ATTY. RHENEIR P. MORA, CPA MANAGING PARTNER R. P. MORA & CO. Historical background Records of auditing activity in early Babylonian times (around 3,000 BC). Ancient China, Greece and Rome. The Latin meaning of the word 'auditor' was a 'hearer or listener' because in Rome auditors heard taxpayers. Modern auditing dates to beginning of the modern corporation By the audit process, the auditor enhances the usefulness and value of the financial statements, and also increases the credibility of other non-­‐audited information released by management. The func5on of audi5ng is to lend credibility to the financial statements ① Is the company a going concern? ② Is it free of fraud? ③ Is it managed properly? ④ Is there integrity in its database? ⑤ Do directors have proper and adequate information to make decisions? ⑥ Are there adequate controls? ⑦ What effect do the company's products and by-­‐ products have on the environment? ⑧ Can an ‘unfortunate mistake’ bring this company to its knees? Philippine Financial Repor5ng Standards Philippine Financial Reporting Standards (PFRS) are the standards that are applied for financial accounting. PFRS were formerly called Philippine Accounting Standards (PAS) The Philippine Accounting Standards Board (PASB) has accounting standard setting responsibilities for PFRS. Advantages of Philippine Standards of Audi5ng (PSA) worldwide increases confidence in non-­‐domestic investment consistent international investors comprehend financial statements from different countries high quality Non-­‐national standards encourage better quality, less political influence Audi5ng and Assurance Standards Board (AASB) Issues: Philippine Standards on Auditing (PSAs) as the standards to be applied by auditors in reporting on historical financial information. Philippine Standards on Assurance Engagements (PSAEs) as the standards to be applied by practitioners in assurance engagements dealing with information other than historical financial information Philippine Standards on Quality Control (PSQCs) as the standards to be applied for all services falling under the Standards of the AASB, and Philippine Standards on Related Services (PSRSs) as the standards to be applied on related services, as it considers appropriate Philippine Standards on Review Engagements (PSREs) as the standards to be applied to the review of historical financial information. PSAs 100-­‐999 Philippine Standards on Auditing (PSAs) 100-­‐199 Introductory Matters 120 Framework of International Standards on Auditing 200-­‐299 General Principles And Responsibilities 200 Objective and General Principles Governing an Audit of Financial Statements 210 Terms of Audit Engagements 220 Quality Control for Audit Work 230 Documentation (ED) PSAs 240 The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements 250 Consideration of Laws and Regulations in an Audit of Financial Statements 260 The Auditor’s Communication with Those Charged with Governance 300-­‐499 Risk Assessment And Response To Assessed Risks 300 Planning 310 Knowledge of the Business 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement 320 Materiality in the Identification and Evaluation of Misstatements 330 The Auditor’s Procedures in Response to Assessed Risks PSAs 400 Risk Assessments and Internal Control 401 Auditing in a Computer Information Systems Environment 402 Audit Considerations Relating to Entities Using Service Organizations 500-­‐599 Audit Evidence 500 Audit Evidence 500R Audit Evidence 501 Audit Evidence—Additional Considerations for Specific Items 505 External Confirmations PSAs 510 Initial Engagements—Opening Balances 520 Analytical Procedures 530 Audit Sampling and Other Selective Testing Procedures 540 Auditing Accounting Estimates and Related Disclosures (Other than Those Involving Fair Value Measurements and Disclosures) 545 Auditing Fair Value Measurements and Disclosures 550 Related Parties 560 Subsequent Events 570 Going Concern 580 Management Representations PSAs 600-­‐699 Using Work Of Others 600 The Audit of Group Financial Statements 610 Considering the Work of Internal Auditing 620 Using the Work of an Expert 700-­‐799 Audit Conclusions And Reporting 700 The Auditor’s Report on Financial Statements 701 The Independent Auditor’s Report on Other Historical Financial Information 705 Modifications to the Opinion in the Independent Auditor’s Report 706 Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor’s Report 710 Comparatives 720 Other Information in Documents Containing Audited Financial Statements 800-­‐899 Specialized Areas 800 The Independent Auditor’s Report on Summary Audited Financial Statements 2000-­‐2699 Philippine Standards on Review Engagements (PSREs) 2400 Engagements to Review Financial Statements (Previously PSA 910) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity 3000-­‐3699 Philippine Standards on Assurance Engagements (PSAEs) 3000 Assurance Engagements (Previously PSAE 100) 3000R Assurance Engagements Other Than Audits or Reviews of Historical Financial Information 3400 The Examination of Prospective Financial Information (Previously PSA 810) 4000-­‐4699 Philippine Standards on Related Services (PSRSs) 4400 Engagements to Perform Agreed-­‐upon Procedures Regarding Financial Information (Previously PSA 920) 4410 Engagements to Compile Financial Information (Previously PSA 930) PSA 200 states 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 an identified financial reporting framework. Terms used 'give a true and fair view' or ‘present fairly, in all material respects’ equivalent terms? Audit Defini5on “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.” American Accounting Association General Principles Governing an Audit of Financial Statements Ø An auditor should comply with the Code of Ethics for Professional Accountants issued by IFAC. Ø An auditor should conduct an audit in accordance with International Standards on Auditing. General Principles Governing an Audit of Financial Statements Ø Scope of an audit -­‐ the audit procedures deemed necessary to achieve the objective of the audit. Ø Certain inherent limitations in an audit affect the auditor’s ability to detect material misstatements. Ø Test and sampling Ø Internal control Ø Audit evidence Ø Audit process permeated by judgment Ø Management is responsible for the financial statements, accounting, and internal control. Business Risk and Audit Risk Companies, depending on the nature of their operations and industry, the regulatory environment in which they operate, and their size and complexity, they face a variety of business risks. The risk that causes the greatest concern by the auditor is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated (known as audit risk). “The auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit.” (ISA 200) TYPES OF AUDIT Audit of financial statements Examine financial statements, determine if they give a true and fair view or fairly present the financial statements. Operational Audit A study of a specific unit of an organization for the purpose of measuring its performance. Compliance Audit A review of an organization’s procedures and financial records performed to determine whether the organization is following specific procedures, rules, or regulations set out by some higher authority. Types of Auditors Internal auditors are employed by individual companies to investigate and appraise the effectiveness of company operations for management. Independent auditors are typically certified either by a professional organization or government agency. Planning Fieldwork Audit Report Audit Follow Up AUDIT PROCESS Planning Fieldwork Audit Report Announcement Letter Transaction Testing Initial Meeting Advice & Informal Exit Conference Communications Preliminary Survey Internal Control Review Audit Program Audit Follow-­‐Up Discussion Draft Follow-­‐up Review Audit Summary Formal Draft Working Papers Final Report Client Response Client Comments Follow-­‐up Report Audit Annual Report to the Board Audit Planning The audit process is similar for most engagements and normally consists of four stages: Planning (sometimes called Survey or Preliminary Review), Fieldwork, Audit Report, and Follow-­‐up Review. Client involvement is critical at each stage of the audit process. As in any special project, an audit results in a certain amount of time being diverted from your department's usual routine. One of the key objectives is to minimize this time and avoid disrupting ongoing activities. Planning During the planning portion of the audit, the auditor notifies the client of the audit, discusses the scope and objectives of the examination in a formal meeting with organization management, gathers information on important processes, evaluates existing controls, and plans the remaining audit steps. Management Asser5ons and Audit Objec5ves The audit starts with the financial statements prepared by the client and the claims or “assertions”. that the client makes about these numbers. It is the auditor's job to validate management's assertions. In order to do so, the auditor will identify audit objectives, which can be regarded as the auditor's counterpart of management assertions. Management asser5ons Management assertions are implied or expressed representations by management about classes of transactions and related accounts in the financial statements. An example of a management assertion is that “the company’s financial statements are prepared based on international financial reporting standards.” Asser5ons about classes of transac5ons and events for the period under audit Ø Occurrence. Transaction and events that have been recorded have occurred and pertain to the entity. Ø Completeness – All transactions and events that should have been recorded have been recorded.. Ø Accuracy - Amounts and other data relating to recorded transactions and events have been recorded appropriately. Ø Cutoff - Transactions and events have been recorded in the correct accounting period. Ø Classification - Transactions and events have been recorded in the proper accounts. Asser5ons about account balances at the period end. § Existence:- Assets, liabilities and equity interests exist. § Rights and obligations:- An entity holds or controls the rights to assets, and liabilities are the obligations of the entity. § Completeness—All assets, liabilities and equity interests that should have been recorded have been recorded § Valuation and allocation —Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Asser5ons about presenta5on and disclosure vOccurrence and rights and obligations— Disclosed events, transactions, and other matters have occurred and pertain to the entity. vCompleteness—All disclosures that should have been included in the financial statements have been included.. vClassification and understandability—Financial information is appropriately presented and described, and disclosures are clearly expressed. vAccuracy and valuation—Financial and other information are disclosed fairly and at appropriate amounts. Phase 1: Planning Stages in Planning of Audit 1. Engagement This could be a request from the authority or a routine audit. • Appointment of audit team: The appointed team (by Audit Executive) should do the following: Conduct team first meeting Document preparations for audit Set engagement objectives (audit objective) Determine the scope of audit. 9/6/14 30 Phase 1: Planning…… 2. Conduct in office review Review documents (criteria) related to the client (laws, regulations, guideline etc.) Advantages of in-­‐office review ÷ Gain good understanding of the client ÷ Help to establish audit risk and materiality of issues (relevant criteria). ÷ Help to identify criteria and establish compliance requirements ÷ Clarify audit objectives (operating objectives). ÷ Enable the team to prepare relevant questions to the client during entrance meeting. ÷ Help the team to understand well the criteria (what is to be done; by whom and when). 9/6/14 32 Phase 1: Planning…. 3. Contact and meeting client Clients needs to be notified on the audit at least 5 (five) working days before entrance meeting. Notification should be formal (eg. Engagement letter) Contents of engagement letter ÷ Letter reference ÷ Date of letter Source of audit (Annual plan, Management request etc.) ÷ General audit objective ÷ Names of audit team and team leader ÷ Official contacts of team leader ÷ Time and location of entrance. 9/6/14 33 Phase 1: Planning…. 4. Entrance Conference Should be conducted prior to preliminary survey Head of Internal audit should meet with key personnel of the client Points to be discussed in entrance meeting ÷ Scope and objective of audit ÷ Emphasize that the purpose of audit is to add value to the organization. ÷ Determine who will be the contract person from the client (it should not be the director or person of too high level). ÷ Brief overview of the process from preliminary survey to reporting. ÷ Tentative audit event timeline estimated dates of fieldwork, interim meeting, exit meeting, audit report (draft and final) and follow-­‐up audits. 9/6/14 34 Entrance Conference…… ÷ How audit findings will be handled (resolution of minor findings; agreement on the action plan to implement the audit recommendations etc.) ÷ Collective review of draft report. ÷ Method of distribution of final audit report. ÷ Identification of areas of special concern by client (Note: Do not get involved in functional or operational activities of the client). ÷ Working hours, access to records, available work area, clients work deadline requirements (i.e. Auditor should fit into the clients office routine with minimal disruption to client). ÷ Arrange for tour of the facility for familiarization. ÷ Arrangement for auditors to meet other personnel who will be working with during audit. Note: Effective Communication at the beginning of audit engagement will significantly influence the atmosphere in which the entire audit is conducted. 9/6/14 35 Phase 1: Planning…. 5. Preliminary survey This refers to the process for gathering information without detailed verification on the activity being examined (audited) Why Preliminary Survey ÷ To understand well the activity under review. ÷ Identify significant areas that worth special emphasis. ÷ Obtain relevant information for use in actual audit. ÷ Determine whether further audit is necessary (nature, timing and extent of detailed audit work). Note: i) No fieldwork should be started unless preliminary survey has been conducted. Survey work may be more extensive for activities that are audited for the first time than for areas that were audited previously. 9/6/14 36 Preliminary survey…… Phases of Preliminary Survey i. Familiarization Obtaining significant back ground information and practical working knowledge of applicable laws, regulations policies, and procedures, management and financial controls, organizations statues and staffing; and unusual challenges faced. Documents to be reviewed includes; previous audit reports/programs, working papers, laws, regulations, operating manuals, organization charts, financial statements, flow charts, budget, operating reports etc. 9/6/14 37 Phases of Preliminary Survey….. ii) Identification of potential areas for improvement Identifying areas for audit emphasis (risk area). These include:Areas identified/documented in risk. Register. Area of high possibility of fraud or mis management Where there is large volumes of transactions. Where management has expressed concerns. Where prior audit disclosed major weakness/deficiencies. 9/6/14 38 Phases of Preliminary Survey….. iii) Confirmation: Getting evidences from third parties where necessary. (iv) Planning the detailed audit Preparation of audit program in areas that worth for further audit Audit program should be recorded It basically show, what is to be done; by when; by who; for how long and how will it be done. This is a link between preliminary survey and field work. 9/6/14 39 Announcement Letter: The client is informed of the audit through an announcement or engagement letter from the Internal Audit Director. Initial Meeting: the client describes the unit or system to be reviewed, the organization, available resources (personnel, facilities, equipment, funds), and other relevant information. Preliminary Survey: In this phase the auditor gathers relevant information about the unit in order to obtain a general overview of operations. Internal Control Review: The auditor will review the unit's internal control structure, a process which is usually time-­‐consuming. Audit Program Preparation of the audit program concludes the preliminary review phase. This program outlines the fieldwork necessary to achieve the audit objectives. Mechanics for preparation of Audit Program Setting of Audit Objective: Start from operating objectives followed by operating procedures eg. Operating objective: To ensure procurement of right goods/ service at right, right price, at right time and right quantity and quality). Operating Procedure: On requisition, the ordering dept should clearly spell out the goods/service to be procured – proper specification). Audit Objective: To ascertain whether the procurement of goods/services was done properly to ensure right goods/service, right price, right time and right quality and quantity. Determine the scope of Audit Program – (objective of Internal Control System) and key risk from the same. Develop audit objective from operating objective/target; requirement of the law (legislative requirements) terms of reference – in special audit assignment [see item (i) above]. 9/6/14 43 Benefits/Advantages of Audit Program Set a systematic approach to audit. Gives specific steps to be taken by auditor. Provide precise instruction to obtain precise audit information. Provide for more focused audit hence serve time for audit engagement. As a bases of or duty/assignment to audit assistants. Help the supervisor to monitor the audit Provide summary of work to be done. 9/6/14 44 Phase 2: Field work (Evidence Gathering) Is the systematic process of gathering evidence about entity’s operations, evaluating it and found out whether those operations meet the acceptable standards. Here auditor perform the procedures as in the audit program by doing the following: Concentration on transaction testing and informal communication. Determine and evaluate whether internal controls are operating properly and in manner described by management. 9/6/14 45 Evidence Defn: Refers to all matters that supports a point/ position assumed by auditor Qualities of an evidence Evidence must be: Suffient ie. Adequate and convincing. Competent ie. Reliable and best attainable. Relevant ie. Supporting the observations and recommendations; consistent with objectives. Useful ie. Help the organization to meets its objective. 9/6/14 46 Evidence…. Types of evidence Physical - direct inspection/observation – documented as memoranda, charts, maps, photographs etc. Documentary - created information eg. Accounting records, invoices, letters contracts etc. Testimonial - responses to inquires – interview (needs to be confirmed). Analytical - analysis or verification of information – computations, comparisons of operations; standards, law/regulations, and evaluation of physical or documentary information. 9/6/14 47 Field work Audit Checklist Before going to fieldwork the audit team should ensure to have the following:-­‐ Audit program (each team member should have a copy). Responsibility of each team member (segregation of duties). That audit client is aware in advance. Adequate working tools (working papers, folders, stationery, calculator, laptop, camera etc.). Copies of relevant laws, regulation, standards, etc. relating to the audit area. 9/6/14 48 Documentation of the fieldwork results The field results (step of activities) will be recorded in the audit working paper. The reference should be made in the working paper with the audit program to maintain consistency. The working papers are used to arrive to the audit finding. 9/6/14 49 AUDIT EVIDENCE & DOCUMENTATION Eviden5al MaMer Evidential matter supporting financial statements consists of: Underlying accounting data Corroborating evidence (supporting information) Eviden5al MaMer Appropriate Sufficient •Reliable •Amount of evidence •Relevant •Professional judgment Sufficient Audit Evidence Influenced by: Competence of evidence Risks involved Materiality and tolerable error Experience Appropriate Evidence Relevant Satisfies audit objective Timely Reliability is influenced by: Independence of source How the evidence is obtained Condition of internal control Audit Workflow 55 Audit Methodology Audit Work Flow P R E L I M I N A R Y F I N A L Planning and Risk Assessment • • • • Understand the business including the IT environment Evaluation of entity level controls and fraud assessment Perform risk assessment and evaluation procedures Determine audit approach and plan audit strategy Evaluation of Controls • • • Understand significant processes and perform walkthrough Evaluate design and implementation of controls Test and conclude on operating effectiveness of controls Anticipation and Resolution of Audit Issues • • Team discussion of accounting and auditing issues Brain storming session with the Company on the identification and resolution of issues` Perform Substantive Test • • • Determine substantive procedures Perform substantive procedures Conclude on procedures performed General Audit Procedures • • • • Fraud assessment procedures Going concern assessment Subsequent events review Laws and regulations, litigations and claims Conclude the Audit • • • • Perform completion procedures Perform overall review of financial statements Obtain management representation Form an audit opinion Planning and Risk Assessment • • • • • • • • • • • Engagement acceptance and con5nuance Understand the business Understand IT environment Planning materiality En5ty level control and fraud assessment Iden5fica5on of significant account and processes Understanding and evalua5on of IT general controls Understanding of significant process and walkthrough Audit planning memorandum Combined risk assessment Audit planning discussion Control Evalua6on • Test of the design and opera5ng effec5veness of control – Nature of test of control – Timing of test of control – Extent of test of control • Conclude on opera5ng effec5veness of control – Control devia5ons discovered during the tes5ng – Control deficiencies – Documen5ng control deficiency Substan6ve Procedures • Test of Details • Analy5cal Review Procedures • Other Substan5ve Procedures General Audit Procedures • • • • • • Fraud Going concern assessment Subsequent events Laws and regula5ons Li5ga5ons and claims Related par5es Conclude the Audit • Overall review of financial statements • Management representa5ons • Perform overall evalua5on of: – Procedures performed on each significant accounts – Significant findings and issues • Reassessment of materiality • Changes in audit strategy and planned procedures • Audit differences – Ethical and independence issues • Form an audit opinion SUBSTANTIVE PROCEDURES – ASSETS Cash and Cash Equivalents Obtain bank confirmations for all accounts, including the accounts closed during the year Examine client's bank reconciliation Test proper cut off of cash receipts and cash disbursements Test appropriate valuation Cash and Cash Equivalents Bank confirmation Bank reconciliation Bank statement Cash book General ledger Cash and Cash Equivalents Bank Reconciliation Balance per Bank xxx Add: Deposit in Transit x (Less) Outstanding Checks (x) Balance per book xx Bank Statement Bank Confirmation Post Year-End Bank Statement Cash Book Post Year-End Bank Statement Cash Book General Ledger SUBSTANTIVE PROCEDURES – ASSETS Accounts Receivable -­‐ Trade Agree subledger to general ledger control account Verify existence through confirmation or subsequent cash receipts. Perform roll-­‐forward procedures, as necessary Perform analytical procedures SUBSTANTIVE PROCEDURES – ASSETS Accounts Receivable – Trade (cont) Evaluate adequacy of the allowance for impairment of receivables Evaluate the adequacy of other adjustments to accounts receivables Test valuation of balances in foreign currencies Inquire about or review list of credit balances and investigate large items. SUBSTANTIVE PROCEDURES – ASSETS Inventories Observe the taking of physical inventories If significant, confirm inventories held by others at the physical inventory date Review the reconciliation of physical inventory compilation with the GL account and records Perform roll-­‐forward procedures, as necessary Perform cut off procedures Perform valuation and NRV testing Physical Inventory Observation Review industry observation instructions obtained from client. Review the physical inventory work program Attend physical inventory: Plant tour Test counts Physical Inventory Observation Checklist and memo Conclusion QUANTITY x UNIT COST = TOTAL COST Q x UC = TC Countsheet Location Description Qty X1 Cheddar Cheese 600 X2 Cream Cheese 400 X3 Cheddar Cheese 300 (completeness) Qty Inventory by Location Report Location Description Total Cost Cost 24,000,000 Qty Cheddar Cheese 600 X3 Cheddar Cheese 300 6000 Cream Cheese Unit _________ X1 X2 Priced Out Inventory Listing 400 (accuracy) G/L Inventory cut-­‐off procedures In order to ensure that the books and records are complete, the paperwork associated with the above must all be processed by the same count date. Inventory Obsolescence Review The identification and valuation of inventory items that are: Excess Slow moving Obsolete Defective Expired Replaced or reproduced for less than the cost or current carrying amount SUBSTANTIVE PROCEDURES – ASSETS Investments, including investments in affiliates Verify the existence through confirmation or examination of evidence of ownership Review minutes of meetings, agreements and confirmation replies Perform valuation procedures through inspection of market quotations Perform impairment testing SUBSTANTIVE PROCEDURES – ASSETS Property, Plant and Equipment Obtain a schedule of property, plant and equipment, including capitalized leases Examine invoices, authorizations, leases and other data for additions and disposals Review and examine support for rentals under operating leases Test reasonableness of depreciation, depletion and amortization Assess possible indications of impairment SUBSTANTIVE PROCEDURES – ASSETS Intangibles, including Goodwill Obtain a schedule of intangibles, including goodwill, and test the bases on which additions, amortization and disposals are recorded. Assess possible indications of impairment Impairment testing for goodwill (e.g. review of discounted cashflows) SUBSTANTIVE PROCEDURES -­‐ LIABILITIES Accounts Payable -­‐ Trade Agree subledger to general ledger control account Review subledger for unusual items Test proper cut-­‐off Review subsequent events and analytic procedures Test valuation of balances in foreign currencies SUBSTANTIVE PROCEDURES -­‐ LIABILITIES Income Taxes, Deferred Taxes and Related Income Statement Accounts Test reconciliation of the current year book/local GAAP/statutory and taxable income Test computations of provisions for current and deferred income taxes Review movements of income tax accounts Determine whether provision should be made for tax positions or other tax contingencies Test intercompany and other related party transactions SUBSTANTIVE PROCEDURES -­‐ LIABILITIES Provisions, Accrued Liabilities and Deferred Income Review the schedule of provisions, accrued liabilities and deferred income and agree amounts to the general ledger accounts Test if provisions, accrued liabilities and deferred income were recorded at appropriate or reasonable amounts Review lawyers’ confirmation, minutes and other documents for completeness of recorded liabilities Search for unrecorded reserves/accruals (i.e. review contracts, invoices, payments) SUBSTANTIVE PROCEDURES -­‐ LIABILITIES Notes Payable, Long-­‐term debt & Leases Obtain confirmations from banks or other debt holders Inspect documents and authorization (i.e. loan documents, minutes, lines of credit) Test compliance with loan covenants Identify liens, security interests, and assets pledged as collateral for debt. Ensure proper disclosure SUBSTANTIVE PROCEDURES -­‐ LIABILITIES Notes Payable, Long-­‐term debt & Leases Review subsequent events (i.e. refinancing transactions) Test reasonableness of interest expense Review summary of lease and rent contracts and test correct presentation (e.g., operating or finance lease) in the financial statements Test reasonableness of rent expense SUBSTANTIVE PROCEDURES – INCOME STATEMENT ACCOUNTS Revenue Perform analytical review procedures Inquire of sales and marketing personnel for any unusual transactions, or similar items Review of the terms of sales agreements (i.e. returns, sales incentives) Identify unusual items SUBSTANTIVE PROCEDURES – INCOME STATEMENT ACCOUNTS Other Income Review contents of miscellaneous income and identify unusual transactions Test interest and dividend income Determine that the changes in the value of investments is properly recorded SUBSTANTIVE PROCEDURES – INCOME STATEMENT ACCOUNTS Cost of Sales And Expenses Obtain details of expenses and analyze in comparison of prior period / and or budget Test reasonableness of major expense accounts i.e. payroll, depreciation, interest Verify through a review of lawyers fees that all lawyers and in-­‐house legal counsels, who handle significant litigation or other claims, have been covered in the lawyers' confirmation work Review significant other taxes, e.g., property taxes, for correctness and proper cutoff. Purpose of Audit Documenta5on Documentation occurs throughout the Audit The Engagement Team Conducts testing Obtains sufficient appropriate evidence Provides opinion Reasons for Documenta5on Supports compliance with PSA Provides the principal support for our audit opinion Aids us in the conduct and supervision of the engagement Facilitates communication We Document What we did What we found Where we found it What we concluded GOAL OF DOCUMENTATION Quality and Efficiency Volume EXTENT OF WORKING PAPER DOCUMENTATION PSA 230 The auditor should prepare the audit documentation so as to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed to comply with PSAs and applicable legal and regulatory requirements; (b) The results of the audit procedures and the audit evidence obtained; and (c) Significant matters arising during the audit and the conclusions reached thereon. Audit Files Continuing Audit Files § Current Workpaper Files Permanent File Brings together all the materials which may continue to be of interest to this and future audits. Contents of a Continuing Audit File General information about the client Minutes, contracts, and regulations Accounting policies and procedures Material relating to the formation of the company Historical analyses of accounts Income tax information Current Workpaper File Brings together all of the current audit work performed and conclusions reached in the current-­‐ year audit Contents of Current Workpaper File: Working Trial Balance Lead Schedules Detailed Schedules Planning document Audit Program Schedules prepared by clients Safeguarding Working Papers All professionals are responsible for safeguarding audit working papers to prevent their loss or use by an unauthorized person. Secure working papers and computers in a locked area at the client’s office. Be careful not to leave confidential data on the screen of the computers for unauthorized persons view. Consider security matters when transporting working papers and computer to the client’s location. Elements of an Effec5ve Work Program Responds to risks in the planning process Acts as a substitute for practice aids in lower risk areas. May serve as a vehicle to communicate time expectations Includes client procedures Incorporates any general notes Documents results of work done Reinforces what work to do and how to do it Contents of the Work Program Company procedures and background information Audit objectives Audit procedures Performance and results of work (including general explanatory notes) Conclusions Current Working Paper File FINANCIAL STATEMENT Working Trial Balance Assets Lead Schedules Cash LEAD SCHEDULES & SUBSTANTI VE TEST Detail Schedules & Memoranda Liabilities & Shareholders Statement Profit & Loss Accounts Payable Sales Workpaper Hierarchical Structure Financial Statements (Liabilities & Equity) (Assets) (Profit & Loss) A W (CASH) K B (Notes Payable) (Selling, General & Admin Costs) (Accounts Receivable) M (Accruals) L (Accounts Payable) C E (Inventory) (PPE) D (Prepaid) V U (Sales) (Cost of Sales) L (Accounts Payable Lead Schedule) L1 (Reconciliation of Payables Listing to General Ledger) L2 (Listings of Trade Payables) L3.1 (Agreed Replies) L3 (Trade Payables Circularization Control) L3.2 (Disagreed Replies) L3.3 (Nonreply Work) Techniques for Documen5ng Work Indexing Cross Referencing Tick Marks General Notes Lettered Explanations Conclusions Disclosures Cross-­‐Referencing Two-­‐types of cross-­‐referencing: Internal External Cross-­‐referencing should be in red pencil Tick marks Symbols used to refer to an explanation of work completed Explain that work was done in a specific way Eliminate the need to write repetitive explanations Normally include description of evidence examined, findings and results and unusual items noted and how they were resolved. Tick marks ! -­‐ agrees with support document C -­‐ confirmed ü -­‐ all formula and calculations have been tested i -­‐ immaterial balance, accept as reasonable, NFA PY -­‐ agrees to prior period working papers TB -­‐ agrees to trial balance GL -­‐ agrees to general ledger β -­‐ discussed with client Example of a General Note Example: General note on review of subsequent payments: Note 1 – Reviewed cash payments book and all bank statements until Feb 15, last fieldwork day. One omission noted. A payment on Jan 8 to Tokyo office was not accrued. This is the subject of an Audit Difference. No other above sdcope omissions. LeMered Explana5ons Document and explain exceptions and unusual items Can be documented in the workprogram or workpaper Should be in red pencil Types of Conclusions 1 2 3 4 Conclusions on the financial statements taken as a whole Explicit conclusions dealing with fraud and going concern Conclusions on passed adjustments and reclassifications Conclusions on resolution of significant audit issues Audit Difference A difference between the amount, classification, or presentation of a financial statement element, account, or other item and the amount, classification, or presentation that we believe would be required under PFRS Omission of a financial statement amount, account, or item required under PFRS. Essen5al Documenta5on Features Indexing Cross-­‐referencing Tick marks General Notes Lettered Explanations Signed Conclusions Completed Work Program Signature and Date on Workpaper Headings Outline v Purposes and Uses of Working Papers v Working Papers Includes v Permanent File Index v Current File Index v Audit Documentation v Matters Affecting the Form & Content of Working Papers v Types of Audit Evidence Purposes and Uses of Working Papers Serve as basic tools to assist the auditor in the conduct of the audit. Support the auditor’s opinion on the financial statements. Substantiate the competence of the auditor’s examination. Serve as guides in subsequent audits. Aid in giving advice on tax and business matters Provide a basis for evaluation of staff members’ performance. 9/6/14 10 9 WORKING PAPERS ORDINARILY INCLUDE: Information concerning the legal and organizational structure of the entity. Extracts or copies of important legal documents, agreements and minutes. Information concerning the industry, economic environment and legislative environment within which the entity operates. 9/6/14 110 Evidence of the planning process including audit programs and any changes thereto. Evidence of the auditor’s understanding of the accounting and internal control systems. Evidence of inherent and control risk assessments and any revisions thereof. Evidence of the auditor’s consideration of the work of internal auditing and conclusions reached. Analyses of transactions and balances. 9/6/14 111 Analyses of significant ratios and trends. A record of the nature, timing and extent of audit procedures performed and the results of such procedures. Evidence that the work performed by assistants was supervised and reviewed. An indication as to who performed the audit procedures and when they were performed. Details of procedures applied regarding components of business whose financial statements are audited by another auditor. 9/6/14 112 Copies of communications with other auditors, experts and other third parties. Letters of representation received from the entity. Conclusions reached by the auditor concerning significant aspects of the audit, including how exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated. Copies of the financial statements and auditor’s report. 9/6/14 113 Permanent File Index I. II. III. Information About the Client’s Business Internal Control System Documentation Organization and Equity Capital 9/6/14 Articles of Incorporation By-­‐Laws Minutes or Resolution of Continuing Interest 114 Permanent File Index (Cont.) IV. Financing and Other Significant Agreements and Contracts V. Other Information of Continuing Relevance 9/6/14 Bank and Other Financing Agreement Bond Indentures, Mortgages and Trust Agreements Certificates of Registration with Gov’t. or Regulatory Bodies Tax Information 115 Current Index File I. II. Auditor’s Report, Financial Statements and General Matters Planning and Administration PA Initial Planning Audit Program PA1 Initial Planning Memorandum III. 9/6/14 Compliance Test Documentation 116 Current Index File (Cont.) Substantive Tests IV. WORKING TRIAL BALANCES AND ADJUSTMENTS ST Substantive Test Program Summary WBS Working Balance Sheet WPL Working Profit and Loss TB Trial Balance AJE/RJE Summary of Adjusting/Reclassifying Journal Entries PJE Summary of Passed Journal Entries 9/6/14 117 Current Index File (Cont.) ASSETS (Single Capital Letters) A Cash B Trade Receivables C Other Receivables D Inventories E Prepayments F Investments G Property, Plant and Equipment H Deferred Charges I Intangible Assets J Other Assets 9/6/14 118 Current Index File (Cont.) LIABILITIES (Double Capital Letters) AA Notes Payable and Bank Loans BB Accounts Payable CC Acceptances Payable and Related Accounts DD Accrued Liabilities EE Income Taxes FF Other Current Liabilities GG Long-­‐Term Debt HH Other Non-­‐Current Liabilities II Contingent Liabilities and Commitments JJ Stockholders’, Partners’ or Proprietor’s Equity KK Retained Earnings 9/6/14 119 Current Index File (Cont.) INCOME AND EXPENSES (Two-­‐Digit Numbers) 10 Sales 20 Cost of Sales 30 Selling Expenses 40 Administrative Expenses 50 (60 or 70) Other Groupings of Expense Accounts 80 Other Income or Expenses 9/6/14 120 PSA 210 ON AUDIT DOCUMENTATION Section 2. The auditor should document matters which are important in providing evidence to support the audit opinion and evidence that the audit was carried out in accordance with Philippine Standards on Auditing. Section 5. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit. 9/6/14 121 MaMers Affec5ng the Form and Contents of Working Papers Nature of the engagement. Form of the auditor’s report. Nature and complexity of the business. Nature and condition of the entity’s accounting and internal control systems. Need in the particular circumstances for direction, supervision and review of work performed by assistants. Specific audit methodology and technology used in the course of the audit. 9/6/14 122 Types of Audit Evidence Physical Examination Third-­‐Party Statements or Confirmation Client Statements or Representations Authoritative Documentations Observation Clerical Accuracy Comparison & Data Relationships 9/6/14 123 PHYSICAL EXAMINATION Description Of General Auditing Procedures COUNTING OF INVENTORY, CASH, SECURITIES, UNMATURED PROMISSORY NOTES -­‐ To establish existence and, where applicable, ownership and condition of assets 9/6/14 124 THIRD-­‐PARTY STATEMENTS OR CONFIRMATIONS OBTAINING CONFIRMATION DIRECTLY OR DETAILS OF ACCOUNT BALANCES -­‐ To verify validity and accuracy of balances and other information with outside parties. 9/6/14 125 CLIENT STATEMENTS OR REPRESENTATIONS OBTAINING CLIENTS REPRESENTATION LETTER, EXPLANATIONS TO MANY DIVERSE QUESTIONS RAISED DURING THE AUDIT -­‐ To obtain knowledge and understanding about the client and its circumstances. 9/6/14 126 AUTHORITATIVE DOCUMENTATION EXAMINING (OR VOUCHING) PAID CHECKS, VENDORS PRUCHASE ORDERS, RECEIVING REPORTS, TITLES, CONTRACTS AND OTHER DOCUMENTARY MATERIALS. -­‐ To verify the validity and propriety of accounting treatment of transactions and account balances and compliance with internal controls. 9/6/14 127 OBSERVATION OBSERVING THE TAKING OF PHYSICAL INVENTORIES BY CLIENT PERSONNEL OR THE ACTUAL OPERATION OF INTERNAL CONTROL -­‐ To determine compliance with prescribed procedures. 9/6/14 128 CLERICAL ACCURACY RECHECKING CLERICAL DETERMINATION BY CLIENT -­‐ To verify the accuracy of computations and transfers of information made by client. 9/6/14 129 COMPARISON AND DATA RELATIONSHIPS COMPARING CURRENT PERIOD ACCOUNT BALANCES OR OPERATING DATA WITH SIMILAR INFORMATION FOR PRIOR PERIODS AND INVESTIGATING UNUSUAL DATA RELATIONSHIPS. -­‐To disclose and determine the reasons for significant changes. 9/6/14 130 Working Paper Organization Chart Continuing Audit File Current Working Paper File Evidential Matter (Test of Controls) Risk Assessment & Planning Job Administration Work Of Others Lead Schedules & Substantive Work Financial Reporting Transaction Processing Cycles Transaction Processing Cycles Financial Reporting Account Level Evidential Matter (Substantive Testing) Working Trial Balances Lead Schedules and Lead Substantive Work Schedules Detail Schedules and Memoranda Assets Liabilities & Equity Profit & Loss Indexing If there are two or more pages comprising a given schedule, the pages are marked to indicate both the particular page and the number of total pages (see B-­‐5 above). Detailed work of an account balance could be supported by several tiers of supporting schedules using fractional indexing (see B-­‐9 above) Examples ANAK NG JUETENG, INC. Analysis of Reserved for Doubtful Accounts Audit: 12-­‐31-­‐04 2003 2004 _ Balance Beginning of Year P130,089 1 P151,691 Write-­‐offs ( 71,087) ( 2 62,439) Provision 92,689 83,994_ Balance End of Year 1 P151,691 P173,246 ========= ========= B B DETAIL OF CURRENT WRITE-­‐OFF Date Customer Amount _ 4-­‐21-­‐04 Lion King P 25,081 4-­‐29-­‐04 Jose Pedal 5,377 5-­‐18-­‐04 Atty. Ong 17,341 5-­‐20-­‐04 Sec. Bunye – Original 10,093 Various amounts under P1,000 4,547_ 2004 Write-­‐Offs 2 P 62,439 ========== Examined write-­‐off form approved by the controller noting agreement of date, customer and amount all write-­‐offs over P1,000. Accumulated write-­‐offs under P1,000 from detail maintained by the credit manager noting agreement. Traced to Prior Year Audit Working Papers noting agreement. Footed by QCB & Co. and agrees. B-­‐9 PBC Examples ANAK NG JUETENG, INC. List of Outstanding Checks Audit: 12-­‐31-­‐04 Amount _ P 991.90 15,000.00 2,001.03 12,576.13 2,790.29 1,745.75 8,941.86 49,810.73 15,439.75 4,989.51 5,533.64 P122,410.43 ========== A-­‐4 PBC NOTE 1> Reviewed the list of outstanding checks noting no unusual or significant items except for & A aBs discussed below. B P25,962.90 ========= Examined cancelled checks returned by bank together with the December 2005 bank statement, noted in order. Examined check register and noted that these were not acknowledged received by the payee in December 2004. Footed by QCB & Co. and agrees. A Per review of the vendor invoices and receiving reports, this check is for lumber and supplies purchased for the additions to the building site. See extracts from the board of directors meeting minutes at XX for further discussion. B Per discussion with Gen. Garcia, Comptroller, these checks dated 12/30/04 were not released to the vendors until 1/2/05 as all authorized check signers were on vacation. Based on the dates these checks cleared the bank per our review on the January 2005 bank statement, this explanation is reasonable. Thus the following adjustment is proposed to properly state cash and accounts payable at 12/31/04: PAJE <1> Cash Accounts Payable P25,962.90 P25,962.90 Exit Meeting This is the meeting between audit team and the client at the end of fieldwork. The objective of the meeting is to share and discuss the key noted findings. It is the important forum for audit team to get confirmation on the obtained/noted findings; responses from the management and the tentative corrective actions/action plans. The minutes of the meeting should be well documented and signed by both parties and these forms parties of the working papers. 9/6/14 135 Filling of 5 – Attribute form/sheet This is the sheet/form where audit findings are recorded. It is a key tool for ensuring effective report writing. Summary of contents of the form include: Audit objective: The purpose of audit Attributes of the findings: Condition, criteria, cause effect and recommendation. Client personnel with who discussed: Name, title, dept, date of discussion, and name of auditor. Comments by client personnel: Relevant comments made by client personnel with whom the finding was discussed. 9/6/14 136 Phase 3: Reporting This refers to the communication between the Auditor and the Client on the results of the audit engagement (It is the product of audit engagement). It is the most visible output that provides feedback to the client and other stakeholders on the result of engagement. It is an opportunity for audit showing how it can add value to the organization. It provide the management with the opinion on the adequacy of internal controls systems. 9/6/14 137 AUDIT REPORT . Audit Step : To communicate the results of the audit to management A. Act. Hrs. Write report introduction, background & scope. Consolidate conclusion summaries into a report, x-ref SS E C Write memo for less significant items. PRO T I Submit report for review & clear review notes. AUD Set up the Exit Conference and distribute Draft Report Conduct Exit Conference to brief on the audit results and request a date for completion of the corrective action plan. (Note: If any material changes to the audit report are identified, establish the date for revised report to be issued.) Obtain Corrective Action Plan 1. 2. C. Est. Hrs. Prepare a Draft Report: 1. 2. 3. 4. 5. 6. B. W/P No. Analyze the Corrective Action Plan for adequacy and document. Advise agency management of any apparent inadequacies in the Corrective Action Plan & resolve. Prepare a Final Report: 1. 2. 3. Add the revised Corrective Action Plan to the Draft Report to prepare the Final Report. Submit report for review & clear review notes. Distribute the final report. REPORTING: Date Completed April 4, 2010 _____69_____Total Hours: Discussion Dra= the auditor drafts the At the conclusion of fieldwork, report. Audit's goal is to complete the audit and issue a draft audit report within 30 days after the completion of fieldwork. Audit management reviews the audit working papers and the discussion draft before it is presented to the client for comment. This discussion draft is submitted to the client for review before the exit conference. Exit Conference Internal Audit meets with the unit's management team to discuss the findings, recommendations, and text of the discussion draft. At this meeting, the client comments on the draft and the group works to reach an agreement on the audit findings. Exit Conference Is an opportunity for the auditor, department management, process owners, and other to review and validate audit outcomes. The Exit Conference should accomplish the following: 1) Present observations and determine if the current operating context might affect past transactions. 2) Confirm facts, observations, and conclusions, e.g., that the findings are accurate. 3) Validate the cause leading to findings and present recommendations. 4) Estimate the effect of the findings on operations or its risk management. 5) Solicit draft management comments on the audit findings and determine if alternative recommendations adequately eliminate the cause of findings. 6) Define the timeline for issuing the final audit report and implementing recommendations. Audit Finding Audit Findings Reconciliation Supervisory Review (Urgent) During our sample review of account reconciliations, it was noted that many account reconciliations were not being reviewed by the supervisor in Item Processing and Deposit Operations. Recommendation We recommend management review all accounts at least monthly. Action Plan The Supervisor of the Item Processing Department was advised of this requirement and has implemented changes as requested. The Deposit Operations Manager will sign and review all account reconciliations. A secondary signature by the balancing associate and/ or supervisor will also be implemented. This procedure is currently in place. Exit Conference Checklist Procedure Set the date, time, and location of the exit meeting. The agenda should include the following: • Accomplishment of the audit objectives (theirs and ours). • Discussion of potential audit findings and recommendations. • Discussion of when management’s response will be due. • Audit reporting process. • Follow up process. Document results of the exit meeting. Exit Conference This section of the report summarizes the pertinent information regarding the Audit Exit Conference. It includes: The date the conference was held. The persons in attendance and their titles. A statement that a summary of the Findings and Recommendations was discussed. Audit Exit Conference WP Audit Location (Faculty Division)-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Audit Date-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Lead Auditor-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ Audit team Member-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐ The main purpose of this meeting is to immediately present audit observations to the senior management in a timely manner at the end of the audit and in such a manner so as to ensure that they clearly understand the results of the audit. List Observations: The lead auditor should present observations, taking into account their perceived significance and identifying key non-­‐conformance areas. Key Non-­‐conformances: The lead auditor should present the audit team’s conclusions . Proposed Audit Score: Audi tee response to observations, non-­‐conformances and audit score proposed by the auditor. JOSE Formal Dra= The auditor then prepares a formal draft, taking into account any revisions resulting from the exit conference and other discussions. This report is issued to the audited requesting a written response to any audit findings and recommendations. When the changes have been reviewed by audit management and the client, the final report is issued. AUDIT REPORT Our principal product is the final report in which we present the audit findings and discuss recommendations for improvements. Once the fieldwork is completed, Internal Audit will draft a report to include the result of the audit including recommendations for improvement. After the draft report is completed, it will be forwarded to department management for review and discussion at a scheduled exit conference. Quality of the Internal Audit report Internal Audit Report must be:-­‐ Accurate -­‐ ie. Free from errors and distortions (purpose clearly communicated). Objective -­‐ ie. Fair, impartial and unbiased. Clear -­‐ ie. Easy to understood and logical. Concise -­‐ ie. Straight to the point without unnecessary details. Constructive -­‐ ie. Help the client to improve its performance (practical solution). Complete -­‐ ie. Should include all the relevant facts. Timely -­‐ ie. Well timed to enable timely decision on proposed recommendations. 9/6/14 148 Format of Internal Audit Report The standard audit report should have the following key sections Executive Summary: showing all aspects of the report but in a nutshell. It should be able to give the snapshot of the whole report, but it should not too much summarized to lose the meaning. Introduction: Show the background information on area under the audit, establishment, objective, function etc. (The mandate of the internal audit in auditing such area). Objectives: Show the audit focus, expected output (what it will achieves (could generals and specific ones). Scope of Audit: description of auditable areas, timing (period covered and when the audit conducted). Compliance statement: describe that the audit activity was conducted “In accordance with professional practice of auditing standards” (whether local, international or both). 9/6/14 149 Format of Internal Audit Report… Approach or Methodology use: describe the criteria followed; standards used; work done in testing; documents used (reviewed) etc. Findings and Recommendations: For each finding, describe the condition; criteria; cause and effect/impact. Recommendations should address the cause to improve operations, and is shown in a separate sub-paragraph. Conclusion/Summary: This show the auditors’ evaluation of the effect of the findings on the activity audited (The overall implications). Should focus on audit objectives and any qualifications. Can also focus on clients accomplishment in relation to previous findings, compliance and achievements of operations (Here the auditor can show the noted strengths of the client). Compliance plan: Agreement between auditor and client on the implementation of the auditor’s recommendations as part of management responses. It show area of improvement, responsible person, action to be taken and time frame, name and signature of both parties (client & auditor). [where possible the compliance plan can be signed between Head of Internal Audit and the Head of audited entity]. Acknowledgement: General statement to show the appreciation for cooperation/ assistance extended by client to the audit team during time of audit (Note: it should not mention specific individuals). 9/6/14 150 Format of Internal Audit Report… Signature: Signed after the audit examination completed. Should be signed by the authorized internal auditor and showing his/her name after his/ her signature. Appendixes: Any relevant information that clarifies the finding/ observation can be shown as appendix to the report. This must be cross-referenced in the report by number or letters (eg. Appendix 1 or Appendix A) 9/6/14 151 Phase 4: Audit follow-up Sometime referred as Recommendation Audit. It assumes all steps like any other audit engagement. The objective is to review and verify the Implementation of audit recommendation. It is the last phase of audit engagement. However The Audit Engagement is completed/closed when all recommendation has been fully implemented. 9/6/14 152 Report Issuance Control Sheet Spelling and Grammar Check Performed by: ______PABLO____________________ Quality Assurance Review (QAR) Performed by: ______VILMARI__________________ Approval of final draft with responses Director of Audits: ___AMANDA_________________ Engagement Manager: ___JOSE ____________________ Check all reports (original and all copies). Verify the following: 1. They contain all pages, in the appropriate order __________ 2 All copies are straight and legible; and __________ 3. The signature page has been signed. __________ Report Distribution*: President Client Management Chief Business Officer Director of Internal Audit Chancellor Vice Chancellor for Academic Affairs Executive Vice Chancellor for Health Affairs Executive Vice Chancellor for Business Affairs Institution Compliance Officer Others (list) Reading File (unbound hard copy – stamped and placed in Reading File) Unbound hard copy provided to Office Associate * As determined by type of audit and institution where engagement is conducted (Academic, Medical, or System Administration). Compliance Officer should be included in report distribution if engagement involves a compliance issue. Engagement Distribution Timeline: Last Day of Fieldwork (MM/DD/YYYY) _____________ Report Issuance Date _____________ Days between Last Day of Fieldwork and Report Issuance. _____________ Final Report A`er audited management has been given an opportunity to respond to the Preliminary Dra`, the Final Dra` Report is presented to the Accountability Oversight CommiMee for approval. Upon approval of the Final Dra` the Final Report is issued. Auditor distributes the final report the Chief Financial Officer, the Chief Accountant, the President, the Board of Directors, and other appropriate members of senior management. Final Reports are considered public informa5on and will be available to anyone. Independent Auditors' Report To the Board of Directors and Shareholders I have audited the accompanying financial statements of ABC CO., INC., which comprise the statements of financial posi5on as at December 31, 2013 and 2012, and the statements of comprehensive income, statements of changes in equity and statements of cash flows for the years then ended, and notes, comprising a summary of significant accoun5ng policies and other explanatory informa5on. Management’s Responsibility for the Financial Statements Management is responsible for the prepara5on and fair presenta5on of these financial statements in accordance with Philippine Financial Repor5ng Standards (PFRS), and for such internal control as management determines is necessary to enable the prepara5on of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Philippine Standards on Audi5ng. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the en5ty’s prepara5on and fair presenta5on of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effec5veness of the en5ty’s internal control. An audit also includes evalua5ng the appropriateness of accoun5ng policies used and the reasonableness of accoun5ng es5mates made by management, as well as evalua5ng the overall presenta5on of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion. Opinion In my opinion, the financial statements referred to above present fairly, in all material respects, the financial posi5on of ABC CO., INC. as of December 31, 2013, and their financial performance and its cash flows for the years then ended in accordance with the PFRS. Client Response to respond to the audit The client has the opportunity findings prior to issuance of the final report which can be included or attached to our final report. In the response, the client should explain how report findings will be resolved and include an implementation timetable. In some cases, managers may choose to respond with a decision not to implement an audit recommendation and to accept the risks associated with an audit finding. Client Response Example Client Response (1) -­‐ Treasury balances are reconciled monthly. Treasury activity is reconciled daily. Differences are isolated to the period of October 1, 2012 and prior, and have been controlled since that date. Adjusting entries are made with proper documentation and review. Moving the function to a private sector financial institution has been discussed and poses two major obstacles. The first obstacle is the negotiability of a private sector check versus a Treasury check. This would obviously cause problems for account holders in remote locations as Treasury checks are readily negotiated at local merchants. A private sector financial institutions checks would not be as negotiable. The second obstacle is the financial resources required to obtain the services of a private sector institution. Client Comments Audit's self-­‐evaluation Finally, as part of Internal program, we ask clients to comment on Internal Audit's performance. This feedback has proven to be very beneficial to us, and we have made changes in our procedures as a result of clients' suggestions. Client Comment Example "I would highly recommend Schmidt & Associates to any credit union currently searching for a quality auditing firm. I have been very impressed with the scope of the audits and the level of detail employed by representatives of the firm during their monthly and quarter contacts. Furthermore, I always receive prompt attention whenever I have questions regarding regulatory or compliance issues." Greg Kidwell Members First Credit Union Columbus, Ohio 11,000 Members, $38 Million in Assets Audit Follow up Depending on the nature of the audit or the audit findings, the Follow-­‐Up procedure may formal or informal”. Audit Approximately one year of the final report, Internal Audit will perform a follow-­‐up review to verify the resolution of the report findings. FOLLOW UP REVIEW FOLLOW UP REPORT AUDIT ANNUAL REPORT TO THE BOARD Followed up review The actions taken to resolve the audit report findings may be tested to ensure that the desired results were achieved. Followed up Report To resolve the original report findings. Unresolved findings will include a brief description of the finding, the original audit recommendation, the client response, the current condition, and the continued exposure to the board of company. Audit Annual Report Memorandum to the senior manager that notifies them that audit activities are underway and describes the follow-­‐up process. This memo should include: timeframes for the project, a copy of the outstanding findings relating to areas reporting. a request that they distribute the findings to these areas and ask the managers to provide Internal Audit with the information requested, a statement that these comments were previously distributed as part of an audit report or close-­‐out letter notification that the results will be reported to Board of Trustees. The Announce Memo report Findings Access database provides sample wording for the notification memo. The notification memo should be sent Thank You for Your AMen5on Any Questions?
