PSA 200

OVERALL OBJECTIVES OF THE INDEPENDENT

AUDITOR AND THE CONDUCT OF AN AUDIT IN
ACCORDANCE WITH PHILIPPINE STANDARDS ON
AUDITING
 OBJECTIVE OF AN
AUDIT

• The objective of an audit of financial

statements is to enable the auditor to
express an opinion whether the financial
statements are prepared, in all material
respects, in accordance with an identified
financial reporting framework.
GENERAL PRINCIPLES
OF AN AUDIT

• The auditor should comply with the “Code of Professional Ethics

for Certified Public Accountants” promulgated by the Board of
Accountancy and approved by the Philippine Professional
Regulation Commission.
• The auditor should conduct an audit in accordance with Philippine
Standards on Auditing.
• The auditor should plan and perform the audit with an attitude of
professional skepticism recognising that circumstances may
exist which cause the financial statements to be materially
misstated.
 SCOPE OF AN
AUDIT
• Refers to audit procedures deemed necessary in the
circumstances to achieve the objective of the audit
• The procedures required to conduct an audit in
accordance with PSAs should be determined by the
auditor having regard to the requirements of PSAs,
relevant professional bodies, legislation, regulations
and, where appropriate, the terms of the audit
engagement and reporting requirements.
 REASONABLE
ASSURANCE
• An audit in accordance with PSAs is designed to
provide reasonable assurance that the financial
statements taken as a whole are free from material
misstatement.
– a concept relating to the accumulation of the audit
evidence necessary for the auditor to conclude that
there are no material misstatements in the financial
statements taken as a whole
– relates to the whole audit process
 INHERENT
LIMITATIONS IN AN
AUDIT
• The use of testing.
• The inherent limitations of any accounting
and internal control system (for example,
the possibility of collusion).
• The fact that most audit evidence is
persuasive rather than conclusive
PROFESSIONAL
JUDGMENT
• The work undertaken by the auditor to form an
opinion is permeated by judgment, in particular
regarding:
– the gathering of audit evidence, for example, in deciding the
nature, timing and extent of audit procedures; and
– the drawing of conclusions based on the audit evidence
gathered, for example, assessing the reasonableness of the
estimates made by management in preparing the financial
statements
• Other limitations may affect the persuasiveness of evidence
available to draw conclusions on particular financial
statement assertions (for example, transactions between
related parties). In these cases, certain PSAs identify
specified procedures which will, because of the nature of the
particular assertions, provide sufficient appropriate audit
evidence in the absence of:
– unusual circumstances which increase the risk of material
misstatements beyond that which would ordinarily be expected; or
– any indication that a material misstatement has occurred.
Responsibility for the
Financial Statements

• While the auditor is responsible for forming and

expressing an opinion on the financial
statements, the responsibility for preparing and
presenting the financial statements is that of the
management of the entity.
• The audit of the financial statements does not
relieve management of its responsibilities.
 PSA 210
AGREEING THE TERMS OF
AUDIT ENGAGEMENTS
 APPOINTMENT
OF THE AUDITOR
• The audit committee of the client's board
of directors is responsible for the
selection and appointment of the
independent external auditor, and for
reviewing the nature and scope of the
engagement.
 Timing

• Although early appointment of the auditor allows the

auditor to plan a more efficient audit, an auditor is
permitted to accept an engagement near or after year-
end.
• The auditor should consider whether late appointment
will pose limitations on the audit that may lead to a
qualified opinion or a disclaimer of opinion, and should
discuss such concerns with the client.
 OBJECTIVE

• The objective of the auditor is to accept or continue an

audit engagement only when the basis upon which it is
to be performed has been agreed, through:
– Establishing whether the preconditions for an audit are present;
and
– Confirming that there is a common understanding between the
auditor and management and, where appropriate, those
charged with governance of the terms of the audit engagement.
Client Acceptance and
Continuance Policies

• The auditor should assess the following:

– Firm’s ability to meet reporting deadlines
– Firm’s ability to staff the engagement
– Independence
– Integrity of client management
– Group audits
Firm’s ability to meet
reporting deadlines

• A firm should not accept or continue a client

relationship unless the firm believes that it has
the ability to perform the engagement within
reporting deadlines.
• The firm's ability to meet reporting deadlines is
affected by many factors, including the timing
and complexity of the engagement and the
availability of audit staff.
 Firm’s ability to
staff engagement
• The firm must have personnel with both
the experience and availability to meeting
staffing and supervision requirements. It
may be more difficult to staff an
engagement during "busy season" than at
other times of the year.
 Independence

• Independence is required for all audit engagements, as

well as for review and attestation engagements.
• Independence is not necessarily required for
compilation engagements.
• Before accepting or continuing a client relationship
when independence is required to be maintained, the
firm must ensure that it is in fact independent of the
client and that it will be able to maintain independence
throughout the engagement.
Integrity of Client
Management
• The likelihood of financial statement misrepresentation
increases when the client's management lacks integrity.
• The audit firm should minimize the likelihood of
association with a client whose management lacks
integrity by considering the reputation of the client, its
owners, key management, related parties, those
charged with governance, the nature of the client's
operations, and the client's overall attitude towards
matters such as internal control s and the aggressive
application of accounting principles.
 Group Audits

• The group engagement partner should evaluate

whether the group engagement team will be
able to obtain sufficient appropriate audit
evidence through the group engagement
team's work or the work of component auditors
to act as the auditor of the group financial
statements.
• Before accepting an audit engagement with a
new or existing audit client, the auditor should
establish that the preconditions for an audit are
present. If the preconditions for an audit are not
present, the auditor should not accept the
proposed engagement, unless the auditor is
required by law or regulation to do so.
Preconditions for
an Audit
• In order to establish whether the preconditions
for an audit are present, the auditor shall:
– Determine whether the financial reporting framework
to be applied in the preparation of the financial
statements is acceptable; and
– Obtain the agreement of management that it
acknowledges and understands its responsibility.
 Acceptability of
Financial Reporting
Framework
a. The nature of the entity (e.g. business,
government, or not-for-profit)
b. The purpose of the financial statements (e.g.
wide or narrow range of users)
c. The nature of the financial statements (e.g.
complete set or single financial statement)
d. Whether law or regulation prescribes the
framework
 Management
Responsibilities
– For the preparation of the financial statements in
accordance with the applicable financial reporting
framework, including where relevant their fair
presentation;
– For the internal control as management determines
is necessary to enable the preparation of financial
statements that are free from material misstatement,
whether due to fraud or error; and
 Management
Responsibilities
– To provide the auditor with:
• Access to all information of which management is aware
that is relevant to the preparation of the financial statements
such as records, documentation and other matters;
• Additional information that the auditor may request from
management for the purpose of the audit; and
• Unrestricted access to persons within the entity from whom
the auditor determines it necessary to obtain audit
evidence.
Limitation on Scope Prior to
Audit Engagement
Acceptance

• If management or those charged with governance

impose a limitation on the scope of the auditor’s work in
the terms of a proposed audit engagement such that
the auditor believes the limitation will result in the
auditor disclaiming an opinion on the financial
statements, the auditor shall not accept such a
limited engagement as an audit engagement, unless
required by law or regulation to do so.
• The auditor shall agree the terms of the
audit engagement with management or
those charged with governance, as
appropriate.
The agreed terms of the audit engagement shall be recorded in an
audit engagement letter or other suitable form of written agreement
and shall include:
a. The objective and scope of the audit of the financial statements;
b. The responsibilities of the auditor;
c. The responsibilities of management;
d. Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
e. Reference to the expected form and content of any reports to be issued
by the auditor and a statement that there may be circumstances in which
a report may differ from its expected form and content.
• If law or regulation prescribes in sufficient
detail the terms of the audit engagement,
the auditor need not record them in a
written agreement, except for the fact that
such law or regulation applies and that
management acknowledges and
understands its responsibilities.
Recurring Audits

• On recurring audits, the auditor shall

assess whether circumstances require
the terms of the audit engagement to be
revised and whether there is a need to
remind the entity of the existing terms of
the audit engagement.
 SENDING NEW
ENGAGEMENT LETTER

• Any indication that the client misunderstands

the objective and scope of the audit
• Any revised or special terms of the engagement
• A recent change of senior management
• A significant change in ownership
• A significant change in nature or size of the
client’s business
 SENDING NEW
ENGAGEMENT LETTER

• A change in legal or regulatory requirements

• A change in the financial reporting framework
adopted by management in preparing financial
statements
• A change in other reporting requirements
 Acceptance of a
Change in the Terms of
the Audit Engagement
• The auditor shall not agree to a change in
the terms of the audit engagement where
there is no reasonable justification for
doing so.
• If, prior to completing the audit
engagement, the auditor is requested to
change the audit engagement to an
engagement that conveys a lower level of
assurance, auditor shall determine
whether there is reasonable justification
for doing so.
• If the terms of the audit engagement are
changed, the auditor and management
shall agree on and record the new terms
of the engagement in an engagement
letter or other suitable form of written
agreement.
• If the auditor is unable to agree to a change of the
terms of the audit engagement and is not permitted by
management to continue the original audit engagement,
the auditor shall:
– Withdraw from the audit engagement where possible under
applicable law or regulation; and
– Determine whether there is any obligation, either contractual or
otherwise, to report the circumstances to other parties, such as
those charged with governance, owners or regulators.
Additional Considerations in
Engagement Acceptance

• If financial reporting standards established by an authorized or

recognized standards setting organization are supplemented by
law or regulation, the auditor shall determine whether there are any
conflicts between the financial reporting standards and the
additional requirements. If such conflicts exist, the auditor shall
discuss with management the nature of the additional requirements
and shall agree whether:
a. The additional requirements can be met through additional disclosures in the
financial statements; or
b. The description of the applicable financial reporting framework in the financial
statements can be amended accordingly.
• If neither of the actions is possible, the
auditor shall determine whether it will be
necessary to modify the auditor’s opinion
INITIAL AUDITS

• An initial audit is an engagement in which

the financial statements for the prior
period were not audited or were audited
by a predecessor auditor.
 Communication with the
Predecessor Auditor Before
Engagement Acceptance

• In an initial audit, including a re-audit

engagement, it is mandatory to make inquiries
of the predecessor auditor. Client permission is
needed, however.
• If the client is unwilling to agree to this
procedure, the auditor should consider the
implications and decide whether to accept the
engagement.
 Communication with the
Predecessor Auditor Before
Engagement Acceptance

• The auditor should make oral or written inquiries of the

predecessor auditor before accepting an engagement. Inquiries
should be made regarding:
1. information that might bear on management integrity;
2. disagreements with management over accounting principles,
auditing procedures, or other similarly significant matters;
3. the predecessor's understanding as to the reasons for the change
of auditors; and
4. communication to management, the audit committee, and those
charged with governance regarding fraud, noncompliance with
laws and regulations, and matters relating to internal control.
 Opening Balances-
Auditor’s
Responsibility
• In initial audits and re-audit engagements, the auditor should
obtain sufficient appropriate audit evidence about whether:
a. Opening balances contain misstatements that could
materially affect the current period financial statements.
b. Accounting policies reflected in the opening balances have
been consistently applied in the current period financial
statements and whether any changes in accounting policies
have been properly accounted for, presented, and disclosed
in accordance with the applicable financial reporting
framework.
 Opening Balances-
Auditor’s Procedures

• Read most recent financial statements, if any, and the

predecessor auditor’s report
• Request management to authorize the predecessor auditor
to allow a review of the predecessor auditor's audit
documentation related to the most recently completed audit.
• Perform audit procedures on current period
transactions that provide evidence about the opening
balances or consistency.
Auditor Remains
Responsible
• While the current period auditor may consider
information obtained from the review of the
predecessor's audit documentation, the auditor
remains solely responsible for the audit work
performed and the conclusions reached during the
current audit. The auditor should not make
reference to the report or work of the
predecessor auditor as the basis for the
auditor's opinion.
Discovery of Material
Misstatements in the
Opening Balances
• If the auditor obtains audit evidence that opening balances
contain misstatements, the auditor should determine the
effect on the current period financial statements. If the
auditor believes that the financial statements reported on by
the predecessor auditor require revision, the auditor should
ask the client to arrange a meeting (involving both auditors
and the client) to resolve the matter. If the client's
management refuses to inform the predecessor auditor, or if
the auditor is not satisfied with the resolution, the auditor
should consider the implications on the current audit and
whether to resign from the engagement.
 Effect on
Auditor’s Report
• Qualified or Disclaimer
The inability of the auditor to obtain sufficient appropriate
audit evidence regarding opening balances may result in
one of the following report modifications:
– A qualified opinion or a disclaimer of opinion, as appropriate.
– An opinion that is qualified or disclaimed, as appropriate,
regarding the results of operations and cash flows, and
unmodified regarding financial position.
 Effect on
Auditor’s Report
• Qualified or Adverse
1. The opening balances contain a misstatement that
materially affects the current period financial statements,
and the effect of the misstatement is not appropriately
accounted for or adequately presented or disclosed.
2. The current period's accounting policies are not consistently
applied regarding opening balances.
3. A change in accounting policy is not properly accounted for
or adequately presented or disclosed.
AUDIT PLANNING
 AUDIT
PLANNING
• Involves establishing an overall audit
strategy for the engagement and
developing an audit plan, in order to
reduce audit risk to an acceptably
low level. (PSA 300)
Main objective:

• To determine the scope of the

audit procedures to be
performed
Outputs of Audit
Planning
• The overall audit strategy
• The overall audit plan; and
• The draft audit programs detailing the work to be
performed
*these are supported by a summary that documents the
main decisions taken during planning, the information
gathered in relation to the audit engagement, and the
main administrative arrangements.
• The overall audit strategy is
documented in a STRATEGY
DOCUMENT, oftentimes, it is
combined with the overall audit
plan and included in the Audit
Planning Memorandum.
Standard Planning
Procedures
a. Obtaining an understanding of the client and its
environment
b. Assessing the possibility of non-compliance
c. Establishing materiality and assessing risk
d. Identifying related parties
e. Performing preliminary analytical procedures
f. Determining the need for experts
g. Development of the overall audit strategy and detailed audit
plan
h. Preparation of preliminary audit programs
• The auditor should plan the audit work so that audit will
be performed in an effective and efficient manner.
• The extent of planning will vary according to:
– the size of the entity,
– the complexity of the operations and organizational structure of
client/entity
– the auditor’s experience with the entity and knowledge of the
business.
– Materiality
– Extent of other documentation
 Importance of
Adequate
Planning
• Planning helps ensure that appropriate attention is
devoted to important areas of the audit
• It helps identify potential problems
• It allows that work to be completed expeditiously
• It assists in the proper assignment and coordination of
work.
• It helps ensure that the audit is conducted efficiently
and effectively
Overall audit
strategy
• Sets the scope, timing and
direction of the audit and guides
the development of the more
detailed audit plan
 Audit plan

• More detailed than the audit strategy

• 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
AUDIT RISK
 AUDIT RISK
MODEL

AR = IR x CR x DR
WHERE:
AR = Audit Risk
IR = Inherent Risk
DR = Detection Risk
OBTAINING AN UNDERSTANDING OF THE
CLIENT AND ITS ENVIRONMENT
• 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
misstatements of the financial
statements whether due to fraud or error,
sufficient to design and perform further audit
procedures.
Sources of Understanding
of the Entity and the
Environment

• Previous experience with the entity and its industry

• Discussion with people with the entity
• Discussion with internal audit and personnel and review
of internal audit reports
• Discussion with other auditors and with legal and other
advisors who have provided services to the entity or
within the industry
• Discussion with knowledgeable people outside the
entity
Sources of Understanding
of the Entity and the
Environment

• Publications related to the industry

• Legislation and regulations that
significantly affect the entity
• Visits to the entity’s premises and plant
facilities
• Documents produced by the entity
Uses of information
obtained

• Assists the auditor in:

– Assessing risks and identifying potential problems
– Planning and performing the audit effectively and
efficiently
– Evaluating evidence as well as the reasonableness
of client’s representations and estimates
– Providing better service to clients
Risk Assessment
Procedures
• Inquiries of management and others within the
entity who in the auditor’s judgment may have
information that is likely to assist in identifying
risks of material misstatement due to fraud or
error
• Analytical procedures; and
• Observation and inspection
Inquiries can be
directed to
• Those charged with governance
• Internal audit personnel
• Employees who are involved in initiating,
processing or recording complex or unusual
transactions
• In-house legal counsel
• Marketing or sales personnel
Observation and
Inspection
• Observation of entity activities and operation
• Inspection of documents, records and internal control
manuals
• Reading reports prepared by management and those
charged with governance
• Visits to the entity’s premises and plant facilities
• Tracing transactions through the information system
relevant to financial reporting (or walkthrough)
 Required
Understanding of
the Entity and its
Environment
• Industry, regulatory, and other external factors, including
financial reporting framework;
• Nature of the entity, including entity’s selection and
application of accounting policies
• Objectives and strategies and the related business risks that
may result in a material misstatement of the financial
statements;
• Measurement and review of the entity’s performance and
• Internal control
ASSESSING THE POSSIBILITY
OF NON-COMPLIANCE
Non-compliance

• Acts of omission or commission by the

entity being audited, either intentional or
unintentional, which are contrary to the
prevailing laws or regulations
• Include transactions entered into by, or in
the name of, the entity or on its behalf by
its management or employees
Procedures for obtaining a
general understanding of
the legal and regulatory
framework
• Use the existing understanding of the entity’s industry,
regulatory and other external factors
• Inquire of management concerning the entity’s policies and
procedures regarding compliance with laws and regulations
• Inquire of management as to the laws and regulations that
may be expected to have a fundamental effect on the
operations of the entity
• Discuss with management the policies or procedures
adopted for identifying, evaluating and accounting for
litigation claims and assessments; and
• Discuss the legal and regulatory framework with auditors of
subsidiaries in other countries
ASSESSING THE RISKS OF
MATERIAL MISSTATEMENTS
Risks of Material
Misstatements

Inherent Obtain
understanding
of the entity and
risk its environment

Control Obtain an
understanding
of the internal
risk control structure
Risk Assessment
Procedures
• Identify the risks by considering the understanding of
the entity and its environment, and by considering the
classes of transactions, account balances, and
disclosures in the financial statements
• Relate the identified risks to what can go wrong at the
assertion level
• Consider whether the risks are of a magnitude that
could result in a material misstatement of the financial
statements
 Factors Considered in
Assessing Inherent Risk –
FS level

• The integrity of management

• Management experience and knowledge and
changes in management during the period
• Unusual pressures on management
• The nature of the entity’s business
• Factors affecting the industry in which the entity
operates
 Factors Considered in
Assessing Inherent Risk –
class of transaction level

• Financial statement accounts likely to be susceptible to

misstatement
• Complexity of underlying transactions and other events
which might require using the work of an expert
• Degree of judgment involved in determining account
balances
• Susceptibility of assets to loss or misappropriation
• Completion of unusual and complex transactions, particularly
at or near period-end
• Transactions not subjected to ordinary processing
 Assessment of
Control Risk
• Generally, the more reliable internal
controls are, the lesser the substantive
test procedures to apply in auditing year-
end account balances
Significant Risks

• Risks that require special audit

consideration
• Is a matter of the auditor’s professional
judgment
Consideration
– Whether the risk is a risk of fraud
– Whether the risk is related to recent significant economic, accounting
or other developments and, therefore, requires specific attention
– The complexity of transactions
– Whether the risk involves significant transactions with related parties
– The degree of subjectivity in the measurement of financial information
related to the risk especially those involving a wide range of
measurement uncertainty
– Whether the risk involves significant transactions that are outside the
normal course of business for the entity, or that otherwise appear to be
unusual
Effect of Audit Risk on
Audit Procedures

• The higher the combined assessments of

inherent and control risks, the lower the amount
of detection risk that can be accepted.
• The lower the acceptable detection risk, the
greater the amount of audit procedures to be
performed in order to reduce the chances of not
detecting misstatements
MATERIALITY
 Definition:

“Information is material if its omission or misstatement

could influence the economic decisions of users taken
on the basis of the financial statements. Materiality
depends on the size of the item or error judged in the
particular circumstances of its omission or
misstatement. Thus, materiality provides a threshold or
cut-off point rather than being a primary qualitative
characteristic which information must have if it is to be
useful.”
• In designing an audit plan, the auditor
should make a preliminary estimate of
materiality for use during the examination
• The concept of materiality recognizes that
some matters are important for fair
presentation of financial statements while
other matters are not important.
Materiality may
be viewed as:
• The largest amount of misstatement that
the auditor could tolerate in the financial
statements

• The smallest aggregate amount that

could misstate the financial statements
• Materiality is a matter of professional
judgment and necessarily involves
quantitative factors (amount of the item in
relation to the financial statements) and
qualitative factors (the nature of
misstatement)
 Importance of
Materiality
• The auditor should make a
preliminary estimate of materiality to
determine the amount of evidence to
accumulate.
• There is an inverse relationship
between materiality and evidence.
 Uses of
materiality
• In the planning stage – to determine the
scope of the audit procedures

• In the completion phase – to evaluate the

effect of misstatements on the financial
statements
 Using materiality
levels (planning stage)

• Determine the Overall Materiality

Level ( FS LEVEL)
1

• Determine the tolerable misstatement

(Account Balance Level)
2
Bases that can be used
to determine the
materiality level

• Annualized interim financial

statements
• Prior years’ financial statement
• Budgeted financial statements of the
current year
 Relationship
between Audit Risk
and Materiality
• There is an INVERSE RELATIONSHIP
between materiality and the level of audit
risk
UNDERSTANDING THE
INTERNAL CONTROL
• The auditor should obtain an
understanding of the accounting and
internal control systems sufficient to
plan the audit and develop an
effective audit approach
IDENTIFYING RELATED
PARTIES
 Related party

• Controlled by the entity

• Associate of the entity
• Joint venture in which the entity is a venturer
• Member of the key management personnel of
the entity or its parent
• Close member of the family of any individual
referred to above
 importance

• Disclosure requirements
• Effect on financial statements
• Reliability of documents
• Source of fraud
ANALYTICAL
PROCEDURES
 ANALYTICAL
PROCEDURES
• Refer to evaluations of financial information made by a
study of plausible relationships among both financial
and non-financial data
• Encompass the investigation of identified fluctuations
and relationships that are inconsistent with other
relevant information or deviate significantly from
predicted amounts
• Required to be performed in the PLANNING and FINAL
REVIEW stages of the audit
 Planning

• To enhance the auditor’s understanding

of the client, its business and the industry
in which the client operates and
• to identify areas of potential risk
 examples

• Study of the changes in a given account balance, item, or

element over prior accounting periods with expectations for
the current year
• Comparison of financial information with anticipated results
• Study of relationships between account balances over time
or among firms in a given industry
• Comparison of simple computations or series of
computations that develop an estimate for a given account
balance, item or element
DEVELOPING AN OVERALL
AUDIT STRATEGY
• The best audit strategy is the
approach that results in the most
efficient audit – that is, an effective
audit performed at the least possible
cost.
An audit should be
made regarding:

• How much evidence to accumulate

• How and when this should be done
• When developing an audit strategy,
the auditor must consider carefully
the appropriate levels of materiality
and audit risk.
THE AUDIT PROGRAM
 Audit program
preparation
• Specific assessments of inherent and control risks with
required degree of substantive tests
• Timing of tests of controls and substantive procedures
• Coordination of any assistance from the client’s staff
• Availability of assistants
• Involvement of other auditors or experts
• The matters considered in drafting the overall audit plan
Contents of the
Audit Program
1. A set of instructions to assistants assigned to the
client for control and proper execution of work
– A description of the nature, timing and extent of planned risk
assessment procedures
– A description of the nature, timing and extent of planned further
audit procedures at the assertion level for each material class
of transactions, account balance, and disclosure, whether the
auditor has decided to test the operating effectiveness of
controls, or directly go to the performance of planned
substantive procedures
– Other procedures
Contents of the Audit
Program (cont’d)

2. Audit objectives for each area

3. Time budget for the various
tasks to be undertaken
Changes to audit
plan and program
Planning is continuous throughout the
engagement because of changes in conditions
or unexpected results of audit procedures. The
overall audit plan and the audit program should
be revised as necessary during the course of
the audit and the reasons for significant
changes would be recorded.