AT NOTES

OVERVIEW OF AUDIT
Scope of Practice CAREER PATH OF AN AUDITOR
1. Public – works in a CPA Firm (Audit Firm)
2. Private – employed in a private company Managing (President / CEO)
3. Academe – teaching CPALE subjects Partner Senior
4. Government – ex. auditor of COA, CPA in BIR Junior

Senior Director (2-3 years)

Audit Firms
Director (2-3 years)
1. SGV (EY)
Associate Director (2-3 years)
2. Isla Lipana (PWC)
3. Manabat San Agustin (KPMG) Senior Associate (2 years)
4. P&A (Grantt-Thorton)
5. Navarro Amper (Deloitte) Associate (1-2 years)
6. Reyes Tacandong (RSM)

Example
SGV
A
Market Groups (MG) Cluster – Partner B
C
1. Manufacturing
2. Mining Partner (1)
3. Telco Managers (3)
MG 5, Cluster B
4. Airline / Hotel Sr. Associates (5)
5. Banking Associates (10)
6. Entertainment
7. Food
8. Outsourcing
Investors/Shareholders
Suppliers
Unaudited FS Audited FS Lenders
BDO Audit Firm Users
Customers
(Client/Management/Preparer) (SGV)
A (cash, AR, inventory) Government
 Attractive FS BS L (SEC, BSP, BIR)
↑ asset, ↑ revenues, ↑ NI IS E  faithful representation
 Expectation gap (conflict of interest) SCF
 Information risk

Case 1: Celadon Group Case 2: 2GO (Logistics Company)

- Traded in NYSE - 2017  purchased by SMC 35% for ₱6 billion
- Engaged in tracking business Dennis Uy
- 2013  2016 - Audited by KPMG
750 trucks 11, 000 trucks SGV (special audit)

- 2017 (decrease in demand)  NI (2016 & 2017)

- PPE ↓ 2B
- Sale (inflate invoices by x2 or x3)  Improper recognition of deferred tax asset
For Ex. $1M, record $2M or $3M  ADA amounted to 390M (KPMG)  1.2B (SGV)
 Gain  BDO
 No impairment loss  Creditor of 2GO
 Owned by SMC

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

SERVICES:
Level of Assurance Reports
Assurance Audit High / Reasonable Positive Form
 Opinion Review Moderate / Limited Negative Form
 Independent

GW Impairment
Non-assurance Agreed Upon Procedures Derivatives Factual Findings
Sales
 w/o opinion
 no assurance
Compilation Preparation of FS Compilation Report (FS)
Tax Compliance Filing of ITR
Planning (Merger, Estate) Tax Advice

Consulting / Advisory Cybersecurity, digital

transformation, transfer Consulting Report
pricing

Audit
Financial
Review
 Inquiry, Analytical Procedure
ASSURANCE ASSURANCE > ATTESTATION > AUDIT
 Financial Other Assurance  Non-financial Similarity:
& non-financial Often used interchangeably because they
encompass the same decision-process.
 Absolute assurance is not attainable due to: Main Difference:
 Use of judgment. Scope of Services.
 Use of testing.
 Inherent limitations of internal control.
 Most evidence available to the practitioner is persuasive rather than conclusive.
 In some cases, the characteristics of the subject matter.

 Assertion-based Engagement
 Also known as attestation engagements.
 Evaluation or measurement of the subject matter
 Performed by the responsible party
 Subject matter information is in the form of an assertion by the responsible party
 Made available to the interested users.

 Direct Reporting Engagement

 Practitioner either directly performs the evaluation or measurement of the subject matter,
 Or obtains a representation from the responsible party that has performed the evaluation or
measurement
 Not available to the intended users.

GAAP (Audit)
ATTESTATION
Non-GAAP (Cash Basis)
 Pure financial
engagement
 Generally refers to an expert's written communication of a conclusion about the reliability of someone
else's assertions.

AUDIT
 Historical FS (GAAP)

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

Elements of Assurance Engagement
Practitioner (Auditor)
1. 3-party relationship Responsible Party (Management / Preparer)
a. Practitioner Intended User
 CPA in public practice who performs the assurance engagement
 Broader than the term “Auditor”

b. Responsible Party
 responsible for the subject matter or the assertion (subject matter information)

c. Intended Users
 person, persons or class of persons for whom the practitioner prepares the assurance
report
 they are the users to whom the practitioner usually addresses the report

2. Appropriate Subject Matter

 Subject Matter  refers to the information to be evaluated or measured against the criteria
 Subject Matter Information
 the outcome of the evaluation or measurement of a subject matter

 Requirements for subject matter to be considered appropriate:

 Identifiable
 Capable of consistent evaluation and measurement against suitable criteria
 In the form that can be subjected to procedures for gathering evidence to support that
evaluation or measurement.

 Forms of Subject Matter

 Financial performance or conditions
 For example, historical or prospective financial position, financial performance
and cash flows

 Non-financial performance or conditions

 For example, performance indicators of an entity

 Physical characteristics
 for example, capacity of a facility

 Systems and processes

 for example, entity’s internal control or IT system

 Behavior
 for example, corporate governance, compliance with regulation, human resource
practices

3. Suitable Criteria  IFRS

 Criteria  standard or benchmark used to evaluate or measure the subject matter of an
assurance engagement, including, where relevant, benchmarks for presentation and disclosure.

 Characteristics
 Relevance
 contribute to conclusions that assist decision-making by the intended users.
 Completeness
 criteria are sufficiently complete when relevant factors that could affect the
conclusions in the context of the engagement circumstances are not omitted.
 Reliability
 allows reasonably consistent evaluation or measurement of the subject matter
when used in similar circumstances by similarly qualified practitioners.
 Neutrality
 contribute to conclusions that are free from bias
 Understandability
 Conclusions are clear, comprehensive, and not subject to significantly different
interpretations

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

  Two types of Criteria:
 Established criteria
 embodied in laws or regulations or issued by authorized or recognized bodies of
experts that follow a transparent due process.
 Specifically developed criteria
 those criteria specifically designed for the purpose of the engagement.

4. Sufficient Appropriate Evidence

 The practitioner shall plan and perform the engagement with an attitude of professional skepticism
to obtain sufficient appropriate evidence that the assertions are free of material misstatements.

 Professional skepticism
 an attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of evidence.
 Evidence
 refers to the information obtained by the practitioner in arriving at the conclusions on
which the conclusion is based.
 Sufficiency
 refers to the measure of the quantity of evidence.
 Appropriateness
 refers to the measure of the quality of evidence, that is, its relevance and its reliability.

5. Written Assurance Report

 should be in the form appropriate to a reasonable assurance engagement or a limited assurance
engagement.

Types of Audit

1. FS Audit  external auditors (Ex. Audit Firms)

2. Operational Audit  internal auditors (employed by clients)
3. Compliance Audit  government audit / COA

Pronouncement of Assurance Engagement:

AASC Engagement Standards Applications Related Practice Statements

Philippine Standards on Auditing Philippine Auditing Practice
FS audit engagements
(PSAs) Statements (PAPSs)
Philippine Standards on Review Philippine Review Engagement
Review engagements
Engagements (PSREs) Practice Statements (PREPSs)
Other assurance engagements
Philippine Standards on Philippine Assurance Engagement
dealing with subject matters other
Assurance Engagements (PSAEs) Practice Statements (PAEPSs)
than historical financial information
Philippine Standards on Related Philippine Related Services
Related services
Services (PSRSs) Practice Statements (PRSPSs)

Other pronouncements:
 Philippine Standards on Quality Control (PSQCs) – to be applied for all services that fall under the
AASC’s engagement standards, namely, audit, review, other assurance, and related services.

 Philippine Framework for Assurance Engagements – to be applied for assurance engagements.

o Identifies engagements to which assurance engagement standards (PSAs, PSREs, and
PSAEs) apply

o Distinguishes assurance engagements and non-assurance engagements (non-assurance

engagements are not covered by the Framework).

o Sets out characteristics that must be exhibited before a practitioner can accept an assurance
engagement.

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

 o In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform
assurance engagements are governed by:
 The Code of Ethics for Professional Accountants in the Philippines.
 The Philippine Standards on Quality Control (PSQCs).

o Does not itself establish standards or provide procedural requirements for the performance of
assurance engagements.

Accounting Audit

International IASB IAASB

Regulatory Bodies
Local FRSC AASC

International IFRS ISA

Standards
Local PFRS (GAAP) PSA (GAAS)

Reports on Non-Assurance Engagements:

o Should not use the words “assurance”, “audit” or “review”.
o Should not imply compliance with assurance engagement standards (PSAs, PSREs or PSAEs).
o Should not include a statement that may be misinterpreted as assurance engagements.

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

AUDITOR’S PROFESSIONAL AND LEGAL RESPONSIBLITIES AND QUALITY CONTROL ON
AUDIT

Systems of Quality Control (SQC)

 Policies & procedures adopted by audit firms Professional Standards (PSAs)
to ensure that the auditors comply with the
Regulatory & Legal Requirements
(Code of Ethics & RA 9298)
Illustration:
Audit engagement
Isla Lipana / PWC 2 weeks training Philex Mining Corporation (PMC)
MG 2 (Mining) - copper & gold
- listed company
Partner X
- mines in Benguet, Surigao, Negros, Zamboanga
- Subsidiaries:
Issues ← M1 M2 M3 M4 Lascogon Mining Corp.
PXP Energy
SA 1 SA 2 SA 1 SA 2 SA 1 SA 2 SA 1 SA 2 Silangan Mindanao
- Head Office: Mandaluyong
A1 A2 A3 A1 A2 A3 A1 A2 A3 A1 A2 A3
M-W  Fieldwork
VP for Finance  Father Th-F  PWC
 issue on independence
 ask to be reassigned
Elements of SQC
1. Leadership Responsibilities
 Partner in charge (PIC)  in charge for each client engagement
 Managing partner / CEO  in charge for the whole audit firm
 Signing of auditor’s report
In Appearance  perception of 3rd party
2. Ethical Requirements including Independence
 Integrity In Fact / Mind  state of mind
 Objectivity
 Confidentiality
 Due care
 Professional competence

3. Acceptance & Continuance of Client Relationship

 Recurring client
Assess integrity of the client
 New client
 Why is there a change in auditor?
 Communicate w/ predecessor auditor
 Must be w/ management permission
 Successor auditor must initiate communication w/ the permission of the
management

4. Human Resources and Assignment

 Manpower & expertise to handle the client
 Bring specialist (experts  not accounting related)

5. Engagement Performance
 Auditors must comply w/ the PSAs
 Teamwork between Associates & Sr. Associates must always be present
 Communication must be present

6. Monitoring
 Evaluation
 Engagement Quality Control Review (EQCR)  one partner auditing another partner
 Required for listed companies
 Spot check

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

Professional & Legal Responsibilities

 Fraud, compliance w/ laws & regulations

Manipulation of FS (↑ rev, ↓ exp, ↑ asset, ↓ liab)

Fraudulent Financial Reporting
 management fraud Misapplication of accounting principles
FRAUD
Stealing of cash, inventory
Misappropriation of Assets
 employee fraud Payment to fictitious employees

illustration:
RCBC Money Heist
1. Opened 4 dollar accounts (RCBC – Jupiter)
$500 per account
2. $81M  RCBC – Jupiter
A $30M
Bank of Bangladesh B $20M
 Federal Reserves in NY C $25M
D $6M Not yet covered by AMLA

3. A withdraw $23M  Philrem  Businessman  Casinos (Solaire)

($  ₱) (money disappeared)

4. Bank of Bangladesh
$58M withdraw

5. Aftermath
- Branch Manager  32 – 56 years imprisonment
 to pay $109M
- AMLA  included casinos to covered transactions
- President of RCBC  resigned

Incentives / Pressure  bonuses, stock option, sale of business

Fraud Risk Factors Opportunities  lack of internal control
 red flags
Attitude / Rationalization  personal reasons

Management / BOD
 prevention & detection of fraud
Responsibilities in terms of Fraud
Auditor
 provides reasonable assurance that the FS are free from
material misstatements whether due to fraud or error

 application of audit procedures

Compliance w/ Laws & Regulations

 responsibility of the management

Illustration:
RCBC 2008 Financial Crisis
 SEC, BIR, PSE, BSP Basel III  to ensure capital adequacy of bank
 liquidity of banks
 capital adequacy ratio (CAR)

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

AUDIT PLANNING AND MATERIALITY
Stages in Audit:

1. Preliminary Engagement Activities (PEA)

2. Audit Planning
3. Understanding Internal Controls
4. Testing of Internal Controls
5. Substantive Testing
6. Completing the Audit

Preliminary Engagement Activities

1. Acceptance & Continuance of Client Relationship
 Assessing client integrity
 Reasons for change
2. Evaluate compliance with Ethical Requirements including Independence
3. Establish an Understanding of the Terms of the Engagement

Engagement Letter  written content between audit team & client

To outline the terms
 Purpose
To avoid misunderstandings
 Content
1. Objective & Scope
Auditor  express an opinion on the FS
2. Responsibilities
Management:
a. Preparation of FS
b. Implementation of Internal Control
c. Adjust the FS to correct misstatements
d. Compliance with Laws and Regulations

3. Framework  PFRS / IFRS

4. Other requirements
 Ex. BIR, SEC, BSP, CAAP
5. Fees
Illustration:
Deloitte JG Summit Holdings
Partner JHA (Conglomerate)
MG: Airline Industry Organizational Structure
4 Managers
8 Sr. Associates JG Summit
15 Associates
Real Estate Banks Airline Others
61% 60% 100% PLDT 8%
RLC Robinsons CP Air Meralco 30%
Banks Holdings Others
Management (Executive Officers) 100% 68%
Lance Gokongwei (President & CEO) Legaspi Cebu Air
Michael Liwanag (SVP) Savings
Nicasio Lim (SVP) Cebu
BOD
Pacific
James Go (Chairman)
Lance Gokongwei
Antonio Go
Jose Pardo Independent Directors Audit Committee
Renato de Guzman

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

AUDIT PLANNING
 Partners & Managers
1. Establish the overall audit strategy
a. Scope  coverage of the audit (Parent & Subsidiary); annual or interim
b. Timing  timeline; schedule of fieldwork; documents needed Oct Dec Apr

c. Direction  areas where there may be high risk

 Example:
 IFRS 16 (Leases), Effects of COVID-19, Forex  Cebu Pac
 RLC  new accounting system; ERP, SAP

2. Developing the more detailed audit plan / program

- Planned audit procedure
- Example:

B/S Objective Procedures Time Conclusion

Cash & CE Assertions Bank recon, Proof of Cash 20 hrs Over/Under
Account AR (Completeness, Bank Confirmation
balances Investments Existence) Aging, AR Confirmation 5 hrs
(line item) Inventory Recomputation, MTM 10 hrs
PPE Inventory count, LCNRV, Cut-off
Inspection
Analytical Procedures
 analyzing using numbers / amounts

1. Ratio Analysis  GPM, NPM, Asset TO, ROA

2. Trend Analysis Rev
3. Regression Analysis Rev
4. Variance Analysis 2019 2020 2021 2022

Benchmarking  comparison between competitors

Cebu Pac
5. PAL
 Cebu Pac vs. PAL 2019 2020 2021 2022

 can be used during:

Required by PSA Objective

1. Planning ✔ - to identify areas that may represent specific risks

(unaudited) - to understand the business

2. Substantive ✖ - substantive audit procedure

Testing

3. Completion ✔ - to test the reasonableness of audited amounts

(audited)

Materiality

 Guidelines + Professional judgement

 Materiality thresholds are often computed using:
o .5% to 1% of Assets
o 1% to 3% of Revenues
o 5% to 10% of Net Income
Materiality Levels
1. Overall / Planning Materiality
- FS Level (Assets, Revenue, Income)

2. Performance Materiality / Tolerable Misstatement/Error

- Account balance level (line item)
1. To know which transactions to test
Uses
2. To know if the audit amount of the differences is material or not

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

Example:
5,000 Transactions
Transactions ≥ 5M
1,000 transactions tested
Client:
Total Asset 1B Audited Unaudited Difference Material?
x 1%
OM 10M Cash 20M 30M 10M ✔
x 50% AR 5M 6M 1M ✖
PM 5M Inventory 10M 8M 2M ✖
PPE 50M 70M 20M ✔

Summary of Audit Difference (SAD)  cumulative immaterial amounts

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

AUDIT RISK

Objective of Audit: To provide an opinion on the reliability of the FS of the client

 benefits the users
Types of Opinion

1. Unqualified  FS is reliable
2. Qualified
3. Adverse
4. Disclaimer
Illustration:
Wirecard Aftermath:
 280,000 corporate clients  Share price ↓ 72%
 2018: $29B ($117/share  $1.5/share)
 2019: Whistleblower  issues found: inflated earnings  2020  Bankruptcy
 $2B cash  non-existent  Outstanding debt $4B  creditors
 EY (more than 10 years)  Auditor  Thousands of employees laid-off
 2016 – 2018  unqualified
 2019  EY did not sign-off
BPI
PH Employee falsified deposit certificate
BDO

Susceptibility of Risk that the audit procedures will fail

account balances to detect misstatements in the FS
AR FORMULA:

AR = IR x CR x DR
Risk of giving an Internal controls of the client will not be able to
incorrect opinion prevent, detect, correct misstatements in the FS

AR = IR x CR x DR

Controlled? ✖ ✖ ✔
Level Desired Assessed Assessed Acceptable
RoMM Inquiry
Observation
Risk Assessment Procedure
Inspection
Stage Planning IC ST Analytical Procedure

Step 1: Set the desired level of audit risk Ex. (1%, 5%, 10%)
AR = 1 – Confidence Level

Step 2: Assess the IR & CR (Risk of Material Misstatement)  performing RAP

Step 3: Set the acceptable level of DR
Nature  More effective
Scenario 1: ↑ RoMM, ↓ DR  Conservative Timing  Year end
Extent  Larger sample size
RoMM
(IR x CR) Nature  Less effective
Scenario 2: ↓ RoMM, ↑ DR  Less Conservative Timing  Interim
Extent  Smaller sample size

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

 AR Bank Recon
DR = Cash
IR x CR Proof of Cash  more effective
RoMM Cut Off
Inventory
Inventory Count  more effective

Illustration:

KPMG Coins PH
- Fintech
- Blockchain
Remittance
Bills payment
- Services
Fund transfer
Loading
- Management
- BOD

↑ ↑ ↓
AR = IR x CR x DR
10% = 60% x 60% x DR

AR 10%
DR = = = 27.8%
IR x CR 60% x 60%

Bank Recon
Cash Proof of Cash
Confirmation
N: More effective
Legal docs
↓ DR T: Year-end
IA Recompute GW
E: Larger sample size
IAS 38

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

INTERNAL CONTROLS
Design
Understanding of Internal Control End goal: Assess level of CR
Implementation
Parts
Testing of Internal Control (TOC)  evaluate the effectiveness of internal control

Below maximum (Good IC)  TOC  ST ↓

CR
At maximum (Weak IC)  ST ↑

Processes, policies & procedures

Internal Controls Implemented & maintained by top management
To provide reasonable assurance about the achievement of the entity’s objectives

Objectives / Reasons for Internal Control:

1. To ensure reliability of Financial Reporting (FS)
2. Efficiency & Effectiveness of Operations (↓ expense, ↑ NI)
3. To ensure compliance with laws and regulations

Illustration:
Luckin Coffee
 Beijing, China
 2017: Founded, Listed in NASDAQ, $17/share, $2.9B
 2018: 1,300 stores $50
apps, kiosk
 2019: Muddy Waters Research
 $310M (fictitious sales)  80%
 Overstated advertising expense (150%)
 2020: 4,500 stores
US SEC  $180M
CEO & CFO  fired
 2021: Bankruptcy

PCAOB  Public Company Accounting Oversight Board

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

UNDERSTANDING INTERNAL CONTROLS
Components of Internal Controls (CRIME)
1. Control Environment
- Level of commitment of top management & BOD

2. Risk Assessment
- Management’s identification & assessment of risk (business risk)
- Value at Risk (VAR)
- Courses of action in mitigating risk

3. Information & Communication Systems

- Means of recording transactions & communication responsibilities
- Accounting system (SAP)
- Quickbooks

4. Monitoring
- Assessment of internal control performance
- Internal auditors

5. Existing Control Activities

- Control policies & procedures that help ensure management directives are carried out.

a. Physical Controls  safeguarding of assets

Authorization
b. Segregation of Duties Recording
Custody

c. Information Processing Controls

 Application controls
 General Controls

d. Performance Reviews
 Evaluation of performance
 Variance analysis

Illustration:
Lending
P&A BDO Banking Industry Investment Banking
Sy Family Asset Management
1,400 Branches
(HK, SG) Annual FS:
IFRS 9 SMIC
I/S
IFRS 13 45%
BDO Int. Income
Unibank - Int. Expense
(BDO Private Bank, BDO Network Banks, BDO Capital) Net Int. Income
- OPEX
 IR NI
 CR

Understanding Design (Should be)

Implementation (Actual)
Procedures:
1. Inquiry
2. Inspection
3. Observation
4. Reperformance (walk-through)

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

Implementation
Deposit Withdrawal Loan Application

1. Accomplishment of deposit slip ✔ accomplishment of loan application forms

(account name, #, date, amount,
signature)

2. Validation & processing ✔ credit investigation

(CASA System) ≤ ₱5,000 teller
5k – 50k branch head

3. End of day procedures ✔ deliberation by credit committee

(cash reconciliation)
Cash
Beg bal
Deposit W/drawal
End bal
4. JE: JE: JE:
Cash D/L LR
1M 800k 5M
DL Cash Cash

Int Exp Cash

50k 100k
Cash Int Inc

Physical Controls (vaults, CASA system, passwords)

Banks Authorization Bank Heads
Segregation of Duties Recording Separate Departments
Custody Teller

Inherent Limitations
1. Management override
2. Collusion among employees
3. Cost-benefit relationship
4. Human errors

Types of Controls

Before problem arise

1. Preventive Segregation of duties, physical access
Authorization

2. Detective As problem arise

Bank recon

To remedy problems discovered

3. Corrective
Maintaining backups

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

TEST OF CONTROLS
Design Below maximum: TOC  ST ↓ (limited ST)
Understanding CR
Implementation At maximum: ST ↑ (extensive ST)
Internal Control
Testing of Internal Control (TOC)  evaluate the effectiveness of internal control

Procedures:
1. Inquiry
2. Inspection
3. Observation
4. Reperformance

Transaction Cycles:

1. Revenue Cycle
 Revenues / sales, cash receipt

2. Expenditure Cycle
 Purchases, AP, cash disbursement

3. Inventory
 Physical count, costing

4. Payroll / HR (personnel)
 Salaries, OT

5. PPE Cycle
 Acquisition, disposal, depreciation

6. Investment
 Debt, equity, income

7. Financing
 Issuance of debt, equity, interest expense, dividends

Control Deficiencies
 Material (more severe)
 Significant deficiency (less severe) Reportable Conditions  BOD (Audit Committee)

TOC vs ST
 IC  Testing / Auditing
 Processes  the amounts (Cash, AR)

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

AUDIT EVIDENCE / ST (PSA 500)
Audit Procedures

 Risk Assessment Procedures (RAP)  Inquiry, Analytical Procedures, Observation, Inspection

 Test of Control (TOC)  Inquiry, Inspection, Observation, Reperformance
 Substantive Testing (ST)

FS / Management Assertions
 representations or claims by the management that are embodied in the FS
B/S I/S
1. Existence Cut-off
 Items in the FS really exists
 Assets (cash, AR, inventory, PPE)
 Overstatement

2. Completeness Completeness
 All transactions are recorded
 Liabilities (AP, NP, LP)
 Understatement

3. Rights & Obligations Occurrence

 Rights to assets & liabilities are obligations
 Ex. Inventory, Loan Payable

4. Valuation & Allocation Accuracy

 Items in the FS are measured at proper amounts
 FV (FVPL, FVOCI), AC, Revalued amount, LCNRV
 Depreciation & Amortization

5. Presentation & Disclosure Classification

 Current vs Noncurrent, notes to FS

AUDIT EVIDENCE
 supports the opinion

Sufficient  Quantity
Characteristics Relevant Professional Judgement
Appropriate Quality
Reliable

Nature  Persuasive rather than conclusive

Accounting Records  General Journal, Special Journal, GL, SL, worksheets

Types  direct

Corroborating Information / Other information / Source Documents  PO, RR, Bank Statement
 indirect

Substantive Procedures AR
Test of Transactions Beg bal Collections
Test of Details  small volume Cr Sales Write-off
Types Test of Balances End bal
 large balances
Analytical Procedures

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

Specific Procedures

 Inquiry
 Inspection
 Observation
 Reperformance
 Recalculation / Recomputation
 Confirmation
 Analytical Procedures

Documentation / Working Papers

Content:

1. Audit Objectives  assertions

2. Related ST procedures
3. Audit Conclusion
4. Signature
5. Estimated hours

Generalizations:
More reliable if:
1. Obtained from independent source outside the entity
2. Internal controls are effective
3. Obtained directly by the Auditor
4. Documentary form (written) than obtained orally
5. Original documents than photocopy

Directional Testing
PO GJ
1. Tracing Source Accounting  Test Completeness Assertion
Documents Records  Liabilities  Understatement

GJ PO
2. Vouching Accounting Source  Test Existence Assertion
Records Documents  Assets  Overstatement

Positive  customer should reply whether or not they agree (blank amount)
AR Confirmation  1st try, 2nd try, Alternative Procedure

Negative  customer should reply only if they disagree (amounts are indicated)

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

AUDIT SAMPLING (PSA 530)
 applying audit procedures to less than 100% of the items in the population
 TOC & ST
MB
Example: MB QC Branch
1,000 deposits Signatures
100 deposits / day < 5k Teller
x 300 100 sample 5k – 10k Supervisor
Population 30,000 deposits / year >10k Manager
Sample 3,000 (10%)
₱10M – 800 withdrawals DL
2M
₱2M – 80 samples Cash
Random Selection
Statistical Probabilities Objective
Mathematical
Approaches

Nonstatistic Subjective
al Professional Judgement

Attributes  rate of deviation / occurrence (IC)  TOC

Types
Variables  numerical quantity (amounts)  ST

Sampling Risk
 risk that the result from the sample  population
Types: TOC ST Sacrificed
1. Alpha Risk Risk of assessing CR too high Risk of incorrect rejection Efficiency
(Type 1 Error) Sample: CR↑ Sample: DL misstated (under
Population: CR↓ Population: DL is correct reliance)
DR ↓, ST ↑ ST ↑, ↑ evidence

2. Beta Risk Risk of assessing CR too low Risk of incorrect acceptance Effectiveness
(Type 2 Error) Sample: CR ↓ Sample: DL is correct (over reliance)
Population: CR ↑ Population: DL is misstated (✖ opinion)
DR ↑, ST ↓, ↓ evidence

Reduce Sampling Risk:

1. Using the appropriate Sample Selection Method
2. Using the appropriate sample size
3. Correct projection

Sample Selection Method

1. Random Sampling
 Random numbers
 Equal changes of getting selected

2. Systematic Sampling
 Sampling interval
1,000 transactions
 Ex. 100 samples
= 10 intervals

3. Stratified Sampling 100 0-30 days 5

 Grouping of items of similar characteristics AR aging 50 31-60 5
 Stratification 30 61-90 5
20 samples 20 >90 days 5

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

 4. Value-weighted / Monetary Unit / Population Proportional to Size (PPS)
 The higher the amount, the higher the chances of getting selected
 Ex.
Deposit Slip #30 ₱1M ✔ x10
#50 ₱100k

5. Haphazard
 Does not follow any mathematical / structural approach
 Ex.
All deposit except 15th & 30th
All deposits from 1-3 PM

6. Discovery Sampling
 Used when the auditor believes that the deviation is zero
 100% complete review if the auditor finds an exception.

7. Block Selection
 Least desirable; biased

8. Stop-or-Go Sampling
 Auditor expects few errors
 Sufficient evidence  stop

Sample Size
TOC ST Relationship to Sample Size
1. Acceptable SR Acceptable SR (ASR) Inverse

2. Tolerable Deviation Rate (TDR) Tolerable Misstatement / Error Inverse

3. Expected Population Deviation Expected Population Direct

Rate Misstatement / Error

Prior experience

Projection
30
1. TOC 1,000 Deposits 100
= 30% sample deviation rate
100 samples + 5% acceptable sampling risk
30 deviations 35%
ASR 5%
2.
Case 1: 20% vs 35% ↑ CR
TDR
Case 2: 40% vs 35% ↓ CR

10k
3. ST ₱1M 1,000 withdrawals x 1M = 200k
50k
₱50k 100 samples 50k acceptable sampling risk
Misstatement ₱10k 250k
ASR ₱50k

Case 1: ₱100k vs ₱250k Material

TM
Case 2: ₱300k vs ₱250k Immaterial

Projection (ST):
1. Mean per unit (MPU) Estimation
2. Ratio estimation
3. Difference estimation

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

COMPLETING THE AUDIT Stages:
Sept. 1. Preliminary Engagement Activities
 Procedures performed at the end of audit Sept. 2. Audit Planning
 Wrapping up  necessary & required 3. Understanding Internal Controls
 Performed by Senior Associates & Managers Oct-Nov
4. TOC
sampling
Illustration: Dec-Mar 5. ST
Mar-Apr 6. Completing the Audit
Philippine Airlines (PAL)
1. Preliminary Engagement Activities
 Airline / Aviation Industry PNB
 Competitors: Cebu Pacific, Air Asia CAAP Eton Properties
 Management: Lucio Tan (Chairman, CEO) LTG Tanduay
Susan Lee (CFO) Fortune
 BOD: Carmen Tan PAL Holding Inc
Lucio Tan Family Members
Joseph Tan
Gregorio Yu Zuma PAL PR
Independent Directors Holding Holdings Inc
Johnip Cua

16 (owned) Air PH
 Fleet 97 Corp
81 (leased)
 Pasay (MOA)

2. Planning
 Overall audit strategy SGV
 Initial audit program 1 Partner
 Setting materiality level 4 Members
 Computing AR 8 Sr. Associations
 IR 10 Associates

3. Understanding Internal Control

 Design & Implementation  walkthrough
 Manual of processes
 Fieldwork
 Operations, accounting, finance, treasury department
 CR

4. Testing of Controls
 Operating effectiveness
 IC with direct effect  FS
 I, I, O, R
N
↓ DR T
E

5. Substantive Testing
 Inquiry, inspection, observation, reperformance, confirmation, recalculation, analytical procedure
 Audited Balance  propose AJE

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

 6. Completing the Audit
Proceedings:

1. Review Related Party Transactions (RPT)

Examples (Parent & Sub)
IAS 24
Disclosures
Responsibility:
Management  properly identify, record & disclose RPT
₱100M
PNB
Loan
PAL  Favorable
 RPT are not usually at arms-length
3%, Grace Period: 3 years, 15 years to pay transactions

Auditor: 1. Obtain understanding (inquire management)

2. Check if properly disclosed in the FS

2. Review of Subsequent Event (IAS 10)

 events occurring between BS date & date of auditor’s report
Dec 31 Apr 1
 date of auditor’s report
Date of BS / FS  responsibility of the auditor is up to this date

Adjusting Event (Type 1)

 conditions existing as of BS date
 settlement of litigation
 write-off of AR

Non-adjusting Event (Type 2)

Issuance of Share
 disclosures Ex. CREATE Law affecting PAL
Catastrophe
Responsibility:
Management  properly identified & recorded or disclosed

Auditor  verify that the management has properly recorded or disclosed

3. Verify Litigations & Claims

 On-going cases
 Probable and measurable  provision (accrue)
 Probable or measurable  disclose (contingent)
Responsibility
Auditor
List of litigations & claims
1. Inquire of Management
Management assessment of the outcome
 primary evidence

2. Letter of Audit Inquiry  client legal counsel (lawyer)

 corroborating evidence

Management  Auditor  Lawyer

4. Perform Analytical Procedures (AP)  test of reasonableness

 Audited amounts
 Benchmarking vs competitors
PSA Revenue ↓ 64%
Planning ✔ unaudited 2020 OPEX ↓ 46%
AP ST ✖ (vs 2019) Net Loss ↑ 86%
Completion ✔ audited 10B  73B

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

 5. Assess Going-Concern Assumption
Conceptual Framework: Entity is assumed to operate in foreseeable future
Opposite: Liquidation Assumption

Responsibilities:
Management:
1. Assess the entity’s ability to continue as a going concern
2. Disclose the assessment

Auditor:
1. Evaluate the appropriateness of management’s use of going-concern assumption
2. Evaluate if properly disclosed
3. Identify, based on management’s assessment,
 Events & conditions that may give rise to business risk
 Management’s mitigating factors (plans)

Dec. 31, 2020

Net Loss 73B
Deficit 88B Gives rise to material uncertainty
CL > CA 3B

Recovery Plan: (FRIA)

1. Financial restructuring  banks, lessors
2. Deferral or airport authority fees
3. Retrenchment Program  2,000+ lay-offs
4. Disposal of assets
5. Returned 20 leased aircrafts

6. Obtain Management Representation Letter

 impress upon management its representation on the FS

Content:
1. Management acknowledges its responsibility on the FS
2. Management approved the FS
3. Management acknowledges its responsibility on the IC
4. Management believes that the uncorrected misstatements are immaterial
5. Management has made available all financial record (evidence)
 signed by top management (CEO & CFO)
 addressed to the auditor
 date  coincides with the date of auditor’s report
7. Review adequacy of disclosures
- Disclosure checklist

8. Review of Working Papers

- Final review before archiving

9. Forming an Opinion

Discovery of Omitted Procedures

Auditor:
Yes  No further actions
Yes  Compensated by other procedures?
Did it affect the opinion? No  Apply omitted procedures
No  no further action

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

FORMING AN OPINION AND AUDITOR’S REPORT
Types:

1. Unqualified  FS are fairly stated

 No material misstatement
2. Qualified  FS are fairly presented except for…
3. Adverse  FS are not fairly presented
4. Disclaimer  the auditor does not know if fairly or not fairly presented (no opinion)

Material but not Pervasive Material and Pervasive

Misstatement Qualified Adverse
Scope Limitation
 inability to obtain evidence
Multiple uncertainties
 Client Imposed Qualified Disclaimer
Lacks Independence
 Others

Auditor’s Report
1. Title
 Independent Auditor’s Report

2. Addressee
 Stockholders & BOD; with address

3. Opinion
 Client
 FS, periods
 In accordance with PFRS

4. Basis for Opinion

 PSAs, Independence
 Code of Ethics
 Sufficient & Appropriate Evidence

5. Key Audit Matters

 Most significant aspects / areas
 Ex. Real Estate Revenue Recognition (LTCC)
 Why significant?
 Effect to FS
 Auditor’s response

6. Management’s Responsibilities
 FS & Internal Control

7. Auditor’s Responsibilities
 Obtain reasonable assurance
 Issue an opinion
 General description of the audit

8. Other Reporting Responsibilities

9. Name of the Engagement Partner

10. Partner’s Signature

11. Auditor’s Address

12. Date of Auditor’s Report

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

Unmodified vs Modified
1. Opinion is Qualified, Adverse, Disclaimer
2. Emphasis of Matter (a)  presented in the FS
3. Other Matter (b)  not presented in the FS

(a) 1. An uncertainty such as litigation or regulation action

2. Material going-concern issue
3. Early adoption of IFRS
4. Subsequent discovery affecting previously issued opinion
5. Major catastrophe (fire, flood)
(b) 1. If there’s a restriction on distribution or use of report
2. If the FS of prior period were audited by another auditor
3. Other information (history, management, plans, BOD)

Comparative Information Opinion

 Comparative FS 2020 & 2019

 required under IFRS (All periods)
 complete set of FS

 Corresponding Figures 2020

 selected items (Current period)
(Ex. Inventory 2020 & 2019)

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

AUDITING IN A CIS (IT) ENVIRONMENT
Characteristics:

1. Lack of visible audit trail

 Paperless

2. Consistency of Performance
 CIS functions exactly as programmed

3. Concentration of Duties
 Authorization, Recording, Custody  properly segregated

4. Ease of access to data & computer program

5. System-Generated Transactions
6. Vulnerability of Data & Program Storage

Effect on Audit:
 Same - objectives
Real-time
- responsibilities Data Processing
Batch
- stages

 Focus is TOC rather than ST

Internal Control in a CIS

General Controls (High-level controls)

 Understanding
Application Controls
 TOC
General Controls
1. Organization Controls
 Clear assignment of responsibilities

Between CIS & user departments

 Segregation of duties  IT department (process, monitor)
Development (coding)
Within CIS department  Program Operations
 headed by CIS Director Maintenance

2. Systems Development & Documentation Controls

 Major changes  authorized official

3. Access Controls

4. Data Recovery Controls  backup

Data Recovery Plans
1. Internally provided backup (on site)
 Separate department
 Most expensive; less risky

2. Externally provided backup (off site)

 Outsourced

a. Hot site (recovery operation center)

 most readily available
 equipped hardware, software & internet
 less risky; costly

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

 b. Warm site
 not as equipped
 less costly; risky

c. Cold site (empty shell)

 least readily available
 least costly

3. Mutual Aid Compact

 Arrangement with another company with similar needs
 Hardest to execute

5. Monitoring of Controls

Application of Controls

1. Key Verification
 Data is to be entered twice

2. Field / Validity Check

 Characters
Invoice  Numeric
Terms, Due date

3. Check Digit
 Ex. Add Supplier 7530261 6
= 24  2+4 = 6
4. Hash Total
 Adding numbers without meaning
 Ex. Customer A ₱5,000 #101
B 3,000 #102
C 2,000 #103
₱10,000 306
5. Limit Check
 Ex. ₱50k / day

Test of Control
1. Auditing around the computer
- Input is reconciled with output
- Black box approach 1. Test Data
- Auditor gets a copy of the program
2. Auditing with the computer - Auditor installs the program
- Audit software - Auditor inputs erroneous / fictitious
transactions
3. Auditing through the computer
- Computer Assisted Audit Techniques 2. Integrated Test Facility (ITF)
- White box approach - Auditor uses the actual system used by
the clients
- Risk of contamination

3. Parallel Simulation
- Auditor codes or writes the program

Client’s Data Client’s Data

Client’s Program Auditor’s Program

Actual Results Simulated Results

Reconcile

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

CODE OF ETHICS
- Revised International Code of Ethics for Professional Accountants
- Developed by International Ethics Board for Accountants (IESBA)
- Implemented by BOA

Part 1: Compliance with the Code  distinguishing mark, responsibility to act in public interest
Fundamental Principles Applies to all CPA
Conceptual Framework
Part 2: CPAs in Business (employed, owners, managers)
Part 3: CPAs in Public Practice (audit firm)

4a Independence for Audit & Review Engagement

Part 4:
4b Independence for Other Assurance Engagement

Fundamental Principles
1. Integrity
- Straight forward & honest in all professional and business relationship
- Fair dealing and truthfulness
- Ex. Correct Opinion

2. Objectivity
- Fair, intellectually honest and free of conflict of interest

3. Professional Competence - attain and maintain professional knowledge

& - Ex. BSA, CPALE, trainings, CPD
Due Care - act diligently and in accordance with the standards
- Ex. PSA, proper supervision

4. Confidentiality
- Respect the confidentiality of information acquired
- Except when, legally required to disclose, with client consent
- Ex. inside information

5. Professional Behavior
- To comply with relevant laws & regulations
- To avoid misconduct that might discredit the profession

Threats Examples:

1. Self-interest threat - potential employment

- Financial or other interest that will influence judgement or behavior - gifts
- dependent on fees
2. Self-review threat - valuation of derivatives
- CPA will not appropriately evaluate the results of a previous - preparation of FS
judgement made

3. Advocacy threat - under litigation

- CPA will promote a client’s position or opinion - acting in behalf of the client
- promoting shares
4. Familiarity threat
- 5 years
- CPA will be too sympathetic due to a long & close relationship
- close family member
with client

5. Intimidation threat - change of audit firm

- CPA will be deterred from acting objectively because of actual - significant gifts
or perceived threats

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

Conceptual Framework
Step 1: Identify
Step 2: Evaluate Applies to all CPA
Step 3: Address
 Eliminate or reduce using safeguards
 If no safeguards, as last resort  reject the client

Scenario 1: Close family relationships Threats 4,5

Objectivity
Associate CFO
(SGV) (Father) ALI

Scenario 2: Long association with client Threats 4,5

Objectivity
SGV PAL
5 years Address: rotation (cooling-off period)

Scenario 3: Client has no valuation knowledge Threat 2

Address:  3rd party experts
 engaging other departments in the firm

Scenario 4: Senior Associates  shares Threat 1

SGV PLDT
Address: Sr. Associate to sell shares or re-assign

Material ✖
Direct
Immaterial ✖
Financial Interest
Material ✖
Indirect
Immaterial ✔

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

REPUBLIC ACT 9298
- Philippine Accountancy Act of 2004
- Accountancy Law

1. Objectives (Sec. 3)
 Accounting education
 Board exam
 Practice of accountancy

2. Scope of Practice (Sec. 4)

a. Public Accountancy  audit firms; own  Certificate of Accreditation (3 years)
b. Commerce & Industry  private practice; employed
c. Education & Academe  colleges / universities
d. Government  government agencies

3. Board of Accountancy (BOA) (Sec. 5)

 Chairman 3 31 33✖
 6 members Appointed by the President  3 years
Max. 12 years
 VC  1 year
5 members Rank 3
PICPA PRC President
Each position

4. Qualifications of BOA members (Sec. 6)

 Natural-born citizen
 At least 10 years  any scope of practice
 Good moral character; not convicted
 Not affiliated with any schools or review centers

5. Power and Functions (Sec. 9)

6. Grounds for Suspension or Removal (Sec. 11)

 Neglect of duty
 Violation
 Final judgement
 Manipulation / rigging of results

7. Qualifications of Applicants for CPALE (Sec. 14)

 Filipino Citizen

8. Scope of CPALE (Sec. 15)

✔ F F C
FAR 80% 75% 74% 75%
AFAR 90% 75% 74% 75%
75%
MAS 80% 75% 74% 75%
AUD 70% 70% 74% 75%
RFBT 80% 70% 74% 50%
TAX 90% 64% 74% 50%
Average 85% 71.5% 74% 66%

9. Rating in CPALE (Sec. 16)

 Pass  75%, no grades below 65%
 Fail  below 75% average, below 65% (2 times fail  Refresher Course (24 units))
 Conditional  75% average in at least majority (4) of subjects
 remaining subjects must be taken within 2 years

10. Successful Examinees (Sec. 20)

 Certificate of Registration
 Professional Identification Card
 Valid for 3 years
 Registration #, date of issuance, expiry date

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM

 11. Suspension and Revocation (Sec. 24)
 2 years  reinstatement

12. Penal Provisions (Sec. 26)

 Fine ≥ 50k
or or Both
Imprisonment ≤ 2 years

Sec. 9(A)

FRSC – PFRS Chair + 15 members = 16

PRC AASC – PSA Chair + 14 members = 15
ETC – Academe Chair + 6 members = 7

Sec. 30

APO  PICPA

Renewal
Ex. 3 years
Approval July 31, 2022
Expiration Dec. 31, 2024
Renewal Sept. 30, 2024  2025 – 2027
Renewal Sept. 30, 2027

Reference: Sir Brad’s Lecture + Pinnacle Handouts Compiled by CPM