wrong quantity/item, Incomplete Delivery timekeeping records
 SOLUTIONS: SOD, Inspection Process, automate  Withholding of compensations (taxes, contributions)
c) Store Goods - updates inventory stock record  Special Cases (Incentives, vales/advances,)
RISKS/ISSUES SOLUTIONS
Step 3: Record the Liability (Accounting Department)  Inaccurate Computations  Recomputation
 Before recording, it needs to have and reconcile the  Terminated employee  Reconciliation
might still receive payroll with timekeeping
VOUCHER PACKAGE (VP):
beyond contract period  Updated details
 PO, Receiving Report, Vendor’s Invoice
 ISSUES: Did not Order, Not yet Delivered, Wrong Details
TREASURY is concerned with:
 SOLUTIONS: SOD, 3-Way Test (Compare Voucher  Payroll Distribution thru:
Package), check with Budget Controls and inspect details -Direct Transfer -Checks -Bills and Coins

Purchases xx General Account --> Payroll Fund --> Each Employee

Accounts Payable xx Companies may employ zero balance accounts for control
 FRAUD, ERROR AND NONCOMPLIANCE EVIDENCE AND SUBSTANTIVE TESTING

TCWG Mgmt. Auditor AUDIT EVIDENCE - all information (accounting and others)
used in arriving at a conclusion on which the auditor’s opinion
Prevent Fraud   
is based. Needs to be persuasive only (not 100%)
Detect Fraud     Sufficiency (Quantity)
*The “preventor” should also be the detector.  100% testing
**AUDITOR should detect fraud that is directly affecting the and  Selective Sampling
material to the FS.  Audit Sampling - all have a chance
 Appropriateness/Competence (Quality)
Primary Causes of Material Misstatements  Relevance - consistent with audit objectives
FRAUD (Irregularities) ERROR  Reliability - depends on nature/source/controls
Intentional Unintentional  See Generalizations on “Fundamentals of Assurance”
Error of Commission Error of Omission
Of all the audit procedures, INQUIRY is the least reliable and costly;
that is why it is combined with other procedures.
TYPES OF FRAUD: Inquiry + Inspection Inquiry + Observation
 Fraudulent Financial Reporting (Management Fraud) -
involves intentional misstatements to deceive FS users ANALYTICAL PROCEDURES (Comptuation) is the 2nd least reliable
 Window Dressing - “pinapaganda” and costly procedure. It is OPTIONAL to use it in substantive testing,
 ↑ assets/income, ↓ liabilities/expenses = ↑ equity depending on reliability of figures and internal control.
 COMMON PROCEDURE: Cut-off Test
 Kiting - (under window dressing) end of clearing period
**The auditor’s PROFESSIONAL JUDGMENT will
 PROCEDURE: Simultaneous Bank Reconciliation
 Secret Reserve - opposite of window dressing determine the scope and combination of procedures**
 ↓ assets/income, ↑ liabilities/expenses = ↓ equity
Inspecting the equipment/asset itself= EXISTENCE;
 Assets Misappropriation (Employee Fraud) - Inspecting supporting documents of such assets = RIGHTS
embezzlement of receipt (theft)

FRAUD CHARACTERISTICS (Fraud Triangle +1 - CROPI) What one OBSERVES is a process, not a thing/asset; otherwise it is
an inspection.
 Capacity to do it (+1)
 Rationalization/Justification of the fact
 Opportunity to do so (weak internal control) CONFIRMATION
 Pressure/Incentive to commit  Verification of transactions, balance, details, etc.
If Management DECLINES to the request of sending confirmation,
Whether suspected or actual fraud, ALWAYS report it to the and this request is the only way to obtain evidence:
client to be able to address it or take action.
Existence of YES Perform Alternative Procedures
CIRCUMSTANCES TO DOUBT CLIENTS: ALTERNATIVE
PROCEDURE Scope Qualified Opinion
 Did NOT take remedial action NO
Limitation Adverse Opinion
 Pervasive or Systemic Fraud (Involves whole company)
 Doubt Management Competent/Integrity  Checks existence/occurrence thru external respondents
When any of the following cases is present, WITHDRAW  Cash in bank --> bank (manager)
with due notice and reason, and report if with Legal Reqs.  Accounts Receivable --> customers
 Consignment --> consignee
 Accounts Payable --> supplier
SUMMARIZED INVENTORY COUNT PROCEDURE:  Litigation -->legal counsel
(Client counts with the supervision of the Auditor)  Client prepares & signs the confirmation request; format:
Counting/Tagging -> Transfer to Count Sheet -> Test Count (by Auditor)  Positive - respondents always reply
 Blank Request - “what is in your record?”; used
RESPONSE TO FRAUD RISKS: when there is HIGH risk of misstatement/fraud
 ↑ Professional Skepticism  Negative - if no difference, no reply (only when disagrees)
 ↑ Experienced Team Members If did not respond: inspect collections of A/R after balance sheet
 ↑ Unpredictability of Procedures date; inspect shipping documents for proof of delivery.

Audit Committee - responsible for the set-up of the internal  Auditor sends and receive the replies
audit department
↑RMM (Inherent + Control Risk) = ↓ Detection Risk; ↑Sub. Test
HIGHER ST = more test of details, less analytical procedures,
Auditor is NOT responsible for non-prevention/detection of larger sample size, @year-end
fraud/error, but responsible if failed to comply with the the
requirements of PSAs. SPECIFIC AUDIT PROCEDURES
PROCEDURES
NONCOMPLIANCE - NOT a matter of judgment but of Fact. RAPs TOC ST
(I2 OA C RR)
 NOT only about violation of law (forgot to submit, remit, etc.) Inquiry   
 May be intentional or unintentional Inspection   
 FOCUS: Direct and Material Effect on FS
Observation   
It is the responsibility of the management and TCWG to Analytical  
ensure that their operations are in accordance with Confirmation 
laws/regulations. Re-performance 
Recalculation 
Audits are not expected to bring all illegal acts to the auditor’s
attention because it is often an operating aspect rather than ACCOUNTING ESTIMATES
accounting. Amount approximation in the absence of precise means of measuring.

**Auditors shall document and communicate non- Management is RESPONSIBLE for making accounting estimates and
disclosures in the FS.
compliance to the management and TCWG**
 AUDIT SAMPLING
METHODS IN GATHERING AUDIT EVIDENCE
 100% TESTING - tests everything
 A lot of evidence, BUT time consuming
 UNLIKELY for TOC but more COMMON in TOD
 SELECTIVE SAMPLING - selecting specific items
 Setting of Criteria or factors relevant
 EXAMPLE: Inspect supp. docs with expenses
amounting to 1x,xxx and above.
 AUDIT SAMPLING - most efficient; contains
characteristics of the two.
 Tests less than 100%
 All have a chance to be selected
 WEAKNESS: samples represent the whole population
which results to sampling risk -->
AUDIT PROCEDURES
Risk Assessment Procedures - Understanding entity
Test of Controls - Effectiveness
a) WITH audit trail
b) WITHOUT audit trail
Substantive Testing - detect material misstatements
 Test of Details of Balances
 Test of Details of Transactions
 Substantive Analytical Procedures
ATTRIBUTE SAMPLING (Used in Test of Controls)
Estimate the rate/frequency of occurrence and deviations; it is
generally used when the evidence are WITH audit trail.
Factors Affecting Sample Size in TOC:
 Expected Population Deviation Rate (↑EPDR, ↑Sample Size)
 Tolerable Deviation Rate (↓TDR, ↑Sample Size) Inverse
 Allowance for Sampling Risk (↓ASR, ↑Sample Size) Relationship
 Difference of EPDR and TDR
To push thru attribute sampling, TDR ≥ EPDR (may be RELIABLE)
Sample Deviation Rate = # of Deviations / Sample Size
SDR > TDR = ↑Control Risk | SDR ≤ TDR = ↓Control RIsk (Reliable)
VARIABLE SAMPLING (Used in Substantive Testing)
Used to estimate numerical measurement of population such as pesos;
generally used to estimate amount of misstatements.
SAMPLING?
 Factors Affecting Sample Size in ST:
 Expected Amount of Misstatement (↑EAM, ↑Sample Size)
  Tolerable Misstatement (↓TM, ↑Sample Size)
  Allowance for Sampling Risk (↓ASR, ↑Sample Size)
 Projected Misstatement = Audited Value vs Book Value
 (Thru Ratio Estimation, Difference Estimation, Mean-per-Unit, Regression)
 PM ≤ TM = Tolerable | PM > TM = Not Tolerable

��, ������ ����

SAMPLING RISK Ratio Estimation --> ��, ������ ����
� �� �� ����������
conclusions based on a sample would be different from
��, �� − ��,��
conclusions reached if the entire population were subjected. Difference Estimation --> ������ ����
� ����������
��, ������ ����
Sampling Risk in TEST OF CONTROLS (Deviation) Mean-per-Unit --> � ����������
������ ����
Risk of Assessing Risk of UNDER RELIANCE
Control Risk TOO HIGH (OVER auditing - Efficiency) TEMPLATE FOR COMPUTING PROJECTED MISSTATEMENT
Sample Population
Per Sample = ↑CR, ↑ST Per Population =↓CR, ↓ST
Audited Value (Estimate)* xx xx
Risk of Assessing Risk of OVER RELIANCE (squeezed)*

Control Risk TOO LOW (UNDER auditing - Effectiveness) Book Value xx xx

Projected Misstatement xx xx
Per Sample = ↓CR, ↓ST Per Population = ↑CR, ↑ST
Size/Number of Accounts xx xx
Efficiency = Type 1/Alpha Risk Effectiveness = Type 2/Beta Risk
(MORE IMPORTANT)
COMMON METHODS OF SAMPLING
 RANDOM NUMBER SAMPLING - each unit has an EQUAL
Sampling Risk in SUBSTANTIVE TEST (Misstatement) CHANCE to be selected; matching random numbers with the
population numbering system. (PRENUMBERED)
Risk of incorrect
OVER auditing - Efficiency WITH REPLACEMENT WITHOUT REPLACEMENT
REJECTION
Bringing it back on the choices; Has Removing it from the choices; NO
Per Sample = ↑ST Per Population = Fairly Stated ↓ST a chance to be chosen again chance of being chosen again
Risk of incorrect SYSTEMATIC SELECTION - intervals (XPRENUMBERED)
UNDER auditing - Effectiveness 
ACCEPTANCE  Interval = Population Size / Sample Size
Per Sample = Fairly Stated ↓ST Per Population = ↑ST  HAPHAZARD SAMPLING - applied on a surprise bases; without
following an organized/structured technique. (NON-STAT)
 Selecting WITHOUT any regard for particular characteristic
*Sampling Risk can never be Eliminated, UNLESS 100% Testing*  WEAKNESS: Conscious Bias (Sol: Proper supervision)
 BLOCK SELECTION - (CLUSTER Sampling) opposite of
STATISTICAL SAMPLING haphazard; selecting blocks (common characteristics) of items;
 Statistical Tools + Prof. Judgment in Selecting Samples ease of selecting samples; least desirable
 Random Selection and uses probability theory  STRATIFIED SAMPLING - dividing a population into sub
 More costly but CAN quantify sampling risk populations; decreases effect of variance in population.
 Measures the sufficiency of evidence  PROBABILITY-PROPORTIONAL-TO-SIZE SAMPLING (PPS) -
tests for overstatement; it is calculated on a per item basis.
NON-STATISTICAL SAMPLING (Judgment Sampling) VOIDED, UNUSED, INAPPLICABLE, ANOMALOUS ERROR
 Relies on Professional Judgment on sampling GENERAL RULE: Properly = Replace Sample
 Less costly but CANNOT quantify sampling risk EXCEPTION: Improperly = Treat it as Deviation
----------------------------------------------------------------------------------
Statistical and non-statistical are EQUALLY effective if done properly. MISSING DOCUMENTS
GENERAL RULE: Deviation
EXCEPTION: With alternative Procedure
NON-SAMPLING RISKS
Risk of INCORRECT conclusion due to causes unrelated to **ANOMALY/ANOMALOUS ERROR is a misstatement or deviation
sample size. (Fatigue, Carelessness, Misinterpretation, Failure that is NOT a REPRESENTATIVE of such in a population (it does
to Recognize Error, and Use of Inappropriate Procedures) not speak for the whole population**

*NS Risks can NEVER be eliminated, but CAN be minimized by

proper planning /supervision of AUDIT TEAM MEMBERS*
 COMPLETING THE AUDIT LETTERS ISSUED IN AN AUDIT ENGAGEMENT
Done with main substantive tests, now evaluating evidence gathered, Letters Written by Given to Contents
and tying up the loose ends of the audit. Engagement Auditor Client Terms of
(contents were (both must have a
Letter already agreed prior) copy) Engagement
CONSIDERATIONS: Deficiencies in
 Effects on the FS of litigation, claims, and assessments Management Internal Control
Auditor Client
 Disclosure requirements Letter (Significant - in writing)
 Adjusting entries/accruals + other matters
 PRIMARY SOURCE: Client Management (but might be Management Clarification of
biased; so need to CORROBORATE it with Legal Counsel) Representation Client Auditor Management
 Supporting or corroborating evidence can be Letter Responsibility
(FS & Internal Conttrol)
attained thru legal confirmation (client prepares/signs
and auditor sends/accept the reply) *Engagement Letter (NOT Required)
 If legal counsel declines (scope limitation) = lack of **Management Representation Letter (REQUIRED by PSA 580)
evidence = 3 options (withdraw, qualified/disclaim **Not obligated to provide solutions to the client
opinion)
 Related parties and their transactions ANALYTICAL PROCEDURES
 Disclosure requirements When is it REQUIRED?
 Proper accounting treatment Planning --> Risk Assessment Procedures
Motivations and quality of evidence gathered

 (Understanding the Entity)
 ISSUE: Might end up asking for documents from the Substantive Test Optional
client as well as the RP --> docs might be biased
Audit Completion --> identify the following:
Related-parties usually include the elements of control and 
Unusual/Overlooked Items & Abnormal Balances
significant influence; RP may include transactions with DOSRI
(Directors, Officers, Shareholders, Other Related Interest)
UNRECORDED LIABILITIES
RP Transactions --> Substance ≠ Form and with special terms Like Subsequent Events - From BS Date to Audit Report Date

 Going Concern Assumption SEARCHING FOR UNRECORDED LIABILITIES:

 Management - assesses the going concern assumption AT
LEAST 12 Months from BS Date
 If less than 12 months, get more evidence; if NOT,
there exist a scope limitation (3 Options)
 Auditor - rechecks management’s assessments
 Aggravating - ↑Risk (cash out); mitigating ↓Risk (cash in)
 Disclosure Requirements
 Financial Statement Presentation
Reporting Implications:
a) Going Concern Basis is STILL APPROPRIATE but there is
SUBSTANTIAL DOUBT about the ability to continue as GC.
 Properly Disclosed = Unqualified Opinion
 Improperly Disclosed = Qualified/Adverse Opinion
b) GC is NO LONGER APPROPRIATE but management
INSISTS OF USING GC basis
 Misleading = Adverse
 Subsequent Events
 From BS Date to Audit Report Date (End of Audit) =
Subsequent Events Period
 Adjusting Events (TYPE 1) - condition giving rise to the
event EXISTS as of balance sheet date (pahabol -
additional info; usually done when there are estimates)
 Disclosure Events (TYPE 2) - condition giving rise to the
event DID NOT EXIST as of balance sheet date (January,
there was a fire - disclose only; Unexpected events)
If there is a subsequent event that was not considered at first:
GO BACK, if GREATLY AFFECTS the opinion/FS = extends
audit report date and subsequent event period (more testing)
If too long gap between the FIRST date of audit report and the
NEW date of such report:
Adjusting Event - NO choice, record and update.
Disclosure Event - can do a DUAL-DATED report (FIRST date
or audit + Date of the disclosure event)
 Obtain Management Representation Letters
 Clarifies management responsibility for FS
 Usually, it is signed by the CEO/CFO
 DATE OF LETTER: Last Day of Audit (Audit Report Date)
 CANNOT replace audit procedures but VALID evidence
 It includes management’s admission of the responsibility
for the FS, internal control, estimates, and misstatements
-----------------------------------------------------------------------------------
OMITTED PROCEDURE: ANSWERS
NO - no need to perform
1) Does this affect the audit report?
YES - proceed to next
2) Did perform alternative procedures YES - no need to perform
(compensating evidence)? NO - undertake procedure
 General Review of Cash Disbursements + Supp. Docs.
AUDIT DOCUMENTATION AND COMMUNICATION
WITH THOSE CHARGED WITH GOVERNANCE
WORKING PAPERS - Audit/Engagement documentation
 PURPOSES: (2 Primary, 1 Secondary)
 Support for the audit report/opinion
 Evidence of compliance with PSAs
 Serve as a reference for future engagements
 Owned by the auditor but can only be shared with 3rd
parties if with the consent of the client
 PSAs allows that the working papers be finalized/
assembled within 60 days from the Audit Report Date
 Retention of Working Papers:
 10 years (Securities & Exhange Commission - SEC)
 5 years (Ordinarily - sufficient to meet needs)
Working Papers should be prepared on a timely basis.
It does NOT SUPPORT Financial Statements (it is the
accounting records that supports it)
It is NOT NECESSARY nor practical to document every matter;
ORAL explanations may be used to clarify.
TYPES OF WORKING PAPERS
 Current File - for a single period only
 Audited FS, Trial Balance, Worksheet, Adjusting
Entries, Current Asset/Liability
 Permanent File - continuing significance
 Non-current Assets/Liabilities (Depreciation), Equity,
Long-term Debts , Articles of Incorporation/By-laws
 Correspondence File - communications with clients
 Tax File - tax return copies & supporting computations
The quantity, type, and content of the working papers might be
affected with the anticipated nature of report. Unqualified Opinion =
thinner WP; other opinions = thicker due to justifications, supports, etc.
Draft versions of WP should be deleted after finalization;
maintain only 1 copy - the final one.
The following SHOULD BE documented:
Who performed and reviewed Any departure from principles
Specific Items Test (Documents Inspected, Copies/Records)
 QUALITY MANAGEMENT
Former: Quality Controls - uses tick box approach (compliance)
COMPONENTS OF QUALITY CONTROLS (HEAL ME, Doc)
 Human Resources
 Ethical Requirements
 Acceptance and Continuance of Client
 Leadership Responsibilities
 Monitoring
 Engagement Performance
 Documentation (not technically a component)
QUALITY MANAGEMENT
Being pro-active all throughout the process (Dec. 15, 2022)
PURPOSES:
 Compliance with legal and regulatory Requirements
 Compliance with Engagement Standards
 Ensure appropriateness of Reports Issued
GOVERNING STANDARDS:
 PSQM 1 - QM for Firms (performs Audit, Review, or
Other assurance and Related Services)
 PSQM 2 - Engagement Quality Reviews
 PSA 220 - Quality Management for an Audit of FS
Governing Standards < Laws and Regulations
COMPONENTS OF QM (HEAL ME RIn, Doc)
 Human and OTHER Resources
 Ethical Requirements
 Acceptance and Continuance of Client
 Leadership AND Governance
 Monitoring AND Remediation
 Engagement Performance
 Risk Assessment Process
 Information and Communication
 Documentation (not technically a component)
RESOURCES
TYPES: (HIT)
 Human Resources
 Hiring, compensation, development/advancement
 Commitment to Quality/ Competence
 Intellectual Resources (Methodology/Procedures/Policies)
 Technological Resources (Software)
 IT Applications, Infrastructure, Processes
Service Providers - called when the needed resources are
NOT AVAILABLE INTERNALLY.
RELEVANT ETHICAL REQUIREMENTS
Understanding and application of the fundamental principles
(COBID) + independence
(Sets the minimum standards, thus, firm can be stricter)
INDEPENDENCE: Confirmed AT LEAST annually
ACCEPTANCE AND CONTINUANCE OF CLIENTS
CONSIDERATIONS:
 CLIENT EVALUATION: Accept clients with emphasis on
client integrity and ethical values as well as the nature
and circumstances of the engagement
 SELF- EVALUATION: Firms ability to provide QUALITY
audits/engagements
 Availability of resources and access to information
 It should NOT compromise relevant ethical requirements
REASSESSMENT OF CLIENTS: AT LEAST annually, at the
START of the year, prior to re-appointment
GOVERNANCE AND LEADERSHIP
All about long-term, strategic vision about the firm. It requires
the “leaders” of the firm to be role models for their staff.
LEADERS:
 Propietor or Lead Partner and Managing Partners
 Have the right people and set the right environment
 They support the design, implementation and
operation of the SQM.
IT INCLUDES QUALITY OBJECTIVES: (CARABAOS)
 Commitment to Quality thru Culture
 Firm-wide and sets the tone at the Top
 Serves public interest and gives importance to
professional ethics, values, and attitudes
 Allocation of Resources (Resource Planning)
 determine resources required or forecasting needs
 Responsible and Accountable for Quality
 Requires to have a properly designed structure
 Firm - ultimately RESPONSIBLE for SQM
 Behaviors and Actions
 Organizational Structure
 Assignment of roles, responsibilities, and authority
Reward commitment to quality > client retention & profitability.
MONITORING AND REMEDIATION
Questions ALL of the other COMPONENTS - checks their
design, implementation/application, and effectiveness
Monitoring and Remediation Process must be properly
designed for accumulation of sufficient information that will
serve as a basis for the identification of deficiencies.
OTHER SIGNIFICANT MATTERS:
 Complaints/Allegations - identifying and preventing such
 Performance Evaluation - promotes accountability
 Positive - rewarded thru compensation/promotion
 Negative - Corrective actions to address
ENGAGEMENT PERFORMANCE
Establishes policies/procedures to provide reasonable
assurance that engagements are performed in accordance
with professional standards.
(FOCUS: Consistency of Performance)
CONSIDERATIONS:
 Engagement team members’ responsibilities
 Less experienced team members should be given
proper supervision and directions
 Engagement Partner should be involved ALL
THROUGHOUT the engagement
 Exercise Professional Judgment and Skepticism
 Consult on contentious matters
 Resolve differences in opinion BEFORE issuance of
report (Unresolved Differences = NO issuance)
Lack of Time and Experience ↑Detection Risk ↓Quality
RISK ASSESSMENT PROCESS
Sets out the process in implementing risk-based approach
QUALITY OBJECTIVES
(anchored with Quality Risk)
Human and OTHER
Leadership AND Governance
Resources
Ethical Requirements Engagement Performance
Client Acceptance/ Information and
Continuance Communication
ACTION - needed for attainment of objectives and mitigating
quality risks.
 Increases level of confidence and competence
 More complex/risky audits
 INFORMATION AND COMMUNICATION AUDIT REPORTING
The firm must have a way to Obtain, Generate, and Use PARTS OF AN AUDIT REPORT: (TAOB GEKOO MANAD)
information and communicate it within the firm 1) Title - “independent”
2) Addressee/Client - party who appoints auditor (TCWG)
INFORMATION COMMUNICATED: 3) Opinion (PFRS)
 Policies a) Introductory Paragraph
 Information obtained during audit for EQR i. Name of the Entity
 Communication with Group of Component Auditors ii. “We have AUDITED this entity…”
 Communication with TCWG and Regulators iii. Enumerates FS audited
iv. Date/Period Covered of the FS
IMPORTANT TO NOTE ON COMMUNICATION: b) Opinion Paragraph
 Ethical Requirements i. Mentions of Standards (PFRS)
 Policies on Ethics 4) Basis for the Opinion (PSAs)
 Training Register and Materials a) Compliance with PSAs
 Completed Independence Declarations
b) Independence + Ethical Requirements
 Client Acceptance and Continuance
c) Audit Evidence Obtained - basis for opinion
 Risk Assessments
 Identity documents obtained and stored 5) Going Concern Matters (if necessary)
 Engagement Letters 6) Emphasis of Matter Paragraph
 Engagement Performance  Mentions items which are disclosed in the FS
 Audit Programs a) Unacceptable Framework BUT required by law
 Role Assignments b) FS is prepared using a special framework
 Information obtained during the engagement c) “Pahabol” Subsequent Events -> amended report
 Conclusions reached and reports to management and 7) Key audit matters (Required always; XPN: Disclaimed )
TCWG a) Current Year matters
b) Discussed with those charged with governance
ENGAGEMENT QUALITY REVIEW c) “Most Significant” to the audit
Other person (NOT a member of the audit team) will review i. Why significant?
the auditor’s judgments, conclusions & report during the audit; ii. How it was addressed?
DONE PRIOR to issuance of report. iii. Refer to note disclosures
(Auditing the Auditor’s Audit) 8) Other Information
a) Annual Report - focus on consistency
Who can review the work of:
9) Other Matter Paragraph (Not disclosed in FS)
AUD. 1 AUD. 2 AUD. 3 10) Management and TCWG Responsibilities
Auditor 1 - 10 years 
a) Prepare and Present FS thru PFRS
Auditor 2 - 15 years  FUSION
b) System of Internal Control
Auditor 3 - 20 years   c) Going Concern Assumption/Assessment
d) Oversee the Financial Reporting Process
When the EQ Reviewer becomes aware of its impaired 11) Auditor’s Responsibilities
eligibility, such shall give notice and decline/discontinue EQR. a) Obtain Reasonable Assurance; issue the report
12) Name of the Engagement Partner (With exception)
**The EQ Reviewer’s criteria for eligibility extends to their assistants** 13) Auditor’s Signature, Qualification, Location of practice
14) Date of Report (when auditor obtained SA Evidence)
EVALUATION AND REVIEW:
 Reviewer has concerns regarding the appropriateness of Unqualified Opinion - fairly stated
judgments/conclusion = notify engagement partner  No material Misstatements
 NOT resolved = notify firm that the EQR cannot be  Obtained Sufficient, Appropriate Evidence
completed (results to consultation)
Material But NOT pervasive Qualified Opinion
 If there are NO CONCERNS, the reviewer shall notify the
Misstatement And PERVASIVE Adverse Opinion
engagement partner that the EQR is complete.
Scope Limitation Mat. but NOT Perv. Qualified Opinion
(Inability to Obtain
Inspection is being done AFTER the issuance of report Evidence) Mat. and Pervasive Disclaimer / Withdraw

QUALITY MANAGEMENT FOR AN AUDIT OF FS Financial Reporting Framework According to Flexibility

The public interest is served by the consistent performance of quality Fair Presentation Compliance
audit engagements thru proper planning and performing such in Framework Framework
accordance with professional standards and relevant ethical Additional Disclosures  
requirements. Departs from standard
 
WITH valid reason
The engagement team, led by the engagement partner, is
responsible for audit quality. Audit Quality preserves the Auditor’s Opinion PFRS
integrity of the audit profession. Management Responsibilities (Opinion Paragraph - Accounting Std.)
Basis for Opinion PSA
KEY ELEMENTS OF AUDIT QUALITY: Auditor’s Responsibilities (Basis for Opinion Parag. - Auditing Std.)
Inputs Outputs
Process Key Interactions **When adding a paragraph/emphasizing a matter in a paragraph,
the opinion DOES NOT change**
Contextual Factors
Audited FS - Fairly Stated Unqualified Opinion
Components are the SAME WITH QUALITY CONTROLS + annual report NOT updated + Explanatory Paragraph
(HEAL ME, Doc.) FS - NOT Fairly Stated Qualified / Adverse
+ annual report updated Opinion
INSTANCES WHERE EQR IS PERFORMED:
Listed Entity Required by law/regulation **Auditors are NOT giving an opinion on Other Information, only
Where appropriate - base on judgment to the FS**
High level of complexity/judgment; No prior engagement; Significant/Unusual
Circumstances; Regulatory findings and ethical threats
 OTHER ENGAGEMENTS AUDIT REPORT:
AUDIT OF SPECIAL PURPOSE FS Audited FS Summary FS Can Give
Cash Basis Tax Basis Consistent Opinion
Contract Regulatory Unqualified Consistent 
 Must be suitably titled Qualified + Consistent +

 Notes to FS - mention basis of the accounting Reasons Reasons
 IF BOTH NOT CONSIDERED, consider a modified Adverse/ Consistent Disclaim
report (Qualified/Adverse Opinion) Disclaimer Consistency
Any Opinion Inconsistent Adverse Consistency
Considerations:
 Professional Competence REVIEW OF FINANCIAL STATEMENTS
 Acceptability of the Framework Used Provides limited assurance and formed in a negative manner.
 Purpose of the FS (is it matched with framework?) (INQUIRY + ANALYTICAL PROCEDURES)
 Needs of the users
PROSPECTIVE INFORMATION:
Audit Report:  Forecast - best estimate has a basis (the past) but has
 Special Purpose FS NO hypothetical assumptions --> not realistic
 Intended Users  For GENERAL AND LIMITED use
 Basis of Framework/Accounting Used  Projection - best estimate and/or has hypothetical
 Alert users (restriction statement) assumption --> realistic
 For LIMITED use only
AUDIT OF ELEMENTS AND SINGLE FS
ELEMENTS: Audit a part of FS only (i.e. Current Assets only)
AUDIT REVIEW
SINGLE FS: Audit of a FS Component only (i.e. B/S only)
Unqualified Opinion Statement of Negative Assurance
Audit of Elements/Single FS can be made in conjunction with an audit
of complete FS; BUT it is considered a SEPARATE ENGAGEMENT.
Qualified Opinion Qualification of Negative Assurance
Adverse Statement of Negative
Adverse Opinion
If the Audit of Complete FS opinion is Adverse/Disclaimer, Audit of Assurance
Element with an opinion of Unqualified is accepted if: Disclaimer of Opinion Disclaim of Negative Assurance
 Not prohibited by law/regulation
 Report is published separately
 Element must NOT be a major portion of the complete FS COMPILATION
NO ASSURANCE provided; INDEPENDENCE is NOT require
*Therefore, Audit of Single FS is not allowed to do so* but should be disclosed.

AUDIT OF SUMMARY FINANCIAL STATEMENTS “Unaudited” or “Compiled without audit review”

Summary of the audited complete FS (considered a violation
of PFRS) is done using an APPLIED CRITERIA. Since it Incomplete Information, CANNOT proceed = WITHDRAW
violates PFRS, the auditor CANNOT give an opinion but rather
focuses on auditing the consistency of it. If there incorrect/inconsistencies, let the management correct
it, afterwards, continue compiling.
Restriction as to who can audit summary of FS
 Can only audit it if he audited the complete FS AGREED-UPON PROCEDURES
Agreement between the parties (client/3rd party and auditor)
Concerns: on some of the procedures to be conducted; WITH REPORT
 Is the Applied Criteria acceptable? Reasonable? BUT NO OPINION expressed.
 Level of detail presented + disclosures
 Was the applied Criteria used? Report on Factual Findings: --> Restricted only to those who
 Management must be committed with responsibilities agreed or the parties
 Prepare and present Summary FS in accordance 1. Procedures
with the Applied Criteria 2. Findings
 Make it accessible to users WITHOUT difficulty
 Attach auditor’s report

Format of Report/Opinion:
 Consistent in all material respects/Fair summary