PSA 300 (Revised) engagement.

However, in planning an audit, the auditor considers the adversely affect the auditors ability to plan and perform the audit PHILIPPINE STANDARD ON AUDITING 300 (REVISED) timing of engagement to PLANNING AN AUDIT certain planning activities and audit procedures that need to be completed reduce audit risk to an acceptably low level. Performing these preliminary OF FINANCIAL STATEMENTS prior to engagement activities helps to ensure that the auditor plans an audit Auditing Standards and Practices Council the performance of further audit procedures. For example, the auditor plans engagement PSA 300 (Revised) the for which: PHILIPPINE STANDARD ON AUDITING 300 (REVISED) discussion among engagement team members,1 the analytical procedures to The auditor maintains the necessary independence and ability to perform PLANNING AN AUDIT OF FINANCIAL STATEMENTS be the Philippine Standard on Auditing (PSA) 300, Planning an Audit of applied as risk assessment procedures, the obtaining of a general engagement. Financial understanding of 2 PSA 220, Quality Control for Audit Work will be withdrawn when PSA Statements, should be read in the context of the Preface to the Philippine 1 PSA 315, Understanding the Entity and Its Environment and Assessing 220 (Revised), Quality Standards on the Risks of Material Control for Audits of Historical Financial Information becomes effective. Quality Control, Auditing, Review, Other Assurance and Related Services,Misstatement paragraphs 14-19 provide guidance on the engagement PSA 220 (Revised) is effective which sets teams discussion of the for audits of historical financial information for periods commencing on or out the application and authority of PSAs. susceptibility of the entity to material misstatements of the financial after June 15, 2005. PSA 300 (Revised) statements. PSA 240 (revised), The - 3 - PSA 300 (Revised) PLANNING AN AUDIT OF FINANCIAL STATEMENTS Auditors Responsibility to Consider Fraud in an Audit of Financial There are no issues with management integrity that may affect the Introduction Statements paragraphs 24-27 provide auditors 1. The purpose of this Philippine Standard on Auditing (PSA) is to establishguidance on the emphasis given during this discussion to the susceptibility willingness to continue the engagement. standards and provide guidance on the considerations and activities of the entitys financial There is no misunderstanding with the client as to the terms of the applicable to statements to material misstatement due to fraud. engagement. planning an audit of financial statements. This PSA is framed in the context- 2 - PSA 300 (Revised) Planning Activities of the legal and regulatory framework applicable to the entity and how the The Overall Audit Strategy recurring audits. In addition, matters the auditor considers in initial audit entity is 8. The auditor should establish the overall audit strategy for the audit. engagements are included in paragraphs 28 and 29. complying with that framework, the determination of materiality, the 9. The overall audit strategy sets the scope, timing and direction of the 2. The auditor should plan the audit so that the engagement will be involvement audit, and performed of experts and the performance of other risk assessment procedures prior to guides the development of the more detailed audit plan. The establishment in an effective manner. identifying and assessing the risks of material misstatement and performingof the 3. Planning an audit involves establishing the overall audit strategy for the further audit procedures at the assertion level for classes of transactions, audit strategy involves: engagement and developing an audit plan, in order to reduce audit risk to anaccount (a) Determining the characteristics of the engagement that define its scope, acceptably low level. Planning involves the engagement partner and other balances, and disclosures that are responsive to those risks. such key Preliminary Engagement Activities as the financial reporting framework used, industry-specific reporting members of the engagement team to benefit from their experience and 6. The auditor should perform the following activities at the beginning of requirements and the locations of the components of the entity; insight and the (b) Ascertaining the reporting objectives of the engagement to plan the to enhance the effectiveness and efficiency of the planning process. current audit engagement: timing 4. Adequate planning helps to ensure that appropriate attention is devoted to Perform procedures regarding the continuance of the client relationship of the audit and the nature of the communications required, such as important areas of the audit, that potential problems are identified and and the specific audit engagement (see PSA 220,Quality Control for deadlines for interim and final reporting, and key dates for expected resolved on Audit Work2 for additional guidance). communications with management and those charged with governance; and a timely basis and that the audit engagement is properly organized and Evaluate compliance with ethical requirements, including independence (c) Considering the important factors that will determine the focus of the managed (see PSA 220 for additional guidance). engagement teams efforts, such as determination of appropriate materiality in order to be performed in an effective and efficient manner. Adequate Establish an understanding of the terms of the engagement (see PSA levels, preliminary identification of areas where there may be higher risks planning 210, Terms of Audit Engagements for additional guidance). of also assists in the proper assignment of work to engagement team members,The auditors consideration of client continuance and ethical requirements, material misstatement, preliminary identification of material components facilitates the direction and supervision of engagement team members and including independence, occurs throughout the performance of the audit and account balances, evaluation of whether the auditor may plan to obtain the engagement as conditions and changes in circumstances occur. However, evidence regarding the effectiveness of internal control, and identification review of their work, and assists, where applicable, in coordination of work the of done auditors initial procedures on both client continuance and evaluation of recent significant entity-specific, industry, financial reporting or other by auditors of components and experts. The nature and extent of planning ethical relevant developments. In developing the audit strategy, the auditor also activities will vary according to the size and complexity of the entity, the requirements (including independence) are performed prior to performing considers the results of preliminary engagement activities (see paragraphs 6 auditors other and 7) and, where practicable, experience gained on other engagements previous experience with the entity, and changes in circumstances that significant activities for the current audit engagement. For continuing audit performed for the entity. The Appendix to this PSA lists examples of occur engagements, such initial procedures often occur shortly after (or in matters the auditor may consider in establishing the overall audit strategy during the audit engagement. connection for 5. Planning is not a discrete phase of an audit, but rather a continual and with) the completion of the previous audit. an engagement. iterative 7. The purpose of performing these preliminary engagement activities is to 10. The process of developing the audit strategy helps the auditor to process that often begins shortly after (or in connection with) the help ascertain the completion of ensure that the auditor has considered any events or circumstances that maynature, timing and extent of resources necessary to perform the engagement. the previous audit and continues until the completion of the current audit The

audit strategy sets out clearly, in response to the matters identified in 14. The audit plan is more detailed than the audit strategy and includes the when the auditor planned the audit procedures. For example, the auditor paragraph 9, nature, may and subject to the completion of the auditors risk assessment procedures: timing and extent of audit procedures to be performed by engagement team obtain audit evidence through the performance of substantive procedures - 4 - PSA 300 (Revised) members in order to obtain sufficient appropriate audit evidence to reduce that (a) The resources to deploy for specific audit areas, such as the use of audit contradicts the audit evidence obtained with respect to the testing of the appropriately experienced team members for high risk areas or the risk to an acceptably low level. Documentation of the audit plan also servesoperating involvement of experts on complex matters; as a effectiveness of controls. In such circumstances, the auditor re-evaluates the (b) The amount of resources to allocate to specific audit areas, such as the record of the proper planning and performance of the audit procedures that planned audit procedures, based on the revised consideration of assessed number of team members assigned to observe the inventory count at can be risks at material locations, the extent of review of other auditors work in the case reviewed and approved prior to the performance of further audit procedures. assertion level for all or some of the classes of transactions, account the of 15. The audit plan includes: balances group audits, or the audit budget in hours to allocate to high risk areas; A description of the nature, timing and extent of planned risk assessment or disclosures. (c) When these resources are deployed, such as whether at an interim audit procedures sufficient to assess the risks of material misstatement, as Direction, Supervision and Review stage or at key cut-off dates; and determined under PSA 315, Understanding the Entity and Its Environment18. The auditor should plan the nature, timing and extent of direction and (d) How such resources are managed, directed and supervised, such as when Assessing the Risks of Material Misstatement; and supervision of engagement team members and review of their work. team briefing and debriefing meetings are expected to be held, how A description of the nature, timing and extent of planned further audit 19. The nature, timing and extent of the direction and supervision of engagement partner and manager reviews are expected to take place (for procedures at the assertion level for each material class of transactions, engagement example, on-site or off-site), and whether to complete engagement quality account balance, and disclosure, as determined under PSA 330, The team members and review of their work vary depending on many factors, control reviews. Auditors Procedures in Response to Assessed Risks. The plan for further including the size and complexity of the entity, the area of audit, the risks of 11. Once the audit strategy has been established, the auditor is able to start audit procedures reflects the auditors decision whether to test the operatingmaterial misstatement, and the capabilities and competence of personnel the effectiveness of controls , and the nature, timing and extent of planned performing the audit work. PSA 220 contains detailed guidance on the development of a more detailed audit plan to address the various matters substantive procedures; and direction, identified in the audit strategy, taking into account the need to achieve the Such other audit procedures required to be carried out for the engagement supervision and review of audit work. audit in 20. The auditor plans the nature, timing and extent of direction and objectives through the efficient use of the auditors resources. Although the order to comply with PSAs (for example, seeking direct communication supervision of auditor ordinarily establishes the audit strategy before developing the with the entitys lawyers). engagement team members based on the assessed risk of material detailed Planning for these audit procedures takes place over the course of the audit misstatement. audit plan, the two planning activities are not necessarily discrete or as the As the assessed risk of material misstatement increases, for the area of audit sequential audit plan for the engagement develops. For example, planning of the risk, processes but are closely inter-related since changes in one may result in auditors the auditor ordinarily increases the extent and timeliness of direction and consequential changes to the other. Paragraphs 14 and 15 provide further risk assessment procedures ordinarily occurs early in the audit process. supervision of engagement team members and performs a more detailed guidance on developing the audit plan. However, review of 12. In audits of small entities, the entire audit may be conducted by a very planning of the nature, timing and extent of specific further audit their work. Similarly, the auditor plans the nature, timing and extent of small audit procedures review of team. Many audits of small entities involve the audit engagement partner depends on the outcome of those risk assessment procedures. In addition, the engagement teams work based on the capabilities and competence of (who the the may be a sole practitioner) working with one engagement team member (or auditor may begin the execution of further audit procedures for some individual team members performing the audit work. without any engagement team members). With a smaller team, coordinationclasses of 21. In audits of small entities, an audit may be carried out entirely by the and transactions, account balances and disclosures before completing the more audit communication between team members are easier. Establishing the overall detailed audit plan of all remaining further audit procedures. engagement partner (who may be a sole practitioner). In such situations, audit Changes to Planning Decisions During the Course of the Audit questions strategy for the audit of a small entity need not be a complex or time16. The overall audit strategy and the audit plan should be updated and of direction and supervision of engagement team members and review of consuming changed their exercise; it varies according to the size of the entity and the complexity of as necessary during the course of the audit. work do not arise as the audit engagement partner, having personally the 17. Planning an audit is a continual and iterative process throughout the conducted audit. For example, a brief memorandum prepared at the completion of the audit all aspects of the work, is aware of all material issues. The audit previous audit, based on a review of the working papers and highlighting engagement. As a result of unexpected events, changes in conditions, or theengagement issues audit partner (or sole practitioner) nevertheless needs to be satisfied that the audit identified in the audit just completed, updated and changed in the current evidence obtained from the results of audit procedures, the auditor may has period need to been conducted in accordance with PSAs. Forming an objective view on the based on discussions with the owner-manager, can serve as the basis for modify the overall audit strategy and audit plan, and thereby the resulting appropriateness of the judgments made in the course of the audit can planning planned present the current audit engagement. nature, timing and extent of further audit procedures. Information may practical problems when the same individual also performed the entire The Audit Plan come to audit. 13. The auditor should develop an audit plan for the audit in order to reducethe auditors attention that differs significantly from the information When particularly complex or unusual issues are involved, and the audit is audit risk to an acceptably low level. available performed by a sole practitioner, it may be desirable to plan to consult with - 5 - PSA 300 (Revised) - 6 - PSA 300 (Revised) other suitably-experienced auditors or the auditors professional body.

- 7 - PSA 300 (Revised) the entity or may be made to improve the effectiveness and efficiency of the competence to respond to anticipated significant risks. Documentation audit. - 9 - PSA 300 (Revised) 22. The auditor should document the overall audit strategy and the audit Discussions with those charged with governance ordinarily include the Other procedures required by the firms system of quality control for plan, overall initial including any significant changes made during the audit engagement. audit strategy and timing of the audit, including any limitations thereon, or audit engagements (for example, the firms system of quality control may 23. The auditors documentation of the overall audit strategy records the any require the involvement of another partner or senior individual to review the key additional requirements. Discussions with management often occur to overall audit strategy prior to commencing significant audit procedures or to decisions considered necessary to properly plan the audit and to facilitate review reports prior to their issuance). communicate the conduct and management of the audit engagement (for example, to Effective Date significant matters to the engagement team. For example, the auditor may coordinate 30. This PSA is effective for audits of financial statements for periods summarize the overall audit strategy in the form of a memorandum that some of the planned audit procedures with the work of the entitys beginning on contains personnel). or after December 15, 2004. key decisions regarding the overall scope, timing and conduct of the audit. - 8 - PSA 300 (Revised) Acknowledgment 24. The auditors documentation of the audit plan is sufficient to Although these discussions often occur, the overall audit strategy and the 31. This PSA is based on International Standard on Auditing (ISA) 300 demonstrate the audit (Revised), planned nature, timing and extent of risk assessment procedures, and further plan remain the auditors responsibility. When discussions of matters Planning an Audit of Financial Statements, issued by the International audit included in Auditing procedures at the assertion level for each material class of transaction, the overall audit strategy or audit plan occur, care is required in order to notand Assurance Standards Board. account compromise the effectiveness of the audit. For example, the auditor 32. There are no significant differences between this PSA and ISA 300 balance, and disclosure in response to the assessed risks. The auditor may considers (Revised). use whether discussing the nature and timing of detailed audit procedures with Public Sector Perspective standard audit programs or audit completion checklists. However, when management compromises the effectiveness of the audit by making the 1. This PSA is applicable in all material respects to audits of public sector such audit entities. standard programs or checklists are used, the auditor appropriately tailors procedures too predictable. 2. Some of the terms used in this PSA such as engagement partner and them to Additional Considerations in Initial Audit Engagements firm reflect the particular engagement circumstances. 28. The auditor should perform the following activities prior to starting an should be read as referring to their public sector equivalents. 25. The auditors documentation of any significant changes to the originallyinitial 3. Paragraph 6 of this PSA refers to PSA 210, Terms of Audit planned audit: Engagements, and overall audit strategy and to the detailed audit plan includes the reasons for (a) Perform procedures regarding the acceptance of the client relationship PSA 220, Quality Control for Audit Work.3 The Public Sector the and the specific audit engagement (see PSA 220 for additional Perspectives to significant changes and the auditors response to the events, conditions, or guidance). those PSAs contain a discussion of their applicability to audits of public results (b) Communicate with the previous auditor, where there has been a change sector of audit procedures that resulted in such changes. For example, the auditor of auditors, in compliance with relevant ethical requirements. entities, and are therefore relevant to the application of this PSA in the may 29. The purpose and objective of planning the audit are the same whether public significantly change the planned overall audit strategy and the audit plan as the audit is sector. a an initial or recurring engagement. However, for an initial audit, the auditor3 See footnote 2. result of a material business combination or the identification of a material may - 1 0 - PSA 300 (Revised) misstatement of the financial statements. A record of the significant changes need to expand the planning activities because the auditor does not Appendix to ordinarily EXAMPLES OF MATTERS THE AUDITOR MAY CONSIDER IN the overall audit strategy and the audit plan, and resulting changes to the have the previous experience with the entity that is considered when ESTABLISHING THE OVERALL AUDIT STRATEGY planned planning This Appendix provides examples of matters the auditor may consider in nature, timing and extent of audit procedures, explains the overall strategy recurring engagements. For initial audits, additional matters the auditor may establishing the and consider in developing the overall audit strategy and audit plan include the overall audit strategy. Many of these matters will also influence the audit plan finally adopted for the audit and demonstrates the appropriate following: auditors detailed response Unless prohibited by law or regulation, arrangements to be made with the audit plan. The examples provided cover a broad range of matters to significant changes occurring during the audit. previous auditor, for example, to review the previous auditors working applicable to many 26. The form and extent of documentation depend on such matters as the papers. engagements. While some of the matters referred to below may be required size and Any major issues (including the application of accounting principles or of to be complexity of the entity, materiality, the extent of other documentation, andauditing and reporting standards) discussed with management in connectionperformed by other PSAs, not all matters are relevant to every audit the with the initial selection as auditors, the communication of these matters to engagement and the circumstances of the specific audit engagement. those charged with governance and how these matters affect the overall list is not necessarily complete. In addition, the auditor may consider these Communications With Those Charged With Governance and Management audit strategy and audit plan. matters in an 27. The auditor may discuss elements of planning with those charged with The planned audit procedures to obtain sufficient appropriate audit order different from that shown below. governance and the entitys management. These discussions may be a part evidence Scope of the Audit Engagement of regarding opening balances (see paragraph 2 of PSA 510, Initial The auditor may consider the following matters when establishing the scope overall communications required to be made to those charged with EngagementsOpening Balances). of the audit governance of The assignment of firm personnel with appropriate levels of capabilities engagement: and

 The financial reporting framework on which the financial information to The discussion with management regarding the expected communications auditor to rely on internal control. be on the - 1 3 - PSA 300 (Revised) audited has been prepared, including any need for reconciliations to anotherstatus of audit work throughout the engagement and the expected Importance attached to internal control throughout the entity to the financial reporting framework. deliverables successful Industry-specific reporting requirements such as reports mandated by resulting from the audit procedures. operation of the business. industry Communication with auditors of components regarding the expected types Significant business developments affecting the entity, including changes regulators. and in The expected audit coverage, including the number and locations of timing of reports to be issued and other communications in connection withinformation technology and business processes, changes in key components the management, and to be included. audit of components. acquisitions, mergers and divestments. The nature of the control relationships between a parent and its The expected nature and timing of communications among engagement Significant industry developments such as changes in industry regulations components that team and determine how the group is to be consolidated. members, including the nature and timing of team meetings and timing of new reporting requirements. The extent to which components are audited by other auditors. the Significant changes in the financial reporting framework, such as changes The nature of the business segments to be audited, including the need for review of work performed. in specialized knowledge. - 1 2 - PSA 300 (Revised) accounting standards. The reporting currency to be used, including any need for currency Whether there are any other expected communications with third parties, Other significant relevant developments, such as changes in the legal translation for including any statutory or contractual reporting responsibilities arising fromenvironment the financial information audited. the affecting the entity. The need for a statutory audit of standalone financial statements in audit. Philippine Standard on Auditing 200 (Revised and Redrafted) addition to an Direction of the Audit OVERALL OBJECTIVES OF THE INDEPENDENT audit for consolidation purposes. The auditor may consider the following matters when setting the direction AUDITOR AND THE CONDUCT OF AN AUDIT IN The availability of the work of internal auditors and the extent of the of the audit: ACCORDANCE WITH PHILIPINE STANDARDS ON auditors With respect to materiality: AUDITING potential reliance on such work. - Setting materiality for planning purposes. Conforming Amendments - 1 1 - PSA 300 (Revised) - Setting and communicating materiality for auditors of components. Preface to the Philippine Standards on Quality Control, The entitys use of service organizations and how the auditor may obtain - Reconsidering materiality as audit procedures are performed during the Auditing, Review, Other Assurance and Related Services evidence course of the audit. Other PSAs concerning the design or operation of controls performed by them. - Identifying the material components and account balances. Auditing and Assurance Standards Council The expected use of audit evidence obtained in prior audits, for example, Audit areas where there is a higher risk of material misstatement. PSA 200 (Revised and Redrafted) audit The impact of the assessed risk of material misstatement at the overall PSA 200 (Revised and Redrafted) evidence related to risk assessment procedures and tests of controls. financial Introduction The effect of information technology on the audit procedures, including statement level on direction, supervision and review. Scope of this PSA the The selection of the engagement team (including, where necessary, the 1. This Philippine Standard on Auditing (PSA) establishes the independent availability of data and the expected use of computer-assisted audit engagement quality control reviewer) and the assignment of audit work to auditors techniques. the overall responsibilities when conducting an audit of financial statements in The coordination of the expected coverage and timing of the audit work team members, including the assignment of appropriately experienced teamaccordance with PSAs. Specifically, it sets out the overall objectives of the with any members to areas where there may be higher risks of material misstatement.independent auditor, and explains the nature and scope of an audit designed reviews of interim financial information and the effect on the audit of the Engagement budgeting, including considering the appropriate amount of to information obtained during such reviews. time to enable the independent auditor to meet those objectives. It also explains the The discussion of matters that may affect the audit with firm personnel set aside for areas where there may be higher risks of material misstatement. scope, responsible for performing other services to the entity. The manner in which the auditor emphasizes to engagement team authority and structure of the PSAs, and includes requirements establishing The availability of client personnel and data. members the the Reporting Objectives, Timing of the Audit and Communications Required need to maintain a questioning mind and to exercise professional skepticism general responsibilities of the independent auditor applicable in all audits, The auditor may consider the following matters when ascertaining the in including the obligation to comply with the PSAs. The independent auditor reporting gathering and evaluating audit evidence. is objectives of the engagement, the timing of the audit and the nature of Results of previous audits that involved evaluating the operating referred to as the auditor hereafter. communications effectiveness of 2. PSAs are written in the context of an audit of financial statements by an required: internal control, including the nature of identified weaknesses and action auditor. The entitys timetable for reporting, such as at interim and final stages. taken to They are to be adapted as necessary in the circumstances when applied to The organization of meetings with management and those charged with address them. audits of governance to discuss the nature, extent and timing of the audit work. Evidence of managements commitment to the design and operation of other historical financial information. The discussion with management and those charged with governance sound An Audit of Financial Statements regarding internal control, including evidence of appropriate documentation of such 3. The purpose of an audit is to enhance the degree of confidence of the expected type and timing of reports to be issued and other internal intended users communications, control. in the financial statements. This is achieved by the expression of an opinion both written and oral, including the auditors report, management letters and Volume of transactions, which may determine whether it is more efficient by the communications to those charged with governance. for the

auditor on whether the financial statements are prepared, in all material Judgments about materiality are made in the light of surrounding (a) To obtain reasonable assurance about whether the financial statements respects, circumstances, as a in accordance with an applicable financial reporting framework. In the case and are affected by the auditors perception of the financial information whole are free from material misstatement, whether due to fraud or error, of needs of thereby enabling the auditor to express an opinion on whether the financial most general purpose frameworks, that opinion is on whether the financial users of the financial statements, and by the size or nature of a statements are prepared, in all material respects, in accordance with an statements are presented fairly, in all material respects, in accordance with misstatement, or a applicable financial reporting framework; and the combination of both. The auditors opinion deals with the financial (b) To report on the financial statements, and communicate as required by framework. An audit conducted in accordance with PSAs and relevant statements as a the ethical whole and therefore the auditor is not responsible for the detection of PSAs, in accordance with the auditors findings. requirements enables the auditor to form that opinion. (Ref: Para. A1) misstatements that are not material to the financial statements as a whole. 12. In all cases when reasonable assurance cannot be obtained and a 4. The financial statements subject to audit are those of the entity, prepared 7. The PSAs contain objectives, requirements and application and other qualified opinion and explanatory in the auditors report is insufficient in the circumstances for purposes of presented by management of the entity with oversight from those charged material that are designed to support the auditor in obtaining reasonable reporting with assurance. to the intended users of the financial statements, the PSAs require that the governance. PSAs do not impose responsibilities on management or those The PSAs require that the auditor exercise professional judgment and auditor charged maintain disclaim an opinion or withdraw from the engagement, where withdrawal is with governance and do not override laws and regulations that govern their professional skepticism throughout the planning and performance of the legally permitted. responsibilities. However, an audit in accordance with PSAs is conducted audit and, Definitions on the among other things: 13. For purposes of the PSAs, the following terms have the meanings premise that management and, where appropriate, those charged with Identify and assess risks of material misstatement, whether due to fraud orattributed governance error, based on an understanding of the entity and its environment, below: have responsibilities that are fundamental to the conduct of the audit. The including (a) Applicable financial reporting framework The financial reporting audit of the entitys internal control. framework adopted by management and, where appropriate, those charged the financial statements does not relieve management or those charged with Obtain sufficient appropriate audit evidence about whether material with governance in the preparation and presentation of the financial governance of those responsibilities. (Ref: Para. A2-A11) misstatements exist, through designing and implementing appropriate statements that is acceptable in view of the nature of the entity and the 5. As the basis for the auditors opinion, PSAs require the auditor to obtain responses to the assessed risks. objective of the financial statements, or that is required by law or reasonable assurance about whether the financial statements as a whole are Form an opinion on the financial statements based on conclusions drawn regulation. free from the audit evidence obtained. The term fair presentation framework is used to refer to a financial from material misstatement, whether due to fraud or error. Reasonable 8. The form of opinion expressed by the auditor will depend upon the reporting framework that requires compliance with the requirements of the assurance applicable framework and: is a high level of assurance. It is obtained when the auditor has obtained financial reporting framework and any applicable laws or regulations. (Ref: (i) Acknowledges explicitly or implicitly that, to achieve fair sufficient Para. presentation of the financial statements, it may be necessary for appropriate audit evidence to reduce audit risk (i.e., the risk that the auditor A12-A13) management to provide disclosures beyond those specifically expresses an inappropriate opinion when the financial statements are 9. The auditor may also have certain other communication and reporting required by the framework; or materially responsibilities to users, management, those charged with governance, or (ii) Acknowledges explicitly that it may be necessary for management to misstated) to an acceptably low level. However, reasonable assurance is notparties depart from a requirement of the framework to achieve fair an outside the entity, in relation to matters arising from the audit. These may presentation of the financial statements. Such departures are expected absolute level of assurance, because there are inherent limitations of an be to be necessary only in extremely rare circumstances. audit established by the PSAs or by applicable laws or regulations.2 The term compliance framework is used to refer to a financial reporting which result in most of the audit evidence on which the auditor draws Effective Date framework that requires compliance with the requirements of the conclusions 10. This PSA is effective for audits of financial statements for periods framework, but does not contain the acknowledgements in (i) or (ii) above. and bases the auditors opinion being persuasive rather than conclusive. beginning on or PSA 200 (Revised and Redrafted) (Ref: Para. after December 15, 2009. 6 A28-A52) 1 PSA 320 (Revised and Redrafted), Materiality in Planning and (b) Audit evidence Information used by the auditor in arriving at the PSA 200 (Revised and Redrafted) Performing an Audit and PSA 450 conclusions on which the auditors opinion is based. Audit evidence 4 (Revised and Redrafted), Evaluation of Misstatements Identified during includes 6. The concept of materiality is applied by the auditor both in planning and the Audit. both information contained in the accounting records underlying the performing the audit, and in evaluating the effect of identified 2 See, for example, PSA 260 (Revised and Redrafted), Communication financial misstatements on with Those Charged with statements and other information. For purposes of the PSAs: the audit and of uncorrected misstatements, if any, on the financial Governance; and paragraph 43 of PSA 240 (Redrafted), The Auditors (i) Sufficiency of audit evidence is the measure of the quantity of audit statements.1 In Responsibilities Relating to evidence. The quantity of the audit evidence needed is affected by the general, misstatements, including omissions, are considered to be material Fraud in an Audit of Financial Statements. auditors assessment of the risks of material misstatement and also by if, PSA 200 (Revised and Redrafted) the quality of such audit evidence. individually or in the aggregate, they could reasonably be expected to 5 (ii) Appropriateness of audit evidence is the measure of the quality of audit influence Overall Objectives of the Auditor evidence; that is, its relevance and its reliability in providing support for the economic decisions of users taken on the basis of the financial 11. In conducting an audit of financial statements, the overall objectives of the conclusions on which the auditors opinion is based. statements. the auditor (c) Audit risk The risk that the auditor expresses an inappropriate audit are: opinion

when the financial statements are materially misstated. Audit risk is a includes the design, implementation and maintenance of internal control Ethical Requirements Relating to an Audit of Financial Statements function of the risks of material misstatement and detection risk. relevant to the preparation and presentation of financial statements that 14. The auditor shall comply with relevant ethical requirements, including (d) Auditor Auditor is used to refer to the person or persons conducting are free from material misstatement, whether due to fraud or error; and those the (ii) To provide the auditor with: pertaining to independence, relating to financial statement audit audit, usually the engagement partner or other members of the engagement a. All information, such as records and documentation, and other engagements. team, or, as applicable, the firm. Where aPSA expressly intends that a matters that are relevant to the preparation and presentation of the (Ref: Para. A14-A17) requirement or responsibility be fulfilled by the engagement partner, the financial statements; Professional Skepticism term b. Any additional information that the auditor may request from 15. The auditor shall plan and perform an audit with professional skepticism engagement partner rather than auditor is used. Engagement partner management and, where appropriate, those charged with recognizing that circumstances may exist that cause the financial statements and firm are to be read as referring to their public sector equivalents governance; and to be where c. Unrestricted access to those within the entity from whom the materially misstated. (Ref: Para. A18-A22) relevant. auditor determines it necessary to obtain audit evidence. Professional Judgment (e) Detection risk The risk that the procedures performed by the auditor toIn the case of a fair presentation framework, the responsibility is for the 16. The auditor shall exercise professional judgment in planning and reduce audit risk to an acceptably low level will not detect a misstatement preparation and fair presentation of the financial statements in accordance performing an that exists and that could be material, either individually or when with the financial reporting framework. This applies to all references to audit of financial statements. (Ref: Para. A23-A27) aggregated preparation and presentation of the financial statements in the PSAs. PSA 200 (Revised and Redrafted) with other misstatements. The premise, relating to the responsibilities of management and, where 9 (f) Financial statements A structured representation of historical financial appropriate, those charged with governance, on which an audit is Sufficient Appropriate Audit Evidence and Audit Risk information, including related notes, intended to communicate an entitys conducted 17. To obtain reasonable assurance, the auditor shall obtain sufficient economic resources or obligations at a point in time or the changes therein may also be referred to as the premise. appropriate for a period of time in accordance with a financial reporting framework. (k) Professional judgment The application of relevant training, knowledgeaudit evidence to reduce audit risk to an acceptably low level and thereby The and enable related notes ordinarily comprise a summary of significant accounting experience, within the context provided by auditing, accounting and ethical the auditor to draw reasonable conclusions on which to base the auditors policies and other explanatory information. The term financial statementsstandards, in making informed decisions about the courses of action that areopinion. ordinarily refers to a complete set of financial statements as determined by appropriate in the circumstances of the audit engagement. (Ref: Para. A28-A52) the requirements of the applicable financial reporting framework, but can PSA 200 (Revised and Redrafted) Conduct of an Audit in Accordance with PSAs also refer to a single financial statement. 8 Complying with PSAs Relevant to the Audit (g) Historical financial information Information expressed in financial (l) Professional skepticism An attitude that includes a questioning mind, 18. The auditor shall comply with all PSAs relevant to the audit. APSA is terms in being relevant to relation to a particular entity, derived primarily from that entitys alert to conditions which may indicate possible misstatement due to error orthe audit when the PSA is in effect and the circumstances addressed by the accounting fraud, and a critical assessment of audit evidence. PSA system, about economic events occurring in past time periods or about (m) Reasonable assurance In the context of an audit of financial exist. (Ref: Para. A53-A57) economic conditions or circumstances at points in time in the past. statements, a 19. The auditor shall have an understanding of the entire text of aPSA, (h) Management The person(s) with executive responsibility for the high, but not absolute, level of assurance. including its conduct of (n) Risk of material misstatement The risk that the financial statements application and other explanatory material, to understand its objectives and the entitys operations. For some entities in some jurisdictions, management are to includes some or all of those charged with governance, for example, materially misstated prior to audit. This consists of two components, apply its requirements properly. (Ref: Para. A58-A66) executive members of a governance board, or an owner-manager. described as follows at the assertion level: 20. The auditor shall not represent compliance with PSAs in the auditors PSA 200 (Revised and Redrafted) (i) Inherent risk The susceptibility of an assertion about a class of report 7 transaction, account balance or disclosure to a misstatement that could unless the auditor has complied with the requirements of this PSA and all (i) Misstatement A difference between the amount, classification, be material, either individually or when aggregated with other other presentation, or disclosure of a reported financial statement item and the misstatements, before consideration of any related controls. PSAs relevant to the audit. amount, classification, presentation, or disclosure that is required for the (ii) Control risk The risk that a misstatement that could occur in an Objectives Stated in Individual PSAs item assertion about a class of transaction, account balance or disclosure 21. To achieve the overall objectives of the auditor, the auditor shall use the to be in accordance with the applicable financial reporting framework. and that could be material, either individually or when aggregated with objectives stated in relevant PSAs in planning and performing the audit, Misstatements can arise from error or fraud. When the auditor expresses an other misstatements, will not be prevented, or detected and corrected, having opinion on whether the financial statements are presented fairly, in all on a timely basis by the entitys internal control. regard to the interrelationships among the PSAs, to: (Ref: Para. A67-A69) material respects, misstatements also include those adjustments of amounts,(o) Those charged with governance The person(s) or organization(s) (e.g.,(a) Determine whether any audit procedures in addition to those required by classifications, presentation, or disclosures that, in the auditors judgment, a the are necessary for the financial statements to be presented fairly, in all corporate trustee) with responsibility for overseeing the strategic direction PSAs are necessary in pursuance of the objectives stated in the PSAs; and material respects. of (Ref: Para. A70) (j) Premise, relating to the responsibilities of management and, where the entity and obligations related to the accountability of the entity. This (b) Evaluate whether sufficient appropriate audit evidence has been appropriate, those charged with governance, on which an audit is conductedincludes overseeing the financial reporting process. For some entities in obtained. That management and, where appropriate, those charged with governancesome (Ref: Para. A71) have the following responsibilities that are fundamental to the conduct of an jurisdictions, those charged with governance may include management Complying with Relevant Requirements audit in accordance with PSAs. That is, responsibility: personnel, for example, executive members of a governance board of a 22. Subject to paragraph 23, the auditor shall comply with each requirement (i) For the preparation and presentation of the financial statements in private or public sector entity, or an owner-manager. of aPSA accordance with the applicable financial reporting framework; this Requirements unless, in the circumstances of the audit:

(a) The entire PSA is not relevant; or A2. An audit in accordance with PSAs is conducted on the premise that applicable financial reporting framework may encompass such other (b) The requirement is not relevant because it is conditional and the management sources, or condition and, where appropriate, those charged with governance have responsibility: may even consist only of such sources. Such other sources may include: does not exist. (Ref: Para. A72-A73) (a) For the preparation and presentation of the financial statements in PSA 200 (Revised and Redrafted) 23. In exceptional circumstances, the auditor may judge it necessary to accordance 12 depart from a with the applicable financial reporting framework; this includes the design, The legal and ethical environment, including statutes, regulations, court relevant requirement in aPSA. In such circumstances, the auditor shall implementation and maintenance of internal control relevant to the decisions, and professional ethical obligations in relation to accounting perform preparation and presentation of financial statements that are free from matters; alternative audit procedures to achieve the aim of that requirement. The material misstatement, whether due to fraud or error; and Published accounting interpretations of varying authority issued by need for 3 PSA 230 (Redrafted), Audit Documentation, paragraph 8(c). standards the auditor to depart from a relevant requirement is expected to arise only PSA 200 (Revised and Redrafted) setting, professional or regulatory organizations; where 11 Published views of varying authority on emerging accounting issues the requirement is for a specific procedure to be performed and, in the (b) To provide the auditor with: issued specific (i) All information, such as records and documentation, and other matters by standards setting, professional or regulatory organizations; PSA 200 (Revised and Redrafted) that are relevant to the preparation and presentation of the financial General and industry practices widely recognized and prevalent; and 10 statements; Accounting literature. circumstances of the audit, that procedure would be ineffective in achieving(ii) Any additional information that the auditor may request from Where conflicts exist between the financial reporting framework and the the management and, where appropriate, those charged with governance; sources aim of the requirement. (Ref: Para. A74) and from which direction on its application may be obtained, or among the Failure to Achieve an Objective (iii) Unrestricted access to those within the entity from whom the auditor sources 24. If an objective in a relevant PSA cannot be achieved, the auditor shall determines it necessary to obtain audit evidence. that encompass the financial reporting framework, the source with the evaluate A3. As part of their responsibility for the preparation and presentation of the highest whether this prevents the auditor from achieving the overall objectives of financial authority prevails. the statements, management and, where appropriate, those charged with A6. The requirements of the applicable financial reporting framework auditor and thereby requires the auditor, in accordance with the PSAs, to governance determine the modify are responsible for: form and content of the financial statements. Although the framework may the auditors opinion or withdraw from the engagement. Failure to achieve The identification of the applicable financial reporting framework, in the not an context of any relevant laws or regulations. specify how to account for or disclose all transactions or events, it objective represents a significant matter requiring documentation in The preparation and presentation of the financial statements in accordanceordinarily accordance with that framework. embodies sufficient broad principles that can serve as a basis for developing with PSA 230 (Redrafted).3 (Ref: Para. A75-A76) An adequate description of that framework in the financial statements. and *** The preparation of the financial statements requires management to exercise applying accounting policies that are consistent with the concepts Application and Other Explanatory Material judgment in making accounting estimates that are reasonable in the underlying the An Audit of Financial Statements circumstances, requirements of the framework. Scope of the Audit (Ref: Para. 3) as well as to select and apply appropriate accounting policies. These A7. Some financial reporting frameworks are fair presentation frameworks, A1. The auditors opinion on the financial statements deals with whether judgments while the financial are made in the context of the applicable financial reporting framework. others are compliance frameworks. Financial reporting frameworks that statements are prepared, in all material respects, in accordance with the A4. The financial statements may be prepared in accordance with a encompass primarily the financial reporting standards established by an applicable financial reporting organization that is authorized or recognized to promulgate standards to be financial reporting framework. Such an opinion is common to all audits of framework designed to meet: used financial statements. The auditors opinion therefore does not assure, for The common financial information needs of a wide range of users (i.e., by entities for preparing and presenting general purpose financial statements example, general purpose financial statements); or are the future viability of the entity nor the efficiency or effectiveness with The financial information needs of specific users (i.e., special purpose often designed to achieve fair presentation, for example, International which financial statements). Financial management has conducted the affairs of the entity. In some jurisdictions, A5. The applicable financial reporting framework often encompasses Reporting Standards (IFRSs) issued by the International Accounting however, applicable laws and regulations may require auditors to provide financial Standards opinions reporting standards established by an authorized or recognized standards Board (IASB), which are adopted by the Financial Reporting Standards on other specific matters, such as the effectiveness of internal control, or the setting Council as consistency of a separate management report with the financial statements. organization, or legislative or regulatory requirements. In some cases, the Philippine Financial Reporting Standards (PFRSs). While financial reporting framework may encompass both financial reporting A8. The requirements of the applicable financial reporting framework also the PSAs include requirements and guidance in relation to such matters to standards determine the established by an authorized or recognized standards setting organization what constitutes a complete set of financial statements. In the case of many extent that they are relevant to forming an opinion on the financial and frameworks, financial statements are intended to provide information about statements, the legislative or regulatory requirements. Other sources may provide direction the auditor would be required to undertake further work if the auditor had on the financial position, financial performance and cash flows of an entity. For additional application of the applicable financial reporting framework. In some cases, such responsibilities to provide such opinions. the frameworks, a complete set of financial statements would include a balance Preparation of the Financial Statements (Ref: Para. 4) sheet;

an income statement; a statement of changes in equity; a cash flow Accordance with Special Purpose Frameworks, paragraphs [to be principles with which the auditor is required to comply by the Code of statement; and inserted].] Ethics are: related notes. For some other financial reporting frameworks, a single 6 [Proposed] PSA 210 (Redrafted), paragraph [4(b)]. (a) Integrity; financial 7 PSA 580 (Revised and Redrafted), Written Representations, paragraphs(b) Objectivity; statement and the related notes might constitute a complete set of financial 10-11. (c) Professional competence and due care; statements: PSA 200 (Revised and Redrafted) (d) Confidentiality; and For example, the International Public Sector Accounting Standard 14 (e) Professional behavior. (IPSAS), the responsibility for the execution of transactions and events in accordancePart B of the Code of Ethics illustrates how the conceptual framework is to Financial Reporting Under the Cash Basis of Accounting issued by the with be International Public Sector Accounting Standards Board states that the legislation or proper authority. applied in specific situations. primary financial statement is a statement of cash receipts and payments Form of the Auditors Opinion (Ref: Para. 8) PSA 200 (Revised and Redrafted) PSA 200 (Revised and Redrafted) A12. The opinion expressed by the auditor is on whether the financial 15 13 statements are A16. In the case of an audit engagement it is in the public interest and, when a public sector entity prepares and presents its financial statements in prepared, in all material respects, in accordance with the applicable therefore, accordance with that IPSAS. financial required by the Code of Ethics, that the auditor be independent of the entity Other examples of a single financial statement, each of which would reporting framework. The form of the auditors opinion, however, will subject to the audit. The Code of Ethics describes independence as include depend comprising related notes, are: upon the applicable financial reporting framework and any applicable laws both independence of mind and independence in appearance. The auditors O Balance sheet. or independence from the entity safeguards the auditors ability to form an O Statement of income or statement of operations. regulations. Most financial reporting frameworks include requirements audit O Statement of retained earnings. relating to opinion without being affected by influences that might compromise that O Statement of cash flows. the presentation of the financial statements; for such frameworks, opinion. O Statement of assets and liabilities that does not include owners equity. preparation of Independence enhances the auditors ability to act with integrity, to be O Statement of changes in owners equity. the financial statements in accordance with the applicable financial objective O Statement of revenue and expenses. reporting and to maintain an attitude of professional skepticism. O Statement of operations by product lines. framework includes presentation. A17. Philippine Standard on Quality Control (PSQC) 1 (Redrafted) sets out A9. [Proposed] PSA 210 (Redrafted) establishes requirements and providesA13. Where the financial reporting framework is a fair presentation the guidance framework, as is responsibilities of the firm for establishing policies and procedures designed on determining the acceptability of the applicable financial reporting generally the case for general purpose financial statements, the opinion to framework.4 required provide it with reasonable assurance that the firm and its personnel comply PSA 800 (Revised and Redrafted) deals with special considerations when by the PSAs is on whether the financial statements are presented fairly, in with financial statements are prepared in accordance with a special purpose all relevant ethical requirements, including those pertaining to independence.8 framework.5 material respects. Where the financial reporting framework is a compliance PSA A10. Because of the significance of the premise to the conduct of an audit, framework, the opinion required is on whether the financial statements are 220 (Redrafted) sets out the engagement partners responsibilities with the auditor is prepared, in all material respects, in accordance with the framework. Unlessrespect to required to obtain agreement from management and, where appropriate, specifically stated otherwise, references in the PSAs to the auditors opinion relevant ethical requirements. These include evaluating whether members of those cover the charged with governance that they acknowledge and understand their both forms of opinion. engagement team have complied with relevant ethical requirements, responsibilities set out in paragraph A2 as a precondition for accepting the Ethical Requirements Relating to an Audit of Financial Statements (Ref: determining audit Para. 14) the appropriate action if matters come to the engagement partners attention engagement.6 The auditor is also required to obtain written representations A14. The auditor is subject to relevant ethical requirements, including thosethat about pertaining indicate that members of the engagement team have not complied with whether management and, where appropriate, those charged with to independence, relating to financial statement audit engagements. relevant governance have Relevant ethical requirements, and forming a conclusion on compliance with fulfilled those responsibilities.7 Considerations Specific to Audits in the ethical requirements ordinarily comprise Parts A and B of the Code of independence Public Ethics for requirements that apply to the audit engagement.9 PSA 220 (Redrafted) Sector Professional Accountants in the Philippines (the Code of Ethics) related to recognizes A11. The mandates for audits of the financial statements of public sector an that the engagement team is entitled to rely on a firms systems in meeting entities may audit of financial statements together with national requirements that are its be broader than those of other entities. As a result, the premise, relating to more responsibilities with respect to quality control procedures applicable to the managements responsibilities, on which an audit of the financial statements restrictive. individual audit engagement, unless information provided by the firm or of a A15. Part A of the Code of Ethics establishes the fundamental principles of other public sector entity is conducted may include additional responsibilities, professional parties suggests otherwise. such as ethics relevant to the auditor when conducting an audit of financial Professional Skepticism (Ref: Para. 15) 4 [Proposed] PSA 210 (Redrafted), Agreeing the Terms of Audit statements and A18. Professional skepticism includes being alert to, for example: Engagements, paragraph [4(a)]. provides a conceptual framework for applying those principles. The Audit evidence that contradicts other audit evidence obtained. 5 [PSA 800 (Revised and Redrafted), Special ConsiderationsAudits of fundamental Information that brings into question the reliability of documents and Financial Statements Prepared in responses to inquiries to be used as audit evidence.

 Conditions that may indicate possible fraud. audit evidence when obtaining reasonable assurance. audit documentation sufficient to enable an experienced auditor, having no Circumstances that suggest the need for audit procedures in addition to Professional Judgment (Ref: Para. 16) previous connection with the audit, to understand the significant those A23. Professional judgment is essential to the proper conduct of an audit. professional required by the PSAs. This is judgments made in reaching conclusions on significant matters arising A19. Maintaining professional skepticism throughout the audit is necessary because interpretation of relevant ethical requirements and the PSAs and the during the if the informed decisions required throughout the audit cannot be made without audit.13 Professional judgment is not to be used as the justification for auditor is, for example, to reduce the risks of: the decisions Overlooking unusual circumstances. application of relevant knowledge and experience to the facts and that are not otherwise supported by the facts and circumstances of the 8 [Philippine Standard on Quality Control (PSQC) 1 (Redrafted), Quality circumstances. engagement Control for Firms that Perform Professional judgment is necessary in particular regarding decisions about: or sufficient appropriate audit evidence. Audits and Reviews of Financial Statements, and Other Assurance and Materiality and audit risk. Sufficient Appropriate Audit Evidence and Audit Risk (Ref: Para. 5 and 17) Related Services Engagements, The nature, timing, and extent of audit procedures used to meet the Sufficiency and Appropriateness of Audit Evidence paragraphs [to be inserted].] requirements of the PSAs and gather audit evidence. A28. Audit evidence is necessary to support the auditors opinion and 9 [PSA 220 (Redrafted), Quality Control for an Audit of Financial 10 [PSA 500 (Redrafted), Audit Evidence, paragraph [to be inserted].] report. It is Statements, paragraphs [ to be 11 PSA 240 (Redrafted), paragraph 13;[ PSA 500 (Redrafted), paragraph cumulative in nature and is primarily obtained from audit procedures inserted].] [to be inserted]]; and [PSA 505 performed PSA 200 (Revised and Redrafted) (Revised and Redrafted), External Confirmations, paragraphs [to be during the course of the audit. It may, however, also include information 16 inserted].] obtained Over generalizing when drawing conclusions from audit observations. PSA 200 (Revised and Redrafted) from other sources such as previous audits (provided the auditor has Using inappropriate assumptions in determining the nature, timing, and 17 determined extent of the audit procedures and evaluating the results thereof. Evaluating whether sufficient appropriate audit evidence has been whether changes have occurred since the previous audit that may affect its A20. Professional skepticism is necessary to the critical assessment of auditobtained, 12 [PSA 220 (Redrafted), paragraph [ to be inserted].] evidence. and whether more needs to be done to achieve the objectives of the PSAs 13 PSA 230 (Redrafted), paragraph 8. This includes questioning contradictory audit evidence and the reliability ofand PSA 200 (Revised and Redrafted) documents and responses to inquiries and other information obtained from thereby, the overall objectives of the auditor. 18 management and those charged with governance. It also includes The evaluation of managements judgments in applying the entitys relevance to the current audit14) or a firms quality control procedures for consideration of applicable financial reporting framework. client the sufficiency and appropriateness of audit evidence obtained in the light The drawing of conclusions based on the audit evidence obtained, for acceptance and continuance. In addition to other sources inside and outside of the example, assessing the reasonableness of the estimates made by the circumstances, for example in the case where fraud risk factors exist and a management entity, the entitys accounting records are an important source of audit single in preparing the financial statements. evidence. document, of a nature that is susceptible to fraud, is the sole supporting A24. The distinguishing feature of the professional judgment expected of an Also, information that may be used as audit evidence may have been evidence auditor is prepared by for a material financial statement amount. that it is exercised by an auditor whose training, knowledge and experience an expert employed or engaged by the entity. Audit evidence comprises A21. The auditor may accept records and documents as genuine unless the have both auditor has assisted in developing the necessary competencies to achieve reasonable information that supports and corroborates managements assertions, and reason to believe the contrary. Nevertheless, the auditor is required to judgments. any consider the A25. The exercise of professional judgment in any particular case is based information that contradicts such assertions. In addition, in some cases, the reliability of information to be used as audit evidence.10 In cases of doubt on the facts absence of information (for example, managements refusal to provide a about and circumstances that are known by the auditor. Consultation on difficult requested the reliability of information or indications of possible fraud (for example, or representation) is used by the auditor, and therefore, also constitutes audit if contentious matters during the course of the audit, both within the evidence. Most of the auditors work in forming the auditors opinion conditions identified during the audit cause the auditor to believe that a engagement consists of document team and between the engagement team and others at the appropriate level obtaining and evaluating audit evidence. may not be authentic or that terms in a document may have been falsified), within A29. The sufficiency and appropriateness of audit evidence are interrelated. the or outside the firm, such as that required by PSA 220 (Redrafted),12 assist Sufficiency PSAs require that the auditor investigate further and determine what the is the measure of the quantity of audit evidence. The quantity of audit modifications auditor in making informed and reasonable judgments. evidence or additions to audit procedures are necessary to resolve the matter.11 A26. Professional judgment can be evaluated based on whether the needed is affected by the auditors assessment of the risks of misstatement A22. The auditor cannot be expected to disregard past experience of the judgment reached (the honesty and reflects a competent application of auditing and accounting principles and is higher the assessed risks, the more audit evidence is likely to be required) integrity of the entitys management and those charged with governance. appropriate in the light of, and consistent with, the facts and circumstances and also Nevertheless, a belief that management and those charged with governance that by the quality of such audit evidence (the higher the quality, the less may be are were known to the auditor up to the date of the auditors report. required). Obtaining more audit evidence, however, may not compensate honest and have integrity does not relieve the auditor of the need to A27. Professional judgment needs to be exercised throughout the audit. It for its maintain also needs to poor quality. professional skepticism or allow the auditor to be satisfied with lessbe appropriately documented. In this regard, the auditor is required to A30. Appropriateness is the measure of the quality of audit evidence; that thanpersuasive prepare is, its

relevance and its reliability in providing support for the conclusions on express an opinion on the financial statements at an acceptably low level of rather to a combined assessment of the risks of material misstatement. which the audit However, auditors opinion is based. The reliability of evidence is influenced by its risk. Auditors use various approaches to accomplish the objective of the auditor may make separate or combined assessments of inherent and source assessing the control and by its nature, and is dependent on the individual circumstances under risks of material misstatement. For example, the auditor may make use of a risk depending on preferred audit techniques or methodologies and practical which it model considerations. The assessment of the risks of material misstatement may be is obtained. that expresses the general relationship of the components of audit risk in expressed in quantitative terms, such as in percentages, or in nonA31. Whether sufficient appropriate audit evidence has been obtained to mathematical terms to arrive at an acceptable level of detection risk. Some quantitative reduce audit auditors find such a model to be useful when planning audit procedures. terms. In any case, the need for the auditor to make appropriate risk risk to an acceptably low level, and thereby enable the auditor to draw A37. The risks of material misstatement at the assertion level consist of twoassessments is reasonable components: inherent risk and control risk. Inherent risk and control risk are more important than the different approaches by which they may be made. conclusions on which to base the auditors opinion, is a matter of the A41. PSA 315 (Redrafted) establishes requirements and provides guidance professional entitys risks; they exist independently of the audit of the financial on judgment. PSA 500 (Redrafted) and other relevant PSAs establish statements. identifying and assessing the risks of material misstatement at the financial additional A38. Inherent risk is higher for some assertions and related classes of statement and assertion levels. requirements and provide further guidance applicable throughout the audit transactions, Detection Risk regarding the auditors considerations in obtaining sufficient appropriate account balances, and disclosures than for others. For example, it may be A42. For a given level of audit risk, the acceptable level of detection risk audit higher bears an evidence. for complex calculations or for accounts consisting of amounts derived inverse relationship to the assessed risks of material misstatement at the Audit Risk from assertion A32. Audit risk is a function of the risks of material misstatement and accounting estimates that are subject to significant estimation uncertainty. level. For example, the greater the risks of material misstatement the auditor detection risk. External circumstances giving rise to business risks may also influence believes exists, the less the detection risk that can be accepted and, The assessment of risks is based on audit procedures to obtain information inherent accordingly, necessary for that purpose and evidence obtained throughout the audit. The risk. For example, technological developments might make a particular the more persuasive the audit evidence required by the auditor. assessment of risks is a matter of professional judgment, rather than a product A43. Detection risk relates to the nature, timing, and extent of the auditors matter obsolete, thereby causing inventory to be more susceptible to overstatement. procedures capable of precise measurement. Factors in the entity and its environment that relate to several or all of the that are determined by the auditor to reduce audit risk to an acceptably low A33. For purposes of the PSAs, audit risk does not include the risk that the classes level. auditor of transactions, account balances, or disclosures may also influence the It is therefore a function of the effectiveness of an audit procedure and of its might express an opinion that the financial statements are materially inherent application by the auditor. Matters such as: misstated risk related to a specific assertion. Such factors may include, for example, a adequate planning; when they are not. This risk is ordinarily insignificant. Further, audit risk is lack proper assignment of personnel to the engagement team; a of sufficient working capital to continue operations or a declining industry the application of professional skepticism; and technical term related to the process of auditing; it does not refer to the characterized by a large number of business failures. supervision and review of the audit work performed, auditors A39. Control risk is a function of the effectiveness of the design, assist to enhance the effectiveness of an audit procedure and of its 14 PSA 315 (Redrafted), Identifying and Assessing the Risks of Material implementation and application and Misstatement Through maintenance of internal control by management to address identified risks reduce the possibility that an auditor might select an inappropriate audit Understanding the Entity and Its Environment, paragraph 9. that procedure, misapply an appropriate audit procedure, or misinterpret the PSA 200 (Revised and Redrafted) threaten the achievement of the entitys objectives relevant to preparation of audit 19 the results. business risks such as loss from litigation, adverse publicity, or other eventsentitys financial statements. However, internal control, no matter how wellA44. PSA 300 (Redrafted) 16 and PSA 330 (Redrafted) establish arising in connection with the audit of financial statements. designed and operated, can only reduce, but not eliminate, risks of material requirements and Risks of Material Misstatement misstatement in the financial statements, because of the inherent limitationsprovide guidance on planning an audit of financial statements and the A34. The risks of material misstatement may exist at two levels: of auditors The overall financial statement level; and internal control. These include, for example, the possibility of human errors15 PSA 330 (Redrafted), The Auditors Reponses to Assessed Risks, The assertion level for classes of transactions, account balances, and or paragraphs 7-17. disclosures. PSA 200 (Revised and Redrafted) 16 PSA 300 (Redrafted), Planning an Audit of Financial Statements. A35. Risks of material misstatement at the overall financial statement level 20 PSA 200 (Revised and Redrafted) refer to mistakes, or of controls being circumvented by collusion or inappropriate 21 risks of material misstatement that relate pervasively to the financial management override. Accordingly, some control risk will always exist. responses to assessed risks. Detection risk, however, can only be reduced, statements as The not a whole and potentially affect many assertions. PSAs provide the conditions under which the auditor is required to, or may eliminated, because of the inherent limitations of an audit. Accordingly, A36. Risks of material misstatement at the assertion level are assessed in choose some order to to, test the operating effectiveness of controls in determining the nature, detection risk will always exist. determine the nature, timing, and extent of further audit procedures timing Inherent Limitations of an Audit necessary to and extent of substantive procedures to be performed.15 A45. The auditor is not expected to, and cannot, reduce audit risk to zero obtain sufficient appropriate audit evidence. This evidence enables the A40. The PSAs do not ordinarily refer to inherent risk and control risk and cannot auditor to separately, but

therefore obtain absolute assurance that the financial statements are free to conceal it. Therefore, audit procedures used to gather audit evidence mayinherent limitations on the auditors ability to detect material misstatements from be ineffective for detecting an intentional misstatement that involves, for are material misstatement due to fraud or error. This is because there are example, collusion to falsify documentation which may cause the auditor toparticularly significant. Such assertions or subject matters include: inherent believe that audit evidence is valid when it is not. The auditor is neither Fraud, particularly fraud involving senior management or collusion. See limitations of an audit, which result in most of the audit evidence on which trained as nor expected to be an expert in the authentication of documents. PSA the An audit is not an official investigation into alleged wrongdoing. 240 (Redrafted) for further discussion. auditor draws conclusions and bases the auditors opinion being persuasive Accordingly, the auditor is not given specific legal powers, such as the The existence and completeness of related party relationships and rather power transactions. See PSA 550 (Revised and Redrafted)20 for further than conclusive. The inherent limitations of an audit arise from: of search, which may be necessary for such an investigation. discussion. The nature of financial reporting; Timeliness of Financial Reporting and the Balance between Benefit and The occurrence of non-compliance with laws and regulations. See PSA The nature of audit procedures; and Cost 250 The need for the audit to be conducted within a reasonable period of time A48. The matter of difficulty, time, or cost involved is not in itself a valid (Redrafted)21 for further discussion. and basis for the Future events or conditions that may cause an entity to cease to continue at a reasonable cost. auditor to omit an audit procedure for which there is no alternative or to be as a The Nature of Financial Reporting satisfied with audit evidence that is less than persuasive. Appropriate going concern. See PSA 570 (Redrafted)22 for further discussion. A46. The preparation of financial statements involves judgment by planning Relevant PSAs identify specific audit procedures to assist in mitigating the management in assists in making sufficient time and resources available for the conduct of effect applying the requirements of the entitys applicable financial reporting the of the inherent limitations. framework audit. Notwithstanding this, the relevance of information, and thereby its A52. Because of the inherent limitations of an audit, there is an unavoidable to the facts and circumstances of the entity. In addition, many financial value, risk that statement tends to diminish over time, and there is a balance to be struck between the some material misstatements of the financial statements may not be items involve subjective decisions or assessments or a degree of reliability of information and its cost. This is recognized in certain financialdetected, even uncertainty, and reporting frameworks (see, for example, the IASBs Framework for the though the audit is properly planned and performed in accordance with there may be a range of acceptable interpretations or judgments that may bePreparation and Presentation of Financial Statements). Therefore, there is PSAs. made. an Accordingly, the subsequent discovery of a material misstatement of the Consequently, some financial statement items are subject to an inherent expectation by users of financial statements that the auditor will form an financial level of opinion statements resulting from fraud or error does not by itself indicate a failure variability which cannot be eliminated by the application of additional on the financial statements within a reasonable period of time and at a to auditing reasonable conduct an audit in accordance with PSAs. However, the inherent procedures. For example, this is often the case with respect to certain cost, recognizing that it is impracticable to address all information that maylimitations of an accounting exist audit are not a justification for the auditor to be satisfied with less-thanestimates. Nevertheless, the PSAs require the auditor to give specific or to pursue every matter exhaustively on the assumption that information is persuasive consideration to whether accounting estimates are reasonable in the context in audit evidence. Whether the auditor has performed an audit in accordance of the error or fraudulent until proved otherwise. with applicable financial reporting framework and related disclosures, and to the A49. Consequently, it is necessary for the auditor to: PSAs is determined by the audit procedures performed in the circumstances, qualitative aspects of the entitys accounting practices, including indicators Plan the audit so that it will be performed in an effective manner; the of Direct audit effort to areas most expected to contain risks of material sufficiency and appropriateness of the audit evidence obtained as a result possible bias in managements judgments.17 misstatement, whether due to fraud or error, with correspondingly less thereof The Nature of Audit Procedures effort and the suitability of the auditors report based on an evaluation of that A47. There are practical and legal limitations on the auditors ability to directed at other areas; and evidence obtain audit Use testing and other means of examining populations for misstatements. in light of the overall objectives of the auditor. evidence. For example: A50. In light of the approaches described in paragraph A49, the PSAs 19 PSA 330 (Redrafted); [ PSA 500 (Redrafted)]; [Proposed] PSA 520 There is the possibility that management or others may not provide, contain (Redrafted), Analytical intentionally or unintentionally, the complete information that is relevant torequirements for the planning and performance of the audit and require the Procedures; and PSA 530 (Redrafted), Audit Sampling. the preparation and presentation of the financial statements or that has been auditor, among other things, to: 20 PSA 550 (Revised and Redrafted), Related Parties. requested by the auditor. Accordingly, the auditor cannot be certain of the Have a basis for the identification and assessment of risks of material 21 PSA 250 (Redrafted), Consideration of Laws and Regulations in an completeness of information, even though the auditor has performed audit misstatement at the financial statement and assertion levels by performing Audit of Financial Statements. 17 PSA 540 (Revised and Redrafted), Auditing Accounting Estimates, risk assessment procedures and related activities;18 and 22 PSA 570 (Redrafted), Going Concern. Including Fair Value Accounting 18 PSA 315 (Redrafted), paragraphs 5-10. PSA 200 (Revised and Redrafted) Estimates, and Related Disclosures, and [PSA 700 (Redrafted), Forming PSA 200 (Revised and Redrafted) 24 an Opinion and Reporting on 23 Conduct of an Audit in Accordance with PSAs Financial Statements, paragraph [to be inserted].] Use testing and other means of examining populations in a manner that Nature of the PSAs (Ref: Para. 18) PSA 200 (Revised and Redrafted) provides a reasonable basis for the auditor to draw conclusions about the A53. The PSAs, taken together, provide the standards for the auditors work 22 population.19 in fulfilling procedures to obtain assurance that all relevant information has been Other Matters that Affect the Inherent Limitations of an Audit the overall objectives of the auditor. The PSAs deal with the general obtained. A51. In the case of certain assertions or subject matters, the potential effects responsibilities of the auditor, as well as the auditors further considerations Fraud may involve sophisticated and carefully organized schemes of the relevant to the application of those responsibilities to specific topics. designed

A54. The scope, effective date and any specific limitation of the Explain more precisely what a requirement means or is intended to cover. qualitative characteristics); and applicability of a Include examples of procedures that may be appropriate in the (b) One or more of the following: specific PSA is made clear in the PSA. Unless otherwise stated in the PSA, circumstances. (i) Straightforward or uncomplicated transactions; the While such guidance does not in itself impose a requirement, it is relevant (ii) Simple record-keeping; auditor is permitted to apply an PSA before the effective date specified to the (iii) Few lines of business and few products within business lines; therein. proper application of the requirements of a PSA. The application and other (iv) Few internal controls; A55. In performing an audit, the auditor may be required to comply with explanatory material may also provide background information on matters (v) Few levels of management with responsibility for a broad range of legal or addressed in a PSA. controls; or regulatory requirements in addition to the PSAs. The PSAs do not override A60. Appendices form part of the application and other explanatory (vi) Few personnel, many having a wide range of duties. laws material. The These qualitative characteristics are not exhaustive, they are not exclusive and regulations that govern an audit of financial statements. In the event purpose and intended use of an appendix are explained in the body of the to that those related smaller entities, and smaller entities do not necessarily display all of these laws and regulations differ from the PSAs, an audit conducted only in PSA or within the title and introduction of the appendix itself. characteristics. accordance A61. Introductory material may include, as needed, such matters as A65. The considerations specific to smaller entities included in the PSAs with laws and regulations will not automatically comply with PSAs. explanation of: have been A56. The auditor may also conduct the audit in accordance with both PSAs The purpose and scope of the PSA, including how the PSA relates to otherdeveloped primarily with unlisted entities in mind. Some of the and PSAs. considerations, auditing standards of a specific jurisdiction or country. In such cases, in The subject matter of the PSA. however, may be helpful in audits of smaller listed entities. addition The respective responsibilities of the auditor and others in relation to the A66. The PSAs refer to the proprietor of a smaller entity who is involved in to complying with each of the PSAs relevant to the audit, it may be subject matter of the PSA. running the necessary for The context in which the PSA is set. entity on a day-to-day basis as the owner-manager. the auditor to perform additional audit procedures in order to comply with A62. A PSA may include, in a separate section under the heading Objectives Stated in Individual PSAs (Ref: Para. 21) the Definitions, a A67. Each PSA contains one or more objectives which provide a link relevant standards of that jurisdiction or country. description of the meanings attributed to certain terms for purposes of the between the Considerations Specific to Audits in the Public Sector PSAs. requirements and the overall objectives of the auditor. The objectives in A57. The PSAs are relevant to engagements in the public sector. The publicThese are provided to assist in the consistent application and interpretation individual sector of the PSAs serve to focus the auditor on the desired outcome of the PSA, while auditors responsibilities, however, may be affected by the audit mandate, PSAs, and are not intended to override definitions that may be established being or by for specific enough to assist the auditor in: obligations on public sector entities arising from legislation, regulation, other purposes, whether in law, regulation or otherwise. Unless otherwise Understanding what needs to be accomplished and, where necessary, the ministerial directives, government policy requirements, or resolutions of theindicated, those terms will carry the same meanings throughout the PSAs. appropriate means of doing so; and legislature, which may encompass a broader scope than an audit of financial The Deciding whether more needs to be done to achieve them in the particular statements in accordance with the PSAs. These additional responsibilities Glossary of Terms relating to Philippine Standards issued by the Auditing circumstances of the audit. are not and PSA 200 (Revised and Redrafted) dealt with in the PSAs. They may be dealt with in the pronouncements of Assurance Standards Council contains a complete listing of terms defined in 27 the the A68. Objectives are to be understood in the context of the overall objectives International Organization of Supreme Audit Institutions - or in guidance PSAs. It also includes descriptions of other terms found in PSAs to assist inof the developed by government audit agencies. common and consistent interpretation and translation. auditor stated in paragraph 11 of this PSA. As with the overall objectives of Contents of the PSAs (Ref: Para. 19) A63. When appropriate, additional considerations specific to audits of the A58. In addition to objectives and requirements (requirements are expressed smaller entities auditor, the ability to achieve an individual objective is equally subject to in the and public sector entities are included within the application and other the PSAs using shall), a PSA contains related guidance in the form of explanatory inherent limitations of an audit. application material of a PSA. These additional considerations assist in the application A69. In using the objectives, the auditor is required to have regard to the and other explanatory material. It may also contain introductory material of the interrelationships among the PSAs. This is because, as indicated in that requirements of the PSA in the audit of such entities. They do not, however,paragraph provides context relevant to a proper understanding of the PSA, and limit A53, the PSAs deal in some cases with general responsibilities and in others definitions. or reduce the responsibility of the auditor to apply and comply with the with The entire text of a PSA, therefore, is relevant to an understanding of the requirements of the PSAs. the application of those responsibilities to specific topics. For example, this objectives stated in a PSA and the proper application of the requirements ofPSA 200 (Revised and Redrafted) PSA a 26 requires the auditor to adopt an attitude of professional skepticism; this is PSA. Considerations Specific to Smaller Entities necessary in all aspects of planning and performing an audit but is not PSA 200 (Revised and Redrafted) A64. For purposes of specifying additional considerations to audits of repeated as 25 smaller entities, a a requirement of each PSA. At a more detailed level, PSA 315 (Redrafted) A59. Where necessary, the application and other explanatory material smaller entity refers to an entity which typically possesses qualitative and provides further characteristics such as: PSA 330 (Redrafted) contain, among other things, objectives and explanation of the requirements of a PSA and guidance for carrying them (a) Concentration of ownership and management in a small number of requirements out. In individuals (often a single individual either a natural person or another that deal with the auditors responsibilities to identify and assess the risks of particular, it may: enterprise that owns the entity provided the owner exhibits the relevant material misstatement and to design and perform further audit procedures to

respond to those assessed risks, respectively; these objectives and Complying with Relevant Requirements Result in its not being practicable or possible for the auditor to carry out requirements Relevant Requirements (Ref: Para. 22) the apply throughout the audit. A PSA dealing with specific aspects of the auditA72. In some cases, a PSA (and therefore all of its requirements) may not additional audit procedures or obtain further audit evidence as determined (for be relevant in necessary from the use of the objectives in accordance with paragraph 21, example, PSA 540 (Revised and Redrafted)) may expand on how the the circumstances. For example, if an entity does not have an internal audit for objectives function, nothing in PSA 610 (Redrafted)23 is relevant. example due to a limitation in the available audit evidence. and requirements of such PSAs as PSA 315 (Redrafted) and PSA 330 A73. Within a relevant PSA, there may be conditional requirements. Such aA76. Audit documentation that meets the requirements of PSA 230 (Redrafted) requirement is relevant when the circumstances envisioned in the (Redrafted) and the are to be applied in relation to the subject of the PSA but does not repeat requirement specific documentation requirements of other relevant PSAs provides them. apply and the condition exists. In general, the conditionality of a evidence of Thus, in achieving the objective stated in PSA 540 (Revised and Redrafted), requirement will the auditors basis for a conclusion about the achievement of the overall the either be explicit or implicit, for example: objectives auditor has regard to the objectives and requirements of other relevant The requirement to modify the auditors opinion if there is a limitation of of the auditor. While it is unnecessary for the auditor to document PSAs. scope24 represents an explicit conditional requirement. separately (as Use of Objectives to Determine Need for Additional Audit Procedures (Ref: The requirement to communicate significant deficiencies in internal in a checklist, for example) that individual objectives have been achieved, Para. 21(a)) control the A70. The requirements of the PSAs are designed to enable the auditor to identified during the audit to those charged with governance,25 which documentation of a failure to achieve an objective assists the auditors achieve the depends on the existence of such identified significant deficiencies; and the evaluation objectives specified in the PSAs, and thereby the overall objectives of the requirement to obtain sufficient appropriate audit evidence regarding the of whether such a failure has prevented the auditor from achieving the auditor. presentation and disclosure of segment information in accordance with the overall The proper application of the requirements of the PSAs by the auditor is applicable financial reporting framework,26 which depends on that objectives of the auditor. therefore framework requiring or permitting such disclosure, represent implicit Acknowledgment expected to provide a sufficient basis for the auditors achievement of the conditional requirements. This PSA is based on International Standard on Auditing 200 (Revised and objectives. However, because the circumstances of audit engagements vary Departure from a Requirement (Ref: Para. 23) Redrafted), widely A74. PSA 230 (Redrafted) establishes documentation requirements in thoseOverall Objectives of the Independent Auditor and the Conduct of an and all such circumstances cannot be anticipated in the PSAs, the auditor is exceptional Audit in responsible for determining the audit procedures necessary to fulfill the circumstances where the auditor departs from a relevant requirement.27 The Accordance with Philippine Standards on Auditing, issued by the requirements of the PSAs and to achieve the objectives. In the PSAs International Auditing circumstances of an 23 PSA 610 (Redrafted), Using the Work of Internal Auditors. and Assurance Standards Board. engagement, there may be particular matters that require the auditor to 24 PSA 705 (Revised and Redrafted), Modifications to the Opinion in the There are no significant differences between this PSA 200 (Revised and perform Independent Auditors Report, Redrafted) and audit procedures in addition to those required by the PSAs to meet the paragraph 13. ISA 200 (Revised and Redrafted). objectives 25 [Proposed] PSA 265, Communicating Deficiencies in Internal Control, CONFORMING AMENDMENTS AS A RESULT OF PSA 200 specified in the PSAs. paragraph [10]. (REVISED AND REDRAFTED), OVERALL OBJECTIVES OF THE Use of Objectives to Evaluate Whether Sufficient Appropriate Audit 26 [Proposed] PSA 501 (Redrafted), Audit Evidence Regarding Specific INDEPENDENT Evidence Has Been Financial Statement Account AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE Obtained (Ref: Para. 21(b)) Balances and Disclosures, paragraph [14]. WITH A71. The auditor is required to use the objectives to evaluate whether 27 PSA 230 (Redrafted), paragraph 12. PHILIPPINE STANDARDS ON AUDITING sufficient PSA 200 (Revised and Redrafted) Preface to the Philippine Standards on Quality Control, Auditing, appropriate audit evidence has been obtained in the context of the overall 29 Review, Other Assurance and Related Services (Preface) objectives of the auditor. If as a result the auditor concludes that the audit do not call for compliance with a requirement that is not relevant in the PSA 200 (Revised and Redrafted) evidence is not sufficient and appropriate, then the auditor may follow one circumstances of the audit. 30 or Failure to Achieve an Objective (Ref: Para. 24) [There are no changes proposed to paragraphs 13. Accordingly, they are more of the following approaches to meeting the requirement of paragraph A75. Whether an objective has been achieved is a matter for the auditors not 21(b): professional reproduced.] Evaluate whether further relevant audit evidence has been, or will be, judgment. That judgment takes account of the results of audit procedures The Authority Attaching to Philippine Standards Issued by the Auditing and obtained as a result of complying with other PSAs; performed in complying with the requirements of the PSAs, and the Assurance Standards Council PSA 200 (Revised and Redrafted) auditors [There are no changes proposed to paragraphs 45 and 79. Accordingly, 28 evaluation of whether sufficient appropriate audit evidence has been they are not Extend the work performed in applying one or more requirements; or obtained and reproduced.] Perform other procedures judged by the auditor to be necessary in the whether more needs to be done in the particular circumstances of the audit 6. Philippine Standards on Assurance Engagements (PSAEs) are to be circumstances. to applied in Where none of the above is expected to be practical or possible in the achieve the objectives stated in the PSAs. Accordingly, circumstances that assurance engagements dealing with subject matters other than audits or circumstances, the auditor will not be able to obtain sufficient appropriate may reviews audit give rise to a failure to achieve an objective include those that: of historical financial information. evidence and is required by the PSAs to determine the effect on the Prevent the auditor from complying with the relevant requirements of a Philippine Standards on Auditing1 auditors PSA. 10. PSAs are written in the context of an audit of financial statements12 report or on the auditors ability to complete the engagement. by an

independent auditor.3 Requirements These are provided to assist in the consistent application and interpretation They are to be adapted as necessary in the circumstances 16. The requirements of each PSA are contained in a separate section and of the when applied to audits of other historical financial information. The expressed PSAs, and are not intended to override definitions that may be established authority of using the word shall. The auditor applies the requirements in the context for PSAs is set out in PSA 200 (Revised and Redrafted).2 of the other purposes, whether in law, regulation or otherwise. Unless otherwise 11. The objective of an audit of financial statements is to enable the auditor other material included in the PSA. indicated, those terms will carry the same meanings throughout the PSAs. to express 17. The auditor complies with the requirements of an PSA in all cases The an opinion whether the financial statements are prepared, in all material where they are Glossary of Terms contains a complete listing of terms defined in the PSAs. respects, relevant in the circumstances of the audit. In exceptional circumstances, It in accordance with an applicable financial reporting framework. It is however, also includes descriptions of other terms found in PSAs to assist in common undertaken the auditor may judge it necessary to depart from a relevant requirement by and to enhance the degree of confidence of intended users in the financial performing alternative audit procedures to achieve the aim of that consistent interpretation and translation. statements. requirement. Philippine Standards on Quality Control PSAs, taken together, provide the standards for the auditors work in The need for the auditor to depart from a relevant requirement is expected 1123. PSQCs are written to apply to firms in respect of all their services fulfilling this to arise falling under objective. only where the requirement is for a specific procedure to be performed and,the AASCs Engagement Standards. The authority of PSQCs is set out in 12. In conducting an audit, the overall objective of the auditor is to obtain in the the reasonable specific circumstances of the audit, that procedure would be ineffective. introduction to the PSQCs. assurance about whether the financial statements as a whole are free from 18. A requirement is not relevant only in the cases where: the PSA is not [There are no changes proposed to paragraphs 2433, except renumbering. material relevant; or Accordingly, misstatement, whether due to fraud or error, and to report on the financial the circumstances envisioned do not apply because the requirement is they are not reproduced.] statements in accordance with the auditors findings. In all cases when this conditional __________ overall and the condition does not exist. The auditor is not required to comply with 1 The terms and concepts in this Preface are explained further in the PSAs, objective has not been or cannot be achieved, the PSAs require that the a in particular in PSA 200, auditor requirement that is not relevant in the circumstances of the audit; this does Objective and General Principles Governing an Audit of Financial modifies the auditors opinion accordingly or withdraws from the not Statements. (PSA 200 will be revised, engagement. constitute a departure from the requirement. inter alia, to incorporate relevant provisions of this Preface that deal with 13. The auditor applies each PSA relevant to the audit. An PSA is relevant Application and Other Explanatory Material the obligations of the auditor, and when the 19. The application and other explanatory material contained in an PSA is the status and authority of objectives, requirements and other material. PSA is in effect and the circumstances addressed by the PSA exist. an integral When PSA 200 is revised and 14. The PSAs deal with the general responsibilities of the auditor, as well as part of the PSA as it provides further explanation of, and guidance for exposed for public comment in 2007, respondents will be invited to the carrying comment on the material derived from auditors further considerations relevant to the application of those out, the requirements of an PSA, along with background information on thethis Preface in that new context.) responsibilities matters addressed in the PSA. It may include examples of procedures, some12 Unless otherwise stated, financial statements mean financial to specific topics. An PSA contains objectives and requirements together of statements comprising historical financial with which the auditor may judge to be appropriate in the circumstances. Such information. related guidance in the form of application and other explanatory material. guidance is, however, not intended to impose a requirement. 20. 2 PSA 200 (Revised and Redrafted), Overall Objectives of the Independent It may Appendices, Auditor and the Conduct of an also contain introductory material that provides context essential to a properwhich form part of the application and other explanatory material, are an Audit in Accordance with Philippine Standards on Auditing. understanding of the PSAs, and definitions. It is, therefore, necessary to integral 3 Referred to hereafter as the auditor. consider part of an PSA. The purpose and intended use of an appendix are explained PSA 230 (Redrafted), Audit Documentation the entire text of an PSA to understand and apply its requirements. in the Nature and Purposes of Audit Documentation PSA Objectives body of the related PSA or within the title and introduction of the appendix 2. Audit documentation that meets the requirements of this PSA and the 15. Each PSA contains an objective or objectives, which provide the context itself. specific in which PSA 200 (Revised and Redrafted) documentation requirements of other relevant PSAs provides: the requirements of the PSA are set. The auditor aims to achieve these 32 (a) Evidence of the auditors basis for a conclusion about the achievement objectives, Introductory Material and Definitions of PSA 200 (Revised and Redrafted) 21. Introductory material may include, as needed, such matters as the overall objectives of the auditor1; and 31 explanation of: the (b) Evidence that the audit was planned and performed in accordance with having regard to the interrelationships amongst the PSAs. For this purpose, purpose and scope of the PSA, including how the PSA relates to other PSAs and applicable legal and regulatory requirements the PSAs; the PSA 200 (Revised and Redrafted) auditor uses the objectives to judge whether, having complied with the subject matter of the PSA; specific expectations on the auditor and others; 33 requirements of the PSAs, sufficient appropriate audit evidence has been and the Documentation of Significant Matters and Related Significant Professional obtained context in which the PSA is set. Judgments in the context of the overall objective of the auditor. Where an individual 22. An PSA may include, in a separate section under the heading (Ref: Para. 8(c)) objective has not been or cannot be achieved, the auditor considers whether Definitions, a A11. The auditor may consider it helpful to prepare and retain as part of the this description of the meanings attributed to certain terms for purposes of the audit prevents the auditor from achieving the auditors overall objective. PSAs.

documentation a summary (sometimes known as a completion Responsibilities of the Auditor procedures that are effective for detecting error may not be effective in memorandum) that 5. An auditor conducting an audit in accordance with PSAs is responsible detecting describes the significant matters identified during the audit and how they for fraud. The requirements in this PSA are designed to assist the auditor in were obtaining reasonable assurance that the financial statements taken as a identifying and assessing the risks of material misstatement due to fraud and addressed, or that includes cross-references to other relevant supporting whole are in audit free from material misstatement, whether caused by fraud or error. Owing designing procedures to detect such misstatement documentation that provides such information. Such a summary may to the PSA 200 (Revised and Redrafted) facilitate inherent limitations of an audit, there is an unavoidable risk that some 35 effective and efficient reviews and inspections of the audit documentation, material Professional Skepticism particularly for large and complex audits. Further, the preparation of such a misstatements of the financial statements may will not be detected, even 12. In accordance with PSA 200 (Revised and Redrafted),5 summary may assist the auditors consideration of the significant matters. Itthough the auditor shall maintain may the audit is properly planned and performed in accordance with the PSAs.3 professional skepticism throughout the audit, recognizing the possibility also help the auditor to consider whether, in light of the audit procedures __________ that a performed and conclusions reached, there is any individual relevant PSA 3 PSA 200 (Revised and Redrafted), Overall Objectives of the Independent material misstatement due to fraud could exist, notwithstanding the objective Auditor and the Conduct of an auditors past that the auditor cannot achieve has not met or is unable to meet that would Audit in Accordance with Philippine Standards on Auditing, paragraphs experience of the honesty and integrity of the entitys management and prevent A45-A52. those the auditor from achieving the overall objectives of the auditors overall 6. As described in PSA 200 (Revised and Redrafted),4 charged with governance...4 objective the potential effects of A7. Professional skepticism is an attitude that includes a questioning mind inherent limitations are particularly significant in the case of misstatement and a Departure from a Relevant Requirement (Ref: Para. 12) resulting from fraud. The risk of not detecting a material misstatement critical assessment of audit evidence. Maintaining an attitude of A18. The objectives and requirements of the in PSAs are designed to enable resulting professional the auditor from fraud is higher than the risk of not detecting one resulting from error. skepticism requires an ongoing questioning of whether the information and to achieve the objectives specified in the PSAs, and thereby support the This is audit achievement of the overall objectives of the auditor.6 Accordingly, other because fraud may involve sophisticated and carefully organized schemes evidence obtained suggests that a material misstatement due to fraud may than in designed to conceal it, such as forgery, deliberate failure to record exist. It exceptional circumstances, the PSAs call for compliance with each transactions, or includes considering the reliability of the information to be used as audit requirement intentional misrepresentations being made to the auditor. Such attempts at evidence that is relevant in the circumstances of the audit. concealment may be even more difficult to detect when accompanied by and the controls over its preparation and maintenance where relevant. Due A19. The documentation requirement applies only to requirements that are collusion. Collusion may cause the auditor to believe that audit evidence is to the relevant in persuasive when it is, in fact, false. The auditors ability to detect a fraud characteristics of fraud, the auditors attitude of professional skepticism is the circumstances. A requirement is not relevant7 depends particularly important when considering the risks of material misstatement only in the cases where: on factors such as the skillfulness of the perpetrator, the frequency and due to (a) The entire PSA is not relevant (for example, if an entity does not have extent of fraud. an manipulation, the degree of collusion involved, the relative size of A8. Although the auditor cannot be expected to disregard past experience of internal audit function in a continuing engagement, nothing in [proposed] individual the PSA 610510 (Redrafted)8 is relevant); or amounts manipulated, and the seniority of those individuals involved. While honesty and integrity of the entitys management and those charged with (b) The circumstances envisioned do not apply because tThe requirement is the governance, the auditors attitude of professional skepticism is particularly conditional and the condition does not exist (for example, the requirement auditor may be able to identify potential opportunities for fraud to be important in considering the risks of material misstatement due to fraud to modify the auditors opinion where there is an inability to obtain perpetrated, because sufficient appropriate audit evidence, and there is no such inability) it is difficult for the auditor to determine whether misstatements in there may have been changes in circumstances _________ judgment areas __________ 1 PSA 200 (Revised and Redrafted), Overall Objectives of the Independent such as accounting estimates are caused by fraud or error. 4 PSA 200 (Revised and Redrafted), paragraph A51. Auditor and the Conduct of an 7. Furthermore, the risk of the auditor not detecting a material misstatement5 PSA 200 (Revised and Redrafted), paragraph 15. Audit in Accordance with International Standards on Auditing, paragraph resulting 4 [Proposed] PSA 200 (Revised and Redrafted), paragraph [18]. 11. from management fraud is greater than for employee fraud, because PSA 260 (Revised and Redrafted), Communication with Those 6 [Proposed] PSA 200 (Revised and Redrafted), Overall Objective of the management Charged with Governance Independent Auditor, and the is frequently in a position to directly or indirectly manipulate accounting Definitions Conduct of an Audit in Accordance with International Standards on records, 6. For purposes of the PSAs, the following terms have the meanings Auditing, paragraphs [23-24]. present fraudulent financial information or override control procedures attributed 7 [Proposed] PSA 200 (Revised and Redrafted), paragraph 22[27]. designed below: 8 [Proposed] PSA 610 (Redrafted), Using the Work of Internal to prevent similar frauds by other employees. (a) Those charged with governance The person(s) or organization(s) (e.g., AuditorsInitial Audit Engagements 8. When obtaining reasonable assurance, the auditor is responsible for a Opening Balances. maintaining corporate trustee) with responsibility for overseeing the strategic direction PSA 200 (Revised and Redrafted) an attitude of professional skepticism throughout the audit, considering the of the entity and obligations related to the accountability of the entity. This 34 potential for management override of controls and recognizing the fact that includes overseeing the financial reporting process. For some entities in PSA 240 (Redrafted), The Auditors Responsibilities Relating to Fraud audit some jurisdictions, those charged with governance may include in an Audit of Financial Statements management personnel, for example, executive members of a governance

board of a private or public sector entity, or an owner-manager. In some been prepared. auditors report is finalized. Documentation prepared at the time the work is cases, those charged with governance are responsible for approving1 the PSA 200 (Revised and Redrafted) performed is likely to be more accurate than documentation prepared entitys financial statements (in other cases management has this 37 subsequently. responsibility). For discussion of the diversity of governance structures, All Final Clarified PSAs 4. Compliance with the requirements of this PSA together with the specific see paragraphs A5-A12. Phrases documentation requirements of other relevant PSAs is ordinarily sufficient PSA 200 (Revised and Redrafted) attitude of professional skepticism to 36 PSA 250 (Redrafted), paragraph 8. achieve the objectives in paragraph 2. (b) Management The person(s) with executive responsibility for the PSA 540 (Revised and Redrafted), paragraph A40. 5. In addition to these objectives, audit documentation serves a number of conduct PSA 550 (Revised and Redrafted), paragraph A9. purposes, of the entitys operations. For some entities in some jurisdictions, affected by the inherent limitations of inherent to internal control including: management includes some or all of those charged with governance, for PSA 315 (Redrafted), paragraph A42. (a) Assisting the audit team to plan and perform the audit; example, executive members of a governance board, or an owner-manager. PSA 200 (Revised and Redrafted) (b) Assisting members of the audit team responsible for supervision to Management is responsible for the preparation of the financial statements, 38 direct overseen by those charged with governance, and in some cases This PSA 200 (Revised and Redrafted), Overall Objectives of the and supervise the audit work, and to discharge their review responsibilities management is also responsible for approving2 the entitys financial Independent Auditor in accordance with PSA 220 (Revised), Quality Control for Audits of statements (in other cases those charged with governance have this and the Conduct of an Audit in Accordance with Philippine Standards on Historical Financial Information; responsibility). Auditing, was (c) Enabling the audit team to be accountable for its work; Those Charged with Governance (Ref: Para. 7) unanimously approved for adoption on October 27, 2008 by the members of Retaining a record of matters of continuing significance to future audits; (d) A5. Governance structures vary by jurisdiction and by entity, reflecting the - 4 - PSA 230 (Revised) influences (e) Enabling an experienced auditor to conduct quality control reviews and such as different cultural and legal backgrounds, and size and ownership inspections1 in accordance with PSQC 1, Quality Control for Firms that characteristics. For example: Perform Audits and Reviews of Historical Financial Information, and In some jurisdictions, a supervisory (wholly or mainly non-executive) Other Assurance and Related Services Engagements; and board (f) Enabling an experienced auditor to conduct external inspections in exists that is legally separate from an executive (management) board (a Philippine Standard on Auditing 230 (Revised) accordance with applicable legal, regulatory or other requirements. twotier AUDIT DOCUMENTATION Definitions board structure). In other jurisdictions, both the supervisory and Conforming Amendments 6. In this PSA: executive functions are the legal responsibility of a single, or unitary, boardPSA 200, Objective and General Principles Governing an Audit of (a) Audit documentation means the record of audit procedures (a Financial Statements performed,2 one-tier board structure). PSA 330, The Auditors Procedures in Response to Assessed Risks relevant audit evidence obtained, and conclusions the auditor reached In some entities, those charged with governance hold positions that are an PSQC 1, Quality Control for Firms that Perform Audits and (terms such as working papers or workpapers are also sometimes integral part of the entitys legal structure, for example, company directors. Reviews of Historical Financial Information and Other Assurance used); and In and Related Services Engagements (b) Experienced auditor means an individual (whether internal or external others, for example, some government entities, a body that is not part of theAuditing and Assurance Standards Council to entity is charged with governance. - 1 - PSA 230 (Revised) the firm) who has a reasonable understanding of (i) audit processes, (ii) In some cases, some or all of those charged with governance are involved PHILIPPINE STANDARD ON AUDITING 230 (REVISED) PSAs and applicable legal and regulatory requirements, (iii) the business in AUDIT DOCUMENTATION environment in which the entity operates, and (iv) auditing and financial managing the entity. In others, those charged with governance and (Effective for audits of financial information for reporting issues relevant to the entitys industry. management comprise different persons. periods beginning on or after June 15, 2006) Nature of Audit Documentation In some cases, those charged with governance are responsible for Audit Documentation 7. Audit documentation may be recorded on paper or on electronic or other approving3 Introduction media. It the entitys financial statements (in other cases management has this 1. The purpose of this Philippine Standard on Auditing (PSA) is to establishincludes, for example, audit programs, analyses, issues memoranda, responsibility). standards and provide guidance on audit documentation. The Appendix listssummaries of __________ other significant matters, letters of confirmation and representation, checklists, 1 As described at paragraph [A43] of [proposed] PSA 700, (Redrafted), PSAs containing subject matter-specific documentation requirements and and The Independent Auditors Report guidance. Laws or regulations may establish additional documentation correspondence (including e-mail) concerning significant matters. Abstracts on General Purpose Financial Statements, having responsibility for requirements. or approving in this context means having 2. The auditor should prepare, on a timely basis, audit documentation that copies of the entitys records, for example, significant and specific contracts the authority to conclude that all the statements that comprise the financial provides: and statements, including the related (a) A sufficient and appropriate record of the basis for the auditors agreements, may be included as part of audit documentation if considered notes, have been prepared. report; and appropriate. Audit documentation, however, is not a substitute for the 2 See footnote 1. (b) Evidence that the audit was performed in accordance with PSAs and entitys 3 As described at paragraph [to be inserted] of PSA 700, (Redrafted), applicable legal and regulatory requirements. accounting records. The audit documentation for a specific audit Forming an Opinion and Reporting 3. Preparing sufficient and appropriate audit documentation on a timely engagement is on Financial Statements, having responsibility for approving in this basis helps assembled in an audit file. context means having the authority to to enhance the quality of the audit and facilitates the effective review and 8. The auditor ordinarily excludes from audit documentation superseded conclude that all the statements that comprise the financial statements, evaluation of the audit evidence obtained and conclusions reached before drafts of including the related notes, have the working papers and financial statements, notes that reflect incomplete or

preliminary thinking, previous copies of documents corrected for purchase order numbers. other personnel within the entity, and external parties, such as persons typographical or For a procedure requiring selection or review of all items over a specific providing other errors, and duplicates of documents. amount from a given population, the auditor may record the scope of the professional advice to the entity. 1 As defined in PSA 220 (Revised). procedure and identify the population (for example, all journal entries over 18. If the auditor has identified information that contradicts or is 2 Audit procedures performed include audit planning, as addressed in PSA a specified amount from the journal register). inconsistent with the 300, Planning an Audit of For a procedure requiring systematic sampling from a population of auditors final conclusion regarding a significant matter, the auditor should Financial Statements. documents, the auditor may identify the documents selected by recording document how the auditor addressed the contradiction or inconsistency in - 5 - PSA 230 (Revised) their source, the starting point and the sampling interval (for example, a forming Form, Content and Extent of Audit Documentation systematic sample of shipping reports selected from the shipping log for the final conclusion. 9. The auditor should prepare the audit documentation so as to enable an the period from April 1 to September 30, starting with report number - 8 - PSA 230 (Revised) experienced 12345 and selecting every 125th report). 19. The documentation of how the auditor addressed the contradiction or auditor, having no previous connection with the audit, to understand: For a procedure requiring inquiries of specific entity personnel, the auditor inconsistency, however, does not imply that the auditor needs to retain (a) The nature, timing, and extent of the audit procedures performed to may record the dates of the inquiries and the names and job designations documentation that is incorrect or superseded. comply with PSAs and applicable legal and regulatory requirements; of the entity personnel. Documentation of Departures from Basic Principles or Essential Procedures (b) The results of the audit procedures and the audit evidence obtained; and For an observation procedure, the auditor may record the process or 20. The basic principles and essential procedures in PSAs are designed to (c) Significant matters arising during the audit and the conclusions reached subject matter being observed, the relevant individuals, their respective assist the thereon. responsibilities, and where and when the observation was carried out. auditor in meeting the overall objective of the audit. Accordingly, other than 10. The form, content and extent of audit documentation depend on factors - 7 - PSA 230 (Revised) in such as: Significant Matters exceptional circumstances, the auditor complies with each basic principle The nature of the audit procedures to be performed; 14. Judging the significance of a matter requires an objective analysis of theand The identified risks of material misstatement; facts and essential procedure that is relevant in the circumstances of the audit. The extent of judgment required in performing the work and evaluating circumstances. Significant matters include, amongst others: 21. Where, in exceptional circumstances, the auditor judges it necessary to the Matters that give rise to significant risks (as defined in PSA 315, depart results; Understanding the Entity and its Environment and Assessing the Risks of from a basic principle or an essential procedure that is relevant in the The significance of the audit evidence obtained; Material Misstatement). circumstances of the audit, the auditor should document how the alternative The nature and extent of exceptions identified; Results of audit procedures indicating (a) that the financial information audit The need to document a conclusion or the basis for a conclusion not could be materially misstated, or (b) a need to revise the auditors previous procedures performed achieve the objective of the audit, and, unless readily assessment of the risks of material misstatement and the auditors otherwise determinable from the documentation of the work performed or audit responses to those risks. clear, the reasons for the departure. This involves the auditor documenting evidence obtained; and Circumstances that cause the auditor significant difficulty in applying how The audit methodology and tools used. necessary audit procedures. the alternative audit procedures performed were sufficient and appropriate It is, however, neither necessary nor practicable to document every matter Findings that could result in a modification to the auditors report. to the 15. The auditor may consider it helpful to prepare and retain as part of the replace that basic principle or essential procedure. auditor considers during the audit. audit 22. The documentation requirement does not apply to basic principles and 11. Oral explanations by the auditor, on their own, do not represent documentation a summary (sometimes known as a completion essential adequate support memorandum) that procedures that are not relevant in the circumstances, i.e., where the for the work the auditor performed or conclusions the auditor reached, but describes the significant matters identified during the audit and how they circumstances envPSAged in the specified basic principle or essential may be were procedure used to explain or clarify information contained in the audit documentation.addressed, or that includes cross-references to other relevant supporting do not apply. For example, in a continuing engagement, nothing in PSA - 6 - PSA 230 (Revised) audit 510, Documentation of the Identifying Characteristics of Specific Items or documentation that provides such information. Such a summary may Initial EngagementsOpening Balances, is relevant. Similarly, if a PSA Matters Being facilitate includes conditional requirements, they are not relevant if the specified Tested effective and efficient reviews and inspections of the audit documentation, conditions 12. In documenting the nature, timing and extent of audit procedures particularly for large and complex audits. Further, the preparation of such a do not exist (for example, the requirement to modify the auditors report performed, the summary may assist the auditors consideration of the significant matters. where auditor should record the identifying characteristics of the specific items or 16. The auditor should document discussions of significant matters with there is a limitation of scope). matters being tested. management Identification of Preparer and Reviewer 13. Recording the identifying characteristics serves a number of purposes. and others on a timely basis. 23. In documenting the nature, timing and extent of audit procedures For 17. The audit documentation includes records of the significant matters performed, the auditor should record: example, it enables the audit team to be accountable for its work and discussed, (a) Who performed the audit work and the date such work was facilitates and when and with whom the discussions took place. It is not limited to completed; and the investigation of exceptions or inconsistencies. Identifying characteristics records (b) Who reviewed the audit work performed and the date and extent of such will prepared by the auditor but may include other appropriate records such as review.3 vary with the nature of the audit procedure and the item or matter being agreed 3 Paragraph 26 of PSA 220 (Revised) establishes the requirement for the tested. minutes of meetings prepared by the entitys personnel. Others with whom auditor to review the audit work For example: the performed through review of the audit documentation, which involves the For a detailed test of entity-generated purchase orders, the auditor may auditor may discuss significant matters include those charged with auditor documenting the extent identify the documents selected for testing by their dates and unique governance,

and timing of the reviews. Paragraph 25 of PSA 220 (Revised) describes the When exceptional circumstances arise after the date of the auditors 31. as a Result of PSA 230 (Revised) nature of a review of work report that PSA 200, Objective and General Principles Governing an Audit of performed. require the auditor to perform new or additional audit procedures or that Financial Statements - 9 - PSA 230 (Revised) lead the The following sentences are inserted at the end of paragraph 14: 24. The requirement to document who reviewed the audit work performed auditor to reach new conclusions, the auditor should document: The auditor may, in exceptional circumstances, judge it necessary to depart does not (a) The circumstances encountered; from a basic imply a need for each specific working paper to include evidence of review.(b) The new or additional audit procedures performed, audit evidence principle or an essential procedure that is relevant in the circumstances of The obtained, and conclusions reached; and the audit, in audit documentation, however, evidences who reviewed specified elements (c) When and by whom the resulting changes to audit documentation were order to achieve the objective of the audit. In such a case, the auditor is not of the made, and (where applicable) reviewed. precluded audit work performed and when. 32. Such exceptional circumstances include the discovery of facts regardingfrom representing compliance with PSAs, provided the departure is Assembly of the Final Audit File the appropriately 25. The auditor should complete the assembly of the final audit file on a audited financial information that existed at the date of the auditors report documented as required by PSA 230, Audit Documentation. timely that This amendment is effective for audits of financial statements for periods basis after the date of the auditors report. might have affected the auditors report had the auditor then been aware of beginning on or 26. PSQC 1 requires firms to establish policies and procedures for the them. after June 15, 2006. timely Effective Date PSA 330, The Auditors Procedures in Response to Assessed Risks completion of the assembly of audit files. As PSQC 1 indicates, 60 days 33. This PSA is effective for audits of financial information for periods The following paragraphs in PSA 330 are amended as marked: after the beginning on 50. The auditors substantive procedures should include the following audit date of the auditors report is ordinarily an appropriate time limit within or after June 15, 2006. procedures related to the financial statement closing process: which to 34. PSA 230, Documentation, approved by the Auditing Standards and Agreeing or reconciling the financial statements with the underlying complete the assembly of the final audit file. Practices accounting records; and 27. The completion of the assembly of the final audit file after the date of Council in 2001 will be withdrawn in June 2006 when PSA 230 (Revised) Examining material journal entries and other adjustments made during the the becomes effective. course of preparing the financial statements. auditors report is an administrative process that does not involve the - 11 - PSA 230 (Revised) The nature and extent of the auditors examination of journal entries and performance Acknowledgment other of new audit procedures or the drawing of new conclusions. Changes may, 35. This PSA is based on International Standard on Auditing (ISA) 230 adjustments depends on the nature and complexity of the entitys financial however, be made to the audit documentation during the final assembly (Revised), reporting process if Audit Documentation, issued by the International Auditing and Assurance process and the associated risks of material misstatement. they are administrative in nature. Examples of such changes include: Standards Board. Deleted: to Deleting or discarding superseded documentation. 36. There are no significant differences between this PSA and ISA 230 - 14 - PSA 230 (Revised) Sorting, collating and cross-referencing working papers. (Revised). Conforming Amendments Signing off on completion checklists relating to the file assembly process. - 12 - PSA 230 (Revised) 73. The auditor should document the overall responses to address the Documenting audit evidence that the auditor has obtained, discussed and Appendix assessed risks of agreed with the relevant members of the audit team before the date of the Specific Audit Documentation Requirements and Guidance material misstatement at the financial statement level and the nature, timing, auditors report. in Other PSAs and 28. After the assembly of the final audit file has been completed, the auditor The following lists the main paragraphs that contain specific documentationextent of the further audit procedures, the linkage of those procedures with should requirements the not delete or discard audit documentation before the end of its retention and guidance in other PSAs: assessed risks at the assertion level, and the results of those audit period. PSA 210, Terms of Audit EngagementsParagraph 5; procedures, 29. PSQC 1 requires firms to establish policies and procedures for the PSA 220 (Revised), Quality Control for Audits of Historical Financial including the conclusions where these are not otherwise clear. In addition, if retention of InformationParagraphs 1114, 16, 25, 27, 30, 31 and 33; the engagement documentation. As PSQC 1 indicates, the retention period for PSA 240, The Auditors Responsibility to Consider Fraud in an Audit of auditor plans to use audit evidence about the operating effectiveness of audit Financial StatementsParagraphs 60 and 107111; controls engagements ordinarily is no shorter than five years from the date of the PSA 250, Consideration of Laws and RegulationsParagraph 28; obtained in prior audits, the auditor should document the conclusions auditors PSA 260, Communication of Audit Matters with Those Charged with reached report, or, if later, the date of the group auditors report. GovernanceParagraph 16; with regard to relying on such controls that were tested in a prior audit. - 10 - PSA 230 (Revised) PSA 300, Planning an Audit of Financial StatementsParagraphs 22-26;The following paragraphs are added to PSA 330: 30. When the auditor finds it necessary to modify existing audit PSA 315, Understanding the Entity and its Environment and Assessing 73a. The auditors documentation should demonstrate that the financial documentation the statements or add new audit documentation after the assembly of the final audit file has Risks of Material MisstatementParagraphs 122 and 123; agree or reconcile with the underlying accounting records. been completed, the auditor should, regardless of the nature of the PSA 330, The Auditors Procedures in Response to Assessed Risks 73b. The manner in which the matters referred to in paragraphs 73 and 73a modifications or additions, document: Paragraphs 73 and 74; are (a) When and by whom they were made, and (where applicable) reviewed; PSA 505, External ConfirmationsParagraph 33; documented is based on the auditors professional judgment. PSA 230 (b) The specific reasons for making them; and PSA 580, Management RepresentationsParagraph 10; and (Revised), (c) Their effect, if any, on the auditors conclusions. PSA 600, Using the Work of Another AuditorParagraph 14. Audit Documentation establishes standards and provides guidance Changes to Audit Documentation in Exceptional Circumstances after - 13 - PSA 230 (Revised) regarding the Date of the Auditors Report Conforming Amendments to PSA 200, PSA 330 and PSQC 1 documentation in the context of the audit of financial statements.

These amendments to PSA 330 are effective for audits of financial Documentation Conforming Amendments statements for periods 73d. The firm should establish policies and procedures designed to maintain 73h. For practical reasons, original paper documentation may be beginning on or after June 15, 2006. the electronically scanned PSQC 1, Quality Control for Firms that Perform Audits and Reviews confidentiality, safe custody, integrity, accessibility and retrievability of for inclusion in engagement files. In that case, the firm implements of Historical Financial Information and Other Assurance and Related engagement documentation. appropriate Services Engagements 73e. Relevant ethical requirements establish an obligation for the firms procedures requiring engagement teams to: The following definition is added to PSQC 1: personnel to (a) Generate scanned copies that reflect the entire content of the original 6. (a) Engagement documentationthe record of work performed, results observe at all times the confidentiality of information contained in paper documentation, including manual signatures, cross-references and obtained, and conclusions the practitioner reached (terms such as engagement annotations; working papers or workpapers are sometimes used). The documentation, unless specific client authority has been given to disclose (b) Integrate the scanned copies into the engagement files, including documentation for a specific engagement is assembled in an information, or there is a legal or professional duty to do so. Specific laws indexing engagement file; or and signing off on the scanned copies as necessary; and Existing subparagraphs (a)-(o) of paragraph 6 will be renumbered regulations may impose additional obligations on the firms personnel to (c) Enable the scanned copies to be retrieved and printed as necessary. accordingly. maintain The firm considers whether to retain original paper documentation that has Deleted: The manner in which these - 16 - PSA 230 (Revised) been matters are documented is based on the Conforming Amendments scanned for legal, regulatory or other reasons. auditors professional judgment. PSA client confidentiality, particularly where data of a personal nature are Retention of Engagement Documentation 230, Documentation, establishes concerned._ 73i. The firm should establish policies and procedures for the retention of standards and provides guidance 73f. Whether engagement documentation is in paper, electronic or other engagement regarding documentation in the context of media, the documentation for a period sufficient to meet the needs of the firm or as the audit of financial statements. integrity, accessibility or retrievability of the underlying data may be required - 15 - PSA 230 (Revised) compromised if the documentation could be altered, added to or deleted by law or regulation. Conforming Amendments without 73j. The needs of the firm for retention of engagement documentation, and The following new subheader and paragraphs are added to PSQC 1 as a the firms knowledge, or if it could be permanently lost or damaged. the period subsection within Accordingly, the firm designs and implements appropriate controls for of such retention, will vary with the nature of the engagement and the firms the Engagement Performance section, after paragraph 73. engagement documentation to: circumstances, for example, whether the engagement documentation is Engagement Documentation (a) Enable the determination of when and by whom engagement needed to Completion of the Assembly of Final Engagement Files documentation was created, changed or reviewed; provide a record of matters of continuing significance to future 73a. The firm should establish policies and procedures for engagement (b) Protect the integrity of the information at all stages of the engagement, engagements. The teams to especially when the information is shared within the engagement team or retention period may also depend on other factors, such as whether local complete the assembly of final engagement files on a timely basis after the transmitted to other parties via the Internet; law or engagement reports have been finalized. (c) Prevent unauthorized changes to the engagement documentation; and regulation prescribes specific retention periods for certain types of 73b. Law or regulation may prescribe the time limits by which the assembly Allow access to the engagement documentation by the engagement team (d) engagements, of final and other authorized parties as necessary to properly discharge their or whether there are generally accepted retention periods in the jurisdiction engagement files for specific types of engagement should be completed. responsibilities. in the Where 73g. Controls that the firm may design and implement to maintain the absence of specific legal or regulatory requirements. In the specific case of no such time limits are prescribed in law or regulation, the firm establishes confidentiality, audit time safe custody, integrity, accessibility and retrievability of engagement engagements, the retention period ordinarily is no shorter than five years limits appropriate to the nature of the engagements that reflect the need to documentation include, for example: from the complete the assembly of final engagement files on a timely basis. In the The use of a password among engagement team members to restrict access date of the auditors report, or, if later, the date of the group auditors case of to electronic engagement documentation to authorized users. report. an audit, for example, such a time limit is ordinarily not more than 60 days Appropriate back-up routines for electronic engagement documentation at73k. Procedures that the firm adopts for retention of engagement after appropriate stages during the engagement. documentation the date of the auditors report. Procedures for properly distributing engagement documentation to the include those that: 73c. Where two or more different reports are issued in respect of the same team members at the start of engagement, processing it during Enable the retrieval of, and access to, the engagement documentation subject engagement, and collating it at the end of engagement. during the retention period, particularly in the case of electronic matter information of an entity, the firms policies and procedures relating Procedures for restricting access to, and enabling proper distribution and documentation since the underlying technology may be upgraded or to time confidential storage of, hardcopy engagement documentation. changed over time. limits for the assembly of final engagement files address each report as if it _ Paragraph 4.2 of Part A of the Code of Ethics for Professional Provide, where necessary, a record of changes made to engagement were Accountants in the Philippines, issued by documentation after the engagement files have been completed. for a separate engagement. This may, for example, be the case when the the Philippine Institute of Certified Public Accountants and adopted and - 18 - PSA 230 (Revised) firm implemented by the Board of Conforming Amendments issues an auditors report on a components financial information for group Accountancy, requires the auditor to observe at all times the confidentiality Enable authorized external parties to access and review specific consolidation purposes and, at a subsequent date, an auditors report on the of information contained in engagement documentation for quality control or other purposes. same audit documentation, unless specific authority has been given to disclose Ownership of Engagement Documentation financial information for statutory purposes. information, or there is legal or 73l. Unless otherwise specified by law or regulation, engagement Confidentiality, Safe Custody, Integrity, Accessibility and Retrievability of professional duty to do so. documentation is the Engagement - 17 - PSA 230 (Revised)

property of the firm. The firm may, at its discretion, make portions of, or extracts from, engagement documentation available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the firm or its personnel. These amendments to PSQC 1 are effective beginning June 15, 2006.