AUDITING and Assurance Principles sa kanya.

Kailangan hindi ma associate sa entity na

Continuation walang integrity.

How will be able to know if there’s no integrity?

AUDIT PROCESS: Overview
- If there is a PREDECESSOR AUDITOR – dating
auditor ng entity) the auditor must communicate
Overview of Audit Process:
the predecessor auditor.
 Client Acceptance and Continuance Decisions If he rejects?
-kailan dapat at hindi dapat tanggapin ang - Can based on the experience or other resources.
engagement.
Agreeing the terms of Audit Engagement
 Performing Risk Assessment
-inaassess ang risk para maka tulong sa pag plano - Engagement Letter – contract, terms between
ng engagement. client and management (responsibilities of
auditor and management, scope) before mag start
 Obtaining Evidence about Internal Control binibigay.
Operating Effectiveness - Management Representation Letter – sinasabi ni
-also called test of control management na inaacknowledge nya ang
responsibility, at ang lahat ng evidence na
 Obtaining Substantive Evidence about Accounts, binibigay kay auditor is valid. Sa dulo binibigay.
Disclosures and Assertions
-also called substantive test b. Initial Audit Planning
-pinaplano kun ano ang gagawin sa buong audit.
 Completing the Audit and Making Reporting
Decisions CLIENT CONTINUANCE

CLIENT ACCEPTANCE DECISIONS a. Client Continuance

-if itutuloy paba?
a. Client Acceptance
Competence – kailangan alam ang industry and Revision on Terms of Audit Engagement
nature ng client na naghhire or nag ooffer ng - May nag bago?
engagement service. - Do you still have competence?
- Ethical requirements
Capability- kailangan hindi lang competent,kundi - Nawalan na nag integrity?
ON THE kaya natin gawin ang isang audit firm.
PART OF
AUDITOR Reminder on Terms of Audit Engagement
Resources- sapat na human resources para gawin - Reminders are needed
ang audit, or magagawa ba within the time set by - Send again engagement letter (if nakalimutan na
the client. or if theres changes)

Ethical Requirements- lahat ng professional b. Initial Audit Planning

accountants kailangan mag follow sa code of “Planning is not discrete phase, but continual and
ethics. iterative”

5 CODE OF ETHICS RISK ASSESSMENT

 Integrity a. Risk Assessment Procedures

 Confidentiality
 Objectivity Inquiry -kailangan mag tanong
 Professional Competence and Due Care
 Professional Behavior It can be:
Informational, interrogative, and others.
CPA IN PUBLIC PRACTICE (CODE OF ETHICS)
Analytical Procedures –
 Independence Analysis of plausible relationships:
- Ratios
Integrity of the Client Management – kaya nya ba - Trends
ibigay yung mga tunay na information na tatanungin Titignan bakit biglang tumaas ang ganitong bagay?
Bakit may nag bago?
 e. Audit Risk Model
Ex. Return on Investment or Net Profit Margin
 Audit Risk = Inherent Risk x Control Risk
Observation and Inspection – manuod and tignan x Detection Risk
ang documents.
AUDIT RISK - Risk na baka mag sustain tayo ng
THESE 3 ARE REQUIRED TO DO WHEN lost sa engagement. (PWEDE TAASAN OR
ASSESSING THE RISK. BABAAN ANG RISK)

Other factors considered – Inherent Risk – susceptibility to misstatement.

Prior period information (INAASSESS LANG)
Engagement team discussion
Control Risk – hindi nadetect ng internal control
b. Understanding the Entity and Its Environment ang misstatement. (INAASSESS LANG)

Industry – if saan nag ooperate si client Detection Risk – risk na baka hindi madetect ng
Accounting Principles Risk of procedures ni auditor yung material misstatement
material
Laws and Regulations – needs permits misstatement
na nandun sa fs. (PWEDE TAASAN OR BABAAN
ANG RISK)
Nature – business differs from:
Operations – real time ang pag update ng data or  Detection Risk = Audit Risk / (Inherent
not? Risk x Control Risk)
Ownership & Governance – sino ang may-ari?
Partnership? Sole? High – tataasan ang detection risk at KONTI ang
Structure – organizational chart? procedures
Low- bababaan ang detection risk pero mas
Accounting Policies - EXTENSIVE ang procedures.
How he/she determines his/her estimates?
f. Overall Audit Strategy
Objectives and Strategies – ng entity at
management. Scope, timing, and direction of the audit.
Baka hindi sila same ng objectives? There’s a goal
conflict.
Audit Plan – detailed na plano
Methods of Measuring and Reviewing Nature, timing, and extent of procedures.
Performance – if there’s a significant bonus?
Maybe there is a pressure on the management. Audit Program – mas specific
Set of instructions to assistants
c. Understanding the Entity’s Internal Control
TEST OF CONTROLS
Over Financial Reporting –
a. Test the operating effectiveness only if the design
d. Materiality is strong.
After omission of the information
Why do we need to test the control?
Overall Materiality – threshold or cut off point at Makabawas sa substantive test.
the FS Level
b. Attribute Sampling
Performance Materiality – less than the level of
overall materiality. Highly based sa judgment ni High level of assurance lang ang dapat iprovide ng
auditor. isang audit.

Materiality Level for Transaction, Account Balance Characteristics ang tinitignan

or Disclosure – inaallocate ang overall
materiality’s to different account. c. Communication to Management and Those
Charged with Governance.
“High level of assurance that the financial
statements are free from material misstatements, o Significant Deficiencies
either due to fraud or error.” -less than material weakness, not
necessarily na mag provide ng material
misstatement but importante sya sa
 management and those charged with Obtain Management Representation Letter
governance. - Bawal mag issue ng audit report hanggang hindi
o Material Weakness nag bibigay si management ng letter na nagsasabi
-may possibility nab aka may material na inaaknowledge niya yung kanyang
misstatement responsibility.
o Management Letter
-came from auditor to management, THE AUDITORS REPORT
suggestion para ma improves ang internal
control. a. Forming and Audit Opinion and Issue of Audit
Report
STANDARD Unqualified Opinion – “present fairly, in all
SUBSTANTIVE TEST OPINION material respect”
a. Substantive Test Procedures Qualified – “present fairly except for”
material misstatement, scope of
Analytical Procedures – analyze ng plausible
limitation, or uncertainty
relationship
(as long as hindi pervasive)
Substantive Test of Details of MODIFIED Pervasive means hindi kalat
OPINIONS
I. Transactions Adverse – “do not present fairly”
II. Balances Material and pervasive
Misstatements
Or BOTH Disclaimer of Opinion – “do not express an
opinion”
b. Variables Sampling high degree of scope of
Corroborating Evidence – more evidence or limitation and uncertainty
supporting evidence.
b. Contents of audit report
COMPLETING THE AUDIT
Opinion – (qualified or unqualified)
a. Completing the Audit
Basis for Opinion – (bakit mo nasabi na qualified
Search for Unrecorded Liabilities or unqualified?)
- usually, confirmations
Key Audit Matters – utmost importance and
Review Minutes of Meetings significance.
- Plant acquisition, dividends declaration, material
Responsibilities of Management and Those
share issuance, business combinations or
Charged with Governance
investments.
Auditors Responsibilities
Final Analytical Procedures
- Risk Assessment (required) Other Legal and Regulatory Requirements
- Substantive Test (Optional)
- Completing the Audit (Required) It may also include:

Loss Contingencies Emphasis of the Matter Paragraph (ilalagay right

after the opinion)
Going Concern Assumption

Review of Subsequent Events Other Matter Paragraph (scope limitations)

- Consider pati yung mga after ng audit report date.
- What can happen?
- Kapag may na discover beyond issuing the report:
- EXTENDING THE DATE (pag April, change into
May)
DUAL DATING (issuing pero dalawa ang date)

Engagement Quality Control Review Report

- Bawal mag issue ng audit report if wala pa ito.
-
 - “Ninanakaw ng employee ang resources ng entity”
AUDITORS RESPONSIBILITIES
REGARDING FRAUD  Defalcation or Employee Fraud
- Kadalasan nagnanakaw ay yung mga low level ng
employee
FRAUD
II. Fraudulent Financial Reporting (USUALLY
- “An intentional act by one or more individuals MATERIAL) needs to be bantayan
among management, those charged with
governance, employees, or third parties, involving  Manipulation of financial statements
the use of deception to obtain an unjust or illegal - Binabaan ang liability, tinataasan ang assets
advantage.” - Normally ang gumagawa is ang mga managers.
- ‘panloloko’
- Not just within the entity, third parties can also be  Management Fraud
involved.
III. Examples
ERROR vs FRAUD
Misappropriation of Asset
ERROR
 Unintentional  Embezzling receipts
 Misjudgment  Stealing physical assets
 Miscalculation  Stealing intellectual property
 Misapplication  Disbursement for unreceived goods or
services
Example:  Using resources for personal use
Nagkamali ng judgment with pure intentions
Fraudulent Financial Reporting
FRAUD
 Intentional  Fictitious journal entries
 Theft  Inappropriate adjustments
 Corruption  Omitting, advancing or delaying recognition
 Manipulation  Concealing facts
 Misrepresentation  Misrepresenting financial statements
 Altering records
AUDITOR’S RESPONSIBILITY
- “Auditor is responsible for obtaining reasonable FRAUD RISK FACTORS
assurance that the financial statements as a whole “May indicate the existence of fraud”
are free from material misstatements, whether
due to fraud or error” FRAUD TRIANGLE
Auditor is not expected to detect all fraud.

Auditors is only liable to fraud that results to

material misstatement.
Opportu
ACCOUNTABILITY & RESPONSIBILITY nity

- “Management and those charged with governance FRAUD

are responsible for prevention and detection of Attitud
fraud.” Incent
e&
ive &
Ration
Pressu alizatio
How they were able to detect fraud? re n
 Designing and Implementing Internal Control
FRAUD RELATED TO AUDIT Incentive & Pressure

I. Misappropriation of Assets (MOST COMMON - Minsan kahit ayaw ng isang tawo na gumawa ng
FRAUD) immaterial also fraud, minsan napipilitan sya dahil may benefit
syang makukuha or may pumipilit sa kanya.
 Theft or misuse of an organization’s assets - AVOID CONSEQUENCES
- Example: inventory, cash, and others
 - “pressure” it can be internal or external factors eg.
(family) Possible na pag usapan during discussion?

Opportunity  Susceptibility to material misstatements due to

fraud
- Weak control  Indications of earnings management (ano yung
mga nakita na factor, na baka mag drive sa entity
Attitude & Rationalization na mag commit ng fraud) (it can be PRESSURE)
 External and internal fraud risk factors (fraud
- Justification of fraud triangle must be considered)
 Audit procedures to respond to susceptibility to
DETECTION RISK fraud (paano madedetect na walang material
misstatement due to fraud)
a. The risk of not detecting material misstatement  Allegations to fraud (if may nalalaman ba sila na
due to fraud is higher than due to error. fraud within the entity)
- Concealed (ang fraud)
RISK ASSESSMENT PROCEDURES
b. The risk of not detecting material misstatements
due to management fraud is higher than employee a. Inquiries of Management
fraud.
- Management can override controls  Assessment of risk of material misstatements due
to fraud
AUDITOR’S OBJECTIVE  Inquiries of knowledge of actual, suspected or
alleged fraud
a.Objectives in relation to fraud
 Identify and assess risk of material b. Those Charged with Governance and Internal
misstatements due to fraud. Auditor
 Obtain sufficient appropriate evidence
through designing and implementing  Inquiries of knowledge of actual, suspected or
appropriate responses. alleged fraud
 Respond appropriately to identified or
suspected fraud c. Analytical Procedures
HOW CAN THESE BE MET? d. Evaluation of Fraud Risk Factors

PROFESSIONAL SKEPTICISM “Management is in the best position to perpetrate fraud”

a. Professional Skepticism (ATTITUDE) IDENTIFICATION & ASSESSMENT

 Questioning mind and critical assessment a. Identify and assess the risk of material
misstatements due to fraud
(Kailangan maging alert sa red flags/ mali)  At financial statements level
 At assertion level of transactions, account
Paano naapply? balances and disclosures.

 Management is neither honest nor dishonest b. Risk of Fraud of Revenue Recognition

 Records and documents are presumed to be (Overstatement)
genuine Kailangan ipresume na may fraud sa revenue
recognition
b. Professional Judgment (COMPETENCE)
c. Understanding Entity’s Control
 Application of relevant training, professional (RELATED TO FRAUD)
knowledge, skills and experience in making Alamin ang design ng entity’s internal control.
decisions. Internal control must be STRONG.

(talks about COMPETENCE sa proper judgment) RESPONSES TO ASSESSED RISK

(competence ng auditor)
a. Overall Responses
DISCUSSION AMONG THE TEAM
a. Discussion among the engagement partner and  Assignment and supervision of personnel
key audit members. (not necessarily tanan  Evaluate accounting policies
members)  Element of unpredictability
  Disclose known and suspected fraud
b. Responses to Risk at the Assertion Level
COMMUNICATIONS TO CLIENT
 Changing the nature, timing and extent of
procedures a. Communication with Management

Extent  Suspected or detected fraud to appropriate level

- Gaano karami yung tinitest na evidence of management
Atleast 1 level above the person involved
Timing
- Kailan icoconduct ang procedures? b. Communication with those charged with
- either, Interim Procedures, Near the financial Governance
statement date, and at the end of financial (sasabihin kay management whether may fraud or
statement date. wala, regardless kung material or immaterial man
yun)
Nature
- ano yung mga procedures na gagawin?  Suspected or detected management fraud and
- Observations? Confirmations? Recalculation? those result to material misstatements.
Inquiry?  Inquire about known or suspected fraud, and
senior management’s integrity and competence.
c. Response to Risk of Management Control Override Doubtful Integrity? May seek legal advice

 Test the appropriateness of journal entries and COMMUNICATIONS TO REGULATORS

adjustments Suspected or Detected Fraud?
 Reviewing accounting estimates for biases
 Evaluating the business rationale for significant “The auditor shall determine whether there is a
unusual transactions responsibility to report the occurrence or suspicion to a
party outside the entity.”
EVALUATION OF AUDIT EVIDENCE
Legal responsibility may override confidentiality.
a. Analytical procedures results are consistent with
auditor’s understanding Example:
b. Are misstatements due to fraud?
Fraud is unlikely to be an isolated occurrence.  Report to BSP the occurrence of fraud in financial
c. Reevaluate risk assessment if management fraud institutions
is suspected  Report to SEC the material audit findings, if the
d. Evaluate implications if auditor is unable to entity fails to report.
conclude whether the financial statements is
materially misstated. DOCUMENTATIONS

Qualitative matter based on PROFESSIONAL JUDGMENT. a. Understanding of the entity and its environment
and the assessment of the risk of material
WITHDRAWAL FROM ENGAGEMENT misstatements.
Identified fraud or suspected fraud? b. Responses of the assessed risk of material
misstatements
a. Determine professional and legal responsibility c. Communications about fraud to management,
b. Consider whether withdrawal is appropriate and those charged with governance, regulators and
legally permitted other.
d. Presumption that risks of fraud of revenue
 Discuss with management and those recognition is not applicable.
charged with governance
 Determine reporting responsibilities

MANAGEMENT REPRESENTATIONS

a. Obtain written representations that Management

 Acknowledges its responsibilities to

prevent and detect fraud
 Discloses its assessment of risk of
material misstatements due to fraud
 Auditor Responsibilities
INTERNAL CONTROL
“PSAs require the auditor to assess the risk of material
“The process designed, implemented and maintained by misstatement through obtaining an understanding of the
those charged with governance, management and other entity and its environment, including the entity’s internal
personnel to provide reasonable assurance about the control”
achievement of the entity’s objectives with regard to
reliability of financial reporting, effectiveness and CONTROLS RELEVANT TO THE AUDIT
efficiency of operations, and compliance with applicable
laws and regulations” -COSO “An entity’s objectives and the controls are directly related
however not all of these objectives and controls are
Achievement of objectives also include relevant to the audit.”
 Adherence to management policies
 Safeguarding assets Factors to determine a control’s relevance to audit:
 Prevention and detection of fraud and error
 Accuracy and completeness of accounting records  Materiality and significance of related risk
 Timely preparation of financial information  Nature and characteristics of the entity and its
internal control
LIMITATIONS OF INTERNAL CONTROL (PSA 315)  Legal and regulatory requirements
 Prevents, detects and corrects material
“Internal control can provide an entity only with misstatements
reasonable assurance about achieving the entity’s financial
reporting objectives” RISK ASSESSMENT: UNDERSTANDING CONTROLS

- Hindi pa rin absolute assurance “The auditor shall evaluate the design of those controls
- Hindi 100% sure na maachieve ang goal and determine whether they have been implemented.”
Controls exists and in use
Factors why we can’t achieve that 100%: Capable of effectively
preventing, or detecting
and correcting material Subcategory of Internal Control
Inherent Limitations
a. Human Error misstatements.
 Misunderstanding
 Faulty judgment How can we assess?
 Carelessness Procedures may include:
 Distraction
 Fatigue  Inquiry of entity personnel (by itself, is not sufficient)
 Observing the application of controls
b. Employee Collusion  Inspecting the documents and reports
There must be a segregation of duties  Tracing transactions through the system (aka “Walk-
through”)
c. Management Override
Kaya ni management ibypass ang internal control The auditor shall document his understanding of internal
control through:
For small entities, segregation of duties may be
limited but management oversight may be more a. Standardized Internal Control Questionnaires
effective. - Just like a “survey”
- “yes or no” questions
RESPONSIBILITIES OVER CONTROLS
Advantages:
Management Responsibilities - Easy to prepare and can easily identify
deficiencies
“Management is responsible for designing, implementing, Disadvantages:
and maintaining effective internal control over financial - Lacks flexibility and a tendency to be filled
reporting.” mechanically

 Management needs to maintain sufficient and b. Written narratives

appropriate internal control documentation. - Gagawa ng essay according to what he/she
understands
- In paragraph form
 Advantages: a. A control is designed, implemented or operated in
- Show the level of auditor’s understanding a way that it is unable to prevent, or detect and
Disadvantages: correct, misstatements on a timely basis
- Deficiencies cannot be easily identified b. A control necessary to prevent, or detect and
correct, misstatements on a timely basis is missing
c. Flowcharts
- Symbols, graphical documentation, (drawing), Levels of Deficiency
flow ng internal control
a. Material weakness – there is a reasonable
Advantages: possibility that a material misstatement of the
- Clearer and more specific portrayal of the client’s financial statements will not be prevented or
system detected on a timely basis.
Disadvantages: b. Significant deficiency – less severe than a material
- Sufficient understanding of flowcharts and weakness, yet of sufficient importance to merit the
deficiencies cannot be easily identified. attention of those charged with governance
- Kailan memorize ang symbols c. Other deficiencies – not significant deficiencies

Walk-through are performed after the documentation What should an auditor do when he/she detect these
deficiencies?
RISK RESPONSE: TEST OF CONTROLS The auditor shall communicate

The auditor shall design and perform test of controls to  In writing, significant deficiencies to those
obtain sufficient appropriate evidence as to the operating charged with governance and, if appropriate, to
effectiveness of controls when: management on a timely basis
 Other deficiencies to management that are of
a. The auditor’s assessment of risk of material sufficient importance to merit management’s
misstatement includes an expectation that the attention
controls are operating effectively. Maybe made orally
- If maganda ang risk assessment, if mababa or
below maximum, it means maybe the internal COMPONENTS OF INTERNAL CONTROL: OVERVIEW
control are effective. If maganda ang internal
control design, tsaka gagawa ng test of control. a. Control Environment
- Mas common na mangyari
 Communication and Enforcement of Integrity
b. Substantive procedures alone cannot provide and Ethical Values
sufficient appropriate evidence  Commitment to Competence
- Hindi sapat ang substantive test to perform test of  Participation by Those Charged with
controls. Governance
 Management’s Philosophy and Operating Style
Strong design = perform test of controls (to make sure it is  Organization Structure
really  Assignment of Authority and Responsibility
strong)
 Human Resource Policies and Practices
Weak design = do not perform test of controls
b. Entity’s Risk Assessment Process
Procedures may include:
 Identifying Business Risks
 Inquiry of entity personnel
 Estimating the Significance of the Risks
 Observing the application of controls
 Assessing the Likelihood of Occurrence
 Inspecting the documents and reports
 Deciding Actions
 Reperforming control activities (madami kang ittest)
c. Information System and Communication
“The auditor may use audit evidence about operating
effectiveness of specific controls and only test the controls
 Infrastructure (physical and hardware
at least once in every third audit if there are no significant
components)
changes to such controls”
 Software
 People
DEFICIENCY IN INTERNAL CONTROL
 Procedures
Deficiency in internal control exist when:
 Data

d. Control Activities
  Authorization - Recruitment, orientation, training, evaluation,
 Performance Reviews counseling, promotion, compensation and
 Information Processing remedial actions
 Physical Controls
 Segregation of Duties
o Authorizing transactions
o Recording transactions B. ENTITY’S RISK ASSESSMENT PROCESS
o Custody of assets The auditor shall obtain an understanding of
whether the entity has a process for
e. Monitoring of Controls
a. Identifying business risks relevant to financial
A. CONTROL ENVIRONMENT reporting objectives;
The auditor shall evaluate whether: b. Estimating the significance or risks;
c. Assessing the likelihood of their occurrence;
a. Management, with the oversight of those and
charged with governance, has created and d. Deciding about actions to address those risks
maintained a culture of honesty and ethical
behavior. Risks may arise from:
b. The strengths in the control environment
elements collectively provide an appropriate  Rapid growth
foundation for the other components of  New technology
internal controls.  New products
 Corporate restructuring
Control Environment sets the tone of an organization
Whether the entity’s risk assessment process is
A satisfactory control environment is not an absolute appropriate is a matter of judgment.
deterrent to fraud.
C. INFORMATION SYSTEM AND COMMUNICATION
The auditor shall obtain an understanding of the
In itself does not prevent, or detect and correct a
information system, including related business
material misstatement.
processes, relevant to financial reporting.
Elements of Control Environment
a. Communication and Enforcement of Integrity and The auditor shall obtain an understanding of how
Ethical Values the entity communicates financial reporting roles
- Effectiveness of controls cannot rise above the and responsibilities and significant matters
integrity and ethical values of the people who relating to financial reporting.
create, administer, and monitor them An information system consists of infrastructure,
software, people, procedures and data.
b. Commitment to Competence
c. Participation by those Charged with Governance Communication forms:
- Oversight and whistle-blowing mechanism
 Manuals and memoranda
Policy or way for employees na  Electronic
maka pag sumbong in safely.  Oral
 Through actions
d.
Management’s Philosophy and Operating Style D. CONTROL ACTIVITIES
- Conservative or aggressive attitude toward The auditor shall obtain an understanding of
financial reporting. control activities relevant to the audit in order to
assess the risk or material misstatement at the
e. Organizational Structure assertion level and design further audit
- Considering key area of authority and procedures.
responsibility and appropriate lines of reporting.
Control activities that are relevant to the audit are those:
f. Assignment of Authority and Responsibility  Related to significant risks and risks for which
- Personnel understanding of objectives, how they substantive procedures alone do not provide
contribute, and accountability sufficient appropriate evidence
 Relevant in the judgment of the auditor
g. Human resource Policies and Procedures
Control Activities are the policies and procedures that help
ensure that management directives are carried out.
 The auditor shall obtain an understanding of the sources of
the information used in entity’s monitoring activities, and
the basis upon which the management considers the
Generally, control activities may be categorized as policies information to be sufficiently reliable.
and procedures that pertain to the following:
If the entity has an internal audit function, the auditor shall
a. Authorization = general and specific authorization obtain an understanding of.

General Authorization a. The nature of the function’s responsibilities and

- Established guidelines how it fits in the entity’s organizational structure
- Applicable sa recurring activities or normal - Kanino nag rereport? Sino ang boss? (para ma
operations determine ang objectivity)
- Internal auditor usually reports to the audit
Specific Authorization committee or directly to the BOD
- Specific High-Level Approval
- Hindi pwede basta basta gagawin, need ng b. The activities performed, or to be performed, by
approval the function
- Ano ang ginawa at gagawin? (para malaman if
b. Performance Reviews = variance analysis, namonitor nya ba ang internal control)
comparing internal and external information, and
review of functional performance In determining whether the work of internal auditors can
be used, the auditor shall evaluate the internal auditor’s
c. Information Processing = application and general objectivity, technical, competence, due professional care,
controls and whether the internal and external auditor can
effectively communicate.
Application Controls
- Processing of individual applications ENTITY-WIDE AND TRANSACTION CONTROLS

General Controls a. Entity- wide Controls

- Relate to many application controls  Affect multiple processes, transactions, accounts
and assertions
d. Physical Controls = physical security of assets, o Controls over management
access to computer programs and data files, and override
periodic counting and comparison with records. o Organizations’ risk assessment
process
e. Segregation of Duties = reduce the opportunities o Controls to monitor other
to both perpetrate and conceal errors of fraud controls
b. Transaction Controls
- Segregate authorization, recording and custody  Affect only certain processes, transactions,
accounts and assertions
Incompatible Duties o Segregation of duties over cash
receipts and recording
E. MONITORING OF CONTROLS o Authorization procedures for
The auditor shall obtain an understanding of the purchasing
major activities used to monitor internal control o Physical controls to safeguard
over financial reporting and how the entity inventories
initiates remedial actions to deficiencies in its
controls.

Monitoring is the process to assess the effectiveness of

internal control performance over time.

Ongoing Evaluations Separate Evaluations

Habang ginagawa ang Merong another

operations, department na nag
minomonitor mo na iivaluate o responsible
rin sya. sa monitoring.
 THE CODE OF ETHICS FOR PROFESSIONAL
ACCOUNTANTS STATES THAT CONTRACT WITH
PRELIMINARY ENGAGEMENT PREDECESSOR AUDITOR IS RELEVANT.
ACTIVITIES
TO KNOW THE:
Reasons to decline the engagement
PRECONDITIONS FOR AN AUDIT
 Integrity of management
PSA
220
a. Consider the Integrity of the Client  Disagreements
and b. Competence to perform the Engagement  Understanding of the reasons for the change
PSQC
1
c. Compliance to Relevant Ethical Requirements
d. Acceptable Financial Reporting Framework a. Needs client permission, preferably in writing.
PSA e. Management Representation b. If unable to communicate, take other steps to
210
f. Agreement on Engagement Terms obtain information.

CLIENT INTEGRITY
The auditor shall not associate with clients who are lacking COMPETENCE
in integrity. Competence, capabilities and resources
- An auditor must have a public confidence.
Competence – knowledge and skills
Before accepting a client, things must be considered: Capabilities – if u are capable to do certain skills
Resource – sapat na personnel
 Identity and business reputation of principal
owners, key management and those charged with Need to consider:
governance.
 Knowledge of relevant industries and subject
 Nature of client’s operations matters
- Including business practices (paano nag rerecord
ng cost of goods sold? paano pinipresent yung  Experience with relevant regulatory requirements
kanilang current asset?)
What if walang knowledge and experience?
 Attitude on interpretation of accounting standards - Ability to gain necessary skills and knowledge
and internal control environment effectively

 Aggressive in maintaining audit fee as low as  Sufficient personnel

possible - Competent and capable

 Indications of inappropriate scope limitation  Experts are available

- Lawyers, doctors, engineer, actuary and appraiser
 Indications of involvement in money laundering
and other crimes  Engagement quality control reviewer
- Competent with proper authority (hindi pwede
 Reason for appointment and non-reappointment kung sino sino lang)
of predecessor auditor
 Completion within the reporting deadline
 Identity and business reputation of related parties - Perform audit in accordance with standards

Sources of information about client integrity ETHICAL REQUIREMENTS

Fundamental Principles
o Communication with existing and previous
a. Integrity
provider of accounting services and discussion
- Straight forward and honest
with other third parties (PREDECESSOR
AUDITOR)
b. Objectivity
- Uncompromised judgment (hindi below sa
o Inquiry of other firm personnel or third parties
standard na iniexpect)
(BANKERS, LEGAL COUNSEL, and INDUSTY
PEERS)
c. Professional Competence and Due Care
- Knowledge and skills diligent
o Background searches of relevant databases
 d. Confidentiality  Prescribed Framework by Law or Regulation
- No unauthorized disclosure - PFRS or other framework

e. Professional Behavior MANAGEMENT REPRESENTATION

- Comply with relevant laws and regulations Obtain agreement that it acknowledges and understands
its responsibilities. (MANAGEMENT REPRESENTATION
ADDITIONAL ETHICAL REQUIREMENTS FOR THOSE WHO LETTER)
ARE IN PUBLIC PRACTICE:
Management ang mananagot sa:
a. Independence
- Independence of Mind and in Appearance  Preparation of Financial Statements
 Internal Control over Financial Reporting
Independence Mind  Provide the auditor with
- Alam mo talaga na independent ka, objective ka, o Access to all information relevant to the
meron kang integrity, tama ang judgment financial statements
o Additional information for the purpose of
Independence in Appearance audit
- Hindi sapat na alam mo na independent ka, o Unrestricted access to persons within the
kailangan pati sa paningin ng public independent entity
ka rin. Scope Limitation
- kapag hindi nag provide si management ng
b. Professional Skepticism information na kailangan ni auditor
- Attitude - magiging dahilan para mag issue of declaimer
- Critical assessment and alert to red flags
- Hindi dapat inaassume na honest/dishonest
AGREEMENT ON TERMS
THREATS TO COMPLIANCE SHALL BE Agreement with management or those charged with
governance includes: (ENGAGEMENT LETTER)
o Eliminated
o Reduce to an acceptable level  Objective and scope of the audit
- Objective is to provide reasonable assurance
ACCEPTABLE FRAMEWORK
- Kailangan acceptable and framework  Responsibilities of the auditor
- Mag issue ng opinion
Elements of Assurance Engagement
 Responsibilities of the management and those
a. 3-Party Relationship charged with governance
b. Appropriate Subject Matter - Oversee ng FS
c. Suitable Criteria
- Financial reporting framework  Identification of applicable financial reporting
- IFRS, PRFS, USGAAP framework
- RUN-CR (kailangan ang criteria ay relevant, - Standards na ginamit para magawa ang FS
understandable, neutral, complete and reliable)
d. Sufficient Appropriate Evidence  Reference as to the expected form and content of
e. Written Assurance Report reports
- Printed, written or electronic and also the content,
Paano malalaman is acceptable ba ang framework na key audit matter, responsibilities of auditor and
ginagamit ni client? client.

Relevant Factors ENGAGEMENT LETTER MAY INCLUDE:

 Nature of the Entity o Elaboration of the scope

- Business, public sector entity, or NFP Organization o Form of any other communication of results
o The fact that there is an unavoidable risk that
 Purpose of the Financial Statements some material misstatements may not be detected
- General or Specific o Arrangement on planning and performing the
audit
 Nature of the Financial Statements
- Complete set or single FS
 o The expectation that the management will provide
written representations
o Agreement to make available to the auditor draft
financial statements

o Agreement to inform the auditor of facts that may

affect FS AUDIT PLANNING
o Basis on which fees are computed and billing
arrangements How to conduct the Audit Engagement?
o Request to acknowledge the receipt and agree to
the terms in the engagement letter Planning involves developing a general strategy and a
o Arrangements involving other auditors and detailed approach for the expected nature, timing and
experts extent of the audit.
o Arrangements involving internal auditors and
other staff of the client Audit Plan
Overall Audit Strategy
o Arrangements to be made with predecessor
auditor
o Any restriction of the auditor’s liability It is not a discrete phase, but rather a continual and
o Reference to any further agreements iterative process that often begins shortly after the
o Any obligations to provide working papers to completion of the previous audit and continues until the
other parties. completion of the current audit.
Risk-based Approach
OTHER MATTERS:

a. Audit of Components ADEQUATE PLANNING

- Other branches ng isang entity Adequate planning helps the auditor:
- If ikaw din ang nag auaudit
- Separate Engagement Letter?  Devote appropriate attention to important areas
 Identify and resolve potential problems on a
b. Recurring Audits timely basis
- Hindi kailangan yearly mag provide ng  Properly organize and manage the audit so that it
engagement letter is performed in an effective and efficient manner.
 Assist in the selection of team members to
Instances if need mag provide ng engagement letter: respond to anticipated risks, and the proper
assignment of work
o Revision of engagement letter  Facilitate the direction and supervision of team
- Bago ng fees, scope or additional members and review of their work
 Coordination of work done by auditors of
o Reminder of terms to client components and experts (branch of company from
- Baka nakakalimutan na ni client ang terms other location)

Involvement of the engagement partner and other key members

Examples:
in planning enhances the effectiveness and efficiency of the
planning process.
 Indication of misunderstanding
 Revised or special terms
 Changes of management Auditor may decide to discuss elements of planning with the
 Change of ownership client’s management but with care in order not to compromise
 Change in business the effectiveness of the audit.
 Change legal or regulatory requirements
 Change in framework
 Change in other requirements OVERALL AUDIT STRATEGY (PSA 300)
In establishing the overall audit strategy, the auditor shall:
c. Changes in Terms
- Papayag sya if may changes, kapag reasonable ang a. Identify the characteristics of the engagement that
justification. define its scope
Examples:
o Reporting requirements
o Expected audit coverage
Scope of an audit refers to audit
procedures deemed necessary.
 Audit plan is more detailed than the overall audit strategy
in that it includes the nature, timing and extent of audit
b. Ascertain the reporting objectives to plan the procedures to be performed by engagement team.
timing of the audit and the nature of the
communications required The audit plan shall include a description of:

Examples: a. The nature, timing and extent of planned risk

o Timetable for reporting assessment procedures
o Discussions with management and those b. The nature, timing and extent of planned further
charged with governance audit procedures at the assertion level
- Test of control and substantive test
c. Consider significant factors in directing the
engagement team’s efforts c. Other planned procedures
o Determination of materiality levels Examples:
o Significant changes and developments - Special requirements

d. Consider the results of preliminary engagement DIRECTION, SUPERVISION & REVIEW

activities
DIRECTION
e. Ascertain the nature, timing and extent of - Pag aassign ng task
resources necessary to perform the engagement - Normally junior auditors ang gumagawa
o Selection of engagement team and
assignment of work SUPERVISION
o Engagement budgeting - Guidance
- Normally senior auditors ang gumagawa
BENEFITS OF OVERALL STRATEGY
The process of establishing the overall audit strategy REVIEWS
assists the auditor to determine: - Normally ginagawa ng engagement partner

 Resources to deploy for specific audit areas such The auditor shall plan the nature, timing and extent of
as use of direction and supervision of team members and the review
o Experienced team members for high-risk of their work.
areas
It may vary depending on factors including:
o Experts on complex matters
 Size and complexity of the entity
 Amount of resources to allocate to specific audit
- The more mas complex ang client, then dapat mas
areas such as
may experience.
o Number of team members assigned to
 Area of the audit
perform a procedure - High-risk area, mas experience ang inaassign
o Extent of review of other auditor’s work  Assessed risk of material misstatement
o Budget in hours to allocate to high-risk - Competent ang mga engagement members
areas  Capabilities and competence of the members
performing the work
 When such resources are to be deployed such as
o Interim audit stage AUDIT PROGRAM
o Key cut-off dates An audit program sets out the nature, timing and extent of
planned audit procedures required to implement the
 How such resources are managed, directed and overall audit plan.
supervised such as
o Schedule of briefing and debriefing It serves as a set of instructions to assistants involved in
meetings the audit and as a mean to control the proper execution of
o How reviews are expected to take place work.
o Whether to complete engagement quality
control reviews AUDIT PLAN AUDIT PROGRAM
Includes consideration of: Schedule of further audit
AUDIT PLAN o Risk assessment procedures:
Once the overall strategy has been established, an audit procedures o Tests of controls
plan can be developed. o Further audit o Substantive tests
procedures
 o Other planned
procedures

CHANGES TO PLANNING
Planning is no a discrete phase, but rather a continual and
iterative process.

As a result of unexpected events, changes in conditions, or

the audit evidence obtained, the auditor may need to
modify the overall audit strategy and audit plan.
DOCUMENTATION
The auditor shall document the overall audit strategy and
AUDIT DOCUMENTATION
the audit plan, including any significant changes.
The record of audit procedures performed, relevant audit
evidence, obtained and conclusions the auditor reached.
Documentation:
a. Overall audit strategy – record of key decisions
- Also called as WORKING PAPERS
b. Audit plan – record of planned risk assessment
procedures and further procedures
It provides evidence
c. Significant changes – record of explanation of
changes and the final overall audit strategy and
a. Of the basis for conclusion about the achievement
audit plan
of the overall objective of the auditor
b. That the audit was planned and performed in
ADDITIONAL CONSIDERATIONS
accordance with PSAs and legal and regulatory
 For initial audits, additional matters the auditor requirements
may consider include:
Documentation provides evidence that the audit
 Arrangements with predecessor auditor, such as complies with the PSAs.
review of working papers
 Any major issues discussed with management OTHER PURPOSES
 Audit procedures regarding opening balances Audit documentation can also
 Other procedures required by the system of
quality control for initial audits  Assist the engagement team to plan and perform
the audit
 Consideration of work performed by  Assist member to direct and supervise the audit
work, and to discharge their review
 Client’s staff, including internal auditors – may responsibilities
reduce the cost of audit  Enable the engagement team to be accountable for
 Specialists or experts – brings unique knowledge its work
and judgement  Retains a record of matters of continuing
 Other CPAs – when a component is audited by significance to future audits
another firm Audit file:
- Current audit file
- Permanent audit file (transactions na magagamit
pa sa future audits)

 Enable the conduct of quality control reviews and

inspection in accordance with PSQC 1
 Enable the conduct of external inspections in
accordance with applicable legal, regulatory or
other requirements

Also serve as the auditor’s primary defense in case

of lawsuit.

TIMELINESS
The auditor shall prepare audit documentation on a timely
basis.

Timely Documentation Benefits:

  Helps to enhance the quality of audit  analysis
 issues memoranda
 Facilitates the effective review and evaluation of  summaries of significant matters
the audit evidence obtained and conclusions  letters of confirmation and representation
reached before the auditor’s report is finalized.
Client’s accounting records may be included as part of
Documentation prepared after the audit work has been documentation however, documentation is not a substitute for
performed is likely to be less accurate than documentation client’s records.
prepared at the time such work is performed.
 checklists
FORM, CONTENT AND EXTENT  correspondence (including e-mail) concerning
Documentation should be sufficient to enable an significant matters
experienced auditor, with no previous connection with the
audit, to understand:

a. The nature, timing and extent of procedures DEPARTURE FROM A REQUIREMENT

performed If, in exceptional circumstances, the auditor judges it
necessary to depart from a relevant requirement in a PSA,
b. The results of the audit procedures performed and the auditor shall document how the alternative audit
the audit evidence obtained procedures performed achieved the aim of that
requirement, and the reasons for the departure.
c. Significant matters arising during the audit,
conclusions reached thereon, and significant ASSEMBLY OF FINAL AUDIT FILE
professional judgments The auditor shall assemble the audit documentation in an
audit file and complete the administrative process of
In documenting the nature, timing and extent of assembling the final audit file on a timely basis after the
procedures performed, the auditor shall record: date of the auditor’s report.
a. The identifying characteristics of specific items or Archiving Within 60 days (after the
matter tested date of audit reports).

b. Who performed the audit work and the date such

work was completed AUDIT FILE
- one or more folders or other storage media, in
c. Who reviewed the audit work performed and the physical or electronic form, containing the record
extent of such review that comprise the audit documentation for a
specific engagement.
The auditor shall also document:
After the assembly of the final audit file, the auditor shall
not delete or discard audit documentation of any nature
o Discussions of significant matters
before the end of its retention period.
 Management (inquiry about the
managements risk assessment process)
Within 10 years from the date of
 Those charged with governance (audit audit report – Revised SRC Rule 68
committee may fraud na ginagawa,
material weakness/significant deficiency,
Audit file may not be modified but with documentation of:
hindi pala independent)
 specific reasons
 when and by whom they were made and reviewed
 Others, such as client’s personnel, experts,
other auditors and regulators (lawyers,
with regards to litigations, components of
auditors, regulators)

o Inconsistency regarding significant matters

Documentation may be recorded on paper or on electronic

or other media.

Examples:
 audit programs