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1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the
AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.
ASSURANCE ENGAGEMENTS
1. “Assurance engagement” means an agreement in which a particular expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria.
2. “Subject matter information” refers to the outcome of the evaluation or measurement of a subject
matter.
3. In some assurance engagements, the evaluation or measurement of the subject I performed by the
responsible party, and the subject matter information is in the form of an assertion by the responsible
party that is made available to intended users (assertion-based engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that has
performed the evaluation or measurement that is not available to the intended users in the assurance
report (direct reporting engagements)
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TWO TYPES OF ASSURANCE ENGAGEMENT
1. Reasonable assurance engagement – the objective is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for a positive form of
expression of the practitioner’s conclusion.
2. Limited assurance engagement – the objective is a reduction in assurance engagement risk to a level
that is acceptable in the circumstances of the engagement, but where the risk is greater than for a
reasonable assurance engagement, as a basis for a negative form of expression of the practitioner’s
conclusion.
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1. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to
auditing expertise to collect, classify, and summarized financial information.
2. It ordinarily entails reducing detailed data to manageable and understandable form without a
requirement to test the assertions underlying that information.
3. The procedures performed are not designed and do not enable the accountant to express any
assurance on the financial information.
4. Users of compiled financial information derived some benefit as a result of the accountant’s
involvement because the service has been performed with due professional skill and care.
SUMMARY
Nature of Audit Review Agreed-upon Compilation
service Procedures
Level of High, but not Moderate No assurance No assurance
Assurance absolute assurance
Provided assurance
Report provided Positive Negative Factual findings Identification of
assurance on assurance on of procedures information
assertion(s) assertion(s) compiled
(Audit Report) (Review Report) (Compilation
Report)
PSQC1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF
HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED
SERVICES
PSA 220 (REVISED)
QUALITY CONTROL FOR AUDITS OF HISTORICAL FINANCIAL INFORMATION
PSA 210 [AMENDED BY PSA 700(REVISED)]
TERMS OF AUDIT ENGAGEMENTS
PSQC 1
1. The firm should establish a System of Quality Control to provide it with reasonable assurance that:
a. The firm and its personnel comply with professional standards and regulatory and legal
requirements; and
b. The reports issued by the firm or engagement partners are appropriate in the
circumstances.
2. Elements of a System of Quality Control
a. Leadership responsibility for quality within the firm
b. Ethical requirements
c. Acceptance and continuance of client relationships and specific engagements.
d. Human resources
e. Engagement performance
f. Monitoring
It is in the interest of both client and auditor that the auditor sends an engagement letter,
preferably before the commencement of the engagement, to help in avoiding misunderstandings with
respect to the engagement.
Principal Contents
An engagement letter would generally include reference to:
The objective of the audit of financial statements.
Management’s responsibility for the financial statements.
The financial reporting framework adopted by management in preparing
the financial statements.
The scope of the audit, including reference to applicable legislation,
regulations or pronouncements of professional bodies to which the
auditor adheres.
The form of any reports or other communication of results of the
engagement.
The fact that because of the test nature and other inherent limitations of
an audit, together with the inherent limitations of any accounting and
internal controls system, there is an unavoidable risk that even some
material misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation and other
information requested in connection with the audit.
3. Acceptance of a Change in Engagement
1. An auditor who, before the completion of the engagement, is requested to change the
engagement tone which provides a lower level of assurance, should consider the
appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result from:
a. A change in circumstances affecting the need for the service;
b. A misunderstanding as to the nature of an audit or related service originally
requested; or
c. A restriction on the scope of the engagement, whether imposed by management or
caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for requesting a change
in the engagement)
3. A change would not be considered reasonable if it appeared that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory.
4. Before agreeing to change an audit engagement to a related service, an auditor would also
consider any legal or contractual implications of the change.
5. If the auditor concludes that there is reasonable justification to change the engagement and
if the audit work performed complies with the PSAs applicable to the change engagement,
the report issued would be that appropriate for the revised terms of the engagement.
6. In order to avoid confusing the reader, the report would not include reference to:
a. The original engagement; or
b. Any procedures that may have been performed by the original engagement, except
where the engagement is changed to undertake agreed-upon procedures.
7. Where the terms of the engagement are changed, the auditor and the client should agree in
the new terms.
8. The auditor should not agree to a change of engagement where there is no reasonable
justification for doing so.
9. If the auditor is unable to agree to a change of engagement and is not permitted to continue
the original engagement, the auditor should withdraw and consider whether there is any
obligation, contractual or otherwise, to report to other parties, such as the board of directors
or shareholders, the circumstances necessitating the withdrawal.
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Manila
2. The auditor should perform the following activities at the beginning of the current audit engagement:
Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.
Planning Activities
3. The auditor should establish the overall audit strategy for the audit. The overall audit strategy sets the
scope, timing and direction of the audit, and guides the development of the more detailed audit plan
5. The auditor should develop an audit plan for the audit in order to reduce audit risk to an acceptably low
level.
6. The audit plan is more detailed than the overall audit strategy and includes the nature, timing and extent of
audit procedures to be performed by engagement team members in order to obtain sufficient appropriate
audit evidence to reduce audit risk to an acceptably low level.
The overall audit strategy and the audit plan should be updated and changed as necessary during the course
of the audit.
1. The auditor should plan the nature, timing and extent of direction and supervision of engagement team
members and review their work.
2. The nature, timing and extent of the direction and supervision of engagement team members and review
of their work vary depending on many factors, including:
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3. The auditor plans the nature, timing and extent of direction and supervision of engagement team members
based on the assessed risk of material misstatement.
Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant changes
made during the audit engagement.
1. The auditor may discuss elements of planning with those charged with governance and the entity’s
management.
2. Discussions with those charged with governance ordinarily include the overall audit strategy and timing of
the audit, including any limitations thereon, or any additional requirements.
3. When discussion of matters included in the overall audit strategy or audit plan occur, care is required in
order not to compromise the effectiveness of the audit.
The auditor should perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit engagement.
2. Communicate with the previous auditor, where there has been a change of auditors, in compliance with
relevant ethical requirements.
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT
1. The auditor should obtain an understanding of the entity and its environment, including its internal control,
sufficient to identify and assess the risks of material misstatement of the financial statements whether due
to fraud or error, and sufficient to design and perform further audit procedures.
2. The auditor should perform the following risk assessment procedures to obtain an understanding of the
entity and its environment, including its internal control:
a.) Industry, regulatory, and other external factors, including the applicable financial reporting framework.
b.) Nature of the entity, including the entity’s selection and application of accounting policies.
c.) Objectives and strategies and the related business risks that may result in a material misstatement of
the financial statements.
d.) Measurement and review of the entity’s financial performance.
e.) Internal control.
INTERNAL CONTROL
1. Internal control is the process designed and effected by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with
regard to:
Reliability of financial reporting;
Effectiveness and efficiency of operations; and
Compliance with applicable laws and regulations.
The control environment includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management concerning the entity’s
internal control and its importance in the entity.
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Elements of control environment:
a) Communication of enforcement of integrity and ethical values.
b) Commitment to competence.
c) Participation by those charged with governance.
d) Management’s philosophy and operating style.
e) Organizational structure.
f) Assignments of authority and responsibility.
g) Human resource policies and practices.
The auditor should obtain an understanding of the entity’s risk assessment process, i.e., the entity’
process for identifying business risks relevant to financial reporting objectives and deciding about actions
to address those risks, and the results thereof.
The auditor should obtain an understanding of the information system, including the related business
processes, relevant to financial reporting, including the following areas:
The classes of transactions in the entity’s operations that is significant to the financial statements.
The procedures, within both IT and manual systems, by which those transactions are initiated,
recorded, processed and reported in the financial statements.
The related accounting records, whether electronic or manual, supporting information, and specific
accounts in the financial statements, in respect of initiating, recording, processing and reporting
transactions.
How the information system captures events and conditions, other than classes of transactions
that are significant to the financial statements.
The financial reporting process used to prepare the entity’s financial statements, including
significant accounting estimates and disclosures.
Control activities are the policies and procedures to help ensure that management directives are carried
out. Examples of control activities include those relating to the following:
Authorization
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Monitoring of controls involves assessing the design and operation of controls on a timely basis and
taking the necessary corrective actions modified for changes in conditions.
1. The auditor should identify and assess the risks of material misstatement at the financial statements level,
and at the assertion level for classes of transactions, account balances, and disclosures.
2. The auditor:
Identifies risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the classes of
transactions, account balances, and disclosures in the financial statements;
Relates the identified risks to what can go wrong at the assertion level;
Considers whether the risks are of a magnitude that could result in a material misstatement of the
financial statements; and
Considers the likelihood that the risks could result in a material misstatement of the financial
statements.
PSA 330
THE AUDITOR’S PROCEDURES IN REPONSE TO ASSESSED RISKS
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Overall responses
1. The auditor should determine overall responses to address the risks of material misstatement at the
financial statement level. Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism n gathering
and evaluating audit evidence
Assigning more experienced staff or those with special skills or using experts
Providing more supervision
Incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed
Making general changes to the nature, timing or extent of audit procedures
Timing refers to when audit procedures are performed or the period or date to which the audit evidence
applies.
TESTS OF CONTROLS
1. The auditor is required to perform tests of controls when:
a. The auditor’s risk assessment includes an expectation of the operating effectiveness of
controls; or
b. When the substantive procedures alone do not provide sufficient appropriate audit evidence
at the assertion level
2. Tests of the operating effectiveness of controls are performed only on those controls that the
auditor has determined are suitably designed to prevent, or detect and correct, a material
misstatement in an assertion
3. Testing the operating effectiveness of controls includes obtaining evidence about:
a. How controls were applied at relevant times during the period under audit;
b. The consistency with which they were applied; and
c. By whom or by what means they were applied.
SUBSTANTIVE PROCEDURES
1. Substantive test procedures are performed in order to detect material misstatements at the assertion
level, and include:
Tests of details of classes of transactions, account balances, and disclosures; and
Substantive analytical procedures
2. The auditor’s substantive procedures should include the following audit procedures related to the
financial statement closing process:
Agreeing or reconciling the financial statements with accounting records; and
Examining material journal entries and other adjustments made during the course of
preparing the financial statements
3. The auditor should perform audit procedures to evaluate whether the overall presentation of the
financial statements, including the related disclosures, are in accordance with the applicable financial
reporting framework.
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Documentation
1. The auditor should document:
The overall responses to address the assessed risks of material misstatement at the
financial statement level and the nature, timing, and extent of the further audit
procedures;
The linkage of those procedures with the assessed risks at the assertion level; and
The results of the audit procedures
2. If the auditor plans to use audit evidence about the operating effectiveness of controls obtained in prior
audits, the auditor should document the conclusions reached with regard to relying on vcfsuch controls
that were tested in a prior audit.
3. The auditor’s documentation should demonstrate that the financial statements agree or reconcile with
the underlying accounting records.
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 320
AUDIT MATERIALITY
1. Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements
2. There is an inverse relationship between materiality and the level of audit risk
3. In evaluating whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework, the auditor should assess whether the aggregate of
uncorrected misstatements that have been identified during the audit is material.
4. If the auditor concludes that the aggregate of uncorrected misstatements may be material, the auditor
needs to consider:
Reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements for the misstatements
identified
5. If management refuses to adjust the financial statements and the results of extended audit procedures
do not enable the auditor to conclude that the aggregate of uncorrected misstatements is not material,
the auditor should consider the appropriate modification to the auditor’s report.
6. If the auditor has identified a material misstatement resulting from error, the auditor should
communicate the misstatements to the appropriate level of management on a timely basis, and
consider the need to report it to those charged with governance.
PSA 520
ANALYTICAL PROCEDURES
1. “Analytical procedures” means the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant information or
which deviate from predicted amounts.
2. Analytical procedures also include consideration of comparisons of the entity’s financial statements:
a. Comparable information for prior periods
b. Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor,
such as an estimation of depreciation
c. Similar industry information
3. Analytical procedures also include consideration of relationships:
a. Among elements of financial information that would be expected to conform to a predictable
patter based on the entity’s experience, such as gross margin percentages.
b. Between financial information and relevant no-financial information, such as payroll costs to
numbers and employees
4. The auditor should apply analytical procedures at the planning stage to assist in understanding the
business and in identifying areas of potential risk. Analytical procedures in planning the use both
financial and non-financial information.
5. The auditor should apply analytical procedures at or near the end of the audit when performing an
overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s
knowledge of the business.
6. The application of analytical procedures is based on the expectation that relationships among data exist
and continue in the absence of known conditions to the contrary. The presence of these relationships
provides audit evidence as to the completeness, accuracy and validity of the data produced by the
accounting system
7. The extent of reliance that the auditor places on the results of analytical procedures depends on the
following factors:
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a. Materiality of the items involved
b. Other audit procedures directed toward the same audit objectives
c. Accuracy with which the expected results of analytical procedures can be predicted.
8. When analytical procedures identify significant fluctuations or relationships that are inconsistent with
other relevant information or that deviate from predicted amounts, the auditor should investigate and
obtain adequate explanations and appropriate corroborative evidence.
9. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by:
a. Corroboration of management responses; and
b. Consideration of the need to apply other audit procedures based on the results of such
inquiries, if management is unable to provide an explanation or if the explanation is not
considered adequate.
PSA 550
RELATED PARTIES
1. Management is responsible for the identification and disclosure of related parties and transactions with
such parties.
2. The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence
regarding the identification and disclosure by management of related parties and the effect of related
party transactions that are material to the financial statements. However, an audit cannot be expected
to detect all related party transactions.
3. The auditor needs to have a sufficient understanding of the entity and its environment to enable
identification of the events, transactions and practices that may result in a risk of material misstatement
regarding related parties and transactions with such parties.
4. When obtaining an understanding of the entity’s internal control, the auditor should consider the
adequacy of control activities over the authorization and recording of related party transactions.
5. In examining the identified related party transactions, the auditor should obtain sufficient appropriate
audit evidence as to whether these transactions have been properly recorded and disclosed.
6. The auditor should obtain a written representation from management concerning:
a. The completeness of information provided regarding the identification of related parties; and
b. The adequacy of related party disclosures in the financial statements
7. The auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and
transactions with such parties or concludes that their disclosure in the financial statements is not
adequate; the auditor should modify the audit report appropriately.
PSA 610
CONSIDERING THE WORK OF INTERNAL AUDIT
1. The external auditor should obtain a sufficient understanding of internal audit activities to identify and
assess the risks of material misstatement of the financial statements and to design and perform further
audit procedures.
2. The external auditor should perform an assessment of the internal audit function when internal auditing
is relevant to the external auditor’s risk assessment.
3. When obtaining an understanding and performing a preliminary assessment of the internal audit
function, the important criteria are:
a. Organizational status
b. Scope of the function
c. Technical competence
d. Due professional care
4. When planning to use the work of internal auditing, the external auditor will need to consider internal
auditing’s tentative plan for the period and discuss it as early a stage as possible.
5. Where the work of internal auditing is to be a factor in determining the nature, timing and extent of the
external auditor’s procedures, it is desirable to agree in advance the timing of such work, the extent of
audit coverage, materiality levels and proposed methods of sample selection, documentation of the
work performed and review and reporting procedures.
6. A liaison with internal auditing is more effective when meetings are held at appropriate intervals during
the period.
7. When the external auditor intends to use specific work of internal auditing, the external auditor should
evaluate and perform audit procedures on that work to confirm its adequacy for the external auditor’s
purposes.
8. The evaluation of specific work of internal auditing involves consideration of the adequacy of the scope
of the work and related programs and whether the preliminary assessment of the internal auditing
remains appropriate.
9. The nature, timing and extent of audit procedures performed on the specific work of internal auditing
will depend on:
The external auditor’s judgment as to the risk of material misstatement of the area
concerned;
The assessment of internal auditing; and
The evaluation of the specific work by internal auditing.
10. The external auditor would record conclusions regarding the specific internal auditing work that has
been evaluated and the audit procedures performed on the internal auditor’s work.
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PSA 620
USING THE WORK OF AN EXPERT
1. “Expert’ means a person or firm possessing special skill, knowledge and experience in a particular filed
other than accounting and auditing.
2. An expert may be:
a. Contracted by the entity;
b. Contracted by the auditor;
c. Employed by the entity; or
d. Employed by the auditor.
3. When determining the need to use the work of an expert, the auditor would consider:
a. The materiality of the financial statement item being considered;
b. The risk of misstatement based on the nature and complexity of the matter being
considered; and
c. The quantity and quality of other audit evidence available
4. When planning t use the work of an expert, the auditor should evaluate the professional competence
and objectivity of the expert.
5. The risk that an expert’s objectivity will be impaired increases when the expert is:
a. Employed by the entity; or
b. Related in some other manner to the entity.
6. The auditor should obtain sufficient appropriate audit evidence that the scope of the expert’s work is
adequate for the purposes of the audit. Audit evidence may be obtained through a review of the terms
of reference which are often set out in written instructions from the entity to the expert.
Such instructions to the expert may cover matters such as:
a. The objectives and scope of the expert’s work
b. A general outline as to the specific matters the auditor expects the expert’s report to cover
c. The intended use by the auditor of the expert’s work, including the possible communication
to third parties of the expert’s identity and extent f involvement
d. The extent of the expert’s access to appropriate records and files
e. Clarification of the expert’s relationship with the entity, if any.
f. Confidentiality of the entity’s information
g. Information regarding the assumptions and methods intended to be used by the expert and
their consistency with those used in prior periods.
7. The auditor should evaluate the appropriateness of the expert’s work as audit evidence regarding the
financial statement assertion being considered. This will involve assessment of whether the substance
of the expert’s findings is properly reflected in the financial statements or supports the financial
statement assertions, and consideration of:
a. Source data used.
b. Assumptions and methods used and their consistency with prior periods
c. Results of the expert’s work in the light of the auditor’s overall knowledge of the business
and of the results of other audit procedures.
8. When considering whether the expert has used source data which is appropriate in the circumstances,
the auditor would consider the following procedures:
a. Making inquiries regarding any procedures undertaken by the expert to establish whether
the source data is sufficient, relevant and reliable.
b. Reviewing or testing the data used by the expert
9. If the results of the expert’s work do not provide sufficient audit evidence or if the results are not
consistent with other audit evidence, the auditor should resolve the matter. This may involve:
a. Discussions with the entity and the expert
b. Applying additional audit procedures
c. Including possibly engaging another expert; or
d. Modifying the auditor’s report
10. When issuing an unmodified auditor’s report, the auditor should not refer to the work of an expert. Such
a reference might be misunderstood to be a qualification of the auditor’s opinion or a division of
responsibility, neither of which is intended.
11. If as a result of the work of an expert, the auditor decides to issue a modified auditor’s report, in some
circumstances it may be appropriate, in explaining the nature of the modification, to refer to or describe
the work o the expert (including the identity of the expert and the extent of the expert’s involvement). In
these circumstances, the auditor would obtain the permission of the expert before making such a
reference. If permission is refused and the auditor believes a reference is necessary, the auditor may
need to seek legal advice.
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
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PSA 500(REVISED)
AUDIT EVIDENCE
1. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion
2. “Audit Evidence” is all the information used by the auditor in arriving at the conclusions on which the
opinion is based, and includes the information contained in the accounting records underlying the
financial statements and other information
3. Accounting records generally include:
The records of initial entries and supporting records, such as checks and records of
electronic fund transfers;
Invoices
Contracts
The general and subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in formal journal entries; and
Records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures
4. Other information that the auditor may use as audit evidence includes:
Minutes of the meetings
Confirmations from third parties
Analysts’ reports
Comparable data about competitors (benchmarking)
Control manuals
Information obtained by auditors from such audit procedures as inquiry, observation, and
inspection; and
Other information developed by, or available to, the auditor that permits the auditor to
reach conclusions through valid reasoning
CATEGORIES OF ASSERTIONS
a. Assertions about classes of transactions and events for the period under audit:
1. OCCURRENCE - transactions and events that have been recorded have occurred and
pertain to the entity
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2. COMPLETENESS - all transactions and events that should have been recorded have
been recorded.
3. ACCURACY - amounts and other data relating to recorded transactions and
events have been recorded appropriately
4. CUTOFF - transactions and events have been recorded in the correct accounting
period
5. CLASSIFICATION - transactions and events have been recorded in the proper
accounts
b. Assertions about account balances at the period end:
1. EXISTENCE -assets, liabilities, and equity interests exist
2. RIGHTS AND OBLIGATIONS - the entity holds or controls the right to assets, and
liabilities are obligations of the entity
3. COMPLETENESS - all assets, liabilities, and equity interests that
should have been recorded have been recorded
4. VALUATION AND ALLOCATION - assets, liabilities and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded
3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include analytical review
procedures and tests of details
PSA 501
AUDIT EVIDENCE – ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
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Attendance at Physical Inventory Counting
1. When inventory is material to the financial statements, the auditor should obtain sufficient appropriate
audit evidence regarding its existence and condition by attendance at physical inventory counting unless
impracticable.
2. If unable to attend the physical inventory count on the date panned due to unforeseen circumstances, the
auditor should take or observe some physical counts on an alternative date and, when necessary,
perform tests of intervening transactions.
3. Where attendance is impracticable, due to factors such as the nature and location of the inventory, the
auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of
existence and condition to conclude that the auditor need not make reference to a scope limitation.
4. In planning attendance at the physical inventory count or the alternative procedures, the auditor would
consider:
The nature of the accounting and internal control systems used regarding inventory.
Inherent, control, and detection risks, and materiality related to inventory.
Whether adequate procedures are expected to be established and proper instructions issued for
physical inventory counting.
The timing of the count.
The locations at which inventory is held.
Whether an expert’s assistance is needed.
6. To obtain assurance that management’s procedures are adequately implemented the auditor would
observe employee’s procedures and perform test counts.
7. The auditor would also consider cutoff procedures including details of the movement of inventory just
prior to, during, and after the count so that the accounting for such movements can be checked at a later
date.
8. The auditor would test the final inventory listing to assess whether it accurately reflects actual inventory
counts.
9. When inventory is under the custody and control of a third party, the auditor would ordinarily obtain direct
conformation from the third party as to the quantities and condition of inventory held on behalf of the
entity. Depending on the materiality of this inventory, the auditor would consider:
The integrity and independence of the third party.
Observing, or arranging for another auditor to observe, the physical inventory count.
Obtaining another auditor’s report on the adequacy of third party’s accounting and internal control
systems for ensuring that inventory is correctly counted and adequately safeguarded.
Inspecting documentation regarding inventory held by third parties, for example, warehouse receipts,
or obtaining confirmation from other parties when such inventory has been pledged as collateral.
1. The auditor should carry out procedures in order to become aware of any litigation and claims involving
the entity, which may have a material effect on the financial statements.
2. When litigation or claims have been identified or when the auditor believes they may exist, the auditor
should seek direct communication with the entity’s lawyers.
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3. The letter, which should be prepared by management and sent by the auditor, should request the lawyer
to communicate directly with the auditor. When it is considered unlikely that the lawyer will respond to a
general inquiry, the letter would ordinarily specify:
A list of litigation and claims.
Management’s assessment of the outcome of the litigation or claim and its estimate of the financial
implications, including costs involved.
A request that the lawyer confirms the reasonableness of management’s assessments and provides
the auditor with further information if the list is considered by the lawyer to be incomplete or incorrect.
4. The auditor considers the status of legal matters up to date of the audit report.
5. If management refuses to give the auditor permission to communicate with the entity’s lawyers, this
would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of opinion.
1. When long-term investments are material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding their valuation and disclosure.
2. Audit procedures ordinarily include considering evidence as to whether the entity has the ability to
continue to hold the investments on a long-term basis and discussing with management whether the
entity will continue to hold the investments as long-term investments and obtaining written
representations to that effect.
3. Other procedures would ordinarily include considering related financial statements and other information,
such as market quotations, which provide an indication of value and comparing such values to the
carrying amount of the investments up to the date of the auditor’s report.
Segment information
1. When segment information is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its disclosure in accordance with the applicable financial reporting
framework.
2. The auditor considers segment information in relation to the financial statements taken as a whole, and is
not ordinarily required to apply auditing procedures that would be necessary to express an opinion on the
segment information standing alone.
3. Audit procedures regarding segment information ordinarily consist of analytical procedures and other
audit test appropriate in the circumstances.
4. The auditor would discuss with management the methods used in determining segment information, and
consider whether such methods are likely to result in disclosure in accordance with GAAP and test the
application of such methods.
PSA 505
EXTERNAL CONFIRMATIONS
1. External confirmation is the process of obtaining and evaluating audit evidence through a direct
communication from a third party in response to a request for information about a particular item affecting
assertions made by management in the financial statements.
2. A positive external confirmation request asks the respondent to reply to the auditor in all cases either by
indicating the respondent’s agreement with the given information, or by asking the respondent to fill in the
information.
3. A negative external confirmation request asks the respondent to reply only in the event of disagreement
with the information provided in the request.
4. Negative confirmation requests may be used to reduce the risk of material misstatement to an
acceptable level when:
The assessed risk of material misstatement is lower.
A large number of small balances are involved.
A substantial number of errors are not expected.
The auditor has no reason to believe that respondents will disregard these requests.
5. When performing confirmation procedures, the auditor should maintain control over the process of
selecting those to whom a request will be sent, the preparation and sending of confirmation requests, and
the responses to those requests.
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6. The auditor should perform alternative procedures where no response is received to a positive external
confirmation request. The alternative audit procedures should be such as to provide the evidence the
evidence about the financial statement assertions that the confirmation request was intended to provide.
7. When the auditor forms a conclusion that the confirmation process and alternative procedures have not
provided sufficient appropriate audit evidence regarding an assertion, the auditor should undertake
additional procedures to obtain sufficient audit evidence.
8. The auditor should evaluate whether the results of the external confirmation process together with the
results from any other procedures performed, provide sufficient appropriate audit evidence regarding the
assertion being audited.
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FRAUD refers to an intentional act by one party or more individuals among management, those charged with
governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage
Fraud involves:
Incentive or pressure to commit fraud
A perceived opportunity to act or to do so
Some rationalization of the act
Management fraud - fraud involving one or more members of management or those charged with
governance
Employee fraud - fraud involving only employees of the entity
(In either case, there may be collusion within the entity or with third parties outside of the entity)
2. MISAPPROPRIATION OF ASSETS
Involves the theft of an entity’s assets and is often perpetrated by employees in relatively small
and immaterial amounts
Can also involve management who are usually more able to disguise or conceal
misappropriations in ways that are difficult to detect
Often accompanied by false or misleading records or documents in order to conceal the fact
that the aspects are missing or have been pledged without proper authorization
Can be accompanied in a variety of ways including:
o Embezzling receipts
o Stealing physical assets or intellectual property
o Causing an entity to pay for the goods and services not received
o Using an entity’s assets for personal use
Responsibilities of Those charged with Governance and of Management
1. The primary responsibility for the prevention and detection of fraud rests with both those charged with
governance of the entity and with management
2. It is important management, with the oversight of those charged with governance, place a strong
emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud
deterrence, which could persuade in individuals not to commit fraud because of the likelihood detection
and punishment
3. It is the responsibility of those charged with governance of the entity to ensure , through oversight of
management, that the entity establishes and maintains internal control to provide reasonable assurance
with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance
with applicable law and regulations
4. It is the responsibility of management, with oversight from those charged with governance, to establish
a control environment and maintain policies and procedures to assist in achieving the objective
ensuring, as far as possible, the orderly and efficient conduct of the entity’s business
3. The risk of the auditor not detecting a material misstatement resulting from management fraud is
greater than for employee fraud, because management is frequently in a position to directly or indirectly
manipulate accounting records and present fraudulent financial information
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4. The subsequent discovery of a material misstatement of the financial statements resulting from fraud
does not, in and of itself, indicate a failure to comply with PSAs
Management representations
The auditor should obtain written representations from management that:
a. It acknowledges its responsibility for the design and implementation of internal control to prevent and
detect fraud
b. It has disclosed to the auditor the results of its assessment of the risk that the financial statements may
be materially misstated as a result of fraud
c. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving:
i. Management
ii. Employees who have significant roles in internal control
iii. Others where the fraud could have a material effect on the financial statements and
d. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud,
affecting the entity’s financial statements communicated by the employees, former employees,
analysts, regulators or others
Documentation
1. The documentation of the auditor’s understanding of the entity and its environment and the auditor’s
assessment of the risks of material misstatement should include:
a. The significant decisions reached during the discussion among the engagement team
regarding the susceptibility of the entity’s financial statements to material misstatement due
to fraud
b. The identified and assessed risks of material misstatement due to fraud at the financial
statement level and at the assertion level
2. The documentation of the auditor’s responses to the assessed risks of material misstatement should
include:
a. The overall responses to the assessed risks of material misstatement due to fraud at the
financial statement level and the nature, timing and extent of audit procedure, and the
linkage of those procedures with the assessed risks of material misstatement due to fraud at
the assertion level
b. The results of the audit procedures, including those designed to address the risk of
management override of controls
3. The auditor should document the communications about fraud made to management, those charged
with governance, regulators and others
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4. When the auditor has concluded that the presumption that there is a risk of material misstatement due
to fraud related to revenue recognition is not applicable in the circumstances of the engagement, the
auditor should document the reasons for that conclusion
PSA 250
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
1. “Noncompliance” as used in PSA 250 refers to acts of omission or commission by he entity being
audited, either intentional and unintentional, which are contrary to the prevailing laws and regulations
2. Noncompliance does not include personal misconduct (unrelated to the business activities of the entity)
by the entity’s management or employees
3. When planning and performing audit procedures and in evaluating and reporting the results thereof, the
auditor should recognize that noncompliance by the entity with laws and regulation may materially
affect the financial statements
AUDIT SAMPLING
1. “Audit Sampling” involves the application of audit procedures to less than 100% of items with an
account balance or class of transactions
2. Sampling may be statistical or nonstatistical.
I. Statistical sampling means any approach t sampling that has the following
characteristics:
a. Random selection of a sample
b. Use of probability theory to evaluate sample results
II. Nonstatistical sampling is a sampling approach that does not have characteristics (a)
and (b).
Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application. In aids
an auditor I forming conclusions about one r more characteristics or either a particular class of transactions or
a particular account balances
1. ATTRIBUTE SAMPLING
Applicable to tests of control
Used to test an entity’s rate of deviation (also called rate of occurrence) from a prescribed
control procedure
2. VARIABLES SAMPLING
Applicable to substantive test
Most commonly used to test whether recorded account balances are fairly stated
SAMPLING RISK
1. It arises from the possibility that the auditor’s conclusion, based on a sample may be different from the
conclusion reached if the entire population were subjected to the same audit procedures
2. The confidence level (also called reliability level) is the mathematical complement of the applicable
sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level when
developing the sampling design
4. For tests of control, it has the following aspects:
a. Risk of assessing control risk too low (Risk of Overreliance)
The risk that the auditor would conclude that the control risk is lower than it
actually is
It affects audit effectiveness and is more likely to lead to an inappropriate audit
opinion
b. Risk of assessing control risk too high (Risk of under reliance)
The risk that the auditor would conclude that control risk is higher than actually is
It affects audit efficiency as it would lead to additional work to establish that initial
conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
The risk that the auditor would conclude that a material error exists when in fact it
does
It affects audit effectiveness and is more likely to lead to an inappropriate audit
opinion
b. Risk of incorrect rejection
The risk that the auditor would conclude that a material error exists when in fact it
does not
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It affects audit effectiveness as it would lead to additional work to establish that
initial conclusions were incorrect
NONSAMPLING RISK
It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the
size of the sample. For example, most audit evidence is persuasive rather than conclusive, the auditor might
use inappropriate procedures, or the auditor might misinterpret evidence and fail to recognize an error.
e. Stratification
This involves subdividing the population into subpopulations or strata, i.e., a group of sampling
units which have similar characteristics (often monetary value)
The strata must be explicitly defined so that each sampling unit can belong to only one stratum
This method enables the auditor to direct his efforts towards the items he considers would
potentially contain the greater monetary error
B. Difference estimation
It is a classical variables sampling technique that uses the average difference between audited
amounts and individual recorded amounts to estimate the total audited amount of a population and an
allowance for sampling risk.
C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited amounts to recorded
amount in the sample to estimate the total amount of the population and an allowance for sampling risk
Ratio estimation is more appropriate when he differences are nearly proportional to book values.
Difference estimation is more appropriate when there is little or n relationship between the absolute
amounts of the differences and the book values.
1. A CIS environment exists when a computer of any type or size is involved in the processing by the
entity of financial information of significance to the audit, whether the computer is operated by the entity
or by a third party
2. The overall objective and scope of an audit does not change in a CIS environment
3. A CIS environment may affect:
a. The procedures followed in obtaining a sufficient understanding of the accounting and
internal control systems
b. The consideration of the inherent and control risk
c. The design and performance of tests of controls and substantive procedures
4. The auditor should have sufficient knowledge of the CIS to plan, direct, and review the work performed
5. If specialized skills are needed, the auditor would seek the assistance of a professional possessing
such skills, who may be either on the auditor’s staff or an outside professionals
6. In planning the portions of the audit which may be affected by the client’s CIS environment, the auditor
should obtain an understanding of the significance and complexity of the CIS activities and the
availability of data for use in the audit
7. When the CIS are significant, the auditor should also obtain an understanding of the CIS environment
and whether it may influence the assessment of inherent and control risks
8. The auditor should consider the CIS environment in designing audit procedures to reduce audit risk to
an acceptably low level. The auditor can use either manual audit procedures, computer-assisted audit
techniques, or a combination of both to obtain sufficient evidential matter
Organizational Structure
Characteristics of a CIS organizational structure includes:
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a. Concentration of functions and knowledge
Although most systems employing CIS methods will include certain manual operations,
generally the number of persons involved in the processing of financial information is significantly reduced.
b. Concentration of programs and data
Transaction and master file data are often concentrated, usually in machine-readable form,
either in one computer installation located centrally or in a number of installations distributed throughout the
entity.
Nature of Processing
The use of computers may result in the design of systems that provide less visible evidence than those
using manual procedures. In addition, these systems may be accessible by a larger number of persons.
System characteristics that may result from the nature of CIS processing include:
a. Absence of input documents
Data may be entered directly into the computer system without supporting document
In some on-line transaction systems, written evidence of individual data entry authorization
(e.g., approval for order entry) may be replaced by other procedures, such as authorization
controls contained in computer programs (e.g., credit limit approval)
b. Lack of visible audit trail
The transaction trail may be partly in machine-readable form and may exist only for a limited
period of time (e.g., audit logs may be set to overwrite themselves after a period of time or when the allocated
disk space is consumed)
c. Lack of visible output
Certain transactions or results of processing may not be printed or only summary data may be
printed
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Request for changes to the existing systems
Acquisition, implementation, and maintenance of system software
c. Delivery and support controls – designed to control the delivery of CIS services and include:
Establishment of service level agreements against which CIS services are measured
Performance and capacity management controls
Disaster recovery/contingency planning, training, and file backup
Computer operations controls
Systems security
Physical and environment controls
d. Monitoring controls – designed to ensure that CIS controls are working effectively as planned. These
include:
Monitoring of key CIS performance indicators
Internal external CIS audits
CIS APPLICATION CONTROLS – to establish specific control procedures over the application systems in
order to provide reasonable assurance that all transactions are authorized, recorded and are processed
completely, accurately and on a timely basis. CIS application controls include:
a. Controls over Input – designed to provide reasonable assurance that:
Transactions are properly authorized before being processed by the computer
Transactions are accurately converted into machine readable form and recorded in the
computer data files
Transactions are not lost, added, duplicated or improperly changed
Incorrect transactions are rejected, corrected and, if necessary, resubmitted on a timely basis.
b. Controls over processing and computer data files – designed to provide reasonable assurance that:
Transactions, including system generated transactions, re properly processed by the computer
Transactions are not lost, added, duplicated or improperly changed
Processing errors (i.e., rejected data and incorrect transactions) are identified and corrected on
a timely basis
c. Controls over output – designed to provide reasonable assurance that:
Results of processing are accurate
Access to output is restricted to authorized personnel on a timely basis
Output is provided to appropriate authorized personnel on a timely basis
NETWORK ENVIRONMENT
1. A network environment is a communication system that enables computer users to share computer
equipment, application software, data, and voice and video transmissions
2. A file server is a computer with an operating system that allows multiple users in a network to access
software applications and data files
3. Basic types of networks
a. Local area network (LAN)
b. Wide area network (WAN)
c. metropolitan area network (MAN)
Software consists of computer programs which instruct the computer hardware to perform the desired
processing.
ELECTRONIC DATA INTERCHANGE (EDI) – the electronic exchange of transactions, from one entity’s
computer to another entity’s computer through an electronic communications network. In electronic fund
transfer (EFT) Systems, for example, electronic transactions replace checks as a mean of payment.
EDI controls include:
a. Authentication – controls must exist over the origin, proper submission, and proper delivery of EDI
communications to ensure that the EDI messages are accurately sent and received to and from
authorized customers and suppliers.
b. Encryption – involves conversion of plain text data to cipher text data to make EDI messages
unreadable to unauthorized persons
c. VAN controls – a value added network (VAN) is a computer service organization that provides
network, storage, and forwarding (mailbox) services for EDI messages
AUDIT APPROACHES
1. Auditing around the computer – the auditor ignores or bypasses the computer processing function of an
entity’s EDP system
2. Auditing with the computer – the computer is used as an audit tool
3. Auditing through the computer – the auditor enters the client’s system and examines directly the
computer and its system and application software
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Factors to consider in using CAAT
1. Degree of technical competence in CIS
2. Availability of CAAT and appropriate computer facilities
3. Impracticability of manual tests
4. Effectiveness and efficiency
5. Timing of tests
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5. Arrange for the audits of intercompany balances to be performed as of concurrent dates, even the fiscal
years differ, and for the examination of the specified, important, and representative related party
transactions by the auditor for each of the parties with appropriate exchange of relevant information
6. Inspect or confirm and obtain satisfaction concerning the transferability and value of the collateral
The representation letter is provided in connection with your audit of the financial statements of ABC Company for the
year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial statements present
fairly, in all material aspects, the financial position of ABC Company as of December 31, 20X1 and of the results of its
operations and its cash flows for the year time ended in accordance with (indicate relevant financial reporting framework).
We acknowledge our responsibility for the fair presentation of the financial statements in accordance with (indicate
relevant financial reporting framework).
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We confirm to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may include:
There have been no irregularities involving management or employees who have a significant role in the
accounting and internal control systems or that could have a material effect on the financial statements
We have made available to you all the books of account and supporting documentation and all minutes of
meetings and shareholders and BOD (namely those held on (dates) respectively)
We confirm the completeness of the information provided regarding the identification of related parties
The financial statements are free of material misstatements, including omissions
The company has complied with all aspects of contractual agreements that could have a material effect on the
financial statements in the event of noncompliance. There has been no noncompliance with requirements of
regulatory authorities that could have a material effect on the financial statements in the event of
noncompliance.
We have no plans or intentions that may affect or alter the carrying value or classification of asset and liabilities
reflected in the financial statement
(no plans regarding the inventory abandonment or no inventory were stated in an amount in excess of net
realizable value)
Indicate that there are no events subsequent to period which require adjustments in the statements
Indicate that the claim is settled in a specific amount and there are no other litigations are expected to be
received
Indicate that there are no formal or informal compensating balance arrangements with any of the cash, except
those that are disclosed
Indicate that you have recorded material regarding the capital per se
______________________
(Senior Executive Officer)
______________________
(Senior Financial Officer)
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
[Appropriate addressee]
We have audited the accompanying financial statements of ABC Company which comprise a balance sheet as
at date December 31, 20X1, and the income statement, statement of changes in equity and cash flow
statement for the year ended, and a summary of significant accounting policies and other explanatory notes.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our
audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements
are free from material misstatement. An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The procedures selected depend upon the auditor’s
judgment, including the assessment of the risks of material misstatements on the financial statements whether
due to fraud or error. In making those risk assessments; the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the internal control of the entity. An audit also includes evaluating the appropriateness of the accounting
policies used and the reasonableness of accounting estimates made by the management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the financial statements fairly, in all material respects, the financial position of ABC Company as
of December 31, 20X1, and of its financial performance and its cash flows for the year then ended in
accordance with the Philippine Financial Reporting Standards.
[Auditor’s signature]
[Date of Auditor’s report]
[Auditor’s address]
Without qualifying our opinion, we draw attention to Note X in the financial statements which indicates that
the Company incurred a net loss of P_____ during the year ended December 31,20X1 and, as of date, the
company’s current liabilities exceeded its total assets by P_____. These conditions, along with other matters,
as set forth in Note X, indicate the existence of a material uncertainty which may cast significant doubt about
the Company’s ability to continue as a going concern.
Qualified opinion
Should be expressed when the auditor concludes that the unqualified opinion cannot be
expressed but that the effect of any disagreement with management, or limitation on scope is
not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.
A qualified opinion should be expressed as being “except for” the effects of the matter to which
the qualification relates.
Adverse opinion
Should be expressed when the effect of the disagreement is so material and pervasive to the
financial statements that the auditor concludes that a qualification of the report is not adequate
to disclose the misleading or incomplete nature of the financial statements.
Disclaimer of Opinion
Should be expressed when the possible effect of a limitation on the scope is so material and
pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and
accordingly is unable to express an opinion on the financial statements.
REPORT MODIFICATIONS
Limitation on scope
Our responsibility is to express an opinion on these financial statements based on our audit. Except as
discussed in the following paragraph, we conducted our audit in accordance with … (auditor’s
responsibility paragraph)
We did not observe the counting of the physical inventories as of December 31, 20X1, since that date
was prior to the time we were initially engaged as auditors for the company. Owing to the nature of the
company’s records, we were unable to satisfy ourselves as to inventory quantities by other audit
procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be
necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial
statements fairly presents, in all material respects … (opinion paragraph)
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Management is responsible for … (same as illustrated in the management’s responsibility paragraph)
(The paragraph discussing the scope of the audit would either be omitted or amended according to the
circumstances)
We were not able to observe all physical inventories and confirm accounts receivables due to limitations
placed on the scope of our work by the company)
Because of the significance of the matters discussed in the preceding paragraph, we do not express an
opinion on the financial statements.
Our responsibility is to express an opinion on these financial statements based on our audit. Except as
discussed in the following paragraph, we conducted our audit in accordance with … (auditor’s
responsibility paragraph)
As discussed in the Note X to the financial statements, no depreciation has been provided in the financial
statements which practice, in our opinion, is not in accordance in PFRS. The provision for the year ended
December 31, 20X1, should be xxx based on the straight-line method of depreciation using annual rates
of 5% for the building and 20% for the equipment. Accordingly, the fixed assets should be reducedby
accumulated depreciation of xxx and the loss for the year and accumulated deficit should be increased by
xxx and xxx, respectively.
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be
necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial
statements fairly presents, in all material respects … (opinion paragraph)
4. DISAGREEMENT ON ACCOUNTING POLICIES – INADEQUATE DISCLOSURES
QUALIFIED OPINION
We have audited … (remaining words are the same as in the introductory page)
Our responsibility is to express an opinion on these financial statements based on our audit. Except as
discussed in the following paragraph, we conducted our audit in accordance with … (auditor’s
responsibility paragraph)
On January 31,20X2, the Company issued debentures in the amount of… for the purpose of financing
plant expansion. The debenture agreement restricts the payment of future cash dividends to earnings
after December 31,19X1, which restrictions was not disclosed in the company’s financial statements.
Disclosure of this is required by the PAS 1, Presentation of financial statements.
In our opinion, except for the omission of the information included in the preceding paragraph, the
financial statements present fairly, in all material respects… (opinion paragraph)
Our responsibility is to express an opinion on these financial statements based on our audit. Except as
discussed in the following paragraph, we conducted our audit in accordance with … (auditor’s
responsibility paragraph)
In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the
financial statements do not present fairly, in all material respects, the financial position of ABC Company
as of December 31,19X1, and of its financial performance and its cash flows for the year then ended in
accordance with PFRS… (Opinion paragraph)
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Events occurring up to the date of the auditor’s report
2. The auditor should perform procedures designed to obtain sufficient appropriate audit
evidence that all events up to date of the auditor’s report that may require adjustment of, or
disclosure in, the financial statements have been identified.
3. When the auditor becomes aware of events which materially affect the financial statements,
the auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements.
Facts discovered after the date of the auditor’s report but before the financial statements are
issued
4. During the period from the date of the auditor’s report to the date the financial statements are
issued:
o The responsibility to inform the auditor of facts which may affect the financial statements
rests with management
o When the auditor becomes aware of the facts that will materially affect the financial
statements, the auditor should:
Consider whether the financial statements needed amendment
Discuss the matter with the management
Take the action appropriate in the circumstances
5. When the management amends the financial statements, the auditor would carry out the
procedures necessary in the circumstances and would provide management with a new report
on the amended financial statements
6. The new auditor’s report would be dated not earlier than the date the amended financial
statements are signed or approved and, accordingly, the procedures to identify subsequent
events would be extended to the date of the new auditor’s report
7. When management does not amend the financial statements but the auditor believes they
need to be amended and the auditor’s report has not been released to the entity, the auditor
should express a qualified opinion or an adverse opinion.
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o The performance of additional procedures as set out in PSA 600 regarding the
components audited by other auditor resulting in the principal auditor having significant
participation in such audit
3. When planning to use the work of another auditor, the principal auditor should:
o Consider the professional competence of the other auditor in the context of specific
assignment
o Perform procedures to obtain sufficient appropriate audit evidence that the work of the
other auditor is adequate for the principal auditor’s purposes in the context of the
specific assignment
o Consider the significant findings of the other auditor
4. Reporting conclusions
o When the principal auditor concludes that the work of the other cannot be used and the
principal auditor has not been able to perform sufficient additional procedures regarding
financial information of the component audited by the other auditor, the principal auditor
should express a qualified or a disclaimer of opinion because of a scope of limitation.
o If the auditor issues or intend to issue, a modified auditor’s report, the principal auditor
would consider whether the subject of modification is of such a nature and significance,
in relation to the financial statements of the entity on which the principal auditor is
reporting that a modification on the principal auditor’s report is required.
5. Division of responsibility
o When the principal auditor bases the audit opinion on the financial statements taken as
a whole solely upon the report of another auditor regarding the audit of one or more
components, the principal auditor’s report should state this fact clearly and should
indicate the magnitude of the portion of the financial statements audited by the other
auditor.
CORRESPONDING FIGURES
o For the prior periods, these are an integral part of the current period financial
statements and have to be read in conjunction with the amounts and other disclosures
relating to the current period.
o These are not presented as complete financial statements capable of standing alone
o The auditor should obtain sufficient appropriate audit evidence that the corresponding
figures meet the requirements of GAAP in the Philippine
o The auditor should assess whether:
Accounting policies used for the corresponding figures are consistent with those
of the current period or whether appropriate adjustments and/or disclosures have
been made
Corresponding figures agree with the amounts and other disclosures presented
in prior period or whether appropriate adjustments and/or disclosures have been
made
COMPARATIVE FINANCIAL STATEMENTS
These comparative financial statements for the prior period(s) are considered separate
financial statements.
These are presented for comparison with the financial statements of the current period, but do
not form part of the current period financial statements
The auditor should obtain sufficient appropriate evidence that the comparative financial
statements meet the requirements of GAAP in the Philippines
The auditor should assess whether:
o Accounting policies of the prior period are consistent with those of the current period or
whether appropriate adjustments and/or disclosures have been made
o Prior period figures presented agree with the amounts and other disclosures presented
in the prior period or whether appropriate judgments and disclosures have been made
3. When the incoming auditor decides to refer to the predecessor auditor’s report, the incoming
auditor’s report should indicate:
a. That the financial statements of the prior period were audited by another auditor
b. Type of report issued by the predecessor auditor and, if the report was modified, the
reasons therefore;
c. Date of that report
4. When the prior period financial statements were not audited, the incoming auditor should state
that the corresponding figures are unaudited.
5. If the incoming auditor identifies that the corresponding figures are materially misstated, the
auditor should request management to revise the corresponding figures or if management
refuses to do so, appropriately modify the report
INCOMING AUDITOR
When the financial statements of the prior period were audited by another auditor,
The predecessor auditor may reissue the audit report on the prior period with the incoming
auditor only reporting on the current period; or
The incoming auditor’s report should state that the prior period was audited by another auditor
and the incoming auditor’s report should indicate:
o That the financial statements of the prior period was audited by another auditor
o The type of report issued by the predecessor auditor, and if the report was modified, the
reasons; therefore
o Date of the report
1. An entity ordinarily issues on an annual basis a document which includes its audited financial
statements together with the auditor’s report thereon, also called “annual report”.
Material inconsistencies
2. This exists when the other information contradicts information contained in the audited
financial statements
3. If, on reading the other information, the auditor identifies material inconsistency, the auditor
should determine whether the financial statements need to be amended
If the amendment is necessary and the entity refuses to make an amendment, the
auditor should express a qualified or adverse opinion
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If the amendment is necessary and the entity refuses to make an amendment, the
auditor should consider including in the auditor auditor’s report an emphasis of
matter paragraph.
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Reports on a compliance with contractual agreements
1. Engagements to express an opinion as to an entity’s compliance with contractual agreements
should be undertaken only when the overall aspects of compliance relate to accounting and
financial matters within the scope of the auditor’s professional competence
2. The report should state whether, in the auditor’s opinion, the entity has complied with the
particular provisions of the agreement
1. The objective of a review of financial statements is to enable an auditor to state whether, on the
basis of procedures which do not provide all the evidence that would be required in an audit,
anything has come to the auditor’s attention that causes the auditor to believe that the financial
statements are not prepared, in all material respects, in accordance with Philippine Financial
Reporting Standards (negative assurance).
2. For the purpose of expressing negative assurance in the review report, the auditor should obtain
sufficient appropriate audit evidence primarily through inquiry and analytical procedures to be
able to draw conclusions.
3. A review engagement provides a moderate level of assurance that the information subject to
review is free of material misstatement. This is expressed in the form of negative assurance.
4. In planning a review of financial statements, the auditor should obtain or update the knowledge of
the business including consideration of the entity’s organization, accounting systems, operating
characteristics and the nature of its assets, liabilities, revenues, and expenses.
6. If the auditor has reason to believe that the information subject to review may be materially
misstated, the auditor should carry out additional or more extensive procedures as are necessary
to be able to express negative assurance or to confirm that a modified report is required.
We have reviewed the accompanying balance sheet of AAA Company at December 31, 19XX, and the related statements
of income, changes in equity and cash flows for the year then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to issue a report on these financial statements based on our review.
We conducted our review in accordance with the Philippines Standards on Review Engagements 2400. This Standard
requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are
free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures
applied to financial data and thus provide less assurance than an audit. We have not performed an audit an accordingly,
we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial
statements are not presented fairly, in all material respects in accordance with Philippine Financial Reporting Standards.
1. An engagement to perform agreed-upon procedures may involve the auditor in performing certain
procedures concerning:
Individual items of financial data (for example, accounts payable, accounts receivable, purchases from related
parties and sales and profits of a segment of an entity).
A financial statement (for example, a balance sheet).
A complete set of financial statements.
2. The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate third parties
have agreed and to report on factual findings.
3. As the auditor simply provides a report of the factual findings of agreed-upon procedures, no
assurance is expressed. Users of the report assess for themselves the procedures and findings
reported by the auditor and draw their own conclusions from the auditor’s work.
4. The report is restricted to those parties that have agreed to procedures to be performed since
others, unaware of the reasons for the procedures, may misinterpret the results.
REPORTING
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6. The report on an agreed-upon procedures engagement needs to describe the purpose and the
agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.
1. A compilation engagement would ordinarily include the preparation of financial statements (which
may or may not be a complete set of financial statements) but may also include the collection,
classification, and summarization o other financial information.
2. The objective of a compilation engagement is for the accountant to use accounting expertise, as
opposed to auditing expertise, to collect, classify and summarize financial information.
3. The procedures employed are not designed and do not enable the accountant to express any
assurance on the financial information.
5. The accountant should obtain a general knowledge of the business and operations of the entity
and should be familiar with the accounting principles and practices of the industry in which the
entity operates and with the form and content of the financial information that is appropriate in the
circumstances.
If management refuses to provide additional information, the accountant should withdraw from
the engagement, informing the entity of the reasons for the withdrawal.
7. The accountant should read the compiled information and consider whether it appears to be
appropriate in form and free from obvious material misstatements.
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8. The accountant should obtain an acknowledgement from management of its responsibility for
the appropriate presentation of the financial information and of its approval of the financial
information.
9. The financial information compiled by the accountant should contain a reference such as
“Unaudited’, “Compiled without Audit or Review,’ or “Refer to the Compilation report’ on each
page of the financial information or on the front of the complete set of financial statements.
On the basis of information provided by the management we have compiled, in accordance with the Philippine Standard
on Related Services applicable to compilation engagements, the balance sheet of XXX Company as of December 31,
19XX and statements of income, changes in equity and cash flows for the year then ended. Management is responsible
for these financial statements. We have not audited or reviewed these financial statements and accordingly express no
assurance thereon.
4. Prospective financial information can include financial statement or one or more elements of
financial statements and may be prepared:
As an internal management tool, for example, to assist in evaluating a possible capital investment; or
For distribution to third parties.
5. Management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the assumptions on which it is based.
7. The auditor should not express any opinion as to whether the results shown in the prospective
financial information will be achieved.
8. When reporting on the reasonableness of management’s assumptions, the auditor provides only
a moderate level of assurance.
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9. The auditor should not accept, or should withdraw from, an engagement when the assumptions
are clearly unrealistic or when the auditor believes that the prospective financial information will
be inappropriate for its intended use.
10. The auditor should obtain written representations from management regarding the intended use
of the prospective financial information, the completeness of significant management
assumptions and management’s acceptance of its responsibility for the prospective financial
information.
We have examined the forecast (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the forecast including the assumptions set out in Note X on which it is based.
Based on our examination of the evidence supporting the assumptions the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast. Further, in
our opinion the forecast is properly prepared on the basis of the assumptions and is presented in accordance with
Philippine Financial Reporting Standards.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected and
the variation may be material.
We have learned the projection (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the projection including the assumptions set out in Note X on which it is based.
This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection has been
prepared using a set of assumptions that include hypothetical assumptions about future events and management’s
actions that are not necessarily expected to occur. Consequently, readers are cautioned that this projection may not be
appropriate for purposes other than that described above.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes
us t believe that these assumptions do not provide a reasonable basis for the projection, assuming that (state or refer to
the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the basis of the assumptions
and is presented in accordance with Philippine Financial Reporting Standards.
Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still likely to
be different from the projection since other anticipated events frequently do not occur as expected and the variation may
be material.
When the auditor believes that the presentation and disclosure of the prospective information is not
adequate, the auditor should express a qualified or adverse opinion or withdraw from the engagement as
appropriate.
When the auditor believes that one or more significant assumptions do not provide a reasonable basis for
the prospective financial information, the auditor should either express an adverse opinion or withdraw
from the engagement as appropriate.
When the examination is affected by conditions that preclude application of one or more procedures
considered necessary in the circumstances, the auditor should either withdraw from the engagement or
disclaim the opinion describe the scope limitation in the report on the prospective financial information.
is based on the International Code of Ethics for professional accountants developed by the
International Federation of Accountants.
Is mandatory for all CPAs and is applicable to professional services performed in the Philippines
on or after January 1, 2004.
Is divided into three parts:
Part A - applies to all professional accountants unless otherwise specified
Part B - applies only to those professional accountants in public practice
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Part C - applies to employed professional accountants, and may also apply, in appropriate
circumstances, to accountants employed in public practice
3. CONFIDENTIALITY
a. Professional accountants have an obligation to respect the confidentiality of information about
a client’s or employer’s affairs acquired in the course of professional services.
b. The duty of confidentiality continues even after the end of the relationship between the
professional accountant and the client or employer.
4. TAX PRACTICE
a. The professional accountant should ensure that the client or the employer are aware of the
limitations attaching to tax advice and services so that they do not misinterpret an expression
of opinion as an assertion of fact.
b. A professional accountant should not be associated with any return or communication in which
there is reason to believe that it:
1. Contains a false or misleading statement;
2. Contains statements or information furnished recklessly or without any real knowledge of
whether they are true or false; or
3. Omits or obscure information required to be submitted and such omission or obscurity
would mislead the revenue authorities.
c. When a professional accountant learns of a material error or omission in a tax return of a prior
year, or the failure to file a required tax return, he/she has a responsibility to:
1. Promptly advise the client or employer of the error or omission and recommend that
disclosure be made to the revenue authorities.
2. If the client or employer does not correct the error, he/she:
a. Should inform the client or the employer that it is possible to act for them in connection
with that return or other related information submitted to the authorities; and
b. Should consider whether continued association with the client or employer in any
capacity is consistent with professional responsibilities.
When a professional accountant performs services in a country other than the home country and
differences on specific matters exist between ethical requirements of the two countries, the
following provisions should be applied:
1. When the ethical requirements of the country in which the services are being performed are
LESS STRICT than the Philippine Code of Ethics, then our code should be applied.
2. When the ethical requirements of the country in which the services are being performed are
STRICTER than our code, then the ethical requirements in the country where services are
being performed should be applied.
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3. When the ethical requirements of the Philippines are mandatory for services performed outside
the Philippines and are stricter than that set out in (1) and (2) above, then the ethical
requirements of the Philippines should be applied.
6. PUBLICITY
In the marketing and promotion of themselves and their work, professional accountants should:
a. Not use means which brings the profession into disrepute.
b. Not make exaggerated claims for the services they are able to offer, the qualifications they
possess, or experience they have gained; and
c. Not denigrate the work of other accountants.
INDEPENDENCE
a. Independence requires:
1. Independence of mind – The state of mind that permits the provision of an opinion without
being affected by influences that compromise professional judgment, allowing an individual
to act with integrity, and exercise objectivity and professional skepticism.
2. Independence in appearance – The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all relevant
information, including safeguards applied, would reasonably conclude a firms, or a member
of the assurance team’s integrity, objectivity or professional skepticism had been
compromised.
b. Members of assurance teams, firms, and network firms should identify THREATS to
independence, evaluate the significance of those threats, and, if the threats are other than
clearly insignificant, identify and apply SAFEGUARDS to eliminate the threats or reduce them
to acceptable level, such that independence of mind and independence in appearance are not
compromised. In situations when no safeguards are available to reduce the threat to an
acceptable level. The only possible actions are to:
1. Eliminate the activities or interest creating the threat; or
2. Refuse to accept or continue the assurance engagement.
Network firm – an entity under common control, ownership or management with the firm or any entity that a
reasonable and informed third party having knowledge of all relevant information would reasonably conclude
as being part of the firm nationally or internationally
Financial interest – an interest in equity or other security, debenture, loan or other debt instrument of an entity
including rights and obligations to acquire such an interest and derivatives directly related to such interest
THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a financial interest in, or
other self-interest conflict with, an assurance client. Examples:
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a. A direct financial interest or material indirect financial interest in an assurance client
b. A loan or guarantee to or from an assurance client or any of its directors or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements
2. SELF-REVIEWTHREAT
Occurs when:
a. Any product or judgment of a previous assurance engagement or non-assurance engagement
needs to be reevaluated in reaching conclusions on the assurance engagement or;
b. When a member of the assurance team was previously a director or officer of the assurance client,
or was an employee in a position to exert direct and significant influence over the subject matter of
the assurance engagement
3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote,
an assurance client’s position or opinion to the point that objectivity may, or may be perceived to be
compromised
4. FAMILIARITY THREAT
Occurs when, by virtue of a close relationship with an assurance client, its directors, officers or
employees, a firm or a member of the assurance team becomes too sympathetic to the client’s
interests.
5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting objectively and exercising
professional skepticism by threats, actual or perceived, from the directors, officers or employees of an
assurance client
SAFEGUARDS
1. When the threats are identified, other than those that are clearly insignificant, appropriate safeguards
should be identified and applied to eliminate the threats or reduce them to an acceptable level. This
decision should be documented
2. When the safeguards are available are insufficient to eliminate the threats to independence or to
reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or interest
creating the threat, the only course of action available will be the refusal to perform, or withdrawal from,
the assurance engagement
CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firm’s own systems and procedures
Safeguards within the firm’s own systems and procedures may include ENGAGEMENT SPECIFIC
safeguards such as the following:
a. Involving an additional professional accountant to review the work done or otherwise advise as
necessary. This individual could be someone from outside the firm or network firm, or someone with the
firm or network firm who was not otherwise associated with the assurance team
b. Consulting a third party, such as a committee of independent directors, a professional regulatory body
or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged with governance,
e. Disclosing to audit committee, or others charged with governance, the nature of services provided and
extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client
g. Involving another firm to perform or re-perform part of the assurance engagement
h. Involving another firm to re-perform the non-assurance service to the extent necessary to enable to
take responsibility for that service; and
i. Removing an individual from the assurance team, when that individual’s financial interest or
relationships create a threat to independence
ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of the assurance client during
the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the assurance services and ends
when the assurance report is issued, except when the assurance engagements is of a recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance engagement ends with
the notification by either party that the professional relationship has terminated or the issuance of the
final assurance report, whichever is later
4. In the case of an audit engagement, the engagement period includes the period covered by the
financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by the financial statements
that the firm will report on, the firm should consider whether any thretas to independence may be
created by:
a. Financial or business relationships with the audit client during or after the period covered by the
financial statements, but prior to the acceptance of the audit engagement; or
b. Previous services provided to the audit client
Similarly, in the case of an assurance engagement that is not an audit engagement, the firm should
consider whether any financial or business relationships or previous services may create threats to
independence.
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