FOCUS NOTES by Bocali J. Balt Jr.
agreed-upon procedures
AA 3101
Philippine Standard on Auditing 120
Framework of Philippine Standards
on Auditing
Introduction: The purpose of this
document is to describe the framework
within which PSAs are issued in relation
to the services which may be performed
by auditors.
 For ease of reference, except
where indicated, the term
“auditor” is used throughout the
PSAs when describing both
auditing and related services
which may be performed.
Financial Reporting Framework
Financial Statements are ordinarily
prepared and presented annually and
are directed toward the common
information need of a wide range of
users.
Financial statements need to be
prepared in accordance with one, or
combination of:
a) Accounting standards generally
accepted in the Philippines;
b) International Accounting
Standards; and
c) Another authoritative and
comprehensive financial
reporting framework which has
been designed for use in
financial reporting and is
identified in the financial
statements.
Framework for Auditing and
Related Services
 It distinguishes audits from
related services. Related
services comprise reviews,
and compilations.
 Audits and reviews are
designed to enable the
auditor to provide high and
moderate levels of
assurance respectively,
such terms being used to
indicate their comparative
ranking.
 Engagements to undertake
agreed-upon procedures
and compilations are not
intended to enable the
auditor to express
assurance.
 The Framework does not
apply to other services
provided by auditors such
as taxation, consultancy,
and financial and
accounting advice.
Level of Assurance
Assurance
 It refers to the auditor's
satisfaction as to the
reliability of an assertion
being made by one
party for use by another
party.
 To provide such assurance, the
auditor assesses the evidence
collected as a result of
procedures conducted and
expresses a conclusion.
Audit Engagement
 The auditor provides a
high, but not absolute,
level of assurance that
the information subject
to audit is free of
material misstatement.
This is expressed
positively in the audit
 report as reasonable “present fairly, in all
assurance. material respects.”
Review Engagement Forming Audit Opinion
 The auditor provides a
moderate level of  The auditor obtains
assurance that the sufficient appropriate audit
information subject to evidence to be able to
review is free of material draw conclusions on which
misstatement. This is to base that opinion.
expressed in the form of Purpose of Auditor’s opinion
negative assurance.
 The auditor's opinion
Agreed upon Procedures
enhances the credibility of
 As the auditor simply financial statements by
provides a report of the providing a high, but not
factual findings, no absolute, level of
assurance is expressed. assurance.
Instead, users of the
report assess for
themselves the Absolute assurance
procedures and findings  It is not attainable
reported by the auditor as a result of such
and draw their own factors as the need
conclusions from the for judgment, the
auditor's work. use of testing, the
Compilation Engagement inherent limitations
of any accounting
 Although the users of the
and internal control
compiled information
systems and the
derived some benefit from
fact that most of the
the accountant’s
evidence available
involvement, no assurance
to the auditor is
is expressed in the report.
persuasive, rather
than conclusive, in
Audit nature.
Objective of an Audit Related Services
 To enable the auditor to Reviews
express an opinion 1. To enable an auditor to state
whether the financial whether, on the basis of
statements are prepared, procedures which do not provide
in all material respects, in all the evidence that would be
accordance with an required in an audit, anything has
identified financial come to the auditor's attention
reporting framework. The that causes the auditor to believe
phrase used to express that the financial statements are
the auditor's opinion is not prepared, in all material
 respects, in accordance with an
identified financial reporting
framework.
2. It comprises inquiry and
analytical procedures which are
designed to review the reliability
of an assertion that is the
responsibility of one party for use
by another party. It involves the
application of audit skills and
techniques and the gathering of
evidence
3. The procedures of a review make
the achievement of this objective
less likely than in an audit
engagement, thus the level of
assurance provided in a review
report is correspondingly less
than that given in an audit report.
Agreed upon Procedures
● To carry out those
procedures of an audit
nature to which the auditor
and the entity and any
appropriate third parties
have agreed and to report
on factual findings.
Recipients must form their
own conclusions from the
report by the auditor.
Auditor Association with Financial
Information
Auditor is associated with financial
information when the auditor attaches a
report to the information or consents to
the use of the auditor’s name in a
professional connection.
1. If the auditor is not associated,
third parties can assume no
responsibility of the auditor.
2. If the auditor learns that an entity
is inappropriately using the
auditor’s name in association with
financial information, the auditor
would require management to
cease doing so and consider
what further steps, if any need to
be taken, such as informing any
known third party users of the
information of the inappropriate
use of the auditor's name in
connection with the information.

Compilations
● The accountant is
engaged to use
accounting expertise as
opposed to auditing
expertise to collect,
classify and summarize
financial information.
 Philippine Standard on Auditing 210
AGREEING THE TERMS OF AUDIT
ENGAGEMENTS
Scope of this PSA. Deals with the
auditor’s responsibilities in agreeing the
terms of the audit engagement with
management and, where appropriate,
those charged with governance. This
includes establishing that certain
preconditions for an audit, responsibility
for which rests with management and,
where appropriate, those charged with
governance, are present.
Effective Date: On or after December
15, 2009.
Objective: The objective of the auditor
is to accept or continue an audit
engagement only when the basis upon
which it is to be performed has been
agreed through establishing whether the
preconditions for an audit are present
and confirming that there is a common
understanding between the auditor and
management and, where appropriate,
those charged with governance of the
terms of the audit engagement.
Requirements
Preconditions for an Audit
The Auditor shal:
1. Determine whether the financial
reporting framework to be applied
in the preparation of the financial
statements is acceptable
2. Obtain the agreement of
management that it
acknowledges and understands
its responsibility for the
preparation of financial
statements and for such internal
control.
3. To provide auditors with access
to all information, with additional
information relevant to the audit,
and unrestricted access to
persons to obtain information.
Limitation on Scope Prior to Audit
Engagement Acceptance: the auditor
shall not accept such a limited
engagement as an audit engagement,
unless required by law or regulation to
do so.
Other Factors Affecting Audit
Engagement Acceptance
If the preconditions for an audit are not
present, the auditor shall discuss the
matter with management. It shall not be
accepted by the auditor unless required
by law If the auditor has determined that
the financial reporting framework to be
applied in the preparation of the
financial statements is unacceptable
and If the agreement that he
acknowledges and understands its
responsibilities has not been obtained.
Agreement on Audit Engagement
Terms
1. The auditor shall agree the terms
of the audit engagement with
management or those charged
with governance, as appropriate.
2. The agreed terms of the audit
engagement shall be recorded in
an audit engagement letter or
other suitable form of written
agreement. If law or regulation
prescribes in sufficient detail the
terms of the audit engagement,
the auditor need not record them
in a written agreement, except for
the fact that such law or
regulation applies and that
management acknowledges and
understands its responsibilities
3. For such responsibilities that are
equivalent, the auditor may use
the wording of the law or
 regulation to describe them in the
written agreement. For those
responsibilities that are not
prescribed by law or regulation
such that their effect is
equivalent, the written agreement
shall use the description on
agreement of acknowledging and
understanding its responsibilities.
Recurring Audits: On recurring audits,
the auditor shall assess whether
circumstances require the terms of the
audit engagement to be revised and
whether there is a need to remind the
entity of the existing terms of the audit
engagement.
Acceptance of a Change in the Terms
of the Audit Engagement
1. The auditor shall not agree to a
change in the terms of the audit
engagement where there is no
reasonable justification for doing
so.
2. the auditor shall determine
whether there is reasonable
justification for the change of the
audit engagement to an
engagement that conveys a
lower level of assurance.
3. If the terms of the audit
engagement are changed, the
auditor and management shall
agree on and record the new
terms of the engagement in an
engagement letter or other
suitable form of written
agreement.
4. If the auditor is unable to agree to
a change of the terms of the audit
engagement and is not permitted
by management to continue the
original audit engagement, the
auditor shall: withdraw from the
audit engagement where
possible under applicable law or
regulation; and determine
whether there is any obligation,
either contractual or otherwise, to
report the circumstances to other
parties, such as those charged
with governance, owners or
regulators.
Additional Considerations in
Engagement Acceptance
Financial Reporting Standards
Supplemented by Law or Regulation
1. If financial reporting standards
established by an authorized or
recognized standards setting
organization are supplemented
by law or regulation, the auditor
shall determine whether there are
any conflicts between the
financial reporting standards and
the additional requirements.
2. If such conflicts exist, the auditor
shall discuss with management
the nature of the additional
requirements and agree on
additional requirements and
description of the financial
reporting framework.If neither of
the actions is possible, the
auditor shall determine whether it
will be necessary to modify the
auditor’s opinion.
Financial Reporting Framework
Prescribed by Law or Regulation—
Other Matters Affecting Acceptance
If the auditor has determined that the
financial reporting framework prescribed
by law or regulation would be
unacceptable but for the fact that it is
prescribed by law or regulation, the
auditor shall accept the audit
engagement only if the following
conditions are present:
1. Management agrees to provide
additional disclosures in the
financial statements required to
avoid the financial statements
being misleading
2. It is recognized in the terms of
the audit engagement that the
auditor’s report on the financial
statements will incorporate an
Emphasis of Matter paragraph
and unless the auditor is required
by law or regulation to express
the auditor’s opinion on the
financial statements by using the
phrases “present fairly, in all
material respects” the auditor’s
opinion on the financial
statements will not include such
phrases.
Auditor’s Report Prescribed by Law or
Regulation
The auditor shall evaluate:
1. Whether users might
misunderstand the assurance
obtained from the audit of the
financial statements and, if so,
2. Whether additional explanation in
the auditor’s report can mitigate
possible misunderstanding.
If the auditor concludes that additional
explanation in the auditor’s report
cannot mitigate possible
misunderstanding, the auditor shall not
accept the audit engagement, unless
required by law or regulation to do so.
Philippine Standard on Auditing 220
 Quality Control for an Audit of
Financial Statements ● This PSA is effective for
audits of financial
Introduction statements for periods
beginning on or after
Scope December 15, 2009.
● It deals with the specific
responsibilities of the Objective
auditor regarding quality
control procedures for an ● To implement quality
audit of financial control procedures at the
statements. engagement level that
● It also addresses, where provide the auditor with
applicable, the reasonable assurance
responsibilities of the that:
engagement quality
control reviewer. (a) The audit complies
● To be read in conjunction with professional
with relevant ethical standards and regulatory
requirements. and legal requirements;
and
System of Quality Control and (b) The auditor’s report
Role of Engagement Teams issued is appropriate in
the circumstances.
● Quality control systems,
policies and procedures Requirements
are the responsibility of
the audit firm. Under Leadership Responsibilities for
PSQC 1 (Redrafted), the Quality on Audits
firm has an obligation to
establish and maintain a ● The engagement partner
system of quality control to shall take responsibility for
provide it with reasonable the overall quality on each
assurance that: audit engagement to
which that partner is
(a)The firm and its assigned.
personnel comply with
professional standards Relevant Ethical Requirements
and regulatory and legal
requirements; and ● Throughout the audit
(b)The reports issued by engagement, the
the firm or engagement engagement partner shall
partners are appropriate in remain alert, through
the circumstances. observation and making
inquiries as necessary, for
evidence of
Effective Date noncompliance with
 relevant ethical
requirements by members
of the engagement team.
Independence
● The engagement partner
shall form a conclusion on
compliance with
independence
requirements that apply to
the audit engagement. In
doing so, the engagement
partner shall:
(a) Obtain relevant
information from the
firm and, where
applicable, network
firms.
(b) Evaluate Assignment of Engagement Teams
information on
identified breaches.
(c) Take appropriate
action to eliminate
such threats or
reduce them to an
acceptable level by
applying
safeguards, or, if
considered
appropriate, to
withdraw from the
audit engagement,
where withdrawal is
permitted by law or
regulation.
Acceptance and Continuance of Client
Relationships and Audit Engagements
● The engagement partner
shall be satisfied that
appropriate procedures
regarding the acceptance Engagement Performance
and continuance of client
relationships and audit Direction, Supervision and Performance
engagements have been
followed, and shall
determine that conclusions
reached in this regard are
appropriate.
● If the engagement partner
obtains information that
would have caused the
firm to decline the audit
engagement had that
information been available
earlier, the engagement
partner shall communicate
that information promptly
to the firm, so that the firm
and the engagement
partner can take the
necessary action. (Ref:
Para. A9)
● The engagement partner
shall be satisfied that the
engagement team, and
any auditor’s experts who
are not part of the
engagement team,
collectively have the
appropriate competence
and capabilities to:
(a) Perform the audit
engagement in
accordance with
professional
standards and
regulatory and legal
requirements; and
(b) Enable an auditor’s
report that is
appropriate in the
circumstances to be
issued.
 ● The engagement partner The engagement partner shall:
shall take responsibility
for:
(a) Take responsibility for the
(a) The direction, engagement team
supervision and undertaking appropriate
performance of consultation on difficult or
the audit contentious matters;
engagement in (b) Be satisfied that
compliance with members of the
professional engagement team have
standards and undertaken appropriate
regulatory and consultation during the
legal course of the
requirements; engagement, both within
and the engagement team
(b) The auditor’s and between the
report being engagement team and
appropriate in others at the appropriate
the level within or outside the
circumstances. firm;
(c) Be satisfied that the
Reviews nature and scope of, and
conclusions resulting
from, such consultations
● The engagement partner
are agreed with the party
shall take responsibility for
consulted; and
reviews being performed
(d) Determine that
in accordance with the
conclusions resulting
firm’s review policies and
from such consultations
procedures.
have been implemented.
● On or before the date of
Engagement Quality Control Review
the auditor’s report, the
engagement partner shall,
through a review of the ● For audits of financial
audit documentation and statements of listed
discussion with the entities, and those other
engagement team, be audit engagements, if any,
satisfied that sufficient for which the firm has
appropriate audit evidence determined that an
has been obtained to engagement quality
support the conclusions control review is required,
reached and for the the engagement partner
auditor’s report to be shall:
issued.
(a) Determine that an
Consultation engagement quality
control reviewer
 has been made and the
appointed; conclusions it
(b) Discuss significant reached; and
matters arising (d) Evaluation of the
during the audit conclusions
engagement, reached in
including those formulating the
identified during the auditor’s report and
engagement quality consideration of
control review, with whether the
the engagement proposed auditor’s
quality control report is
reviewer; and appropriate.
(c) Not date the
auditor’s report until ● For audits of financial
the completion of statements of listed
the engagement entities, the engagement
quality control quality control reviewer, on
review. performing an
engagement quality
● The engagement quality control review, shall also
control reviewer shall consider the following:
perform an objective
evaluation of the (a) The engagement
significant judgments team’s evaluation of
made by the engagement the firm’s
team, and the conclusions independence in
reached in formulating the relation to the audit
auditor’s report. This engagement;
evaluation shall involve: (b) Whether
appropriate
(a) Discussion of consultation has
significant matters taken place on
with the matters involving
engagement differences of
partner; opinion or other
(b) Review of the difficult or
financial statements contentious
and the proposed matters, and the
auditor’s report; conclusions arising
(c) Review of selected from those
audit consultations; and
documentation (c) Whether audit
relating to the documentation
significant selected for review
judgments the reflects the work
engagement team performed in
 relation to the affect the audit
significant engagement.
judgments made
and supports the Documentation
conclusions
reached. (Ref: ● The auditor shall
Para. A28-A31) document:

Differences of Opinion (a) Issues identified with

respect to compliance with
● If differences of opinion relevant ethical
arise within the requirements and how
engagement team, with they were resolved.
those consulted or, where (b) Conclusions on
applicable, between the compliance with
engagement partner and independence
the engagement quality requirements that apply to
control reviewer, the the audit engagement, and
engagement team shall any relevant discussions
follow the firm’s policies with the firm that support
and procedures for dealing these conclusions.
with and resolving (c) Conclusions reached
differences of opinion. regarding the acceptance
and continuance of client
Monitoring relationships and audit
engagements.
● An effective system of (d) The nature and scope of,
quality control includes a and conclusions resulting
monitoring process from, consultations
designed to provide the undertaken during the
firm with reasonable course of the audit
assurance that its policies engagement.
and procedures relating to
the system of quality ● The engagement quality
control are relevant, control reviewer shall
adequate, and operating document, for the audit
effectively. The engagement reviewed,
engagement partner shall that:
consider the results of the
firm’s monitoring process (a) The procedures required
as evidenced in the latest by the firm’s policies on
information circulated by engagement quality
the firm and, if applicable, control review have been
other network firms and performed;
whether deficiencies noted (b) The engagement quality
in that information may control review has been
completed on or before
 the date of the auditor’s
report; and
(c) The reviewer is not aware
of any unresolved
matters that would cause
the reviewer to believe
that the significant
judgments the
engagement team made
and the conclusions they
reached were not
appropriate.

Philippine Standard on Auditing 300

Planning an Audit of Financial
Statements

Introduction

Scope
● It deals with the auditor’s
responsibility to plan an
 audit of financial “Quality Control for
statements. Audits of Historical
● It is framed in the context Financial
of recurring audits. Information”
Additional considerations regarding the
in initial audit continuance of the
engagements are client relationship
separately identified. and the specific
audit engagement;
Effective Date (b) Evaluating
compliance with
● This PSA is effective for ethical
audits of financial requirements,
statements for periods including
beginning on or after independence, as
December 15, 2009. required by PSA
Objectives 220; and
● The objective of the (c) Establishing an
auditor is to plan the audit understanding of
so that it will be performed the terms of the
in an effective manner. engagement, as
required by PSA
Requirements 210, “Terms of
Audit
Involvement of Key Engagement Engagements.”
Team Members
● The engagement partner Planning Activities
and other key members of
the engagement team ● The auditor shall establish
shall be involved in an overall audit strategy
planning the audit, that sets the scope, timing
including planning and and direction of the audit,
participating in the and that guides the
discussion among development of the audit
engagement team plan.
members. ● In establishing the overall
audit strategy, the auditor
Preliminary Engagement Activities shall:
○ Identify the
● The auditor shall characteristics of
undertake the following the engagement
activities at the beginning that define its scope
of the current audit ○ Ascertain the
engagement: reporting objectives
(a) Performing of the engagement
procedures required to plan the timing of
by PSA 220, the audit and the
 nature of the Understanding the
communications Entity and Its
required; Environment.”
○ Consider the factors ○ The nature, timing
that, in the auditor’s and extent of
professional planned further
judgment, are audit procedures at
significant in the assertion level,
directing the as determined
engagement team’s under PSA 330,
efforts; “The Auditor’s
○ Consider the results Responses to
of preliminary Assessed Risks.”
engagement ○ Other planned audit
activities and, procedures that are
where applicable, required to be
whether knowledge carried out so that
gained on other the engagement
engagements complies with
performed by the PSAs. (Ref: Para.
engagement A13)
partner for the entity
is relevant; and ● The auditor shall update
○ Ascertain the and change the overall
nature, timing and audit strategy and the
extent of resources audit plan as necessary
necessary to during the course of the
perform the audit
engagement. ● The auditor shall plan the
nature, timing and extent
of direction and
supervision of
● The auditor shall develop engagement team
an audit plan that shall members and the review
include a description of: of their work.
○ The nature, timing Documentation
and extent of
planned risk
● The auditor shall
assessment
document:
procedures, as
○ The overall audit
determined under
strategy;
PSA 315,
○ The audit plan; and
“Identifying and
○ Any significant
Assessing the Risks
changes made
of Material
during the audit
Misstatement
engagement to the
through
 overall audit
strategy or the audit
plan, and the
reasons for such
changes.

Additional Considerations in Initial Audit Engagements

The auditor shall undertake the following activities prior to starting an initial audit:
○ Performing procedures required by PSA 220 regarding the
acceptance of the client relationship and the specific audit
engagement; and
○ Communicating with the predecessor auditor, where there has
been a change of auditors, in compliance with relevant ethical
requirements.

Philippine Standard on Auditing 315

IDENTIFYING AND ASSESSING THE Scope of this PSA: This Philippine
RISKS OF MATERIAL Standard on Auditing (PSA) deals with
MISSTATEMENT THROUGH the auditor’s responsibility to identify
UNDERSTANDING THE ENTITY AND and assess the risks of material
ITS ENVIRONMENT misstatement in the financial
statements, through understanding the
entity and its environment, including the
entity’s internal control.
Effective Date: On or after the date of
December 15, 2009.
Objectives: To identify and assess the
risks of material misstatement, whether
due to fraud or error, at the financial
statement and assertion levels, through
understanding the entity and its
environment, including the entity’s
internal control, thereby providing a
basis for designing and implementing
responses to the assessed risks of
material misstatement.
Risk Assessment Procedures and
Related Activities
The Auditor shall:
➢ provide a basis for the
identification and assessment of
risks of material misstatement at
the financial statement and
assertion levels.
➢ include inquiries by the
management and of others in the
entity, analytical procedures, and
observation and inspections.
➢ Consider the information
obtained from the auditor’s
continuance or acceptance that
are relevant to identifying risk of
material misstatement.
➢ Consider information by an
engagement partner that is
relevant to identifying risk of
material misstatement.
➢ determine whether changes have
occurred since the previous audit
that may affect its relevance to
the current audit.
➢ The engagement partner and
other key engagement team
members shall discuss the
susceptibility of the entity’s
financial statements to material
misstatement, and the application
of the applicable financial
reporting framework to the
entity’s facts and circumstances.
The engagement partner shall
determine which matters are to
be communicated to engagement
team members not involved in
the discussion.
The Required Understanding of the
Entity and its Environment, Including the
Entity’s Internal Control
The Entity and Its Environment
The auditor shall obtain
understanding of the following:
Relevant industry, regulatory,
and other external factors
including the applicable financial
reporting framework, nature of
the entity, the entity’s selection
and application of accounting
policies, including the reasons for
changes, the entity’s objectives
and strategies, and those related
business risk, and the
measurement and review of the
entity’s financial performance.
The Entity’s Internal Control
The auditor shall obtain
understanding of the internal
control that is relevant to the
audit. The auditor shall evaluate
the design of those controls and
determine whether they have
been implemented.
Components of Internal Control
1. Control Environment
➢ Communication
and enforcement of
integrity and ethical
values
➢ Commitment to
competence
 ➢ Participation by 3. Information System and
those charged with Communication
governance An information system
➢ Management’s consists of infrastructure
philosophy and (physical and hardware
operating style components), software,
➢ Organizational people, procedures, and
structure. data.
➢ Assignment of
authority and
responsibility 4. Control Activities
➢ Human resource Control activities that may
policies and be relevant to an audit
practices may be categorized as
2. Risk Assessment Process policies and procedures
➢ How management that pertain to the
identifies business following:
risks relevant to the ➢ Performance
preparation of reviews.
financial statements ➢ Information
in accordance with processing
the entity’s ➢ Physical
applicable financial controls.
reporting ➢ Segregation
framework. of duties
Risks can arise or change 5. Monitoring
due to circumstances such as the Management’s monitoring
following: of controls includes
a. Changes in considering whether they
operating are operating as intended
environment and that they are modified
b. New Personnel as appropriate for changes
c. New or revamped in conditions
information systems
d. Rapid growth. Identifying and Assessing the Risks
e. New technology of Material Misstatement
f. New business The auditor shall assess and
models, products, identify risk of material misstatement at
or activities. financial statement level and assertion
g. Corporate level.
restructurings. The Auditor shall:
h. Expanded foreign ➢ Identify risks throughout the
operations. process of obtaining an
i. New accounting understanding of the entity and
pronouncements its environment
 ➢ Assess and evaluate the material weakness in the design,
identified risks implementation or maintenance of
➢ Relate the identified risks to what internal control and shall communicate
can go wrong at the assertion material weaknesses in internal control
level identified during the audit on a timely
➢ Consider the likelihood of basis to management at an appropriate
misstatement level of responsibility.

Risks that Require Special Audit Documentation

Consideration The Auditor shall document:
Judgement to significant risks: 1. The discussion among the
➢ Whether a risk of fraud engagement team.
➢ Whether the risk is related to 2. Key elements of the
recent significant economic, understanding obtained
accounting or other regarding each of the
developments aspects of the entity and
➢ The complexity of transactions its environment.
➢ Whether the risk involves 3. The identified and
significant transactions with assessed risks of material
related parties misstatement at the
➢ The degree of subjectivity in the financial statement level
measurement of financial and at the assertion level .
information related to the risk 4. The risks identified, and
➢ Whether the risk involves related controls about
significant transactions that are which the auditor has
outside the normal course of obtained an
business understanding.

Risks for Which Substantive Procedures

Alone Do Not Provide Sufficient
Appropriate Audit Evidence
Such risks may relate to the
inaccurate or incomplete
recording of routine and
significant classes of transactions
or account balances, the
characteristics of which often
permit highly automated
processing with little or no
manual intervention.
Revision of Risk Assessment:
Inconsistency of evidence

Material Weakness in Internal Control

The auditor shall evaluate
whether the auditor has identified a
 1. Have a reasonable knowledge of
business and economic activities
and accounting and a willingness
to study the information in the
Philippine Standard on Auditing 320 financial statements with
reasonable diligence;
MATERIALITY IN PLANNING AND 2. Understand that financial
PERFORMING AN AUDIT statements are prepared,
presented and audited to levels
Scope of this PSA 1.This Philippine of materiality;
Standard on Auditing (PSA) deals with 3. Recognize the uncertainties
the auditor’s responsibility to apply the inherent in the measurement of
concept of materiality in planning and amounts based on the use of
performing an audit of financial estimates, judgment and the
statements. consideration of future events;
Materiality in the Context of an Audit: and
1. Misstatements, including 4. Make reasonable economic
omissions, are considered to be decisions on the basis of the
material if they, individually or in information in the financial
the aggregate, could reasonably statements.
be expected to influence the
economic decisions of users In planning the audit, the auditor makes
taken on the basis of the financial judgments about the size of
statements; misstatements that will be considered
2. Judgments about materiality are material.
made in light of surrounding
circumstances, and are affected The auditor considers not only the size
by the size or nature of a but also the nature of uncorrected
misstatement, or a combination misstatements, and the particular
of both; and circumstances of their occurrence, when
3. Judgments about matters that evaluating their effect on the financial
are material to users of the statements
financial statements are based
on a consideration of the Effective Date: On or after December
common financial information 15, 2009.
needs of users as a group. Objective: To apply the concept of
materiality appropriately in planning and
The auditor’s determination of performing the audit.
materiality is a matter of professional
judgment, and is affected by the Requirements
auditor’s perception of the financial
information needs of users of the Determining Materiality and
financial statements. In this context, it is Performance Materiality when
reasonable for the auditor to assume Planning the Audit
that users:
 1. The auditor shall determine
materiality for the financial
statements as a whole.
2. The auditor shall also determine
the materiality level or levels to
be applied to those particular
classes of transactions, account
balances or disclosures.
3. The auditor shall determine
performance materiality for
purposes of assessing the risks
of material misstatement and
determining the nature, timing
and extent of further audit
procedures.
Revision as the Audit Progresses
1. The auditor shall revise
materiality for the financial
statements as a whole in the
event of becoming aware of
information during the audit that
would have caused the auditor to
have determined a different
amount.
2. If the auditor concludes that a
lower materiality for the financial
statements as a whole than that
initially determined is appropriate,
the auditor shall determine
whether it is necessary to revise
performance materiality, and
whether the nature, timing and
extent of the further audit
procedures remain appropriate.
Documentation
The audit documentation shall include
the following amounts and the factors
considered in their determination:
1. Materiality for the financial
statements as a whole
2. If applicable, the materiality level
or levels for particular classes of
transactions, account balances or
disclosures
3. Performance materiality
4. Any revision of the three above
as the audit progressed

Philippine Standard on Quality Control 1
QUALITY CONTROL FOR FIRMS
THAT PERFORM AUDITS AND
REVIEWS OF FINANCIAL
STATEMENTS, AND OTHER
ASSURANCE AND RELATED
SERVICES ENGAGEMENTS
Scope of PSQC 1: deals with a firm’s
responsibilities for its system of quality
control for audits and reviews of
financial statements, and other
assurance and related services
engagements. Also, it contains other
pronouncements of the Auditing and
Assurance Standards Council. A system
of quality control consists of policies
designed to achieve the objective and
the procedures necessary to implement
and monitor compliance with those
policies.
Authority of this PSQC:It applies to all
firms of professional accountants in
respect of audits and reviews of
financial statements, and other
assurance and related services
engagements.
Effective Date: December 15, 2009
Objective:The objective of the firm is to
establish and maintain a system of
quality control to provide it with
reasonable assurance that the firm and
its personnel comply with professional
standards and regulatory and legal
requirements; and reports issued by the
firm or engagement partners are
appropriate in the circumstances.
Requirements
Applying, and Complying with, Relevant
Requirements
1. Personnel within the firm
responsible for
establishing and
maintaining the firm’s
system of quality control
shall have an
understanding of the entire
text of this PSQC
2. The firm shall comply with
each requirement of this
PSQC unless, in the
circumstances of the firm,
the requirement is not
relevant to the services.
3. The requirements are
designed to enable the
firm to achieve the
objective stated in this
PSQC
Elements of a System of Quality Control
The firm shall establish and
maintain a system of quality
control that includes policies and
procedures that address each of
the following elements:
➢ Leadership responsibilities
for quality within the firm.
➢ Relevant ethical
requirements.
➢ Acceptance and
continuance of client
relationships and specific
engagements.
➢ Human resources.
➢ Engagement performance.
➢ Monitoring.
The firm shall document its
policies and procedures and
communicate them to the firm’s
personnel.
Leadership Responsibilities for Quality
within the Firm:The firm shall establish
policies and procedures designed to
promote an internal culture recognizing
that quality is essential in performing
engagements. Establish policies and
procedures such that any person or
persons assigned operational
responsibility for the firm’s system of
quality control by the firm’s chief
executive officer or managing board of
partners has sufficient and appropriate
experience and ability, and the
necessary authority, to assume that
responsibility.
Relevant Ethical Requirements: The
firm shall establish policies and
procedures designed to provide it with
reasonable assurance that the firm and
its personnel comply with relevant
ethical requirements.
Independence
The firm shall establish policies
and procedures designed to
provide it with reasonable
assurance that the firm, its
personnel and, where applicable,
others subject to independence
requirements (including network
firm personnel) maintain
independence where required by
relevant ethical requirements.
Such policies and procedures shall
require:
1. Engagement partners to
provide the firm with
relevant information about
client engagements
2. Personnel to promptly
notify the firm of
circumstances and
relationships that create a
threat to independence so
that appropriate action can
be taken.
3. The accumulation and
communication of relevant
information to appropriate
personnel
The firm shall establish policies
and procedures designed to
provide it with reasonable
assurance that it is notified of
breaches of independence
requirements.The policies and
procedures shall include
requirements for:
1. Personnel to promptly
notify the firm
2. The firm to promptly
communicate identified
breaches
3. Prompt communication to
the firm, if necessary, by
the engagement partner
and the other individuals.
At least annually, the firm shall
obtain written confirmation of
compliance with its policies and
procedures on independence.
Acceptance and Continuance of
Client Relationships and Specific
Engagements
The firm shall establish policies and
procedures for the acceptance and
continuance of client relationships and
specific engagements, designed to
provide the firm with reasonable
assurance that it will only undertake or
continue relationships and
engagements where the firm:
1. Is competent to perform the
engagement and has the
capabilities, including time and
resources, to do so
2. Can comply with relevant ethical
requirements; and
3. Has considered the integrity of
the client, and does not have
 information that would lead it to The firm shall assign
conclude that the client lacks responsibility for each
integrity. engagement to an engagement
Such policies and procedures shall partner and shall establish
require: policies and procedures requiring
➢ The firm to obtain such that:
information as it considers ➢ The identity and role of the
necessary in the circumstances engagement partner are
before accepting an engagement communicated to key
with a new client members of client
➢ If a potential conflict of interest is management and those
identified in accepting an charged with governance
engagement from a new or an ➢ The engagement partner
existing client has the appropriate
➢ If issues have been identified competence, capabilities,
and authority to perform
Policies and Procedures addressing the the role
circumstances where the firm obtains ➢ The responsibilities of the
information that would have caused it to engagement partner are
decline the engagement had that clearly defined and
information been available earlier. Such communicated to that
policies and procedures shall include partner.
consideration of:
1. The professional and legal Engagement Performance
responsibilities that apply Policies and Procedures to provide it
2. The possibility of withdrawing with reasonable assurance that
from the engagement or from engagements are performed in
both the engagement and the accordance with professional standards
client relationship. and regulatory and legal requirements,
and that the firm or the engagement
Human Resources partner issue reports that are
Policies and Procedures to provide it appropriate in the circumstances. Such
with reasonable assurance that it has policies and procedures shall include:
sufficient personnel with the 1. Matters relevant to promoting
competence, capabilities, and consistency in the quality of
commitment to ethical principles engagement performance
necessary to: 2. Supervision responsibilities
1. Perform engagements in 3. Review responsibilities
accordance with professional It shall be determined on the basis that
standards and regulatory and work of less experienced team
legal requirements members is reviewed by more
2. Enable the firm or engagement experienced engagement team
partners to issue reports that are members.
appropriate in the circumstances.
Consultation
Assignment of Engagement Teams
 The firm shall establish policies 3. Require an engagement
and procedures designed to quality control review for
provide it with reasonable all engagements
assurance that: The firm shall establish policies and
1. Appropriate consultation procedures setting out the nature, timing
takes place on difficult or and extent of an engagement quality
contentious matters; control review.
2. Sufficient resources are
available to enable The firm shall establish policies and
appropriate consultation to procedures to require the engagement
take place; quality control review to include:
3. The nature and scope of, 1. Discussion of significant matters
and conclusions resulting with the engagement partner
from, such consultations 2. Review of the financial
are documented and are statements or other subject
agreed by both the matter information and the
individual seeking proposed report
consultation and the 3. Review of selected engagement
individual consulted documentation relating to
4. Conclusions resulting from significant judgments the
consultations are engagement team made and the
implemented. conclusions it reached
Engagement Quality Control Review 4. Evaluation of the conclusions
Policies and procedures required reached in formulating the report
for appropriate engagements, an and consideration of whether the
engagement quality control proposed report is appropriate.
review that provides an objective
evaluation of the significant For audits of financial statements of
judgments made by the listed entities, the firm shall establish
engagement team and the policies and procedures to require the
conclusions reached in engagement quality control review to
formulating the report. Such also include consideration of the
policies and procedures shall: following:
1. Require an engagement 1. The engagement team’s
quality control review for evaluation of the firm’s
all audits of financial independence in relation
statements of listed to the specific
entities engagement
2. Set out criteria against 2. Whether appropriate
which all other audits and consultation has taken
reviews of historical place on matters involving
financial information and differences of opinion or
other assurance and other difficult or
related services contentious matters, and
engagements shall be the conclusions arising
evaluated from those consultations
 3. Whether documentation
selected for review reflects
the work performed in
relation to the significant
judgments made and
supports the conclusions
reached.
Criteria for the Eligibility of Engagement
Quality Control Reviewers
The firm shall establish policies and
procedures to address the appointment
of engagement quality control reviewers
and establish their eligibility through:
1. The technical qualifications
required to perform the role,
including the necessary
experience and authority
2. The degree to which an
engagement quality control
reviewer can be consulted on the
engagement without
compromising the reviewer’s
objectivity.
Policies and procedures designed to
maintain the objectivity of the
engagement quality control reviewer. It
shall provide for the replacement of the
engagement quality control reviewer
where the reviewer’s ability to perform
an objective review may be impaired.
Documentation of the Engagement
Quality Control Review
The firm shall establish policies and
procedures on documentation of the
engagement quality control review
which require documentation that:
1. The procedures required by the
firm’s policies on engagement
quality control review have been
performed;
2. The engagement quality control
review has been completed on or
before the date of the report
3. The reviewer is not aware of any
unresolved matters that would
cause the reviewer to believe that
the significant judgments the
engagement team made and the
conclusions it reached were not
appropriate.
Differences of Opinion
The firm shall establish policies and
procedures for dealing with and
resolving differences of opinion within
the engagement team, with those
consulted and, where applicable,
between the engagement partner and
the engagement quality control
reviewer.
Such policies and procedures shall
require that: (a) Conclusions reached be
documented and implemented; and (b)
The report not be dated until the matter
is resolved.
Engagement Documentation
Completion of the Assembly of Final
Engagement Files:The firm shall
establish policies and procedures for
engagement teams to complete the
assembly of final engagement files on a
timely basis after the engagement
reports have been finalized.
Confidentiality, Safe Custody, Integrity,
Accessibility and Retrievability of
Engagement Documentation:The firm
shall establish policies and procedures
designed to maintain the confidentiality,
safe custody, integrity, accessibility and
retrievability of engagement
documentation.
Retention of Engagement
Documentation:The firm shall establish
policies and procedures for the retention
of engagement documentation for a
period sufficient to meet the needs of
the firm or as required by law or
regulation.
Monitoring
Monitoring the Firm’s Quality Control
Policies and Procedures
Process designed to provide it with
reasonable assurance that the policies
and procedures relating to the system of
quality control are relevant, adequate,
and operating effectively. This process
shall:
1. Include an ongoing consideration
and evaluation of the firm’s
system of quality control
including
2. Require responsibility for the
monitoring process to be
assigned to a partner or partners
or other persons with sufficient
and appropriate experience and
authority in the firm to assume
that responsibility
3. Require that those performing the
engagement or the engagement
quality control review are not
involved in inspecting the
engagements.
Evaluating, Communicating and
Remedying Identified Deficiencies
The firm shall evaluate the effect
of deficiencies noted as a result
of the monitoring process and
determine whether they are
either:
1. Instances that do not
necessarily indicate that
the firm’s system of quality
control is insufficient to
provide it with reasonable
assurance that it complies
PSQC 1 (Redrafted) 16
with professional
standards and regulatory
and legal requirements,
and that the reports issued
by the firm or engagement
partners are appropriate in
the circumstances; or
2. Systemic, repetitive or
other significant
deficiencies that require
prompt corrective action.
The firm shall establish policies
and procedures to address cases
where the results of the
monitoring procedures indicate
that a report may be
inappropriate or that procedures
were omitted during the
performance of the engagement.
The firm shall
communicate at least annually
the results of the monitoring of its
system of quality control to
engagement partners and other
appropriate individuals within the
firm
Complaints and Allegations
The firm shall establish policies
and procedures designed to
provide it with reasonable
assurance that it deals
appropriately with:
1. Complaints and
allegations that the work
performed by the firm fails
to comply with
professional standards
and regulatory and legal
requirements
 2. Allegations of non-
compliance with the firm’s
system of quality control.
The firm shall take any
appropriate actions when there is
noncompliance with the firm’s
system of quality control.

Documentation of the System of

Quality Control
The firm shall establish policies and
procedures requiring appropriate
documentation to provide evidence of
the operation of each element of its
system of quality control. Policies and
procedures that require retention of
documentation for a period of time
sufficient to permit those performing
monitoring procedures to evaluate the
firm’s compliance with its system of
quality control, or for a longer period if
required by law or regulation. Policies
and procedures requiring
documentation of complaints and
allegations and the responses to them.
 ISAEs and,
consequently, the
Auditing Standards
and Practices
Council (ASPC) in
its adoption of said
standards for
application in the
Philippines.

● This Framework does not

itself establish standards
Philippine Framework for Assurance or provide procedural
Management requirements for the
performance of assurance
Introduction engagements. ISAs,
ISREs and ISAEs and,
● It defines and describes therefore, their counterpart
the elements and PSAs, PSREs, and
objectives of an assurance PSAEs, contain basic
engagement, and principles, essential
identifies engagements to procedures and related
which Philippine guidance, consistent with
Standards on Auditing the concepts in this
(PSAs), Philippine Framework, for the
Standards on Review performance of assurance
Engagements (PSREs) engagements.
and Philippine Standards
on Assurance Overview of this
Engagements (PSAEs) Framework:
apply.
● It provides a frame of ● Introduction:
reference for: ○ This Framework
○ Professional deals with
accountants in assurance
public practice engagements
○ Others involved performed by
with assurance practitioners. It
engagements
provides a frame of
○ The International
reference for
Auditing and
Assurance practitioners and
Standards Boards others involved with
(a) (IAASB) in its assurance
development of engagements, such
ISAs, ISREs and as those engaging
 a practitioner (the ● Elements of an assurance
“engaging party”). engagement:
○ This section
● Definition and objective of identifies and
an assurance discusses five
engagement: elements of
○ This section defines assurance
assurance engagements
engagements and performed by
identifies the practitioners exhibit:
objectives of the a three party
two types of relationship, a
assurance subject matter,
engagement a criteria, evidence
practitioner is and an assurance
permitted to report.
perform. This
Framework calls
these two types
reasonable ● Inappropriate use of the
assurance practitioner’s name:
engagements and ○ This section
limited assurance discusses
engagements. implications of a
practitioner’s
association with a
● Scope of the Framework: subject matter.
○ This section
distinguishes Ethical Principles and Quality Control
assurance Standards
engagements from
other engagements, ● In addition to this
such as consulting Framework and PSAs,
engagements. PSREs, and PSAEs,
practitioners who perform
assurance engagements
● Engagement acceptance: are governed by:
○ This section sets (a) The Code of Ethics
out characteristics for Professional
that must be Accountants in the
exhibited before a Philippines
practitioner can (b) Philipine Standards
on Quality Control
accept an
assurance
● Part A of the Code sets
engagement. out the fundamental
ethical principles that all
 professional accountants ● An assurance engagement
are required to observe, may be part of a larger
(a) Integrity engagement. This
(b) Objectivity framework is relevant only
(c) Professional to the assurance portion of
Competence and engagements.
Due Care ● The following
(d) Confidentiality engagements:
(e) Professional ○ Engagement to
Behavior testify in legal
proceedings
● Part B of the Code, which regarding
applies only to accounting,
professional accountants auditing, taxation,
in public practice or other matters;
(practitioners), includes a and
conceptual approach to ○ Engagement that
independence that takes includes
into account, for each professional
assurance engagement, opinions, views, or
threats to independence, wording from which
accepted safeguards and users may derive
the public interest. some assurance.

Scope of the Framework Report on Non-assurance Engagement

● Not all engagements

performed by practitioners ● A practitioner reporting on
are assurance an engagement that is not
engagements. Other an assurance engagement
frequently performed within the scope of this
engagements that do not Framework, clearly
meet, including: distinguishes that report
○ Engagement from an assurance report.
covered by So as not to confuse
Philippine users, a report that is not
Standards for an assurance report
Related Services avoids, for example:
○ The preparation of ○ Implying
tax returns where compliance with this
no conclusion Framework, PSAs,
conveying PSREs or PSAEs.
assurance is ○ Inappropriately
expressed. using the words
○ Consulting “assurance,” “audit”
engagements or “review.”
 ○ Including a (ii) Criteria are
statement that suitable and
could reasonably be available to
mistaken for a
intended
conclusion
designed to users.
enhance the degree (iii) Practitioners
of confidence of have access
intended users to sufficient
about the outcome evidence to
of the evaluation or support
measurement of a
his/her
subject matter
against criteria. conclusion.
● The practitioner and the (iv) Conclusion is
responsible party may in the form
agree to apply the appropriate
principles of this to the
Framework to an engagement
engagement when there
and is in a
are no intended users
other than the responsible written
party but where all other report.
requirements of the PSAs, (v) There is a
PSREs or PSAEs are met. rational
purpose for
Engagement Acceptance
the
● A practitioner accepts an engagement.
assurance engagement Engagement
only where the s with scope
practitioner’s preliminary limitations or
knowledge of the negotiated in
engagement
inappropriate
circumstances indicates
that: manner is
(a) Relevant ethical unlikely to
requirements are have a
met rational
(b) Engagement purpose.
exhibits ALL:
(i) Subject
matter is
● PSAs, PSREs and PSAEs
appropriate.
include additional
requirements which need
 to be satisfied before
accepting an assurance
engagement.
● When a potential
engagement cannot be
accepted as an assurance
engagement, the
practitioner may still
accept such as a designed for specified
consulting or agreed upon
procedures engagement.
● The practitioner cannot
change an assurance
engagement to non-
assurance or a reasonable
assurance to a limited
assurance without
reasonable justification. If
such change is made,
evidence gathered is not
disregarded.
Elements of Assurance Engagement
Three-party relationship
● An assurance engagement
involves 3 separate parties
- practitioner, responsible
party and intended users.
The responsible party and
intended users may be
from the same or different
entities. The responsible
party in a direct reporting
engagement is responsible
for the subject matter or in
an assertion-based
engagement is responsible
for the assertions.
● Intended users are the
persons to whom the
report is being addressed.
Practitioner is responsible
for determining the nature,
timing and extent of
procedures and is required
to pursue any matter in
question whether material
modification should be
made to the subject matter
information.
● When engagements are
intended users or a
specific purpose, the
practitioner shall consider
including a restriction in
the report that limits its use
to those users or purpose.
Appropriate subject matter
● An appropriate subject
matter identifiable and
capable of consistent
evaluation or
measurement against the
criteria and can be
subjected to procedures to
gather sufficient and
appropriate evidence to
support conclusion.
Suitable criteria
● A criteria is suitable if it is
relevant (can assists users
in decision making),
complete (relevant factors
that can affect a
conclusion are not
omitted), reliable (allows
for evaluation or
verification), neutral (free
from bias) and understable
(comprehensive, clear and
not subject to different
interpretations).
 ● Criteria need to be including consideration of
available to intended controls over their
users, either publicly, preparation and
inclusion in presentation of maintenance where
subject matter information, relevant.
inclusion in the assurance
report or by general
understanding, to allow
them to understand how Sufficiency and Appropriateness of
subject matter was Evidence
measured or evaluated. ● Sufficiency is the measure
of the quantity of evidence.
Appropriateness is the
Evidence measure of the quality of
● The practitioner plans and evidence; that is, its
performs an assurance relevance and its
engagement with an attitude of reliability. Accordingly, the
professional skepticism to obtain sufficiency and
sufficient appropriate evidence appropriateness of
about whether the subject matter evidence are interrelated.
information is free of material However, merely obtaining
misstatement.The practitioner more evidence may not
considers materiality, assurance compensate for its poor
engagement risk, and the quality.
quantity and quality of available ● The reliability of evidence
evidence. is influenced by its source
and by its nature, and is
Professional skepticism dependent on the
● An attitude of professional individual circumstances
skepticism means the under which it is obtained.
practitioner makes a While recognizing that
critical assessment, with a exceptions may exist, the
questioning mind, of the following generalizations
validity of evidence about the reliability of
obtained and is alert to evidence may be useful:
evidence that contradicts ○ Evidence is more
or brings into question the reliable when it is
reliability of documents or obtained from
representations by the independent
responsible party. sources outside the
● The practitioner considers entity.
the reliability of the ○ Evidence that is
information to be used as generated internally
evidence, for example is more reliable
photocopies, facsimiles, when the related
filmed, digitized or other
electronic documents,
 controls are determines the nature,
effective. timing and extent of
○ Evidence obtained evidence-gathering
directly by the procedures, and when
practitioner is more assessing whether the
reliable than subject matter information
evidence obtained is free of misstatement.
indirectly or by
inference. Assurance Engagement Risk
○ Evidence is more ● Assurance engagement
reliable when it risk is the risk that the
exists in practitioner expresses an
documentary form, inappropriate conclusion
whether paper, when the subject matter
electronic, or other information is materially
media. misstated.
○ Evidence provided ● Assurance engagement
by original risk can be represented by
documents is more the following components:
reliable than ○ The risk that the
evidence provided subject matter
by photocopies or information is
facsimiles. materially misstated
● Obtaining evidence from ○ Detection risk: the
different sources or of a risk that the
different nature may practitioner will not
indicate that an individual detect a material
item of evidence is not misstatement that
reliable. when evidence exists.
obtained from one source
is inconsistent with that Written assurance report in appropriate
obtained from another, the form
practitioner determines
what additional evidence- ● PSAs, PSREs and PSAEs
gathering procedures are establish basic elements
necessary to resolve the for reports in a particular
inconsistency. assurance engagement.
● The practitioner considers In addition, practitioners
the relationship between consider other reporting
the cost of obtaining responsibilities when
evidence and the appropriate. A practitioner
usefulness of the does not express
information obtained. unqualified (clean)
conclusion when these
Materiality circumstances exist and
● Materiality is relevant
when the practitioner
 impact to the conclusion is users of the inappropriate
material: use or seeking legal
a. Scope limitation - advice.
practitioner expresses
either qualified or Effective Date: This Framework shall be
disclaimer depending on effective for assurance reports dated on
materiality of the limitation. or after January 1, 2005. Earlier
In some cases, reference is permissible.
practitioners consider
withdrawing from the
engagement.
b. Subject matter
information or assertion is
not fairly stated as against
criteria - practitioner
expresses either qualified
or adverse opinion.
c. When it is
discovered after accepting
the engagement that the
criteria is unsuitable or
subject matter is
inappropriate, the
practitioner expresses
qualified, adverse or
disclaimer of opinion
depending on the
pervasiveness of the
issue. In some cases, the
practitioner considers
withdrawing from the
engagement.

Inappropriate Use of
Practitioner’s Name

● If the practitioner learns

that a party is
inappropriately using the
practitioner's name in a
subject matter, he/she
should require the party to
cease doing so.
Practitioner also considers
other steps needed such
as informing third party