Beruflich Dokumente
Kultur Dokumente
Theory
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement
Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under
the AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.
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The Philippine Code of Ethics for Professional Accountants; and
Philippine Standards on Quality Control (PSQCs)
ASSURANCE ENGAGEMENTS
1. “Assurance engagement” means an agreement in which a particular expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a subject matter
against criteria.
2. “Subject matter information” refers to the outcome of the evaluation or measurement of a
subject matter.
3. In some assurance engagements, the evaluation or measurement of the subject I performed
by the responsible party, and the subject matter information is in the form of an assertion
by the responsible party that is made available to intended users (assertion-based
engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party
that has performed the evaluation or measurement that is not available to the intended
users in the assurance report (direct reporting engagements)
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OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
1. The OBJECTIVE of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.
2. The auditor should comply with relevant ethical requirements relating to audit
engagements.
3. The auditor should conduct the audit in accordance with PSAs.
4. “Scope of an audit” refers to the audit procedures that, in the auditor’s judgment and based
on PSAs, are deemed appropriate in the circumstances to achieve the objective of the audit.
5. The auditor should plan and perform an audit with an attitude of PROFESSIONAL
SKEPTICISM recognizing that circumstances may exist that cause the financial statements to
be materially misstated.
6. In forming the audit opinion, the auditor obtains sufficient appropriate evidence to be able
to draw conclusions on which to base that opinion.
7. The auditor’s opinion enhances the credibility of financial statements by providing a high,
but not absolute, level of assurance.
8. Absolute assurance in auditing is not attainable as a result of such factors as:
The need for judgment;
The use of testing;
The inherent limitations of any accounting and internal control systems; and
The fact that most of the evidence available to the auditor is persuasive, rather than
conclusive, in nature.
9. While the auditor is responsible for forming and expressing an opinion on the financial
statements, the responsibility for the preparation and presentation of the financial
statements in accordance with the applicable financial reporting framework is that of the
entity’s MANAGEMENT, with oversight from those charged with governance.
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ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION
1. In a compilation engagement, the accountant is engaged to use accounting expertise as
opposed to auditing expertise to collect, classify, and summarized financial information.
2. It ordinarily entails reducing detailed data to manageable and understandable form without
a requirement to test the assertions underlying that information.
3. The procedures performed are not designed and do not enable the accountant to express
any assurance on the financial information.
4. Users of compiled financial information derived some benefit as a result of the accountant’s
involvement because the service has been performed with due professional skill and care.
SUMMARY
Nature of service Audit Review Agreed-upon Compilation
Procedures
Level of High, but not Moderate No assurance No assurance
Assurance absolute assurance
Provided assurance
Report provided Positive Negative Factual findings Identification of
assurance on assurance on of procedures information
assertion(s) assertion(s) compiled
(Audit Report) (Review Report) (Compilation
Report)
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSQC1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF
HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED
SERVICES
PSA 220 (REVISED)
QUALITY CONTROL FOR AUDITS OF HISTORICAL FINANCIAL INFORMATION
PSA 210 [AMENDED BY PSA 700(REVISED)]
TERMS OF AUDIT ENGAGEMENTS
PSQC 1
1. The firm should establish a System of Quality Control to provide it with reasonable assurance
that:
a. The firm and its personnel comply with professional standards and regulatory
and legal requirements; and
b. The reports issued by the firm or engagement partners are appropriate in the
circumstances.
2. Elements of a System of Quality Control
a. Leadership responsibility for quality within the firm
b. Ethical requirements
c. Acceptance and continuance of client relationships and specific engagements.
d. Human resources
e. Engagement performance
f. Monitoring
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f. Be satisfied that sufficient appropriate audit evidence has been obtained to
support the conclusions reached and for the auditor’s report to be issued.
It is in the interest of both client and auditor that the auditor sends an engagement
letter, preferably before the commencement of the engagement, to help in avoiding
misunderstandings with respect to the engagement.
Principal Contents
An engagement letter would generally include reference to:
The objective of the audit of financial statements.
Management’s responsibility for the financial statements.
The financial reporting framework adopted by management
in preparing the financial statements.
The scope of the audit, including reference to applicable
legislation, regulations or pronouncements of professional
bodies to which the auditor adheres.
The form of any reports or other communication of results
of the engagement.
The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent
limitations of any accounting and internal controls system,
there is an unavoidable risk that even some material
misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation
and other information requested in connection with the
audit.
3. Acceptance of a Change in Engagement
1. An auditor who, before the completion of the engagement, is requested to
change the engagement tone which provides a lower level of assurance, should
consider the appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result
from:
a. A change in circumstances affecting the need for the service;
b. A misunderstanding as to the nature of an audit or related service
originally requested; or
c. A restriction on the scope of the engagement, whether imposed by
management or caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for
requesting a change in the engagement)
3. A change would not be considered reasonable if it appeared that the change
relates to information that is incorrect, incomplete or otherwise unsatisfactory.
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4. Before agreeing to change an audit engagement to a related service, an auditor
would also consider any legal or contractual implications of the change.
5. If the auditor concludes that there is reasonable justification to change the
engagement and if the audit work performed complies with the PSAs applicable
to the change engagement, the report issued would be that appropriate for the
revised terms of the engagement.
6. In order to avoid confusing the reader, the report would not include reference
to:
a. The original engagement; or
b. Any procedures that may have been performed by the original
engagement, except where the engagement is changed to undertake
agreed-upon procedures.
7. Where the terms of the engagement are changed, the auditor and the client
should agree in the new terms.
8. The auditor should not agree to a change of engagement where there is no
reasonable justification for doing so.
9. If the auditor is unable to agree to a change of engagement and is not permitted
to continue the original engagement, the auditor should withdraw and consider
whether there is any obligation, contractual or otherwise, to report to other
parties, such as the board of directors or shareholders, the circumstances
necessitating the withdrawal.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
2. The auditor should perform the following activities at the beginning of the current audit
engagement:
Perform procedures regarding the continuance of the client relationship and the
specific audit engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.
Planning Activities
3. The auditor should establish the overall audit strategy for the audit. The overall audit strategy
sets the scope, timing and direction of the audit, and guides the development of the more
detailed audit plan
5. The auditor should develop an audit plan for the audit in order to reduce audit risk to an
acceptably low level.
6. The audit plan is more detailed than the overall audit strategy and includes the nature, timing
and extent of audit procedures to be performed by engagement team members in order to
obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
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“Understanding the Entity and its Environment and Assessing the Risks of Material
Misstatement.”;
A description of the nature, timing and extent of planned further audit procedures at the
assertion level for each material class of transactions, account balance, and disclosure, as
determined under PSA 330, “The Auditor’s Procedures in Response to Assessed Risks,”; and
Such other procedures required to be carried out for the engagement in order to comply
with PSAs
The overall audit strategy and the audit plan should be updated and changed as necessary during
the course of the audit.
1. The auditor should plan the nature, timing and extent of direction and supervision of
engagement team members and review their work.
2. The nature, timing and extent of the direction and supervision of engagement team members
and review of their work vary depending on many factors, including:
3. The auditor plans the nature, timing and extent of direction and supervision of engagement
team members based on the assessed risk of material misstatement.
Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.
1. The auditor may discuss elements of planning with those charged with governance and the
entity’s management.
2. Discussions with those charged with governance ordinarily include the overall audit strategy
and timing of the audit, including any limitations thereon, or any additional requirements.
3. When discussion of matters included in the overall audit strategy or audit plan occur, care is
required in order not to compromise the effectiveness of the audit.
The auditor should perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
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2. Communicate with the previous auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT
1. The auditor should obtain an understanding of the entity and its environment, including its
internal control, sufficient to identify and assess the risks of material misstatement of the
financial statements whether due to fraud or error, and sufficient to design and perform further
audit procedures.
2. The auditor should perform the following risk assessment procedures to obtain an
understanding of the entity and its environment, including its internal control:
a.) Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
b.) Nature of the entity, including the entity’s selection and application of accounting policies.
c.) Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
d.) Measurement and review of the entity’s financial performance.
e.) Internal control.
INTERNAL CONTROL
1. Internal control is the process designed and effected by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of
the entity’s objectives with regard to:
Reliability of financial reporting;
Effectiveness and efficiency of operations; and
Compliance with applicable laws and regulations.
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The control environment includes the governance and management functions and the
attitudes, awareness, and actions of those charged with governance and management
concerning the entity’s internal control and its importance in the entity.
The auditor should obtain an understanding of the entity’s risk assessment process, i.e., the
entity’ process for identifying business risks relevant to financial reporting objectives and
deciding about actions to address those risks, and the results thereof.
The auditor should obtain an understanding of the information system, including the related
business processes, relevant to financial reporting, including the following areas:
The classes of transactions in the entity’s operations that is significant to the financial
statements.
The procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed and reported in the financial statements.
How the information system captures events and conditions, other than classes of
transactions that are significant to the financial statements.
The financial reporting process used to prepare the entity’s financial statements,
including significant accounting estimates and disclosures.
Control activities are the policies and procedures to help ensure that management directives
are carried out. Examples of control activities include those relating to the following:
Authorization
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Monitoring of controls involves assessing the design and operation of controls on a timely basis
and taking the necessary corrective actions modified for changes in conditions.
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4. Obtaining an understanding of internal control involves:
1. The auditor should identify and assess the risks of material misstatement at the financial
statements level, and at the assertion level for classes of transactions, account balances, and
disclosures.
2. The auditor:
Identifies risks throughout the process of obtaining an understanding of the entity and
its environment, including relevant controls that relate to the risks, and by considering
the classes of transactions, account balances, and disclosures in the financial
statements;
Relates the identified risks to what can go wrong at the assertion level;
Considers whether the risks are of a magnitude that could result in a material
misstatement of the financial statements; and
Considers the likelihood that the risks could result in a material misstatement of the
financial statements.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 330
THE AUDITOR’S PROCEDURES IN REPONSE TO ASSESSED RISKS
Overall responses
1. The auditor should determine overall responses to address the risks of material
misstatement at the financial statement level. Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism
n gathering and evaluating audit evidence
Assigning more experienced staff or those with special skills or using experts
Providing more supervision
Incorporating additional elements of unpredictability in the selection of
further audit procedures to be performed
Making general changes to the nature, timing or extent of audit procedures
Timing refers to when audit procedures are performed or the period or date to which the
audit evidence applies.
TESTS OF CONTROLS
1. The auditor is required to perform tests of controls when:
a. The auditor’s risk assessment includes an expectation of the operating
effectiveness of controls; or
b. When the substantive procedures alone do not provide sufficient appropriate
audit evidence at the assertion level
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2. Tests of the operating effectiveness of controls are performed only on those controls
that the auditor has determined are suitably designed to prevent, or detect and correct,
a material misstatement in an assertion
3. Testing the operating effectiveness of controls includes obtaining evidence about:
a. How controls were applied at relevant times during the period under audit;
b. The consistency with which they were applied; and
c. By whom or by what means they were applied.
SUBSTANTIVE PROCEDURES
1. Substantive test procedures are performed in order to detect material misstatements at the
assertion level, and include:
Tests of details of classes of transactions, account balances, and disclosures;
and
Substantive analytical procedures
2. The auditor’s substantive procedures should include the following audit procedures related
to the financial statement closing process:
Agreeing or reconciling the financial statements with accounting records;
and
Examining material journal entries and other adjustments made during the
course of preparing the financial statements
3. The auditor should perform audit procedures to evaluate whether the overall presentation
of the financial statements, including the related disclosures, are in accordance with the
applicable financial reporting framework.
Documentation
1. The auditor should document:
The overall responses to address the assessed risks of material
misstatement at the financial statement level and the nature, timing, and
extent of the further audit procedures;
The linkage of those procedures with the assessed risks at the assertion
level; and
The results of the audit procedures
2. If the auditor plans to use audit evidence about the operating effectiveness of controls
obtained in prior audits, the auditor should document the conclusions reached with regard
to relying on vcfsuch controls that were tested in a prior audit.
3. The auditor’s documentation should demonstrate that the financial statements agree or
reconcile with the underlying accounting records.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 320
AUDIT MATERIALITY
1. Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements
2. There is an inverse relationship between materiality and the level of audit risk
3. In evaluating whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework, the auditor should assess
whether the aggregate of uncorrected misstatements that have been identified during the
audit is material.
4. If the auditor concludes that the aggregate of uncorrected misstatements may be material,
the auditor needs to consider:
Reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements for the
misstatements identified
5. If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should consider the appropriate modification to
the auditor’s report.
6. If the auditor has identified a material misstatement resulting from error, the auditor should
communicate the misstatements to the appropriate level of management on a timely basis,
and consider the need to report it to those charged with governance.
PSA 520
ANALYTICAL PROCEDURES
1. “Analytical procedures” means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other
relevant information or which deviate from predicted amounts.
2. Analytical procedures also include consideration of comparisons of the entity’s financial
statements:
a. Comparable information for prior periods
b. Anticipated results of the entity, such as budgets or forecasts, or expectations of
the auditor, such as an estimation of depreciation
c. Similar industry information
3. Analytical procedures also include consideration of relationships:
a. Among elements of financial information that would be expected to conform to
a predictable patter based on the entity’s experience, such as gross margin
percentages.
b. Between financial information and relevant no-financial information, such as
payroll costs to numbers and employees
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4. The auditor should apply analytical procedures at the planning stage to assist in
understanding the business and in identifying areas of potential risk. Analytical procedures
in planning the use both financial and non-financial information.
5. The auditor should apply analytical procedures at or near the end of the audit when
performing an overall conclusion as to whether the financial statements as a whole are
consistent with the auditor’s knowledge of the business.
6. The application of analytical procedures is based on the expectation that relationships
among data exist and continue in the absence of known conditions to the contrary. The
presence of these relationships provides audit evidence as to the completeness, accuracy
and validity of the data produced by the accounting system
7. The extent of reliance that the auditor places on the results of analytical procedures
depends on the following factors:
a. Materiality of the items involved
b. Other audit procedures directed toward the same audit objectives
c. Accuracy with which the expected results of analytical procedures can be
predicted.
8. When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should investigate and obtain adequate explanations and appropriate corroborative
evidence.
9. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by:
a. Corroboration of management responses; and
b. Consideration of the need to apply other audit procedures based on the results
of such inquiries, if management is unable to provide an explanation or if the
explanation is not considered adequate.
PSA 550
RELATED PARTIES
1. Management is responsible for the identification and disclosure of related parties and
transactions with such parties.
2. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and
the effect of related party transactions that are material to the financial statements.
However, an audit cannot be expected to detect all related party transactions.
3. The auditor needs to have a sufficient understanding of the entity and its environment to
enable identification of the events, transactions and practices that may result in a risk of
material misstatement regarding related parties and transactions with such parties.
4. When obtaining an understanding of the entity’s internal control, the auditor should
consider the adequacy of control activities over the authorization and recording of related
party transactions.
5. In examining the identified related party transactions, the auditor should obtain sufficient
appropriate audit evidence as to whether these transactions have been properly recorded
and disclosed.
6. The auditor should obtain a written representation from management concerning:
a. The completeness of information provided regarding the identification of
related parties; and
b. The adequacy of related party disclosures in the financial statements
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7. The auditor is unable to obtain sufficient appropriate audit evidence concerning related
parties and transactions with such parties or concludes that their disclosure in the financial
statements is not adequate; the auditor should modify the audit report appropriately.
PSA 610
CONSIDERING THE WORK OF INTERNAL AUDIT
1. The external auditor should obtain a sufficient understanding of internal audit activities to
identify and assess the risks of material misstatement of the financial statements and to
design and perform further audit procedures.
2. The external auditor should perform an assessment of the internal audit function when
internal auditing is relevant to the external auditor’s risk assessment.
3. When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the important criteria are:
a. Organizational status
b. Scope of the function
c. Technical competence
d. Due professional care
4. When planning to use the work of internal auditing, the external auditor will need to
consider internal auditing’s tentative plan for the period and discuss it as early a stage as
possible.
5. Where the work of internal auditing is to be a factor in determining the nature, timing and
extent of the external auditor’s procedures, it is desirable to agree in advance the timing of
such work, the extent of audit coverage, materiality levels and proposed methods of sample
selection, documentation of the work performed and review and reporting procedures.
6. A liaison with internal auditing is more effective when meetings are held at appropriate
intervals during the period.
7. When the external auditor intends to use specific work of internal auditing, the external
auditor should evaluate and perform audit procedures on that work to confirm its adequacy
for the external auditor’s purposes.
8. The evaluation of specific work of internal auditing involves consideration of the adequacy of
the scope of the work and related programs and whether the preliminary assessment of the
internal auditing remains appropriate.
9. The nature, timing and extent of audit procedures performed on the specific work of
internal auditing will depend on:
The external auditor’s judgment as to the risk of material misstatement of
the area concerned;
The assessment of internal auditing; and
The evaluation of the specific work by internal auditing.
10. The external auditor would record conclusions regarding the specific internal auditing work
that has been evaluated and the audit procedures performed on the internal auditor’s work.
PSA 620
USING THE WORK OF AN EXPERT
1. “Expert’ means a person or firm possessing special skill, knowledge and experience in a
particular filed other than accounting and auditing.
2. An expert may be:
a. Contracted by the entity;
b. Contracted by the auditor;
c. Employed by the entity; or
d. Employed by the auditor.
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3. When determining the need to use the work of an expert, the auditor would consider:
a. The materiality of the financial statement item being considered;
b. The risk of misstatement based on the nature and complexity of the matter
being considered; and
c. The quantity and quality of other audit evidence available
4. When planning t use the work of an expert, the auditor should evaluate the professional
competence and objectivity of the expert.
5. The risk that an expert’s objectivity will be impaired increases when the expert is:
a. Employed by the entity; or
b. Related in some other manner to the entity.
6. The auditor should obtain sufficient appropriate audit evidence that the scope of the
expert’s work is adequate for the purposes of the audit. Audit evidence may be obtained
through a review of the terms of reference which are often set out in written instructions
from the entity to the expert.
Such instructions to the expert may cover matters such as:
a. The objectives and scope of the expert’s work
b. A general outline as to the specific matters the auditor expects the expert’s
report to cover
c. The intended use by the auditor of the expert’s work, including the possible
communication to third parties of the expert’s identity and extent f involvement
d. The extent of the expert’s access to appropriate records and files
e. Clarification of the expert’s relationship with the entity, if any.
f. Confidentiality of the entity’s information
g. Information regarding the assumptions and methods intended to be used by the
expert and their consistency with those used in prior periods.
7. The auditor should evaluate the appropriateness of the expert’s work as audit evidence
regarding the financial statement assertion being considered. This will involve assessment of
whether the substance of the expert’s findings is properly reflected in the financial
statements or supports the financial statement assertions, and consideration of:
a. Source data used.
b. Assumptions and methods used and their consistency with prior periods
c. Results of the expert’s work in the light of the auditor’s overall knowledge of the
business and of the results of other audit procedures.
8. When considering whether the expert has used source data which is appropriate in the
circumstances, the auditor would consider the following procedures:
a. Making inquiries regarding any procedures undertaken by the expert to
establish whether the source data is sufficient, relevant and reliable.
b. Reviewing or testing the data used by the expert
9. If the results of the expert’s work do not provide sufficient audit evidence or if the results
are not consistent with other audit evidence, the auditor should resolve the matter. This
may involve:
a. Discussions with the entity and the expert
b. Applying additional audit procedures
c. Including possibly engaging another expert; or
d. Modifying the auditor’s report
10. When issuing an unmodified auditor’s report, the auditor should not refer to the work of an
expert. Such a reference might be misunderstood to be a qualification of the auditor’s
opinion or a division of responsibility, neither of which is intended.
11. If as a result of the work of an expert, the auditor decides to issue a modified auditor’s
report, in some circumstances it may be appropriate, in explaining the nature of the
modification, to refer to or describe the work o the expert (including the identity of the
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expert and the extent of the expert’s involvement). In these circumstances, the auditor
would obtain the permission of the expert before making such a reference. If permission is
refused and the auditor believes a reference is necessary, the auditor may need to seek legal
advice.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 500(REVISED)
AUDIT EVIDENCE
1. The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion
2. “Audit Evidence” is all the information used by the auditor in arriving at the conclusions on
which the opinion is based, and includes the information contained in the accounting
records underlying the financial statements and other information
3. Accounting records generally include:
The records of initial entries and supporting records, such as checks and
records of electronic fund transfers;
Invoices
Contracts
The general and subsidiary ledgers, journal entries and other adjustments to
the financial statements that are not reflected in formal journal entries; and
Records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures
4. Other information that the auditor may use as audit evidence includes:
Minutes of the meetings
Confirmations from third parties
Analysts’ reports
Comparable data about competitors (benchmarking)
Control manuals
Information obtained by auditors from such audit procedures as inquiry,
observation, and inspection; and
Other information developed by, or available to, the auditor that permits
the auditor to reach conclusions through valid reasoning
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c. Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly
or by inference (for example, the inquiry about the application of control)
d. Audit evidence is more reliable when it exists in a documentary form, whether
paper, electronic, or other medium (for example, contemporaneously written
record of a meeting is more reliable than a subsequent oral representation of
the matters discussed)
e. Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles
4. An audit rarely involves the authentication of documentation, nor is the auditor trained as or
expected to be an expert in such authentication
5. When information produced by the entity is used by the auditor to perform audit
procedures, the auditor should obtain audit evidence about the accuracy and completeness
of the information
6. In forming an audit opinion, the auditor does not examine all the information available
because conclusions ordinarily can be reached by using sampling approaches and other
means of selecting items for testing.
CATEGORIES OF ASSERTIONS
a. Assertions about classes of transactions and events for the period under audit:
1. OCCURRENCE - transactions and events that have been recorded have
occurred and pertain to the entity
2. COMPLETENESS - all transactions and events that should have been recorded
have been recorded.
3. ACCURACY - amounts and other data relating to recorded transactions
and events have been recorded appropriately
4. CUTOFF - transactions and events have been recorded in the correct
accounting period
5. CLASSIFICATION - transactions and events have been recorded in the proper
accounts
b. Assertions about account balances at the period end:
1. EXISTENCE -assets, liabilities, and equity interests exist
2. RIGHTS AND OBLIGATIONS - the entity holds or controls the right to
assets, and liabilities are obligations of the entity
3. COMPLETENESS - all assets, liabilities, and equity interests
that should have been recorded have been recorded
4. VALUATION AND ALLOCATION - assets, liabilities and equity interests are
included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded
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c. Assertions about presentation and disclosure:
1. OCCURRENCE AND RIGHTS AND OBLIGATIONS
Disclosed events, transactions, and other matters have occurred and
pertain to the entity
2. COMPLETENESS
All disclosures that should have been included in the financial
statements have been included
3. CLASSIFICATION AND UNDERSTANDABILITY
Financial information is appropriately presented and described and
disclosures are clearly expressed
4. ACCURACY AND VALUATION
Financial and other information are disclosed fairly and at
appropriate amounts
3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include analytical review
procedures and tests of details
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investigation of identified fluctuations and relationships that are inconsistent with
other relevant information or deviate significantly from predicted amounts.
PSA 501
AUDIT EVIDENCE – ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
1. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable.
2. If unable to attend the physical inventory count on the date panned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an alternative date
and, when necessary, perform tests of intervening transactions.
3. Where attendance is impracticable, due to factors such as the nature and location of the
inventory, the auditor should consider whether alternative procedures provide sufficient
appropriate audit evidence of existence and condition to conclude that the auditor need not
make reference to a scope limitation.
4. In planning attendance at the physical inventory count or the alternative procedures, the
auditor would consider:
The nature of the accounting and internal control systems used regarding inventory.
Inherent, control, and detection risks, and materiality related to inventory.
Whether adequate procedures are expected to be established and proper instructions
issued for physical inventory counting.
The timing of the count.
The locations at which inventory is held.
Whether an expert’s assistance is needed.
6. To obtain assurance that management’s procedures are adequately implemented the auditor
would observe employee’s procedures and perform test counts.
7. The auditor would also consider cutoff procedures including details of the movement of
inventory just prior to, during, and after the count so that the accounting for such movements
can be checked at a later date.
8. The auditor would test the final inventory listing to assess whether it accurately reflects actual
inventory counts.
24
9. When inventory is under the custody and control of a third party, the auditor would ordinarily
obtain direct conformation from the third party as to the quantities and condition of inventory
held on behalf of the entity. Depending on the materiality of this inventory, the auditor would
consider:
The integrity and independence of the third party.
Observing, or arranging for another auditor to observe, the physical inventory count.
Obtaining another auditor’s report on the adequacy of third party’s accounting and
internal control systems for ensuring that inventory is correctly counted and adequately
safeguarded.
Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts, or obtaining confirmation from other parties when such inventory has
been pledged as collateral.
1. The auditor should carry out procedures in order to become aware of any litigation and claims
involving the entity, which may have a material effect on the financial statements.
2. When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should seek direct communication with the entity’s lawyers.
3. The letter, which should be prepared by management and sent by the auditor, should request
the lawyer to communicate directly with the auditor. When it is considered unlikely that the
lawyer will respond to a general inquiry, the letter would ordinarily specify:
A list of litigation and claims.
Management’s assessment of the outcome of the litigation or claim and its estimate of the
financial implications, including costs involved.
A request that the lawyer confirms the reasonableness of management’s assessments and
provides the auditor with further information if the list is considered by the lawyer to be
incomplete or incorrect.
4. The auditor considers the status of legal matters up to date of the audit report.
5. If management refuses to give the auditor permission to communicate with the entity’s
lawyers, this would be a scope limitation and should ordinarily lead to a qualified opinion or a
disclaimer of opinion.
25
Valuation and disclosure of long-term investments
1. When long-term investments are material to the financial statements, the auditor should
obtain sufficient appropriate audit evidence regarding their valuation and disclosure.
2. Audit procedures ordinarily include considering evidence as to whether the entity has the
ability to continue to hold the investments on a long-term basis and discussing with
management whether the entity will continue to hold the investments as long-term
investments and obtaining written representations to that effect.
3. Other procedures would ordinarily include considering related financial statements and other
information, such as market quotations, which provide an indication of value and comparing
such values to the carrying amount of the investments up to the date of the auditor’s report.
Segment information
1. When segment information is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its disclosure in accordance with the applicable
financial reporting framework.
2. The auditor considers segment information in relation to the financial statements taken as a
whole, and is not ordinarily required to apply auditing procedures that would be necessary to
express an opinion on the segment information standing alone.
4. The auditor would discuss with management the methods used in determining segment
information, and consider whether such methods are likely to result in disclosure in
accordance with GAAP and test the application of such methods.
PSA 505
EXTERNAL CONFIRMATIONS
1. External confirmation is the process of obtaining and evaluating audit evidence through a
direct communication from a third party in response to a request for information about a
particular item affecting assertions made by management in the financial statements.
2. A positive external confirmation request asks the respondent to reply to the auditor in all
cases either by indicating the respondent’s agreement with the given information, or by asking
the respondent to fill in the information.
3. A negative external confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request.
4. Negative confirmation requests may be used to reduce the risk of material misstatement to an
acceptable level when:
The assessed risk of material misstatement is lower.
A large number of small balances are involved.
A substantial number of errors are not expected.
The auditor has no reason to believe that respondents will disregard these requests.
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5. When performing confirmation procedures, the auditor should maintain control over the
process of selecting those to whom a request will be sent, the preparation and sending of
confirmation requests, and the responses to those requests.
6. The auditor should perform alternative procedures where no response is received to a positive
external confirmation request. The alternative audit procedures should be such as to provide
the evidence the evidence about the financial statement assertions that the confirmation
request was intended to provide.
7. When the auditor forms a conclusion that the confirmation process and alternative
procedures have not provided sufficient appropriate audit evidence regarding an assertion,
the auditor should undertake additional procedures to obtain sufficient audit evidence.
8. The auditor should evaluate whether the results of the external confirmation process together
with the results from any other procedures performed, provide sufficient appropriate audit
evidence regarding the assertion being audited.
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who reviewed the audit work performed and the date and extent of such review
28
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
FRAUD refers to an intentional act by one party 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
Fraud involves:
Incentive or pressure to commit fraud
A perceived opportunity to act or to do so
Some rationalization of the act
Management fraud - fraud involving one or more members of management or those charged
with governance
Employee fraud - fraud involving only employees of the entity
(In either case, there may be collusion within the entity or with third parties outside of the
entity)
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intentional misapplication of accounting principles relating to
amounts, classifications, manner of presentation, or disclosure
2. MISAPPROPRIATION OF ASSETS
Involves the theft of an entity’s assets and is often perpetrated by employees in
relatively small and immaterial amounts
Can also involve management who are usually more able to disguise or conceal
misappropriations in ways that are difficult to detect
Often accompanied by false or misleading records or documents in order to conceal
the fact that the aspects are missing or have been pledged without proper
authorization
Can be accompanied in a variety of ways including:
o Embezzling receipts
o Stealing physical assets or intellectual property
o Causing an entity to pay for the goods and services not received
o Using an entity’s assets for personal use
Responsibilities of Those charged with Governance and of Management
1. The primary responsibility for the prevention and detection of fraud rests with both those
charged with governance of the entity and with management
2. It is important management, with the oversight of those charged with governance, place a
strong emphasis on fraud prevention, which may reduce opportunities for fraud to take
place, and fraud deterrence, which could persuade in individuals not to commit fraud
because of the likelihood detection and punishment
3. It is the responsibility of those charged with governance of the entity to ensure , through
oversight of management, that the entity establishes and maintains internal control to
provide reasonable assurance with regard to reliability of financial reporting, effectiveness
and efficiency of operations and compliance with applicable law and regulations
4. It is the responsibility of management, with oversight from those charged with governance,
to establish a control environment and maintain policies and procedures to assist in
achieving the objective ensuring, as far as possible, the orderly and efficient conduct of the
entity’s business
3. The risk of the auditor not detecting a material misstatement resulting from management
fraud is greater than for employee fraud, because management is frequently in a position to
directly or indirectly manipulate accounting records and present fraudulent financial
information
4. The subsequent discovery of a material misstatement of the financial statements resulting
from fraud does not, in and of itself, indicate a failure to comply with PSAs
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1. An auditor conducting an audit in accordance with PSAs obtains reasonable assurance that
the financial statements taken as a whole are free from material misstatement, whether
caused by fraud or error
2. An auditor cannot obtain absolute assurance that material misstatements in the financial
statement will be detected because of such factors as of the following:
use of judgment
use of testing
inherent limitations of internal control
the fact that much of the audit evidence available to the auditor is
persuasive rather than conclusive in nature
3. The auditor should maintain an attitude of professional skepticism throughput the audit,
recognizing the possibility that a material misstatement due to fraud could exist,
notwithstanding the auditor’s past experience with the entity about the honesty and
integrity of management and those charged with governance
4. Members of the engagement team should discuss the susceptibility of the entity’s financial
statements to material misstatement due to fraud
5. Risk assessment procedures
The auditor should perform risk assessment procedures to obtain an understanding
of the entity and its environment, including its internal control. As part of this work,
the auditor performs the following procedures to obtain information that is used to
identify the risks of material misstatements due to fraud:
1. Makes inquiries of management, of those charged with governance, and of
others within the entity as appropriate and obtains an understanding of how
those charged with governance exercise oversight of management’s processes
for identifying and responding to the risks of fraud and he internal control that
management has established to mitigate these risks
2. Considers whether one or more fraud risk factors are present
3. Considers any unusual or unexpected relationships that have been identified in
performing analytical procedures
4. Considers other information that may be helpful in identifying the risks of
material misstatement due to fraud.
Responses to the risks of material misstatement due to fraud
1. The auditor should determine overall responses to address he assessed risks of material
misstatement due to fraud at the financial statement level and should design and perform
further audit procedures whose nature, timing and extent are responsive to the assessed
risks at the assertion level
2. In determining overall responses to address the risks of material misstatement due to fraud
at the financial statement level the auditor should:
Consider the assignment and supervision of personnel
Consider the accounting policies used by the entity; and
Incorporate an element of unpredictability in the selection of the nature,
timing and extent of audit procedures
3. Audit procedures responsive to risks of material misstatement due to fraud at the assertion
level
The auditor’s responses may include changing the nature, timing, and extent of audit
procedures in the following ways:
a. The nature of audit procedures to be performed may need to be changed to obtain
audit evidence that is more reliable and relevant to obtain additional corroborative
information
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b. The timing of substantive procedures may need to be modified. The auditor may
conclude that performing substantive testing at or near the period end better
addresses an assessed risk of material misstatement due to fraud
c. The extent of the procedures applied reflects the assessment of the risks of material
misstatement due to fraud. For example, increasing sample sizes or performing
analytical procedures at a more detailed level may be appropriate
4. To respond to the risk of management override of controls, the auditor should design and
perform audit procedures to:
a. Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in the preparation of the financial statements
b. Review accounting estimates for biases that could result to material misstatement
due to fraud
c. Obtain an understanding of the business rationale of significant transactions that the
auditor become aware of that are outside the normal course of the business for the
entity, or that otherwise appear to be unusual given the auditor’s understanding of
the entity and its environment
Management representations
The auditor should obtain written representations from management that:
a. It acknowledges its responsibility for the design and implementation of internal control to
prevent and detect fraud
b. It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud
c. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity
involving:
i. Management
ii. Employees who have significant roles in internal control
iii. Others where the fraud could have a material effect on the financial
statements and
d. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected
fraud, affecting the entity’s financial statements communicated by the employees,
former employees, analysts, regulators or others
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2. If the auditor has identified fraud involving management, employers who have significant
roles in internal control, or others where the fraud results in a material misstatement in the
financial statements, the auditor considers seeking legal advice to assist in the
determination of the appropriate course of action
3. If the integrity or honesty of management or those charged with governance is doubted, the
auditor considers seeking legal advice to assist in the determination of the appropriate
course of action
4. The auditor should make those charged with governance and management aware, as soon
as practicable, and at the appropriate level of responsibility, of material weaknesses in the
design or implementation of internal control to prevent and detect fraud which may have
come to the auditor’s attention
5. The auditor’s professional duty to maintain the confidentiality of client information may
preclude reporting fraud to a party outside the client the entity. However, the duty of
confidentiality may be overridden by regulatory requirements
Documentation
1. The documentation of the auditor’s understanding of the entity and its environment and the
auditor’s assessment of the risks of material misstatement should include:
a. The significant decisions reached during the discussion among the engagement
team regarding the susceptibility of the entity’s financial statements to material
misstatement due to fraud
b. The identified and assessed risks of material misstatement due to fraud at the
financial statement level and at the assertion level
2. The documentation of the auditor’s responses to the assessed risks of material
misstatement should include:
a. The overall responses to the assessed risks of material misstatement due to
fraud at the financial statement level and the nature, timing and extent of audit
procedure, and the linkage of those procedures with the assessed risks of
material misstatement due to fraud at the assertion level
b. The results of the audit procedures, including those designed to address the risk
of management override of controls
3. The auditor should document the communications about fraud made to management, those
charged with governance, regulators and others
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4. When the auditor has concluded that the presumption that there is a risk of material
misstatement due to fraud related to revenue recognition is not applicable in the
circumstances of the engagement, the auditor should document the reasons for that
conclusion
PSA 250
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
1. “Noncompliance” as used in PSA 250 refers to acts of omission or commission by he entity
being audited, either intentional and unintentional, which are contrary to the prevailing laws
and regulations
2. Noncompliance does not include personal misconduct (unrelated to the business activities of
the entity) by the entity’s management or employees
3. When planning and performing audit procedures and in evaluating and reporting the results
thereof, the auditor should recognize that noncompliance by the entity with laws and
regulation may materially affect the financial statements
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should not accept the appointment. If permission from the client to discuss its
affairs with the proposed auditor of denied by the client, the fact should be
disclosed to the propose auditor
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDIT SAMPLING
1. “Audit Sampling” involves the application of audit procedures to less than 100% of items
with an account balance or class of transactions
2. Sampling may be statistical or nonstatistical.
I. Statistical sampling means any approach t sampling that has the following
characteristics:
a. Random selection of a sample
b. Use of probability theory to evaluate sample results
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II. Nonstatistical sampling is a sampling approach that does not have
characteristics (a) and (b).
Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application.
In aids an auditor I forming conclusions about one r more characteristics or either a particular class
of transactions or a particular account balances
1. ATTRIBUTE SAMPLING
Applicable to tests of control
Used to test an entity’s rate of deviation (also called rate of occurrence) from a
prescribed control procedure
2. VARIABLES SAMPLING
Applicable to substantive test
Most commonly used to test whether recorded account balances are fairly stated
SAMPLING RISK
1. It arises from the possibility that the auditor’s conclusion, based on a sample may be
different from the conclusion reached if the entire population were subjected to the same
audit procedures
2. The confidence level (also called reliability level) is the mathematical complement of the
applicable sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level
when developing the sampling design
4. For tests of control, it has the following aspects:
a. Risk of assessing control risk too low (Risk of Overreliance)
The risk that the auditor would conclude that the control risk is
lower than it actually is
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of assessing control risk too high (Risk of under reliance)
The risk that the auditor would conclude that control risk is higher
than actually is
It affects audit efficiency as it would lead to additional work to
establish that initial conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
The risk that the auditor would conclude that a material error exists
when in fact it does
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of incorrect rejection
The risk that the auditor would conclude that a material error exists
when in fact it does not
It affects audit effectiveness as it would lead to additional work to
establish that initial conclusions were incorrect
NONSAMPLING RISK
It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not
related to the size of the sample. For example, most audit evidence is persuasive rather than
conclusive, the auditor might use inappropriate procedures, or the auditor might misinterpret
evidence and fail to recognize an error.
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5 STEPS IN ATTRIBUTE SAMPLING PLAN
1. Define the objectives of the plan
2. Define the population
For example, if an auditor’s objective is to test controls designed to
assure that all shipped goods are invoiced, the population would be
defined as all sipping documents issued during the period not all sales
invoices
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It is appropriate for both statistical and nonstatistical sampling
b. Systematic selection
The number of sampling units in the population is divided by the sample size to give
a sample interval, for example 50, and having determined the starting point within
the first 50, each 50th sampling unit is hereafter selected
Although the starting point may be determined haphazardly, the sample is more
likely to be truly random if it is determined by use of a computerized random
number generator or random number tables
When using systematic selection, the auditor would need to determine that
sampling interval corresponds with a particular pattern in the population
d. Haphazard selection
The auditor selects a sample without following a structured technique
It is not appropriate when using statistical sampling
e. Stratification
This involves subdividing the population into subpopulations or strata, i.e., a group
of sampling units which have similar characteristics (often monetary value)
The strata must be explicitly defined so that each sampling unit can belong to only
one stratum
This method enables the auditor to direct his efforts towards the items he considers
would potentially contain the greater monetary error
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COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES
1. ATTRIBUTE ESTIMATION SAMPLING
A statistical sampling plan for tests of controls
Appropriate when an auditor wishes to estimate a true but unknown population
deviation rate
Uses a fixed sampling plan, i.e., the auditor tests a single sample
2. SEQUENTIAL SAMPLING (ALSO CALLED STOP-OR-GO SAMPLING)
The sampling plan is performed in several steps
Following each step, the auditor decides whether to stop or to go on to the next
step
Appropriate when the auditor expects zero or very few deviations
3. DISCOVERY SAMPLING
Appropriate when the expected deviation rate is near zero and when the auditor’s
objective is to find at least one deviation in a sample if the actual population
deviation rate exceeds or equals a predetermined critical rate (tolerable deviation
rate)
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B. Difference estimation
It is a classical variables sampling technique that uses the average difference
between audited amounts and individual recorded amounts to estimate the total audited
amount of a population and an allowance for sampling risk.
C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited amounts to
recorded amount in the sample to estimate the total amount of the population and an
allowance for sampling risk
Ratio estimation is more appropriate when he differences are nearly proportional to book
values.
Difference estimation is more appropriate when there is little or n relationship between the
absolute amounts of the differences and the book values.
41
EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR TESTS OF CONTROL
(PSA 530, APPENDIX I)
42
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. A CIS environment exists when a computer of any type or size is involved in the processing
by the entity of financial information of significance to the audit, whether the computer is
operated by the entity or by a third party
2. The overall objective and scope of an audit does not change in a CIS environment
3. A CIS environment may affect:
a. The procedures followed in obtaining a sufficient understanding of the
accounting and internal control systems
b. The consideration of the inherent and control risk
c. The design and performance of tests of controls and substantive procedures
4. The auditor should have sufficient knowledge of the CIS to plan, direct, and review the work
performed
5. If specialized skills are needed, the auditor would seek the assistance of a professional
possessing such skills, who may be either on the auditor’s staff or an outside professionals
6. In planning the portions of the audit which may be affected by the client’s CIS environment,
the auditor should obtain an understanding of the significance and complexity of the CIS
activities and the availability of data for use in the audit
7. When the CIS are significant, the auditor should also obtain an understanding of the CIS
environment and whether it may influence the assessment of inherent and control risks
8. The auditor should consider the CIS environment in designing audit procedures to reduce
audit risk to an acceptably low level. The auditor can use either manual audit procedures,
computer-assisted audit techniques, or a combination of both to obtain sufficient evidential
matter
Organizational Structure
Characteristics of a CIS organizational structure includes:
a. Concentration of functions and knowledge
Although most systems employing CIS methods will include certain manual
operations, generally the number of persons involved in the processing of financial information is
significantly reduced.
b. Concentration of programs and data
Transaction and master file data are often concentrated, usually in machine-
readable form, either in one computer installation located centrally or in a number of installations
distributed throughout the entity.
Nature of Processing
The use of computers may result in the design of systems that provide less visible evidence
than those using manual procedures. In addition, these systems may be accessible by a larger
number of persons.
System characteristics that may result from the nature of CIS processing include:
43
a. Absence of input documents
Data may be entered directly into the computer system without supporting
document
In some on-line transaction systems, written evidence of individual data entry
authorization (e.g., approval for order entry) may be replaced by other procedures,
such as authorization controls contained in computer programs (e.g., credit limit
approval)
b. Lack of visible audit trail
The transaction trail may be partly in machine-readable form and may exist only for
a limited period of time (e.g., audit logs may be set to overwrite themselves after a period of time or
when the allocated disk space is consumed)
c. Lack of visible output
Certain transactions or results of processing may not be printed or only summary
data may be printed
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Strategic information technology plan
CIS policies and procedures
Segregation of incompatible functions
Monitoring of CIS activities performed by third party consultants
b. Development and maintenance controls – designed to provide reasonable assurance that
systems are developed or acquired, implemented and maintained in an authorized and
efficient manner. They also typically are designed to establish control over:
Project initiation, requirements definition, systems design, testing, data conversion,
go-live decision, migration to production environment, documentation of new or
revised systems, and user training
Acquisition and implementation of off-the-shelf packages
Request for changes to the existing systems
Acquisition, implementation, and maintenance of system software
c. Delivery and support controls – designed to control the delivery of CIS services and include:
Establishment of service level agreements against which CIS services are measured
Performance and capacity management controls
Disaster recovery/contingency planning, training, and file backup
Computer operations controls
Systems security
Physical and environment controls
d. Monitoring controls – designed to ensure that CIS controls are working effectively as
planned. These include:
Monitoring of key CIS performance indicators
Internal external CIS audits
CIS APPLICATION CONTROLS – to establish specific control procedures over the application systems
in order to provide reasonable assurance that all transactions are authorized, recorded and are
processed completely, accurately and on a timely basis. CIS application controls include:
a. Controls over Input – designed to provide reasonable assurance that:
Transactions are properly authorized before being processed by the computer
Transactions are accurately converted into machine readable form and recorded in
the computer data files
Transactions are not lost, added, duplicated or improperly changed
Incorrect transactions are rejected, corrected and, if necessary, resubmitted on a
timely basis.
b. Controls over processing and computer data files – designed to provide reasonable
assurance that:
Transactions, including system generated transactions, re properly processed by the
computer
Transactions are not lost, added, duplicated or improperly changed
Processing errors (i.e., rejected data and incorrect transactions) are identified and
corrected on a timely basis
c. Controls over output – designed to provide reasonable assurance that:
Results of processing are accurate
Access to output is restricted to authorized personnel on a timely basis
Output is provided to appropriate authorized personnel on a timely basis
45
Accordingly, it may be more efficient to review the design of the general controls before reviewing
the application controls.
46
Individual transactions immediately update a memo file containing
information that has been extracted from the most recent version of
the master file. Inquiries are made from this memo file
These same transactions are added to a transaction file for
subsequent validation and updating of the master file on a batch
basis
d. On-line/ inquiry
Restricts users at terminal devices to making inquiries of master file
Master files are updated by other systems, usually on a batch basis
e. On-line downloading/ uploading processing
On-line downloading refers to the transfer of data from a master file
to an intelligent terminal device for further processing by a user
NETWORK ENVIRONMENT
1. A network environment is a communication system that enables computer users to share
computer equipment, application software, data, and voice and video transmissions
2. A file server is a computer with an operating system that allows multiple users in a network
to access software applications and data files
3. Basic types of networks
a. Local area network (LAN)
b. Wide area network (WAN)
c. metropolitan area network (MAN)
47
a. Magnetic tape reader – capable of sensing information recorded as magnetized
spots on magnetic tape. It is also used as an output device and storage medium.
b. Magnetic ink character reader( MICR) – reads characters by scanning
temporarily magnetized characters using magnetic ink
c. Optical character recognition (OCR) – reads characters directly from documents
based on their shapes and positions on the source document
d. Cathode ray tube (CRT) – a typewriter-like device that decodes keystrokes into
electronic impulses
e. Key-to-tape and Key-to-disk – systems in which input data can be entered
directly onto magnetic tape, magnetic disk, or floppy disk through CRT
10. STORAGE DEVICES – devices which store data that can be subsequently used by the CPU
a. Random access – data can be accessed directly regardless of how it is physically
stored (e.g., magnetic disk)
b. Sequential access – data must be processed in the order in which it is physically
stored (e.g., magnetic tape)
11. OUTPUT DEVICES – produce readable data or machine-readable data when further
processing is required. Examples are CRT, printer, and CRT COM (Computer output to Micro
film)
12. TERMINALS – CRT devices or microcomputers used for input/output (communication) with
the CPU
13. POINT-OF-SALE DEVICES – a terminal connected to a computer. It takes the place of a cash
register or similar devices which allows instant recording and is capable of keeping perpetual
inventory
14. MODEM – a device for interfacing communications equipment within communication
networks
Software consists of computer programs which instruct the computer hardware to perform the
desired processing.
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7. INTERPRETER – converts each source code instruction to object code each time it is executed
8. DATABASE MANAGEMENT SYSTEM (DBMS) – a software package for the purpose of
creating, accessing, and maintaining a database
9. TELECOMMUNICATIONS MONITOR PROGRAM – provides edit capabilities and file
maintenance to users, monitors on-line terminals, and handles input to application
programs
ELECTRONIC DATA INTERCHANGE (EDI) – the electronic exchange of transactions, from one entity’s
computer to another entity’s computer through an electronic communications network. In
electronic fund transfer (EFT) Systems, for example, electronic transactions replace checks as a mean
of payment.
EDI controls include:
a. Authentication – controls must exist over the origin, proper submission, and proper
delivery of EDI communications to ensure that the EDI messages are accurately sent and
received to and from authorized customers and suppliers.
b. Encryption – involves conversion of plain text data to cipher text data to make EDI
messages unreadable to unauthorized persons
c. VAN controls – a value added network (VAN) is a computer service organization that
provides network, storage, and forwarding (mailbox) services for EDI messages
AUDIT APPROACHES
1. Auditing around the computer – the auditor ignores or bypasses the computer processing
function of an entity’s EDP system
2. Auditing with the computer – the computer is used as an audit tool
3. Auditing through the computer – the auditor enters the client’s system and examines
directly the computer and its system and application software
49
It embedded controls are functioning properly, the client’s software
should detect all the exceptions planted in the auditor’s test data
Ineffective if the client does not use the software tested
b. Base case system evaluation (BCSE)
Develops test data that purports to test every possible condition
that an auditor expects a client’s software will confront
Provides an auditor with much more assurance than test data alone,
but expensive to develop and therefore cost-effective only in large
computer systems
c. Integrated test facility (ITF)
A variation of test of data whereby simulated data and actual data are run simultaneously
with the client’s program and computer results are compared with auditor’s
predetermined results
It provides assurance that the software tested is actually used to prepare financial reports
d. Parallel simulation
It involves of processing client’s live (actual) data utilizing an auditor’s generalized audit
software
If an entity’s control have been operating efficiently, the client’s software should generate
the same exceptions as the auditor’s software
It should be performed on a surprise basis, I possible
e. Controlled reprocessing
A variation of parallel simulation, it involves processing of actual client data through a
copy of the client’s application program
2. Continuous audit techniques – test the audit computer controls throughout a
period.
a. Audit modules – programmed audit routines incorporated into an
application program that are designed to perform an audit function such
as a calculation, or logging activity
b. Systems control audit review files (SCARFs) – log that collect transaction
information for subsequent review and analysis by the auditor
c. Audit hooks – “exists” in an entity’s computer program that allows an
auditor to insert commands for audit processing
d. Transaction tagging – a transaction record is tagged and then traced
through critical control points in the information system
e. Extended records – this technique attaches additional audit data which
would not otherwise be saved to regular historic records and thereby
helps to provide a more complete audit trail
III. Review of operating system and other system software
1. JOB ACCOUNTING DATA/ OPERATING SYSTEM LOGS – these logs that track
particular functions, include reports of the resources use by the computer
system. The auditor may be able to use them to review the work processed, to
determined whether unauthorized applications were processed and to
determine that authorized applications were processed properly
2. LIBRARY MANAGEMENT SOFTWARE – this logs changes in programs, program
modules, job control language, and other processing activities
3. ACCESS CONTROL AND SECURITY SOFTWARE – this restricts access to computers
to authorized personnel through techniques such as only allowing certain users
with “read-only” access or through use of an encryption
COMPUTERIZED AUDIT TOOLS
1. AUDIT SOFTWARE – computer programs used to process data of audit significance from the
client’s accounting system
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a. Package programs (generalized audit software)
1. Reading computer files
2. Selecting samples
3. Performing calculations
4. Creating data files
5. Printing reports in an auditor-specified format
b. Purpose written programs (special purpose or custom designed programs)
c. Utility programs – they are generally not designed for audit purposes
2. Electronic spreadsheets – contain a variety of predefined mathematical operations and
functions that can be applied to data entered into the cells of a spreadsheet
3. Automated work paper software – designed to generate a trial balance, lead schedules, and
other reports useful for the audit. The schedules and reports can be created once the
auditor has either manually entered or electronically imported through using the client’s
account balance information into the system
4. Text retrieval software – allow user to view any text that ia available in an electronic format.
The software program allows the user to browse through text files much as a user would
browse through books.
5. Database management systems
6. Public databases
7. Word processing software
Factors to consider in using CAAT
1. Degree of technical competence in CIS
2. Availability of CAAT and appropriate computer facilities
3. Impracticability of manual tests
4. Effectiveness and efficiency
5. Timing of tests
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
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EVENTS AFTER THE BALANCE SHEET DATE (subsequent events)
(Based on PSA 560 – subsequent events)
1. Events after the balance sheet date are those events, both favorable and unfavorable, that
occur between the balance sheet date and the date when the financial statements are
authorized for issue
2. The following procedures are typically performed at or near the completion of the fieldwork
to detect subsequent events:
a. Read the latest available interim financial statements and compare them with
the financial statements being reported on
b. Read the available minutes of the meetings of stockholders, directors, and
appropriate committees
c. Assemble pertinent findings resulting from inquiries of legal counsel and other
auditing procedures for litigation, claims, and assessments
d. Obtain a letter of representation from management
3. When the auditor becomes aware of events which materially affect the financial statements,
the auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements
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f. Not a substitute for the application of other necessary auditing procedures
2. If management refuses to provide a representation that the auditor considers necessary, this
constitutes a scope limitation and the auditor should express a qualified opinion or a
disclaimer of opinion
3. Written representations requested from management may be limited to matters that are
considered either individually or collectively material to the financial statements
The representation letter is provided in connection with your audit of the financial statements of ABC
Company for the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the
financial statements present fairly, in all material aspects, the financial position of ABC Company as of
December 31, 20X1 and of the results of its operations and its cash flows for the year time ended in
accordance with (indicate relevant financial reporting framework).
We acknowledge our responsibility for the fair presentation of the financial statements in accordance with
(indicate relevant financial reporting framework).
We confirm to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may include:
There have been no irregularities involving management or employees who have a significant role
in the accounting and internal control systems or that could have a material effect on the financial
statements
We have made available to you all the books of account and supporting documentation and all
minutes of meetings and shareholders and BOD (namely those held on (dates) respectively)
We confirm the completeness of the information provided regarding the identification of related
parties
The financial statements are free of material misstatements, including omissions
The company has complied with all aspects of contractual agreements that could have a material
effect on the financial statements in the event of noncompliance. There has been no
noncompliance with requirements of regulatory authorities that could have a material effect on the
financial statements in the event of noncompliance.
We have no plans or intentions that may affect or alter the carrying value or classification of asset
and liabilities reflected in the financial statement
(no plans regarding the inventory abandonment or no inventory were stated in an amount in
excess of net realizable value)
Indicate that there are no events subsequent to period which require adjustments in the
statements
Indicate that the claim is settled in a specific amount and there are no other litigations are expected
to be received
Indicate that there are no formal or informal compensating balance arrangements with any of the
cash, except those that are disclosed
Indicate that you have recorded material regarding the capital per se
______________________
(Senior Executive Officer)
______________________
(Senior Financial Officer)
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EVALUATION OF GOING CONCERN STATUS
(BASED ON PSA 570 – GOING CONCERN)
1. The auditor should evaluate if the entity is going to continue as a going concern
2. The auditor should consider:
The process followed
Assumptions that are being based on
Management’s plans for future action
3. When doubting events with regards to its “going concern assumption”, the auditor should:
Review the plans of the management
Gather sufficient evidence that indicates a company will not be able to carry out the
business anymore, consider the effect of any plans and other mitigating factors
Seek written representations from the management regarding its future plans
4. Events and conditions that may cast doubt about the going concern assumption:
FINANCIAL
Net (current) liability position
Fixed-term borrowings approaching maturity without realistic prospects of renewal
or repayment
Financial debtors indications of withdrawal
Negative operating cash flows
Adverse key financial ratios
Substantial operating loss or deterioration of assets
Arrears of dividends
Inability to pay creditors on time
Inability to comply with loan terms and agreements
Conversion of cash to credit when in delivery
Inability to obtain financing for essential investments
OPERATING
Loss of key management personnel without replacement
Loss of major franchise, supplier etc.
Labor and shortages of important supplies
OTHER
Non compliance with capital or other statutory requirements
Pending legal or regulatory proceedings against the entity
Changes in the legislation or government policy that may affect the entity
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
[Appropriate addressee]
We have audited the accompanying financial statements of ABC Company which comprise a balance
sheet as at date December 31, 20X1, and the income statement, statement of changes in equity and
cash flow statement for the year ended, and a summary of significant accounting policies and other
explanatory notes.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with Philippine Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement. An audit involves
performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend upon the auditor’s judgment, including the assessment
of the risks of material misstatements on the financial statements whether due to fraud or error. In
making those risk assessments; the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the internal control of the entity. An audit also includes evaluating the
appropriateness of the accounting policies used and the reasonableness of accounting estimates
made by the management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
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In our opinion, the financial statements fairly, in all material respects, the financial position of ABC
Company as of December 31, 20X1, and of its financial performance and its cash flows for the year
then ended in accordance with the Philippine Financial Reporting Standards.
[Auditor’s signature]
[Date of Auditor’s report]
[Auditor’s address]
Without qualifying our opinion, we draw attention to Note X in the financial statements which
indicates that the Company incurred a net loss of P_____ during the year ended December 31,20X1
and, as of date, the company’s current liabilities exceeded its total assets by P_____. These
conditions, along with other matters, as set forth in Note X, indicate the existence of a material
uncertainty which may cast significant doubt about the Company’s ability to continue as a going
concern.
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A disagreement with the management regarding the acceptability of the
accounting policies selected the method of their application on the
adequacy of financial statement disclosures. Could lead to a qualified
opinion or an adverse of opinion.
Qualified opinion
Should be expressed when the auditor concludes that the unqualified opinion cannot
be expressed but that the effect of any disagreement with management, or
limitation on scope is not so material and pervasive as to require an adverse opinion
or a disclaimer of opinion.
A qualified opinion should be expressed as being “except for” the effects of the
matter to which the qualification relates.
Adverse opinion
Should be expressed when the effect of the disagreement is so material and
pervasive to the financial statements that the auditor concludes that a qualification
of the report is not adequate to disclose the misleading or incomplete nature of the
financial statements.
Disclaimer of Opinion
Should be expressed when the possible effect of a limitation on the scope is so
material and pervasive that the auditor has not been able to obtain sufficient
appropriate audit evidence and accordingly is unable to express an opinion on the
financial statements.
REPORT MODIFICATIONS
Limitation on scope
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
We did not observe the counting of the physical inventories as of December 31, 20X1, since
that date was prior to the time we were initially engaged as auditors for the company. Owing
to the nature of the company’s records, we were unable to satisfy ourselves as to inventory
quantities by other audit procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been
determined to be necessary had we been able to satisfy ourselves as to physical inventory
quantities, the financial statements fairly presents, in all material respects … (opinion
paragraph)
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2. LIMITATION ON SCOPE – DISCLAIMER OF OPINION
We were engaged to audit the accompanying financial statements of ABC Company, which
comprise the balance sheet date as of December 31, 20X1, and the income statements,
statement of changes in equity and cash flow statement for the year ended, and a summary
of significant accounting policies and other explanatory notes.
(The paragraph discussing the scope of the audit would either be omitted or amended
according to the circumstances)
We were not able to observe all physical inventories and confirm accounts receivables due to
limitations placed on the scope of our work by the company)
Because of the significance of the matters discussed in the preceding paragraph, we do not
express an opinion on the financial statements.
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
As discussed in the Note X to the financial statements, no depreciation has been provided in
the financial statements which practice, in our opinion, is not in accordance in PFRS. The
provision for the year ended December 31, 20X1, should be xxx based on the straight-line
method of depreciation using annual rates of 5% for the building and 20% for the equipment.
Accordingly, the fixed assets should be reducedby accumulated depreciation of xxx and the
loss for the year and accumulated deficit should be increased by xxx and xxx, respectively.
In our opinion, except for the effects of such adjustments, if any, as might have been
determined to be necessary had we been able to satisfy ourselves as to physical inventory
quantities, the financial statements fairly presents, in all material respects … (opinion
paragraph)
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Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
On January 31,20X2, the Company issued debentures in the amount of… for the purpose of
financing plant expansion. The debenture agreement restricts the payment of future cash
dividends to earnings after December 31,19X1, which restrictions was not disclosed in the
company’s financial statements. Disclosure of this is required by the PAS 1, Presentation of
financial statements.
In our opinion, except for the omission of the information included in the preceding
paragraph, the financial statements present fairly, in all material respects… (opinion
paragraph)
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
In our opinion, because of the effects of the matters discussed in the preceding paragraph(s),
the financial statements do not present fairly, in all material respects, the financial position
of ABC Company as of December 31,19X1, and of its financial performance and its cash flows
for the year then ended in accordance with PFRS… (Opinion paragraph)
Facts discovered after the date of the auditor’s report but before the financial statements
are issued
4. During the period from the date of the auditor’s report to the date the financial
statements are issued:
o The responsibility to inform the auditor of facts which may affect the
financial statements rests with management
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o When the auditor becomes aware of the facts that will materially affect the
financial statements, the auditor should:
Consider whether the financial statements needed amendment
Discuss the matter with the management
Take the action appropriate in the circumstances
5. When the management amends the financial statements, the auditor would carry
out the procedures necessary in the circumstances and would provide management
with a new report on the amended financial statements
6. The new auditor’s report would be dated not earlier than the date the amended
financial statements are signed or approved and, accordingly, the procedures to
identify subsequent events would be extended to the date of the new auditor’s
report
7. When management does not amend the financial statements but the auditor
believes they need to be amended and the auditor’s report has not been released to
the entity, the auditor should express a qualified opinion or an adverse opinion.
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2. The auditor should consider whether the auditor’s own participation is sufficient to
be able to act as principal auditor. The following would be considered:
o The materiality of the portion of the financial statements which the principal
auditor audits
o The principal auditor’s degree of knowledge regarding the business of the
components
o The risk of material misstatements in the financial statements of the
components audited by the other auditor
o The performance of additional procedures as set out in PSA 600 regarding the
components audited by other auditor resulting in the principal auditor having
significant participation in such audit
3. When planning to use the work of another auditor, the principal auditor should:
o Consider the professional competence of the other auditor in the context of
specific assignment
o Perform procedures to obtain sufficient appropriate audit evidence that the
work of the other auditor is adequate for the principal auditor’s purposes in
the context of the specific assignment
o Consider the significant findings of the other auditor
4. Reporting conclusions
o When the principal auditor concludes that the work of the other cannot be
used and the principal auditor has not been able to perform sufficient
additional procedures regarding financial information of the component
audited by the other auditor, the principal auditor should express a qualified
or a disclaimer of opinion because of a scope of limitation.
o If the auditor issues or intend to issue, a modified auditor’s report, the
principal auditor would consider whether the subject of modification is of
such a nature and significance, in relation to the financial statements of the
entity on which the principal auditor is reporting that a modification on the
principal auditor’s report is required.
5. Division of responsibility
o When the principal auditor bases the audit opinion on the financial
statements taken as a whole solely upon the report of another auditor
regarding the audit of one or more components, the principal auditor’s
report should state this fact clearly and should indicate the magnitude of the
portion of the financial statements audited by the other auditor.
CORRESPONDING FIGURES
o For the prior periods, these are an integral part of the current period financial
statements and have to be read in conjunction with the amounts and other
disclosures relating to the current period.
o These are not presented as complete financial statements capable of
standing alone
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o The auditor should obtain sufficient appropriate audit evidence that the
corresponding figures meet the requirements of GAAP in the Philippine
o The auditor should assess whether:
Accounting policies used for the corresponding figures are consistent
with those of the current period or whether appropriate adjustments
and/or disclosures have been made
Corresponding figures agree with the amounts and other disclosures
presented in prior period or whether appropriate adjustments and/or
disclosures have been made
COMPARATIVE FINANCIAL STATEMENTS
These comparative financial statements for the prior period(s) are considered
separate financial statements.
These are presented for comparison with the financial statements of the current
period, but do not form part of the current period financial statements
The auditor should obtain sufficient appropriate evidence that the comparative
financial statements meet the requirements of GAAP in the Philippines
The auditor should assess whether:
o Accounting policies of the prior period are consistent with those of the
current period or whether appropriate adjustments and/or disclosures have
been made
o Prior period figures presented agree with the amounts and other disclosures
presented in the prior period or whether appropriate judgments and
disclosures have been made
3. When the incoming auditor decides to refer to the predecessor auditor’s report, the
incoming auditor’s report should indicate:
a. That the financial statements of the prior period were audited by another
auditor
b. Type of report issued by the predecessor auditor and, if the report was
modified, the reasons therefore;
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c. Date of that report
4. When the prior period financial statements were not audited, the incoming auditor
should state that the corresponding figures are unaudited.
5. If the incoming auditor identifies that the corresponding figures are materially
misstated, the auditor should request management to revise the corresponding
figures or if management refuses to do so, appropriately modify the report
INCOMING AUDITOR
When the financial statements of the prior period were audited by another auditor,
The predecessor auditor may reissue the audit report on the prior period with the
incoming auditor only reporting on the current period; or
The incoming auditor’s report should state that the prior period was audited by
another auditor and the incoming auditor’s report should indicate:
o That the financial statements of the prior period was audited by another
auditor
o The type of report issued by the predecessor auditor, and if the report was
modified, the reasons; therefore
o Date of the report
1. An entity ordinarily issues on an annual basis a document which includes its audited
financial statements together with the auditor’s report thereon, also called “annual
report”.
Material inconsistencies
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2. This exists when the other information contradicts information contained in the
audited financial statements
3. If, on reading the other information, the auditor identifies material inconsistency,
the auditor should determine whether the financial statements need to be amended
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should express a qualified or adverse opinion
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should consider including in the auditor
auditor’s report an emphasis of matter paragraph.
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o Reference to the PSAs applicable to special purpose audit
engagements
o Description of the work the auditor performed
Opinion paragraph containing an expression of opinion on the financial
information
Date of the report
Auditor’s address
Auditor’s signature
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3. Summarized financial statements do not contain all the information required by the
financial reporting framework used for annual audited financial statements.
Consequently, wording such as “present fairly, in all material respects,” is not used
4. The following elements in an auditor’s report:
a. Title
b. Addressee
c. An identification of the audited financial statements from the summarized
financial statements were derived
d. A reference to the date of the audit report on the unabridged financial
statement and the type of opinion given in that report
e. An opinion as to whether the information in the summarized financial
statements is consistent with the audited financial statements from which it
is derived
f. A statements, or reference to te note within the summarized financial
statements, which indicates that for a better understanding of an entity’s
financial performance and position and of the scope of the audit performed,
the summarized financial statements should be read n conjunction with the
unabridged financial statements and the audit report thereon
g. Date of the report
h. Auditor’s address
i. Auditor’s signature
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
2. For the purpose of expressing negative assurance in the review report, the auditor
should obtain sufficient appropriate audit evidence primarily through inquiry and
analytical procedures to be able to draw conclusions.
4. In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entity’s organization,
accounting systems, operating characteristics and the nature of its assets, liabilities,
revenues, and expenses.
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Reading the financial statements to consider, on the basis of information coming
to the auditor’s attention, whether the financial statements appear to conform to
basis of accounting indicated.
Obtaining reports from other auditor’s, if any if considered necessary, who have
been engaged to audit or review the financial statements of components of the
entity.
Inquiries of persons having responsibility for financial and accounting matters
concerning, for example:
Whether all transactions have been recorded.
Whether the financial statements have been prepared in accordance with the basis of
accounting indicated.
Changes in the entity’s business activities and accounting principles and practices.
Matters as to which questions have arisen in the course of applying the foregoing
procedures.
Obtaining written representations from managements when considered appropriate.
6. If the auditor has reason to believe that the information subject to review may be
materially misstated, the auditor should carry out additional or more extensive
procedures as are necessary to be able to express negative assurance or to confirm that
a modified report is required.
We have reviewed the accompanying balance sheet of AAA Company at December 31, 19XX, and the related
statements of income, changes in equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to issue a report on these financial
statements based on our review.
We conducted our review in accordance with the Philippines Standards on Review Engagements 2400. This
Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial
statements are free of material misstatement. A review is limited primarily to inquiries of company personnel
and analytical procedures applied to financial data and thus provide less assurance than an audit. We have not
performed an audit an accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial
statements are not presented fairly, in all material respects in accordance with Philippine Financial Reporting
Standards.
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3. As the auditor simply provides a report of the factual findings of agreed-upon
procedures, no assurance is expressed. Users of the report assess for themselves the
procedures and findings reported by the auditor and draw their own conclusions from
the auditor’s work.
REPORTING
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ENGAGEMENTS TO COMPLETE FINANCIAL INFORMATION (Based on PSRS 4410)
3. The procedures employed are not designed and do not enable the accountant to
express any assurance on the financial information.
5. The accountant should obtain a general knowledge of the business and operations of
the entity and should be familiar with the accounting principles and practices of the
industry in which the entity operates and with the form and content of the financial
information that is appropriate in the circumstances.
7. The accountant should read the compiled information and consider whether it appears
to be appropriate in form and free from obvious material misstatements.
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9. The financial information compiled by the accountant should contain a reference such
as “Unaudited’, “Compiled without Audit or Review,’ or “Refer to the Compilation
report’ on each page of the financial information or on the front of the complete set of
financial statements.
On the basis of information provided by the management we have compiled, in accordance with the Philippine
Standard on Related Services applicable to compilation engagements, the balance sheet of XXX Company as of
December 31, 19XX and statements of income, changes in equity and cash flows for the year then ended.
Management is responsible for these financial statements. We have not audited or reviewed these financial
statements and accordingly express no assurance thereon.
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Management’s best-estimate assumptions on which the prospective financial
information is based are not unreasonable and, in the case of hypothetical
assumptions, such assumptions are consistent with the purpose of the information.
The prospective financial information is properly presented and all material
assumptions are adequately disclosed, including a clear indication as to whether
they are best-estimate assumptions or hypothetical assumptions; and
The prospective financial information is prepared on a consistent basis with
historical financial statements, using appropriate accounting principles.
7. The auditor should not express any opinion as to whether the results shown in the
prospective financial information will be achieved.
9. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective
financial information will be inappropriate for its intended use.
10. The auditor should obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of significant
management assumptions and management’s acceptance of its responsibility for the
prospective financial information.
We have examined the forecast (include name of the entity, the period covered by the forecast and provide
suitable identification, such as by reference to page numbers or by identifying the individual statements) in
accordance with Philippine Standard on Assurance Engagements applicable to the examination of prospective
financial information. Management is responsible for the forecast including the assumptions set out in Note X
on which it is based.
Based on our examination of the evidence supporting the assumptions the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.
Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in
accordance with Philippine Financial Reporting Standards.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as
expected and the variation may be material.
We have learned the projection (include name of the entity, the period covered by the forecast and provide
suitable identification, such as by reference to page numbers or by identifying the individual statements) in
accordance with Philippine Standard on Assurance Engagements applicable to the examination of prospective
financial information. Management is responsible for the projection including the assumptions set out in Note X
on which it is based.
This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection has
been prepared using a set of assumptions that include hypothetical assumptions about future events and
management’s actions that are not necessarily expected to occur. Consequently, readers are cautioned that this
projection may not be appropriate for purposes other than that described above.
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Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which
causes us t believe that these assumptions do not provide a reasonable basis for the projection, assuming that
(state or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the
basis of the assumptions and is presented in accordance with Philippine Financial Reporting Standards.
Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still
likely to be different from the projection since other anticipated events frequently do not occur as expected and
the variation may be material.
When the auditor believes that the presentation and disclosure of the prospective information
is not adequate, the auditor should express a qualified or adverse opinion or withdraw from the
engagement as appropriate.
When the auditor believes that one or more significant assumptions do not provide a
reasonable basis for the prospective financial information, the auditor should either express an
adverse opinion or withdraw from the engagement as appropriate.
When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw
from the engagement or disclaim the opinion describe the scope limitation in the report on the
prospective financial information.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
3. CONFIDENTIALITY
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a. Professional accountants have an obligation to respect the confidentiality of
information about a client’s or employer’s affairs acquired in the course of
professional services.
b. The duty of confidentiality continues even after the end of the relationship between
the professional accountant and the client or employer.
4. TAX PRACTICE
a. The professional accountant should ensure that the client or the employer are aware
of the limitations attaching to tax advice and services so that they do not
misinterpret an expression of opinion as an assertion of fact.
b. A professional accountant should not be associated with any return or
communication in which there is reason to believe that it:
1. Contains a false or misleading statement;
2. Contains statements or information furnished recklessly or without any real
knowledge of whether they are true or false; or
3. Omits or obscure information required to be submitted and such omission or
obscurity would mislead the revenue authorities.
c. When a professional accountant learns of a material error or omission in a tax return
of a prior year, or the failure to file a required tax return, he/she has a responsibility
to:
1. Promptly advise the client or employer of the error or omission and recommend
that disclosure be made to the revenue authorities.
2. If the client or employer does not correct the error, he/she:
a. Should inform the client or the employer that it is possible to act for them in
connection with that return or other related information submitted to the
authorities; and
b. Should consider whether continued association with the client or employer in
any capacity is consistent with professional responsibilities.
When a professional accountant performs services in a country other than the home
country and differences on specific matters exist between ethical requirements of the
two countries, the following provisions should be applied:
1. When the ethical requirements of the country in which the services are being
performed are LESS STRICT than the Philippine Code of Ethics, then our code should
be applied.
2. When the ethical requirements of the country in which the services are being
performed are STRICTER than our code, then the ethical requirements in the country
where services are being performed should be applied.
3. When the ethical requirements of the Philippines are mandatory for services
performed outside the Philippines and are stricter than that set out in (1) and (2)
above, then the ethical requirements of the Philippines should be applied.
6. PUBLICITY
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In the marketing and promotion of themselves and their work, professional accountants
should:
a. Not use means which brings the profession into disrepute.
b. Not make exaggerated claims for the services they are able to offer, the
qualifications they possess, or experience they have gained; and
c. Not denigrate the work of other accountants.
INDEPENDENCE
a. Independence requires:
1. Independence of mind – The state of mind that permits the provision of an
opinion without being affected by influences that compromise professional
judgment, allowing an individual to act with integrity, and exercise objectivity
and professional skepticism.
2. Independence in appearance – The avoidance of facts and circumstances that are
so significant that a reasonable and informed third party, having knowledge of all
relevant information, including safeguards applied, would reasonably conclude a
firms, or a member of the assurance team’s integrity, objectivity or professional
skepticism had been compromised.
b. Members of assurance teams, firms, and network firms should identify THREATS to
independence, evaluate the significance of those threats, and, if the threats are
other than clearly insignificant, identify and apply SAFEGUARDS to eliminate the
threats or reduce them to acceptable level, such that independence of mind and
independence in appearance are not compromised. In situations when no
safeguards are available to reduce the threat to an acceptable level. The only
possible actions are to:
1. Eliminate the activities or interest creating the threat; or
2. Refuse to accept or continue the assurance engagement.
Network firm – an entity under common control, ownership or management with the firm or any
entity that a reasonable and informed third party having knowledge of all relevant information
would reasonably conclude as being part of the firm nationally or internationally
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Financial interest – an interest in equity or other security, debenture, loan or other debt instrument
of an entity including rights and obligations to acquire such an interest and derivatives directly
related to such interest
THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a financial
interest in, or other self-interest conflict with, an assurance client. Examples:
a. A direct financial interest or material indirect financial interest in an assurance client
b. A loan or guarantee to or from an assurance client or any of its directors or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements
2. SELF-REVIEWTHREAT
Occurs when:
a. Any product or judgment of a previous assurance engagement or non-assurance
engagement needs to be reevaluated in reaching conclusions on the assurance
engagement or;
b. When a member of the assurance team was previously a director or officer of the
assurance client, or was an employee in a position to exert direct and significant
influence over the subject matter of the assurance engagement
3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance 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 an assurance client, its directors, officers
or employees, a firm or a member of the assurance team becomes too sympathetic to the
client’s interests.
5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting objectively and
exercising professional skepticism by threats, actual or perceived, from the directors,
officers or employees of an assurance client
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SAFEGUARDS
1. When the threats are identified, other than those that are clearly insignificant, appropriate
safeguards should be identified and applied to eliminate the threats or reduce them to an
acceptable level. This decision should be documented
2. When the safeguards are available are insufficient to eliminate the threats to independence
or to reduce them to an acceptable level, or when a firm chooses not to eliminate the
activities or interest creating the threat, the only course of action available will be the
refusal to perform, or withdrawal from, the assurance engagement
CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firm’s own systems and procedures
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j. Designating a member of senior management as responsible for overseeing the adequate
functioning of the safeguarding system
k. Means of advising partners and professional staff of those assurance clients and related
entities from which they must be independent
l. A disciplinary mechanism to promote compliance with policies and procedures; and
m. Policies and procedures to empower staff to communicate to senior levels within the firm
any issue of independence and objectivity that concerns them; this includes informing staff
of the procedures open to them
Safeguards within the firm’s own systems and procedures may include ENGAGEMENT SPECIFIC
safeguards such as the following:
a. Involving an additional professional accountant to review the work done or otherwise advise
as necessary. This individual could be someone from outside the firm or network firm, or
someone with the firm or network firm who was not otherwise associated with the
assurance team
b. Consulting a third party, such as a committee of independent directors, a professional
regulatory body or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged with
governance,
e. Disclosing to audit committee, or others charged with governance, the nature of services
provided and extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client
g. Involving another firm to perform or re-perform part of the assurance engagement
h. Involving another firm to re-perform the non-assurance service to the extent necessary to
enable to take responsibility for that service; and
i. Removing an individual from the assurance team, when that individual’s financial interest or
relationships create a threat to independence
ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of the assurance
client during the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the assurance services and
ends when the assurance report is issued, except when the assurance engagements is of a
recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance engagement
ends with the notification by either party that the professional relationship has terminated
or the issuance of the final assurance report, whichever is later
4. In the case of an audit engagement, the engagement period includes the period covered by
the financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by the financial
statements that the firm will report on, the firm should consider whether any thretas to
independence may be created by:
a. Financial or business relationships with the audit client during or after the period
covered by the financial statements, but prior to the acceptance of the audit
engagement; or
b. Previous services provided to the audit client
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Similarly, in the case of an assurance engagement that is not an audit engagement, the firm
should consider whether any financial or business relationships or previous services may
create threats to independence.
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