Summary

Code of Ethics for Professional Accountants in the Philippines

Part A Fundamental Principles
Part B Professional Accountants in Public Practice
Part C Professional Accountants in Business

Fundamental Principles
1. Integrity – a professional accountant should not be associated with information where he
believes that the information contains incorrect, incomplete or misleading statements
2. Objectivity – a professional accountant should be fair and should not allow prejudice or
bias, conflict of interest or influence of others to override objectivity
3. Professional competence and due care – professional competence: a professional
accountant should continually strive to improve his knowledge and skills to ensure that a
client or employer receives the advantage of competent professional services based on
up-to-date developments in practice, legislation and techniques.
Two separate phases: Attainment of professional competence and maintenance of
professional competence
Due professional care: the responsibility to perform professional services in accordance
with technical and professional standards, carefully, thoroughly and on a timely basis.
4. Confidentiality – accountants who acquire information in the course of performing
services shall neither use nor appear to use that information for personal advantage or
for the advantage of a third party.
Confidential information may be disclosed under the following circumstances: permitted
by the client or employer; required by law; professional duty or right to disclose
confidential information
5. Professional behavior – a professional accountant should comply with relevant laws and
regulations and refrain from any conduct which might bring discredit to the profession.

How to observe and enforce all ethical standards?

Conceptual framework approach – identify threats to compliance with fundamental
principles; evaluate the significance of threats identified; and, apply safeguards, when
necessary, to eliminate the threats or reduce them to an acceptable level.

Threats to compliance with the Fundamental Principles are now categorized:

1. Self-Interest threat – that a financial or other interest will inappropriately influence the
professional accountant’s judgment or behavior.
2. Self-Review threat – that a professional accountant will not objectively evaluate the
results of the previous judgment made or service performed in forming a conclusion
about the subject matter of the engagement.
 3. Advocacy threat – occurs when a firm, or a member of the engagement team, promotes,
or may be perceived to promote, an assurance client’s position or opinion to the point
that objectivity may, or may be, perceived to be, compromised.
4. Familiarity threat – occurs when, by virtue of a close relationship with a client, its
directors, officers or employees, a firm or a member of the engagement team becomes
too sympathetic to the client’s interests.
5. Intimidation threat – that the professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise
undue influence over the professional accountant.

How to minimize/eliminate the threats to the fundamental principles?

SAFEGUARDS
1. Safeguard created by the profession, legislation or regulation; and
2. Safeguard created in the work environment
a. Firm-wide safeguards in the work environment (leadership will, documented
policies and procedures, independence)
b. Engagement-specific safeguards (review, consultation, disclosure)
Additional safeguard:
Safeguards within the client’s system and procedures (appointment of external practitioners by
other non-management personnel)

PART B (Some important features)

Professional appointment
Client acceptance – threats to integrity and professional behavior when the client is
involved in illegal activities or client’s owner or management lacks integrity
Engagement acceptance – threat to competence and due care (safeguards: acquire
appropriate understanding, use experts when necessary)
Changes in professional appointment – threat to professional competence and due care
Conflicts of Interest – threat to objectivity or confidentiality
Second opinions – threat to professional competence and due care
Fees and other types of renumeration
Professional fees – self-interest threat to professional competence and due care
Contingent fees – self-interest threat to objectivity
Referral fee or commission – self-interest threat to objectivity and professional
competence and due care
Marketing professional services – self-interest threat to professional behavior
Gifts and hospitality – self-interest threats to objectivity; intimidation threats to objectivity
Custody of client assets – self-interest threat to objectivity

INDEPENDENCE – independence of mind and independence in appearance

Engagement period – starts when assurance team begins to perform assurance services and
ends when the assurance report is issued, except when the assurance engagement is recurring
in nature
Independence Requirement

INTERPRETATIONS AND RULINGS

• Financial interest – direct (material or immaterial) impairs independence; indirect (only
material)
• Loans and guarantees
• Close business relationships
• Family and personal relationships
• Past employment with an assurance client
• Fees - overdue
• Etc

FRAUD, ERROR AND NONCOMPLIANCE

Error – unintentional misstatements in the financial statements, including the omission of an
amount or a disclosure
Fraud – intentional act by one or more individuals among management, those charged with
governance, employees, or third parties, involving the use of deception to obtain an unjust or
illegal advantage
Types of Fraud
1. Fraudulent financial reporting (management fraud)
2. Misappropriation of assets (employee fraud)

Fraud triangle: incentive/pressure, perceived opportunity, rationalization of the act

Responsibility of Management and Those Charged with Governance

• Management – establish control environment and implement internal control policies
and procedures
• Individuals charged with governance – ensure the integrity of the entity’s accounting and
financial reporting systems and appropriate controls are in place
Auditor’s Responsibility
Design the audit to obtain reasonable assurance that the financial statements are free from
material misstatements, whether caused by error or fraud.
PLANNING PHASE
1. Inquiries of management
2. Assess the risk – clue: FRAUD RISK FACTORS
Fraud Risk Factors – events or conditions that provide an opportunity, a motive or a means to
commit fraud, or indicate that fraud may already have occurred.
Fraud risk factors relating to misstatements resulting from fraudulent financial reporting
1. Management’s characteristics and influence over the control environment
(management’s compensation is represented by bonuses, stock options or other
incentives)
2. Industry conditions (new accounting, statutory or regulatory requirements that could
impair the financial stability or profitability of the entity)
3. Operating characteristics and financial stability (inability to generate cash flows from
operations while reporting earnings and earnings growth)

Fraud risk factors relating to misstatements resulting from Misappropriation of Assets

1. Susceptibility of Assets to Misappropriation (large amounts of cash on hand processed)
2. Controls (Lack of procedures to screen applicants for positions of trust)

Noncompliance – acts or omission or commission by the entity being audited, either intentional
or unintentional, which are contrary to the prevailing laws or regulations.

Management’s Responsibility
Ensure that the entity’s operations are conducted in accordance with laws and regulations,
including the prevention and detection of noncompliance.
Auditor’s Responsibility
1. Obtain a general understanding of the legal and regulatory framework
2. Design procedures, etc.

STEPS IN AUDIT ENGAGEMENT

ACCEPTING AN ENGAGEMENT
Consideration to accept an engagement: competence, independence, ability to serve the client
properly and integrity of the management
Integrity of the management
• Making inquiries of appropriate parties in the business community
• Communicating with the predecessor auditor
o The predecessor auditor’s understanding as to the reasons for the change of
auditors
o Any disagreements between the predecessor auditor and the client
o Any facts that might have a bearing on the integrity of the prospective client’s
management
Acceptance through the use of Engagement Letter – written contract between the auditor and
the client
• The objective of the audit of financial statements – express opinion
• The management’s responsibility for the fair presentation of the financial statements
 • The scope of the audit
• The forms or any reports or other communication that the auditor expects to issue
• The fact that because of the limitation of the audit, there is unavoidable risk that material
misstatements may remain undiscovered
• The responsibility of the client to allow the auditor to have unrestricted access to
whatever records, documentation and other information requested in connection with
the audit

Importance of engagement letter

• Avoid misunderstandings with respect to the engagement
• Document and confirm the auditor’s acceptance of the appointment

Recurring audits – no need new engagement letter, except

• Any indication that the client misunderstands the objective and scope of the audit
• Any revised or special terms of the engagement
• A recent change of senior management, board of directors or ownership
• A significant change in the nature or size of the client’s business
• Legal requirements and other government agencies’ pronouncements

Audit of components – separate engagement letter need to be sent depending on

• Who appoints the auditor of the component;
• Whether a separate audit report is to be issued on the component;
• Legal requirements;
• The extent of any work performed by other auditor;
• Degree of ownership by parent;
• Degree of independence of the component’s management

AUDIT PLANNING
Developing a general audit strategy (Audit Plan) and a detailed approach for the expected
conduct of the audit (Audit Program and Time Budget) to determine the scope of the audit
procedures to be performed.

It is important because:
• Helps ensure that appropriate attention is devoted to important areas of the audit
• Helps identify potential problems
• Allows the work to be completed expeditiously
• Assists in the proper assignment and coordination of work
• Helps ensure that the audit is conducted effectively and efficiently
How to formulate an effective and useful AUDIT PLAN?
Obtain sufficient understanding of the entity and its environment including its internal
control

Sources of Information
• Review of prior years’ working papers
• Tour of client’s facilities
• Discussion with people within and outside the entity
• Reading books, periodicals, and other publications related to the client’s industry

Use of Information obtained

• Assessing risks and identifying potential problems
• Planning and performing the audit effectively and efficiently
• Evaluating audit evidence as well as the reasonableness of client’s representation and
estimates
• Providing better service to the client

Additional Consideration on New Engagements – opening balances

Understanding the Internal Control

Developing an Overall Audit Strategy:

• How much evidence to accumulate;
• How and when this should be done

What to consider: #Materiality and #Audit Risk

For MATERIALITY
Step 1: Determine the Overall Materiality – Financial Statement Level
Step 2: Determine the tolerable misstatement – Account balance level
Step 3: Compare the aggregate amount of uncorrected misstatements with the overall
materiality

Bases: Annualized interim financial statements; Prior years’ financial statements; Budgeted
financial statements of the current year

For AUDIT RISK

AUDIT RISK – risk that the auditor gives an inappropriate audit opinion on the financial
statements.
Why? Reasonable assurance only: the auditor cannot possibly expect to detect all material
misstatements; instead, the auditor should perform audit procedures to increase the likelihood
of detecting these misstatements

Audit Risk = Inherent Risk x Control Risk x Detection Risk

Inherent risk – the susceptibility of an account balance or class of transactions to a material
misstatement assuming there were no related internal controls.

Factors (FS level):

1. Management integrity
2. Management characteristics
3. Operating characteristics
4. Industry characteristics
Factors (account balance level)
1. Susceptibility of the account to theft
2. Complexity of calculations related to account
3. The complexity underlying transactions and other events
4. The degree of judgment involved in determining account balances

Control risk – risk that a material misstatement that could occur in an account balance or class
of transactions will not be prevented or detected and corrected on a timely basis by accounting
and internal control systems.

Detection risk – risk that a material misstatement will not be detected by the auditor’s audit
procedures

RISK ASSESSMENT PROCEDURES

Includes
1. Inquiries of management and others within the entity
2. Analytical procedures; and,
3. Observation and inspection

ANALYTICAL PROCEDURES – involve analysis of significant ratios and trends, including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or deviate from predicted amounts—possible because of plausible relationships
among data may reasonably be expected to exist and continue in the absence of known
conditions to the contrary
Analytical procedures used in planning, substantive testing and in completion phase

Steps in performing Analytical Procedures

 1. Develop expectations regarding financial statements using: PAINT (Prior years’ fs,
Anticipated results such as budgets or forecasts, Industry averages, Non-financial
information, and Typical relationships among fs account balances)
2. Compare the expectations with the financial statements under audit
3. Investigate significant unexpected differences (unusual fluctuations) to determine
whether fs contain material misstatements

Analytical procedures in planning an audit should focus on:

• Enhancing the auditor’s understanding of the client’s business
• Identifying areas that may represent specific risks
STEPS IN USING THE AUDIT RISK MODEL
Step 1 Set the desired level of Audit Risk
Use your judgment
Step 2 Assess the Level of Inherent Risk
Knowledge of the client’s business and industry and results of preliminary analytical
procedures
Step 3 Assess the Level of Control Risk
Studying and evaluating the effectiveness of the client’s accounting and internal control
systems
Step 4 Determine the Acceptable Level of Detection Risk
Rearrange the audit risk model: DR = AR/(IR x CR)
Step 5 Design substantive tests
IF Detection Risk is Low, scope of substantive tests:
• Nature – more effective procedures
• Timing – perform procedures at year-end
• Extent – Use larger sample size
IF Detection Risk is High, scope of substantive tests:
• Nature – less effective procedures
• Timing – perform procedures at interim
• Extent – Use smaller sample size

Relating Inherent, Control and Detection Risk to the Overall Audit Risk
Inherent Risk and Control Risks – cannot be changed by the auditor—only assess the levels
Detection Risk can be controlled by the auditor by performing substantive procedures

Relationship between Materiality and Audit Risk – inverse

CONSIDERATION OF INTERNAL CONTROL

Assessing control risk is the process of evaluating the design and operating effectiveness of an
entity’s internal control as to how it prevents or detects material misstatements in the financial
statements

Concept of INTERNAL CONTROL

1. Internal control is a process
2. Internal control is effective by those charged with governance, management and other
personnel
3. Internal control can be expected to provide reasonable assurance of achieving the entity’s
objectives, because of the inherent limitations:
a. Cost-benefit
b. Internal controls direct routine transactions vs. non-routine transactions
c. Human error
d. Possibility of circumvention of internal controls
e. Possibility of overriding internal control
f. Impractical application of internal control
4. Internal control is designed to help achieve the entity’s objectives
a. Effectiveness and efficiency of operations
b. Compliance with laws and regulations
c. Reliability of financial reporting

Components of Internal Control

1. Control Environment – attitudes, awareness, and actions of management and those
charged with governance concerning the entity’s internal control and its importance in
the entity. Factors:
a. Integrity and ethical values
b. Management philosophy and operating style
c. Active participation of those charged with governance
d. Commitment to competence
e. Personnel policies and procedures
f. Assignment of responsibility and authority/organizational structure
2. Risk assessment – management should adopt policies and procedures that are designed
to identify and analyze the risks affecting the entity’s business and to take the appropriate
action to manage these risks.
Business risk – risk that the entity’s business objectives will not be attained as a result of
internal and external factors
3. Information and Communications Systems
4. Control Activities – policies and procedures that help ensure that management directives
are carried out.
a. Performance reviews
 b. Information processing
c. Physical controls
d. Segregation of duties
5. Monitoring – process of assessing the quality of internal control performance over time
(ongoing monitoring or separate evaluations)

Internal control for a small business

Consideration of Internal Control

1. Obtain understanding of the internal control
Involves: evaluating the DESIGN of a control; and, determining whether it has been
IMPLEMENTED.
To understand the design of entity’s internal control system:
o Make inquiries of appropriate individuals
o Inspect documents and controls; and,
o Observe entity’s activities and operations
To determine whether these controls have been implemented: WALK-THROUGH TEST
TAKE NOTE: Auditor is not required to obtain knowledge about the operating
effectiveness of internal control when obtaining an understanding of the entity’s internal
control system
Use of understanding internal control:
o Identify types of potential misstatements that can occur
o Consider factors that affect the risk of material misstatements
o Design the nature, timing and extent of audit procedures to be performed
2. Document the understanding of accounting and internal control systems
Either in:
o Narrative description
o Flowchart
o Internal control questionnaire
3. Assess the level of control risk

4. Perform tests of controls (optional)

Tests of controls are performed to obtain evidence about the EFFECTIVENESS of the
o DESIGN of the accounting internal control systems; or
o OPERATION of the internal control throughout the period
Purpose: Support the basis for assessing the control risks to low level

How to perform test of controls (NATURE):

Inquiry; Observation; Inspection; Reperformance
 When to perform test of controls (TIMING):
During interim visit

How many evidences needed to gather when performing test of controls (EXTENT)
Determine sufficient sample size

5. Document the assessed level of control risk

Communication of Internal Control Weakness – management letter

PERFORMING SUBSTANTIVE TESTS – are audit procedures designed to substantiate the account
balances or to detect material misstatements in the financial statements
1. Analytical procedures – corroborative evidence
When intending to perform analytical procedures as substantive tests, auditor should
focus on those accounts that are PREDICTABLE:
o Income statements accounts vs. Balance sheet accounts
o Accounts not subject to management discretion are generally predictable
o Relationships in a stable environment are more predictable vs. Dynamic or unstable
environment
2. Tests of details
Test of details of balances vs. Test of details of transactions

Effectiveness of Substantive Tests

• Nature of substantive test – quality of evidence, consider cost
• Timing of substantive test – Interim date vs. Year-end
• Extent of substantive test – amount of evidence needed

Relationship between Substantive Test and Test of Control (Buti pa sila may RELATIONSHIP)

AUDIT EVIDENCE – basis on drawing reasonable conclusions on forming audit opinion

Evidence – information obtained by the auditor in arriving at the conclusions on which the audit
opinion is based
• Underlying accounting data
• Corroborating information

Qualities of evidence – sufficient and appropriate evidence

Sufficiency – amount of evidence:
• Competence of evidence (power to persuade)
• Materiality
• Risk
 • Experience
Appropriateness – quality and relevance (timeliness and ability to satisfy the audit objective) to
a particular assertion and reliability (objectivity of evidence)
• Audit evidence obtained from INDEPENENT OUTSIDE SOURCES—more reliable than
generated internally
• Audit evidence generated internally is more reliable when the related ACCOUNTING AND
INTERNAL CONTROL SYSTEMS ARE EFFECTIVE
• Audit evidence OBTAINED DIRECTLY BY THE AUDITOR is more reliable than that obtained
by the entity
• Audit evidence in the form of documents and written representations is more reliable
than oral representations

Cost/benefit consideration – persuasive rather than conclusive

AUDIT DOCUMENTATION/WORKING PAPERS

Working papers are records kept by the auditor that documents the audit procedures applied,
information obtained, and conclusions reached.

Functions of working papers

Primarily to
• Support the auditor’s opinion on financial statements
• Support the auditor’s representation as to compliance with PSA
• Assist the auditor in the planning, performance, review and supervision of the
engagement
Secondarily, assist the auditor in
• Planning future audits
• Providing information useful in rendering other services
• Providing adequate defense in case of litigation

Form, Content and Extent of Audit Documentation

The auditor should consider what would enable an experienced auditor, having no previous
connection with the audit, to understand:
a. The nature, timing and extent of the audit procedures performed to comply with
PSAs and applicable legal and regulatory requirements
b. The results of the audit procedures and the audit evidence obtained; and,
c. Significant matters arising during the audit and the conclusions reached thereon

Procedures normally require audit documentation:

• Discussions of significant matters with management and others on a timely basis
 • In exceptional circumstances, when the auditor judges it necessary to depart from a basic
principle or an essential procedure that is relevant in the circumstances in the audit
• In documenting the nature, timing and extent of audit procedures perform – including
who performed the audit work; date completed; and, who reviewed the audit work
performed; date and extent of such review
Classification of working papers
Permanent file AND Current file

Ownership of Working Papers – property of the auditor

Confidentiality of Working Papers – refer to Code of Ethics

Retention of Working Papers – legal requirements

Guidelines for preparation of working papers:

• Heading
• Indexing
• Cross-indexing/cross referencing
• Tick marks

AUDIT SAMPLING
Risks in Sampling
• Sampling Risk – the possibility that the auditor’s conclusion, based on a sample may be
different from the conclusions reached if the entire population were subjected to the
same audit procedure
a. Alpha Risk – efficiency; type A risks
i. Test of control – Risk of Underreliance; Risk of Assessing Control Risk Too
High
ii. Substantive Tests – Risk of Incorrect Rejection
b. Beta Risk – effectiveness; type B risks
i. Test of control – Risk of Overreliance; Risk of Assessing Control Risk Too Low
ii. Substantive Test – Risk of Incorrect Acceptance
• Non-sampling Risk – risk that the auditor may draw incorrect conclusions among the
account balance or class of transactions because of human errors

Controlling the Risks

For Sampling Risks
• To eliminate – examine the entire population
• To minimize:
 o Increase the sample size; and,
o Use an appropriate sample selection method
For Non-sampling Risks, to minimize
• Proper planning; and,
• Adequate direction, review and supervision of the audit team

General Approaches to Audit Sampling:

Statistical sampling vs. Non-statistical sampling

Audit Sampling Plans

• Attribute sampling – used in tests of controls; occurrence rate
• Variable sampling – used in substantive tests; amount of misstatements

Steps in Audit Sampling

1. Define the objective of the test
2. Determine the audit procedure to be performed
3. Determine the sample size
4. Select the sample
5. Apply the procedures
6. Evaluate the sample results

Sampling for Test of Controls

• Determining sample size – factors:
o Acceptable sampling risk – level of sampling risk the auditor is willing to accept
o Tolerable deviation rate – maximum rate of deviations the auditor is willing to
accept, without modifying the planned degree of reliance on the internal control
o Expected deviation rate – rate of deviations the auditor expects to find in the
population
• Sample selection method
o Random number selection
o Systematic selection
o Haphazard selection
Voided documents – replaced by another item if properly voided
Missing documents – treated as a deviation
• Evaluation of results

Other Sampling Applications for Test of Controls

• Sequential sampling – when auditor expects very few deviations within the population
• Discovery sampling – when auditor expects no deviation
Sampling for Substantive Tests
• Determination of sample size
o Acceptable sampling risk
o Tolerable misstatement – maximum amount of misstatement that the auditor will
permit in the population and still be willing to conclude that the account balance is
fairly stated
o Expected misstatement – amount of misstatement that the auditor believes exists
in the population
o Variation in the population – use standard deviation
• Sample selection method
o Stratified sampling
o Value weighted selection
• Evaluating the results
o Project the misstatements to the population using: ratio estimation (variance is
high); or, Difference estimation (variance is low)
• Compare the projected misstatements together with the tolerable misstatements and
draw an overall conclusion

Treatment of Anomalous Errors

COMPLETING THE AUDIT

1. Identifying subsequent events that may affect the financial statements under audit
Events or transactions that occur subsequent to the balance sheet date that may affect
the financial statements and the auditor’s report.
o Requiring adjustment – those that provide further evidence of conditions that
existed at the balance sheet date
o Requiring disclosure – those that are indicative of conditions that arose subsequent
to the balance sheet date
Subsequent events occurring after the report date but before the financial statements
are issued
Auditor has no responsibility—the management has responsibility to inform the
auditor of events that may affect the financial statements

Effect of subsequent events on the date of the report

IF Requiring adjustment – original date of the report
IF Requiring disclosure:
As of the date of the subsequent event; OR
Dual date the report

2. Identifying contingencies
 Management is the primary source of information about litigations, claims, and
assessment
Auditor then corroborates the information by asking client to send letters of audit inquiry
to lawyers whom the client has consulted concerning these matters.
Effect: Refer to audit reporting

AUDITING ACCOUNTING ESTIMATES – approximation of amounts of an item in the absence of a

precise means of measurement
Auditor’s Responsibility
Obtain sufficient appropriate evidence as to whether accounting estimate is properly accounted
for and disclosed; and, accounting estimate is reasonable in the circumstances

Steps:
1. Review and test the process used by management to develop the estimate
2. Make an independent estimate
3. Review subsequent events which confirm the estimate made

RELATED PARTIES
Related party – persons or entities that may have dealings with one another in which one party
has the ability to exercise significant influence or control over the other party in making financial
and operating decisions

Auditor needs to be aware of them because:

• GAAP
• Related party transactions may be motivated by other than ordinary business
considerations
• The existence of related parties or related party transactions may affect the financial
statements and the reliability of audit evidence

USING THE WORK OF AN AUDITOR’S EXPERT

Expert’s work include:
• Valuation of precious stones; works of arts, real estate, and other specialized assets
• Determination of amounts using specialize techniques
• Interpretation of technical requirements, regulations or contracts

Auditor’s Expert vs. Management’s Expert

Determining the need for an Auditor’s Expert:

• Whether management has used a management’s expert in preparing the financial
statements
 • The nature and significance of the matter
• Risk of material misstatement in the matter
• Expected nature of procedures to respond to identified risks

Evaluating the Auditor’s Expert

1. Assess the competence and objectivity of the expert
2. Understand the field of the expertise of auditor’s expert
3. Establish the terms of the agreement with the expert
4. Evaluate the results of the work of the expert

Effect of the Reliance on Expert’s Work on the Audit Report

Unmodified opinion – no reference
Modified opinion – make reference

CONSIDERING THE WORK OF INTERNAL AUDITORS

1. Making a preliminary assessment of internal auditing; and,
a. Competence
b. Objectivity
c. Due professional care
d. Scope of function
2. Evaluating and testing the work of internal auditors
May request assistance of the internal auditors in performing routine or mechanical audit
procedures.

Effect on the Audit Report – NO REFERENCE

3. Obtaining written management representation
o Has acknowledged that it has fulfilled its responsibility for the preparation and
presentation of fair financial statements; and,
o Has approved the financial statements

Written representations as audit evidence – complements the audit evidence but they do
not substitute for the performance of audit procedures

Form and Content of Written Representations – Representation Letter

Basic Elements of a Written Management Representation

o Addressed to the auditor
o Date shall be as near as practicable, but not after, the date of the auditor’s report
o Signed by the appropriate level of management who has primary responsibility for
the financial statements
 Management’s Refusal to provide Written Representation
Effect: Modified Opinion
4. Performing wrap-up procedures
a. Final analytical procedures
▪ Identifying unusual fluctuations that were not previously identified
▪ Assessing the validity of the conclusions reached and evaluating the overall
financial statement presentation
b. Evaluation of the entity’s ability to continue as a going concern
Management’s Responsibility – make a specific assessment of the entity’s ability to
continue as a going concern
Auditor’s Responsibility – consider the appropriateness of management use of the
going concern assumption in the preparation of the financial statements
Effect: Refer to Audit Report
c. Evaluating audit findings and obtaining client’s approval for the proposed adjusting
entries
If management accepts – unmodified report
If management refuses to correct the financial statements – modified report

POST AUDIT RESPONSIBILITIES – Events after the financial statements have been issued
Subsequent discovery of facts
1. Discuss the matter with the appropriate level of management and consider whether the
financial statements need revision
2. Advise management to take the necessary steps to ensure that the users of the previously
issued financial statements are informed of the situations
Effect: Issue new audit report

Subsequent discovery of omitted procedures

1. Assess the importance of the omitted procedures to the auditor’s ability to support his
opinion
2. Undertake to apply the omitted procedures or the corresponding alternative procedures
Effect: Take steps to prevent future reliance on the report

AUDITOR’S REPORT
General purpose financial statements may be prepared using either “compliance framework”
or “fair presentation framework”

Fair presentation framework – refer to a financial reporting framework that requires compliance
with the requirements of the framework and:
 a. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond those
specifically required by the framework; or
b. Acknowledges explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the financial statements

Compliance framework – used to refer to a financial reporting framework that requires

compliance with the requirements of the framework, but does not contain the
acknowledgements mentioned above

The Unmodified Report – clean opinion

Fair presentation framework – financial statements are presented fairly, in all material respects,
in accordance with the applicable financial reporting framework
Compliance framework – financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework

Basic elements of the Unmodified Report

1. Title
REPORT OF AN INDEPENDENT AUDITOR
o To distinguish the auditor’s report from the reports that might be issued by others;
and,
o To emphasize the independence of the auditor with respect to the client being
audited
2. Addressee
Address to those parties for whom the report is prepared (ordinarily, shareholders or
board of directors)
Include complete mailing address of the client – SEC requirement
3. Auditor’s Opinion
Heading – OPINION and shall:
a. Identify the name of the entity whose financial statements have been audited
b. State that the financial statements have been audited
c. Identify the title of each of the financial statements audited including the date and
period covered by the financial statements; and,
d. Refer to the summary of significant accounting policies and explanatory notes
4. Basis for Opinion
Heading – BASIS FOR OPINION and shall:
a. State that the audit was conducted in accordance with the Philippines Standards on
Auditing;
b. Refer to the section of the auditor’s report that describes the auditor’s responsibilities
under the PSAs;
 c. Include a statement that the auditor is independent of the entity and has fulfilled the
auditor’s ethical responsibilities; and,
d. State whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion
5. Responsibilities for the Financial Statements
Heading – RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH
GOVERNANCE FOR THE FINANCIAL STATEMENTS
a. Management’s responsibility for the preparation and fair presentation of the financial
statements in according with the applicable financial reporting framework, and for
such internal control necessary to enable the preparation of financial statements that
are free from material misstatement;
b. Responsibility of the management in assessing the entity’s ability to continue as a
going concern and whether the use of the going concern basis of accounting is
appropriate as well as disclosing, if applicable, matters relating to going concern; and,
c. The responsibility of those charged with governance for overseeing the financial
reporting process
6. Auditor’s Responsibilities for the Audit of the Financial Statements
Heading – AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
and shall:
a. State that the objectives of the auditor are to:
a. Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement whether due to fraud or error; and,
b. Issue a report that includes the auditor’s opinion
b. State that reasonable assurance is a high level of assurance but is not a guarantee that
an audit conducted in accordance with PSAs will always detect a material
misstatement when it exists; and,
c. State that misstatement can arise from fraud and error, and either:
a. Describe that they are considered material if, individually or in aggregate, they
could reasonably expected to influence the economic decisions of users taken
on the basis of the financial statements; or,
b. Provide a definition or description of materiality on accordance with the
applicable financial reporting framework.
d. State that, as part of the audit in accordance with PSAs, the auditor exercises
professional judgment and maintains professional skepticism throughout the audit;
and,
e. Describe an audit by stating that the auditor’s responsibilities are:
a. To identify and assess the risk of material misstatement of the financial
statements
b. To obtain an understanding of internal control relevant to the audit in order to
design appropriate audit procedures
 c. To evaluate the appropriateness of the accounting policies used and the
reasonableness of the accounting estimates and related disclosures
d. To conclude on the appropriateness of management’s use of the going concern
basis of accounting
e. To evaluate the fair presentation of the financial statements
The description of the auditor’s responsibilities in the auditor’s report may be presented
in the following ways:
o Within the body of the auditor’s report;
o Within an appendix of the auditor’s report;
o By a specific reference to the location of such a description on the website of the
Board of Accountancy or the Auditing and Assurance Standards Council
f. State that the auditor communicates with those charged with governance the
planned scope and timing of the audit and significant audit findings including
any significant deficiencies in internal control identified during the audit
7. Other Reporting Responsibilities

8. Auditor’s Signature
Name of the audit firm and/or the personal name of the auditor
9. Auditor’s Address
Location in the jurisdiction
10.Date of the report
Date when the auditor completed all essential audit procedures to provide basis for
opinion

Modification to the opinion

• Material misstatement/departure from PFRS
1. Inappropriate accounting policy selected;
2. Misapplication of selected accounting policy; or
3. Inappropriate or inadequate disclosure
Effect: Qualified or Adverse Opinion
• Scope limitation – unable to perform necessary audit procedures required by PSA or is
unable to obtain sufficient appropriate evidence about assertion
Client-Imposed Scope Limitation
What to do: Request the management to remove the limitation
If management refuses to remove the limitation, communicate the matter to those
charged with governance and determine whether it is possible to perform alternative
procedures to obtain sufficient appropriate evidence
If no avail:
1. Express a qualified opinion if the effect is material but not pervasive; or
 2. If the effect is both material and pervasive, the auditor may resign from the
engagement or disclaim an opinion on the financial statements, depending on the
stage of completion
Circumstances-Imposed Scope Limitation
1. Due to the nature or timing of the auditor’s work
2. Due to circumstances that are beyond the control of the entity
What to do: Design and perform alternative procedures to obtain satisfaction about the
assertions in the financial statements
If no alternative procedures that can be performed or the results of the alternative
procedures performed do not enable the auditor to obtain sufficient appropriate
evidence: qualified opinion or disclaimer of opinion

Materiality and Pervasiveness Consideration

Modification of the Auditor’s Report

QUALIFIED OPINION DUE TO MATERIAL MISSTATEMENT
Opinion
• Use the heading “Qualified Opinion”
• In the auditor’s opinion, except for the effects of the matter described in the Basis for
Qualified Opinion section, the financial statements present fairly, in all material respects,
the financial position and financial performance of the entity in accordance with the
applicable financial reporting framework
Basis for Opinion
• Use the heading “Basis for Qualified Opinion”
• If material misstatement:
o A description of the nature of misstatements; and,
o A quantification of the financial effects of the misstatement or a disclosure of
omitted information, if practicable
• If omission of narrative disclosure
o Describe the nature of the omitted information in the Basis for Opinion section of
the report; and,
o Include the omitted information, if practicable

QUALIFIED OPINION DUE TO SCOPE LIMITATION

Opinion
• Use the heading “Qualified Opinion”
• In the auditor’s opinion, except for the possible effects of the matter described in the
Basis for Qualified Opinion section, the financial statements present fairly, in all material
respects, the financial position and financial performance of the entity in accordance with
the applicable financial reporting framework
Basis for Opinion
• Use the heading “Basis for Qualified Opinion”
• Explain the reason for the inability to obtain sufficient appropriate audit evidence

ADVERSE OPINION
Opinion
• Use the heading “Adverse Opinion”
• In the auditor’s opinion, because of the significance of the matter described in the Basis
for Adverse Opinion section, the financial statements do not present fairly the financial
position and financial performance of the entity in accordance with the applicable
financial reporting framework
Basis for Opinion
• Use the heading “Basis for Adverse Opinion”
• If material misstatement:
o A description of the nature of misstatements; and,
o A quantification of the financial effects of the misstatement or a disclosure of
omitted information, if practicable
• If omission of narrative disclosure
o Describe the nature of the omitted information in the Basis for Opinion section of
the report; and,
o Include the omitted information, if practicable

DISCLAIMER OF OPINION
Opinion
• Use the heading “Disclaimer of Opinion”
• The auditor does not express an opinion on the financial statements
• Because of the significance of the matter described in the Basis for Disclaimer of Opinion
section, the auditor has not been able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements; and,
• Amend the opening statement: “auditor has audited the financial statements” to “the
auditor was engaged to audit the financial statements”
Basis for Opinion
• Use the heading: Basis for Disclaimer of Opinion
• Explain the reason for the inability to obtain sufficient appropriate audit evidence
• Omit the elements in the Basis for Opinion section that: make reference to the auditor’s
responsibility; and, states that the audit evidence obtained is sufficient and appropriate
to provide a basis for the auditor’s opinion
Auditor’s Responsibility
 • The Auditor’s responsibility is to conduct an audit of financial statements in accordance
with PSA and to issue an auditor’s report
• Because the matter described in the Basis for Disclaimer of Opinion section, the auditor
was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on the financial statements; and, the auditor is independent of the entity and the
auditor has fulfilled his ethical responsibilities

PIECEMEAL OPINION – not allowed by PSA

Going concern

Going concern Assumption is Appropriate and No Material Uncertainty Exists – Unmodified

Opinion with a separate section with a heading “Going Concern”

Going concern appropriate—Material uncertainty exists

If with adequate disclosure: Unmodified Opinion with separate section “Material Uncertainty
Related to Going Concern” that:
1. Draws the readers’ attention to the note in the financial statements that discloses the
matter; and,
2. States that these events or conditions indicate the existence of material uncertainty that
may cast significant doubt about the entity’s ability to continue as a going concern and
that the auditor’s opinion is not modified in respect of this matter.
If not adequately disclosed, express either qualified or adverse opinion

Going Concern Assumption Inappropriate

Use alternative basis – PFRS 5 – unmodified opinion
If the entity insists on using the going concern basis of accounting – adverse opinion

Multiple Uncertainties affecting the financial statements – Disclaimer of Opinion

KEY AUDIT MATTERS

Intended to assist the readers in understanding those matters that were of most significance in
the audit of the financial statements of the current period.

Identifying Key Audit Matters

Step 1 Categorize the matters that were communicated with those charged with governance
Step 2 Determine which of these matters required significant auditor’s attention
Step 3 Which of these matters that required significant attention are the most significance to
the audit of the current period
Manners of Communicating and Documenting Key Audit Matters
1. What the matters was considered to be most significant; and,
2. How the matters were addressed in the audit

NOTE: Auditor’s report should not include key audit matters when the auditor disclaims an
opinion on the financial statements

EMPHASIS OF MATTER – included in the audit report to draw the readers’ attention to a matter
presented or disclosed in the financial statements
• Significant Uncertainties
o If properly accounted for and disclosed – add EOM
o If not – Qualified/Adverse Opinion
• Early application of new accounting standard
o Add EOM if entity applied early the new accounting standard
• Major catastrophe
o If properly accounted for and disclosed – add EOM
o If not – Qualified/Adverse Opinion
• Subsequent discovery of facts that affect the auditor’s opinion – amendment of an
already issued audited financial statement
o Add EOM if new Audit Report is issued
• Financial statements prepared using a special purpose framework
o Add EOM if Audit Report on FS prepared based on special purpose framework

Emphasis of Matter vs. Key Audit Matters

Present prominently: KAM first before EOM;
Include additional description that indicates the importance of the matter to readers’
understanding of the financial statements.

OTHER MATTER – auditor considers it necessary to communicate a matter that is not presented
or disclosed in the financial statements but, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report
• Reporting on comparative information
o Comparative Financial Statements
▪ Prior period financial statements were audited by a continuing auditor
• Continuing auditor’s report – update the report on previous FS by: re-
expressing opinion originally issued; or, expressing opinion different
from the one originally issued
• If the latter was considered, add Other Matter paragraph stating:
different opinion from previous; date of prior year’s report; type of
 opinion previously issued; and, reason for changing the auditor’s
opinion.
▪ Prior period financial statements were audited by another auditor
• If predecessor auditor reissues the audit report on the prior period fs
– original report and date
• If predecessor auditor does not want to reissue the audit report on the
prior period fs – add Other matter: fact that prior period FS were
audited by another auditor; date of predecessor auditor’s report; type
of opinion issued and if the opinion is modified, the reasons therefore.
▪ Prior period financial statements not audited
• Add OM that prior period fs is UNAUDITED
• If contains material misstatements – request management to revise –
if not, issue qualified/adverse on the impact of current year fs
o Reporting on Corresponding Figures – amounts and other disclosures for the
preceding period are included as part of the current period fs
▪ Add OM if corresponding figures reported resulted in different audit opinion
• Financial statements prepared using more than one financial frameworks
o Add OM: the fact that another set of financial statements have been prepared and
same auditor issued respective audit report
• Limiting the use of the Auditor’s Report
o Other information accompanying Audited Financial Statements
• Material misstatement of fact

SYSTEM OF QUALITY CONTROL

Policies and procedures adopted by CPAs to provide reasonable assurance of conforming with
professional standards in performing audit and related services.

A firm has an obligation to establish a system of quality control designed to provide it with
reasonable assurance that the firm and its personnel comply with professional standards and
regulatory and legal requirements, and that the report issued by the firm are appropriate in the
circumstances. (PSQC 1)

Elements of a System of Quality Control

• Leadership responsibilities for Quality on Audits – engagement partner should take
responsibility for the overall quality on each audit engagement to which the partner is
assigned; set example by emphasizing through actions and messages the importance of
performing work that complies with professional standards, complying with firm’s quality
control policies and procedures, and issuing appropriate audit reports.
 • Ethical Requirements – Integrity, Objectivity, Professional Competence and Due Care,
Confidentiality, and Professional behavior. The engagement partner should consider
whether members of the engagement team have complied with those ethical principles.
• Independence – members of the engagement team, the firm, and where applicable, the
network firms maintains independence when providing assurance services.
o Acceptance and Continuance of Client Relationships (na naman!) – for the
acceptance and continuance of client relationships and specific engagements,
design to provide it with reasonable assurance that it will only undertake or
continue relationships and engagement where it:
▪ Has considered the integrity of the client;
▪ Is competent to perform the engagement and has the capabilities, time and
resources to do so; and,
▪ Can comply with ethical requirements.
• Human Resources and Assignment – it has sufficient personnel with the capabilities,
competence, and commitment to ethical principles necessary to perform the
engagement. Such policies and procedures should address issues concerning personnel:
recruitment; performance evaluation, compensation, and promotion; capabilities and
competence; career development; and assignment of engagement teams.
• Engagement Performance – engagements are performed in accordance with professional
standards and other regulatory and legal requirements; and, that the audit report issued
is appropriate in the circumstances.
o Direction – assistants should be informed on their responsibilities, the nature of
the entity’s business, potential problems that may arise and the detailed approach
to the performance of the engagement.
o Supervision – involves monitoring the progress of the audit, resolving accounting
and audit issues, and considering the level of consultation appropriate for
engagement.
o Review – work performed by assistants should be reviewed to consider whether
the audit procedures, evidence and documentation are appropriate to support the
conclusions reached.
o Consultation – encourage firm personnel to seek assistance from authoritative
sources either within or outside the firm.
o Engagement Quality Control Review
o Difference of Opinion
• Monitoring – systems of quality control are relevant, adequate and operating effectively.

QUALITY CONTROL REVIEW

The BOA has required all CPA firms and individual CPAs in Public Practice to obtain certificate of
accreditation to practice public accountancy valid for three (3) years and can be renewed after
complying with requirements of the BOA.
The BOA requires individual CPAs and CPA firms to undergo a quality control review through
Quality Review Committee (QRC).

AUDITING IN A COMPUTERIZED ENVIRONMENT (Test of Control continuation)

Characteristics of Computer Information Systems (CIS)
• Lack of visible transaction trails
• Consistency of performance
• Ease of access to data and computer programs
• Concentration of duties
• Systems generated transactions
• Vulnerability of data and program storage media

Internal Control in a CIS Environment

GENERAL CONTROLS
2. Organizational Controls
a. Segregation between the CIS department and user departments
b. Segregation of duties within the CIS department
3. Systems development and documentation controls – software development as well as
changes thereof must be approved by appropriate level of management and the user
department
4. Access controls – adequate security controls to protect equipment, files and programs
5. Data recovery controls – provides for the maintenance of back-up files and off-site
storage
6. Monitoring controls – designed to ensure that CIS controls are working effectively as
planned
APPLICATION CONTROLS
2. Controls over input – examples include:
a. Key verification
b. Field check
c. Validity check
d. Self-checking digit
e. Limit check
f. Control totals
3. Controls over processing – designed to provide reasonable assurance that input data are
processed accurately, and that data are not lost, added, excluded, duplicated or
improperly changed
4. Controls over output – designed to provide reasonable assurance that the results of
processing are complete, accurate and that these outputs are distributed only to
authorized personnel
Test of Control in a CIS Environment
1. Audit around computer – auditor ignores the client’s data processing procedures,
focusing solely on the input documents and the CIS output (black box approach)
2. Use Computer-Assisted Audit Techniques – auditor will have to audit directly the client’s
computer program (white box approach)
a. Test data – determine whether the client’s computer programs can correctly
handle valid and invalid conditions as they arise
b. Integrated test facility – integrates the processing of test data with the actual
processing of ordinary transactions without management being aware of the
testing process
c. Parallel simulation – requires the auditor to write a program that simulates the key
features or processes of the program under review

Other CAATs
1. Snapshots
2. Systems control audit review files (SCARF)

ASSURANCE ENGAGEMENTS
Audit, Review, Attestation and Other Assurance Engagements

Elements of Assurance Engagements

• A three-party relationship – professional accountant, party responsible, and intended
users
• An appropriate subject matter – data; systems and processes; behavior; and physical
characteristics. To be considered appropriate, the subject matter of an assurance
engagement must be identifiable, capable of consistent evaluation and measurement
against suitable criteria, and in form that can be subjected to procedures for gathering
evidence to support that evaluation or measurement. Assertions-based engagements or
direct-reporting engagements.
• Suitable criteria – standards or benchmarks used to evaluate or measure the subject
matter of an assurance engagement.
• Sufficient appropriate evidence – plan and perform the engagement to obtain sufficient
appropriate evidence
• A written assurance report

Non-assurance engagements
• Agreed-upon procedures
• Compilation of financial or other information
• Preparation of tax returns when no conclusions is expressed, and tax consulting
• Management consulting
 • Other advisory services

Common Engagements in connection with the entity’s financial statements

AUDIT – express opinion on the entity’s financial statements – high level of assurance
(reasonable assurance) – positive assurance

REVIEW – enable the auditor to state whether, on the basis of procedures, anything has come
to the auditor’s attention that causes the auditor to believe that the financial statements are
not prepared, in all material respects, in accordance with an identified financial reporting
framework. Level of assurance: moderate level of assurance or negative assurance. Procedures
to be performed: inquiry and analytical procedures. Output: Review Report. Modification of
Review Report: Material misstatements – qualification of negative assurance or adverse
statement; Scope limitation – qualification of negative assurance or not provide any assurance.

COMPILATION – professional accountants assist them in the preparation and presentation of

their financial statements – use accounting expertise. Level of assurance: no assurance.
Procedures to be performed: From Trial Balance to Complete set of Financial Statements.
Withdrawal of engagement: if management supplies incorrect, incomplete, or unsatisfactory—
verify and inquire; otherwise withdraw. OR there are misstatements and management refuse
to make amendments.

AGREED-UPON PROCEDURES – carry out procedures of an audit nature to which the auditor and
the entity and any appropriate third parties have agreed and to report on factual findings. Level
of assurance: no assurance. Restrictions on the distribution of the report. Clear terms of
engagement. Procedures and Evidence: Any audit procedures.

Thank you.

- Sir Bats

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