SPSPS SOLAR COMPANY
REQUIREMENT #2
SYNTHESIS 257
Submitted by:
Andrada, Wilfredo Jr. C.
Calceta, Desiree O.
Garcia, Glina Rosele B.
Sanita, Lucille Rae T.
CACAO DE MERCEDES & CO.
1:00 PM – 2:00 PM S
Submitted to:
Mr. Marwin Baldevia, CPA
QUESTIONS TO BE ASKED IN UNDERSTANDING THE CLIENT’S BUSINESS:
1. What business model do you use in your daily operations?
2. Where is the industry heading? What are some regulatory trends that may result in an impact
on your client’s business?
3. What are the company’s mission, vision, goals and objectives? What are your key personnel’s
goals and objectives?
4. What are some obstacles that may get in the way in achieving the company’s objectives? What
are your stated risks?
5. How is your company organized? Which business unit leaders are influential in hiring outside
counsel and what is the decision process for approval of work?
6. Who are the company’s principal competitors?
7. Who are the company’s main suppliers? What are the company's consideration upon choosing
the suppliers?
8. How are the individuals at the company rewarded or judged?
9. What are the company’s strategic plans? Who is your target market and what marketing
strategies do you use to attract them?
10. What are the measures used to protect your data? Who can have access to these?
CACAO DE MERCEDES & CO.
PLANNING MATERIALITY CALCULATION
SPSPS Solar Company OVERALL MATERIALITY STANDARD
Information has the capability to affect the economic decisions of users of the financial report or
the discharge of accountability by the management or those that are charged with governance if
the highest amount of information is omitted, misstated, or not disclosed.
In order for appropriate parameters to be determined, the following table is used for the calculation
of benchmark percentages and weighing factors.
SECTIONS
Revenue
Profit
before
Tax
Total
Assets
Net Assets/ Net
Equity
Current
Assets
Low
2%
8.5%
2%
8.5%
8.5%
Low to
Moderate
1.75%
7%
1.75%
7%
7%
1.5%
6%
1.5%
6.%
6%
1%
5%
1%
5%
5%
0.5%
4.5%
0.5%
4.5%
4.5%
User’s tolerance
Moderate
for
misstatements
Moderate
To High
High
This is based upon the user’s needs and expectations, not those of the auditor based or audit
risk. Accordingly, ‘Performance Materiality’ shall be used to accommodate for the audit risk.
SPSPS Solar Company Weighting Factor (%)
Weighting Factor % - It is based upon the expectations of the users.
SECTION
For Profit
Entity
Type
Not
Profit
Revenue
Profit
before
Tax
Total
Assets
Net Assets/ Net Current
Equity
Assets
50%
50%
-
-
-
-
50%
-
-
for 50%
Council
50%
-
-
-
50%
Selections in between different materiality bases may be made through this, such as the average
of two to three years. To avoid potential benchmarks that are influenced by unusual or one that
results in revenue or profit, an average should be used wherever possible. The current period
should not be used, therefore, in cases if a one off event has occurred in a previous period and
the current period approximates to normal. Notwithstanding which basis is used the work paper
should stipulate explanation.
In the case of council audits, the average of the two previous years for the purposes of the interim
audit and final materiality should be based on the current year results shall be the basis of
preliminary materiality.
SPSPS Solar Company Overall Performance Materiality
In order to reduce to an appropriately low level and to assure that the probability that the
aggregate of undetected misstatements exceeds the Overall Materiality, the amount set by Cacao
de Mercedes must be less than the Overall Materiality.
A % of the Overall Materiality must be set in order to obtain the Overall Performance Materiality
because it allows a margin or buffer of the undetected misstatements that may possibly incur
during the engagement. Auditors use a sliding scale of % based upon an estimate of the
engagement risk associated with the client.
Engagement Risk
Low
Low
Moderate
90%
85%
to Moderate
80%
Moderate
High
75%
to High
70%
Sets of guidelines and standards has been set up and adopted in order for the work to be
systemized and to proficiently support the audit of client’s financial statements and to secure
quality control of the audit’s standard procedures.
The following related data in the audit may differ in usage of specific audit arrangements because
of the auditor’s own professional judgement.
SET MATERIALITY:
MATERIALITY
Overall Materiality
Performance
Materiality
BASIS
{[Revenue = 2% x 50% * x 90%
x (1)] + (Profit before tax
= 8.5% x 50% (2)]}
Posting
Threshold
Materiality
** x 6%
AMOUNT
*24,095,330.76
**P21,685,797.68
HER RE
(1) Based on Pro-forma 2019 Total revenue = P 575,034,036.00
(2) Based on Pro-forma 2019 Profit before tax = P 431,646,833.00
OM = 5,750,340.36 + 18,344,990.40 = P 24,095,330.76
PM = 24,095,330.76 x 90% = P 21,685,797.68
PTM = 19,276,264.61 x 6% = P 1,301,147.86
P1,301,147.86
PRELIMINARY LIST OF SIGNIFICANT ACCOUNTS AND RELATED RELEVANT
ASSERTION/S
CURRENT ASSETS
A. CASH
ASSERTIONS
AUDIT OBJECTIVES
1. Existence
All cash on the statement of financial position
at a given date is held by the entity or by others
for the entity.
2. Completeness
All cash owned by the entity at the reporting
date is included on the statement of financial
position.
3. Valuation and Allocation
Cash, including bank balances, is stated at
realizable value and agrees with supporting
schedules.
4. Rights and Obligation
The entity owns, or has a legal right to, and
has unrestricted use on all the cash on the
statement of financial position at the reporting
date.
5. Presentation and Disclosure
Cash, including bank balances is propely
classified, described and disclosed in the
financial statements, including notes, in
accordance with PFRS.
Lines
of
credit,
loan
guarantees,
compensating balance agreement, and other
restrictions (liens) on cash balances are
appropriately identified and disclosed.
Since almost all of the entity’s transactions involve the use of cash (in either receipt or payment),
Cash is considered as one of the most important assets of the business. It is also considered as
a high-risk area – most vulnerable to misappropriation than other assets, which requires good
internal controls and careful monitoring, as part of its very nature.
B. TRADE AND OTHER RECEIVABLES
ASSERTIONS
1. Existence
AUDIT OBJECTIVES
All receivables on the statement of financial
position are authentic claims of the entity.
2. Completeness
All authentic claims of the entity for amounts
loans and other receivables are included on
the statement of financial position.
3. Valuation and Allocation
Receivables are carried at their net realizable
value.
4. Rights and Obligation
The entity owns, or has a legal right to all the
receivables on the statement of financial
position at the reporting date.
5. Presentation and Disclosure
Receivables are properly classified, described
and disclosed in the financial statements,
including notes, in accordance with PFRS.
Pledged, discounted, or assigned accounts
receivable are properly disclosed. Related
party receivables are properly disclosed.
The audit of receivables represents significant audit risk because (1) many incidences of financial
statement fraud have involved the overstatement of receivables; (2) receivables are usually
subject to valuation using significant accounting estimates.
NON-CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT
ASSERTIONS
AUDIT OBJECTIVES
1. Existence
All PPE on the statement of financial position
exist.
2. Completeness
All PPE owned or leased under finance lease
by the entity at the reporting date is included
on the statement of financial position.
3. Valuation and Allocation
PPE is carried at the appropriate amount
taking into account the requirement of PAS 16,
PPE and PAS 36 Impairment of Assets.
4. Rights and Obligation
The entity owns, or has a legal right to all the
PPE on the statement of financial position at
the reporting date.
5. Presentation and Disclosure
PPE and other related accounts are properly
classified, described and disclosed in the
financial statements, including notes, in
accordance with PFRS.
Liens, pledges, security interests and
restrictions to PPE are identified and properly
disclosed.
PPE is one of the most significant portions of an entity’s non-current assets and requires careful
planning and analysis before acquisition. Through auditing this account, the transactions
regarding from acquisition to disposal are identified and traced.
CURRENT LIABILITIES
A. ACCOUNTS PAYABLE
ASSERTIONS
AUDIT OBJECTIVES
1. Existence
All recorded accounts payable on the
statement of financial position are authentic
debts due to creditors of the entity.
2. Completeness
All accounts payable owed by the entity at the
reporting date are included on the statement
of financial position.
3. Valuation and Allocation
Accounts payable are included on the
statement of financial position at the
appropriate amounts.
4. Rights and Obligation
Liabilities reported in the statement of financial
position represent obligations of the entity at
the reporting date.
5. Presentation and Disclosure
Accounts payable is properly classified,
described, and disclosed in the financial
statements, including notes, in accordance
with the applicable PFRSs.
Accounts payable is an obligation of an enterprise other than owner’s funds. It constitutes a
significant proportion of the total sources of funds of an entity, and is represented only by
documentary evidence which originates mostly from third parties in their dealings with the entity.
Auditing accounts payable enables the finding of off-balance-sheet financing: commitments,
guarantees, and other potential obligations not recorded on the same most especially of the
evolving, complex nature of accounting standards for high-level financing transactions.
B. NOTES PAYABLE
ASSERTIONS
AUDIT OBJECTIVES
1. Existence
All recorded notes payable on the statement
of financial position are authentic debts due to
creditors of the entity.
2. Completeness
All notes payable owed by the entity at the
reporting date are included on the statement
of financial position.
3. Valuation and Allocation
Notes payable are included on the statement
of financial position at the appropriate
amounts.
4. Rights and Obligation
Notes payable reported in the statement of
financial position represent obligations of the
entity at the reporting date.
5. Presentation and Disclosure
Notes payable is properly classified,
described, and disclosed in the financial
statements, including notes, in accordance
with the applicable PFRSs.
Notes payable is an obligation of an enterprise other than owner’s funds. It constitutes a significant
proportion of the total sources of funds of an entity, and is represented only by documentary
evidence which originates mostly from third parties in their dealings with the entity. Auditing
accounts payable enables the finding of off-balance-sheet financing: commitments, guarantees,
and other potential obligations not recorded on the same most especially of the evolving, complex
nature of accounting standards for high-level financing transactions.
SHAREHOLDER’S EQUITY
A. COMMON STOCKS
ASSERTIONS
AUDIT OBJECTIVES
1. Existence
All the common stocks on the statement of
financial position exist.
2. Completeness
All common stocks that should have been
recorded have been recorded and included in
the statement of financial position.
3. Valuation and Allocation
The common stocks are stated on the
statement of financial position at the
appropriate amounts.
4. Presentation and Disclosure
Common stocks are properly classified,
described, and disclosed in the financial
statements, including notes, in accordance
with the applicable financial reporting
framework.
As it is common for the rest of the accounts in the finance and investment cycles, auditing this
account is important most especially in new stock issues, purchase or reissuance of treasury
shares, dividend payments, and dividend declarations. Through this, information about the
financing cycle which involves the activities designed to obtain capital funds of the company can
be traced accordingly.
B. RETAINED EARNINGS
ASSERTIONS
AUDIT OBJECTIVES
5. Existence
Retained Earnings on the statement of
financial position exist.
6. Completeness
Retained Earnings that should have been
recorded has been recorded and included in
the statement of financial position.
7. Valuation and Allocation
The Retained Earnings is stated on the
statement of financial position at the
appropriate amounts.
8. Presentation and Disclosure
Retained Earnings is properly classified,
described, and disclosed in the financial
statements, including notes, in accordance
with the applicable financial reporting
framework.
Having the retained earnings account is important since its balance is used to improve market
and investor confidence in the organization. This is considered as significant since it is used as a
marker to help analyze the health of a firm. Retained earnings is usually redirected, often as a
reinvestment within the organization.
INCOME STATEMENT ACCOUNTS
A. SALE OF ELECTRICITY
ASSERTIONS
AUDIT OBJECTIVES
1. Existence
All sales have really occurred and pertain to
the entity.
2. Completeness
All sales relate to the current period and have
been included in the statement of
comprehensive income.
3. Accuracy
Sales have been accurately recorded in the
statement of comprehensive income.
4. Presentation and Disclosure
Sales are properly classified, described and
disclosed in the financial statements, including
notes, in accordance with PFRS.
5. Cut-off
Sales have been recorded in the proper
accounting period.
6. Classification
All Sales in the income statement have been
recorded in the proper accounts.
Sales = revenue = covers expenses. The ability of a business to cover its expenses create stable
operations and the opportunity for growth. This is considered as qualitatively significant since,
without this, the organization will struggle and have a difficult time attracting talent and actually
growing the business. Sales also appears as the top line number of any financial document and
usually gives an indication as to the health of the organization
B. COST OF SALE OF ELECTRICITY
ASSERTIONS
AUDIT OBJECTIVES
1. Existence
All cost of sale of electricity in the income
statement are properly supported as charges
against the entity in the period and are
appropriately matched with revenues.
2. Completeness
All cost of sale of electricity related to the
current period are included in the income
statement.
3. Accuracy
Cost of sale of electricity has been accurately
recorded in the statement of comprehensive
income.
4. Presentation and Disclosure
Cost of sale of electricity is properly classified,
described and disclosed in the financial
statements, including notes, in accordance
with PFRS.
5. Cut-off
Cost of sale of electricity has been recorded in
the proper accounting period.
6. Classification
The cost of sale of electricity in the income
statement has been recorded in the proper
accounts.
Cost of goods sold measures the costs associated with purchasing or manufacturing materials
that a company uses for sales. It is considered qualitatively significant since it is the pulse of
companies. It shows how profitable they are relatively, and shows how profitable they are able to
be. When management mentions decreasing COGS, stock pricing typically react positively.
C. NET INCOME
ASSERTIONS
AUDIT OBJECTIVES
7. Existence
The net income have really occurred and
pertain to the entity.
8. Completeness
Net income relates to the current period and
has been included in the statement of
comprehensive income.
9. Accuracy
Net income has been accurately recorded in
the statement of comprehensive income.
10. Presentation and Disclosure
Net income is properly classified, described
and disclosed in the financial statements,
including notes, in accordance with PFRS.
11. Cut-off
Net income has been recorded in the proper
accounting period.
12. Classification
Net income in the income statement has been
recorded in the proper accounts.
It is important to take this into consideration because it is of a fundamental importance to
stakeholders of the entity - the level of earnings of an entity is often given a great emphasis as an
indicator of its financial performance. It also shows the stewardship of the management on how
well they managed the resources provided by investors and lenders. For some, these accounts
are the basis of compensation or bonuses of the management.
SPSPS SOLAR CORPORATION
INFORMATION REQUEST LIST
In order to facilitate our understanding of your departmental operations and activities, the following
information is requested from your company. This list is not intended to be all-inclusive. Additional
information or questions, throughout the course of the audit, may be required. In cases where
information detailed below is not available, we do not intend for you to create this information for
our purposes. Please feel free to advise us of any additional information/documentation not listed
below that may be useful to us in the conduct of this audit. If you or your staff have any questions
or need clarification regarding this request, please call Cacao de Mercedes & Co. at (053) 325 –
5029.
#
SCOPE AREA
DOCUMENT REQUIRED
Operations
1.
Organization/
Operational
Departmental Organization chart(s) including roles
and responsibilities
Please identify process owners and name and
contact person in each organization for IT Areas
List of personnel within each unit
2.
Organization/
Operational
3.
Strategic/Business Plans for the future
4.
Organization/
Operational
Operational
5.
Operational
6.
Operational
7.
Operational
8.
Operational
List of all accounts (numbers and account titles)
maintained by your unit
Operating and/or comparative analysis reports
prepared or issued by your department on an
annual basis
Description of significant departmental processes
(including flowcharts if available)
Internal policies and procedures manual
9.
Operational
Internal policies and procedures manual
10.
Operational
11.
Operational
Copies of external regulations applicable to the
department
List of Key Personnel Contact (including any
significant upcoming leaves
FY2018-2019 approved budgets
DUE
DATE
DATE RECEIVED
#
Scope Area
Document Period
Due
Date
Date Received
Information Technology
12.
Control
Environment
A list of any known deficiencies or deviations as
defined in the IT Policy Manual
13.
Control
Environment
An application inventory
14.
Infrastructure
Controls
15.
Infrastructure
Controls
Overview of the hardware and software platforms
(Servers Inventory, Operating System, Database
Management System, Authentication Software,
server type and IP addresses, patch status and
virus DAT file level).
Overview documentation for IT Strategy
16.
Infrastructure
Controls
WAN Diagram of network infrastructure support
17.
Disaster
Recovery
18.
Other
High level summary of Business continuity and
disaster recovery plan for recovery procedures
from the loss of applications, hardware and
infrastructure. Information on application specific
back up procedures is recommended.
List of major IT supplier contracts and
agreements.
19.
Other
Reports of unusual events since the last audit
(e.g. security breaches, failed access attempt
reports and improper practices).
Note: Any documentation listed above may be sent electronically to the in charge auditor for the
engagement. If information is on the WEB, please note the WEB address under the remarks. If
information is FAXED please notify the recipient before sending. Thank you for your attention and
cooperation.