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PSAs

PSAs

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TABLE OF CONTENTS

TOPICS 1. THE COUNCIL & ITS PRONOUNCEMENTS 2. PSA UPDATES/HIGHLIGHTS 2.1 2.2 LIST OF PSAs PSA HIGHLIGHTS

PAGE NUMBER 1 2 - 17

3. FRAMEWORK OF AUDITING & OTHER SERVICES 4. OBJECTIVE & GENERAL PRINCIPLES GOVERNING AN AUDIT OF FS 5. OVERALL AUDIT PROCESS 6. PLANNING PROCESS 7. AUDIT ENGAGEMENT LETTER 8. UNDERSTANDING THE ENTITY & ITS ENVIRONMENT 9. RESPONSE TO ASSESSED RISKS 10. AUDIT EVIDENCE

18 19 20 21 - 22 22 - 24 24 - 29 30 - 31 32 - 34

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11.SUBSTANTIVE AUDIT PROCEDURES a. CONSIDERATIONS ON SPECIFIC ITEMS b. EXTERNAL CONFIRMATIONS c. INITIAL ENGAGEMENTSOPENING BALANCES d. AUDIT OF ACCOUNTING ESTIMATES e. AUDITING FMV MEASUREMENTS f. RELATED PARTIES 12. COMPLETING THE AUDIT AND AND POST-AUDIT RESPONSIBILITIES 4.1 4.2 4.3 SUBSEQUENT EVENTS GOING CONCERN MANAGEMENT REPRESENTATIONS

35 - 51

52 – 61

13. THE INDEPENDENT AUDITOR’S REPORT 14. MODIFICATIONS TO THE INDEPENDENT AUDITOR’S REPORT 15. AUDIT DOCUMENTATION

62 – 71 72 – 79 80 – 83

2

The Council and Its Pronouncements
Auditing and Assurance Standards Council
The AASC was established by RA 9298 (Philippine Accountancy Act of 2004) The Council has 15 members coming from the following: The Council members from PICPA represent the following sectors

The Authority Attaching to Philippine Standards
Standards contain basic principles and essential procedures together with related guidance in the form of explanatory and other material. In exceptional circumstances, and auditor may judge it necessary to depart from a Standard in order to more effectively achieve the objective of an audit, but the auditor should be prepared to justify the departure. Standards need only be applied to material matters. Any limitation of the applicability of a specific standard is made clear in the Standard.

The Authority Attaching to Practice Statements
Practice Statements are issued to provide practical assistance to auditors in implementing the Standards or to promote good practice. These Statements are not intended to have the authority of the Standards
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PSQCs, Framework, PSAs, PAPSs, PSREs, PSAEs, PSRSs in effect as of December 31, 2006 No. Title – Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services and Preface to the Philippine Standards on Quality Control, Auditing, Review, Other Assurance and Related Services Philippine Framework for Assurance Engagements Glossary of Terms (December 2002) [amended by PSA 220 (Revised)] Quality Control for Firms That Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements Framework of Philippine Standards on Auditing Objective and General Principles Governing an Audit of Financial Statements [amended by PSA 700 (Revised)] Terms of Audit Engagements [amended by PSA 700 (Revised)]

– –

Philippine Standard on Quality Control (PSQC) 1

Philippine Standards on Auditing (PSAs) 120 200

210

220 Quality Control for Audits of Historical Financial (Revise Information d) 230 Audit Documentation (Revise d) 240 The Auditor’s Responsibility to Consider Fraud in an
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No. (Revise d 2005) 250 260

Title Audit of Financial Statements

Consideration of Laws and Regulations in an Audit of Financial Statements Communications of Audit Matters with Those Charged with Governance

300 Planning an Audit of Financial Statements (Revise d) 315 320 330 402 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement Audit Materiality [amended by PSA 240 (Revised 2005)] The Auditor’s Procedures in Response to Assessed Risks Audit Considerations Relating to Entities Using Service Organizations

500 Audit Evidence (Revise d) 501 505 510 520 530 540 545 Audit Evidence - Additional Considerations on Specific Items External Confirmations Initial Engagements--Opening Balances Analytical Procedures Audit Sampling and Other Selective Testing Procedures Audit of Accounting Estimates Auditing Fair Value Measurements and Disclosures

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No. 550 560 570 580 600 610 620

Title Related Parties Subsequent Events [amended by PSA 700 (Revised)] Going Concern Management Representations [amended by PSA 240 (Revised 2005)] Using the Work of Another Auditor Considering the Work of Internal Auditing Using the Work of an Expert

700 The Independent Auditor’s Report on a Complete Set (Revise of General Purpose Financial Statements d) 701 710 720 800 Modifications to the Independent Auditor’s Report Comparatives Other Information in Documents Containing Audited Financial Statements The Independent Auditor’s Report on Special Purpose Audit Engagements [amended by PSA 700 (Revised)]

Philippine Auditing Practice Statements (PAPSs) 1000 Inter-Bank Confirmation Procedures 1000P Audit Evidence – Practical Problems in an Audit of h Financial Statements 1004 The Relationship Between Bangko Sentral ng Pilipinas (BSP) and Banks’ External Auditors 1005 The Special Consideration in the Audit of Small (Revise Entities d) 1006 Audits of the Financial Statements of Banks

4

No. Title 1010 The Consideration of Environmental Matters in the Audit of Financial Statements 1012 Auditing Derivative Financial Instruments [amended by PSA 220 (Revised)] 1013 Electronic Commerce – Effect on the Audit of Financial Statements 1014 Reporting by Auditors on Compliance with International Financial Reporting Standards Philippine Standards on Review Engagements (PSREs) 2400 Engagements to Review Financial Statements (previously PSA 910) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity Philippine Standards on Assurance Engagements (PSAEs) 3000 Assurance Engagements Other Than Audits or (Revise Reviews of Historical Financial Information d) 3400 The Examination of Prospective Financial Information (previously PSA 810) Philippine Standards on Related Services (PSRSs) 4400 Engagements to Perform Agreed-Upon Procedures Regarding Financial Information (previously PSA 920) 4410 Engagements to Compile Financial Information (previously PSA 930)

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Standards that have been REPLACED: Old Standard Preface to Philippine Standards on Auditing and Related Services New Standard Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services and Preface to the Philippine Standards on Quality Control, Auditing, Review, Other Assurance and Related Services Quality Control for PSA Quality Control for Audit Work 220 Audits of Historical (Revis Financial ed) Information Documentation PSA Audit 230 Documentation (Revis ed) The Auditor’s PSA The Auditor’s Responsibility to 240 Responsibility to Consider Fraud and (Revise Consider Fraud in Error in an Audit of d an Audit of Financial Financial 2005) Statements Statements Planning PSA Planning an Audit of 300 Financial (Revis Statements ed) The Auditor’s Reports PSA The Independent
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PSA 220

PSA 230

PSA 240 (Revis ed)

PSA 300

PSA

700

on Financial Statements

700 (Revis ed)

PAPS 1005

PSA 100 / PSAE 3000

The Special Consideration in the Audit of Small Business Assurance Engagements

PAPS 1005 (Revis ed) PSAE 3000 (Revis ed)

Auditor’s Report on a Complete Set of General Purpose Financial Statements The Special Consideration in the Audit of Small Entities Assurance Engagements Other Than Audits or Reviews of Historical Financial Information

Standards that have been WITHDRAWN: PSA 310, “Knowledge of Business” PSA 400, “Risk Assessments and Internal Control” PSA 401, “Auditing in a Computer Information System Environment” PAPS 1001, “CIS Environment – Stand-Alone Personal Computers” PAPS 1002, “CIS Environment – On-line Computer Systems” PAPS 1003, “CIS Environment – Database Systems” PAPS 1008, “Risk Assessments and Internal Control – CIS Characteristics and Considerations” PAPS 1009, “Computer-Assisted Audit Techniques”

PSA Highlights

PSA 220 – Quality Control
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A more comprehensive quality control requirements

PSA 240 (revised)

Requires assessment of risk of significant misstatement Requires communication with those charged with governance Requires to obtain a written management representation

PSA 250 – Laws and Regulation (new) Requires the auditor to recognize that noncompliance by the entity with laws and regulations may materially affect the financial statements.

PSA Highlights
Provides that auditor may conclude that withdrawal from the engagement is necessary when the entity does not take the remedial action that the auditor considers necessary in the circumstances, even when the noncompliance is not material to the financial statements.

PSA 260 – Communication with Those Charged with Governance (amended by PSA 240 revised)
Requires the auditor to communicate audit matters of governance interest arising from the audit of financial statements with those charged with governance of an
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entity.
PSA 310 – Understanding the Entity … In performing an

audit of financial statements, the auditor is required to have or obtain a knowledge of the business sufficient to enable the him to identify and understand the events, transactions and practices that, in the auditor's judgment, may have a significant effect on the financial statements or on the examination or audit report.

PSA Highlights

PSA 320 – Materiality (amended by PSA 240)
Requires the auditor to consider materiality and its relationship with audit risk when conducting an audit.
PSA 400 – Risk Assessment and Internal Control (withdrawn)

Requires the auditor to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. The auditor is required also to use professional judgment to assess audit risk and to design audit procedures
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to ensure it is reduced to an acceptably low level.

PSA 401 – CIS Environment (withdrawn)
When the CIS are significant, the auditor is required to obtain an understanding of the CIS environment and whether it may influence the assessment risks.

PSA Highlights

PSA 402 – Organizations

Entities

Using

Service

Requires the auditor to consider how a service organization affects the client's accounting and internal control systems so as to plan the audit and develop an effective audit approach.

PSA 500/501 – Audit Evidence (revised)
When obtaining audit evidence from tests of control, the auditor is required to consider the sufficiency and appropriateness of the audit evidence to
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support the assessed level of control risk.
PSA 505 – External Confirmations Requires the auditor to determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence to support certain financial statement assertions. In making this determination, the auditor should consider materiality, the assessed level of risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level for the applicable financial statement assertions.

PSA Highlights PSA 510 – Initial Engagements – Opening Balances For initial audit engagements, the auditor is required to obtain sufficient appropriate audit evidence that: (a) The opening balances do not contain misstatements that materially affect the current period's financial statements; PSA 510 – Initial Engagements – Opening Balances
(b) The prior period's closing balances have been correctly brought forward to the current period or, when appropriate, have been restated; and (c) Appropriate accounting policies are

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consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed.

PSA 520 – Analytical Procedures

Requires the auditor to apply analytical procedures at the planning stage to assist in understanding the business and in identifying areas of potential risk.

PSA Highlights
The auditor is also required to apply analytical procedures at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor's knowledge of the business.

PSA 540 – Accounting Estimates
Requires the auditor to obtain sufficient appropriate audit evidence as to whether an accounting estimate is reasonable in the circumstances and, when required, is appropriately disclosed.

PSA 545 – Fair Value Measurements and Disclosure
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Requires the auditor to obtain an understanding of the entity's process for determining fair value measurements and disclosures and of the relevant control procedures sufficient to develop an effective audit approach.

PSA Highlights
PSA 550 – Related Parties Requires the auditor to perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements.

PSA 550 – Related Parties

Requires the auditor to obtain a written representation from management concerning: (a) The completeness of information provided regarding the identification of related parties; and

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(b) The adequacy of related party disclosures in the financial statements.

PSA 560 – Subsequent Events
Requires the auditor to perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified.
PSA Highlights
PSA 560 – Subsequent Events When, after the date of the auditor's report but before the financial statements are issued, the auditor becomes aware of a fact which may materially affect the financial statements, the auditor should consider whether the financial statements need amendment, should discuss the matter with management, and should take the action appropriate in the circumstances.

PSA 560 – Subsequent Events
When management does not amend the financial statements in circumstances where the auditor believes they need to be amended and the auditor's report has not been released to the entity, the
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auditor should express a qualified opinion or an adverse opinion.

PSA 560 – Subsequent Events
When the auditor's report has been released to the entity, the auditor would notify those persons ultimately responsible for the overall direction of the entity not to issue financial statements and the auditor's report thereon to third parties.
PSA Highlights
PSA 560 – Subsequent Events When, after the financial statements have been issued, the auditor becomes aware of a fact which existed at the date of the auditor's report and which, if known at that date, may have caused the auditor to modify the auditor's report, the auditor should consider whether the financial statements need revision, should discuss the matter with management, and should take the action appropriate in the circumstances.

PSA 580 – Management Representations (amended by PSA 240 revised) Requires the auditor to obtain evidence that management acknowledges its responsibility for the fair presentation of the financial statements in accordance with the relevant
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financial reporting framework, and approved the financial statements.

has

PSA 580 – Management Representations
If management refuses to provide a representation that the auditor considers necessary, this constitutes a scope limitation and the auditor should express a qualified opinion or a disclaimer of opinion.
PSA Highlights PSA 600 – Using Work of Another Auditor (revised) Requires the principal auditor to perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor's purposes, in the context of the specific assignment.
\

PSA 610 – Considering the Work of Internal Audit The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach. When the external auditor intends to use specific

16

work of internal auditing, the external auditor should evaluate and test that work to confirm its adequacy for the external auditor's purposes.

PSA 700 – The Auditor’s Report (revised)
Since the auditor's responsibility is to report on the financial statements as prepared and presented by management, the auditor should not date the report earlier than the date on which the financial statements are signed or approved by management.

PSA Highlights

PSA 710 – Comparatives
(a) Corresponding figures where amounts and other disclosures for the preceding period are included as part of the current period financial statements, and are intended to be read in relation to the amounts and other disclosures relating to the current period.

PSA 710 – Comparatives
(b) Comparative financial statements where amounts and other disclosures for the preceding period are included for comparison with the financial statements
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of the current period, but do not form part of the current period financial statements.
PSA 720 – Information in Documents Containing Audited Financial Statements (new) Requires the auditor to read the other information to identify material inconsistencies with the audited financial statements.

PSA Highlights
If, on reading the other information, the auditor identifies a material inconsistency, the auditor should determine whether the audited financial statements or the other information needs to be amended.

PSA 800 – Special Purpose Audit Engagements (amended by PSA 700)

Provides guidance in connection with special purpose audit engagements including: Financial statements prepared in accordance with a comprehensive basis of accounting other than International Accounting Standards or national standards;

PSA 800 – Special Purpose Audit Engagements
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Specified accounts, elements of accounts, or items in a financial statement (hereafter referred to as reports on a component of financial statements); Compliance with contractual agreements; and Summarized financial statements.

FRAMEWORK OF AUDITING AND OTHER SERVICES
Auditing
Nature of service Audit

Review
Review

Related Services
Agreedupon Procedures No assurance Compilation

Comparative level of assurance provided by the auditor Report provided

High, but not absolute, assurance (Reasonable assurance) Positive assurance on assertion(s)

Moderate assurance (Limited assurance)

No assurance

Negative assurance on assertion(s)

Factual findings of procedures

Identification of information compiled

Levels of Assurance
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Refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party for use by another party

Audit of Financial Statements
The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrase used to express the auditor’s opinion is “present fairly, in all material respects.”

Objective of an Audit

Reasonable Assurance
An audit in accordance with PSAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. Is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstaments in the financial statements taken as a whole Relates to the whole audit process Inherent Limitations in an Audit: The use of testing Inherent limitations of any accounting and internal control system That most audit evidence is persuasive rather than conclusive 20

Use of judgment Characteristic(s) of subject matter

Responsibility for the Financial Statements
 While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for preparing and presenting the financial statements is that of the management of the entity. The audit of the financial statements does not relieve management of its responsibilities.

The Overall Audit Process:
CLIENT Transactions And Other Economic Events Control Structure Recorded Transactions General & `Subsidiary Account Balances Ledger AUDITOR

Audit Planning (PSA 300) Assessing (PSA 400) Control Risk (Tests of Controls Over Transactions) Substantive Tests (PSA 500/600) Of Transactions Direct Tests of Account Balances And Analytical Procedures Final Assessment Of Audit Approach &

Dual-Purpose Tests

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Financial Statement Presentation Financial Statements Opinion (PSA 700) Audit

THE PLANNING PROCESS
Process A. Accepting the Engagement B. Establishing Terms of Engagement C. General Planning (PSA 300) Planning Considerations/Relevant PSA and Auditing Pronouncements 1. Evaluate the integrity of the management 2. Assess ability to meet generally accepted auditing standards 1. Prepare engagement letter 1. Understanding the Entity and its Environment (PSA 315) 2. Conduct preliminary analytical procedures (PSA 520) 3. Establish materiality & audit risk (PSA 320/ amended by PSA 240)

Planning Considerations/Relevant PSA and Auditing Pronouncements

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4. Assessing the possibility for material errors, fraud, and certain types of illegal acts (PSA 240/250) 5. Identify related parties & related party transactions (PSA 550) 6. Consider other planning issues such as work of others (PSAs 600/610/620) 7. Consider other critical matters such as assessment of going-concern assumption (PSA 570)

Planning Considerations/Relevant PSA and Auditing Pronouncements D. Develop Overall Audit Strategy 1. Identify audit objectives/audit programs or procedures (PSA 300) 2. Quality control for audit work (PSA 220) 3. Schedule the audit work (timing considerations). 4. Assign professional staff to the engagement

E. Prepare Engagement Planning Memorandum

Audit Engagement Letter To the Board of Directors or the appropriate representative of senior management
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You have requested that we audit the financial statements of ....................., which comprise the balance sheet as at ……….., and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be made with the objective of our expressing an opinion on the financial statements. We will conduct our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered.

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We remind you that management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. As part of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit. We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit. (Insert additional paragraph here regarding fee arrangements and billings, as appropriate.) Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements. XYZ & Co. Acknowledged on behalf of ABC Company by (signed) ...................... Name and Title Date PSA 315 - Understanding The Entity And Its Environment And Assessing The Risks Of Material Misstatement
1. (Purpose): To establish standards and to provide guidance on

obtaining an understanding of the entity and its environment,
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including its internal control, an on assessing the risks of material misstatement in a financial statement.
2. The auditor should obtain an understanding of the entity and its

environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud and error, sufficient to design and perform further audit procedures. (PSA 240 & 500) 3. Requirements of the standard: a) Risk assessment procedures and sources of information about the entity and its environment, including its internal control (to discuss susceptibility among the engagement team). b) Understanding the entity and its environment, including its internal control (understand to identify & assess). c) Assessing the risk of material misstatement (to identify and assess risk of material misstatements). d) Communicating with those charged with governance and management (matters relating to internal control). e) Documentations (establish) Risk assessment procedures: 1. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control: a) Inquiries of management and others within the entity;  Inquiries towards those with governance  Inquiries directed toward internal audit personnel  Inquiries of employees  Inquiries directed toward in-house legal counsel  Inquiries directed towards marketing or sales personnel
b) Analytical procedures;

 Develop expectation about the plausible relationship that are reasonably expected to exist. – PSA 520 a) Observation and inspection

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 Observation of entity activities and operations  Inspection of documents, records and internal controls manuals.  Reading report prepared by management and those charges with governance.  Visits to the entity’s premises and plant facilities.  Tracing transactions through the information system relevant to financial reporting (walkthroughs) NOTE:  When auditor intends to use information about the entity and its environment obtained in prior periods, the auditor should determine whether changes have occurred that may affect the relevance of such information in the current audit.

Understanding the Entity and Its Environment, Including Its Internal Control The auditor’s understanding of the entity and its environment consists of an understanding of the following aspects:
 Industry, regulatory, and other external factors, including the

applicable financial reporting framework.  Nature of the entity, including the entity’s selection and application of accounting policies.
 Objectives and strategies and the related business risks that may

result in a material misstatement of the financial performance
 Measurement and review of the entity’s financial performance

 Internal control Assessing the Risks of Material Misstatement

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1. The auditor should identify and assess the risks of material

misstatement at the financial statement level, and the assertions level for classes of transaction, account balances, and disclosures. 2. For this purpose, the auditor:
 Identifies risks throughout the process of obtaining an understanding

of the entity and its environment, including relevant controls that relate to the risks, and by considering the classes of transactions, account balances, and disclosure in the FS;
 Relates the identified risks to what can go wrong at the assertion

level;
 Considers whether the risks are of a magnitude that could result in a

material misstatement of the FS; and  Considers the likelihood that the risks could result in a material misstatement of the FS. Communicating With Those Charged With Governance and Management The auditor should make those charged with governance or management aware, as soon as practicable, and at an appropriate level of responsibility, of material weakness in the design or implementation of internal control which have come to the auditor’s attention. Documentation The auditor should document:  The discussion among the engagement team regarding the susceptibility of the entity’s FS to material misstatements due to error or fraud, and the significant decision reached;  Key elements of the understanding obtained regarding each of the aspect of the entity and its environment identified in , including each of the internal control components identified in the , to assess the risks of material misstatements of the FS; the sources of information from which the understanding was obtained; and the risk assessment procedures;  The identified and assessed risk of material misstatements at the FS level and at the assertion level as required; and
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 The risks identified and related controls evaluated as a results of the requirements . "Analytical procedures" means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts. Analytical procedures include the consideration of comparisons of the entity's financial information with • Comparable information for prior periods. • Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.

• Similar industry information, such as a comparison of the entity's ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry. Analytical procedures also include consideration of relationships: • Among elements of financial information that would be expected to conform to a predictable pattern based on the entity's experience, such as gross margin percentages. • Between financial information and relevant nonfinancial information, such as payroll costs to number of employees. When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative evidence.

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The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of management, followed by: (a)corroboration of management's responses; (b)consideration of the need to apply other audit procedures based on the results of such inquiries Examples of matters an auditor may consider related to business risk include the following:        Industry developments New products and services Expansion of the business New accounting requirements Regulatory requirements Current and prospective financing requirements Use of IT

Conditions and Events That May Indicate Risks of Material Misstatement  Operations in regions that are economically unstable, for example, countries with significant currency devaluation or highly inflationary economies.  Operations exposed to volatile markets, for example, futures trading.  High degree of complex regulation.  Going concern and liquidity issues including loss of significant customers.  Constraints on the availability of capital and credit.  Changes in the industry in which the entity operates.  Changes in the supply chain.  Developing or offering new products or services, or moving into new lines of business.  Expanding into new locations.  Changes in the entity such as large acquisitions or reorganizations or other unusual events.  Significant transactions with related parties.

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 Lack of personnel with appropriate accounting and financial reporting skills.  Changes in key personnel including departure of key executives.  Weaknesses in internal control, especially those not addressed by management.  Inconsistencies between the entity’s IT strategy and its business strategies.  Application of new accounting pronouncements.  Accounting measurements that involve complex processes.  Events or transactions that involve significant measurement uncertainty, including accounting estimates.  Pending litigation and contingent liabilities, for example, sales warranties, financial guarantees

PSA 330 – The Auditor’s Procedures In Response To Assessed Risks (Purpose) To establish standards and provide guidance determining overall responses and designing and performing further audit procedures to respond to the assessed risks of MM at the FS and assertion levels in a financial statement audit. The auditor’s understanding of the entity and its environment, including its internal control, and assessment of the risks of MM are described in PSA 315. The following is an overview of the requirements of this standard: In order to reduce audit risk to an acceptably low level, the auditor should determine overall responses to assessed risks at the financial statement level, and should design and perform further audit procedures to respond to assessed risks at the assertion risks at the assertion level. (1)Overall responses
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 The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. o Such responses may include:  Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence;  Assigning more experienced staff or those with special skills or using experts (the assignment of engagement personnel to the particular engagement reflects the auditor’s risk assessment, which is based on the auditor’s understanding of the entity)  Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed  Additionally, the auditor may make general changes to the nature, timing, or extent of audit procedures as an overall response (example, performing substantive procedures at period end instead of at an interim date) Audit Procedures Responsive to risks of Material Misstatement at the Assertion Level  The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of MM at the assertion level. o The auditor considers such matters as the following:  The significance of the risk  The likelihood that MM will occur  The characteristics of the class of transaction, account balance or disclosure involved  The nature of the specific control used by the entity and in particular whether they manual or automated  Whether the auditor expects to obtain audit evidence to determine if the entity’s control

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are effective in preventing, or detecting and correcting, material misstatements. The nature of the audit procedures is of most importance in responding to the assessed risks. Documentation The auditor should document the overall responses to address the assessed risk of MM at the FS level an the nature, timing and extent of the further audit procedures, the linkage of those procedures with the assessed risks at the assertion level, and the results of the audit procedures. In addition, if the auditor plans to use audit evidence about the operating effectiveness of controls obtained in prior audits, the auditor should document the conclusions reached with regard to relying on such controls that were tested in a prior audit. The manner in which these matters are documented is based on the auditor’s professional judgment (PSA 230)

AUDIT EVIDENCE PSA 500 – Audit Evidence (Revised) The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusion on which to base the audit opinion Audit evidence – is all the information used by the auditor in arriving at the conclusion on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information. Accounting Records
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• • • • • • • •

Records of Initial entries Checks Invoices Contracts Electronic Fund Transfers Ledgers Journal entries and other adjustments Worksheets supporting cost allocations and computations Other information Minutes of meetings Confirmation from third parties Analysts’ reports Comparable data about competitors (benchmarking) Control manuals Info obtained from inquiry, inspection and observation Sufficient Appropriate Audit Evidence

• • • • • •

Sufficiency is the measure of the quantity of the audit evidence (the greater the risk, the more audit evidence is likely to be required). Appropriateness is the measure of the quality of the audit evidence (the higher the quality, the less may be required). Sufficiency and Appropriateness of audit evidence are interrelated. The Use of Assertions in Obtaining Audit Evidence

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 Management is responsible for the fair presentation of financial statements the reflect the nature and operations of the entity, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various elements of financial statements and related disclosures.  The auditor should use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risk of material misstatement and the design and performance of further audit procedures.

Assertions used by the auditor fall into following categories: Assertions about classes of transactions and events for the period under audit: o Occurrence o Completeness o Accuracy o Cutoff o Classification Assertions about account balances at the period end: o Existence

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o Rights and obligations o Completeness o Valuations and allocation Assertions about presentation and disclosure: o Occurrence and rights and obligations o Completeness o Classification and understandability o Accuracy and valuation AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE • Inspection • Observation • Inquiry • Confirmation • Recalculation • Reperformance • Analytical procedures

PSA 501 AUDIT EVIDENCE – ADDITIONAL CONSIDERATION ON SPECIFIC ITEMS This PSA comprises the following parts: Part A: Part B: Attendance at Physical Inventory Counting Confirmation of Accounts Receivable (Superseded by PSA 505 – Part B has been deleted) Part C: Inquiry Regarding Litigation and Claims Part D: Valuation and Disclosure of Long-term Investments
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Part E:

Segment Information

PART A: Attendance at Physical Inventory Counting Management ordinarily establishes procedures under which inventory is physically counted at least once a year to serve as a basis for the preparation of the financial statements or to ascertain the reliability of the perpetual inventory system. When inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable. Such attendance will enable the auditor to inspect the inventory, to observe compliance with the operation of management’s procedures for recording and controlling the results of the count and to provide evidence as to the reliability of management’s procedures.

If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor should take or observe some physical counts on an alternative date and, when necessary, perform tests of intervening transactions. Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude
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that the auditor need not make reference to a scope limitation. For example, documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory count may provide sufficient appropriate audit evidence. PART C: Inquiry Regarding Litigation and Claims Litigation and claims involving an entity may have a material effect on the financial statements and thus may be required to be disclosed and/or provided for in the financial statements. The auditor should carry out procedures in order to become aware of any litigation and claims involving the entity which may have a material effect on the financial statements. Such procedures would include: • Make appropriate inquiries of management including obtaining representations. • Review board minutes and correspondence with the entity’s lawyers. • Examine legal expense accounts. • Use any information obtained regarding the entity’s business including information obtained from discussions with any in-house legal department. When litigation or claims have been identified or when the auditor believes they may exist, the auditor should seek direct communication with the
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entity’s lawyers. Such communication will assist in obtaining sufficient appropriate audit evidence as to whether potentially material litigation and claims are known and management’s estimates of the financial implications, including costs, are reliable. The letter, which should be prepared by management and sent by the auditor, should request the lawyer to communicate directly with the auditor. When it is considered unlikely that the lawyer will respond to a general inquiry, the letter would ordinarily specify: • A list of litigation and claims. • Management’s assessment of the outcome of the litigation or claim and its estimate of the financial implications, including costs involved. • A request that the lawyer confirm the reasonableness of management’s assessments and provide the auditor with further information if the list is considered by the lawyer to be incomplete or incorrect. If management refuses to give the auditor permission to communicate with the entity’s lawyers, this would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of opinion. Where a lawyer refuses to respond in an appropriate manner and the auditor is unable to obtain sufficient appropriate audit evidence by applying alternative procedures, the auditor would
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consider whether there is a scope limitation which may lead to a qualified opinion or a disclaimer of opinion. PART D: Valuation and Disclosure of Long-term Investments When long-term investments are material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding their valuation and disclosure. Audit procedures regarding long-term investments ordinarily include considering evidence as to whether the entity has the ability to continue to hold the investments on a long term basis and discussing with management whether the entity will continue to hold the investments as long-term investments and obtaining written representations to that effect. Other procedures would ordinarily include considering related financial statements and other information, such as market quotations, which provide an indication of value and comparing such values to the carrying amount of the investments up to the date of the auditor’s report. PART E: Segment Information When segment information is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its disclosure in accordance with generally accepted accounting principles in the Philippines.

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Audit procedures regarding segment information ordinarily consist of analytical procedures and other audit tests appropriate in the circumstances. PSA 505 EXTERNAL CONFIRMATIONS The auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence to support certain financial statement assertions. In making this determination, the auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level for the applicable financial statement assertions.

External Confirmations are frequently used in relation to account balances and their components, but need not be restricted to these items. For example, the auditor may request external confirmation of the terms of agreements or transactions an entity has with third parties. Other examples of situations where external confirmations may be used include the following. • Bank balances and other information from bankers. • Accounts receivable balances.

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• Inventories held by third parties at bonded warehouses for processing or on consignment. • Property title deeds held by lawyers or financiers for safe custody or as security. • Investments purchased from stockbrokers but not delivered at the balance sheet date. • Loans from lenders. • Accounts payable balances. Use of Positive and Negative Confirmations The auditor may use positive or negative external confirmation requests or a combination of both.

A positive external confirmation request asks the respondent to reply to the auditor in all cases either by indicating the respondent's agreement with the given information, or by asking the respondent to fill in information. A response to a positive confirmation request is ordinarily expected to provide reliable audit evidence. There is a risk, however, that a respondent may reply to the confirmation request without verifying that the information is correct. The auditor is not ordinarily able to detect whether this has occurred.

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The auditor may reduce this risk, however, by using positive confirmation requests that do not state the amount (or other information) on the confirmation request, but ask the respondent to fill in the amount or furnish other information. On the other hand, use of this type of "blank" confirmation request may result in lower response rates because additional effort is required of the respondents. A negative external confirmation request asks the respondent to reply only in the event of disagreement with the information provided in the request. However, when no response has been received to a negative confirmation request, the auditor remains aware that there will be no explicit evidence that intended third parties have received the confirmation requests and verified that the information contained therein is correct. Accordingly, the use of negative confirmation requests ordinarily provides less reliable evidence than the use of positive confirmation requests, and the auditor considers performing other substantive procedures to supplement the use of negative confirmations. Negative confirmation requests may be used to reduce audit risk to an acceptable level when: (a) the assessed level of inherent and control risk is low; (b) (c) (d) a large number of small balances is involved; a substantial number of errors is not expected; and the auditor has no reason to believe that respondents will disregard these requests.

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A combination of positive and negative external confirmations may be used. For example, where the total accounts receivable balance comprises a small number of large balances and a large number of small balances, the auditor may decide that it is appropriate to confirm all or a sample of the large balances with positive confirmation requests and a sample of the small balances using negative confirmation requests. Where no response is received, the auditor ordinarily contacts the recipient of the request to elicit a response. Where the auditor is unable to obtain a response, the auditor uses alternative audit procedures. The nature of alternative procedures varies according to the account and assertion in question. In the examination of accounts receivable, alternative procedures may include examination of subsequent cash receipts, examination of shipping documentation or other client documentation to provide evidence for the existence assertion, and sales cut off tests to provide evidence for the completeness assertion. In the examination of accounts payable, alternative procedures may include examination of subsequent cash disbursements or correspondence from third parties to provide evidence of the existence assertion, and examination of other records, such as goods received notes, to provide evidence of the completeness assertion. PSA 505 INITIAL ENGAGEMENTS – OPENING BALANCES For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that:
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(a)

the opening balances do not contain misstatements that materially affect the current period's financial statements;

(b) the prior period's closing balances have been correctly brought forward to the current period or, when appropriate, have been restated; and (c) appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed.

"Opening balances" means those account balances which exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of: a. transactions of prior periods; and b. accounting policies applied in the prior period. When the prior period's financial statements were audited by another auditor, the current auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by reviewing the predecessor auditor's working papers. In these circumstances, the current auditor would also consider the professional competence and independence of the predecessor auditor. If the prior period's auditor's report was modified, the auditor would pay particular attention in the current period to the matter which resulted in the modification.

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Audit Conclusions and Reporting If, after performing procedures including those set out above, the auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances, the auditor's report should include: a. a qualified opinion, for example (where the qualification covers the balance sheet, income statement and statement of cash flows): "We did not observe the counting of the physical inventory stated at XXX as at December 31, 20X1, since that date was prior to our appointment as auditors. We were unable to satisfy ourselves as to the inventory quantities at that date by other audit procedures. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to observe the counting of physical inventory and satisfy ourselves as to the opening balance of inventory, the financial statements present fairly, in all material respects, the financial position of ….. as at December 31, 20X2, and the results of its operations and its cash flows for the year then ended in accordance with ..."; (b)
(c)

a disclaimer of opinion; or in those jurisdiction where it is permitted, an opinion which is qualified or disclaimed regarding the results of operations and cash

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flows and unqualified regarding financial position, for example: "We did not observe the counting of the physical inventory stated at XXX as at December 31, 20X1, since that date was prior to our appointment as auditors. We were unable to satisfy ourselves as to the inventory quantities at that date by other audit procedures. Because of the significance of the above matter in relation to the results of the Company's operations for the year to December 31, 20X2, we are not in a position to, and do not, express an opinion on the results of its operations and its cash flows for the year then ended. In our opinion, the balance sheet presents fairly in all material respects, the financial position of the Company as at December 31, 20X2, in accordance with ..." If the opening balances contain misstatements which could materially affect the current period's financial statements, the auditor would inform management and, after having obtained management's authorization, the predecessor auditor, if any. If the effect of the misstatement is not properly accounted for and adequately disclosed, the auditor should express a qualified opinion or an adverse opinion, as appropriate. If the current period's accounting policies have not been consistently applied in relation to opening balances and if the change has not been properly
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accounted for and adequately disclosed, the auditor should express a qualified opinion or an adverse opinion as appropriate. PSA 540 AUDIT OF ACCOUNTING ESTIMATES “Accounting estimate” means an approximation of the amount of an item in the absence of a precise means of measurement. Examples are: • Allowances to reduce inventory and accounts receivable to their estimated realizable value. • Provisions to allocate the cost of fixed assets over their estimated useful lives. • Accrued revenue. • Deferred tax. • Provision for a loss from a lawsuit. • Losses on construction contracts in progress. • Provision to meet warranty claims. The auditor should obtain sufficient appropriate audit evidence as to whether an accounting estimate is reasonable in the circumstances and, when required, is appropriately disclosed. The
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evidence available to support an accounting estimate will often be more difficult to obtain and less conclusive than evidence available to support other items in the financial statements. The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimate: (a) review and test the process used by management to develop the estimate;

(b) use an independent estimate for comparison with that prepared by management; or (c) review subsequent events which confirm the estimate made.

PSA 545 AUDITING FAIR MARKET VALUE MEASUREMENTS AND DISCLOSURES The auditor should obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with GAAP in the Philippines.

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The auditor should evaluate whether the fair value measurements and disclosures in the financial statements are in accordance with GAAP in the Philippines. The auditor's understanding of the requirements of GAAP in the Philippines and knowledge of the business and industry, together with the results of other audit procedures, are used to assess whether the accounting for assets or liabilities requiring fair value measurements is appropriate, and whether the disclosures about the fair value measurements and significant uncertainties related thereto are appropriate under GAAP in the Philippines. Where the method for measuring fair value is specified by GAAP in the Philippines, for example, the requirement that the fair value of a marketable security be measured using quoted market prices as opposed to using a valuation model, the auditor considers whether the measurement of fair value is consistent with that method.

PSA 550 RELATED PARTIES The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the effect of related party transactions that are
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material to the financial statements. However, an audit cannot be expected to detect all related party transactions. The auditor should review information provided by the directors and management identifying the names of all known related parties and should perform the following procedures in respect of the completeness of this information: a. b. c. d. review prior year working papers for names of known related parties; review the entity's procedures for identification of related parties; inquire as to the affiliation of directors and officers with other entities; review shareholder records to determine the names of principal shareholders or, if appropriate, obtain a listing of principal shareholders from the share register; review minutes of the meetings of shareholders and the board of directors and other relevant statutory records such as the register of directors' interests; inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related parties; and

e.

f.

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g.

review the entity's income tax returns and other information supplied to regulatory agencies.

During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related parties. Examples include: • Transactions which have abnormal terms of trade, such as unusual prices, interest rates, guarantees, and repayment terms. • Transactions which lack an apparent logical business reason for their occurrence. • Transactions in which substance differs from form. • Transactions processed in an unusual manner. • High volume or significant transactions with certain customers or suppliers as compared with others. • Unrecorded transactions such as the receipt or provision of management services at no charge. During the course of the audit, the auditor carries out procedures which may identify the existence of transactions with related parties. Examples include:
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• Performing detailed tests of transactions and balances. • Reviewing minutes of meetings of shareholders and directors. • Reviewing accounting records for large or unusual transactions or balances, paying particular attention to transactions recognized at or near the end of the reporting period. • Reviewing confirmations of loans receivable and payable and confirmations from banks. Such a review may indicate guarantor relationship and other related party transactions. • Reviewing investment transactions, for example, purchase or sale of an equity interest in a joint venture or other entity.

Audit Conclusions and Reporting
If the auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or concludes that their disclosure in the financial statements is not adequate, the auditor should modify the audit report appropriately. COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES

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PSA 560 SUBSEQUENT EVENTS The auditor should consider the effect of subsequent events on the financial statements and on the auditor’s report. The procedures to identify events that may require adjustment of, or disclosure in, the financial statements would be performed as near as practicable to the date of the auditor’s report and ordinarily include the following: •Reviewing procedures management has established to ensure that subsequent events are identified. •Reading minutes of the meetings of shareholders, the board of directors and audit and executive committees held after period end and inquiring about matters discussed at meetings for which minutes are not yet available. •Reading the entity’s latest available interim financial statements and, as considered necessary and appropriate, budgets, cash flow forecasts and other related management reports. •Inquiring, or extending previous oral or written inquiries, of the entity’s lawyers concerning litigation and claims. •Inquiring of management as to whether any subsequent events have occurred which might

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affect the financial statements. Examples of inquiries of management on specific matters are:

The current status of items that were accounted for on the basis of preliminary or inconclusive data. Whether new commitments, borrowings or guarantees have been entered into.

Wh ether sales of assets have occurred or are planned.
– –

Whether the issue of new shares or debentures or an agreement to merge or liquidate has been made or is planned. Whether any assets have been appropriated by government or destroyed, for example, by fire or flood. Whether there have been any developments regarding risk areas and contingencies. Whether any unusual accounting adjustments have been made or are contemplated. Whether any events have occurred or are likely to occur which will bring into question the appropriateness of accounting policies used in the financial statements as would be the case, for example, if such events call into question the validity of the going concern assumption.

PSA 570 GOING CONCERN
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When planning and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements. Examples of events or conditions, which individually or collectively, may cast significant doubt about the going concern assumption are set out below. This listing is not all-inclusive nor does the existence of one or more of the items always signify that a material uncertainty exists. Financial • Net liability or net current liability position. • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets. • Indications of withdrawal of financial support by debtors and other creditors. • Negative operating cash flows indicated by historical or prospective financial statements. • Adverse key financial ratios. • Substantial operating losses or significant deterioration in the value of assets used to generate cash flows. • Arrears or discontinuance of dividends. • Inability to pay creditors on due dates. • Inability to comply with the terms of loan agreements. • Change from credit to cash-on-delivery transactions with suppliers.
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Inability to obtain financing for essential new product development or other essential investments.

Operating
• • •

Loss of key management without replacement. Loss of a major market, franchise, license, or principal supplier. Labor difficulties or shortages of important supplies.

Other
• •

Non-compliance with capital or other statutory requirements. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that are unlikely to be satisfied. Changes in legislation or government policy expected to adversely affect the entity.

Additional Audit Procedures When Events or Conditions are Identified When events or conditions have been identified which may cast significant doubt on the entity’s
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ability to continue as a going concern, the auditor should: (a) review management’s plans for future actions based on its going concern assessment; (b) gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary, including considering the effect of any plans of management and other mitigating factors; and (c) seek written representations from management regarding its plans for future action. Audit Conclusions and Reporting Based on the audit evidence obtained, the auditor should determine if, in the auditor’s judgment, a material uncertainty exists related to events or conditions that alone or in aggregate, may cast significant doubt on the entity’s ability to continue as a going concern.

A material uncertainty exists when the magnitude of its potential impact is such that, in the auditor’s judgment, clear disclosure of the nature and implications of the uncertainty is necessary for the presentation of the financial statements not to be misleading.
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PSA 580 MANAGEMENT REPRESENTATIONS The auditor should obtain evidence that management acknowledges its responsibility for the fair presentation of the financial statements in accordance with generally accepted accounting principles in the Philippines, and has approved the financial statements. The auditor can obtain evidence of management's acknowledgment of such responsibility and approval from relevant minutes of meetings of the board of directors or similar body or by obtaining a written representation from management or a signed copy of the financial statements. Representations by Management as Audit Evidence The auditor should obtain written representations from management on matters material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist. The possibility of misunderstandings between the auditor and management is reduced when oral representations are confirmed by management in writing.

During the course of an audit, management makes many representations to the auditor, either unsolicited or in response to specific inquiries. When such representations relate to matters which are material to the financial statements, the auditor will need to:
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(a)

seek corroborative audit evidence from sources inside or outside the entity;

(b) evaluate whether the representations made by management appear reasonable and consistent with other audit evidence obtained, including other representations; and (c) consider whether the individuals making the representations can be expected to be well informed on the particular matters.

Example of a Management Representation Letter The following letter is not intended to be a standard letter. Representations by management will vary from one entity to another and from one period to the next. (Entity Letterhead) (Date) (To Auditor) This representation letter is provided in connection with your audit of the financial statements of ABC Company for the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial statements present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1 and of the results of its operations and its cash flows for the year then ended in accordance with generally accepted accounting principles in the Philippines.

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We acknowledge our responsibility for the fair presentation of the financial statements in accordance with generally accepted accounting principles in the Philippines. We confirm, to the best of our knowledge and belief, the following representations: Include here representations relevant to the entity. Such representations may include: • There have been no irregularities involving management or employees who have a significant role in the accounting and internal control systems or that could have a material effect on the financial statements. • We have made available to you all books of accounts and supporting documentation and all minutes of meetings of shareholders and the board of directors (namely those held on March 15, 20X1 and September 30, 20X1, respectively). • We confirm the completeness of the information provided regarding the identification of related parties. • The financial statements are free of material misstatements, including omissions. • The Company has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of noncompliance. There has been no noncompliance with requirements of regulatory authorities that could
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have a material effect on the financial statements in the event of noncompliance. • The following have been properly recorded and when appropriate, adequately disclosed in the financial statements: a) The identity of, and balances and transactions with, related parties. b) Losses arising from sale and purchase commitments. c) Agreements and options to buy back assets previously sold. d) Assets pledged as collateral. • We have no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements. • We have no plans to abandon lines of product or other plans or intentions that will result in any excess or obsolete inventory, and no inventory is stated at an amount in excess of net realizable value.

• The Company has satisfactory title to all assets and there are no liens or encumbrances on the company's assets, except for those that are disclosed in Note X to the financial statements.

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• We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent, and have disclosed in Note X to the financial statements all guarantees that we have given to third parties. • Other than …….. described in Note X to the financial statements, there have been no events subsequent to period end which require adjustment of or disclosure in the financial statements or Notes thereto. • The …… claim by XYZ Company has been settled for the total sum of XXX which has been properly accrued in the financial statements. No other claims in connection with litigation have been or are expected to be received. • There are no formal or informal compensating balance arrangements with any of our cash and investment accounts. Except as disclosed in Note X to the financial statements, we have no other line of credit arrangements. • We have properly recorded or disclosed in the financial statements the capital stock repurchase options and agreements, and capital stock reserved for options, warrants, conversions and other requirements.

____________________ Senior Executive Officer ____________________ Senior Financial Officer
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THE INDEPENDENT AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIAL STATEMENTS (PSA 700 Revised) The following are the elements of the auditor’s report when the audit has been conducted in accordance with the PSAs: (a) Title; (b) Addressee; (c) Introductory paragraph; (d) Management’s statements; responsibility for the financial

(e) Auditor’s responsibility; (f) Auditor’s opinion; (g) Other reporting responsibilities; (h) Auditor’s signature; (i) Date of the auditor’s report; and (j) Auditor’s address. Title The auditor’s report should have a title that clearly indicates that it is the report of an independent auditor.

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A title indicating the report is the report of an independent auditor, for example, “Independent Auditor’s Report,” affirms that the auditor has met all of the relevant ethical requirements regarding independence and, therefore, distinguishes the independent auditor’s report from reports issued by others. Addressee The auditor’s report should be addressed as required by the circumstances of the engagement. Introductory Paragraph The introductory paragraph in the auditor’s report should identify the entity whose financial statements have been audited and should state that the financial statements have been audited. The introductory paragraph should also: (a) Identify the title of each of the financial statements that comprise the complete set of financial statements; (b) Refer to the summary of significant accounting policies and other explanatory notes; and (c) Specify the date and period covered by the financial statements. Management’s Statements Responsibility for the Financial

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The auditor’s report should state that management is responsible for the preparation and the fair presentation of the financial statements in accordance with the applicable financial reporting framework and that this responsibility includes: (a) Designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (b) Selecting and applying appropriate accounting policies; and (c) Making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility The auditor’s report should state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit.

The auditor’s report states that the auditor’s responsibility is to express an opinion on the financial statements based on the audit in order to contrast it to management’s responsibility for the preparation and fair presentation of the financial statements. The auditor’s report should state that the audit was conducted in accordance with Philippine Standards on Auditing. The auditor’s report should also explain that
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those standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. The auditor’s report should describe an audit by stating that: (a) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements; (b) The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, the auditor should omit the phrase that the auditor’s consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; and (c) An audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of accounting estimates made by
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management, as well as the overall presentation of the financial statements. The auditor’s report should state that the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion. Auditor’s Opinion An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. When expressing an unqualified opinion, the opinion paragraph of the auditor’s report should state the auditor’s opinion that the financial statements give a true and fair view or present fairly, in all material respects, in accordance with the applicable financial reporting framework (unless the auditor is required by law or regulation to use different wording for the opinion, in which case the prescribed wording should be used). When Philippine Financial Reporting Standards or Philippine Public Sector Accounting Standards are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion should identify the jurisdiction or country of origin of the financial reporting framework. Other Reporting Responsibilities
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In some jurisdictions, the auditor may have additional responsibilities to report on other matters that are supplementary to the auditor’s responsibility to express an opinion on the financial statements. For example, the auditor may be asked to report certain matters if they come to the auditor’s attention during the course of the audit of the financial statements. Alternatively, the auditor may be asked to perform and report on additional specified procedures, or to express an opinion on specific matters, such as the adequacy of accounting books and records. Auditing standards in the specific jurisdiction or country often provide guidance on the auditor’s responsibilities with respect to specific additional reporting responsibilities in that jurisdiction or country. When the auditor addresses other reporting responsibilities within the auditor’s report on the financial statements, these other reporting responsibilities should be addressed in a separate section in the auditor’s report that follows the opinion paragraph. The auditor addresses these other reporting responsibilities in a separate section of the report in order to clearly distinguish them from the auditor’s responsibilities for, and opinion on, the financial statements. Auditor’s Signature The auditor’s report should be signed. The auditor’s signature is either in the name of the audit firm, the personal name of the auditor or both, as appropriate for the particular jurisdiction. In addition to the
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auditor’s signature, in certain jurisdictions, the auditor may be required to declare the auditor’s professional accountancy designation or the fact that the auditor or firm, as appropriate, has been recognized by the appropriate licensing authority in that jurisdiction. Date of the Auditor’s Report The auditor should date the report on the financial statements no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements. Sufficient appropriate audit evidence should include evidence that the entity’s complete set of financial statements has been prepared and that those with the recognized authority have asserted that they have taken responsibility for them. The date of the auditor’s report informs the reader that the auditor has considered the effect of events and transactions of which the auditor became aware and that occurred up to that date. The auditor’s responsibility for events and transactions after the date of the auditor’s report is addressed in PSA 560, “Subsequent Events.” Since the auditor’s opinion is provided on the financial statements and the financial statements are the responsibility of management, the auditor is not in a position to conclude that sufficient appropriate audit evidence has been obtained until the auditor obtains evidence that a complete set of financial statements has been prepared and management has accepted responsibility for them. Auditor’s Address
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The report should name the location in the country or jurisdiction where the auditor practices. Auditor’s Report The auditor’s report should be in writing.

INDEPENDENT AUDITOR’S REPORT [Appropriate Addressee] Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This
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responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards. Report on Other Legal and Regulatory Requirements [Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.] [Auditor’s signature] [Date of the auditor’s report] [Auditor’s address] Modifications to the Independent Auditor's Report PSA 701 Matters that Do Not Affect the Auditor's Opinion (a) Emphasis of matter Matters that Do Affect the Auditor's Opinion (a) Qualified opinion, (b) Disclaimer of opinion, or (c) Adverse opinion.
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Matters that Do Not Affect the Auditor's Opinion In certain circumstances, an auditor's report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph does not affect the auditor's opinion. The paragraph would preferably be included after the paragraph containing the auditor's opinion but before the section on any other reporting responsibilities, if any. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor's opinion is not qualified in this respect.

The auditor should consider modifying the auditor's report by adding a paragraph if there is a significant uncertainty (other than a going concern problem), the resolution of which is dependent upon future events and which may affect the financial statements. An uncertainty is a matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements. An illustration of an emphasis of matter paragraph for a significant uncertainty in an auditor's report follows: "Without qualifying our opinion we draw attention to Note X to the financial statements. The Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The Company has filed a counter action, and preliminary'
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hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements. " Matters that Do Affect the Auditor's Opinion An auditor may not be able to express an unqualified opinion when either of the following circumstances exists and, in the auditor's judgment, the effect of the matter is or may be material to the financial statements: (a) There is a limitation on the scope of the auditor's work; or (b) There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but the effect of any disagreement with management, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being 'except for' the effects of the matter to which the qualification relates. A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.

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An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. Circumstances that may Result in Other than an Unqualified Opinion Limitation on Scope A limitation on the scope of me auditor's work may sometimes be imposed by the entity (for example, when the terms of the engagement specify that the auditor will not carry out an audit procedure that the auditor believes is necessary). However, when the limitation in the terms of a proposed engagement is such that the auditor believes the need to express a disclaimer of opinion exists, the auditor would ordinarily not accept such a limited engagement as an audit engagement, unless required by statute. Also, a statutory auditor would not accept such an audit engagement when the limitation infringes on the auditor's statutory duties. A scope limitation may be imposed by circumstances (for example, when the timing of the auditor's appointment is such that the auditor is unable to observe the counting of physical inventories). It may also arise when, in the opinion of the auditor, the entity's accounting records are inadequate or when the auditor is unable to carry out an audit procedure believed to be desirable. In these circumstances, auditor would attempt to carry out reasonable alternative procedures to obtain sufficient appropriate audit evidence to support an unqualified opinion.

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When there is a limitation on the scope of the auditor's work that requires expression of a qualified opinion or a disclaimer of opinion, the auditor's report should describe the limitation and indicate the possible adjustments the financial statements that might have been determined to be necessary h; the limitation not existed. Illustrations of these matters are set out below. Limitation on Scope—Qualified Opinion "We haye audited... (remaining words are the same as illustrated in the introductory paragraph - see paragraph 60 of PSA 700). Management is responsible for ... (remaining words are the same as illustrate in the management's responsibility paragraph - see paragraph 60 of PSA 70C Our responsibility is to express an opinion on these financial statements base-on our audit. Except as discussed in the following paragraph, we conducted c audit in accordance with ...(remaining words are the same as illustrated in the auditor's responsibility paragraphs - see paragraph 60 of PSA 700). We did not observe the counting of the physical inventories as of December 3 20X1, since that date -was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of the Company's records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.
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In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial statements present fairly, in all material respects,... (remaining words are the same as illustrated in the opinion paragraph - paragraph 60 of PSA 700)." Limitation on Scope—Disclaimer of Opinion "We were engaged to audit the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management is responsible for... (remaining words are the same as illustrated in the management's responsibility paragraph - see paragraph 60 of PSA 700) (Omit the sentence stating the responsibility of the auditor.) (The paragraph discussing the scope of the audit would either be omitted or amended according to the circumstances.) (Add a paragraph discussing the scope limitation as follows: We were not able to observe all physical inventories and confirm accounts receivable due to limitations placed on the scope of our work by the Company.)
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Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statements. " Disagreement with Management The auditor may disagree with management about matters such as the acceptability of accounting policies selected, the method of their application, or the adequacy of disclosures in the financial statements. If such disagreements are material to the financial statements, the auditor should express a qualified or an adverse opinion. Illustrations of these matters are set out below. Disagreement on Accounting Policies—Inappropriate Accounting Method Qualified Opinion "We have audited... (remaining words are the same as illustrated in the introductory paragraph - see paragraph 60 of PSA 700). Management is responsible for ... (remaining words are the same as illustrated in the management's responsibility paragraph - see paragraph 60 of PSA 700) Our responsibility is to ... (remaining words are the same as illustrated in the auditor's responsibility paragraphs - see paragraph 60 of PSA 700). As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with Philippine Financial Reporting Standards. The provision for the year ended December
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31, 20X1, should be xxx based on the straight-line method of depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly, the fixed assets should be reduced by accumulated depreciation of xxx and the loss for the year and accumulated deficit should be increased by xxx and xxx, respectively. In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements present fairly, in all material respects,... (remaining words are the same as illustrated in the opinion paragraph - see paragraph 60 of PSA 700)."

Disagreement on Accounting Policies—Inadequate Disclosure—Adverse Opinion "We have audited ... (remaining words are the same as illustrated in the introductory paragraph - see paragraph 60 of PSA 700). Management is responsible for ... (remaining words are the same as illustrated in the management's responsibility paragraph - see paragraph 60 of PSA 700) Our responsibility is to ... (remaining words are the same as illustrated in the auditor's responsibility paragraphs - see paragraph 60 of PSA 700).

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(Paragraph(s) discussing the disagreement.) In_ our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the financial statements do not present fairly, in all material respects, the financial position of ABC Company as of December 20,19X1, and of its financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards."

AUDIT DOCUMENTATION

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“Audit documentation” means the record of audit procedures performed,² relevant audit evidence obtained, and conclusions the auditor reached (terms such as ”working papers” or “ workpapers” are also sometimes used); and The auditor should prepare, on a timely basis, audit documentation that provides: (a) A sufficient and appropriate record of the basis for auditor’s report; and (b) Evidence that the audit was performed in accordance with PSAs and applicable legal and regulatory requirements. Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance the quality of the audit and facilities the effective review an evaluation of the audit evidence obtained and conclusions reached before the auditor’s report is finalized. Documentation prepared at the time the work is performed is likely to be more accurate than documentation prepared subsequently. Compliance with the requirements of this PSA together with the specific documentation requirements of other relevant PSAs is ordinarily sufficient to achieve the objectives in paragraph 2.

In additional to these objectives, audit documentation serves a number of purposes, including:
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a. Assisting the audit team to plan and perform the audit b. Assisting members of the audit team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with c. PSA 220 (Revised), “Quality Control for Audits of Historical Financial Information;” d. Enabling the audit team to be accountable for its work; e. Retaining a record of matters of continuing significance to future audits; f. Enabling an experienced auditor to conduct quality control reviews and inspections in accordance with PSQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and related Services Engagements;” and g. Enabling an experience auditor to conduct external inspections in accordance with applicable legal, regulatory or other requirements. Nature of Audit Documentation Audit documentation may be recorded on paper or on electronic or other media. It includes, for example, audit programs, analyses, issues memoranda, summaries of significant matters, letters of confirmation and representation, checklist, and correspondence (including e-mail) concerning significant matters. Abstracts or copies of the entity’s records, for example, significant and specific contracts and agreements, may be included as part of audit documentation if considered appropriate. Audit documentation, however, is not a substitute for the entity’s accounting records.
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The auditor ordinarily excludes from audit documentation superseded drafts of working papers and financial statements, notes that reflect incomplete or preliminary thinking, previous copies of documents corrected for typographical or other errors, and duplicates of documents Documentation of the Identifying Characteristics of Specific Items or Matters Being Tested In documenting the nature, timing and extent of audit procedures performed, the auditor should record he identifying characteristics of the specific items or matters being tested. Significant Matters Judging the significance of a matter requires an objective analysis of the facts and circumstances. Significant matters include, amount others: • Matters that give rise to significant risks (as defined in PSA 315, “Understanding the Entity and Its Environment and Assessing the Risk of Material Misstatement”). • Results of audit procedures indicating (a) that the financial information could be materially misstated, or (b) a need to revise the auditor’s previous assessment of the risk of material misstatement and the auditor’s responses to those risks. • Circumstances that cause the auditor significant difficult in applying necessary audit procedures. • Findings that could result in a modification to the auditor’s report.

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Identification of Preparer and Reviewer In documenting the nature, timing and extent of audit procedures performed, the auditor should record: (a) Who performed the audit work and the date work was completed; and (b) Who reviewed the audit work performed and the date extent of such review ³. Assembly of the Final Audit File The auditor should complete the assembly of the final audit file on a timely basis after the date of the auditor’s report. PSQC 1 requires firms to establish policies and procedures for the timely completion of the assembly of audit files. As PSQC 1 indicates, 60 days after the date of the auditor’s report is ordinarily an appropriate time limit within which to complete the assembly of the final audit file. After the assembly of the final audit file has been completed, the auditor should not delete or discard audit documentation before the end of its retention period. PSQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. As PSQC 1 indicates, the retention period for audit engagements ordinarily is no shorter than five years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

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