
1.



a.
b.
FS AUDIT PROCESS
Need to be in a sequential order and not
to be in different orders.
PRE-ENGAGEMENT
Proper screening of potential clients
The more complex your client is – the
larger reputation the auditor has if he
pulled it out successfully.
Check the client’s profile, if it is inclined
with your goals
Ethical
Requirements
–
independence
Professional Competence – working
knowledge (if the knowledge is lacking,
try to acquire knowledge by simply
asking and trying to small industries,
just to be familiar with the procedure
and gather some experience).
MAJOR CONCERNS: Interest of Clients
1. Compliance – ex. SEC (format,
guideline, etc.)
2. Cash Flow
c.
Regulatory
requirements
–
accreditation
d. Resources – manpower, IT audit
capability
e. Auditability – FS items have
supporting documents, records, and
tangible assets.
--------------------------------------------------------Predecessor Auditor – former auditor
Successor Auditor – incoming auditor

He needs to initiate the communication
with the predecessor auditor.

P.A. need not to approach first the S.A.
S.A. needs to:
1. Know what is the expected output needed
2. Question: If someone has already done the task.
P.A. is under the Confidentiality Rule

P.A. can only talk to S.A. if client consent
is obtained.
Factors about the change of auditors:
a. Disagreements between the P.A. and
client
management
–
auditing
procedures, and accounting principles.
b. Reason for change in auditors
c. Matters that bear on integrity of
management.
Agree on the TERMS OF ENGAGEMENT –
Engagement Specifications (DISUFOT)
1. Division of responsibility (both the
auditor and the client).
2. Inherent limitations of audit.
3. Scope of the engagement (Coverage:
what is the range of the information to
audit).
4. Unrestricted Access – if the auditor
wants information that needs the client’s
cooperation.
5. Format of reports (addressee, etc.)
6. Objective of the audit of FS (expression
of an opinion on FS).
7. Timetable, fees, and billing (start, end,
meeting, fee, and schedule)
Note:

Terms of engagement are commonly
documented in an engagement letter.

Both the client and the auditor shall sign
the letter.
--------------------------------------------------------2. AUDIT PLANNING
EFFECTIVENESS: Achieve our objective of
expressing an opinion on the FS.
Opinion on the FS --- Evidence Gathered ---Performance of Audit procedures --- Questions:
a.
b.
c.
d.
What procedures will be performed?
When will the procedures need to be
done?
What is the extent of testing?
Who will perform the audit procedures?
Outputs of Audit Planning
a. Audit Strategy
b. Audit Planning Document
c. Audit programs by transaction cycle or
by account
Constraints
a. Time (field work – one to two weeks on
the average).
b. Cost (budget – audit fee).
c. Quality (Compliance with Standards)
--------------------------------------------------------3. CONSIDERATION OF INTERNAL
CONTROL
Internal Control
Main Definition:

Policies and procedures established and
implemented by the entity (all levels)
that provides reasonable assurance
about preventing, detecting, and
correcting material misstatements in a
timely manner.
Keywords:

Policies (concept or idea) and
procedures (action to implement idea)
Ex. Only authorized personnel are in the
company (Policy), No ID no entry (Procedure)




Established and implemented by the
entity (all levels)
Provides reasonable assurance about
achievement of entity objectives
(financial reporting, efficiency and
effectiveness of operations, compliance)
Broad in scope – FS audits are
concerned – controls about preventing,
detecting, and correcting material
misstatements in a timely manner. (to
reduce the chance of mistakes).
Related to FS is the only needed to be
checked.
Note:

If controls are strong or reliable (can
prevent, can detect and correct
misstatements in a timely manner) – the
unaudited FS is expected to contain less
amount of material misstatements –
update our audit plan to reflect less
amount of planned audit tests.

If controls are weak or unreliable or
missing (cannot prevent, cannot
detects and correct misstatements in a
timely manner) – the unaudited FS is
expected to contain a lot of material
misstatements – update our audit plan
to reflect more amount of planned audit
tests.
---------------------------------------------------------Sir George’s Tip:
AUD – Aud theory – AAP, AAP-SI, Enhancement
Review
FAR – Basic, IA1-3, Auditing Problems,
Enhancement review
AFAR
MAS
Tax – Tax 1 & 2, Enhancement review, constant
update.
RFBT
Policies and procedures
Tax – read the latest textbook in tac (every day, 5
pages of tax, 2 problems)
AUD – read and record our handouts in Auditing,
10 theory questions)
Purchasing Cycle
1. Request for goods

Any department

Purchase requisition form (prenumbered, date, requesting department,
quantity and description of goods
requested, date needed)
o Necessity Test (is it needed?
Is it urgent? Do we have a
budget?)
o It is not sufficient that the
company has a lot of money,
monitory
of
control
is
necessary.
o Approved by appropriate level
of management (department
manager, counter-signed by
someone
higher
than
department manager)
o Approved purchase requisition
form
forwarded
to
the
purchasing department
2.
Prepare and send a purchase
order to the vendor

Purchasing Department

Received Purchase requisition form –
o Not asked with the necessity
test since it is done in the first
part.
o What is asked here, who is the
authorized vendor?

Check authorized vendor list (vendors
must be accredited based on reputation
and past experience) approved by top
management

Request for quotations from qualified
vendors.

Select the appropriate vendor and
prepare the purchase order form (prenumbered, date, supplier name and
contact, quantity and description of
goods ordered, date needed, offered
price, offered terms) – PO must be
approved by purchasing manager.

PO is sent to the vendor (inform the
vendor), another copy of the PO
(without quantity) shall be sent to the
receiving department, another copy of
the PO (with quantity) shall be sent to
the accounting department (AP).
Lead Time – time waiting for the ordered foods
to arrive.
3.
Receive ordered goods from the
vendor

Receiving Department

Receive the “blind” PO from the
purchasing department – aware that
goods are coming.

Goods arrived
o Receiving department shall
check the PO and check
identity of delivery personnel
o Count the goods, fill up the
blind copy PO (essence of the
without quantity, is to oblige
the personnel to count the
items delivered), inspect the
goods for any damage.
o Vendor shall request receiving
department to sign a delivery
receipt (DR)

Receiving report (date received, who
received the goods, name of delivery
personnel, quantity and description of
goods received, time of receipt) vs
purchase order (asking first if there is a
purchase order before receiving items)

Blind copy of PO (filled-up), receiving
report – filed in the receiving
department

Goods will be sent to the warehousing
department (if inventory) or to the
department that requested for the goods
(ex. Supplied).

Receiving report duplicate – sent to the
accounting department (AP terms,
Freight terms)
AP Subdepartment – receives the receiving
report from the receiving department
4.




Receive the vendor’s invoice
Receptionist’s Area
Vendor’s invoice (pre-numbered, date of
sale, name of the customer, quantity and
description of goods sold by vendor,
amount due, due date, credit terms, and
freight terms (shipping point or
destination)
Vendor’s invoice is forwarded to the
Accounting
Department
(AP
subdepartment)
AP-subdepartment –
o Reconciliation: Purchase order
+ receiving report + vendor’s
invoice (If all the same
amounts from these three
sources, we can record the
transaction)
Record the purchase in the
purchase journal, P10,000
o Update the AP subsidiary
ledger of the vendor, P10,000
(subsidiary
ledger
–
individual record for each
supplier)
o Weekly or monthly, the totals
of all recorded purchases shall
be forwarded to the General
Ledger
sub-department
(Accounting)
GL-subdepartment (Accounting)
o Gets the totals of recorded
purchases
from
APsubdepartment.
Record
summary entry in the General
Journal:
o

Ex.
Purchases
P10,000
AP
P10,000

Posting is done to the General Ledger

Monthly
or
more
frequently,
reconciliation is done between GL and
SL.
5.

Pay the amount due to the vendor
Before you pay the amount due, there is
an authorization in a form of voucher
3 types of vouchers
1. Journal vouchers – to authorize journal
entries
2. Check vouchers – to authorize check
disbursements
3. Petty cash voucher – to authorize small
disbursements from the petty cash fund.

Treasury Department

Prepares check for the amount due
(date, vendor’s name, amount in figures
and words, signature) – the treasurer
will put the signature in the check.

Forwarded
to
check
releasing
department.

Receive official receipt from the vendor
(pre-numbered, date of collection,
customer’s name, amount received).
Ex.
AP
P10,000
Cash
P10,000
Note:

If we will notice, where is the accounting
department? It is not present in the
façade of the business but the backoffice
workers,
recording
the
transactions.

All events in the company should be
authorized by the manager.
09-22-2022
AP – Specialized Industry
1. Banking Industry

Compliance

Major Concern of specialized industry:
to understand what the users looking for
(information)
Hardest Fraud to Detect:

Fraud that is no record, no document

Note: Always get a receipt

90% the auditor cannot detect of fraud.

10% part of the employees will told the
auditor (possible he has something
negative intention to the company).
2. Real Estate
3. Insurance
4. Telco
5. Transport and Logistics
6. Hotels
Scapegoating

Someone who has a problem with the
company and in return he will drag the
company down.
1. COST CENTER

To minimize cost, no income (Goal)

Maintain or exceed quality
Ex. Certifications, quotas on trainings
2.

REVENUE CENTER
Goal: Maximize income, sales target.
3.

PROFIT CENTER
Revenue and cost are handled by this
center.
Ex. Departments in Schools
4. INVESTMENTS CENTERS
Ex. Facilities
Steps:
1. Determine the cost
Ex.
AL G.
DRIX V.
Budget
1M
1M
Actual
(900k)
(1,050M)
Favorable
100k Unfav. (50k)
BOD:
JJ URO – Pilinas First
GEORGE J – Knights of Rizal
JULIUS A – Stat. Int’l Inc.

JJ Uro and George J will invest
correlating to the values or purpose of
the budget of Drix.
Auditor’s Work

Is to track inconsistent expenses of the
company

Common misleading evidence is the
personal expenses charged to the
company.

Even if there is a receipt, ask or know
what is the purpose of the purchase.
Technique to talk to client:
1. Have a good approach with the client,
have an approachable intro, and
disclosing what is done by the auditor.
2. Give the client a chance to talk with his
side.
3. Give the possible recommendation, if
there is a problem.
Auditors should talk to:

Secretary, Janitors, and Drivers – Ask
for their permission to have a recording
with their statements.

Know your client (background, culture
and others).
BSP – Manual Regulation for Banks
Products of the Bank
1. Deposits; and
2. Loans – can be paid through non-cash
asset.
ROPOA (Real and Other Properties Owned
and Acquired)
Cash
xx
Deposit Liability
xx
Loans Rec.
xx
Cash
xx
Interest Inc.
xx
Credit loss (bad debt)
xx
Allow. – CL
xx
DOSRI (Director, Officer, Shareholders
and Other Related Interest)
--------------------------------------------------------REAL ESTATE

How the company earns w/ Real Estate
– Malls will purchase land beside it and
sell it high (creating subdivisions). Buy
them low and sell them high.

It also allows traffic (customers)
1. Rent of Tenants
2. Products
in
supermarket
(consignment)
3. Peripheral Income – Parking Fees