1
Table of Contents
Introduction ................................................................................................................ 8
A.
Basis for Manual Preparation .......................................................................................................... 8
B.
Project requirements and INTOSAI prerequisites ............................................................................ 9
C.
COA Audit Framework ................................................................................................................... 10
Overview of the Financial Audit Manual .................................................................... 11
A.
Objectives of Financial Audit.......................................................................................................... 11
B.
The Financial Statements Audit Process ........................................................................................ 11
C.
Applying the INTOSAI Financial Audit Guidelines (ISSAI 1000-2999)............................................. 12
Section 1 ................................................................................................................... 13
Preliminary Engagement Activities ............................................................................ 13
I.
Ensuring Engagement Team’s Independence and Compliance with the Ethical Standards .......... 13
II.
Defining the Terms of Audit Engagement ...................................................................................... 15
A.
Establishing the Terms of Audit Engagement ............................................................................. 15
B.
Communicating the Terms of Engagement ................................................................................ 16
Appendix 1-1. Auditor’s Declaration of Independence and Compliance with Other Ethical
Standards ....................................................................................................................................... 17
Appendix 1-2. Engagement Letter with attached Management Representation Letter Format ........... 18
Section 2 ................................................................................................................... 24
Planning Phase .......................................................................................................... 24
I.
Preparing the Overall Audit Strategy ............................................................................................. 24
II.
Conducting Preliminary Risk Assessment ...................................................................................... 25
A.
Defining Risks .............................................................................................................................. 25
B.
Understanding the Audit Entity .................................................................................................. 26
C.
Summarizing the Results of Preliminary Identification of Risks.................................................. 36
III.
Conducting Final Risk Assessment ................................................................................................. 38
A.
Determining the Materiality Thresholds ..................................................................................... 38
B.
Assessing Risks and Determining Risk Responses ....................................................................... 43
IV.
Preparing the Audit Engagement Plan ........................................................................................... 47
A.
Updating the Overall Audit Strategy ........................................................................................... 47
B.
Preparing the Audit Program ...................................................................................................... 47
C.
Preparing the Engagement Planning Memorandum .................................................................. 48
Appendix 2-1. Overall Audit Strategy ...................................................................................................... 49
2
Appendix 2-2. Understanding the Agency Template .............................................................................. 52
Appendix 2-2A. Financial Accountability LogFrame ................................................................................ 54
Appendix 2-3. Agency-Level Controls Checklist ...................................................................................... 55
Appendix 2-3A. Control Activities -Cash Receipts checklist .................................................................... 70
Appendix 2-4. General Accounting Plan.................................................................................................. 72
Appendix 2-5. Variance Analysis of Financial Statements ...................................................................... 73
Appendix 2-6. Summary Report on the Preliminary Identification of Risks ........................................... 74
Appendix 2-7. Template on Determining Materiality Level .................................................................... 75
Appendix 2-8. Results of Risk Assessment at the Assertion Level .......................................................... 77
Appendix 2-8A. Illustration on Results of Risk Assessment at the Assertion Level ................................ 78
Appendix 2-9. Audit Program .................................................................................................................. 79
Appendix 2-10. Engagement Planning Memorandum ............................................................................ 80
Section 3 ................................................................................................................... 81
Audit Execution Phase ............................................................................................... 81
I.
Execute Audit Tests ........................................................................................................................ 81
A.
Determining the Nature, Timing and Extent of Audit Procedures .............................................. 81
B.
Performing Audit Procedures...................................................................................................... 82
C.
Gathering Audit Documentation and Evidence .......................................................................... 93
D.
Addressing Risk Areas that Need Specific Considerations .......................................................... 98
E.
Summarizing Proposed Audit Adjustments and Evaluating Effects in the Audit Opinion ........ 103
II.
III.
Summarize Audit Observations and Recommendations and Communicate with Those
Charged with Governance ........................................................................................................... 104
A.
Areas for Consideration in Summarizing Audit Observations ................................................... 104
B.
Elements of Audit Observation ................................................................................................. 106
C.
Performing Review of Overall Audit Work ................................................................................ 107
D.
Tracking Status of Prior Years’ Recommendations ................................................................... 108
Conduct Exit Conference.............................................................................................................. 109
Appendix 3-1. Summary of Audit Observations and Recommendations ............................................. 110
Appendix 3-2. Affirmation of Audit Team’s Independence and Compliance with Ethical
Standards ..................................................................................................................................... 111
Appendix 3-3. Recommendations Tracking Sheet ................................................................................ 112
Section 4 ................................................................................................................. 113
Reporting Phase ...................................................................................................... 113
I.
Write the Independent Auditor’s Report..................................................................................... 114
3
A.
Forming an Audit Opinion ......................................................................................................... 114
B.
Forms of Independent Auditor’s Report ................................................................................... 121
II.
Specific Elements of the Independent Auditor’s Report ............................................................. 126
A.
Title............................................................................................................................................ 127
B.
Addressee.................................................................................................................................. 127
C.
Report on the Audit of Financial Statements............................................................................ 127
D.
Report on Other Legal and Regulatory Requirements .............................................................. 136
E.
Name of the Engagement Partner ............................................................................................ 138
F.
Signature of the Auditor............................................................................................................ 138
G.
Auditor’s Address ...................................................................................................................... 138
H.
Date of the Independent Auditor’s Report ............................................................................... 138
III.
Comparative Information............................................................................................................. 138
A.
Corresponding Figures and Comparative Financial Statements ............................................... 138
A.1. Corresponding Figures .............................................................................................................. 139
A.2. Comparative Financial Statements ........................................................................................... 140
IV.
Special Considerations - Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks ....................................................................................................... 140
V.
Types of Audit Report .................................................................................................................. 140
Appendix 4-1A. Illustration of Cases for Modified Opinion .................................................................. 142
Section 5 ................................................................................................................. 145
Quality Control Review ........................................................................................... 145
I.
Quality Control versus Quality Assurance.................................................................................... 145
II.
Responsibility for Quality Control System and Quality Control Procedures................................ 145
III.
Quality Control Review Process in COA ....................................................................................... 146
IV.
Quality Control Documents.......................................................................................................... 146
V.
Quality Control Review Documents ............................................................................................. 147
Appendix 5-1. Completion Compliance Checklist ................................................................................. 149
Appendix 5-2. Auditee Feedback Sheet ................................................................................................ 155
Appendix 5-3. Director’s Evaluation Form ............................................................................................ 158
Appendix 5-4. Financial Management Performance Rating ................................................................. 159
Works Cited ............................................................................................................ 161
Technical Working Group and Resource Persons ..................................................... 162
4
List of Exhibits
Exhibit 1. General principles of public sector auditing in the audit of financial statements ........................ 8
Exhibit 2. COA Audit Framework................................................................................................................. 10
Exhibit 3. Audit Activities by Phase ............................................................................................................. 11
Exhibit 4. Diagramming Tool ..................................................................................................................... 107
Exhibit 5. Decision Tree in Preparing the Auditor's Report ...................................................................... 115
Exhibit 6. Summary of Reporting Phase activities .................................................................................... 121
Exhibit 7. Quality Control Documents ....................................................................................................... 148
List of Tables
Table 1. The link between general auditing principles and financial audit specific requirements............... 9
Table 2. ISSAIs related to written representations ..................................................................................... 15
Table 3. Sources of financial information ................................................................................................... 27
Table 4. Principles of Internal Control ........................................................................................................ 29
Table 5. Examples of conditions and events that may indicate risks of material misstatements .............. 37
Table 6. Assertions in considering misstatements ...................................................................................... 37
Table 7. Examples of Risks .......................................................................................................................... 43
Table 8. Risk Decision Table ........................................................................................................................ 46
Table 9. List of Current Audit File and Permanent Audit File...................................................................... 95
Table 10. Summary of Modifications of the Independent Auditor’s Report ............................................ 125
Table 11. Levels of Quality Control Review............................................................................................... 146
List of Illustrations
Illustration 1. Working Paper on Preliminary data analysis ........................................................................ 27
Illustration 2. Walkthrough Analysis for Source Agency – Fund Transfer Account .................................... 33
Illustration 3. Sample Financial Information ............................................................................................... 42
Illustration 4. Sample Materiality Computation Table................................................................................ 42
Illustration 5. Working Paper – Test of Control .......................................................................................... 85
Illustration 6. Sample Trend Analysis .......................................................................................................... 90
Illustration 7. Proposed Summary WP in Substantive Test ........................................................................ 93
Illustration 8. Sample Top Schedule and Audit Conclusion ........................................................................ 96
Illustration 9. Summary of Proposed Audit Adjustments ......................................................................... 103
Illustration 10. Sample - Elements of an Audit Observation ..................................................................... 106
Illustration 11. Sample - Audit Recommendation ..................................................................................... 107
Illustration 12. Summary of Uncorrected Misstatements ........................................................................ 119
5
List of Acronyms
Acronym
AAPSI
AAR
ADA
ADADJ
ADB
AICF
ALCC
AM
AOM
AP
APMT
ASEAN
ATL
ATM
CAAR
CAATs
CAF
CD
CGS
COA
COE
CR
CRDC
DV
EPM
EQCR
FOU
FRF
FS
GAM
GAP
GBE
GL
IAR
ICPPP
IDI
INTOSAI
IR
ICSPPS
Definition
Agency Action Plan and Status of Implementation
Annual Audit Report
Advice to Debit Account
Advice to Debit Account Disbursements Journal
Asian Development Bank
Agency's Internal Control Framework
Agency-Level Controls Checklist
Audit Memorandum
Audit Observation Memorandum
Audit Program
Action Plan Monitoring Tool
Association of Southeast Asian Nations
Audit Team Leader
Audit Team Member
Consolidated Annual Audit Report
Computer assisted audit techniques
Current Audit File
Cluster Director
Corporate Government Sector
Commission on Audit
COA Order of Execution
Control Risk
Consolidated Report of Daily Collections
Disbursement Voucher
Engagement Planning Memorandum
Engagement Quality Control Reviewer
Field Operating Units
Financial Reporting Framework
Financial Statements
Government Accounting Manual
General Accounting Plan
Government Business Enterprise
General Ledger
Independent Auditor’s Report
Internal Control Policy, Procedures and Practices
INTOSAI Development Initiative
International Organization of Supreme Audit Institutions
Inherent Risk
Internal Control Standards for Philippine Public Sector
6
Acronym
ISQC
ISSAI
JEV
KAM
LGU
ML
MOA
MRL
MT
NC
ND
NFD
NGO
NS
OAS
OR
PAF
PDA
PFRS
PPE
PPSAS
R-CDTA
RANTA
RBFAM
RD
RMM
RRAAL
RSA
RTS
SA
SAI
SAOR
SCBAA
SCF
SFPer
SFPos
SRPIR
UTA
WP
Definition
International Standard on Quality Control
International Standards of Supreme Audit Institutions
Journal Entry Voucher
Key Audit Matters
Local Government Unit
Management Letter
Memorandum of Agreement
Management Representation Letter
Materiality Template
Notice of Charge
Notice of Disallowance
Notice of Finality of Decision
Non-government organization
Notice of Suspension
Overall Audit Strategy
Official Receipt
Permanent Audit File
Preliminary data analysis
Philippine Financial Reporting Standards
Property, Plant and Equipment
Philippine Public Sector Accounting Standards
Regional Capacity Development Technical Assistance
Registry of Notice of Transfer Allocation
Risk-Based Financial Audit Manual
Regional Director
Risk of Material Misstatement
Results of Risk Assessment at the Assertion Level
Regional Supervising Auditor
Recommendation Tracking Sheet
Supervising Auditor
Supreme Audit Institution
Summary of Audit Observations and Recommendations
Statement of Comparison of Budget and Actual Amounts
Statement of Cash Flows
Statement of Financial Performance
Statement of Financial Position
Summary Report on Preliminary Identification of Risks
Understanding the Agency
Working Paper
7
Introduction
A. Basis for Manual Preparation
1. The Commission on Audit entered into an agreement with the Asian Development Bank for the
Regional Capacity Development Technical Assistance (R-CDTA) entitled Enhancing the Roles of
Supreme Audit Institutions in Selected Association of Southeast Asian Nations (ASEAN). The project
was funded by the Japan Fund for Poverty Reduction. The agreement was signed on February 27,
2015, and the Project was jump started in early 2016.
2. The Project aims to increase compliance with international standards on public sector financial
audits of the participating SAIs by at least 20%. This objective agrees with a similar strategy of the
IDI for the SAIs to adopt the INTOSAI audit guidelines so that they can meet the expectations of their
stakeholders through quality audits and ultimately strengthen the accountability of government.
The cause and effect relationship of the INTOSAI principles vis-à-vis public sector accountability is
demonstrated as follows:
Exhibit 1. General principles of public sector auditing in the audit of financial statements
Principles of
financial audit
•ISSAI 100
lists 8
general
principles
for public
sector
auditing
General
principles of
public sector
auditing
•ISSAI 200 explains
those principles in
the context of
financial auditing
and those are
elaborated further
on ISSAIs at level 4
•The Level 4
Financial Audit
ISSAIs can be
used as
authoritative
standards in the
audit practice or
used as an
example for best
practice of
financial audits in
the public sector
Value added
through the
financial audits
•According to
ISSAI 20, SAIs
contribute to
the
strengthening
of public sector
accountability
Financial audit
practice
3. In effect, the COA-ADB Financial Audit Manual will put into practice the IDI plan :
“to promote implementation of the INTOSAI audit principles by translating these into
audit procedures in the SAIs audit manuals and followed in the actual financial audit
practice of the SAI.The results for financial audits, communicated through audit reports
to the stakeholders; increase confidence of the stakeholders towards public sector
financial statements and enable better control over the use of taxpayers’ money.
Ultimately each financial audit will directly contribute to the SAIs role to strengthen
accountability, integrity, and transparency of governments and public sector entities.”
8
B. Project requirements and INTOSAI prerequisites
4. A briefer on the INTOSAI fundamental prerequisites, fundamental principles and the ISSAI financial
audit guidelines is necessary to better explain their being considered as benchmarks of this
Financial Audit Manual.
5. The ISSAI Framework is structured in four levels: Level 1: Founding Principles; Level 2: Prerequisites
for the Functioning of SAIs; Level 3: Fundamental Auditing Principles; and, Level 4: Auditing
Guidelines.
6. The eight Fundamental Auditing Principles of Level 3, which are listed below, are the key elements
of public sector auditing regardless of the mandate of the SAI or the type of audits to be conducted.
These Principles and the Level 4 Auditing Guidelines (which are based on the detailed guidelines of
the Principles) are guides in preparing the Financial Audit Manual. The link is illustrated in this IDI
table showing the Principles, ISSAI guidelines and COA’s existing policies and practices as well as the
application of the principles in this Manual.
Table 1. The link between general auditing principles and financial audit specific requirements
General
Auditing
Principle
Ethics and
independence
Professional
judgment, due
care and
skepticism
Quality control
Audit team
management
and skills
Principle explanation in ISSAI 100
Auditors should comply with
relevant ethical requirements and
be independent.
Auditors should maintain an
appropriate professional behavior
by applying professional skepticism,
professional judgment and due care
throughout the audit.
Auditors should perform the audit
in accordance with professional
standards on quality control.
Auditors should possess or have
access to the necessary skills.
Audit risk
Auditors should manage the risks of
providing an inappropriate report in
the circumstances of the audit.
Materiality
Auditors
should
consider
materiality throughout the audit
process.
Documentation Auditors should prepare audit
documentation in sufficient detail
to provide a clear understanding of
work performed, evidence obtained
9
COA’s existing policy and application of the
principles in this Manual
COA has adopted the Revised Code of Conduct and
Ethical Standards for COA Officials and Employees
under Resolution No. 2018-010 dated February 1,
2018.
This is emphasized under Section 1 (Preliminary
Engagement Activities) of this Manual and
throughout the entire audit process.
The audit tools to assist and guide Auditors in
ensuring the quality of audit are prescribed in the
Manual. The Auditors’ compliance with the Manual
will be assessed using the Quality Control
Documents prescribed under Section 5 of this
Manual.
The training of Auditors is a continuous activity.
They will be trained on the use of audit tools
prescribed in the Manual and subsequent
issuances to keep them updated on international
standards.
The adoption of the Manual will address this
concern.
The determination of materiality threshold is
discussed under Section 2 Part III.A. of this Manual.
The auditor shall be guided by the step by step
procedures provided in Section 3 Part I.C. of this
Manual.
General
Auditing
Principle
COA’s existing policy and application of the
principles in this Manual
Principle explanation in ISSAI 100
and conclusions reached.
Communication Auditors should establish effective
communication throughout the
audit process.
The auditors maintain open communication with
the auditees which is also defined in the Audit
Terms of Engagement proposed in the Manual.
7. The Plan of action towards full compliance with the ISSAI is based on the IDI recommended
approach, subject to the SAI’s own development selection requirements.
C. COA Audit Framework
8. Presented below as Exhibit 3 is a graphical presentation of the COA Audit Framework common to all
audit streams – Financial Audit, Compliance Audit and Performance Audit. The orange box displays
the Strategic Audit Planning and Risk Identification comprising the Preliminary Engagement,
Planning, Execution and Reporting. The blue box displays the four stages of the audit giving
important consideration on quality control encompassing all four stages.
Exhibit 2. COA Audit Framework
Strategic Planning and Risk Identification
Preliminary Engagement
Quality Control
10
Overview of the Financial Audit Manual
A. Objectives of Financial Audit
1. The objectives of a financial audit in the public sector are often broader than expressing an opinion
whether the financial statements have been prepared, in all material respects, in accordance with
the applicable financial reporting framework (i.e. the scope of the ISSAIs). The audit mandate, or
obligations for public sector entities, arising from legislation, regulation, ministerial directives,
government policy requirements, or resolutions of the legislature may result in additional
objectives. These additional objectives, which may be of equal importance to the opinion on the
financial statements, may include audit and reporting responsibilities, for example, relating to
reporting whether public sector auditors found any instances of non-compliance with authorities
including budgets and accountability frameworks, and/or reporting on the effectiveness of internal
control. However, even when there are no such additional objectives, there may be general public
expectations in regard to public sector auditors’ reporting of non-compliance with authorities or
reporting on effectiveness of internal control. Such additional responsibilities would be reported in a
separate section of the auditor’s report.
B. The Financial Statements Audit Process
2. The financial audit guidelines are explained with the aid of illustrations and suggested templates for
use as the case may be.
3. Guidelines are divided in five main sections excluding this Overview section:
Section 1: Preliminary Engagement Activities;
Section 2: Planning Phase;
Section 3: Audit Execution Phase;
Section 4: Reporting Phase; and,
Section 5: Quality Control Review.
4. Exhibit 2 presented below identifies the more important aspects discussed in each of the sections
and the applicable ISSAI.
QUALITY CONTROL
Exhibit 3. Audit Activities by Phase
Preliminary
Engagement
 Ensure engagement team’s independence and compliance with ethical standards (ISSAIs 1200; 1220)
 Define the terms of engagement (ISSAIs 1210; 1260)
Planning






Execution
 Execute audit tests (ISSAIs 1260; 1230; 1500; 1501; 1520; 1530; 1540; 1560; 1600; 1450)
 Summarize audit observations and recommendations (ISSAI 1230)
 Conduct exit conference (ISSAI 1230)
Reporting
 Evaluate misstatement (ISSAI 1450)
 Affirm written representations (ISSAI 1580)
 Form an audit opinion (ISSAI 1700 series (Revised); 1800; 1805)
Quality Control
Review
 Establish responsibility for quality control system and quality control procedures (ISSAI 1220)
 Quality Control Review Process (ISSAI 1220)
 Document Quality Control Review Process (ISSAI 1220)
Prepare overall audit strategy (ISSAI 1300)
Understand the audit entity (ISSAI 1240; 1250; 1265; 1300; 1315;1550; 1610)
Summarize results of preliminary identification of risks (ISSAI 1315; 1610)
Determine materiality thresholds (ISSAI 1320)
Assess risks and determine risk responses (ISSAIs 1315; 1330)
Prepare audit engagement plan (ISSAI 1300)
11
C. Applying the INTOSAI Financial Audit Guidelines (ISSAI 1000-2999)
5. The ISSAI 1700 (Revised) notes that depending on the standards applied, the public sector auditors
may refer to relevant auditing standards in one of the following ways:
a) in accordance with national standards, which are based on [or consistent with] the Fundamental
Auditing Principles (ISSAIs 100-999) of the International Standards of Supreme Audit Institutions
(refer to ISSAI 200.12);
b) in accordance with international standards (ISSAIs 1000-2999) (refer to ISSAI 200.13a);
c) in accordance with ISAs (refer to ISSAI 200.13b)
COA has adopted the INTOSAI Financial Audit Guidelines under COA Resolution Nos. 2013-007,
2014-011, and 2016-007.
12
Section 1
Preliminary Engagement Activities
1. Under Presidential Decree 1445 (PD 1445) or the Government Auditing Code of the Philippines, the
COA operates under the audit residency approach where government auditors and COA-assigned
administrative staff have the legal right to hold office in COA resident audit offices based in the
audited agencies.
2. Residency audits are justified by the multifarious audit and non-audit functions performed on a
year-round basis by the COA Auditors. Aside from audits (financial, compliance, initial fraud reviews,
post audit of transactions, cash examinations of cash accountable officers), they perform non-audit
related functions required by law including the custody of vouchers and witnessing of asset
disposals; among others. Given the power of the Commission under PD 1445 to institute measures
designed to preserve and ensure the independence of its representatives, COA is moving its auditors
by phase from the premises of the Auditees to the Satellite Audit Offices, subject to availability of
facilities.
3. With the mandate of COA under the Constitution and the PD 1445, there are certain ISSAI
requirements which can be done away with:
a. a review of the auditee’s professional and ethical practices as the results cannot be used as basis
for deciding whether to accept or not to accept and/or to continue with the engagement under
ISSAI 1220. COA is mandated under the Constitution and the PD 1445 to conduct audit of all
government agencies and instrumentalities. Unethical practices constitute “corrupt acts” under
Republic Act 3019, the Anti-Graft and Corrupt Practices Act, and must be considered by the COA
Auditor; and,
b. the need for management conformity with the terms of engagement under ISSAI 1210. COA
audits are mandated by law and the auditee has no discretion to refuse audit. The engagement
terms, which are contained in a formal letter issued to the Agency (discussed in this Section),
must be explained during the entrance conference for easy understanding and compliance by
the agency.
4. Preliminary engagement activities will involve:
I.
II.
I.
Ensuring Engagement Team’s Independence and Compliance with Ethical Standards; and,
Defining the Terms of Audit Engagement.
Ensuring Engagement Team’s Independence and Compliance with the Ethical Standards
5. The purpose of an FS audit is to enhance the degree of confidence of intended users in FS. This is
achieved by the expression of an opinion by the Auditor on whether the FS are prepared, in all
material respects, in accordance with an applicable FRF. In the case of most general purpose
frameworks, the opinion is on whether the FS are presented fairly, in all material respects in
accordance with the framework. An audit conducted in accordance with the standards and relevant
ethical requirements enables the auditor to form that opinion, which is required under ISSAI 1200.
13
6. The audit team is also required under ISSAI 1220 to implement quality control procedures at the
engagement level to have a reasonable assurance that:
a. The audit complies with professional standards and applicable legal and regulatory
requirements; and,
b. The auditor’s report issued is appropriate in the circumstances.
7. To ensure COA stakeholders that the audits conducted are in accordance with international
standards, the SA/RSA, ATL and Audit Team Members shall execute their respective Auditor’s
Declaration of Independence and Compliance with Other Ethical Standards, to be confirmed by the
CD/RD (Appendix 1-1). This is also in line with the adoption of the Revised Code of Conduct and
Ethical Standards for COA Officials and Employees under COA Resolution No. 2018-010 dated
February 1, 2018. This Declaration shall be executed by the concerned auditor upon assumption to
new assignment and before the start of audit for the year. The Declaration shall be executed by the
auditors for each audited agency.
8. Throughout the audit engagement, the CD/RD shall ensure that:
a. There are no threats to the independence of the audit engagement and that members of the
engagement team comply with relevant ethical standards. In instances that might compromise
the auditor’s ability to form an audit opinion without being affected by other influences, a
written notification must be made to update the Auditor’s Declaration of Independence and
Compliance with Other Ethical Standards. Threats to independence may take the form of:
i.
ii.
iii.
Conflict of interest;
Individual values system; or,
Familiarity with key management officials.
b. The engagement team collectively possesses appropriate competence and capabilities to: (i)
perform the audit engagement in accordance with professional standards and applicable legal
and regulatory requirements; and (ii) issue an auditor’s report that is appropriate in the
circumstances.
c. Due professional care is exercised. Due professional care requires the auditor to
exercise professional skepticism, an attitude that includes a questioning mind and a critical
assessment of audit evidence and to use the knowledge, skill, and ability called for by the
profession of public accounting to diligently:
i.
ii.
iii.
iv.
Gather and objectively evaluate evidence;
Gauge the experience and qualification level of an audit staff in relation to the audit
area/s where he/she is assigned. More experienced staff or those with special skills and
expertise are assigned to assertions and accounts with high risk. Technical audit staff such
as civil engineers should be requested when the audit requires an evaluation of
infrastructure projects;
Exercise closer supervision over critical areas especially where fraud was uncovered; and,
Identify areas where additional elements of unpredictability should be incorporated in the
audit procedures that need to be performed.
14
II.
Defining the Terms of Audit Engagement
9. The two sub-steps in undertaking this particular activity are: Establishing the terms of Audit
Engagement; and, Communicating the Terms of Audit Engagement with those charged with
governance
A. Establishing the Terms of Audit Engagement
10. The terms of the audit engagement required under ISSAI 1210 shall be established before the
commencement of the audit of a certain financial period. The audit engagement letter (Appendix 12) or other suitable form of written engagement shall include: (a) the objective and scope of the
audit of the financial statements; (b) the responsibilities of the auditor; (c) the responsibilities of
management; (d) identification of the applicable financial reporting framework which is PPSAS or
PFRS, for the preparation of the financial statements; (e) reference to the expected form and
content of any reports to be issued by the auditor; and, (f) a statement that there may be
circumstances in which a report may differ from its expected form and content.
11. This letter shall also specify the required disclosures for inclusion in the Notes to FS, particularly,
Related Parties, Claims and Litigations and Segment Accounting, if these exist; the performance
review to be done on the financial accounting and reporting practices of the auditee; the deadline
for the submission of a final Management written representation and the requests for copies of
specific reports and appointments for interview.
12. Written representation is a written statement provided by management, and where appropriate,
those charged with governance to confirm certain matters or support other audit evidence. It also
contains management’s representation that:
a. It has fulfilled its responsibilities for the preparation and fair presentation of FS in accordance
with applicable FRF;
b. It has provided the auditors with all relevant information and access as required in the
Engagement Letter. The management’s responsibility as discussed in the Engagement Letter
shall be included in the written representation;
c. All transactions have been recorded and are reflected in the FS; and,
d. Other concerns such as propriety of selection and application of accounting policies, compliance
with applicable frameworks in terms of recognition, measurement and presentation of accounts
and disclosures, and specific assertions in the FS.
13. Written representations are particularly required under the following ISSAIs:
Table 2. ISSAIs related to written representations
ISSAI
1240
1250
1450
1501
1540
Subject
The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements (par. 39)
Consideration of Laws and Regulations in an Audit of Financial Statements (par. 16)
Evaluation of Misstatements Identified during the Audit (par. 14)
Audit Evidence – Specific Considerations for Selected Items (paragraph 12)
Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related Disclosures
(par. 22)
15
ISSAI
1550
1560
1570
1580
1710
Subject
Related Parties (par. 26)
Subsequent Events (par. 9)
Going Concern (par. 16e)
Written Representations
Comparative Information (par. 9)
14. The Management Representation Letter should be issued as near as practicable to, but not after, the
date of the auditor’s report on the FS. The written representations shall be for all FS and period(s)
referred to in the auditor’s report (ISSAI 1580, par. 14). The MRL format, for management’s
reference, is attached to the Engagement Letter.
15. If the auditor did not receive the requested written representation or doubts the competence,
integrity, ethical value or diligence of management, or its commitment to, or enforcement thereof,
in particular, if written representations are inconsistent with other audit evidence, and the matter
remained unresolved despite additional audit procedures performed, the auditor shall determine
the effect that such concerns or non-submission thereof, may have on the reliability of oral or
written representations and audit evidence in general.
16. For foreign assisted projects, the engagement letter will consider the requirements of the foreign
lending/grantor institution.
B. Communicating the Terms of Engagement
17. The engagement letter shall be issued to management or to those charged with governance. This is
being issued to formally inform the auditee of the audit requirements, including the responsibilities
of the auditor and the auditee, and as a matter of professional courtesy and engagement direction.
After the engagement letter is formally acknowledged as received, the Audit Team shall arrange for
an entrance conference taking into consideration the availability of management, to discuss the
conditions cited in the terms of engagement. There is no need to seek conformity by the auditees
with the terms of engagement because COA is constitutionally and legally mandated to audit all
government agencies. However, the auditee’s cooperation and assistance should be sought
specifically on their responsibilities under the terms of engagement, such as submission of required
documents or schedules, and availability in meetings or interviews on dates agreed upon during the
entrance conference or meeting.
16
Appendix 1-1. Auditor’s Declaration of Independence and Compliance with
Other Ethical Standards
REPUBLIC OF THE PHILIPPINES
COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines
AUDITOR’S DECLARATION OF INDEPENDENCE AND COMPLIANCE
WITH OTHER ETHICAL STANDARDS
As (state designation; e.g. team member, team leader, supervising auditor/regional supervising auditor),
I acknowledge my assignment which requires me to be part of the audit team to conduct a financial
audit of the ____(Name of Agency)____ for the financial year ended _______.
I declare that to the best of my knowledge, I know of nothing that might impair my independence and
impartiality on the Audit that will contravene the independence requirements and other ethical
standards of any applicable code of professional conduct in relation to the audit.
Responsibility to Update This Declaration
I understand that I am also responsible to make timely written notification in the event any other
circumstance arises during the course of this audit that might impair or appear to impair my
independence with respect to this audit.
__ (Signature over printed name) __
Designation (SA/RSA/ATL/ATM)
Date:
Cluster/Regional Director’s Certification:
I have assigned the above staff to work on the stated audit and I am not aware of anything that might
impair his/her independence and impartiality and the competence of the Audit Team.
__ (Signature over printed name)__
Cluster/Regional Director
Date:
17
Appendix 1-2. Engagement Letter with attached Management Representation
Letter Format
REPUBLIC OF THE PHILIPPINES
COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines
Date
AGENCY HEAD
Agency XYZ
Quezon City
Attention: Chief Accountant
Dear ______________;
Pursuant to the Philippine Constitution of 1987, Article IX-D, Section 2, the Commission on Audit (COA) shall
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities. In this connection, the COA Audit Team will audit your Agency’s financial reports and financial
reporting processes for the year ended xxx.
A. Audit objectives
1.
The objectives of this audit are as follows:
1.1 Express an opinion on whether your financial statements are fairly presented, in all material respects,
in accordance with Philippine Public Sector Accounting Standards (PPSAS)/Philippine Financial
Reporting Standards (PFRS).
1.2 Communicate whether the internal control, particularly those affecting accounting and financial
reporting systems, are operating effectively to provide reasonable assurance that misstatements,
losses, or non-compliance would be reported in a timely basis.
1.3 Communicate the results of tests of compliance with selected provisions of laws and regulations,
including budgets and accountability issues, and details of audit suspensions, charges and
disallowances identified during the audit.
B. Auditor’s responsibilities
2.
We will conduct our audits in accordance with International Standards of Supreme Audit Institutions
(ISSAIs) issued by the International Organization of Supreme Audit Institutions (INTOSAI) to which the
Commission is a member. Those standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free
from material misstatement and comply with applicable laws and regulations.
3.
We will perform procedures to obtain audit evidence about amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including assessment of the risks
of material misstatement of the financial statements; whether due to fraud or error. In making those risk
assessments, we will limit internal control testing to those controls over financial reporting and
18
compliance issues which we consider critical based on our experienced professional judgment. However,
we will not test compliance with all laws and regulations applicable to the Agency. We caution that noncompliance may occur and not be detected by these tests and that such testing may not be sufficient for
other purposes.
4.
Our procedures will include internal control review; examination of documents/records/reports; analysis,
confirmation and inspection of selected accounts, transactions and projects, as necessary.
5.
We will communicate in writing any significant deficiencies and material weaknesses that come to our
attention as a result of the audit. In addition, we will communicate suggestions to improve agency
operations and address control deficiencies identified during our audit.
C.
Agency Financial Management Performance
6.
As part of the audit, we will assess agency financial management performance.
D. Audit Limitations
7.
Although the audit is designed to provide reasonable assurance of detecting errors and irregularities that
are material to the financial statements, it is not designed and cannot be relied upon to disclose all fraud,
defalcations, or other irregularities. However, we will inform you of any material errors, and all
irregularities or illegal acts, unless they are clearly inconsequential, that come to our attention.
E.
Agency’s responsibilities
8.
Management is responsible for:
8.1 The preparation and fair presentation of the following financial statements in accordance with
PPSAS/PFRS and submission of the same on deadlines set by the Commission on Audit:






Statement of Financial Position
Statement of Financial Performance / Statement of Comprehensive Income /
Statement of Profit or Loss
Statement of Cash Flows
Statement of Changes in Net Assets/Equity / Statement of Changes in Equity
Statement of Comparison of Budgets and Actual Amounts
Notes to Financial Statements
8.2 Making all financial records and reports, and related information available to us and for adjusting the
financial statements to correct material misstatements, and other information as required under
ISSAI 1720.
8.3 Issuing the Management Representation Letter (MRL) as near as practicable to, but not after, the
date of the auditor’s report on the financial statements as there are events occurring up to the date
of the auditor’s report that may require adjustment to or disclosure in the financial statements. The
MRL should be signed by the Chief Accountant/Head of Finance Group and the Head of the Agency.
(Format attached for your reference)
8.4 Submitting status of any pending claims and litigation involving the Agency, breakdown of related
party transactions and subsequent events which have to be adjusted and/or disclosed in the Notes to
Financial Statements.
9.
Management is encouraged to confer with the Auditor as to the required formats of the financial
19
statements to facilitate compliance with the presentation requirements of the PPSAS/PFRS.
F.
Assistance from Management
10. We will request assistance for the following, among others:
10.1
10.2
10.3
10.4
Assignment of focal person/s to facilitate meetings and requests relative to the audit
Preparing schedules or analyses and providing needed documents
Conferring with your officials and staff to facilitate understanding of the agency operation
Access to the work of internal auditors to facilitate review of internal control and risk assessment
related to audit of financial information
10.5 Workspace for the duration of the audit as required
10.6 Facilitating requirements of the audit team/s assigned to conduct field inspections and
observations.
G. Use and reproduction of COA audit reports
11. The working papers for this engagement are the property of the Commission on Audit and constitute
confidential information. However, certain documents may be made available upon request subject to
pertinent COA issuances. The Annual Audit Report, once released, will be published in the COA website,
for information of the public.
H. Audit Timelines
12. Subject to availability of requirements contained in this Letter, we expect to complete our audit and
transmit the required audited financial statements and report to management on or before (indicate the
prescribed period).
I.
Auditee’s Feedback on Audit Team’s Performance
13. After completion of the audit, the COA Central Office will send a Feedback Sheet to assess the team’s
performance as a way of improving the quality of our audits and our service to our audit clients. Please
send the filled in sheet duly signed by your Designated Official to the Office of the [Cluster/Region],
[Sector], Commission on Audit, Quezon City.
We look forward to your full cooperation during the audit.
Sincerely,
__Signature over Printed Name__
Cluster/Regional Director
Date Received by the Agency:
By: Name and Signature:____________________
Stamp date and signed received
20
Letterhead of the Audited Agency
Date (near but never after the date of the Auditor’s Report)
Management Representation Letter
Cluster/Regional Director
Commission on Audit
Commonwealth Avenue
Quezon City
Subject: Name of Agency/Corporation/LGU/Project Being Audited
This representation letter is provided in connection with your audit of the financial statements of the
Agency/Corporation/LGU/Project for the year ended December 31, 20xx for the purpose of expressing opinions as
to whether the financial statements are presented fairly, in all material respects, in accordance with Philippine
Public Sector Accounting Standards (PPSAS)/Philippine Financial Reporting Standards (PFRS) and as to other terms
required, if any.
Statement of Management's Responsibility for the Financial Statements
We affirm that the financial statements for the __(name of Agency/Corporation/LGU/Project)__ are
management's responsibility; that these were prepared in accordance with the PPSAS/PFRS, that all relevant
information was provided the Commission on Audit Team, that access to relevant information and records were
made available and that all transactions were recorded and reflected in the financial statements; and that all
instances of non-compliance of which we are aware of are disclosed to the COA audit team.
Specific Affirmations pertaining to the Financial Statements Provided to the Commission on Audit
We affirm that to the best of our knowledge and belief, having made such inquiries as we considered necessary for
the purpose of appropriately informing ourselves:
A. Financial Statements
We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated (indicate date),
for the preparation of the financial statements in accordance with the PPSAS/PFRS:
1.
2.
3.
4.
5.
6.
7.
8.
In particular, the financial statements are free from material misstatements including omissions and
errors, and are fairly presented.
Significant assumptions used in making accounting estimates, including those measured at fair value,
are reasonable.
Related party relationships and transactions, if any, have been appropriately accounted for and
disclosed in accordance with the requirements of the PPSAS/PFRS.
All events subsequent to the date of the financial statements and for which PPSAS/PFRS require
adjustment or disclosure have been adjusted or disclosed.
All matters related to claims, litigations, assessments and dispute have been disclosed to COA by our
Legal Office and external legal counsel.
The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to
the financial statements as a whole. A list of the uncorrected misstatements is attached to the
representation letter.
The selection and application of accounting policies are appropriate.
The following have been recognized, measured, presented or disclosed in accordance with the
PPSAS/PFRS:
21
a.
b.
c.
d.
Plans or intentions that may affect the carrying value or classification of assets and liabilities;
Liabilities, both actual and contingent;
Title to, or control over, assets, the liens or encumbrances on assets, and assets pledged as
collateral; and
Aspects of laws, regulations and contractual agreements that may affect the financial
statements, including non-compliance.
In preparing the financial statements, management is also responsible for assessing the
Agency/Corporation/LGU/Project’s ability to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting unless management either intends
to liquidate the Agency/Corporation/LGU/Project or to cease operations, or has no realistic alternative but to
do so.
B.
Internal Control
1.
2.
3.
C.
We have assessed the effectiveness of the [Agency/Corporation/LGU/Project's] internal control in
achieving the following objectives:
a. Reliability of financial reporting;
b. Compliance with applicable laws and regulations;
c. Safeguarding of assets; and
d. Achievement of agency objectives.
We have disclosed to you all significant deficiencies in the design or operation of internal control that
could adversely affect the entity's ability to meet the internal control objectives and identified those
we believe to be material weaknesses.
There have been no changes to internal control subsequent to (date of latest audited financial
statements), or other factors that might significantly affect it. (If there were changes, describe them,
including any corrective actions taken with regard to any significant deficiencies or material
weaknesses.)
Compliance
1.
2.
3.
4.
5.
The activities and financial transactions are in compliance with the relevant government rules and
regulations.
We have provided you with interpretation of compliance requirements that may have varying
interpretations.
All contracts, agreements and other correspondence have been made available.
We have disclosed all contracts and agreements with service organizations, including any
communications with those organizations related to instances of non-compliance.
The Agency/Corporation/LGU/Project has been operated effectively, throughout the period covered
by the audit.
D. Information Required
1.
We have provided you with:
a. Access to all information deemed relevant to the preparation of the financial statements such as
records, documentation and other matters;
b. Additional information requested for the purpose of the audit; and
c. Unrestricted access to persons within the entity determined necessary to obtain audit evidence.
2.
All transactions have been recorded in the accounting records and are reflected in the financial
statements.
22
3.
We have disclosed to you the specific results of our assessment of the risk indicating that the financial
statements may be materially misstated as a result of fraud.
4.
We have disclosed to you all information in relation to fraud or suspected fraud that we are aware of
and that affects the entity and involves: management; employees who have significant roles in
internal control; or others where the fraud could have a material effect on the financial statements.
5.
We have disclosed to you all known instances of non-compliance or suspected non-compliance with
laws and regulations whose effects should be considered when preparing financial statements.
6.
We have disclosed to you the identity of related parties and all the related party relationships and
transactions of which we are aware.
Signed:
_____Signature over Printed Name____
Chief Accountant /Head of Finance Group
_____Signature over Printed Name_____
Head of Agency/Authorized Representative
Date
Date
23
Section 2
Planning Phase
1. Under ISSAI 1300, planning is not a discrete phase of an audit but rather a continual and iterative
process that often begins shortly after the completion of the previous audit and continues until the
completion of the current audit.
2. Planning activities involve the following steps:
I.
II.
Preparing the Overall Audit Strategy
Conducting Preliminary Risk Assessment
A. Defining risks
B. Understanding the Audit Entity
a. Updating information base for financial audit and conducting preliminary risk assessment
b. Assessing other matters for consideration
1. Understanding Fraud Risks
2. Understanding risks from non-compliance with laws, rules and regulations
c. Assessing related parties
C. Summarizing the results of preliminary identification of risks
III.
Conducting Final Risk Assessment
A. Determining the materiality threshold
B. Assessing risks and determining risk responses
a. Performing Risk assessment
b. Determining Risk responses
IV.
Preparing the Audit Engagement Plan
A. Updating the Overall Audit Strategy
B. Preparing the Audit Program
C. Preparing the Engagement Planning Memorandum
I.
Preparing the Overall Audit Strategy
3. Establishing the audit strategy involves setting the scope, timing and direction of the audit towards
the development of an Audit Engagement Plan. When developing the overall strategy, ISSAI 1300
identifies these concerns:
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.
24
4. The overall audit strategy is prepared by the ATL, reviewed by the SA/RSA and approved by the
CD/RD. The auditor may need to modify the overall audit strategy as the circumstances arise because
of unforeseen events, changes in conditions, or audit evidence obtained from the results of audit
procedures which require significant changes in strategy. These changes, while allowable, must be
approved by the CD/RD upon the recommendation of the SA/RSA. Frequent changes should be
avoided as these indicate poor planning. The overall audit strategy template is attached as Appendix
2-1 of this Section.
II.
Conducting Preliminary Risk Assessment
A. Defining Risks
5. Based on paragraph 1.6.1 of RBFAM, risk is the probability of an act or event occurring that would
have an adverse effect in the achievement of an agency’s objectives. Thus, the threat that an event,
action or inaction will adversely affect the agency’s ability to successfully achieve its mandate and
objectives and execute its strategies is defined as the agency risk.
6. On the other hand, the risk that the auditor may express an inappropriate opinion on the FS is known
as audit risk. Although audit risks and agency risks are dissimilar in nature, it is often the case that
identification of significant agency risks lead to the detection of audit risks.
7. The three components of audit risks are:
a.
Inherent risk is the susceptibility of an assertion, about a class of transaction, account balance or
disclosure to a misstatement that could be material, either individually or when aggregated with
other misstatements, before consideration of any related controls. (IRRBAM, par. 2.6.1 (b))
b.
Control risk is the risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements will not be prevented, or detected and corrected, on a
timely manner by the entity’s internal control. (IRRBAM, par. 2.6.1 (c))
c.
Detection risk is the risk that the auditor’s procedures will not detect a misstatement that exists
in an assertion that could be material, individually or when aggregated with misstatements.
(RBFAM, par. 1.6.1)
8. The factors that may affect inherent risk assessment are:
a. Judgment – a high degree of judgment is involved in business transactions.
i. Degree of subjectivity
ii. Competence and experience of agency personnel
b. Estimates – significant estimates are included in transactions, which make it more likely that an
estimation error will be made.
i. Susceptibility to material misstatement
ii. Variations from expected amounts
iii. Transactions not subjected to routine processing
25
c. Complexity – the transactions in which a business engages are highly complex, and so are more
likely to be completed or recorded incorrectly.
i. Size and composition
ii. Effects of external factors
iii. Completion of unusual/complex transactions at or near period-end
9. The preliminary assessment of control risk is based on the following:
a. Evaluation of the design of controls done in Understanding the Process activity;
b. Information obtained from prior periods’ engagements, if available; and
c. Information obtained from the results of walkthrough procedures in Understanding the Process
activity.
10. For a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to the
assessed risks of material misstatement (inherent risk plus control risk) at the assertion level. For
example, the greater the risk of material misstatement the auditor believes exists, the less the
detection risk that can be accepted and, accordingly, the more persuasive the audit evidence required
by the auditor. (ISSAI 1200, par. A44)
11. Detection risk relates to the nature, timing and extent of the auditor’s procedures that are determined
by the auditor to reduce audit risk to an acceptably low level. It is therefore a function of the
effectiveness of a procedure and of its application by the auditor. Matters such as: (a) adequate
planning; (b) proper assignment of personnel to the engagement team; (c) the application of
professional skepticism; and (d) supervision and review of the audit work performed, would help
enhance the effectiveness of an audit procedure and of its application, and reduce the possibility that
an auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or
misinterpret the audit results. (ISSAI 1200, par. A45)
B. Understanding the Audit Entity
12. The resident auditors assigned in their respective agencies perform, among others, financial and
compliance audits. Thus, auditors have practically broad knowledge of agency operations which
should be summarized in the UTA Template attached as Appendix 2-2.
13. The UTA template may include the following:
a.
b.
c.
d.
e.
A general overview of the entity’s organization and operations;
The agency’s main activities and critical processes;
Projects/Programs/Activities;
Results of previous audit;
Auditor’s notes on any component that may be significant to the conduct of financial audit.
14. To enhance Auditor’s understanding of the audit entity, the following steps shall be undertaken:
a. Updating information base for financial audit and conducting preliminary risk assessment;
b. Assessing other matters for consideration; and,
c. Assessing Related Parties transactions
26
a. Updating Information Base for Financial Audit and Conducting Preliminary Risk Assessment
15. Given the extent and quality of information available to COA Auditors, the sources of financial
information to be used as basis for the preliminary risks assessment review are categorized as:
Table 3. Sources of financial information
Category
1. COA
informatio
n base
2. Auditees
and other
offices
3. Generated
based on
audit
analysis
performed
Sources
 Financial, compliance and performance audit reports; cash
examination reports; fraud audit reports; project audit reports;
 Bank Statements and Bank Reconciliation Statements;
 Property and personnel accountability audits
 Notice of Suspensions, Notice of Charges and Notice of
Disallowances, Notice of Finality of Decisions, COA Order of
Execution;
 Evaluation/investigation reports/emerging issues from newspaper
accounts;
 Financial Reports such as Reports of Checks Issued and Report of
Collections and Deposit
 Disbursement Vouchers
 Recommendation Tracking Sheet
 UTA Template and Financial Accountability LogFrame
 Charter or mandate;
 Organizational Chart/Functional Chart;
 Manual of operations;
 Internal audit reports;
 Minutes of meetings and conferences with the agency;
 Official directives, new laws and regulations affecting the agency;
 Appropriations/annual budget and other financial and project reports
 General Accounting Plan;
 Financial Statement Analysis;
 Agency-level Controls Checklist
Information to be obtained
 Possible
causes
of
misstatements due to errors,
fraud;
 Financial statements accounts
which may be misstated;
 Inherent risks for specific
accounts particularly cash,
PPE, expenditures;
 Possible controls which need
to be tested;
 Possible risk areas
 Adequacy of internal control
over financial reporting;
 Risks posed affecting specific
financial statements accounts;
 Agency’s primary functions;
 Limits of authority
 Operations flow in relation to
internal control
 Adequacy of internal control;
 Risks posed affecting financial
statements accounts;
 Risks on assertions related to
presentation and disclosure
16. Analysis of information under categories 1 and 2 may assist the audit team in identifying accounts
with possible material misstatements. The results of analysis based on categories 1 and 2 information
is presented in Illustration 1.
Illustration 1. Working Paper on Preliminary data analysis
Sample
Source
Document
Issues
Amount
Involved
(in PhP)
Real
Account
Affected
Income/Expense
Account Affected
Assertions
Affected
Category 1
1. Bank
Reconciliation
Statements
Unrecorded reconciling items, i.e.
interest income
500,000.00
2. Notices of
disallowance
Two NDs considered final and
executory were issued NFD/ COE.
The disallowance was not yet
recorded in the books.
5,000,000.00
27
Cash
Receivable;
Retained
Earnings/
Accumula
Interest Income
Completeness
Accuracy,
Completeness
Sample
Source
Document
Issues
Amount
Involved
(in PhP)
Real
Account
Affected
Income/Expense
Account Affected
Assertions
Affected
ted
Surplus/
(Deficit)
3. Performance Ten livelihood projects undertaken
Audit Report
by partner NGOs in 2016 are nonexistent. Funds released to the
NGOs cannot be accounted for.
4,500,000.00
Due from
NGOs;
Cash
Accuracy/
Existence
Five vehicles cannot be presented
and remained unaccounted
1,758,000.00
PPE
4. Cash
Examination
Report
Shortage of ₱10,000,000.00, not yet
restituted
10,000,000.00
Cash;
Receivable
Existence
Accuracy
Valuation
5. Prior Year’s
audit
adjustments/
Financial Audit
Reports
Property and equipment officially
turned over to LGUs were still
reported under Construction in
Progress account
59,000,000.00
Construction in
Progress
PPE
Accuracy
Existence
Valuation
6. Recommendation
Tracking Sheet
Misstated accounts remained
unadjusted
500,000.00
Inventory
Supplies Expense
200,000.00
PPE
Depreciation
Expense
Depreciation
expense
Accuracy
Occurrence
Existence
Valuation
Accuracy
Valuation
Category 2
1. Internal
Audit Reports
2. Project
Reports
Supply ledger cards were not
regularly updated, and preparation
and submission of reports on the
issuance of supplies to the
Accounting Office is delayed by
three to six months.
Undetermined
Inventory
Supplies
expense
Accuracy
Valuation
The procurement plan of the agency
was not reflective of the actual
requirements. This resulted in
overstocking of slow moving
supplies, of which significant
amounts were already expired
and/or damaged.
500,000.00
Inventory
Loss/ spoilage
Accuracy
Valuation
10 projects were already completed
but not yet turned-over to
implementing agency
20,000,000.00
CIP
PPE
Accuracy
Valuation
2,000,000.00
CIP
PPE
Accuracy
Valuation
Two projects were terminated
28
17. The activities and information that can be gathered under Category 3 are discussed below.
a.1 Updating the Understanding of the Agency’s Internal Control System (AICS)
a. Internal Control is an integral process that is effected by an agency’s management and personnel,
and is designed to address risks and provide reasonable assurance that in pursuit of the agency’s
mission, the general objectives are being achieved.
b. Internal Control should provide reasonable assurance regarding the achievement of agency’s
objectives in the following categories:




Effectiveness and efficiency of operations;
Reliability of financial reporting;
Compliance with applicable laws and regulations; and,
Safeguarding of assets.
c. The preliminary assessment of the Internal Control System of the agency is based on the five
components of the internal control:





Control Environment – sets the tone of an organization, influencing the control
consciousness of its staff. It is the foundation for all other components of internal
control, providing discipline and structure.
Risk Assessment – process of identifying and analyzing relevant risks to the
achievement of the agency’s objectives and determining the appropriate response.
Control Activities – The policies and procedures established to address risks and to
achieve the agency’s objectives. The procedures that an organization puts in place to
treat risk.
Information & Communication – effective processes and systems that identify, capture
and report operational, financial and compliance-related information in a form and
timeframe that enable people to carry out their responsibilities.
Monitoring – the process that assesses the quality of the internal control system’s
performance over time.
d. The principles of internal control are presented in Table 4.
Table 4. Principles of Internal Control
Components
Control
Environment
Risk
Assessment
Principles
1) Management and staff demonstrate personal and professional integrity and
ethical values;
2) Management sets the “tone at the top” (i.e. management’s philosophy and
operating style);
3) Management establishes an appropriate government organizational structure;
4) Management and staff exhibit commitment to competence; and,
5) Management establishes human resource policies and practices.
6) Management identifies and defines appropriate objectives and risk tolerance in
specific and measurable terms;
7) Management identifies, evaluates and assesses agency’s risks; and,
8) Management determines appropriate response to the identified, evaluated, and
29
Components
Control
Activities
Information &
Communication
Monitoring
Principles
assessed agency’s risks.
9) Management designs control activities which are appropriate, function
consistently according to plan throughout the period, cost effective,
comprehensive, reasonable and directly relate to the control objectives and to
address risks;
10) Management develops control activities which include a range of diverse policies
and procedures; and,
11) Management develops an effective information technology control activities.
12) Management develops and maintains reliable and relevant financial and nonfinancial information;
13) Management communicates information throughout the agency; and,
14) Management communicates information with external parties.
15) Management establishes and operates activities to monitor the internal control
system and evaluates the results; and,
16) Monitoring activities ensure that audit findings and recommendations are
adequately and promptly resolved.
e. An effective internal control system requires that:


Each of the five components of internal control are present and functioning.
The five components are operating together in an integrated manner.
f. For the evaluation of Internal Control Structure, the ALCC template attached as Appendix 2-3 will
be used. (Culled from the Internal Control Standards for Philippine Public Sector 2017 (ICSPPS)
under COA Resolution No. 2018-007 dated February 1, 2018.)
g. Upon the completion of the ALCC template, the generated answers shall be evaluated and the
results of the evaluation shall be summarized. The summary of the evaluation shall form part of
the preliminary assessment of the Internal Control System. The auditor should be able to identify
which areas of internal control activities must be tested as a result of the preliminary evaluation.
To guide the auditor in evaluating the critical internal control processes to be tested, the
procedures can be designed in the form of a checklist questionnaire. An example of a checklist
questionnaire for cash receipts is attached as Appendix 2-3A.
h. Test of Internal Control Design (Effectiveness and Operating Effectiveness)
In selecting controls to test, key controls must be considered. Important or key controls address
the risk of a material misstatement. Testing internal control design determines whether the
control is designed in a way that would prevent or detect an error or fraud.
In testing internal control design, the auditor should only test those controls that are important
to the auditor’s conclusion about whether the controls of the Agency/Unit/Corporation/Project
sufficiently address the assessed risk of misstatement to each relevant assertion.
There might be more than one control that addresses the assessed risk of misstatement to a
particular relevant assertion; conversely, one control might address the assessed risk of
misstatement to more than one relevant assertion. It is neither necessary to test all controls
30
related to a relevant assertion nor necessary to test redundant controls, unless redundancy is
itself a control objective.
The auditor should test the design effectiveness of controls by determining whether the
Agency/Unit/Corporation/Project controls satisfy the Agency/Unit/Corporation/Project’s control
objectives and can effectively prevent or detect errors or fraud that could result in material
misstatements in the financial statements.
An example of a control being designed well is a journal entry recording and approval where one
person prepares and another one reviews and approves, irrespective of whether they are
actually following such rule.
The auditor should test the operating effectiveness of a control by determining whether the
control is operating as designed and whether the person performing the control possesses the
necessary authority and competence to perform the control effectively.
In the previous example of journal entry recording and approval, although there are two
different individuals preparing, and reviewing and approving the journal entry, the design may
not be operating effectively, if the one preparing and/or the one reviewing and approving, or
both, do not have the necessary authority and competence to do their respective
responsibilities.
The Control Design may be tested in the following manner:
i. Inquiring – ask appropriate people;
ii. Observing – watch them do the operation or do the particular steps; and,
iii. Inspecting relevant documents – get a copy of the report, look through the pages or items
and the comments that the reviewer made.
i. Two types of controls
There are two types of controls, preventive controls and detective controls.
i.
Preventive Controls are designed to discourage errors or irregularities from occurring.
Examples of preventive controls are:
o Segregation of Duties – Duties are segregated among different people to reduce the risk
of error or inappropriate action;
o Approvals, Authorizations, and Verifications– Management authorizes employees to
perform certain activities and to execute certain transactions within limited parameters;
and,
o Security of Assets (Preventive and Detective) – Access to equipment, inventories,
securities, cash and other assets is restricted; assets are periodically counted and
compared to amounts shown on control records.
ii.
Detective Controls are designed to find errors or irregularities after they have occurred.
Examples of detective controls are:
31
o
o
o
o
Review of Performance – Management compares information about current
performance to budgets, forecasts, prior periods, or other benchmarks to measure the
extent to which goals and objectives are being achieved and to identify unexpected
results or unusual conditions that require follow-up;
Reconciliations – An employee relates different sets of data to one another, identifies
and investigates differences, and takes corrective action, when necessary;
Physical Inventories – Annual or Semi-annual;
Audits – Internal or External
j. External Auditor, in this case COA Auditors, can also use the works of Internal Auditors, when
they have determined that the internal audit function is likely to be relevant to the audit. The
guidance on the use of the works of Internal Auditors and in assessing their objectivity is
provided under ISSAI 1610.
k. The internal auditor may be presumed to be objective if the following criteria are met and the
internal auditor’s function is established by legislation or regulation:






The internal auditor is accountable to top management and to those charged with
governance;
The internal auditor reports the audit results both to top management and those charged
with governance;
The internal audit unit is located organizationally outside the staff and management
function of the unit under audit;
The internal auditor is sufficiently removed from political pressure to conduct audits and
report observations, opinions, and conclusions objectively without fear of political
reprisal;
The top management permits internal auditors to audit operations for which they have
previously been responsible for to avoid any perceived conflict of interest; and,
The internal auditor has access to those charged with governance.1
l. Irrespective of the degree of autonomy and objectivity of the internal audit function, such
function is not independent of the entity as required of the external auditor when expressing an
opinion on financial statements. The external auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the external auditor’s use of the work of the
internal auditors.
a.2 Testing Compliance with the General Accounting Plan (GAP)
The GAP shows the overall accounting system of the agency/unit including the standard source
documents, the flow of transactions and recording in the books of accounts, and their conversion
into financial information/data presented in the financial reports. The general flow of transaction
as well as the possible source documents, books of accounts and monitoring reports generally
required by affected accounts using the GAM for national government agencies as guide, is
illustrated in Appendix 2-4.
1
(Nzechukwu, 2016, p. 546)
32
The actual flow of transactions of a particular subsystem as well as the existence of the
documents and books of accounts can be established through a walkthrough analysis using
sample transactions pertaining to the subsystem being analyzed. The Auditors are advised to
prepare the GAP indicating only the specific source documents and reports by account applicable
to their respective agencies which should be used in the walkthrough analysis.
To illustrate, the fund transfer process is tested based on the standard documents flow identified
in the GAM using, five journal vouchers for fund transfers of various types. The results show the
need for the Chief Accountant to clarify why certain activities and forms were not used. There is
also a need to establish the officials authorized to approve the fund transfers, among others. The
walkthrough analysis of the fund transfers process is shown below:
Illustration 2. Walkthrough Analysis for Source Agency – Fund Transfer Account
Type of
document/
report
Source
Document
Specific
document
examined
MOA, DV,
ADA
Summarizing None
report
Basis of
JEV
Recording
Books of
Original
Entry
CkDJ,
ADADJ
Subsidiary
Ledger
Book of
Final Entry
By nature/IA
Monitoring
Reports
Aging
Schedules,
Unliquidated
Fund
Transfers
GL
JEV 012016-01-24
JEV 012016-03-67
DV and
letter
requests
dtd. Jan.
23, 2016
DV and
MOA dtd.
Mar. 12,
2016
none
none
Walkthrough analysis performed
JEV 01JEV 01JEV 012016-082016-102016-06-250
359
450
DV dtd.
DV and
DV and
Sept. 9,
letter from MOA
2016
Senator
Aug. 3,
Tralala
2016
dtd. Aug.
25, 2016
none
none
none
JEV,
approved
by Chief
accountant
CkDJ dtd.
Jan. 21-23,
2016
JEV,
approved
by Fin.
Officer
CkDJ dtd.
Mar. 31,
2016
JEV,
approved by
Chief
accountant
CkDJ dtd.
Sept. 9,
2016
Due from
NGOs
GL dtd.
Jan. 31,
2016
none
none
none
GL dtd.
Mar. 31,
2016
none
GL dtd.
Sept. 30,
2016
none
Remarks
Three transactions
were not covered by
MOA, two were not
reflected in the SL,
while two others were
misposted.
Aging
schedule was not
also prepared. There
is a need to inquire
JEV,
JEV,
why
transactions
approved
approved
were authorized and
by Dept.
by Chief
approved
despite
Head
Accountant insufficient
CkDJ dtd. CkDJ dtd. documentation and
Aug. 25,
Aug. 31,
approved by different
2016
2016
approving officers.
There is also a need
to assess compliance
Other
Due from
with existing rules
receivables LGU
and
regulations
GL dtd.
GL dtd.
governing
fund
Aug. 31,
Aug. 31,
transfer.
2016
2016
none
none
a.3 Financial Statements Analysis
There are two types of financial analysis that can be applied by the Auditor.
a. One is variance analysis where the Auditor can compare the latest set of FS and the
corresponding period of the preceding year's FS balances. The results of the analysis will
provide an initial indication about whether a risk of material misstatement exists. An example
of variance analysis is presented in Appendix 2-5.
33
b. Another form of FS analysis is a tie-in analysis. The Auditor compares the figures of the
accounts or group of accounts or contra accounts in the FS and reported in the Notes to FS. A
tie-in analysis will show whether the figures presented and disclosed are reliable and properly
presented.
i.
Figures of accounts in the SFPos are compared against those reported in other statements
and in the Notes to FS. For instance, the Cash balance of the SFPos should agree with the
ending balance figure of the SCF and Notes to FS. Differences indicate mathematical errors
or omissions.
ii.
The amount reflected in the budget and actual amounts columns in the SCBAA should
match the figures reflected in the various registries maintained and financial
accountability reports prepared by the Budget Division/Unit.
iii.
The Auditors should have a good knowledge of the chart of accounts, account description,
contra-accounts, accounts that shall no longer be appearing in the year end SFPos such as
Cash-MDS, Regular, and accounts that are for exclusive use of a particular agency or
groups of agencies to be able to perform extensive tie-in-analysis of accounts within a
specific financial statements, and between and among financial statements.
b. Assessing Other Matters for Consideration
b.1. Understanding Fraud Risks
18. Misstatements in the FS can arise from either fraud or error. The distinguishing factor between fraud
and error is whether the underlying action that results in the misstatements of the FS is intentional or
unintentional.
19. Although fraud is a broad legal concept, the auditor is concerned with fraud that causes a material
misstatement in the FS. Two types of intentional misstatements are relevant to the auditor;
misstatements resulting from fraudulent financial reporting and misstatements resulting from
misappropriation of assets. Although the auditor may suspect or, in rare cases, identify the occurrence
of fraud, the auditor does not make legal determinations of whether fraud has actually occurred.
20. The Auditor, though, should obtain evidence on management processes of addressing fraud risks from
identification to responding and to monitoring compliance with management processes by those
charged with governance.
21. The following are examples of circumstances that may indicate the possibility that the FS may contain
a material misstatement resulting from fraud.
a. Discrepancies in the accounting records, including:
i. Transactions that are not recorded in a complete or timely manner or are improperly recorded
as to amount, accounting period, classification or entity policy;
ii. Unsupported or unauthorized balances or transactions;
iii. Last-minute adjustments that significantly affect financial results;
34
iv. Evidence of employees’ access to systems and records inconsistent with that necessary to
perform their authorized duties; and,
v. Tips or complaints to the auditor about alleged fraud.
b. Conflicting or missing evidence, including:
i. Missing documents;
ii. Documents that appear to have been altered;
iii. Unavailability of documents other than photocopied or electronically transmitted documents
when documents in original form are expected to exist;
iv. Significant unexplained items or reconciliations;
v. Unusual balance sheet changes, or changes in trends or important FS ratios or relationships –
for example, receivables growing faster than revenues;
vi. Inconsistent, vague, or implausible responses from management or employees arising from
inquiries or analytical procedures;
vii. Unusual discrepancies between the entity’s records and confirmation replies;
viii. Large number of credit entries and other adjustments made to accounts receivable records.
ix. Unexplained or inadequately explained differences between the accounts receivable subledger and the control account, or between the customer statements and the accounts
receivable sub-ledger; and,
x. Missing or non-existent cancelled checks in circumstances where cancelled checks are
ordinarily returned to the entity with the bank statement.
22. The Auditor should be guided with the requirements under ISSAI 1240 in relation to fraud in the audit
of financial statements.
b.2. Understanding Risks from Non-compliance with Laws, Rules and Regulations
23. Non-compliance by the entity with laws and regulations may result in a material misstatement of the
FS. Detection of non-compliance, regardless of materiality, may affect other aspects of the audit
including, for example, the auditor’s consideration of the integrity of management or employees.
24. Transactions which are non-compliant with existing laws and regulations are considered illegal and
irregular and, thus, disallowed in audit as required under existing COA regulations. Notices of
Disallowance issued to entities for non-compliance with laws, rules and regulations are not yet taken
up in the books until a Notice of Finality of Decision has been issued in accordance with Rules and
Regulations on Settlement of Accounts. There is a financial error or misstatement in the event that the
management failed to record disallowances which are final and executory.
25. The Auditor should be guided with the requirements under ISSAI 1250 in their consideration of
compliance with laws and regulations. Furthermore, where there are specific statutory reporting
requirements, it may be necessary for the audit plan to include appropriate tests for compliance with
these provisions of the laws and regulations.
26. As discussed in ISSAI 1250, non-compliance shall be reported in the Auditor’s Report on the Financial
Statements in the following manner:
35
a.
If the auditor concludes that the non-compliance has a material effect on the FS, and has not
been adequately reflected in the FS, the auditor shall, in accordance with ISSAI 1705, express a
qualified opinion or an adverse opinion on the FS.
b.
If the auditor is precluded by management or those charged with governance from obtaining
sufficient appropriate audit evidence to evaluate whether non-compliance that may be material
to the FS has or is likely to have occurred, the auditor shall express a qualified opinion or disclaim
an opinion on the FS on the basis of a limitation on the scope of the audit in accordance with
ISSAI 1705.
c.
If the auditor is unable to determine whether non-compliance has occurred because of
limitations imposed by the circumstances rather than by management or those charged with
governance, the auditor shall evaluate the effect on the auditor’s opinion in accordance with
ISSAI 1705.
c. Assessing Related Parties
27. Related Parties pertain to (i) persons or other entities that have control or significant influence,
directly or indirectly through one or more intermediaries, over the reporting entity, (ii) entities over
which the reporting entity has control or significant influence, directly or indirectly through one or
more intermediaries, and (iii) other entities under common control with the reporting entity through
having common controlling ownership and common key management.
28. Entities that are under common control by a state, (that is, a national, regional or local government)
are not considered as related unless they engage in significant transactions or share resources to a
significant extent with one another. (par. 10, ISSAI 1550)
29. The objectives of assessing related parties is to obtain an understanding of related party relationships
and transactions sufficient to be able:
a. To recognize fraud risk factors, if any, arising from related party relationships and transactions
that are relevant to the identification and assessment of the risks of material misstatement due to
fraud; and,
b. To conclude, based on the audit evidence obtained, whether the FS, insofar as they are affected
by those relationships and transactions:
i. Achieve fair presentation (for fair presentation frameworks); or
ii. Are not misleading (for compliance frameworks)
C. Summarizing the Results of Preliminary Identification of Risks
30. In summarizing the information gathered, focus is on conditions which will facilitate identification of
risk of misstatements due to errors or fraud on the FS as a whole or to specific accounts at the
assertion level during the risk assessment process.
31. Appendix 2 of ISSAI 1315 lists conditions and events that may indicate risks of material misstatements.
As emphasized below, these are only examples and should not be considered as a complete listing.
Information gathered at this point may relate to some of these conditions/events:
36
Table 5. Examples of conditions and events that may indicate risks of material misstatements
Conditions and Events that May Indicate Risks of Material Misstatement
Listed below are examples of conditions that may indicate the existence of risks of material misstatement in the financial
statements. The examples provided cover a broad range of conditions and events; however, not all conditions and events
are relevant to every audit engagement and the list of examples is not necessarily complete.





















Constraints on the availability of capital and credit
Changes in the supply chain
Expanding into new locations
Changes in the entity such as large acquisitions or reorganizations or other unusual events
Existence of complex alliances and joint ventures
Use of off balance sheet finance, special-purpose entities, and other complex financing arrangements such as buildoperate-transfer, etc.
Significant transactions with related parties
Lack of personnel with appropriate accounting and financial reporting skills
Changes in key personnel including departure of key executives
Deficiencies in internal control, especially those not addressed by management
Incentives for management and employees to engage in fraudulent financial reporting
Changes in the IT environment
Installation of significant new IT systems related to financial reporting
Congressional, investigative bodies or COA inquiries into the entity’s operations or financial results by regulatory or
government bodies
Past misstatements, history of errors or a significant amount of adjustments at period end
Significant amount of non-routine or non-systematic transactions including intercompany transactions and large
revenue transactions at period end
Transactions that are recorded based on management’s intent, for example, debt refinancing, assets to be sold and
classification of marketable securities
Application of new accounting pronouncements
Accounting measurements that involve complex processes
Omission, or obscuring, of significant information in disclosures
Pending litigation and contingent liabilities, for example, claims and lawsuits
32. For ease in analysis, the potential misstatements may be grouped into three categories considering
the following assertions:
Table 6. Assertions in considering misstatements
Category
Transaction level
assertions
Assertion
Occurrence
Completeness
Accuracy
Cutoff
Classification
Account balance
assertions
Existence
Rights and
obligations
Completeness
Condition
All recorded transactions and events actually took place.
All transactions and events that should be recorded have been
recorded.
Full amounts of all transactions and events were recorded without
error.
All transactions and events were recorded within the correct
reporting period.
All transactions have been recorded in the correct accounts in the
general ledger.
All account balances exists for assets, liabilities, and equity.
The entity holds or controls the rights to assets, and liabilities are
the obligations of the entity.
All reported asset, liability, and equity balances have been fully
reported.
37
Category
Assertion
Accuracy,
valuation
and
allocation
Classification
Presentation and
Other
disclosures
Presentation
Understandability
Accuracy
Completeness
Rights and
obligations
Occurrence
Condition
Assets, liabilities, and equity interests have been included in the
financial statements at appropriate amounts and any resulting
valuation or allocation adjustments have been appropriately
recorded.
Assets, liabilities and equity interests have been recorded in the
proper accounts.
For account balances, assets, liabilities and equity interests are
appropriately aggregated or disaggregated and clearly described,
and related disclosures are relevant and understandable in the
context of the requirements of the applicable financial reporting
framework.
For transactions and events, they are appropriately aggregated or
disaggregated and clearly described, and related disclosures are
relevant and understandable in the context of the requirements of
the applicable financial reporting framework.
The information included in the financial statements has been
appropriately presented and is clearly understandable.
All information disclosed is in the correct amounts, and which
reflect their proper values.
All transactions that should be disclosed have been disclosed
Disclosed rights and obligations actually relate to the reporting
entity.
Disclosed transactions have indeed occurred.
33. The preliminary assessment should also include account/s covered by Specific Audit Instructions
issued by the concerned Supervising Auditor. The results of the preliminary assessment will be
summarized to include the FS accounts affected; possible risk identified from the information
gathered and the type of risk in terms of assertion. Additional information required to firm up the
assessments should also be indicated so that the necessary documents or appointments for interviews
with officials concerned are obtained. A sample Summary Report on the Preliminary Identification of
Risks and other matters is attached as Appendix 2-6.
34. The SRPIR becomes the initial basis for conducting further risk assessment and updating the overall
audit strategy. Materiality considerations will be discussed as part of the conduct of final risk
assessment.
III.
Conducting Final Risk Assessment
A. Determining the Materiality Thresholds
35. Materiality threshold pertains to the amount of materiality set as benchmark to evaluate the
significance of misstatements or omissions noted during audit.
36. ISSAI 1320 explains that misstatements and omissions are considered to be material if they,
individually or in aggregate, could reasonably be expected to influence the economic decisions of
users of the FS. The users are considered as a group of users of FS rather than as individual users.
38
37. The concept of materiality is applied both in planning and performing the audit, and also in evaluating
the effect of identified misstatement in the FS. It is also based on the concept that items of little
importance do not require to be audited since these will not affect the judgment or action of a
reasonable FS user. While materiality is primarily based on the auditor’s professional judgment, such
judgment should consider both qualitative and quantitative aspects to reduce the risk of audit
decisions which are either overly liberal or conservative.
38. Items of little importance are considered trivial. Clearly trivial as mentioned in ISSAI 1450, par. A2 does
not mean “not material.” Misstatements that are clearly trivial will be of wholly different (smaller)
order of magnitude, or of a wholly different nature than those that would be determined to be
material, and will be misstatements that are clearly inconsequential, whether taken individually or in
the aggregate and whether judged by any criteria of size, nature or circumstances.
39. ISSAI 1320 describes qualitative considerations specific to determining materiality levels in the public
sector: When determining whether a particular class of transactions, account balance, disclosure, or
other assertion which is part of the financial reporting framework, is material by virtue of its nature,
public sector auditors take into account qualitative aspects such as:
a) The context in which the matter appears; for example, if the matter is also subject to compliance
with authorities, legislation or regulations, or if law or regulation prohibits overspending of public
funds, regardless of the amounts involved;
b) The needs of the various stakeholders and how they use the financial statements;
c) The nature of the transactions that are considered sensitive to users of the financial statements;
d) Public expectations and public interest, including emphasis placed on the particular matter by
relevant committees in the legislature, such as a public accounts committee, including the
necessity of certain disclosures;
e) The need for legislative oversight and regulation in a particular area; and
f) The need for openness and transparency; for example, if there are particular disclosure
requirements for frauds or other losses.
40. Quantitative materiality thresholds or the maximum errors are established at three levels:
a. Overall materiality (for the FS as a whole) is an amount set to establish whether or not the
financial statements can be regarded as materially misstated. Misstated, individually or in
aggregate, above this threshold is considered significant enough to influence the decision of users
and thus, considered the FS materially misstated. This can be changed during the audit depending
on the information received by the Auditor. This is used to determine the level of performance
materiality and specific materiality.
b. Performance materiality is the amount set at less than the overall materiality to lower the risk of
not being able to detect uncorrected and undetected misstatements which in the aggregate, may
be considered material for the overall financial statements. Some known advantages of setting
performance materiality include:
i.
ii.
Providing some assurance that the undetected and uncorrected misstatements will not
accumulate to reach an amount that would cause the FS to be materially misstated;
Serving as a guide to the Auditor to require adjustment in the FS, aggregate errors reaching
this amount;
39
iii.
iv.
Assessing the risks of material misstatement and determining the nature, testing and
extent of further audit procedures; and
Serving as the assertion testing level/threshold to identify high value items or as sampling
interval when selecting items for testing or calculating sample size. The audit has to cover
all items or transactions or accounts above the value set as performance materiality.
c. Specific materiality refers to the amount or amounts set at less than overall materiality for
particular classes of transactions, account balance or disclosures which may reasonably be
expected to influence the economic decisions of users taken on the basis of FS.
Specific Materiality could relate to sensitive areas such as particular note disclosures (that is,
management remuneration or entity key-specific data), compliance with legislation or certain
terms in a contract, or transactions upon which remunerations are based. It could also relate to
the nature of a potential misstatement such as an illegal act, non-compliance with loan covenants
and statutory/regulatory reporting requirements.
Some of the disclosures that would normally be subject to a Specific Materiality level are:
i.
ii.
iii.
iv.
Related party transactions and balances;
Significant management estimates or valuations;
Non-compliance with legislation or terms in a contract;
Significant events and important changes in operations (e.g., expansion or discontinued
operations, new services);
v. Significant accounting policies or changes in accounting policies; and,
vi. Sensitive income and expense accounts such as management fees and research and
development costs.
41. The Audit Team Leader shall determine the materiality thresholds particular to the audited entity,
subject to the review of the Supervising Auditor and to the approval of the Cluster/Regional Director
concerned.
42. In an audit of the financial statements of stand-alone agencies (not a component/regional/head
office), the Audit Team Leader shall determine and use the overall materiality, performance
materiality, specific materiality (if applicable), and testing threshold throughout the audit.
43. In an audit of a consolidated/combined FS of groups with components or agencies with regional
offices:
i.
The Audit Team Leaders in the head/component/regional office preparing ML/ SAOR (whichever
may be applicable) shall determine and compute the overall materiality, performance
materiality, specific materiality and testing threshold using their respective FS. In case of
separate FS for each type of fund (e.g., General Fund, Special Education Fund, Trust Fund), the
auditor shall compute materiality thresholds using the specific FS for each fund.
ii.
The Supervising Auditor (head of audit group) preparing the CAAR and issuing the IAR shall
determine the overall materiality, performance materiality, specific materiality and testing
threshold (if applicable) based on the consolidated/combined financial information of the whole
group/agency. The computed overall materiality will be used in determining whether the
40
consolidated/combined FS is misstated or not, and in determining the type of audit opinion to be
issued on the consolidated/combined FS.
44. Calculating materiality is established through these steps:
a. selecting an appropriate benchmark;
b. identifying appropriate financial data for the selected benchmark; and,
c. calculating materiality based on established percentages.
Step 1. Selecting an Appropriate Benchmark
45. Among the factors that may affect the identification of an appropriate benchmark include the
elements of the FS (for example, assets, liabilities, equity, revenue, expenses).
46. ISSAI 1320 (A9) notes that in an audit of public sector entity, the total cost or net cost (expenses less
revenues or expenditures less receipts) may be appropriate benchmarks for program activities. Where
a public sector has custody of public assets, these may be the appropriate benchmark. There are no
hard and fast rules for determining whether an agency is to be considered as asset or expenditure
driven. However, the following may facilitate in identifying where the agency is driven:
a. The agency mandate and even the targeted outputs will determine the appropriate benchmark.
For instance, if outputs are identified in terms of physical assets such as number of buildings,
kilometers of roads among others, then it must be asset driven. If outputs are in terms of number
of workshops, number of trainings, number of services rendered, then it must be expenditure
driven.
b. If the agency’s targets are both in terms of physical assets and expenditures, the auditor may
consider the mandate or major activity of the agency, whether assets acquisition or expenditures.
47. The ATL shall determine the benchmark to be used, either total expenditures or total assets or total
revenues, subject to the review of the SA/RSA and approval of the CD/RD. This benchmark shall be
consistent yearly unless the agency’s mandate is changed.
Step 2. Identifying Appropriate Financial Data for the Selected Benchmark
48. The benchmark figures shall be based on the unaudited FS for the current year-end unless the same is
not available. In such case, the audited FS figures for the past year-end is used to be adjusted upon
availability of the current year-end unadjusted FS.
49. If the base is asset, the total assets of the latest year-end SFPos available is used.
50. If the base is expenditure or revenue, the reported total expenditure or revenues of the latest yearend SFPer is used.
Step 3. Calculating Materiality Based on Established Percentages
41
51. The levels of materiality thresholds are set and applied in the following manner, unless a different
materiality benchmark/computation is required thru the issuance of a materiality circular or
guidelines:
a.
b.
c.
The overall materiality shall be set at 1 percent of the total selected benchmark.
The performance materiality shall be set at 50 percent of the overall materiality. Testing
threshold for high value items shall be set at 25 percent of performance materiality.
The specific materiality shall be set at 0.20 percent for the chosen class of transactions, account
balances or disclosures.
52. The percentage set for overall materiality can be increased up to 2 percent upon the recommendation
of the SA/RSA and approval by the CD/RD. The decision to change the rate shall be based on
assessment that the entity has a strong internal control and has implemented audit recommendations
to address misstatements and ensure reliability of FS.
53. The performance materiality and specific materiality can be decreased upon the recommendation of
the SA/RSA and approval by the CD/RD.
54. To illustrate how these levels are computed, the following financial information based on the latest FS
are used as sample:
Illustration 3. Sample Financial Information
(Name of Agency)
Year ended December 31, 20xx (In billion ₱)
1.380
0.520
0.860
0.001
1.350
Account
Asset
Liabilities
Equity
Revenue
Expenses
55. The materiality level set using the financial information is calculated as:
Illustration 4. Sample Materiality Computation Table
Materiality Computation Template
Agency
Objective
Users of financial statements
Asset or expenditure driven
Financial data used
Overall materiality
Performance materiality
Specific materiality
Testing Threshold for HVI
(Name of Agency/Unit/Corporation/Project)
Improved urban environment through capacity building and construction of structure
Agency; Legislative Bodies; Oversight Bodies; COA; Public
Expenditure driven
Statement of Income for 20xx
1%
of ₱1.350 billion = ₱13.500 million
50% of ₱13.500 million = ₱6.750 million
0.20% of ₱810.000 million = ₱1.620 million (Repairs and Maintenance Expenses)
25% of ₱6.750 million = ₱1.687 million
Note:
 Repairs and Maintenance Expenses – ₱810.000 million
42
56. The template for determining materiality level is attached as Appendix 2-7. The same Appendix should
be used in case of changes in the original calculation where the actual results using the final financial
statements are substantially different from the preliminary FS used as a basis for original calculation.
B. Assessing Risks and Determining Risk Responses
57. The steps are broken into: (a) performing risk assessment; and (b) determining risk responses.
a. Performing Risk Assessment
58. As discussed in the preliminary risk assessment, the SRPIR becomes the initial basis for further risk
assessment. The Auditor shall conduct final risk assessment on each of the relevant assertions in the
SRPIR.
59. Risk assessment involves the identification of sources of risk and assessment as to whether
information obtained could result in a material misstatement in the financial statements. Risk of
material misstatement at the assertion level (risk that the financial statements are materially
misstated prior to audit) consists of inherent risks and control risks which were discussed earlier.
(ISSAI 1003)
60. The following are examples of risks that the entity may encounter:
Table 7. Examples of Risks





Inherent risks
Inexperienced or not properly trained
accounting staff
Officers not aware of their
responsibilities
Non-preparation of monitoring reports
Non-existent bank accounts
Undocumented or not sufficiently
documented transactions and/or
unliquidated fund transfers
Control Risks
 Non-preparation of bank reconciliation
 Use of funds for purposes other than the intended purposes
or for personal purposes
 Unreconciled accounts
 Failure to recognize properties transferred to other
agencies or work-in progress already completed
 Delay in recording transactions such as liquidation reports,
issuances of supplies and failure to recognize book
reconciling items
61. The Auditors should, however, not limit their evaluation on the risks identified during Preliminary
Assessment as there could be intervening events or circumstances that may need equal attention. This
include material items in the FS even if initially, they have no risk as these should eventually be
included in the audit plan.
62. The ISSAI Implementation Handbook – Financial Audit relative to ISSAI 1315 enumerates the steps
involved in a risk assessment as:
a.
b.
c.
d.
e.
f.
Inherent risk identification;
Inherent risk assessment;
Identification of significant risk;
Understanding internal control;
Evaluating internal control design and implementation of internal controls; and,
Final risk assessment.
43
Step 1. Inherent Risk Identification
63. There are two major classifications of inherent risk: agency risk and fraud risk. Agency risk results from
significant conditions, events, circumstances, actions that could adversely affect the entity’s ability to
achieve its objectives and exercise its strategies. Fraud risk is related to events or conditions that
indicate an incentive or pressure to commit fraud.
64. For identifying risks, the auditor considers: factors like the nature of the operation, accounting
policies, agency objectives and strategies and financial implications, review of financial performance,
relevant controls to mitigate risks at the agency and transactional levels, and laws and rules applicable
for the audited entity.
Step 2. Inherent Risk Assessment
65. The Auditor needs to assess the identified risks and determine their importance for the audit of the
financial statements before considering any internal control that might mitigate such risks. Risk
assessment involves consideration of two attributes about inherent risks: (i) the likelihood of a
misstatement occurring as a result of the risk with the probability rated as high, moderate or low.; (ii)
the magnitude (monetary impact) if the risk would occur.
66. The auditor should gather information from the concerned management officials about their risk
assessment process and as to how risks are identified and managed. The SRPIR (Appendix 2-6) may be
updated as the need arises or when additional information is obtained.
67. Significant risks or pervasive risks affecting the FS as a whole are segregated. These risks will be
considered in all the financial statements accounts. In the case of inherent risks on FS accounts, these
are sorted by FS account and summarized to reflect the final conditions and assertions identified.
Step 3. Identification of Significant Risks
68. A significant risk is where the assessed risk of material misstatement is so high that in the auditor’s
judgment, it will require special audit consideration as in these cases:
a.
b.
c.
d.
e.
large non-routine transactions;
matters requiring judgment or management intervention such as changes in accounting
impairment policies;
error or fraud is high;
non-compliance with laws and regulations; or,
unreliable internal control.
69. For significant risks, the auditor should: evaluate internal control over these risks, such as control
activities and indirect (pervasive) internal controls; design an audit response to obtain audit evidence
with high reliability including tests of controls and substantive procedures. Substantive analytical
procedures alone are not sufficient and are not considered as an appropriate response.
70. Significant risks will include unqualified accounting staff; lack of values formations training, accounting
and procurement training of concerned staff; fraudulent project transactions; non-routine large
44
transactions; and non-compliance with laws and regulations. These risks are considered in all of the
accounts affected, usually all FS accounts.
Step 4. Understanding Internal Control
71. Since not all control activities are relevant to the audit, an understanding of the controls related to the
risk of misstatement is necessary to ensure that the relevant control is identified. This is initially
undertaken during the preliminary risk identification (Appendices 2-2 to 2-6 for initial assessment).
Only controls related to the risk of material misstatement should be identified.
72. Based on the understanding of control activities and the determination as to whether they are likely
to achieve the control objectives, the auditor reassesses control risk to decide whether to test
controls.
Step 5. Evaluation of Internal Control Design and Implementation of Internal Controls
73. This means that significant risks are identified as to whether they are pervasive or specific; controls
are identified to mitigate them; and controls are tested, observed or inspected to ensure that these
are implemented and functioning.
74. Significant risks are considered pervasive if these are not confined to specific elements, accounts or
items of the financial statements. If so confined, the affected account represents or could represent a
substantial proportion of the financial statements. The level of control risks is assessed as to high,
moderate or low based on the results of tests. (Appendices 2-2 to 2-6 for initial assessment)
75. The operating effectiveness of internal control design can be tested in the following manner, among
others:
a.
b.
c.
d.
e.
f.
Identifying appropriate controls to be tested.
Deciding on the appropriate testing technique.
Determining the appropriate documents to be tested.
Determining the level of test (period to be covered, representative sample, extent).
Examining evidence/documents to determine whether controls have been properly
implemented.
Summarizing and documenting the results of evaluation.
Step 6. Final Risk Assessment
76. The final step in the risk assessment phase of the audit is to review the results of the risk assessment
procedures performed, and assess the risks of material misstatements at the FS level and the assertion
level for classes of transactions and disclosures guided by the Risk Decision Table.
b. Determining Risk Responses
77. Responses to the results of the risk assessment are based on the decision model setting the nature of
audit procedure/s and extent of audit to be performed given the results of a risk assessment and
45
depending on the level of risk of material misstatement established for specific audit objectives,
accounts and assertions.
78. To summarize, the risk responses to be adopted may be:
a. When both inherent and control risks are low, the overall RMM is also low. Hence, further testing
of controls is performed to firm up the audit conclusion reached together with a low level of
substantive tests.
b. When the inherent risk is low but the control risk is moderate, a low overall RMM is established.
Hence, the extent of tests of controls is moderate with a low level of substantive tests.
c. When inherent risk is low but control risk is high, the RMM is moderate. As such, there is no need
to perform tests of controls as these cannot be relied on anyway. Since inherent risk is low, a
moderate level of substantive tests is required.
d. When inherent risk is moderate and control risk is low, the RMM is low. More tests of controls are
performed to firm up the audit conclusion, with a low level of substantive tests.
e. When both inherent and control risks are moderate, the RMM is also moderate. Hence, the levels
of tests of controls and substantive tests to be performed are also moderate.
f. When inherent risk is moderate and control risk is high, the RMM is high. Hence no reliance is
placed on controls meaning, no tests of controls are necessary. A high level of substantive tests is
however needed.
g. When inherent risk is high and control risk is low, the RMM is moderate. Hence a high reliance is
placed on tests of controls and a moderate level of substantive tests is required.
h. When inherent risk is high and control risk is moderate, RMM is high. No reliance is placed on
control hence no need to test controls but a high level of substantive tests is required.
i. When both inherent and control risks are high, RMM is high. No reliance is placed on control
hence no need to test controls but a high level of substantive tests is required.
79. These risk responses are summarized in the Risk Decision Table presented in Table 8.
Table 8. Risk Decision Table
IR
Low
Moderate
High
CR
Low
Moderate
High
Low
Moderate
High
Low
Moderate
High
RMM (IR + CR)
Low
Low
Moderate
Low
Moderate
High
Moderate
High
High
Preliminary Audit Strategy
High reliance on controls and a low level of substantive tests.
Moderate reliance on controls and a low level of substantive tests.
No reliance on controls and a moderate level of substantive tests.
High reliance on controls and a low level of substantive tests.
Moderate reliance on controls and a moderate level of substantive tests.
No reliance on controls and a high level of substantive tests.
High reliance on controls and a moderate level of substantive tests.
No reliance on controls and a high level of substantive tests.
No reliance on controls and a high level of substantive tests.
80. Following the risk decision table, tests of controls are performed when control risks are low to
moderate. No tests of controls are needed when control risk is high because there is no point testing
controls which are absent or cannot be relied upon.
81. The result of the test of controls will determine the nature, extent and timing (net) of the substantive
tests that will be performed. Substantive tests are procedures performed by the auditor to detect
material misstatement or fraud related to transactions or account balances.
46
82. The resulting test of assessed risks will form the foundation for the next audit phase which is to
determine how to respond to the assessed risks through the design of audit procedures. The results of
risk assessment at the assertion level is illustrated in Appendix 2-8. A duly filled out sample of
Appendix 2-8 is attached as Appendix 2-8A for guidance.
IV.
Preparing the Audit Engagement Plan
83. The fundamental elements in preparing the audit engagement plan are: (a) updating the overall audit
strategy; (b) preparing the audit program; and (c) preparing the engagement planning memorandum.
A. Updating the Overall Audit Strategy
84. The overall audit strategy prepared during the preliminary risk assessment need to be updated to
consider the results of final risk assessments.
85. ISSAI 1450 requires the auditor to revise the overall audit strategy if: (a) the nature of identified
misstatements and the circumstances of their occurrence indicate that other misstatements may exist
that, when aggregated with misstatements accumulated during the audit, could be material; or (b) the
aggregate misstatements accumulated during the audit, approaches the materiality level determined
in accordance with ISSAI 1320.
86. The overall audit strategy for COA purposes should consider the key activities from the Risk
Assessment Process to the Reporting Phase. Moreover, there are audit activities or requirements
which no longer form part of the risk assessment process but must be included in the Strategy. These
pertain to, among others:
a. Special considerations: Related Parties; Litigation and Claims; Segment Reporting and Subsequent
Events with procedures discussed in Section 3, Execution Phase;
b. Other accounts determined falling within the performance materiality level not covered in the risk
assessment;
c. In the case of nationwide audits, the Strategy should consider synchronization of timelines for
group planning, execution and reporting; setting materiality thresholds in a uniform manner;
scheduling of audit inspections; confirmations from external parties, among others.
B. Preparing the Audit Program
87. An audit program contains the audit procedures to be performed for a specific audit objective for the
financial account and the risks identified by assertion. Audit Program for each audit areas included in
the overall audit strategy should be prepared.
88. The audit program saves time and labor; increases efficiency; controls the work performed; maintains
uniformity and continuity; identifies responsibilities; helps to maintain continuity; and, facilitates
presentation of evidence.
89. The auditor may use standard audit programs relevant to the risks identified or to the audit areas. An
audit program template is provided as Appendix 2-9.
47
C. Preparing the Engagement Planning Memorandum
90. The final activity of the Planning Phase is preparing the EPM. As a planning tool, EPM sets out the
objectives of the audit and spells out how the auditor aims to achieve these objectives. As a
supervision and monitoring tool, it tracks the progress of the audit and promotes high quality and
professional audit work.
91. This Memorandum contains the following:
Part 1 – Audit Coverage, Objective and Methodology
a. Audit Scope/coverage- should be clearly described;
b. Audit objectives -should be clearly defined; and,
c. Audit methodology- should be clearly established supported with audit programs.
Part 2 - Significant contents of the Overall Audit Strategy
A brief narration of the major activities to be performed supported by the final overall audit strategy
updated brought about by new conditions, unforeseen events, or audit evidence obtained from the
results of audit procedures which includes the following, among others:
a. Materiality thresholds;
b. The number of staff to conduct the audit;
c. The major timelines: entrance conference, exit conference, securing management representation
letter, audit report issuance;
d. Coordination activities relative to a nationwide audit;
e. Inspections to be conducted; and,
f. External confirmations to be performed.
Part 3 – Summary of major accounts and assertions for audit considerations
a. Accounts and Assertions with high risks of material misstatements and significant risks identified
in the final risk assessment template. (Appendix 2-8)
b. Other Material Accounts (OMA) refer to financial statement accounts above or equal to the
performance materiality but were not considered as significant based on the results of the Final
Risk Assessment.
c. Special Considerations: Related Parties, Litigation and Claims, Segment Reporting and Subsequent
Events
Part 4 – Audit Program (Appendix 2-9)
92. The EPM serves as the “blueprint” of the financial audit after the Planning Phase and contains the
detailed audit procedures to be performed in response to the results of the risk assessment and the
procedures for audit areas which no longer had to pass through a risk process but are required to be
performed. It must be prepared by the Audit Team Leader, reviewed by the SA/RSA and approved by
the CD/RD. Template of EPM (Appendix 2-10) and other related appendices are attached to elaborate
on certain facts as considered necessary.
48
Appendix 2-1. Overall Audit Strategy
(SECTOR) (CLUSTER) - Agency XYZ
OVERALL AUDIT STRATEGY
Audit Team/Address ________________________________________________________________________________________
Prepared by ___________________________________________________________
Reviewed by __________________________________________________________
Approved by __________________________________________________________
Date Prepared _____________________
Date Reviewed _____________________
Date Approved ____________________
A. Introduction
A.1. Background
State the COA Office Order on the creation and composition of the audit team.
B. Audit Scope and Period Covered
Financial audit of CY 2017 Financial Statements
C. Significant Milestones
Phase
Activities
A. PLANNING
1
Conduct initial risk assessment based on available
data and additional documents requested from
management:
a. Initial analysis of available documents/reports
b. Initial variance and tie in analysis (latest
available TB of the Current Year)
c. Initial indication of Misstatements
d. Updated UTA Template
e. Updated General Accounting Plan
f. Updated Agency-level Control Checklist
g. Validation of implementation of prior year's
audit recommendations
2
Establish materiality threshold.
WP
Ref.
Expected Output
Summary Report on the
Preliminary Identification
of Risks
Materiality Template
49
Person
Responsible
M
J
J
Target Date to Accomplish
2017
2018
A S O N D J F M
A
Remarks
Phase
Activities
3
Update risk assessment based on the additional
information, data and reports. (Including testing
of control for significant inherent risk and
establishing the overall audit risk). Prepare
summary of risk assessment by account and by
assertion.
4
Identify other audit activities not covered in the
risk assessment (Segment reporting, litigation
and claims, related parties, subsequent event,
accounting estimates and analysis of accounts,
etc.)
5
Updating overall audit strategy (OAS)
6
Prepare Audit Engagement Planning
Memorandum including audit program by
account/by assertion/ by special considerations
(ISSAI 1800)
7
Approve Audit Engagement Planning
Memorandum.
8
Issue Specific Audit Instructions to the audit team
for the execution of the audit plan.
B. EXECUTION
1
2
3
4
5
6
7
Conduct the audit based on the approved Audit
Engagement Planning Memorandum and the
attached Audit Program
Issue AOM, ND, NS, NC, Audit Memorandum, as
the need arises
Perform final financial statements variance and
tie-in analysis.
Review financial statements and corresponding
Notes to FS to ensure compliance to presentation
and disclosure requirements by ISSAIs.
Prepare summary of proposed audit adjustments
and evaluate effects in the audit opinion
Prepare Summary of Audit Observations and
Recommendations
Follow-up of the Agency Action Plan
WP
Ref.
Expected Output
Results of Risk Assessment
at the Assertion Level
Summary of other audit
activities
Updated OAS
Approved Engagement
Planning Memorandum
supported with Audit
Program by
account/assertions/special
considerations
Specific Audit Instructions
Working Papers by account
AOM, NS, ND, NC, AM
WP on Financial Analysis
Summary of notes for
review
Summary of proposed audit
adjustments
Summary of Audit
Observations and
Recommendations
Agency Action Plan
50
Person
Responsible
M
J
J
Target Date to Accomplish
2017
2018
A S O N D J F M
A
Remarks
Phase
Activities
8
Prepare the recommendation tracking sheet
indicating the control number and deadline for
implementation
9
Conduct exit conference
C. REPORTING
1
2
3
4
5
6
7
Secure Management Representation Letter which
is dated near the date of the audit report
Draft the annual audit report including section on
the results of internal control review
Submit draft report to the supervisor for review
Submit draft report to the Director for review
Finalize AAR and sign the IAR
Transmit the audit report to the management
Wrap-up, organization and archiving of working
papers
D. Quality Control Review
1
Accomplish compliance completion checklist
supported by audit working papers
2
Send the Auditee Feedback Sheet to Agency for
accomplishment
3
Accomplish the Director’s Evaluation Form
4
Rate Management Performance
WP
Ref.
Expected Output
Recommendation Tracking
Sheet
Minutes of exit conference
Management
Representation Letter
Draft AAR
Draft Report
Final AAR and signed IAR
Duly received Transmittal
Letter
Duly indexed Working
Papers
Compliance completion
checklist
Auditee Feedback Sheet
Director’s Evaluation Form
Financial Management
Performance Rating
Note: Highlight the date the activities are to be implemented.
51
Person
Responsible
M
J
J
Target Date to Accomplish
2017
2018
A S O N D J F M
A
Remarks
Appendix 2-2. Understanding the Agency Template
UNDERSTANDING THE AGENCY
A. MANDATE
Relevant law, rule or regulation defining the purpose of the agency.
B. OPERATIONS
The Agency’s main activities and critical processes.
C. STRUCTURE
Describe the Agency’s organizational structure and its relation to other key government
agencies. (Attach the Agency’s organizational structure, as necessary)
D. KEY STAKEHOLDERS
List stakeholders, or unified stakeholder groups, whose expectations or actions (or
inactions) can significantly influence management or affect the agency objectives
E. KEY ENVIRONMENTAL FACTORS
Briefly describe the environment of the agency and how the operations of the Agency are
affected/influenced by environmental factors.(e.g., Political Environment, Social
Environment, Legal and Regulatory Environment, Technological Environment)
F. PROGRAMS/ PROJECTS/ ACTIVITIES
Briefly describe the Agency’s major/significant programs/projects/activities for the year
including the expected outputs and budget allocation and initial evaluation on whether the
expected outputs are in line with the objectives and strategies of the agency and the budget
allocation is appropriate using the Financial Accountability LogFrame attached as Appendix
2-2A.
G. ACCOUNTING POLICIES
Brief description of key accounting policies applied, including financial reporting
standards/financial reporting framework (e.g. PPSAS, PFRS)
H. RESULTS OF PREVIOUS AUDIT
Significant audit findings included in the financial, compliance, and performance audit
reports that have financial implications
1) Audit opinion/s rendered on the agency for the last three years and the reason for
qualifications, if any
2) Financial management rating of the auditor on the auditee
52
I. RECENT DEVELOPMENT/NEWS
RECENT DEVELOPMENT/NEWS
IMPACT ON THE AGENCY
 Source (e.g. Inquirer/date)
 Court/COA/CSC Decisions


Subject to Congressional inquiry
Subject to Ombudsman case

UTA Summary
Auditor’s notes on any component that may be significant to the conduct of Financial Audit.
53
Appendix 2-2A. Financial Accountability LogFrame
Particulars
Accountable
Operational Units
Program
1
Planning, Monitoring and Knowledge
Management Division
Monitoring and Evaluation Reports
prepared through research studies
Outputs expected  No. of M&E Reports
324
(efficiency targets)  No. of M&E Reports
6300
disseminated
1
 No. of M&E system
maintained
3
 No. of evaluative study
conducted
1
 No. of website updated
20000
 No. of website visits
30244
 No. of knowledge products
disseminated (publications and
3
 No. of database system
developed/updated
Budget by object
Consultancy services - 8,350,000
of expenditures
Traveling expenses - 5,469,000
Donations - 3,712,000
Other MOOE - 5,518,000
Printing and Publication - 1,369,000
Budget
allocated
PS
MOOE
Total
2
Policy Development and Coordination
Division
AFC Consultations for policy development
 No. of policy agenda
 No. of consultations/workshops
facilitated
 No. of consultations supported
 No. of policy briefs/reviews
 No. of local issues resolved
 No. of plans/profiles
Volunteer management, capacity
development and social mobilization
17  No. of projects showcased
2
833  No. of stakeholder
12
collaborations supported
1716  No. of partnership
6
agreements facilitated
12
147
14
Traveling Expenses – Local - 4,661,000
Consultancy Services - 8,000,000
Representation Expenses - 7,071,000
Donations - 13,281,000
Traveling Expenses – Foreign - 1,694,000
Other MOOE - 5,518,000
6,005,000.00
8,115,000.00
24,418,000.00
40,225,000.00
30,423,000.00
48,340,000.00
54
3
Partnership Development Division
Traveling Expenses – Local - 8,617,000
Training Expenses - 3,946,000
Awards/Rewards Expenses - 1,560,000
Other Professional Services - 10,083,000
Representation Expenses - 5,904,000
Other MOOE - 1,443,000
8,083,000.00
31,553,000.00
39,636,000.00
Appendix 2-3. Agency-Level Controls Checklist
AGENCY-LEVEL CONTROLS CHECKLIST
Agency/Project
Audit Period
:
:
Name
January 1 to December 31, 20xx
Internal Control Component
Yes No NA
Remarks
I.
Control Environment
1. Management demonstrates personal and professional integrity and ethical values.
1.1 Management should establish and communicate the integrity and ethical values of the agency.
a) Management’s actions influence others to behave and respond in
ways that are deemed valuable and appropriate to their agency’s
outcomes.
b) Management promotes the primacy of public interest in the
performance of duties.
c) Management develops, regularly reviews, and updates manual
that addresses expectations regarding agency’s practices and
ethical behaviors; disciplinary policies and procedures; and
methods of reporting fraud, other misconduct, etc.
d) Management’s commitment to integrity and ethical behavior is
communicated effectively throughout the agency, both in words
and deeds. This may be achieved through oral communications in
meetings, via one-on-one discussions, and by example in day-today activities.
e) Management and staff are familiar with the importance of high
ethics and controls.
f) Existing and new employees are provided with the code of
ethics/conduct.
g) There are appropriate policies regarding agency’s practices,
conflicts of interest, and code of conduct that are established and
communicated.
h) The agency conducts value development programs for its
officials and employees in order to strengthen their commitment
to the public.
i) The following subjects, among others, are included in the
agency’s programs and other parallel efforts on value
development:
 Ethical and moral values;
 Rights, duties, and responsibilities of public servants; and
 Socio-economic conditions prevailing in the country.
1.2 Management and staff should exhibit a supportive attitude toward internal control at all times throughout the agency.
a) The head of agency or the governing body shows concern for
integrity and ethical values.
b) The agency adopts innovative programs and
continually
conducts experimentation/research on measures to motivate
officials and employees in raising the level of observance of public
ethical standards.
c) There is a mechanism in place to regularly educate and
communicate to management and employees the importance of
internal controls, and to raise their level of understanding of
controls.
55
Internal Control Component
Yes No NA
Remarks
1.3 Every officer and employee in the agency should maintain and demonstrate personal and professional integrity and ethical
values, and has to comply with the applicable code of conduct at all times.
a) Management acts to remove or reduce incentives, opportunities,
or temptations that may prompt personnel to engage in dishonest,
illegal, or unethical acts.
b) Coverage of ethical dilemmas, ethical failures, and ethical
successes are included in the agency’s newsletter, bulletin, or
other printed forms.
c) All employees are aware that all forms of fraudulent acts against
the agency will result in administrative and criminal investigations.
d) The agency conducts continuing refresher courses, seminars,
and/or workshops to promote high standards of ethics in the
public service.
e) There is a committee or officer designated to conduct
investigation over disciplinary matters.
f) The agency promulgates rules and regulations governing
expeditious, fair, and equitable judgment of employees’ complaints
or grievances in accordance with the policies enunciated by the
Civil Service Commission (CSC).
g) The head of agency or the governing body ensures that the policy
on fiscal responsibility is faithfully adhered to in all the financial
affairs, transactions, and operations of the agency.
2. Management sets the “tone at the top.”
2.1 The “tone at the top” should reflect management’s commitment, involvement, and support toward internal controls in the
agency.
a) Management creates an internal audit service as part of the
internal control system.
b) Management provides sufficient resources to carry out internal
controls.
c) Management leads by example with respect to good governance,
risk management, and internal controls.
d) Management sets a good example through its own actions and
its conduct, reflecting what is proper rather what is acceptable or
convenient.
e) Values of the agency and creation of roles and responsibilities
with respect to good governance, risk management, and internal
controls are communicated from the top as key values of the
agency.
f) Management commits to provide appropriate attention to internal
controls, including the effects of information systems processing.
g) The head of agency or the governing body gives adequate
consideration to understanding management’s processes for
monitoring risks affecting the agency.
h) The head of agency or the governing body represents an
informed, vigilant, and effective overseer of the financial reporting
process and the agency’s internal control, including information
systems processing and related computer controls.
i) The agency implements the government-wide Quality
Management Program.
j) Management shows a positive and supportive attitude toward the
functions of accounting, information management systems,
personnel operations, monitoring, and internal and external audits
and evaluations.
2.2 The code of conduct, counselling, and performance appraisals should support the internal control objectives and, in
56
Internal Control Component
Yes No NA
Remarks
particular, the objective of “ethical operations.”
a) The head of agency ensures that officials and employees attend
value development programs and participate in parallel value
development efforts.
b) The head of agency or the governing body ensures adherence to
the principle that public office is a public trust.
c) A code of conduct/ethics can support and enable the desired
types of employee behavior and point out the consequences of
violating the principles of the code.
d) Management continually reinforces its principles in word and
deed, with training programs, model behavior, and by taking
appropriate actions in response to violations.
e) The agency establishes performance evaluation system.
2.3 Agency’s policies, procedures, and practices should promote orderly, ethical, economical, efficient, and effective conduct of
operations.
a) There are control features interwoven into, and making an
integral part of each system in the agency that management can
use to regulate and guide its operations.
b) The agency adopts and implements control policies and
measures on the following:
 delegation of authority and supervision;
 segregation of functions for processing, reviewing,
recording, custody, and approval;
 access to resources and records;
 completeness and integrity of transaction documents and
reports;
 verification of transactions; and,
 reconciliation of records and data.
c) The agency takes appropriate measures to promote transparency
and accountability in the management of public finances.
d) The design and implementation of an agency’s quality
management system are influenced by the following:
 organizational environment;
 changes in that environment and the risks associated with
that environment;
 varying needs;
 particular objectives;
 services it provide;
 processes it employ; and
 size and organizational structure.
e) Management’s development of accounting estimates tends to be
conservative and is consistent with objective and fair reporting.
f) Manuals of procedures are in use.
g) The agency has written policies on, but not limited to, the
following:
 delegation or assumption of duties when an employee is
absent;
 annual vacations for all staff;
 obtaining background or reference for new staff;
 training programs for employees; and,
 rotation of employees.
h) The agency requires designated official/s to regularly monitor or
review compliance with the requirements of loan contracts, trust
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Internal Control Component
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agreements, and similar contracts.
i) The agency complies with the policies, standards, and guidelines
promulgated by the CSC to promote economical, efficient, and
effective personnel administration in the government.
Personnel should be reminded periodically of their obligations under an operative code of conduct issued by the
management.
a) All employees are provided with updated code of ethics/conducts,
at least yearly, and receive periodic training on the application of
the code.
b) All personnel are aware that the agency’s control environment is
within the framework of public service accountability, where
government, its partners, and agents assume fiduciary
responsibilities toward the public they serve.
Overall performance appraisals should be based on an assessment of many critical factors, including the employees’ role in
effecting internal control.
a) Management sets realistic (i.e., not unduly aggressive) financial
targets and expectations for operating personnel.
b) The agency’s operating units are able to achieve the expected
results and contribute to the achievement of its sectoral or
societal goals.
c) The agency establishes its Performance Evaluation System
(PES) or other applicable tools based on an objectively
measured output and the performance of personnel and units,
such as the Performance Management System-Office
Performance Evaluation System developed by the CSC.
d) The head of agency or the governing body has evaluated on a
continuing basis the quantitative and qualitative measures of its
performance as reflected in the units of work measurement and
other indicators of agency performance, including the standard
and actual costs per unit of work.
Management establishes an appropriate government organizational structure.
The organizational structure should clearly define key areas of authority and responsibility, and establish appropriate lines of
reporting.
a) The organizational structure is appropriately centralized or
decentralized given the nature of its operations, and management
has clearly articulated the considerations and factors taken into
account in balancing the degree of centralization versus
decentralization.
b) Key areas of authority and responsibility are defined and
communicated throughout the agency.
c) Reporting relationships have been established and have
effectively provided officers or personnel concerned with the
information they need to carry out their responsibilities and
perform their jobs.
d) Management periodically evaluates the organizational structure
and makes changes, as necessary, in response to changing
conditions.
e) Job descriptions and performance evaluations contain specific
references to internal control-related duties, responsibilities, and
accountability.
Management should develop and communicate policies to employees to ensure that they understand or are aware of the
following:
3.2.1 their duties and responsibilities;
3.2.2 how their individual actions interrelate and contribute to the agency’s objectives;
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3.2.3 the authority they are delegated; and
3.2.4 how and for what they will be held accountable.
a) Authority and responsibility are clearly defined throughout the
agency and are clearly communicated to all employees.
b) There are written job descriptions, reference manuals, or other
forms of communication to inform personnel of their duties.
c) Job descriptions clearly indicate the degree of authority and
accountability delegated to each position and the responsibilities
assigned.
d) There are adequate policies and procedures for authorization and
approval of transactions at the appropriate level.
e) The head of agency or the governing body:
 promulgates administrative issuances necessary for the
efficient administration of the offices under them and for the
proper execution of the laws relative thereto;
 exercises disciplinary powers over officers and employees
under them in accordance with law;
 appoints all officers and employees of the agency (except
those whose appointments are vested in the President or in
some other appointing authority); and
 delegates authority to officers and employees in accordance
with EO No. 292 or the law creating the agency.
f) The authority and responsibility for the agency’s operations, as
may be necessary to implement the plans and programs, are
adequately delegated by the head of agency or the governing
body to the bureau and regional directors, or their equivalent.
 the delegation is in writing;
 it has indicated to which officer or class of officers or
employees the delegation is made; and
 it has vested sufficient authority to enable the delegatee to
discharge
his
assigned responsibility.
g) Assignment of responsibilities is clear, including responsibilities
for information system processing and program development.
h) There is an appropriate structure for assigning ownership of
data, including who is authorized to initiate and/or change
transactions. Ownership is assigned for each application and
database within the IT infrastructure.
i) There is an appropriate segregation of incompatible activities (i.e.,
separation of accounting for, and access to assets).
3.3 Management should develop and maintain documentation of its internal control system to facilitate the establishment and
communication of the who, what, where, and why of internal control execution.
a) Job descriptions and performance evaluations contain specific
references to internal control-related duties, responsibilities, and
accountability.
b) Levels of authority and responsibility are documented by way of
written policy and, more generally, through the agency’s
organizational chart.
c) Employee job descriptions clearly document the authority level of
each employee.
4.
Management exhibits commitment to competence.
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4.1 Management should establish policies and procedures in hiring staff with the necessary skills and knowledge.
a) Existing policies and procedures have resulted in recruiting and
developing competent and trustworthy people, necessary to
support an effective internal control structure.
b) The agency establishes, administers, and maintains qualification
standards.
c) The establishment, administration, and maintenance of
qualification standards are with the assistance and approval of the
CSC.
d) The degree of qualifications of an officer or employee is
determined based on the qualification standards of a particular
position.
e) The qualification standards express the minimum requirements for
a position in terms of education, training and experience, civil
service eligibility, physical fitness, and other qualities required for
successful performance.
4.2 Management should establish policies and procedures that current staff receives adequate ongoing training, mentoring, and
supervision.
a) Personnel have sufficient competence and training necessary for
their assigned level of responsibility or the nature and complexity
of the agency’s mandate.
4.3 Management should establish policies and procedures in determining the level of knowledge and skill needed to help ensure
orderly, ethical, economical, efficient and effective performance, as well as a good understanding of individual responsibilities
with respect to internal control.
a) Job performance is periodically evaluated and reviewed with each
employee.
4.4 Management should have defined succession and contingency plans for key roles in the agency so it can continue to achieve
its objectives, whether there are sudden personnel changes or just the need for training personnel for the long-term
replacement of critical positions.
a) Management develops a manual that addresses continuity plan
for succession and contingencies.
b) Management establishes criteria for employee retention and
considers the effect to operations if a large number of employees
are expected to leave or retire in a given period.
c) Management develops contingency plans to ensure that
candidates for succession are trained for assuming the target role
so that internal controls will not lapse.
5. Management establishes human resource policies and practices.
5.1 Management should establish human resource policies and practices, incorporating the methods by which people are hired,
trained, evaluated, compensated, and promoted.
a) Policies and procedures are clear and these are issued, updated,
and revised on a timely basis. They are effectively communicated
to personnel at decentralized and/or foreign locations.
b) The mission, goals, and objectives of the agency are clearly
communicated to all personnel.
c) Background checks are conducted on candidates for employment.
5.2 Hiring and staffing decisions should exemplify assurance that individuals recruited have the integrity, proper education, and
experience required to carry out their jobs; and that the necessary formal, on-the-job, and ethics trainings are provided.
a) There are trainings/orientations for new employees, or current
employees when starting a new position, to discuss the nature
and scope of their duties and responsibilities. Such trainings/
orientations include a discussion of specific internal controls they
are responsible for.
b) Management demonstrates commitment to provide personnel with
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6.2
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sufficient accounting and financial training, to keep pace with the
growth and/or complexity of the agency.
c) Employees receive guidance, review, and on-the-job training from
supervisors to help ensure proper workflow and processing of
transactions and events, reduce misunderstandings, and
discourage wrongful acts.
Management should enforce transparency in recruitment, performance appraisal, and promotion processes.
a) Openness of the selection processes should be secured, by
publishing both the recruitment rules and vacant positions, to help
realize ethical human resource management.
b) There are screening procedures for job applicants.
c) Management formulates and enforces a system of measuring and
evaluating periodically and objectively the performance of the
agency, and submits the same annually to the required authority.
d) Management provides appropriate bases for compensation,
promotion, and fair incentives to help ensure integrity and
adherence to ethical values.
II.
RISK ASSESSMENT
Management identifies and defines objectives and risk tolerance in specific and measurable terms.
Management defines objectives in specific and measurable terms.
a) Agency objectives are established, communicated, and
monitored.
b) The key elements of the agency’s strategic plan are
communicated throughout the agency.
c) All employees have a basic understanding of the agency’s overall
strategy, strategic plan, and objectives.
Management considers internal expectations and external requirements when defining objectives.
a) In establishing the internal context, the agency considers an
understanding of the following:
 capabilities of the agency in terms of resources and
knowledge;
 information flows and decision-making processes;
 internal stakeholders;
 objectives and the strategies that are in place to achieve
them;
 perceptions, values, and culture;
 policies and processes;
 standards and reference models adopted by the agency;
and
 structures.
Management considers the risk tolerances in the context of the agency’s applicable laws, regulations,
standards.
a) Management considers how much risk it is willing to accept when
setting strategic direction and strives to maintain risk within those
levels.
b) Management has a risk assessment framework in place.
c) The agency’s risk assessment is fully integrated into the other
components of risk management process, which includes the
following:
 communication and consultation;
 establishing the context;
 risk assessment (comprising risk identification, risk analysis,
and risk evaluation);
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 risk treatment; and
 monitoring and review.
7. Management identifies, evaluates, and assesses agency’s risks.
7.1 Management identifies all risks that may occur (internal or external factors) at both the agency and activity levels.
a) Management identifies the causes and sources of the risk (hazard
in the context of physical harm), events, situations, or
circumstances which can have a material impact upon objectives
and the nature of that impact.
b) Management identifies the likelihood of the risks happening and
the impact or consequence when these happen.
c) Management reviews the risk assessment and considers actions
to mitigate the significant risks identified.
d) Management considers the presence (or absence) and the
effectiveness of any existing controls in determining the risk’s
consequences and probabilities.
e) In establishing the external context, Management considers
familiarization with the environment in which the agency and the
system operates, including the following:
 cultural, political, legal, regulatory, financial, economic, and
competitive environment factors whether international,
national, regional, or local;
 key drivers and trends having impact on the objectives of
the agency; and
 perceptions and values of external stakeholders.
f) Internal audit service (or another group within the agency)
performs periodic (at least annual) risk assessment.
7.2 Management adopts appropriate tools for the analysis and assessment of risks.
a) Management develops an adequate mechanism for identifying
operations risks, including those resulting from the following:
 entering new programs or lines of operation;
 offering new products and services;
 privacy and data protection compliance requirements; and
 other changes in the agency, economic, and regulatory
environment.
b) Management performs periodic review to anticipate and identify
routine events or activities that may affect the agency’s ability to
achieve its objectives and address them.
7.3 Management considers the potential risks related to fraud and corruption.
a) Management designs an overall risk response and specific
actions for responding to fraud risks.
b) Management includes fraud risk management programs as part of
the agency’s governance structure.
c) Management assesses fraud risk exposure periodically to identify
specific potential schemes and events that the agency needs to
mitigate.
d) Management establishes prevention mechanisms and techniques
to avoid potential key fraud risk events and, where feasible, to
mitigate possible impacts on the agency.
e) Management establishes detection techniques to uncover fraud
events when preventive measures fail or unmitigated risks are
realized.
f) Management establishes a reporting process to solicit input on
potential fraud, and a coordinated approach to investigation and
corrective action should be used to help ensure potential fraud is
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8.
8.1
8.2
9.
9.1
9.2
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Internal Control Component
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addressed appropriately and timely.
g) There are processes to ensure that accounting department is
aware of significant transactions with related parties, so it can
determine if such transactions are appropriately accounted for and
disclosed.
Management determines appropriate response to the identified, evaluated, and assessed agency’s risks.
Management designs appropriate response to the relevant agency’s risks.
a) The head of agency or governing body oversees and monitors the
risk assessment process and takes action to address the
significant risks identified.
Management identifies, analyzes, and responds to significant changes that could impact the internal control system.
a) The accounting department has a process for identifying and
addressing changes in PPSAS/PFRS, as well as for approving
changes in accounting principles and policies.
b) There are groups or individuals who are responsible for
anticipating or identifying changes with possible significant effects
on the agency.
c) There are processes in place to inform appropriate levels of
management about changes with possible significant effects on
the agency.
d) Management reports to the head of agency or the governing body
on changes that may have a significant effect on the agency.
e) There are processes to ensure that the accounting department is
aware of changes in the operating environment, so it can review
the changes and determine what, if any, effect the change may
have on the agency’s accounting practices.
f) There are channels of communication between the accounting
department and/or individual(s) in charge of monitoring regulatory
rules, so the accounting department is aware of regulatory
changes that could affect the agency’s accounting practices.
g) The head of agency or the governing body reviews and approves
significant changes in the agency’s accounting practices.
h) Management works with the agency’s independent auditors or
other third party experts to determine if it is addressing complex
changes in PPSAS/ PFRS appropriately.
i) Budgets/forecasts are updated during the year to reflect changing
conditions.
III.
CONTROL ACTIVITIES
Management designs control activities which are appropriate, consistently functioning according to plan throughout the
period, cost-effective, comprehensive, reasonable, and directly related to the control objectives.
Controls are in the right place and commensurate to the risk involved.
a) Management establishes policies and procedures to address risks
and to achieve the agency’s objectives.
b) Management identifies all relevant objectives and associated risks
for each significant activity, in conjunction with conducting the
risk assessment and analysis function.
c) Management identifies the actions and control activities needed to
address the risks and directs their implementation.
Controls are complete, practicable, and directly addressing the identified control objectives.
a) Management establishes control activities pertaining to top-level
management review, human resources management, information
systems management, physical asset management, and
performance measurement.
Controls are complied with by all employees involved and not bypassed in the absence of key personnel.
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Management establishes policies to ensure that duties are
logically divided or segregated (whether manually or through
appropriate set up of information technology [IT] applications)
among different people to reduce the risk of fraud or inappropriate
actions.
b) The organizational charts and written job descriptions adequately
define the lines of authority, duties, and accountability of all
personnel.
c) The IT organizational chart clearly reflects areas of responsibility
and lines of reporting and communication.
9.4 The cost of implementing the control does not exceed the benefits derived.
a) Management sets clear objectives in terms of budget and other
financial and operating goals. These objectives are clearly written
and communicated throughout the agency, and are actively
monitored.
10. Management develops control activities which include a range of diverse policies and procedures.
10.1 Management develops and undertakes diverse range of policies and procedures needed to address risks in achieving
agency’s objectives.
a) Management develops policies, and procedures including the
following:
 top level reviews and performance;
 authorization and approval procedures;
 segregation of duties;
 control over access to resources and records;
 verifications;
 reconciliations;
 reviews of operations, processes and activities;
 management of human capital;
 establishments of controls for physical assets and
vulnerable assets; and
 documentations.
10.2 Management designs control activities at the appropriate level of agency’s organizational structure.
a) There is an appropriate segregation of incompatible activities
(e.g., separation of accounting functions from access to assets; IT
operation functions separate from systems and programming; and
database administration function separate from applications and
systems programming).
b) Management designs its control activities at the agency level,
transaction level, or both, depending on the level of precision
needed to ensure achievement of objectives and address risks in
the operations.
c) Management designs a variety of transaction control activities for
operational processes which include verifications, reconciliations,
authorizations and approvals, physical control activities, and
supervisory control activities.
11. Management develops effective information technology control activities.
11.1 Management designs an effective information system and use of information technology.
a) Management designs appropriate general and application controls
to ensure proper operations of agency’s information systems.
11.2 Management designs appropriate type of control activities to help ensure complete and accurate information processing.
a) Management creates a plan and establishes a structure that
clearly describes the agency’s security management program and
policies, and the procedures that support it, including procedures
a)
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for the secured storage and disposal of sensitive information.
b) Management designs controls that limit or detect access to
computer resources (data, programs, equipment, and facilities) to
safeguard against loss, unauthorized modification, and disclosure.
c) Management designs controls that prevent unauthorized
programs or modifications to existing programs.
d) Management designs controls that limit and monitor access to the
powerful programs and sensitive files that control the computer
hardware and secure applications supported by the system.
e) Management establishes policies, procedures, and organizational
structure to prevent one individual from controlling all key aspects
of computer-related operations, and thereby conducting
unauthorized actions or gaining unauthorized access to assets or
records.
f) Management designs a service continuity plan to ensure that
when unexpected events occur, critical operations continue
without interruption; are promptly resumed; and critical and
sensitive data are protected.
g) Management designs application controls that ensure data to be
considered are authorized, converted to an automated form, and
entered into the application in an accurate, complete, and timely
manner.
h) Management designs application controls that ensure data are
properly processed by the computer, and files are updated
correctly.
i) Management designs controls that ensure files and reports
generated by the application reflect transactions or events that
actually occurred; reflect accurately the results of processing; and
the reports are controlled and distributed to the authorized users.
IV.
INFORMATION AND COMMUNICATION
12. Management develops and maintains reliable and relevant financial and non-financial information.
12.1 An array of pertinent, reliable, and relevant information should be identified.
a) Management obtains and identifies internally generated
information, critical to achieving the agency’s objectives,
including information relative to critical success factors.
b) Management obtains and communicates to all, any relevant
external information that may affect the achievement of its
missions, goals, and objectives.
c) Agency is able to prepare accurate and timely financial reports,
including interim reports.
12.2 Information should be captured and communicated in a form/content and timeframe that enable people to carry out their
internal control roles and other responsibilities.
a) Relevant information are identified, captured, and communicated
in a form/content and timeframe that enable personnel to carry out
internal controls and other responsibilities.
b) Management’s objectives in terms of budget and other financial
and operating goals are defined and measurable.
c) Management uses communication methods which may include
policy and procedure manuals, management directives,
memoranda, bulletin board notices, internet and intranet web
pages, videotaped messages, e-mails, and speeches.
d) Management obtains information that is summarized and
presented appropriately, and provides pertinent information while
permitting a closer inspection of details as needed.
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Management develops a mechanism that ensures information will
be available on a timely basis to allow effective monitoring of
events, activities, and transactions and to allow prompt reaction.
f) Actual results are measured against agency’s specific objectives.
12.3 Transactions and events must be promptly recorded, properly classified, and fully and clearly documented.
a) There is a clearly identifiable audit trail within the agency.
b) There is a sufficient level of coordination between the accounting
and information system processing functions/ departments.
12.4 Information systems deal not only with quantitative and qualitative forms of internally generated data, but also with information
about external events, activities, and conditions necessary for informed decision-making and reporting.
a) The agency’s financial management ensures and monitors user
involvement in the development of programs, including the design
of internal control checks and balances.
b) The agency’s officers and employees concerned receive both
operational and financial information to help them determine
whether they are meeting the strategic and annual performance
plans, and the agency’s goals for accountability of resources.
13. Management communicates information throughout the agency.
13.1 Information can be communicated in a verbal, written, and/or electronic form.
a) There is a process to quickly disseminate critical information
throughout the agency, when necessary.
13.2 Communication occurs in all directions – flowing down, across, and up the agency – throughout all components and the entire
structure.
a) The lines of authority and responsibility (including lines of
reporting) within the agency are clearly defined and
communicated.
b) Policies and procedures are established for, and communicated to
personnel at decentralized locations (including foreign
operations).
c) Communication flows down, across, and up the agency,
throughout all components and the entire structure.
d) Employees believe they have adequate information to complete
their job responsibilities.
e) Employees’ specific duties are clearly communicated to them, and
they understand the relevant aspects of internal control, how their
roles fit into it, and how their work relate to the work of others.
f) Employees are informed that when the unexpected occurs in
performing their duties, attention must be given not only to the
event but also to the underlying cause, so that potential internal
control weaknesses can be identified and corrected before these
can do further harm to the agency.
g) Acceptable behavior versus unacceptable behavior and the
consequences of improper conduct are clearly communicated to
all employees.
h) Personnel have a means of communicating information upstream
within the agency through someone other than a direct supervisor,
and there is a genuine willingness to listen on the part of
management.
i) Mechanisms exist to allow the easy flow of information down,
across, and up the agency; and easy communications exist
between/among functional activities such as between
procurement
activities and production activities.
e)
14. Management communicates information with external parties.
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14.1 Management provides adequate means of communicating with, and obtaining information from external parties.
a) The agency provides a citizen’s charter showing procedures or
flow of documents.
b) The chart is posted in conspicuous places in the department,
office, or agency for the information and guidance of all
concerned.
c) All information are classified, summarized, and disseminated on a
regular basis.
d) The agency establishes mechanisms to gather feedback and
suggestions on the efficiency, effectiveness, and economy of
frontline services.
14.2 Management establishes separate reporting line, where it is necessary.
a) Confidential and sensitive information are restricted to those
individuals who need them.
b) Personnel understand that there will be no reprisals for reporting
adverse information, improper conduct, or circumvention of
internal control activities.
c) There is a process for employees to communicate improprieties.
The process is well communicated throughout the agency.
d) The process allows for anonymity of individuals who report
possible improprieties.
e) There are processes for reporting improprieties and actions taken
to address them to senior management, the head of agency, or
the governing body.
14.3 Agency’s method of communication considers the audience to be reached, the nature and availability of the information, the
cost, and the legal or regulatory requirements.
a) Ownership is assigned to a member of management to help
ensure that agency responds appropriately, timely, and accurately
to
communications with customers, vendors, regulators, and
other external parties.
b) The agency institutes mechanisms by which clients may
adequately express their complaints, comments, or suggestions
such as in hotline numbers, short message service, or information
and communication technology.
c) The agency communicates frequently with its constituents or the
public it serves and stakeholders to ensure continual
understanding of their requirements, needs, and expectations.
d) The head of agency or the governing body establishes measures
and standards that will ensure transparency of, and openness in
public transactions; e.g., biddings, purchases, other internal
transactions, including contracts, status of projects, and other
matters involving public interest.
e) The head of agency or the governing body establishes
information system that will inform the public of the following:
 policies, rules, and procedures;
 work programs, projects and performance targets;
 performance reports; and
 all other documents classified as public information.
f) The Citizens’ Charter is posted at its office’s main entrance or at
the most conspicuous place, and in the agency’s Seal of
Transparency.
g) The Citizens’ Charter includes the following information:
 Vision and mission of the government office or agency;
 Identification of the frontline services offered and the
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clientele;
 The step-by-step procedure to obtain a particular service;
 The officer or employee responsible for each step;
 The maximum time to conclude the process;
 Document/s to be presented by the client with a clear
indication of the relevance of said document/s;
 The amount of fees, if necessary;
 The procedure for filing complaints in relation to requests
and applications, including the names and contact details of
the officials/ channels to approach for redress;
 Allowable period for extension due to unusual
circumstances (i.e.,
unforeseen events beyond the
control of government office or agency concerned); and
 Feedback mechanisms, contact numbers to call, and/or
persons to approach for recommendations, inquiries,
suggestions, as well as complaints.
h) There is a process for tracking communications with customers,
vendors, regulators, and other external parties.
V.
MONITORING ACTIVITIES
15. Management establishes and operates activities to monitor the internal control system, and evaluates the results.
15.1 Management establishes a baseline to monitor the internal control system.
a) The agency provides routine feedback and
monitoring
of
performance and control objectives strategies.
b) The agency has plans for periodic evaluations of control activities
in critical operational and support systems.
c) Procedures are in place to monitor if controls are overridden and
to determine if the override was appropriate.
d) Management reviews control processes to ensure that the
controls are being applied as expected.
e) Issues, information, and feedback concerning internal control
raised at trainings, seminars, planning sessions, and other
meetings are considered and used by management to address
problems or strengthen the internal control structure.
15.2 Management considers ongoing monitoring activities, separate evaluations, or a combination of both, in the conduct of
assessment.
15.2.1 Ongoing activities
a) The agency establishes an internal audit service.
b) The internal audit function is independent (in terms of authority
and reporting relationships) of the activities it audits.
c) The internal audit unit regularly assesses the effectiveness of the
internal controls.
d) The monitoring of internal control occurs in the course of the
normal, recurring operations of the agency.
e) The scope of activities of internal audit service is appropriate,
given the nature, size, and structure of the agency.
f) The scope of planned activities of internal audit service is
reviewed in advance by the head of agency or the governing
body.
g) The methodology used may include self-assessments using
checklists, questionnaires, or other similar devices/tools.
15.2.2 Separate evaluations
a) There has been a recent quality assurance review of the internal
audit function by an external party such as, but not limited to, the
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Commission on Audit auditors.
b) The external party conducting the assessment gains sufficient
understanding of the agency’s missions, goals, objectives, and its
operations and activities.
c) The external party gains an understanding of how the agency’s
internal control is supposed to work and how it actually works.
d) The external party analyzes the results of the evaluation/
assessment against established criteria.
16. Management takes appropriate actions on the findings and recommendations of audit and other reviews.
16.1 Deficiencies noted during ongoing monitoring or through separate evaluations are communicated to those positioned to take
necessary action.
a) Management is responsive to the findings and recommendations
of audits and other reviews aimed at strengthening internal control
b) Executives with the proper authority evaluate the findings and
recommendations, and decide upon the appropriate actions to
take to correct or improve control.
c) Policies/procedures are in place to assure that corrective action is
taken, on a timely basis, when control exceptions occur.
16.2 The findings and recommendations of audits and other reviews are adequately and promptly resolved.
a) All reported potential improprieties are reviewed, investigated, and
resolved on a timely manner.
b) Management is kept informed through periodic reports on the
status of audit and reviews resolution so that it can ensure the
quality and timeliness of individual resolution decisions.
Note: Please provide documents for all “Yes” answers.
ALCC SUMMARY EVALUATION
OBSERVATIONS
AOM REF.
NO./WP
RECOMMENDATIONS
Prepared by:
Date
Reviewed by:
Date
69
Appendix 2-3A. Control Activities -Cash Receipts checklist
INTERNAL CONTROL QUESTIONNAIRE (ICQ)
YES NO
1) Does the organization structure provide a clear-cut separation of
cashiering function from accounting function?
2) Are the employees of the cashier’s office denied access to
accounting records? Is the collecting officer closely supervised
by a responsible officer of the agency?
3) Are all accountable officers given instructions regarding their
duties and responsibilities?
4) Do accountable officers keep a file of COA and other circulars
pertaining to their work?
5) Are the collecting officer and other employees handling cash
provided with safe?
6) If so, is the duplicate combination of the safe filed with an
authorized official?
7) Is the combination of the safe changed whenever there is a
change of custodian?
8) Is the cashier office amply protected against intrusion by
unauthorized persons?
9) Are all employees handling cash adequately bonded?
10) Are surprise cash counts frequently made by department
examiners?
11) Are official receipts booklets used? If so,
a) Are these pre-numbered?
b) Are the booklets issued in numerical sequence?
c) Is the form of payment indicated in the receipts?
d) Is the numerical sequence of issued officials receipts and
booklets checked by the accounting department?
e) Is a register of forms maintained? If so, is it kept up-todate?
f) Are unused booklets physically safeguarded?
12) Are official receipts issued for every receipt of payment?
13) Is it the practice of collecting officer not to accept postdated
checks payment of charges or fees?
14) Are collections deposited intact and as frequently as required by
regulations?
15) Is the person making deposit escorted by armed guards and
provided with transportation facilities?
16) Are items of deposit subsequently dishonored by the
Bank/Treasury promptly adjusted in the collecting officers’
records?
ACCOUNTING UNIT
17) Are both the totals and details of bank authenticated duplicate
deposit slip matched by the accounting department against the
corresponding official receipts?
18) Are totals of bank-authenticated deposit slips compared with the
debit to respective bank accounts in the book of original entry?
19) Are all cash funds and cash receipts compared with the debit to
respective bank accounts in the book of original entry?
70
REMARKS
INTERNAL CONTROL QUESTIONNAIRE (ICQ)
20) Are collection and deposits recorded daily in the cash book?
YES NO
REMARKS
21) Is the cash book balance compared daily with the cash on
hand?
22) Are collection reports submitted regularly to the accounting
division?
23) Is reconciliation made monthly of the collecting officer’s book
balance and the accounting subsidiary ledger balance?
Name of Process/System
Results of Walkthrough
ICQ Ref. No.
Description of the Gap
Source of the Gap
(Weakness - absence of
control; Breakdown - no
evidence that the control was
applied)
Effect
Prepared by:
Date
Reviewed by:
Date
71
Appendix 2-4. General Accounting Plan
FS
Revenues
Source
Document
-OR, Stubs, Tickets,
Credit Memo,
Deposit Slips, Deed
of Donation, Directly
deposited, CRDCfrom bank, List of
Deposited
Collections, Deposit
Slips
Summarizing report
-Report of collections
and deposits (RCD)
-Consolidated Report
of Daily Collections
(CRDC-from bank)
Basis of
Recording
Books of
Original
Entry
Subsidiary
Ledger
Book of
Final Entry
Monitoring
Reports
Subsidy from
National
Government
NCA, NTA,
CDC, NCAA,
RANCA/
RANTA
Cash
Advances
Expenses
Receivables Fund Transfer
Investments
Inventory
Authority,
DV,
liquidation
documents/
Report of
disbursemen
t
DV
Billing
Statement
MOA, DV,
ADA/
liquidation
documents
Investment
Documents
such as
bonds,
security
certificates
etc.
DV, DR,
IAR, RSMI
RANCA/
RANTA
RCI, RDAI
Report of cash
disbursements,
RCI, Report of
ADA Issued
(RADAI)
None
RCI, RADAI
None
JEV
JEV
JEV
JEV
JEV
JEV
CRJ
GJ
CDJ, CkDJ
By nature of
collections/revenue/r
eceipts
By MDS
account
CkDJ/
General
Journal
By
Accountable
Officer
General
Journal/
CRJ
By
debtors
General Ledger (GL)
GL
GL
GL
GL
FAR No. 5, BS, BRS
RANCA,
RANTA, BS,
BRS
Report on
Unliquidated
Cash
Advances/
Aging
schedule
FAR-1, 1a, 2,
2a, 3, 4,
BS, BRS
Aging
Schedules
By
nature/recipient
s
Prepayments
PPE
Intangible
Assets
Liabilities
Equity
DV, DR,
IAR, IIRUP,
Report on
Lost/Stolen
equipment,
Police
Report/
Authority to
dispose
DV, DR,
IAR/Repo
rt of lost/
damaged/
destroyed
property/
Approved
authority
DV, DR,
Reports and
IAR, Billing documents
Statements,
MOA,
Contracts
RSMI
Contacts,
MOA,
Agency
Procurement
Request
(APR), DV,
Report on
utilization of
expired
portion
RCI, RADAI
RCI,
RADAI
RCI,
RADAI
CkDJ
Applicable
reports
such as
RCD, RCI,
RADAI, etc.
JEV
JEV
JEV
JEV
JEV
JEV
JEV
SA-CkDJ,
ADADJ,
IA-CRJ, GJ
For SA: By
nature/IA
For IA: By
nature/SA
GL
CkDJ,
ADADJ
CkDJ,
ADADJ, GJ
CkDJ,
ADADJ, GJ
CkDJ,
ADADJ, GJ
CkDJ,
GJ
ADADJ, GJ
By
nature/term
s/investee/i
nvestor
GL
By
nature/sup
plies/accou
nt
GL
By
nature/credit
or/debtor
By specific
account
(e.g.
Buildings)
GL
CkDJ,
ADADJ,
GJ
By
specific
account
GL
GL
GL
Aging
Schedules,
Unliquidated
Fund Transfers,
RBUD-for IA
Fund
Managers
Report,
schedules
RPCI,
Lapsing
Inventory of schedules
semi(LS)
expendables
Schedules
Aging,
LDDAP
Schedules
by nature of
adjustment
Note: Not all documents are applicable to all agencies.
72
GL
LS,
RPCPPE,
IIRUP
By specific By nature of
account/cre adjustment
ditor
Appendix 2-5. Variance Analysis of Financial Statements
(For illustration purposes, using selected accounts only)
FS Account
Cash Collecting
Officers
20xy
20xx
Variance
Amount
%
20,000,000.00
15,000,000.00
5,000,000.00
33.30
Cash in Bank
171,500,000.00
198,550,000.00
(27,050,000.00)
13.60
PPE
720,000,000.00
600,000,000.00
120,000,000.00
20.00
Due from NGAs
400,000,000.00
380,000,000.00
20,000,000.00
5.30
Due from LGUs
90,000,000.00
85,010,000.00
4,990,000.00
5.87
Due from officers
and employees
20,000,000.00
19,800,000.00
200,000.00
1.00
Office Supplies
Inventory
5,000,000.00
4,000,000.00
1,000,000,00
25.00
Construction in
Progress
659,870,000.00
709,000,000.00
(49,130,000.00)
6.93
Vehicles/Motor
Vehicles
16,877,900.00
17,671,800.00
(793,900.00)
4.50
Loans ReceivableLocal Government
Units
79,506,420.00
75,453,010.00
4,053,410.00
5.37
280,000,000.00
100,000,000.00
180,000,000.00
180.00
Subsidy Income
from National
Government
1,977,775,640.00
1,889,415,640.00
88,360,000.00
4.68
Travel expenses
98,566,489.00
85,422,489.00
13,144,000.00
15.39
759,875,555.00
744,230,555.00
15,645,000.00
2.10
6,500,000.00
7,000,000.00
500,000.00
7.14
Due from NGOs/POs
Salaries and Wages
Consultancy
Services
73
Possible
risks
Possible
unadjusted
reconciling
items
Possible
unrecorded
issuances
of supplies
Additional
fund
transfers
with
unrecorded
liquidations
Appendix 2-6. Summary Report on the Preliminary Identification of Risks
Information Source
WP
ref
Conditions
noted
Amount
involved
Possible risks
1. Audit reports
a. Performance audit report
b. Cash examinations reports
c. Evaluation/ Investigation Reports on Emerging Issues/ Fraud Audit Reports
d. Property Audit
e. Personnel Audit
f. NSs/NDs/NCs
g. Unadjusted prior audit reflected in PY Financial Audit Reports
h. BRS
2.
3.
4.
5.
Internal Audit Office Reports
Recommendation Tracking Sheet
Agency-level Controls Checklist
Financial Statement Analysis (Initial Analysis)
a. Variance Analysis
b. Tie-in Analysis
6. General Accounting Plan
7. Results of Fraud Risk Analysis
8. Results of evaluation of risks from non-compliance with laws, rules and
regulations
9. Results of assessment of related party transactions
Note: The Team should be guided by Tables 3 to 5, Illustrations 1 and 2 and Appendices 2-2 to 2-6 and relevant discussion in the Manual.
74
Account
affected
Assertion
affected
Appendix 2-7. Template on Determining Materiality Level
Agency/Unit/Corporation/Project: Name
Period Covered: CY 20xx ending December 31, 20xx
Objective: To set overall materiality for the purpose of planning the engagement
Users of Financial Statements
Users
Public in General
Legislative
Oversight Bodies
Focus/Concerns
Use of funds for the purpose intended; benefits delivered from
the project; compliance with rules and regulations
Qualitative Considerations
Public expectations and interest
Compliance with laws and regulations
Needs of legislative, executive and oversight bodies
Need for transparency
Financial Information (in million pesos)
Planning Date
Assets
Liabilities
Equity
Revenues
Expenses
Previous Materiality
Latest Financial Data (In billion ₱)
1.380
0.520
0.860
0.001
1.350
0.011
Quantitative Materiality
Type of Entity
Expenditure
driven
Possible
Benchmark
Assets
Liabilities
Equity
Revenue
Expenses
Percentage (%)
Prescribed
Applied
Determined Materiality
Level (In million ₱)
1
1
13.500
Considering the existing condition and professional judgment, the overall materiality for planning is set
at ₱13.500 million. There is no felt need to increase the percentage prescribed by the Commission
considering that some of the prior years’ adjustments were not effected and a number of prior years’
recommendations remained unimplemented.
75
Given the Overall Materiality Level of₱13.500 million, the performance materiality and specific
materiality are set as follows:
Base
Materiality
(In million
₱)
Types
Percentage
Determined
Materiality Level
(In million ₱)
Prescribed
Adopted
13.500
50
50
6.750
6.750
25
25
1.687
For Repairs
and
Maintenance
Expenses of
810.000
0.20
0.20
1.620
Performance Materiality
(Auditors should consider the results of
risk assessment, misstatements
identified in prior years, and relevant
qualitative factor in deciding to use
percentage lower than the prescribed
levels)
Testing Threshold
(Auditors to determine high value
items to be included in the audit)
Specific Materiality
(Identify the classes of transactions,
account balance determined to be
subjected to specific materiality
considering the results of risk analysis.)
Name
Position
ATL
SA/RSA
CD/RD
Prepared by
Reviewed by
Approved by
76
Date
Appendix 2-8. Results of Risk Assessment at the Assertion Level
STEP 1
Trial Balance,
12/31/20xx
STEP 2
Inherent Risks
STEP 3
STEP 4
STEP 6
Risk Response
Overall
Control
Risk of
Reliance
Control
Control
Type of
to
Material
on
functioning Level of
Level of Mitigate Design
Level of Substantive Test
Mis?
Needed
Overall Inherent adequate?
Control statement controls SubsImpact
Inherent Risk
tantive
Based Risk (CR) (RMM =
WP
WP
Analytical Test of
Risk (IR)
Test
(Y/N)
on (L/M/H) IR+CR)
Ref
Ref
Review Details
Test?
Inherent Risk of Material
Misstatement
Final
Conditions
Acct Unaudited WP relative to Assertions LikeTitle Balance ref inherent risk Affected lihood
(in PHP)
susceptibility
STEP 5
Control Risks
Prepared by:
_______________________________
_______________________
Date
Reviewed by:
_______________________________
_______________________
Date
77
Appendix 2-8A. Illustration on Results of Risk Assessment at the Assertion Level
STEP 1
Trial Balance,
12/31/20xx
STEP 4
STEP 5
Control Risks
Control Design
Level of
Asseradequate?
LikeliOverall Control to Mitigate
tions
Impact
hood
Inherent
Inherent Risk
WP
Affected
Y/N
Risk (IR)
Ref
124.500 Variance analysis Classifi- High High
High
GL
and
SL 1
Yes
revealed
no cation
reconciled.
changes
during
the year, but Accuracy
Completed
CIP
status report on
reported quarterly
completed
construction
in
Building and Other
progress showed
Structures SL and
two
completed
CIP SL reconciled
building
and
quarterly
other structures
amounting
to
Prompt recording
P22,602,412.00.
of Certificate of
100% Completion
and Certificate of
Acceptance
Final
Account Unaudited
Title Balance (in
Million P)
Buildings
and Other
Structures
Inherent Risks
STEP 2
STEP 3
Inherent Risk of
Material Misstatement
Conditions
relative to
inherent risk
susceptibility
Performance Materiality: P18,000,000.00
W/P 1: Based on the results of assessment using Appendix 2-3 of FAM
- Results of evaluation of critical processes (e.g. Accounting Process on CIP)
Control functioning?
WP
Ref
2
Based on Test
GL and SL
reconciled
With
quarterly CIP
report
Building and
Other
Structures SL
and CIP SL
not
reconciled
Building and
Other
Structures SL
and CIP SL
not
reconciled
With
Unrecorded
Certificate of
100%
Completion
and
Certificate of
Acceptance
Level of
Control
Risk (CR)
(L/M/H)
High
STEP 6
Overall
Risk of
Material
Misstatement
(RMM=IR+
CR)
High
Risk Response
Reliance
Type of Substantive
on
Level of
Test Needed
conSubstantrols
tive Test Test of Analytical
Details Review
No
High
No
Yes
Reliance
W/P 2: Summary/Auditor’s Note
- GL and SL reconciled
- With quarterly reports, but Building and Other Structures SL and CIP SL not reconciled
- Unrecorded Certificate of 100% Completion and Certificate of Acceptance
78
Appendix 2-9. Audit Program
Account
Risk Statement
Assertions/Criteria
Audit Objective
:
:
:
:
Audit Procedures
WP
Ref.
Staff Responsible
Prepared by:
(ATL)
Date:
Reviewed by:
(SA/RSA)
Date:
79
Mandays
Appendix 2-10. Engagement Planning Memorandum
Engagement Planning Memorandum
For _________________________________
Audit coverage ________________________
Date
Prepared by:
Reviewed by:
Approved by:
Part 1 – Audit Coverage, Objective and Methodology
Part 2 – Significant contents of the Overall Audit Strategy
Part 3 – Summary of major accounts and assertions for audit considerations
Part 4 – Audit Program
80
Section 3
Audit Execution Phase
1. During this Phase, the audit activities contained in the approved EPM and the Audit Programs are
pursued to ensure that audit procedures are performed as planned and on time. The steps to be
taken follow:
I.
Execute Audit Tests
A. Determining the nature, timing and extent of audit procedures
B. Performing audit procedures
C. Gathering audit documentation and evidence
D. Addressing risk areas that need specific considerations
E. Summarizing proposed audit adjustments and evaluating effects in the audit opinion
II.
Summarize Audit Observation and Recommendation and Communicate with Those Charged
with Governance
A. Areas for consideration in summarizing audit observations
B. Elements of audit observation
C. Performing review of overall audit work
D. Tracking status of prior years’ recommendation
III.
Conduct Exit Conference
I.
Execute Audit Tests
A. Determining the Nature, Timing and Extent of Audit Procedures
2. The nature, timing and extent of the audit procedures should be based on and be responsive to the
assessed risks of material misstatement at the assertion level.
3. The nature of an audit procedure refers to the purpose of the audit which is either test of controls
or substantive procedure, and the type of audit procedures to be performed. The types of audit
procedures are classified as inspection, observation, inquiry, confirmation, reperformance,
recalculation, and analytical procedures. By type, the first four procedures usually pertain to tests of
controls and the last three to substantive procedures. Substantive procedures can either be
analytical procedures or test of details.
4. Timing of an audit procedure refers to when the audit procedure is performed, or the period or
date to which the audit evidence applies.
a. The auditor may perform audit procedures at an interim date or at period end.
b. The higher the risk of material misstatement, the more likely it is that the auditor may decide it
is more effective to perform substantive procedures nearer to, or at, the period end rather than
at an earlier date, or to perform audit procedures unannounced or at unpredictable times.
81
c. This is particularly relevant when considering the response to the risks of fraud. It may be better
to perform audit procedures before the period end so the auditor can identify significant
matters at an early stage of the audit, and consequently resolve them with the assistance of
management or by developing an effective audit approach to address such matters.
d. Certain audit procedures can be performed only at or after period end, for example:
i. Reconciling the FS with the accounting records;
ii. Examining adjustments made during the course of preparing the FS; and
iii. Performing procedures to respond to a risk that, at period end, the entity may have entered
into improper contracts or transactions that may not have been finalized.
5. Extent of an audit procedure refers to the quantity of audit procedures to be performed, sample
size of population to be tested, or the number of observations of a control activity.
a.
The extent of necessary audit procedures is determined after considering the materiality
threshold, the assessed risk, and the degree of assurance the auditor plans to obtain.
b.
In general, the extent of audit procedures increases as the risk of material misstatement
increases. To cite an example, in response to the assessed risk of material misstatement due to
fraud, increasing sample sizes or performing substantive analytical procedures at a more
detailed level may be appropriate.
c.
However, increasing the extent of an audit procedure is effective only if the audit procedure
itself is relevant to the specific risk.
d.
The use of CAATs may enable more extensive testing of electronic transactions and account
files, which may be useful when the auditor decides to modify the extent of testing, say, in
responding to the risks of material misstatement due to fraud. Such techniques can be used to
select sample transactions from key electronic files, to sort transactions with specific
characteristics, or to test an entire population instead of a sample.
B. Performing Audit Procedures
6. The following steps should be undertaken:
a.
b.
c.
d.
Determining the extent of tests to be performed;
Selecting the sample items;
Performing the planned procedures in the selected items; and,
Evaluating the sample results and establishing conclusion.
Step 1. Determining the Extent of Tests to be Performed
82
7. In determining the extent of tests to be performed, the auditor may apply non-sampling or sampling
technique. In case of sampling technique, either statistical or non-statistical sampling may be
adopted.
a.
Non-sampling is applied when all the items in an audit population are to be audited. To
illustrate:
i. Audit objective: to determine the causes for material changes in financial statement account
balances as of end of the year under audit compared with the past year balances.
ii. Items covered: all financial statement accounts.
b.
Audit sampling, as defined by ISSAI 1530, is the application of audit procedures to less than 100
percent of items within a population of audit relevance providing a reasonable basis on which
to draw conclusions about the entire population. 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 to the audit evidence will assist the auditor in defining what constitutes
a deviation or misstatement and what population to use for sampling. Sampling as an approach
may either statistical sampling or non-statistical sampling.
i. Statistical sampling is an approach with two characteristics: random selection of the sample
items and the use of probability theory to evaluate sample results including measurement of
sampling risks (par. 5(g) of ISSAI1530). Statistical based formulas/tables are used to
determine sample size considering population, confidence level, precision; and expected
rate of error considered acceptable. Statistical sampling is used in the following instances:


c.
to determine the sample size especially in auditees with very large volume of
homogenous transactions; and
when the sampling results are likely to be included in the audit report to support an
adjustment or qualification.
Statistical sampling following the procedures described in Appendix 1 of ISSAI 1530 provides
that:

Audit efficiency may be improved if the auditor stratifies a population by dividing it into
discrete sub-populations which have an identifying characteristic. 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.

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.
83

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 percent of the
items in a population may make up 90 percent 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 percent of value separately from the
remaining 10 percent (on which a further sample or other means of gathering audit
evidence will be used, or which may be considered immaterial).

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.
ii. Non-statistical sampling is an approach where samples are not drawn randomly but rather
judgmentally and where probability is not applied. Samples are selected based on the
auditor’s informed assessment of how many samples will be required to yield a reasonably
reliable result. Samples may be carried out: (a) systematically (every nth item say beginning
with the number 3); (b) unsystematically (pulling files from a cabinet without any selection
criteria); or (c) according to the auditor’s judgment (picking large or unusual items from a
computer report). Non-statistical sampling is used when any of these conditions exist:




the line item/account is not material;
the risk of material misstatement is low;
the analytical procedures are effective; and,
when the sample size needed is small so that the use of statistical sampling becomes very
costly.
Step 2. Selecting the Sample Items
8. ISSAI 1530 recommends the following in selecting the sample items:
a.
b.
c.
d.
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.
When designing a sample, the auditor uses the tolerable misstatement arrived at when
computing for the materiality thresholds discussed in the previous Section.
9. Examples of factors influencing sample size for tests of details are appended in the tables presented
in Appendix 2 of ISSAI 1530.
84
10. The Auditor should be conscious of the sampling risks. The risk that the Auditor’s conclusion based
on a sample may be different from the conclusion if the entire population were subjected to the
same audit procedure.
Step 3. Performing the Planned Procedures on the Selected Items
11. For performing audit procedures on selected items, ISSAI 1530 provides that:
a.
b.
c.
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.
Step 3.1. Performing Test of Controls
12. A sample of test of control working paper is presented in Illustration 5. The illustration shows the
tests of internal controls on accounts payable for the audit of Agency XXX’s 20xx FS. A sample size of
78 accounts payable voucher packets has been selected for the test of internal controls on the
accounts payable system. The sample size is designed to provide high level of assurance (or
confidence) that a control is operating effectively so long as one or fewer control deviations is
observed for each control activity tested (see WP 1). The first 74 voucher packets have already been
tested by other staff members and no errors have been found.
Illustration 5. Working Paper – Test of Control
1
2
3
4
AGENCY XXX
Controls Testing Evaluation Summary: Accounts Payable
December 31, 20xx
Test Results and Evaluation*
Number of
Maximum
Description of Control
Accept/
Assertion
Deviations Number of
Activities
Reject
Observed
Deviations
Procurement documents
Occurrence
1
1
Accept
include all attachments
appropriate for the
transaction.
The purchase requisition is
Authorization
2
1
Reject
signed by the head of the
requisitioning office.
The purchase order is signed
Authorization
0
1
Accept
by the property officer.
Quantities on supplier's
Accuracy
3
1
Reject
invoice agree with related
inspection & acceptance
report and purchase order,
and invoice is mathematically
correct.
85
WP 1
Describe Any
Necessary Revisions
to the Audit Plan
Increase samples for
substantive testing
Increase samples for
substantive testing
5
AGENCY XXX
Controls Testing Evaluation Summary: Accounts Payable
December 31, 20xx
Test Results and Evaluation*
WP 1
Number of
Maximum
Describe Any
Description of Control
Accept/
Assertion
Deviations Number of
Necessary Revisions
Activities
Reject
Observed
Deviations
to the Audit Plan
All documents in voucher
Occurrence
0
1
Accept
package have been stamped
"paid".
Note: * Controls Testing for the accounts payable process typically involve more control activities.
AGENCY XXX
Controls Testing Deviation Report: Accounts Payable
December 31, 20xx
Sample Testing Documentation
WP 2
P.O. Number
1
2
164210


185423

190214
195840
74 additional items
Total Number of Exceptions
Control Activity
3
4
5

















Effective
Effective
Effective
Effective
Effective
1
2
0
3
0
Legend:  - Effective
 - Deviation
13. The auditor shall evaluate the results of the sample and consider that an unexpectedly high sample
deviation rate may lead to an increase in the assessed risk of material misstatement, unless further
audit evidence substantiating the initial assessment is obtained.
Step 3.2. Performing Substantive Procedures
14. Under the Audit Execution Phase, audit procedures listed in the Audit Program attached to the EPM
shall be pursued/conducted. To reduce audit risk to acceptable level, the auditor should conduct
substantive procedures in order to detect material misstatements in the assertion level. These
comprise of tests of details and analytical procedures.
Step 3.2.1. Test of Details
15. The auditor shall evaluate the results of sampling using the test of details. An unexpectedly high
misstatement amount in a sample may cause the auditor to believe that a class of transaction or
account is materially misstated, in the absence of further evidence that no material misstatement
exists.
86
16. Tests of details are categorized into two types: (a) test of transactions; and (b) test of details of
account balances and disclosures.
Step 3.2.1 (a) Test of Transactions
17. This requires substantive test of transactions to test errors or fraud in individual transactions and is
used to verify the monetary value of transactions and to obtain reasonable assurance that the
accounting records are accurate, reliable, complete, properly classified and presented, actually took
place, and recorded within the correct reporting period.
18. The auditor’s approach in substantive tests of transactions is to inspect underlying documents, to
trace the flow of transactions through the system and to recompute for mathematical accuracy. The
direction of the trace determines the objective to be satisfied. For example, tracing from a source
document to the accounting record provides evidence of completeness of the accounting records,
that is, it detects errors of understatement.
19. Tracing from the accounting record to the source document (commonly called vouching) provides
evidence of occurrence, that is, it detects errors of overstatement. Usually some tests are made in
both directions.
20. The extent of testing in a particular direction depends on the auditor’s judgment of the likelihood of
error. When an error is detected, the auditor needs to consider the cause of the error and
determine whether any change is called for in the planned nature and extent of testing. (Please
refer to Table 6 – Assertions in Considering Misstatements regarding transaction level assertions.)
Step 3.2.1 (b) Test of Details of Account Balances and Disclosures
21. This requires substantive testing of the ending balance of a general ledger to provide reasonable
assurance of the completeness, existence, rights and obligations, accuracy, valuation and allocation,
classification and presentation of accounts.
22. To complete the test of details, the following steps should be performed:
a. Determining the sample size
To select the items for testing, the auditor must consider what represents the population for
testing in the circumstances. It can be the entire population of an account balance, class of
transactions or disclosures; or specific items composed of high value or unusual items, or
selecting sample from the whole population.
b. Selecting the sample items
c. Performing the planned procedures in the selected items
d. Evaluating the sample results and establishing conclusion
23. External confirmation is one of the procedures adopted in substantive tests. This procedure is used
to address assertions associated with account balances and their elements and to confirm terms of
87
agreements, contracts, or transactions between an agency and other parties. In preparing
confirmation requests, the following factors should be considered, among others (ISSAI 1505):
a. The specific risks and assertion/s being addressed
b. Layout and presentation of confirmation requests - The auditor may request the respondent
only to indicate whether he or she agrees with the information stated on the request. In other
positive forms, referred to as blank forms, the amount (or other information) is not stated on
the confirmation request, and instead, the recipient is requested to fill in the balance or furnish
other information.
c. Prior experience on the sending of confirmations in previous audits: response rates, knowledge
of misstatements identified during prior years' audits, and any knowledge of inaccurate
information on returned confirmations. For example, if the auditor has experienced poor
response rates to properly designed confirmation requests in prior audits, the auditor may
instead consider obtaining audit evidence from other sources.
d. Method of communications—by mail, email or personal service
e. Management’s authorization or encouragement to the confirming parties to respond to the
auditor
f. The ability of the intended confirming party to confirm or provide the requested information.
When designing confirmation requests, the auditor should consider the types of information
respondents will be readily able to confirm, since the nature of the information being confirmed
may directly affect the competence of the evidence obtained as well as the response rate. For
example, certain respondents' accounting systems may facilitate the confirmation of single
transactions rather than of entire account balances. In addition, respondents may not be able to
confirm the balances of their installment loans, but they may be able to confirm whether their
payments are up-to-date, the amount of the payment, and the key terms of their loans.
24. In case no replies were received, the Auditor shall apply alternative procedures to the nonresponses to obtain the evidence necessary to reduce audit risk to an acceptably low level.
a. For accounts receivable, this may include examination of subsequent cash receipts (including
matching such receipts with the actual items being paid), shipping documents, or other client
documentation to provide evidence for the existence assertion.
b. For accounts payable, this may include examination of subsequent cash disbursements,
correspondence from third parties, or other records to provide evidence for the completeness
assertion.
25. The auditor should evaluate the combined audit evidence provided by the confirmations and the
alternative procedures to determine whether sufficient audit evidence has been obtained about all
the applicable financial statement assertions. In performing that evaluation, the auditor should
consider (a) the reliability of the confirmations and alternative procedures; (b) the nature of any
exceptions, including the implications, both quantitative and qualitative, of those exceptions; (c) the
audit evidence provided by other procedures; and (d) whether additional audit evidence is needed.
88
If the combined audit evidence provided by the confirmations, alternative procedures, and other
procedures is not sufficient, the auditor should request additional confirmations or extend other
tests, such as tests of details or analytical procedures.
26. Situations where external confirmation procedures may provide relevant audit evidence in
responding to assessed risks of material misstatement include:
a.
b.
c.
d.
e.
f.
g.
Bank balances and other information relevant to banking relationships;
Accounts receivable balances and terms;
Inventories held by third parties at bonded warehouses for processing or on consignment;
Property title deeds held by financiers for safe custody or as security;
Investments purchased from stockbrokers but not delivered at the reporting date;
Amounts due to lenders, including relevant terms of repayment and restrictive covenants; and,
Accounts payable balances and terms.
27. There are some assertions for which external confirmations provide less relevant audit evidence,
such as relating to the recoverability of accounts receivable balances, than they do for their
existence.
28. The auditor may determine that external confirmation procedures performed for one purpose
provide an opportunity to obtain audit evidence about other matters. For instance, confirmation
requests for bank balances often include requests for information relevant to other financial
statement assertions. Such considerations may influence the auditor’s decision about whether to
perform external confirmation procedures.
29. Factors that may assist the auditor in determining whether external confirmation procedures are to
be performed as substantive audit procedures include:
a. The confirming party’s knowledge of the subject matter;
b. The ability or willingness of the intended confirming party to respond:
i.
ii.
iii.
iv.
May consider responding too costly or time consuming;
May have concerns about the potential legal liability resulting from responding;
May account for transactions in different currencies; or,
May operate in an environment where responding to confirmation requests is not a
significant aspect of day-to-day operations. In such situations, confirming parties may not
respond, may respond in a casual manner or may attempt to restrict the reliance placed on
the response.
c. The objectivity of the intended confirming party such that if the confirming party is a related
party of the entity, responses to confirmation requests may be less reliable.
Step 3.2.2. Analytical Procedures
30. Analytical procedures is defined in the ISSAI 1520 as the means of evaluating financial information
through analysis of plausible relationships among both financial and non-financial data. Analytical
procedures also encompass such investigation necessary to identify fluctuations or relationships
89
that are inconsistent with other relevant information or that differ from expected values by a
significant amount.
31. These are used to obtain evidential matter about particular assertions related to account balances
or classes of transactions. In some cases, analytical procedures can be more effective or efficient
than tests of details for achieving particular substantive testing objectives.
32. Following are examples of sources of information for the conduct of analytical procedures:
a. Financial information for comparable prior period(s) giving consideration to known changes;
b. Anticipated results—for example, budgets, or forecasts including extrapolations from interim or
annual data;
c. Relationships among elements of financial information within the period;
d. Information regarding the industry in which the client operates—for example, gross margin
information; and,
e. Relationships of financial information with relevant non-financial information.
33. The most common types of analytical procedures conducted are trend analysis, ratio analysis, and
reasonableness testing.
a. Trend analysis is the analysis of changes in an account over time. To illustrate:
Illustration 6. Sample Trend Analysis
Maintenance and other operating expenses (in
thousand pesos)
2017
Traveling
2016
2015
Vertical Analysis
2017
2016
2015
Horizontal
Analysis (Rate
of increase)
2017
2016
800
560
150
2%
1%
0%
433%
273%
Training
3,000
1,870
200
8%
4%
0%
1400%
835%
Office supplies
1,000
200
100
3%
0%
0%
900%
100%
Rental expenses
Light water and
telephone
Consultancy services
Repairs and
maintenance
5,000
5,000
10,000
14%
10%
21%
-50%
-50%
500
250
25
1%
0%
0%
1900%
900%
5,000
17,000
17,000
14%
33%
35%
-71%
0%
600
550
500
2%
1%
1%
20%
10%
300
870
100
1%
2%
0%
200%
770%
Representation
20,000
25,000
20,000
55%
49%
42%
0%
25%
Total
36,200
51,300
48,075
100%
100%
100%
Printing
Remarks
Examine cause of
increase
Examine cause of
increase
Test of details
Examine cause of
decrease
Test of details
b. Ratio analysis is the comparison across time or to a benchmark of relationships between
financial statements accounts and a non-financial data. Examples are contribution margin,
current ratio, days sales in inventory, accounts receivable turnover, debt ratio, debt to equity
ratio, inventory turn-over ratio, payable turn-over ratio, among others.
90
c. Reasonableness testing is the audit technique used to assess the reasonableness of accounting
transactions or events recorded in the FS by using two or more different sources of data or
information to predict accounting transactions or event. This means testing the validity of
financial information provided through analysis of accounts or changes in accounts between
accounting period involving development of a model to form an expectation based on financial
data, non-financial data or both. Examples are: i) matching the estimated payroll costs based on
the number of employees multiplied by fixed pay rates with the actual payroll costs incurred; ii)
comparing the balances of loans payable with the related interest expenses for the period; iii)
comparing the total rental contracts with the recorded rental income; and, iv) comparing the
total reported application for passports and the like with the recorded income.
34. When designing and performing substantive analytical procedures, either independently or in
combination with tests of details, 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;
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.
35. Substantive analytical procedures are conducted when the auditor considers the use of these
procedures as more effective and efficient than tests of details in reducing the risk of material
misstatements at the assertion level to an acceptably low level.
36. If analytical procedures performed 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 from management and obtaining appropriate
audit evidence relevant to management’s responses; and (b) performing other audit procedures as
necessary in the circumstances.
Step 4. Evaluating the Sample Results and Establishing Conclusion
37. As provided in ISSAI 1530, the auditor shall evaluate whether the use of the audit sampling has
provided a reasonable basis for conclusions about the population that has been tested. If the
auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the
population that has been tested, the auditor may:
a. Request management to investigate misstatements that have been identified and the potential
for further misstatements and to make any necessary adjustments; or,
91
b. Tailor the nature, timing and extent of those further audit procedures to best achieve the
required assurance. For example, the auditor might extend the sample size, test an alternative
control or modify related substantive procedures.
38. Relationship of the results of substantive analytical procedures with the conclusion of the audit
The auditor shall design and perform analytical procedures near the end of the audit as guide when
forming an overall conclusion as to whether the financial statements are consistent with the
auditor’s understanding of the entity.
a.
The conclusion 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 financial statements. This assists the auditor to draw reasonable conclusions on
which to base the auditor’s opinion. (ISSAI 1520, par. A17)
If evaluation of the result of substantive analytical procedures discloses significant variances
that may lead to material misstatements, the auditor’s reasonable conclusion may be affected
which necessitates rendering a modified opinion.
b.
The results of such analytical procedures may identify a previously unrecognized risk of
material misstatement. In such circumstances, ISSAI 1315 (Revised) requires the auditor to
revise the auditor’s assessment of risks of material misstatement and modify the further
planned audit procedures accordingly. (ISSAI 1520, par. A18)
39. Relationship of test of controls with substantive tests
a. Tests of controls and substantive tests of details of transactions and balances are both tests
involving transactions; in many instances transactions selected for examination are tested for
compliance with controls as well as determining whether monetary errors have occurred, giving
rise to the concept of dual-purpose testing.
b. Tests of controls and substantive tests of transactions are both usually performed for major
classes of transactions that are repetitive and large in volume. Tests of controls detect
departures from prescribed controls but do not directly measure monetary error in accounting
records. Substantive tests must be performed to determine whether monetary errors have
occurred based on the result of tests of controls, determines the extent of substantive tests
considered necessary. In a true dual-purpose test, different procedures are performed to satisfy
different objectives, but they are performed using the same documents at approximately the
same time.
c. Substantive tests of transactions and substantive tests of balances - If the account balance is
affected by many relatively small transactions, the auditor designs substantive tests of balances
directed to selected items (e.g. individual customers, inventory items) which aggregate to create
the ending balance. This commonly occurs for the accounts receivable and inventory balances.
To illustrate: If the auditor verifies the PhP250,000.00 ending balance of a receivable due from a
debtor through confirmation procedures, this is a substantive test of balances. If the auditor
92
verifies the peso value of the individual transactions comprising the PhP250,000.00 (such as by
verifying sales invoices and remittance advices associated with cash receipts transactions), this
is a substantive test of transactions.
d. Substantive tests of balances of statement of financial position accounts are generally preferred
because there are fewer items in the ending balance than there are transactions that affect the
balance, and there is generally more persuasive evidence available to support the ending
balance.
e. Note also that the substantive tests of balances of statement of financial position accounts
indirectly test the statement of financial performance account balances (sales and expenditure).
For example, the testing of accounts receivable will verify the sales that gave rise to this asset.
40. 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.
41. The proposed working paper to summarize the results of substantive testing is presented in
Illustration 7.
Illustration 7. Proposed Summary WP in Substantive Test
Substantive Test
Extent of Testing
Extensive
Less Extensive
ST Working Program Reference:
Summary of Test Results
Findings
Recommendation
ST W/P Ref.
AOM Ref.
Conclusion:
C.
Gathering Audit Documentation and Evidence
C.1. Audit Documentation
42. The audit documentation serves as sufficient and appropriate record of the auditor’s basis for a
conclusion about the achievement of the overall objectives of the auditor. It also functions as
93
evidence that the audit was planned and performed in accordance with ISSAIs and applicable legal
and regulatory requirements.
43. Paragraph 3 of ISSAI 1230 also states that: ”Audit documentation serves a number of additional
purposes, including the following:
a) Assisting the engagement team to plan and perform the audit.
b) Assisting members of the engagement team responsible for supervision to direct and supervise
the audit work, and to discharge their review responsibilities in accordance with ISSAI 1220.
c) Enabling the engagement team to be accountable for its work.
d) Retaining a record of matters of continuing significance to future audits.
e) Enabling the conduct of quality control reviews and inspections in accordance with ISQC 1 or
national requirements that are at least as demanding.
f) Enabling the conduct of external inspections in accordance with applicable legal, regulatory or
other requirements.”
44. The WPs may be in the form of paper, tapes, films, and other reliable storage and shall be
maintained in two copies (one for the office file and one for the ATL, as back-up copy). The audit
team’s custodian of the WPs shall be responsible for the updating/upgrading of the audit files and
providing a back-up copy for the ATL.
45. In the case of electronic files, the file naming standards of COA shall be adopted, if any, otherwise,
the Audit Team shall devise its own. Backup copies of all electronic WPs shall be maintained by the
Audit Team and stored separately from the original copies. Fraud investigation WPs shall not be
saved in the network common drive.
C.1.1. Organization of Working Papers
46. Working papers should be properly titled, referenced and cross-referenced to supporting evidence
and signed by the preparer and the reviewer. To prove that the audit responded to the assessed
risks of material misstatements, audit procedures actually performed are summarized on the main
audit working papers of each FS account. Deviations to the planned audit procedures in terms of the
nature, extent and timing of audit procedures must be fully explained with the SA/RSA
acknowledging acceptability of the changes done upon signing the working papers as reviewer.
47. The auditor shall assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis after the date of the auditor’s report.
(ISSAI 1230, par. 14). An audit file may be one or more folders or other storage media, in physical or
electronic form, containing the records that comprise the audit documentation for a specific
engagement.
48. An audit file may be classified into two types: current audit file and permanent audit file. Current
Audit File (CAF) contains working papers relating to a single audit engagement.2 Permanent Audit
File (PAF) is a set of records that serves as an ongoing reference for successive audit. The
2
(Current Audit File, 2018)
94
information in the PAF, which should be regularly updated, is intended to be accessed repeatedly to
assist the audit team in the conduct of their tasks.3
49. Listed below are the contents of CAF and PAF, among others, which shall be shall be systematically
organized/arranged to facilitate supervisory review, exhibiting a consistent structure thru the use of
a logical or easy-to-follow index code, agreed upon by the Auditor and his/her Supervisor during the
planning phase of each audit, to promote efficient cross-referencing system, convenience and ease
in locating these WPs when circumstances demand for its use. The Auditor shall avail of the use of
databases, word processing search facilities and other software packages, when necessary, to assist
in information storage and retrieval.
Table 9. List of Current Audit File and Permanent Audit File
Current Audit File
Preliminary Activities
Execution Phase
1. Engagement Letter
1. Summary of Proposed Audit
2. Auditor’s Declaration of
Adjustments
Independence and Compliance 2. Working Papers (WPs) by
with Ethical Standards
account with top schedule and
3. Management Representation
sub schedule supported with
Letter
audit evidence
3. Current Year’s AOM, NS, ND, NC,
AM, WP on Financial Analysis
(Trend Analysis, Ratio Analysis,
Reasonableness Testing)
4. Bank Statements and Bank
Reconciliation Statements
5. Reports of Checks Issued and
Disbursement Vouchers
6. Minutes of exit conference
Planning Phase
Reporting Phase
1. Engagement Planning
1. Final AAR and signed
Memorandum
IAR/Management Letter
2. Audit Program
2. Summary of Uncorrected
3. Summary of other audit
Misstatements
activities Overall Audit Strategy 3. Summary of Audit Observations
4. Specific Audit Instructions
and Recommendations
5. Results of Risk Assessment at 4. Management Comments
the Assertion Level
6. Materiality Template
Quality Control Review Documents
7. Summary Report on the
5. Duly signed Financial
Preliminary Identification of
Management Performance
Risks
Rating
8. UTA Template and Financial
6. Completion Compliance
Accountability LogFrame
Checklist
9. Agency-level Controls Checklist 7. Auditee Feedback Survey
Template
8. Director’s Evaluation Form
10. General Accounting Plan/
3
(Bragg, 2018)
95
Permanent Audit File
Charter or mandate;
Manual of operations;
Internal audit reports;
Minutes of meetings and
conferences of agency
officials;
5. Organizational Chart/
Functional Chart;
6. Official directives, new laws
and regulations affecting the
agency;
7. Appropriations/annual
budget and other financial
and project reports;
8. Property and personnel
accountability audits;
9. Notices of Suspensions,
Charges and Disallowances,
Notices of Finality of
Decisions (NFD), COA Order
of Execution (COE); Financial,
compliance and performance
audit reports; cash
examination reports; fraud
audit reports; project audit
reports;
10. Evaluation/investigation
reports/emerging issues from
newspaper accounts
11. Financial Reports
1.
2.
3.
4.
Current Audit File
Walkthrough Analysis
11. Prior Years’ AOM, NS, ND, NC,
AM, WP on Financial Analysis
(Trend Analysis, Ratio Analysis,
Reasonableness Testing)
12. Agency Action Plan and Status
of Implementation
13. Action Plan Monitoring Tool
14. Recommendation Tracking
Sheet
15. Variance Analysis of FS
16. Tie-in Analysis
17. WP on Preliminary Data
Analysis
18. Test of Internal Control Design
Permanent Audit File
50. The ATL is primarily responsible for the timely assembly of the final audit file within 60 days from
receipt of transmittal of the audit report (AAR/ML) by the audited agency, in accordance with
Section A21 of ISSAI 230. As a general rule, the WPs shall be kept under lock and key.
C.1.2. Characteristics of Working Paper
51. Working papers should be complete and accurate, and must support observations, testing,
conclusions, and recommendations. It should also show the nature and scope of the work
performed. Working papers should also be clear and understandable without supplementary oral
explanations.
52. The structure of the working paper should be in a logical format that clearly shows the
purpose/objective of the test (risk being tested), a description of the test, extent of testing
performed, results, conclusion arrived at i.e. any control weaknesses identified, and potential
process improvements, and positive change opportunities. Where working papers are hand written
they should be neat and legible. If working papers are not clear they may lose their worth as
documented evidence.
53. Each top schedule of the accounts presents the Audit Conclusion: whether the audit objective was
met or not and the reason thereof; whether the Main Account audited (e.g. Cash, Receivables,
Inventory, etc.) is considered as fairly stated and presented, as shown below.
Illustration 8. Sample Top Schedule and Audit Conclusion
ABC Agency
Top Schedule – Cash & Cash Equivalents
December 31, 20x2
Account
Cash in
Bank
Cash
Amount
Audit Adjustments
DR
CR
WP
ref
Per Books
20x2 (CY)
20x1 (PY)
A-1
10,000
0
500
9,500
20,000
A-2
1,000
0
0
1,000
2,000
96
Per Audit
Collecting
Officer
Short-term
Investment
A-3
2,000
500
0
2,500
3,500
Audit conclusion on the audit of cash:
Based on the audit procedures performed for the Cash and Cash Equivalents, total adjustment of Pxxx representing unrecorded bank charges was
taken up in the books to effect the adjusted cash in bank balance per books. We conclude that this account is fairly stated and presented in the
financial statements.
Prepared by:
Reviewed by:
Audit Team Member
Audit Team Leader
Date of audit completion
Date of review
54. All WPs shall be dated, signed by the preparer and reviewer, and clearly referenced using the
standard tickmarks developed by the audit teams.
55. The WPs shall be cross-referenced to the appropriate source, complete with no unanswered
questions or other evidence of unfinished work. Cross-referencing of documents shall also be made
to provide a link between pages of the WPs which are interrelated and allow the reader/reviewer of
the WPs easy access to the data.
56. All pages in the WPs shall be indexed except in the case of a set of document with several pages,
wherein only the cover page shall be given an index number. The indexing of the files shall be
aligned with the order of presentation in the Table of Contents. The index code shall be indicated at
the right top portion of the WP or on the lower center of the page of the WP and when numbering a
given area, consecutive numbers shall be used (i.e., 2-1, 2-2, 3-1, 3-2, etc.). WPs shall be indexed
according to the Audit Working Paper Checklist agreed by the ATL and the SA or the concerned
Cluster/office.
C.2. Audit Evidence
57. The SA/RSA and ATL ensure that all evidence is documented properly in audit working papers. Audit
evidence refers to information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. It includes both information contained in the accounting records
underlying the financial statements and information obtained from other sources. (ISSAI 1500)
58. The auditor can obtain evidence in many different ways, such as:
a. Inspection or observation evidenced by photographs, inspection reports; formal analysis
performed by expert/s, and even the object or a portion of the object itself such as substandard
materials.
b. Evaluation of records, reports and documents including disbursement vouchers to prove certain
facts noted in the course of the audit. For instance, proof of a cash shortage in a cash
examination report; one proof of noncompliance with specific terms would be the contract
itself; proof of payments made are the official receipts, and proofs that payments made are
valid are the delivery reports, sales invoices and purchase orders.
c. Interviews/inquiries evidenced by signed interview sheets or a recording of a conversation with
the interviewees; confirmation replies received from banks, debtors and creditors; emailed
97
replies to queries made from a client or another department. To strengthen evidence through
interviews; other forms of evidence are obtained, say an inspection performed to prove
interviewees’ contention that certain assets are missing.
d. Study, comparison, and evaluation of relationships among financial and non-financial data at a
point in time and the trend in those relationships over a period.
e. Questionnaires with a list of questions on a particular area or function may be developed to
obtain information relating to the audit objective. The questionnaire should be short and
answerable by “yes” or “no” only, to facilitate collation and analysis. For this to be considered as
audit evidence, the Auditor should request for copy of related documents, records or reports or
results of questionnaire used to conduct alternative procedures.
f.
Flowcharts showing the flow of activities through a process. They help to visualize the process
and therefore facilitate an analysis of the operation and assist in identifying inefficiencies,
overlaps and duplications/missing procedures and control weaknesses. Flowcharts are valuable
when documenting a complicated flow of documents or process such as cash receipts, cash
disbursements, and procurement, among others. Completed flowcharts should be discussed
with the interviewee to ensure correctness.
g. Walkthroughs to document the audited entity’s processes. This activity involves following one or
two transactions or activities step-by-step through the process from beginning to end. A
walkthrough test helps to confirm the accuracy of the auditor’s documentation of the process
and ensure that it is understood. Walkthroughs are more effective in understanding the audited
entity’s processes than a general review of manuals and operating procedures, as they provide a
faster and more effective identification of weaknesses and potential problem areas.
h. Re-computation or verifying the mathematical accuracy of figures. The value of this procedure
as evidence is limited as the reliability of the evidence obtained depends on the validity of the
source documents.
i.
Reperformance or Auditor’s independent execution of procedures or controls that were
originally performed as part of the entity’s internal control, either manually or through the use
of CAATs. For example, reperforming the aging of accounts receivable or comparing the price on
an invoice to that reflected in an approved purchase order.
59. Audit evidences can be obtained either in the form of:
a.
b.
c.
d.
Physical - through inspection or observation
Documentary - records, reports and documents
Testimonial - from third parties
Analytical - study, comparison, and evaluation of relationships among financial and nonfinancial data
D. Addressing Risk Areas that Need Specific Considerations
60. Audit evidence obtained for these areas/issues and requirements should consider the following:
98
a. Inventory in the public sector is often held for use rather than for resale. As such, property
audits go beyond the usual observations of physical inventories conducted during year-end and
cover year round activities. Violations to property related regulations especially those included
in the State Audit Code, are reported as part of the auditor’s observations and
recommendations.
b. Litigation and claims
i. These conditions need to be disclosed in the Notes to FS. In addition, audit procedures may
have to be performed to identify litigation and claims which may give rise to the need to
recognize a contingent asset or liability in the FS.
ii. Contingent liability refers to a possible obligation that arises from past events, and whose
existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or a present obligation
that arises from past events, but is not recognized because: (i) it is not probable that an
outflow of resources embodying economic benefits or service potential will be required to
settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient
reliability.
iii. Contingent asset refers to a possible asset that arises from past events whose existence will
be confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity.
iv. Audit procedures for these areas may include:

Obtain from management and/or from its internal Legal Counsel a description and
evaluation of litigation, claims, and assessments that existed at the date of the balance
sheet being reported on, and during the period from the balance sheet date to the date
the information is furnished, including an identification of those matters referred to
legal counsel. The ISSAI recognizes that public sector auditors such as COA auditors
have the right to communicate directly with the agency’s external legal counsel without
need for management permission.

Examine documents in the client's possession concerning litigation, claims, and
assessments, including correspondence and invoices from lawyers.

Review of legal expense account if this exists and if management denies having any
litigation and claim related issues.

Evaluate the likelihood of an unfavorable outcome and its estimate of the amount or
range of potential loss. Assess if the potential loss will affect the reliability of the FS and
require disclosure in the Notes to FS.
99
c. Segment information - presentation and disclosure of specific segment information discussed in
the ISSAI are not applicable in the Philippines except for certain public sector entities.
However, there may be information similar to segment information requiring disclosure.
i.
This is in the case of foreign assisted projects funded by the World Bank; European Union;
USAID; United Nations Development Programme and the ADB where stand-alone audit
reports are submitted to the funding organizations. This can be presented in the following
manner:
Note 10. Audit of Loans and Grants from the Asian Development Bank
A separate special purpose financial audit was performed on government and ADB funds
for Project 12345 “Project on Climate Change” included in this 20xx financial statements
for the Agency. The COA rendered an unmodified audit opinion on the fairness in
presentation of the financial statements and on the Project’s compliance with ADB
requirements particularly on SOE and imprest account procedures prescribed in the Loans
Disbursements Handbook; and on the use of the funds for the purposes intended.
ii.
The materiality of misstatements on the overall FS in separate audits will have to be
evaluated.
d. Related party transactions – persons or other entities that have control or significant influence,
directly or indirectly through one or more intermediaries, over the reporting entity; entities over
which the reporting entity has control or significant influence, directly or indirectly through one
or more intermediaries; or, other entities under common control with the reporting entity
through having common controlling ownership, owners who are close family members, and
common key management. The auditor is required to examine the documents (minutes of
meetings, bank and legal confirmations, such other documents provided) supporting the
transaction/s; establish whether these transactions are properly accounted for and identify
possible misstatements or errors due to fraud by the very nature of the transactions. In
addition, material transactions should be confirmed with related parties identified and
appropriate background research should be conducted as necessary.
i. The Notes to FS should disclose related party transactions, business rationale and effects of
the transactions on the FS. Key terms, conditions, or other important elements of the
transactions necessary for understanding them should also be disclosed.
ii. Examples of transactions which may qualify as related party transactions in the Philippines
are:




fund transfers to the agency for projects which are not related to the mandate or
objective of the agency;
fund transfers to the agency and subsequent transfers of the same amounts to nongovernment agencies;
material cash advances, fund transfers or loans released by the agency to persons or
non-government agencies or parties;
guarantees and guarantor relationships;
100







agreements for the provision of services to certain parties under terms and conditions
outside the agency’s normal course of business;
complex equity transactions such as corporate restructurings or acquisitions;
transactions with offshore entities in jurisdictions with weak corporate laws;
leasing of premises or the rendering of management services by the agency to another
party if no consideration is exchanged;
sales transactions with unusually large discounts or returns;
transactions with circular arrangements such as sales with commitment to repurchase;
and,
transactions under contracts whose terms are changed before expiry.
iii. Auditors should be guided by the requirements of ISSAI 1240 in case of intentional nondisclosure by management of related party transactions. The auditor may also consider the
need to re-evaluate the reliability of management’s responses to audit inquiries and the
management’s representations to the auditor.
e. Accounting estimates are an approximation of monetary amount in the absence of a precise
means of measurement.
i. In the public sector these pertain to:

Programs: social insurance; governmental employee pension; health care; veterans’
benefits, environmental liabilities; tax revenue and receivables and certain property and
equipment such as specialized military equipment and heritage assets.

Activities with high estimation uncertainty: outcome of litigation; derivative financial
instruments not publicly traded; fair value accounting estimates for which a highly
specialized entity developed model is used such as employees benefit pension fund
which requires the estimation of an actuary.

Situations where accounting estimates may be required: inventory obsolescence;
warranty obligations; depreciation method or asset useful life; share-based payments;
property or equipment held for disposal; goodwill or intangible assets; non-monetary
exchange of plant facilities.
ii. The nature and reliability of information to support the accounting estimates may affect the
risks of material misstatement of accounting estimates including the susceptibility to
unintentional or intentional management bias.
iii. For accounting estimates that give rise to significant risks, the auditor obtains appropriate
evidence of management’s decision to recognize or not to recognize accounting estimates in
the financial statements. The auditor then evaluates reasonableness of such estimates and
adequacy of disclosures.
iv. The disclosures should include the assumptions used, the method of estimation, including
any applicable model, the basis for selection of the method of estimation, the effect of any
101
changes to the method of estimation from prior period and the sources and implications of
estimation uncertainty.
f.
Subsequent Events pertain to events which occur after the date of the FS but which: i) provide
evidence of conditions that existed at the date of the FS and ii) those that provide evidence of
conditions that arose after the date of the FS.
i. Accruing expenses paid during the ensuing year but pertaining to transactions which should
have been recognized during the year under audit, under accrual accounting is an example
of adjustments made resulting from a subsequent events analysis.
ii. The auditor should inquire from management whether any subsequent events that might
affect the financial statements have occurred. Specific inquiries about the following matters
should be made about these transactions reported after the date of the FS:









New commitments, borrowings, or guarantees entered into
Sales, acquisitions or assets
Increases in capital or issuances of debt instruments such as issuance of new shares or
debentures or an agreement to merge or liquidate has been made or planned
Assets appropriated by government or destroyed by fire or flood
Developments regarding contingencies such as claims or litigations
Unusual accounting adjustments made or contemplated
Events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the FS, such as going concern issues
Events that have occurred relevant to the measurement of estimates or provisions
made in the FS
Events that have occurred that are relevant to the recoverability of assets
iii. The terms of audit engagement should include the obligation of management to inform the
auditor of facts that may affect the FS of which management may become aware during the
period from the date the FS are approved for issuance to the date of the auditor’s report.
During this period, the auditor is responsible for matters that may occur regardless of the
lack of disclosure by management. The lack of disclosure by management may be addressed
by performing applicable audit procedures to obtain sufficient appropriate audit evidence
that all subsequent events have been identified. Such subsequent matters, if material, may
affect the audit opinion to be rendered.
iv. For example, way before the end of the reporting period, a debtor of the agency/unit/
corporation/project with a substantial account already displays inability to pay its obligation.
Management did not adjust the corresponding allowance for impairment on the account of
such debtor despite the circumstances. Two months after the approval of the issuance of the
year-end financial statements and before the issuance of the auditor’s report, the debtorclient declared bankruptcy. This is an adjusting subsequent event. The auditor, having
knowledge of the situation, recommended for an adjustment for the increase of allowance
for impairment on the account of the bankrupt client. However, Management refused to
make the adjustment. In such a case, the auditor’s opinion is modified on the matter
depending on the materiality of the account’s amount.
102
v. The auditor is not responsible for subsequent matters that occur after the date of the
auditor’s report which management purposely did not divulge to him/her.
g. Audits of Group Financial Statements (including work of Component Auditors)
ISSAI 1600 provides the guidance for Group FS. In COA, Group FS refer to consolidated FS
prepared by the head office of a department/agency.
i. The auditors assigned at the head office (group auditor) and field operating offices
(component auditor) conduct the audit of the FS of their respective auditees and prepare an
ML or SAOR, whichever is applicable.
ii. The component auditor transmits the ML/SAOR to the respective auditees, a copy thereof
furnished to the CD through the RD.
iii. The group auditor prepares the CAAR based on the ML/SAOR issued by the component
auditors, and the result of reviews of the Group Financial Statements.
iv. The group auditor is responsible for the issuance of group audit opinion taking into
consideration the materiality threshold established for the Group FS. When the opinion is
modified because of inability to obtain sufficient appropriate audit evidence in relation to
the financial information of one or more components, the reasons for that inability shall be
discussed in the Basis for Modification paragraph in the IAR on the group FS. The group
auditor may refer the matter to the component auditor as deemed necessary for an
adequate explanation of the circumstances.
v. After review of the CAAR, the report is then transmitted to the department/agency.
vi. For consistency of audit focus and area, the group auditor issues Specific Audit Instructions
for compliance by the component auditors down to the provincial/division level. The
component auditors are, however, not constrained to look into areas considered of
significant risks at their level.
E. Summarizing Proposed Audit Adjustments and Evaluating Effects in the Audit Opinion
61. Whenever necessary, proposed audit adjustments of the Audit Team are forwarded to the Chief
Accountant for action. Once the audit is completed, the Audit Team Leader prepares a list of all
audit adjustments indicating the actions taken by the Chief Accountant as illustrated below.
Illustration 9. Summary of Proposed Audit Adjustments
In Thousand Pesos
No.
Accounts and
Description
WP
ref
Asset
Current
1
Other Expenses
Cash in bank
To record bank
charges
NonCurrent
Liability
Current
(60.00)
NonCurrent
Current
Period
Revenue/
Expense
60.00
Prior
Period
Revenue/
Expense
Adjusted by
Management
?
Y
N


103

In Thousand Pesos
No.
Accounts and
Description
WP
ref
Asset
Current
2
3
4
Impairment Loss –
Loans &Receivables
Allowance for
Impairment – Loans
& Receivables
To set up Allowance
for Impairment
Operating expenses
Accrued expenses
To accrue expenses
PPE
Accumulated
Surplus / Prior
Period Adjustments
To capitalize major
repairs of buildings
which were
previously charged
to expenses
NonCurrent
Liability
Current
NonCurrent
Current
Period
Revenue/
Expense
2,000.00
Prior
Period
Revenue/
Expense
(2,000.00)
Adjusted by
Management
?
Y
N

23,000.00

23,000.00

50,000.00
(50,000.00)

62. The auditor shall analyze and evaluate whether the unrecorded audit adjustment will affect the
audit opinion to be issued considering the final and/or revised overall and specific materiality
thresholds established, the size, nature and particular circumstance of misstatement, both in
relation to the particular classes of transaction, account balance, or disclosure, and to the FS as a
whole.
II.
Summarize Audit Observations and Recommendations and Communicate with Those Charged
with Governance
A. Areas for Consideration in Summarizing Audit Observations
63. Upon completion of the Execution Phase but before the conduct of an Exit conference, an audit
summary should be prepared to summarize the work done and conclusions reached (Appendix 3-1).
All uncorrected misstatements accumulated during the audit shall be included in the summary.
64. Misstatement pertains to a difference between the reported amount, classification, presentation, or
disclosure of a financial statement item and the amount, classification, presentation, or disclosure
that is required for the item to be in accordance with the applicable financial reporting framework.
65. A misstatement may not be an isolated occurrence. Evidence that other misstatements may exist
include, for example, where the auditor identifies that a misstatement arose from a breakdown in
internal control or from inappropriate assumptions or valuation methods that have been widely
applied by the entity. (Guidance on the determination of projected misstatements and evaluation of
the results is set out in ISSAI 1530.9 Consideration of Identified Misstatements as the Audit
Progresses)
104
66. The determination of whether a misstatement(s) in a qualitative disclosure is material, in the
context of the applicable financial reporting framework and the specific circumstances of the entity,
is a matter that involves the exercise of professional judgment. Examples where such misstatements
may be material include:
a. Inaccurate or incomplete descriptions of information about the objectives, policies and
processes for managing capital for entities with insurance and banking activities.
b. The omission of information about the events or circumstances that have led to an impairment
loss (e.g., a significant long-term decline in the demand for a metal or commodity) in an entity
with mining operations.
c. The incorrect description of an accounting policy relating to a significant item in the statement
of financial position, the statement of financial performance, the statement of changes in net
assets/equity, statement of comparison of budget and actual amounts, or the statement of cash
flows.
67. The circumstances related to some misstatements may cause the auditor to evaluate them as
material, individually or when considered together with other misstatements accumulated during
the audit, even if they are lower than materiality for the FS as a whole. Circumstances that may
affect the evaluation include the extent to which the misstatement:
a. Affects compliance with regulatory requirements;
b. Affects compliance with debt covenants or other contractual requirements;
c. Relates to the incorrect selection or application of an accounting policy that has an immaterial
effect on the current period’s FS but is likely to have a material effect on future periods’
financial statements;
d. Masks a change in earnings or other trends, especially in the context of general economic and
industry conditions;
e. Affects ratios used to evaluate the entity’s financial position, results of operations or cash flows;
f. Affects segment information presented in the FS (for example, the significance of the matter to
a segment or other portion of the entity’s business that has been identified as playing a
significant role in the entity’s operations or profitability);
g. Has the effect of increasing management compensation, for example, by ensuring that the
requirements for the award of bonuses or other incentives are satisfied;
h. Is significant having regard to the auditor’s understanding of known previous communications to
users, for example, in relation to forecast earnings;
i. Relates to items involving particular parties (for example, whether external parties to the
transaction are related to members of the entity’s management);
j. Is an omission of information not specifically required by the applicable FRF but which, in the
judgment of the auditor, is important to the users’ understanding of the financial position,
financial performance or cash flows of the entity; or,
k. Affects other information to be included in the entity’s annual report (for example, information
to be included in a “Management Discussion and Analysis” or an “Operating and Financial
Review”) that may reasonably be expected to influence the economic decisions of the users.
These circumstances are only examples; not all are likely to be present in all audits nor is the list
necessarily complete.
105
68. Significant related party matters arising during the audit shall be communicated to management
such as:
a. Non-disclosure of related parties or significant related party transactions by management
b. Significant related party transactions that have not been appropriately authorized and approved
giving rise to suspected fraud
c. Disagreement with management regarding the accounting for and disclosure of significant
related party transactions in accordance with the applicable FRF
d. Non-compliance with applicable law or regulations prohibiting or restricting specific types of
related party transactions
69. As discussed in ISSAI 1240 in relation to ISSAI 1450, the result of fraud will be considered in relation
to other aspects of the audit, even if the size of the misstatement is not material in relation to the
FS. Depending on the circumstances, misstatements in disclosures could also be indicative of fraud,
and, for example, may arise from:
a. Misleading disclosures that have resulted from bias in management’s judgments; or
b. Extensive duplicative or uninformative disclosures that are intended to obscure a proper
understanding of matters in the FS.
B. Elements of Audit Observation
70. The cumulative effect of immaterial uncorrected misstatements related to prior periods may have a
material effect on the current period’s FS and should also be reviewed.
71. The working paper supporting the summary should include the conclusions reached containing the
elements of audit observation. The required COA format for an audit summary should be followed.
72. The elements of audit observation are explained as follows and presented in Illustration 10:
a. criteria - pertains to the standard or the benchmark. This is usually a policy, circular, directive or
a law.
b. condition – explains whether the criteria were followed or not based on evidence gathered.
c. cause – the reason/s for the existing conditions and unmet criteria.
d. effect – adverse result of the failure to meet criteria which is expressed in terms of losses,
wastage, inability to perform ones tasks or meet client expectations among others.
Illustration 10. Sample - Elements of an Audit Observation
Inventory balance overstated by P1M due to non-recording of issuances in the books of accounts.
The non-recording of inventory issuances distributed to various offices rendered the inventory account overstated by
P1M and understating the corresponding inventory account by the same amount due to the non-preparation by the
Property Officer of the RSMI and its non-submission to the Accounting Office which is contrary to Paragraph 44 of
PPSAS 12 on the recognition of expense.
106
Criteria: Paragraph 44 of PPSAS 12
Condition: Non-recording of inventory issuances
Cause:
Non-preparation by the Property Officers of the RSMI
Effect:
Overstatement of Inventory Balance; Understatement of expense
73. Recommendations should address both causes and effects of the observation and may consider
inputs from management. The proposed recommendation for the sample audit observation is
presented below.
Illustration 11. Sample - Audit Recommendation
We recommended that the Property Officer be required to submit the RSMI to the Accountant, and the
Accountant to adjust the Inventory account and Expense account accordingly.
74. The logical relationships between and among the elements of an audit observation as well as the
recommendation is presented in Exhibit 4.
Exhibit 4. Diagramming Tool
Criteria
Cause
Condition
Effect
Recommendations
Evidence
Recommendations
C. Performing Review of Overall Audit Work
75. The auditor shall consider the following:
a. Affirmation of Audit Team’s independence
Before reporting, the SA/RSA shall affirm that the Team is still independent of the auditee.
(Appendix 3-2)
b. Consider subsequent events
Sufficient evidence should be gathered to ensure that all events occurring between the date of
the FS and the date of the Auditor’s Report that require adjustment or disclosure are identified.
Subsequent events are more relevant under accrual accounting.
c. Update lead schedule and perform final analytical review
107
Should there be any changes in the FS, the schedules shall be updated and additional
procedures documented.
d. Consider the adequacy of work performance
The audit team shall make conclusion on whether all planned audit works have been performed
or there are other activities to be undertaken before closing the audit or reporting.
D. Tracking Status of Prior Years’ Recommendations
76. In addition to existing COA regulation requiring the submission of AAPSI and APMT, the audit team
shall prepare an RTS.
77. All audit issues with unimplemented recommendations per SIPYAR (Part III of the AAR) should be
reiterated in Part II (Findings and Observations) of the current year’s audit report if the existing
condition still exists that affects the audit opinion. However, the reasons for the failure of the
management to implement recommendation should be assessed to determine if there is a need to
revise or refocus the recommended action. In such case, the status of affected recommendation in
the RTS should be considered “closed for having been revised”.
78. If the audit issues intended to be addressed by the unimplemented recommendation are no longer
existing due to, among others, closing of the project, or adoption of new accounting system, or
implementation by management of control measures other than the Audit Team’s recommended
course of action, the status of such recommendation in the RTS can be considered closed.
79. All unimplemented recommendations considered closed/closed for having been revised shall be
recommended by the SA/RSA for approval of the CD/RD, and once approved, the same shall be
deleted from the SIPYAR of the succeeding year.
80. If considered necessary, the Head of the audited agency should be formally informed of the
unimplemented recommendations and possible action to be taken by COA for continued inaction.
Non-implementation of recommendations for no valid reason and without any alternative action
taken to address the problem is a criterion for decreasing the performance rating of an agency as
discussed in Section 5 of this FAM.
81. The format of the RTS to be maintained by the concerned Audit Team Leader and the Office of the
Director for each agency is shown in Appendix 3-3.
82. There are factors preventing the Auditee to implement the agreed upon actions, such as competing
priorities; funding issues and lack of staff to implement the recommendations. One other reason for
non-implementation of recommendations is that the recommendation is not practical and doable.
Recommendations should be:
a.
b.
c.
d.
Specific – target a specific area for improvement.
Measurable – quantify or at least suggest an indicator of progress.
Assignable – specify who will do it.
Realistic – what results can realistically be achieved, given available resources.
108
e. Time-related – specify when the result(s) can be achieved.
III.
Conduct Exit Conference
83. The Audit Team Leader prepares the audit highlights as basis for an exit conference with
management subject to the approval of the SA/RSA. Points for discussion are:
a.
b.
c.
d.
e.
f.
The misstatements identified and the adjustments which the Chief Accountant failed to take up;
The effect of failure to take up adjustments as far as the audit opinion is concerned;
Additional disclosures or explanations for inclusion in the Notes to FS;
Audit observations and tentative audit recommendations using the audit summaries as basis;
Deadline for submission of management comments;
Pending issues and requests such as related parties, litigation and claims, if remained
unsubmitted as of exit conference;
g. Submission of the MRL, if remained unsubmitted as of exit conference;
h. Unimplemented audit recommendations and its impact on the FS; and,
i. Other matters included in the Engagement Letter which have not been addressed.
109
Appendix 3-1. Summary of Audit Observations and Recommendations
Agency _____________________
_____________________
Period _____________________
Prepared by: _______________
Reviewed by: ______________
Approved by: ______________
Date: __________
Date: __________
Date: __________
A. Matrix of Financial Audit Observations and Recommendations
No.
AOM
No./Date
Observation
Recommendation
Management
Comment
Auditor’s
Rejoinder
1.
2.
3.
4.
B. Summary of Uncorrected Misstatements
No.
Accounts and WP
Description ref
Asset
Current
NonCurrent
In Thousand Pesos
Liability
Current
1.
2.
3.
4.
Total
110
NonCurrent
Current
Period
Revenue/
Expense
Prior
Auditor’s
Period
Evaluation
Revenue/
Expense
Appendix 3-2. Affirmation of Audit Team’s Independence and Compliance with
Ethical Standards
REPUBLIC OF THE PHILIPPINES
COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines
AFFIRMATION OF AUDIT TEAM’S INDEPENDENCE AND COMPLIANCE
WITH ETHICAL STANDARDS
I affirm to the best of my knowledge that, I know of nothing that have impaired the Audit Team’s
independence and impartiality that contravened the requirements of any applicable code of
professional conduct.
__(Signature over printed name)__
Supervising Auditor/Regional
Supervising Auditor
Date:
Cluster/Regional Director’s Certification:
I certify that I am not aware of anything that impaired the independence and impartiality of the Audit
Team.
__(Signature over printed name)__
Cluster/Regional Director
Date:
111
Appendix 3-3. Recommendations Tracking Sheet
Recommendations Tracking Sheet
As of _____________
Agency:
Ref.
AAR
Year
Prepared by:
Audit
Observation
Audit
Recommendation
Date:
__(Signature over printed name)__
ATL
Audit Recommendation
Restated/
Closed/
Reiterated
Revised
Implemented
Reviewed by:
Date:
__(Signature over printed name)__
SA/RSA
112
Reason for NonImplementation
Approved by:
Auditor’s
Further
Action
Date:
__(Signature over printed name)__
CD/RD
Section 4
Reporting Phase
1. After sufficient and appropriate audit evidence has been obtained, the auditor is now ready to
prepare the independent auditor’s report on the audit of the financial statements of the
Agency/Local Government Unit/Corporation. This phase comprises the following:
I.
Write the independent auditor’s report
A. Forming an audit opinion
A.1. Evaluating audit evidence obtained
A.2. Considering materiality of uncorrected misstatements
A.3. Evaluating financial statements prepared using the appropriate financial reporting
framework
B. Forms of independent auditor’s report
B.1. Unmodified auditor’s report
B.2. Modified auditor’s report
B.2.1. Matters affecting the Auditor’s unmodified opinion
B.2.2. Matters not affecting the unmodified opinion
B.3. Auditor’s report on consolidated financial statements
B.4. Auditor’s report on comparative financial statements
II.
Specific Elements of the Independent Auditor’s Report
A. Title
B. Addressee
C. Report on the audit of the financial statements
C.1. Opinion section
C.2. Basis for opinion
C.3. Key audit matters
C.4. Emphasis of matter
C.5. Other matter
C.6. Other information
C.7. Responsibilities of management for the financial statements
C.8. Auditor’s responsibilities for the audit of the financial statements
D. Report on other legal and regulatory requirements
E. Name of the engagement partner
F. Signature of the auditor
G. Auditor’s address
H. Date of the independent auditor’s report
III.
Comparative information
A. Corresponding figures and Comparative Financial Statements
A.1. Corresponding Figures
A.2. Comparative Financial Statements
IV.
Special Considerations – Audits of Financial Statements Prepared in Accordance with Special
Purpose Frameworks
V.
Types of Audit Report
113
I.
Write the Independent Auditor’s Report
2. Paragraph 17.1 of the Guide to Using International Standards on Auditing in the Audits of Small- and
Medium-sized Entities, Third Edition, Volume 2 – Practical Guidance, 2011 (Guide 2011) states that
the final step in the audit process is to evaluate the audit evidence obtained, consider the impact of
misstatements identified, form an audit opinion, and prepare an appropriately worded audit report.
3. In a similar way, Chapter 9, Audit Reporting of the Financial Audit ISSAI Implementation Handbook
(Handbook 2018) states that the audit report is the final product of the entire audit process, which is
prepared based on sufficient appropriate audit evidence gathered by auditors through performing
audit procedures. In this regard, according to ISSAI 1700, the objectives of the auditor are to form
an opinion on the financial statements, based on an evaluation of the conclusions drawn from the
audit evidence obtained; and to express clearly that opinion through a written report that also
describes the basis for that opinion.
A. Forming an Audit Opinion
4. ISSAI 1700 (Revised), paragraphs 10 to 13 provide that the auditor shall form an opinion on whether
the FS are prepared, in all material respects, in accordance with the applicable FRF. In order to form
that opinion, the auditor shall conclude as to:
a. whether sufficient appropriate audit evidence has been obtained;
b. whether uncorrected misstatements are material, individually or in aggregate; and
c. whether the FS are prepared in accordance with the requirements of the applicable and
appropriate FRF.
5. The applicable and appropriate FRF for National Government Agencies (COA Resolution No. 2014003 dated January 24, 2014), LGUs (COA Resolution No. 2014-003), and Non-GBEs under the CGS
(COA Circular No. 2015-003 dated April 16, 2015) is the PPSAS, while that for GBEs, CGS is the PFRS
(COA Circular No. 2015-003 dated April 16, 2015).
A.1. Evaluating Audit Evidence Obtained
6. The relevant ISSAIs that serve as guide in evaluating the sufficiency and appropriateness of audit
evidence obtained in order to draw reasonable conclusions on which to base the audit opinion are:
a.
b.
c.
d.
e.
ISSAI 1220 – Quality Control for an Audit of Financial Statements;
ISSAI 1330 – The Auditor’s Responses to Assessed Risks;
ISSAI 1450 – Evaluation of Misstatements Identified during the Audit;
ISSAI 1520 – Analytical Procedures; and
ISSAI 1540 – Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures. (Item 21, Guide 2011)
7. The objectives of evaluating audit evidence are “to decide, after considering all relevant data
obtained whether:
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a. the assessment of the risks of material misstatement at the assertion level are appropriate; and
b. sufficient evidence have been obtained to reduce the risks of material misstatement (RMM) in
the financial statements to an acceptably low level.” (Guide 2011)
8. Further, to address such objectives, the important questions to ask and consider under evaluating
audit evidence are:
a. Has sufficient appropriate audit evidence been obtained?
b. Are the accounting estimates made by management reasonable?
c. Did the analytical procedures performed at or near the end of the audit corroborate conclusions
formed during the audit? (Paragraph 17.3 Forming the Opinion, Guide 2011)
9. The following exhibit shows in graphic form the decision that the auditor has to make in preparing
the auditor’s report.
Exhibit 5. Decision Tree in Preparing the Auditor's Report
Back to risk
assessment
ACTIVITY
REPORTING
Evaluate the
audit evidence
obtained
yes
PURPOSE
DOCUMENTATION
Determine what
additional work (if
any) is required
 New/revised risk factors
and audit procedures
 Changes in materiality
 Communications on
audit findings
 Conclusions on audit
procedures performed
Form an audit
opinion based on
audit findings
 Significant decisions
 Signed audit opinion
Is
additional
work
required?
no
Prepare the
auditor’s report
10. It is essential that the auditor has to determine that sufficient appropriate audit evidence has been
obtained, and no additional work is required. Otherwise, the auditor should undertake additional
risk assessment to address such matters as:
115
a.
b.
c.
d.
those that affect the original audit plan;
those that have material impact on the auditor’s report;
those changes that affect the overall materiality threshold arrived at in the planning phase; and,
those which necessitates application of additional audit procedures.
11. Audit evidence represents information used by the auditor in arriving at the conclusions as basis for
the auditor’s opinion. Audit evidence includes both information contained in the accounting records
underlying the FS and information obtained from other sources (ISSAI 1500-Audit Evidence, par.
5(c)). Examples of the latter are confirmation replies from the Agency’s/Unit’s/Corporation/Project’s
depository banks, debtors, or creditors. Information from third parties is considered to be more
reliable as they have the impartiality that documents obtained from management lacks.
12. Sufficiency is the measure of quantity of audit evidence. The quantity of audit evidence needed is
affected by the auditor’s assessment of the risks of misstatement (the higher the assessed risks, the
more audit evidence is likely to be required) and also by the quality of such audit evidence (the
higher quality, the less may be required). Obtaining more audit evidence, however, may not
compensate for its poor quality. (ISSAI 1500, par. A4.)
13. Audit evidence does not have to be copious. As long as the audit is well documented, and the
procedures manifested in such documents attained the audit objectives, the auditor may conclude
that sufficient evidence is obtained which can support the conclusions made. For example, a
working paper (top schedule and sub-schedules) showing how the cash balance is arrived at in the
statement of financial position, with corresponding tick marks to show the audit procedures
undertaken – vouching (accuracy and/or occurrence), verification of bank reconciliation statements
(completeness and/or accuracy), confirmation (existence, disclosure and/or valuation), cash
examination (existence and/or accuracy), workback of cash flow statement (accuracy) – to address
the risks identified supported with duly validated bank reconciliation statements, cash examination
reports and bank confirmation replies is sufficient enough audit evidence.
14. Appropriateness is the measure of the quality of audit evidence; that is its relevance and 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. (ISSAI 1500, par. A5.)
15. The auditor must make sure that sources of audit evidence are reliable, those that can be trusted in
terms of authenticity and truthfulness. For example, contracts properly signed by contracting parties
duly witnessed and notarized by a notary public; bank statements obtained directly by management
from depository banks; official receipts with complete information.
16. The evaluation of audit evidence obtained would address the following matters (Section 21.1, Guide
2011):
a. Materiality
i. If the amounts established for overall and performance materiality are still appropriate in
the context of the entity’s actual financial results
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ii. If a lower overall materiality (for the financial statements as a whole) than that initially
determined is appropriate, the auditor is required to determine:
 whether it is necessary to revise performance materiality; and,
 whether the nature, timing and extent of the further audit procedures remain
appropriate.
b. Risk
In light of the audit observations, assessments of risks of material misstatement at the assertion
level are still appropriate. If not, the risk assessments would be revised, and further planned
audit procedures would be modified.
c. Misstatements
The effect on the audit of identified misstatements and uncorrected misstatements, and the
reason for misstatements/deviations has been considered. These may indicate an unidentified
risk or a significant deficiency in internal control.
Revision of the overall audit strategy and the audit engagement plan applies when:
i. the nature of identified misstatements and the circumstances of their occurrence indicate
that other misstatements may exist that, when aggregated with misstatements accumulated
during the audit, could be material; or
ii. the aggregate of misstatements accumulated during the audit approaches materiality.
Additional audit procedures shall be performed to determine whether misstatements remain (in
classes of transactions, account balance, or disclosures) where management was asked to
correct misstatements.
A.2. Considering Materiality of Uncorrected Misstatements
17. Pertinent paragraphs of ISSAI 1450-Evaluation of Misstatements Identified during the Audit that
guides the evaluation of the effect of misstatements are:
a. Paragraph 3. The objective of the auditor is to evaluate:
i. The effect of identified misstatements on the audit; and
ii. The effect of uncorrected misstatements, if any, on the FS.
b. Paragraph 5. The auditor shall accumulate misstatements identified during the audit, other than
those that are clearly trivial.
c. Paragraph 6. The auditor shall determine whether the overall audit strategy and audit plan need
to be revised if:
i. The nature of identified misstatements and the circumstances of their occurrence indicate
that other misstatements may exist that, when aggregated with misstatement accumulated
during the audit, could be material;
117
ii. The aggregate of misstatements accumulated during the audit approaches materiality
determined in accordance with ISSAI 1320-Materiality in Planning and Performing an Audit.
d. Paragraph 10. Prior to evaluating the effect of uncorrected misstatements, the auditor shall
reassess materiality determined in accordance with ISSAI 1320 to confirm whether it remains
appropriate in the context of the entity’s actual financial results.
e. Paragraph A.21. Circumstances that may affect the evaluation include the extent to which the
misstatement:
i. Affects compliance with regulatory requirements;
ii. Affects compliance with debt covenants or other contractual requirements;
iii. Relates to the incorrect selection or application of an accounting policy that has an
immaterial effect on the current period’s FS but is likely to have a material effect on future
periods’ FS;
iv. Masks a change in earnings or other trends, especially in the context of general economic
and industry conditions;
v. Affects ratios used to evaluate the entity’s financial position, results of operations or cash
flows;
vi. Affects segment information presented in the FS (for example, the significance of the matter
to a segment or other portion of the entity’s business that has been identified as playing a
significant role in the entity’s operations or profitability);
vii. Has the effect of increasing management compensation, for example, by ensuring that the
requirements for the award of bonuses or other incentives are satisfied;
viii. Is significant having regard to the auditor’s understanding of known previous
communications to users, for example, in relation to forecast earnings;
ix. Relates to items involving particular parties (for example, whether external parties to the
transaction are related to members of the entity’s management);
x. Is an omission of information not specifically required by the applicable FRF but which, in
the judgment of the auditor, is important to the users’ understanding of the financial
position, financial performance or cash flows of the entity; or,
xi. Affects other information to be included in the entity’s annual report (for example,
information to be included in a “Management Discussion and Analysis” or an “Operating and
Financial Review”) that may reasonably be expected to influence the economic decisions of
the users of the financial statements. ISSAI 1720 (Revised) deals with the auditor’s
responsibilities relating to other information.
18. Before the auditor evaluates the results of performing procedures and any misstatements arising
therefrom, the first step is to reassess the amounts established for overall and performance
materiality. This is necessary because the initial determination of materiality will often be based on
estimates of the entity’s financial results, and the actual results may be different. Factors that would
lead to a change include:
a. Initial determination of materiality is no longer appropriate in the context of the entity’s actual
financial results;
b. New information becomes available (such as user expectations) that would have caused the
auditor to determine a different amount (or amounts) initially; and,
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c. Unexpected misstatements that may cause the materiality amount for that particular class of
transactions, account balance, or disclosure to be exceeded. (Item 21.2, par. 1, Guide 2011)
19. Whenever revisions to materiality is necessary, the auditor is required to consider and document
the impact on the nature, timing and extent of further audit procedures required. (Item 21.2, par. 2,
Guide 2011)
20. During the execution stage, Management may be unwilling to correct or adjust its accounting
records on misstatements determined by the Auditor that affect the fair presentation of its FS for
some reason or another. The Auditor summarizes these uncorrected misstatements (Illustration 11),
and evaluates whether such uncorrected misstatements are material, individually or in aggregate
and whether these will affect the opinion to be rendered.
21. For agencies/corporations with FOUs with complete sets of books, the FOU Team Leader submits to
the RSA, the Summary of Uncorrected Misstatements (Illustration 12) for consolidation and
submission to the SA at the Head Office.
Illustration 12. Summary of Uncorrected Misstatements
In Thousand Pesos
No.
Accounts and Description
WP
ref
Asset
Current
1
2
3
Other Expenses
Cash in bank
To record bank
charges
Operating expenses
Accrued expenses
To accrue expenses
PPE
Accumulated Surplus
/ Prior Period
Adjustments
To capitalize major
repairs of buildings
which were previously
charged to expenses
Total
NonCurrent
Liability
Current
NonCurrent
Current
Prior Period
Period
Revenue/
Revenue/
Expense
Expense
60
Total
Auditor’s
Evaluation
60
(60)
Not
material*
23,000
23,000
23,000
Material*
50,000
50,000
(50,000)
Material*
50,060
23,000
23,060
50,000
73,060
Material
to modify
auditor’s
opinion *
* Based on the overall materiality of P13.5 million
A.3. Evaluating Financial Statements Prepared Using the Applicable Financial Reporting
Framework
22. Before determining what appropriate opinion to render, the Auditor must also evaluate if:
a. Financial statements are prepared in accordance with the applicable FRF, either PPSAS or PFRS.
These accounting standards serve as guide in the preparation of the FS:
119
i. the appropriate presentation and classification of individual and group of accounts – for
example, current and non-current distinction of accounts; real accounts are correctly
presented in the SFPos, nominal accounts in the SFPer;
ii. a complete set of FS that comprises: a statement of financial position, a statement of
financial performance/statement of comprehensive income, a statement of changes in net
assets/equity, a cash flow statement, a separate statement of comparison of budget and
actual amounts or a budget column in the FS (for PPSAS users only), and notes, comprising a
summary of significant accounting policies and other explanatory notes (PPSAS 1Presentation of Financial Statements, par. 21/PAS 1-Presentation of FS, par. 1.10);
iii. minimum required disclosure in the FS and/or in the notes to FS – the standards require
disclosures presented in the FS and/or in the Notes to FS information for each classification
or sub-classification of accounts. For example, minimum disclosure required for property,
plant and equipment includes the initial and subsequent measurements-either cost or
revaluation models; recognition criteria-probable future economic benefit and reliable
measurement of either cost or fair value; treatment of transfers; acquisitions and disposals.
b. Accounting policies are appropriate and are consistent with PPSAS/PFRS – for example, the
adopted accounting policy on measurement of inventory is the lower of cost and net realizable
value which is aligned with paragraph 15 of PPSAS 12/PAS 2-Inventories.
c. There are adequate disclosure of significant accounting policies – minimum disclosure of a
summary of significant accounting policies includes:
i. the measurement basis/bases used in preparing the financial statements;
ii. the extent to which the entity has applied any transitional provisions in any PPSAS (PFRS);
and,
iii. other accounting policies used that are relevant to an understanding of the FS (PPSAS/PFRS
1).
d. There is reasonable use of accounting estimates – the assumptions underlying the accounting
estimates must be reasonable, or practical and rational. For example, the estimated useful life of
a motor vehicle of five to 15 years depending on the utility of the vehicle is considered
reasonable in computing for depreciation charges on such an asset.
e. There is relevant, reliable, comparable and understandable presentation of information – the
user must be able to compare the information in the FS with other agencies/units/corporations/
projects within the industry or business it operates; the information in the FS must be easily
comprehensible to the user to avoid misconceptions and misunderstanding; such information
must also be dependable, pertinent and appropriate.
f.
There is adequate disclosure of information conveyed in the FS – sufficient disclosure for every
account considered as significant is required to avoid misinterpretation and to help the user
arrive at an informed judgment/decision.
g. There is appropriate use of terminologies – terms and words in the FS and the notes must be
correct and proper to be more understandable to all kinds of users.
120
23. The auditors shall use as guide in the evaluation of Management’s disclosure in the Notes to FS, the
disclosure requirements of each of the PPSAS/PFRS. For National Government Agencies, a disclosure
checklist is provided in the GAM.
24. This stage in the audit is summarized in the following figure (Section 20, Guide 2011):
Exhibit 6. Summary of Reporting Phase activities
REPORTING
Evaluate evidence obtained
Complete all
required file
reviews
Consider
misstatements
identified
Resolve any
issues with
management
Communicate
audit findings
with TCWG*
Prepare the auditor’s report
Complete
audit
documentation
Document
significant
decisions
Form an
opinion
Issue the
auditor’s
opinion
*TCWG = those charged with governance
B. Forms of Independent Auditor’s Report
25. There are two forms of auditor’s report, unmodified and modified auditor’s report.
B.1. Unmodified Auditor’s Report
26. An unmodified auditor’s report is rendered when the auditor concludes that the FS are free from
material misstatements and are prepared in accordance with the applicable and appropriate FRF
(PPSAS or PFRS).
27. The contents of the opinion paragraph in an unmodified report are:
Opinion
We have audited the financial statements of (Agency/Unit/Corporation/Project) which comprise the
statements of financial position as at December 31, 20X1 and 20X0, statements of financial
performance/profit or loss/comprehensive income, statements of cash flows, statements of
comparison of budget and actual amounts (for PPSAS users) for the years then ended, and notes to
the financial statements, including a summary of significant accounting policies.
121
In our opinion, the accompanying financial statements of (Agency/Unit/Corporation/Project) are
prepared in all material respects, in accordance with Philippine Public Sector Accounting Standards
or Philippine Financial Reporting Standards.
B.2. Modified Auditor’s Report
28. A modified auditor’s report is rendered if the auditor: (a.1) concludes that the FS are not free from
material misstatements; or (a.2) is unable to obtain sufficient appropriate audit evidence to
conclude that the FS as a whole are free from material misstatement. The auditor’s opinion in a
modified auditor’s report is considered modified if he/she issued qualified or adverse opinion or
disclaim an opinion.
a. Qualified Opinion - The auditor shall express a qualified opinion when:
i. The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the FS; or,
ii. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the FS of undetected
misstatements, if any, could be material but not pervasive.
b. Adverse Opinion - The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are both material and pervasive to the FS. Misstatements are considered
pervasive if in the auditor’s judgment: (a) they are not confined to specific elements, accounts or
items of the FS; (b) if so confined, they represent or could represent a substantial proportion of
the FS; or (c) in relation to disclosures, they are fundamental to users’ understanding of the FS.
c. Disclaimer of Opinion - The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes
that the possible effects on the FS of undetected misstatements, if any, could be both material
and pervasive. A disclaimer is also rendered when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient
appropriate audit evidence regarding each of the individual uncertainties; it is not possible to
form an opinion on the FS due to the potential interaction of the uncertainties and their possible
cumulative effect on the FS.
B.2.1. Matters AFFECTING the Auditor’s Unmodified Opinion
29. The auditor may disagree with Management about certain matters such as the acceptability of
accounting policies selected, the method of their application, or the adequacy of disclosures in the
FS resulting in the misstatement of the FS. If such disagreements are significant to the FS, the
auditor shall express a qualified or an adverse opinion.
30. Examples of material misstatements due to disagreements with Management are:
a. Acceptability of accounting policies – for example, policy of using the cost model to recognize
property, plant and equipment, lower of cost and net realizable value to recognize inventory,
122
amortized cost for loans and receivables are acceptable. Deviation from such policy may result
in material misstatement;
b. Method of application – accounting policies must be used consistently from period to period to
attain comparability of FS. For example, if Management adopts in the current year the cost
model of recognizing property, plant and equipment, and presenting in the FS, it shall apply the
same model for the asset for the next year. Inconsistent application of the policy may lead to a
material misstatement;
c. Adequacy of disclosures – for example, Management discloses the initial and subsequent
measurements of transportation equipment, the year’s acquisitions and disposals, depreciation
charges, accumulated depreciation and allowance for impairment and other important matters
relating to the asset. Anything less would be inadequate, thus, may result in material
misstatement.
31. When the auditor is unable to perform necessary audit procedures or the auditor is unable to gather
sufficient appropriate evidence, limitations on the scope of the audit arise. Such limitations may be
imposed by the entity or imposed by circumstances. The inability to obtain sufficient appropriate
audit evidence will result to either a qualified or a disclaimer of an opinion.
32. Scope limitation imposed by the entity takes the form of Management not providing access to
accounting records or the status of the entity’s records (is incomplete, etc.), not allowing or limiting
the conduct of interview with key personnel, sanctioning the undertaking of inspection of projects or
deliveries.
33. Limitations to the scope of the audit should never arise from impositions by the auditor, as this
constitutes deviation from audit engagement protocol and demonstrates unprofessionalism.
34. Whenever the auditor expresses a modified opinion, a clear description of all the substantive
reasons should be included in the report and, unless impracticable, a quantification of the material
uncorrected misstatements.
B.2.2. Matters NOT AFFECTING the unmodified opinion
35. There are matters that do not affect the auditor’s unmodified opinion but discussed in the Emphasis
of Matter and Other Matter paragraphs in the IAR.
B.2.2.1.
Emphasis of Matter Paragraph
36. Emphasis of Matter refer to matters appropriately presented or disclosed in the Notes to FS that, in
the auditor’s judgment, are of such importance that it is fundamental to users’ understanding of the
FS. (ISSAI 1706) The inclusion of an Emphasis of Matter paragraph does not affect the auditor’s
opinion.
37. These are uncertainties, going concern uncertainties, justifiable PPSAS/PFRS departure, and
inconsistencies that are adequately disclosed in the Notes to the FS. These result in an unmodified
opinion with an addition of emphasis of matter paragraph. Lack of disclosure of such matters
123
significant to the FS would result in either a qualified or adverse opinion, not just the addition of
emphasis of matter paragraph.
38. An uncertainty is a matter whose outcome depends on future actions or events not under the direct
control of the entity but that may affect the FS. When there are significant uncertainties that are
adequately accounted for and disclosed in the Notes to the FS, the auditor should consider
modifying the report by adding an explanatory paragraph to the unmodified report to emphasize
the material uncertainty.
39. The auditor should evaluate information gathered during the audit to determine whether there is
substantial doubt about the entity’s ability to continue as a going concern. If there is a significant
doubt about such an ability to continue as a going concern for a reasonable period of time, the
auditor should consider whether the going concern problems are adequately disclosed in the Notes
to FS.
40. In extreme cases, such as situations involving multiple uncertainties that are significant to the FS,
the auditor may consider it appropriate to issue a disclaimer of opinion instead of adding an
emphasis of a matter paragraph.
41. Changes affecting accounting principles and estimates may result in inconsistency of FS
presentations. For example, in prior year, the Agency/Unit/Corporation/Project adopted the straight
line method of depreciating its assets. In the current year, because of some valid reasons, it has
changed its policy to declining balance method. When this arises, Management cannot present
depreciation using two different methods for prior and current years, as this is tantamount to
inconsistent FS. Management may either restate the prior year FS to use the declining balance
method for that year and for the current year to achieve consistency.
42. Management may judge it necessary to depart from financial reporting standards in order to come
up with a fair presentation of FS. If the reasons are adequately disclosed and the auditor believes
that such a departure is justified the auditor should express an unmodified opinion and disclose the
departure in a separate paragraph of the report. Examples of instances of acceptable departure
from financial reporting standards are, new legislation or evolution of a new form of business
transaction.
B.2.2.2.
Other Matter Paragraph
43. This refers to a matter other than those presented or disclosed in the financial statements that, in
the auditor’s judgment, is relevant to user’s understanding of the audit, the auditor’s responsibilities
or the auditor’s report (ISSAI 1706). Instances where this paragraph is included are:
a.
the law, regulation or accepted practice require or permit elaboration on matters to explain the
auditors responsibilities in the audit;
b.
where FS intending for a specific purpose/user is prepared in accordance with a general
purpose framework such as for the ADB. In such case, the auditor may consider inclusion of an
Other Matter paragraph stating that the auditor’s report is intended solely for the intended
users, and should not be distributed to or used by other parties.
124
c.
In accordance with ISSAI 1720 (requirements, paragraph 10) “Material inconsistencies
identified in other information obtained prior to the date of the auditor’s report”: if the
revision of other information is necessary and Management refuses to make the revision, an
Other Matter paragraph describing the material inconsistency is included.
d.
When the prior year audit opinion is different from the current year audit opinion, the change
shall be communicated in the Other Matter paragraph. This applies to audit opinion using
comparative FS approach.
If during our current audit we became aware of events/circumstances that affect the FS of a
prior period, we shall consider such matter when updating our report on the FS of the prior
period.
If in an updated report, we express an opinion different from our previous opinion on the FS of
a prior period, we shall disclose all the substantive reasons for the different opinion in the
Other Matter paragraph of our report. Also, if the updated opinion on the prior period FS is
other than unmodified, we shall include in the opinion paragraph an appropriate modification
with a reference to the Basis for Opinion paragraph.
If we have previously modified our opinion on FS of a prior period because of disagreement
with management (departure from PFRS/PPSAS, uncorrected misstatements, inadequate
disclosure) and prior period FS are restated in the current period to conform with PFRS/PPSAS,
our report on the FS of the prior period shall indicate that the FS have been restated and shall
express an unmodified opinion with respect to the restated FS or to that matter/s presented
which were the subject of prior period modification.
44. Shown in Table 9 is the summary of modifications of the Independent Auditor’s Report:
Table 10. Summary of Modifications of the Independent Auditor’s Report
Matters that:
Affect the Unmodified Opinion
Disagreement with Management
(FS are materially misstated)
Scope Limitation
Do NOT affect the Unmodified Opinion
Uncertainties
Going Concern Uncertainties
Inconsistencies
Justifiable departure from PPSAS/PFRS
Further explanation on auditor’s
responsibilities in the audit
6. Financial statement intended for specific
purpose but prepared in accordance with
general purpose framework
7. Material inconsistency in other
information not issued to management
8. Updating of prior year modified opinion
to unmodified opinion
A.
1.
2.
3.
B.
1.
2.
3.
4.
5.
Effect on the Financial Statements
Material but not pervasive
Material and Pervasive
Qualified
Adverse
Qualified
Disclaimer
If disclosed in the Notes to FS,
Unmodified opinion with
Emphasis of Matter Paragraph
If not disclosed in the Notes to FS,
Unmodified opinion with Other
Matter Paragraph
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45. Illustrations for modified opinion is presented in Appendix 4-1 of this Manual.
B.3. Auditor’s Report on Consolidated Financial Statements
46. For consolidated FS where auditors are required to render an auditor’s report, the wordings on the
auditor’s report are the same except in the title and opinion paragraph where it is specifically stated
that the FS and the Notes to FS are consolidated.
47. Consolidated financial statements are the FS of a group presented as those of single economic entity
(PFRS 10-Consolidated Financial Statements). It is presented by the parent corporation in which it
consolidates its FS with its investments in subsidiaries in accordance with PFRS 10.
48. Following is an example of the opinion paragraph of an unmodified auditor’s report for consolidated
FS:
Report on the Audit of the Financial Statements
Qualified Opinion
We have audited the financial statements of the Agency/Unit/Corporation/Project and its
subsidiaries (the Group), which comprise the statement of financial position as at December 31,
20X1 and 20X0, and the statement of financial performance, statement of changes in net
assets/equity and statement of cash flows for the years then ended, and notes to the financial
statements, including a summary of significant accounting policies.
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
section of our report, the accompanying financial statements present fairly, in all material
respects, the financial position of the Group as at December 31, 20X1 and 20X0, and their financial
performance and cash flows for the years then ended, and notes to the financial statements, in
accordance with Philippine Public Sector Accounting Standards or Philippine Financial Reporting
Standards/Philippine Financial Reporting Standards.
B.4. Auditor’s Report on Comparative Financial Statements
49. The Auditor is required to render an auditor’s report on comparative information. PPSAS 1, par. 53
states that Management must disclose comparative information in respect of the previous period
for all amounts reported in the FS. Comparative information shall be included for narrative and
descriptive information when it is relevant to an understanding of the current period’s FS.
50. More discussions on comparative FS are presented in Section III, Comparative Information.
II.
Specific Elements of the Independent Auditor’s Report
51. The IAR prescribed in ISSAI 1700 (Revised) shall be adopted. The elements are enumerated as
follows:
126
A. Title
The auditor’s report shall have a title that clearly indicates that it is the report of an independent
auditor. (Ref: ISSAI 1700 (Revised) par. 21)
B. Addressee
The auditor’s report is normally addressed to those for whom the report is prepared, often either to
the shareholders or to those charged with governance of the entity whose FS are being audited.
(Ref: ISSAI 1700 (Revised) par. A21)
C. Report on the Audit of Financial Statements
The title, Report on the Audit of Financial Statements, is included to distinguish the following
sections form the other reports required to be contained in the IAR.
C.1. Opinion Section
The opinion section should also report:
a.
b.
c.
d.
The agency audited;
The FS audited, identify the title of each statements;
The Notes to FS, including the summary of significant accounting policies; and,
The date of or period covered by each FS.
Opinion (for unmodified opinion)
We have audited the accompanying financial statements of the (Agency/Unit/Corporation/
Project), which comprise the statements of financial position as at December 31, 20X1 and
20X0, and the statements of financial performance/profit or loss/comprehensive income,
statements of changes in net assets/equity, statements of comparison of budget and actual
amounts and statements of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies and other explanatory
information.
In our opinion, the accompanying financial statements present fairly, in all material respects,
the financial position of (Agency/Unit/Corporation/Project) as at December 31, 20X1 and
20X0, and its financial performance, cash flows, changes in net assets/equity, and comparison
of budget and actual amounts for the year then ended in accordance with Philippine Public
Sector Accounting Standards/Philippine Financial Reporting Standards.
C.2. Basis for Opinion
The auditor’s report shall include a section, directly following the opinion section the “Basis for
Opinion”.
This section shall:
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a. States that the audit was conducted in accordance with ISSAI;
b. Refers to the section of the auditor’s report that describes the auditor’s responsibilities under
the auditing standards;
c. Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit and has fulfilled the auditor’s other
responsibilities under those ethical requirements. The statement shall identify the jurisdiction of
origin of the relevant ethical requirements; and,
d. States 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.
Basis for Opinion (for unmodified opinion)
We conducted our audits in accordance with International Standards of Supreme Audit
Institutions (ISSAI). Our responsibilities under those standards are described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Company in accordance with the Revised Code of Conduct and Ethical
Standards for Commission on Audit Officials and Employees (Code of Ethics) together with the
ethical requirements that are relevant to our audit of the financial statements in the
Philippines, and we have fulfilled our other ethical responsibilities in accordance with these
requirements and the Code of Ethics. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
In case of modified opinion, this section shall state the basis for modification as the first paragraph.
Basis for Qualified Opinion (for Qualified Opinion – same qualification for both years)
The Agency’s inventories are carried in the statement of financial position at Pxxx and Pxxx as at
December 31, 20X1 and 20X0, respectively. Management has not stated the inventories at the
lower of cost and net realizable value but has stated them solely at cost, which constitutes a
departure from PPSAS/PFRS. The Agency’s records indicate that, had management stated the
inventories at the lower of cost and net realizable value, an amount of Pxxx and Pxxx as at
December 31, 20X1 and 20X0, respectively, would have been required to write the inventories
down to their net realizable value. This resulted in the understatement as at December 31, 20X1
and 20X0, respectively, of cost of sales by Pxxx and Pxxx and overstatement of income tax by Pxxx
and Pxxx, net income by Pxxx and Pxxx, and stockholders’ equity by Pxxx and Pxxx.
We conducted our audits in accordance with International Standards of Supreme Audit
Institutions. Our responsibilities under those standards are described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Agency in accordance with the Revised Code of Conduct and Ethical Standards
for Commission on Audit Officials and Employees (Code of Ethics) together with the ethical
requirements that are relevant to our audit of the financial statements, and we have fulfilled our
other ethical responsibilities in accordance with these requirements and the Code of Ethics. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our qualified opinion.
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C.3. Key Audit Matters
These are matters that, in the auditor’s professional judgment, are of most significant in the audit of
FS of the current period. These matters are addressed in the context of the audit of the FS as a
whole.
ISSAI 1701 applies to audit of complete sets of general purpose FS of listed entities, thus making this
section a requirement for listed entities only.
The purposes of reporting on KAM in the audit report are to:
a. Increase transparency about the audit that was performed. Communicating KAM provides
additional information to intended users of the FS to assist them in understanding those matters
that, in the auditor’s professional judgment, were of most significance in the audit of the FS of
the current period.
b. Focus users of the FS on areas in the FS that are subject to significant management judgment
and significant auditor attention, which may assist the users in better understanding the entity
and FS, and the outcome of the audit as reflected in the auditor’s opinion.
c. Provide users a basis to further engage with management and those in charge of governance,
about certain matters related to the entity, the audited FS, or the audit that was performed.
Communicating KAM in the auditor’s report is not:
a. A substitute for disclosure in the Notes to FS that the applicable FRF requires Management to
make, or that are otherwise necessary to achieve fair presentation;
b. A substitute for the auditor expressing a modified opinion when required by the circumstances
of a specific audit engagement in accordance with ISSAI 1705 (Revised);
c. A substitute for reporting in accordance with ISSAI 1570 (Revised) when a material uncertainty
exists relating to event or condition that may cast significant doubt on an entity’s ability to
continue as a going concern; or,
d. A separate opinion on individual matters.
When communicating KAM, auditors should consider laws and regulations that restrict the reporting
of such information by imposing confidentiality requirements. The need for confidentiality may be
based on the mandate of the SAI or legislation related to official secrets or privacy. Auditors should
identify such laws and regulations and should consider confidentiality requirements when
determining the KAM to communicate.
The Auditor is prohibited under ISSAI 1705 (Revised) from communicating KAM when the Auditor
disclaims an opinion on the FS, unless such reporting is required by law or regulations.
The Auditor shall describe each KAM, using an appropriate subheading, in a separate section of the
Auditor’s Report under the heading “Key Audit Matters”. The introductory language shall state that:
a. KAMs are those matters that, in the auditor’s professional judgment, were of most significance
in the audit of the FS for the period; and,
b. Those matters were addressed in the context of the audit of FS as a whole, and in forming the
auditor’s opinion thereon; the auditor does not provide a separate opinion on those matters.
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Key Audit Matters
(For unmodified opinion - 1st paragraph)
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters. For each
matter below, our description of how our audit addressed the matter is provided in that
context.
(For qualified opinion – 1st paragraph)
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements. These matters were addressed in the
context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. In addition to the matter
described in the Basis for Qualified Opinion section, we have determined the matters described
below to be the key matters to be communicated in our report.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of
the Consolidated Financial Statements section of our report, including in relation to these
matters. Accordingly, our audit included the performance of procedures designed to respond
to our assessment of the risks of material misstatement of the consolidated financial
statements. The results of our audit procedures, including the procedures performed to
address the matters below, provide the basis for our audit opinion on the accompanying
consolidated financial statements.
C.4. Emphasis of Matter
Emphasis of Matter
(For unmodified opinion)
We draw attention to Note X of the financial statements, which describes the effects of a fire
in the agency’s facilities. Our opinion is not modified in respect of this matter.
(For qualified opinion)
We draw attention to Note 30 to the Financial Statements which describes the contingent
liabilities for lawsuits or claims filed by third parties against (Agency/Unit/Corporation/
Project) which are either pending in courts or under negotiation, and cases filed by
(Agency/Unit/Corporation) against the (concerned agencies) which are pending before the
Supreme Court, Court of Appeals and the Local Board of Assessments of the Local Government
Unit. Our opinion is not modified in respect of these matters.
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(For adverse of opinion)
We draw attention to Note X to the financial statements which describes the uncertainties
related to pending cases in several courts involving various claims against the Agency.
Because of the significance of the matters described in the Basis for Adverse Opinion
paragraph, it is appropriate to, and we do not, express an opinion on the information referred
to above.
C.5. Other Matter
Other matter
In our report dated March 1, 20X1, we expressed an opinion that the 20X0 financial
statements did not fairly present the financial position, results of operations, and cash flows of
Agency/Unit/Corporation/Project in accordance with the PPSAS or PFRS because of two
departures from such principles: (1) Agency/Unit/Corporation/Project carried its property,
plant, and equipment at appraisal values, and provided for depreciation on the basis of such
values, and (2) Agency/Unit/Corporation/Project did not provide for deferred income taxes
with respect to differences between income for financial reporting purposes and taxable
income. The Agency/Unit/Corporation/Project has changed its method of accounting for these
items and restated its 20X0 financial statements to conform with the PPSAS or PFRS.
Accordingly, our present opinion on the restated 20X0 financial statements, as presented
herein, is different from that expressed in our previous report.
C.6. Other Information
ISSAI 1720 (Revised), The Auditor’s Responsibilities Relating to Other Information, requires reporting
on other information, financial or non-financial information included in an entity’s annual report.
The auditor shall read the other information and, in doing so shall:
a. Consider whether there is a material inconsistency between the other information and the FS.
As the basis for this consideration, the auditor shall, to evaluate their consistency, compare
selected amounts or other items in the other information (that are intended to be the same as,
to summarize, or to provide greater detail about, the amounts or other items in the FS) with
such amounts or other items in the FS; and,
b. Consider whether there is a material inconsistency between the other information and the
auditor’s knowledge obtained in the audit, in the context of audit evidence obtained and
conclusions reached in the audit.
While reading the other information, the auditor shall remain alert for indications that the
information not related to the financial statements or the auditor’s knowledge obtained in the audit
appears to be materially misstated.
A separate section in the auditor’s report is used to identify the other information, describe the
auditor’s responsibilities in relation thereto, and, if applicable, report on any material misstatement
of the other information in “Other Matter” paragraph.
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Some examples of other information to be disclosed are listed below:
a. Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capital lease and minority interest obligations
b. Amounts involved in guarantees, contractual obligations, legal or environmental claims, and
other contingencies
c. Financial measures or ratios, such as gross margin, return on average capital employed, return
on average shareholders’ equity, current ratio, interest coverage ratio and debt ratio. Some of
these may be directly reconcilable to the FS
d. Explanations of critical accounting estimates and related assumptions
e. Identification of related parties and descriptions of transactions with them
f. Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management’s qualitative
assessments of the entity’s related exposures
g. Management’s qualitative assessments of the impacts of new financial reporting standards that
have come into effect during the period or in the following period, on the entity’s financial
results, financial position and cash flows
Illustration:
An auditor’s report of any entity, whether listed or other than listed, containing an unmodified
opinion when the auditor has obtained all of the other information prior to the date of the
auditor's report and has not identified a material misstatement of the other information.
Other Information
Management is responsible for the other information. The other information obtained at the
date of this auditor’s report is included in the Annual Report of the Agency/Unit/Corporation/
Project, but does not include the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit or otherwise appears to
be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact. We have nothing to report in this
regard.
C.7. Responsibilities of Management and Those Charged with Governance for the Financial
Statements
The auditor’s report shall include a section with a heading using the appropriate term to describe
those responsible for the preparation of the FS. This heading need not refer specifically to
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“Management,” but may also refer to “Those Charged with Governance” or such term that is
appropriate in the context of the legal framework in the particular jurisdiction.
This section shall describe management’s responsibility for:
a. Preparing the FS in accordance with the applicable FRF, and for such internal control as
management determines is necessary to enable the preparation of FS that are free from
material misstatements whether due to fraud or error; and,
b. Assessing the entity’s ability to continue as a going concern and whether the use of the going
concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to
going concern. The explanation of management’s responsibility for this assessment shall include
a description of when the use of the going concern basis of accounting is appropriate.
Those responsible for the oversight of the financial reporting process, if different from those
responsible for preparing the FS shall also be identified in this section.
Responsibilities of Management and Those Charged with Governance for the Financial
Statements
Management is responsible for the preparation of the financial statements in accordance with the
Philippine Public Sector Accounting Standards or Philippine Financial Reporting Standards and for
such internal control as management determined is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management’s responsibility for assessing the agency’s
ability to continue as a going concern, disclosing as applicable, matters related to going concern
and using the going concern basis of accounting unless management either intend to liquidate the
agency or to cease operations, or has no alternative but to do so.
Those charged with governance are responsible for overseeing the agency’s financial reporting
process.
C.8. Auditor’s Responsibilities for the Audit of the Financial Statements
The auditor’s report shall state that:
a. The objectives of the audit are to: (i) Obtain reasonable assurance about whether the FS as a
whole are free from material misstatement, whether due to fraud or error; and, (ii) Issue an IAR
that includes an opinion.
b. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISSAIs will always detect a material misstatement when it exists;
c. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these FS;
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d. The auditor exercises professional judgment and maintains professional skepticism throughout
the audit;
e. The Auditor’s responsibilities are:
i. To identify and assess the risks of material misstatements of the FS, whether due to fraud or
error; to design and perform audit procedures responsive to those risks; and to obtain audit
evidence that is sufficient and appropriate to provide a basis for his opinion. The risk of
material misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
ii. To obtain an understanding of internal control relevant to the audit 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 agency’s internal control.
iii. To evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
iv. To conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the agency’s ability
to continue as a going concern. If he concludes that a material uncertainty exists, he is
required to draw attention in the auditor’s report to the related disclosures in the FS or, if
such disclosures are inadequate, to modify his opinion. His conclusions are based on the
audit evidence obtained up to the date of the auditor’s report. However, future events or
conditions may cause the agency to cease to continue as a going concern.
v. To evaluate the overall presentation, structure and content of the FS, including the
disclosures, and whether the FS represent the underlying transactions and events in a
manner that achieves fair presentation.
f.
The Auditor communicates with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit observations, including
any significant deficiencies in internal control that he identifies during the audit.
g. The Auditor provides those charged with governance with a statement that he has complied
with relevant ethical requirements regarding independence, and communicate with them all
relationships and other matters that may reasonably be thought to bear on his independence,
and where applicable, related safeguards.
h. From the matters communicated with those charged with governance, the auditor determines
those matters that were of most significance in the audit of the FS of the current period and are
therefore the key audit matters.
i.
In cases of group audits where ISSAI 1600, paragraph 14 applies, the auditor’s responsibilities in
group audit are: i.1) To obtain sufficient appropriate audit evidence regarding the financial
information of the entities and business activities within the group to express an opinion on the
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group FS; i.2) For the direction, supervision and performance of the group audit; and (i.3) To
remain solely responsible for the auditor’s opinion.
Auditor’s Responsibilities for the Audit of Financial Statements
(For unmodified, qualified, and adverse opinion)
Our objectives are to obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISSAI will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISSAIs, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit 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 Agency/Unit/Corporation/Project’s
internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the
Agency/Unit/Corporation/Project’s ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor’s report. However, future events or conditions may
cause the Agency/Unit/Corporation/Project to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
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We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit observations, including any
significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those
matters that were of most significance in the audit of the financial statements of the current
period and are therefore the key audit matters. We describe these matters in our auditor’s
report unless law or regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.
(The last paragraph is not included if there is no KAM to report)
(For disclaimer of opinion)
Our responsibility is to conduct an audit of the Agency/Unit/Corporation/Project’s financial
statements in accordance with ISSAI and to issue an auditor’s report. However, because of the
matter described in the Basis for Disclaimer of Opinion section of our report, we were not able
to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these
consolidated financial statements.
We are independent of the Agency/Unit/Corporation/Project in accordance with the ethical
requirements that are relevant to our audit of the financial statements in Code of Ethics, and
we have fulfilled our other ethical responsibilities in accordance with these requirements.
D. Report on Other Legal and Regulatory Requirements
This refers to other reporting responsibilities not addressed under the reporting responsibilities
required by the ISSAIs as part of the report. (ISSAI 1720)
The Auditor is required to report on other regulatory requirements, such as the entity’s inclusion in
the Notes to FS information on taxes, duties and license fees paid or accrued during the taxable
year. It may also include applicable requirements from other regulatory bodies.
Report on Other Legal and Regulatory Requirements
(for unmodified opinion)
Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. The supplementary information in Note X to the financial statements is
presented for the purpose of filing with the Bureau of Internal Revenue and is not a required part
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of the basic financial statements. Such supplementary information is the responsibility of
management and has been subjected to auditing procedures applied in our audits of the basic
financial statements. In our opinion, the supplementary information is fairly stated, in all material
respects, in relation to the basic financial statements taken as a whole.
(for qualified opinion)
Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. The supplementary information in Note X to the financial statements is
presented for the purpose of filing with the Bureau of Internal Revenue and is not a required part
of the basic financial statements. Such supplementary information is the responsibility of
management and has been subjected to auditing procedures applied in our audits of the basic
financial statements. In our opinion, except for the effect of the information of the matter/s
described in the Basis for Qualified Opinion paragraph, the supplementary information is fairly
stated, in all material respects, in relation to the basic financial statements taken as a whole.
(for adverse opnion)
Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. The supplementary information in Note X to the financial statements is
presented for the purpose of filing with the Bureau of Internal Revenue and is not a required part
of the basic financial statements. Such supplementary information is the responsibility of
management. Because of the significance of the matter/s described in the Basis for Adverse
Opinion paragraph, it is inappropriate to and we do not express opinion on the supplementary
information referred to above.
(for disclaimer of opinion)
We were engaged for the purpose of forming an opinion on the basic financial statements taken
as a whole. The supplementary information in Note X to the financial statements is presented for
the purpose of filing with the Bureau of Internal Revenue and is not a required part of the basic
financial statements. Such supplementary information is the responsibility of management.
Because of the significance of the matter/s described in the Basis for Disclaimer of Opinion
paragraph, it is inappropriate to and we do not express opinion on the supplementary information
referred to above.
(unmodified opinion & the entity did not disclose all the required supplementary information)
Management of X Company has not presented the supplementary information on taxes, duties
and license fees required for the purpose of filing with the Bureau of Internal Revenue and is not a
required part of the basic financial statements. Our opinion on the basic financial statements is
not affected by the non-presentation of the supplementary information.
(unqualified opinion & the required supplementary information is presented and clearly
differentiated from the audited financial statements but was not audited)
Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. The supplementary information in Note X to the financial statements is
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presented for the purpose of filing with the Bureau of Internal Revenue and is not a required part
of the basic financial statements. Such supplementary information is the responsibility of
management. We were not able to apply auditing procedures on such supplementary information
because [state the reason/s]. Accordingly, it is inappropriate to and we do not express an opinion
on the supplementary information referred to above.
E. Name of the Engagement Partner
“COMMISSION ON AUDIT”, placed before the signature and name of the Supervising Auditor.
F. Signature of the Auditor
The IAR shall be signed by the Supervising Auditor or duly authorized signatory.
G. Auditor’s Address
This represents the official address of the Auditor. It is usually a part of the letterhead hence, no
need to include this after the signature of the Auditor.
H. Date of the Independent Auditor’s Report
It shall be dated not earlier than the date when the auditor has obtained sufficient appropriate audit
evidence, usually after fieldwork or after the exit conference if there are still procedures to be
undertaken as a result of what has been discussed, as basis of the auditor’s opinion on the FS.
III.
Comparative Information
52. ISSAI 1710 – Comparative Information deals with the auditor's responsibilities relating to
comparative information in an audit of FS. The nature of the comparative information that is
presented in an entity's FS depends on the requirements of the applicable FRF. Comparative
information refers to the amounts and disclosures included in the FS in respect of one or more prior
periods in accordance with the applicable FRF.
A. Corresponding Figures and Comparative Financial Statements
53. There are two different broad approaches to the auditor's reporting responsibilities in respect of
such comparative information: corresponding figures and comparative FS. Under the corresponding
figures approach, the amounts and other disclosures for the prior period included as an integral part
of the current period FS, are intended to be read only in relation to the amounts and other
disclosures relating to the current period (referred to as “current period figures”). The level of detail
presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the
current period figures.
54. The objectives of the auditor are:
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a.
b.
To obtain sufficient appropriate audit evidence about whether the comparative information
included in the FS has been presented, in all material respects, in accordance with the
requirements for comparative information in the applicable FRF; and,
To report in accordance with the auditor’s reporting responsibilities.
55. The auditor shall determine whether the FS include the comparative information required by the
applicable FRF and whether such information is appropriately classified.
56. For this purpose, the auditor shall evaluate whether:
a.
b.
The comparative information agrees with the amounts and other disclosures presented in the
prior period or, when appropriate, have been restated; and,
The accounting policies reflected in the comparative information are consistent with those
applied in the current period or, if there have been changes in accounting policies, whether
those changes have been properly accounted for and adequately presented and disclosed.
A.1. Corresponding Figures
57. Under ISSAI 1710, when corresponding figures are presented, the auditor’s opinion shall not refer to
the corresponding figures except in the circumstances described below:
a.
If the auditor’s report on the prior period, as previously issued, included a MODIFIED opinion
and the matter which gave rise to the modification is unresolved, the auditor shall modify the
auditor’s opinion on the current period’s FS. In the “Basis for Modification” paragraph in the
auditor’s report, the auditor shall either:
i.
ii.
Refer to both the current period’s figures and the corresponding figures in the description
of the matter giving rise to the modification when the effects or possible effects of the
matter on the current period’s figures are material; or,
In other cases, explain that the audit opinion has been modified because of the effects or
possible effects of the unresolved matter on the comparability of the current period’s
figures and the corresponding figures.
b.
If the auditor obtains audit evidence that a material misstatement exists in the prior period
financial statements on which an unmodified opinion has been previously issued, and the
corresponding figures have not been properly restated or appropriate disclosures have not
been made, the auditor shall express a qualified opinion or an adverse opinion in the auditor’s
report on the current period financial statements, modified with respect to the corresponding
figures included therein.
c.
If the prior period financial statements were not audited, the auditor shall state in an Other
Matter paragraph in the auditor’s report that the corresponding figures are unaudited. Such a
statement does not, however, relieve the auditor of the requirement to obtain sufficient
appropriate audit evidence that the opening balances do not contain misstatements that
materially affect the current period’s financial statements.
58. When the auditor’s report on the prior period, as previously issued, included a MODIFIED opinion
(qualified, disclaimer, or adverse) and the matter which gave rise to the modified opinion is resolved
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and properly accounted for or disclosed in the FS in accordance with the applicable FRF, the
auditor’s opinion on the current period need not refer to the previous modification.
A.2. Comparative Financial Statements
59. When comparative FS are presented, the auditor’s opinion shall refer to each period for which FS
are presented and on which an audit opinion is expressed.
60. When reporting on prior period FS in connection with the current period’s audit, if the auditor’s
opinion on such prior period FS differs from the opinion the auditor previously expressed, the
auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph
in accordance with ISSAI 1706.
61. If the prior period FS were not audited, the auditor shall state in an Other Matter paragraph that the
comparative FS are unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening balances do not
contain misstatements that materially affect the current period’s FS.
62. Government entities adopt the PPSAS or PFRS as their FRF. These standards require that
comparative information shall be disclosed in respect of the previous period for all amounts
reported in the FS.
IV.
Special Considerations - Audits of Financial Statements Prepared in Accordance with Special
Purpose Frameworks
63. When forming an opinion and reporting on special purpose FS, the auditor shall apply the
requirements of ISSAI 1700 (Revised). The Auditor’s Report shall describe the purpose for which the
FS are prepared and if necessary, the intended users or refer to a note in the special purpose FS that
contains that information.
64. If management has a choice of FRFs in the preparation of such FS, the explanation of management’s
responsibility for the FS shall also make reference to its responsibility for determining that the
applicable FRF is acceptable in the circumstances.
65. The auditor’s report shall include an Emphasis on Matter paragraph (ISSAI 1720) alerting users that
FS are prepared in accordance with a special purpose framework and that, as a result, the FS may
not be suitable for another purpose. The auditor shall include this paragraph under an appropriate
heading.
V.
Types of Audit Report
66. The audit report considers the management’s comments during the exit conference which should be
reduced in writing and formed part of documentation. This may be in the form of:
a. Annual Audit Report (AAR) – a report prepared at year-end on the results of audit on the
accounts and operations of an Agency/Unit/Corporation/Project. It is composed of the IAR and
discussion on observations with corresponding recommendations. In case the audited agency
140
failed to submit the FS for audit, no IAR can be issued. The auditor instead will issue ML
containing only the observations with corresponding recommendations. For an
Agency/Corporation with regional/branch offices and FOUs, the AAR shall be the consolidated
report on the results of audit of the head office, and the regional/division/district/field offices of
such Agency/Corporation. This report is transmitted to the Agency Head by the CD/RD. In the
case of GOCCs, the AAR is also transmitted to the governing board.
b. Management Letter (ML) – an audit report on the results of audit of the regional/branch offices,
FOUs, staff bureau and line office with complete set of books of accounts. This is addressed to
the Regional/Branch/Office Head and transmitted by the SA/RSA.
c. Summary of Audit Observations and Recommendations (SAOR) – a report/matrix that
summarizes the audit observations, recommendations, management comments and auditor's
rejoinder. This is the required year-end audit report for regional/field office agency with
incomplete set of books of accounts and national high schools with complete set of books of
accounts. This report is transmitted to the Agency Head by the SA/RSA. The SAOR shall be the
basis/input for the consolidation of ML/AAR.
67. The audit observations and recommendations are reviewed by the SA/RSA and CD/RD to ensure
that the same are based on the results of audit and duly documented, and all material issues and
concerns noted during the audit are included in the report and/or cleared by the CD/RD.
68. The guidelines on the preparation of audit report including the transmittal of reports and
requirements for the agency to submit the financial statements and documents are prescribed
under pertinent COA Issuances.
141
Appendix 4-1A. Illustration of Cases for Modified Opinion
1. Disagreement with management
a. Departure from PPSAS/PFRS
Recognition of PPE - hospital equipment - does not include an initial estimate of dismantling
cost. Amount is material, but effect is not pervasive.
Qualified opinion
We have audited…
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
section of our report, the accompanying financial statements present fairly, in all material
respects, the financial position of the Agency as at December 31, 20CY, and its financial
performance and its cash flows for the year then ended in accordance with Philippine Public
Sector Accounting Standards.
Basis for Qualified Opinion
The Agency’s hospital equipment acquired on January 15, 20CY was recognized at a cost of
Pxxxxx.xx, but such cost did not include an initial estimate of the cost to dismantle and remove
the item and restoring the site on which it is located. The non-recognition of dismantling cost is a
departure from Philippine Public Sector Accounting Standards 17-Property, Plant and Equipment.
PPE, therefore, is understated by Pxxx.xx at the end of 20CY and depreciation expense and
accumulated depreciation are understated by Pxx.xx at the end of the same year.
b. Uncorrected misstatements
Inventory worth Pxxx.xx is not adjusted for items already expired valued at Pxxx.xx. Further, the
Corporation refuses to recognize a material loss on a settlement of a lawsuit that was
determinable during the period covered by the audit report.
Adverse opinion
We have audited…
In our opinion, because of the effects of the matters described in the Basis for Adverse Opinion
section of our report, the accompanying financial statements do not present fairly, in all material
respects, the financial position of the Corporation as at December 31, 20CY, and its financial
performance and its cash flows for the year then ended in accordance with Philippine Financial
Reporting Standards.
Basis for Adverse Opinion
142
The balance of Inventory stated in the financial statements as at December 31, 20CY at
P00,000,000 is inaccurate since the Corporation refused to record an allowance for impairment
of inventory items that were already expired. The non-recognition of allowance for impairment
loss of P000,000 rendered the valuation of the account higher by P000,000, and impairment loss
and allowance for impairment loss lower by P000,000 as at the end of the current year.
As explained in Note xx to the financial statements, during December 20CY, the Corporation
agreed to settle a pending lawsuit by the payment of P00,000,000, which was approximately
greater than the amount by P000,000 that had been accrued to cover this litigation. No
additional amount was provided in the financial statements.
c. Inadequate disclosure
Non-disclosure of a major loans payable in the amount of Pxxx.xx in the notes to financial
statements incurred to build a new plant in the Visayas to expand its operations. A land acquired
for the plant was not also disclosed. Effect is material but not pervasive.
Qualified opinion
We have audited…
In our opinion, except for the effects of the matters described in the Basis for Qualified Opinion
section of our report, the accompanying financial statements present fairly, in all material
respects, the financial position of the Corporation as at December 31, 20CY, and its financial
performance and its cash flows for the year then ended in accordance with Philippine Financial
Reporting Standards.
Basis for Qualified Opinion
The QRST Corporation entered into a loan agreement with BBB Banking Corporation worth
P00,000,000 to build a new plant in the Visayas to expand its operations with terms of xx years
at xx% interest annually. This was not, however, disclosed in the financial statements as
required in PFRS 1-Presentation of Financial Statements and PFRS 23-Borrowing Costs, as well as
the information that the Corporation’s payment for the loan’s substantial interest may affect its
working capital. The lack of disclosure precluded the users of the financial statements to make
informed decisions.
Further, a parcel of land acquired where the plant will be situated was not disclosed in the
financial statements. The land is stated at P0,000,000 as at December 31, 20CY.
2. Scope limitation
a. The LGU did not conduct a physical inventory of its assets. Evidence supporting its PPE assets
acquired in prior years is no longer available. The condition of its accounting records does not
permit application of adequate alternative procedures. Effect is material and pervasive.
Disclaimer of Opinion
143
We were engaged to audit…
We do not express an opinion on the accompanying financial statements. Because of the
significance of the matter described in the Basis for Disclaimer of Opinion section of our report,
the scope of our work was not sufficient to enable us to obtain sufficient and appropriate audit
evidence to provide a basis for an audit opinion on these financial statements.
Basis for Disclaimer of Opinion
The City did not conduct a physical count of its inventory, stated at P000,000 in the
accompanying financial statements as at December 31, 20CY. Further, evidence supporting the
cost of property and equipment acquired prior to December 31, 20CY is no longer available. The
City’s records do not permit the application of adequate alternative procedures regarding the
inventories or the cost of property and equipment.
b. Non-confirmation of accounts receivable because of a restriction imposed by management
Qualified opinion
We have audited…
In our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion section of our report, the accompanying financial statements present fairly, in all
material respects, the financial position of the Corporation as at December 31, 20CY, and its
financial performance and its consolidated cash flows for the year then ended in accordance with
Philippine Financial Reporting Standards.
Basis for qualified opinion
As instructed by management, we did not request confirmation of accounts receivable by direct
correspondence with the debtors of the Corporation. Consequently, we were unable to determine
whether any adjustments to the balance of accounts receivable as at December 31, 20CY were
necessary.
144
Section 5
Quality Control Review
1. Quality control provides reasonable assurance that the audit engagement is performed in
compliance with professional standards and applicable legal and regulatory requirements, and the
audit report is appropriate in the circumstances. (The definition and discussions are covered by ISSAI
1220).
I.
Quality Control versus Quality Assurance
2. While Quality Control and Quality Assurance are used interchangeably, there is a clear difference.
Quality control involves policies and procedures through which a SAI ensures that the audit is
carried out in compliance with the SAI auditing standards, rules and procedures in line with the best
international practices while quality assurance is a process through which a SAI monitors and
ensures that quality control is working effectively. Both Quality Control and Quality Assurance
operate within the Quality Management approach implemented by the SAI to ensure that audit
results as well as the means to achieving them, are within the desired level of quality.
II.
Responsibility for Quality Control System and Quality Control Procedures
3. The SAI has an obligation to establish and maintain a system of quality control to provide reasonable
assurance that: (a) The SAI and its personnel comply with professional standards and applicable
legal and regulatory requirements; and (b) Reports issued by the Auditors are appropriate in the
circumstances. Quality controls are established in all phases of the audit.
4. Within the context of the SAI’s system of quality control, the audit teams are responsible for
implementing quality control procedures that are applicable to the audit engagement and provide
the SAI with relevant information to ensure that quality controls relating to independence are
functional. The SA/RSA is responsible for the overall quality of each audit engagement.
5. The elements of quality control follow (ISQC 1):
a. Leadership responsibilities for quality – Engagement partner shall take responsibility for the
overall quality of audit.
b. Relevant ethical requirements – Fundamental principles of professional ethics are integrity,
objectivity, professional competence and due care, confidentiality, and professional behavior.
c. Acceptance and continuance of client relationships and specific engagements – Information
affecting conclusion include integrity of those charged with governance, competence of the
engagement team, compliance with relevant ethical requirements, and significant matters that
have arisen during the current or previous audit engagements.
d. Human resources – The audit team must have appropriate competence and capabilities such as
experience with audit engagements of a similar nature, understanding of professional standards
and applicable legal and regulatory requirements, technical expertise, and ability to apply
professional judgment.
e. Engagement performance – Direction of the engagement team involves discussion with all
members of the team, appropriate teamwork and training, and supervision.
145
f.
Monitoring – Quality control policies and procedures are relevant, adequate, and operating
effectively.
III.
Quality Control Review Process in COA
6. The responsibility for the quality of an audit and resulting Audit Report rests with the CD/RD and
SA/RSA. Following the Revised Guidelines in the Implementation of the Unified Audit Approach,
there are three levels of quality control review implemented in all the phases of the audit. These are
summarized below:
Table 11. Levels of Quality Control Review
Outputs Prepared by
Reviewed and Signed by
ATM
ATL
ATL
SA/RSA
SA/RSA
CD/RD
7. At the first level, ATLs are responsible for the initial review of the working papers prepared/obtained
by the ATMs, namely, results of evaluation and validation of controls over identified risks,
substantive work reducing residual audit risks to acceptable levels, supporting documents for the
audit report, draft audited FS; and other working papers.
8. At the level of SA/RSA, review should sufficiently satisfy the requirements that the audit
documentation contains adequate evidence of the work done and conclusions reached, and provide
a reasonable basis for an opinion.
9. The SA/RSA is responsible for:
a. Determining whether the overall presentation of the FS, including the related disclosures, is in
accordance with the applicable FRF. (This aspect is discussed in Section 4)
b. Ensuring that all necessary audit procedures have been completed, reviewed, and sufficiently
and appropriately documented.
c. Monitoring compliance by the audit team with auditing standards, laws, regulations and ethical
requirements.
d. Reviewing audit conclusions, recommendations, and professional judgments made by the audit
team.
e. Ensuring that all significant changes made to the audit strategy and audit plan are justified and
appropriately documented and approved.
f. Monitoring Management compliance with the requirements included in the Engagement Letter,
and action on deficiencies requiring corrections in the final FS.
IV.
Quality Control Documents
10. Auditor’s Declaration of Independence and Compliance with Other Ethical Standards - At the
Preliminary Engagement Phase, the Auditor’s Declaration of Independence and Compliance with
Other Ethical Standards signed by all members of the team, confirmed by the SA/RSA during the
Execution Phase and concurred by the CD/RD serves as an assurance that the audit is performed by
a team composed of competent and professional auditors.
146
11. Engagement Letter - COA formally informs the Auditee of its audit requirements well ahead of time
as a matter of professional courtesy and engagement direction.
12. Engagement Planning Memorandum is not only a planning tool but also serves as supervision and
monitoring tool for the SA/RSA and the CD/RD. The progress of work by the team members, the
audit procedures performed and the timing of audit activities can be kept track through the Plan.
Deviations to activities approved in the Plan need to be approved by the SA/RSA before these are
effected. Otherwise, the ATL will be required to formally explain why certain procedures were
skipped, why budgeted time for each objective was exceeded, among others. This Plan will then
serve as a gauge of how well each member in the team performed.
V.
Quality Control Review Documents
13. Completion Compliance Checklist (Appendix 5-1)- This Checklist enables the SA/RSA and the CD/RD
to check that all the required key, sign-off and quality control procedures from the Preliminary
Engagement Phase to the Reporting Phase were performed. The accomplished checklist serves as
basis for the CD/RD in rating the performance of the audit team along with the Auditee performance
rating on the audit team.
14. An Auditee Feedback Sheet (Appendix 5-2) is designed to assess audit team’s performance in the
field. It should be sent directly by the CD/RD to the Auditee. This serves as a tool to ensure COA’s
commitment to quality service through quality staff. This Sheet should be addressed to the Agency
Head who is requested to respond within a given timeframe. The feedback results especially for
audit teams receiving negative feedback should be acted upon by the CD/RD.
a. It is important to seek explanation of the audit team on negative feedback to make them aware
of actions considered unprofessional and/or unethical by the Auditee.
b. The CD/RD shall ensure that a report of all feedback results and actions taken by the CD/RD is
submitted to the Assistant Commissioner for his/her information after transmittal of all the
annual audit reports.
15. Director’s Evaluation Form (Appendix 5-3)
a. The Audit Team’s performance including that of the SA/RSA will be assessed based on the
Completion Compliance Checklist and the Auditee Feedback Sheet by the CD/RD with the
assessment evaluation to the Assistant Commissioner concerned.
b. This quality control review tool allows the CD/RD and the Assistant Commissioner to have a
reasonable basis for taking appropriate action to ensure the quality of financial audit performed
by the audit teams.
16. Financial Management Performance Rating (Appendix 5-4)
a. This quality control review tool assesses the quality of an Auditee’s financial management
performance using the results of the audit performed, including internal control review.
b. When necessary, the results may be provided to the Department of Budget and Management as
one of the bases for reviewing the Auditee’s performance.
147
17. A summary of the Quality Control Documents is presented in Exhibit 7.
Exhibit 7. Quality Control Documents
Q
U
A
L
I
T
Y
Preliminary
Activities
C
O
N
T
R
O
L
Reporting
Planning
Execution
Engagement Letter
Auditor’s Declaration of Independence and Compliance with
Other Ethical Standards
Engagement Planning Memorandum
OAS, PDA, SRPIR, RRAAL, MT, AP
AOM/AAPSI/APMT/RTS/Minutes of Exit Conference
Audit Report
Completion Compliance Checklist
Quality
Control
Review
Auditee Feedback Sheet
Director’s Evaluation Form
Financial Management Performance Rating
148
Appendix 5-1. Completion Compliance Checklist
Name of Agency
Completion Compliance Checklist
Year end ____________
I. Key Procedures
No.
Description
Preliminary engagement
1. Auditee informed of the audit to be undertaken, its
responsibilities under the audit and the audit requirements
2. Auditors are independent from the Auditee and committed
to be objective in the conduct of audit
Planning
1. Established the Initial overall audit strategy indicating the
scope, timing and direction of the audit
2. Auditors gathered/updated and analyzed financial related
information as basis for Preliminary Risk Assessment
Document
Engagement letter signed and
delivered
Auditor’s Declaration of
Independence and Compliance
with Other Ethical Standards
Overall Audit Strategy
- Evaluated results of other audits conducted, cash Working Paper on Preliminary
examination, notices of suspension, disallowances and
charges issued, personnel/property accountability audit,
investigation of current/emerging issues
- Obtained understanding of agency’s objectives, operations
and outputs in relation to funds/appropriations
data analysis
UTA/Financial Accountability
LogFrame
- Assessed existence and design of internal controls related Updated Agency Internal Control
to financial statements
- Assessed compliance with the Internal Control Policies,
Framework/ALCC
Walkthrough Analysis
Procedures and Practices (or General Accounting Plan for
national agencies)
- Conducted preliminary analytical review of financial Tie in analysis worksheet/variance
5.
statements
Summarized information gathered and the results of
preliminary risk assessment
Determined Materiality level by identifying and selecting
appropriate benchmark and financial data
Conducted risk assessment process
6.
Established the audit engagement plan to execute the audit
3.
4.
Execution
1. Approved changes in assessed risks of material
misstatements, either due to fraud or errors, reflected in
Engagement Planning Memorandum
149
analysis worksheet
Summary Report on Preliminary
Identification of Risks
Materiality Template
Results of Risk Assessment at the
Assertion Level
Approved Engagement Planning
Memorandum with Audit Program
Approved Revised Risk
Assessment Template
No.
Description
2. Approved changes in the Overall Audit Strategy and Audit
Plan
3. Sufficient documents gathered and fieldwork procedures
completed
4. Identified, evaluated, and documented related parties and
related party transactions; litigation and claims; segment
reporting; subsequent events; and account balances and
disclosures
5. Discussed all misstatements and errors identified during the
audit with the Auditee
6. Summarized all uncorrected misstatements and errors
7.
Summarized audit observations and observations for
approval by the SA/RSA and discussion with the
management
8. Conducted exit meeting with the Auditee or those charged
with governance (if appropriate)
9. Tracked Status of Prior Years’ Recommendations
Reporting
1. Presented Financial Statements and notes/disclosures
complete and in accordance with the prescribed reporting
framework
2. Audit observations based on the results of audit and duly
documented
3. All material issues and concerns noted during the audit
included in the report or cleared
4. AOMs well written with complete elements of an
observation
5. All critical matters cleared by the Audit Team Leader with
the SA/RSA and CD/RD as deemed appropriate
6. Audit Report dated after and near the date of Management’s
written representation certificate
7. Audit Report issued was appropriate given the established
materiality level and other qualitative factors deemed
significant
8. Audit Report was completed, reviewed and transmitted/
distributed on time
Quality assurance
1. All working papers and other documents in proper order,
complete and signed off by preparer
All top schedules contain the audit conclusion of the auditor
2. All working papers and other documents properly reviewed
and signed off by reviewer
150
Document
Approved Revised Overall Audit
Strategy and Audit Plan
Working Papers and audit
evidence duly indexed
WPs/AOMs/NSs/NDs/NCs
Minutes of the meeting
Summary of Uncorrected
Misstatements
Summary of Audit Observations
and Recommendations
Minutes of exit conference
Recommendation Tracking Sheet
Financial Statements
AOM with supporting documents
Working Paper
Management Representation
Letter
Review Notes
AAR/ML/SAOR
AAR/ML/SAOR
Audit documentation/Working
Papers
No.
Description
3. All working papers properly indexed and referenced
4. File and secure all working papers
5. All requirements in the templates from Preliminary
engagement to Reporting completed and documented
6. Financial management performance of agency evaluated
7.
Team performance evaluated
Document
Duly approved Financial
Management Performance Rating
Director’s Evaluation Form
Auditee Feedback Sheet
Plan for the next audit engagement
1. Actual hours completed and relative documentation placed
on file
2. Team debriefing held
3. Overall audit performance/execution reviewed
Prepared by:
__(Signature over printed name)__
ATL
Date:
Reviewed by:
__(Signature over printed name)__
SA/RSA
Date:
151
II. Engagement Sign-off
No.
Description
1.
Based on my consideration of the matters set out below, supported by sufficient
review of relevant and significant audit documentation, I confirm that:
 The engagement has been appropriately executed in accordance with the policies
and procedures, sufficient appropriate evidence has been obtained to support our
opinion, and the audit report to be issued is appropriate in the circumstances.
 I have been sufficiently involved in the audit process, including in key meetings
with the entity and the team.
 The extent and timing of my review of the items and matters referred to below is
sufficiently evidenced, either in the audit file or through comments below and
through this completion sign-off. Further, all significant matters have been
evidenced as reviewed.
2. Financial statements
I have read the final financial statements [and other information as appropriate] and
am satisfied that the presentation and related disclosures are appropriate.
3. I have read the audit report and am satisfied that it was transmitted at an appropriate
time after the financial statements were authorized for issue by the entity’s
Management.
4. I have reviewed the Recommendation Tracking Sheet, and agree with the disposition
of the Audit Team (of restating and/or clearing ________ audit observations and
recommendations).
5. I have reviewed the rating given by the Audit Team on the financial management
performance of the Auditee and find this in order.
6. I checked and noted that the Auditee Feedback Sheet has been sent to the Office of
the Director, Cluster ___.
7. I have prepared the performance rating of the audit team
8. I have discussed the performance rating with the Team.
9. Consultation and significant matters
There has been appropriate consultation on complicated or contentious matters, and
conclusions from consultation have been agreed, documented and implemented.
All significant matters identified, including matters that include information
inconsistent with the final conclusions, significant professional judgments, and matters
included the Schedule of Uncorrected Misstatements and justified departures have
been resolved, communicated to management and documented to my satisfaction.
10. Sufficient appropriate audit evidence about the assessed risks of material
misstatement due to fraud has been obtained through designing and implementing
the appropriate responses to those risks.
Identified or suspected fraud has been appropriately responded to.
11. Sufficient appropriate evidence has been obtained in relation to financial statement
assertions for each significant financial statement area, including disclosures, allowing
us to draw reasonable conclusions on which to base our audit opinion.
12. Significant changes to the audit strategy and audit plan
All significant changes made to the audit strategy and audit plan since planning sign-off
152
SA/RSA
sign-off
and date
No.
13.
14.
15.
16.
17.
18.
19.
20.
21.
SA/RSA
sign-off
and date
Description
have been appropriately documented and to my satisfaction.
The materiality values as assessed in the planning phase represent the final materiality
values and are considered appropriate.
I am not aware of any other information arising from the audit that requires those
materiality values to be revised further.
Entity representations have been obtained sufficient to support the audit report.
I have been sufficiently involved in the completion process
I have reviewed the Auditee performance rating prepared by the Audit Team and
agree to the ratings given
Independence
Since planning sign-off, no other matters have arisen that affect my independence or
that of the Audit Team and/or of COA, or any such matters arising have been
satisfactorily dealt with.
Compliance with ethical requirements
Since planning sign-off, no other matters have arisen that affect compliance of
members of the engagement team with ethical requirements, or if any matters have
arisen, these have been satisfactorily dealt with.
Where procedures additional to the original audit strategy and plan were deemed
necessary to achieve the stated objectives, these have been included in the audit file
and documented to my satisfaction
All necessary audit procedures have been completed, reviewed, and sufficiently and
appropriately documented.
Where matters have arisen after the date of the audit report, which required
additional procedures to be performed or resulted in a change to previous conclusions
drawn, they have been satisfactorily dealt with.
Prepared by:
__(Signature over printed name)__
SA/RSA
Date:
153
III. Engagement Quality Control Reviewer (EQCR) Sign-off
Office of the Director _____________________________________________
EQCR signoff and
date
Description
1. I have read and assessed at least the documents indicated below. I have included
additional comments, where necessary to refer to key meetings attended, any
further steps taken and/or any additional documentation reviewed by me.
 All significant matters
 Documents reviewed on a selective basis to review work performed in
significant areas (specify those documents or indicate if none is selected)
 The record in the completion sign-off of the engagement team's involvement in
the audit
 Records of internal consultations on significant matters
 Records of important discussions with the entity (significant matters)
 Schedule of Uncorrected Misstatements
 Others (specify)
2. I have sufficiently reviewed the draft audit report before it was finalized and
transmitted to the Auditee.
I have reviewed related documents for significant audit matters.
I have approved the dropping of unimplemented audit recommendation for the
Recommendation Tracking Sheet after evaluating the Audit Team report.
3. I have reviewed the Auditee Feedback Sheet and have discussed the contents with
the SA/RSA for feedback to the Team and for their formal response, if necessary
4. I have read the formal justifications of the Team to the negative feedback received
and taken the necessary action
5. I have reviewed the Performance rating given by the Team on the Agency and have
instructed the SA/RSA to take the necessary action.
6. I have given Performance rating of the Team.
I have discussed the performance rating with the Team.
7. I have transmitted a copy of the Audit Report to the Auditee.
I have sent the Auditee Feedback Sheet to the auditee.
Since the start of the audit, I am not aware of any matter that arose that may have
affected the independence, objectivity and competence of the audit team.
Prepared by:
__(Signature over printed name)__
CD/RD
Date:
154
Appendix 5-2. Auditee Feedback Sheet
(Heading)
Auditee Feedback Sheet
Addressee:
Date
Dear _____________________,
With reference to the financial audit of the ________________________________________________
please accomplish the attached feedback survey by placing check () mark on the items that best
describe the statements 1-12. We consider our audit clients’ feedback on our audit service very valuable
as this will enable us to ensure and to continually improve the quality of our audits.
Please send the filled-out survey directly to the Office of the Cluster/Regional Director, (Cluster/Region),
(Audit Sector), (Address) within five days from receipt.
Thank you for your cooperation.
Very truly yours,
__(Signature over printed name)__
Cluster/Regional Director
155
Agency Name: _______________________
Address: ____________________________
Date: _______________________________
Financial Audit Team to be rated
Calendar Year covered: _______________
Supervising Auditor/Regional Supervising Auditor: ____________________
Audit Team Leader: _______________________
Audit Team Members: _____________________
_____________________
_____________________
No
Audit Quality
1
Requirements contained in the Engagement
Letter were adequately explained by the Audit
Team.
Entrance meeting was held and all questions/
comments were adequately addressed.
The objectives and scope of audit were
discussed.
The audit was completed within the timeframe
communicated.
The audit was conducted in a professional and
courteous manner.
The audit was conducted with minimal disruption
to our business.
The Audit Team kept us informed of key issues
throughout the audit.
The exit conference provided us the opportunity
to discuss our comments on the observations and
recommendations.
All our key concerns were attended to by the
Audit Team.
The audit observations and recommendations
contained in the audit report were properly
communicated.
The audit report reflected our comments and/or
actions taken/to be taken.
The overall audit provided value to the
organization.
2
3
4
5
6
7
8
9
10
11
12
Agree Disagree
156
Not
Done
Remarks
(pls indicate
reason if you
disagree)
Suggestions to improve future financial audits (Please use separate page if necessary.)
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_______________________________
Accomplished by:
Signature: ________________________
Name: ___________________________
Position/Designation: ______________
I fully concur with the answers given, and this form is approved for release to COA
Signature: ________________________
Name: ___________________________
Position/Designation: ______________
Date Approved: ___________________
157
Appendix 5-3. Director’s Evaluation Form
DIRECTOR’S EVALUATION FORM
Financial Audit
Agency __________________________________________________________________
Period Covered____________________________________________________________
Team Composition:
Name
Position
Supervising Auditor/Regional Supervising Auditor
Audit Team Leader
Audit Team Members
Director's Evaluation
Remarks for
Yes No "No" Answers
1. The financial audit was performed in accordance with the FAM based on the
results of the Completion Compliance Checklist.
2. The audit team complied with the ethical and professional standards of COA
based on the feedback received from the agency and in case of negative
feedback, that the team's justification is acceptable.
3. The Audit Opinion rendered on the Financial Statements was the most
appropriate considering the results of the financial audit conducted. The
reason for the modified opinion is acceptable considering the reporting
materiality threshold and the qualitative conditions cited. (Include only if
applicable)
4. The required review process was performed and that critical issues have
been addressed or have been discussed with me for my proper action.
Considering my responses above, I am (satisfied or not satisfied) with the financial audit performed by
the Audit Team.
RATING
All ‘yes’ answers – Outstanding
3 ‘yes’ answers – Very Satisfactory
2 ‘yes’ answers – Satisfactory
1 and below ‘yes’ answers – Unsatisfactory
__________________________________________
Rated by:
Signature: ________________________
Name: ___________________________
Position/Designation: Cluster/Regional Director
Date Approved:___________________
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Appendix 5-4. Financial Management Performance Rating
Financial Management Performance Rating
based on the financial audit performed on:
Agency: _____________________
Period: _____________________
Reliability of Financial Information
Score Remarks
1. Audit Opinion rendered (20 points unqualified, zero for other opinions)
20
Adequacy of Internal control
2. Internal control survey indicated adequate control environment (5 points
5
adequate)
3. Ethical awareness seminars are conducted and have been attended by 75% of
1
all staff surveyed. (1 point)
4. Risk assessment is being performed to identify risks and responses to these
7
risks. (7 points)
5. Control activities including forms and reports required in the Internal Control
10
Policies, Procedures and Practices are in place (10 points)
6. An internal audit unit exists. (1 point if yes)
1
7. The internal audit unit reviews the internal control of the agency based on
5
reports received. (5 points if yes)
Compliance with Management Representation in the Engagement Letter
8. The requirements in the engagement letter were complied with by the agency.
15
- Submission of complete FS within the deadline set (5 points)
- Audit queries and request for documents were addressed on time (5 points)
- Submission of written representations required on time and near the date
of audit report (5 points)
Adjustments required by the Auditor
9. All audit adjustments were considered by the agency and were taken up during 10
the audit period. (0-10 points)
Audit observations and recommendations
10. Observations and recommendations as a result of the audit were considered
2
and management has provided a time plan for implementing the
recommendations. (2 points)
11. Prior period recommendations were implemented during the current year. (010
10 points)
Quality of financial statements furnished for audit
12. The Financial Statements were prepared in accordance with the prescribed
7
reporting framework.
13. The Accounting team that prepared the FS is composed of qualified accounting
2
staff.
14. Cooperation extended to the audit team
5
15. Total Score—perfect score
100
16. Indications of fraud and intentional errors
(25)
159
90 to 100% of all applicable criteria
85 to 89%
75% to 84% of total applicable criteria
Below 75%
Excellent
Very Satisfactory
Satisfactory
Poor
Group Assessment of the Agency’s Financial Management Performance
We are giving a joint performance score of _______ %.
__(Signature over printed name)__
Supervising Auditor/Regional Supervising Auditor
Date:
__(Signature over printed name)__
Cluster/Regional Director
Date:
160
Works Cited
Current Audit File. (2018). Retrieved March 6, 2018, from AuditingHelp.com:
https://auditinghelp.com/current-audit-file-13747
Bragg, S. (2018). Permanent File. Retrieved March 6, 2018, from accountingtools.com:
https://www.accountingtools.com/articles/2017/5/17/permanent-file
Nzechukwu, P. O. (2016). Internal Audit Practice from A to Z (1st ed.). Boca Raton, Florida: CRC Press.
161
Technical Working Group and Resource Persons
An output of the Technical Working Group under COA Office Order Nos. 2016-185, 2016-185-A,
2016-185-B, and 2017-201, and Resource Persons under COA Office Order Nos. 2017-781 and 2017-866,
with the Assistance of National Consultant Juanita A. Villarosa and inputs from International Consultant
Karin Holmerin, Senior International Advisor, Swedish National Audit Office.
Assistant Commissioner Susan P. Garcia
National Government Sector
Assistant Commissioner Wilfredo A. Agito
Administration Sector
Director Irma S. Besas, Cluster 4, NGS
Director Estelita B. Catubay, Cluster 7, NGS
Director Arlene C. Pira, PMO, CHO
OIC Director Joycelyn R. Ramos, Cluster 1, NGS
OIC Director Marivel C. Broñola, Cluster 7, NGS
Auditor Digna Crescencia G. Filler, Cluster 4, CGS
Auditor Jesusa R. Gauang, DENR 1, Cluster 8, NGS
Auditor Marilyn B. Miran, BOC, Cluster 2, NGS
Auditor Carmela S. Zamora, UPS, Cluster 5, NGS
Auditor Cecilia E. Bernales, DOTr 1, Cluster 7, NGS
Auditor Jeannelyn V. Dulay, BJMP, Cluster 4, NGS
Auditor Andrew T. Garcia, PhilFIDA, Cluster 8, NGS
Auditor Mary Joy P. De Jesus, FAPS-DENR, Cluster 8, NGS
Auditor Jo Anne Bless A. Clavio, NPDC/IA, Cluster 7, NGS
Auditor Vivian P. Reyno, OAC, NGS
Ms. Irah Joelle S. Nicdao, OAC, NGS
162