AuditingandAssuranceStandardsCouncil

PhilippineStandardonAuditing200(RevisedandRedrafted)

OVERALLOBJECTIVESOFTHEINDEPENDENTAUDITORAN
DTHECONDUCTOFANAUDITINACCORDANCEWITHPHILIP
INESTANDARDSONAUDITING
ConformingAmendments

PrefacetothePhilippineStandardsonQualityControl,Auditi
ng,Review,OtherAssuranceandRelatedServices
OtherPSAs
CONTENTS
P
agePhilippineStandardonAuditing(PSA)200(RevisedandRedra
fted),OverallObjectivesoftheIndependentAuditorandtheCond
uctofanAuditinAccordancewithPhilippineStandardsonAuditing
....................2ConformingAmendmentsPrefacetothePhilippin
eStandardsonQualityControl,Auditing,Review,OtherAssuranc
eandRelatedServices................................30PSA230(Redrafte
d),AuditDocumentation.................................................32PS
A240(Redrafted),TheAuditorsResponsibilitiesRelatingtoFrau
dinanAuditofFinancialStatements..........................................

.........34PSA260(RevisedandRedrafted),Communicationwith
ThoseChargedwithGovernance..............................................
.......................35AllFinalClarifiedPSAs.....................................
...............................................37
*

PHILIPPINESTANDARDONAUDITING200(REVISEDANDREDRAFTED
)
OVERALLOBJECTIVESOFTHEINDEPENDENTAUDITORANDTHECONDUCTOFANA
UDITINACCORDANCEWITHPHILIPPINESTANDARDSONAUDITING
(Effectiveforauditsoffinancialstatementsforperiodsbeginning onorafterDecember15,2009)

CONTENTS
Paragraph
Introduction
ScopeofthisPSA..............................................................................
12
...................
AnAuditofFinancialStatements.......................................................
39
..................
EffectiveDate.................................................................................
10
......................
OverallObjectivesoftheAuditor....................................................... 111
..............
2
Definitions......................................................................................
13
.....................
Requirements
EthicalRequirementsRelatingtoanAuditofFinancialStatements.......
14
............
ProfessionalSkepticism..................................................................
15
.....................
ProfessionalJudgment....................................................................
16
.....................
SufficientAppropriateAuditEvidenceandAuditRisk..........................
17
............
ConductofanAuditinAccordancewithPSAs....................................... 182
...........
4
ApplicationandOtherExplanatoryMaterial

AnAuditofFinancialStatements..............................................................
........A1A13EthicalRequirementsRelatingtoanAuditofFinancialStatem
ents.................A14A17ProfessionalSkepticism...................................
..................................................A18A22ProfessionalJudgment...........
............................................................................A23A27SufficientAp
propriateAuditEvidenceandAuditRisk....................................A28A52

ConductofanAuditinAccordancewithPSAs..............................................
..A53A76
Acknowledgment

*
[ReferencesinthisPSAto otherPSAsthathavenotyetbeen finalized reflecttheworking titlesofth
osePSAs.Thereferencesareindicatedinbracketsand willbeupdatedwhen thosePSAsarefinalize
d.]

Introduction
ScopeofthisPSA

ThisPhilippineStandardonAuditing(PSA)establishestheindependentau
ditorsoverallresponsibilitieswhenconductinganauditoffinancialstatem
entsinaccordancewithPSAs.Specifically,itsetsouttheoverallobjectiveso
ftheindependentauditor,andexplainsthenatureandscopeofanauditdesi
gnedtoenabletheindependentauditortomeetthoseobjectives.Italsoexp
lainsthescope,authorityandstructureofthePSAs,andincludesrequireme
ntsestablishingthegeneralresponsibilitiesoftheindependentauditorapp
licableinallaudits,includingtheobligationtocomplywiththePSAs.Theind
ependentauditorisreferredtoastheauditorhereafter.
PSAsarewritteninthecontextofanauditoffinancialstatementsbyanaudit
or.Theyaretobeadaptedasnecessaryinthecircumstanceswhenappliedt
oauditsofotherhistoricalfinancialinformation.

AnAuditofFinancialStatements

Thepurposeofanauditistoenhancethedegreeofconfidenceofintendedu
sersinthefinancialstatements.Thisisachievedbytheexpressionofanopin
ionbytheauditoronwhetherthefinancialstatementsareprepared,inallm
aterialrespects,inaccordancewithanapplicablefinancialreportingframe
work.Inthecaseofmostgeneralpurposeframeworks,thatopinionisonwh
etherthefinancialstatementsarepresentedfairly,inallmaterialrespects,i
naccordancewiththeframework.AnauditconductedinaccordancewithP
SAsandrelevantethicalrequirementsenablestheauditortoformthatopini
on.(Ref:Para.A1)
Thefinancialstatementssubjecttoauditarethoseoftheentity,prepareda
ndpresentedbymanagementoftheentitywithoversightfromthosecharg
edwithgovernance.PSAsdonotimposeresponsibilitiesonmanagemento
rthosechargedwithgovernanceanddonotoverridelawsandregulationst
hatgoverntheirresponsibilities.However,anauditinaccordancewithPSA
sisconductedonthepremisethatmanagementand,whereappropriate,th
osechargedwithgovernancehaveresponsibilitiesthatarefundamentalto

theconductoftheaudit.Theauditofthefinancialstatementsdoesnotreliev
emanagementorthosechargedwithgovernanceofthoseresponsibilities.
(Ref:Para.A2A11)

Asthebasisfortheauditorsopinion,PSAsrequiretheauditortoobtainreas
onableassuranceaboutwhetherthefinancialstatementsasawholearefre
efrommaterialmisstatement,whetherduetofraudorerror.Reasonableas
suranceisahighlevelofassurance.Itisobtainedwhentheauditorhasobtai
nedsufficientappropriateauditevidencetoreduceauditrisk(i.e.,theriskth
attheauditorexpressesaninappropriateopinionwhenthefinancialstate
mentsaremateriallymisstated)toanacceptablylowlevel.However,reaso
nableassuranceisnotanabsolutelevelofassurance,becausethereareinh
erentlimitationsofanauditwhichresultinmostoftheauditevidenceonwhi
chtheauditordrawsconclusionsandbasestheauditorsopinionbeingpers
uasiveratherthanconclusive.(Ref:Para.
A28A52)

6.
Theconceptofmaterialityisappliedbytheauditorbothinplanningandpe
rformingtheaudit,andinevaluatingtheeffectofidentifiedmisstatemen
tson
1

theauditandofuncorrectedmisstatements,ifany,onthefinancialstateme
nts.Ingeneral,misstatements,includingomissions,areconsideredtobem
aterialif,individuallyorintheaggregate,theycouldreasonablybeexpecte
dtoinfluencetheeconomicdecisionsofuserstakenonthebasisofthefinanc
ialstatements.Judgmentsaboutmaterialityaremadeinthelightofsurroun
dingcircumstances,andareaffectedbytheauditorsperceptionofthefinan
cialinformationneedsofusersofthefinancialstatements,andbythesizeor
natureofamisstatement,oracombinationofboth.Theauditorsopinionde
alswiththefinancialstatementsasawholeandthereforetheauditorisnotre
sponsibleforthedetectionofmisstatementsthatarenotmaterialtothefina
ncialstatementsasawhole.
7.
ThePSAscontainobjectives,requirementsandapplicationandotherexpla
natorymaterialthataredesignedtosupporttheauditorinobtainingreason
ableassurance.ThePSAsrequirethattheauditorexerciseprofessionaljudg
mentandmaintainprofessionalskepticismthroughouttheplanningandpe
rformanceoftheauditand,amongotherthings:
Identifyandassessrisksofmaterialmisstatement,whetherduetofraudor
error,basedonanunderstandingoftheentityanditsenvironment,includin
gtheentitysinternalcontrol.
Obtainsufficientappropriateauditevidenceaboutwhethermaterialmisst
atementsexist,throughdesigningandimplementingappropriaterespons
estotheassessedrisks.
Formanopiniononthefinancialstatementsbasedonconclusionsdrawnfro
mtheauditevidenceobtained.

1. 8.
Theformofopinionexpressedbytheauditorwilldependupontheapplic
able
2. financialreportingframeworkandanyapplicablelawsorregulations.
(Ref:Para.A12A13)

Theauditormayalsohavecertainothercommunicationandreportingresp
onsibilitiestousers,management,thosechargedwithgovernance,orparti
esoutsidetheentity,inrelationtomattersarisingfromtheaudit.Thesemay
be
2

establishedbythePSAsorbyapplicablelawsorregulations.
EffectiveDate
10.
ThisPSAiseffectiveforauditsoffinancialstatementsforperiodsbeginning
onorafterDecember15,2009.
1
PSA320 (Revised andRedrafted),MaterialityinPlanningandPerforminganAuditand PSA450 (
Revisedand Redrafted),EvaluationofMisstatementsIdentified during theAudit.
2
See,forexample,PSA260 (Revisedand Redrafted),Communication withThoseCharged with
Governance;andparagraph 43ofPSA240 (Redrafted),TheAuditorsResponsibilitiesRelatingt
o
Fraud in anAuditofFinancialStatements.

OverallObjectivesoftheAuditor
11.
Inconductinganauditoffinancialstatements,theoverallobjectivesofthea
uditorare:

(a)

Toobtainreasonableassuranceaboutwhetherthefinancialstatementsas
awholearefreefrommaterialmisstatement,whetherduetofraudorerror,t
herebyenablingtheauditortoexpressanopiniononwhetherthefinancials
tatementsareprepared,inallmaterialrespects,inaccordancewithanappl
icablefinancialreportingframework;and
(b)
Toreportonthefinancialstatements,andcommunicateasrequiredbytheP
SAs,inaccordancewiththeauditorsfindings.

12.
Inallcaseswhenreasonableassurancecannotbeobtainedandaqualifiedo
pinionintheauditorsreportisinsufficientinthecircumstancesforpurpose
sofreportingtotheintendedusersofthefinancialstatements,thePSAsrequ
irethattheauditordisclaimanopinionorwithdrawfromtheengagement,w
herewithdrawalislegallypermitted.

Definitions
13.
ForpurposesofthePSAs,thefollowingtermshavethemeaningsattrib
utedbelow:
(a) Applicablefinancialreportingframework
Thefinancialreportingframeworkadoptedbymanagementand,whe
reappropriate,thosechargedwithgovernanceinthepreparationand
presentationofthefinancialstatementsthatisacceptableinviewofth
enatureoftheentityandtheobjectiveofthefinancialstatements,orth
atisrequiredbylaworregulation.
Thetermfairpresentationframeworkisusedtorefertoafinancialr
eportingframeworkthatrequirescompliancewiththerequirement
softheframeworkand:

(i)

Acknowledgesexplicitlyorimplicitlythat,toachievefairpresentationofth
efinancialstatements,itmaybenecessaryformanagementtoprovidedisc
losuresbeyondthosespecificallyrequiredbytheframework;or
(ii)
Acknowledgesexplicitlythatitmaybenecessaryformanagementtodepar
tfromarequirementoftheframeworktoachievefairpresentationofthefina
ncialstatements.Suchdeparturesareexpectedtobenecessaryonlyinextr
emelyrarecircumstances.

Thetermcomplianceframeworkisusedtorefertoafinancialreport
ingframeworkthatrequirescompliancewiththerequirementsofthe
framework,butdoesnotcontaintheacknowledgementsin(i)or(ii)a
bove.
(b) Auditevidence
Informationusedbytheauditorinarrivingattheconclusionsonwhichth
eauditorsopinionisbased.Auditevidenceincludesbothinformationc
ontainedintheaccountingrecordsunderlyingthefinancialstatements
andotherinformation.ForpurposesofthePSAs:
(i)

Sufficiencyofauditevidenceisthemeasureofthequantityofauditevid
ence.Thequantityoftheauditevidenceneededisaffectedbytheaudito
rsassessmentoftherisksofmaterialmisstatementandalsobythequal
ityofsuchauditevidence.
(ii)

Appropriatenessofauditevidenceisthemeasureofthequalityofaudite
vidence;thatis,itsrelevanceanditsreliabilityinprovidingsupportforth
econclusionsonwhichtheauditorsopinionisbased.
(c)
Auditrisk
Theriskthattheauditorexpressesaninappropriateauditopinionwhenthe
financialstatementsaremateriallymisstated.Auditriskisafunctionofther
isksofmaterialmisstatementanddetectionrisk.
(d)
AuditorAuditorisusedtorefertothepersonorpersonsconductingtheau
dit,usuallytheengagementpartnerorothermembersoftheengagementt
eam,or,asapplicable,thefirm.WhereaPSAexpresslyintendsthatarequire
mentorresponsibilitybefulfilledbytheengagementpartner,thetermen
gagementpartnerratherthanauditorisused.Engagementpartnera
ndfirmaretobereadasreferringtotheirpublicsectorequivalentswherer
elevant.
(e)
Detectionrisk
Theriskthattheproceduresperformedbytheauditortoreduceauditriskto
anacceptablylowlevelwillnotdetectamisstatementthatexistsandthatco
uldbematerial,eitherindividuallyorwhenaggregatedwithothermisstate
ments.
(f)
Financialstatements
Astructuredrepresentationofhistoricalfinancialinformation,includingrel
atednotes,intendedtocommunicateanentityseconomicresourcesorobl
igationsatapointintimeorthechangesthereinforaperiodoftimeinaccord
ancewithafinancialreportingframework.Therelatednotesordinarilycom
priseasummaryofsignificantaccountingpoliciesandotherexplanatoryin
formation.Thetermfinancialstatementsordinarilyreferstoacompletes
etoffinancialstatementsasdeterminedbytherequirementsoftheapplica
blefinancialreportingframework,butcanalsorefertoasinglefinancialstat
ement.
(g)
Historicalfinancialinformation
Informationexpressedinfinancialtermsinrelationtoaparticularentity,de
rivedprimarilyfromthatentitysaccountingsystem,abouteconomiceven
tsoccurringinpasttimeperiodsorabouteconomicconditionsorcircumsta
ncesatpointsintimeinthepast.
(h)
Management
Theperson(s)withexecutiveresponsibilityfortheconductoftheentitysop
erations.Forsomeentitiesinsomejurisdictions,managementincludesso
meorallofthosechargedwithgovernance,forexample,executivemembe
rsofagovernanceboard,oranownermanager.
(i)
Misstatement
Adifferencebetweentheamount,classification,presentation,ordisclosur
eofareportedfinancialstatementitemandtheamount,classification,pres

entation,ordisclosurethatisrequiredfortheitemtobeinaccordancewithth
eapplicablefinancialreportingframework.Misstatementscanarisefrome
rrororfraud.Whentheauditorexpressesanopiniononwhetherthefinancia
lstatementsarepresentedfairly,inallmaterialrespects,misstatementsal
soincludethoseadjustmentsofamounts,classifications,presentation,or
disclosuresthat,intheauditorsjudgment,arenecessaryforthefinancialst
atementstobepresentedfairly,inallmaterialrespects.
(j)
Premise,relatingtotheresponsibilitiesofmanagementand,whereapprop
riate,thosechargedwithgovernance,onwhichanauditisconducted

Thatmanagementand,whereappropriate,thosechargedwithgovernance
havethefollowingresponsibilitiesthatarefundamentaltotheconductofana
uditinaccordancewithPSAs.Thatis,responsibility:

(i)
Forthepreparationandpresentationofthefinancialstatementsinaccorda
ncewiththeapplicablefinancialreportingframework;thisincludesthedes
ign,implementationandmaintenanceofinternalcontrolrelevanttothepr
eparationandpresentationoffinancialstatementsthatarefreefrommater
ialmisstatement,whetherduetofraudorerror;and
1. (ii) Toprovidetheauditorwith:
2. a.
Allinformation,suchasrecordsanddocumentation,andothermatterst
hatarerelevanttothepreparationandpresentationofthefinancialstat
ements;
3. b.
Anyadditionalinformationthattheauditormayrequestfrommanagem
entand,whereappropriate,thosechargedwithgovernance;and
4. c.
Unrestrictedaccesstothosewithintheentityfromwhomtheauditordet
erminesitnecessarytoobtainauditevidence.

Inthecaseofafairpresentationframework,theresponsibilityisfortheprep
arationandfairpresentationofthefinancialstatementsinaccordancewith
thefinancialreportingframework.Thisappliestoallreferencestoprepara
tionandpresentationofthefinancialstatementsinthePSAs.
Thepremise,relatingtotheresponsibilitiesofmanagementand,whereappr
opriate,thosechargedwithgovernance,onwhichanauditisconductedmay
alsobereferredtoasthepremise.

(k)
Professionaljudgment
Theapplicationofrelevanttraining,knowledgeandexperience,withinthe

contextprovidedbyauditing,accountingandethicalstandards,inmakingi
nformeddecisionsaboutthecoursesofactionthatareappropriateinthecir
cumstancesoftheauditengagement.
(l)
Professionalskepticism
Anattitudethatincludesaquestioningmind,beingalerttoconditionswhic
hmayindicatepossiblemisstatementduetoerrororfraud,andacriticalass
essmentofauditevidence.
(m)
Reasonableassurance
Inthecontextofanauditoffinancialstatements,ahigh,butnotabsolute,lev
elofassurance.
1. (n) Riskofmaterialmisstatement
Theriskthatthefinancialstatementsaremateriallymisstatedpriortoa
udit.Thisconsistsoftwocomponents,describedasfollowsattheasserti
onlevel:
2. (i) Inherentrisk
Thesusceptibilityofanassertionaboutaclassoftransaction,accountb
alanceordisclosuretoamisstatementthatcouldbematerial,eitherindi
viduallyorwhenaggregatedwithothermisstatements,beforeconside
rationofanyrelatedcontrols.
3. (ii) Controlrisk
Theriskthatamisstatementthatcouldoccurinanassertionaboutaclas
softransaction,accountbalanceordisclosureandthatcouldbemateria
l,eitherindividuallyorwhenaggregatedwithothermisstatements,will
notbeprevented,ordetectedandcorrected,onatimelybasisbytheenti
tysinternalcontrol.
(o)
ThosechargedwithgovernanceTheperson(s)ororganization(s)
(e.g.,acorporatetrustee)withresponsibilityforoverseeingthestrategicdi
rectionoftheentityandobligationsrelatedtotheaccountabilityoftheentit
y.Thisincludesoverseeingthefinancialreportingprocess.Forsomeentitie
sinsomejurisdictions,thosechargedwithgovernancemayincludemanag
ementpersonnel,forexample,executivemembersofagovernanceboard
ofaprivateorpublicsectorentity,oranownermanager.

Requirements
EthicalRequirementsRelatingtoanAuditofFinancialStatements
14.
Theauditorshallcomplywithrelevantethicalrequirements,includingthos
e
pertainingtoindependence,relatingtofinancialstatementauditenga
gements.(Ref:Para.A14A17)
ProfessionalSkepticism
15.
Theauditorshallplanandperformanauditwithprofessionalskepticismrec
ognizingthatcircumstancesmayexistthatcausethefinancialstatements

tobemateriallymisstated.(Ref:Para.A18A22)
ProfessionalJudgment

1
2

Theauditorshallexerciseprofessionaljudgmentinplanningandperformin
ganauditoffinancialstatements.(Ref:Para.A23A27)
Toobtainreasonableassurance,theauditorshallobtainsufficientappropri
ateauditevidencetoreduceauditrisktoanacceptablylowlevelandthereb
yenabletheauditortodrawreasonableconclusionsonwhichtobasetheau
ditorsopinion.

SufficientAppropriateAuditEvidenceandAuditRisk
(Ref:Para.A28A52)

ConductofanAuditinAccordancewithPSAs
ComplyingwithPSAsRelevanttotheAudit

1
2
3

TheauditorshallcomplywithallPSAsrelevanttotheaudit.APSAisrelevantt
otheauditwhenthePSAisineffectandthecircumstancesaddressedbythe
PSAexist.(Ref:Para.A53A57)
TheauditorshallhaveanunderstandingoftheentiretextofaPSA,includingi
tsapplicationandotherexplanatorymaterial,tounderstanditsobjectives
andtoapplyitsrequirementsproperly.(Ref:Para.A58A66)
TheauditorshallnotrepresentcompliancewithPSAsintheauditorsreport
unlesstheauditorhascompliedwiththerequirementsofthisPSAandalloth
erPSAsrelevanttotheaudit.

ObjectivesStatedinIndividualPSAs
21.
Toachievetheoverallobjectivesoftheauditor,theauditorshallusetheobj
ectivesstatedinrelevantPSAsinplanningandperformingtheaudit,havi
ngregardtotheinterrelationshipsamongthePSAs,to: (Ref:Para.A67A69)

1. (a)

Determinewhetheranyauditproceduresinadditiontothoserequiredb
ythe
2. PSAsarenecessaryinpursuanceoftheobjectivesstatedinthePSAs;an
d(Ref:Para.A70)
(b)
Evaluatewhethersufficientappropriateauditevidencehasbeenobtained
.(Ref:Para.A71)

ComplyingwithRelevantRequirements

22.
Subjecttoparagraph23,theauditorshallcomplywitheachrequirementof
aPSAunless,inthecircumstancesoftheaudit:

1
2

(a)
(b)

TheentirePSAisnotrelevant;or

Therequirementisnotrelevantbecauseitisconditionalandtheconditiond
oesnotexist.(Ref:Para.A72A73)
23.
Inexceptionalcircumstances,theauditormayjudgeitnecessarytodepart
fromarelevantrequirementinaPSA.Insuchcircumstances,theauditorsh
allperformalternativeauditprocedurestoachievetheaimofthatrequirem
ent.Theneedfortheauditortodepartfromarelevantrequirementisexpect
edtoariseonlywheretherequirementisforaspecificproceduretobeperfor
medand,inthespecificcircumstancesoftheaudit,thatprocedurewouldb
eineffectiveinachievingtheaimoftherequirement.(Ref:Para.A74)
FailuretoAchieveanObjective
24.
IfanobjectiveinarelevantPSAcannotbeachieved,theauditorshallevalu
atewhetherthispreventstheauditorfromachievingtheoverallobjective
softheauditorandtherebyrequirestheauditor,inaccordancewiththePS
As,tomodifytheauditorsopinionorwithdrawfromtheengagement.Fail
uretoachieveanobjectiverepresentsasignificantmatterrequiringdocu
mentationinaccordance
3

withPSA230(Redrafted).(Ref:Para.A75A76)

***
ApplicationandOtherExplanatoryMaterial
AnAuditofFinancialStatements
ScopeoftheAudit(Ref:Para.3)
A1.Theauditorsopiniononthefinancialstatementsdealswithwhetherthefinanc
ialstatementsareprepared,inallmaterialrespects,inaccordancewiththe
applicablefinancialreportingframework.Suchanopinioniscommontoalla
uditsoffinancialstatements.Theauditorsopinionthereforedoesnotassur
e,forexample,thefutureviabilityoftheentitynortheefficiencyoreffectiven
esswithwhichmanagementhasconductedtheaffairsoftheentity.Insomej
urisdictions,however,applicablelawsandregulationsmayrequireauditor
stoprovideopinionsonotherspecificmatters,suchastheeffectivenessofin

ternalcontrol,ortheconsistencyofaseparatemanagementreportwiththe
financialstatements.WhilethePSAsincluderequirementsandguidancein
relationtosuchmatterstotheextentthattheyarerelevanttoforminganopi
niononthefinancialstatements,theauditorwouldberequiredtoundertake
furtherworkiftheauditorhadadditionalresponsibilitiestoprovidesuchopi
nions.
PreparationoftheFinancialStatements(Ref:Para.4)
A2.AnauditinaccordancewithPSAsisconductedonthepremisethatmanagem
entand,whereappropriate,thosechargedwithgovernancehaverespon
sibility:
(a)
Forthepreparationandpresentationofthefinancialstatementsinacco
rdancewiththeapplicablefinancialreportingframework;thisincludes
thedesign,implementationandmaintenanceofinternalcontrolreleva
nttothepreparationandpresentationoffinancialstatementsthatarefr
eefrommaterialmisstatement,whetherduetofraudorerror;and

PSA230 (Redrafted),AuditDocumentation,paragraph 8(c).

(b) Toprovidetheauditorwith:

(i)

Allinformation,suchasrecordsanddocumentation,andothermattersthat
arerelevanttothepreparationandpresentationofthefinancialstatement
s;
(ii)
Anyadditionalinformationthattheauditormayrequestfrommanagement
and,whereappropriate,thosechargedwithgovernance;and
(iii)
Unrestrictedaccesstothosewithintheentityfromwhomtheau
ditordeterminesitnecessarytoobtainauditevidence.

A3.Aspartoftheirresponsibilityforthepreparationandpresentationofthefinanc
ialstatements,managementand,whereappropriate,thosechargedwith
governanceareresponsiblefor:
Theidentificationoftheapplicablefinancialreportingframework,intheco
ntextofanyrelevantlawsorregulations.
Thepreparationandpresentationofthefinancialstatementsinaccordanc
ewiththatframework.

Anadequatedescriptionofthatframeworkinthefinancialstatements.
Thepreparationofthefinancialstatementsrequiresmanagementtoexerci
sejudgmentinmakingaccountingestimatesthatarereasonableinthecirc
umstances,aswellastoselectandapplyappropriateaccountingpolicies.T
hesejudgmentsaremadeinthecontextoftheapplicablefinancialreporting
framework.
A4.Thefinancialstatementsmaybepreparedinaccordancewithafinancialrepor
tingframeworkdesignedtomeet:

1
2

Thecommonfinancialinformationneedsofawiderangeofusers(i.e.,gen
eralpurposefinancialstatements);or
Thefinancialinformationneedsofspecificusers(i.e.,specialpurposefina
ncialstatements).

A5.Theapplicablefinancialreportingframeworkoftenencompassesfinancialrep
ortingstandardsestablishedbyanauthorizedorrecognizedstandardssett
ingorganization,orlegislativeorregulatoryrequirements.Insomecases,t
hefinancialreportingframeworkmayencompassbothfinancialreportings
tandardsestablishedbyanauthorizedorrecognizedstandardssettingorg
anizationandlegislativeorregulatoryrequirements.Othersourcesmaypr
ovidedirectionontheapplicationoftheapplicablefinancialreportingframe
work.Insomecases,theapplicablefinancialreportingframeworkmayenc
ompasssuchothersources,ormayevenconsistonlyofsuchsources.Sucho
thersourcesmayinclude:
Thelegalandethicalenvironment,includingstatutes,regulations,courtd
ecisions,andprofessionalethicalobligationsinrelationtoaccountingmatt
ers;
Publishedaccountinginterpretationsofvaryingauthorityissuedbystanda
rdssetting,professionalorregulatoryorganizations;
Publishedviewsofvaryingauthorityonemergingaccountingissuesissued
bystandardssetting,professionalorregulatoryorganizations;
Generalandindustrypracticeswidelyrecognizedandprevalent;and
Accountingliterature.
Whereconflictsexistbetweenthefinancialreportingframeworkandthes
ourcesfromwhichdirectiononitsapplicationmaybeobtained,oramongt
hesourcesthatencompassthefinancialreportingframework,thesource
withthehighestauthorityprevails.
A6.Therequirementsoftheapplicablefinancialreportingframeworkdetermin
etheformandcontentofthefinancialstatements.Althoughtheframewor
kmaynotspecifyhowtoaccountforordisclosealltransactionsorevents,it
ordinarilyembodiessufficientbroadprinciplesthatcanserveasabasisfo
rdevelopingandapplyingaccountingpoliciesthatareconsistentwiththe
conceptsunderlyingtherequirementsoftheframework.
A7.Somefinancialreportingframeworksarefairpresentationframeworks,while
othersarecomplianceframeworks.Financialreportingframeworksthaten

compassprimarilythefinancialreportingstandardsestablishedbyanorga
nizationthatisauthorizedorrecognizedtopromulgatestandardstobeused
byentitiesforpreparingandpresentinggeneralpurposefinancialstateme
ntsareoftendesignedtoachievefairpresentation,forexample,Internation
alFinancialReportingStandards(IFRSs)issuedbytheInternationalAccoun
tingStandardsBoard(IASB),whichareadoptedbytheFinancialReportingS
tandardsCouncilasPhilippineFinancialReportingStandards(PFRSs).
A8.Therequirementsoftheapplicablefinancialreportingframeworkalsodeterm
inewhatconstitutesacompletesetoffinancialstatements.Inthecaseofm
anyframeworks,financialstatementsareintendedtoprovideinformation
aboutthefinancialposition,financialperformanceandcashflowsofanenti
ty.Forsuchframeworks,acompletesetoffinancialstatementswouldinclu
deabalancesheet;anincomestatement;astatementofchangesinequity;
acashflowstatement;andrelatednotes.Forsomeotherfinancialreportin
gframeworks,asinglefinancialstatementandtherelatednotesmightcon
stituteacompletesetoffinancialstatements:

Forexample,theInternationalPublicSectorAccountingStandard(IP
SAS),FinancialReportingUndertheCashBasisofAccountingissue
dbytheInternationalPublicSectorAccountingStandardsBoardstate
sthattheprimaryfinancialstatementisastatementofcashreceiptsa
ndpaymentswhenapublicsectorentitypreparesandpresentsitsfin
ancialstatementsin
accordancewiththatIPSAS.

Otherexamplesofasinglefinancialstatement,eachofwhichwouldin
cluderelatednotes,are:
OBalancesheet.
OStatementofincomeorstatementofoperations.
OStatementofretainedearnings.
OStatementofcashflows.
OStatementofassetsandliabilitiesthatdoesnotincludeownersequity

.
OStatementofchangesinownersequity.
OStatementofrevenueandexpenses.
OStatementofoperationsbyproductlines.

A9.
[Proposed]PSA210(Redrafted)establishesrequirementsandprovidesgui
dance
4

ondeterminingtheacceptabilityoftheapplicablefinancialreportingfram
ework.PSA800(RevisedandRedrafted)dealswithspecialconsiderations
whenfinancialstatementsarepreparedinaccordancewithaspecialpurp
ose
5

framework.
A10.Becauseofthesignificanceofthepremisetotheconductofanaudit,theaudit
orisrequiredtoobtainagreementfrommanagementand,whereappropria
te,thosechargedwithgovernancethattheyacknowledgeandunderstandt
heirresponsibilitiessetoutinparagraphA2asapreconditionforacceptingt
6
heauditengagement.
Theauditorisalsorequiredtoobtainwrittenrepresentationsaboutwhether
managementand,whereappropriate,thosechargedwithgovernancehav
7
efulfilledthoseresponsibilities.
ConsiderationsSpecifictoAuditsinthePublicSector
A11.Themandatesforauditsofthefinancialstatementsofpublicsectorentities
maybebroaderthanthoseofotherentities.Asaresult,thepremise,relatin
gtomanagementsresponsibilities,onwhichanauditofthefinancialstat
ementsofapublicsectorentityisconductedmayincludeadditionalrespo
nsibilities,suchas

4
[Proposed]PSA210 (Redrafted),AgreeingtheTermsofAuditEngagements,paragraph [4(a)].
5
[PSA800(Revised and Redrafted),SpecialConsiderations
AuditsofFinancialStatementsPrepared in AccordancewithSpecialPurposeFrameworks,para
graphs[tobeinserted].]
6
[Proposed]PSA210 (Redrafted),paragraph [4(b)].
7
PSA580 (Revised andRedrafted),Written Representations,paragraphs1011.

theresponsibilityfortheexecutionoftransactionsandeventsinaccordan
cewithlegislationorproperauthority.
FormoftheAuditorsOpinion(Ref:Para.8)
A12.Theopinionexpressedbytheauditorisonwhetherthefinancialstatementsa
reprepared,inallmaterialrespects,inaccordancewiththeapplicablefina
ncialreportingframework.Theformoftheauditorsopinion,however,will

dependupontheapplicablefinancialreportingframeworkandanyapplica
blelawsorregulations.Mostfinancialreportingframeworksincluderequir
ementsrelatingtothepresentationofthefinancialstatements;forsuchfra
meworks,preparationofthefinancialstatementsinaccordancewiththea
pplicablefinancialreportingframeworkincludespresentation.
A13.Wherethefinancialreportingframeworkisafairpresentationframework,asi
sgenerallythecaseforgeneralpurposefinancialstatements,theopinionre
quiredbythePSAsisonwhetherthefinancialstatementsarepresentedfairl
y,inallmaterialrespects.Wherethefinancialreportingframeworkisacomp
lianceframework,theopinionrequiredisonwhetherthefinancialstatemen
tsareprepared,inallmaterialrespects,inaccordancewiththeframework.U
nlessspecificallystatedotherwise,referencesinthePSAstotheauditorso
pinioncoverbothformsofopinion.
EthicalRequirementsRelatingtoanAuditofFinancialStatements (Ref:Para.14)
A14.Theauditorissubjecttorelevantethicalrequirements,includingthoseperta
iningtoindependence,relatingtofinancialstatementauditengagements
.RelevantethicalrequirementsordinarilycomprisePartsAandBoftheCod
eofEthicsforProfessionalAccountantsinthePhilippines(theCodeofEthic
s)relatedtoanauditoffinancialstatementstogetherwithnationalrequire
mentsthataremorerestrictive.
A15.PartAoftheCodeofEthicsestablishesthefundamentalprinciplesofprofessio
nalethicsrelevanttotheauditorwhenconductinganauditoffinancialstate
mentsandprovidesaconceptualframeworkforapplyingthoseprinciples.T
hefundamentalprincipleswithwhichtheauditorisrequiredtocomplybyth
eCodeofEthicsare:

1
2
3
4
5

(a) Integrity;
(b) Objectivity;
(c) Professionalcompetenceandduecare;
(d) Confidentiality;and
(e) Professionalbehavior.

PartBoftheCodeofEthicsillustrateshowtheconceptualframeworkisto
beappliedinspecificsituations.
A16.Inthecaseofanauditengagementitisinthepublicinterestand,therefore,re
quiredbytheCodeofEthics,thattheauditorbeindependentoftheentitysu
bjecttotheaudit.TheCodeofEthicsdescribesindependenceascomprisin
gbothindependenceofmindandindependenceinappearance.Theaudito
rsindependencefromtheentitysafeguardstheauditorsabilitytoforman
auditopinionwithoutbeingaffectedbyinfluencesthatmightcompromise
thatopinion.Independenceenhancestheauditorsabilitytoactwithinteg
rity,tobeobjectiveandtomaintainanattitudeofprofessionalskepticism.
A17.PhilippineStandardonQualityControl(PSQC)1(Redrafted)setsouttherespo
nsibilitiesofthefirmforestablishingpoliciesandproceduresdesignedtopr
ovideitwithreasonableassurancethatthefirmanditspersonnelcomplywit

hrelevantethicalrequirements,includingthosepertainingtoindependenc
8
e.
PSA220(Redrafted)setsouttheengagementpartnersresponsibilitieswit
hrespecttorelevantethicalrequirements.Theseincludeevaluatingwheth
ermembersoftheengagementteamhavecompliedwithrelevantethicalre
quirements,determiningtheappropriateactionifmatterscometotheenga
gementpartnersattentionthatindicatethatmembersoftheengagement
teamhavenotcompliedwithrelevantethicalrequirements,andformingac
onclusiononcompliancewithindependencerequirementsthatapplytothe
9
auditengagement.
PSA220(Redrafted)recognizesthattheengagementteamisentitledtorely
onafirmssystemsinmeetingitsresponsibilitieswithrespecttoqualitycont
rolproceduresapplicabletotheindividualauditengagement,unlessinfor
mationprovidedbythefirmorotherpartiessuggestsotherwise.
ProfessionalSkepticism(Ref:Para.15)
A18.Professionalskepticismincludesbeingalertto,forexample:

1
2
3
4

Auditevidencethatcontradictsotherauditevidenceobtained.
Informationthatbringsintoquestionthereliabilityofdocumentsandrespo
nsestoinquiriestobeusedasauditevidence.
Conditionsthatmayindicatepossiblefraud.
Circumstancesthatsuggesttheneedforauditproceduresinadditiontotho
serequiredbythePSAs.

A19.Maintainingprofessionalskepticismthroughouttheauditisnecessary
iftheauditoris,forexample,toreducetherisksof:

Overlookingunusualcircumstances.

8
[PhilippineStandardonQualityControl(PSQC)1(Redrafted),QualityControlforFirmsthatPerfo
rmAuditsandReviewsofFinancialStatements,and OtherAssuranceand Related ServicesEng
agements,paragraphs[tobeinserted].]
9
[PSA220(Redrafted),QualityControlforan AuditofFinancialStatements,paragraphs[tobeinse
rted].]

Overgeneralizingwhendrawingconclusionsfromauditobservations.
Usinginappropriateassumptionsindeterminingthenature,timing,andex
tentoftheauditproceduresandevaluatingtheresultsthereof.
A20.Professionalskepticismisnecessarytothecriticalassessmentofauditevide
nce.Thisincludesquestioningcontradictoryauditevidenceandthereliabi
lityofdocumentsandresponsestoinquiriesandotherinformationobtaine
dfrommanagementandthosechargedwithgovernance.Italsoincludesc
onsiderationofthesufficiencyandappropriatenessofauditevidenceobta

inedinthelightofthecircumstances,forexampleinthecasewherefraudris
kfactorsexistandasingledocument,ofanaturethatissusceptibletofraud,
isthesolesupportingevidenceforamaterialfinancialstatementamount.
A21.Theauditormayacceptrecordsanddocumentsasgenuineunlesstheauditor
hasreasontobelievethecontrary.Nevertheless,theauditorisrequiredtoco
nsiderthe
10

reliabilityofinformationtobeusedasauditevidence.Incasesofdoubtabout
thereliabilityofinformationorindicationsofpossiblefraud(forexample,ifc
onditionsidentifiedduringtheauditcausetheauditortobelievethatadocu
mentmaynotbeauthenticorthattermsinadocumentmayhavebeenfalsifi
ed),thePSAsrequirethattheauditorinvestigatefurtheranddeterminewha
tmodificationsoradditionstoauditproceduresarenecessarytoresolvethe
11
matter.
A22.Theauditorcannotbeexpectedtodisregardpastexperienceofthehonest
yandintegrityoftheentitysmanagementandthosechargedwithgover
nance.Nevertheless,abeliefthatmanagementandthosechargedwith
governancearehonestandhaveintegritydoesnotrelievetheauditoroft
heneedtomaintainprofessionalskepticismorallowtheauditortobesati
sfiedwithlessthanpersuasiveauditevidencewhenobtainingreasonableassurance.
ProfessionalJudgment(Ref:Para.16)
A23.Professionaljudgmentisessentialtotheproperconductofanaudit.Thisisb
ecauseinterpretationofrelevantethicalrequirementsandthePSAsandt
heinformeddecisionsrequiredthroughouttheauditcannotbemadewith
outtheapplicationofrelevantknowledgeandexperiencetothefactsandc
ircumstances.Professionaljudgmentisnecessaryinparticularregarding
decisionsabout:

1
2

Materialityandauditrisk.
Thenature,timing,andextentofauditproceduresusedtomeettherequire
mentsofthePSAsandgatherauditevidence.

10

[PSA500 (Redrafted),AuditEvidence,paragraph[tobeinserted].]
11

PSA240(Redrafted),paragraph 13;[PSA500(Redrafted),paragraph [tobeinserted]];and [PSA

505 (Revisedand Redrafted),ExternalConfirmations,paragraphs[tobeinserted].]

1
2
3

Evaluatingwhethersufficientappropriateauditevidencehasbeenobtain
ed,andwhethermoreneedstobedonetoachievetheobjectivesofthePSAs
andthereby,theoverallobjectivesoftheauditor.
Theevaluationofmanagementsjudgmentsinapplyingtheentitysapplic
ablefinancialreportingframework.
Thedrawingofconclusionsbasedontheauditevidenceobtained,forexam
ple,assessingthereasonablenessoftheestimatesmadebymanagementi

npreparingthefinancialstatements.
A24.Thedistinguishingfeatureoftheprofessionaljudgmentexpectedofanaudi
toristhatitisexercisedbyanauditorwhosetraining,knowledgeandexper
iencehaveassistedindevelopingthenecessarycompetenciestoachiev
ereasonablejudgments.
A25.Theexerciseofprofessionaljudgmentinanyparticularcaseisbasedonthefa
ctsandcircumstancesthatareknownbytheauditor.Consultationondiffic
ultorcontentiousmattersduringthecourseoftheaudit,bothwithintheeng
agementteamandbetweentheengagementteamandothersattheappro
priatelevelwithinoroutsidethefirm,suchasthatrequiredbyPSA220(Redr
12
afted), assisttheauditorinmakinginformedandreasonablejudgments.
A26.Professionaljudgmentcanbeevaluatedbasedonwhetherthejudgmentre
achedreflectsacompetentapplicationofauditingandaccountingprinci
plesandisappropriateinthelightof,andconsistentwith,thefactsandcirc
umstancesthatwereknowntotheauditoruptothedateoftheauditorsre
port.
A27.Professionaljudgmentneedstobeexercisedthroughouttheaudit.Italsonee
dstobeappropriatelydocumented.Inthisregard,theauditorisrequiredtop
repareauditdocumentationsufficienttoenableanexperiencedauditor,ha
vingnopreviousconnectionwiththeaudit,tounderstandthesignificantpro
fessionaljudgmentsmadeinreachingconclusionsonsignificantmattersar
13
isingduringtheaudit.
Professionaljudgmentisnottobeusedasthejustificationfordecisionsthat
arenototherwisesupportedbythefactsandcircumstancesoftheengagem
entorsufficientappropriateauditevidence.
SufficientAppropriateAuditEvidenceandAuditRisk (Ref:Para.5and17)
SufficiencyandAppropriatenessofAuditEvidence
A28.Auditevidenceisnecessarytosupporttheauditorsopinionandreport.Itiscu
mulativeinnatureandisprimarilyobtainedfromauditproceduresperform
edduringthecourseoftheaudit.Itmay,however,alsoincludeinformationo
btainedfromothersourcessuchaspreviousaudits(providedtheauditorha
sdeterminedwhetherchangeshaveoccurredsincethepreviousauditthat
mayaffectits
12

[PSA220 (Redrafted),paragraph[tobeinserted].]
13

PSA230(Redrafted),paragraph 8.
14

relevancetothecurrentaudit )orafirmsqualitycontrolproceduresforclie
ntacceptanceandcontinuance.Inadditiontoothersourcesinsideandoutsi
detheentity,theentitysaccountingrecordsareanimportantsourceofaudi
tevidence.Also,informationthatmaybeusedasauditevidencemayhaveb

eenpreparedbyanexpertemployedorengagedbytheentity.Auditevidenc
ecomprisesbothinformationthatsupportsandcorroboratesmanagemen
tsassertions,andanyinformationthatcontradictssuchassertions.Inaddit
ion,insomecases,theabsenceofinformation(forexample,managements
refusaltoprovidearequestedrepresentation)isusedbytheauditor,andthe
refore,alsoconstitutesauditevidence.Mostoftheauditorsworkinforming
theauditorsopinionconsistsofobtainingandevaluatingauditevidence.
A29.Thesufficiencyandappropriatenessofauditevidenceareinterrelated.Suffic
iencyisthemeasureofthequantityofauditevidence.Thequantityofaudite
videnceneededisaffectedbytheauditorsassessmentoftherisksofmissta
tement(thehighertheassessedrisks,themoreauditevidenceislikelytober
equired)andalsobythequalityofsuchauditevidence(thehigherthequality
,thelessmayberequired).Obtainingmoreauditevidence,however,mayn
otcompensateforitspoorquality.
A30.Appropriatenessisthemeasureofthequalityofauditevidence;thatis,itsrele
vanceanditsreliabilityinprovidingsupportfortheconclusionsonwhichthe
auditorsopinionisbased.Thereliabilityofevidenceisinfluencedbyitssour
ceandbyitsnature,andisdependentontheindividualcircumstancesunder
whichitisobtained.
A31.Whethersufficientappropriateauditevidencehasbeenobtainedtoreduce
auditrisktoanacceptablylowlevel,andtherebyenabletheauditortodraw
reasonableconclusionsonwhichtobasetheauditorsopinion,isamattero
fprofessionaljudgment.PSA500(Redrafted)andotherrelevantPSAsesta
blishadditionalrequirementsandprovidefurtherguidanceapplicablethr
oughouttheauditregardingtheauditorsconsiderationsinobtainingsuffi
cientappropriateauditevidence.
AuditRisk
A32.Auditriskisafunctionoftherisksofmaterialmisstatementanddetectionri
sk.Theassessmentofrisksisbasedonauditprocedurestoobtaininform
ationnecessaryforthatpurposeandevidenceobtainedthroughoutthe
audit.Theassessmentofrisksisamatterofprofessionaljudgment,rathe
rthanamattercapableofprecisemeasurement.
A33.ForpurposesofthePSAs,auditriskdoesnotincludetheriskthattheauditor
mightexpressanopinionthatthefinancialstatementsaremateriallymis
statedwhentheyarenot.Thisriskisordinarilyinsignificant.Further,audit
riskisatechnicaltermrelatedtotheprocessofauditing;itdoesnotrefertot
heauditors

PSA315(Redrafted),Identifying andAssessingtheRisksofMaterialMisstatementThrough Und

erstanding theEntityandItsEnvironment,paragraph 9.

businessriskssuchaslossfromlitigation,adversepublicity,orothere
ventsarisinginconnectionwiththeauditoffinancialstatements.

RisksofMaterialMisstatement
A34.Therisksofmaterialmisstatementmayexistattwolevels:
Theoverallfinancialstatementlevel;and
Theassertionlevelforclassesoftransactions,accountbalances,anddisclo
sures.
A35.Risksofmaterialmisstatementattheoverallfinancialstatementlevelreferto
risksofmaterialmisstatementthatrelatepervasivelytothefinancialstate
mentsasawholeandpotentiallyaffectmanyassertions.
A36.Risksofmaterialmisstatementattheassertionlevelareassessedinordertod
eterminethenature,timing,andextentoffurtherauditproceduresnecessa
rytoobtainsufficientappropriateauditevidence.Thisevidenceenablesth
eauditortoexpressanopiniononthefinancialstatementsatanacceptablyl
owlevelofauditrisk.Auditorsusevariousapproachestoaccomplishtheobj
ectiveofassessingtherisksofmaterialmisstatement.Forexample,theaud
itormaymakeuseofamodelthatexpressesthegeneralrelationshipofthec
omponentsofauditriskinmathematicaltermstoarriveatanacceptablelev
elofdetectionrisk.Someauditorsfindsuchamodeltobeusefulwhenplanni
ngauditprocedures.
A37.Therisksofmaterialmisstatementattheassertionlevelconsistoftwocomp
onents:inherentriskandcontrolrisk.Inherentriskandcontrolriskarethe
entitysrisks;theyexistindependentlyoftheauditofthefinancialstatem
ents.
A38.Inherentriskishigherforsomeassertionsandrelatedclassesoftransactions
,accountbalances,anddisclosuresthanforothers.Forexample,itmaybeh
igherforcomplexcalculationsorforaccountsconsistingofamountsderive
dfromaccountingestimatesthataresubjecttosignificantestimationunce
rtainty.Externalcircumstancesgivingrisetobusinessrisksmayalsoinflue
nceinherentrisk.Forexample,technologicaldevelopmentsmightmakea
particularproductobsolete,therebycausinginventorytobemoresuscept
ibletooverstatement.Factorsintheentityanditsenvironmentthatrelatet
oseveraloralloftheclassesoftransactions,accountbalances,ordisclosur
esmayalsoinfluencetheinherentriskrelatedtoaspecificassertion.Suchf
actorsmayinclude,forexample,alackofsufficientworkingcapitaltoconti
nueoperationsoradecliningindustrycharacterizedbyalargenumberofb
usinessfailures.
A39.Controlriskisafunctionoftheeffectivenessofthedesign,implementationa
ndmaintenanceofinternalcontrolbymanagementtoaddressidentifiedr
isksthatthreatentheachievementoftheentitysobjectivesrelevanttopr
eparationoftheentitysfinancialstatements.However,internalcontrol,
nomatterhowwelldesignedandoperated,canonlyreduce,butnotelimin
ate,risksofmaterialmisstatementinthefinancialstatements,becauseo
ftheinherentlimitationsofinternalcontrol.Theseinclude,forexample,th
epossibilityofhumanerrorsormistakes,orofcontrolsbeingcircumvente

dbycollusionorinappropriatemanagementoverride.Accordingly,some
controlriskwillalwaysexist.ThePSAsprovidetheconditionsunderwhich
theauditorisrequiredto,ormaychooseto,testtheoperatingeffectivenes
sofcontrolsindeterminingthenature,timingandextentofsubstantivepr
15
ocedurestobeperformed.
A40.ThePSAsdonotordinarilyrefertoinherentriskandcontrolriskseparately,but
rathertoacombinedassessmentoftherisksofmaterialmisstatement.H
owever,theauditormaymakeseparateorcombinedassessmentsofinhere
ntandcontrolriskdependingonpreferredaudittechniquesormethodologi
esandpracticalconsiderations.Theassessmentoftherisksofmaterialmiss
tatementmaybeexpressedinquantitativeterms,suchasinpercentages,o
rinnonquantitativeterms.Inanycase,theneedfortheauditortomakeappropriate
riskassessmentsismoreimportantthanthedifferentapproachesbywhicht
heymaybemade.
A41.PSA315(Redrafted)establishesrequirementsandprovidesguidance
onidentifyingandassessingtherisksofmaterialmisstatementatth
efinancialstatementandassertionlevels.
DetectionRisk
A42.Foragivenlevelofauditrisk,theacceptablelevelofdetectionriskbearsaninv
erserelationshiptotheassessedrisksofmaterialmisstatementattheasse
rtionlevel.Forexample,thegreatertherisksofmaterialmisstatementthe
auditorbelievesexists,thelessthedetectionriskthatcanbeacceptedand,
accordingly,themorepersuasivetheauditevidencerequiredbytheaudit
or.
A43.Detectionriskrelatestothenature,timing,andextentoftheauditorsproced
uresthataredeterminedbytheauditortoreduceauditrisktoanacceptably
lowlevel.Itisthereforeafunctionoftheeffectivenessofanauditprocedure
andofitsapplicationbytheauditor.Matterssuchas:

1
2
3
4

adequateplanning;
properassignmentofpersonneltotheengagementteam;
theapplicationofprofessionalskepticism;and
supervisionandreviewoftheauditworkperformed,
assisttoenhancetheeffectivenessofanauditprocedureandofitsapplicati
onandreducethepossibilitythatanauditormightselectaninappropriatea
uditprocedure,misapplyanappropriateauditprocedure,ormisinterprett
heauditresults.
16

A44.PSA300(Redrafted)
andPSA330(Redrafted)establishrequirementsandprovideguidanceo
nplanninganauditoffinancialstatementsandtheauditors

15

PSA330(Redrafted),TheAuditorsReponsestoAssessedRisks,paragraphs717.
16

PSA300(Redrafted),Planningan AuditofFinancialStatements.

responsestoassessedrisks.Detectionrisk,however,canonlybereduc
ed,noteliminated,becauseoftheinherentlimitationsofanaudit.Accor
dingly,somedetectionriskwillalwaysexist.
InherentLimitationsofanAudit
A45.Theauditorisnotexpectedto,andcannot,reduceauditrisktozeroandcanno
tthereforeobtainabsoluteassurancethatthefinancialstatementsarefre
efrommaterialmisstatementduetofraudorerror.Thisisbecausethereare
inherentlimitationsofanaudit,whichresultinmostoftheauditevidenceon
whichtheauditordrawsconclusionsandbasestheauditorsopinionbeing
persuasiveratherthanconclusive.Theinherentlimitationsofanauditaris
efrom:
Thenatureoffinancialreporting;
Thenatureofauditprocedures;and
Theneedfortheaudittobeconductedwithinareasonableperiodoftimeand
atareasonablecost.
TheNatureofFinancialReporting
A46.Thepreparationoffinancialstatementsinvolvesjudgmentbymanagementi
napplyingtherequirementsoftheentitysapplicablefinancialreportingfra
meworktothefactsandcircumstancesoftheentity.Inaddition,manyfinanc
ialstatementitemsinvolvesubjectivedecisionsorassessmentsoradegree
ofuncertainty,andtheremaybearangeofacceptableinterpretationsorjud
gmentsthatmaybemade.Consequently,somefinancialstatementitemsa
resubjecttoaninherentlevelofvariabilitywhichcannotbeeliminatedbyth
eapplicationofadditionalauditingprocedures.Forexample,thisisoftenth
ecasewithrespecttocertainaccountingestimates.Nevertheless,thePSAs
requiretheauditortogivespecificconsiderationtowhetheraccountingesti
matesarereasonableinthecontextoftheapplicablefinancialreportingfra
meworkandrelateddisclosures,andtothequalitativeaspectsoftheentity
saccountingpractices,includingindicatorsof
17

possiblebiasinmanagementsjudgments.
TheNatureofAuditProcedures
A47.Therearepracticalandlegallimitationsontheauditorsabilitytoobtaina
uditevidence.Forexample:

Thereisthepossibilitythatmanagementorothersmaynotprovide,in
tentionallyorunintentionally,thecompleteinformationthatisreleva

nttothepreparationandpresentationofthefinancialstatementsort
hathasbeenrequestedbytheauditor.Accordingly,theauditorcanno
tbecertainofthecompletenessofinformation,eventhoughtheaudit
orhasperformedaudit
PSA540(Revised and Redrafted),AuditingAccounting Estimates,IncludingFairValueAccounti
ng
Estimates,and Related Disclosures,and[PSA700(Redrafted),ForminganOpinion andReporti
ngon
FinancialStatements,paragraph [tobeinserted].]

procedurestoobtainassurancethatallrelevantinformationha
sbeenobtained.
Fraudmayinvolvesophisticatedandcarefullyorganizedschemesdesigne
dtoconcealit.Therefore,auditproceduresusedtogatherauditevidencem
aybeineffectivefordetectinganintentionalmisstatementthatinvolves,fo
rexample,collusiontofalsifydocumentationwhichmaycausetheauditort
obelievethatauditevidenceisvalidwhenitisnot.Theauditorisneithertrain
edasnorexpectedtobeanexpertintheauthenticationofdocuments.
Anauditisnotanofficialinvestigationintoallegedwrongdoing.Accordingl
y,theauditorisnotgivenspecificlegalpowers,suchasthepowerofsearch,
whichmaybenecessaryforsuchaninvestigation.
TimelinessofFinancialReportingandtheBalancebetweenBenefitandCost
A48.Thematterofdifficulty,time,orcostinvolvedisnotinitselfavalidbasisforthe
auditortoomitanauditprocedureforwhichthereisnoalternativeortobesa
tisfiedwithauditevidencethatislessthanpersuasive.Appropriateplanni
ngassistsinmakingsufficienttimeandresourcesavailablefortheconduct
oftheaudit.Notwithstandingthis,therelevanceofinformation,andthereb
yitsvalue,tendstodiminishovertime,andthereisabalancetobestruckbet
weenthereliabilityofinformationanditscost.Thisisrecognizedincertainfi
nancialreportingframeworks(see,forexample,theIASBsFrameworkfo
rthePreparationandPresentationofFinancialStatements).Therefore,th
ereisanexpectationbyusersoffinancialstatementsthattheauditorwillfor
manopiniononthefinancialstatementswithinareasonableperiodoftime
andatareasonablecost,recognizingthatitisimpracticabletoaddressallin
formationthatmayexistortopursueeverymatterexhaustivelyontheassu
mptionthatinformationisinerrororfraudulentuntilprovedotherwise.
A49.Consequently,itisnecessaryfortheauditorto:

1
2
3

Plantheauditsothatitwillbeperformedinaneffectivemanner;
Directauditefforttoareasmostexpectedtocontainrisksofmaterialmissta
tement,whetherduetofraudorerror,withcorrespondinglylesseffortdirec
tedatotherareas;and
Usetestingandothermeansofexaminingpopulationsformisstatements.

A50.InlightoftheapproachesdescribedinparagraphA49,thePSAscontain
requirementsfortheplanningandperformanceoftheauditandrequ

iretheauditor,amongotherthings,to:

1
2

Haveabasisfortheidentificationandassessmentofrisksofmaterialmissta
tementatthefinancialstatementandassertionlevelsbyperformingriskas
18
sessmentproceduresandrelatedactivities; and
Usetestingandothermeansofexaminingpopulationsinamannerthatpro
videsareasonablebasisfortheauditortodrawconclusionsaboutthepopul
19
ation.

PSA315(Redrafted),paragraphs510.

OtherMattersthatAffecttheInherentLimitationsofanAudit
A51.Inthecaseofcertainassertionsorsubjectmatters,thepotentialeffectsoft
heinherentlimitationsontheauditorsabilitytodetectmaterialmisstat
ementsareparticularlysignificant.Suchassertionsorsubjectmattersin
clude:

1
2
3
4

Fraud,particularlyfraudinvolvingseniormanagementorcollusion.SeePS
A240(Redrafted)forfurtherdiscussion.
Theexistenceandcompletenessofrelatedpartyrelationshipsandtransac
20
tions.SeePSA550(RevisedandRedrafted) forfurtherdiscussion.
Theoccurrenceofnon21
compliancewithlawsandregulations.SeePSA250(Redrafted)
forfurtherdiscussion.
Futureeventsorconditionsthatmaycauseanentitytoceasetocontinueas
22
agoingconcern.SeePSA570(Redrafted) forfurtherdiscussion.
RelevantPSAsidentifyspecificauditprocedurestoassistinmitigatingthe
effectoftheinherentlimitations.

A52.Becauseoftheinherentlimitationsofanaudit,thereisanunavoidablerisktha
tsomematerialmisstatementsofthefinancialstatementsmaynotbedete
cted,eventhoughtheauditisproperlyplannedandperformedinaccordanc
ewithPSAs.Accordingly,thesubsequentdiscoveryofamaterialmisstatem
entofthefinancialstatementsresultingfromfraudorerrordoesnotbyitselfi
ndicateafailuretoconductanauditinaccordancewithPSAs.However,thei
nherentlimitationsofanauditarenotajustificationfortheauditortobesatis
fiedwithlessthanpersuasiveauditevidence.Whethertheauditorhasperformedanauditina
ccordancewithPSAsisdeterminedbytheauditproceduresperformedinth
ecircumstances,thesufficiencyandappropriatenessoftheauditevidence
obtainedasaresultthereofandthesuitabilityoftheauditorsreportbasedo
nanevaluationofthatevidenceinlightoftheoverallobjectivesoftheauditor
.

19

PSA330(Redrafted);[PSA500 (Redrafted)];
[Proposed]PSA520(Redrafted),AnalyticalProcedures;and PSA530(Redrafted),AuditSamplin
g.
20

PSA550(Revised and Redrafted),RelatedParties.

21

PSA250(Redrafted),Consideration ofLawsand RegulationsinanAuditofFinancialStatements.

22

PSA570(Redrafted),Going Concern.

23
ConductofanAuditinAccordancewithPSAs
NatureofthePSAs(Ref:Para.18)
A53. ThePSAs,takentogether,providethestandardsfortheauditorsworkinf
ulfillingtheoverallobjectivesoftheauditor.ThePSAsdealwiththegenera
lresponsibilitiesoftheauditor,aswellastheauditorsfurtherconsiderati
onsrelevanttotheapplicationofthoseresponsibilitiestospecifictopics.
A54. Thescope,effectivedateandanyspecificlimitationoftheapplicabilityof
aspecificPSAismadeclearinthePSA.UnlessotherwisestatedinthePSA,t
heauditorispermittedtoapplyanPSAbeforetheeffectivedatespecifiedt
herein.
A55. Inperforminganaudit,theauditormayberequiredtocomplywithlegalorr
egulatoryrequirementsinadditiontothePSAs.ThePSAsdonotoverridel
awsandregulationsthatgovernanauditoffinancialstatements.Intheev
entthatthoselawsandregulationsdifferfromthePSAs,anauditconducte
donlyinaccordancewithlawsandregulationswillnotautomaticallycom
plywithPSAs.
A56. TheauditormayalsoconducttheauditinaccordancewithbothPSAsanda
uditingstandardsofaspecificjurisdictionorcountry.Insuchcases,inaddi
tiontocomplyingwitheachofthePSAsrelevanttotheaudit,itmaybenece
ssaryfortheauditortoperformadditionalauditproceduresinordertoco
mplywiththerelevantstandardsofthatjurisdictionorcountry.

ConsiderationsSpecifictoAuditsinthePublicSector
A57.ThePSAsarerelevanttoengagementsinthepublicsector.Thepublics
ectorauditorsresponsibilities,however,maybeaffectedbytheaudi
tmandate,orbyobligationsonpublicsectorentitiesarisingfromlegis
lation,regulation,ministerialdirectives,governmentpolicyrequire
ments,orresolutionsofthelegislature,whichmayencompassabroa
derscopethananauditoffinancialstatementsinaccordancewiththe
PSAs.TheseadditionalresponsibilitiesarenotdealtwithinthePSAs.T

heymaybedealtwithinthepronouncementsoftheInternationalOrg
anizationofSupremeAuditInstitutionsoringuidancedevelopedbygovernmentauditagencies.
ContentsofthePSAs(Ref:Para.19)
A58.Inadditiontoobjectivesandrequirements(requirementsareexpressedinth
ePSAsusingshall),aPSAcontainsrelatedguidanceintheformofapplicati
onandotherexplanatorymaterial.Itmayalsocontainintroductorymateria
lthatprovidescontextrelevanttoaproperunderstandingofthePSA,andde
finitions.TheentiretextofaPSA,therefore,isrelevanttoanunderstandingo
ftheobjectivesstatedinaPSAandtheproperapplicationoftherequirement
sofaPSA.
A59.Wherenecessary,theapplicationandotherexplanatorymaterialprovides
furtherexplanationoftherequirementsofaPSAandguidanceforcarrying
themout.Inparticular,itmay:

1
2

Explainmorepreciselywhatarequirementmeansorisintendedtocover.
Includeexamplesofproceduresthatmaybeappropriateinthecircumstan
ces.
Whilesuchguidancedoesnotinitselfimposearequirement,itisrelevantt
otheproperapplicationoftherequirementsofaPSA.Theapplicationando
therexplanatorymaterialmayalsoprovidebackgroundinformationonm
attersaddressedinaPSA.

A60.Appendicesformpartoftheapplicationandotherexplanatorymaterial.Th
epurposeandintendeduseofanappendixareexplainedinthebodyofthe
relatedPSAorwithinthetitleandintroductionoftheappendixitself.
A61.Introductorymaterialmayinclude,asneeded,suchmattersasexplanationof
:
ThepurposeandscopeofthePSA,includinghowthePSArelatestootherPSA
s.
ThesubjectmatterofthePSA.
Therespectiveresponsibilitiesoftheauditorandothersinrelationtothesu
bjectmatterofthePSA.
ThecontextinwhichthePSAisset.
A62.APSAmayinclude,inaseparatesectionundertheheadingDefinitions,ad
escriptionofthemeaningsattributedtocertaintermsforpurposesoftheP
SAs.Theseareprovidedtoassistintheconsistentapplicationandinterpre
tationofthePSAs,andarenotintendedtooverridedefinitionsthatmaybe
establishedforotherpurposes,whetherinlaw,regulationorotherwise.U
nlessotherwiseindicated,thosetermswillcarrythesamemeaningsthrou
ghoutthePSAs.TheGlossaryofTermsrelatingtoPhilippineStandardsissu
edbytheAuditingandAssuranceStandardsCouncilcontainsacompleteli
stingoftermsdefinedinthePSAs.Italsoincludesdescriptionsofotherter

msfoundinPSAstoassistincommonandconsistentinterpretationandtra
nslation.
A63.Whenappropriate,additionalconsiderationsspecifictoauditsofsmallerenti
tiesandpublicsectorentitiesareincludedwithintheapplicationandothere
xplanatorymaterialofaPSA.Theseadditionalconsiderationsassistinthea
pplicationoftherequirementsofthePSAintheauditofsuchentities.Theydo
not,however,limitorreducetheresponsibilityoftheauditortoapplyandco
mplywiththerequirementsofthePSAs.
ConsiderationsSpecifictoSmallerEntities
A64.Forpurposesofspecifyingadditionalconsiderationstoauditsofsmallerentiti
es,asmallerentityreferstoanentitywhichtypicallypossessesqualitativ
echaracteristicssuchas:

(a)
Concentrationofownershipandmanagementinasmallnumberofindividu
als(oftenasingleindividual
eitheranaturalpersonoranotherenterprisethatownstheentityprovidedt
heownerexhibitstherelevantqualitativecharacteristics);and
1. (b) Oneormoreofthefollowing:
2. (i) Straightforwardoruncomplicatedtransactions;
3. (ii) Simplerecordkeeping;
(iii) Fewlinesofbusinessandfewproductswithinbusinesslines;

1
2

(iv)
(v)

Fewlevelsofmanagementwithresponsibilityforabroadrangeofcontrols;
or
(vi)
Fewpersonnel,manyhavingawiderangeofduties.

Fewinternalcontrols;

Thesequalitativecharacteristicsarenotexhaustive,theyarenotexcl
usivetosmallerentities,andsmallerentitiesdonotnecessarilydispla
yallofthesecharacteristics.
A65.TheconsiderationsspecifictosmallerentitiesincludedinthePSAshavebe
endevelopedprimarilywithunlistedentitiesinmind.Someoftheconsid
erations,however,maybehelpfulinauditsofsmallerlistedentities.
A66.ThePSAsrefertotheproprietorofasmallerentitywhoisinvolvedinrunningth
eentityonadaytodaybasisastheownermanager.
ObjectivesStatedinIndividualPSAs(Ref:Para.21)
A67.EachPSAcontainsoneormoreobjectiveswhichprovidealinkbetweenthereq
uirementsandtheoverallobjectivesoftheauditor.Theobjectivesinindivid
ualPSAsservetofocustheauditoronthedesiredoutcomeofthePSA,whileb

eingspecificenoughtoassisttheauditorin:
Understandingwhatneedstobeaccomplishedand,wherenecessary,the
appropriatemeansofdoingso;and
Decidingwhethermoreneedstobedonetoachievethemintheparticularci
rcumstancesoftheaudit.
A68.Objectivesaretobeunderstoodinthecontextoftheoverallobjectivesofth
eauditorstatedinparagraph11ofthisPSA.Aswiththeoverallobjectives
oftheauditor,theabilitytoachieveanindividualobjectiveisequallysubj
ecttotheinherentlimitationsofanaudit.
A69.Inusingtheobjectives,theauditorisrequiredtohaveregardtotheinterrelati
onshipsamongthePSAs.Thisisbecause,asindicatedinparagraphA53,th
ePSAsdealinsomecaseswithgeneralresponsibilitiesandinotherswithth
eapplicationofthoseresponsibilitiestospecifictopics.Forexample,thisP
SArequirestheauditortoadoptanattitudeofprofessionalskepticism;thisi
snecessaryinallaspectsofplanningandperforminganauditbutisnotrepe
atedasarequirementofeachPSA.Atamoredetailedlevel,PSA315(Redraf
ted)andPSA330(Redrafted)contain,amongotherthings,objectivesandr
equirementsthatdealwiththeauditorsresponsibilitiestoidentifyandass
esstherisksofmaterialmisstatementandtodesignandperformfurtherau
ditprocedurestorespondtothoseassessedrisks,respectively;theseobje
ctivesandrequirementsapplythroughouttheaudit.APSAdealingwithspe
cificaspectsoftheaudit(forexample,PSA540(RevisedandRedrafted))ma
yexpandonhowtheobjectivesandrequirementsofsuchPSAsasPSA315(
Redrafted)andPSA330(Redrafted)aretobeappliedinrelationtothesubje
ctofthePSAbutdoesnotrepeatthem.Thus,inachievingtheobjectivestate
dinPSA540(RevisedandRedrafted),theauditorhasregardtotheobjective
sandrequirementsofotherrelevantPSAs.
UseofObjectivestoDetermineNeedforAdditionalAuditProcedures (Ref:Para.21(a))
A70.TherequirementsofthePSAsaredesignedtoenabletheauditortoachieveth
eobjectivesspecifiedinthePSAs,andtherebytheoverallobjectivesofthea
uditor.TheproperapplicationoftherequirementsofthePSAsbytheauditori
sthereforeexpectedtoprovideasufficientbasisfortheauditorsachievem
entoftheobjectives.However,becausethecircumstancesofauditengage
mentsvarywidelyandallsuchcircumstancescannotbeanticipatedintheP
SAs,theauditorisresponsiblefordeterminingtheauditproceduresnecess
arytofulfilltherequirementsofthePSAsandtoachievetheobjectives.Inthe
circumstancesofanengagement,theremaybeparticularmattersthatreq
uiretheauditortoperformauditproceduresinadditiontothoserequiredbyt
hePSAstomeettheobjectivesspecifiedinthePSAs.
UseofObjectivestoEvaluateWhetherSufficientAppropriateAuditEvidenceHas
BeenObtained(Ref:Para.21(b))
A71.Theauditorisrequiredtousetheobjectivestoevaluatewhethersufficientap
propriateauditevidencehasbeenobtainedinthecontextoftheoverallobj

ectivesoftheauditor.Ifasaresulttheauditorconcludesthattheauditevide
nceisnotsufficientandappropriate,thentheauditormayfollowoneormor
eofthefollowingapproachestomeetingtherequirementofparagraph21(
b):

1
2
3

Evaluatewhetherfurtherrelevantauditevidencehasbeen,orwillbe,obtai
nedasaresultofcomplyingwithotherPSAs;
Extendtheworkperformedinapplyingoneormorerequirements;or
Performotherproceduresjudgedbytheauditortobenecessaryinthecircu
mstances.
Wherenoneoftheaboveisexpectedtobepracticalorpossibleinthecircu
mstances,theauditorwillnotbeabletoobtainsufficientappropriateaudi
tevidenceandisrequiredbythePSAstodeterminetheeffectontheaudit
orsreportorontheauditorsabilitytocompletetheengagement.

ComplyingwithRelevantRequirements
RelevantRequirements(Ref:Para.22)
A72.Insomecases,aPSA(andthereforeallofitsrequirements)maynotberelevant
inthecircumstances.Forexample,ifanentitydoesnothaveaninternalaudi
t
23

function,nothinginPSA610(Redrafted)isrelevant.
A73.WithinarelevantPSA,theremaybeconditionalrequirements.Sucharequire
mentisrelevantwhenthecircumstancesenvisionedintherequirementap
plyandtheconditionexists.Ingeneral,theconditionalityofarequirement
willeitherbeexplicitorimplicit,forexample:
Therequirementtomodifytheauditorsopinionifthereisalimitationof
24

scoperepresentsanexplicitconditionalrequirement.

Therequirementtocommunicatesignificantdeficienciesininternal
controlidentifiedduringtheaudittothosechargedwithgovernance,
25

whichdependsontheexistenceofsuchidentifiedsignificantdeficien
cies;andtherequirementtoobtainsufficientappropriateauditevide
nceregardingthepresentationanddisclosureofsegmentinformatio
26
ninaccordancewiththeapplicablefinancialreportingframework,
whichdependsonthatframeworkrequiringorpermittingsuchdisclo
sure,representimplicitconditionalrequirements.
DeparturefromaRequirement(Ref:Para.23)

A74.PSA230(Redrafted)establishesdocumentationrequirementsinthoseexce
ptionalcircumstanceswheretheauditordepartsfromarelevantrequireme
27
nt. ThePSAs

23

PSA610(Redrafted),UsingtheWorkofInternalAuditors.
24

PSA705 (Revisedand Redrafted),ModificationstotheOpinion in theIndependentAuditorsR

eport,paragraph 13.
25

[Proposed]PSA265,Communicating DeficienciesinInternalControl,paragraph [10].

26

[Proposed]PSA501 (Redrafted),AuditEvidenceRegardingSpecificFinancialStatementAccoun
tBalancesand Disclosures,paragraph [14].
27

PSA230(Redrafted),paragraph 12.

donotcallforcompliancewitharequirementthatisnotrelevantin
thecircumstancesoftheaudit.
FailuretoAchieveanObjective(Ref:Para.24)
A75.Whetheranobjectivehasbeenachievedisamatterfortheauditorsprofessi
onaljudgment.Thatjudgmenttakesaccountoftheresultsofauditprocedu
resperformedincomplyingwiththerequirementsofthePSAs,andtheaudi
torsevaluationofwhethersufficientappropriateauditevidencehasbeen
obtainedandwhethermoreneedstobedoneintheparticularcircumstanc
esoftheaudittoachievetheobjectivesstatedinthePSAs.Accordingly,circ
umstancesthatmaygiverisetoafailuretoachieveanobjectiveincludetho
sethat:
PreventtheauditorfromcomplyingwiththerelevantrequirementsofaPSA
.
Resultinitsnotbeingpracticableorpossiblefortheauditortocarryoutthea
dditionalauditproceduresorobtainfurtherauditevidenceasdeterminedn
ecessaryfromtheuseoftheobjectivesinaccordancewithparagraph21,for
exampleduetoalimitationintheavailableauditevidence.
A76.AuditdocumentationthatmeetstherequirementsofPSA230(Redrafted)an
dthespecificdocumentationrequirementsofotherrelevantPSAsprovides
evidenceoftheauditorsbasisforaconclusionabouttheachievementofthe
overallobjectivesoftheauditor.Whileitisunnecessaryfortheauditortodoc
umentseparately(asinachecklist,forexample)thatindividualobjectivesh
avebeenachieved,thedocumentationofafailuretoachieveanobjectiveas
siststheauditorsevaluationofwhethersuchafailurehaspreventedtheau
ditorfromachievingtheoverallobjectivesoftheauditor.

Acknowledgment
ThisPSAisbasedonInternationalStandardonAuditing200(RevisedandRedrafte
d),OverallObjectivesoftheIndependentAuditorandtheConductofanAuditinA
ccordancewithPhilippineStandardsonAuditing,issuedbytheInternationalAu
ditingandAssuranceStandardsBoard.
TherearenosignificantdifferencesbetweenthisPSA200(RevisedandRedrafte
d)andISA200(RevisedandRedrafted).

CONFORMINGAMENDMENTSASARESULTOFPSA200(REVISEDANDREDRAFTED
),OVERALLOBJECTIVESOFTHEINDEPENDENTAUDITORANDTHECONDUCTOFAN
AUDITINACCORDANCEWITHPHILIPPINESTANDARDSONAUDITING

PrefacetothePhilippineStandardsonQualityControl,Auditing
,Review,OtherAssuranceandRelatedServices(Preface)
[Therearenochangesproposedtoparagraphs13.Accordingly,they
arenotreproduced.]
TheAuthorityAttachingtoPhilippineStandardsIssuedbytheAuditingand
AssuranceStandardsCouncil
[Therearenochangesproposedtoparagraphs45and79.Accordingly,they
arenotreproduced.]
6.
PhilippineStandardsonAssuranceEngagements(PSAEs)aretobeapplie
dinassuranceengagementsdealingwithsubjectmattersotherthanaudi
tsorreviewsofhistoricalfinancialinformation.
1

PhilippineStandardsonAuditing
10.

PSAsarewritteninthecontextofanauditoffinancialstatements
3

12

by an

independentauditor.Theyaretobeadaptedasnecessaryinthecircumsta
nceswhenappliedtoauditsofotherhistoricalfinancialinformation.Thea
2
uthorityofPSAsissetoutinPSA200(RevisedandRedrafted).

Theobjectiveofanauditoffinancialstatementsistoenabletheauditortoex
pressanopinionwhetherthefinancialstatementsareprepared,inallmater
ialrespects,inaccordancewithanapplicablefinancialreportingframewor
k.Itisundertakentoenhancethedegreeofconfidenceofintendedusersint
hefinancialstatements.PSAs,takentogether,providethestandardsforth
eauditorsworkinfulfillingthisobjective.
Inconductinganaudit,theoverallobjectiveoftheauditoristoobtainreason

3
4

ableassuranceaboutwhetherthefinancialstatementsasawholearefreefr
ommaterialmisstatement,whetherduetofraudorerror,andtoreportonth
efinancialstatementsinaccordancewiththeauditorsfindings.Inallcases
whenthisoverallobjectivehasnotbeenorcannotbeachieved,thePSAsreq
uirethattheauditormodifiestheauditorsopinionaccordinglyorwithdraw
sfromtheengagement.
TheauditorapplieseachPSArelevanttotheaudit.AnPSAisrelevantwhent
hePSAisineffectandthecircumstancesaddressedbythePSAexist.
ThePSAsdealwiththegeneralresponsibilitiesoftheauditor,aswellasthea
uditorsfurtherconsiderationsrelevanttotheapplicationofthoseresponsi
bilitiestospecifictopics.AnPSAcontainsobjectivesandrequirementstoge
therwithrelatedguidanceintheformofapplicationandotherexplanatory
material.Itmayalsocontainintroductorymaterialthatprovidescontextes
sentialtoaproperunderstandingofthePSAs,anddefinitions.Itis,therefore
,necessarytoconsidertheentiretextofanPSAtounderstandandapplyitsre
quirements.
EachPSAcontainsanobjectiveorobjectives,whichprovidethecontextinw
hichtherequirementsofthePSAareset.Theauditoraimstoachievetheseo
bjectives,

PSAObjectives
havingregardtotheinterrelationshipsamongstthePSAs.Forthispurpose,t
heauditorusestheobjectivestojudgewhether,havingcompliedwiththere
quirementsofthePSAs,sufficientappropriateauditevidencehasbeenobta
inedinthecontextoftheoverallobjectiveoftheauditor.Whereanindividual
objectivehasnotbeenorcannotbeachieved,theauditorconsiderswhethe
rthispreventstheauditorfromachievingtheauditorsoverallobjective.
Requirements

1
2

TherequirementsofeachPSAarecontainedinaseparatesectionandexpre
ssedusingthewordshall.Theauditorappliestherequirementsinthecont
extoftheothermaterialincludedinthePSA.
TheauditorcomplieswiththerequirementsofanPSAinallcaseswherethey
arerelevantinthecircumstancesoftheaudit.Inexceptionalcircumstance
s,however,theauditormayjudgeitnecessarytodepartfromarelevantreq
uirementbyperformingalternativeauditprocedurestoachievetheaimoft
hatrequirement.Theneedfortheauditortodepartfromarelevantrequire
mentisexpectedtoariseonlywheretherequirementisforaspecificproced
uretobeperformedand,inthespecificcircumstancesoftheaudit,thatproc
edurewouldbeineffective.
Arequirementisnotrelevantonlyinthecaseswhere:thePSAisnotrelevant;
orthecircumstancesenvisioneddonotapplybecausetherequirementisco
nditionalandtheconditiondoesnotexist.Theauditorisnotrequiredtocom
plywitharequirementthatisnotrelevantinthecircumstancesoftheaudit;t
hisdoesnotconstituteadeparturefromtherequirement.

ApplicationandOtherExplanatoryMaterial

19.
TheapplicationandotherexplanatorymaterialcontainedinanPSAisaninte
gralpartofthePSAasitprovidesfurtherexplanationof,andguidanceforcarr
yingout,therequirementsofanPSA,alongwithbackgroundinformationon
themattersaddressedinthePSA.Itmayincludeexamplesofprocedures,so
meofwhichtheauditormayjudgetobeappropriateinthecircumstances.Su
chguidanceis,however,notintendedtoimposearequirement.20.Appendi
ces,whichformpartoftheapplicationandotherexplanatorymaterial,area
nintegralpartofanPSA.Thepurposeandintendeduseofanappendixareex
plainedinthebodyoftherelatedPSAorwithinthetitleandintroductionofthe
appendixitself.
IntroductoryMaterialandDefinitions

Introductorymaterialmayinclude,asneeded,suchmattersasexplanatio
nof:thepurposeandscopeofthePSA,includinghowthePSArelatestoother
PSAs;thesubjectmatterofthePSA;specificexpectationsontheauditorand
others;andthecontextinwhichthePSAisset.
AnPSAmayinclude,inaseparatesectionundertheheadingDefinitions,a
descriptionofthemeaningsattributedtocertaintermsforpurposesoftheP
SAs.Theseareprovidedtoassistintheconsistentapplicationandinterpret
ationofthePSAs,andarenotintendedtooverridedefinitionsthatmaybeest
ablishedforotherpurposes,whetherinlaw,regulationorotherwise.Unless
otherwiseindicated,thosetermswillcarrythesamemeaningsthroughout
thePSAs.TheGlossaryofTermscontainsacompletelistingoftermsdefined
inthePSAs.ItalsoincludesdescriptionsofothertermsfoundinPSAstoassist
incommonandconsistentinterpretationandtranslation.

PhilippineStandardsonQualityControl
1123.PSQCsarewrittentoapplytofirmsinrespectofalltheirservicesfallingunder
theAASCsEngagementStandards.TheauthorityofPSQCsissetoutinthe
introductiontothePSQCs.
[Therearenochangesproposedtoparagraphs2433,exceptrenumbering.Acc
ordingly,theyarenotreproduced.]
1
Thetermsand conceptsin thisPrefaceareexplainedfurtherin thePSAs,inparticularin PSA200,
Objectiveand GeneralPrinciplesGoverningan AuditofFinancialStatements.(PSA200 willberevi
sed,interalia,toincorporaterelevantprovisionsofthisPrefacethatdealwiththeobligationsoftheau
ditor,and thestatusand authorityofobjectives,requirementsand othermaterial.WhenPSA200 is
revised and exposedforpubliccommentin 2007,respondentswillbeinvited tocommenton them
aterialderivedfromthisPrefacein thatnewcontext.)
12

Unlessotherwisestated,financialstatementsmean financialstatementscomprisinghistorica
lfinancialinformation.
2
PSA200(Revised andRedrafted),OverallObjectivesoftheIndependentAuditorand theConduct
ofan AuditinAccordancewith PhilippineStandardsonAuditing.
3

Referredtohereafterastheauditor.

PSA230(Redrafted),AuditDocumentation
NatureandPurposesofAuditDocumentation
2.
AuditdocumentationthatmeetstherequirementsofthisPSAandthesp
ecificdocumentationrequirementsofotherrelevantPSAsprovides:

(a)

Evidenceoftheauditorsbasisforaconclusionabouttheachievementofth
eoverallobjectives oftheauditor1; and
(b)
EvidencethattheauditwasplannedandperformedinaccordancewithPSA
sandapplicablelegalandregulatoryrequirements

DocumentationofSignificantMattersandRelatedSignificantProfessionalJudgm
ents
(Ref:Para.8(c))

A11.Theauditormayconsiderithelpfultoprepareandretainaspartoftheauditdoc
umentationasummary(sometimesknownasacompletionmemorandum)
thatdescribesthesignificantmattersidentifiedduringtheauditandhowth
eywereaddressed,orthatincludescrossreferencestootherrelevantsupportingauditdocumentationthatprovides
suchinformation.Suchasummarymayfacilitateeffectiveandefficientrevi
ewsandinspectionsoftheauditdocumentation,particularlyforlargeandc
omplexaudits.Further,thepreparationofsuchasummarymayassisttheau
ditorsconsiderationofthesignificantmatters.Itmayalsohelptheauditort
oconsiderwhether,inlightoftheauditproceduresperformedandconclusio
nsreached,thereisanyindividualrelevantPSAobjectivethattheauditorca
nnotachievehasnotmetorisunabletomeetthatwouldpreventtheauditorf
romachievingtheoverallobjectivesoftheauditorsoverallobjective
DeparturefromaRelevantRequirement(Ref:Para.12)
A18.Theobjectivesandrequirements of the in
PSAsaredesignedtoenabletheauditortoachievetheobjectivesspecifiedi
nthePSAs,andtherebysupporttheachievementoftheoverallobjectives
6
oftheauditor.
Accordingly,otherthaninexceptionalcircumstances,thePSAscallforcom
pliancewitheachrequirementthatisrelevantinthecircumstancesofthea
udit.
A19.Thedocumentationrequirementappliesonlytorequirementsthatarerele

vantinthecircumstances.Arequirementisnotrelevant
onlyinthecaseswhere:

(a)

TheentirePSAisnotrelevant(forexample,ifanentitydoesnothaveaninter
nalauditfunctioninacontinuingengagement,nothingin[proposed] PSA
8
610510 (Redrafted) is relevant); or
(b)
ThecircumstancesenvisioneddonotapplybecausetTherequirementisco
nditionalandtheconditiondoesnotexist(forexample,therequirementto
modifytheauditorsopinionwherethereisaninabilitytoobtainsufficienta
ppropriateauditevidence,andthereisnosuchinability)

1
PSA200(Revised andRedrafted),OverallObjectivesoftheIndependentAuditorand theConduc
tofan AuditinAccordancewith InternationalStandardsonAuditing,paragraph 11.

[Proposed]PSA200 (Revised and Redrafted),OverallObjectiveoftheIndependentAuditor,

andtheConductofanAuditin AccordancewithInternationalStandardson Auditing,paragrap
hs[2324].

7
[Proposed] PSA200 (Revised and Redrafted),paragraph 22[27].
8
[Proposed] PSA 610 (Redrafted),
UsingtheWorkofInternalAuditorsInitialAuditEngagementsOpening Balances.

PSA240(Redrafted),TheAuditorsResponsibilitiesRelatingtoFrau
dinanAuditofFinancialStatements
ResponsibilitiesoftheAuditor
5.
AnauditorconductinganauditinaccordancewithPSAsisresponsibleforo
btainingreasonableassurancethatthefinancialstatementstakenasaw
holearefreefrommaterialmisstatement,whethercausedbyfraudorerro
r.Owingtotheinherentlimitationsofanaudit,thereisanunavoidableriskt
hatsomematerialmisstatementsofthefinancialstatementsmay will
notbedetected,eventhoughtheauditisproperlyplannedandperformed
3
inaccordancewiththePSAs.
3
PSA200(Revised andRedrafted),OverallObjectivesoftheIndependentAuditorand theConduc
tofan AuditinAccordancewith PhilippineStandardsonAuditing,paragraphsA45A52.
4

AsdescribedinPSA200(RevisedandRedrafted),thepotentialeffectsofinh
erentlimitationsareparticularlysignificantinthecaseofmisstatementres
ultingfromfraud.Theriskofnotdetectingamaterialmisstatementresultin
gfromfraudishigherthantheriskofnotdetectingoneresultingfromerror.T
hisisbecausefraudmayinvolvesophisticatedandcarefullyorganizedsch
emesdesignedtoconcealit,suchasforgery,deliberatefailuretorecordtra
nsactions,orintentionalmisrepresentationsbeingmadetotheauditor.Su
chattemptsatconcealmentmaybeevenmoredifficulttodetectwhenacco
mpaniedbycollusion.Collusionmaycausetheauditortobelievethataudit
evidenceispersuasivewhenitis,infact,false.Theauditorsabilitytodetect
afrauddependsonfactorssuchastheskillfulnessoftheperpetrator,thefre
quencyandextentofmanipulation,thedegreeofcollusioninvolved,therel
ativesizeofindividualamountsmanipulated,andtheseniorityofthoseindi
vidualsinvolved.Whiletheauditormaybeabletoidentifypotentialopportu
nitiesforfraudtobeperpetrated,itisdifficultfortheauditortodeterminewh
ethermisstatementsinjudgmentareassuchasaccountingestimatesarec
ausedbyfraudorerror.
Furthermore,theriskoftheauditornotdetectingamaterialmisstatementr
esultingfrommanagementfraudisgreaterthanforemployeefraud,becau
semanagementisfrequentlyinapositiontodirectlyorindirectlymanipulat
eaccountingrecords,presentfraudulentfinancialinformationoroverridec
ontrolproceduresdesignedtopreventsimilarfraudsbyotheremployees.
Whenobtainingreasonableassurance,theauditorisresponsibleformaint
ainingan attitude of
professionalskepticismthroughouttheaudit,consideringthepotentialfor
managementoverrideofcontrolsandrecognizingthefactthatauditproce
duresthatareeffectivefordetectingerrormaynotbeeffectiveindetectingf
raud.TherequirementsinthisPSAaredesignedtoassisttheauditorinidenti
fyingandassessingtherisksofmaterialmisstatementduetofraudandinde
signingprocedurestodetectsuchmisstatement

ProfessionalSkepticism
5

12.
InaccordancewithPSA200(RevisedandRedrafted),theauditorshallmain
tainprofessionalskepticismthroughouttheaudit,recognizingthepossibil
itythatamaterialmisstatementduetofraudcouldexist,notwithstandingt
heauditorspastexperienceofthehonestyandintegrityoftheentitysman
4
agementandthosechargedwithgovernance...
A7.
Professionalskepticismisanattitudethatincludesaquestioningmindanda
criticalassessmentofauditevidence.Maintaining an attitude of
professionalskepticismrequiresanongoingquestioningofwhethertheinf
ormationandauditevidenceobtainedsuggeststhatamaterialmisstateme
ntduetofraudmayexist.Itincludesconsideringthereliabilityoftheinforma
tiontobeusedasauditevidenceandthecontrolsoveritspreparationandma

intenancewhererelevant.Duetothecharacteristicsoffraud,theauditorsa
ttitude of
professionalskepticismisparticularlyimportantwhenconsideringtherisk
sofmaterialmisstatementduetofraud.
A8.Althoughtheauditorcannotbeexpectedtodisregardpastexperienceofthe
honestyandintegrityoftheentitysmanagementandthosechargedwith
governance,theauditorsattitude of
professionalskepticismisparticularlyimportantinconsideringtheriskso
fmaterialmisstatementduetofraudbecausetheremayhavebeenchang
esincircumstances
4
PSA200(Revised andRedrafted),paragraph A51.

5
PSA200(Revised andRedrafted),paragraph 15.

[Proposed]PSA200 (Revised and Redrafted),paragraph [18].

PSA260(RevisedandRedrafted),CommunicationwithThos
eChargedwithGovernance
Definitions
6.
ForpurposesofthePSAs,thefollowingtermshavethemeaningsattributedb
elow:

(a)
ThosechargedwithgovernanceTheperson(s)ororganization(s)
(e.g.,acorporatetrustee)withresponsibilityforoverseeingthestrategicdi
rectionoftheentityandobligationsrelatedtotheaccountabilityoftheentit
y.Thisincludesoverseeingthefinancialreportingprocess.Forsomeentitie
sinsomejurisdictions,thosechargedwithgovernancemayincludemanag
ementpersonnel,forexample,executivemembersofagovernanceboard
ofaprivateorpublicsectorentity,oranownermanager.Insomecases,thosechargedwithgovernanceareresponsiblefo
1
rapproving the
entitysfinancialstatements(inothercasesmanagementhasthisrespons
ibility).Fordiscussionofthediversityofgovernancestructures,seeparagr
aphsA5A12.
(b)
Management
Theperson(s)withexecutiveresponsibilityfortheconductoftheentitysop
erations.Forsomeentitiesinsomejurisdictions,managementincludesso
meorallofthosechargedwithgovernance,forexample,executivemembe
rsofagovernanceboard,oranownermanager.Managementisresponsibleforthepreparationofthefinancialst
atements,overseenbythosechargedwithgovernance,andinsomecases
2

managementisalsoresponsibleforapprovingtheentitysfina
ncialstatements(inothercasesthosechargedwithgovernanc
ehavethisresponsibility).
ThoseChargedwithGovernance(Ref:Para.7)
A5.Governancestructuresvarybyjurisdictionandbyentity,reflectinginfluen
cessuchasdifferentculturalandlegalbackgrounds,andsizeandowner
shipcharacteristics.Forexample:
Insomejurisdictions,asupervisory(whollyormainlynonexecutive)boardexiststhatislegallyseparatefromanexecutive(manage
ment)board(atwotierboardstructure).Inotherjurisdictions,boththesupervisoryandexecu
tivefunctionsarethelegalresponsibilityofasingle,orunitary,board(aon
etierboardstructure).
Insomeentities,thosechargedwithgovernanceholdpositionsthatareani
ntegralpartoftheentityslegalstructure,forexample,companydirectors.I
nothers,forexample,somegovernmententities,abodythatisnotpartofth
eentityischargedwithgovernance.
Insomecases,someorallofthosechargedwithgovernanceareinvolvedin
managingtheentity.Inothers,thosechargedwithgovernanceandmanag
ementcomprisedifferentpersons.
Insomecases,thosechargedwithgovernanceareresponsibleforapprovin
3
g
theentitysfinancialstatements(inothercasesmanagementhasthisresp
onsibility).
1
Asdescribedatparagraph [A43]of[proposed]PSA700,
(Redrafted),TheIndependentAuditorsReportonGeneralPurposeFinancialStatements,havingr
esponsibilityforapproving in thiscontextmeanshavingtheauthoritytoconcludethatallthestatem
entsthatcomprisethefinancialstatements,including therelatednotes,havebeenprepared.

2
Seefootnote1.
3
Asdescribedatparagraph [tobeinserted]ofPSA700,(Redrafted),ForminganOpinionand Repo
rtingonFinancialStatements,havingresponsibilityforapprovinginthiscontextmeanshaving th
eauthorityto concludethatallthestatementsthatcomprisethefinancialstatements,including th
erelated notes,havebeenprepared.

AllFinalClarifiedPSAs
Phrases
attitude of professionalskepticism
PSA250(Redrafted),paragraph8.
PSA540(RevisedandRedrafted),paragraphA40.
PSA550(RevisedandRedrafted),paragraphA9.affectedbytheinherentli

mitations of inherent tointernalcontrol

PSA315(Redrafted),paragraphA42.
ThisPSA200(RevisedandRedrafted),OverallObjectivesoftheIndependentAudi
torandtheConductofanAuditinAccordancewithPhilippineStandardsonAuditing
,wasunanimouslyapprovedforadoptiononOctober27,2008bythemembersoft
heAuditingandAssuranceStandardsCouncil.

BenjaminR.Punongbayan,Chairman

FelicidadA.Abad

AntonioP.Acyatan

ErwinVincentG.Alcala

FroilanG.Ampil

DavidL.Balangue

Ma.GraciaF.CasalsDiaz

EliseoA.Fernandez

JaimeP.Naranjo

Ma.CeciliaF.Ortiz

NestorioC.Roraldo

JoaquinP.Tolentino

EdithaO.Tuason

JaimeE.Ysmael