3 Oct 2023

Outline (Syllabus)
1.1 Fundamentals of
Auditing and Assurance 1. Introduction to assurance engagements
1. Nature, objective and elements
2. Types of assurance engagements (audit, reviews, other assurance
Services engagements)
3. Assurance service vis-à-vis attestation services
Kheen V. Batingal, MICB, CPA 2. Introduction to auditing
1. Nature, philosophy, and objectives
Reviewer 2. Types of audit
1. According to nature of assertion / data (financial statements audit, operational
audit, and compliance audit)
2. According to types of auditor (external independent financial statements audit,
internal audit, and government audit)

1 2

Assurance Engagements
Assurance Engagements are
intended to enhance the
Assurance credibility of information about a
Engagements subject matter by evaluating
whether the subject matter
conforms in all material respects
with suitable criteria.

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Elements of Assurance
Engagements
Three Party Relationship
•A three-party relationship •Professional accountant
•An appropriate subject matter
•Suitable criteria •Responsible party
•Sufficient appropriate evidence
•A written assurance report •Intended users

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Appropriateness of subject
Subject Matter
matter
•Data The subject matter of an assurance
engagement must be identifiable,
•Systems and processes capable of consistent evaluation and
measurement against suitable criteria,
•Behavior and in the form that can be subjected
to procedures for gathering evidence
to support that evaluation or
•Physical characteristics measurement.

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Types of engagements according to who

performs the evaluation or measurement of the Criteria
subject matter

•Assertions-based Criteria are the standards or

engagements benchmarks used to evaluate
or measure the subject matter
•Direct reporting of an assurance engagement.
engagements
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Evidence Assurance Report

The practitioner should plan and The professional accountant
perform the engagement to expresses a conclusion that
obtain sufficient appropriate provides a level of assurance as
evidence to determine whether to whether the subject matter
the assertions are free of conforms in all material respects
material misstatement. with identifiable suitable criteria.

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Types of Assurance Assurance Service v. Attestation

Engagements Service

•Reasonable assurance • Audit – Financial

Statements
Assurance

engagements • Attestation –
Financial Information
Attestation

Audit

•Limited assurance • Assurance –

Information Review

engagements
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Resources

Introduction to Capital
providers
Managers

Auditing
Information

Auditor

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Definition Breakdown
An audit is a systematic process of • Auditing is a systematic process
objectively obtaining and evaluating evidence • An audit involves obtaining and evaluating evidence
about assertions regarding economic actions and
regarding assertions about economic actions events
and events to ascertain the degree of • An audit is conducted objectively
correspondence between these assertions • Auditors ascertain the degree of correspondence
and established criteria and communicating between assertions and established criteria
the results to intended users. • Auditors communicate the audit results to various
interested users

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Types of Audits Common characteristics

•Financial statement audit • Systematic examination and evaluation of
evidence which are undertaken to ascertain
•Compliance audit whether assertions comply with established
criteria; and,
•Operational audit • Communication of the results of the examination,
usually in a written report, to the party by whom,
or on whose behalf, the auditor was appointed.

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The Independent Financial Statement

Types of auditors Audit

•External auditors The objective of an audit of financial

statements is to enable the auditor to express
•Internal auditors an opinion whether the financial statements
are prepared, in all material respects, in
•Government auditors accordance with an identified financial
reporting framework or acceptable financial
reporting standards.

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Responsibility for the financial

management Assurance provided by the auditor
• MANAGEMENT – preparation and
presentation of financial statements in
accordance with the financial reporting Reasonable assurance
framework (not absolute assurance)
• AUDITOR – form and express an opinion on
these financial statements based on his/her
audit

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General principles governing the audit of

Inherent limitations financial statements
• The use of testing/sampling risk • Comply with the “Code of ethics for
• Error in application of judgment/non- professional accountants”
sampling risk • Conduct audit in accordance with Philippine
• Reliance on management’s representation Standards on Auditing
• Inherent limitations of the client’s accounting • Plan and perform audit with an attitude of
and internal control systems professional skepticism
• Nature of evidence

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Need for an independent financial

statement audit Theoretical framework of Auditing
•Conflict of interest between Audit function operates on the
management and users of financial
statements assumption that all financial
•Expertise data are verifiable.
•Remoteness
•Financial consequences

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Theoretical framework of Auditing Theoretical framework of Auditing

The auditor should always There should be no long-term

maintain independence with conflict between the auditor
respect to the financial and the client management.
statements under audit.

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Theoretical framework of Auditing Theoretical framework of Auditing

Effective internal control Consistent application of

generally accepted accounting
system reduces the possibility principles (GAAP) or Philippine
of errors and fraud affecting Financial Reporting Standards
the financial statements. (PFRS) results in fair
presentation of financial
statements.

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Theoretical framework of Auditing Theoretical framework of Auditing

What was held true in the past An audit benefits the public.
will continue to hold true in the
future in the absence of
known conditions to the
contrary.
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1.2 The Risk-based Financial Outline (Syllabus)

Statement Audit – Client 1.2.1 Overview of the risk-based audit process
Acceptance, Audit Planning, 1.2.2 Pre-engagement procedures
1.2.3 Scope and purposes of audit planning
Supervision and Monitoring 1.2.3.1 Essential planning requirements
1.2.3.1.1 Knowledge of the business
Kheen V. Batingal, MICB, CPA 1.2.3.1.2 Preliminary analytical procedures
1.2.3.1.3 Materiality
Reviewer 1.2.3.1.4 Assessing and managing audit risks
1.2.3.1.5 Overall audit plan and audit program (experts, internal auditor, other
independent auditors)
1.2.4 Direction, supervision, and review

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The Risk-Based Audit Process

Overview of the (AARC-PCIP)
•Accepting an Engagement
Risk-Based Audit •Audit Planning
Process •Risk assessment procedures
1.2.1 •Consideration of internal
control

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The Risk-Based Audit Process

(AARC-PCIP)
•Performing substantive
tests Categories of
•Completing the Audit
•Issuing a Report
Assertions
“I DO DECLARE!”

•Post-audit responsibilities
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Assertions about classes of transactions

Financial Statement Assertions and events for the period under audit
(CACCO)
Management assertions •Occurrence
Company’s explicit or implicit •Completeness
official statements regarding •Accuracy
various elements of financial •Cutoff
statements and related
•Classification
disclosures
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Assertions about account balances at the Assertions about presentation and

period end (CERV) disclosure (C2OA)
•Existence •Occurrence and rights and
•Rights and obligations obligations
•Completeness •Completeness
•Classification and understandability
•Valuation and allocation
•Accuracy and valuation

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General classifications of
Audit procedures
assertions (PERCV)
•Presentation and disclosure The auditor should use assertions for
classes of transactions, account
•Existence/occurrence balances, and presentation and
disclosures in sufficient detail to form a
•Rights and obligations basis for the assessment of risks of
material misstatement and the design
•Completeness and performance of further audit
•Valuation and allocation procedures.

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Common audit procedures (IOI-

Audit procedures
CCA)
The procedures selected •Inspection •Computation
should enable the auditor to •Observation •Analytical
gather sufficient appropriate •Inquiry procedures
evidence about a particular •Confirmation
assertion.
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Evidence
The information obtained
by the auditor in arriving at
Pre-Engagement
the conclusions on which Procedures
the audit opinion is based. 1.2.2

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Gathering information on integrity

Factors in accepting the
of the management
engagement (CI-AIm)
(Marites: silingan x ex)
•Competence •Making inquiries of
•Independence appropriate parties in the
•Ability to serve the client business community
properly •Communicating with the
•Integrity of the management predecessor auditor
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Information that can be obtained

from predecessor auditor
Retention of Existing Clients
•The predecessor auditor’s understanding
as to the reasons for the change of auditors
Clients should be evaluated at
•Any disagreement between the least once a year or upon
predecessor auditor and the client occurrence of major events
•Any facts that might have a bearing on the that may affect the scope of
integrity of the prospective client’s
management the examination.
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Engagement Letter Contents of engagement letter

The written contract •The objective of the audit of

the financial statements
between the auditor •The management’s
and the client. responsibility
Client: Will you audit me?
Auditor: ???
•The scope of the audit
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Contents of engagement letter Additional optional contents

•The forms or any reports or other •Billing arrangements
communications that the auditor •Expectations of receiving management
expects to issue representation letter
•Limitations of the audit •Arrangements concerning the
•Responsibility of the client to allow involvement of others
the auditor unrestricted access •Request for the client to confirm the
terms of engagement
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Importance of the engagement

letter
•Avoid misunderstandings with
respect to the engagement
•Document and confirm the
auditor’s acceptance of the
Recurring audits
appointment

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Recurring audits Recurring audits

•Any indication that the client •A significant change in the
misunderstands the objective and scope nature or size of the client’s
of the audit
business
•Any revised or special terms of the
engagement •Legal requirements and other
•A recent change of senior management, government agencies’
board of directors or ownership pronouncements
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Audits of Components

Audits of •Who appoints the auditor of the

component
Components •Whether a separate audit report
is to be issued on the component
•Legal requirements

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Audits of Components
•The extent of any work
Scope and
performed by other auditor Purposes of Audit
•Degree of ownership by the
parent
Planning
1.2.3

•Degree of independence of the

component’s management
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Preliminary planning activities Audit Planning

1. Performing procedures regarding the It involves developing a general
continuance of the client relationship
and the specific audit engagement audit strategy and a detailed
2. Evaluating compliance with ethical approach for the expected
requirements, including independence conduct of the audit.
3. Establishing an understanding of the
terms of the engagement

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Audit Planning Importance of Audit Planning

The auditor’s main objective is to •Planning helps ensure that
determine the scope of the appropriate attention is devoted to
audit procedures to be important areas of the audit.
performed. •It helps identify potential problems.
•It allows the work to be completed
expeditiously.

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Importance of Audit Planning Essential Planning Requirements

•It assists in the proper assignment 1. Knowledge of the business
and coordination of work. 2. Preliminary analytical procedures
3. Materiality
•It helps ensure that the audit is 4. Assessing and managing audit risks
conducted effectively and efficiently. 5. Overall audit plan and audit program
(experts, internal auditor, other
independent auditors)

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Obtaining knowledge about the

Requirements in PSA 315
entity’s:
The auditor is required to obtain •Industry, regulatory, and other external
sufficient understanding of the factors, including financial reporting
framework;
entity and its environment
•Nature of the entity, including entity’s
including its internal control. selection and application of accounting
policies;

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Obtaining knowledge about the

Sources of information
entity’s:
•Objectives and strategies and the •Review of prior years’ working
related business risks that may result in
a material misstatement of the financial papers
statements; •Tour of client’s facilities
•Measurement and review of the entity’s
performance; and, •Discussion with people within
•Internal Control and outside the entity

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Sources of information Uses of information obtained

•Reading books, periodicals, and •Assessing risks and identifying
other publications related to the potential problems
client’s industry •Planning and performing the
•Reading corporate documents audit effectively and efficiently
and financial reports

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Additional Consideration on
Uses of information obtained
New Engagements
•Evaluating audit evidence as •The opening balances do not
well as the reasonableness of contain misstatements that
client’s representations and materially affect the current
estimates year’s financial statements
•Providing better service to the
client

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Additional Consideration on Additional Consideration on

New Engagements New Engagements
•The prior period’s closing •Appropriate accounting policies
balances have been correctly are consistently applied or
brought forward to the current changes in accounting policies
period or, when appropriate, have been properly accounted
have been restated; and, for and adequately disclosed.

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Developing an Overall Audit Factors to consider in developing

Strategy audit strategy
The approach that results in the most
efficient audit. •Materiality
•How much evidence to accumulate; •Audit risk
•How and when this should be done.

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Materiality Uses of materiality (PSA 320)

•the largest amount of misstatement •Planning stage – determine the
that the auditor could tolerate in the scope of audit procedures
financial statements, or •Completion phase – evaluate the
•the smallest aggregate amount that effect of misstatements on the
could misstate the financial financial statements
statements

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Importance of materiality in
planning
Using materiality levels
There is an inverse Step 1 – Determine the Overall
Materiality – Financial Statement
relationship between Level
materiality and evidence. Step 2 – Determine the tolerable
misstatement – Account Balance
Level

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Bases to determine materiality

Using materiality levels level
Step 3 – Compare the aggregate •Annualized interim financial
amount of misstatement with the statements
overall materiality •Prior years’ financial statements
•Budgeted financial statements of the
current year

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Factors to consider in developing

audit strategy Audit Risk

•Materiality •level of assurance the auditor wishes

to attain that the financial statements
do not contain material
•Audit risk misstatements?

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Audit Risk
•susceptibility of the account to
material misstatement
•effectiveness of client’s internal
control in preventing or detecting Audit Risk Model
misstatements

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Audit Risk Model Audit Risk

The risk that the auditor gives an
Audit Inherent Control Detection inappropriate audit opinion on the
= x x
Risk Risk Risk Risk financial statements.
Audit Risk = 100% - Level of assurance

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Factors affecting risk of misstatement

Inherent Risk – financial statement level (TMOI)
The susceptibility of an account •The management integrity
balance or class of transactions •Management characteristics
to a material misstatement •Operating characteristics
assuming that there were no •Industry characteristics
related internal controls.

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Factors affecting risk of misstatement

– account balance level (SCT2) Control Risk
• Susceptibility of the account to theft The risk that a material misstatement
• Complexity of calculations related to account that could occur in an account
• The complexity underlying transactions and balance or class of transactions will
other events not be prevented or detected and
• The degree of judgment involved in corrected on a timely basis by
determining account balances accounting and internal control
systems.
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Steps in using the audit risk

Detection Risk
model
The risk that an auditor’s Step 1 – Set the desired level of Audit Risk
substantive procedure will not Step 2 – Assess the level of Inherent Risk
Step 3 – Assess the level of Control Risk
detect a material misstatement.
Step 4 – Determine the Acceptable level of
Detection Risk
Step 5 – Design Substantive tests

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Step 4 – Acceptable level of Step 4 – Acceptable level of

Detection Risk Detection Risk

Audit Inherent Control Detection Audit Combined Risk of Detection

= x x = x
Risk Risk Risk Risk Risk Material Misstatements Risk

Assurance of detecting material misstatement from

substantive tests increases by designing more effective
audit procedures

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Step 4 – Acceptable level of Low Detection Risk – Greater

Detection Risk assurance
•Nature – more effective
Audit Combined Risk of Detection
substantive procedures
= x •Timing – procedures at year-end
Risk Material Misstatements Risk

Assurance of detecting material misstatement from •Extent – using larger sample size
substantive tests decreases by allowing less effective
audit procedures

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High Detection Risk – Lower Relating inherent, control, and

assurance detection risk to the overall audit risk
•Nature – less effective substantive •Inherent risk and control risk are
procedures independent from audit
•Timing – procedures at interim date •Detection risk are dependent upon
•Extent – using smaller sample size the auditor’s actions

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Relationship between materiality and

risk Audit Risk Model
There is an inverse relationship
between materiality and the level of Audit Inherent Control Detection
audit risk. = x x
Risk Risk Risk Risk

Combined Risk of
Material Misstatements

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Risk Assessment Procedures Risk Assessment Procedures

The procedures performed by auditors to •Inquiries of management and others
obtain an understanding of the entity within the entity;
and its environment including its
•Analytical procedures;
internal control and to assess the risks
of material misstatements in the financial •Observation and inspection
statements.

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Use of Analytical Procedures in

Analytical Procedures Audit (PSA 520)
It involves analysis of significant ratios •Planning the audit
and trends, including the resulting
investigation of fluctuations and •Substantive tests
relationships that are inconsistent with •Overall review
other relevant information or deviate
from predicted amounts.

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Steps in applying Analytical

Analytical procedures in planning
Procedures
Analytical procedures used in planning Step 1 – Develop expectations regarding financial
an audit should focus on statements using:
• Prior years’ financial statements
•Enhancing the auditor’s understanding
• Anticipated results (budgets & forecasts)
of the client’s business
• Industry averages
•Identifying areas that may represent • Non-financial information
specific risks • Typical relationships among financial statement
account balances

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Steps in applying Analytical

Procedures
Step 2 – Compare the expectations with the
financial statements under audit
Step 3 – Investigate significant unexpected
Documenting the
differences (unusual fluctuations) to
determine whether financial statements
Audit Plan
contain material misstatements

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Audit Plan Audit Program

The overall audit plan sets out in It sets out in detail the audit
broad terms the nature, timing and procedures to be performed in each
extent of the audit procedures to be segment of the audit.
performed.

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Changes to audit plan and

Time Budget program
It is an estimate of the time that will The overall audit plan and the audit
be spent in executing the audit program should be revised as
procedures listed in the audit necessary during the course of the
program. audit and the reasons for significant
changes would be recorded.

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Auditor’s Responsibilities
•Direction
Direction, supervision, •Supervision
and review •Review
1.2.4

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Direction, Supervision and Direction, matters to inform in the

Performance engagement team:
The auditor shall take responsibility for: •Their responsibilities, including the need
a) The direction, supervision and performance of to comply with relevant ethical
the audit engagement in compliance with requirements, and to plan and perform
professional standards and regulatory and an audit with professional skepticism
legal requirements; and •Responsibilities of respective partners
b) The auditor’s report being appropriate in the where more than one partner is involved
circumstances. in the conduct of an audit engagement.

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Direction, matters to inform in the Direction, matters to inform in the

engagement team: engagement team:
•The objectives of the work to be performed. Discussion among members of the
•The nature of the entity’s business. engagement team allows less
•Risk-related issues. experienced team members to raise
•Problems that may arise. questions with more experienced team
members so that appropriate
•The detailed approach to the performance
of the engagement.
communication can occur within the
engagement team.

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Supervision includes matters such

Engagement Performance as:
Appropriate teamwork and training • Tracking the progress of the audit engagement.
assist less experienced members of • Considering the competence and capabilities of
individual members of the engagement team,
the engagement team to clearly including whether they have sufficient time to
understand the objectives of the carry out their work, whether they understand
assigned work. their instructions, and whether the work is being
carried out in accordance with the planned
approach to the audit engagement.

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Supervision includes matters such

as:
Review
•Addressing significant matters arising The engagement partner shall take
during the audit engagement, considering
their significance and modifying the responsibility for reviews being
planned approach appropriately. performed in accordance with the
•Identifying matters for consultation or firm’s review policies and procedures.
consideration by more experienced
engagement team members during the
audit engagement.

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Review Review, Examples

On or before the date of the auditor’s •The work has been performed in
report, the lead auditor shall, through a accordance with professional standards
review of the audit documentation and and regulatory and legal requirements;
discussion with the engagement team, be •Significant matters have been raised for
satisfied that sufficient appropriate audit further consideration;
evidence has been obtained to support •Appropriate consultations have taken
the conclusions reached and for the place and the resulting conclusions have
auditor’s report to be issued. been documented and implemented;

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Review, Examples Review of Work Performed, areas

• There is a need to revise the nature, timing and • Critical areas of judgment, especially those
extent of work performed; relating to difficult or contentious matters
• The work performed supports the conclusions identified during the course of the
reached and is appropriately documented;
engagement;
• The evidence obtained is sufficient and
appropriate to support the auditor’s report; and • Significant risks; and
• The objectives of the engagement procedures • Other areas the engagement partner
have been achieved. considers important.

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Review of Work Performed, areas Recap

1.2.1 Overview of the risk-based audit process
The engagement partner need not 1.2.2 Pre-engagement procedures
review all audit documentation, but 1.2.3 Scope and purposes of audit planning
may do so. However, the partner 1.2.3.1 Essential planning requirements
1.2.3.1.1 Knowledge of the business

documents the extent 1.2.3.1.2 Preliminary analytical procedures

1.2.3.1.3 Materiality
1.2.3.1.4 Assessing and managing audit risks
and timing of the reviews. 1.2.3.1.5 Overall audit plan and audit program (experts, internal auditor, other
independent auditors)
1.2.4 Direction, supervision, and review

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The End
Daghang Salamat!

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