Auditing and Assurance Principles
Overview of Audit
1
Module 001
Overview of Audit
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Define what is auditing
2. Enumerate the different types of audits and auditors
3. Understand the advantages of audit and inherent limitations of audit
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LO 1
What is Auditing?
As defined by the Philippine Standards on Auditing (PSA), auditing 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.
Another definition of auditing as defined by the American Accounting Association (AAA), it is a
systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between these assertions
and established criteria and communicating results to interested users.
The above definitions convey the following notions with regards to auditing:

Auditing is a systematic process
An audit involves series of steps and procedures which are carried out in
logical order.

Objectively obtaining and evaluating evidence
Objectively obtaining evidence means that the one conducting the audit
should exercise an impartial attitude, meaning to say, free from bias and
conflicts of interests.
Evaluating evidence comes in the form of which the gathered information
must be corroborated. Such gathered information may come from the
documents of the company, interview with management and the like,of
which calls for the need of validation and verification process.

Regarding assertions about economic actions and events
Assertions are the representations of management that explains the
economic actions and events that happen during the audit period.
Accordingly, the role of an auditor is to validate such assertions or
management representations.
Auditing and Assurance Principles
Overview of Audit
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3
To ascertain the degree of correspondence between these assertions and established
criteria
In conducting the audit, auditors use standards in order to ascertain the
assertions made by the management.
Established criteria are usually the standards that are being used to validate
assertions or management representations.
So, taking into an instance the audit of financial statements, the auditor will
perform audit procedures in order to ascertain that the financial statements
prepared by the management(this is the assertions) conforms with the
Generally Accepted Accounting Principles (GAAP)(this is the established
criteria).

Communicating results to interested users
This involves the process of communicating the audit findings to users of
financial statements by way of issuing the what we called, “auditor’s
opinion”.
These users can be both internal and external users.
Internal users
These are the users of financial information who are working within
the company and use financial information primarily on planning,
controlling and making decision for the betterment of the company’s
operations.
They are the company’s management itself – Senior/top-level
management, middle level management and low-level management.
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External users
These are the users of financial information who are outside of an
organization and does not directly run its operations but uses
financial information of the company to make decisions particularly if
decisions involve investing or granting credit to the company.
LO 2
Types of Audits
The following are the types audit that can be conducted:
1. Financial Audit
2. Operational Audit
3. Tax Audit
4. Compliance Audit
5. Information System Audit
Financial Audit
-
This is the type of audit that confirms the fairness of all the information reported in a
company’s financial statement.
-
This is the most common type of audit being conducted by an independent Certified
Public Accountant (CPA).
Operational Audit
-
This is a type of audit that involves an evaluation of processes, procedures, and results
of the operations of a business with the intention of improving the current processes
and procedures of the company.
-
This type of audit may be conducted internally or through hiring an external entity to
do the audit on the company’s behalf.
Tax Audit
-
This is a type of audit that involves examination of the tax returns submitted by an
individual or business entity, with the intention of determining whether income tax
payment is valid and correct and if such payment has been made on the proper period
that such tax payments has been made.
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Overview of Audit
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In the Philippine setting, this is the type of audit being conducted by the CPAs working
in the assessment division of Bureau of Internal Revenue (BIR)
Compliance Audit
-
This is a type of audit that determines whether the company’s current policies and
procedures is in compliance with internal or regulatory standards.
-
This type of audit is most commonly conducted in regulated industries.
Information Systems Audit
-
This is a type of audit that involves a review of the controls over software development,
data processing, and access to computer systems
-
The type of audit is intended in order to determine any issues that could impair the
ability of information technology (IT) systems to provide accurate information to users,
as well as to ensure that unauthorized users do not have access to the data and such
data are well protected from such unauthorized users.
LO 3
Advantagesof Audit
Audits are usually conducted in order to asses the fairness and reliability of the information being
provided. Thus, audit primarily gives the following advantages:
1. It safeguards the financial interest of persons who are not associatedwith the management
of the entity, whether they are partners orshareholders.
2. It acts as a moral check on the employees from committingdefalcations or embezzlement.
3. Audited statements of account are helpful in setting liability for taxes,negotiating loans and
for determining the purchase consideration for abusiness.
4. This are also use for settling trade disputes or higher wages or bonusas well as claims in
respect of damage suffered by property, by fire orsome other calamity.
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5. An audit can also help in the detection of wastage and losses to showthe different ways by
which these might be checked, especially those thatoccur due to the absence of inadequacy
of internal checks or internalcontrol measures.
6. Audit ascertains whether the necessary books of accounts and alliedrecords have been
properly kept and helps the client in making gooddeficiencies or inadequacies in this
respect.
7. As an appraisal function, audit reviews the existence and operations ofvarious controls in
the organizations and reports weakness, inadequacy,etc., in them.
8. Government may require audited and certificated statement before itgives assistance or
issues a license for a particular trade.
Moreover, through outlining the advantages of performing an audit on a specific perspective of
stakeholders, the following are its advantages taking on the viewpoint of a businessman and an
investor.
Businessman's point of
Investor's point of view
Other Advantages.
view
1. Detection
of
errorsandfrauds
of
5. Government acceptance
6. Update accounts
improvement
8. Useful for agency
2. Boosting of shares
valuation
4. Good security
of
3. Settlements of claims
4. Evidence in court
5. Settlement of accounts
6. Facilitates taxation
assets
7. Suggestions
2. Moral check
investments
3. Builds reputation
valuation
1. Evaluate financial status
3. Proper
2. Loan from banks
4. Proper
1. Protects interest
for
Auditing and Assurance Principles
Overview of Audit
LO 4
7
Inherent Limitations of Audit
Though audits provide reliance on the information being provided to users of such information,
there are still inherent limitations that should be noted.
Generally speaking, the following are the inherent limitations of audit:
1.
Non-detection of errors and/or frauds
-
Auditor may not be able to detect certain frauds which are committed with
intentions.
2.
Dependence on explanation by others:
-
Though exercised by skepticism, auditor hasto depend on the explanation and
information given by the responsible personnel of the company.
3.
Dependence on opinions of others
-
Auditor has to rely on the views or opinions given by different experts such as
Lawyers, Engineers, Architects,Appraisers and other professionals, since an
auditor is not an expert in all the fields.
4.
Conflict with others
-
Auditor may have differences of opinion with the accountants, management,
engineers, etc. In such case, a personal judgement may be employed, of which
may differ from person to person.
5.
Effect of inflation and other economic related issues
-
Financial statements may not disclose true picture even after audit due to
inflationary trends and other economic related issues
6.
Corrupt practices may influence the auditors
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-
The management may use corrupt practices to influence the auditors in order to
get a favorable report about the current status of the company, i.e., bribery.
7.
No assurance
-
Auditor cannot give any assurance about future profitability and prospects of
the company.
8.
Inherent limitations of the financial statements
-
Financial statements do not reflect current market values of the assets and
liabilities. Estimations are based on personal judgement of the owners, of which
are being used as basis for a company policy.
9.
Detailed checking is not possible
-
Auditor cannot check each and every transaction due to large volume of daily
transactions. Consequently, auditors opt to use sampling techniques, of which
has also its own limitations.
Specifically, inherent limitations of audit are the following:
1.
The work of an auditorinvolves exercise of judgment.
Examples:
i.
Deciding the extent of audit procedures and in assessing the
reasonableness of the judgment and estimates made by the
management in preparing the financial statements.
ii.
Reasonable conclusions of an auditor about the results of the
audit being conducted is being drawn from the evidence
available to the auditor.
Because of this, the audit evidence obtained by an auditor is
generally persuasive in nature rather than conclusive in
nature. Because of these factors, the auditor expresses an
opinion based only on the audit evidences that has been
obtained. Therefore, absolute certainty in auditing is rarely
attainable.
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Overview of Audit
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There is also likelihood that some material misstatements of
the financial information resulting from fraud or error, if either
exists, may not be detected.
2.
The entire audit process is generally dependent upon the existence of an effective
system of internal control.
Further, this gives an impression that there is always some risk associated in an
internal control system failing to operate as designed.
Thus, internal control system also suffers from certain inherent limitations. Any
system of internal control may be ineffective against fraud if there are collusion
among employees or fraud committed by management.
Certain levels of management may be in a position to override controls.
Example:
i.
Managers directing subordinates to record transactions
incorrectly or to conceal them, or by suppressing information
relating to transactions. Such inherent limitations of internal
controls system also contribute to inherent limitations of an
audit.
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LO 5
Types of Auditors
The following are the types of auditors:
1. Independent/External Auditors
2. Internal Auditors
3. Government Auditors
Independent/External Auditors
-
This type of auditor is a professional audit services provider who performs an
independent examination of financial statement and express opinion if such financial
report is free from any material misstatements.
-
Independent auditors are usually Certified Public Accountants (CPAs) who are either
individual practitioners or members of public accounting firms who render
professional auditing services to clients.
Internal Auditors
-
This is a type of auditor who are employees of the organization where they conduct an
audit.
-
This type of auditors is involved in an independent evaluation of evidence, called
internal auditing, within an organization as a service to the organization.
-
The objective of internal auditing is to assist the management of the organization in the
effective discharge of its responsibilities and helps maintain sound internal control
system.
Government Auditors
-
This is a type of auditor who are working with various government agencies.
-
In the Philippines, the most common agencies that performs audit are those working in
the Commission of Audit (COA) which conducts audit on the disbursements and other
transactions of government officials.
END OF MODULE
Auditing and Assurance Principles
Overview of Audit
11
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle (2017
ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Retrieved and excerpted from:
http://archive.mu.ac.in/myweb_test/study%20TYBCom%20Accountancy%20Auditi
ng-II.pdf
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Auditing and Assurance Principles
Code of Ethics
1
Module 002
Code of Ethics
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Determine the role of International Ethics Standards Board for
Accountants
2. Determine the role of International Federation of Accountants
3. Understand the Part A of the Code of Ethics for Professional Accountants
4. Understand the Part B of the Code of Ethics for Professional Accountants
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LO 1
International Ethics Standards Board for Accountants
The International Ethics Standards Board for Accountants (IESBA) is an independent standardsetting body that develops an internationally appropriate Code of Ethics for Professional
Accountants (the Code).
The objective of the IESBA, as outlined in its Terms of Reference, is to serve the public interest by
setting high-quality ethics standards for professional accountants.
The IESBA’s long-term objective is convergence of the Code's ethical standards for professional
accountants, including auditor independence standards, with those issued by regulators and
national standard setters. Convergence to a single set of standards can enhance the quality and
consistency of services provided by professional accountants throughout the world and can
improve the efficiency of global capital markets.
The IESBA’s membership consists of 18 board members from around the world, of whom no more
than 9 are practitioners and no fewer than 3 are public members.
Public Members
-
individuals who are expected to reflect, and are seen to reflect, the wider public interest
Members are appointed by the International Federation of Accountants (IFAC) Board, based on
recommendations fromthe IFAC Nominating Committee and with the approval of the Public
InterestOversight Board (PIOB), which oversees the activities of the IESBA.
The standard-setting process of the IESBA includes the involvement of the PIOB andthe IESBA’s
Consultative Advisory Group (CAG), which provides public interestinput into the development of
the IESBA’s standards and guidance.
In developing its standards, the IESBA is required to be transparent in its activities, and to adhere
to due process as approved by the PIOB. Board meetings, includingmeetings by teleconference, are
open to the public, and agenda papers are available onits website.
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Code of Ethics
LO 2
3
International Federation of Accountants
The International Federation of Accountants (IFAC) serves the public interest bycontributing to
the development of strong and sustainable organizations, markets, andeconomies.
IFAC:

advocates for transparency, accountability, and comparability offinancial reporting;

helps develop the accountancy profession; and

communicates theimportance and value of accountants to the global financial
infrastructure.
Founded in1977, IFAC is currently comprised of 172 members and associates in 129 countriesand
jurisdictions, representing approximately 2.5 million accountants in publicpractice, education,
government service, industry, and commerce.
As part of its public interest mandate, IFAC contributes to the development, adoption,and
implementation of high-quality international ethics standards for accountants,primarily through
its support of the International Ethics Standards Board forAccountants (IESBA).
IFAC provides human resources, facilities management,communications support, and funding to
this independent standard-setting board, andfacilitates the nominations and selection process for
board members.
The IESBA sets its own agendas and approves its publications in accordance with itsdue process
and without IFAC’s involvement.
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IFAC has no ability to influence theagendas or publications. IFAC publishes the handbooks,
standards, and otherpublications and owns the copyrights.
The IESBA’s independence is safeguarded in a number of ways:

formal, independent public interest oversight for standard setting by the PublicInterest
Oversight Board (seewww.ipiob.org for more information), whichincludes a rigorous due
process involving public consultation

a
public
call
for
nominations,
and
formal,
independent
oversight
of
thenominations/selection process by the Public Interest Oversight Board

full transparency, both in terms of due process for standard setting, as well aspublic access
to agenda materials, meetings, and a published basis forconclusions with each final
standard

the involvement of a Consultative Advisory Group and observers in thestandard-setting
process, and

the requirement that IESBA members, as well as nominating/employingorganizations,
commit to the board’s independence, integrity, and publicinterest mission.
Auditing and Assurance Principles
Code of Ethics
LO 3
5
Part A of the Code of Ethics for Professional Accountants
(GENERAL APPLICATION OF THE CODE)
SECTION 100 - Introduction and Fundamental Principles
100.1
A distinguishing mark of the accountancy profession is its acceptance of the
responsibility to act in the public interest.
Therefore, a professional accountant’s responsibility is not exclusively to satisfy the
needs of an individual client or employer. In acting in the public interest, a
professional accountant shall observe and comply with this Code. If a professional
accountant is prohibited from complying with certain parts of this Code by law or
regulation, the professional accountant shall comply with all other parts of this
Code.
100.2
This Code contains three parts. Part A establishes the fundamental principles of
professional ethics for professional accountants and provides a conceptual
framework that professional accountants shall apply to:
(a) Identify threats to compliance with the fundamental principles;
(b) Evaluate the significance of the threats identified; and
(c) Apply safeguards, when necessary, to eliminate the threats or reduce them
to an acceptable level. Safeguards are necessary when the professional
accountant determines that the threats are not at a level at which a
reasonable and informed third party would be likely to conclude, weighing
all the specific facts and circumstances available to the professional
accountant at that time, that compliance with the fundamental principles is
not compromised.
A professional accountant shall use professional judgment in applying this
conceptual framework.
100.3
Parts B and C describe how the conceptual framework applies in certain situations.
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They provide examples of safeguards that may be appropriate to address threats to
compliance with the fundamental principles. They also describe situations where
safeguards are not available to address the threats, and consequently, the
circumstance or relationship creating the threats shall be avoided.
Part B applies to professional accountants in public practice.
Part C applies to professional accountants in business. Professional accountants in
public practice may also find Part C relevant to their particular circumstances.
100.4
The use of the word “shall” in this Code imposes a requirement on the professional
accountant or firm to comply with the specific provision in which “shall” has been
used. Compliance is required unless an exception is permitted by this Code.
Fundamental Principles
100.5
A professional accountant shall comply with the following fundamental principles:
(a) Integrity
-
to be straightforward and honest in all professional and business
relationships.
(b) Objectivity
-
to not allow bias, conflict of interest or undue influence of others
to override professional or business judgments.
(c) Professional Competence and Due Care
-
to maintain professional knowledge and skill at the level required
to ensure that a client or employer receives competent
professional services based on current developments in practice,
legislation and techniques and act diligently and in accordance
with applicable technical and professional standards.
(d) Confidentiality
-
to respect the confidentiality of information acquired as a result of
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Code of Ethics
7
professional and business relationships and, therefore, not
disclose any such information to third parties without proper and
specific authority, unless there is a legal or professional right or
duty to disclose, nor use the information for the personal
advantage of the professional accountant or third parties.
(e) Professional Behavior
-
to comply with relevant laws and regulationsand avoid any action
that discredits the profession.
Conceptual Framework Approach
100.6
The circumstances in which professional accountants operate may create specific
threats to compliance with the fundamental principles. It is impossible to define
every situation that creates threats to compliance with the fundamental principles
and specify the appropriate action. In addition, the nature of engagements and work
assignments may differ and, consequently, different threats may be created,
requiring the application of different safeguards. Therefore, this Code establishes a
conceptual framework that requires a professional accountant to identify, evaluate,
and address threats to compliance with the fundamental principles.
The conceptual framework approach assists professional accountants in complying
with the ethical requirements of this Code and meeting their responsibility to act in
the public interest. It accommodates many variations in circumstances that create
threats to compliance with the fundamental principles and can deter a professional
accountant from concluding that a situation is permitted if it is not specifically
prohibited.
100.7
When a professional accountant identifies threats to compliance with the
fundamental principles and, based on an evaluation of those threats, determines
that they are not at an acceptable level, the professional accountant shall determine
whether appropriate safeguards are available and can be applied to eliminate the
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threats or reduce them to an
acceptable level. In making that determination, the professional accountant shall
exercise professional judgment and take into account whether a reasonable and
informed third party, weighing all the specific facts and circumstances available to
the professional accountant at the time, would be likely to conclude that the threats
would be eliminated or reduced to an acceptable level by the application of the
safeguards, such that compliance with the fundamental principles is not
compromised.
100.8
A professional accountant shall evaluate any threats to compliance with the
fundamental principles when the professional accountant knows, or could
reasonably be expected to know, of circumstances or relationships that may
compromise compliance with the fundamental principles.
100.9
A professional accountant shall take qualitative as well as quantitative factors into
account when evaluating the significance of a threat. When applying the conceptual
framework, a professional accountant may encounter situations in which threats
cannot be eliminated or reduced to an acceptable level, either because the threat is
too significant or because appropriate safeguards are not available or cannot be
applied. In such situations, the professional accountant shall decline or discontinue
the specific professional service involved or, when necessary, resign from the
engagement (in the case of a professional accountant in public practice) or the
employing organization (in the case of a professional accountant in business).
100.10
A professional accountant may inadvertently violate a provision of this Code.
Depending on the nature and significance of the matter, such an inadvertent
violation may be deemed not to compromise compliance with the fundamental
principles provided, once the violation is discovered, the violation is corrected
promptly and any necessary safeguards are applied.
100.11
When a professional accountant encounters unusual circumstances in which the
application of a specific requirement of the Code would result in a disproportionate
outcome or an outcome that may not be in the public interest, it is recommended
that the professional accountant consult with a member body or the relevant
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Code of Ethics
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regulator.
Threats and Safeguards
100.12
Threats may be created by a broad range of relationships and circumstances. When
a relationship or circumstance creates a threat, such a threat could compromise, or
could be perceived to compromise, a professional accountant’s compliance with the
fundamental principles. A circumstance or relationship may create more than one
threat, and a threat may affect compliance with more than one fundamental
principle.
Threats fall into one or more of the following categories:
(a) Self-interest threat
-
the threat that a financial or other interest will inappropriately
influence the professional accountant’s judgment or behavior;
(b) Self-review threat
-
the threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made or service
performed by the professional accountant, or by another
individual within the professional accountant’s firm or employing
organization, on which the accountant will rely when forming a
judgment as part of providing a current service;
(c) Advocacy threat
-
the threat that a professional accountant will promote a client’s or
employer’s position to the point that the professional accountant’s
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objectivity is compromised;
(d) Familiarity threat
-
the threat that due to a long or close relationship with a client or
employer, a professional accountant will be too sympathetic to
their interests or too accepting of their work; and
(e) Intimidation threat
-
the threat that a professional accountant will be deterred from
acting objectively because of actual or perceived pressures,
including attempts to exercise undue influence over the
professional accountant.
100.13
Safeguards are actions or other measures that may eliminate threats or reduce
them to an acceptable level. They fall into two broad categories:
(a)Safeguards created by the profession, legislation or regulation; and
(b)Safeguards in the work environment.
100.14
Safeguards created by the profession, legislation or regulation:

Educational, training and experience requirements for entry into the
profession.
•
Continuing professional development requirements.
•
Corporate governance regulations.
•
Professional standards.
•
Professional or regulatory monitoring and disciplinary procedures.

External review by a legally empowered third party of the reports, returns,
communications or information produced by a professional accountant.
200.11
In the work environment, the relevant safeguards will vary depending on
thecircumstances. Work environment safeguards comprise
(a) firm-widesafeguards and
(b) engagement-specific safeguards.
200.12
Examples of firm-wide safeguards in the work environment include:
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Code of Ethics

11
Leadership of the firm that stresses the importance of compliance withthe
fundamental principles.

Leadership of the firm that establishes the expectation that membersof an
assurance team will act in the public interest.

Policies and procedures to implement and monitor quality control
ofengagements.

Documented policies regarding the need to identify threats tocompliance
with the fundamental principles, evaluate the significanceof those threats,
and apply safeguards to eliminate or reduce the threatsto an acceptable level
or, when appropriate safeguards are notavailable or cannot be applied,
terminate or decline the relevantengagement.

Documented internal policies and procedures requiring compliancewith the
fundamental principles.

Policies and procedures that will enable the identification of interestsor
relationships between the firm or members of engagement teamsand clients.

Policies and procedures to monitor and, if necessary, manage thereliance on
revenue received from a single client.

Using different partners and engagement teams with separate reportinglines
for the provision of non-assurance services to an assurance client.

Policies and procedures to prohibit individuals who are not membersof an
engagement team from inappropriately influencing the outcomeof the
engagement.

Timely communication of a firm’s policies and procedures, includingany
changes to them, to all partners and professional staff, andappropriate
training and education on such policies and procedures.

Designating a member of senior management to be responsible
foroverseeing the adequate functioning of the firm’s quality controlsystem.

Advising partners and professional staff of assurance clients andrelated
entities from which independence is required.

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A
disciplinary
mechanism
to
promote
compliance
with
policies
andprocedures.

Published policies and procedures to encourage and empower staff
tocommunicate to senior levels within the firm any issue relating
tocompliance with the fundamental principles that concerns them.
200.13
Examples of engagement-specific safeguards in the work environment include:

Having a professional accountant who was not involved with the nonassurance service review the non-assurance work performed or otherwise
advise as necessary.

Having a professional accountant who was not a member of the assurance
team review the assurance work performed or otherwise advise as
necessary.

Consulting an independent third party, such as a committee of independent
directors, a professional regulatory body or another professional accountant.

Discussing ethical issues with those charged with governance of the client.

Disclosing to those charged with governance of the client the nature of
services provided and extent of fees charged.
200.14

Involving another firm to perform or re-perform part of the engagement.

Rotating senior assurance team personnel.
Depending on the nature of the engagement, a professional accountant in public
practice may also be able to rely on safeguards that the client has implemented.
However, it is not possible to rely solely on such safeguards to reduce threats to an
acceptable level.
200.15
Examples of safeguards within the client’s systems and procedures include:

The client requires persons other than management to ratify or approve the
appointment of a firm to perform an engagement.

The client has competent employees with experience and seniority to make
managerial decisions.

The client has implemented internal procedures that ensure objective
choices in commissioning non-assurance engagements.

The client has a corporate governance structure that provides appropriate
oversight and communications regarding the firm’s services.
Auditing and Assurance Principles
Code of Ethics
LO 4
13
Part B of the Code of Ethics for Professional Accountants
(PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE)
SECTION 210 - Professional Appointment
Client Acceptance
210.1
Before accepting a new client relationship, a professional accountant in public
practice shall determine whether acceptance would create any threats to
compliance with the fundamental principles. Potential threats to integrity or
professional behavior may be created from, for example, questionable issues
associated with the client (its owners, management or activities).
210.2
Client issues that, if known, could threaten compliance with the fundamental
principles include, for example, client involvement in illegal activities (such as
money laundering), dishonesty or questionable financial reporting practices.
201.3
A professional accountant in public practice shall evaluate the significance of any
threats and apply safeguards when necessary to eliminate them or reduce them to
an acceptable level.
Examples of such safeguards include:

Obtaining knowledge and understanding of the client, its owners, managers
and those responsible for its governance and business activities; or

Securing the client’s commitment to improve corporate governance
practices or internal controls.
210.4
Where it is not possible to reduce the threats to an acceptable level, the professional
accountant in public practice shall decline to enter into the client relationship.
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210.5
It is recommended that a professional accountant in public practice periodically
review acceptance decisions for recurring client engagements.
Engagement Acceptance
210.6
The fundamental principle of professional competence and due care imposes an
obligation on a professional accountant in public practice to provide only those
services that the professional accountant in public practice is competent to
perform. Before accepting a specific client engagement, a professional accountant in
public practice shall determine whether acceptance would create any threats to
compliance with the fundamental principles.
For example, a self-interest threat to professional competence and due care is
created if the engagement team does not possess, or cannot acquire, the
competencies necessary to properly carry out the engagement.
210.7
A professional accountant in public practice shall evaluate the significance of
threats and apply safeguards, when necessary, to eliminate them or reduce them to
an acceptable level. Examples of such safeguards include:

Acquiring an appropriate understanding of the nature of the client’s
business, the complexity of its operations, the specific requirements of the
engagement and the purpose, nature and scope of the work to be performed;

Acquiring knowledge of relevant industries or subject matters;

Possessing or obtaining experience with relevant regulatory or reporting
requirements;

Assigning sufficient staff with the necessary competencies;

Using experts where necessary;

Agreeing on a realistic time frame for the performance of the engagement; or

Complying with quality control policies and procedures designed to provide
reasonable assurance that specific engagements are accepted only when
they can be performed competently.
210.8
When a professional accountant in public practice intends to rely on the advice or
work of an expert, the professional accountant in public practice shall determine
Auditing and Assurance Principles
Code of Ethics
15
whether such reliance is warranted.
Factors to consider include:
reputation, expertise, resources available and applicable professional and ethical
standards. Such information may be gained from prior association with the expert
or from consulting others.
Changes in a Professional Appointment
210.9
A professional accountant in public practice who is asked to replace
anotherprofessional accountant in public practice, or who is considering
tenderingfor an engagement currently held by another professional accountant
inpublic practice, shall determine whether there are any reasons, professionalor
otherwise, for not accepting the engagement, such as circumstances thatcreate
threats to compliance with the fundamental principles that cannot beeliminated or
reduced to an acceptable level by the application of safeguards.
For example, there may be a threat to professional competence and due careif a
professional accountant in public practice accepts the engagement beforeknowing
all the pertinent facts.
210.1
A professional accountant in public practice shall evaluate the significance of any
threats. Depending on the nature of the engagement, this may require direct
communication with the existing accountant to establish the facts and
circumstances regarding the proposed change so that the professional accountant
in public practice can decide whether it would be appropriate to accept the
engagement.
For example, the apparent reasons for the change in appointment may not fully
reflect the facts and may indicate disagreements with the existing accountant that
may influence the decision to accept the appointment.
210.11
Safeguards shall be applied when necessary to eliminate any threats or reduce them
to an acceptable level.
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Examples of such safeguards include:

When replying to requests to submit tenders, stating in the tender that,
before accepting the engagement, contact with the existing accountant will
be requested so that inquiries may be made as to whether there are any
professional or other reasons why the appointment should not be accepted;

Asking the existing accountant to provide known information on any facts or
circumstances that, in the existing accountant’s opinion, the proposed
accountant needs to be aware of before deciding whether to accept the
engagement; or

Obtaining necessary information from other sources.
When the threats cannot be eliminated or reduced to an acceptable level through
the application of safeguards, a professional accountant in public practice shall,
unless there is satisfaction as to necessary facts by other means, decline the
engagement.
200.12
A professional accountant in public practice may be asked to undertake work that is
complementary or additional to the work of the existing accountant.
Such circumstances may create threats to professional competence and due care
resulting from, for example, a lack of or incomplete information. The significance of
any threats shall be evaluated and safeguards applied when necessary to eliminate
the threat or reduce it to an acceptable level. An example of such a safeguard is
notifying the existing accountant of the proposed work, which would give the
existing accountant the opportunity to provide any relevant information needed for
the proper conduct of the work.
210.13
An existing accountant is bound by confidentiality. Whether that professional
accountant is permitted or required to discuss the affairs of a client with a proposed
accountant will depend on the nature of the engagement and on:
(a) Whether the client’s permission to do so has been obtained; or
(b) The legal or ethical requirements relating to such communications and
disclosure, whichmay vary by jurisdiction.
Auditing and Assurance Principles
Code of Ethics
210.14
17
A professional accountant in public practice will generally need to obtain the
client’s permission, preferably in writing, to initiate discussion with an existing
accountant. Once that permission is obtained, the existing accountant shall comply
with relevant legal and other regulations governing such requests. Where the
existing accountant provides information, it shall be provided honestly and
unambiguously. If the proposed accountant is unable to communicate with the
existing accountant, the proposed accountant shall take reasonable steps to obtain
information about any possible threats by other means, such as through inquiries of
third parties or background investigations of senior management or those charged
with governance of the client.
SECTION 220 - Conflicts of Interest
220.1
A professional accountant in public practice shall take reasonable steps to identify
circumstances that could pose a conflict of interest. Such circumstances may create
threats to compliance with the fundamental principles.
For example, a threat to objectivity may be created when a professional accountant
in public practice competes directly with a client or has a joint venture or similar
arrangement with a major competitor of a client. A threat to objectivity or
confidentiality may also be created when a professional accountant in public
practice performs services for clients whose interests are in conflict or the clients
are in dispute with each other in relation to the matter or transaction in question.
220.2
A professional accountant in public practice shall evaluate thesignificance of any
threats and apply safeguards when necessary to eliminatethe threats or reduce
them to an acceptable level. Before accepting orcontinuing a client relationship or
specific engagement, the professionalaccountant in public practice shall evaluate
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the significance of any threatscreated by business interests or relationships with
the client or a third party.
220.3
Depending upon the circumstances giving rise to the conflict, application of one of
the following safeguards is generally necessary:
(a) Notifying the client of the firm’s business interest or activities that may
represent a conflict of interest and obtaining their consent to act in such
circumstances; or
(b) Notifying all known relevant parties that the professional accountant in
public practice is acting for two or more parties in respect of a matter where
their respective interests are in conflict and obtaining their consent to so act;
or
(c) Notifying the client that the professional accountant in public practice does
not act exclusively for any one client in the provision of proposed services
(for example, in a particular market sector or with respect to a specific
service) and obtaining their consent to so act.
220.4
The professional accountant shall also determine whether to apply one or more
of the following additional safeguards:
(a) The use of separate engagement teams;
(b) Procedures to prevent access to information (for example, strict physical
separation of such teams, confidential and secure data filing);
(c) Clear guidelines for members of the engagement team on issues of security
and confidentiality;
(d) The use of confidentiality agreements signed by employees and partners of
the firm; and
(e) Regular review of the application of safeguards by a senior individual not
involved with relevant client engagements.
220.5
Where a conflict of interest creates a threat to one or more of the fundamental
principles, including objectivity, confidentiality, or professional behavior, that
cannot be eliminated or reduced to an acceptable level through the application of
safeguards, the professional accountant in public practice shall not accept a specific
engagement or shall resign from one or more conflicting engagements.
Auditing and Assurance Principles
Code of Ethics
220.6
19
Where a professional accountant in public practice has requested consent from a
client to act for another party (which may or may not be an existing client) in
respect of a matter where the respective interests are in conflict and that consent
has been refused by the client, the professional accountant in public practice shall
not continue to act for one of the parties in the matter giving rise to the conflict of
interest.
SECTION 230 - Second Opinions
230.1
Situations where a professional accountant in public practice is asked to provide a
second opinion on the application of accounting, auditing, reporting or other
standards or principles to specific circumstances or transactions by or on behalf of
a company or an entity that is not an existing client may create threats to
compliance with the fundamental principles.
For example, there may be a threat to professional competence and due care in
circumstances where the second opinion is not based on the same set of facts that
were made available to the existing accountant or is based on inadequate evidence.
The existence and significance of any threat will depend on the circumstances of the
request and all the other available facts and assumptions relevant to the expression
of a professional judgment.
230.2
When asked to provide such an opinion, a professional accountant in public practice
shall evaluate the significance of any threats and apply safeguards when necessary
to eliminate them or reduce them to an acceptable level.
Examples of such safeguards include seeking client permission to contact the
existing accountant, describing the limitations surrounding any opinion in
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communications with the client and providing the existing accountant with a copy
of the opinion.
230.3
If the company or entity seeking the opinion will not permit communication with
the existing accountant, a professional accountant in public practice shall determine
whether, taking all the circumstances into account, it is appropriate to provide the
opinion sought.
SECTION 240 - Fees and Other Types of Remuneration
240.1
When entering into negotiations regarding professional services, a professional
accountant in public practice may quote whatever fee is deemed appropriate. The
fact that one professional accountant in public practice may quote a fee lower than
another is not in itself unethical. Nevertheless, there may be threats to compliance
with the fundamental principles arising from the level of fees quoted.
For example, a self-interest threat to professional competence and due care is
created if the fee quoted is so low that it may be difficult to perform the engagement
in accordance with applicable technical and professional standards for that price.
240.2
The existence and significance of any threats created will depend on factors such as
the level of fee quoted and the services to which it applies. The significance of any
threat shall be evaluated and safeguards applied whennecessary to eliminate the
threat or reduce it to an acceptable level.
Examplesof such safeguards include:

Making the client aware of the terms of the engagement and, in particular,
the basis on which fees are charged and which services are covered by the
quoted fee; or

240.3
Assigning appropriate time and qualified staff to the task.
Contingent fees are widely used for certain types of non-assurance engagements.
They may, however, create threats to compliance with the fundamental principles
Auditing and Assurance Principles
Code of Ethics
21
in certain circumstances. They may create a self-interest threat to objectivity.
The existence and significance of such threats will depend on factors including:
• The nature of the engagement.
• The range of possible fee amounts.
• The basis for determining the fee.
• Whether the outcome or result of the transaction is to be reviewed by an
independent third party.
240.4
The significance of any such threats shall be evaluated and safeguards applied when
necessary to eliminate or reduce them to an acceptable level. Examples of such
safeguards include:
• An advance written agreement with the client as to the basis of remuneration;
• Disclosure to intended users of the work performed by the professional
accountant in public practice and the basis of remuneration;
• Quality control policies and procedures; or
• Review by an independent third party of the work performed by the professional
accountant in public practice.
240.5
In certain circumstances, a professional accountant in public practice may receive a
referral fee or commission relating to a client.
For example, where the professional accountant in public practice does not provide
the specific service required, a fee may be received for referring a continuing client
to another professional accountant in public practice or other expert. A professional
accountant in public practice may receive a commission from a third party (for
example, a software vendor) in connection with the sale of goods or services to a
client. Accepting such a referral fee or commission creates a self-interest threat to
objectivity and professional competence and due care.
240.6
A professional accountant in public practice may also pay a referral fee to obtain a
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client, for example, where the client continues as a client of another professional
accountant in public practice but requires specialist services not offered by the
existing accountant. The payment of such a referral fee also creates a self-interest
threat to objectivity and professional competence and due care.
240.7
The significance of the threat shall be evaluated and safeguards applied when
necessary to eliminate the threat or reduce it to an acceptable level.
Examples of such safeguards include:
• Disclosing to the client any arrangements to pay a referral fee to another
professional accountant for the work referred;
• Disclosing to the client any arrangements to receive a referral fee for referring the
client to another professional accountant in public practice; or
• Obtaining advance agreement from the client for commission arrangements in
connection with the sale by a third party of goods or services to the client.
240.8
A professional accountant in public practice may purchase all or part of another
firm on the basis that payments will be made to individuals formerly owning the
firm or to their heirs or estates. Such payments are not regarded as commissions or
referral fees for the purpose of paragraphs 240.5−240.7 above.
Auditing and Assurance Principles
Code of Ethics
23
SECTION 250 - Marketing Professional Services
250.1
When a professional accountant in public practice solicits new work through
advertising or other forms of marketing, there may be a threat to compliance with
the fundamental principles. For example, a self-interest threat to compliance with
the principle of professional behavior is created if services, achievements, or
products are marketed in a way that is inconsistent with that principle.
250.2
A professional accountant in public practice shall not bring the profession into
disrepute when marketing professional services. The professional accountant in
public practice shall be honest and truthful, and not:
(a) Make exaggerated claims for services offered, qualifications possessed, or
experience gained; or
(b) Make disparaging references or unsubstantiated comparisons to the work of
another.
If the professional accountant in public practice is in doubt about whether a
proposed form of advertising or marketing is appropriate, the professional
accountant in public practice shall consider consulting with the relevant
professional body.
SECTION 260 - Gifts and Hospitality
260.1
A professional accountant in public practice, or an immediate or close family
member, may be offered gifts and hospitality from a client. Such an offer may create
threats to compliance with the fundamental principles.
For example, a self-interest or familiarity threat to objectivity may be created if a
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gift from a client is accepted; an intimidation threat to objectivity may result from
the possibility of such offers being made public.
260.2
The existence and significance of any threat will depend on the nature, value, and intent of
the offer. Where gifts or hospitality are offered that a reasonable and informed third party,
weighing all the specific facts and circumstances, would consider trivial and
inconsequential, a professional accountant in public practice may conclude that the offer is
made in the normal course of business without the specific intent to influence decision
making or to obtain information. In such cases, the professional accountant in public
practice may generally conclude that any threat to compliance with the fundamental
principles is at an acceptable level.
260.3
A professional accountant in public practice shall evaluate the significance of any threats
and apply safeguards when necessary to eliminate the threats or reduce them to an
acceptable level. When the threats cannot be eliminated or reduced to an acceptable level
through the application of safeguards, a professional accountant in public practice shall not
accept such an offer.
SECTION 270 - Custody of Client Assets
270.1
A professional accountant in public practice shall not assume custody of client
monies or other assets unless permitted to do so by law and, if so, in compliance
with any additional legal duties imposed on a professional accountant in public
practice holding such assets.
270.2
The holding of client assets creates threats to compliance with the
fundamentalprinciples; for example, there is a self-interest threat to professional
behaviorand may be a self-interest threat to objectivity arising from holding
clientassets. A professional accountant in public practice entrusted with money
(orother assets) belonging to others shall therefore:
(a) Keep such assetsseparately from personal or firm assets;
Auditing and Assurance Principles
Code of Ethics
25
(b) Use such assets only for the purpose for which they are intended;
(c) At all times be ready to account for those assets and any income,dividends, or
gainsgenerated, to any persons entitled to suchaccounting; and
(d) Comply with all relevant laws and regulations relevant to the holdingof and
accounting for such assets.
270.3
As part of client and engagement acceptance procedures for services that may
involve the holding of client assets, a professional accountant in public practice
shall make appropriate inquiries about the source of such assets and consider legal
and regulatory obligations.
For example, if the assets were derived from illegal activities, such as money
laundering, a threat to compliance with the fundamental principles would be
created. In such situations, the professional accountant may consider seeking legal
advice.
SECTION 280 - Objectivity—All Services
280.1
A professional accountant in public practice shall determine when providing any
professional service whether there are threats to compliance with the fundamental
principle of objectivity resulting from having interests in, or relationships with, a
client or its directors, officers or employees.
For example, a familiarity threat to objectivity may be created from a family or close
personal or business relationship.
280.2
A professional accountant in public practice who provides an assurance service
shall be independent of the assurance client.
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Independence of mind and in appearance is necessary to enable the professional
accountant in public practice to express a conclusion, and be seen to express a
conclusion, without bias,
conflict of interest, or undue influence of others.
280.3
The existence of threats to objectivity when providing any professional service will
depend upon the particular circumstances of the engagement and the nature of the
work that the professional accountant in public practice is performing.
280.4
A professional accountant in public practice shall evaluate the significance of any
threats and apply safeguards when necessary to eliminate them or reducethem to
an acceptable level. Examples of such safeguards include:
• Withdrawing from the engagement team;
• Supervisory procedures;
• Terminating the financial or business relationship giving rise to the threat;
• Discussing the issue with higher levels of management within the firm; or
• Discussing the issue with those charged with governance of the client.
If safeguards cannot eliminate or reduce the threat to an acceptable level, the
professional accountant shall decline or terminate the relevant engagement.
SECTION 290 - Independence
Engagement Period
290.3
Independence from the audit client is required both during the engagementperiod
and the period covered by the financial statements. The engagementperiod starts
when the audit team begins to perform audit services. Theengagement period ends
when the audit report is issued. When theengagement is of a recurring nature, it
ends at the later of the notification byeither party that the professional relationship
Auditing and Assurance Principles
Code of Ethics
27
has terminated or the issuanceof the final audit report.
290.31
When an entity becomes an audit client during or after the period covered by the financial
statements on which the firm will express an opinion, the firm shall determine whether any
threats to independence are created by:
(a) Financial or business relationships with the audit client during or after the period
covered by the financial statements but before accepting the audit engagement; or
(b) Previous services provided to the audit client.
290.32
If a non-assurance service was provided to the audit client during or after the period
covered by the financial statements but before the audit team begins to perform audit
services and the service would not be permitted during the period of the audit engagement,
the firm shall evaluate any threat to independence created by the service. If a threat is not
at an acceptable level, the audit engagement shall only be accepted if safeguards are applied
to eliminate any threats or reduce them to an acceptable level.
Examples of suchsafeguards include:
• Not including personnel who provided the non-assurance service asmembers of the audit
team;
• Having a professional accountant review the audit and non-assurancework as
appropriate; or
• Engaging another firm to evaluate the results of the non-assuranceservice or having
another firm re-perform the non-assurance serviceto the extent necessary to enable it to
take responsibility for theservice.
END OF MODULE
Course Module
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle (2017
ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
3. Handbook of the Code of Ethics for Professional Accountants 2013 Edition.
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
1
Module 003
Professional Practice, Standards
and Quality Control System
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Specify the professional standards
2. Enumerate the minimum standards of Generally Accepted Auditing
Standards (GAAS)
3. Discuss the Philippine Standards on Auditing (PSA), Philippine
Standard on Auditing 220, Philippine Standard on Quality Control
(PSQC)
4. Determine the objectives of auditor
5. Explain the Elements of a System of Quality Control
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LO 1
Professional Standards
Professional standards serve as an established criterion of which professional accountants
based their audit services to their clients.
In the Philippine setting, the standards that are relevant in the conduct of the CPA profession
are:
LO 2

Generally Accepted Auditing Standards (GAAS)

Philippine Standards on Auditing (PSA)

Philippine Standard on Quality Control (PSQC)
Generally Accepted Auditing Standards
An independent auditor plans, conducts, and reports the results of an audit in accordance
with generally accepted auditing standards. Auditing standards provide a measure of audit
quality and the objectives to be achieved in an audit. Auditing procedures differ from auditing
standards. Auditing procedures are acts that the auditor performs during the course of an
audit to comply with auditing standards.
GAAS outlines ten (10) minimum standards that auditors should follow. These are grouped
into three auditing standards, namely:
1. General standards,
2. Fieldwork standards, and
3. Reporting standards
General Standards
1. The auditor must have adequate technical training and proficiency toper form
the audit.
2. The auditor must maintain independence in mental attitude in all matters
relating to the audit.
3. The auditor must exercise due professional care in the performance of the audit
and the preparation of the report.
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
3
Fieldwork Standards
4. The auditor must adequately plan the work and must properly supervise any
assistants.
5. The auditor must obtain a sufficient understanding of the entity and its
environment, including its internal control, to assess the risk of material
misstatement of the financial statements whether due to error or fraud, and to
design the nature, timing, and extent of further audit procedures.
6. The auditor must obtain sufficient appropriate audit evidence by performing
audit procedures to afford a reasonable basis for an opinion regarding the
financial statements under audit
Reporting Standards
7. The auditor must state in the auditor's report whether the financial statements
are presented in accordance with generally accepted accounting principles.
8. The auditor must identify in the auditor's report those circumstances in which
such principles have not been consistently observed in the current period in
relation to the preceding period.
9. When the auditor determines that informative disclosures are not reasonably
adequate, the auditor must so state in the auditor's report.
10. The auditor must either express an opinion regarding the financial statements,
taken as a whole, or state that an opinion cannot be expressed, in the auditor's
report. When the auditor cannot express an overall opinion, the auditor should
state the reasons there for in the auditor's report. In all cases where an
auditor's name is associated with financial statements, the auditor should
clearly indicate the character of the auditor's work, if any, and the degree of
responsibility the auditor is taking, in the auditor's report.
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LO 3
Philippine Standard on Auditing
The Philippine Standard on Auditing (PSA) establishes the independent auditor’s overall
responsibilities when conducting an audit of financial statements in accordance with PSAs.
Specifically,
 It sets out the overall objectives of the independent auditor
 It explains the nature and scope of an audit designed to enable the independent
auditor to meet those objectives.
 It explains the scope, authority and structure of the PSAs, and includes requirements
establishing the general responsibilities of the independent auditor applicable in all
audits, including the obligation to comply with the PSAs.
An Audit of Financial Statements
The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on
whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
In the case of most general purpose frameworks, that opinion is on whether the
financial statements are presented fairly, in all material respects, in accordance with
the framework. An audit conducted in accordance with PSAs and relevant ethical
requirements enables the auditor to form that opinion.
The financial statements subject to audit are those of the entity, prepared and
presented by management of the entity with oversight from those charged with
governance. PSAs do not impose responsibilities on management or those charged
with governance and do not override laws and regulations that govern their
responsibilities. However, an audit in accordance with PSAs is conducted on the
premise that management and, where appropriate, those charged with governance
have responsibilities that are fundamental to the conduct of the audit. The audit of the
financial statements does not relieve management or those charged with governance
of those responsibilities.
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
5
As the basis for the auditor’s opinion, PSAs require the auditor to obtain reasonable
assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. Reasonable assurance is a high level of
assurance. It is obtained when the auditor has obtained sufficient appropriate audit
evidence to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated) to an acceptably low
level. However, reasonable assurance is not an absolute level of assurance, because
there are inherent limitations of an audit which result in most of the audit evidence on
which the auditor draws conclusions and bases the auditor’s opinion being persuasive
rather than conclusive.
The concept of materiality is applied by the auditor both in planning and performing
the audit, and in evaluating the effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements.1 In general,
misstatements, including omissions, are considered to be material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements. Judgments about materiality are
made in the light of surrounding circumstances, and are affected by the auditor’s
perception of the financial information needs of users of the financial statements, and
by the size or nature of a misstatement, or a combination of both. The auditor’s
opinion deals with the financial statements as a whole and therefore the auditor is not
responsible for the detection of misstatements that are not material to the financial
statements as a whole.
The PSAs contain objectives, requirements and application and other explanatory
material that are designed to support the auditor in obtaining reasonable assurance.
The PSAs require that the auditor exercise professional judgment and maintain
professional skepticism throughout the planning and performance of the audit and,
among other things:
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
Identify and assess risks of material misstatement, whether due to fraud or
error, based on an understanding of the entity and its environment, including
the entity’s internal control.

Obtain sufficient appropriate audit evidence about whether material
misstatements exist, through designing and implementing appropriate
responses to the assessed risks.

Form an opinion on the financial statements based on conclusions drawn from
the audit evidence obtained.
The form of opinion expressed by the auditor will depend upon the applicable financial
reporting framework and any applicable laws or regulations.
The auditor may also have certain other communication and reporting responsibilities
to users, management, those charged with governance, or parties outside the entity, in
relation to matters arising from the audit. These may be established by the PSAs or by
applicable laws or regulations
Requirements for an Audit of Financial Statements
Ethical Requirements Relating to an Audit of Financial Statements
The auditor shall comply with relevant ethical requirements, including those
pertaining to independence, relating to financial statement audit engagements.
Professional Skepticism
The auditor shall plan and perform an audit with professional skepticism
recognizing that circumstances may exist that cause the financial statements to
be materially misstated.
Professional Judgment
The auditor shall exercise professional judgment in planning and performing an
audit of financial statements.
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
7
Sufficient Appropriate Audit Evidence and Audit Risk
To obtain reasonable assurance, the auditor shall obtain sufficient appropriate
audit evidence to reduce audit risk to an acceptably low level and thereby
enable the auditor to draw reasonable conclusions on which to base the
auditor’s opinion.
Conduct of an Audit in Accordance with PSAs
Complying with PSAs Relevant to the Audit

The auditor shall comply with all PSAs relevant to the audit. APSA is
relevant to the audit when the PSA is in effect and the circumstances
addressed by the PSA exist.

The auditor shall have an understanding of the entire text of a PSA,
including its application and other explanatory material, to understand
its objectives and to apply its requirements properly.

The auditor shall not represent compliance with PSAs in the auditor’s
report unless the auditor has complied with the requirements of this
PSA and all other PSAs relevant to the audit.
Objectives Stated in Individual PSAs

To achieve the overall objectives of the auditor, the auditor shall use the
objectives stated in relevant PSAs in planning and performing the audit,
having regard to the interrelationships among the PSAs, to
(a) Determine whether any audit procedures in addition to those
required by the PSAs are necessary in pursuance of the objectives
stated in the PSAs;
(b) Evaluate whether sufficient appropriate audit evidence has been
obtained.
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Complying with Relevant Requirements

The auditor shall comply with each requirement of a PSA unless, in the
circumstances of the audit:
(a) The entire PSA is not relevant; or
(b) The requirement is not relevant because it is conditional and the
condition does not exist.

In exceptional circumstances, the auditor may judge it necessary to
depart from a relevant requirement in a PSA. In such circumstances, the
auditor shall perform alternative audit procedures to achieve the aim of
that requirement. The need for the auditor to depart from a relevant
requirement is expected to arise only where the requirement is for a
specific procedure to be performed and, in the specific circumstances of
the audit, that procedure would be ineffective in achieving the aim of the
requirement.
Failure to Achieve an Objective
If an objective in a relevant PSA cannot be achieved, the auditor shall
evaluate whether this prevents the auditor from achieving the overall
objectives of the auditor and thereby requires the auditor, in accordance
with the PSAs, to modify the auditor’s opinion or withdraw from the
engagement. Failure to achieve an objective represents a significant
matter requiring documentation in accordance with PSA 230
(Redrafted)
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
LO 4
9
Objectives of the Auditor
In conducting an audit of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial
reporting framework; and
(b) To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the
auditor’s report is insufficient in the circumstances for purposes of reporting to the intended
users of the financial statements, the PSAs require that the auditor disclaim an opinion or
withdraw from the engagement, where withdrawal is legally permitted.
Course Module
LO 5
Philippine Standard on Auditing 220
(QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS)
PSA 220 deals with the specific responsibilities of the auditor regarding quality control
procedures for an audit of financial statements. It also addresses, where applicable, the
responsibilities of the engagement quality control reviewer. This PSA is to be read in
conjunction with relevant ethical requirements.
System of Quality Control and Role of Engagement Teams
Quality control systems, policies and procedures are the responsibility of the audit firm.
Under PSQC 1 (Redrafted), the firm has an obligation to establish and maintain 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.
Within the context of the firm’s system of quality control, engagement teams have a
responsibility to implement quality control procedures that are applicable to the audit
engagement and provide the firm with relevant information to enable the functioning of
that part of the firm’s system of quality control relating to independence.
Engagement teams are entitled to rely on the firm’s system of quality control, unless
information provided by the firm or other parties suggests otherwise.
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
LO 6
11
Philippine Standard on Quality Control (PSQC)
(QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF FINANCIAL
STATEMENTS, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS)
Philippine Standard on Quality Control (PSQC) deals with a firm’s responsibilities for its
system of quality control for audits and reviews of financial statements, and other assurance
and related services engagements. This PSQC is to be read in conjunction with relevant ethical
requirements.
The objective of the firm is to establish and maintain a system of quality control to provide it
with reasonable assurance that:
(a)
The firm and its personnel comply with professional standards and applicable legal
and regulatory requirements; and
(b)
Reports issued by the firm or engagement partners are appropriate in the
circumstances.
Course Module
LO 7
Elements of a System of Quality Control
The firm shall establish and maintain a system of quality control that includes policies and
procedures that address each of the following elements:
1. Leadership Responsibilities for Quality on Audits
2. Relevant Ethical Requirements
3. Acceptance and Continuance of Client Relationships and Audit Engagements
4. Assignment of Engagement Teams
5. Engagement Performance
6. Monitoring
7. Documentation
Leadership Responsibilities for Quality on Audits
The engagement partner shall take responsibility for the overall quality
on each audit engagement to which that partner is assigned.
Relevant Ethical Requirements
Throughout the audit engagement, the engagement partner shall remain
alert, through observation and making inquiries as necessary, for
evidence of noncompliance with relevant ethical requirements by
members of the engagement team
Throughout the audit engagement, the engagement partner shall remain
alert, through observation and making inquiries as necessary, for
evidence of noncompliance with relevant ethical requirements by
members of the engagement team.
If matters come to the engagement partner’s attention through the firm’s
system of quality control or otherwise that indicate that members of the
engagement team have not complied with relevant ethical requirements,
the engagement partner, in consultation with others in the firm, shall
determine the appropriate action.
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
13
Independence
The engagement partner shall form a conclusion on
compliance with independence requirements that apply to the
audit engagement. In doing so, the engagement partner shall:
(a) Obtain relevant information from the firm and, where
applicable, network firms, to identify and evaluate
circumstances and relationships that create threats to
independence;
(b) Evaluate information on identified breaches, if any, of the
firm’s independence policies and procedures to determine
whether they create a threat to independence for the audit
engagement; and
(c) Take appropriate action to eliminate such threats or
reduce them to an acceptable level by applying safeguards,
or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is permitted by law or
regulation. The engagement partner shall promptly report
to the firm any inability to resolve the matter for
appropriate action.
Acceptance and Continuance of Client Relationships and Audit Engagements
The engagement partner shall be satisfied that appropriate procedures
regarding the acceptance and continuance of client relationships and
audit engagements have been followed, and shall determine that
conclusions reached in this regard are appropriate.
If the engagement partner obtains information that would have caused
the firm to decline the audit engagement had that information been
available earlier, the engagement partner shall communicate that
Course Module
information promptly to the firm, so that the firm and the engagement
partner can take the necessary action
Assignment of Engagement Teams
The engagement partner shall be satisfied that the engagement team,
and any auditor’s experts who are not part of the engagement team,
collectively have the appropriate competence and capabilities to:
(a) Perform the audit engagement in accordance with professional
standards and regulatory and legal requirements; and
(b) Enable an auditor’s report that is appropriate in the circumstances to
be issued.
Engagement Performance
1. Direction, Supervision and Performance
The engagement partner shall take responsibility for:
(a) The direction, supervision and performance of the audit
engagement in compliance with professional standards and
regulatory and legal requirements; and
(b) The auditor’s report being appropriate in the circumstances.
2. Reviews
The engagement partner shall take responsibility for reviews
being performed in accordance with the firm’s review policies
and procedures.
On or before the date of the auditor’s report, the engagement
partner shall, through a review of the audit documentation and
discussion with the engagement team, be satisfied that sufficient
appropriate audit evidence has been obtained to support the
conclusions reached and for the auditor’s report to be issued.
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
15
3. Consultation
The engagement partner shall:
(a) Take responsibility for the engagement team undertaking
appropriate consultation on difficult or contentious matters;
(b) Be satisfied that members of the engagement team have
undertaken appropriate consultation during the course of the
engagement, both within the engagement team and between
the engagement team and others at the appropriate level
within or outside the firm;
(c) Be satisfied that the nature and scope of, and conclusions
resulting from, such consultations are agreed with the party
consulted; and
(d) Determine that conclusions resulting from such consultations
have been implemented.
4. Engagement Quality Control Review
For audits of financial statements of listed entities, and those
other audit engagements, if any, for which the firm has
determined that an engagement quality control review is
required, the engagement partner shall:
(a) Determine that an engagement quality control reviewer has
been appointed;
(b) Discuss
significant
engagement,
matters
including
arising
those
during
identified
the
during
audit
the
engagement quality control review, with the engagement
quality control reviewer; and
(c) Not date the auditor’s report until the completion of the
engagement quality control review.
Course Module
The engagement quality control reviewer shall perform an
objective evaluation of the significant judgments made by the
engagement team, and the conclusions reached in formulating the
auditor’s report. This evaluation shall involve:
(a) Discussion of significant matters with the engagement
partner;
(b) Review of the financial statements and the proposed auditor’s
report;
(c) Review of selected audit documentation relating to the
significant judgments the engagement team made and the
conclusions it reached; and
(d) Evaluation of the conclusions reached in formulating the
auditor’s report and consideration of whether the proposed
auditor’s report is appropriate.
For audits of financial statements of listed entities, the
engagement quality control reviewer, on performing an
engagement quality control review, shall also consider the
following:
(a) The engagement team’s evaluation of the firm’s independence
in relation to the audit engagement;
(b) Whether appropriate consultation has taken place on matters
involving differences of opinion or other difficult or
contentious matters, and the conclusions arising from those
consultations; and
(c) Whether audit documentation selected for review reflects the
work performed in relation to the significant judgments made
and supports the conclusions reached.
5. Differences of Opinion
If differences of opinion arise within the engagement team, with
those consulted or, where applicable, between the engagement
partner and the engagement quality control reviewer, the
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
17
engagement team shall follow the firm’s policies and procedures
for dealing with and resolving differences of opinion.
Monitoring
An effective system of quality control includes a monitoring process
designed to provide the firm with reasonable assurance that its policies
and procedures relating to the system of quality control are relevant,
adequate, and operating effectively.
The engagement partner shall consider the results of the firm’s
monitoring process as evidenced in the latest information circulated by
the firm and, if applicable, other network firms and whether deficiencies
noted in that information may affect the audit engagement.
Documentation
The auditor shall document:
(a) Issues identified with respect to compliance with relevant ethical
requirements and how they were resolved.
(b) Conclusions on compliance with independence requirements that
apply to the audit engagement, and any relevant discussions with the
firm that support these conclusions.
(c) Conclusions reached regarding the acceptance and continuance of
client relationships and audit engagements.
(d) The nature and scope of, and conclusions resulting from,
consultations undertaken during the course of the audit engagement.
The engagement quality control reviewer shall document, for the audit
engagement reviewed, that:
(a) The procedures required by the firm’s policies on engagement
quality control review have been performed;
Course Module
(b) The engagement quality control review has been completed on or
before the date of the auditor’s report; and
(c) The reviewer is not aware of any unresolved matters that would
cause the reviewer to believe that the significant judgments the
engagement team made and the conclusions they reached were not
appropriate.
END OF MODULE
Auditing and Assurance Principles
Professional Practice, Standards and Quality and Control System
19
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
3. Handbook of the Code of Ethics for Professional Accountants 2013 Edition.
Online Supplementary Reading Materials
1. Generally Accepted Auditing Standards;
https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocume
nts/AU-00150.pdf ; September 1, 2018
2. Philippine Standards on Auditing;
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-220Redrafted.pdf ; September 1, 2018
3. Philippine Standard on Quality Control 1;
https://www.aasc.org.ph/downloads/codifiedstandards/publications/PDFs/ISQC-1.pdf ; September 3, 2018
Course Module
Auditing and Assurance Principles
Audit Process
1
Module 004 Audit Process
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Differentiate the audit process
2. Explain each phase of the audit process
3. Discuss the assurance engagement
4. Enumerate the types and elements of an assurance engagement
5. Familiarize with engagement letter
Course Module
LO 1
Audit Process
The audit process begins with the set of financial statements that were prepared by the
company’s management.
The complete set of financial statements are:

Statement of Financial Position

Statement of Comprehensive Income

Statement of Changes in Equity

Statement of Cash Flows

Notes to Financial Statements
For audit purposes, these set of financial statements serve as assertions which are the
representations of management that explains the economic actions and events that happen
during the audit period. Through the conduct of audit such assertions or management
representations will be validated.
Auditing the financial statements usually involves the following processes:
1.Accepting an
engagement
Audit Planning
Studying and Evaluating
the Internal Controls
Performing Substantive
Testing
Completing the Audit
Issuing an Audit Report
Auditing and Assurance Principles
Audit Process
LO 2
3
Phases of the Audit Process
1. Accepting an engagement
Auditors should establish procedures that will guide them in deciding which
prospective audit engagements to accept and which to decline.
Before making any decision, auditors should evaluate potential clients according to:

Client’s financial statement,

their reputation in the business community and

the information provided by their previous auditors.
Pre-acceptance Procedures
A pre-acceptance procedure of a prospective clientprimarily consists the
following two phases:
1. Information gathering and,
2. Information evaluation.
Information Gathering Procedures:
i.
Obtain and analyze financial statements of the
prospective client and other relevant financial
information. Also, as part of this analysis, obtain the
names of the prospective client's key executives
and principals.
ii.
Make inquiries of knowledgeable third parties
within the business community as to the reputation
of the prospective client's business and the
integrity of the prospective client's management
iii.
If a predecessor auditor exists, request the
prospective client to authorize the predecessor to
Course Module
respond to your
inquiries and then make
appropriate inquiries of the predecessor.
Information Evaluation Procedures:
i.
Independence and Technical Competence.
Early in the pre-acceptance evaluation process, the
auditor should evaluate whether any independence
problems will be encountered if the prospective
engagement is accepted, and whether the auditor
has the technical abilities to perform the work. If
such problems cannot be resolved, the auditor
should decline the engagement.
ii.
Assuming there is independence and has the
required technical abilities, the pre- acceptance
evaluation of a prospective audit engagement
normally focuses on three factors:

personal integrity of the prospective client's
management

presence of circumstances pointing towards
unusual
risks
in
the
engagement
or
requiring special attention,

other practice management considerations.
Auditing and Assurance Principles
Audit Process
5
2. Audit Planning
Planning an audit involves establishing the overall audit strategy for the engagement
and developing an audit plan.
This phase will be further discussed in Week006-Module005
3. Studying and Evaluating the Internal Controls
This phase deals with the external auditor’s responsibilities relating to the work of
internal auditors when the external auditor has determined, in accordance with PSA
315,1 that the internal audit function is likely to be relevant to the audit.
This phase will be further discussed in Week007-Module006
4. Performing Substantive Testing
This phase deals with the auditor’s use of analytical procedures as substantive
procedures, and as procedures near the end of the audit that assist the auditor when
forming an overall conclusion on the financial statements.
This phase will be further discussed in Week009-Module007 and Week010Module008
5. Completing the Audit
This phase involves performing additional audit procedures before concluding the
audit engagement. These procedures include:

Review of subsequent events

Assessing the going concern assumption

Performing overall analytical review procedures

Obtaining written representations from the client’s management.
This phase will be further discussed in Week011-Module009
Course Module
6. Issuing an Audit Report
This phase deals with the auditor’s responsibility to form an opinion on the financial
statements. It also deals with the form and content of the auditor’s report issued as a
result of an audit of financial statements.
This phase will be further discussed in Week012-Module010
LO 3
Assurance Engagement
“Assurance engagement” means an engagement in which a practitioner 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.
The outcome of the evaluation or measurement of a subject matter is the information that
results from applying the criteria to the subject matter.
For example:

The recognition, measurement, presentation and disclosure represented
in the financial statements (outcome)
result from applying a financial reporting framework for recognition,
measurement, presentation and disclosure,
such as Philippine Financial Reporting Standards, (criteria)
to an entity’s financial position, financial performance and cash flows
(subject matter).

An assertion about the effectiveness of internal control (outcome)
results from applying a framework for evaluating the effectiveness of
internal control, such as COSO4 or CoCo5 (criteria)
to internal control, a process (subject matter).
“Subject Matter Information” is the outcome of the evaluation or measurement of a subject
matter. It is the subject matter information about which the practitioner gathers sufficient
appropriate evidence to provide a reasonable basis for expressing a conclusion in an
assurance report.
Auditing and Assurance Principles
Audit Process
LO 4
7
Types of Assurance Engagement
1. Reasonable Assurance Engagement
2. Limited Assurance Engagement
Reasonable Assurance Engagement
The objective of a reasonable assurance engagement 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.
Limited Assurance Engagement
The objective of a limited assurance engagement is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the engagement,
but where that risk is greater than for a reasonable assurance engagement, as the basis
for a negative form of expression of the practitioner’s conclusion.
It must be noted that not all engagements performed by practitioners are assurance
engagements.
Other frequently performed engagements that do not meet the above definition, hence, not
covered on this course and module, include

Engagements covered by Philippine Standards for Related Services, such as agreedupon procedures engagements and compilations of financial or other information.

The preparation of tax returns where no conclusion conveying assurance is expressed.

Consulting (or advisory) engagements, such as management and tax consulting.
Course Module
An assurance engagement may be part of a larger engagement,
For example,
Whena business acquisition consulting engagement includes a requirement to
conveyassurance regarding historical or prospective financial information. In
suchcircumstances, this framework, as discussed on this module and course is
relevant only to the assurance portion of theengagement.
The following engagements, which may meet the definition as discussed, need not be
performed in accordance with this Framework:
(a) Engagements to testify in legal proceedings regarding accounting, auditing,
taxation or other matters; and
(b) Engagements that include professional opinions, views or wording from which a
user may derive some assurance, if all of the following apply:
(i)
Those opinions, views or wording are merely incidental to the overall
engagement;
(ii)
(Any written report issued is expressly restricted for use by only the
intended users specified in the report;
(iii)
Under a written understanding with the specified intended users, the
engagement is not intended to be an assurance engagement; and
(iv)
The engagement is not represented as an assurance engagement in the
professional accountant’s report.
Engagement Acceptance
A practitioner accepts an assurance engagement only where the practitioner’s
preliminary knowledge of the engagement circumstances indicates that:
(a) Relevant ethical requirements, such as independence and professional
competence will be satisfied, and
(b) The engagement exhibits all of the following characteristics:
(i)
The subject matter is appropriate;
(ii)
The criteria to be used are suitable and are available to the
intended users;
(iii)
The practitioner has access to sufficient appropriate evidence to
support the practitioner’s conclusion;
Auditing and Assurance Principles
Audit Process
(iv)
9
The practitioner’s conclusion, in the form appropriate to either a
reasonable assurance engagement or a limited assurance
engagement, is to be contained in a written report; and
(v)
The practitioner is satisfied that there is a rational purpose for
the engagement.
Having accepted an assurance engagement, a practitioner may not change that engagement to
a non-assurance engagement, or from a reasonable assurance engagement to a limited
assurance engagement without reasonable justification.
A change in circumstances that affects the intended users’ requirements, or a
misunderstanding concerning the nature of the engagement, ordinarily will justify a request
for a change in the engagement. If such a change is made, the practitioner does not disregard
evidence that was obtained prior to the change.
LO 5
Elements of an Assurance Engagement
The following elements of an assurance engagement are discussed in this section:
1. A three-party relationship involving a practitioner, a responsible party, and intended
users;
2. An appropriate subject matter;
3. Suitable criteria;
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable assurance engagement
or a limited assurance engagement.
Course Module
A three-party relationship involving a practitioner, a responsible party, and intended users;
Assurance engagements involve three separate parties:

a practitioner,

aresponsible party and

intended users.
The responsible party and the intended users may be from different entities or
thesameentity.
For example,

In a two-tier board structure, thesupervisory board may seek assurance
about information provided by themanagement board of that entity.
The relationship between the responsible partyand the intended users
needs to be viewed within the context of a specificengagement and may
differ from more traditionally defined lines ofresponsibility.

An entity’s senior management (an intended user)may engage a
practitioner to perform an assurance engagement on a particularaspect
of the entity’s activities that is the immediate responsibility of a lower
levelof management (the responsible party), but for which senior
management isultimately responsible.
Practitioner
A practitioner may be requested to perform assurance engagements on a
wide range of subject matters. Some subject matters may require
specialized skills and knowledge beyond those ordinarily possessed by
an individual practitioner.
A practitioner does not accept an engagement if preliminary knowledge
of the engagement circumstances indicates that ethical requirements
regarding professional competence will not be satisfied.
Auditing and Assurance Principles
Audit Process
11
In some cases, this requirement can be satisfied by the practitioner using
the work of persons from other professional disciplines, referred to as
experts. In such cases, the practitioner is satisfied that those persons
carrying out the engagement collectively possess the requisite skills and
knowledge, and that the practitioner has an adequate level of
involvement in the engagement and understanding of the work for
which any expert is used.
Responsible Party
The responsible party is the person (or persons) who:
(a) In a direct reporting engagement, is responsible for the subject
matter; or
(b) In an assertion-based engagement, is responsible for the subject
matter information (the assertion), and may be responsible for the
subject matter.
An example of when the responsible party is responsible for both the
subject matter information and the subject matter, is when an entity
engages a practitioner to perform an assurance engagement
regarding a report it has prepared about its own sustainability
practices.
An example of when the responsible party is responsible for the
subject matter information but not the subject matter, is when a
government organization engages a practitioner to perform an
assurance engagement regarding a report about a private company’s
sustainability practices that the organization has prepared and is to
distribute to intended users. The responsible party may or may not
be the party who engages the practitioner (the engaging party).
Course Module
The responsible party ordinarily provides the practitioner with a
written representation that evaluates or measures the subject matter
against the identified criteria, whether or not it is to be made
available as an assertion to the intended users. In a direct reporting
engagement, the practitioner may not be able to obtain such a
representation when the engaging party is different from the
responsible party.
Intended Users
The intended users are the person, persons or class of persons for whom
thepractitioner prepares the assurance report. The responsible party
can be one of theintended users, but not the only one.
An appropriate subject matter;
The subject matter, and subject matter information, of an assurance engagement can
take many forms, such as:

Financial performance or conditions
For example,
historical or prospective financial position, financial
performance and cash flows
 for which the subject matter information may be
the recognition, measurement, presentation and
disclosure represented in financial statements.

Non-financial performance or conditions
For example,
performance of an entity
 for which the subject matter information may be
key indicators of efficiency and effectiveness.

Physical characteristics
For example,
capacity of a facility
 for which the subject matter information may be a
specifications document.
Auditing and Assurance Principles
Audit Process

13
Systems and processes
For example,
an entity’s internal control or IT system
 for which the subject matter information may be an
assertion about effectiveness.

Behavior
For example,
corporate governance, compliance with regulation,human
resource practices
 for which the subject matter information maybe a
statement of compliance or a statement of
effectiveness.
Subject matters have different characteristics, including the degree to which
information about them is qualitative versus quantitative, objective versus subjective,
historical versus prospective, and relates to a point in time or covers a period. Such
characteristics affect the:
(a) Precision with which the subject matter can be evaluated or measured against
criteria; and
(b) The persuasiveness of available evidence. The assurance report notes
characteristics of particular relevance to the intended users.
An appropriate subject matter is:
(a) Identifiable, and capable of consistent evaluation or measurement against the
identified criteria; and
(b) Such that the information about it can be subjected to procedures for gathering
sufficient appropriate evidence to support a reasonable assurance or limited
assurance conclusion, as appropriate.
Suitable criteria;
Course Module
Criteria are the benchmarks used to evaluate or measure the subject matter including,
where relevant, benchmarks for presentation and disclosure.
Criteria can be formal, for example,

in the preparation of financial statements, the criteria may be Philippine
Financial Reporting Standards;

when reporting on internal control, the criteria may be an established internal
control framework or individual control objectives specifically designed for the
engagement; and

when reporting on compliance, the criteria may be the applicable law,
regulation or contract.
Examples of less formal criteria are an internally developed code of conduct or an
agreed level of performance (such as the number of times a particular committee is
expected to meet in a year).
Suitable criteria are required for reasonably consistent evaluation or measurement of
a subject matter within the context of professional judgment. Without the frame of
reference provided by suitable criteria, any conclusion is open to individual
interpretation and misunderstanding.
Suitable criteria are context-sensitive, that is, relevant to the engagement
circumstances. Even for the same subject matter there can be different criteria.
o For example, one responsible party might select the number of customer
complaints resolved to the acknowledged satisfaction of the customer
for the subject matter of customer satisfaction; another responsible
party might select the number of repeat purchases in the three months
following the initial purchase.
Auditing and Assurance Principles
Audit Process
15
Suitable criteria exhibit the following characteristics:
(a) Relevance:
Relevant criteria contribute to conclusions that assist decision making by the
intended users.
(b) Completeness:
Criteria are sufficiently complete when relevant factors that could affect the
conclusions in the context of the engagement circumstances are not omitted.
Complete criteria include, where relevant, benchmarks for presentation and
disclosure.
(c) Reliability
Reliable criteria allow reasonably consistent evaluation or measurement of the
subject matter including, where relevant, presentation and disclosure, when
used in similar circumstances by similarly qualified practitioners.
(d) Neutrality
Neutral criteria contribute to conclusions that are free from bias.
(e) Understandability
Understandable
criteria
contribute
to
conclusions
that
are
clear,
comprehensive, and not subject to significantly different interpretations. The
evaluation or measurement of a subject matter on the basis of the practitioner’s
own expectations, judgments and individual experience would not constitute
suitable criteria.
Sufficient appropriate evidence
The practitioner plans and performs an assurance engagement with an attitude of
professional skepticism to obtain sufficient appropriate evidence about whether the
subject matter information is free of material misstatement.
The practitioner considers materiality, assurance engagement risk, and the quantity
and quality of available evidence when planning and performing the engagement, in
particular when determining the nature, timing and extent of evidence-gathering
procedures.
Course Module
 Professional Skepticism
The practitioner plans and performs an assurance engagement with an
attitude of professional skepticism recognizing that circumstances may
exist that cause the subject matter information to be materially
misstated.
An attitude of professional skepticism means the practitioner makes a
critical assessment, with a questioning mind, of the validity of evidence
obtained and is alert to evidence that contradicts or brings into question
the reliability of documents or representations by the responsible party.
For example, an attitude of professional skepticism is necessary
throughout the engagement process for the practitioner to reduce the
risk of overlooking suspicious circumstances, of over generalizing when
drawing conclusions from observations, and of using faulty assumptions
in determining the nature, timing and extent of evidence gathering
procedures and evaluating the results thereof.

Sufficiency and Appropriateness of Evidence
Sufficiency is the measure of the quantity of evidence.
Appropriateness is the measure of the quality of evidence; that is, its
relevance and its reliability.
The quantity of evidence needed is affected by the risk of the subject
matter information being materially misstated (the greater the risk, the
more evidence is likely to be required) and also by the quality of such
evidence (the higher the quality, the less may be required).
Accordingly, the sufficiency and appropriateness of evidence are
interrelated. However, merely obtaining more evidence may not
compensate for its poor quality.
Auditing and Assurance Principles
Audit Process
17
The reliability of evidence is influenced by its source and by its nature,
and is dependent on the individual circumstances under which it is
obtained.
Generalizations about the reliability of various kinds of evidence can be
made; however, such generalizations are subject to important
exceptions. Even when evidence is obtained from sources external to the
entity, circumstances may exist that could affect the reliability of the
information obtained. For example, evidence obtained from an
independent external source may not be reliable if the source is not
knowledgeable.
While
recognizing
that
exceptions
may
exist,
the
following
generalizations about the reliability of evidence may be useful:

Evidence is more reliable when it is obtained from independent
sources outside the entity.

Evidence that is generated internally is more reliable when the
related controls are effective.

Evidence obtained directly by the practitioner
for example,
 observation of the application of a control is more
reliable than evidence obtained indirectly or by
inference
(for
example,
inquiry
about
the
application of a control).

Evidence is more reliable when it exists in documentary form,
whether paper, electronic, or other media
for example,
 a contemporaneously written record of a meeting
is
more
reliable
than
a
subsequent
representation of what was discussed.
Course Module
oral

Evidence provided by original documents is more reliable than
evidence provided by photocopies or facsimiles.
 Materiality
Materiality is relevant when the practitioner determines the nature,
timing and extent of evidence-gathering procedures, and when assessing
whether the subject matter information is free of misstatement.
When considering materiality, the practitioner understands and
assesses what factors might influence the decisions of the intended
users.
For example, when the identified criteria allow for variations in the
presentation of the subject matter information, the practitioner
considers how the adopted presentation might influence the decisions of
the intended users.
Materiality is considered in the context of quantitative and qualitative
factors, such as relative magnitude, the nature and extent of the effect of
these factors on the evaluation or measurement of the subject matter,
and the interests of the intended users.
The assessment of materiality and the relative importance of
quantitative and qualitative factors in a particular engagement are
matters for the practitioner’s judgment.
 Assurance Engagement Risk
Assurance engagement risk is the risk that the practitioner expresses an
inappropriate conclusion when the subject matter information is
materially misstated.
In a reasonable assurance engagement, the practitioner reduces
assurance engagement risk to an acceptably low level in the
circumstances of the engagement to obtain reasonable assurance as the
Auditing and Assurance Principles
Audit Process
19
basis for a positive form of expression of the practitioner’s conclusion.
The level of assurance engagement risk is higher in a limited assurance
engagement than in a reasonable assurance engagement because of the
different nature, timing or extent of evidence gathering procedures.
However, in a limited assurance engagement, the combination of the
nature, timing and extent of evidence gathering procedures is at least
sufficient for the practitioner to obtain a meaningful level of assurance
as the basis for a negative form of expression. To be meaningful, the level
of assurance obtained by the practitioner is likely to enhance the
intended users’ confidence about the subject matter information to a
degree that is clearly more than inconsequential.
In general, assurance engagement risk can be represented by the
following components, although not all of these components will
necessarily be present or significant for all assurance engagements:
(a) The risk that the subject matter information is materially misstated,
which in turn consists of:
(i)
Inherent risk
-
the susceptibility of the subject matter information to a
material misstatement, assuming that there are no related
controls; and
(ii)
Control risk
-
the risk that a material misstatement that could occur will
not be prevented, or detected and corrected, on a timely
basis by related internal controls. When control risk is
relevant to the subject matter, some control risk will
always exist because of the inherent limitations of the
design and operation of internal control
(b) Detection risk
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-
the risk that the practitioner will not detect a material
misstatement that exists.
The degree to which the practitioner considers each of these
components is affected by the engagement circumstances, in particular
by the nature of the subject matter and whether a reasonable assurance
or a limited assurance engagement is being performed.

Nature, Timing and Extent of Evidence-Gathering Procedures
The exact nature, timing and extent of evidence-gathering procedures
will vary from one engagement to the next. In theory, infinite variations
in evidence gathering procedures are possible.
In practice, however, these are difficult to communicate clearly and
unambiguously. The practitioner attempts to communicate them clearly
and unambiguously and uses the form appropriate to a reasonable
assurance engagement or a limited assurance engagement.
“Reasonable assurance” is a concept relating to accumulating evidence
necessary for the practitioner to conclude in relation to the subject
matter information taken as a whole. To be in a position to express a
conclusion in the positive form required in a reasonable assurance
engagement, it is necessary for the practitioner to obtain sufficient
appropriate evidence as part of an iterative, systematic engagement
process involving:
(a) Obtaining an understanding of the subject matter and other
engagement circumstances which, depending on the subject
matter, includes obtaining an understanding of internal
control;
(b) Based on that understanding, assessing the risks that the
subject matter information may be materially misstated;
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21
(c) Responding to assessed risks, including developing overall
responses, and determining the nature, timing and extent of
further procedures;
(d) Performing further procedures clearly linked to the identified
risks, using a combination of inspection, observation,
confirmation,
recalculation,
reperformance,
analytical
procedures and inquiry.
Such further procedures involve substantive procedures
including,
where
applicable,
obtaining
corroborating
information from sources independent of the responsible
party, and depending on the nature of the subject matter, tests
of the operating effectiveness of controls; and
(e) Evaluating the sufficiency and appropriateness of evidence.
“Reasonable assurance” is less than absolute assurance. Reducing
assurance engagement risk to zero is very rarely attainable or cost
beneficial as a result of factors such as the following:

The use of selective testing.

The inherent limitations of internal control.

The fact that much of the evidence available to the practitioner is
persuasive rather than conclusive.

The use of judgment in gathering and evaluating evidence and
forming conclusions based on that evidence.

In some cases, the characteristics of the subject matter when
evaluated ormeasured against the identified criteria.
 Quantity and Quality of Available Evidence
The quantity or quality of available evidence is affected by:
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(a) The characteristics of the subject matter and subject matter
information.
For example,

less objective evidence might be expected
when information about the subject matter
is future oriented rather than historical
(b) Circumstances of the engagement other than the characteristics of
the subject matter, when evidence that could reasonably be expected
to exist is not available because of,
for example,

the timing of the practitioner’s appointment,
an entity’s document retention policy, or a
restriction imposed by the responsible
party.
Ordinarily, available evidence will be persuasive rather than conclusive.
A written assurance report in the form appropriate to a reasonable assurance engagement
or a limited assurance engagement.
The practitioner provides a written report containing a conclusion that
conveys the assurance obtained about the subject matter information.
1. In an assertion-based engagement, the practitioner’s conclusion can
be worded either:
(a) In terms of the responsible party’s assertion
For example:

“In our opinion the responsible party’s
assertion that internal control is effective, in
all material respects, based on XYZ criteria,
is fairly stated”;
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23
(b) Directly in terms of the subject matter and the criteria
For example:

“In our opinion internal control is effective,
in all material respects, based on XYZ
criteria”.
In a direct reporting engagement, the practitioner’s conclusion is
worded directly in terms of the subject matter and the criteria.
2. In a reasonable assurance engagement, the practitioner expresses the
conclusion in the positive form,
For example:

“In our opinion internal control is effective,
in all material respects, based on XYZ
criteria.”
This form of expression conveys “reasonable
assurance.”
Having performed evidence-gathering procedures of a nature, timing
and extent that were reasonable given the characteristics of the
subject matter and other relevant engagement circumstances
described in the assurance report, the practitioner has obtained
sufficient appropriate evidence to reduce assurance engagement risk
to an acceptably low level.
3. In a limited assurance engagement, the practitioner expresses the
conclusion in the negative form,
For example,

“Based on our work described in this report,
nothing has come to our attention that
causes us to believe that internal control is
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not effective, in all material respects, based
on XYZ criteria.”
This form of expression conveys a level of
“limited assurance” that is proportional to
the level of the practitioner’s evidencegathering
procedures
given
the
characteristics of thesubject matter and
other engagement circumstances described
in the assurance report.
Auditing and Assurance Principles
Audit Process
LO 6
SAMPLE ENGAGEMENT LETTER
(excerpted from www.alasoplascpas.com/Download/Proposal-Compilation-Services-TEMPLATE.docx
Proposal for Compilation Engagement
For the year ended _______________(reporting date)
Presented to
NAME OF THE COMPANY
Course Module
25
Date
THE BOARD OF DIRECTORS
NAME OF THE COMPANY
Address
SUBJECT:
LETTER OF ENGAGEMENT FOR COMPILATION SERVICE TO
NAME OF THE COMPANY
Gentlemen:
We are pleased to submit our proposal to render compilation service to
NAME OF THE COMPANY (the Company) for the year ended
_______________.
We discuss below highlights of our practice philosophies that guide us in delivering
value-for-money and world class quality service.
PRACTICE PHILOSOPHIES
In order to deliver the value-for-money and world class quality service that you
deserve, we observe the following practice philosophies:

Business-oriented approach
Alas, Oplas& Co., CPAs, herein referred to as “the Firm”, uses business-oriented approach with an emphasis on
early planning and understanding your business. This enables us to identify key areas and tailor our response to
the unique aspects, size, and nature of your business and to offer value-added constructive comments and
recommendations.

Professional competence
We always seek for continuous improvement of our skills and capabilities through investing heavily in training
and technology. Our personnel are well trained by international and local trainers and we are active in
participating with international conferences and forum that increase our knowledge.

Independence and integrity
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27
We are committed to giving what our clients rightly demand, yet still recognizes that our personnel is uniquely
placed to give constructive advices to the client regarding its business.
ABOUT OUR FIRM
For 30 years of global standard professional service in the field of audit and
assurance, we certainly take great pride in letting our clients know who we are and
the industry capabilities we can deliver.

We are member Firm of BKR International a leading global association of independent accounting and
business advisory Firms representing the expertise of more than 160 member Firms with over 500 offices in
over 80 countries around the world.
The succeeding pages will contain the scope of our services and our standard terms
and conditions. We appreciate the opportunity you gave us to submit this audit
proposal to your company. We will be pleased to clarify any questions that you may
have regarding this proposal.
Sincerely,
MARYCRIS S. OPLAS
Managing Partner
CONTENTS OF THE PROPOSAL
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Objectives and Scope of the Compilation
5
Our Responsibilities
5
Management’s Responsibilities
6
Reporting and Deliverables
7
Planning and Performance of the Compilation
8
Quality Control
8
Engagement Fees and Terms of Payment
8
Standard Terms and Conditions of Business
9
Closing
10
Conforme
10
This proposal has been submitted to NAME OF THE COMPANYfor the purpose of describing ALAS, OPLAS & CO., CPAs’ (“the Firm”)
qualifications and capabilities to provide the outlined services. In doing so, the Firm has disclosed certain proprietary and other sensitive
information, which if disclosed to other parties, might harm the Firm competitively. In consideration of receiving the disclosures, NAME OF THE
COMPANY agrees to treat this proposal as a confidential material and not to be disclosed to any third party without obtaining the Firm’s consent.
This proposal remains the property of the Firm and we reserve the right to request the return of all materials included in this proposal.
OBJECTIVES AND SCOPE OF THE COMPILATION ENGAGEMENT
You have requested that we perform the following services:
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29
On the basis of information provide, we will compile, in accordance with the Philippine Standard on
Related Services (PSRS) 4410, Engagements to Compile Financial Information, the statement of
financial position of NAME OF THE COMPANY as of ______________(reporting date) and related
statement of comprehensive income, changes in equity and cash flows for the year then ended in
accordance with the ___________________ (applicable reporting framework).
We will not carry out or review engagement procedures in relation to such financial statements.
Consequently, no assurance on the financial statements will be expressed.
Our compilation service will include routine consultation on tax and accounting matters. However, it will
not include tax compliance review and tax advisory service that usually entails extensive work such as
research, data gathering and consultation. Also, our compilation service will not include a review of the
supplementary information required under Bureau of Internal Revenue (BIR) Revenue Regulations (RR)
Nos. 15-2010 and 19-2011, including income tax computation.
OUR RESPONSIBILITIES
We will conduct our compilation engagement in accordance with PSRS 4410, Engagements to Compile
Financial Information. This standard requires that we comply with ethical requirements and plan and
perform the compilation engagement to use our accounting expertise, as opposed to auditing expertise,
to collect, classify and summarize financial information.
Compilation engagement ordinarily entails reducing data to a manageable and understandable form
without a requirement to test the assertions underlying that information. The procedures to be
employed are not designed and do not enable us to express any assurance on the financial information.
In carrying out this engagement, we will perform the following procedures:
a. Obtain general knowledge of the business and operations of the Company and be familiar with the
accounting principles and practices of the industry in which the Company operates and with the form
and content of the financial information that is appropriate in the circumstances.
b. Obtain trial balance and related supporting schedules and/or general ledger.
c. Prepare and review lead schedules.
d. Prepare and review the unaudited financial statements which comprise of the statement of financial
position, comprehensive income, change in equity, cash flows and notes to financial statements.
e. Prepare and review income tax computation (OPTIONAL)
f. Prepare and review disclosures relating to BIR Revenue Regulation Nos. 15-2010 and 19-2011
(OPTIONAL)
In a compilation engagement, we are NOT ordinarily required to perform the following procedures:
a. Make any inquiries of management to assess the reliability and completeness of the information
provided;
b. Assess internal controls;
c.
Verify any matters; or
d. Verify any explanations.
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However, if we become aware that information supplied by the management is incorrect, incomplete, or
otherwise unsatisfactory, we will consider performing the above procedures and request management
to provide additional information. If management refuses to provide additional information, we will
withdraw from the engagement, as provided in PSRS 4410.
Compiled financial statements will be checked and consider whether it appears to be appropriate in
form and free from obvious material misstatements, such as:
a. Mistakes in the application of __________________ (applicable financial reporting framework).
b. Non-disclosure of the requirements of _____________ (applicable financial reporting framework).
c.
Non-disclosure of any other significant matters of which we become aware.
We will disclose the above matters in the compiled financial information, though their effects will not be
quantified.
Because of the inherent limitations of the compilation engagement, there is an unavoidable risk that
some material misstatements may not be detected, even though the engagement is properly planned
and performed in accordance with PSRS.
MANAGEMENT’S RESPONSIBILITIES
Our compilation services will be conducted on the basis that management and those charged with governance
acknowledge and understand that they have responsibility:
1.
For the preparation and fair presentation of the financial
__________________(applicable financial reporting framework);
statements
in
2.
For such internal control as management determines is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud and error; and
3.
To provide us with:
a. Access to all information of which management is aware of that is relevant to the
financial statements such as records, documentation and other matters;
accordance
with
preparation of the
b. Additional information that we may request from management for the purpose of the compilation;
c.
Unrestricted access to persons within the entity from whom we determine it necessary to obtain
information;
d. Trial balance, general ledger/schedule and any accompanying information on a timely manner to allow
us to complete the compilation; and
e. Written representation letter that management has fulfilled its responsibilities for the preparation and
presentation of financial statements and that all transactions have been recorded and are reflected in
the financial statements.
4. For the preparation and fair presentation of the:
a. Supplementary information as required by Revenue Regulation No. 15-2010, and
b. Supplementary information required by Revenue Regulation No. 2-2014 (New Income Tax Forms)
issued by the Bureau of Internal Revenue.
Management is likewise responsible for making available to us, upon request, all original records and
related information, and personnel to whom we may direct our inquiries.
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31
5. For the preparation and fair presentation of the supplementary information required under Securities
Regulation Code (SRC) Rule 68 as revised in October 2011.
In accordance with SRC Rule 68, management of all corporations covered by this Rule is required to
acknowledge their responsibility over their financial statements. For this purpose, the financial
statements to be filed with the Securities and Exchange Commission shall be accompanied by a
Statement of Management’s Responsibility for Financial Statements signed by the Chairman of the
Board, the Chief Executive Officer, and the Chief Financial Officer.
In addition, the management is also mandated to comply with the submission of a Statement of
Management’s Responsibility for Annual Income Tax Return to accompany the financial
statements, pursuant to Revenue Regulation No. 3-2010.
REPORTING AND DELIVERABLES
Our deliverables will consist of the following:
A. Unaudited financial statements for the year then ended which comprise of the following:
1. Statement of Financial Position;
2. Statement of Comprehensive Income;
3. Statement of Changes in Equity;
4. Statement of Cash Flows; and
5. Notes to Financial Statements
B. Report on Compilation Engagement stating therein the following:
1. A statement that the engagement was performed in accordance with PSRS 4410;
2. Identification of the financial information noting that it is based on information provided by management;
3. A statement that the management is responsible for the financial information compiled by us;
4. A statement that neither an audit nor a review has been carried out and that accordingly no assurance
is expressed on the financial information; and
5. A paragraph, when considered necessary, drawing attention to the disclosure of material departures
from ______________ (applicable financial reporting framework).
C. Certificate on the Compilation Services for Preparation of FS and Notes to FS as required by the Board
of Accountancy
D. Lead schedule of line items presented in the compiled financial information
LIMITATIONS
We understand that the intended use and distribution of the information we have compiled is for the
purpose of complying with the requirements of Resolution No. 03-2016 issued by the Board of
Accountancy and that should this change in a material respect, that you will inform us.
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PLANNING AND PERFORMANCE OF THE AUDIT
We will plan our compilation engagement as expeditiously as possible to minimize disruptions of your
work. At the start of our work, we will present to you in a kick-off meeting our approach and timetable,
we will also introduce to you the members of our Client Service Team.
We look forward to the full cooperation of your staff to do the preparatory work that will be discussed in
our arrangement letter. We also trust that they will make available to us whatever records,
documentation and other information that are requested in connection with our audit.
QUALITY CONTROL
The conduct of our compilation engagement in accordance with PSRS 4410 means that information
acquired by us in the course of our audit is subject to strict confidentiality requirements. Information will
not be disclosed by us to other parties except as required or allowed for by law or professional
standards, or with your express consent. Our files may, however, be subject to review as part of the
quality control review program by: a) our network firm which monitors the quality of audits undertaken
by member firms, and b) regulatory bodies such as SEC and Board of Accountancy.
ENGAGEMENT FEES AND TERMS OF PAYMENT
Our professional fee for the compilation engagement for financial statements ended December 31, 2015
is ___________________ (PHP_____________), exclusive of applicable Value Added Tax (VAT) and
out-of-pocket expenses (OPEs). OPEs are expenses necessarily incurred in the performance of our
service, such as office supplies, transportation, meals, printing, postage, facsimile transmission,
reproduction of financial statements, communication, allocation of office charges in support of our
services and other incidental charges. Other extended services/works that will be incurred by the Firm
to complete the submission of the deliverables shall likewise be billed in addition to the professional fee
indicated herein.
We further propose to bill you as follows:
50% upon the start of field work; and
50% upon submission of our deliverables.
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33
STANDARD TERMS AND CONDITIONS OF BUSINESS
1.
CONFIDENTIALITY
We confirm that where you give us confidential information, we shall at all times keep it confidential, except as required by
law or as provided for in regulatory, ethical or other professional pronouncements applicable to our engagement. However,
in the event that we are required by law or other regulatory, ethical or other professional pronouncements, to disclose
confidential information to a third party, the Firm shall first notify the Companyprior to making such disclosure to the extent
that the Firm is legally able to do so. You agree that it will be sufficient compliance with our duty of confidence for us to
take such steps as we in good faith think fit to preserve confidential information both during and after termination of this
engagement.
The Firm also reserves the right to act during this engagement for other clients whose interests are, or may be, adverse to
yours, subject to the preceding paragraph.
2. ELECTRONIC COMMUNICATION
During the engagement we may, from time to time, communicate electronically with each other. Although
electronic transmission of information is fast and convenient, it cannot be guaranteed to be virus-free or errorfree. Transmitted information could be intercepted, corrupted, lost, destroyed, be delayed, or incomplete or
otherwise, be adversely affected by technical factors or considered unsafe to use. Therefore, we recognize that
systems and procedures cannot be a guarantee that transmissions will be unaffected by such hazards.
In this regard, we accept the risks of and authorize the use of electronic communications between us. We
propose that the Firm and the Company mutually agree to use commercially reasonable procedures to check for
the most commonly known viruses before sending information electronically. Moreover, both shall be responsible
for protecting its own systems and interests, in relation to electronic communications.
3. PAYMENT AND FEES
Our invoices are due for settlement fourteen (14) days from the date of the invoice. We reserve the right to
charge interest on overdue debts at a rate of 2% per month.
The Firm also reserves the right to withdraw our staff from their involvement on the relevant assignment, in the
event that the Company fail to perform the preparatory work in accordance with the terms of this engagement
proposal or if payment was not properly made.
4. CONTINUATION OF SERVICE/TERMINATION CLAUSE
This compilation engagement starts when the client service team begins to perform audit services and ends
when the deliverables are submitted. Should the Company intend to rehire the services of the Firm for
succeeding periods, such continuation of service will be subjected to a reacceptance evaluation and the result
will be communicated to the Company.
Should either party to this engagement encounter extraordinary difficulties while in service and that the Firm or
the Company will no longer be viable to continue such service, either party may invoke a termination of the
service through a written notice. The written notice should be received by the other party at least thirty (30) days
before the date of termination
5. INDEMNIFICATION
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NAME OF THE COMPANY hereby indemnifies ALAS, OPLAS & CO., CPAs and its partners, principals and
employees and holds them harmless from all claims, liabilities, losses and costs arising in circumstances where
there have been known misrepresentations by a member of the Company’s management, even if such
member’s act was in the interest of the Company.This indemnification will survive termination of this letter.
6. INCREASE IN FEES
If, for any reason, there is an increase in the amount of work and any variations from or additional work not
related to the terms of this engagement proposal, the engagement team will sit down with the Company and
discuss the necessary adjustments of the professional fees. Adjustments will only take effect upon the
agreement of both parties.
We hope the above terms correctly express our understanding.
Please indicate your agreement by signing and returning a copy for our file.
Sincerely yours,
ALAS, OPLAS & CO., CPAs
By:
MARYCRIS S. OPLAS
Managing Partner
=============================================================================
APPROVED AND ACCEPTED BY:
NAME OF THE COMPANY
By:
______________________________________
Printed Name over Signature / Designation
END OF MODULE
__________________________
Date
Auditing and Assurance Principles
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35
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Philippine Standards on Auditing;
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-200-Revisedand-Redrafted.pdf; September 1, 2018
2. Should the client be accepted?(Auditing);
http://archives.cpajournal.com/old/13856825.htm; September 1, 2018
3. Philippine Framework for Assurance Engagements;
https://www.aasc.org.ph/downloads/PSA/publications/PDFs/PhilippineFramework-for-Assurance-Engagements.pdf; September 1, 2018
Course Module
Auditing and Assurance Principles
Audit Planning
Module 005 Audit Planning
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Enumerate the key activities in audit planning
2. Discuss the audit planning activities
3. Familiarize with an audit plan
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1
LO 1
Key Activities in Planning an Audit
Involvement of Key Engagement Team Members
The engagement partner and other key members of the engagement team shall be
involved in planning the audit, including planning and participating in the discussion
among engagement team members.
Preliminary Engagement Activities
The auditor shall undertake the following activities at the beginning of the current audit
engagement:
(a) Performing procedures required by PSA 220, “Quality Control for Audits of Historical
Financial Information” regarding the continuance of the client relationship and the
specific audit engagement;
(b) Evaluating compliance with ethical requirements, including independence, as
required by PSA 220; and
(c) Establishing an understanding of the terms of the engagement, as required by PSA
210, “Terms of Audit Engagements.”
Planning Activities
The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:
(a) Identify the characteristics of the engagement that define its scope;
(b) Ascertain the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required;
(c) Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts;
(d) Consider the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant; and
(e) Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
Auditing and Assurance Principles
Audit Planning
3
The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures, as determined
under PSA 315, “Identifying and Assessing the Risks of Material Misstatement
Through Understanding the Entity and Its Environment.”
(b) The nature, timing and extent of planned further audit procedures at the assertion
level, as determined under PSA 330, “The Auditor’s Responses to Assessed Risks.”
(c) Other planned audit procedures that are required to be carried out so that the
engagement complies with PSAs.
The auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit.
The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work.
Documentation
The auditor shall document:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.
Additional Considerations in Initial Audit Engagements
The auditor shall undertake the following activities prior to starting an initial audit:
(a) Performing procedures required by PSA 220 (Quality Control) regarding the
acceptance of the client relationship and the specific audit engagement; and
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(b) Communicating with the predecessor auditor, where there has been a change of
auditors, in compliance with relevant ethical requirements.
LO 2
Audit Planning Activities
1. Obtain an understanding of the client and its environment
2. Establish materiality and assessing the risk
3. Identify related parties
4. Perform preliminary analytical procedures
5. Determine the need for experts
6. Develop an overall audit strategy and detailed audit plan
7. Prepare preliminary audit plan

Obtain an understanding of the client and its environment
The Entity and Its Environment
The auditor shall obtain an understanding of the following:
(a) Relevant industry, regulatory, and other external factors including the
applicable financial reporting framework.
(b) The nature of the entity, including:
(i)
Its operations;
(ii)
Its ownership and governance structures;
(iii)
The types of investments that the entity is making and plans
to make; and
(iv)
The way that the entity is structured and how it is financed,
to enable the auditor to understand the classes of
transactions, account balances, and disclosures to be
expected in the financial statements.
(c) The entity’s selection and application of accounting policies, including
the reasons for changes thereto.
The auditor shall evaluate whether the entity’s accounting policies are
appropriate for its business and consistent with the applicable financial
Auditing and Assurance Principles
Audit Planning
5
reporting framework and accounting policies used in the relevant
industry.
(d) The entity’s objectives and strategies, and those related business risks
that may result in risks of material misstatement.
(e) The measurement and review of the entity’s financial performance.
Relevant industry, regulatory, and other external factors including the
applicable financial reporting framework.
Industry Factors
Relevant industry factors include industry conditions such as
the:
 competitive environment,
 supplier
 customer relationships, and
 technological developments.
Examples of matters the auditor may consider
include:
o The
market
and
competition,
including
demand, capacity, and price competition.
o Cyclical or seasonal activity.
o Product technology relating to the entity’s
products.
o Energy supply and cost.
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The industry in which the entity operates may give rise to
specific risks of material misstatement arising from the
nature of the business or the degree of regulation.
For example,
 long-term
contracts
may
involve
significant estimates of revenues and
expenses that give rise to risks of
material misstatement. In such cases, it
is important that the engagement team
include
members
with
sufficient
relevant knowledge and experience, as
required by PSA 220, “Quality Control
for
Audits
of
Historical
Financial
Information.”
Regulatory Factors
Relevant
regulatory
factors
include
the
regulatory
environment.
The regulatory environment encompasses, among other
matters,

the applicable financial reporting framework and

the legal and political environment.
Examples of matters the auditor may consider
include:
 Accounting principles and industry
specific practices.
 Regulatory framework for a regulated
industry.
Auditing and Assurance Principles
Audit Planning
7
 Legislation
and
significantly
regulation
affect
the
that
entity’s
operations, including direct supervisory
activities.
 Taxation (corporate and other).
 Government policies currently affecting
the conduct
of the entity’s business,
such as monetary, including foreign
exchange
controls,
fiscal,
financial
incentives (for example, government aid
programs),
and
tariffs
or
trade
restrictions policies.
 Environmental requirements affecting
the industry and the entity’s business.
Other External Factors
Examples of other external factors affecting the entity that
the auditor may consider include the:
 general economic conditions,
 interest rates,
 availability of financing,
 inflation,
 currency revaluation.
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The nature of the entity,
Business operations – such as:
o Nature of revenue sources, products or services, and
markets, including involvement in electronic commerce such
as Internet sales and marketing activities.
o Conduct of operations (for example, stages and methods of
production, or activities exposed to environmental risks).
o Alliances, joint ventures, and outsourcing activities.
o Geographic dispersion and industry segmentation.
o Location of production facilities, warehouses, and offices, and
location and quantities of inventories.
o Key customers and important suppliers of goods and
services, employment arrangements (including the existence
of union contracts, pension and other post-employment
benefits, stock option or incentive bonus arrangements, and
government regulation related to employment matters).
o Research and development activities and expenditures.
o Transactions with related parties.
Investments and investment activities – such as:
o Planned or recently executed acquisitions or divestitures.
o Investments and dispositions of securities and loans.
o Capital investment activities.
o Investments
in
non-consolidated
entities,
including
partnerships, joint ventures and special-purpose entities.
Financing and financing activities – such as:
o Major
subsidiaries
and
associated
entities,
including
consolidated and nonconsolidated structures.
o Debt structure and related terms, including off-balance-sheet
financing arrangements and leasing arrangements.
Auditing and Assurance Principles
Audit Planning
9
o Beneficial owners (local, foreign, business reputation and
experience) and related parties.
o Use of derivative financial instruments.
Financial reporting – such as:
o Accounting principles and industry specific practices,
including industryspecific significant categories
for example,
 loans and investments for banks, or research
and development for pharmaceuticals.
o Revenue recognition practices.
o Accounting for fair values.
o Foreign currency assets, liabilities and transactions.
o Accounting for unusual or complex transactions including
those in controversial or emerging areas (for example,
accounting for stock-based compensation).
An understanding of the nature of an entity enables the auditor to
understand such matters as:
o Whether the entity has a complex structure, for example with
subsidiaries or other components in multiple locations.
Complex structures often introduce issues that may give rise to
risks of material misstatement. Such issues may include whether
goodwill, joint ventures, investments, or special-purpose entities
are accounted for appropriately.
o The ownership, and relations between owners and other people
or entities. This understanding assists in determining whether
Course Module
related party transactions have been identified and accounted
for appropriately. PSA 550, “Related Parties,” establishes
requirements
and
provides
guidance
on
the
auditor’s
considerations relevant to related parties.
The entity’s selection and application of accounting policies, including the
reasons for changes thereto.
The auditor shall evaluate whether the entity’s accounting policies
are appropriate for its business and consistent with the applicable
financial reporting framework and accounting policies used in the
relevant industry.
The Entity’s Selection and Application of Accounting Policies
An understanding of the entity’s selection and application of
accounting policies may encompass such matters as:

The methods the entity uses to account for significant and
unusual transactions.

The
effect
of
significant
accounting
policies
in
controversial or emerging areas for which there is a lack
of authoritative guidance or consensus.

Changes in the entity’s accounting policies.

Financial reporting standards and laws and regulations
that are new to the entity and when and how the entity
will adopt such requirements.
Auditing and Assurance Principles
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11
The entity’s objectives and strategies, and those related business risks that
may result in risks of material misstatement.
The entity conducts its business in the context of industry,
regulatory and other internal and external factors.
To respond to these factors, the entity’s management or those
charged with governance define objectives, which are the overall
plans for the entity.
Strategies are the approaches by which management intends to
achieve its objectives. The entity’s objectives and strategies may
change over time.
Business risk is broader than the risk of material misstatement of
the financial statements, though it includes the latter. Business risk
may arise from change or complexity. A failure to recognize the need
for change may also give rise to business risk. Business risk may
arise, for example, from:

The development of new products or services that may fail;

A market which, even if successfully developed, is inadequate
to support a product or service; or

Flaws in a product or service that may result in liabilities and
reputational risk.
An understanding of the business risks facing the entity increases
the likelihood of identifying risks of material misstatement, since
most business risks will eventually have financial consequences and,
therefore, an effect on the financial statements.
However, the auditor does not have a responsibility to identify or
assess all business risks because not all business risks give rise to
risks of material misstatement.
Course Module
Examples of matters that the auditor may consider when obtaining
an understanding of the entity’s objectives, strategies and related
business risks that may result in a risk of material misstatement of
the financial statements include:

Industry developments
-
a potential related business risk might be,
for example,
 that the entity does not have the personnel or
expertise to deal with the changes in the
industry.

New products and services
-
a potential related business risk might be,
for example,
 that there is increased product liability).

Expansion of the business
-
a potential related business risk might be,
for example,
 that the demand has not been accurately
estimated).

New accounting requirements
-
a potential related business risk might be,
for example,
 incomplete or improper implementation, or
increased costs.

Regulatory requirements
-
a potential related business risk might be,
for example,
 that there is increased legal exposure.

Current and prospective financing requirements
-
a potential related business risk might be,
for example,
Auditing and Assurance Principles
Audit Planning
13
 the loss of financing due to the entity’s inability
to meet requirements).

Use of IT
-
a potential related business risk might be,
for example,
 that systems and processes are incompatible).

The effects of implementing a strategy, particularly any
effects that will lead to new accounting requirements
-
a potential related business risk might be,
for example,
 incomplete or improper implementation.
A business risk may have an immediate consequence for the risk of
material misstatement for classes of transactions, account balances,
and disclosures at the assertion level or the financial statement
level.
For example,
 the business risk arising from a contracting
customer base may increase the risk of
material misstatement associated with the
valuation of receivables.
However, the same risk, particularly in
combination with a contracting economy, may
also have a longer-term consequence, which
the auditor considers when assessing the
appropriateness
of
the
going
concern
assumption.
Whether a business risk may result in a risk of
material misstatement is, therefore, considered
in light of the entity’s circumstances.
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(f) The measurement and review of the entity’s financial performance.
Management and others will measure and review those things they
regard as important.
Performance measures, whether external or internal, create
pressures on the entity. These pressures, in turn, may motivate
management to take action to improve the business performance or
to misstate the financial statements.
Accordingly, an understanding of the entity’s performance measures
assists the auditor in considering whether pressures to achieve
performance targets may result in management actions that
increase the risks of material misstatement, including those due to
fraud.
Examples of internally-generated information used by management
for measuring and reviewing financial performance, and which the
auditor may consider, include:

Key performance indicators (financial and non-financial) and
key ratios, trends and operating statistics.

Period-on-period financial performance analyses.

Budgets, forecasts, variance analyses, segment information
and divisional, departmental or other level performance
reports.

Employee
performance
measures
and
incentive
compensation policies.

Comparisons of an entity’s performance with that of
competitors.
Auditing and Assurance Principles
Audit Planning

15
Establish materiality and assessing the risk
Risk Assessment Procedures and Related Activities
The auditor shall perform risk assessment procedures to provide a basis
for the identification and assessment of risks of material misstatement at
the financial statement and assertion levels.
Risk assessment procedures by themselves, however, do not provide
sufficient appropriate audit evidence on which to base the audit opinion.
The risk assessment procedures shall include the following:
(a) Inquiries of management, and of 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.
(b) Analytical procedures.
(c) Observation and inspection.
The auditor shall consider whether information obtained from the auditor’s
client acceptance or continuance process is relevant to identifying risks of
material misstatement.
Where the engagement partner has performed other engagements for the
entity, the engagement partner shall consider whether information
obtained is relevant to identifying risks of material misstatement.
When the auditor intends to use information obtained from the auditor’s
previous experience with the entity and from audit procedures performed
in previous audits, the auditor shall determine whether changes have
occurred since the previous audit that may affect its relevance to the
current audit.
Course Module
The engagement partner and other key engagement team members shall
discuss the susceptibility of the entity’s financial statements to material
misstatement, and the application of the applicable financial reporting
framework to the entity’s facts and circumstances. The engagement partner
shall determine which mattersare to be communicated to engagement team
members not involved in the discussion.
Identifying and Assessing the Risks of Material Misstatement
The auditor shall identify and assess the risks of material misstatement at:
(a) The financial statement level; and
(b) The assertion level for classes of transactions, account balances,
and disclosures,
to provide a basis for designing and performing further audit
procedures.
For this purpose, the auditor shall:
(a) Identify 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;
(b) Assess the identified risks, and evaluate whether they relate
more pervasively to the financial statements as a whole and
potentially affect many assertions;
(c) Relate the identified risks to what can go wrong at the assertion
level, taking account of relevant controls that the auditor intends
to test; and
(d) Consider the likelihood of misstatement, including the possibility
of
multiple
misstatements,
and
whether
the
potential
misstatement is of a magnitude that could result in a material
misstatement.
Auditing and Assurance Principles
Audit Planning
17
Assessment of Risks of Material Misstatement at the Financial Statement
Level
Risks of material misstatement at the financial statement level refer
to risks that relate pervasively to the financial statements as a whole
and potentially affect many assertions.
Risks of this nature are not necessarily risks identifiable with
specific assertions at the class of transactions, account balance, or
disclosure level. Rather, they represent circumstances that may
increase the risks of material misstatement at the assertion level,
for example,
 through management override of internal
control.
Financial statement level risks may be especially relevant to the
auditor’s consideration of the risks of material misstatement arising
from fraud.
Risks at the financial statement level may derive in particular from a
weak control environment (although these risks may also relate to
other factors, such as declining economic conditions).
For example,
 weaknesses such as management’s lack of
competence may have a more pervasive effect
on the financial statements and may require an
overall response by the auditor.
The auditor’s understanding of internal control may raise doubts
about the auditability of an entity’s financial statements.
For example:
Course Module
 Concerns about the integrity of the entity’s
management may be so serious as to cause the
auditor
to
conclude
that
the
risk
of
management misrepresentation in the financial
statements is such that an audit cannot be
conducted.
 Concerns about the condition and reliability of
an entity’s records may cause the auditor to
conclude that it is unlikely that sufficient
appropriate audit evidence will be available to
support an unqualified opinion on the financial
statements.
Assessment of Risks of Material Misstatement at the Assertion Level
Risks of material misstatement at the assertion level for classes of
transactions, account balances, and disclosures need to be
considered
because
such
consideration
directly
assists
in
determining the nature, timing, and extent of further audit
procedures at the assertion level necessary to obtain sufficient
appropriate audit evidence.
In identifying and assessing risks of material misstatement at the
assertion level, the auditor may conclude that the identified risks
relate more pervasively to the financial statements as a whole and
potentially affect many assertions.
The Use of Assertions
In representing that the financial statements are in
accordance
with
the
applicable
financial
reporting
framework, management implicitly or explicitly makes
assertions
regarding
the
recognition,
measurement,
presentation and disclosure of the various elements of
financial statements and related disclosures.
Auditing and Assurance Principles
Audit Planning
19
Assertions used by the auditor to consider the different types
of potential misstatements that may occur fall into the
following three categories and may take the following forms:
(a) Assertions about classes of transactions and events for
the period under audit
(b) Assertions about account balances at the period end:
(c) Assertions about presentation and disclosure:
Assertions about classes of transactions and events for the
period under audit
(i)
Occurrence
— transactions and events that have been
recorded have occurred and pertain to the
entity.
(ii)
Completeness
— all transactions and events that should have
been recorded have been recorded.
(iii)
Accuracy
— amounts and other
data
relating to
recorded transactions and events have
been recorded appropriately.
(iv)
Cutoff
— transactions
and
events
have
been
recorded in the correct accounting period.
(v)
Classification
— transactions
and
events
have
recorded in the proper accounts.
Assertions about account balances at the period end
Course Module
been
(i)
Existence
— assets, liabilities, and equity interests exist.
(ii)
Rights and obligations
— the entity holds or controls the rights to
assets, and liabilities are the obligations of
the entity.
(iii)
Completeness
— all assets, liabilities and equity interests
that should have been recorded have been
recorded.
(iv)
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.
Assertions about presentation and disclosure
(i)
Occurrence and rights and obligations
— disclosed events, transactions, and other
matters have occurred and pertain to the
entity.
(ii)
Completeness
— all disclosures that should have been
included in the financial statements have
been included.
(iii)
Classification and understandability
— financial
information
is
appropriately
presented and described, and disclosures
are clearly expressed.
(iv)
Accuracy and valuation
— financial
disclosed
amounts.
and
fairly
other
and
information
at
are
appropriate
Auditing and Assurance Principles
Audit Planning
21
Risks that Require Special Audit Consideration
As part of the risk assessment, the auditor shall determine whether any of
the risks identified are, in the auditor’s judgment, a significant risk.
In exercising this judgment, the auditor shall exclude the effects of
identified controls related to the risk.
(a) Whether the risk is a risk of fraud;
(b) Whether the risk is related to recent significant economic,
accounting or other developments and, therefore, requires
specific attention;
(c) The complexity of transactions;
(d) Whether the risk involves significant transactions with related
parties;
(e) The degree of subjectivity in the measurement of financial
information related to the risk, especially those measurements
involving a wide range of measurement uncertainty; and
(f) Whether the risk involves significant transactions that are
outside the normal course of business for the entity, or that
otherwise appear to be unusual.
When the auditor has determined that a significant risk exists, the auditor
shall obtain an understanding of the entity’s controls, including control
activities, relevant to that risk.
Course Module
Audit Risk
-
the risk that the auditor expresses an inappropriate opinion when the financial
statements are materially misstated
(a) The risk that the subject matter information is materially misstated,
which in turn consists of:
(i)
Inherent risk
-
the susceptibility of the subject matter information to a
material misstatement, assuming that there are no related
controls; and
(ii)
Control risk
-
the risk that a material misstatement that could occur will
not be prevented, or detected and corrected, on a timely
basis by related internal controls. When control risk is
relevant to the subject matter, some control risk will always
exist because of the inherent limitations of the design and
operation of internal control
(b) Detection risk
-
the risk that the practitioner will not detect a material
misstatement that exists.

Identify related parties
Many related party transactions are in the normal course of business. In such
circumstances, they may carry no higher risk of material misstatement of the
financial statements than similar transactions with unrelated parties.
However, the nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the financial
statements than transactions with unrelated parties.
For example:
 Related parties may operate through an extensive and
complex range of relationships and structures, with a
Auditing and Assurance Principles
Audit Planning
23
corresponding increase in the complexity of related party
transactions.
 Information systems may be ineffective at identifying or
summarizing transactions and outstanding balances between
an entity and its related parties.
 Related party transactions may not be conducted under
normal market terms and conditions; for example, some
related party transactions may be conducted with no
exchange of consideration.
The auditor shall inquire of management regarding:
(a) The identity of the entity’s related parties, including changes from the prior
period;
(b) The nature of the relationships between the entity and these related parties;
and
(c) Whether the entity entered into any transactions with these related parties
during the period and, if so, the type and purpose of the transactions.
The auditor shall inquire of management and others within the entity, and
perform other risk assessment procedures considered appropriate, to obtain an
understanding of the controls, if any, that management has established to:
(a) Identify, account for, and disclose related party relationships and transactions
in accordance with the applicable financial reporting framework;
(b) Authorize and approve significant transactions and arrangements with related
parties; and
(c) Authorize and approve significant transactions and arrangements outside the
normal course of business.

Perform preliminary analytical procedures
Course Module
Analytical procedures are evaluations of financial information through analysis of
plausible relationships among both financial and non-financial data.
Analytical procedures also encompass such investigation as is necessary of
identified fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount.

Determine the need for experts
If expertise in a field other than accounting or auditing is necessary to obtain
sufficient appropriate audit evidence, the auditor shall determine whether to use
the work of an auditor’s expert.
Expertise in a field other than accounting or auditing may include expertise in
relation to such matters as:

The valuation of complex financial instruments, land and buildings,
plant and machinery, jewelry, works of art, antiques, intangible assets,
assets acquired and liabilities assumed in business combinations and
assets that may have been impaired.

The actuarial calculation of liabilities associated with insurance
contracts or employee benefit plans.

The estimation of oil and gas reserves.

The valuation of environmental liabilities, and site clean-up costs.

The interpretation of contracts, laws and regulations.

The analysis of complex or unusual tax compliance issues.
Determining the Need for an Auditor’s Expert
An auditor’s expert may be needed to assist the auditor in one or more of
the following:

Obtaining an understanding of the entity and its environment, including
its internal control.

Identifying and assessing the risks of material misstatement.

Determining and implementing overall responses to assessed risks at
the financial statement level.
Auditing and Assurance Principles
Audit Planning

25
Designing and performing further audit procedures to respond to
assessed risks at the assertion level, comprising tests of controls or
substantive procedures.

Evaluating the sufficiency and appropriateness of audit evidence
obtained in forming an opinion on the financial statements.
Nature, Timing and Extent of Audit Procedures
The nature, timing and extent of the auditor’s procedures will vary
depending on the circumstances. In determining the nature, timing and
extent of those procedures, the auditor shall consider matters including:
(a) The nature of the matter to which that expert’s work relates;
(b) The risks of material misstatement in the matter to which that expert’s
work relates;
(c) The significance of that expert’s work in the context of the audit;
(d) The auditor’s knowledge of and experience with previous work
performed by that expert; and
(e) Whether that expert is subject to the auditor’s firm’s quality control
policies and procedures.
Evaluating the Adequacy of the Auditor’s Expert’s Work
The auditor shall evaluate the adequacy of the auditor’s expert’s work for
the auditor’s purposes, including:
(a) The relevance and reasonableness of that expert’s findings or
conclusions, and their consistency with other audit evidence;
(b) If that expert’s work involves use of significant assumptions and
methods, the relevance and reasonableness of those assumptions and
methods in the circumstances; and
Course Module
(c) If that expert’s work involves the use of source data that is significant to
that expert’s work, the relevance, completeness, and accuracy of that
source data.
If the auditor determines that the work of the auditor’s expert is not adequate for
the auditor’s purposes, the auditor shall:
(a) Agree with that expert on the nature and extent of further work to be
performed by that expert; or
(b) Perform further audit procedures appropriate to the circumstances.

Develop an overall audit strategy and detailed audit plan
The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment procedures,
such matters as:

The resources to deploy for specific audit areas,
 such as the use of appropriately experienced team members for high
risk areas or the involvement of experts on complex matters.

The amount of resources to allocate to specific audit areas,
 such as the number of team members assigned to observe the
inventory count at material locations, the extent of review of other
auditors’ work in the case of group audits, or the audit budget in
hours to allocate to high risk areas;

When these resources are to be deployed,
 such as whether at an interim audit stage or at key cut-off dates; and

How such resources are managed, directed and supervised,
 such as when team briefing and debriefing meetings are expected to
be held, how engagement partner and manager reviews are
expected to take place (for example, on-site or off-site), and whether
to complete engagement quality control reviews.
Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit strategy,
Auditing and Assurance Principles
Audit Planning
27
taking into account the need to achieve the audit objectives through the efficient
use of the auditor’s resources.
The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter-related since
changes in one may result in consequential changes to the other.

Prepare preliminary audit plan
The audit plan is more detailed than the overall audit strategy in that it includes
the
 nature,
 timing and
 extent of audit procedures to be performed by engagement team members.
Planning for these audit procedures takes place over the course of the audit as the
audit plan for the engagement develops.
For example,
o planning of the auditor's risk assessment procedures occurs
early in the audit process.
o planning the nature, timing and extent of specific further
audit procedures depends on the outcome of those risk
assessment procedures.
In addition, the auditor may begin the execution of further
audit procedures for some classes of transactions, account
balances and disclosures before planning all remaining
further audit procedures.
LO 2
Sample Audit Plan
(excerpted from https://www.highland.gov.uk/.../item_4_-_annual_audit_plan_201617_external_audit...)
Please refer to:
Course Module


Week006-Module_Sample Audit Plan
Week006-Module_Sample Audit Plan with Audit Strategy
END OF MODULE
Auditing and Assurance Principles
Audit Planning
29
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Philippine Standards on Auditing 300
(Redrafted);http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-300Redrafted.pdf; September 1, 2018
2. Philippine Standard on Auditing 315 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-315Redrafted.pdf; September 1, 2018
3. Philippine Standard on Auditing 550 (Revised and Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/psa-550-revisedredrafted.php; September 1, 2018
4. Philippine Standard on Auditing 620 (Revised and Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/psa-620-revisedredrafted.php; September 1, 2018
Course Module
Auditing and Assurance Principles
Evaluation of Internal Control
1
Module 006
Evaluation of Internal Control
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Discuss the overview of evaluation of internal control
2. Explain the internal control evaluation process
Course Module
LO 1
Overview of Evaluation of Internal Control
The auditor shall obtain an understanding of internal control relevant to the audit. Although
most controls relevant to the audit are likely to relate to financial reporting, not all controls that
relate to financial reporting are relevant to the audit. It is a matter of the auditor’s professional
judgment whether a control, individually or in combination with others, is relevant to the audit.
Nature and Extent of the Understanding of Relevant Controls
When obtaining an understanding of controls that are relevant to the audit, the auditor
shall evaluate the design of those controls and determine whether they have been
implemented, by performing procedures in addition to inquiry of the entity’s personnel.
An understanding of internal control assists the auditor in identifying types of potential
misstatements and factors that affect the risks of material misstatement, and in designing
the nature, timing, and extent of further audit procedures.
The following application material on internal control is presented in four sections, as
follows:

General Nature and Characteristics of Internal Control.

Controls Relevant to the Audit.

Nature and Extent of the Understanding of Relevant Controls.

Components of Internal Control.
Auditing and Assurance Principles
Evaluation of Internal Control
LO 2
3
Internal Control Evaluation Process
General Nature and Characteristics of Internal Control
Purpose of Internal Control
Internal control is designed, implemented and maintained to address identified
business risks that threaten the achievement of any of the entity’s objectives that
concern:

The reliability of the entity’s financial reporting;

The effectiveness and efficiency of its operations; and

Its compliance with applicable laws and regulations.
The way in which internal control is designed, implemented and maintained varies
with an entity’s size and complexity.
Limitations of Internal Control
Internal control, no matter how effective, can provide an entity with only
reasonable assurance about achieving the entity’s financial reporting objectives.
The likelihood of their achievement is affected by limitations inherent to internal
control. These include the realities that human judgment in decision-making can
be faulty and that breakdowns in internal control can occur because of human
error.
For example, there may be an error in the design of, or in the change to, a
control. Equally, the operation of a control may not be effective, such as
where information produced for the purposes of internal control (for
example, an exception report) is not effectively used because the individual
responsible for reviewing the information does not understand its purpose
or fails to take appropriate action.
Course Module
Additionally, controls can be circumvented by the collusion of two or more people
or inappropriate management override of internal control.
For example, management may enter into side agreements with customers
that alter the terms and conditions of the entity’s standard sales contracts,
which may result in improper revenue recognition. Also, edit checks in a
software program that are designed to identify and report transactions that
exceed specified credit limits may be overridden or disabled.
Further, in designing and implementing controls, management may make
judgments on the nature and extent of the controls it chooses to implement, and
the nature and extent of the risks it chooses to assume.
Division of Internal Control into Components
The division of internal control into the following five components, for purposes of
the PSAs, provides a useful framework for auditors to consider how different
aspects of an entity’s internal control may affect the audit:
(a) The control environment;
(b) The entity’s risk assessment process;
(c) The information system, including the related business processes, relevant to
financial reporting, and communication;
(d) Control activities; and
(e) Monitoring of controls.
The division does not necessarily reflect how an entity designs, implements and
maintains internal control, or how it may classify any particular component.
Auditors may use different terminology or frameworks to describe the various
aspects of internal control, and their effect on the audit than those used in this
PSA, provided all the components described in this PSA are addressed.
Auditing and Assurance Principles
Evaluation of Internal Control
5
Characteristics of Manual and Automated Elements of Internal Control Relevant to the
Auditor’s Risk Assessment
An entity’s system of internal control contains manual elements and often contains
automated elements. The characteristics of manual or automated elements are
relevant to the auditor’s risk assessment and further audit procedures based
thereon.
The use of manual or automated elements in internal control also affects the
manner in which transactions are initiated, recorded, processed, and reported:

Controls in a manual system may include such procedures as approvals and
reviews of transactions, and reconciliations and follow-up of reconciling
items. Alternatively, an entity may use automated procedures to initiate,
record, process, and report transactions, in which case records in electronic
format replace paper documents.

Controls in IT systems consist of a combination of automated controls (for
example, controls embedded in computer programs) and manual controls.

Further, manual controls may be independent of IT, may use information
produced by IT, or may be limited to monitoring the effective functioning of
IT and of automated controls, and to handling exceptions. When IT is used
to initiate, record, process or report transactions, or other financial data for
inclusion in financial statements, the systems and programs may include
controls related to the corresponding assertions for material accounts or
may be critical to the effective functioning of manual controls that depend
on IT.
An entity’s mix of manual and automated elements in internal control varies with
the nature and complexity of the entity’s use of IT.
Automated Elements
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Generally, IT benefits an entity’s internal control by enabling an entity to:

Consistently apply predefined business rules and perform complex
calculations in processing large volumes of transactions or data;

Enhance the timeliness, availability, and accuracy of information;

Facilitate the additional analysis of information;

Enhance the ability to monitor the performance of the entity’s activities and
its policies and procedures;

Reduce the risk that controls will be circumvented; and

Enhance the ability to achieve effective segregation of duties by
implementing security controls in applications, databases, and operating
systems.
IT also poses specific risks to an entity’s internal control, including, for example:

Reliance on systems or programs that are inaccurately processing data,
processing inaccurate data, or both.

Unauthorized access to data that may result in destruction of data or
improper changes to data, including the recording of unauthorized or nonexistent transactions, or inaccurate recording of transactions. Particular
risks may arise where multiple users access a common database.

The possibility of IT personnel gaining access privileges beyond those
necessary to perform their assigned duties thereby breaking down
segregation of duties.

Unauthorized changes to data in master files.

Unauthorized changes to systems or programs.

Failure to make necessary changes to systems or programs.

Inappropriate manual intervention.

Potential loss of data or inability to access data as required.
Manual Elements
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Evaluation of Internal Control
7
Manual elements in internal control may be more suitable where judgment and
discretion are required such as for the following circumstances:

Large, unusual or non-recurring transactions.

Circumstances where errors are difficult to define, anticipate or predict.

In changing circumstances that require a control response outside the
scope of an existing automated control.

In monitoring the effectiveness of automated controls.
Manual elements in internal control may be less reliable than automated elements
because they can be more easily bypassed, ignored, or overridden and they are
also more prone to simple errors and mistakes. Consistency of application of a
manual control element cannot therefore be assumed.
Manual control elements may be less suitable for the following circumstances:

High volume or recurring transactions, or in situations where errors that
can be anticipated or predicted can be prevented, or detected and
corrected, by control parameters that are automated.

Control activities where the specific ways to perform the control can be
adequately designed and automated.
The extent and nature of the risks to internal control vary depending on the nature
and characteristics of the entity’s information system. The entity responds to the
risks arising from the use of IT or from use of manual elements in internal control
by establishing effective controls in light of the characteristics of the entity’s
information system.
Controls Relevant to the Audit
There is a direct relationship between an entity’s objectives and the controls it
implements to provide reasonable assurance about their achievement. The entity’s
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objectives, and therefore controls, relate to financial reporting, operations and
compliance; however, not all of these objectives and controls are relevant to the auditor’s
risk assessment.
Factors relevant to the auditor’s judgment about whether a control, individually or in
combination with others, is relevant to the audit may include such matters as the
following:

Materiality.

The significance of the related risk.

The size of the entity.

The nature of the entity’s business, including its organization and ownership
characteristics.

The diversity and complexity of the entity’s operations.

Applicable legal and regulatory requirements.

The circumstances and the applicable component of internal control.

The nature and complexity of the systems that are part of the entity’s internal
control, including the use of service organizations.

Whether, and how, a specific control, individually or in combination withothers,
prevents, or detects and corrects, material misstatement.
Controls over the completeness and accuracy of information produced by the entity may
be relevant to the audit if the auditor intends to make use of the information in designing
and performing further procedures.
Controls relating to operations and compliance objectives may also be relevant to an
audit if they relate to data the auditor evaluates or uses in applying audit procedures.
Internal control over safeguarding of assets against unauthorized acquisition, use, or
disposition may include controls relating to both financial reporting and operations
objectives. The auditor’s consideration of such controls is generally limited to those
relevant to the reliability of financial reporting.
Auditing and Assurance Principles
Evaluation of Internal Control
9
An entity generally has controls relating to objectives that are not relevant to an audit
and therefore need not be considered.
For example,
 an entity may rely on a sophisticated system of automated controls
to provide efficient and effective operations (such as an airline’s
system of automated controls to maintain flight schedules), but
these controls ordinarily would not be relevant to the audit. Further,
although internal control applies to the entire entity or to any of its
operating units or business processes, an understanding of internal
control relating to each of the entity’s operating units and business
processes may not be relevant to the audit.
Nature and Extent of the Understanding of Relevant Controls
Evaluating the design of a control involves considering whether the control, individually
or in combination with other controls, is capable of effectively preventing, or detecting
and correcting, material misstatements.
Implementation of a control means that the control exists and that the entity is using it.
There is little point in assessing the implementation of a control that is not effective, and
so the design of a control is considered first. An improperly designed control may
represent a material weakness in the entity’s internal control.
Risk assessment procedures to obtain audit evidence about the design and
implementation of relevant controls may include:

Inquiring of entity personnel.

Observing the application of specific controls.
 Inspecting documents and reports.
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
Tracing transactions through the information system relevant to financial
reporting.
Components of Internal Control
I.

Control Environment

Entity’s Risk Assessment Process




The Information System, Including the Related
Business Processes, Relevant to Financial Reporting, and Communication
Control Activities
Monitoring of Controls
Control Environment
The auditor shall obtain an understanding of the control environment. As part of
obtaining this understanding, the auditor shall evaluate whether:
(a) Management, with the oversight of those charged with governance, has created
and maintained a culture of honesty and ethical behavior; and
(b) The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control, and
whether those other components are not undermined by control environment
weaknesses.
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.
The control environment sets the tone of an organization, influencing the control
consciousness of its people.
Elements of the control environment that may be relevant when obtaining an
understanding of the control environment include the following:
Auditing and Assurance Principles
Evaluation of Internal Control
11
(a) Communication and enforcement of integrity and ethical values
-
These are essential elements that influence the effectiveness of the design,
administration and monitoring of controls.
(b) Commitment to competence
-
Matters such as management’s consideration of the competence levels for
particular jobs and how those levels translate into requisite skills and
knowledge.
(c) Participation by those charged with governance
-
Attributes of those charged with governance such as:

Their independence from management.

Their experience and stature.

The extent of their involvement and the information they
receive, and the scrutiny of activities.

The appropriateness of their actions, including the degree to
which difficult questions are raised and pursued with
management, and their interaction with internal and external
auditors.
(d) Management’s philosophy and operating style
-
Characteristics such as management’s:

Approach to taking and managing business risks.

Attitudes and actions toward financial reporting.

Attitudes toward information processing and accounting
functions and personnel.
(e) Organizational structure
-
The framework within which an entity’s activities for achieving its
objectives are planned, executed, controlled, and reviewed.
(f) Assignment of authority and responsibility
-
Matters such as how authority and responsibility for operating activities
are assigned and how reporting relationships and authorization hierarchies
are established.
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(g) Human resource policies and practices
-
Policies and practices that relate to, for example, recruitment, orientation,
training, evaluation, counseling, promotion, compensation, and remedial
actions.
Audit Evidence for Elements of the Control Environment
Relevant audit evidence may be obtained through a combination of
inquiries and other risk assessment procedures such as corroborating
inquiries through observation or inspection of documents.
For example,
 through inquiries of management and employees, the
auditor may obtain an understanding of how
management communicates to employees its views on
business practices and ethical behavior. The auditor
may then determine whether relevant controls have
been implemented by considering, for example,
whether management has a written code of conduct
and whether it acts in a manner that supports the
code.
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Evaluation of Internal Control
13
Effect of the Control Environment on the Assessment of the Risks of Material
Misstatement
1. Some elements of an entity’s control environment have a pervasive
effect on assessing the risks of material misstatement.
For example,
 an entity’s control consciousness is influenced significantly
by those charged with governance, because one of their roles
is to counterbalance pressures on management in relation to
financial reporting that may arise from market demands or
remuneration schemes. The effectiveness of the design of the
control environment in relation to participation by those
charged with governance is therefore influenced by such
matters as:
o Their independence from management and their
ability to evaluate the actions of management.
o Whether they understand the entity’s business
transactions.
o The extent to which they evaluate whether the
financial statements are prepared in accordance with
the applicable financial reporting framework.
2. An active and independent board of directors may influence the
philosophy and operating style of senior management.
However, other elements may be more limited in their effect.
For example,
 although human resource policies and practices directed
toward hiring competent financial, accounting, and IT
personnel may reduce the risk of errors in processing
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financial information, they may not mitigate a strong bias by
top management to overstate earnings.
3. The existence of a satisfactory control environment can be a positive
factor when the auditor assesses the risks of material misstatement.
However, although it may help reduce the risk of fraud, a satisfactory
control environment is not an absolute deterrent to fraud.
Conversely, weaknesses in the control environment may undermine the
effectiveness of controls, in particular in relation to fraud.
For example,
 management’s failure to commit sufficient resources to
address IT security risks may adversely affect internal
control by allowing improper changes to be made to
computer programs or to data, or unauthorized transactions
to be processed. As explained in PSA 330, the control
environment also influences the nature, timing, and extent of
the auditor’s further procedures.
4. The control environment in itself does not prevent, or detect and
correct, a material misstatement. It may, however, influence the
auditor’s evaluation of the effectiveness of other controls
for example,
 the monitoring of controls and the operation of specific
control activities
and thereby, the auditor’s assessment of the risks of material
misstatement.
Auditing and Assurance Principles
Evaluation of Internal Control
II.
15
Entity’s Risk Assessment Process
The entity’s risk assessment process forms the basis for how management
determines the risks to be managed. If that process is appropriate to the
circumstances, including the nature, size and complexity of the entity, it assiststhe
auditor in identifying risks of material misstatement. Whether the entity’s risk
assessment process is appropriate to the circumstances is a matter of judgment.
1. The auditor shall obtain an understanding of whether the entity has a process
for:
(a) Identifying business risks relevant to financial reporting objectives;
(b) Estimating the significance of the risks;
(c) Assessing the likelihood of their occurrence; and
(d) Deciding about actions to address those risks.
2. If the entity has established such a process, the auditor shall obtain an
understanding of it, and the results thereof.
Where the auditor identifies risks of material misstatement that management
failed to identify, the auditor shall evaluate whether there was an underlying
risk of a kind that the auditor expects would have been identified by the
entity’s risk assessment process.
If there is such a risk, the auditor shall obtain an understanding of why that
process failed to identify it,and evaluate whether the process is appropriate to
its circumstances or if there is a material weakness in the entity’s risk
assessment process.
3. If the entity has not established such a process or has an ad hoc process, the
auditor shall discuss with management whether business risks relevant to
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financial reporting objectives have been identified and how they have been
addressed.
The auditor shall evaluate whether the absence of a documented risk
assessment process is appropriate in the circumstances, or represents a
material weakness in the entity’s internal control.
The information system, including the related business processes, relevant to
financial reporting, and communication
4. The auditor shall obtain an understanding of the information system, including
the related business processes, relevant to financial reporting, including the
following areas:
(a) The classes of transactions in the entity’s operations that are significant to
the financial statements;
(b) The procedures, within both information technology (IT) and manual
systems, by which those transactions are initiated, recorded, processed,
corrected as necessary, transferred to the general ledger and reported in
the financial statements;
(c) The related accounting records, supporting information and specific
accounts in the financial statements that are used to initiate, record,
process and report transactions; this includes the correction of incorrect
information and how information is transferred to the general ledger. The
records may be in either manual or electronic form;
(d) How the information system captures events and conditions, other than
transactions, that are significant to the financial statements;
(e) The financial reporting process used to prepare the entity’s financial
statements, including significant accounting estimates and disclosures; and
(f) Controls surrounding journal entries, including non-standard journal
entries used to record non-recurring, unusual transactions or adjustments.
Auditing and Assurance Principles
Evaluation of Internal Control
17
5. The auditor shall obtain an understanding of how the entity communicates
financial reporting roles and responsibilities and significant matters relating to
financial reporting, including:
(a) Communications
between
management
and
those
charged
with
governance; and
(b) External communications, such as those with regulatory authorities.
III.
The Information System, Including the Related Business Processes, Relevant to
Financial Reporting, and Communication
Related Business Processes
An entity’s business processes are the activities designed to:

Develop, purchase, produce, sell and distribute an entity’s products
and services;

Ensure compliance with laws and regulations; and

Record information, including accounting and financial reporting
information. Business processes result in the transactions that are
recorded, processed and reported by the information system.
Obtaining an understanding of the entity’s business processes, which
include how transactions are originated, assists the auditor obtain an
understanding of the entity’s information system relevant to financial
reporting in a manner that is appropriate to the entity’s circumstances.
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Financial Reporting
The information system relevant to financial reporting objectives, which
includes the accounting system, consists of the procedures and records
designed and established to:

Initiate, record, process, and report entity transactions (as well as
events and conditions) and to maintain accountability for the related
assets, liabilities, and equity;

Resolve incorrect processing of transactions, for example, automated
suspense files and procedures followed to clear suspense items out on a
timely basis;

Process and account for system overrides or bypasses to controls;

Transfer information from transaction processing systems to the
general ledger;

Captureinformation relevant to financial reporting for events and
conditions other than transactions, such as the depreciation and
amortization of assets and changes in the recoverability of accounts
receivables; and

Ensure information required to be disclosed by the applicable financial
reporting framework is accumulated, recorded, processed, summarized
and appropriately reported in the financial statements.
Communication
Communication by the entity of the financial reporting roles and
responsibilities and of significant matters relating to financial reporting
involves providing anunderstanding of individual roles and responsibilities
pertaining to internal control over financial reporting.
It includes such matters as the extent to which personnel understand how
their activities in the financial reporting information system relate to the
work of others and the means of reporting exceptions to an appropriate
higher level within the entity.
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Evaluation of Internal Control
19
Communication may take such forms as policy manuals and financial
reporting manuals. Open communication channels help ensure that
exceptions are reported and acted on.
IV.
Control Activities
Control activities are the policies and procedures that help ensure that
management directives are carried out.
Control activities, whether within IT or manual systems, have various objectives
and are applied at various organizational and functional levels.
Examples of specific control activities include those relating to the following:

Authorization.

Performance reviews.

Information processing.

Physical controls.

Segregation of duties.
Control activities relevant to the audit
Control activities that are relevant to the audit are:

Those that are required to be treated as such, being control
activities that relate to significant risks and those that relate to risks
for which substantive procedures alone do not provide sufficient
appropriate audit evidence; or

Those that are considered to be relevant in the judgment of the
auditor.
The auditor shall obtain an understanding of control activities relevant to
the audit, being those the auditor judges it necessary to understand in
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order to assess the risks of material misstatement at the assertion level and
design further audit procedures responsive to assessed risks.
An audit does not require an understanding of all the control activities
related to each significant class of transactions, account balance, and
disclosure in the financial statements or to every assertion relevant to
them.
In understanding the entity’s control activities, the auditor shall obtain an
understanding of how the entity has responded to risks arising from IT.
V.
Monitoring of Controls
Monitoring of controls is a process to assess the effectiveness of internal control
performance over time. It involves assessing the effectiveness of controls on a
timely basis and taking necessary corrective actions.
Management accomplishes monitoring of controls through ongoing activities,
separate evaluations, or a combination of the two.
Ongoing monitoring activities are often built into the normal recurring activities of
an entity and include regular management and supervisory activities.
The auditor shall obtain an understanding of the major activities that the entity
uses to monitor internal control over financial reporting, including those related
to those control activities relevant to the audit, and how the entity initiates
corrective actions to its controls.
The auditor shall obtain an understanding of the sources of the information used
in the entity’s monitoring activities, and the basis upon which management
considers the information to be sufficiently reliable for the purpose.
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Evaluation of Internal Control
21
Material Weakness in Internal Control
The auditor shall evaluate whether, on the basis of the audit work performed, the
auditor has identified a material weakness in the design, implementation or
maintenance of internal control.
The auditor shall communicate material weaknesses in internal control identified
during the audit on a timely basis to management at an appropriate level of
responsibility, and, as required by PSA 260 (Revised), “Communication with Those
Charged with Governance,” with those charged with governance (unless all of
those charged with governance are involved in managing the entity).
END OF MODULE
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References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Philippine Standard on Auditing 315 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-315Redrafted.pdf; September 1, 2018
Auditing and Assurance Principles
Substantive Testing
1
Module 007 Substantive Testing
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Define audit evidence
2. Determine the sources of audit evidence
3. Determine the audit procedures for obtaining audit evidence
4. Identify the information to be used as audit evidence
5. Define what are analytical procedures
6. Explain the nature of analytical procedures
7. Determine substantive analytical procedures
8. Identify analytical procedures that assist when forming an overall
conclusion
9. Investigate results of analytical procedures
10. Determine the requirements of audit documentation
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LO 1
Audit Evidence
The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence.
Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in
nature and is primarily obtained from audit procedures performed during the course of the
audit.
It may, however, also include information obtained from other sources such as previous audits
(provided the auditor has determined whether changes have occurred since the previous audit
that may affect its relevance to the current audit) or a firm’s quality control procedures for
client acceptance and continuance.
In addition to other sources inside and outside the entity, the entity’s accounting records are an
important source of audit evidence. Also, information that may be used as audit evidence may
have been prepared using the work of a management’s expert.
Audit evidence comprises
 both information that supports and corroborates management’s assertions, and
 any information that contradicts such assertions.
In addition, in some cases the absence of information
for example,
 management’s refusal to provide a requested representation
is used by the auditor, and therefore, also constitutes audit evidence.
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating
audit evidence.
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Substantive Testing
3
As explained in PSA 200 (Revised and Redrafted), reasonable assurance is obtained when the
auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk
that the auditor expresses an inappropriate opinion when the financial statements are
materially misstated) to an acceptably low level.
The sufficiency and appropriateness of audit evidence are interrelated.

Sufficiency is the measure of the quantity of audit evidence.
The quantity of audit evidence needed is affected by the:
i.
auditor’s assessment of the risks of misstatement
(the higher the assessed risks, the more audit evidence is likely to be required) and
ii.
quality of such audit evidence
(the higher the quality, the less may be required).
Obtaining more audit evidence, however, may not compensate for its poor
quality.

Appropriateness is the measure of the quality of audit evidence; that is,
i.
its relevance and
ii.
its reliability in providing support for the conclusions on which the auditor’s
opinion is based.
The reliability of evidence is influenced by its source and by its nature, and is
dependent on the individual circumstances under which it is obtained.
PSA 330 (Redrafted) requires the auditor to conclude whether sufficient appropriate audit
evidence has been obtained. Whether sufficient appropriate audit evidence has been obtained
to reduce audit risk to an acceptably low level, and thereby enable the auditor to draw
reasonable conclusions on which to base the auditor’s opinion, is a matter of professional
judgment.
PSA 200 (Revised and Redrafted) contains discussion of such matters as the nature of audit
procedures, the timeliness of financial reporting, and the balance between benefit and cost,
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which are relevant factors when the auditor exercises professional judgment regarding
whether sufficient appropriate audit evidence has been obtained.
LO 2
Sources of Audit Evidence
Some audit evidence is obtained by performing audit procedures to test the accounting
records,
for example,
 through analysis and review,
 reperforming procedures followed in the financial reporting
process, and
 reconciling related types and applications of the same information.
Through the performance of such audit procedures, the auditor may determine that the
accounting records are internally consistent and agree to the financial statements.
More assurance is ordinarily obtained from consistent audit evidence obtained from
different sources or of a different nature than from items of audit evidence considered
individually.
For example,
 corroborating information obtained from a source independent of the
entity may increase the assurance the auditor obtains from audit evidence
that is generated internally, such as evidence existing within the
accounting
records,
minutes
of
meetings,
or
a
management
representation.
Information from sources independent of the entity that the auditor may use as audit
evidence may include

confirmations from third parties,

analysts’ reports, and

comparable data about competitors (benchmarking data).
Auditing and Assurance Principles
Substantive Testing
LO 3
5
Audit Procedures for Obtaining Audit Evidence
As required by, and explained further in, PSA 315 (Redrafted) and PSA 330 (Redrafted),
audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is
obtained by performing:
(a) Risk assessment procedures; and
(b) Further audit procedures, which comprise:
(i)
Tests of controls, when required by the PSAs or when the auditor has
chosen to do so; and
(ii)
Substantive procedures, including tests of details and substantive
analytical procedures.
The nature and timing of the audit procedures to be used may be affected by the fact
that some of the accounting data and other information may be available only in
electronic form or only at certain points or periods in time.
For example,
 source documents, such as purchase orders and invoices, may exist
only in electronic form when an entity uses electronic commerce,
or may be discarded after scanning when an entity uses image
processing systems to facilitate storage and reference.
Certain electronic information may not be retrievable after a specified period of time,
for example,
 if files are changed and if backup files do not exist. Accordingly, the
auditor may find it necessary as a result of an entity’s data
retention policies to request retention of some information for the
auditor’s review or to perform audit procedures at a time when the
information is available.
Audit procedures to obtain audit evidence can include
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 inspection,
 observation,
 confirmation,
 recalculation,
 reperformance and
 analytical procedures,
 inquiry.
Although inquiry may provide important audit evidence, and may even produce
evidence of a misstatement, inquiry alone ordinarily does not provide sufficient audit
evidence of the absence of a material misstatement at the assertion level, nor of the
operating effectiveness of controls.
The above mentioned audit procedures to obtain audit evidencemay be used as risk
assessment procedures, tests of controls or substantive procedures, depending on the context
in which they are applied by the auditor.
i.
Inspection
Inspection involves examining records or documents, whether internal or
external, in paper form, electronic form, or other media, or a physical
examination of an asset.
Inspection of records and documents provides audit evidence of varying degrees
of reliability, depending on their nature and source and, in the case of internal
records and documents, on the effectiveness of the controls over their
production.
An example of inspection used as a test of controls is inspection of records
for evidence of authorization.
Some documents represent direct audit evidence of the existence of an asset,
for example,
 a document constituting a financial instrument such as a
stock or bond. Inspection of such documents may not
Auditing and Assurance Principles
Substantive Testing
7
necessarily provide audit evidence about ownership or
value.
 inspecting an executed contract may provide audit evidence
relevant to the entity’s application of accounting policies,
such as revenue recognition.
Inspection of tangible assets may provide reliable audit evidence with respect to
their existence, but not necessarily about the entity’s rights and obligations or
the valuation of the assets.
Inspection of individual inventory items may accompany the observation of
inventory counting.
ii.
Observation
Observation consists of looking at a process or procedure being performed by
others,
for example,
 the auditor’s observation of inventory counting by the
entity’s personnel, or of the performance of control
activities.
Observation provides audit evidence about the performance of a process or
procedure, but is limited to the point in time at which the observation takes
place, and by the fact that the act of being observed may affect how the process
or procedure is performed.
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iii.
Confirmation
An external confirmation represents audit evidence obtained by the auditor as a
direct written response to the auditor from a third party (the confirming party),
in paper form, or by electronic or other medium.
External confirmation procedures frequently are relevant when addressing
assertions associated with certain account balances and their elements.
However, external confirmations need not be restricted to account balances only.
For example,
 the auditor may request confirmation of the terms of
agreements or transactions an entity has with third parties;
the confirmation request may be designed to ask if any
modifications have been made to the agreement and, if so,
what the relevant details are.
External confirmation procedures also are used to obtain audit evidence about
the absence of certain conditions,
for example,
 the absence of a “side agreement” that may influence
revenue recognition.
iv.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or
records. Recalculation may be performed manually or electronically.
v.
Reperformance
Reperformance involves the auditor’s independent execution of procedures or
controls that were originally performed as part of the entity’s internal control.
vi.
Analytical Procedures
Analytical procedures consist of evaluations of financial information made by a
study of plausible relationships among both financial and non-financial data.
Auditing and Assurance Principles
Substantive Testing
9
Analytical procedures also encompass the investigation of identified fluctuations
and relationships that are inconsistent with other relevant information or
deviate significantly from predicted amounts.
vii.
Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial
and nonfinancial, within the entity or outside the entity.
Inquiry is used extensively throughout the audit in addition to other audit
procedures.
Inquiries may range from formal written inquiries to informal oral inquiries.
Evaluating responses to inquiries is an integral part of the inquiry process.
Responses to inquiries may provide the auditor with information not previously
possessed or with corroborative audit evidence.
Alternatively, responses might provide information that differs significantly from
other information that the auditor has obtained,
for example,
 information regarding the possibility of management
override of controls. In some cases, responses to inquiries
provide a basis for the auditor to modify or perform
additional audit procedures.
Although corroboration of evidence obtained through inquiry is often of particular
importance, in the case of inquiries about management intent, the information
available to support management’s intent may be limited. In these cases,
understanding management’s past history of carrying out its stated intentions,
management’s stated reasons for choosing a particular course of action, and
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management’s ability to pursue a specific course of action may provide relevant
information to corroborate the evidence obtained through inquiry.
In respect of some matters, the auditor may consider it necessary to obtain written
representations from management and, where appropriate, those charged with
governance to confirm responses to oral inquiries.
LO 4
Information to Be Used as Audit Evidence
1. When designing and performing audit procedures, the auditor shall consider the relevance
and reliability of the information to be used as audit evidence.
Relevance
Relevance deals with the logical connection with, or bearing upon, the purpose of the
audit procedure and, where appropriate, the assertion under consideration.
The relevance of information to be used as audit evidence may be affected by the
direction of testing.
For example,
 if the purpose of an audit procedure is to test for
overstatement in the existence or valuation of accounts
payable, testing the recorded accounts payable may be a
relevant audit procedure.
 if the purpose of an audit procedure is to testfor
understatement in the existence or valuation of accounts
payable, testing the recorded accounts payable would not
be relevant, but testing such information as subsequent
disbursements, unpaid invoices, suppliers’ statements, and
unmatched receiving reports may be relevant.
Auditing and Assurance Principles
Substantive Testing
11
A given set of audit procedures may provide audit evidence that is relevant to certain
assertions, but not others.
For example,

inspection of documents related to the collection of receivables after the
period end may provide audit evidence regarding existence and valuation,
but not necessarily cutoff.
Similarly, obtaining audit evidence regarding a particular assertion, for example, the
existence of inventory, is not a substitute for obtaining audit evidence regarding
anotherassertion, for example, the valuation of that inventory. On the other hand, audit
evidence from different sources or of a different nature may often be relevant to the
same assertion.
Reliability
The reliability of information to be used as audit evidence, and therefore of the audit
evidence itself, is influenced by its source and its nature, and the circumstances under
which it is obtained, including the controls over its preparation and maintenance where
relevant.
Therefore, generalizations about the reliability of various kinds of audit evidence are
subject to important exceptions. Even when information to be used as audit evidence is
obtained from sources external to the entity, circumstances may exist that could affect
its reliability.
For example,
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
information obtained from an independent external source may not be
reliable if the source is not knowledgeable, or a management’s expert may
lack objectivity.
While recognizing that exceptions may exist, the following generalizations about the
reliability of audit evidence may be useful:

The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity.

The reliability of audit evidence that is generated internally is increased when the
related controls, including those over its preparation and maintenance, imposed
by the entity are effective.

Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or
by inference (for example, inquiry about the application of a control).

Audit evidence in documentary form, whether paper, electronic, or other medium,
is more reliable than evidence obtained orally (for example, a contemporaneously
written record of a meeting is more reliable than a subsequent oral representation
of the matters discussed).

Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles, or documents that have been
filmed, digitized or otherwise transformed into electronic form, the reliability of
which may depend on the controls over their preparation and maintenance.
2. When information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purposes,:
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
3. When using information produced by the entity, the auditor shall evaluate whether the
information is sufficiently reliable for the auditor’s purposes, including as necessary in the
circumstances:
Auditing and Assurance Principles
Substantive Testing
13
(a) Obtaining audit evidence about the accuracy and completeness of the information; and
(b) Evaluating whether the information is sufficiently precise and detailed for the auditor’s
purposes.
LO 5
Analytical Procedures
This is the evaluation of financial information through analysis of plausible relationships
among both financial and non-financial data. Analytical procedures also encompass such
investigation as is necessary of identified fluctuations or relationships that are inconsistent
with other relevant information or that differ from expected values by a significant amount.
LO 6
Nature of Analytical Procedures
Analytical procedures include the consideration of comparisons of the entity’s financial
information with, for example:

Comparable information for prior periods.

Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation.

Similar industry information, such as a comparison of the entity’s ratio of sales to
accounts receivable with industry averages or with other entities of comparable size in
the same industry.
Analytical procedures also include consideration of relationships, for example:

Among elements of financial information that would be expected to conform to a
predictable pattern based on the entity’s experience, such as gross margin percentages.

Between financial information and relevant non-financial information, such as payroll
costs to number of employees.
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Various methods may be used to perform analytical procedures. These methods range from
performing simple comparisons to performing complex analyses using advanced statistical
techniques. Analytical procedures may be applied to consolidated financial statements,
components and individual elements of information.
Auditing and Assurance Principles
Substantive Testing
LO 7
15
Substantive Analytical Procedures
The auditor’s substantive procedures at the assertion level may be:
 tests of details,
 substantive analytical procedures, or
 a combination of both.
The decision about which audit procedures to perform, including whether to use substantive
analytical procedures, is based on the auditor’s judgment about the expected effectiveness and
efficiency of the available audit procedures to reduce audit risk at the assertion level to an
acceptably low level.
The auditor may inquire of management as to the availability and reliability of information
needed to apply substantive analytical procedures, and the results of any such analytical
procedures performed by the entity.
It may be effective to use analytical data prepared by management, provided the auditor is
satisfied that such data is properly prepared.
When designing and performing substantive analytical procedures, either alone or in
combination with tests of details, as substantive procedures in accordance with PSA 330
(Redrafted), the auditor shall:
(a) Determine the suitability of particular substantive analytical procedures for given
assertions, taking account of the assessed risks of material misstatement and tests of
details, if any, for these assertions;
(b) Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or
ratios is developed, taking account of source, comparability, and nature and relevance of
information available, and controls over preparation;
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(c) Develop an expectation of recorded amounts or ratios and evaluate whether the
expectation is sufficiently precise to identify a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements to be materially
misstated; and
(d) Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.
Auditing and Assurance Principles
Substantive Testing
LO 8
17
Analytical Procedures that Assist When Forming an Overall Conclusion
The auditor shall design and perform analytical procedures near the end of the audit that assist
the auditor when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity.
The conclusions drawn from the results of analytical procedures designed and performed are
intended to corroborate conclusions formed during the audit of individual components or
elements of the financial statements. This assists the auditor to draw reasonable conclusions
on which to base the auditor’s opinion.
The results of such analytical procedures may identify a previously unrecognized risk of
material misstatement. In such circumstances, PSA 315 (Redrafted) requires the auditor to
revise the auditor’s assessment of the risks of material misstatement and modify the further
planned audit procedures accordingly
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LO 9
Investigating Results of Analytical Procedures
If analytical procedures performed in accordance with this PSA identify fluctuations or
relationships that are inconsistent with other relevant information or that differ from expected
values by a significant amount, the auditor shall investigate such differences by:
(a) Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses; and
(b) Performing other audit procedures as necessary in the circumstances.
Audit evidence relevant to management’s responses may be obtained by evaluating those
responses taking into account the auditor’s understanding of the entity and its environment,
and with other audit evidence obtained during the course of the audit.
The need to perform other audit procedures may arise when, for example, management is
unable to provide an explanation, or the explanation, together with the audit evidence obtained
relevant to management’s response, is not considered adequate.
Auditing and Assurance Principles
Substantive Testing
LO 10
19
Audit Documentation
The auditor shall prepare audit documentation on a timely basis.
Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance
the quality of the audit and facilitates the effective review and evaluation of the audit evidence
obtained and conclusions reached before the auditor’s report is finalized.
Documentation prepared after the audit work has been performed is likely to be less accurate
than documentation prepared at the time such work is performed.
Documentation of the Audit Procedures Performed and Audit Evidence Obtained
Form, Content and Extent of Audit Documentation
The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to
understand:
(a) The nature, timing, and extent of the audit procedures performed to comply
with the PSAs and applicable legal and regulatory requirements;
(b) The results of the audit procedures performed, and the audit evidence
obtained; and
(c) Significant matters arising during the audit, the conclusions reached thereon,
and significant professional judgments made in reaching those conclusions.
In documenting the nature, timing and extent of audit procedures performed, the
auditor shall record:
(a) The identifying characteristics of the specific items or matters tested;
(b) Who performed the audit work and the date such work was completed; and
(c) Who reviewed the audit work performed and the date and extent of such
review.
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The auditor shall document discussions of significant matters with management,
those charged with governance, and others, including the nature of the
significant matters discussed and when and with whom the discussions took
place.
If the auditor identified information that is inconsistent with the auditor’s final
conclusion regarding a significant matter, the auditor shall document how the
auditor addressed the inconsistency.
END OF MODULE
Auditing and Assurance Principles
Substantive Testing
21
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Philippine Standard on Auditing 500 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-500Redrafted.pdf; September 1, 2018
2. Philippine Standard on Auditing 520 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-520Redrafted.pdf; September 1, 2018
3. Philippine Standard on Auditing 230 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-230Redrafted.pdf; September 1, 2018
Course Module
Auditing and Assurance Principles
Audit Sampling
1
Module 008 Audit Sampling
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Select items for testing to obtain audit evidence
2. Determine how to obtain audit evidence through selecting all items and
specific items.
3. Determine how to obtain audit evidence through audit sampling
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LO 1
Selecting Items for Testing to Obtain Audit Evidence
When designing tests of controls and tests of details, the auditor shall determine means of
selecting items for testing that are effective in meeting the purpose of the audit procedure.
An effective test provides appropriate audit evidence to an extent that, taken with other audit
evidence obtained or to be obtained, will be sufficient for the auditor’s purposes. In selecting
items for testing, the auditor is required to determine the relevance and reliability of
information to be used as audit evidence; the other aspect of effectiveness (sufficiency) is an
important consideration in selecting items to test. The means available to the auditor for
selecting items for testing are:
(a) Selecting all items (100% examination);
(b) Selecting specific items; and
(c) Audit sampling.
The application of any one or combination of these means may be appropriate depending on the
particular circumstances, for example, the risks of material misstatement related to the assertion
being tested, and the practicality and efficiency of the different means.
Auditing and Assurance Principles
Audit Sampling
LO 2
3
Selecting All Items
The auditor may decide that it will be most appropriate to examine the entire population
of items that make up a class of transactions or account balance (or a stratum within that
population).
100% examination is unlikely in the case of tests of controls; however, it is more common
for tests of details.
100% examination may be appropriate when, for example:

The population constitutes a small number of large value items;

There is a significant risk and other means do not provide sufficient appropriate
audit evidence; or

The repetitive nature of a calculation or other process performed automatically by
an information system makes a 100% examination cost effective.
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LO 3
Selecting Specific Items
The auditor may decide to select specific items from a population. In making this
decision, factors that may be relevant include:
 the auditor’s understanding of the entity,
 the assessed risks of material misstatement, and
 the characteristics of the population being tested.
The judgmental selection of specific items is subject to non-sampling risk.
Specific items selected may include:

High value or key items.
The auditor may decide to select specific items within a population because
they are of high value, or exhibit some other characteristic, for example,
items that are suspicious, unusual, particularly risk-prone or that have a
history of error.

All items over a certain amount.
The auditor may decide to examine items whose recorded values exceed a
certain amount so as to verify a large proportion of the total amount of a
class of transactions or account balance.

Items to obtain information.
The auditor may examine items to obtain information about matters such
as the nature of the entity or the nature of transactions.
While selective examination of specific items from a class of transactions or account
balance will often be an efficient means of obtaining audit evidence, it does not constitute
audit sampling. The results of audit procedures applied to items selected in this way
cannot be projected to the entire population; accordingly, selective examination of
specific items does not provide audit evidence concerning the remainder of the
population.
Auditing and Assurance Principles
Audit Sampling
LO 4
5
Audit Sampling
Audit sampling is designed to enable conclusions to be drawn about an entire population on the
basis of testing a sample drawn from it.
Non-Sampling Risk
Examples of non-sampling risk include use of:
 inappropriate audit procedures, or
 misinterpretation of audit evidence and
 failure to recognize a misstatement or deviation.
Sampling Unit
The sampling units might be physical items
for example,
 checks listed on deposit slips,
 credit entries on bank statements,
 sales invoices
 debtors’ balances
 monetary units.
Tolerable Misstatement
When designing a sample, the auditor determines tolerable misstatement in order
to address the risk that the aggregate of individually immaterial misstatements
may cause the financial statements to be materially misstated and provide a
margin for possible undetected misstatements.
Tolerable misstatement is the application of performance materiality, as defined in
PSA 320 (Revised and Redrafted), to a particular sampling procedure.
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Tolerable misstatement may be the same amount or an amount lower than
performance materiality.
Sample Design, Size and Selection of Items for Testing
When designing an audit sample, the auditor shall consider the purpose of the audit
procedure and the characteristics of the population from which the sample will be drawn.
The auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level.
The auditor shall select items for the sample in such a way that each sampling unit in the
population has a chance of selection.
Sample Design
Audit sampling enables the auditor to obtain and evaluate audit evidence
about some characteristic of the items selected in order to form or assist in
forming a conclusion concerning the population from which the sample is
drawn.
Audit sampling can be applied using either non-statistical or statistical
sampling approaches.
When designing an audit sample, the auditor’s consideration includes:

the specific purpose to be achieved and

the combination of audit procedures that is likely to best achieve
that purpose.
Consideration of the nature of the audit evidence sought and possible
deviation or misstatement conditions or other characteristics relating
Auditing and Assurance Principles
Audit Sampling
7
to that audit evidence will assist the auditor in defining what
constitutes a deviation or misstatement and what population to use for
sampling.
When performing audit sampling, the auditor performs audit
procedures to obtain evidence that the population from which the audit
sample is drawn is complete.
The auditor’s consideration of the purpose of the audit procedure,
includes:

a clear understanding of what constitutes a deviation or
misstatement so that all, and only, those conditions that are relevant
to the purpose of the audit procedure are included in the evaluation
of deviations or projection of misstatements.
For example,
 in a test of details relating to the existence of
accounts receivable, such as confirmation,
payments made by the customer before the
confirmation date but received shortly after
that date by the client, are not considered a
misstatement.
 misposting between customer accounts does
not affect the total accounts receivable balance.
Therefore, it may not be appropriate to
consider this a misstatement in evaluating the
sample
results
of
this
particular
audit
procedure, even though it may have an
important effect on other areas of the audit,
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such as the assessment of the risk of fraud or
the adequacy of the allowance for doubtful
accounts.
In considering the characteristics of a population, for tests of controls,
the auditor makes an assessment of the expected rate of deviation
based on the auditor’s understanding of the relevant controls or on the
examination of a small number of items from the population.
This assessment is made in order to design an audit sample and to
determine sample size.
For example,
 if the expected rate of deviation is unacceptably
high, the auditor will normally decide not to
perform tests of controls.
 for tests of details, the auditor makes an
assessment of the expected misstatement in the
population. If the expected misstatement is high,
100% examination or use of a large sample size
may be appropriate when performing tests of
details.
In considering the characteristics of the population from which the
sample will be drawn, the auditor may determine that stratification or
value-weighted selection is appropriate.
Stratification
1. Audit efficiency may be improved if the auditor
stratifies a population by dividing it into discrete
sub-populations
characteristic.
which
have
an
identifying
Auditing and Assurance Principles
Audit Sampling
9
The objective of stratification is to reduce the
variability of items within each stratum and
therefore allow sample size to be reduced without
increasing sampling risk.
2. When performing tests of details, the population is
often stratified by monetary value. This allows
greater audit effort to be directed to the larger
value items, as these items may contain the
greatest potential misstatement in terms of
overstatement. Similarly, a population may be
stratified according to a particular characteristic
that indicates a higher risk of misstatement, for
example, when testing the allowance for doubtful
accounts in the valuation of accounts receivable,
balances may be stratified by age.
3. The results of audit procedures applied to a
sample of items within a stratum can only be
projected to the items that make up that stratum.
To draw a conclusion on the entire population, the
auditor will need to consider the risk of material
misstatement in relation to whatever other strata
make up the entire population. For example, 20%
of the items in a population may make up 90% of
the value of an account balance. The auditor may
decide to examine a sample of these items. The
auditor evaluates the results of this sample and
reaches a conclusion on the 90% of value
separately from the remaining 10% (on which a
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further sample or other means of gathering audit
evidence will be used, or which may be considered
immaterial).
4. If a class of transactions or account balance has
been divided into strata, the misstatement is
projected for each stratum separately. Projected
misstatements
for
each
stratum
are
then
combined when considering the possible effect of
misstatements on the total class of transactions or
account balance.
Value-Weighted Selection
When performing tests of details it may be
efficient to identify the sampling unit as the
individual monetary units that make up the
population.
Having selected specific monetary units from
within the population, for example, the accounts
receivable balance, the auditor may then examine
the particular items, for example, individual
balances, that contain those monetary units.
One benefit of this approach to defining the
sampling unit is that audit effort is directed to the
larger value items because they have a greater
chance of selection, and can result in smaller
sample sizes.
The decision whether to use a statistical or non-statistical sampling
approach is a matter for the auditor’s judgment; however, sample size is
Auditing and Assurance Principles
Audit Sampling
11
not a valid criterion to distinguish between statistical and nonstatistical approaches.
Sample Size
The level of sampling risk that the auditor is willing to accept affects the
sample size required.
The lower the risk the auditor is willing to accept, the greater the
sample size will need to be.
The sample size can be determined by the application of a statisticallybased formula or through the exercise of professional judgment.
Selection of Items for Testing
With statistical sampling, sample items are selected in a way that each
sampling unit has a known probability of being selected.
With non-statistical sampling, judgment is used to select sample items.
Because the purpose of sampling is to provide a reasonable basis for the
auditor to draw conclusions about the population from which the sample is
selected, it is important that the auditor selects a representative sample, so
that bias is avoided, by choosing sample items which have characteristics
typical of the population.
The principal methods of selecting samples are the use of:
 random selection,
 systematic selection and
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 haphazard selection.
Random Selection
-
this is applied through random number generators,
-
for example, random number tables
Systematic Selection
-
in which the number of sampling units in the population is
divided by the sample size to give a sampling interval,
-
for example 50, and having determined a starting point
within the first 50, each 50th sampling unit thereafter is
selected.
Although the starting point may be determined haphazardly,
the sample is more likely to be truly random if it is
determined by use of a computerized random number
generator or random number tables.
When using systematic selection, the auditor would need to
determine that sampling units within the population are not
structured in such a way that the sampling interval
corresponds with a particular pattern in the population.
Haphazard Selection
-
in which the auditor selects the sample without following a
structured technique.
Although no structured technique is used, the auditor would
nonetheless avoid any conscious bias or predictability (for
example, avoiding difficult to locate items, or always
choosing or avoiding the first or last entries on a page) and
thus attempt to ensure that all items in the population have a
chance of selection.
Auditing and Assurance Principles
Audit Sampling
13
Haphazard selection is not appropriate when using statistical
sampling.
Performing Audit Procedures
The auditor shall perform audit procedures, appropriate to the purpose, on each item
selected.
If the audit procedure is not applicable to the selected item, the auditor shall perform the
procedure on a replacement item.
If the auditor is unable to apply the designed audit procedures, or suitable alternative
procedures, to a selected item, the auditor shall treat that item as a deviation from the
prescribed control, in the case of tests of controls, or a misstatement, in the case of tests
of details.
Nature and Cause of Deviations and Misstatements
The auditor shall investigate the nature and cause of any deviations or misstatements
identified, and evaluate their possible effect on the purpose of the audit procedure and on
other areas of the audit.
In the extremely rare circumstances when the auditor considers a misstatement or
deviation discovered in a sample to be an anomaly, the auditor shall obtain a high degree
of certainty that such misstatement or deviation is not representative of the population.
The auditor shall obtain this degree of certainty by performing additional audit
procedures to obtain sufficient appropriate audit evidence that the misstatement or
deviation does not affect the remainder of the population.
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Projecting Misstatements
For tests of details, the auditor shall project misstatements found in the sample to the
population.
Evaluating Results of Audit Sampling
The auditor shall evaluate:
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions
about the population that has been tested.
END OF MODULE
Auditing and Assurance Principles
Audit Sampling
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Philippine Standard on Auditing 530 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-530Redrafted.pdf; September 1, 2018
Course Module
15
Auditing and Assurance Principles
Completing the Audit
1
Module 009
Completing the Audit
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Discuss and enumerate the subsequent events
2. Determine the Management Representation
LO 1
Subsequent Events
These are events occurring between the date of the financial statements and the date of the
auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.
Date of the financial statements
-
The date of the end of the latest period covered by the financial statements.
Date of the auditor’s report
-
The date the auditor dates the report on the financial statements
The auditor’s report cannot be dated earlier than the date on which the auditor
has obtained sufficient appropriate audit evidence on which to base the opinion
on the financial statements.
Sufficient appropriate audit evidence includes evidence that all the statements
that comprise the financial statements have been prepared and that those with
the recognized authority have asserted that they have taken responsibility for
those financial statements.
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Consequently, the date of the auditor’s report cannot be earlier than the date of
approval of the financial statements. A time period may elapse due to
administrative issues between the date of the auditor’s report and the date the
auditor’s report is provided to the entity.
Financial statements may be affected by certain events that occur after the date of the financial
statements. Many financial reporting frameworks specifically refer to such events. Such reporting
frameworks ordinarily identify two types of events:
(a) Those that provide evidence of conditions that existed at the date of the financial statements;
and
(b) Those that provide evidence of conditions that arose after the date of the financial statements.
When the audited financial statements are included in other documents subsequent to the
issuance of the financial statements, the auditor may have additional responsibilities relating to
subsequent events that the auditor may need to consider, such as legal or regulatory requirements
involving the offering of securities to the public in jurisdictions in which the securities are being
offered.
For example,
 the auditor may be required to perform additional audit procedures to the
date of the final offering document. These procedures may include those
performed up to a date at or near the effective date of the final offering
document, and reading the offering document to assess whether the other
information in the offering document is consistent with the financial
information with which the auditor is associated.
Auditing and Assurance Principles
Completing the Audit
3
Events Occurring Between the Date of the Financial Statements and the Date of the
Auditor’s Report
The auditor shall perform audit procedures designed to obtain sufficient
appropriate audit evidence that all events occurring between the date of the
financial statements and the date of the auditor’s report that require adjustment of,
or disclosure in, the financial statements have been identified. The auditor is not,
however, expected to perform additional audit procedures on matters to which
previously applied audit procedures have provided satisfactory conclusions.
The auditor shall perform the procedures so that they cover the period from the
date of the financial statements to the date of the auditor’s report, or as near as
practicable thereto.
The auditor shall take into account the auditor’s risk assessment in determining the
nature and extent of such audit procedures, which shall include the following:
(a) Obtaining an understanding of any procedures management has
established to ensure that subsequent events are identified.
(b) Inquiring of management and, where appropriate, those charged with
governance as to whether any subsequent events have occurred which
might affect the financial statements.
(c) Reading minutes, if any, of the meetings, of the entity’s owners,
management and those charged with governance, that have been held
after the date of the financial statements and inquiring about matters
discussed at any such meetings for which minutes are not yet available.
(d) Reading the entity’s latest subsequent interim financial statements, if
any.
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When, as a result of the procedures performed as required above, the auditor
identifies events that require adjustment of, or disclosure in, the financial
statements, the auditor shall determine whether each such event is appropriately
reflected in those financial statements.
Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but
Before the Date the Financial Statements are Issued
Date the financial statements are issued
-
The date that the auditor’s report and audited financial statements are
made available to third parties.
The date the financial statements are issued generally depends on the
regulatory environment of the entity.
In some circumstances, the date the financial statements are issued may
be the date that they are filed with a regulatory authority.
Since audited financial statements cannot be issued without an auditor’s
report, the date that the audited financial statements are issued must not
only be at or later than the date of the auditor’s report, but must also be
at or later than the date the auditor’s report is provided to the entity.
The auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report.
However, when, after the date of the auditor’s report but before the date the
financial statements are issued, a fact becomes known to the auditor that, had it
been known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall:
Auditing and Assurance Principles
Completing the Audit
5
(a) Discuss the matter with management and, where appropriate, those charged
with governance.
(b) Determine whether the financial statements need amendment and, if so,
(c) Inquire how management intends to address the matter in the financial
statements.
If management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the
amendment.
(b) Unless the circumstances in paragraph 12 of PSA 560* apply:
(i)
Extend the audit procedures to the date of the new auditor’s
report(paragraph 11(b)(i) of PSA 560; and
(ii)
Provide a new auditor’s report on the amended financial statements.
The new auditor’s report shall not be dated earlier than the date of
approval of the amended financial statements.
Date of approval of the financial statements
-
The date on which all the statements that comprise the financial
statements have been prepared and those with the recognized
authority have asserted that they have taken responsibility for
those financial statements.
In some jurisdictions, law or regulation identifies the individuals
or bodies
for example,
 management or those charged with governance
Course Module
that are responsible for concluding that all the statements
comprising the financial statements have been prepared, and
specifies the necessary approval process.
In other jurisdictions, the approval process is not prescribed in
law or regulation and the entity follows its own procedures in
preparing and finalizing its financial statements in view of its
management and governance structures.
In some jurisdictions, final approval of the financial statements by
shareholders is required. In these jurisdictions, final approval by
shareholders is not necessary for the auditor to conclude that
sufficient appropriate audit evidence on which to base the
auditor’s opinion on the financial statements has been obtained.
The date of approval of the financial statements for purposes of
the PSAs is the earlier date on which those with the recognized
authority have asserted that all the statements comprising the
financial statements have been prepared and that those with the
recognized authority have taken responsibility for those financial
statements.
*Paragraph 12 of PSA 560
When law, regulation or the financial reporting framework does not prohibit
management from restricting the amendment of the financial statements to
the effects of the subsequent event or events causing that amendment and
those responsible for approving the financial statements are not prohibited
from restricting their approval to that amendment, the auditor is permitted
to restrict the audit procedures on subsequent events required in paragraph
11(b)(i)of PSA 560 to that amendment.
In such cases, the auditor shall either:
Auditing and Assurance Principles
Completing the Audit
7
(a) Amend the auditor’s report to include an additional date restricted to
that amendment that thereby indicates that the auditor’s procedures on
subsequent events are restricted solely to the amendment of the financial
statements described in the relevant note to the financial statements; or
(b) Provide a new or amended auditor’s report that includes a statement in
an Emphasis of Matter paragraph or Other Matter(s) paragraph (to be
discussed on Module 012) that conveys that the auditor’s procedures on
subsequent events are restricted solely to the amendment of the financial
statements as described in the relevant note to the financial statements.
Facts Which Become Known to the Auditor After the Financial Statements have been
Issued
After the financial statements have been issued, the auditor has no obligation to
perform any audit procedures regarding such financial statements.
However, when, after the financial statements have been issued, a fact becomes
known to the auditor that, had it been known to the auditor at the date of the
auditor’s report, may have caused the auditor to amend the auditor’s report, the
auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged
with governance.
(b) Determine whether the financial statements need amendment and, if so,
(c) Inquire how management intends to address the matter in the financial
statements.
If management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the
amendment.
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(b) Review the steps taken by management to ensure that anyone in receipt of the
previously issued financial statements together with the auditor’s report
thereon is informed of the situation.
(c) Unless the circumstances in paragraph 12 apply:
(i)
Extend the audit procedures to the date of the new auditor’s report, and
date the new auditor’s report no earlier than the date of approval of the
amended financial statements; and
(ii)
Provide a new auditor’s report on the amended financial statements.
(d) When the circumstances in paragraph 12 apply, amend the auditor’s report, or
provide a new auditor’s report as required by paragraph 12.
LO 2
Management Representation
Written representation
- A written statement by management provided to the auditor to confirm
certain matters or to support other audit evidence. Written
representations in this context do not include financial statements, the
assertions therein, or supporting books and records.
Written representations are necessary information that the auditor requires in
connection with the audit of the entity’s financial statements. Accordingly, similar
to responses to inquiries, written representations are audit evidence.
Although written representations provide necessary audit evidence, they do not
provide sufficient appropriate audit evidence on their own about any of the matters
with which they deal.
The auditor shall request written representations from management with
appropriate responsibilities for the financial statements and knowledge of the
matters concerned.
Auditing and Assurance Principles
Completing the Audit
9
Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit evidence that the
auditor obtains about the fulfillment of management’s responsibilities, or about
specific assertions.
Written Representations about Management’s Responsibilities
Preparation and Presentation of the Financial Statements
The auditor shall request management to provide a written representation
that it has fulfilled its responsibility for the preparation and presentation of
the financial statements as set out in the terms of the audit engagement and,
in particular, whether the financial statements are prepared and presented
in accordance with the applicable financial reporting framework.
Information Provided to the Auditor
The auditor shall request management to provide a written representation
that it has provided the auditor with all relevant information agreed in the
terms of the audit engagement, and that all transactions have been recorded
and are reflected in the financial statements.
Description of Management’s Responsibilities in the Written Representations
Management’s responsibilities shall be described in the written
representations in the manner in which these responsibilities are described
in the terms of the audit engagement.
Other Written Representations
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Other PSAs require the auditor to request written representations. If, in addition to
such required representations, the auditor determines that it is necessary to obtain
one or more written representations to support other audit evidence relevant to the
financial statements or one or more specific assertions in the financial statements,
the auditor shall request such other written representations.
For example, in the case of subsequent events,
 The auditor shall request management and, where appropriate, those
charged with governance, to provide a written representation that all
events occurring subsequent to the date of the financial statements
and for which the applicable financial reporting framework requires
adjustment or disclosure have been adjusted or disclosed.
Date of and Period(s) Covered by Written Representations
The date of the written representations shall be as near as practicable to, but not
after, the date of the auditor’s report on the financial statements. The written
representations shall be for all financial statements and period(s) referred to in the
auditor’s report.
Form of Written Representations
The written representations shall be in the form of a representation letter
addressed to the auditor.
If law or regulation requires management to make written public statements about
its responsibilities, and the auditor determines that such statements provide some
or all of the representations, the relevant matters covered by such statements need
not be included in the representation letter.
Doubt as to the Reliability of Written Representations and Requested Written
Representations Not Provided
Doubt as to the Reliability of Written Representations
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Completing the Audit
11
If the auditor has concerns about the competence, integrity, ethical values or
diligence of management, or about its commitment to or enforcement of
these, the auditor shall determine the effect that such concerns may have on
the reliability of representations (oral or written) and audit evidence in
general.
In particular, if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve
the matter.
If the matter remains unresolved, the auditor shall reconsider the
assessment of the competence, integrity, ethical values or diligence of
management, or of its commitment to or enforcement of these, and shall
determine the effect that this may have on the reliability of representations
(oral or written) and audit evidence in general.
If the auditor concludes that the written representations are not reliable, the
auditor shall take appropriate actions, including determining the possible
effect on the opinion in the auditor’s report.
Requested Written Representations Not Provided
If management does not provide one or more of the requested written
representations, the auditor shall:
(a) Discuss the matter with management;
(b) Reevaluate the integrity of management and evaluate the effect
that this may have on the reliability of representations (oral or
written) and audit evidence in general; and
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(c) Take appropriate actions, including determining the possible
effect on the opinion in the auditor’s report.
Written Representations about Management’s Responsibilities
The auditor shall disclaim an opinion (to be discussed on Module 012) on the
financial statements if:
(a) The auditor concludes that there is sufficient doubt about the
integrity of management such that the written representations
are not reliable; or
(b) Management
does
representations
END OF MODULE
not
provide
the
required
written
Auditing and Assurance Principles
Completing the Audit
13
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Philippine Standard on Auditing 560 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-560Redrafted.pdf; September 1, 2018
2. Philippine Standard on Auditing 580 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-580Redrafted.pdf; September 1, 2018
Video Supplementary Materials
1. https://www.youtube.com/watch?v=pK9XYtNNEHw
2. https://www.youtube.com/watch?v=E5yI_skOvew
3. https://www.youtube.com/watch?v=i1nZ3k0E4JQ
4. https://www.youtube.com/watch?v=3IM8tagD2FU
Course Module
Auditing and Assurance Principles
Auditor’s Report
1
Module 010
Auditor’s Report
LEARNING OBJECTIVES (LO)
After completing this module, the student is expected to:
1. Form an opinion on the financial statements
2. Discuss the forms of opinion
3. Enumerate the contents of auditor’s report
4. Discuss the supplementary information presented with the financial
statements
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LO 1
Forming an Opinion on the Financial Statements
The auditor shall form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.
In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained
reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. That conclusion shall take into account:
(a)
The auditor’s conclusion, in accordance with PSA 330 (Redrafted), whether sufficient
appropriate audit evidence has been obtained;
(b)
The auditor’s conclusion, in accordance with PSA 450 (Revised and Redrafted), whether
uncorrected misstatements are material, individually or in aggregate;10 and
(c)
The evaluations required by paragraphs 12-15.
*Paragraphs 12-15
Paragraph 12.
The auditor shall evaluate whether the financial statements are prepared,
in all material respects, in accordance with the requirements of the
applicable financial reporting framework.
This evaluation shall include consideration of the qualitative aspects of the
entity’s accounting practices, including indicators of possible bias in
management’s judgments.
Paragraph 13.
In particular, the auditor shall evaluate whether, in view of the
requirements of the applicable financial reporting framework:
(a)
The financial statements adequately disclose the significant
accounting policies selected and applied;
(b)
The accounting policies selected and applied are consistent
with the applicable financial reporting framework and are
appropriate;
Auditing and Assurance Principles
Auditor’s Report
(c)
3
The accounting estimates made by management are
reasonable;
(d)
The information presented in the financial statements is
relevant, reliable, comparable and understandable;
(e)
The financial statements provide adequate disclosures to
enable the intended users to understand the effect of
material transactions and events on the information
conveyed in the financial statements; and
(f)
The terminology used in the financial statements, including
the title of each financial statement, is appropriate.
Paragraph 14.
When the financial statements are prepared in accordance with a fair
presentation framework, the evaluation required by paragraphs 12-13
shall also include whether the financial statements achieve fair
presentation.
The auditor’sevaluation as to whether the financial statements achieve fair
presentation shall include consideration of:
(a)
The overall presentation, structure and content of the
financial statements; and
(b)
Whether the financial statements, including the related notes,
represent the underlying transactions and events in a
manner that achieves fair presentation.
Paragraph 15.
The auditor shall evaluate whether the financial statements adequately
refer to or describe the applicable financial reporting framework.
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* General purpose financial statements
- Financial statements prepared in accordance with a general purpose framework
* General purpose framework
- A financial reporting framework designed to meet the common financial
information needs of a wide range of users.
- The financial reporting framework may be a fair presentation framework or a
compliance framework.
The term “fair presentation framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework.
(i)
Acknowledges explicitly or implicitly that, to achieve fair
presentation of the financial statements, it may be necessary for
management to provide disclosures beyond those specifically
required by the framework; or
(ii)
Acknowledges explicitly that it may be necessary for management to
depart from a requirement of the framework to achieve fair
presentation of the financial statements. Such departures are
expected to be necessary only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework, but
does not contain the acknowledgements as mentioned in fair presentation
framework
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Auditor’s Report
LO 2
5
Forms of Opinion
Types of Audit Opinions:
1. Unmodified Opinion
2. Modified Opinion
a. qualified opinion
b. adverse opinion
c. disclaimer of opinion
Unmodified Opinion
-
The auditor concludes that the financial statements of a given entity are presented
fairly, in all material respects, in accordance with generally accepted accounting
principles.
The auditor shall express an unmodified opinion when the auditor concludes that
the financial statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework.
If the auditor:
(a)
concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
(b)
is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material
misstatement, the auditor shall modify the opinion in the auditor’s
report
Modified Opinion
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a. Qualified Opinion
-
The auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are
material but not pervasive to the financial statements, or the auditor is
unable to obtain sufficient appropriate audit evidence on which to base
the opinion, but concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not
pervasive.
b. Adverse Opinion
-
After having obtained enough good audit evidence, the auditor concludes
that misstatements, individually or when grouped with other
misstatements, are both material and pervasive to the financial
statements
c. Disclaimer of Opinion
-
The auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both
material and pervasive.
Auditing and Assurance Principles
Auditor’s Report
LO 3
7
Auditor’s Report
The auditor’s report shall be in writing.
Auditor’s Report for Audits Conducted in Accordance with Philippine Standards on Auditing
The following are the components of auditor’s report:
1. Title
2. Addressee
3. Introductory Paragraph
4. Management’s Responsibility for the Financial Statements
5. Auditor’s Responsibility
6. Auditor’s Opinion
7. Other Reporting Responsibilities
8. Signature of the Auditor
9. Date of the Auditor’s Report
10. Auditor’s Address
Title
The auditor’s report shall have a title that clearly indicates that it is the
report of an independent auditor.
Addressee
The auditor’s report shall be addressed as required by the circumstances of
the engagement.
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Introductory Paragraph
The introductory paragraph in the auditor’s report shall:
(a)
Identify the entity whose financial statements have been
audited;
(b)
State that the financial statements have been audited;
(c)
Identify the title of each statement that comprises the
financial statements;
(d)
Refer to the summary of significant accounting policies and
other explanatory information; and
(e)
Specify the date or period covered by each financial
statement comprising the financial statements.
Management’s Responsibility for the Financial Statements
This section of the auditor’s report describes the responsibilities of those in
the organization that are responsible for the preparation of the financial
statements.
The auditor’s report need not refer specifically to “management,” but shall
use the term that is appropriate in the context of the legal framework in the
particular jurisdiction.
In some jurisdictions, the appropriate reference may be to those charged
with governance.
The auditor’s report shall include a section with the heading
“Management’s [or other appropriate term] Responsibility for the Financial
Statements.”
Auditing and Assurance Principles
Auditor’s Report
9
The auditor’s report shall describe management’s responsibility for the
preparation of the financial statements in the manner in which that
responsibility is described in the terms of the audit engagement.
The description shall include an explanation that management is
responsible for the preparation of the financial statements in accordance
with the applicable financial reporting framework; this responsibility
includes the design, implementation and maintenance of internal control
relevant to the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
Where the financial statements are prepared in accordance with a fair
presentation framework, the explanation of management’s responsibility
for the financial statements in the auditor’s report shall refer to “the
preparation and fair presentation of these financial statements.”
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Auditor’s Responsibility
The auditor’s report shall include a section with the heading “Auditor’s
Responsibility.”
The auditor’s report shall state that the responsibility of the auditor is to
express an opinion on the financial statements based on the audit.
The auditor’s report shall state that the audit was conducted in accordance
with PSAs. The auditor’s report shall also explain that those standards
require that the auditor comply with ethical requirements and that the
auditor plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement.
The auditor’s report shall describe an audit by stating that:
(a)
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial
statements;
(b)
The procedures selected depend on the auditor’s judgment,
including
the
assessment
of
the
risks
of
material
misstatement of 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 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 entity’s
internal control.
In circumstances when the auditor also has a responsibility
to express an opinion on the effectiveness of internal control
in conjunction with the audit of the financial statements, the
Auditing and Assurance Principles
Auditor’s Report
11
auditor shall omit the phrase that the auditor’s consideration
of internal control is not for the purpose of expressing an
opinion on the effectiveness of internal control; and
(c)
An audit also includes evaluating the appropriateness of the
accounting policies used and the reasonableness of
accounting estimates made by management, as well as the
overall presentation of the financial statements.
Where the financial statements are prepared in accordance with a fair
presentation framework, the description of the audit in the auditor’s report
shall refer to “the entity’s preparation and fair presentation of the financial
statements.”
The auditor’s report shall state whether the auditor believes that the audit
evidence the auditor has obtained is sufficient and appropriate to provide a
basis for the auditor’s opinion.
Auditor’s Opinion
The auditor’s report shall include a section with the heading “Opinion.”
 When expressing an unmodified opinion on financial statements
prepared in accordance with a fair presentation framework, the
auditor’s opinion shall, unless otherwise required by law or
regulation, use following phrase:
The financial statements present fairly, in all material respects,
… in accordance with [the applicable financial reporting
framework].
 When expressing an unmodified opinion on financial statements
prepared in accordance with a compliance framework, the auditor’s
opinion shall be
Course Module
that the financial statements are prepared, in all material
respects, in accordance with [the applicable financial reporting
framework].
 If the reference to the applicable financial reporting framework in
the auditor’s opinion is not to PFRS issued by the FRSC or IFRS
issued by the IASB or IPSAS issued by the IPSASB, the auditor’s
opinion shall identify the jurisdiction of origin of the framework.
Other Reporting Responsibilities
If the auditor addresses other reporting responsibilities in the auditor’s
report on the financial statements that are in addition to the auditor’s
responsibility under the PSAs to report on the financial statements, these
other reporting responsibilities shall be addressed in a separate section in
the auditor’s report that shall be sub-titled
“Report on Other Legal and Regulatory Requirements,” or otherwise
as appropriate to the content of the section.
If the auditor’s report contains a separate section on other reporting
responsibilities, the headings, statements and explanations shall be under
the sub-title
“Report on the Financial Statements.”
The “Report on Other Legal and Regulatory Requirements” shall
follow the “Report on the Financial Statements.”
Auditing and Assurance Principles
Auditor’s Report
13
Signature of the Auditor
The auditor’s report shall be signed.
Date of the Auditor’s Report
The auditor’s report shall be dated no earlier than the date on which the
auditor has obtained sufficient appropriate audit evidence on which to base
the auditor’s opinion on the financial statements, including evidence that:
(a) All the statements that comprise the financial statements,
including the related notes, have been prepared; and
(b) Those with the recognized authority have asserted that they
have taken responsibility for those financial statements.
Auditor’s Address
The auditor’s report shall name the location in the jurisdiction where the
auditor practices.
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LO 4
Supplementary Information Presented with the Financial Statements
If supplementary information that is not required by the applicable financial reporting
framework is presented with the audited financial statements, the auditor shall evaluate
whether such supplementary information is clearly differentiated from the audited
financial statements.
If such supplementary information is not clearly differentiated from the audited financial
statements, the auditor shall ask management to change how the unaudited
supplementary information is presented. If management refuses to do so, the auditor
shall explain in the auditor’s report that such supplementary information has not been
audited.
Supplementary information that is not required by the applicable financial reporting
framework but is nevertheless an integral part of the financial statements because it
cannot be clearly differentiated from the audited financial statements due to its nature
and how it is presented shall be covered by the auditor’s opinion.
Sample Audit Report
Please refer to Week012-Module_Sample Unqualified Auditors Report on Financial Statement
END OF MODULE
Auditing and Assurance Principles
Auditor’s Report
References and Supplementary Materials
Books and Journals
1. Ireneo J., Ireneo S., and James, George (2017). Auditing and Assurance Principle
(2017 ed). Manila City: La Limariza Printing Corp.
2. Hermosilla, R., Salosagcol, J., and Tiu, Michael (2017). Auditing Theory: A Guide in
Understanding PSA (2017 ed). Manila City: GIC Enterprises & Co., Inc.
Online Supplementary Reading Materials
1. Philippine Standard on Auditing 700 (Redrafted);
http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-700Redrafted.pdf; September 1, 2018
Course Module
15