OVERVIEW OF AUDIT AND ENGAGEMENT STANDARDS

SERVICES
1. ASSURANCE • opinion
• independence required
• three party relationship if gusto mo ng assurance, dapat tatlo kayo. HAHAHAHAH :D
• objective: to enhance the credibility of the information

LEVEL OF ASSURANCE REPORTS/OUTPUT

KINDS: a. AUDIT High/Reasonable Positive
b. REVIEW Moderate/Limited Negative

Note: Under review there are 2 procedecures done: Inquiries and Analytical Procedures

ASSURANCE Broad in
Scope

ATTESTATION Broad than

Audit

AUDIT Narrow in
Scope

ASSURANCE ATTESTATION AUDIT

• Financial and non-financial information • Most narrow ( historical financial
• Financial information
(ex. Nag aaudit ng mga beauty pageant) info )
only
• Enhancing the credibility • Part of attestation services

2. NON ASSURANCE • without opinion

• independence NOT required

KINDS: a. AGREED UPON PROCEDURES  Factual Findings

b. COMPILATION  Compilation Report (FS)
c. TAX COMPILATION  ITR
d. TAX PLANNING  Tax Advise
e. CONSULTING/ADVISORY  Consulting Report

THREE PARTY RELATIONSHIP

1. PRACTITIONER • CPA in public practice who performs the assurance engagement
• broader than the term "auditor"

2. RESPONSIBLE PARTY responsible for the subject matter

3. INTENDED USERS for whom the practitioner prepares the assurance report

APPROPRIATE SUBJECT MATTER

SUBJECT MATTER SUBJECT MATTER INFORMATION

Information to be evaluated (Basically
this is the FS of the client)
VS. Outcome of the evaluation or
measurement of a subject matter
 SUITABLE CRITERIA (IFRS)
CRITERIA standard or benchmark used to evaluate the subject matter
2 Types of Criteria: 1. Established Criteria embodies in laws or regulations
2. Specifically Developed Criteria specifically designed for purpose of
engagement
CHARACTERISTICS R-U-N-C-R

1. R elevance contributues to decision making

2. U nderstandability clear, comprehensive, and not subject to significantly different interpretations
3. N eutrality free from bias
4. C omplete not omit the relevant factors
5. R eliable allows consistent evaluation/measurement

SUFFICIENT APPROPRIATE EVIDENCE (PESA)

1. PROFESSIONAL SKEPTICISM attitude that has questioning mind

2. EVIDENCE information obtained

3. SUFFICIENCY measure of quantity

4. APPROPRIATENESS measure of quality

PRONOUNCEMENT ON ASSURANCE ENGAGMENTS

The following are pronouncements of Auditing and Assurance Standards Council (AASC)

AASC Engagament Standards Applications Related Practice Standards

Philippine Auditing Practice Statements
Philippine Standards on Auditing (PSAs) FS Audit Engagement
(PAPSs)
Philippine Standards on Review Philippine Review Engagement Practice
Review Engagement
Engagements (PSREs) Statements (PREPSs)
Other Assurance
Philippine Standards on Assurance Engagement dealing with Philippine Assurance Engagement
Engagements (PSAEs) subject matter other than Practice Statements (PAEPSs)
historical financial info
Philippine Standards on Related Services Philippine Related Services Practice
Related Services (AUP)
(PSRSs) Statements (PRSPSs)

TYPES OF AUDIT WHO PERFORMS?

FS Audit External Auditor
Operational Audit Internal Auditor
Compliance Audit COA

REGULATORY BODIES AND STANDARDS

ACCOUNTING AUDIT
International Accounting Standards International Auditing and Assurance
INTERNATIONAL
Board (IASB) Standards Board (IAASB)
REGULATORY BODIES
Financial Reporting Standards Council Auditing and Assurance Standard Council
LOCAL
(FRSC) (AASC)
International Financial Reporting
INTERNATIONAL International Standards on Auditing (ISA)
Standards (IFRS)
STANDARD
Philippine Financial Reporting Standards
LOCAL Philippine Standards on Auditing (PSA)
(PFRS)
 SYSTEM OF QUALITY CONTROL
INTRO
DEFINITION These are policies and procedures adapted by audit firms to ensure that the audit firm as a whole complies with:
a. Professional Standards Ex. PSA
b. Regulatory and Legal Requirements Ex. Code of Ethics, RA 9298

ELEMENTS OF SYSTEM OF QUALITY CONTROL/MANAGEMENT

1. LEADERSHIP RESPONSIBILITIES a. Engagement Partner/Partner in Charge In-charge for per engagement
They sign on the auditor's report
b. Managing Partner/CEO In-charge for the whole audit firm

2. ETHICAL REQUIREMENTS PICPO

INCLUDING INDEPENDENCE a. Professional Competence and Due Care
b. Integrity
c. Confidentiality will be expounded on Code of Ethics
d. Professional Behavior
e. Objectivity

↳
In Appearance Perception to you by the public
INDEPENDENCE

In Mind Your perception to your self

it is very crucial/important since our goal is to eliminate the Conflict of Interest

3. ACCEPTANCE AND
CONTINUANCE OF CLIENT
RELATIONSHIP AND ENGAGEMENT a. Recurring
regardless, we have to check the Integrity of the client
b. New
↳ why is there a ∆ in auditor?
To know this, you have to:
Communicate with the Predecessor Auditor with consent of the client

4. HUMAN ANG ENGAGEMENT

RESOURCES Enough power and expertise to handle the client But we can also get an expert who is more
knowledgeable to the industry of our clients
Ex. Mining Industry

5. ENGAGEMENT PERFORMANCE It is a policy that throughout the engagement, we (the auditors) have to comply to the PSA

6. MONITORING AND
REMEDIATION Basically an evaluation of the whole audit Ex. Engagement Quality Control Review (EQCR)
one partner auditing another partner
required for listed entities

PROFESSIONAL AND LEGAL RESPONSIBILITIES

1. FRAUD a. Fraudulent Financial Reporting Manipulation of FS
Ex. ⇓ expenses ⇓ liabilities ⇑ revenues ⇑ assets
b. Misappropriation of Assets Stealing of Cash, Inventories, Payments to fictitous
vendors/employees

Fraud Risk Factors Pressure Often generated by immidiate needs

Perception that he can

commit fraud and it will
not be detected
(Whether Perceived or
Real) Ex. Lack of IC Belief that a crime has not been
committed. Ex. Yung iba ganito
nga din yung ginagawa
Opportunity Rationalization/Attitude
Resposibilities a. Managemet Prevention and Detection of Fraud
b. Auditor Provide reasonable assurance that the FS are free of MM whether due to fraud or
error

NOTE: Magiging responsible si Auditor sa detection ng fraud kapag may obvious na fraud pero binalewala lang
ni Auditor

FRAUD ERROR
Intentional Unintentional

2. COMPLIANCE WITH LAWS AND

REGULATIONS Noncompliance is sometimes described as violations of laws or regulations or illegal acts

Common Examples of
Noncompliance: 1. Violation of tax laws and environmental laws
2. Occupational safety and health
3. Inside trading of securities

Results of non-compliance with

laws and regulations: 1. Fines/penalties
2. Damages
3. Threat of expropriation of assets
4. Enforced discontinuation of operations
5. Litigations

NOTE: the responsibilty for the compliance with laws and regulations rests with the management.

Indications that noncompliance 1. Entity- under investigation by government departments

may have occurred: 2. Payment of fines and penalties
3. Payments for unspecified services or loans to consultants, related parties, employees or government
employees
4. Payments without proper exchange control documentations
5. Accounting system- with inadequate audit trail or sufficient evidence
 AUDIT PLANNING AND MATERIALITY
STAGES OF AUDIT
 1. Preliminary Engagement Activities (PEA)
 2. Planning
3. Understanding Internal Control
4. Testing of Internal Control
5. Substantive Testing
6. Completing the Audit

PRELIMINARY ENGAGEMENT ACTIVITIES

1. PERFORM PROCEDURE REGARDING ACCEPTANCE OR CONTINUANCE OF
THE CLIENT RELATIONSHIP

ACCEPTANCE OR SELECTION
PROCEDURES in case prospective/new client

1. Evaluate integrity of the client's management lack of mgmt integrity usually results to ⇑ audit risk
2. Investigate/research the client's background a. internet searches
b. review entity's FS
c. consider engaging professionals/investigators
d. obtain- credit ratings and reports, if necessary
3. Inquiring from other firm personnel or third parties
4. Communicate with predecessor auditor a. facts/info- might bear the integrity of the client
b. predecessor's undertanding- reason of change of
auditor
c. any disagreements

CONTINUANCE OR RETENTION
PROCEDURES in case recurring/existing client
exisitng client should be evaluated once a year or upon occurrence of the following:
1. Changes in managment, directors, or ownership
2. Nature of client's business

2. EVALUATE COMPLIANCE WITH ETHICAL REQUIREMENTS, INCLUDING

INDEPENDENCE

INDEPENDENCE this is for CPA's firm

PROFESSIONAL COMPENTENCE CPA firm- necessary skills and competence not possess the necessary skills/expertise? Obtain
knowledge!!!
ABILITY TO SERVE THE CLIENT
PROPERLY

3. ESTABLISH AN UNDERSTANDING OF THE TERMS OF THE ENGAGEMENT

PRE-CONDITIONS FOR AN AUDIT Mmgt- used acceptable financial reporting frameworks in preparation of FS

FACTORS 1. Nature of the entity

2. Purpose of FS
3. Nature of FS
 AGREEMENT ON AUDIT ENGAGEMENT
 auditor shall agree on the terms of engagement with management and TCWG, as appropriate

ENGAGEMENT LETTER  written contract between the audit team and client
 avoid misunderstanding
 importance: primary reason of the engagement
 preferably before the start of the engagement
 normally address to whoever hired the CPA
Contents: 1. Objective and scope
2. Responsibilities Auditor express an opinion
Mgmt 1. Preparation of FS
2. Implementation of Internal Control
3. Adjust the FS to correct misstatement
4. Compliance with laws and regulations
3. Framework
4. Other requirements ex. BIR, CAAP
5. Fees

AUDIT ENGAGEMENT IN
RECURRING AUDITS not necessarily required to send new engagement letter each year except in the following:
1. Revision in terms: a. revised/special terms in the engagement
b. recent ∆ in senior management or TCWG
c. significant ∆ in ownerhsip
d. significant ∆ in nature/size of the client
2. Reminder to the client of the existing terms

AUDIT PROCEDURES WHEN THE

CLIENT REQUESTS FOR A CHANGE
IN ENGAGEMENT 1. Consider appropriateness of reasons for the engagement
2. Is there a reasonable justification? YES stop the original engagement and proceed with the new
one
NO refuse. Still continue the orig engagement

AUDIT PLANNING
 establishing the overall audit strategy
 develop an audit plan includes description of: Nature of planned
Timing assessed
Extent procedure

1. OVERALL AUDIT STRATEGY a. Scope coverage (annual or interim)

b. Timing timeline, fieldwork, documents needed
c. Direction areas where there may be ⇑ risks

2. AUDIT PLAN/PROGRAM  this is the detailed/planned audit procedures

Example:
B/S Accounts Objective Procedures Time
Assertions (Completeness,
Cash and Cash Equivalents Bank Recon, Proof of cash 20 hours
Existence)
AR Bank Confirmation 5 hours
Investment Recomputation 10 hours
Inventory Count, LCNRV,
Inventory
Cut-off
PPE Inspection

ANALYTICAL PROCEDURES
 analyzing using numbers/amounts
Example: 1. Ratio Analysis gross profit margin, net profit margin, ATO, ROA
2. Trend Analysis revenue

3. Regression, Forecasting 2019 2020

4. Variance Analysis
 revenue
Cebu Pac

5. Benchmarking cebu pac vs. PAL

pal 2019 2020

REQUIRED BY PSA? OBJECTIVE

Planning  1. to identify areas that may represent
specific risks
2. to understand the business

Substantive Test  used as substantive audit procedure

Completion  to test the reasonableness of audited

amounts

MATERIALITY
CONCEPT this is the amount (threshold or cut-off point) that when FS was altered, it will change or influence the
judgment of the users
auditor uses professional judgment in determining the appropriate level of materiality
auditor's preliminary estimate of the smallest amount of misstatement that would be material to any one of
the client's fs

USES 1. to determine the nature, timing, and extent of RAP

2. to identify and assess risks of Material Misstatement
3. to determine the nature, timing, and extent of FAP

CONSIDERATION OF MATERIALITY 1. Planning Stage

THROUGHOUT THE AUDIT 2. Testing Stage materiality level set during planning are simply updated/revised if
necessary
3. Completion Stage

MATERIALITY LEVEL
1. Materiality at FS as a whole (aka Materiality
Threshhold/ Planning Materiality/ Overall Materiality) FS level (assets, revenue, NI)
Example: Total Assets 10,000,000
x 1%
Overall Materiality 100,000.00
meaning if ang nakita natin na 100k is mistated, meaning mistated na yung buong FS

2. Performance Materiality (Tolerable Account Balance level/ per line item (Cash, AR,
Misstatement/ Tolerable Error) Inventory)
Uses: a. to know which transactions to test
50%
Performance Materiality 50,000.00
i. yung overall materiality is a guide to compute the performance materiality
ii. example yung unaudited cash vs audited cash, kapag lumagpas sya sa treshhold na 50k,
magpopropose tayo ng adjustment kay client. Kapag may difference naman pero pasok sa
materiality threshhold, okay lang. Since hindi ito material for us. Gets?

NOTE: meron tayong tinatawag na Summary of Audit Differences. Meaning eto yung cumulative ng mga
immaterial amounts. Then icocompare ito sa isa pang materiality thresshold
 AUDIT RISK
INTRO
DEFINITION  risk of giving an incorrect opinion
KINDS: Unqualified
Qualified
Disclaimer
Adverse

RISK OF MATERIAL MISSTATEMENT

DEFINITION  risk that the Financial Statements are materially misstated prior to audit

RISK OF MATERIAL
MISSTATEMENT EXISTS IN TWO
LEVELS: 1. Overall FS Level as a whole
2. Assertion Level relate to classes of transactions, account balances, and disclosures
COMPONENTS: Inherent Risk
Control Risk

DETECTION RISK
DEFINITION  risk that the procedures performed by the auditor will not detect a misstatement that exists and that could
be material
 risk that auditor will not detect such misstatement that exists/occurs in an assertion
 can be increased or decreased by performing ST but can never be reduced to zero because of the inherent
limitations

STEPS IN ASSESSING AUDIT RISK

1. SET THE DESIRED LEVEL OF
AUDIT RISK risk that auditor may unknowingly fail to modify appropriately the opinion on fs that are materially misstated
For example: 11%, 5%, 10% etc

2. ASSESS THE LEVEL OF INHERENT

RISK assuming there are no related controls to mitigate the risks. nandyan na kahit anong gawin mo
susceptibility of account balances

3. ASSESS THE LEVEL OF CONTROL

RISK risk that material mistatement will not be prevented or detected and correct on a timely basis by the entity's
internal control
For example: ⇓ control risk if the internal control is effective
⇑ control risk if the internal control is ineffective

4. DETERMINE THE ACCEPTABLE

LEVEL OF DETECTION RISK depends on the assessed level of inherent and control risk INVERSE RELATIONSHIP!!!

AUDIT RISK MODEL

 used by the auditor

Audit Risk = IR x CR x DR

Risk of MM
These two risks are cannot be controlled by can be directly
the auditor because they are entity's risk and controlled by the
independent of the audit auditor

CONTROLLED?   
LEVEL assessed assessed acceptable
STAGE planning IC ST
 Audit Risk
Acceptable Level of Detection Risk =
Inherent Risk x Control Risk

5. DESIGN AUDIT SUBSTANTIVE

TEST auditor's reaction to level of DR:

Scenario 1: ⇑ RISK OF MM; Nature ⇑ effective substantive procedure

⇓ ACCEPTABLE LEVEL OF Timing performing substantive procedure at
DETECTION RISK year end rather than interim
(Conservative) Extent ⇑ sample size (larger)

Scenario 2: ⇓ RISK OF MM; Nature performing ⇓ effective substantive

⇑ ACCEPTABLE LEVEL OF procedure
DETECTION RISK Timing performing substantive procedure at
(Less Conservative) interim dates
Extent ⇓ sample size (smaller)

POINTS TO REMEMBER
1. Risk of MM and DR has inverse relationship
2. AR and DR has direct relationship
3. IH and CR are independent variables while DR is a dependent variable
4. Inverse relationship between materiality and level of Audit Risk
5. Materiality is directly related to acceptable level of detection risk
 UNDERSTANDING INTERNAL CONTROL
STAGES OF AUDIT
1. Preliminary Engagement Activities (PEA)
2. Planning
 3. Understanding Internal Control
4. Testing of Internal Control
5. Substantive Testing
6. Completing the Audit

INTRO
DEFINITION processes, policies, and procedures
implemented and maintained by top management
achievement of the entity's objective (reasonable assurance only)
1. Reliability of Financial Reporting (FS)
2. Efficiency and Effectiveness of operations
3. Compliance with laws and regulations

WHY REASONABLE ASSURANCE

ONLY? because of inherent limitations of any system of internal control
( C-O-C-C-H-A ) 1. C ollusion
2. Management O verride
3. C hanging Circumstances
4. C ost-Benefit
5. H uman Error
6. Routine Transactions ( A nticipated)

Design Here, the end goal is to determine the

Understanding Internal Control (should be) assessed level of Control Risk

INTERNAL CONTROL Implementation

(actual- nasusunod ba?)
Procedures in :
( I-I-O-R ) 1. I nquiry weakest
2. I nspection w/ documents
3. O bservation w/o documents
4. R eperformance (aka walk- through) strongest

NOTE: Compensating Control concept: No segregation of duties but the owner is active in participating in
operations (ex. Small Business)

Testing of Internal Control Evaluate the Effectiveness

Control Risk can be: below maximum level TOC + ST (⇓)

aka at < ⇑ level
( good internal control)

at maximum level ST agad! (⇑)

aka at ⇑ level
( weak internal control)

COMPONENTS OF INTERNAL CONTROL (CRIME)

used by an entity to help it achieve its objective

1. CONTROL ENVIRONMENT level of commitment of the top management and BOD

(most important compoment) foundation for effective internal control

ELEMENTS:
( C-H-A-M-P-O-I ) a. C ommitment to Competence how those levels translate into requisite skills and
knowledge
b. H R Policies and Procedures competent of entity's employees
c. A ssignment of Authority and Responsibility how assigned, how established
 d. M anagement Philosophy and Operating Style approaches
e. P articipation of BOD and TCWG
f. O rganizational Structure achieving its objectives; planned, executed, controlled,
reviewed
g. I ntegrity and Ethical Values most important

2. RISK ASSESSMENT Identifying, Assessing, Managing Risks

( I-A-M )

3. INFO SYSTEM AND

COMMUNICATION means of recording transactions and communicating responsibilities

4. MONITORING OF CONTROLS assessment of IC performance over time

5. EXISTING CONTROL ACTIVITIES control policies and procedures that helps ensure management directives are carried out

CATEGORIES:
( P-I-P-S-A ) a. P erformance Reviews Ex. PY vs CY, Budget vs Actual, Industry Average
b. I nfo Processing Control ensures that transactions are valid, properly authorized, complete,
and accurately recorded
Application Control individual application
General Control throughout the company
NOTE: Application controls are likely to be effective only when general controls are effective
c. P hysical Control safeguarding of assets
d. S egregation of Duties A uthorization
R ecording
C ustody
e. A uthorization General routine transactions
Specific non-routine transactions

3 TYPES OF CONTROL (PDC)

1. PREVENTIVE before the problems may arise
example: Segregation of Duties, Authorization, Physical Access

2. DETECTIVE as the problem arise

example: Bank Reconciliation (malalaman or makikita mo palang ang error upon doing bank recon every
month end)

3. CORRECTIVE to remedy problems discovered

example: Maintaining back up
 TEST OF CONTROLS
NOTE: I will update this soon
STAGES OF AUDIT
1. Preliminary Engagement Activities (PEA)
2. Planning
3. Understanding Internal Control
 4. Testing of Internal Control
5. Substantive Testing
6. Completing the Audit

INTRO
Design Here, the end goal is to determine the
Understanding Internal Control (should be) assessed lever of Control Risk

INTERNAL CONTROL Implementation

(actual- nasusunod ba?)
Procedures in :
( I-I-O-R ) 1. I nquiry
2. I nspection
3. O bservation
4. R eperformance (aka walk- through)

Testing of Internal Control Evaluate the Effectiveness

TRANSACTION CYCLES
1. REVENUE revenue/sales, cash receipts

2. EXPENDITURE purchases, AP, cash disbursement

3. INVENTORY physical count, costing

4. PAYROLL/HR (Personnel) salaries, OT

5. PPE acquisition, disposal, depreciation

6. INVESTMENTS debt, equity, income

7. FINANCING debt, equity, interest expense, dividends

 AUDIT SAMPLING
INTRO
DEFINITION applying audit procedure to < 100% of the population
applicable both to TOC and ST

Random Selection
Statistical Probabilities OBJECTIVE
(more precise) Mathemathical
APPROACHES

Non-statiscal SUBJECTIVE
Professional Judgment

Attributes rate of deviations/occruence TOC

(internal control)
TYPES OF STATISTICAL SAMPLING

Variables numerical quantity ST

(amounts)

SAMPLING RISK
DEFINITION since we only test the samples, meron tayong concept ng sampling risk
results from sample result ≠ from the whole population
 basta related sa sample selection method and sample size

TOC ST Sacrificed
1. Alpha Risk risk of assessing CR too ⇑ risk of incorrect rejection Efficiency
(type 1 error) in sample: CR ⇑ in sample: misstated (underreliance)
in whole: CR ⇓ dapat in whole: hindi naman
TYPES DR ⇓ ST ⇑ ST ⇑ Evidence⇑

2. Beta Risk risk of assessing CR too ⇓ risk of incorrect acceptance Effectiveness

(type 2 error) in sample: CR ⇓ in sample: correct (maapektuhan ang
in whole: CR ⇑ dapat in whole: mistated opinion)
DR ⇑ ST ⇓ Evidence ⇓

NOTE: BETA RISK is a greater concern than the Alpha Risk since Effectiveness is sacrificed and affected nito ay yung opinion natin

WAYS TO REDUCE SAMPLING RISK TO AN ACCEPTABLE LOW

LEVEL 1. Proper sample selection method
2. Appropriate sample size
3. Correct projection

NON SAMPLING RISK

DEFINITION risk of incorrect conclusions due to causes unrelated to sample size
Example:  fatigue, carelessness
 misinterpretation of evidence
 failure to recognize error
 use of inappropriate procedure

NOTE: Non Sampling Risk cannot be eliminated BUT can be minimized by proper planning

SAMPLE SELECTION METHOD

1. RANDOM SAMPLING random numbers
equal chances of getting selected
commonly used in work

2. SYSTEMATIC SAMPLING sampling interval #5 withdrawal ang una mong pinili, then plus 10 ka ng plus 10. so
Example: 1,000 transaction 5+10=15 itest mo yung pag 15 ulit and so on until mareach mo yung
/ 100 samples 100 item na sample size (usually yung una mong napili na # is
10 random yan. Saka ka mag iinterval)
3. STRATIFIED SAMPLING grouping of items with similar characteristics
aka: stratification
Example: Accounts Receivable aging
100 0-30 days 5
para lang din syang random sampling, pero
Population 50 31-60 days 5
igugroupings mo muna and then from then, dun ka
200 30 61-90 days 5
kukuha ng sample randomly
20 >90 days 5

4. VALUE WEIGHTED/ PROBABILITY-PROPORTIONAL-TO-SIZE

(PPS)/ MONETARY UNIT SAMPLING the ⇑ the amount, the ⇑ the chance of being selected
proportional to the size
 automatically nai-stratify mo na sya based sa amounts

5. HAPHAZARD SAMPLING does not follow any mathematical/structural approach

equal chances of getting selected
not appropriate when using statistical sampling

6. DISCOVERY SAMPLING it is used when the auditor believes that there are no deviations or near zero
used when auditor is looking for a very critical characteristic or deviation ( ex . High Value Items- FRAUD)
 but if makakita si auditor at least one deviation, complete review ang gagawin nya. (100%)

7. BLOCK SELECTION  hindi yan ginagamit talaga why? Kasi may potential yan na maging biased
Example: Ang pinili mong samples is lahat ng deposits ng January, then hindi mo naconsider yung February
to December

8. STOP OR GO SAMPLING used when few errors are selected in the population
 test ka lang ng test until makakuha ka ng sufficient evidence, doon ka lang magsstop

SAMPLE SIZE

Relationship to Sample
TOC ST
Size
Acceptable Sampling Risk (ASR) Acceptable Sampling Risk (ASR) Inverse

Tolerable Deviation Rate Tolerable Misstatement/Error Inverse

Expected population deviation rate Expected deviation misstatement/error Direct

usually based on prior experience with the client

PROJECTION TO THE POPULATION

1. TEST OF CONTROL Example:
1,000 deposits 30
30% Sample Deviation Rate (SDR)
100 sample 100
30 deviations 5% Acceptable Sampling Risk
5% ASR Upper Occurrence Limit 35% NOTE : do not forget to add the ASR,
since ang total nila ayun ang icocompare
mo sa tolerable

Case 1: 20% vs 35% ⇑ Control Risk

TDR
Case 2: 40% vs 35% ⇓ Control Risk

2. SUBSTANTIVE TEST Example:

1,000 P1,000,000 deposits
100 P100,000 sample P10,000
x P1,000,000
30 P10,000 missattements P50,000
5% P50,000 ASR
P200,000 + P50,000 = P250,000 (upper occurrence limit)
NOTE : do not forget to add the ASR, since ang total
nila ayun ang icocompare mo sa tolerable
 Case 1: P100,000 vs P250,000 Material
ST
Case 2: P300,000 vs P250,000 Immaterial

WAYS OF PROJECTION
1. MEAN PER UNIT (MPU) average
audited

whole population

sample

2. RATIO ESTIMATION audited

unaudited

unaudited
3. DIFFERENCE ESTIMATION

audited less unaudited

sample size

whole population

add if audited is > unaudited. Deduct if <

 COMPLETING THE AUDIT
STAGES OF AUDIT
1. Preliminary Engagement Activities (PEA)
2. Planning
3. Understanding Internal Control
4. Testing of Internal Control
5. Substantive Testing
 6. Completing the Audit

INTRO
DEFINITION  procedures performed at the end of an audit
 wrapping up (necessary and required)
 usually performed by senior associates and managers

PROCEDURES
1. REVIEW RELATED PARTY TRANSACTIONS  transfer of resources, services, or obligations between Related Parties

Examples: a. Parent and Subisidiary

b. Close member of the family Transaction with them is called: Related
Related Parties
c. Key management personnel Party Transactions
d. Directors and Shareholders

Management's Responsibility Auditor's Responsibility

- properly identify, record, and disclose related party - review related party transactions (obtain
transactions understanding, magtanong kay management/ipa-
why? explain ang transactions)
since related party transactions, usually - check if properly disclosed in FS
favorable ang transactions/terms nila
nyan or not at arms length transaction pag hindi dinisclose, i-advice si management or else
para hindi misleading sa users ng FS, dapat maaapektuhan yung opinion na ibibigay natin
nakadisclose

2. REVIEW OF SUBSEQUENT EVENTS  events occuring between BS date and Auditor's Report date
 aka post-BS events/transactions

31-Dec 1-Apr

BS Date Auditor's Report Date

responsibility of the Auditor is up to this point only
same day with last day of fieldwork

TYPES a. Adjusting Events these are conditions exisiting as of BS date requires ADJUSTMENTS
(Type 1) Example: 1. Settlement of Litigations
2. Recovery of written off AR

b. Non-adjusting Events requires DISCLOSURES

(Type 2) Example: 1. Issuance of Shares
2. Catastrophe

Management's Responsibility Auditor's Responsibility

- properly identified, recorded, and disclose - verify that the management has properly recorded
and disclosed
pag hindi dinisclose, i-advice si management or else
maaapektuhan yung opinion na ibibigay natin

3. VERIFY LITIGATIONS AND CLAIMS  ongoing cases

Probable AND Measurable set up provision (mag accrue tayo)

Probable OR Measurable disclose as contingent liability

 Management's Responsibility Auditor's Responsibility
- will inquire/ask management for the list of litigations
- allow auditor to communicate to entity's legal counsel and claims
- ask management's assessment for the outcome
why? kasi dito natin malalaman if kaya pa
nyang maging going-concern
since these are from managaments, magiging skeptic tayo. So
magsesend tayo ng Letter of Audit Inquiry (corroborating
evidence) sa lawyer made by the management, yung reply
must be directly sent to us
pag hindi pinayagan ng management to communicate
sa entity's legal counsel, maaapektuhan yung opinion
na ibibigay natin

4. PERFORM ANALYTICAL PROCEDURES  analysis of significant ratios and trends (but this time, audited amounts na)
 test of reasonableness

When is Analytical Procedures required?

Planning  unadited amount
Substantive Testing 
Completion  audited amounts

5. ASSESS GOING CONCERN ASSUMPTION  entity is assumed to operate in foreseeable future

 opposite: is liquidating concern

Management's Responsibility Auditor's Responsibility

- assess the entity's ability to continue as a going - evaluate the appropriateness of the management's
concern use of the going concern assumption
- disclose the assessment - evaluate if properly disclosed
- identify: a. events and conditions that may give
rise to business risks
b. mitigating factors

6. OBTAIN MANAGEMENT REPRESENTATION LETTER  impress upon management its responsibility on the FS
 signed by top management (CEO & CFO)
 addressed to the auditor
 date is coincides with the date of auditor's report
 aka Client's Representation Letter

Contents: 1. Management acknowledges the responsibility on the FS

2. Management has approved the FS
3. Management acknowledges its responsibility on the Internal Control
4. Management believes that uncorrected misstatement is immaterial
5. Management has made available all financial records (evidence)

NOTE: Management Representation Letter is different from Management Letter

improvement of Internal Control

7. REVIEW ADEQUACY OF DISCLOSURES  disclosure checklists

8. REVIEW OF WORKING PAPERS  final review before archiving

9. FORMING AN OPINION

NASA COMPLETING STAGE KA NA PERO MAY NA-OMIT KA NA SUBSTANTIVE TEST. WHAT TO DO?

Example: Na-omit mo yung Cut off procedure sa Inventory YES No further action

YES Compensated by other procedure?

Example: Physical Count NO Apply omitted procedure
Did it affect the opinion

NO No further action
 FORMING AN OPINION AND AUDITOR'S REPORT
INTRO
DEFINITION this is the ultimate responsibilty of the auditor which is dito magrerely lahat ng users ng FS

TYPES OF OPINIONS
Modified or Unmodified Report?
1. UNQUALIFIED FS of the client is fairly presented Un modified
no material misstatement

2. QUALIFIED FS of the client is fairly presented except for Modified

3. ADVERSE FS of the client is not fairly presented Modified

(basically, misstated yung FS ni client)

4. DISCLAIMER OF OPINION Auditor does not know if fairly or not fairly Modified
presented
(basically, no opinion at all)

WHEN TO GIVE SUCH Material BUT NOT Pervasive Material AND Pervasive
OPINION? Misstatements Qualified Opinion Adverse Opinion

Scope Limitations
(inability to obtain evidence)
can be:
1. Client Imposed Qualified Opinion Disclaimer of Opinion, or Resign if
appropriate
multiple uncertainties
Auditor lacks independence

2. Others (ex. Yung Qualified Opinion Disclaimer of Opinion

records nya nasunog)

NOTE: 1. Material means lumagpas sa materiality treshhold

2. Pervasive means madaming apektado (prevalent/widespread)
Example: misstated yung EI, apektado na yung EI, COS, Gross Profit, NI, RE

AUDITOR'S REPORT
REQUISITE shall be in writing (hard copy format or an electronic medium)

STANDARD COMPONENTS: 1. Title Independent Auditor's Report

(12 Sections)
2. Addressee Stockholders & BOD; with address
(for whom the report is prepared)

3. Auditor's Opinion Client, Financial Statements, Period

In accordance with PFRS

4. Basis for Opinion PSA, Independence, COE

Sufficient and Appropriate Evidence

5. Key Audit Matters Most significant areas or aspects encountered in audit

(discuss why it is significant and what is the effect on
the FS, and ano yung ginawa ni auditor)

Standard Unmodified Report 6. Management's Responsibilities FS and Internal Controls

(pag may iniba ka ng konti dyan, 7. Auditor's Responsibilities a. Obtain reasonable assurance that the FS are free
magiging modified report na sya) from MM whether due to fraud or error
b. Issue an opinion
c. General description of the audit
 8. Other Reporting Responsibilities The auditor may have additional responsibilities to
report on other matter that are supplementary to the
auditor's responsibility under the PSA

9. Name of the Engagement Partner

10. Signature of the Auditor Either in the name of the audit firm, the personal name
of the auditor or both
11. Auditor's Address

12. Date of the Auditor's Report a. Responsibility of the auditor is until the date of the
Auditor's Report only
b. Should be dated as of the date on which the field
work is completed

MODIFICATIONS OF AUDITOR'S REPORT

Modification include when the auditor: 1. Adds "Emphasis of Matter Paragraph"
a. whenever there are uncertainty or regulatory actions
b. material going concern issues
c. early adaption of PFRS
d. subsequent discovery affecting previously issued opinion
e. if there is major catastrophe

NOTE: 1. Presented in FS
2. Inclusion of this paragraph does not affect the auditor's opinion

Example:

2. Includes "Other Matter Paragraph"

a. if there is restriction on distribution or use of report
b. if the FS of the prior period were audited by another auditor
c. whenever there are other information
(history of company, mgmt, BOD, plans of company, etc.)

NOTE: 1. NOT Presented in FS

2. Inclusion of this paragraph does not affect the auditor's opinion

Example:

3. Provides modified opinions

Opinion
COMPARATIVE INFO: 1. Comparative FS opinion to current year and prior years
a. IFRS presented
b. Complete set of Financial Statements

2. Corresponding Figures opinion for current year only (2019)

a. Selected items only
Example: Inventory (2018, 2019)
 IT AUDIT
INTRO
DEFINITION computer, whether operated by entity or by a third person

CHARACTERISTICS 1. Lack of visible audit trail Paperless (challenge in gathering evidence)

2. Consistency of Performance CIS functions exactly as programmed

a. Properly programmed CIS
consistent output performance
b. Improperly programmed CIS
NOTE: Auditor should focus on whether correct instruction were provided to the CIS

3. Concentration of Duties Authorization, Recording, Custody (properly

segregated)
4. Ease of access to data & computer program
a. Easy to alter
unauthorized person (without visbile evidence)
b. Easy to access

5. System-Generated Transactions CIS can initiate transactions without input documents

Example: Customer forgot to pay on due date
Automatic charging of interest & other charges

6. Vulnerability of Data & Program Storage

EFFECT ON AUDIT
objectives
1. Same responsibilities
stages

2. IT Audit focuses more on TOC rather than ST

3. Data Processing Real Time minimal time delay

more resources (more costly)
minimal print outs
best suited for fast moving accounts
Batch Time resiudal definition

TYPES OF CONTROLS
GENERAL CONTROLS APPLICATION CONTROLS
SAHOD-MO IPO
1. System Development & Documentation Control 1. Input Controls
2. Access Controls 2. Processing Controls
3. Hardware Controls 3. Output Controls
4. Organizational Controls
5. Data Recovery Controls
6. Monitoring Controls

GENERAL CONTROLS
 usual manual audit procedure

1. SYSTEM DEVELOPMENT
CONTROLS major changes? authorized officials

2. ACCESS CONTROLS minimize unauthorized access a. Physical Controls IT dept (secured facility)
alteration b. Programmed Controls PIN/Password

3. HARDWARE CONTROLS a. built in by the manufacturer

b. detect equipment failure

4. ORGANIZATION CONTROLS clear assignment of responsibilties

segregation of duties between CIS & User Department
↳ IT Dept (process, monitor) Development (coding)
 within CIS Department Program Operations
↳ headed by CIS Director Maintenance

5. DATA RECOVERY CONTROLS a. Internally Provided Backup (on-site) separate department

back up most expensive; less risky

most commonly used b. Externally provided backup (off site) outsourced

1. Hot site (recovery operation center) most readily available

equipped hardware, software & internet
less risky; costly

2. Warm site not as equipped

less costly; risky

3. Cold site (empty shell) least readily available

least costly

c. Mutual Aid Compact Arrangement with another company with similar needs
Hardest to execute

6. MONITORING OF CONTROLS design

effectiveness
implementation

APPLICATION CONTROLS
 test will depend whether the accounting system is complex or simple

INPUT PROCESSING OUTPUT

 properly authorized  complete  authorized recipient
 accurate  accurate  accurate
 completeness  complete
Examples: Examples: Controls Total
1. Key Verification SI Customer Amount
↳ data to be entered twice 1 Karim 10,000.00
2. Field/Validity Check 2 Vhin 20,000.00
↳ characters 3 Manso 30,000.00
3. Check Digit
↳ Record Count 3
Financial Total 60,000.00
4. Hash Total Hash Total 6
↳ adding numbers w/o meaning
5. Limit Check

AUDIT APPROACHES (Test of Controls)

1. AUDITING AROUND THE COMPUTER Input is reconciled with output
AKA: Black box approach

2. AUDITING WITH THE COMPUTER Audit software

AKA: White box approach

3. AUDITING THROUGH THE COMPUTER Computer Assisted Audit Techniques

AKA: White box approach

a. Test Data Auditor gets a copy of the program Test Data

Auditor installs the program ⇓
Auditor inputs erroneous / fictitious transactions Client's System
⇓
Output
vs. Pre-determined Results
b. Integrated Test Facility (ITF) Auditor uses the actual system used bythe clients Live Data Test Data
Dummy transaction in the midst of live transactions ⇓
Client's System
⇓
Output
vs. Pre-determined Results

CLIENT AUDITOR
c. Parallel Simulation Auditor codes or writes the program Live Data Live Data
(most effective) In a surprise basis ⇓ ⇓
Client's System Auditor's System
⇓ ⇓
Output Output

compared
 CODE OF ETHICS
INTRO
DEFINITION 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 CPAs
Conceptual Framework
↳ how to deal with these threats 1. identify if present or not
2. evaluate if acceptable or not

PART 2: CPAs in Business (employed, owners, managers)

PART 3: CPAs in Public Practice (audit firm)

PART 4: 4A Independence for Audit & Review Engagement

4B Independence for Other Assurance Engagement

FUNDAMENTAL PRINCIPLES (PICPO)

1. PROFESSIONAL COMPETENCE
AND DUE CARE clients/employer receive competent services attainment
Knowledge
Example: BSA, CPALE, trainings, CPD maintence

2. INTEGRITY straightforward, honest, truthful, & fair dealing

Example: Correct Opinion

3. CONFIDENTIALITY non disclosure of non public information

respect the confidentiality of information acquired
except when, legally required to disclose, with client consent
Applies to: Past
Present Clients
Supposedly

4. PROFESSIONAL BEHAVIOR to comply with relevant laws & regulations

to avoid misconduct that might discredit the profession

5. OBJECTIVITY judgment is not compromised by bias, conflict of interest, or undue influence

THREATS
1. SELF-INTEREST financial or other interest that will influence judgement or behavior (basta usaping pera)
Example: potential employment
gifts
dependent on fees
Types: a. DIRECT all whether material or immaterial
b. INDIRECT material only

2. SELF-REVIEW CPA will not appropriately evaluate the results of a previous judgement made (gawa mo review mo)
Example: you are the Bookkeeper and the Auditor
involved in designing IC, then ikaw din mag-eevaluate

3. ADVOCACY promoting the client position or opinion

Example: acting in behalf of the client
under litigation
promoting shares

4. FAMILIARITY CPA will be too sympathetic due to a long & close relationship with client
Example: long association 7 years considered a threshold for familiarity threats. Cooling period ≥ 2 years
family relationship immediate spouse (or equivalent) & dependents
close parents, siblings, children (not dependents)
5. INTIMIDATION judgment is affected by perceive pressure
 CONCEPTUAL FRAMEWORK
Step 1: Identify
Step 2: Evaluate applies to CPAs
Step 3: Address

PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

1. CONFLICT OF INTEREST threats to objectivity

2. PROFESSIONAL APPOINTMENT self interest, professional competence and due care, integrity, professioanl behavior
pera pera

3. SECOND OPINION self interest, professional competence and due care

4. FEES a. Low Fees self interest, professional competence and due care
b. Contingent Fees self interest, objectivity
this is not allowed in assurance services/engagaments
Example: your fee is based % of NI
c. Referral Fee self interest, professional competence and due care
especially kapag ikaw yung nakareceive

5. GIFTS/HOSPITALITY/INDUCEMENTSmasama lang kapag nagiging suhol na

TWO KINDS OF INDEPENDENCE

In Mind pananaw mo sa sarili mo
Independence
In Appearance based sa nakikita ng 3rd party sayo

INDEPENDENCE PERIOD 1. Covered period of FS

2. Engagament period Start: perform procedures
End: issuance of report

LOANS AND GUARANTEES

1. Auditor nagpautang (vice versa) to non financial institution na client, provided the loan is immaterial to both parties
2. Financial Institution na client nagpautang sa Auditor provided in normal terms and immaterial
3. Brokerage/Deposit account with a financial institution client: normal commercial terms