Unit II. Auditing, Assurance, and Other Services
Readings
A. Assurance Engagements (IFAE)
1. Nature, objectives, and elements
● Assurance engagement - engagement in which a practitioner expresses a conclusion designed to enhance the
degree of confidence of the intended users other than the responsible party about the outcome of the evaluation
or measurement of a subject matter against criteria
● Assurance
○ Assurance engagement: performing audit or review engagements with respect to historical financial
statements/information
○ Required to be independent
○ Assurance: PSAE (IAASB => AASC)
○ Audit of SM : Historical FS : PSA (IAASB => AASC)
○ Review of SM: Historical FS: PSRE (IAASB => AASC)
○ Academy, beauty pageants, operational audit, compliance audit
● Non-Assurance (Advisory/Consulting)
○ Independence is not required
○ PS of Related Services (PSRS) (IAASB => AASC)
● For an engagement to be considered as an Assurance engagement, it has to have all the following
elements: (P-S-C-E-R)
○ A three-party relationship involving a practitioner, a responsible party, and intended users (P)
■ Practitioner
■ Responsible Party
■ Intended Users
■ Example: P: Auditor, RP: Client, IU: Public
○ An appropriate subject matter (S)
■ Financial, Non-Financial, Physical Characteristics, Systems and Processes, Behavior
■ What is being asserted
■ Client → Responsible for the FS
■ Auditor: Express opinion
○ Suitable criteria (C)
■ Benchmarks used to evaluate or measure the subject matter (For FS → PFRS)
■ Characteristics: (R-U-N-C-R)
● Relevance (R)→ timeliness, how it responds to the sign of the times
○ Ex: Attribute it further to the FV accounting
● Completeness(C)→ Complete criteria include, where relevant, benchmarks for
presentation and disclosure
●
●
●
○
Reliability(R) → verifiability
○ Ex: Attribute to the cost model
Neutrality(N)
Understandability(U) → clear, comprehensive, and not subject to significantly
different interpretations, accepted
Sufficient appropriate evidence (E)
■ Sufficient → Quantity
■
Appropriate → Quality
■
Reliability of evidence is influenced by its source and by its nature, and is dependent on the
individual circumstances under which it is obtained. Even when evidence is obtained from
sources external to the entity, circumstances may exist that could affect the reliability of the
information obtained.
■ Audit procedure : meant to provide sufficient and evident evidences
■ Sufficient + Appropriate = Persuasive
○ A written assurance report in the form appropriate to a reasonable assurance engagement or a limited
assurance engagement (R)
2. Types (audits, reviews, other assurance engagements)
● Classification of AE
● Criterion 1: Level of Assurance
○ 0% No Assurance - 100% Absolute
○ Reasonable Assurance Engagement - Close to Absolute
■ Positive Form of Expression
○ Limited Assurance Engagement - Middle close to no assurance
■ Negative form of expression
○ No Assurance - Limited - Reasonable - Absolute
○ Audit of FS - Reasonable (high but not absolute assurance); positive assurance
○ Review of FS - Limited; negative assurance
● Criterion 2: Structure (Check page 5, IFAE)
○ Attestation Engagement/Assertion-Based
■ Both the Audit and Review of FS
■ Audit is an attestation with structure and reasonable and positive with the level of assurance
■ Also assurance
■ The evaluation or measurement of the subject matter is performed by the responsible party,
and the subject matter information is in the form of an assertion by the responsible party that
is made available to the intended users.
○ Direct Engagement
■ No assertion
■ Responsible for the subject matter
■ Practitioner either directly performs the evaluation or measurement of the subject matter, or
obtains representation from the responsible party that has performed the evaluation or
measurement that is not available to the intended users. The subject matter information is
provided to the intended users in the assurance report
3. Assurance vis-a-vis attestation services
B. Auditing (Auditing Theory) - PSA 200
1. Nature, philosophy, and objectives
● PSA Defines auditing by stating the objective of a FS Audit:
○ Enable the auditor to express an opinion on whether the FS are prepared, in all material respects, in
accordance with the applicable financial reporting framework
● American Accounting Association:
○ An audit is a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between these assertions and established criteria and communicating the results to interested
users.
○ AAA - process oriented
○ Yellow - Investigative process → being a critical practitioner
○ Green - Reporting process
● Systematic Process
●
●
●
●
●
●
●
●
●
●
●
●
○ Logical, structured, organized, steps to be undertaken to achieve purpose (conclusion = opinion)
Assertions - Financial Statements
Establish Criteria - GAAP(PFRS)
○ Whether the company is complying with GAAP or IFRS
Communicating the results
○ Written IAR
Conveys the following thoughts:
○ Auditing is a systematic process
○ An audit involves obtaining and evaluating evidence about assertions regarding economic actions and
events
○ An audit is conducted objectively
○ Auditors ascertain the degree of correspondence between assertions and established criteria
○ Auditors communicate the audit results to various interested users
Audit of FS: Assurance and Attestation Engagement
PSA 200
PSA 200 Section 3
○ MGT (FS) === Practitioner (CPA) ///// IU (Public)
○ MGT (FS)Information Asymmetry - difference between what really is happening vs the difference
what the public knows to the client
■ Should be symmetrical to come up with a sound decisions
○ The farther the IU from the MGT, the level of information asymmetry increases
○ Requirements: Independence, ethics, competence (I-C-E) to be an auditor - need “eyes, ears (listen)”
○ At the end of the day the mgt is responsible for their FS
PSA 200 Section 4
○ Client → BOD (has an oversight over the MGT) = Management
■ Audit committee engages CPA
○ PSAs are for the CPAs not for the client
PSA 200 Section 5
○ Not conclusive but persuasive (S+A)
○ Reasonable assurance
○ Audit risk: mistake on giving unqualified or unmodified opinion
○ Free from material misstatement (due to fraud or error)
PSA 200 Section 6
○ Materiality
■ Auditing - Information material or not
● Used as a modifier
● Misstatements - could be standalone or aggregate
● Fraud : intentional
● Error: not intentional
PSA 200 Section 7
○ Professional judgment - not based on personal judgment, but from a criteria
○ Professional skepticism - procedures to come up with a conclusion whether to believe something or
not
○ Misstatement
Applicable financial reporting framework
○ Fair presentation framework
■ PFRS
○ Compliance framework - comply to a certain provision
■ Ex: Cash Basis Report
■ Used for taxation purposes
●
PSA 200 Section 8
○ Opinion = Written auditor’s report
● PSA 200 Section 9
○ Other communication and reporting responsibilities
2. Types as to nature of assertion (FS, operational, compliance)
● Criterion 1: As to nature
○ Financial Statement Audit
○ Compliance audit - adhered to laws, specific procedures, rules, or regulations
■ Ex: Tax compliance, employee benefit compliance
○ Operational Audit
■ Efficiency and Effectiveness
■ Assess entity’s performance, identify areas for improvements and make recommendations to
improve performance
■ Ex: Appraisal of performance
3. Types as to auditor (external, internal, government)
● Criterion 2: As to auditor
○ External Auditors or Independent Auditors
■ FS Audit
■ There is independence from the responsible party
○ Internal Auditors
■ Performs operation audit
■ Employee of the responsible party
○ Government Auditors → Check the mandate - review for SA
■ Conduct compliance audits
■ Employee of the government
■ Government (www.coa.gov.ph)
● FS Audit
● Compliance
● Operational Audit (Performance Audit)
● Economy and Efficiency Audit
● Effectiveness Audit
C. Other Services and Reports
● PSA, PSAE, PSRE
○ Depends on the type or nature of service
Assurance
Assurance Engagements Other Than Audits or Reviews of
Historical Financial Informations
The Examination of Prospective Financial Information
(PSAE 3400)
Review
Attestation Agreements
Prospective FS
Bookkeeping
- Analyze business transactions
- Journalizing
- Posting
Non-Assurance
Compilation (PSRS 4410) and Preparation
Agreed-upon engagements (PSRS 4400)
- Trial Balance
Accounting [Compilation] → if you compiled you cannot audit
- Adjusting Entries
- FS
*********
Auditing [Assurance]
Theoretical Framework of auditing
- Audit function operates on the assumption that all financial data are verifiable
- Auditor should always maintain independence with respect to the financial statements under audit
- There should be no long-term conflict between the auditor and the management
- Effective internal control system reduces the possibility of material misstatement
- Consistent application of the applicable financial reporting framework such as the PFRS
- What was held true in the past will continue to hold true in the future in the absence of known conditions to the
contrary
- An audit benefits the public
Unit III - The Public Accounting Practice
A. Management of public accounting practice
Top 10 Accounting firms in the world (by revenue)
Global
Philippine Counterpart
Deloitte (47.6 B)
Navarro, Amper & Company (BGC)
PwC (43B)
Isla Lipana & Co. (Makati)
Ernst & Young (37.2B)
SyCip, Gorres, Velayo & Co. (Makati)
KPMG (29.75B)
RG Manabat & Co. (Makati)
81.75% of the total revenue
BDO (10.3B)
Roxas, Cruz, Tagle & Co. (Makati)
RSM (6.3B)
Reyes, Tacandong & Co. (Makati)
Grant Thornton (5.72B)
Punongbayan & Araullo (Makati)
Nexia International (4.5B)
Maceda Valencia & Co. (Makati)
Crowe Horwath (4.3B)
Ramon F. Garcia & Co. (Makati)
Baker Tilly (4.04B)
Constantino & Partners (Makati)
18.25% of the total revenue
1. Characteristics of public accounting practice
● Philippines - Revenues:
○ BIG - Top 4 Firms
○ MEDIUM - Top 6-10 Firms
○ SMALL - Sole Practitioners
● Cash Flows (bulk of clients are practicing calendar year)
○ June
○ Jul
○
○
Aug
Sep
○ Oct
50%
○ Nov
○ Dec
○ Jan
○ Feb
○ Mar
○ April
4/15 BIR
○ May
50%
2. Nature of Services and Operations
● Services
○ Assurance
○ Advisory
○ Tax
○ Others
● Set-Up
○ Sole proprietorship [BIR, LGU, BFP, GMDs, accreditation requirements (PRBOA, BIR,CDA, etc)] or
Partnership [SEC, BIR (diff. TIN), GMDs, accreditation requirements (PRBOA, BIR,CDA, etc)
○ 3 years of meaningful experience
○ SEC - SOAR
○ SEC Memorandum Circular No. 13 Series of 2009
■ Accreditation under Group A shall be considered a general accreditation which shall allow the
external auditor to also audit companies under Groups B,C, and D. External Auditors with Group B
accreditation can likewise audit companies under Groups C and D. Accordingly, Group C accredited
external auditors are allowed to audit Group D companies.
3. Structure
● Partner - signs audit reports , client acceptance and retention (market: getting the client)
● Manager - liaises partner and associates (senior & junior), audit plan
● Senior - performs complex audit procedures
● Associate - performs usual auditing procedures
● Problem : employee turnover or attrition
4. Quality Control
● Current: ISQC1(QC for Firms that Perform Audits and Reviews of FS and Other Assurance and Related Services
Engagements), ISA220
○ QC for Accountants
● New: [ISQM1, ISCM2, ISA220 (revised)] → December 15, 2022 → Outcome: Firm level
○ ISQM1 - Quality Management for Firms that Perform Audits and Reviews of FS and Other Assurance and
Related Services Engagements
■ For everyone
○ ISQM2 - Engagement Quality Review
■ Audits of Financial Statements of listed entities
■ Required by law or regulation
■ Determined by the firm
○
Components of QC (ISQC1) (HARLEM)
■ Relevant Ethical Requirements
■ Human Resources
■ Acceptance and Continuance of Client Relationships and Specific Engagements
●
■ Relevant Ethical Requirements
■ Leadership Responsibilities for Quality within the Firm
■ Engagement Performance
■ Monitoring
○ Components of QM (ISQM1) - MARRRIGE, GRRRAMIE
■ Resources (human, technological, intellectual, service providers)
■ Acceptance and Continuance of Client Relationships and Specific Engagements
■ Engagement Performance
■ Relevant Ethical Requirements
■ Governance and Leadership
■ Monitoring and Remediation Process
■ Information and Communication
■ Risk Assessment Process
ISA 220: Quality Management for an Audit of Financial Statements
○ Old ISA 220 (QC) → Respect to HARLEM
○
New ISA 220 (QM) → Respect to GRRRAMIE
■ Outcome: Engagement Level
■ Risk & Info not explained much because it is automatic to the firm
B. The FS Audit
1. Generally Accepted Auditing Standards → promulgated by the BOA that establish required level of quality
for performing financial statement audits
General Standards (TIP) → who the auditor is
○ Technical training and proficiency
○ Independence
○ Professional Care
● Standards of Fieldwork (PIE) → How? Process
○ Plan
○ Internal Control
○ Evidence
● Standards of Reporting (GIDO) → What? Included in the IAR
○ GAAP
○ Inconsistencies
○ Disclosure
○ Opinion
2. Regulatory Agencies
3. Clients with listed parents in the US
● Sarbanes-Oxley Act of 2002 [PCAOB]
○ Enron
○ Arthur Andersen (x)
○ Public Company Accounting Oversight Board
○ Prohibited public accounting firms from performing any client services in which the auditors may find
themselves making managerial decisions or auditing their own firm’s work
○ Paul Sarbanes - Senator (D)
○ Michael Oxley - Congress ®
○ Pres. George W. Bush ®
○ Prohibited Services
■ Bookkeeping
■ Information systems design and implementation
●
○
■ Appraisal or valuation services
■ Actuarial services
■ Internal audit services
■ Management or HR functions
■ Broker/dealer/investment bank services
Self-review threat, familiarity → intimidation, self interest, advocacy
Philippines → Corporate Reform Act
○ Rep. Lapus
○ Sen. Osmena
○ Pres. GMA
○ SEC (management of corporations, Code of Corporate Governance. Accreditation), SOAR
○ QRC = QAR
4. Audit Fees and Billing
● Client - Request for proposal
● CPA - prepare a proposal , once approved [engagement letter → contract of service]
○ Auditor: owner of the letter
● Fee: No. of hours to achieve the objective
● Ex:
●
Php 135,000 x 1.12 = Php 151,200; 40% upon signing of EL, 40% progress billing, 20% final
OPE 10% (for reimbursement)
● Volume of audit work and degree of competence and responsibilities involved
● Audit Fees - professionalizes our practice
● Methods of billing - term of reference is important ! (Engagement Letter)
○ Per Diem Basis (or actual time charges basis): billing is done on the basis of actual time spent by the staff
multiplied by the hourly rate agreed upon
○ Retainer fee basis : the auditor is paid a fixed predetermined fee for all services rendered during a designated
period of time either on a monthly, semi-annual or annual basis
■ You can never have change overnight (gradual); manners matter
■ Establish relationship with clients → prudence
○ Flat or fixed fee basis: The client is billed a flat but all-inclusive pre-arranged amount for the entire
engagement
○ Maximum fee basis - the client is charged on a per diem basis, with the agreement that the total charges will
not exceed a certain agreed maximum amount
Unit V. Planning → Engagement Performance
A. Understanding client’s business and industry
● PSA 300: Planning an Audit of Financial Statements
○ Recurring Audits; Initial Audit (A1 - A4)
○ Initial Audit: (A2) Key engagement team members’ previous experience with the entity
○ Effective; efficient → audit procedures achieve/met audit objective
■
Input = output → effective
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Audit Strategy (KPMG Methodology)
Audit Plan (specific to the engagement) - determine the scope of the audit procedures to be performed
■ Audit objectives
■ Audit procedures (RAP, FAP, Other procedures) = list of audit procedures (audit program)
Audit team (has to be identified)
■ A5 → PSA 315; PSA240 (The Auditor’s Responsibilities Relating to Fraud in an Audit of FS)
■ Express an opinion and to gather sufficient and appropriate evidence and not to look for fraud..
However, you have an obligation to elevate once fraud is discovered through the process
■ Fraud may exist
Preliminary Engagement Activities
■ Performing procedures required by PSA 220 regarding the continuance of the client relationship and
the specific audit engagement
■ Evaluating compliance with ethical requirements
■ Establishing an understanding of the terms of the engagement
Planning Activities
■ Audit Strategy before Audit Plan
● Identify the characteristics of the engagement that define its scope;
● Ascertain the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required
● Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts
● Consider the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant
● Ascertain the nature, timing and extent of resources
■
○
You cannot audit something you don’t know → initial audit is more difficult than recurring
audit
■ The objective of the auditor is to plan the audit so that it will be performed in an effective manner
■ Plans should be solid and full in the planning stage not during the procedures stage.
● Test of Control, reperformance, recalculation, etc. will be done during the further audit
procedures for the purpose of ascertaining the adjusted balance, determining the
misstatements
● Risk assessment is being performed before further audit procedures
● Audit plan should be complete in itself
■ Audit plan shall include a description of the:
● Nature, timing and extent of planned risk assessment procedures
● Nature, timing and extent of planned further audit procedures at the assertion level
● Other planned audit procedures that are required to be carried out so that the engagement
complies with PSAs
Documentation [PSA 230] → Should be done from beginning to end
■ Audit strategy
● After gaining sufficient understanding about the entity and its environment and its internal
controls, the auditors should formulate an overall audit strategy. Best audit strategy is the
approach that results in the most efficient audit, which is an effective audit performed at the
least possible cost.
● An audit plan should be made regard
○ How much evidence to accumulate
○ What are the procedures to be performed
○ When should the procedures be performed
■
○
○
Audit plan - overview of the expected scope and conduct of the audit. The overall audit plan sets out
in broad terms the nature, timing, and extent of the audit procedures to be performed. It should be
sufficiently detailed to guide in the development of an audit program.
■ Significant changes
Initial Audit Engagements
■ PSA 220
■ Communication with predecessor
● Current auditor is called the successor auditor
● A21 - Unless prohibited by law or regulation, arrangements to be made with the PA
● Approach the client first [SA → Client → PA]
● What if Client says no?
○ Don’t proceed → treat it as a red flag → something is hidden
○ Scenario 1: Agree with the disagreements of PA which Client doesn’t want you to
disagree on
○ Scenario 2: PA may be wrong, Client may be right
What if you are not competent because you are not aware of the industry? Don’t turn it down →
PSA 620 (Using the work of an auditor’s expert)
●
●
PSA620
○ Auditor’s Expert → should be I-C-E
■ 9 - necessary competence, capabilities and objectivity [A14 & A15]
○ Evaluating the auditor’s expert
■ Assess the competence and objectivity
■ Understand the field of the expertise of auditor’s expert
■ Establish the terms of the agreement with the expert
■ Evaluate the results of the work of the expert
○ Evaluating Management’s Expert
■ Evaluate the competence, capabilities and objectivity
■ Obtain an understanding of the experts’ field
■ Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion
PSA230
○ Audit Documentation is housed in the auditor’s working papers and the property of the auditor
■ Evidence for opinion
■ Evidence that the audit was planned and performed
B. Performing preliminary analytical procedures
● Consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and
relationships that are inconsistent with other relevant information or deviate from predictable amounts
C. Materiality
1. Financial statements as a whole
2. Performance materiality - The reduced level of materiality which the auditors use both at the financial
statement and account balance level
- Lower level of materiality in the performance of the audit, the extent of the audit procedures is increased
thereby reducing the risk that the amount of uncorrected and undetected misstatements will exceed the
overall materiality.
● PSA320 & PSA450
○ Why is materiality considered in planning? How do we view materiality now that we are in audit in contrast
with financial accounting?
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.
D. Audit strategy and audit program
1. Audit risk model = Glossary/PSA 315
● AR = IR x CR x DR
● RMM = Risk of material misstatement = IR x CR (risk prior to the coming in of the auditor)
● 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)
● Inherent Risk
2. Types of tests
3. Selection of tests
4. Evidence mix
E. Other planning considerations
1. Client
2. Client’s internal auditor
3. Expert
● PSA`
○ Client has an internal audit department → more chances of having low risks only
○ As long as there is employee-employer relationship, there can be no independence
● Audit Program - Develop an AP that sets out the nature, timing and extent of planned audit procedures required to
implement the overall audit plan. In effect, the audit program executes the audit strategy. It sets out in detail the audit
procedures to be performed in each segment of the audit.
Unit VII. Further Audit Procedures (Tests of Controls) → ISA 315 and 330
A. Responses to assessed risks
● Post-RAP → Preliminary Assessment of control risk (PACR) is either high (max; “bad”) or less than high
●
●
●
●
●
●
●
●
●
(“good”)
What is next (response)? FAP [tests of controls (reliance method/approach) or substantive tests (no reliance
method/approach)]
High → Situation C - Everything is substantive test → there is nothing to validate
Less than high → Test of controls - Situation B, A, & D
Reliance of C = High - High = 0 (All are ST)
Reliance of B = High - (LTH) > 0 (TOC and ST)
Reliance of A = High - (LTH) > 0 (TOC and ST)
Reliance of D = High - (LTH) > 0 (TOC and ST)
Reducing the CR → decreasing the ST → Green arrow
Ex:
○ Reliance Before = 100 - (30) = 70
○ (Scenario 1) Reliance After = 100 - (30) = 70
○
(Scenario 2) Reliance After = 100 - (10) = 90 → to the right → ST will decrease → objective is to
decrease CR, so that ST will be less
●
●
●
●
●
●
●
●
●
○ (Scenario 3) Reliance After = 100 - (40) = 60 → to the left → ST will increase
More than asymptotic
Required to do ST
After obtaining an understanding and documenting the entity’s internal control, the next step is to assess the level of
control risk. Shown in the figure of the further audit procedures are different situations on what needs to be
performed to test the controls. The auditor’s preliminary assessment of control risk could either be high level or less
than high level. Situation C shows a high level of control risk, therefore no test of controls need to be performed and
will rely on substantive tests. Situations B, A, and D on the other hand show a less than high level of control risk.
Given the reliance of B, A, and D, which is greater than 0 when the reliance is less than the preliminary assessment of
control risks, the auditor shall perform tests of controls and substantive tests. It is a requirement to conduct
substantive tests whether the assessment of control risk is either high or less than high. The curve will never touch the
x-axis as it goes to the right. This conclusion by the auditor on B, A, and D would mean that it is more efficient to rely
on the entity’s internal control system. The auditor should first identify specific internal control policies or procedures
that are likely to prevent, detect and correct material misstatement and second perform the test of control to
determine the effectiveness of the entity’s policies and procedures right before the auditor moves on to substantive
tests. On testing the controls, the lower the assessment of control risk, the more support the auditor should obtain
that the internal control is suitably designed and operating effectively, therefore the greater the reliance the auditor
plans to place on internal control, the more extensive the tests of those controls that need to be performed.
315 → Assesses; 330 → Response
RAP (less expensive) vs FAP (more expensive)
TOC (less expensive) vs ST (more expensive)
Analytical procedures (RAP,ST) [least expensive] , Test of Controls, Test of Details [most expensive]
Substantive tests
○ Test of details
○ Analytical procedures in FAP → not required → if used, there should be a corroborating (additional)
procedure → for it to have an evidence that is persuasive
AR / (IR x CR) = DR
○ IR and DR → Inverse
○
CR and DR → Inverse
○
○
IR and CR → Direct
If there is an increase in IR, then decrease the DR. Therefore, you will perform more effective ST, gather
more evidence by increasing the sample size.
■ Decreased DR → improving performance to conduct the test
If there is an increase in CR, then you shall decrease DR. Therefore, you will perform more effective ST,
gather more evidence by increasing the sample size.
○
○
If there is a decrease in IR, then you can now afford to increase DR. Therefore, you can afford to perform
less effective substantive tests, gather less evidence by decreasing the sample size.
○ If there is a decrease in CR, then you can now afford to increase DR. Therefore, you can afford to perform
less effective substantive tests, gather less evidence by decreasing the sample size.
○ If there is an increase in IR, then you shall expect an increase in CR.
○ If there is an increase in CR, then you shall expect an increase in IR.
○ If there is an decrease in IR, then you shall expect an decrease in CR.
○ If there is an decrease in CR, then you shall expect an decrease in IR.
B. Tests of controls
● Internal Control - process designed and effected by those charged with governance, management and other personnel
to provide reasonable assurance about the achievement of the entity’s objective with regard to reliability of financial
reporting, effectiveness, and efficiency of operations and compliance with applicable laws and regulations
● Four essential concepts
○ Internal control is a process → means of achieving the entity’s objectives and not an end
○ Internal control is affected by those charged with governance, management and other personnel
○ Internal control can be expected to provide reasonable assurance of achieving the entity’s objectives
→ There are inherent limitations that may affect the effectiveness of the internal control. (fraud,
○
collusion, management overriding)
Internal control is designed to help achieve the entity’s objectives
■ Operational Objective → effectiveness and efficiency of operations
■
Compliance Objectives → Compliance with relevant laws and regulations
■
Financial Reporting Objectives → Reliability of financial reporting (only concern of the
policies and procedures within the accounting and internal control systems that are relevant
●
to the FS assertions)
Components of IC
○ Control environment → attitudes, awareness, and actions of management and those charged with
○
○
○
governance
■ Foundation for effective internal control providing discipline and structure
■ Factors reflected in the control environment:
● Integrity and ethical values
● Management philosophy and operating style
● Active participation of those charged with governance
● Commitment to competence
● Personnel policies and procedures
● Assignment of responsibility and authority/organizational structure
Risk assessment → auditor is concerned with those risks that are relevant to the preparation of a
reliable financial statement
Information and communication systems
■ Information systems - consists of the procedures and records and to maintain accountability for the
related assets and liabilities
■ Communication - understanding of individual roles and responsibilities pertaining to internal control
over financial reporting
● Open communication → ensure that exceptions are reported and acted on
Control Activities → policies and procedures that help ensure that management directives are carried
out
■
Performance reviews
●
■ Information processing
■ Physical controls
■ Segregation of duties
○ Monitoring → process of assessing the quality of internal control performance over time
Consideration of IC
○ Obtaining understanding of the IC
■ Evaluating the design of a control → whether the control is capable of effectively preventing,
○
○
○
○
detecting and correcting material misstatements.
■ Whether it has been implemented
■ Walk-through test - involves tracing one or two transactions through the entire accounting systems
from their source to being a component of an account balance in the financial statements
■ Understanding should be adequate enough to:
● Identify the types of potential misstatement that can occur
● Consider factors that affect the risk of MM
● Design the nature, timing and extent of audit procedures to be performed
Documenting the understanding of accounting and IC systems
Assessing the level of CR
■ High level → No TOC and the auditor will primarily rely on substantive tests
■ If auditor believes that controls appear to be reliable, the auditor should determine whether it is
efficient to obtain the evidence to justify an assessment of CR to a lower level
● Less than high level → TOC
○ Identify specific internal control policies or procedures that are likely to prevent,
detect or correct MM
○ Perform TOC to determine the effectiveness
Performing TOC
■ Performed to obtain evidence about the effectiveness of the:
● Design of the accounting and internal control systems
● Operation of the internal controls throughout the period
■ Auditor should obtain SAE to support any assessment of control risk at less than high level
● The lower the assessment of CR, the more support the auditor should obtain that the IC is
suitably designed and operating effectively
● The greater the reliance the auditor plans to place on IC, the more extensive the TOC that
needs to be performed
■ Nature, Timing and Extent
■ Conclusion reached as a result is the assessed level of control risk
● Used the assessed level of CR and IR to determine the acceptable level of DR
Documenting the assessed level of CR
■ CR → High level → Document his conclusion that control risk is at a high level
■
CR → Less than high → Document his conclusion that control risk is less than high and the
basis (results of TOC) for that assessment. The auditor cannot assess CR at less than high
level without performing TOC
1. Nature, timing and extent
● Also called the reliance method
● An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting
and correcting, material misstatements at the assertion level
● Why test of controls?
○ Validate if PACR is supported / correct
○ Reduce CR
● ISA 315 → Auditor
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IR & CR → client
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DR → Auditor’s
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DR Plan → Auditor
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Responses to the DR → Auditor
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Objective → either reliance or no reliance method is allowed
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ST procedures are required → True
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TOC is always required → False
A1 - Making general changes to the nature, timing or extent of audit procedures, for example:
performing substantive procedures at the period end instead of at an interim date; or modifying the
nature of audit procedures to obtain more persuasive audit evidence.
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Period end - January - December
Interim date - Shorter period e.g. quarterly
When is it effective to do it at year end/interim (timing)?
● A - Internal Control is not that okay → year end
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B - Internal Control is okay → interim because the situation is less risky
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A2 - The assessment of the risks of material misstatement at the financial statement level, and thereby
the auditor’s overall responses, is affected by the auditor’s understanding of the control environment.
An effective control environment may allow the auditor to have more confidence in internal control
and the reliability of audit evidence generated internally within the entity and thus, for example, allow
the auditor to conduct some audit procedures at an interim date rather than at the period end.
Deficiencies in the control environment, however, have the opposite effect; for example, the auditor
may respond to an ineffective control environment by:
■ Conducting more audit procedures as of the period end rather than at an interim date.
■ Obtaining more extensive audit evidence from substantive procedures.
■ Increasing the number of locations to be included in the audit scope.
■ Control environment → client
A3. Such considerations, therefore, have a significant bearing on the auditor’s general approach, for
example, an emphasis on substantive procedures (substantive approach), or an approach that uses tests
of controls as well as substantive procedures (combined approach).
A5 - The nature of an audit procedure refers to its purpose (that is, test of controls or substantive
procedure) and its type (that is, inspection, observation, inquiry, confirmation, recalculation,
reperformance, or analytical procedure). The nature of the audit procedures is of most importance in
responding to the assessed risks.
■ Inquiry
■ Observation
■ Inspection
■ Reperformance
A6 - Timing of an audit procedure refers to when it is performed, or the period or date to which the
audit evidence applies. (e.g. spot check)
A7. Extent of an audit procedure refers to the quantity to be performed, for example, a sample size
or the number of observations of a control activity.
A8. Designing and performing further audit procedures whose nature, timing and extent are based
on and are responsive to the assessed risks of material misstatement at the assertion level provides a
clear linkage between the auditor’s further audit procedures and the risk assessment.
We are doing audit procedures because we have audit objectives → assertions
A12 - Interim
A13 - Year End
A18 - Small entity → Substantive Test
Reliability of source of evidence:
Assertion level → Financial Statement Assertions (check glossary of terms)
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Audit objectives → audit procedures)
Three levels
■ Sales
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■ Purchase
■ Finance/Invest
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
Tendency of client:
○ Assets - overstate → existence assertion
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Liabilities - understate → completeness
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Revenues - overstate → existence assertion
○ Expenses - understate → completeness
○ Accuracy and Valuation (e.g. depreciation, fair value)
○ Rights and Obligations (e.g. leases, biological assets)
P8b - Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level (A20A24)
○ A23 - Dual Purpose Test → Substantive tests of transactions(test of controls and substantive
procedures at the same)
○ *focus for ASR is non-IT
Example Controls:
○ Revenue Cycle
■ New client → check creditworthiness
■ Inventory Availability
■ Consider the movement from one department to another
Expenditure
■ Need for the inventory to be placed → to avoid overstock
■ Supplier has to be dependable
■ Control in identifying your supplier
Tracing and Vouching
○ Tracing forward - traces from the source documents to the accounting records is performed
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primarily to test for understatement → completeness
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overstatement of an account
Nature and Extent of Tests of Controls
○ There’s a design and an implementation (e.g. control of DLSU on authorized entry → ID entry
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Vouching - performed primarily in order to satisfy the existence/occurrence assertion → possible
system; cash advance and liquidation)
Expected rate of deviation
■ e.g. all cash advance transactions should be liquidated
Test of Controls - deviations; Substantive tests - misstatements
Audit Sampling - how big or small the sample size is to warrant a conclusion that can be generalized
to a population → game of quantity
■ Directly relates to the evidence
If there have not been such changes, the auditor shall test the controls at least once in every third audit.
Controls that have changed from previous audits
○ Changes may affect the relevance of the audit evidence obtained in previous audits such that there may no
longer be a basis for continued reliance.
Controls that have not changed from previous audits
○ The auditor’s decision on whether to rely on audit evidence obtained in previous audits for controls that:
■ (a) have not changed since they were last tested; and
■ (b) are not controls that mitigate a significant risk,
is a matter of professional judgment.
Deviations from prescribed controls may be caused by such factors as changes in key personnel, significant seasonal
fluctuations in volume of transactions and human error. The detected rate of deviation, in particular in comparison
with the expected rate, may indicate that the control cannot be relied on to reduce risk at the assertion level to that
assessed by the auditor.
Substantive Procedures
○ 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.
○ The auditor shall perform substantive tests that are specifically responsive to identified risks.
○ Failing to obtain sufficient appropriate evidence as to a material financial statement assertion, express a
qualified opinion.
Example Controls:
○ Revenue Cycle
■ New client → check creditworthiness
■ Inventory Availability
■ Consider the movement from one department to another
○ Expenditure
■ Need for the inventory to be placed → to avoid overstock
■ Supplier has to be dependable
■ Control in identifying your supplier
PSA 500 - Audit Evidence
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Sufficiency - quantity
■ quality (appropriateness) affects sufficiency
Inspection - A14 -16
■ Involves examining records or documents
■ Provides audit evidence of varying degrees of reliability
■ Evidence of authorization
● Ex: acquisition of PPE (authorization can be found usually in the minutes of the meeting,
present title)
■ Some documents represent direct audit evidence of the existence of an asset, for example, a
document constituting a financial instrument such as a stock or bond. Inspection of such documents
may not necessarily provide audit evidence about ownership or value. Inspecting an executed
contract may provide audit evidence relevant to the entity’s application of accounting policies, such
as revenue recognition.
■ Inspection of tangible assets may provide reliable audit evidence with respect to their
existence → observe the physical taking of the inventory
○ Observation
■ Consists of looking at a process or procedure being performed by others
■ Limited to the point in time at which the observation takes place, and by the fact that the act of being
observed may affect how the process or procedure is performed
○ External confirmation
■ Represents audit evidence obtained by the auditor as a direct written response to the auditor from a
third party in paper form, or by electronic or other medium
■ Relevant when addressing assertions associated with certain account balances and their element
■ Used to obtain audit evidence about the absence of certain conditions
○ Recalculation
■ Consists of checking the mathematical accuracy of documents or records.
■ May be performed manually or electronically
○ Reperformance
■ Independent execution of procedures or controls that were originally performed as part of the
entity’s internal control
○ Analytical Procedures
■ Consists of evaluations of financial information made by a study of plausible relationships among
both financial and non-financial data.
■ Encompass the investigation of identified fluctuations and relationships that are inconsistent with
other relevant information or deviate significantly from predicted amount
■ May be used for the following purposes:
● As a planning tool, to determine the nature, timing, and extent of other auditing procedures
● As a substantive test to obtain corroborative evidence about particular assertions related to
the account balance or transaction class or
● As an overall review of the FS in the completion phase of the audit
○ Inquiry
■ Seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or
outside the entity.
■ May range from formal written inquiries to informal oral inquiries
■ Inquiry is used extensively throughout the audit in addition to other audit procedures
PSA 505 - External Confirmations
○ Audit evidence is more reliable when obtained from independent sources outside the entity, obtained directly,
and when in documentary form.
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Positive confirmation request - A request that the confirming party respond directly to the auditor indicating
whether the confirming party agree or disagree with the information in the request, or providing the
requested information
■ Favorable over negative confirmation request
■ Risky - positive confirmation request; less risky - negative confirmation request
○ Negative confirmation request - respond directly to the auditor only if the confirming party disagrees with the
information provided in the request
○ No Response - failure of confirming party to respond; follow-up on the request
○ Exception → do additional procedures
Tracing and Vouching
○ Tracing → satisfy completeness
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Vouching → satisfy existence
Context of direction, assertion, and tendency
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PSA 260
PSA 265
Unit 9 Audit Sampling
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Auditor is required to obtain SAE to be able to draw conclusions on which to base the audit opinion
In forming the audit opinion, the auditor does not normally examine all evidence available → draw
conclusions about the account balance or transaction class by examining only a sample evidence
PSA 530
● Audit sampling - the application of audit procedures to less than 100% of the items within an account balance or class
of transactions such that all sampling units have a chance of selection
● Not all testing procedures performed by auditors involve audit sampling
○ Auditor may decide that it would be more appropriate to examine the entire population of items that make up
an account balance since the population constitutes a small number of large value items
○ May decide to apply audit procedures only to those items which have particular significance
● Regardless, the auditor needs to be satisfied that SAE is obtained to meet the objectives of the test
● Auditor is faced with an uncertainty of not detecting material errors in an account balance or class of transactions.
● TOC
○ Okay, and okay → correct decision
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Not okay and is really not okay → correct decision
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Okay but is actually not okay → Incorrect decision
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Called risk of assessing control risk too low → overreliance
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Beta risk → Type 2 error and auditor has to look on this more
● In the case of TOC, the auditor concludes that the internal control is effective when in fact it
is not effective and cannot be relied upon
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In the case of ST, the auditor concludes that there is no MM when in fact it does exist (RO
Incorrect Acceptance)
● Effectiveness
Not okay but is actually okay
■ Underreliance and you already did ST → not efficient
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Alpha risk → in the case of TOC, the auditor concludes that the internal control is not
effective, but in fact effective and can be relied upon (ROU); on ST, the MM exists in an
account balance or transaction when in fact such misstatement does not exist (RO Incorrect
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Rejection)
● Efficiency
You will be more concerned on the effectiveness → more critical → not effective will lead to audit
conclusion/opinion
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Substantive Testing → misstatement of amount
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Efficiency → only resources will be harmed
Okay but is actually okay → incorrect acceptance; not effective
○ Not okay but is actually okay → not efficient
We should be more concerned about the beta risk
Control Sample risk by
○ Increasing the sample size and
○ Using an appropriate sample selection method
○ Becomes more representative of the population, thus decreasing the sample risk
Non-Sampling risk can be minimized by
○ Proper planning
○ Adequate direction, review, and supervision of the audit team
Basic steps in Audit Sampling
● C → increasing allowable risk , perform TOC but the number as to which you will perform on may be decreased
Examples of Factors Influencing Sample Size for Test of Controls
Sampling for TOC
Factors affecting the determination of sample size for TOC (ATE)
● Acceptable Sampling Risk
○ There is an inverse relationship between the acceptable risk and sample size. The smaller the sampling risk the
auditor is willing to accept, the larger the sample size would be.
● Tolerable Deviation
○ There is an inverse relationship between the tolerable deviation and the sample size. A decrease in the TD Rate will
cause the sample size to increase.
● Expected Deviation Rate
○ Direct effect on the sample size. The larger the expected population deviation rate, the larger the sample size
would be.
○ EPDR should not exceed the tolerable deviation rate.
Selection Method
● Random Number Selection - auditor selects the sample by matching random numbers, generated by a random number table or a
computer software generator, with the population numbering system such as document number. Gives each item in the
population an equal opportunity to be selected.
● Systematic selection - involves determining a constant sampling interval and then selects the sample based on the size of that
interval
● Haphazard selection - sample is selected without following an organized or structured technique
○ Useful for Non-statistical sampling, but it is not used for stat sampling → cannot measure the probability of an
item being selected when using this method
Sampling for ST
● Audit sampling is used when performing tests of details to estimate the amount of misstatements in the financial statements
Factors must be considered in determining sample size: (ATEV)
● Acceptable Sampling Risk
○ Auditor uses the acceptable level of DR as the acceptable sampling
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There is an inverse relationship between the acceptable sample risk and the sample size; the lower the risk the auditor
accepts, the larger the sample size must be
● Tolerable Misstatement
○ There is an inverse relationship between the tolerable misstatement and the sample size; A smaller measure of
tolerable misstatement will cause the sample size to increase
● Expected misstatement
○ Determined based on the results of prior year’s substantive tests or pilot sample
○ An increase in the amount of misstatement that the auditor expects to be present in the population will cause
the sample size to increase
● Variation in the population
○ A larger sample size is required as the degree of variability within the population increases.
Sample Selection Method
● Stratified Sampling - dividing a population into sub-populations
○ Auditor may stratify the population into meaningful groups in order to decrease the effect of variance within the
population.
○ Useful to the auditor when performing substantive test because:
■ It decreases the effect of variance and as a result decreases the sample size
■ Allows the auditor to give more emphasis to those items with higher monetary value
● Value weighted selection - the probability of an item to be selected in this method of selection is directly proportional to the
monetary value of such item
Examples of Factors Influencing Sample Size for Test of Details
Unit XI Report on the Audit of Financial
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The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting framework
Listed - Mandatory
Non-Listed - Not Mandatory
Key take-aways
○ ABIOKEEP
■ Applicability
■ Basis for Opinion Paragraph
■ Independence → Explicit
■ Opinion Section
■ Key Audit Matters
■ Ethics
■ Enhanced Communicative Value
■ Partner
Opinion is unqualified → no need to put “unqualified”
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Last day of Fieldwork → date
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PSA 700 for example check appendix and sample from companies
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Requires the auditor’s report to contain a clear expression of the auditor’s opinion on the FS. The auditor must form
judgment as to whether:
■ The accounting policies are appropriate in the circumstances
■ Accounting estimates are reasonable in the circumstances
■ Information presented in the FS including its accounting policies, is relevant, reliable, comparable and
understandable and
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The FS provide sufficient disclosures to enable users to understand the effects of material transactions and
events conveyed in the FS
Unmodified Report
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End product → contains the auditor’s opinion
Issued when the auditor concludes, based on audit evidence obtained that the FS are presented fairly in all
material respects in accordance with the applicable FRF
Profession deemed it essential to standardize the format and content of the auditor’s report to:
● Enhance the credibility
● Promote the readers’ understanding
● Alerts the readers in circumstances where the auditor expresses an audit report that contains modified
opinion
Basic Elements of the UR (TAARAOAADD)
● Title → clearly indicates that it is the report of an independent auditor
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Addressee → Shareholders of the BOD
Auditor’s Opinion
Basus for the Opinion
Responsibilities of Management and Those Charged with Governance for the FS
○ FS are the responsibilities of the client.
○ Management’s responsibility for the preparation and fair presentation of the financial
statements in accordance with the applicable financial reporting framework, and for such
internal control necessary to enable the preparation of fs that are free from material
misstatement
○ Responsibility for assessing the entity’s ability to continue as a going concern
○ Responsibility of those charged with governance for overseeing the financial reporting
process
Auditor’s Responsibilities for the Audit of the FS
○ Readers should be informed of the objectives of the audit and the degree of responsibility
being assumed by the auditor
■ Obtain reasonable assurance
■ Issue a report that includes the auditor’s opinion
○ Responsibilities of an auditor
■ Identify and assess the risks of material misstatement
■ Evaluate the appropriateness of the accounting policies used
■ Conclude on the appropriateness of management’s use of the going concern
basis of accounting
■ Evaluate the fair presentation of the FS
Other reporting responsibilities
Auditor’s signature
Auditor’s address
Date
Date of Report → date when the auditor’s responsibility for subsequent events ends
○ Must have completed all essential audit procedures
PSA 701
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Communicating key audit matters is intended to assist the readers in understanding those matters that were of
most significance in the audit of the financial statements of the current. It also assists the readers in understanding
areas in the financial statements that require significant management judgment or areas of focus in
performing the audit .
KAM are those matters that in the auditor’s professional judgment, were of most significance in the audit of the FS of
the current period.
Identifying Key Audit Matters
■ Step 1 categorize the matters that were communicated with those charged with governance
■ step 2 determine which of these matters required significant auditors attention
■ step 3 which of these matters that required significant attention are the most significant to the audit of the
current period
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Auditors must use his professional judgment in determining the level of detail and the order of presenting the key audit
matters
The auditor should document the matters that will be communicated as key audit matters and the significant
professional judgment made in reaching this determination. In addition, the psa also requires auditors to communicate
the key audit matters to be included in the report with those charged with governance
The auditor’s objective is to select a smaller number of matters, from the matters communicated with those charged with
governance, that were of most significance in the audit.
The greater the number of key audit matters, the less useful the auditor’s communication of key audit matters will be
The auditor’s report should not include key audit matters when the auditor disclaims an opinion on the FS
PSA 705
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Modified because of a GAAP or GAAS Problem
■ Material, don’t give an UQ opinion → Qualified → no more present fairly but “except for” (GAAP or
GAAS)
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Very material → adverse only for GAAP problem → “do not present fairly” (GAAP)
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Very material → disclaimer only for GAAS problem→ “do not express” (GAAS)
■
Withdraw → false, fraudulent, deceptive or misleading → don’t express anything
Any departure from the specific requirements of the reporting framework will cause the FS to contain material
misstatement
A material misstatement may arise from
■ Inappropriate accounting policy selected
■ Misapplication of selected accounting policy or
■ Inappropriate or inadequate disclosure
■ Auditor should inform the client of such misstatement and should insist that the FS be revised. If mgmt refuses
to correct the misstatement, the auditor should express either a qualified or adverse opinion depending on
the materiality and pervasiveness of effect of the misstatements on the FS
Scope limitation arises when the auditor is unable to perform the necessary audit procedures required by PSA, or the
auditor is unable to obtain sufficient appropriate evidence about an assertion because of the restriction imposed by the
mgmt or because of limitations brought about by the circumstances
■ Circumstance imposed scope limitations may make certain procedures impossible to perform
● Auditors should design and perform alternative procedures to obtain satisfaction about the assertions
● If there are no alternative procedures or the results of the alternative procedures do not enable the
auditor to obtain SAE, the auditor should express either a qualified opinion or disclaimer opinion
depending on the materiality and pervasiveness of the effect on the FS
Failure to obtain SAE will cause the auditor to:
■ Express a qualified opinion if the effect is material but not pervasive
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If the effect is both material and pervasive, the auditor may resign from the engagement or disclaim an
opinion on the FS
Materiality and Pervasiveness
■ If the magnitude of misstatement is significant enough to affect the readers of the financial statements
but not enough to overshadow the fair presentation of the financial statements taken as a whole the auditor
would most likely express a qualified opinion .
■ If the auditor believes that the effect of the misstatements is highly material and there are several items in
the financial statements that are affected by the statement (pervasive) as to render the overall financial
statements materially misleading the auditor would most likely express an adverse opinion .
Qualified Opinion
■ The auditor having obtained sufficient appropriate audit evidence,e concludes that misstatements, individually
or in the aggregate, are material, but not pervasive to the FS
■ The auditor is unable to obtain sufficient appropriate evidence on which to base the opinion, but the auditor
concludes that the possible effects on the FS of undetected misstatements, if any, could be material but not
pervasive
Adverse Opinion
■ The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate evidence,
concludes that misstatements, individually or in the aggregate are both material and pervasive to the FS
Disclaimer of Opinion
■ The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate evidence on
which to base the opinion, and the auditor concludes that the possible effects on the FS of undetected
misstatements, if any, could be both material and pervasive
OPINION SECTION
■ Qualified Due to a MM
■ Qualified Due to SL
■ Adverse opinion → FS are materially misleading
■ Disclaimer
Basis for Opinion
■ If there is a material misstatement that relates to specific amounts or quantitative disclosures in the fs
the auditor should include in the basis for opinion section so this could either be a qualified or adverse
opinion .
■ if the statement relates to non-disclosure of information in the notes of the fs the auditor should discuss
the non-disclosure with those charged with governance so the omission of narrative disclosure could either be
qualified or adverse opinion
■ If the modification results from inability to obtain sufficient appropriate audit evidence then the auditor
should express either a qualified or disclaimer of opinion This is because of the scope limitations of the
management
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PSA 706
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EOM and OM
■ Emphasize important matters affecting the financial statement or affecting the auditor’s report
■ Addition of EOM does not negate the auditor’s unmodified opinion and is not to be construed as a
modification to the opinion or a substitute for the modified opinion
■ Presented in order to help the readers of the FS understand the FS as well as the auditor’s report
Emphasis of matter
An emphasis of matter paragraph is included in the audit report to draw the reader's attention to a matter presented
or disclosed in the financial statements that in the auditor's judgment is of such importance that is fundamental to the
reader's understanding of the financial statements. It is intended to promote the readers’ understanding of the
financial statements .
Circumstances where the auditor may consider it necessary to include and EOM (SEMSS)
■ Significant uncertainties
■ Early application of new accounting standards
■ Major catastrophe
■ Subsequent discovery of facts
■ Special purpose FS
A widespread use of EOM diminishes the effectiveness of the auditor’s communication of such matters. To include
more information in the EOM paragraph rather than presenting them in the FS may imply that the matter has not been
appropriately presented or disclosed.
Other Matter Paragraph
■ There are instances when the auditor considers it necessary to communicate a matter that is not presented or
disclosed in the financial statements but in the auditor's judgment, is relevant to the user's
understanding of the audit, the auditor has responsibilities or the auditor's report.
■ Circumstances
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FS prepared using more than one financial framework (using both PFRS and another set of FS in
accordance with US GAAP)
● Limiting the use of the auditor’s report
● Subsequent discovery of facts
● Reporting on comparative information
List of PSAs Containing Requirements for Other Matters Paragraphs
■ PSA 560 (P12B & 16)
● Provide a new or amended auditor’s report that includes a statement in an Emphasis of Matter
paragraph4 or Other Matter paragraph that conveys that the auditor’s procedures on subsequent
events are restricted solely to the amendment of the financial statements as described in the relevant
note to the financial statements.
● 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.
■ PSA 710 p 13-14, 16-17, 19
● If the financial statements of the prior period were audited by a predecessor auditor and the
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auditor is permitted by law or regulation to refer to the predecessor auditor’s report on the
corresponding figures and decides to do so, the auditor shall state in an Other Matter
paragraph in the auditor’s report:
○ (a) That the financial statements of the prior period were audited by the
predecessor auditor;
○ (b) The type of opinion expressed by the predecessor auditor and, if the opinion
was modified, the reasons therefore; and
○ (c) The date of that report.
If the prior period financial statements were not audited, the auditor shall state in an Other
Matter paragraph in the auditor’s report that the corresponding figures are unaudited. Such a
statement does not, however, relieve the auditor of the requirement to obtain sufficient
appropriate audit evidence that the opening balances do not contain misstatements that
materially affect the current period’s financial statements.
When reporting on prior period financial statements in connection with the current period’s audit, if
the auditor’s opinion on such prior period financial statements differs from the opinion the auditor
previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an
Other Matter paragraph in accordance with PSA 706
If the financial statements of the prior period were audited by a predecessor auditor, in addition to
expressing an opinion on the current period’s financial statements, the auditor shall state in an Other
Matter paragraph:
○ (a) That the financial statements of the prior period were audited by a predecessor auditor;
○ (b) The type of opinion expressed by the predecessor auditor and, if the opinion was
modified, the reasons therefore; and
○ (c) The date of that report,
unless the predecessor auditor’s report on the prior period’s financial statements is reissued
with the financial statements.
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If the prior period financial statements were not audited, the auditor shall state in an Other
Matter paragraph that the comparative financial statements are unaudited. Such a statement
does not, however, relieve the auditor of the requirement to obtain sufficient appropriate
audit evidence that the opening balances do not contain misstatements that materially affect
the current period’s financial statements
PSA 720 (p10a)
List of PSAs containing Requirements for Emphasis of Matter Paragraphs
■ PSA 210 (p19b)
● It is recognized in the terms of the audit engagement that:
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(i) The auditor’s report on the financial statements will incorporate an Emphasis of
Matter paragraph, drawing users’ attention to the additional disclosures, in accordance
with PSA 706 (Revised and Redrafted);
(ii) Unless the auditor is required by law or regulation to express the auditor’s opinion
on the financial statements by using the phrases “present fairly, in all material
respects” in accordance with the applicable financial reporting framework, the
auditor’s opinion on the financial statements will not include such phrases.
PSA 560 (p12b & 16)
● Provide a new or amended auditor’s report that includes a statement in an Emphasis of Matter
paragraph4 or Other Matter paragraph that conveys that the auditor’s procedures on subsequent
events are restricted solely to the amendment of the financial statements as described in the relevant
note to the financial statements.
● 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.
PSA 800 (p14)
● The auditor’s report on special purpose financial statements shall include an Emphasis of Matter
paragraph alerting users of the auditor’s report that the financial statements are prepared in accordance
with a special purpose framework and that, as a result, the financial statements may not be suitable for
another purpose. The auditor shall include this paragraph under an appropriate heading.
PSA 710: Comparatives → read guidance → comparative in exam
○ Corresponding or comparative will be seen in the FS
○ Comparative FS → refers only to the fs of the prior period
PSA 720 - Inconsistencies
○ Take a look at the appendix
○ Annual Report basis → we are being prudent regarding other information
○ Requires the auditor to read the other information to consider:
■ Whether material inconsistencies exist between the other information and the financial statements
■ Whether material inconsistency exists between the other information and the auditor’s knowledge of the entity
obtained in the audit
○ Auditor would normally compare selected items in the other information with similar items in the fs to determine
whether material inconsistencies exist
○ Auditor would also consider whether the other information is consistent with the audit evidence obtained and the
conclusions reached in the audit
○ Material Inconsistency
■ On reading the other information, the auditor identifies a material inconsistency, the auditor should discuss the
matter with management and determine whether:
● The audited FS need to be amended
● The other information needs to be amended
● The auditor’s understanding of the entity needs to be updated
■ If an amendment is necessary in the fs and the entity refuses, the auditor should express a qualified or an
adverse opinion due to MM
ISA 800
○ Established Criteria is the only difference → special purpose framework not pfrs
○ Reporting Responsibility
■ When the auditor undertakes an engagement to report on a single financial statement or on a specific element
of a financial statement in conjunction with an engagement to audit the entity’s complete set of FS, the auditor
should express a separate opinion for each engagement
ISA805
○ Difference: not the whole FS
○
Subject matter is different → not the whole fs but the single or element of it → smaller than the fs and suitable
criteria is special purpose
●
○ Special purpose → acceptability
○ Smaller than the entire FS
ISA 810 → Summary of FS
○ Opinion on the summary of the FS
○ Summary highlights the entity’s Financial Position and results of operations.
○ May be accepted only if the auditor has also been engaged to express an audit opinion on the FS from which the
summary FS were derived.
○ The audit of FS provides the auditor with the necessary knowledge to discharge his responsibilities in relation to the
summary FS
○ Should express an opinion about whether the summary FS are consistent with the audited FS or whether the summary
FS are a fair summary of the audited FS