Auditing Theory

iCARE Accountancy Review - Batch 3 AT Pre-

week
I - Introduction to FS Audit, Pre-
engagement Activities
III.– Planning an Audit of FS

IV.– Study and Evaluation of

IC V – Transaction Cycles
VII – Evidence and Substantive
Tests VIII – Audit Sampling
IX – Completing the Audit and Audit
Documentation XI – Audit Reporting
XII – Special Purpose Engagements
II – The Accountancy
Profession VI – Fraud, Error
and NOCLAR
X – Quality Control for Audit and Assurance
Firms XIII – Code of Ethics
XIV – Auditing in an IT Environment
I. Introduction to Financial
Statements Audit, Pre-
engagement Activities
Assurance Engagements -to enhance the degree of confidence of the intended
users.
Non-assurance Engagements
-residual definition

-engagement risk to acceptably low

level
Reasonable
-positive form of conclusion
Assurance
-”…are free from material
misstatements.”
-example: audit engagements
-engagement risk to level acceptable under the circumstances of the
engagement (greater than RAE)
Limited -negative form of conclusion
Assurance -”Nothing has come to our attention…”
-example: review engagements
 Attestatio -measurement of subject matter against criteria is performed by
n RP
-SMI or representations from RP (assertions)
-report: whether assertions are valid
Direct -measurement of matter against criteria is performed
Reporting subject by
practitioner
-SMI from the practitioner
-report:
resu lt of
evaluation

Elements of an Assurance
Engagement
 • Responsible
• Positive/Negative form of
Party
• Intended
conclusion
Use rs
• Type of opinion: Unqualified,
• Practitioner
Qualified, Adverse, Disclaimer
of Opinion

• Financial
• Sufficient – Quantity • Non-financial
• RoMM (Direct) • Physical
• Quality (Inverse) characteristics
• Appropriate – • Systems and processes
Quality • Behavior
• Relevance
• Reliability

• Reliable
• Understandable
• Neutral
• Complete
• Relevant
 -reasonable assurance engagement
-attestation (assertion-based
engagement)
-subject matter: assertions
Complianc
Audi Financial e
t OperationsEffectiveness and Compliance with
Financial Efficiency of laws and
Statements Operations regulations
External Intern Government
al al

Assurance The risk that the practitioner expresses an inappropriate conclusion when
Engagement the subject matter information is materially misstated.
Risk

The risk that the auditor expresses an inappropriate conclusion when the
Audit financial statements are materially misstated.
Risk
 Risk of
Audit Detection
Risk Material
Risk
Misstatements

• risk that FS
• risk of inappropriate are already • risk that auditor will
conclusion when FS materially
misstated not detect material
are materially prior to misstatements.
misstated. audit. • controllable by the
• reduce to • uncontrollable auditor.
acceptably low by the auditor. • adjust NTE (nature,
• level
matter of • Inherent Risk timing, extent)
profession • Control Risk based on assessed
al • Assess based RoMM
judgment on
understanding
The susceptibility of an assertion about a class of transaction, account balance or
Inherent disclosure to a misstatement that could be material, either individually or when
Risk aggregated with other misstatements, before consideration of any related controls.

The risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either individually
Control or when aggregated with other misstatements, will not be prevented, or detected and
Risk corrected, on a timely basis by the entity’s internal control.
 Financial • representations by management in the financial
Statement statements
• used to consider potential misstatements
• basis of audit objectives and audit procedures
Assertion
s
FS Audit Audit Audit
Assertions Objectives Procedures Evidence

Classes of Income
Transactions Statement Occurrence, Completeness, Cut-off, Accuracy,
and Events Classification
Assertion
s

Balance
Account Sheet
Completeness, Existence, Rights and Obligations, Valuation and
Balances Allocation
Assertions

Presentation Occurrence and Rights and Obligations, Completeness, Accuracy and

FS
and Valuation, Classification and Understandability
Assertions
Disclosure
Pre-
-whether or not to accept a new engagement or continue/discontinue a recurring
engagemen engagement.
t Activities
Considerations:
• Auditor’s competence, capabilities, time and
resources
• Auditor’s independence
• Client management’s integrity
• Audit preconditions:
• Use of acceptable FRF
• Acknowledgment of responsibilities

Engagement -to avoid misunderstanding between auditor and client’s

Letter management
Contents:
• Objective and scope
• Responsibilities of auditor
• Responsibilities of management
• Identification of applicable FRF for the financial
statements
• Form and content of reports
-not required to send separate/new engagement
Component and letter. Considerations:
Recurring -appointment, legal requirements, degree of
ownership, separate report, degree of independence
Audits -change in ownership, nature or size, legal
requirements, FRF, other reporting requirements
II. The
Accountancy
Profession
 -primary regulatory body
Public
Practic
-chairman and six (6) members
e
Professiona -Appointment:
• APO/PICPA (5 nominees)
l
• PRC (3 recommendees)
Regulatory • President (1 appointee)
Board of -3-year term, renewable for another
Accountanc Commerce
Academe
y and Industry Accountanc -1 year cooling off
Profession y (PRBOA) -filling unexpired term ≠ complete
term
-must not exceed 12 years

Government
• Natural-born and resident of the Philippines
• 10 years work experience in any scope of practice
• Good moral character
Qualification • Must not have any pecuniary interest in any school,
s college, or RCs
• Must not be a director or officer of PICPA
 Rating in the
CPALE

Genera
l
average of Ye PASSE
No s
at least D
75%?

Ye
Are there s CONDITIONE
No • D
Take subjects
grades
below 75% within
below two years
65%?
Majority
Ye
s of grades No FAILE
at least D
75%?
FRSC AND
AASC
1. Chairman (FRSC: Any sector; AASC: Public Accountancy)
FRSC AASC*
1 1
2. Board of Accountancy 1 1
3. Securities and Exchange Commission 1 1
Three-
4. Bangko Sentral ng Pilipinas 1 1
5. Commission on Audit 1 1 year
6. Bureau of Internal Revenue 1
7. FINEX (preparers of financial statements) 1 term,
8. An association of CPAs in public practice 1 renewable
APO (PICPA):
9. Public Practice (AASC: Small, medium & big prac.) 2 6 for
10. Commerce and Industry 2 1
11. Academe/Education 2 1
another
12. Government 2 1 term
Total 15 15

*PRBOA Resolution 22-2020: Chairman and 17 representatives (+3 to public

practice)
EDUCATION TECHNICAL
COUNCIL
ETC
1. Chairman (academe/education) 1 Three-
2. Board of Accountancy 1
year
APO (PICPA):
3. Public Practice 1 term,
4. Commerce and Industry 1
renewable
5. Academe/Education (Public & Private) 2
6. Government 1 for
Total 7 another
term
QUALITY REVIEW COMMITTEE
(QRC)
1. Chairman (public practice) 1
2. Board of Accountancy 1 Three-
APO (PICPA): year
3. Public Practice 2
4. Commerce and Industry 1 term,
5. Academe/Education 1 renewable
6. Government 1
for
Total 7
another
term
CPD
COUNCIL
Co-
1. Chairperson (BOA) 1 terminus
2. 1st Member (Officer of PICPA) 1
3. 2nd Member (Academician) 1 with BOA,
Total 3 PICPA and
organizatio
n
incumbency
III. Planning an Audit
of Financial
Statements
 Audit
Planning
Overall Audit Detailed Audit
Strategy Plan
Nature, Timing, and Extent (NTE)
Sets the scope, timing and direction of the audit, and • Risk Assessment Procedures
of:
guides the development of the more detailed audit • Further Audit Procedures
plan. • ToC and SP
• Other Planned Audit
Procedures

Facilitating
Resolve Appropriate

C F P
Assignment the Effective
Coordinatio potential attention
of work direction,
supervision Efficien
and
o
nf work problems important
to
to tea and t Audi
done promptly area
m of
review t
s

A E A
work

Benefits of Audit
Planning
Risk -to obtain an understanding of the entity, its environment and internal control for identifying and
Assessment assessing the risk of material misstatements (F/S level and assertion level)
Procedures
-to test the operating effectiveness of internal controls (assertion
Test of level)
Controls -PDC: Prevent, Detect and Correct material misstatements
Substantiv -to detect material misstatements (assertion
e level)
-substantive analytics and test of details
Procedure
s Risk Assessment Test of Controls Substanti
Procedures ve
Procedur
es
Inquiry, Inspection, Observation (IIO)
+ + +
Analytical Analytical
Types of Procedure Procedure
procedure s s
s Reperformance
External
Confirmatio
n
Recalculation
 Materiality • Misstatements, including omissions, are considered to be material if they, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements.
• Size (quantitative) and Nature (qualitative)

Overall -Smallest aggregate misstatement that could be material to any of the financial
Materiality statements.

The amount or amounts set by the auditor at less than materiality for the financial statements as a
Performanc
whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
e undetected misstatements exceeds materiality for the financial statements as a whole.
Materiality
-to be applied to those particular classes of transactions, account balances or disclosures which could
Specific also reasonably be expected to influence the decisions of users, other than the primary benchmark.
Materiality

Overall
Benchma %
Material
rk
ity

Primary FS info relevant to Matter of professional Basis for

users judgment evaluation
iCARE Accountancy Review - Batch 3 AT Pre-
week
 Direction, • Size and complexity of audit client
• Area of the audit
Supervision • Assessed RoMM
and Review • Team’s capabilities and
competence
• The application of relevant training, knowledge and experience, within the context provided by
Professiona auditing, accounting and ethical standards, in making informed decisions about the courses of
l action that are appropriate in the circumstances of the audit engagement.
• Materiality, risk assessment, audit sampling, evaluation of misstatements, etc.
judgment

• An attitude that includes a questioning mind, being alert to conditions which may indicate possible
Professiona
misstatement due to error or fraud, and a critical assessment of evidence.
l • Best method to detect fraud
skepticism
 Determining the use of an
expert

• Auditor’s expert
• Internal
• External
• Area is other than accounting or auditing
• Expert will assist in obtaining SAAE
• Understand the expert’s role and expertise to determine
adequacy
• Agree terms of the engagement
• No reference to external expert, unless report is modified

Initial audit Audit of small

engagements entities

• More time for audit planning (no

• Manner of recording transactions
previous experience)
and documentation.
• Obtain understanding of the industry and client’s
• Might have less segregation of duties.
practices.
• Risk of management override
• Consider communication with predecessor
• Might use different financial reporting framework.
for planning purposes.
IV. Study and Evaluation of
Internal Controls
 The process designed, implemented and maintained by those charged with governance, management
and other personnel to provide reasonable assurance about the achievement of an entity’s objectives
Internal with regard to reliability of financial reporting, effectiveness and efficiency of operations, and
controls compliance with applicable laws and regulations.

Limitations of Internal Control

C O C C H
A
 Limitations of Internal
Control

IC
Cost-benefit Manageme Changes
Collusio Human addresses
nt in
n error Anticipated
consideratio Override condition
transaction
n
s
 Control Components of Internal Control:
Environment
• Obtain an understanding of entity-level
and transaction-level controls.
• Entity level: Control environment,
Risk assessment process,
Risk Information and
Monitorin communication systems,
Assessment
g Process Monitoring level: Control activities
• Transaction
and Monitoring
CRIM
• Document understanding (flowcharts,
E narratives, ICQ or questionnaires,
control matrices, checklists)
• Confirm understanding by testing a few
transactions from inception to
Information reporting (walkthrough).
Control
and
Activitie
Communication
s
Systems
 • Attitudes and awareness towards IC
Control
• Elements (IM CPA HO): Integrity, Management’s philosophy and operating style, Commitment to competence, Participation by
Environment
TCWG, Assignment of authority and responsibility, HR policies and procedures, Organizational structure

• Business risks and risks of material misstatements

Risk • Likelihood (%) and significance (Php)
Assessment
• How management IAM – Identify, Assess and Manage
Process
risks

• Preventive or Detective
Control • APIPS: Authorization, Performance reviews, Information processing, Physical Controls, Segregation of Duties
Activitie • Segregation of Duties (ICARE): Independent checks, Custody of Assets, Authorization of transactions, Recording of transactions,
s Execution of transactions

Information • How the entity initiates, records, and processes its

and transactions
Communication • (PIISO) People, Input or data, Infrastructure, Software,
Systems Output

• Ongoing and Separate evaluations

Monitorin • Ongoing: Day-to-day (e.g. transaction
g authorizations)
• Separate evaluations: Periodic (e.g. internal audits)
 Understanding the Testing the Internal Controls
Internal Controls
Phase Risk assessment procedure Further audit procedure

Purpose To identify and assess RoMM To test the operating

(CR component) effectiveness of internal
controls (re-assess CR)
Aspect tested Design and Implementation Operating Effectiveness

Required? Required Not required*

Procedures IIO + Walkthrough IIO + Reperformance

Level F/S and Assertion level Assertion level

Attention directing? Yes Yes

V. Transaction
Cycles
 Revenue and Receipt
Cycle

Sales Credit Warehous Shipping Billing Accounting

Customer Departme Departme e or Departme Departme Departme
Reception Treasur
nt nt Storage nt nt nt y

Documents
Used

Transactio
Shipping Sales Remittanc n
Sales
Document Invoice e Advic
Orders Summaries
s s e
Expenditure and Disbursement
Cycle

Accounts
Purchasing Receiving Payable Treasury
User
departmen departmen Departme
department
departmen t t nt
t

Documents
Used

Purchase Purchas Receivin

Voucher Check
Requisitio e g
s s
n Order Report
 Payroll
Cycle

HR Timekeepin Payroll Accounting Treasury

User Department
Department g Departme Departme
Department nt Departme nt
nt

Documents
Used

Cost
Daily Time Personne Payroll Bank
Assignmen
l Files Registe Debit
t Report
Summarie r Advice
s
 Inventory/Conversion
Cycle

Raw Finishe Cost

Production Material Production d Accounting
Departme s Departme Goods Departme
nt Storage nt Storage nt

Documents
Used

Finished Job /
Materials Productio Raw
Goods Department
Requisitio n Materials
Stock cards al Cost
n Reports Stock cards
sheets
 Investing and Financing
Cycle

Find the Make payment

Appropriat (or receive Maintain
most
Identify the e level of payment) to/from
favorable appropriate
need. approval accurat
price and parties.
e
terms.
records.

Documents
Used

Stock/Bond
Minutes Board Broker’s
Formal
of Resolution advices,
Plan Certificates
meetings s etc.
, etc.
VI. Fraud, Error and
NOCLAR
 Fraud vs. Difference: Fraud is intentional. Best method to detect fraud is through use of professional
Error skepticism.
Forensic Audit F/S Audit
Objective To prove the occurrence To evaluate the fairness
and extent of fraud. of financial statements.

Scope To present findings that To express opinion on the fair

support legal and presentation of F/S in
administrative decisions. accordance with AFRF.

Extent of procedures Virtually involves 100% Combination of 100%,

examination. specific, and sampling
examination.

Audit period Any period as necessary. Typically year-end F/S.

Nature of report Investigative report Assurance report

 • How and where the FS may be susceptible to fraud.
Fraud • Best responses to risk of material misstatements due to
Brainstorming fraud.
• Conditions present in most every
Fraud fraud.
Triangle • a.k.a. Fraud Risk Factors (ISA 240)

Incentives/Pressures

Opportunities Attitudes/Rationalizations
 Types of
Fraud
According to nature of F/S According to
misstatements: perpetrator:
Fraudulent Financial Reporting – misrepresentation Management Fraud – more
of information in the F/S (e.g. overstatement of revenue, etc.) difficult to detect due to management’s
ability to override controls
Misappropriation of Assets – theft/misuse of company assets
Employee
(e.g. embezzlement, etc.)
Fraud

Responsibilities for Fraud (prevention and

detection)
Auditor:
Detect an
Those Charged with Management:
communicat d
Governance Internal controls to
e material
(TCWG): address fraud risks F/S users
misstatements due
Oversight (prevention
to fraud.
of management and detection)
Obtain
written
representations.
 • acts of omission or commission
Non-compliance • either intentional or unintentional
• contrary to prevailing laws or regulations.
• entered by, or in the name of, the entity, or on its behalf, by those charged with governance,
management or employees.
• does not include personal misconduct

Direct Effect Indirect

Effect
• Reported in the F/S • Not reported in the F/S (except for penalties and fines)
• Auditor obtains SAAE of compliance • Auditor identifies potential effect to the financial
• Provide reasonable assurance of statements
compliance • No assurance as to compliance
• Examples: tax laws, pension laws, etc. • Examples: environmental laws, health laws, etc.

Responsibilities for Non-compliance with Laws and

Regulations
Audit
Those Charged with Detect
or:
Management:
Governance and
communicate material
Internal controls to
(TCWG):
address risks
misstatements due to F/S users
Oversight non-compliance.
of non-compliance Obtain
of management
written
representations.
VII. Evidence and Substantive
Testing
 F/S Audit Audit Audit
Conclusion
Assertion Objective Procedure Evidenc
s s s e

Audit • Basis of auditor’s conclusion

• Underlying accounting records and other
Evidence
information
• Must be sufficient and appropriate

• Used to prepare financial • Quantity of audit evidence

Underlyin statements. • RoMM – Direct (higher risk =
g • Journals, ledgers Sufficienc more evidence)
supportin , y • Quality – Indirect (higher quality =
accountin less required evidence)
g etc. document
g records s,

• Other than • Quality of audit

Other underlying accounting
Appropriateness evidence
informatio • information of
Minutes • Relevance
meetings, •
n benchmarking, etc.
Reliability
 Relevance Reliability

Nature of Nature, source,

Assertions Direction of
Procedure and
s Testing circumstances

• Generalizations:
Classes of
Risk Transactions external, effective IC,
Vouching
Assessment and Events directly
Procedures
obtained,
documented, original

Test of Controls Account Balances Tracing

Substantiv Presentation
e and Disclosur
Procedure e
s
 Direction of
Testing
Existence /
Occurrence

Overstatement

Assets /

Income

Recor
d Suppor
t

Completeness

Understatement

Liabilities /

Expenses
 Substantiv • To detect material misstatements
e • Test of details (of balances, transactions, or P&D) or Substantive
analytics
Procedure
s • Recorded amounts • How?
vs. Supporting Nature • Higher risk = more effective
Test of • documents
Required procedures
Details • Primarily vouching
• When?
and/or tracing
Timin • Higher risk = closer to balance sheet
g date
• Recorded amounts
Substantiv
vs. Auditor’s • How much?
e • expectations
Not Exten • Higher risk = more evidence
Analytics required t gathered

Inquire with
Recorded
management Perform
Amounts vs.
about significant other
Auditor’s
differences. procedures.
Expectations.
 Risk Assessment Risk Response Conclusion
and
Reporting

Analytical Procedures Preliminary/Planning Substantive Analytics Review/

Analytics Concluding
Analytics

Level F/S Assertion F/S

Attention-directing? Yes No Yes

Required? Yes No Yes

Purpose To obtain To detect To conclude on the F/S.

understanding of the material
entity and its misstatements.
environment.
 Auditing Accounting
Estimates

• Objective: Test the reasonableness of accounting

estimates.
• Procedures:
1. Obtain understanding of estimation process.
2. Test estimation process.
3. Develop own estimate.
4. Review subsequent events.
VIII. Selecting Items for
Testing and Audit
Sampling
 Extent of
Testing
• All items
Complete or • Most common for ToD (small # of items, significant risk, or using
100% CAATs)
• High value or key items
Specific • Conclusion does not extend to the rest of
items population
• All units have a chance of being selected.
Audit • Conclusion extends to the rest of the
Sampling population.

Purpose of
Testing
• Attributes (characteristics)
Test of • Qualitative
Controls • Deviations - % of
(ToC) occurrence

• Variables (monetary value)

Test of Details • Quantitative
• Misstatements – Peso
(ToD)
Value
 The entire set of data from which a sample is selected and about which the auditor wishes to draw
Populatio conclusions.
n
• The individual items constituting a population.
• Examples: supporting documents, entries to the accounting system, etc.
Sampling • If testing less than 100%, ensure completeness of population before selecting items to be tested
unit (dates, reference #, transaction totals).

Sampling • conclusion for sample ≠ conclusion for

population
risk
• Managing
1. Can sampling
be eliminated
risks:by 100% testing
2. Increase sample size
3. Choose appropriate sample selection
method

Non-sampling • other than sampling risk

risk • human error, etc.
• Managing non-sampling
risks:
1. Adequate
2. Cannot beplanning
eliminated
and training
3. Proper direction, supervision and
review
 Alpha Sampling Risk (Type I) Beta Sampling Risk (Type II)

More testing will be Less testing will be

Effect
performed, Inefficient audit performed, Ineffective audit

Less important, as risk results More important, as risk results

Importance
to waste of resources to incorrect conclusion

When performing test of controls Risk of under-reliance Risk of over-reliance

When performing test of details Risk of incorrect rejection Risk of incorrect acceptance
 Selection
Approach
Random • Random Number Generator or RNGs, best for pre-numbered
Selection items

Systematic Selection • Use of interval (# of population ÷ sample size = sampling

interval)

Haphazard • No structure (non-statistical

Selection approach)
Value-
• Higher amount = higher probability of being
weighted selected
Selection
Block Selection • Selecting block/cluster of items, high sampling
risk

• Use of probability • Use of judgment

• Mathematical model Non- • Informal model
Statistical • •
Sampling is statistica Sampling is
risk measured l risk measured
quantitatively qualitatively.
(%).
 Attribute
Sampling
Sample size
Evaluatio
relationship n
s Factor Relationship with sample size • If Sample Deviation Rate (SDR) > Expected Deviation
Rate (EDR), assess CR at maximum.
Assessed RoMM, specifically Inverse
• If Estimated Maximum Rate of Deviation (EMRoD) >
CR
Tolerable Deviation Rate (TDR), assess CR at
Acceptable beta Inverse maximum.
sampling risk • Otherwise, assess CR at below maximum.
• Note:
Confidence level Direct • SDR + Allowance for sampling risk = EMRoD
• EDR + Allowance for sampling risk = TDR
Tolerable deviation rate Inverse

Expected deviation rate
Population size
Other
Direct (Note: If EDR > TDR,
Concepts
no TOC will be performed.)
• Sequential (Stop-or-go) – no fixed sample
Negligible size, continuous testing
• Discovery (Accept/Reject) – one deviation = ineffective
controls
 Variable
Sampling
Sample size
Projectio
n
relationship
s Factor Relationship with sample size • Ratio: %accuracy (based on sample) x Php Population
Assessed RoMM Direct • Difference: (average Php difference based on sample) x
# of sampling units in the population
Alternative Procedures Inverse • Mean-per-unit: (average Php value based on sample) x
# of sampling units in the population
Acceptable beta sampling risk Inverse • Do not project anomalous misstatements

Confidence level Direct

Tolerable misstatement Inverse Evaluatio
n
Expected misstatement Direct
• If Projected Misstatements + Anomalous Misstatements
Stratification Inverse < Tolerable Misstatements, fairly presented
• If Projected Misstatements + Anomalous Misstatements
> Tolerable Misstatements, not fairly presented
Population size Negligible
 Variable Issues with Supporting
Sampling Documents

Other • If yes, replace with valid sample.

Concepts Voided samples • If not, consider item
as deviation/misstatement.

• Under value-weighted selection, the probability of

being selected is proportional to its size • If there are alternative
• This is usually used for tests for overstatements Missing procedures, perform
(existence/occurrence assertion) and for assets/income • alternative.
If not, consider item
accounts. sample deviation/misstatement.
as
s

• A misstatement or deviation that

Anomalou is demonstrably not
s errors representative of misstatements
or deviations in a population.
IX. Completing the Audit and
Audit Documentation
 Risk Assessment Risk Response Conclusion
and
Reporting

Analytical Procedures Preliminary/Planning Substantive Analytics Review/

Analytics Concluding
Analytics

Level F/S Assertion F/S

Attention-directing? Yes No Yes

Required? Yes No Yes

Purpose To obtain To detect To conclude on the F/S.

understanding of the material
entity and its misstatements.
environment.
 Event Fact
s s

Date of F/S Approval Date of F/S and

Date of Date of Auditor’s
for Issuance Auditor’s Report
F/S Report
Issuance

Non-
Adjusting
adjusting
Events
Events

Accounting Audit
Purposes Purposes

Adjusting conditions existing at the date of the Event Gather

Events F/S s SAAE.

Non- conditions that arose after the date of

Fact No responsibility, except when
adjusting the F/S.
s relevant.
Events
 Litigations and
Claims

• Provisions and Contingencies

• Documentation:
• List of litigations and claims
• Management’s assessment of outcome (likelihood and
amount)
• Legal confirmation as to reasonableness of assessments
 Going Concern
Assumption

• Management’s responsibility:
• Assess the appropriateness of going concern assumption.
• Use appropriate measurement basis.
• Disclose material uncertainties related to going concern in the
F/S.
• Auditor’s responsibility:
• Gather SAAE about going concern assumption.
• Emphasize material uncertainties related to going concern in the
auditor’s report.

Were there If GC is
Were the If GC is
events or inappropriat Are there
Did events or appropriate,
conditions that Were e, were the multiple
manageme conditions were the
may cast there FS prepared material
nt make an represent required F/S
‘significant mitigating under uncertainties
assessment ‘material disclosures
doubt’ as to plans? alternative related to
? uncertainty made?
GC basis? GC?
’?
assumption
 A written statement by management provided to the auditor to confirm certain matters or to support
Written
other audit evidence. Written representations in this context do not include financial statements, the
Representatio assertions therein, or supporting books and records.
ns

General Specific

• F/S preparation
Scope • Information provided to the auditor Specific items
• Completeness of transactions

• When required by relevant PSAs

When to obtain? In all audits • Necessary to support other
audit evidence

Qualified opinion or disclaimer

Consequence if not provided Disclaimer of opinion
of opinion
 A written statement by management provided to the auditor to confirm certain matters or to support
Written
other audit evidence. Written representations in this context do not include financial statements, the
Representatio assertions therein, or supporting books and records.
ns

Gener Specific
al

• F/S preparation
Scop • Information provided to the auditor Specific items
e • Completeness of transactions • Fraud
• Non-compliance with laws
regulations
and
• • WhEveanul raetqoi unrioefdmbsi ystraetel
When to obtain? In all audits ••
•• eevm
Rdivceeeaca
lnnontts t PSAs
cuedent i ng
Ne c e s s a r y toesstum
ASubsequent i paptoerst
parties
•other
events
Going concern
audit
• Comparative information
Qu•aliOfitehderosppienciofincioti remdissclaimer
Consequence if not provided Disclaimer of opinion of
opinion
 Audit
Documentation

• Form, content and extent

• Procedures performed
• Evidence gathered
• Conclusions reached
• Understandable to experienced auditor even with no previous involvement in the
engagement.
• Types:
• Permanent working papers
• Current working papers
• Assembly and retention:
• Assembly – w/in 60 days from auditor’s report date
• Retention – ISA – 5 years, Revised SRC Rule 68 – 10 years
• Communication with TCWG
• Auditor’s responsibilities (as distinguished from management’s responsibilities)
• Scope and timing of the audit
• Significant findings
• Auditor independence
X. Quality Control for
Audit and Assurance
Firms
Elements of Quality
Control

A
E H E
Elements
L Quality
of M
Control
Elements of Quality
Control

Acceptance Human
and Resourc
Continuance e
Procedures Policies

Ethical Engagement
Requiremen
ts Performanc
e

Elements
Leadership
Responsibiliti of Monitorin
g
es
Quality
Control
 Elements of Quality
Control

• Internal culture
• Firm’s CEO or managing board of Human • Recruitment, performance evaluation, promotion,
Leadership compensation, etc.
partners Resourc
Responsibiliti
e • Continuing training for employees
es • Engagement partner
Policies
• Members of the engagement team

• Compliance with relevant standards

Ethical • Compliance with the Code of Ethics Engagement • Supervision and review
Requiremen • Independence for assurance
• Engagement quality control review
ts engagements Performanc
(EQCR)
e

• Integrity of the client • Results of implementation of quality control

Acceptance policies and procedures
and • Competence of engagement team Monitorin
• Communicate at least annually to CEO or
Continuance • Compliance with ethical g managing board of partners
Procedures requirements
XI. Audit Reporting (General
Purpose) and Using the
Work of Others
 Audit
Opinion
Unmodified/ • F/S are free from material misstatements and auditor obtained
Unqualified SAAE:
• Either there are material misstatements, or the auditor was not able to obtain
Qualifie SAAE.
d • Effects are not pervasive.
• F/S contain material
Advers misstatements.
e • Effects are pervasive.
• Auditor was not able to obtain
Disclaimer of SAAE.
Opinion • Effects are potentially pervasive.
 Unmodified Auditor’s
Report

Report on
the Audit of
Title Addressee F/S (Omitted Auditor’s Opinion Basis for Opinion
if no ORR)

Other
Key Audit
Other Information Responsibiliti Auditor’s Reporting
Matters
– if applicable es for F/S Responsibiliti Responsibilities
(required for
es (ORR) – if
listed entities)
applicable
Name of
Signature and
engagement Date of the
Address of
partner (required Auditor’s
the Auditor
for listed Report
entities)
 • Title: It affirms that the auditor has met all of the relevant ethical requirements regarding
Title independence. This distinguishes the report from reports issued by others.

Addressee • Addressee: Users of the financial statements (normally, the shareholders or BoD, or
both)

• Unmodified opinion
• Entity name
Auditor’s Opinion • Title of each statement (including notes and summary of significant accounting
policies)
• Date or period covered
• Reference to applicable FRF
 • Audit was conducted in accordance with PSAs.
• Reference to auditor’s responsibilities
Basis for Opinion • Independence and compliance with Code of Ethics
• Statement that the auditor was able to gather sufficient and appropriate audit
evidence.

• Required for listed, voluntary for others

• Matters of most significance in the audit
Key Audit • Why the matter was determined a KAM
Matters • How the matter was addressed in the
(required for audit
listed entities) • Reference to the disclosure(s) in the F/S
• Omitted in case of Disclaimer of Opinion

• Financial or non-financial information

• Other than F/S and auditor’s report
Other Information • Found in an entity’s annual report
– if applicable • Auditor’s Responsibility: Read and identify whether there is a material inconsistency with the F/S,
and report accordingly.
• Material misstatement in other information: Unmodified opinion, with OI paragraph
 • Preparing the F/S and internal control
Responsibiliti
• Assessing the entity’s ability to continue as a going
es for F/S
concern.
• Oversight function of TCWG

• Responsibility to express an opinion in the auditor’s

Auditor’s report
Responsibiliti • Misstatements may arise from fraud or error
es • Definition of reasonable assurance
• Definition of materiality

• ISA: Report on Other Legal and Regulatory Requirements

Other • Supplementary Information
Reporting • Not required by AFRF
Responsibilities • May be required by law/regulation
(ORR) – if • Example: RR15-2010 Disclosures, SRC Rule 68
applicable Disclosures
• May be found in ORR Section of Auditor’s Report
• May be found in Separate Auditor’s Report
 Name of
engagement
partner (required
for listed
entities)

Signature and
Address of
the Auditor

Date of the
Auditor’s
Report
 Modified Auditor’s
Report
EOM and
Modified
OM
Opinion
paragraphs
Emphasis of
Other Matter
• Opinion Matter
• Basis for Opinion
• Auditor’s Responsibilities (modified for
Audit
disclaimer) Purpose F/S understanding
• understandi
Omission of OI Paragraph (disclaimer)
• ng
Omission of KAM Paragraph (disclaimer)
Reference
Yes No
to Notes

Modified Opinion? No Yes/No

Relation to KAM Must not be KAM

 Comparative
Information

Corresponding Figures Comparative F/S

Level of detail Dictated by relevance to Comparable with that of

the current period figures; F/S of the current
hence, may not be period.
complete.

Covered by opinion No Yes

XII. Reporting on Special
Purpose Engagements and
Other Audit-related Services
 Special-purpose Single FS and Specific
engagements Elements
• Single FS: SFP, SCI, SCIE, SCF, Notes (summary of
• Designed to meet the financial information needs of significant accounting policies and other explanatory
specific users information)
• Similar to audit report of general purpose FS • Specific Element: Schedule of receivables, inventories,
• Additional requirements: disbursements, etc.
• Description of purpose • If the auditor issues an adverse opinion or disclaimer
• Management responsibility over the of
framework opinion on the complete set of FS, the auditor is
• Required Emphasis of Matter Paragraph prohibited to issue an unmodified opinion on the audit
(EOM) of single FS or specific element of it.

Summary
F/S

• Derived from complete set of FS

• May be required by law or regulation
• May be derived from general purpose or special
purpose FS
• Requirement: must also be the auditor of the complete
set of F/S
 Review Agreed-upon Procedures
Engagements (AUP)

• Limited assurance (negative form of conclusion)

• Carry out procedures of an audit nature to which the
• Inquiry and analytical procedures
practitioner and the entity and any appropriate third
• Whether anything has come to the practitioner’s
parties have agreed and
attention that causes the practitioner to believe the FS
• Report on factual findings
are not prepared, in all material respects, in
• Non-assurance engagement
accordance with applicable FRF

Compilation
Engagements

• Apply accounting and financial reporting expertise to

assist management in the preparation and presentation
of financial information in accordance with applicable
FRF
• Report on the compiled FS
• Non-assurance engagement
XIII. Code of
Ethics
 Part 1 – Complying with the Code, Fundamental Principles
and Conceptual Framework

Part 2 – Professional
Part 3 – Professional Accountants
Accountants in Business
in Public Practice (PAPPs)
(PAIBs)

Part 4B –
Part 4A – Independence for

Effectivity Date: Independence Assurance

for Audit and Engagements other
June 15, (201 Review than Audit and
2019 8 Review
Engagements
version) Engagements

Glossar
y
 Part 1 – Complying with the Code, Fundamental Principles and Conceptual
Framework
Compliance: Breach:
Code of Ethics vs. Laws of Independence Standards – refer to Parts 4A and
and 4B of any other provision of the code:
Regulations – Laws and
regulations prevail 1. Evaluate the significance and impact of the breach.
2. Take whatever actions might be available to address the
Conflicting requirements of two
consequences.
countries – Apply stricter
3. Determine whether to report the breach to relevant parties.
requirements

Standard of behavior (COBID):

Fundamen
Integrity, Objectivity, Professional and Due
tal Competence Care,
Principles Confidentiality, and Professional Behavior
 Fundamental
Principles
Integri To be straightforward and honest in all professional and business
ty relationships.
Not to compromise professional or business judgments because of bias, conflict of interest or
Objectivit
undue influence of others.
y

Professio To attain and maintain professional knowledge and skill at the level required to
ensure that a client or employing organization receives competent professional
nal
service.
competence
To act diligently and in accordance with applicable technical and professional
Due
standards.
Care
To respect the confidentiality of information acquired as a result of professional and
Confidentialit
business relationships.
y
To comply with relevant laws and regulations and avoid any conduct that the
Professional
Behavior professional accountant knows or should know might discredit the profession.
 Conceptual
Framework

Address the threats by

Identify threats to
Evaluate the eliminating or
compliance with
threats reducing them to an
fundamental
identified acceptable level
principles

I-
FASS 1. Eliminating th
• Intimidatio Acceptable level –
a e
n reasonable and circumstance

• Familiarity informed third party 2. s.

Applying safeguards.

• Advocacy would the

that conclude
accountant 3. Declining or ending the
• Self-review is compliant. activity or engagement.
• Self-interest
 Conceptual Framework – Additional Requirements for Assurance Engagements

The state of mind that permits the expression of a conclusion

without
being affected by influences that compromise professional
Independence of
judgment, thereby allowing an individual to act with integrity, and
mind
exercise objectivity and professional skepticism.

Independenc
e The avoidance of facts and circumstances that are so significant

Independence in that a reasonable and informed third party would be likely to

conclude that a firm's or an audit or assurance team member's
appearance
integrity, objectivity or professional skepticism has been
compromised.
An attitude that includes a questioning mind, being alert to conditions which
Professio
may indicate possible misstatement due to error or fraud, and a critical
nal
assessment of audit evidence.
Skepticism
 Part 4A – Independence for Audit and Review
Engagements
Section 540 – Long Association Provisions

Client Rules on Rotation

• Not a PIE Firm’s discretion
• PIE 7-year “time-on period” (cumulative) for Key Audit Partner (KAP)
roles Cooling-off period:
• 5 years – Engagement Partner
• 3 years – EQCR Partner
• 2 years – Other KAP role (subsidiaries, division, etc.)

• Combination of • 4 or more cumulative years (total as EP, EQCR or other KAP)

KAP roles • 5 years cooling off period
XIV. Auditing in an IT
Environment
 IT/CIS
Environment

• Reduction of paper transaction trails

• Uniform, automated processing of
transactions
• General and Application Controls

Policies and procedures that relate to many applications and support the effective functioning of
General IT application controls by helping to ensure the continued proper operation of information systems.
Controls
• Manual or automated procedures
Application • Preventive or detective in nature
Controls • Input, Processing, and Output
controls
Common input controls:
• Key verification = data is entered twice
• Field check = data agree with required format
• Validity check = data is compared from information in master file (e.g. employee ID)
• Self-checking digit = mathematically calculated digit to detect common transpositional
errors
• Limit check = data does not exceed a certain length or amount
• Control totals = ensure completeness of data
• Financial total, hash total and record count
 ToC and ToD for computerized
systems

Input Proces Output Inpu Process Outpu

s t t

Auditing around the computer Computer Assisted Audit Techniques (CAATs)

• examination of input and output documentation (less • used to audit the client’s computer program directly
complex) (more complex)
• “black box approach” • “white box approach”
 I. Test
Data

Auditor’s Test
Data

Processed
using client’s
program

Compar Auditor’s
Outpu
e expected
t
manuall output
y
 II. Integrated Test Facility
(ITFs)

Auditor’s
Client’s
Test
data
Data

Processed Possibility of
using client’s data
program contamination

Compar Auditor’s
Outpu
e expected
t
manuall output
y
 III. Parallel
Simulation

Client’s Client’s
data data

Processed
Processed
using
using client’s
auditor’s
program
program

Compar Auditor’s
Outpu
e expected
t
manuall output
y
 *

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