Unit 1 - The Professional Practice of Accountancy Readings A. The Philippine Accountancy Act of 2004 and its IRR (RA 9298) ● ● ● ● Senate Bill No. 2748 House Bill No. 6678 Enacted during the time of Pres. Gloria Arroyo (May 13, 2004) Objectives: ○ the standardization and regulation of accounting education ○ the examination for registration of certified public accountants; and ○ the supervision, control, and regulation of the practice of accountancy in the Philippines 1. Title, Declaration of Policy, Objective and Scope of Practice ● Section 3 - Objectives ○ Standardization and Regulation of Accounting Education ■ Rule II - Section 9(B) - Education Technical Council ● Functions ● Composition ○ 6 representatives from the ff: ■ Board of Accountancy (1) ■ Public Practice (1) ■ Commerce and Industry (1) ■ Academe/Education (2) ■ Government (1) ■ CHED - CMO 27 Series of 2017 ■ PICPA is a member of IFAC → PICPA must comply with the SMOs ● You cannot refuse to be a member of PICPA if you passed the CPALE. You are obliged to be a member of PICPA. ○ Member not in good standing: If you fail to pay fees. ■ SMOs (memorize) ● SMO 1: Quality Assurance ● SMO 2: International Education Standards for Professional Accountants and Other Pronouncements Issued by the IAESB - Education ● SMO 3: International Standards and Other Pronouncements Issued by the IAASB ● ● ● 2. ● ● ● ● SMO 4: IESBA Code of Ethics for Professional Accountants - Ethics SMO 5: International Public Sector Accounting Standards and Other Pronouncements Issued by the IPSASB ● SMO 6: Investigation and Discipline ● SMO 7: International Financial Reporting Standards and Other Pronouncements Issued by the IASB ■ International Education Standards ● Published by the IFAC to serve the public interest and strengthen the accountancy profession by: ○ supporting the development of high-quality international standards; ○ promoting the adoption and implementation of these standards; ○ building the capacity of professional accountancy organizations; and ○ speaking out on public interest issues ● IES 1 - Entry Requirements to Professional Accounting Education ● IES 2 - Initial Professional Development - Technical Competence ● IES 3 - Initial Professional Development - Professional Skills ● IES 4 - Initial Professional Development - Professional Values, Ethics and Attitudes ● IES 5 - Initial Professional Development - Practical Experience ● IES 6 - Initial Professional Development - Assessment of Professional Competence ● IES 7 - Continuing Professional Development ● IES 8 - Professional Competence for Engagement Partners Responsible for Audits of FS ● Initial Professional Development - Aspiring ● Continuing Professional Development- Full Pledged ○ Examination for Registration of CPA (See No. 3) ○ The supervision, control and regulation of the practice of accountancy in the Philippines Scope of Practice ○ Practice of Public Accountancy ○ Practice in Commerce and Industry ○ Practice in Education/Academe ○ Practice in the Government Professional Regulatory Board of Accountancy (Rule II) The Professional Regulatory Board of Accountancy of the Philippines created under Republic Act No. 9298 Composed of 7 - Composed of a Chairman and 6 members Current Members of the PRBOA (6) ○ Chairman - NOE G. QUIÑANOLA ○ Vice Chairman - THELMA S. CIUDADANO ○ Member - GLORIA T. BAYSA ○ Member - SAMUEL B. PADILLA ○ Member - ARLYN S. VILLANUEVA ○ Member - GERVACIO I. PIATOR Qualifications of Members of the PRBOA (Rule II, Section 6) ○ Must be a natural-born citizen and a resident of the Philippines ○ Must be a duly registered CPA with at least 10 years of work experience in any scope of practice of accountancy. He/she shall be nominated to represent a sector from he/she has considerable and meaningful professional experience ○ Must be of good moral character and must not have been convicted of crimes involving moral turpitude ○ ● Must not have any pecuniary interest, directly or indirectly, in any school, college, university or institution conferring an academic degree necessary for admission to the practice of accountancy or where review classes in preparation for the licensure examination are being offered or conducted, nor shall he/she be a member of the faculty or administration thereof at the time of his/her appointment to the Board ○ Must not be a director or officer of the APO at the time of his appointment; provided, that if the chairman or any member of the board is still in active practice of public accountancy or connected with any office in commerce and industry or in the government, he/she must go on leave during the pendency of any case involving himself/herself, his firm, partnership, company or government office, or inhibit himself/herself completely in all the stages of the proceedings thereof. ■ Not a national director of PICPA ■ Marydith Miguel → President of PICPA ○ Nomination Process [1 Chair, 6 members) ■ PICPA 5 = > PRC 3 => President 1 x 7 Councils FRSC AASC ETC PRC CPE Council When 90 days after 90 days after 60 days after 30 days after Composition Total of 15 members Chairman (1) - Senior practitioner in any sector 14 Members BOA (1) SEC (1) BSP (1) BIR (1) Major Org of preparers and users of FS (1) COA (1) PP (2) CI (2) A/E (2) GOV (2) Total of 15 members Chairman (1) - Senior practitioner in any sector 14 Members BOA (1) SEC (1) BSP (1) Major Org of preparers and users of FS (1) COA (1) PP - 6 (B,M,S) CI (1) A/E (1) GOV (1) Total of 7 members Chairman (1) - Senior practitioner in any sector 6 Members BOA (1) PP -(1) CI (1) A/E (2, private + public) GOV (1) Total of 3 Members Chairman (1) - Senior practitioner in any sector 2 Members PICPA (1) A/E (1) Term of Office 3 years, renewable for 3 years, renewable for 3 years, renewable for Co-terminus with their another term another term another term incumbency ● Quality Review Committee ○ Conduct an oversight into the quality of audit of financial statements through a review of the quality control measures instituted by Individual CPAs, Firms, or Partnerships in order to ensure compliance with accounting and auditing standards and practices ○ CPAs are not allowed to be corporations ■ Mandated in RA 9298 ■ Objectivity can be questioned ● Compare with COA PRBOA COA ● ● ● ● ● Natural - born CPA with at least 10 years of experience GMRC , not convicted Not connected with the academe Not a national director or officer of PICPA ● ● ● ● ● Natural-born At least 35 years CPA with at least 10 years of auditing experience or Lawyer with at least 10 years Not a candidate of any elective position ● Nomination Process [1 Chair, 6 members) ○ PICPA 5 = > PRC 3 => President 1 x 7 Per term: 3 years + 3 years [1 yr break] 3 years, 3 years [max 12 years] Example: Emile 3 years (after 1 year, step down); Elle 2 years (unexpired) ● ● Chairman and 2 Commissioners Term 7 years with re-appointment ● ● Powers ● Carry out RA 9298 ● Supervise registration, licensure, practice of Accountancy ● Administer oaths ● Issue, suspend, revoke or reinstate the Certificate of Registration for the practice of the accountancy profession ● Adopt an official seal of the Board ● Prescribe and/or adopt a Code of Ethics for the practice of Accountancy ● Monitor the conditions ● Conduct oversight ● Investigate violations ● Motu propio ● Issue cease or desist order ● To punish ● To prepare amend syllabi of CPALE ● To coordinate with CHED ● To exercise such other powers 3. Examination, Registration, and Licensure ● Objective 2: Examination for Registration of CPA ○ Qualifications of Applicants for Examinations (Rule III, Section 14) ■ Requisites ● is a Filipino citizen ● is of good moral character ● is a holder of the degree of Bachelor of Science in Accountancy conferred by a school, college, academy, or institute duly recognized and/or accredited by the Commission on Higher Education or other authorised government offices ● has not been convicted of any criminal offense involving moral turpitude ■ Documents ● Certification of live birth in the Philippine Statistics Authority ● Marriage Contract for female applicants ● ○ ○ ○ ○ ○ ○ ○ College diploma with indication therein of date of graduation and Special Order Number unless not required ● Baccalaureate Transcript of Records with indication therein of date of graduation and Special Order Number unless not required ● NBI clearance ● Other documents as may be required by the Board Examination Fee: Php 900 Conditioned: Php 450 Professional Regulation Commission - 45 Professional Regulatory Boards Rating in the CPALE ■ Average of at least 75% and No grade lower than 65% = PASS ■ Average is 75%; one subject is 64% = FAIL ■ Average is 74%; All subjects 65% or above = FAIL ■ Identifying Conditional Credits ● Majority of 7 subjects: 4 ● Majority of 6 subjects: 4 ● Ex: 4/6 = resit for 2; ⅚ = resit for 1; within 2 years ● Resit: below 75% grade in a subject Certificate of Registration ■ Given only 1 time and cannot be renewable, PRC Number Professional Identification Card ■ Expired after three years; Birthday ■ Ex: Bday = Jan 4 => Boards October 2023 renew on or before January 4, 2026 Suspension and Revocation ■ Unethical Conduct, Malpractice, Violation of RA 9298, Unprofessional ■ Can be reinstated after 2 years from the date of revocation SCOPE OF EXAMINATION RA 9298 (7 subjects) ● ● ● ● ● ● ● Theory of Accounts [TA] Business Law and Taxation [BLT] Management Services [MS] Auditing Theory [AT] Auditing Problems [AP] Practical Accounting Problems I [P1] Practical Accounting Problems II [P2] Current (6 subjects) ● US CPA Financial Accounting and ● Auditing and Attestation Reporting [P1 + Related TA] [AUD] ● Advance Financial Accounting ● Business Environment and and Reporting [P2 + Related Concept [BEC] TA] ● Financial Accounting and ● Management Advisory Services Reporting [FAR] [MS] ● Regulations [REG] ● Auditing [AT + AP] ● Regulatory Frameworks for Examination Business Transactions [BL] Education ● Taxation [T] Experience Ethics Release: Within 10 Calendar Days PH: Conducts it twice (May, October) Overall: Thrice (One in the Middle East) Sec. 15 - The Board, subject to the approval of the Commission, may revise or exclude any of the subjects and their syllabi, and add new ones as the need arises. Provided, that the change shall not be more often than every three years. 4. Practice of Accountancy ● Objective 3: The supervision, control, and regulation of the practice of accountancy in the Philippines ○ The entire Rule IV (Practice of Accountancy) of the IRR of RA 9298 ○ The entire Rule V (Penal and Final Provisions) of the IRR of RA 9298 ○ All the annexes of the IRR of RA 9298 ○ Practice sectors are public practice, CI, GVT, Academe/Education ○ The creation of AASC, FRSC, QRC, and CPE Council ○ 4 Sectors ■ Commerce and Industry (ACPACI) ■ Academe (nACPAE) ■ Government (GACPA) ■ Public Practice (ACPAPP) ○ Accreditation: Academe, Public Practice ○ CPD: 15 CPD Units Renewal ○ CPD Units: 120 units for 3 years ○ Reciprocity ■ ASEAN EC ■ ASEAN CPA ● Revised ASEAN Chartered Professional Accountant - Phl. In accordance with PRC Resolution No. 1120 (A) dated September 27, 2018, providing the ○ Foreigners - Sec. 35 - Coverage of Temporary/Special Permits ■ A foreign CPA called for consultation or for a specific purpose which, in the judgment of the Board, is essential for the development of the country; Provided that his/her practice shall be limited only for the particular work that he/she is being engaged; Provided further, that there is no Filipino CPA qualified for such consultation or specific purposes ■ A foreign CPS engaged as professor, lecturer or critic in fields essential to accountancy education in the Philippines and his/her engagement is confined to teaching only and ■ A foreign CPA who is an internationally recognized expert or with specialization in any branch of accountancy and his/her service is essential for the advancement of accountancy in the Philippines 5. Penal and Final Provisions ● Any person who shall violate any of the provisions of RA 9298 or this Implementing Rules and Regulations as promulgated by the Board subject to the approval of the Commission, shall, upon conviction, be punished by a fine of not less than gift thousand pesos (Php 50,000) or by imprisonment for a period not exceeding two (2) years or both B. Professional Organizations (IFAC, PICPA, ACPAPP, PCPACI, GACPA, NACPAE) 1. Philippine Institute of Certified Public Accountants ● the integrated national professional organization of Certified Public Accountants accredited by the Board of Accountancy and the Commission per PRC Accreditation No. 15 ● Consists of members in good standard and members NOT in good standing ● A newly registered certified public accountant cannot opt not to join the PICPA as provided by Section 30 which states that all registered certified public accountants whose names appear in the roster of the same shall be united and integrated through their membership in a one and only registered accredited national professional organization 2. International Federation of Accountants ● the global advocacy organization for the accountancy profession; mainly for the financial accounting and auditing professions of which PICPA is a member of ● all PICPA members, by virtue of subordination, are likewise associated with the IFAC and are required to abide by its seven statements of membership 3. Association of Certified Public Accountants in Public Practice 4. Association of Certified Public Accountants in Commerce and Industry 5. Government Association of Certified Public Accountants 6. National Association of Certified Public Accountants (nACPAE) ● Academe C. Continuing Professional Development Basis: IES 7, RA9298 (PRC CPE/CPD Council), RA 10912 Renewal of PIC: 15 units for 3 years [All] Accreditation = 120 units for 3 years [Public Practice & Academe] Government have its own civil service commission Competence Areas (Resolution 358/254): ● Technical competence (IES 2); 30 ● Professional skills (IES 3); 5 ● PVEA (IES 4); 5 ○ / 90, 15, 15 ○ X 90. 4. 26 ○ X 29, 71,20 ● Professional ● Service provides, accredited; programs/course, accredited ● PRBOA Resolution 254 Series of 2017 ○ The following can be a CPD Provider: Sole proprietor, partnership, corporation, government institutions, and foreign entities ○ Members of PRBOA are disqualified to be a CPD provider during their incumbency ● PRC Resolution 1146 Series of 2019 ○ Section 3 Procedures for Accreditation of Online CPD Program ● Update: PRC Resolution No. 1207 Series of 2019 ○ 120 units ● Additional Updates: PRC Resolution No. 1278 Series of 2020 ○ Implementation of CPDAS ● Self-Directed Learning - Master’s Degree, Doctoral, Law D. Code of Ethics for Professional Accountants in the Philippines ● Book of accounting firm - Business , C&I ● Accountant of firms - Public Practice ● Part 3 & Part 4- Public Practice ● Part 2 - Other Sector (Education, Government, etc, Includes the accountants of public practice) ● Part 1 & Glossary- Covers both 1. General Application of the Code ● Harmonization of US GAAP and IFRS ● Practice: US; Standard: IFRS ● Ethics: IFAC ● Code of Ethics is universal ● Changes from 2018 Edition ○ Mindset oriented ○ Role is not something demonstrated, but something expected from the mindset ● Guide to the Code ○ Part 2 is also applicable to individuals who are professional accountants in public practice when performing professional activities pursuant to their relationship with the firm, whether as a contractor, employee or owners ■ Preparing FS, Managing firm, complying to taxes ○ I - Introduction ○ R - Requirements ○ A - Application Material ● How to use the code ○ The fundamental principles, independence and conceptual framework ■ Identify ■ Evaluate ■ Address ● Fundamental Principles [PcICOPb] + Independence ○ Professional Competence and Due Care ○ Integrity ■ Doing the right thing, especially when no one is watching ○ Confidentiality ○ Objectivity ○ Professional Behavior ● Documentation is important. If not documented, it did not happen. ● R115.2 Marketing or Promotional Activities ○ Resolution No. 126 ■ 2. Ex: SGV member of Ernst & Young ● Conceptual Framework ○ Identify Threats R120.6 (FISSA) ■ Self-interest threat - financial or other interest will inappropriately influence the accountant’s judgment or behavior ■ Self-review threat - professional accountant will not objectively evaluate the results of the previous judgment made or service performed in forming a conclusion about the subject matter of the engagement ■ Advocacy threat - professional accountant will promote a client’s position to the point that objectivity is compromised ■ Familiarity threat - the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work ■ Intimidation threat - professional accountant will be deterred from acting objectively because of actual or perceived pressures including attempts to exercise undue influence over the accountant ○ Evaluate threats R120.7 ■ Qualitative, Quantitative or Both ○ Address threats R120.10 ■ Reduced - no violation, if not there is a violation ■ Safeguards (Antidote) ○ R120.5 ■ Exercise professional judgment ■ Remain alert ■ Use the reasonable and informed third party test ● 120.5A4 - Reasonable and Informed Third Party ○ Independence 120.12A1 ■ Independence is linked to the fundamental principles of objectivity and integrity ■ Integrity + Objectivity ■ Independence of mind (Independence in fact) - you - mirror → auditor’s perception of his own independence ■ Independence in appearance - others - objective assessment → public’s perception of the professional accountant’s independence Unit IV - Pre-Engagement A. Client Acceptance and Initial Auditing Planning 1. Auditor’s independence ● CPA: ○ Independence ○ Competence ○ Ethics ● Client: ○ Integrity ● Basis is the standard not “i think/i feel” ● PSA 210 - Agreeing the Terms of Audit Engagements ● Board of Directors, AC → External auditor ○ Forms the audit committee (AC), AC will choose an external auditor ○ Scenario 1: Auditor from Public Practice to Commerce and Industry - familiarity threat ● ● ● ● ● ○ Scenario 2: Auditor from Commerce and Industry to Public Practice - self review threat ○ Safeguard: Cooling off period of 1 year Cooling off period - 365 days → safeguard to reduce self-review threat Management ----- BOD (AudCom) ------ Shareholders Request for proposal **Engagement Letter** Conforme 2. Auditor’s competence When it comes to the workplace being professional you have to “makipag kapwa tao”.. But not to the extent of creating a familiarity threat Financial Statement Assertions (CREVP) ○ The auditor uses these assertions to consider the different types of potential misstatements that may occur ■ Rights and obligations - the entity has rights over the reported assets and that it has valid obligations to settle the reported liabilities ■ Valuation and Allocation - assets and liabilities are properly values and that revenues and expenses are properly measured ■ Presentation and Disclosure - assets and liabilities are properly classified and that disclosures in the notes to the FS are adequate ■ Existence or occurrence - assets and liabilities exist as of the FS date and that revenues and expenses occurred during the reporting period(through physical examination or external confirmation) ● Concerned with potential overstatement of accounts ■ Completeness - all items that should be reported in the fs are included ● Potential understatement of accounts ○ Tracing vs Vouching ■ Tracing - from source documents to accounting records → completeness → test for understatement ■ ○ ○ ○ ● Vouching - from accounting records to source documents → existence → test for overstatement Assertions about classes of transactions and events (COACC) ■ Completeness ■ Occurrence ■ Accuracy ■ Cutoff ■ Classification Assertions about account balances (CERV) ■ Existence ■ R&O ■ Completeness ■ Valuation and Allocation Assertions about presentation and disclosure ■ Occurence and R&O ■ Completeness ■ Classification and Understandability ■ Accuracy and Valuation Objective of the Auditor ○ objective of the auditor is to accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through: ■ Establishing whether the preconditions for an audit are present; and ■ Confirming that there is a common understanding between the auditor and management and, where appropriate, those charged with governance of the terms of the audit engagement ● ● ● ● Preconditions for an Audit ○ Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable (PFRS); and ○ Obtain the agreement of management that it acknowledges and understands its responsibility: ■ For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation (in accordance with PFRS); ■ For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and (management is responsible for internal control that FS is free from material misstatement) ■ To provide the auditor with: ● Access to all information of which management is aware that is relevant to the preparation of the financial statements; ● Additional information that the auditor may request from management for the purpose of the audit; and ● Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence Limitations ○ If there are limitations on the auditor, there is a high chance that the auditor will not be able to provide an opinion (do not accept the client if there is limitation imposed, unless required to do so) ○ If preconditions are not present, do not continue the audit Agreement on Audit Engagement Terms → Engagement Letter ○ The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate (conforme) ○ the agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include: ■ The objective of the audit of the FS which is to express an opinion on the FS ■ The responsibilities of management; ■ Scope of the audit ■ The responsibilities of the auditor; ■ Forms or any reports or other communication that the auditor expects to issue ■ The fact that because of the limitations of the audit, there is an unavoidable risk that material misstatements may remain undiscovered ■ Responsibility of the management to allow the auditor to have unrestricted access to whatever records, documentation and other information ■ Identification of the applicable financial reporting framework for the preparation of the financial statements; and ■ Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content. ■ Billing arrangements ■ Expectations ■ Arrangements concerning the involvement of others ■ Request for the client to confirm the terms of the engagement Acceptance ○ Don’t agree if not justified ○ No. 16 → new engagement letter or revise audit fees ○ In making the decision whether to accept or reject, the firm should consider: ■ Its competence → has the necessary skills and competence to handle the engagement and is developed through training and experience ■ Its independence → consider whether there are any threats to the audit team’s independence and objectivity, if so, whether there are safeguards that can be established ■ Its ability to serve the client properly → engagement should not be performed if there are not enough qualified personnel ■ Integrity of the prospective client’s management → PSA 220 requires the firm to conduct a background investigation to the prospective client in order to minimize the likelihood of assocation with clients whose management lacks integrity ■ Adequacy of the accounting records ● Recurring Audits ○ On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement ■ Even though you were the auditor before, there should still be an engagement letter and conforme since there may be revisions ■ Do not agree to changes in engagement letter if not justified ■ If requested to lower the level of assurance, it should be justified (may become review engagement) ■ If changes were agreed, there shall be a new engagement letter ■ If unable to agree with changes, withdraw from the audit engagement ● When you withdraw → manners matter → don’t burn bridges ○ Auditor’s ethical compliance ○ Client’s integrity B. Engagement Letter ● Serves as the written contract between the auditor and the client ● This letter sets forth: ○ The objectives of the audit of FS ○ The management’s responsibility for the fair presentation of the FS ○ Scope ○ Forms or any reports or other communication that the auditor expects to issue ○ Existence of limitations and that there is an unavoidable risk that material misstatements may remain undiscovered ○ Responsibility of the client to allow the auditor to have unrestricted access ○ Billing arrangement ○ Expectations ○ Arrangement with regard to involvement of other parties ○ Request for the client to confirm the term of engagement ● Importance of the EL ○ Avoid misunderstandings ○ Document and Confirm the auditor’s acceptance C. Modifications in terms of engagement ● The auditor shall not agree to change in the terms of the audit engagement where there is no reasonable justification for doing so ● If prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification for doing so ● If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement ● If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement, the auditor shall: ○ Withdraw from the engagement where possible under applicable law or regulation ○ Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties, such as those charged with governance, owners or regulator Unit VI. Risk Assessment Procedures A. Audit Risk Model (Check glossary) ● AR = IR x CR x DR ● Opinions ○ Unmodified - Unqualified (present fairly in all material respects) ○ Modified ■ Qualified (except for) ■ Adverse - (do not) ■ Disclaimer - (not able to perform the audit due to limitations; “We do not express”) ● Audit Risk: Inappropriate audit opinion when the FS are materially misstated ○ Refers to the risk that the auditor might give an inappropriate audit opinion on the FS. ○ Scenario 1: qualified to modified → audit risk ● ● ● ● ○ Scenario 2: modified → unmodified → not an audit risk ○ Built on the experience of the auditor ○ Something we can accept *Risk of Material Misstatement = IR x CR Detection Risk - Auditor → detective ○ Substantive procedures ○ The more effective the substantive tests are, the lower the detection risk will be. Accept AR = Assess IR x Assess CR x Plan DR Plan DR = Accept AR / Assess RMM* or Accept AR / (IR x CR) Know who we are to plan the detection risk so that we may be able to assess the IR and CR Audit Strategy (broad) → Audit Plan → Audit Objectives → Audit Procedures (RAP and FAP = Audit ● ● ● Program) Everything is in the plan FAP is a response to the RAP Planing → you have the RAP and FAP ● CLient and Auditor have the same objective → for FS to be free material misstatement ● Client → Internal Control; Auditor → Audit Procedures ● ● B. ● ● ● ● Assessing Acceptable Audit Risk The auditor’s judgment about the acceptable level of audit risk is influenced by the type of client. As the acceptable level of AR decreases, the amount of AE needed to support the auditor’s opinion increases. It is the auditor who determines the acceptable level of audit risk. The lower the level of acceptable audit risk, the higher the desired level of assurance/certainty, and vice versa C. Risk assessment procedures ● Procedures performed by auditors to obtain an understanding of the entity and its environment including its internal control and to assess the risks of material misstatements in the FS. 1. Inquiries, analytical procedures, observation, and inspection ● Inquiries of Management and Others within the Entity - P14: A22 - A26 ● ● Analytical Procedures P14: A27 - A31 Observation and Inspection P14: A32 - A36 ● You can’t do FAP if you haven’t done RAP D. Assessing inherent risk ● Inherent Risk (P19-P20) ○ Susceptibility of an account balance or class of transactions to a material misstatement assuming that there were no related internal controls. ○ No controls but there’s a possibility of misstatement ○ Neither the client or auditor ○ Cash → most susceptible to fraud/theft ● Contributes to the inherent risk 1. Understanding of the entity and its environment ● PSA 315 - Identifying and Assessing the RMM through understanding the entity and its environment) ○ Risk Assessment Procedure - Inquiries, analytical procedures, observation and inspection ○ We can only assess IR of we understand the entity and its environment - P19-P20: A56-57, A68-A73, a74-a81 ○ Governance - A59-A60 ○ Business Model- takes account of resources to generate revenues A61 ■ Canvas business model - one pager document developed the entire perspective of a business (9 building blocks) ○ Business risk - A63 ○ Matters that the auditor may consider when obtaining an understanding of the entity’s business mode objectives, strategies and related business risks A64 ○ Industry Factors A68 ○ Regulatory Factors A70 ○ P19a(iii) - A74-A81 ○ P19b - A82-A84 ○ P19c - A85 - A89 ● Factors that may influence the auditor’s assessment of the risk of misstatement at the FS level: ○ Management’s integrity ○ Management characteristics ○ Operating characteristics ○ Industry characteristics ● Factors affecting IR at the account balance level: ○ Susceptibility of the account to theft ○ Complexity of calculations related to account ○ The complexity underlying transactions and other events ○ Degree of judgment involved in determining account balances ● As the assessed level of IR increase, the auditor should design more effective Substantive procedures ● The auditor must consider specific factors related to the client that may affect the risk of material misstatement for a particular account. In making this assessment, the auditor relies primarily on the knowledge of the entity and the results of preliminary analytical procedures. E. Assessing control risk ● Risk that a material misstatement that could occur in an account balance or class of transactions will not be prevented or detected and corrected in a timely manner by accounting and internal control systems. ● ● ● ● ● ● ● ● ● ● ● ● ● ● Understand the entity’s internal control If the internal control is effective, then the risk that the control will fail to detect or prevent material misstatement decreases Holding other planning considerations equal, as the assessed level of CR increases, the auditor should design more effective ST P21 Control → Clients may implement Function of the client’s management, can still be influenced by the client who responds to that Clients has to design internal controls that should prevent, detect and correct Detective control → surprise audits Corrective → Cashiers in the bank - bond, insurance (PDIC) 1. Understanding of the entity’s internal control We can only assess CR, if we understand the entity’s internal control ST more expensive than TOC Components → from COSO ○ Control Environment (CRIMe) ○ Risk Assessment Process ○ Information System ○ Monitoring ○ Control Activities COSO - 1992 ○ Commissioner Treadway ○ Committee of Sponsoring Organization ○ AAA, AICPA, FEI, IMA, IIA ○ Landmark Study: Internal Control Integrated Framework ○ Internal control - process, by the client, provide reasonable assurance that objectives are achieved(ROC) ○ Good internal control → high quality output (e.g. fs) → less than high preliminary assessment ○ 2002 - Enterprise Risk Management ■ Additional Components ○ 2017 ● ● ● ● ● ● ● Three objectives of internal control (ROC) ○ Operations ○ Reporting → Regulatory ○ Compliance → with laws and regulations ○ Client reasonable assurance with respect to the ROC (preventive, detective and corrective) Internal Control System P21 A99-A100, A96, A97 ○ A97 → Why? → tone at the top ○ As information goes up, information becomes more aggregate P22 - Entity’s RAP ○ Identify ○ Assessing ○ Addressing P24 ○ IT → more efficient to monitoring ○ periodic , documentation → controls to monitoring is less than high P25 information system and communication P26 Control activities ○ Heart: Segregation of duties (incompatible functions) Perspective is not the office but with respect to the person ■ Custody (cashier, treasurer) ■ Authorization (purchasing manager, sales manager, credit manager) ■ Recordkeeping (accountant) ○ Lapping → fraudulent activity ■ JM - cashier, treasurer ■ Maien - accountant ■ Customers: L (1k), K(1k), F(1k) ■ Using the payment of one customer to another customer, because one of the payments was pocketed ■ Two incompatible functions lies to the cashier who is also the record keeper ■ Maien can catch ○ Theft ■ JM - Cashier and Credit Manager ■ Customers: L (1k), K(1k), F(1k) ■ Payment was pocketed and didn’t credit the cash.. CM will authorize the write-off of the 1,000 Ar ■ Prevented if a separate credit manager was present ○ Compensating Controls - where owners are involved → in the case of small entities ■ Reduce or eliminate/mitigate ■ Reduces to an acceptable level ○ Controls are related to costs ○ ○ ○ ○ ■ They have costs and they are expensive ■ Think of the cost benefit ■ Identify the criticality of an asset that you are safeguarding (ex. Expensive watch) ■ Balance risks and controls ■ If you want to reduce risk more, expect that you will spend more on controls Residual Risk ■ Reduced risk to an acceptable level → will depend on the risk appetite of the client The higher the percentage quantity of the risk from happening, the higher the financial impact Higher control, less risk , the more expensive the control is the lower the likelihood of such risk to happen Equilibrium point → optimal → cost of the controls that they are willing to implement to offset the risk without controls ○ If you go below the level, you will be losing more → risk is reduced but not on an acceptable level, financial impact is higher than cost of controls → client is exposing to the risk ○ ○ ○ ○ ○ ○ ○ ○ Above equilibrium - that would result to the residual risk within the acceptable level → covered risk If you want to really eliminate risk have to go to the left but that would be very expensive and not wise Cost of controls vs Residual risk → perspective of the client Controls are expensive Economics behind risks and controls → are they risk averse or risk seeking? Client is the one responsible for the internal control For you to be able to reduce impact, spend more on controls Controls and Risk Curve ■ In our discussion in class, we used the supply and demand curve, to represent the controls and risk curve. When the controls of the entity are at a high level, the less likely for risks to happen. This entails more expenditures to the control in order to lessen the risk. When the controls of the entity are at a low level, the likelihood of risks from happening are high. The higher the percentage quantity of risk from happening, the higher the financial impact is in an entity. The optimal level is at the equilibrium point which is the level of the cost of controls that an entity is willing to implement, in order to offset the risks from happening. Below the equilibrium, risk is surely reduced, however it is not on an acceptable level, therefore the entity will be losing more.When the level is above the equilibrium, it would result to the residual risk within the acceptable level. Residual risk occurs when there is remaining risk after doing control measures. It should be noted that eliminating risks 100% is not possible, because that would require extremely expensive controls, which is not wise and healthy to the entity. Risks can be reduced, not completely eliminated. Given these circumstances, the entity should deploy or develop the COSO Enterprise Risk Management Framework (2017) or also previously known as the COSO Internal Control Objectives and Components. Based on the PSA, the essential components of internal control are the control environment, risk assessment, information and communication systems, control activities, and monitoring. Each of these components has principles which can provide the entity with a reasonable expectation that the organization understands and strives to manage the risks associated with its strategy and business objectives. ● ● F. G. P27 Assessment CR would involve studying and evaluating the effectiveness of the client’s internal control systems. Relationship of risk to evidence Relationship of risk and materiality to audit evidence Step 1: Should determine the amount of misstatement that could be material to the FS taken as a whole - If materiality level is set too low, the auditor will be wasting his time auditing accounts that are not important. If too high, the auditor may not be able to detect misstatements that could be material. Step 2: Done by allocating the overall materiality to the FS account balances. This allows the auditor to design the appropriate audit procedures that will be applied to specific accounts. Step 3: In this step the auditor will be able to determine whether or not the FS are materially misstated. H. Considering error, fraud, and non-compliance 1. Fraud risk areas 2. Responsibilities when fraud is suspected ● PSA 240 → auditor’s responsibility ○ Intentional - fraud ○ Unintentional - error ○ Fraud ■ Fraudulent financial reporting (mgt fraud) → lying ■ Misappropriation of assets ( employee fraud) → stealing ○ ○ ○ ○ ○ ○ ■ Corruption → cheating ACFE report to the nation Fraud risk factors ■ Opportunities, incentives (pressure), rationalization → direct to fraud ● Ethics is inverse to fraud ■ Fraud triangle - Donald Cressey (1953) Antidote to fraud is ethics → practice fundamental principles Collusion, Management Override Employee Fraud > Management Fraud Financial Impact is greater in Management Fraud Unit VIII. Further Audit Procedures (Substantive Tests) A. Detection risk and substantive tests ● Irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures for each material class of transactions, account balance, and disclosure ● This requirement reflects the facts that: ○ (i) the auditor’s assessment of risk is judgmental and so may not identify all risks of material misstatement; and ○ (ii) there are inherent limitations to internal control, including management override. ● Designing ST depends on the acceptable level of DR. As the acceptable level of detection risk decreases, the assurance provided by ST increases. ● In order to achieve that high level of assurance, the auditor will have to modify the nature, timing, and extent of ST as follows: ○ Performing more effective Substantive Procedures (nature) ○ Applying the SP at year-end (timing) ○ Using larger sample size when performing SP (extent) B. FS assertions ● The auditor’s substantive procedures shall include the following audit procedures related to the financial statement closing process: ○ (a) Agreeing or reconciling the financial statements with the underlying accounting records; and ○ (b) Examining material journal entries and other adjustments made during the course of preparing the financial statements. ● Tracing vs Vouching C. Audit evidence ● The auditor cannot assume that an instance of fraud or error is an isolated occurrence. Therefore, the consideration of how the detection of a misstatement affects the assessed risks of material misstatement is important in determining whether the assessment remains appropriate. ● The auditor shall conclude whether sufficient appropriate audit evidence has been obtained. In forming an opinion, the auditor shall consider all relevant audit evidence, regardless of whether it appears to corroborate or to contradict the assertions in the financial statements ● If the auditor has not obtained sufficient appropriate audit evidence as to a material financial statement assertion, the auditor shall attempt to obtain further audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall express a qualified opinion or a disclaimer of opinion. ● Sufficient Appropriate Evidence ○ Sufficient → Quantity ■ Competence → the more competent the evidence is, the less amount of evidence will be needed ■ Materiality → the more material the financial statement amount being examined is, the more evidence will be needed to support its validity ■ Risk → as the risk of misstatement in a particular account increases, the more evidence will be needed ○ Appropriate → Quality ■ Reliability → objectivity of evidence ● Independent sources outside the entity > generated internally ● Generated internally → when accounting and internal control systems are D. ● ● ● ● ● ● ● effective ● Obtained directly by the auditor > obtained indirectly ● AE in the form of documents and written representations > oral representations ■ Relevance → timeliness Nature, timing, and extent Depending on the circumstances, the auditor may determine that: ○ Performing only substantive analytical procedures will be sufficient to reduce audit risk to an acceptably low level. ○ Only tests of details are appropriate. ○ A combination of substantive analytical procedures and tests of details are most responsive to the assessed risks. Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. The nature of the risk and assertion is relevant to the design of tests of details. Because the assessment of the risk of material misstatement takes account of internal control, the extent of substantive procedures may need to be increased when the results from tests of controls are unsatisfactory. However, increasing the extent of an audit procedure is appropriate only if the audit procedure itself is relevant to the specific risk. When substantive procedures are performed at an interim date, the auditor shall cover the remaining period by performing: ○ (a) Substantive procedures, combined with tests of controls for the intervening period; or ○ (b) If the auditor determines that it is sufficient, further substantive procedures only, that provide a reasonable basis for extending the audit conclusions from the interim date to the period end. ○ In such cases, it may be appropriate to use audit evidence from a previous audit’s substantive procedures if that evidence and the related subject matter have not fundamentally changed, and audit procedures have been performed during the current period to establish its continuing relevance. The auditor may determine that it is effective to perform substantive procedures at an interim date, and to compare and reconcile information concerning the balance at the period end with the comparable information at the interim date to: ○ (a) Identify amounts that appear unusual, ○ (b) Investigate any such amounts, and ○ (c) Perform substantive analytical procedures or tests of details to test the intervening period. Factors such as the following may influence whether to perform substantive procedures at an interim date: ○ The control environment and other relevant controls. ○ The availability at a later date of information necessary for the auditor’s procedures. ○ The purpose of the substantive procedure. ○ The assessed risk of material misstatement. ○ The nature of the class of transactions or account balance and related assertions. ○ The ability of the auditor to perform appropriate substantive procedures or substantive procedures combined with tests of controls to cover the remaining period in order to reduce the risk that misstatements that may exist at the period end will not be detected. ● Factors such as the following may influence whether to perform substantive analytical procedures with respect to the period between the interim date and the period end: ○ Whether the period end balances of the particular classes of transactions or account balances are reasonably predictable with respect to amount, relative significance, and composition. ○ Whether the entity’s procedures for analyzing and adjusting such classes of transactions or account balances at interim dates and for establishing proper accounting cutoffs are appropriate. ○ Whether the information system relevant to financial reporting will provide information concerning the balances at the period end and the transactions in the remaining period that is sufficient to permit investigation of: ■ Significant unusual transactions or entries (including those at or near the period end), ■ Other causes of significant fluctuations, or expected fluctuations that did not occur, and ■ Changes in the composition of the classes of transactions or account balances. E. Substantive analytical procedures ● When the auditor has determined that an assessed risk of material misstatement at the assertion level is a significant risk, the auditor shall perform substantive procedures that are specifically responsive to that risk. When the approach to a significant risk consists only of substantive procedures, those procedures shall include tests of details ○ Substantive procedures related to significant risks are most often designed to obtain audit evidence with high reliability. F. Tests of details ● Tests of details related to the existence or occurrence assertion may involve selecting from items contained in a financial statement amount and obtaining the relevant audit evidence. ● Tests of details related to the completeness assertion may involve selecting from items that are expected to be included in the relevant financial statement amount and investigating whether they are included. G. Audit documentation ● (a) The overall responses to address the assessed risks of material misstatement at the financial statement level, and the nature, timing, and extent of the further audit procedures performed; ● (b) The linkage of those procedures with the assessed risks at the assertion level; and ● (c) The results of the audit procedures, including the conclusions where these are not otherwise clear. ● If the auditor plans to use audit evidence about the operating effectiveness of controls obtained in previous audits, the auditor shall document the conclusions reached about relying on such controls that were tested in a previous audit. ● The auditors’ documentation shall demonstrate that the financial statements agree or reconcile with the underlying accounting records. PSA 520 ● Analytical procedures ○ Risk Assessment Procedures (315) (top bun) ■ Required ○ Substantive Procedures (330) (patty) ■ If used (520), with Corroborating Procedures for a persuasive evidence ■ Not Required based on 330 but if used, use 520 ○ Completing the Audit Procedures (520) (bottom bun) ■ Required PSA250 ● Focus is the Client/Entity not the person ● Material Misstatement ○ Fraud - 240 ○ Error - 240 ○ Non Compliance - 250 ● Direct Effect ● Indirect Effect ● Noncompliance does not include personal misconduct unrelated to the business activities of the entity. ○ If the president does something that is against the laws → non compliance as well ● Elevate - Escalate until the end, if no action → legal advice → don’t withdraw unless recommended by the lawyer PSA 450 - Evaluation of Misstatements Identified during the Audit PSA 540 - Auditing Accounting Estimates ● How should we deal with accounting estimates from the RAP to FAP ● Fair Value - depends on the response to the underlying ● Between the audit of FV and accounting estimate amounts vs client based on balances coming from accounts receivable, etc. where should you plan a low detection risk? ○ Complex transactions (fv, estimates) → inherent risk is high → low detection risk, therefore improve procedures ○ Ordinary transactions (ap, ar) → inherent risk is not that high → high detection risk ○ Detection Risk is always the response of the auditor Unit X Completing the Audit ● PSA 550,560, 570, 580 ● The auditor performs additional audit procedures to complete the audit and become satisfied that the evidence gathered is consistent with the opinion to be expressed in auditor’s report. ○ Review of subsequent events and contingencies ○ Assessing the appropriateness of the use of the going concern assumption ○ Performing overall analytical review procedures ○ Obtaining written representations from the client’s management Provision: A liability of uncertain amount or timing, though its existence is beyond doubt Contingent Liability: 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 enterprise; or a present obligation Contingent Asset: A possible asset that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise Commitment - Represents future cash flow requirements (e.g. purchase commitment) ● ● ● ● ● Audit procedures for Contingencies and Commitments ○ Inquire with management, and those charged with governance regarding possible transactions which qualify for recognition in the financial statements ( for example, a pending lawsuit where an adverse outcome is probable and the amount of loss can be reliably measured). ○ Read the permanent file of the client, and review related documents, such as contract, loan agreements, bond indentures, and lawyer’s letters ○ Read correspondence and communication files of the client, such as letters sent to/ by government agencies, legal counsel, and other entities. Note any items which might indicate provisions and contingencies requiring disclosure or adjustment ○ Review the minutes of meetings of the BOD ○ Send out confirmation letters with legal counsel and inspect replies for any pending litigation or contingent liabilities. Where legal confirmation letters have been sent at an interim date, determine whether updated legal letters are required for the remaining period under audit. ○ ● ● Test the professional fees account, noting any legal expenses incurred and review documents supporting such expenses. ○ Test the reasonableness of any accounting estimates made by management ○ Review the current file and the results of other procedures for indications of contingencies and commitments ○ Read new items related to the client, including any media comment or articles, which might indicate the existence of environmental or other liabilities Timeline and Terms ○ Subsequent events occur between the date of the financial statement and date of the auditors’ report ○ Subsequently discovered facts become known after the date of the auditors’ report Summary of Audit Communications * If oral communication, document in audit documentation ● PSA 560 ○ Subsequent events covers the facts ■ Identify if Type I or Type II ○ P6 vs P10 & P11 ■ The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events ■ ○ ○ ○ ○ occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified. The auditor is not, however, expected to perform additional audit procedures on matters to which previously applied audit procedures have provided satisfactory conclusions. The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report. However, if, after the date of the auditor’s report but before the date the financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall: (a) Discuss the matter with management and, where appropriate, those charged with governance; (b) Determine whether the financial statements need amendment and, if so, (c) Inquire how management intends to address the matter in the financial statements. ■ If management amends the financial statements, the auditor shall: (a) Carry out the audit procedures necessary in the circumstances on the amendment. (b) Unless the circumstances in paragraph 12 apply: ● Extend the audit procedures referred to in paragraphs 6 and 7 to the date of the new auditor’s report; and ● Provide a new auditor’s report on the amended financial statements. The new auditor’s report shall not be dated earlier than the date of approval of the amended financial statements. After the financial statements have been issued, the auditor has no obligation to perform any audit procedures regarding such financial statements. However, if, after the financial statements have been issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall: (a) Discuss the matter with management and, where appropriate, those charged with governance; (b) Determine whether the financial statements need amendment; and, if so, (c) Inquire how management intends to address the matter in the financial statements The auditor shall include in the new or amended auditor’s report an Emphasis of Matter paragraph or Other Matter paragraph referring to a note to the financial statements that more extensively discusses the reason for the amendment of the previously issued financial statements and to the earlier report provided by the auditor If management does not take the necessary steps to ensure that anyone in receipt of the previously issued financial statements is informed of the situation and does not amend the financial statements in circumstances where the auditor believes they need to be amended, the auditor shall notify management and, unless all of those charged with governance are involved in managing the entity,6 those charged with governance, that the auditor will seek to prevent future reliance on the auditor’s report. If, despite such notification, management or those charged with governance do not take these necessary steps, the auditor shall take appropriate action to seek to prevent reliance on the auditor’s report. Where the auditor believes that management, or those charged with governance, have failed to take the necessary steps to prevent reliance on the auditor’s report on financial statements previously issued by the entity despite the auditor’s prior notification that the auditor will take action to seek to prevent such reliance, the auditor’s course of action depends upon the auditor’s legal rights and obligations. Consequently, the auditor may consider it appropriate to seek legal advice ● ● PSA 570 ○ Responsibilities of the auditor ■ The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern. These responsibilities exist even if the financial reporting framework used in the preparation of the financial statements does not include an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern. ■ However, as described in PSA 200,2 the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for future events or conditions that may cause an entity to cease to continue as a going concern. The auditor cannot predict such future events or conditions. Accordingly, the absence of any reference to a material uncertainty about the entity’s ability to continue as a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern. ○ Evaluating Management’s Assessment ■ The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern. (Ref: Para. A8–A10, A12–A13) ■ In evaluating management’s assessment of the entity’s ability to continue as a going concern, the auditor shall cover the same period as that used by management to make its assessment as required by the applicable financial reporting framework, or by law or regulation if it specifies a longer period. If management’s assessment of the entity’s ability to continue as a going concern covers less than twelve months from the date of the financial statements as defined in PSA 560, the auditor shall request management to extend its assessment period to at least twelve months from that date. (Ref: Para. A11–A13) ■ In evaluating management’s assessment, the auditor shall consider whether management’s assessment includes all relevant information of which the auditor is aware as a result of the audit. ○ Implications of the Auditor’s Report ■ If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion ■ If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a separate section under the heading “Material Uncertainty Related to Going Concern” to: (Ref: Para. A28–A31, A34) (a) Draw attention to the note in the financial statements that discloses the matters set out in paragraph 19; and (b) State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the matter. ■ If adequate disclosure about the material uncertainty is not made in the financial statements, the auditor shall: ● (a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with PSA 705 (Revised)5; and ● (b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter. ■ If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor shall consider the implications for the auditor’s report ○ Significant Delay in the Approval of FInancial Statements - If there is significant delay in the approval of the financial statements by management or those charged with governance after the date of the financial statements, the auditor shall inquire as to the reasons for the delay. If the auditor believes that the delay could be related to events or conditions relating to the going concern assessment, the auditor shall perform those additional audit procedures necessary, as described in paragraph 16, as well as consider the effect on the auditor’s conclusion regarding the existence of a material uncertainty, as described in paragraph 18. PSA 550: Related Parties ○ Higher likelihood of fraud on related party transactions (connivance or collusion) ○ Not related unless they engage in significant transactions or share resources to a significant extent with one another ○ ● Arm’s length transactions: A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests ○ Nature of Relationship Party Relationships and Transactions - Many related party transactions are in the normal course of business. In such circumstances, they may carry no higher risk of material misstatement of the financial statements than similar transactions with unrelated parties. However, the nature of related party relationships and transactions may, in some circumstances, give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties. ■ Control risk issues ○ Responsibilities of the Auditor ■ Because related parties are not independent of each other, many financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements. Where the applicable financial reporting framework establishes such requirements, the auditor has a responsibility to perform audit procedures to identify, assess and respond to the risks of material misstatement arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions or balances in accordance with the requirements of the framework. ■ Even if the applicable financial reporting framework establishes minimal or no related party requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party relationships and transactions sufficient to be able to conclude whether the financial statements, insofar as they are affected by those relationships and transactions ● Achieve fair presentation (for fair presentation frameworks ● Are not misleading (for compliance frameworks). ■ In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for such reasons as the following: ● Management may be unaware of the existence of all related party relationships and transactions, particularly if the applicable financial reporting framework does not establish related party requirements. ● Related party relationships may present a greater opportunity for collusion, concealment or manipulation by management. PSA 580: Written Representations ○ PSAs Containing Requirements for Written Representations (Appendix 1) ■ The list is not a substitute for considering the requirements and related application and other explanatory material in PSAs. ■ PSA 240 (Redrafted), “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” – paragraph 39 ■ PSA 250 (Redrafted), “The Auditor’s Responsibilities Relating to Laws and Regulations in an Audit of Financial Statements” – paragraph 1613 ■ [Proposed] PSA 450 (Revised and Redrafted), “Evaluation of Misstatements Identified during the Audit” – paragraph [16] ■ PSA 540 (Revised and Redrafted), “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” – paragraph 22 ■ PSA 550 (Revised and Redrafted), “Related Parties” – paragraph 2614 PSA 560 (Redrafted), “Subsequent Events” – paragraph 9 ■ PSA 570 (Redrafted), “Going Concern” – paragraph 16(e)15 ○ Written Representation ■ Provided by the Management ■ Do not include financial statements, the assertions therein or supporting books and records ■ ○ ○ Date shall be as near as practicable to but not after the date of the auditor’s report on the financial statements. ■ Client should disclose all significant information to the auditor ■ Auditors are protected as well because of written representations ■ A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence Auditors should request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matter concerned. Doubt as to the Reliability of Written Representations and Requested Written Representations Not Provided ■ If the auditor has concerns about the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these, the auditor shall determine the effect that such concerns may have on the reliability of representations (oral or written) and audit evidence in general. ■ In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform audit procedures to attempt to resolve the matter. If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical values or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect that this may have on the reliability of representations (oral or written) and audit evidence in general. ■ If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with [proposed] PSA 705 (Revised and Redrafted),4 having regard to the requirement in paragraph 20 of this PSA. ■ If management does not provide one or more of the requested written representations, the auditor shall: ● Discuss the matter with management ● Reevaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general; and ● Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with [proposed] PSA 705 (Revised and Redrafted), having regard to the requirement in paragraph 20 of this PSA.
