Continuation of chapter 7

For a given level of audit risk, the acceptable level of detection risk has an
inverse relationship with the assessment of risk of material misstatement at
the assertion level.

The greater the risk of material misstatement the auditor believes exist, the
less detection risk that can be accepted.

Professional Judgement

- Application of relevant knowledge and experience, w/in the context provided

by auditing, accounting and ethical standards, in reaching decisions about
the courses of action that are appropriate in the circumstances of the audit
engagement.
- Decisions about:
o Materiality and Audit Risk
o Nature, timing, extent of audit procedures
o Evaluating whether sufficient appropriate evidence has been obtained;
whether more needs to be done to achieve the objectives of PSAs &
overall objectives of auditor
o Evaluation of managements judgments in applying financial reporting
framework
o Drawing conclusions based on audit evidence.
- This needs to be documented appropriately
- This is a PERSONAL QUALITY

Phases of the Audit Process

All FS audits must comply with the standards of auditing which are logically and
chronologically numbered:

1. Pre-engagement
- Initial audit activities like:
o client acceptance or continuance
o Agreement on terms of engagement

2. Audit Planning
- Developing an over-all audit strategy & preparing a detailed audit plan

3. Study and Evaluation of Internal Controls

- Documenting & evaluating the auditors understanding of internal control
structure of client.
 - Based on the understanding of internal control, the auditor ASSESSES RISK
and determines appropriate audit approach

4. Substantive testing
- Gathering evidence

5. Completing the Audit

- WRAPPING-UP procedures and review of conclusions prior issuance

6. Issuance of Audit Report

- Preparation and issuance

7. Post-audit responsibilities
- DEBRIEFING

PRE-ENGAGEMENT PROCEDURES

* Audit firms usually fill out a prospective client form

Preconditions of an Audit: (if hindi naachieve and a & b, DO NOT ACCEPT)

The auditor shall:

a. If financial reporting framework is ACCEPTABLE (except in PAS 210??? )

b. Obtain agreement of management and acknowledges its
responsibility.:
a. To Prepare FS in accordance with fin. rep. framework
b. For internal control
c. To provide auditor w/:
i. Access to all relevant info
ii. Additional info requested
iii. Unrestricted access to persons in the entity to obtain info

If:

1. the mgmt. imposes a limitation on the scope of auditors work

2. Auditor believes that the limitation will result to DISCLAIMING AN
OPINION:

THEN:

Auditor shall NOT ACCEPT such limited engagement UNLESS REQUIRED BY

LAW TO DO SO!!

Terms of Engagement

- Agreement should be reached to the client preferably thru the AUDIT

COMMITTEE
 - Engagement letter is prepared

Engagement letter

- Documents and confirms:

o acceptance of appointment
o Objective and scope of audit
o Extent of responsibilities to the client
o Form of any reports
- Interest of both
- Sent before commencement of engagement
- AGREED TERMS WOULD NEED TO BE RECORDED
- Separate engagement letter if may other services pa like tax, MAS, acctg

AUDITS OF COMPONENTS

IF auditor of parent = auditor of branch, subsidiary, division:

Engagement letter would definitely include:

1. Arrangements concerning the involvement of other auditors & experts

2. Arrangements concerning the involvement of internal auditors & other client
staf
3. Arrangements concerning the involvement of predecessor auditor in case of
initial audit
4. When possibility exists, any restriction of auditors liability
5. Reference to further agreements between auditor and client
6. Any obligations to provide audit working papers to other parties

- This letter sets forth the:

o Objective of audit: express an opinion
o Mgmts responsibility
o Scope of audit
o Other communications forms or any reports
o Limitation of audit: unavoidable risk
o Clients responsibility to have unrestricted
access
- May also include:
o Billing arrangements
o Receiving mgmt. representation letter expectation
o Arrangement of the involvement of others (experts,
other auditors, internal auditors, clients personnel)
o Request for client to confirm the terms of engagement
o Arrangements regarding the planning, performance and
composition of audit team
See page 234!
Consider the ffg factors!!

a. Who appoints the auditor of component

b. Whether a separate audit report is to be issued for the
component
c. Legal requirements
d. Extent of any work performed by other auditor
e. Degree of ownership of parent
f. Degree of independence of the components mgmt.

RECURRING AUDITS
The auditor DOES NOT NORMALLY send new engagement letter every year.
Except:
- Indication of clients misunderstanding of scope and objective
- Revisions and special terms
- Change in mgmt./BOD/ownership
- Significant change in nature or size of business of client
- Legal requirements or govt agencies pronouncements
- Change in reporting framework
- Change in other reporting requirements

If di nagsend: remind nalang si client of original arrangements

Changes in Terms of Engagement

Changing the engagement into one that provides lower level of assurance should
consider the appropriateness of doing so:

Request from client may result from:

a. Change in circumstances afecting the need for service

b. Misunderstanding as to the nature of an audit or related service originally
requested
c. Restriction on the scope of the engagement, whether imposed by
management or caused by circumstances

* There must be a REASONABLE BASIS for requesting a change in the engagement.

NOT REASONABLE IF: (WITHDRAW!!! AND REPORT TO OTHER PARTIES

BAKIT KA NAGWITHDRAW)

- Change relates to info that is incorrect, incomplete, or otherwise

unsatisfactory
- Ex: to avoid a qualified opinion or disclaimer of opinion
-
-

IF REASONABLE, then go.

To avoid confusion, the report would NOT INCLUDE reference to the original
engagement or any procedures that may have been performed in the original
engagement. UNLESS AGREED-UPON PROCEDURES

AUDIT PLANNING

Establishing the overall audit strategy; developing audit plan

Benefits:

1. Helping auditor:
a. To devote attention to important areas of audit
b. To identify and resolve potential problems on a timely basis
c. Organize and manage audit engagement so that it is performed in an
efective and efficient manner
2. Assisting in the selection of ENGAGEMET TEAM MEMBERS w/ appropriate level
of capabilities, competence to respond to anticipated risks & assignment of
work to them
3. Facilitating direction and supervision of engagement team members and the
review of their work
4. Assisting in coordination of work done by auditors of components and
experts, where applicable

Involves:

- Understanding client and environment

- Need for experts
- Establishing materiality and audit risk
- Assessing possibility of noncompliance
- Identifying related parties
- Perform PRELIMINARY analytical prcedures
- Development of OVERALL audit strategy
- Detailed audit plan
- PRELIMINARY audit programs

STUDY AND EVALUATION OF INTERNAL CONTROLS

PSA 315!! Requires auditor to understand clients internal control structure

If recurring, focus on changes, added, or assumed increased importance since prev.

audit

FIVE STEPS:

1. Understanding internal control

2. Preliminary assessment of control risk
 3. Determine auditors response to the risk assessment
4. Reassess control risk
5. Determine nature, extent, timing of substantive tests

OUTPUT OF CONSIDERATION OF INTERNAL CONTROL: finalized versions of the audit

strategy, audit plan, audit programs previously developed during audit planning