CHAPTER1 AUDIT EVIDENCE QUESTION 14 Define audit evidence. ANSWER 1 Auc it evidence efers to all the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information. QUESTION 2 - Explain the meaning of sufficiency and appropriateness of audit evidence. . ANSWER 2 PSA 500, “Audit Evidence", requires that the auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to bgse his audit opinion. However, auditors are not expected to consider all information that may come to his attention. Sufficiency is the measure of the quantity of audit evidence. In making judgments as to the sufficiericy of audit evidence, the auditor considers the nature of the item examined, the materiality of possible errors, the degree of risk involved, and the competence of available evidence. Appropriateness (Competence) is the measure of the quality of audit evidence; that is, its relevance, and its reliability in providing support for, or detecting misstatements in the classes of transactions, account balances, and disclosures and related assertions. The reliability of audit evidence is influenced by its source and by its nature. The sufficiency and appropriateness of audit evidence are interrelated. The quantity of audit evidence to be gathered is affected by the quality of such evidence. For instance, if the quality of the audit evidence is high, a lesser amount of evidence may be required. The quantity is also affected by the risk of misstatements in the financial statements. Ifai matier supporting the financiat Bases nse of the over her tancfad a8 statements, audit evidence may O° a Accounsing records. Examples mene Records of mital entries and supporting records 2 Checks and records of etectronc fund ransters © General and sutmeary sodgers © kurt enteen aF qerments to he fenced statements tal are not rofected #9 formal journal entries © Recor mah ae wcresteets « nacsneets supporting a! alocatora cor Ue MALONE and ACCRUES Onner information Examoies ©chude 8 Marten of Tewergs ard untematons trom thw) partes © Anabpts reget © Comperatie tate stot competions (bers hmaruing © informanon cttened by Te auctor torn inquiry, Observation are Pagecton © Ober information devetoped by or available to te auditor (hat permits he muir lo Meech conckmone trough walt reasoning Accouneng "ecords sone do not onde witcent approprate att ranch to bale an audios opruon on te fnenct a asee Preparing its financial statements? ISWER 7 Assertions categorioe: of management used by the auditor fall into the following 1. Assertions abou it classes of tra wr the Period under audit insactions and events fo! 2 Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity. >. Completeness. Ail transactions and events that should have been recorded have been recorded. © Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately. 4. Cutoff. Transactions and events have been recorded in the correct accounting period. @. Classification. Transactions and events have been recorded in the proper accounts. 2. Assertions about account balances at the period end: a. Existence. Assets, liabilities and equity interests exist. b. Completeness. All assets, liabilities and equity interests that should have been recorded have been recorded. ¢. Rights and obligations. The entity holds or controls the rights + to assets, and liabilities are the obligations of the entity. d. Valuation and allocation. Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. 3, Assertions about presentation and disclosure: Occurrence and rights and obligations. Disclosed events, transactions, and other matters have occurred and pertain to the entity. ‘Completeness. All disclosures that should have been included | in the financial statements have been included. Classification and understandability. Financial information 's appropriately presented and described, and disclosures are clearly expressed, ‘accuracy and valuation. Financial and other information are Gisclosed fairly and at appropriate amounts. a. ch management assertion, the auditor develops auait For each Te achieve audit objectives, and thereby address each object ratement assertion for each account, an auctor assesses final 4Inquiry Analytical procedures. Observation, Inspection. aoge Tests of controls. Mba Procedures are used to test the operating effectiveness of sana in preventing, detecting and correcting material teste apmonts at the assertion level. Evidence obtained using Sts of controls is used as a basis for the reassessment of control risk. Tests of controls are performed only when: * Based on the results of the assessment of risks of material misstatement, the auditor intends to rely on the operating effectiveness of the controls (control risk is less than high). Substantive procedures alone cannot provide sufficient appropriate audit evidence. Tests of controls may ordinarily involve sampling of documents and transactions. Tests of controls include the following procedures: a. Inquiry. b._ Inspection. c, Observation. d. Reperformance. e. Walk-through test. 3. Substantive Procedures. These are procedures performed to detect material misstatements at the assertion level, that is, to determine whether the financial Statements are prepared in accordance with PFRSs. tantive procedures are performed after the auditor evaluates Be sitormation obtained from performing risk assessment procedures and consideration of intemal control QUESTION 10 tive procedures” Explain fully “substan ANSWER 10 substantive Pro material cedures are audit procedures designed to detect ntive Proments at the asserton level. They are appied when_— ————————— ay ents that m ‘aments, the auditor dures to gather is deri f potential miss risks by considering the types of ae occur. After considering the risk of material i a designs the audit Program and selects audit sufficient appropriate audit evidence QUESTION 8 rocedures? What is the difference between audit objectives and audit pr ANSWER 8 init ture Audit objectives are the conceptual basis for determining Qe waiting and extent of auditing procedures necessary to mee! See tandards and to verify the assertions made by manageme! ee financial statements. Conversely, audit procedures are acts At Performed by the auditor to satisfy the audit objectives, and therefore, address management's assertions. QUESTION 9 What are the audit Procedures that an auditor Performs to obtain audit evidence to serve as basis for the auditor's opinion? ANSWER 9 Audit procedures are acts to be performed to Satisfy the audit jecti it it evidence to draw reasonable audit opinion by performing the following audit procedures: 1. Risk assessment procedures. These procedures are used to obtain an understand entity, including its internal control, and its environment 92 ie ae the risks of material misstatement at the financial statement assertion levels. Evidence Obtained usi oC and Procedures is used to identify and assess the risks of ponent misstatement (inherent and control risks), Material Risk assessment procedures are requi to - audit. However, risk assessment Brocecures permed ine Provide sufficient appropriate audit evens On Which 12S. 90 not audit opinion. Rather, they are Supplemented by to base the Procedures such as tests of controls ad Substantive py further audit Tocedures, Risk assessment procedures include the following: 5s of arial sing rtrol 2rial ting ient and nts sial tes ont vet en so amount (or to determine whether the pe: perly stated. Substantive procedures are intended to produce evi the assertion that there are no material Msn ee the completeness, validity, and accuracy of the Tm more jit i rformed by an aude an entity. Thus, substantive procedures are Pe! a7 counting aeiect whether there are any material misstatemen transactions. the auditor's objective is units) of an account is pro} its i Substantive procedt 1é ses of transat a jubstantive pI lures for material classe’ . in sufficient balances and disclosures are always require. appropriate audit evidence. “The following are the two types of substantive procedures: 4. Substantive analytical procedures. 2. Tests of details (of classes of transactions, account balances and disclosures). QUESTION 14 Discuss the purpose of substantive analytical procedures. ‘Analytical procedure means evaluations -of financial information through analysis of plausible relationships among both financial and non-financial data. It also encompasses the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. ‘Analytical procedures may be used in the: Planning stage, as part of risk assessment procedi the risks of material misstatement in order to a, timing and extent of audit procedures to be performed. nature, Testing stage, as a substantive procedure to obtain co ‘audit evidence about the client's assertions. rroborative Completion stage, 2s part of the overall revi reached. lew of conclusions 1g analytical procedures at the plannin the audit is required. g and overall review Applying stages of ical procedures used as @ substantive procedu re are applied to Analyt - os wudit evidence about particular assertions related to account obtain at 7bala unusual cry lasses of transactions, Anal lationship that A Sy sean Udit Obje tives if th e al by the Auditor. va lytical procedures identify Nn and focus on the rationale of ical procedures alone may achieve specific 't evidence obtained is considered Persuasive Substantive n analytical proc, comparisons of the entity Si include the consideration of 'S fir a. inancial information with: Comparable information for prior periods. ticipated results of the entity (budgets or forecasts). Similar industry information c. Substantive analytical Procedures also include consideration of relationships, among elements of financial x] The decision about whether to use substantive analytical procedures instead of tests of details is based on the auditor's judgment about the expected effectiveness and efficiency of the procedures under the \n addition, the auditor should consider the following factors: ‘ali items i lances are . Materiality of the items involved. When inventory bal ‘ * Material, the auditor does "not onen rely only on analytical procedures in forming conclusions. it procedures directed toward the same audit objectives. Citar prooeduree| pettomsedi bysinetecaerne reviewing the @ llectibility of accounts receivable, such as the review of oI quent cash receipts, might confirm or dispel questions raised eeeco application of analytical procedures to an aging of customers’ accounts. it ich the expected results of analytical procedures Y cad! The auditor will ordinarily expect greater Can aoe sey mi comparing 9708s prOM margine frees eee period to consistentyan. in comparing discretionary expenses, Sori’ as ah and development or advertising. res herent and control risks. If internal control is 4, Assassmonts of itvaclive and therefore coil neem high, more assessed Pate of details of transactions and balances rather than ralianc ical procedures may be required onanicant fluctuations t information 28 ir le, the auditor should investiga’ t, an iry of management, wie (tests of details) to ures identify signifi i edi When substantive analytical proc t with other relevan' or relationships that are inconsisten' that deviate from predicted amounts, th obtain adequate explanations through ing consider the need to apply other audit proce obtain appropriate corroborative evidence. QUESTION 12 Discuss the purpose of test of details. ANSWER 12 Tests of details are performed to determine the actual details making up an account balance or classes of transactions. It may be: a. Tests of transactions. These are tests of the processing of individual transactions by inspection of the documents and accounting records involved in processing. Tests of balances. These are tests applied directly to the detail y ti of balances in general ledger accounts. " uf ald ¢. Tests of disclosures. These are procedures to evaluate whether the overall presentation of the financial s' in a tion tatements, i related disclosures, is in accordance with the applic able tne by reporting framework. plicable financial More types of evidence are obtained b than any other type of tests. Howev sts of bala - er, an au inces types of procedures along with tests of balance genoreny uses other are considered the most expensive to perform. Apalnuse these tests a ‘al are the least costly to perform among all the procedi a! Procedures S. y using the te: QUESTION 13 Give examples of the more commonly used audit Proced ANSWER 13 rio auditor: : audit procedures coy > Commonly Used by a. Inspection. yi the: b. Observation. cc. Inquiry. d. Confirmation. e. Recalculationf. Reperformance. QUESTION 14 Explain the audit procedure “inspection”. ANSWER 14 pees ion consists of examining records and documents or tangible sets. Inspection of records and documents provides, audit evidence of varying degrees of reliability depending on the effectiveness of intemal controls over their production. Records may be inspected to determine if they are properly al control), or if they contain the appropriate amounts (substantive procedure). Inspection of tangible assets ‘consists of the physical ‘examination of assets. Inspection of documents and assets may provi evidence with respect to,their existence, but not necesse rights and obligations or the found in the company premises during an i by the company on a consignment basis and not actually owned by such. QUESTION 15 Explain the audit procedure “observation”. ANSWER 15 ition consists of looking at @ process oF procedure being ‘example would be the observation by the fed by others. An e auditor of the ‘counting of inventories by the entity's personnel or the performance of com procedures that leave no audit trail. evan proves evens about i paomance of @ Process O Oosedure, but i “stad to the polnt in time at which the observation Pires place and by the fat that the act of being observed may affect take yo process or procedure |S performed. Nt explain the aut procedure “inquiry” 10VY | ANSWER 19 Recording to PSA 505, ‘Extemal Confirmations’, _ external Confirmation is a specific type of inquiry which involves a direct written TesPonse to the auditor from a third party (the confirming party), either in paper or electronic form. External confirmation usually provides strong audit evidence regarding the existen ce and rights and obligations assertions. Confirmations Seldom provide evidence about the valuation of assets because, in the Case of receivables, it is impractical to ask the customers to confirm information about their ability to pay their accounts. External confirmations are frequently used in testing account balances and their components, but may also be used for other purposes. Accounts or items commonly tested using extemal confirmation include: Bank balances and information about loans from banks. Accounts receivable balances. Inventories held by third parties at warehouses located outside the company premises, or inventories out on consignment (in the hands of the consignee). Property title deeds held by lawyers or financiers for safe custody or as security. + Investments under the custody of trustees. * Loans from lenders. * Accounts payable balances. Terms of agreements with third parties, UE! 20 What is the process in handling external confirmations? ANSWER 20, When performing confirmation procedures, the auditor should maintain control over the process of selecting those to whom a request will be sent, the preparation and sending of confirmation requests, and the responses to those requests. Control is maintained over communications between the intended recipients and the auditor to minimize the possibility that the results of the confirmation process will be biased because of the interception and alteration of confirmation requests or responses. 12ANSWER 16 Inquiry consists of Seeking information from knowledgeable persons throughout the entity OF outside the entity. Inquiry is an audit procedure that is used extensively throughout the audit and often is complementary to performing other audit procedures. Inquiry alone does not provide Sufficient appropriate audit evidence to detect a material misstatem: ‘ent at the assertion level and also not sufficient to test the operating effectiveness of intemal controls. {Rauiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inauiry Process. “Responses to inquiries may previde tre aecitor with Gormation not previously possessed or with conoboratve udlt evidence. Alternatively, responses might provide the auditor with information that differs significantly from other information that the auditor has previously fathered, Responses to inquiries may provide a basis for the auditor to modify or perform additional audit procedures. QUESTION 17 Explain the audit procedure “recalculation*. ANSWER 17 TION 18 Explain the audit procedure “reperformance”. ANSWER 18 Reperformance refers to the auditor's inde, procedures or controls that were originally entity's internal control, either manuall assisted audit techniques (CAATs). QUESTION 19 Explain the audit procedure “confirmation”, Pendent execution of Performed as part of the '¥ or through the use of computer, 1ermal either arding ations in the ances nation de the in the astody aintain will be. nd the tended sults of ion and jg out the The auditor should make sure that it is he bid aeresead! ard confirmation requests, that the requests are prope’ Y aditor considers that all replies are sent directly to the auditor. The ave Whether replies have come from the purported a), the auditor responses received are in electronic form (fax OF rs the replies in should verify the validity of the sources and contents of TIS tg, telephone calls to the senders. In addition, the auditor MAY ©, requesting the sender to mail the original confirmation directly auditor. JUESTION 21 What are the two types of external confirmation? ANSWER 21 The auditor may use positive or negative external confirmation requests or a combination of both. + Positive confirmation request. It 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 fil in the requested information. A response to a positive confirmation request provides reliable audit evidence. When no response is received toa positive confirmation request, the auditor ordinarily contacts the recipient of the request to elicit a response. Where the auditor is unable obtain a response, the auditor applies altemative audit procedur = «Negative confirmation request. It asks the respondent to reply only in the e with the information provided in the request. Tre sseaeoment respondent agrees with the information stated in ter ores_f request, no response is needed. Confirmation When no response is received to a negati the auditor assumes that the respondent” amation request information stated in the request, and there wit the evidence that intended third parties have received ne?" Xplicit requests and verified that information contained na imation Consequently, negative confirmation requests nn" IS correct when: may only be useq a. The risk of material misstatement is tow. b. large number of small balances is involved 2B¢. Asubstantial number of errors is not expected. d. The auditor ha: i S NO reasor i ‘ disregard with these reas ° to believe that respondents will QUESTION 22 What is the difference between tracing and vouching? ANSWER 22 roa) fefers to first selecting an accounting transaction (a source locument) and then following it into the journal or ledger. The direction Of testing in this case is from the source documents to the journals or ledgers and tests whether transactions that occurred are recorded (completeness) in the accounting records. Vouching, on the other hand, refers to first selecting an item for testing from the accounting journals or ledgers and then examining the underlying source document. Thus, the direction of testing is from the journals or ledgers back to the source documents. Vouching provides evidence that items included in the accounting journals or ledgers have occurred (existence or validity). QUESTION 23 What are dual-purpose tests? ANSWER 23 are tests of transactions that both evaluate the Dual-purpose tee ols and detect monetary errors. In substance, effectiveness OF F2"5 combination of tests of controls and substantive dual-purpose 1m ance, inspecting documents may show evidence ures. FOr Wation of transaction (test of control) and also detect of np «fe in recording the amounts (substantive procedure) at the misstat same. 16) what is the meaning of audit documentation? a pers refer to the record of audit Audit documentaie or aoetiog paper ref rt ut e oessions reached by the auditor. con ce ote 14e auditor should ic it tht PSA 230, “Audit Documentation’, requires that ons i jon because S' prepare sufficient and appropriate audit documentati basis for the a. Provides a sufficient and appropriate record of the ditor’s report and audit opinion. rdance with b. Provides evidence that the work was performed i oe PSAs and applicable legal and regulatory require! c. Helps enhance the quality of the audit. evidence d. Facilitates the effective review and evaluation of ne ee peteees ie obtained and conclusions reached before the audi finalized. Also, audit documentation serves the following important purposes: Assists the audit team to plan and perform the audit. , Assists audit team members who are responsible for supervision to direct and supervise the audit work and to discharge their review responsibilities in accordance with quality control policies and procedures. c. Enables the audit team d. Retains a record of a b. to be accountable for its work. matters of continuing Significance to future audits. e. Enables an experienced auditor to conduct juality co; i ral Migpoctien quality contro! reviews f. Enables an experienced auditor to conduct external i i inspe i accordance with applicable legal, regulatory nspections in requirements. and other QUESTION 25 What are the forms and contents of audit documentation? ANSWER 25, The following table shows the . : S of recording audit documentation = and Pe that may Contents eyed in cl documentation: Paper Film Electronic media Other mediaChecklists Correspondence concerning significant matters I ay includeg oat abstracts or copies of the entity's records may be consid Part of audit documentation, but such documentation is not sidered a substi ity’s accounting records. Audit documentation Should also record: a itute for the entit Who performed the audit work and the date such work was completed, Who reviewed the audit Work performed and the date and extent of Such review. The quantity, type and content of working papers is a matter of Professional judgment but they should be sufficient enough to show that the accounting records agree or reconcile with the financial statements. The auditor's judgment about the form, content and extent of audit documentation for a particular engagement should be guided by factors such as: a. The nature of the audit procedures to be performed b. The identified risks of material misstatements. c. The extent of judgment required in performing the work and the results She signifcance of the audit evidence obtained. fe. The nature and extent of exceptions identified. / "The need to document a conclusion or the basis for a conclusion ‘ not readily determinable from the documentation of the work performed or audit evidence obtained. g. The audit methodology and tools used a : igned and organized to meet the circumstances Working tors ‘roees for each individual audit. The use of ai : ka working papers may improve the efficiency with which standardivor papers are prepared, facilitate the delegation of wor and such working Preto control its quality. The auditor may also improve rovide a ssa by utilizing schedules, analyses and other audit tion prepared by the entity. docu question 2 tare the different types of working papers? What a 16Analysis of noncurrent accounts (e.g., equity). * Organizational chart. ea * Documentation of the understanding of the entity's internal control ©. Correspondence (Administrative) File. This file contains all Correspondence to, from, or on behalf of a client and is especially Useful for planning an audit. 4. Tax File. This file Contains information relevant to a client's past, current, and future income and property tax obligations, and serves as a basis for preparing current-year returns or for performing other tax services, QUESTION 28 Explain the ownership of working papers. ANSWER 28 Unless otherwise specified by law or regulation, working papers are the property of the auditor or firm. However, the firm may, at its discretion, make portions of or extracts from, audit documentation available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the firm or its personnel. QUESTION 29 Explain the rules on confidentiality of working papers. ANSWER 29 While the working papers are the property of the auditor, he may not show it to any third parties or in public unless: There is consent of the part of the client to disclose. b.There is a professional right or duty to disclose. ce Disclosure is required by law. QUESTION 30 Explain the rules on retention of working papers, ANSWER 30 The needs of the firm for retention of engagement docum: ge 18ANSWER 26 The types of working papers are: to re designed a. Audit Administrative Working Papers. ean ae aid the auditors in the planning and a engagement (e.g., audit program). jent’s b. Working Trial Balance. A list of the accounts a eae general ledger with columns that include unadjus' he adjusting directly from the client's accounting records, propose entries, and adjusted (audited) amounts. c. Lead Schedules. These are schedules that summarize like accounts. d. Supporting Schedules. These are the detailed schedules Prepared by auditors in ‘Support of specific amounts on the financial statements. e. Summary of Adjusting and Reclassifying Entries, entries are corrections of material errors in the accounting records discovered by the auditor while reclassifying entries are made in the statements to present we canting information properly, even when the general balances are correct QUESTION 27 What are the classifications of working Papers? ANSWER 27 Adjusting Audit working papers may be grouped into: a. Current File. This file co @ particular year (e.g., the * A copy of the financial * Working trial balance. * Lead schedules. * Audit program. ntains information lev; Current year’s examingont £0 Felevant to the a. mination only). audit of Statements, b. Permanent File. This file coy significance to the auditor audits of a client. ntai : NS informati in perfor tae tion ; "ming recurring en nertinuing ‘Urrent * Copies of the articles of incorporatioy * Bond and other long-ter Nn an /-| Tm contracts," by-laws, 7Disclosures” " requires the evidence as auditor to obtain sufficient appropriate to whether the: a. Accounting estimate is Accounting estimate is The auditor s| Methods in Properly accounted for and disclosed reasonable in the circumstances hould also obtain an unders' making the accounting estim: & Reviewing and testing the process used by management to develop She estimate by evaluating data and ap cali assumption, testing of calculations, comparing prior ree estimates with actual Tesults, and considering manag approval procedures. Making an independent estimate. i timate Reviewing the subsequent events which confirm the estir made. tanding of the procedures and ate by: s 20f the . ith the nature ©! a the period of such retention, ea anainpls, whether {ne engagement and the firm's circumstal vide a record of ma ai engagement documentation is needed to pro is. The retention perio continuing significance to future engagements. whether local law or may also depend on other factors, such as for certain types of regulation prescribes specific retention periods or capted. retention engagements, or whether there are Senos legal or regulatory periods in the jurisdiction in the absence of specific leg requirements. i ime sufficient Ordinarily, working papers should be kept for a period orion period ae to meet the needs of the auditor's practice. The reten i of the audit engagements must be at least five (5) years from the date auditor's report QUESTION 31 What is an audit file? ANSWER 34 An audit file represents one or more physical or electronic form, containi audit documentation for folders or other storage media, in ing the records that comprise the a specific engagement. PSQC 1 requires firm to adopt policies and Procedures for the timely completion of the assembly audit files. The assembly of final audit files should be completed not more than 60 days after the date of the auditor's report. QUESTION 33 What are the auditor's responsibilities estimates? uclting accounting ANSWER 33 Accounting estimates are often used the precise amou determined or when the outcome of the occurrence of futur uncertain. Accounting estimates ma be requireg ino vents is debts, depreciation, warranty obligations, trac values and imi bad loss. In auditing accounting estimates, ps4 i 540, “audit Estimates, Including Fair Value Accounting Estimate A Countin, 7 Rel 19WEEAR 5 EUES BASIC CONCEPTS IN AUDIT SAMPLING UESTION 1 What are the means in selecting items for testing to gather a evidence? ANSWER 1 PSA 530, “Audit Sampling’, states that when designing procedures, the auditor should determine the appropriate mea! selecting items for testing. The auditor may choose either combination of the following: a. Selecting all items. b. Selecting specific items. c. Audit sampling. QUESTION 2 In what instances does the auditor select all items for examination? ANSWER 2 Selecting all items or 400% examination may be appropriately when: ulation constitutes a small number of large value items. fe ue a of material misstatement are high and other means! e ot provide sufficient appropriate audit evidence. Th repetitive nature of a calculation or other process perform: a Z puter information system makes @ 100% examinat feasible or cost effective. c. % examination is often used for substantive pt ures tono8ed for tests of controls roced question’ will the auditor resort to selecting specific items only for testi When 116Ss MULTIPLE CHOICE QUESTION ept Accounting records include the following, excep’ Contracts. Checks. Minutes of meetings. Worksheets. aoc Answer: C i ion an Minutes of meetings is considered part of other information auditor obtains to support the accounting records. Answers A, B, and D are incorrect because contracts, checks, and worksheets are considered part of accounting records. What are the two determin: evidence? fants of the persuasiveness of audit Independence and sufficiency. Independence and effectiveness. Appropriateness and sufficiency. Relevance and reliability. aegp Answer: C ‘An auditor relies on evidence convincing. In view of that, the appropriate audit evideni conclusions on which to ba oe 'S Persuasive ra auditor should obtaii ce to be able to drawn ise his audit Opinion. ° Answers A, B, and D are incorrect. ther than Sufficient ‘aSonable Which of the following statements co ir coneet? nceming audit PVidence ; IS a. To be appropriate, audit evidence oF relevant, but need not be both, Ud be either Persu, b. The difficulty and expense. or obtain concerning an account balance ig ¢ Valid ty, Suit evi, test. Basis for gpvidence validity of audit ®Viden, iting a ce c. The measure of the auditor's judgment. 21Vv her wy 1g ay Jeans, m? ng) eo ANSWER 3 ‘an auditor will offen select specific items for examination with regards: High value or key items. B. Allitems over a certain amount. ¢._ Items to obtain information d._ Items to test certain procedures. a. This method is somewhat subjective and may result in increased level of nonsampling risk. QUESTION 4 What is audit sampling? ANSWER 4 Audit sampling involves the application of audit procedures to less than 100% of the items within an account balance or class of transactions such that all sampling units have a chance of selection. This will enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population from which the sample is drawn. Simply stated, sampling is a process of selecting a subset of a population of items for the purpose of making inferences to the whole population. Accounting populations usually consist of a large number of items, often totalling millions of peso, and a detailed or 100% examination of all accounts is almost impossible. Audit sampling can be used in both tests of controls and substantive procedures. In relation to substantive procedures, sampling can only be applied in performing substantive test of details because substantive analytical procedures should be applied to a complete set of data or information so that the relationships generated by computing ratios and trend analysis are realistic. IUESTION 5 What are the general approaches to sampling? ANSWER 5 An auditor often performs audit sampling when examining account 117oe approache, balances or classes of transactions. The two appr S to ay alan sampling are: a. Statistical sampling. b. Nonstatistical sampling. QUESTION 6 Explain briefly statistical sampling. ANSWER 6 Statistical sampling is a sampling approach that rebar a Selection of a sample for inspection and Uses probal lity theon, to evaluate sample results, including measurement of sampling risk. py Statistical Sampling, each item in the Population has aq Calculabje chance of being selected, dom, 4 commonly held misconception about Statistical Sampling is that it Sliminates the ne cd Need for the use of the Professional judgement. White Statistical samp} ji ds to det Size ang to selec 'SPONsibility of ate ttor to. consider ror reeety in. advance '¢ TS Such Materiality, tl xpected rror rate Or amour , the risk f Ver-reliance the risk oF j cep Statistical Sampling allows an auditor’ ON tho: ; F the aus uaHO"S judgement {0,8 concentrate © areas of 1@ audit wt I€re it is Most ne, led. quae, Sed. It permits the 3. Quantify risks, >. Design an efficient sample enue the sulicieney o th placa evidence gat Objectively evaluate the sample Tesults, ‘A ond QUESTION 7 QUESTION 7 Explain briefly Honstatistcal sampling, ANSWER 7 Nonstatistical Sampling or judgmental Samplin, Process where the auditer decides which it volves a subjective selection Of items evaluation of the results Nonstatistical sampling 1c Non-quantitative methods in the evaluation process 1180 aug, ‘andom Bory to isk. In sulable that it While ample ilty of oh as lance 1 tisk, rated s the tion It tive and le results obtained using judgemental se the probability of selection of not be ascertained f he sampl oe pe estimated becaus 7he ing ot ms in the population f gathering audit an acceptable means of g ntal ng a faimess ‘of the financial statements provided 9 Conceming that the sample is not unrepresentative of the It fe often cheaper and less time-consuming to n mi neared to statistical sampling e cor form two approaches in sampling provides more useful of the whieh evidence? ER — ‘ee on which sampling method is better. When used puators disagree OF Oi and nonstatistical sampling approaches may Oot ete propriate audit evidence. Both approaches involve fc ening, executing the sampling plan, and evaluating the Pevaisos ire that appropriate sample methods be Its. Also, both req ide reasonable assurance that the samples selected are f the population. sample resul utilized to provi representative Of those in favor of statistical sampling maintain that such sampling approach would carry greater evidential weight in a court of law and that conclusions drawn from statistical sampling are more defensible in court because the risk of error in the population is objectively and quantifiably determined. On the other hand, auditors in favor of nonstatistical approach believe that the use of professional judgement is a better defence than a statistical measure of risk. It may be better to have an expert witness explain how important professional judgement is in an audit than let a Statistician explain that there is a known chance (e.g., 20% or 50%) {hat the auditor's conclusion was incorrect. QUESTION 9 Expr ess the audit risk model for audit sampling purposes. ANSWER 9 In Obtaj iudgment'"9 Audit evidence, the audi assess audit nex a itor should use professional nd design audit procedures to ensure 119QUESTION 1 What is the purpose of analytical completion stage of the audit? Procedures Pettorne ANSWER 1 PSA 520, “Analytical Procedures” state: and perform analytical procedures near the the auditor when forming an ENd of thy 1 de ; Overall conclusion no Udit thay? nancial statements are consistent with the gucn 28 at a the entity © Auditor's undersie®" b standin S th: Auditor sh, that the audit Shou Qu Analytical procedures performed as an overall stage of an audit usually involves reading the finan) nthe iNancial statement ments an a. Consider unusual or unexpected account balane. = .,_hatirere not previously identiied during the audit ations, Consider the adequacy of audit evidence regard identified unusual or unexpected balances Gerding preview c. Assess the conclusions reached and eval statement presentation. ol QUESTION 2 Define “related parties”. ANSWER 2 PAS 24, “Related Party Disclosures” states that parties are considere? control the of to be related parties if one party has the ability to party, the ability to exercise significant influence over has joint control over another entity. the other party.” In addition, PSA 550, “Related Parties” defines a related party 2 ind 1 significant Or ne a. A person or _ per other entity that has con' termediaries directly or indirectly through one or more in : reporting entity. 3 conte b. Another entity over which the reporting entity rome significant influence, directly or indirectly through interme . Anothe entity 1 are clo QUESTIO! What are 1 ANSWER Related obligation charged. between i between officers. QUESTIC What ar transactic ANSWE! itis man and tran: Related disclose: related | related 5 party rel a Am b. Ami seo ins c. Allo a. Exe ace QUEST What ¢ and reliee EE ee A block sample is obtained by selecting several items in sequence Once the first item in the block is selected, the remainder of the block ig chosen automatically. For instance, the sample may consist of all vouchers processed during a two-week period or all vouchers Processed on specific days. Block samples could theoretically be representative samples but are rarely used because they are inefficient. The time and expense to select sufficient blocks so that the sample could be considered representative of the total population js ridiculous. Block sampling is considered the /east desirable for use by the auditor and, like haphazard sampling, is also inappropriate for statistical ‘sampling. QUESTION 23 What are the usages of sampling? ANSWER 23 | Sampling may be used in: * Test of controls. |t is directed towards the design or operation of a control to assess its effectiveness in preventing, detecting and correcting material misstatements in a financial statement assertion. * Substantive procedures. It is used to obtain evidence about the validity and propriety of the accounting treatment of transactions and balances. © Dual-purpose tests. It is used to test a control and to seve asa substantive procedure of a recorded balance or clase of transactions. When a dual-purpose test is used, auditors select the sample size as the higher of that required for the two purposes, 1282 the lesi ‘Qn ASsigy the "9 of letion and ships ously Ncial wed ther (,0F ice, the or re aries. germedian'e int’tner entity that is under com, An jh havin, a tity throug! 9 Common co} Contra, anijose family members, or commoeiita Owner® "Ye repo Y Mana. ownerctng 3 a gement "8 who pater oated Paty Wransactons7 pisWERS party fransactions invove a transte ‘4 ed parties, Of re enaton » Tegardless of ures orged. COMMON eXAMPIES include Sales or page @ Dre i en a parent company and its subsidiary, exchar =e? tansactions Patween two companies Owned by the same peroe® t auipment nee | and loans to ESTION 4 what are the required disclosures in relation transactions? to related party ANSWER 4 itis management's responsibility to identify and disclose related parties and transactions with such parties. Related party transactions where control exists are required to be disclosed whether or not there have been transactions between the related parties or not. When there have been transactions between ‘elated parties, PAS 24 requires disclosure of the nature of the related party relationship as well as information about the: a. Amount of the transaction. b. Amount of outstanding balance, the ter secured or unsecured, and nature of consideration to be p’ in settlement. & Allowance for doubtful accounts related to the outstanding aa Expense recognized during the period in respect of do accounts due from related parties. WESTION 5 yarties pect to related ms and conditions, whether rovided tat are the auditor's responsibilities with res "elated party transactions? 309dent of each not indepen Other, ayswes a tes i qisclosure requirements for rela paca? cco’ Sang palances 10 enable financia yy 4 ” ns fects Ne 0018 9 angactiO nature and et on the Ate restore derstand. Met Mite ts. stateme” tne aut of related party transactions, the Auditor 5, pect tO We onsibit 1 tify, assess and respong cedures tO ident ry ee pr msstatement arising from the entity's failure 4, iately account for or disclose imlatad Paty Telationshg 2a balances in accordance with the requremens 4 transa the applied framework | Obtain an understanding of the entity's related party relationshig, i and transactions sufficient to: be able to conclude whether the financial statements, inso as they are affected by those relationships and transactions achieve fair presentation or are not misleading + Evaluate whether one or more fraud risk factors are present Eval because fraud may be more easily committed through related parties. However, an ordinary audit cannot be expected to provide assurance that all related party transactions will be detected. Nevertheless, an auditor should be aware of the possible existence of material related party transactions. Owing to the inherent limitations of an audit, there is an unavoidable tsk that some material misstatements of the financial statements may ‘not be detected, even though the audit is properly planned and performed in accordance with the PSAs. In the context of related parties, the potential effects of inherent limitations on the auditors abiity to detect material misstatements are greater for su sons a8 ed misstat gl neue) & Management ma ‘elationships and Teporting framew d party rel Collusion, conce, 'y be unaware of the existence of all related patty transactions, particularly if the applicable financi ork does not establish related party requirements lationships may present a greater opportunity fo" ‘alment or manipulation by management. 310pss? nave a level of Knowledge of the entiy’s business itor ™ fA val ‘gnable him to identify events, transactions and au 10 ate that Wi eS material effect on the financial statements oof NE that MAY tog parties and transactions between such parties 9190 xistence of rel nt yecause: The “portant {0 the auditor b the financial statements of certain wire disclosure in i + PRS arty relationships and transactions. rel : of related parties or related party transactions may Mes on er inancial statements. For example, the entity's tax afet the Moypense may be affected by tax laws which require aad eoasideration when related parties exist. the source of audit evidence affects the auditor's assessment ofits © Mpilty. A greater degree of reliance may be placed on audit ‘idence that is obtained from or created by unrelated third parties. a A related party transaction may be motivated by other than ordinary business considerations. In the absence of evidence to the contrary, related party transactions should not be assumed to be outside the ordinary course of business. However, the auditor should be aware of the possibility that transactions with related parties may have been motivated by conditions that are considered outside the ordinary course of business. Such conditions include: * Lack of sufficient working capital or credit to continue business. * An urgent desire for a continued favorable earnings record in {he hope of supporting the price of the company's stock. pependence on a single or relatively few products, customers, by ransactions for the ongoing success of the venture. Overly optimistic earnit nings for . Deelinin: scterized failures” industry characterized by a large number of business Excess capacity, Significant liti and mare G2tion, especially Iitigation between shareholders fad ment. icant danger of obsolescence. 311Discuss the matter with management. Re-evaluate the integrity of management ang lu that this may have on the reliability of oPresentan® thy written) and audit evidence in general, a ng wh, © Take appropriate actions, including determining the p ~ ‘On the opinion in the auditor's report. 8a " QUESTION 24 What action should the auditor take when written represe, Management's responsibilities were not provided by m, anageths a feng ANSWER 24 The auditor shall disclaim an opinion on the financia} Statements a. The auditor concludes that there is Sufficient doubt . integrity of management such that the written ree, regarding management's responsibilities are unreliable Sema, b. Management does not provide the written "resena, X regarding management's responsibilities. vo ntioned circumstances are ‘antamount to, The aforemey is both material and Pervasive. limitation that QUESTION 25 What are subsequent events? ANSWER 25 Subsequent event financial statement: become known to t! QUESTION 26 SSESTION 26 What are the two types of subsequent events? ISWER 26 ANSWER 26 deals with the treatment PAS 10, ‘Events After Reporting Period”, we bl financial statements of events, both favorable and unfavorable, en facut between the end of the reporting period and the Gea a financial statements are authorized for issue. It identifies Subsequent events: its are events Occurring between the Gate of the Is and the date of the auditor's report, nd facts that the auditor after the date of the auditor's repor, 322yo ins numerous represen obtains tations fr - yditor Cf an audit, some writte m se most GEER ring hile written representations ie oe ne thereby Fequiring that an aus oro erga ae NOt, he from his client Te ey written esentations’, the auditor Shall requ ‘om _ from management wit @Ppropriate Tes ae sossottaltatements and knowledge nanc ten 'SPonsibiy Of the Matters concerey.”® by te gestion z2 at comprises the written Tepresentations about Management’, Wronsbillies? SWER 22 auditor should request management re einlons about ke responsibilities to a z 3 $ 3 3 5 s 8 a ation and maintenance internal RieParation and presentation «> financial ate free from material mic Statement, whether due to fraud or error. To provide the auditor with: * All information, SUCh as records and documentation, and other Matters that are relevant to th the financial st '© Preparation and presentation of fatements, Any additional information that the auditor may request from management, nrestricted @ccess to those within the entity from whom the auditor d Stermines it necessary to obtain audi evidence. tat actions Should the auditor take when Presentations were not provided by Management? R ; 2etebement does not provide *esentations, the auditor shall: requested written 7 itten One or more of the requested write 321nts, Those events that provide evidence went Even the date of the financial statements. ister gtment to the financial statements NiO, require . nts. Those events that provide evidence 6 of sequent after the date of the financial statements. ne5y subse arose Fcjosure in, but not adjustment to, the type 1 subsequent events. g of xan vents relate to conditions existing at or before the subsequent Over ments that affect estimates inherent in the 19 oy the nan financial statements. Accordingly, the financial peonss t Fruld De adjusted for any material changes in estimates, sales ‘consist of: Resolution ity already had a present obligation. the entity already cai ‘a customer which occurs after the reporting period. Ban The discovery sorrect. ‘ : wee of inventories after the reporting period may give evidence | after the reporting period of a court case because it | | about the net realizable value at reporting date. of fraud or errors that show the financial statements JESTION 28 Give examples of type 2 subsequent events. ANSWER 28 Type II subsequent events relate to conditions that did not exist at or before the date of the financial statements, but are disclosed because they may be of such significance that the financial statements would be ee if the events are not disclosed. Examples of these events | include: & Business combinations after the reporting period. ¢. Plan to discontinue an operation. 'ssuance of new notes, bonds, or other indebtedness after the a. CPerting period. * Damage from fire, flood, or other casualty. 323QUESTION 29 Define the following terms: @. Date of the financial statements b. Date of approval of the financial statements ©. Date of the auditor's report | d. Date the financial statements are issued ANSWER 29 The date of the financial statements is the date of latest period covered by the financial Statements. fs Nd gy referred to as the balance sheet date or the reporting date" Some. ting The date of approval of the financial Statements ig Which all the statements that comprise the financiat stator’ Se | been prepared and those with the recognized Authority ponents tae | that they have taken responsibility for those financial Stateme — nts The date of the auditor's report is the date the audito report on the financial statements, dates te The date the fin: d refers to the | the auditors report and audited financial Statements acta | available to third parties ae ie QUESTION 30 What is the auditor’ an audit of financial ANSWER 30 ancial statements are issue: 's responsibility with res Pect to subsequ statements? stent ety Financial statements may be affected by certai the date of the financial Statements. An auditor's Fesponsibilty retatng to these Subsequent events in an audit Of financial statements | addressed in PSA 560, “Subsequent Events”. in events that occur ate, losure in, the financial statements hae led. The auditor is not, however, expected to pet ludit procedures on matters to which previously aie! dures have provided Satisfactory conclusions been identifi additional ai audit proce, 324 questionst the proce at are nts occurrir vith eve wre d ate of the audi suSWER SY uditor shall Tre nid from thy mitor’s Teport, OF foxe into account ure and extent following: a. Obtaining an established to b. Inquiring of n with governe occurred whic c. Reading mii management held after the matters disci yet available d. Reading the if any. When, as a res events that rer statements, the appropriately re WESTION 32 What is the au known to the a date the financ ANSWER 32 The auditor egarding the However, whe date the finan auditor that, h -..©——rr—.... llr CUgot procedures to be perfo Med by th the auditor o eats oooUTNG DELWERN the date of ney OF concern cul man i rer 2 auditor's report? 2! Slatemenie and este os 1 shall perform the procedures re sre audio om the date of the financial statements fat they cover oe pot ort, oF 88 near as tors Practicable theretg, ‘iN ton : Bye nto account the auditor's risk asceee term Shall tye and extent of SUCH aucit procedeess” which sha neg (otoing ing an understanding of an, orepished to ensure that sub: inquiring of management and, where with governance as to whether an occurred which might affect the financidy Statements, Reading minutes of the meetings, © yanagement and those charged with govern held after the date of the financial stateron matters discussed at an Y Procedures manag SoRUER evens are uanageme™ as @ppropriate, those char Subsequent events have ich mi yet available. Me are not 6. Reading the entity's latest subsequent interim fa ifany. When, a5 a result of the procedures avents that require adjustment of, % statements, the auditor shall deter appropriately reflected in those finang! QUESTION 32 What is the auditor's responsibility known to the auditor after the d; date the financial st Performed, the aueitor identifies " eXisclosure in, the financial Fann’ whether such events. are ial statements, 'y with respect to facts which become ‘ate of the auditor's report but before the latements are issued? ANSWER 32 Ihe £2S_N© obligation to perform any audit procedures gg the financial statements atter the date ofthe audliers report ate pe When, after the date of the auultor’s Teport but before the ete the financial statements ave issued, a fact becomes known tothe “uilor that, had it been known to the auditor at the date of the auditor's 325Teport, may have caused the auditor to amend the BUditop, auditor shall: Sr a. Discuss the matter with management ani id, ‘ a Wh | : those charged with governance. ere eg, subs b. Determine whether the financial statements neag ameng % as‘ ©. Inquire how management intends to address the manent the financial statements. ter, 5 Y “(De JESTION 33 } of | des With regards to facts which become known to the auditor aft Of the auditor's report but before the date the financial state’ €t, p. Pro ised, what should he auditor do it management amay ets stal Statements as deemed fit by the auditor? Finan ee } fine ANSWER 33 fing 'fmanagement amends the financial Statements, igement ar the auditor shay Ques’ 3 Carry out the audit procedures necessary in the circu the amendment. stan, | with ®. Extend the audit procedures to the date ofthe new auditors ate ® Provide a new auditors report on. the amended qt ieeued statements and the new auditor's report shall Not be dated en a ‘han the date of approval of the amended finanocy Statements sw When the law, regulation or the financial Feporting framework does fe Prohibit management from festricting the amendment of the financis When qnalements to the effects of the subsequent event or events causig | circur that amendment and those responsible. fer approving the finans then: Statements are not prohibited from Testricting their approval to te amendment, the auditor is permitted to restrict the audit procedures 1 aol Subsequent events required to that amendment. In such cases, te 7 auditor shall either at a. Amend the auditor's report to include an additional date restice! 7 to ithat amendment that thereby indicates that the audios 2 Procedures on subsequent events are restricted solely tot fi amendment of the financial statements described in the tee! | Note to the finar ncial statements, When the auditor amends the auditor's Teport to na Que Additional date restricted to that amendment, the dale JP | et auditor's report on the financial statements prior ae! | Wha Subsequent amendment by management remains ul *@ | know because this wor date informs the reader as to when the ou utd | those financial statements was completed. However. | 326 :included in the auditors report tg date ors procedures subsequent to thor date yo™ USers that the audtiorent amendment of the financial Statements, Seed to the shoal dating his is kno sre following is an illustration of such an Addition, al date “pote of auditor's report), except as to Note y + Which ig tion of audit procedures. resin SS of (Date 6 ean Note Y).” ed to amendmes, je @ New or amended auditors eso in an Emphante ot Matter paragraph ot uses a paragraph that conveys. that tne auditor subsequent events are restricted solely tee pas fnandal Statements as descried in’ oat financial statements mort has already been provided to the entity, the rotify Management and those charged with "ol to issue the financial statements to third parties ments have been made. if the theless subsequently issued without the auditor shall take appropriate \ce on the auditor's report Ments are nevert necessary amendments, 10n, tO Seek to prevent relian: QUESTION a5 wihat 's the auditor's responsibility with respect to facts which became "ow tothe auditor after the financial statements have boca issued’ act 327pose financial sat6™EN do p, wncial ssaterments Of Subsidiary ca en i al Sted fOr ON COs beat ing standards, the fnanciay ‘ olidated. 7 atom, tin i a ‘Repired (0 09 COS cause ofthe pervasive effect soarscussed in the precedin ae ter iso ements _afe NOt Presented j ad fay 2 mation Lis in accordance with Philippine Financia what form of negative assurance won there is a Scope limitation? i in a review engagery Wed bye practioner whe sWER 13 ere has been a material scope limitation, the practitioner sho, ny the limitation. a. Describ a b. Either express regarding the pos might have been existed, oF not provi Of the limitaton is so significant ‘oncludes that no level of assur yualification of the nec 2 gulitatore tote anc lene Se eat Nd eins eri te ce wten fe poste eerie QUESTION 14 Which types 2014 and PSAE 3000, resp PSRE 2400, PStE review engagements fall under tively? ANSWER 14 ‘The effects of the amendments to PSRE 2400 and 2410 are as flow information by? PSRE 2400 applies to reviews of historical finay practioner other than the entity's auditor, information by PSRE 2410 applies to review of historical financial entity's auditor. PSAE E 3000 applies to reviews of other historical information 366mapoee Of PERE 2410 “Revie, of at a erned by the Independent Auditor of tne wooo" NOFIN Finan he Entity cial of PERE 2410 is to establish Wards ‘mance on the auditor's professionay AESPONSibilties winger’, Provide oerees an engagemont to eview interim dient, and on the form and “an financial info content of the 7 TION 16 ation ir of an the objective of an engagement to Feview interim Whemation by an entity's auditors i financial ISWER 16 ses of PFRS 2410, interim financi Information is financial oe that is prepared an in a spplicable financial reporting f cordance with an framework and complete or a condensed set of f Comprises either a Pancial statements for a periog that is shorter than the entity's financial year QUESTION 17 What comprises “related services"? ANSWER 17 Related services comprise of agreed-upon procedures (aurs) eo Compilations engagements Independence is not requir Practitioner wi hen performing related services. i ide {he Philippine Standards on Related Services (PSRs) prov “andards and guidance on related service engagemer 367JUESTION 18 What is an agreed-upon procedures engagement ANSWER 18 PSRS 4400, “Engagements to Perform Agreeg. Regarding Financial Information” (formerly PSA 2,UPON_p, Objective of an agreed-upon procedures auditor to carry out procedures of an audit na and the entity and any appropriate third Pai report on factual findings. » State ura ments Ha © Whi for ties have ae ai The report is restricted to those parties tha Procedures to be performed since others, u the procedures, may misinterpret the results QUESTION 19 What assurance does an a Provides? it have agn maware of the net ® greed-upon procedures engagen, fe ANSWER 19 An “agreed-upon procedures engagement provides no a Instead, users of the report assess for es themselves the Procedures any QUESTION 20 Is independence required in performing agreed-upon procedus engagements? ANSWER 20 Independence is not required in performing agreed-upon procedut! engagements as provided in the Securities Regulation Code ce However, when the auditor is not independent, a statement '0 effect would be made in the report of factual findings. QUESTION 21 What are the general principles governing an agreed-upon engagement? procedut® 368 ANSWER 21 in performing an agr should Comply with the * Accountants” b. Conduct an agre with PSRS 4400. ¢. Comply with the t a UESTION 22 What are the proce engagement? ANSWER 22 The auditor should « evidence obtained « procedures applied procedures may incl Inquiry and ana Recomputation, Observation. Inspection. Obtaining confi QUESTION 23 What are the conte an agreed-upon pr eoaegD ANSWER 23 The report on a describe the pu engagement in st nature and the ex The contents of aassurance cedures and lusions from procedures procedures sode (SRC) nent to that vx perorming @% 80F@4-UPON procedurg snould engagemen, ‘comply with, the m sountants” auditor “Ci ‘ode of Professional Eh, eS for Conduct an agreed-upon pr. Centied Py with PSRS 4400, Procedures engagement = Comply with the terms of the engagem "9 accordance ent cyssTiON 22 ‘are the procedures perform " 'ed in an agreed-upon pr rement? PON procedures susWER 22 ‘re auditor should carry out the proced Tigence obtained as the basis for the Tate ea eae nderceee applied in. an engagement lo. perm findings. The procedures may include the following FM agreed-upon ‘a Inquiry and analysis. f Recomputation, comparison and other cle ; er clerical accuracy ¢. Observation. Re Sot ee d e. Inspection. Obtaining confirmations. QUESTION 23 What are the contents ofa report of factual findings isvedn relation to an agreed-upon procedures engagement? ANSWER 23 The report on an agree describe the purpose and engagement in sufficiont detal © ‘enable the re nature and the extent of the work performed. é-upon procedures engagement needs 10 on raced proceauts oe i yader to ‘understand the The contents of a report of factual findings are 2s fol0WSlytothe ontity’s med solely to a ices 4400p ees aya 2B, Bast You in evatuatng $ocoun summarized as foie," 1 is on Related Sa; aces 1a, NE vale ot ae We obtained and checked the accounts payable as at (date) e218 of the inay ledger account. ance inthe reat pena tated general We compared the attached lst (n major suppliers and the amounts owen ths ex ames and amounts in the tial balance? &t (A) to the prs We obtained suppliers’ statements or confirm balances owing at (date) Fequested supplies to We compared such statements orc reeretasone ory HOC Conan sat aad wo identified and listed outstanding invoices cal rece sod | pore igene pt beetrntod | jocated and examined such invoices ard. crest nots | Subsequently received and’ checks subsequently pad ard we | Sscertained that they should in fact have been lsted as Se a neeadatone We report our findings below: | With respect to item 1 we found the adton to be correct and the | total amount to be in agreement. | With respect to item 2 we found the amounts compared 19 bein | agreement. | statements | With respect to item 3 we found there were SUPPIES statements | for all such suppliers. | s agreed, of with With respect to item 4 we find tte anos erat, = Mercer fo arnounts which dd TO 20ers nates, jared reconciliations an | Company has Pretend cheats 1 Pe a sopcrate | sted as reconciling items W" following exceptions: | ems with the folowing ts cling tt (oetalhe exception) y an audit oF @ constitute either ar pine ‘Standards: =r auating and |‘* Addressee (ordinarily the client who engag perform the agreed-upon Procedures). — «Identification of specific financial or Non-financiaj ™ which the agreed-upon procedures have been a ntormay A statement that the procedures Performed w 3 *PPlieg "nj: upon with the recipient. ® those 5 + A statement that the engagement was perfop— : with P: 0. Med ina A statement that the auditor is not i Cong Independent of the a -Suchisthecase. iy Identification of the purpose for which the agreed Procedures were performed. ‘eon 2A listing of the specific procedures erformed | © A description of the auditor's factual findings incuas-—— details of errors and exceptions found 9 Sufi * Astatement that the procedures perfoy med | _ either an audit or a review and, as Such, |__ expressed do not conga — Onstitvig —~ NO assurance jg ‘ance jg * statement that had the auditor performed adaiion Procedures, an audit or a review, other matters might hav | _to light that would have been reported. - ¢ come A statement that the report is restricted to those pa |__agreed to the procedures to be performed. | © Astatement (when applicable) that the re | elements, accounts, items or financial an | _ information specified and that it does |__ financial statements taken as a whole | Date ofthe report, [* Auditor's address. Le L* Auditor's signature. me QUESTION 24 Give an example of a report on factual findings les that hag” Port relates only oe > id non-financial Not extend to the entiys ANSWER 24 pe As illustrated in PSRS 4400, a Report of Factual Findings ™4Y as follows We have performed the procedures agreed eG Compal below with respect to the accounts payable of not show? ag | (date), set forth in the accompanying schedules (Pe oe iM example). Our engagement was undertaken in a0 370n Review nts, Tepes. ny assurance On the accounts payable ay gh . 3s al 2 z % Pr mes eacnional procedures Of Nad we we performed, So financial statements in. ag, fess "evn ey Epsre Soe Phiiepine Sian matters might have come to our to Font | Enaeae “an reported t0 YOU: en | Peto coda g frouid nave been FeP* purpose set forth in the first mation and is not to be useq fo Sed for he Sorat | our report is solely fo te xd to any other parties. This re rt and for your infor [hs so oto be csribute bniy to the accounts an fo any financial statemen id items specified above and dogs a” My 1s of HSC Company, taken as a yj 8 QUESTION 25 What is a compilation engagement? ANSWER 25 PSRS 4410, “Engagements to Compile Financial Information’ (tomes, PSA 930), states that the objective of a compilation engagement the accountant to use accounting expertise, as opposed to aud expertise, to collect, classify and summarize financial information. Th entails reducing detailed data to a manageable and understandate form without a requirement to test the assertions underlying te information i A compilation engagement would ordinarily include the preparation financial statements (which may or may not be a complete sé? financial statements). Engagements to provide limited assistance client in the preparation of financial statements (for example, on t selection of an appropriate accounting policy), is not considered ® engagement to compile financial information. UESTION 26 What assurance is provided in a compilation engagement? ANSWER 26 The procedure: S employed designed and do not enable t financial information yo 1 in a compilation engagement By | the accountant to express any git | Nevertheless, users of the 372 ‘al information feantatant’sinvowver aceresional compete or ESTION 27 ig independence red ANSWER 27 = with agreed-UPC as Mrequired in_pe! psRS 4410. Simi Flatement to that ef QUESTION 28 What are the gener ANSWER 28 In performing a cot a. Comply with t Accountants” b. Issue a repor financial inforn QUESTION 29 What are the proc ANSWER 29 To compile finane @ Obtain a gen entity b. Be familiar industry in wi of the financi ©. Read the fin be appropn misstatemen The accountant icial information May derive. so oan t's Involvement because fame bene aa ess0nal ‘competence and due care, °° 88 been pean, he independence reaired in performing compiay ion eng agements? formed with ySWERZT wah agreed-upon procedures enga ements, Mquired in performing compilation ements, dependences a 38 4410. Simialy, where the accountant reo Droved in Faement to that effect would be made inthe compl ok independ, jlaton report. QUESTION 28 What are the general principles governin 1g a compilation er ngagement? ANSWER 28 Inperforming a compilation engagement, an accountant shoud a. Comply with the "Code of Professional Ethics for Cetfied Pubic Accountants”. fague 2 report when an accountants name 's associated wit b, financial information compiled by him. QUESTION 29 What are the procedures perfor ANSWER 29 To compile financial information, th a. Obtain a general knowedge of the busin b eae iar with he sao a and Ce aoe misstatements. med in a compilation engagement? ‘e accountant should: cess and operations ft ‘The accountant ia. Make any inquiries of Management to completeness of the information Provideg b. Assess internal controls. Verify any matters. d. Verify any explanations QUESTION 30 {2 compilation engagement, what will the a ASsegy the ° ‘Count, that the information coming from mar Nt do if, incomplete? magement ig if? Sap, Comey ANSWER 30 If the accountant becomes aware th at inf management is incorrect, incomplete, or otha ration sy accountant should consider performing the Necessa, Ore request management to provide additional in formation, !f management refuses to provide additional informas accountant should withdraw from the engagement ang inform ett Of the reasons for the withdrawal the ent The PERSs and any known departures therefrom shout within the financial information, though their effects quantified. Id be discloses Need not te If the accountant becomes aware of material misstatements, te accountant should request the client's management to mat appropriate amendments. If such amendments are not made and te financial information is still considered to be misleading, the accout should withdraw from the engagement QUESTION 31 to obian# In a compilation engagement, does an accountant need representation letter from the client? ANSWER 31 = iat v8 The accountant should obtain an acknowledgment fO0 Tart oF its responsibilty for the appropriate presentation ion ot information and of its approval of the financial iNET nanaget™ | acknowledgement is ordinarily expressed } representation letter. | 374a vynat re the content of iS WVER 32 fon compilation engager nraon ont COMPilation n report Contents of a c, ‘ompilation Report Tite ‘srosseo ‘A slaiement that the engagement with PSRS 4410, was performed in accordance A statomont thatthe such isthe case ienifeaton ofthe anil nomaton nag ata information provided by managomant "based on eet A statement that management I responaitie y _ information compiled by the accountant ® A statement that nether an aust nora review has be "| ‘ose “nancial information." “**wance 18 expressed on the +A paragraph, when considered necessary, draving anton w accounting principles inthe Phiippines, [Date ofthe report Accouniant’s address [e Accountant's signature ‘accountant is not 118 not independent of te enti g for the financial 8, the make vd the ntant In addition, the compiled financial statements should contain a reference such as "Unaudited", “Compiled without Audit or Review” ot “Refer to Compilation Report” on each page ofthe financial information or on the front of the complete set of financial statements WESTION 33 Give examples of compilation reports ANSWER 33 Acompilation report is as follows:wuLnrneined. or its 2 of icial icial ting es. tion itor alid adit cial ANSWER 4 The generalizations about the ‘reliability of audit evidence are as follows: 1. Audit evidence is more reliable when it is obtained from independent sources outside the entity. 2. Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective. 3. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. 4. Audit evidence is more reliable when it exists in documentary form, whether paper, electronic, or other medium. 5. Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles. QUESTION 5 Explain the nature of evidence that the auditor expects to gather. ANSWER 5 In most cases, the auditor relies on audit evidence that is persuasive rather than convincing. The auditor should consider the cost-benefit relationship in gathering evidence, such that the cost of obtaining evidence should not exceed the usefulness or benefits to be achieved from such evidence. However, the matter of difficulty and expense involved in testing a particular item is not in itself a valid basis for omitting the test. QUESTION 6 What are financial statement assertions? ANSWER 6 Management is responsible for the fair presentation of financial statements. In representing 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, management makes certain assertions. These assertions are called financial statement assertions. QUESTION 7 What are the three categories of assertions that management uses in 7that this risk is reduced to an acceptably low level. Audit risk is the risk that the i a appropriately modify his opinion on an Materially misstated. It can be expressed as: AUDIT RISK hat Ri y Unknowingly fail, | Statements that a x CR x pp or \ AUDIT Risk SeGlR “x "eR x (APxTD) Where: jg = Inherent risk CR Control risk OR Detection risk AP = Analytical, Procedures risk nd other relevant substantive Procedures TD = Test of details allowable risk of incorrect acceptance for this Substantive Procedure For sampling PUTPOSeS, audit risk can nonsampling risks, be atfected by sampling and QUESTION 40 What is Fonsampling risk? ANSWER 19 Nonsampling risk an erroneous co) Sample, such as arises from factors that cause the audit. for to reach clusion for any reason "Ot elated to the sinc of the 2. The failure to select appropriate The failure to recognise Misstat Audit prog Misinterpreting th fements © Fesults of audit tests, ‘edures, c, " documents examined. Nonsampling 9 risk results from human en Number of j Error. It exists ara ems selected from a population fo! testing, “9*less ofthe ich is attributable to the auditor, it lated but can be appropriately reduce 7 Proper 9: sweriston and revi othe sua 2 Since nonsampling tisk is a risk whi can never be elimin ‘engagement plannin 120Rie see | |n other words, the risk of assessing control me too pan is the gg that the assessed level of control risk based on : Samp n greater than the true operating effectiveness of the con rol Structurg Policy or procedure. This ris ncems audit efficiency and is likely to result in Greate, ied ton "The cuchors over-assessment of control risk m, Tesult to an unnecessary increase or extension of the Substantive Procedures. For instance, when an auditor concludes that Contra) tisk is high, he generally sets a lower acceptable level of detection, risk and expands the Scope of his substantive procedures in order The risk of assessing control isk too high is also termed a type | €rror, alpha risk, or the risk of under-reliance. It refers to the risk that ‘gree of reliance on the does not justify such The risk of assessing control {oo low is more important to audi | it the risk of assessing control risk too high Fs than QUESTION 14 SSESTION 14 Explain the two types of substantive Procedures sampling risks, 122QUESTION 11 What is sampling risk? ANSWER 11 Sampling tisk is the probability that a Properly drawn sample may not be representative of the population; that is, the auditor's conclusion, based on a sample may be differ . werent from the conclusion reached if the entire population were subjected to the f the sample chosen may not be representative of the true Population characteristic. Sampling risk can be reduced can be eliminated if the audi population. QUESTION 12 What are the types of sampling risk? by increasing sample size, and such risk tor chooses to examine all items in the ANSWER 12 There two types of sampling risks are: 1. Tests of control sampling risks * _ Risk of assessing control risk too high. * Risk of assessing control risk too low. 2. Substantive procedure sampling risks * Risk of incorrect rejection. * Risk of incorrect acceptance. QUESTION 13 Explain the two types of tests of control ‘sampling risks. ANSWER 13 Tests of control sampling risks may be classified into: a. Risk of assessing control risk too high. \t refers to the risk that Sample does not support the auditor's planned degree of reliance on the control when the true compliance rate supports such reliance. 121 hs ee ofANSWER 14 substantive procedures sampling risks maybe classified into: a. Risk of incorrect rejection. It refers to the risk that the sample supports the conclusion that the recorded account balance is materially misstated when in fact, it is not materially misstated. This risk relates to the audit efficiency. Because of the risk involved in sampling, an auditor might select a sample containing disproportionately more misstatements than the population contains. However, the audit client would likely maintain that the balance is properly stated. The auditor would then perform additional procedures and gather supplementary evidence to confirm or dispel his previous findings, thus, resulting to additional effort and extra spending. The risk of incorrect rejection is also called a type 1 error or alpha risk. This risk is similar to the risk of assessing control risk too high for tests of control. b. Risk of incorrect acceptance. It refers to the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact, it is materially misstated. This risk relates to audit effectiveness. Owing to sampling risk, an auditor might select a sample containing disproportionately less misstatements than the population contains. If the auditor incorrectly accepts a materially misstated account balance as fairly stated, this would cause the auditor to express an unmodified opinion on financial statements that actually departs from PFRSs. To sum up, audit ineffectiveness results to audit failure. The risk of incorrect rejection is also called a type 2 error or beta tisk. This risk is similar to the risk of assessing control risk too low for tests of control. The risk of incorrect acceptance is far more consequential to the auditor than the risk of incorrect rejection. QUESTION 15 What is the meaning of the term “confidence level” for audit sampling Purposes? 123a4 e reliability leyey ANSWER 15, |, also called th Vel, ig , The larg ohana risk. Hence, for a test of contro, if the rt moan control risk too low is 10%, the auditor’ ice rniog leva i 90% (100% - 10%). For a substantive procedure, ; e tes of incor, acceptance is 15%, the auditor's confidence level is 85% (1099, ; ). 15% QUESTION 16 Define the term “population” and “sampling unit". ANSWER 16 Population refers to the entire set of data from which a Sample is Selected ang about which the auditor wishes to draw Conclusions, Sampling unit, on the other hand, is defined as the individual items constituting a population, QUESTION 17 What are the common Methods of Selecting Samples? ANSWER 17 Systematic sampling & Stratified sampling Haphazard sampling & Block sampling, The random, Systematic, and stratifieg Selection method in Dloved for both statistical sang Nonstatistical say pea iMpling ay in contrast, the haphazard on block “sampling mathogy aches appropriate for statistical sampling, QUESTION 18 QUESTION 18 Explain random sampling, ( 124ANSWER 18 Random or probability sampling involves selecting it population so that each item has an equal or known chanee fore selected. Random selection requires the use of random Number tables or computer programs. A random number table is composed of a list of randomly selected number which may be used by the auditor. The random number generators are computer Programs that generate the random numbers for the auditor. The auditor should make sure that the sample being selected is representative of the population from which it is drawn. Random sampling typically involves the following steps: ¢ Relating identifying numbers population. « Deriving a random sample from th fandom number table or a rand program. (r letters) to sampling units in the he population with the aid of a lom number generator computer The sampling unit may be in Physical terms. identifiers are check number, invoice number, warehouse row. Examples of physical » Page number, and Random sampling may be restricted or unrestricted. In unrestricted or simple random sampling with replacement a fixed number of items are selected. Each time an item is selected, any item on the frame can be selected into the sample once again. This means that a sample item can be selected into the sample multiple times. In restricted or simple random sampling without replacement, a fixed number of items are selected each time. An item can be selected into the sample only once; therefore, the sample contains unique items. Only items not selected earlier can be selected into the sample. It is one of the most common methods of random sampling. For the same sample size, simple random sampling without replacement will always be statistically more efficient than simple random sampling with replacement. Random sampling may be used for both statistical and nonstatistical Sampling. QUESTION 19 Explain systematic sampling. 125ee ANSWER 19 Systematic or interv: Consists of sequencin, interval sampling 9 all items it ie rder. The lation. Sampling units are Put in numerical o} Popul divides the Udi, i: baseg ON the Is of equal sizes Population into n interval ample (on f nln ink that must be chosen for meant He then chen te sampling Unit from each of the derives interval can be determined by dividing the Population Size (Ny ir by the required Sample size (n), For stance, if the Population is composed of 1,000 a ee the desireg Sample size ig 100 units, the auditor selects a Fandom farting en one and ¢} ‘© sampling interval of 19 (1,000/1909), then randomly Chooses the first Sampling unit from After inclu ing the rando star Auditor the, e the first interval rt unit (e.g. 8S part of the Sample, the then Sequentially Selects, every 10th item of the px Pulation (eg, 14", 2g 34%), Typically, thig @PProach resuits in a tru random sample. Howey if a pate, the pop lation Xists that Ncides with the Selection interval, a biag sy result," R instance, if every 19h Samplin unit or Multiples of 0 @PPeNs to be a ‘©Partmental wenager, then Ss the random * the sample derived may Weld either aly 7s Partmental nage, ‘One. Nay, “theless, the Possibility of inte ducing a bias into Mle as a ult Of a patere ; the a tion fe nimized bY Using ™ultipie starting poe i I eon Process oy Sing an interval that does. Not Ncide with When there ig PO numerical g uen, i secre at CT Ee ur yy Sampling. if Gocuments, ;4° ‘Ords, of F2NSactions Fe ya” Fandom here is no Need with Matic ‘AMDIing to Number th a numbered, rand ber table selection €S inVolveq — © require num ering. ti Sampling interval ac Physically’ the ge ly. ; matic samp the aeack the Basis for select the ag ner ne QUESTION 20 Explain stratified sampling, ANSWER 20 Stratification ‘Simply involves Subdividing the Por int. 126* Be | trata, each of which is a group of sar sub} a ar characteristics. Stratification of which | hay* « usually based on the recorded book value pulatioas wherein the population is divided into strata the line values and a sample is selected independenth their Stratified sampling enables the auditor to direct his ee which contains the greatest potential misstatem ell will focus his attention in auditing larger value it ciated fraud and errors). mpling units accounting amounts of according to ly from each IS audit effort ent (e.g., the lems to detect stratified sampling is used when a population has a high variability, that is, certain parts of the Population are distinct from the other Parts. For instance, some accounts in the population are stated in terms on millions, while others, only in thousands or hundreds. Stratified sampling may be used for both statistical and nonstatistical sampling. QUESTION 21 Explain haphazard sampling. ANSWER 21 Haphazard sampling involves selecting items from the population without following a structured technique. Simply stated, in haphazard Sampling, the auditor must select sample items without regard to their size, shape, location, or other physical features. However, the auditor should avoid any conscious bias in the selection of population items, for example, by selecting only unusual or physically small Omitting the first or last items in a population. Auditors are r exercise due care in selectin sampling. items, or equired to ig representative samples using haphazard Haphazard selection, however, is not appropriate when using statistical Sampling because it does not allow the auditor to measure the Probability of selecting a given combination of sampling units. STION 22 Explain block sampling ANSWER 22 pases or Cluster sampling involves selecting items from the ation in contiguous groups (or blocks) 127QUESTION 7 Give examples of circumstances that may dicate related party transactions. the Reviewing ite © transactio recognize ANSWER 7 4. Reviewiny sonfirmat The auditor should be alert of transactions which abe, iwolved Gitoumstances and that may indicate the ¢ istence “sug. e. Reviewin unidentified related parties Examples include: Ce of Pree of an eq @. Transactions which have abnormal terms of trade. After determ, prices, interest rates, absence Of guarantece a 38 ung an autor st terms. "aime ee b. Transactions which lack an Parent logical by their occurrence, a *88en he Sina ‘once © Transactions in which Substance differs from form identification ¢ Transactions processed in @n unusual manner disclosures & High volume or significant Wransactions with Certain cus, ‘Suppliers. Storer, WON f Unrecorded transactions such &S the receipt of ro sas | management services at no charge. Provision Explain the | related par | QUESTION g ANSWER What Procedures should the auditor Perform to ide lentify the risks If the audi Traterial misstatements @SSociated with relateq ips ipiher renal ist “lated party relationships xa concernin, concludes ANSWER 8 adequate Lack of ¢ The auditor Shall perform audit 'ssuance Felevant to identifying the tisks of 7 on materi with related party relationships ang Party tra fread Necessitz ™aterialit & Understanding the entity's ransactio, EST! ©. Maintaining alertness for related Tecords and docu, What pr S Sharing relateq Party information with the engagement team ents ated ANS) The following audit procedures are also useful in identtying ronal WE transactions With relateg Parties ang identifying transactions ips | Lit be indicative of 4 relations he in Of the existence Of previously undetermine the fine Performing detailed tests of transactions and balances. Reviewing Minutes, of meetir tors. NQS of shareholders and direc 312ing ACCOUNtING records fo, lar Rie one of balances Paying parigg wecigzed tof rear the wg bo Confimations of loang 'eP° i fevemshone from banks to discov any investment tran, © ran equity interest in a jo SACHONS, for 9, Int Venture of oth De determining that a related party transact Amjuditor should obtain Understanaing ofthe transaction. auditor should obtain a writ werd te oe On representation SS Of inform, Management On provided 1 weaton of related parties andar ad mgaring the daclosures inthe financial statements SAUACY Of rata Party QUESTION 9 Explain the auditor's reporting Tesponsibilities with ‘eated parties and related party transactions: Mt '®8Pect to an enttys it report appropriately 'er Of an opinion, - Inadequate disclosur mater depending of related rial misstatement that will Opinion, also, depending on and/or pervasiveness, QUESTION 9 What procedures &re to be performed by an auditor with regards the Hents tigations ang claims? ASWER 9 *eation u : | afect on and claims involving an entity may have a material *e financial ste fents, and thus, may be required to be disclosed a 313nancial statements. tne ator jor ut procedures in Order 10 bec “ ator 800,27 mvaiing the entity which may gr® Ay, tne a nd lal management is the Tyg 6 on at since 9 Priman, any iigatee yatement ies, the auditor's Sour Y rial misstate™’r' contingencies, 1S Procedure.” mmateration about $M = ri include propriate inquires of MANAGEMENt incturing a Making 41 . tions. oy representa! minutes and correspe ce with - board i Reviewing " yers lawng legal expense accounts. c jarding the entt information obtained regi Stn mation obtained from discussions with any a. using any ‘ ho including infor legal department. QUESTION 10 What is the auditor's responsibility regarding an audit Client's ig, contingencies? ANSWER 10 Alloss contingency that arises from litigation and claims is Not only ax accounting and disclosure matter but also a legal matter, since ty probability and amount of loss is determined by arbitration administrative proceeding, or the courts. Hence, determining the existence of a loss contingency is often a legal question, requiing ha an auditor communicate directly with the entity's lawyers to assist hin in obtaining sufficient appropriate audit evidence as to whehe Potentially material litigation and claims are known and managemetts estimates of the financial implications, including costs, are reliable. QUESTION 114 What is the priman d y feason why an auditor requests that a lette ¢ inquiry be sent to a . x client's attorney? ANSWER 11 a x inquiry corroborat furnished man es the information prepares ot About tigation, claims and asescement. It shoul alent’ externa n29eMent but sent by the auditor and request ‘Swvers to communicate directly with the auditor q he letter woulg ordinarily specify: 314 titi list of franage™ and its © involved: requet © manager informatic for incorre ne auditor © audit report a formation question: he ¢ what is t te auditor jegal counse ANSWER 1: If managem with the ent and should opinion. QUESTION What is the respond ap ANSWER. If the law tespond ir Sufficient procedure limitation pinion. QUESTIO What is n to continuBi igation and claims. “plist of a &sSessment of th, 7 manag > End ts ' out; estimate of the inane impin ae that the lawyer Confirms : A gnagement’s assessments th a aso, sess Nd provig, a sation ifthe list is consider’, by the ang tor wt at eet © Pe incomplo tor considers the Status of egal m, Toor} In some instances, the Auditor may nee the date of the ‘omation from lawyers, °c int QUESTION 12 What is the effect on the augj luditor's Teport if man, Si issi ent refuses to auditor permission to communicate T Meet ive il counsel? Set the clients external ANSWER 12 ''management refuses to Give the auditor Permission to og with the entity's lawyers, this would be Mensidered as a scope Municate and should Ordinarily leag toa Qualifieg Opin SCOpe limitation ~ ora disclaimer of opinion. QUESTION 43 What is the effect on t re he auditor's report it {he client's lawyer refuses to spond appropriately to a letter Of inquiry? ANSWER 43 Tefuses to iditor is unable to obtain by applying alternative Would consider wh tT there is a management's fesponsibilit Ue as Going concern? 'y with respect to the entity's abilityA 14 The Philippines Accounting Standards (pq, make an explicit and specific assesg AS) requ, lent fe continue as a going concern OF an = Mang a a erty QUESTION 1 In assessing whether the going concern %y example management takes into “account all” scst™Btion ig , ME Stan orth foreseeable future, which should be at lease intone Prop, balance sheet date. if there is a history 2S" twelve mocton ts, gNSWER 16 ready access to financial resources Managert2ble opens ie! listed in ; Si a li assessment with detailed analysis MEN may Oa BSnditions th a Sssumption’ Management should take note that the ‘ associated with the outcome of an event oe Of 5 Financial i significantly the farther into the future ¢o judgment oration yey Net liabi the outcome of an event or condition Mt being macy ° Paed-te Atay prospec QUESTION 15 term bor « Indicatic ' What is auditor's responsibility with respect to a cli * fnanela continue as a going concern? Sat entitys ably + Adverse e Substar ANSWER 15 of assel © Arrears With respect to a client's ability to continue a + Inability ee Sa goi | 970, “Going Concem" states that the audit. should ebony: nab abbropriate audit evidence about the appropriateness n° manageren = can use of the going concern assumption in tre reparaion ay *—‘nabily Presentation of the financial statements. Based on the audit evidence obtained, the auditor should determine whether material uncerany Operating exists related to events or conditions that may Cast significant doubt o the entity's ability to continue as a going concern, and decide on te « Manag effect on the auditor's report. coe « Losso 7 lout, a Loss ¢ Material uncertainties refer to uncertainties related to eae H jemi conditions which may cast significant doubt on the cals es continue as a going concern that should be disclosed in the fi cece statements. * Emerc ditions that may cas Oth The auditor cannot predict future events or condi a absence of a") ers an entity to cease to continue as a going oe r's report cannot be © Non-c reference to going concern uncertainty in an out or ontinae ‘as 2 going © Pend: viewed as a guarantee as to the entity's ability to may, concern. able t 316 Bean4 f conditions an ymples o" one contity’s going concern, a id events, that may Cag ihiticant out in PSA 570, th Cast si As Tons that may fondo ssorton i puoncial Netliablty Or net current Hiabiity Position * Fixed-term borrowings a pre Maturity With rospects of renewal or rey ayMent; of ex Ce borrowings to finance | © {ollowing arg e 'anificant doube about" les of Mt the oj events. o, "9 Concern Out realistic long-term ee ‘eliance on Short. ications of withdrawal of finanger Support by . cave operating cash flows iNdicateg by histores "financial statements. SPective Adverse key financial ratiog . ‘antial operating losses or Significa ‘yess riSed t0 generate cash tyne Seteroration in the value + Arrears or discontinuance Of dividends. + Inabilty to pay creditors on dye dates, + Inability to comply with the terms of loan agreements, + Change from credit to Cash-on-delivery transactions with Suppliers, + Inability to obtain financing for ®ssential new product development or other essential investments, ati * Management intentions to liquidate the Entity oF to cease operations. * Loss of key Management without replacement, * Loss of @ major market, key customer(s), franchise, license, or Principal suppliers, * Labor difficulties « Shortages Of important Supplies. 4 Mergence o} f a highly successful competitor, Others Non-compliance with capital or other statutory isabel a Pending tegat Sr regulatory proceedings against the shay if Successful, result in Claims that the entity is unli able to Satisfy, 317law or regulation or government poy, Ye 4 int tthe entity, ameimderinsured catastrophes When they, ey, | QUESTION 17 the auditor do when events oF conditions y What should tne or ability to continue as a goin senet on an entity's ability 9 concen rau identified? SWER 17 or conditions have been identified that may ca ts ° eat othe entity's ability to continue as a going Concern, thea Should obtain sufficient appropriate audit evidence tg death Shother or not a material uncertainty exists through,“ addtional audit procedures, and consider managemen 9% mitigate such doubt, such as the following: are Plans to dispose of assets a. Restrictions on disposal of assets, such as Covenants jin such transactions in loan or similar agreeme i encumbrances against assets a b. Apparent marketability of assets that management plans nz Possible direct or indirect effects of disposal of assets c. Plans to borrow money or restructure debt a. Availability of debt financing, including existing or commie credit arrangements, such as lines of credit or arrangemens for factoring receivables or sale-leaseback of assets b. Existing or committed arrangements to restructure ¢ subordinate debt or to guarantee loans to the entity Possible effects on management's borrowing plans of exsitt restrictions on additional borrowing or the sufficiency available collateral Plans to reduce or delay expenditures a. Apparent feasibility of plans to i administrative expenditures, to postpone main research and development projects, or to lease '@ purchase asset aelaye! b. Possible direct or indirect effects of reduced °F expenditures a reduce ovethead tenance ther that Plans to increase Ownership equity 318feasibility of ding, existing oF “comming ca Own incijonal capita sting or committed arrangemen Bemrements OF to accelerate or other investors Plans to j 8 0 rey ce 8h cietribut” auditor's reporting "esponsibilt wwrat rc ‘concern problem? - ety ySWER 18 auditor concludes that the wen the is appropriate in the With, Fespect 0 an USE Of the Qoin Mstance, circ 329 concer nty exists, the audiior shal! qeree™™ Whether 2 atrial vesrents adequately describe the princinen eves om we 10 uncortainty ce Well 2s the many Sore. inancial oF Conditions that t's plang for future wate disclosure is made in the financial Statements in », Sl ye concern problem, the auditor Should express. a moans. jon with an emphasis Of matter Paragraph to highlight ang draw atenton to the uncertainty. If adequate disclosure is not {nancial statements in relation lot made in the to a going concern Problem, the auditor should express either a qualified or adverse opinion, tin the auditor's judgment, the USE Of the going co, tot appropriate, but the financi nceM assumption ig ial statements have still been Prepared © auditor should e XPFESS an adverse. on a going concern basis. tk option, management ig bevilling to make or extend its assessment when Bruested to do so by the Auditor, the auditor sh ‘issue a qualifieg ‘ould consider the need Opinion or disclaim an Opinion as a result of the ‘on on the scope of the auditor's work. TION 19 What is, the form often used to record written Tepresentations of management? ASWER 19 fa " "epresentations from management shall be in the form of 319resentation letter. A management represen; vention by the management to the auditor congetter IMming it, "a representations made to him during the course of pygo™ The purpose of the management representation jg that the financial statements are management's fae thus management has the primary responsiblity fre eema” Also, this leter provides supplementary audit evige®™ ther" nature by giving formal management replies to audi regarding matters that did not come to’ the Auditors, dues Performing audit procedures. Management Tepreseny tent Prevents or minimizes any misunderstanding between the ton et dior his client. Some auditors request written representations of aj} financia, items. All auditors require representations Tegarding "re, inventories, plant and equipment, liabilities, and subsequent tate Vents QUESTION 20 What are the basic elements of a management FEDTeSentation late ANSWER 20 When requesting a management representation letter, the audi Wwould request that it be addressed to the auditors, costa speci information and be appropriately dated and signed, Ordinarily be dated the A management representation letter would 1@ completion date of the same date as the auditors’ report, that is, th audit. However, in certain circumstances, a separate representation letter regarding specific transactions may also be obtained during te course of the audit or at a date after the date of the auditors’ report (€.g., on the date of a public offering), A management representation letter would ordinarily be signed by the members of management who have primary responsibility for the a and its financial aspects, ordinarily the senior executive officer ae senior financial officer. Nevertheless, in certain Ste Ee auditors may wish to obtain representation letters from other me! of management. QUESTION 21 ent’ , to cle What is the auditor's responsibility with respect representations during an audit? 320ANSWER 35, After the financial statements have been issued, ) ‘Obligation to perform any audit procedures ri ial statem« artng a, | wan see statements M8 ta we determined & aT However, when after the financial statements have been i. ANSWER 37 becomes known to the auditor that, had it been known, to tat ay, ere the date of the aucitor's report, may have caused the a i | i managemen the auditor's report, the auditor shall: to amt nyone A @. Discuss the matter with management and, Where - | 4 oreomstans those charged with governance. Prob, | ie auctor b. Determine whether the financial statements neeq amend evernance. ©. Inquire how management intends to address the mate” auditor's Mn financial statements Tiny, | charg QUESTION 36 What should the auditor do if Management di financial statements | auditor shall | | auditor's repc leCid QUESTION: ides with respect to facts which become jomend te | What should autor after the financial statements have been issue’ KO™M tog, procedures « ANSWER 36 ANSWER 3 'fmanagement amends the financial statements, the Auditor shay, | tthe audi | omitted du @. Carry out the audit Procedures necessary in the Circumstances 9, | importance the amendment . tis opinion b. Review the steps taken by management to ensure that anyone, ability to si receipt of the previously issued financial Statements together yy 07 hiS pit the auditor's report thereon is informed of the situation, i procedure: © Extend the audit procedures to the date of the Tew auditors rep, fekponty and date the new auditor's report no earlier than the date were! approval of the amended financial statements; and d. Amend the auditor's report or QUESTION 37 With respect to facts which become known to the 328 auditor after aCHARAAMS REVIEW AND RELATED SERVICEg ESsTI N14 gement? what is 2 review enga: ANSWER 1 “Engagements to Review Financial St that the objective of a review ator inane pSRE 2400 previously PSA 910, states statements is tO enable a practitioner to state whether, on the provedures which do a Prirovide all the evidence that er: in an audit, anything has ‘come to the practitioner's se rerave that the financial statemens 5 that causes the practitioner to in all material respects, in accordance with generaly al not prepared, " ¢ accepted accounting principles in the Philippines. QUESTION 2 What type of assurance is provided in a review engagement? ANSWER 2 A review engagement provides 2 moderate OF limited level n subject to review is free of mat nce. the informatio! This is expresse' ‘m of negative assural assurance that misstatement. d in the for QUESTION 3 What are the general principles 9' overning a review engagemen” ANSWER 3 Id: Ww engagement shoul cs for certified nt The practitioner who performs a revie rofessional Ethi RE 2400- a. Comply with the “Code of Pr Accountants”. b. Conduct a review in accordance with PS! e mae The natu! The woul being Althe ina madi and assu For t the 5 throu concet tn Dosh nc toners wa Ne Meum What act tons 'ake the HOU the a Mecessary anne, Milor ent do take the necessary caps : t eamin receipt of the previously, SSSued financial ayer that anjoned ofthe situation and does ney ‘amend the fi where the auditor believes atements stances where ey Need to be ae ameedtor shall notly the manageses 2nd those charger tm ance, that the auditor will secs Prevent future range, Mth gars report. If, despite such "Take atOn. management othe Sage win goverance cone aes necessary a, OSE ior shall t@Ke Appropriate action to ge e ‘to's report. ent rlance on the VESTION 3 ek 10 prev ubsequently discovered that there are urse of the audit? ANSWER 38 Hine audtr Subsequently discovered that there are Procedures oni uring the course of the audi, he eat 88055. the impotence of the omitted procedures to the avait” ability to support his opinion. If omission of the proce, ‘ot apply the omitted procedure if the results of other procedures that were applied tend to compensate f for the procedure omitted, 329taken at meetings of shar cermin actrees of the board of directors & ‘i inques directo rect the financial statements, 1 othe ooo pat MEY Se statements {0 COnSIGET, On the pg meet pe financial Cauditor's attention, whether the fee 009 ing it a rieaon a peat 10 conform with the basis of acon! statement ” indicated . itioner should 150 consider obtaining @ representation jy he practi ( from the lent question 6 What is the reporting resp engagement? onsibility of the practitioner in a rey ANSWER 6 rhe practioner should issue @ review report which contains a dex Witten expression of negative assurance. The practitioner shou review and assess the conclusions drawn from the evidence obizines as the basis for the expression of negative assurance The report on a review of financial statements should describe the scope of the engagement to enable the reader to understand the nature of the work performed and make it clear that an audit was re performed and, therefore, an audit opinion is not expressed. QUESTION 7 What are the contents of a review report? ANSWER 7 As sated in PSRE 2400, the report on a review of financial state Contain the following basic elements . ——_— = sments (Gentiication of the financial stateme” which the review has been perform * Astatement of the responsibilty of —~ Statement of negative asst Practitioner's address Practitioner's signature QUESTION 8 In what situa report? ANSWER 8 The practition a. Sufficient basis for >. There ar financial WUESTION { Give an exar ANSWER 9 AN unqualifieform the revie and perfor Profesg; Plan nizing that circumstances 2 exist which cae Skepticism, MN nts to be materially misstateq the financial Sate sufficient appropriate evig, Onredures to be able te issue a prot QuEsTION 4 iat is the Meaning of the “scope of a review? wri ANSWER 4 of a review refers to the oe circumstances to achieve t Ugh in, uit Negative assuraned ad Analytical review Procedures deemeg ne he objective of the Feview, "=°88ary The practitioner sh ‘ould apply nature, timing and e, judgment in Getermining the specific xtent of review Procedures, The practitioner shoul apply the same re ietiality considerations ag Mould be applied if an audit pinion on the financial Statements were being given, fihough there is a greater st tat misstatements will not be detected a review than in an audit, the judgment as to what is Material is Made by reference to the information 0n which the Auditor is eportir and n ® of those relying on that information, not to the level cf 'Ssurance Provided 3 Obtaining an understanding of the entity's business and the industry in which Operates, >. Inquiries sneering the entitys accounting ideas mecedures fon Fecording, classifying and sumi Ae8actions, al Procedures designed INdividuaa it to identify relationships and ‘©™s that appear unusual 361was not the entity's managemey the nt of the Practitioner, ~— Describes the nature of " Of a review. incugas— * A reference to the Philippine Stange Review Engagements (esr) 200 oA Statement that a review is imisg primarily to inquiries and procedures. oe * Astatement that an Performed, that the procedures undertaken | Provide less assurance than an audit. and. that an audit opinion is not expressed |_T2* AN AUCH opinion is not exp “Nothing has come to the auditor's ® attention..." ‘eSponsibiity |] audit has not been Date the review is completed: the review report should not be dated earlier than the date on which the financial statements were approved by management QUESTION 8 In what situations sh ctitioner issue an unqualified review I ations should a practitioner Is report? ANSWER 8 ate review The practitioner should issue an unqualified me 3 yathere serve se have been 9 2. Sufficient appropriate evidence To ance cee basis for the issuance of neg be i that should be MACE s, 1 modifications that Sr wi b. The re no material hem financial statements in ol der to make QUESTION 9 if Give an example of an unqual ANSWER 9 sen tlo i i An unqualified review report S ied review report 363review in accordance with Philippine a a conducted OUF NE o9. This standard requires that we terial a Enmore ‘obtain moderate assurance as to wi conclude or incor bid ‘ae free of material misstatement. misleading inquiries of company personnel ang a gone financial data and thus provides less a ESTION 12 We have not performed an audit and, accordingy examples of 0 4 Give ‘on our review, nothing has come to our attention that ANSWER 12 financial stat eres that the accompanying financial statements ay Bi Fad fay, in all material respects 1° accordance with Phiggay = ee cial Reporting Standards. ij —— | (Introductory pi | (Scope pare QUESTION 10 What are the conditions in which the practitioner is required to modiy his review report? | Management ha cost which is in ANSWER 10 computation, w | valued at the lo | Philippine Fine The practitioner should modify his review report when: decreased by P : hs statements were not prepared in accordance wit | have been decr s Sur a b. There is a scope limitation Eas | ventory descr sor {our attention t | financial state “ ; in accordance ' egegviw engagement, what form of negative assurance should ee. ¥ the practitioner when there is a departure from PFRS? wey An adverse repc if matters : [ aa Wnt = 2 soe to the attention of the practitioner that in | (Introductor material re: ments under review are not presented! gi) | Standards Pe": in accordance with Philippine Financial Re?! = the practitioner should. ‘ 364euch meters, ci + 6 the Roane sn c8 8 Quadtcay, Eaner &XPTESS 8 qualification, | 0"%Ycabie t . oF ve an ach the wovmrerts 310 Tol presenrer'®, Sttemen sta ri Sccordance with PFRSs Y: iN all my, statement is issued on} ny when th 1 effect * and pervasive to the finan oft woot oF incomplete nature of the finan eae 10 cial Question 12 Gye examples of modified review reports due to g Ue to departure f piSWER 12 review report with qualification for a departure trom PERS is show, re Bey - FF (introductory paragraph, the same with unqualified re review report) | tom PERS, (Scope paragraph, the same with unqualified review report Management has informed us that inventory has been stats cost which is in excess of its net realizable van "hdonegea neat ‘computation, which we have reviewed, shows that inventory, | valued at the lower of cost and net realizable value as required by Philippine Financial Reporting Standards, would have been | decreased by Pxxx, and net income and shareholders’ equity would have been decreased by Pxxx. Based on our review, except for the effects of the overstatement of inventory described in the previous paragraph, nothing has come to fur attention that causes us to believe that the accompanyieg financial staternents are not presented fairy, in all material respects In accordance with Philippine Financial Reporting Standards. n below An adverse report for a departure from PFRS is show Sao (Introductory paragraph, the same with unqualifi | socap paraqrach eae wii 365CHAPTER 10 SPECIAL PURP og, AUDITS AND OTHER ASSURAN(y, ENGAGEMENTs QUESTION 4 What is a special purpose framework? ANSWER 1 PSA 800, “Special Considerations ~ Audit of Financial Ste, Prepared in Accordance with Special Purpose Framewor ae special considerations in the application of PSAS to an aud igs statements prepared in accordance with a special purpose fran e; A special purpose framework is a financial reporting res designed to meet the financial information needs of spec wx Special purpose financial statements are financial stim prepared in accordance with a special purpose framework. QUESTION 2 Give examples of special purpose frameworks. ANSWER 2 Examples of special purpose frameworks are a. A tax basis of accounting for a set of financial s accompany an entity's tax return b. The cash receipts and disbursements basis of aCCOUn™ 4g flow information that an entity may be requested © ° creditors ws re c. The financial reporting provisions established PY * meet the requirements of that regulator d. The financial reporting provisions of a contra indenture, a loan agreement, or a project grant ct, sucr 396 QuesTION 3 what are the purpose audit ANSWER 3 In an audit ¢ obtain an unt a. The purr pb. The inte’ c. The ste financial QUESTION What are tl special purr ANSWER 4 In the cas statements, a. Descrit prepare the sf informe b. Include framev explan statem deter accep! c. includ! audito accor. accou be su parag QUESTIC Give an ¢ statemenin the case of an auditor's report on special purpose financial diatements, the auditor's report should ‘a Describe the purpose for which the financial statements are and, if necessary, the intended users, or refer to a note in fhe special purpose financial statements that contains that information. b Include, if management has a choice of financial reporting frameworks in the preparation of such financial statements, an explanation of management's responsibility for the financial statements and also make reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances. c. Include an Emphasis of Matter paragraph alerting users of the auditor's report that the financial statements are prepared in accordance with a special purpose framework (e.g., tax basis of accounting) and that, as a result, the financial statements may not be suitable for another purpose. The auditor shall include this Paragraph under an appropriate heading. QUESTION 5 Sve an example of a special purpose audit report based on financial that have been prepared by management in accordance 397a ee reporting Provis © Coma, Y ft ‘ erat financial the accompanying take fe nave audited Tr ice the balance sheet as at yes ™» am which com statement, statement of change es company: corr’ 20x5, and tne ratement for the year then ended, ang = and cash few policies and other explanatory. Tin countin so acoosroments have been prepared by mo, informal nage The financial Stirred on the financial reporting ¢, ey HSC COMPANY contract dated January 1, 20x5 been Sompeny ‘and MEA Company (‘the contract”) Ween nt's Responsibility for the Financial Statements | Manageme ent is responsible for the preparation of thes, | Beaters in accordance with the financial reporting monet Section Y of the contract; this includes the design, implemen st ‘and maintenance of internal control relevant to the prepa financial statements that are free from material migstajg 4 ate whether due to fraud or error. =) Auditor's Responsibility Our responsibility is to express an opinion on these fang statements based on our audit. We conducted our audit , accordance with Philippine Standards on Auditing. Those standat require that we comply with ethical requirements and plan arf perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement An audit involves performing pr to obtain audit evident about the amounts and disclosures in the financial statements. Tht procedures selected depend on the auditor's judgment, including, the assessment of the risks of material misstatement of the finandd) statements, whether due to fraud or error. In making those fit | assessments, the auditor considers internal control relevant to entity's preparation of the financial statements in order to des@t audit procedures that are appropriate in the circumstances, butt | for the purpose of expressing an opinion on the effectiveness | entity's internal control. An audit also includes evaluating appropriateness of accounting policies used on nent, Se rapleness of accounting estimates made by manage Lwell as evaluating the cveral, pisseniton ooo 398sibility ‘5 Respo"s ‘Auditor to express an OPINION on thes, responsibly, “our audit. We conducted our than ‘staternentS bas Philippine Standards on Auditing. Thosg « 2utn ! with with ethical requirements ap, “ngs jaccordance, mply wire that we COMPY. sonable assurance about woah form the au fom material misstatemen, ‘ster financial stateme’ idit to obtal nts are free fr forming procedures t0 obtain aug, « ‘An audit inv josures in the financial avid about the anus ood on the auditor's judgnee =. procedures Sorry ane risks of material misstatement ofthe the assessor ther due to fraud OF error. In making hr statements, Wit auditor considers internal control relavant’ assessmerTaraton of the financial statements in order igo ents coedures that are appropriate in the circumstancas, pq for the purpose of expressing an opinion on me; effectiveness, on Phiys intemal contol. An audit also. includes. evaluaing appropriateness of accounting policies used ang ePerrableness of accounting estimates made by management fal as evaluating the overall presentation of the tna statements. jolves pel We believe that the audit evidence we have obtained is sufigey and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements of HSC Partnership for te year ended December 31, 20x: prepared, in all matetd fespects, in accordance with (describe the applicable income ta law) of Jurisdiction X. | Basis of Accounting and Restriction on Distribution prea Statements are prepared to assist the partners of recut the 'n preparing their individual income tax returns. the financial statements may not be suitable for an rt fens r Should not be distributed to or used by partes Partnership and its partner: pritiout Modifying our opinion, we draw attention to Note Z tole nancial statements, which describes the basis of accounting a Purpose. Our report is intended solely for HSC Partnership aM ive & st in aceanciay tation, believe that the audit o : appropriate to provide a ys We ha " PO 2 aud op suticent our opinion, the financial stay ended December 31 2x5 er e od . mMpany te . As, in accordance with the 2° rat nel a ail material in Y of the contract. cial reporting Provisions of s of Accounting and Restriction on Dig ib | distribution and Us. i modifying our opinion id Use i ial statements, which dee raw attention to Note x to the | scribe ‘ial statern S the basis nc lents “are prepared to assist Gh gceeuntng. The . Compar ny to ply with the finan mal wh te facial pein prowsn sy aoether purpose. une aneial statements may not be cana | MEA Company and ports intended solely for HSC Cea offal te #4 and should not be distrib ‘SC Company In HSC Company or MEA Company, °° B82 4 ee QUESTION 6 Give an example of a special pur pose audit report base selements that have been prepared in accordance wih inex bans accounting. ANSWER 6 je have audited the accompanying financial statements of HSC | lartnership, which comprise the balance sheet as at December 31, | 20x5, and the income statement for the year then ended, and al immary of significant accounting policies and other explanatory ormation. The financial statements have been prepared by, Imanagement using the tax basis of accounting in Jurisdiction X lanagement's Responsibility for the Financial Statements the preparation of these financial th the tax basis ‘of accounting /Management is responsible fo tatements in accordance wit d risdiction X; this includes the design. implemen. oh aintenance of internal control relevent 1 eeeee of specific elements, accounts or items of a financial exam? ow? Sent. ps? ance with PSA 805, “Special Considerations — Audits of ccord arr ial Statements and Specific Elements, Accounts or Items ¥ Eriol Statement”, an auditor may be asked to examine specific 7) Fig accounts or items of a financial statement that include Sementss unts receivable, allowance for doubtful accounts receivable, a. Aco rory, the liability for accrued benefits of a private pension plan, inver corded value of identified intangible assets, or the liability for thefred but not reported” claims in an insurance portfolio, including related notes. ‘a schedule of externally managed assets and income of a private sion plan, including related notes. igchedule of net tangible assets, including related notes ; a schedule of disbursements in relation to a lease property, 4 ‘eluding explanatory notes ‘A schedule of profit participation or employee bonuses, including $ explanatory notes. QUES’ |ON 8 What are the rules on reporting on the entity's complete set of financial statements and on a single financial statement or on a specific element of those financial statements? ANSWER 8 Ifthe auditor undertakes an engagement to report on a single financial Statement or on a specific element of a financial statement in Conjunction with an engagement to audit the entity's complete set of financial statements, the auditor shall express a separate opinion for each engagement. An audited single financial statement or an audited specific element of 4 financial statement may be published together with the entity's feet complete set of financial statements. If the auditor concludes dan”® Presentation of the single financial statement or of the specific "Ment of a financial statement does not differentiate it sufficiently pal the complete set of financial statements, the auditor shall ask the oeement to rectify the situation. The auditor shall also differentiate "on on the single financial statement or on the specific element 401ent from the opinion on the stator , © a financial ote The audito! shall not issue Con tenet ton on the sino Nanci ate. Sontaining the OPC financial statement Ung tant fic eter Sti tas Giterentiation w quesTiON® the entity’s comp} report on lete it the auditor ins a modified opinion, emphasis oy et statements Gs paragraph, what is its effect on the or oer sen statement or on a specific element? single fin ANSWER 9 the auditor's report on an entity's I the Cpr is modified, or that report inclutcg mae ur paragraph or an Other Matter paragraph, ar determine the effect that this| may have on the audio, ats single financial statement or on a specific element of those statements. if deemed appropriate, the auctor shal magi Ma on the single financial statement or on the specie © meh financial statement, or include an Emphasis of Matter par rap a, Other Matter paragraph in the auditor's report, accordingly, Mt Auditors Paras Step thet "Sent If the auditor concludes that it is necessary to express an a opinion or disclaim an opinion on the entily’s compete set yo statements as a whole, the auditor is not permitted to inca, Pp same auditor's report an unmodified opinion on a singe s.® statement that forms part of those financial statements or ON a spay element that forms part of those financial statements, This is set such an unmodified opinion would contradict the adverse opr disclaimer of opinion on the entity’s complete set of finan statements asa whole and would tantamount to exgessn, piecemeal opinion. QUESTION 10 Is an auditor allowed to issue an unmodified opinion on a sped element (e.g., accounts receivable) even though an advereo disclaimer of an opinion was expressed on the entity's complete sed financial statements? ANSWER 10 . se If an auditor Concludes that it is necessary to express an ate 402 woot op ™ 1h pul op Th en Is an financ an ac comp ans! ana finan audi the ¢ ever publ opin state statean opinion on the entity's complete set of financial hole but, in the context of a separate audit of a at is included in those financial statements, the disclaim as a Wi gate™e" ment that is includ ertheless considers it appropriate to express an unmodified fic epee aot" neva element, the auditor shal only do so if: or is not prohibited by law or regulation from doing so. 4 That opinion is expressed in an auditor's report that is not > upished together with the auditor's report containing the adverse inion oF disclaimer of opinion. : apie scic element does not constitute @ major portion of the ‘ prity’s complete set of financial statements. the auditor yESTION 14 |g an auditor allowed to issue an unmodified opinion on a specific fnancial statement (e.g., statement of financial position) even though an adverse OF disclaimer of an opinion was expressed on the entity's complete set of financial statements? ANSWER 14 An auditor is not allowed to issue an unmodified opinion on a single financial statement of a complete set of financial statements if the auditor has expressed an adverse opinion or disclaimed an opinion on the complete set of financial statements as a whole. This is the case even if the auditor's report on the single financial statement is not Published together with the auditor's report containing the adverse opinion or disclaimer of opinion. This is because a single financial statement is deemed to constitute a major portion of those financial statements. QUESTION 12 Gi idee example of an audit report issued in an audit of a specific nt, account or item of a financial statement. ANSWER 12 403_peaprsToM TO THe Schedule = Je for the Preparation of the . ent is resP0NSiPS tne financial he seh _gocordan scribe Feporting wath [oe mutator this includes," Pon ad maintenance of internal contol ri’, te ST le that is free from material n./2" m of the sched Set - id or error. to frau Finether due | auditors Responsibly | E | the sch iy foto empresa in Accom ‘chedulg whe | our PO conducted our audit in accordance wis a |ardords tn Auditing. Those standards require that ye. ANS tan nts and plan and perform the audit my | wih eMgpie assurance about whether the schedule is tag ye psi | material misstatement. | set | an audit involves performing procedures to obtain audit eviten ay | about the amounts and disclosures in the schedule. The proces | a selected depend on the auditor's judgment, including ty a ‘i assessment of the risks of material misstatement of the schedie ye whether due to fraud or error. In making those risk assessment | auditor considers internal control relevant to the entity's preparain _ Qui of the schedule in order to design audit procedures that ae with ethical requireme! appropriate in the circumstances, but not for the purpose d eet expressing an opinion on the effectiveness of the entity's intend control. An audit also includes evaluating the appropriateness d iu accounting policies used and the reasonableness of accouiy AN estimates made by management, as well as evaluating the ova! mn Presentation of the schedule. fine auc Bs believe that the audit evidence we have obtained is suffcat the and appropriate to provide a basis for our audit opinion. Opinion Qu nour : Wr lability pan the financial information in the schedule be ext Company a¢ Sued but not reported” claims of HSC Is! respects, g) Of December 31, 20x5 is prepared, in al AN Provisions estabien with [describe the financial 7e" E ished by the regulator]. Wr S98 OF Account sur i "9 and Restriction on Distribution - Without m, oi at Sched Hi] Our opinion, we draw attention to Not ¥ scribes the basis of accounting. 404Preparation es that are Purpose of y's internal riateness of accounting he overall s sufficient jule of the Insurance ‘ll material a reporting quesTION 13 nat are ‘summary financial statements"? ANSWER 13 psa 810, “Engagements to Report on defines summary financial statement ancl Statements” information that is derived from financial statements bet financial less detail than the financial statements, whic cut {at Contains Ssructured representation consistent with that provided by ovina. Statements of the entity's economic resources or obligetone oe intime or the changes therein for a period of ime, = “t@ Point QUESTION 14 Can an auditor accept an engagement to report on summary financial statements? ANSWER 14 The auditor can only accept an engagement to report on summary financial statements when he has also been engaged to conduct an audit in accordance with PSAs of the financial statements from which the summary financial statements are derived QUESTION 15 What phrases are most likely to be used in an auditor's report immary financial statements? expressing an unmodified opinion on su ANSWER 15 inion on the When the auditor has concluded that an unmodified opi on she ’5 opi summary financial statements is appropriate, the auditor oP y Use the following phrases 405jt are consistent, ji j statements ae cial § "Financial statements, in a in all 1CCOrdan ee , oF ; OF statements are a fair su ancial state” immar Fa ra tierent® in accordance with [the \ nc eg on té eying a audit report on summary e rules on the audi Y finan the U ited fang when qualified © an Emphasis of i te cweR 16 ¢ ited financial statement: ators rePrt S cons ee pinion mpnasis of Matter paragraph. or an Othe qui h, but the ‘auditor iS satisfied that the summary nana all material respects, with or are a far ts, in accordance with the a paragrapn summary of the audited financial statements, applied teria the auditor’ mon the summary finan statements shall: } a, State that the auditor's report OF the audited financial statemers contains ualified opinion, an Emphasis ‘of Matter paragraph, an other Matter paragraph basis for the qualified opinion ‘on the audited financial inion; or th Emphasis of Matter" rt on the audiet b. Describe the pestnat qualified OPINION or ithe auditor's eP! staternents the Other Matter paragraph incial statemen's i financial statements. +t thereof On the summary final . Describe the effec any. JESTION 17 at oe the rules on issuing an audit report on gummay snot eee . ‘when the auditor's repo! on ‘audited fina contains an adverse opinion oF disclaimer of an opinion ANSWER 17 tai ments Oo" ee When the auditor’ an Held erebdetdae audited final summary financial loloments si ot ey all ncial state nthe audio 406Bing ther Cia) fair the 2ial Its or al 1 that the auditor's report on the ate - at «+ Zetains a9 26VErS@ OPINION oF disclaneet eM Tania scribe the basis for that adverse pint! Obinion, *tatemeny fe that, @S a TesUlt Of the adveree” disclaimer oe inion, itis INAPPropriate to express an oO OF disci comion erancial statements, "pinion on the aime of summan Y yesTion te n should an auditor issue a wrrcial statements? | ySWER 18 yine summary financial statements are not consist epects, with OF are not a fair summary of teen gatements, in accordance with the applied enterin does not agree to make the necessary changes gxpress an adverse opinion on the summary fnaretal Modified opin) inion on the summary a nt, in all materi audited finance, “nd Management the auditor shail statements, (ueSTION 19 Give an example of an audit report on summary financial statements, ANSWER 19 The accompanying summary financial statements, which comprise | the summary balance sheet as at December 31, 20x6, the summary | income statement, summary statement of changes in equity and summary cash flow statement for the year then ended, and related | notes, are derived from the audited financial statements of HSC | Company for the year ended December 31, 20x5. We expressed an unmodified audit opinion on those financial statements in our report dated February 15, 20x6. Those financial statements, and the summary financial statements, do not reflect the effects of events that occurred s ent to the date of our report on those [financial statements | The summary financial statements do not contain all the disciosures Fequired by [describe financial reporting framework applied in the Preparation of the audited financial statements of HSC Company] Reading the summary financial statements, therefore, is nol 8 | Substitute for reading the audited financial statements of | Company, sill Lee isi Saasexpress an opinion on the summa our s procedures, which were co esse Phiippine Standard on Auditing (Pay ® Soscfted), Engagements to Report on ) a F Sumy, statements. y financie ents derived tom jy opinion, the summary finan © eee P of HSC y for the year enjg d financial statements ber 31, 20x5 are CON al respects, iy financial statements, 7 ESCribe estaba a}. UESTION 20 What is the meaning of “prospective financial information’? ANSWER 20 As dined in PSAE 3400 (previously PSA 810), “The Examination’ rospectve Financial Information’, prospective financial informat* peer financial information based on assumptions about even's ¥y occur in the future and possible actions by an entity. | Pros, a Pective financial information can be in the form of a forecast Projection or a cor 4 Projection forthe yom oo Path (2.g., a forecast for next year ae s thereafter), WUESTION 24 Explain ANSW Prospe Gener: by thir Foreci projec users under most assur asa: QUE Whaestimate assumptions on tation is based are not ,, hich u ments Pr info manage financial Im ‘ h sthetical assumptions, such Mreago, te t purpose of the information, 8sun, Mah, ive financial information Is properly prepa 1 red ‘assumptions oa % rospectve financial information e property Presente, The P' ‘assumptions are adequately isclosed, inclugin’ ®d material fe to whether they are best-estimate ase age n indication &°,cgumptions. ; ong ¢ ancial information |S prepared on a ¢, 2 3 hypo rospect n te vt historical financial statements, using pas a accounting principles rat question 25 which party is responsible for the preparation and presentation of prospective financial information? te ANSWER 25 Management is responsible for the preparation and presentation of the prospective financial information, including the identification ang ‘umptions on which it is based. The auditor is ofen ial information a gisclosure of the ass asked to examine and repo" fenhanee its credibility tt on the prospective financi QUESTION 26 What assurance doe: financial information? .¢ an auditor provide with respect to prospective ANSWER 26 d_ actions tht 10 events ant may Prospective financial information relates eve not yet occurred and may not actually occur while evidence ‘ available to support the assumptions on which the prose inant information is based, such evidence 'S generally fuwe ee a inesetore, speculative in nature, aS distinct trom , rae inarily available in the audit of historical fin f spinon 22 ae een is, therefore, not in a position ¥ express 2 ¢ ier the re: vective information will be achieved. sults shown in the PrOSe Th ; ts ees bien rsposina on the reasonableness Of managerant ns the auditor provides only a moderate [ev 1 of asst 410 bat tak the wt A Al baof assumptions as to future events vas ace and the actions mana, ment en ane information IS Prepared (best agtiont &XPect ma 2 oeement ®xpects to late 8Ssum, * ions), "* OF the date ESTION 22 What is a projection? ANSWER 22 a. Hypothetical assumptions abo ut future e actions which are not Necessarily expected toy ‘anagement when some entities are in a stancee 'ase of ene major change in the nature of Operations; or Considering a b. Amixture of best-esti imate and hypothetica| assumptions, QUESTION 23 Explain the uses of prospective financial information, ANSWER 23 and related circumstances that concern about the hypothetical tion. However, a projection may be issued t for general use. assumptions used in a project 48a supplement to a forecas! QUESTION 24 What are the auditor's Primary concerms wi ®xamination of prospective hen performing an financial information? ANSWER 24 In an engagement to examine prospective financial infomation, the Auditor should obtain sufficient appropriate evidence as to whether: 409 > 2 ~-of assumptions as to future ever pass ce and the actions Managemen Ot Manage P information s Prepared (bestegtim 2 SS .STION 22 what is projection? ANSWER 22 A projection refers to Prospective financial informatio, pasis of: Prepared on the | : Hypothetical assumptions about fy ! actions which are not Necessarily expects and Management when some entities are in a start-up petal Ke place, such as major change in the nature of Operations; or °° Considering a b. Amixture of best-estimate and hypothetical assumptions, QUESTION 23 Explain the uses of prospective financial information, ANSWER 23 Prospective financial informati General use refers to use by by third parties with whom thi OP are for either general or timit ge fed use, any third party. Limited use refers to use © responsible party is negotiating directly, assumptions used in a projection as a supplement to a forecast for QUESTION 24 QUESTION 24 What are the auditor's primary concerns when performing an examination of prospective financi ial information? ANSWER 24 In an engai gement to examine prospective financial information, the auditor sho uld obtain sufficient appropriate evidence as to whether: — 409te assumptions ‘i estimation is based are ical assumptions, such Ong ve fee of POO eof the information Aum f 1 in ral information iS Properly Prearag rr unten Unease, by he ant erst an Lard ns. y the mptions formation is properly Preseny - vans Se nance "Mdequately disclosed, including: 1g c men assum PT ner they are best-estimate assump on as 10 whe " ai assumptions ation is prepared on 4 . ypothetical ey ancial inform. a ial statements, usin a. The Prot nistorical financial a ‘ecounting principles: : s responsible for the preparation and presentation y party is 0 eer financial information? f ANSWER 25 tion and Presentatioy responsible for the preparat Dm th Mano tqrancal Information, including. the identification” ay discosure ofthe assumptions on which itis based The auaitors oye asked to examine and report onthe prospective financial informaim ‘enhance its credibility. Stay Prop, UESTION 26 What assurance does an auditor provide with respect to prospectie financial information? ANSWER 26 ape financial information relates to events and actions thal aval ected and may not actually occur, Whie evderes na ancil infer fonPort the assumptions on which the prospetié ed andthe ator’, 888d, such evidence is generally futue idence ordinarie re, SPeCulative in nature, as detinet 4m tw aon, The auger @ble in the audit of historical fnancd 28 to whothor ©: therefore, not in a Position to express #” ler : r cal Wilbe achieve °SU"S shown in the. prospective tha iS itor proon,tn® reasonableness of manager” Provides only a moderate level of assu 410nn, in the case of a aaa aa oof tion urance as to wheth, ive assurand er the a eaetie basis. fOr the Prospectiy®*um, ~ fi a ee Min z sher the prospective financial Ge the basis of the assumptcoat it ng a, stand red On jth generally a repeecordance ecepteg ang 280 |" refed it Stopes Note 7 = coneeming the achievabilty op aris 6 tive financial information, ©" "® ngs ny, hould be the date pr 7 set OF sl Procedures aye sent! ——_—_—— gocur. sevacanety } not be : I bese L a assun | peliev (QUESTION 29 the F sur Give an example of a report (unmodified) on a forecast Sep | ANSWER 29 eo Li _ a We have examined the forecast in accorda eo fance with Phil the pi Standard on Assurance Engagements 3400. Manager ®t? expe: tesponsible forthe forecast including the assumptions get serene fe ‘Aon which itis based. Set out in No = Based on our examination of QUES the evidenc Ques | assumptions, nothing has come to ee fi viden 1C€ Supporting the belive that these assumptions do not provide » rescore et What [te recast. Further incur sooo eae 8 feasonabe bass disclo: [he ba of he assumptions and is presented 1 en era (relevant fir IS presented in \ce | nancial reporting framework) in accordance wit ANSv | Actual resus Qe 'S are likel When |acpatd events fein pS different from the forecast sie prosp: Laenmeybe mara ly do not occur as expected and te ae Sash+ up Vhicy Unresch when, wer, WHEN IN the auditor's mere fees i, Sa oS” fete i “ pressing POStIVe Assurance regan’ Audion, br cease senteg sTION 27 Uding 2nd a mo a ae wnat ate he F9CI0S 10 be considereg ~ log ae Ment to examine pr, 31 tor bet c a ton? appre suSWER 27 "pri ia fore accepting an engagement 10 xa ; information, the auditor would congigee the Taomir8Petve financia) a. The intended use of the i ation Whether the information OF the > The nature of the asey estimate or hypothetical information, will be for gener: mptions, that ig assumptions information 4. The elements to be included in the e. The period covered by the informat ion tion of th, Ation ang UESTION 28 OF is often, What are the contents of a report on an examination of ation tp | financial information? OF Prospective | ANSWER 28 The report by an auditor on an examination of Prospective financial spective information should contain the following 1s that ze may I >ective |» Addressee. ees ne | + Identification of the prospective financial information m otihe Pi ancial |_| * Areference to the Philippine Standard on esuates peices ss an | applicable to the examination of prospective financial i a centre ee ad cial - jonsible for the prospective os |* A statement that management PA daira oe || financial information including the ei ents [based = Ray ee, MENT OEE u icted distribution ance: * A reference to the purpose and/or restricted distribution © Tr | 411ined the rae have exam Projecti hye rd on Assurance Ehose in accordance > dar a 202A ye for the projection inchade® 3400. Mann Phlipoin el 7 including th anagemart |e ® ‘on which it is based. © assumptions ome | jection has bee = i Nn prepar ‘s in a start-up phase, the projeceg “eerbe Punsiee [Shot assumptions that include hypothetie |Sents and management's actions that are jogo, consequently, readers are cautio {pot be appropriate for purposes other than has been AS th en Prepared using d Using @ al assumptions Not necessary seat ure ned that this projection a? pr | described above 1" MY | | on our examination of th | ev eeumptions, nothing has come to our attention nics oortng {palieve that these assumptions do not provide a pe — fhe projection, assuming that (state or refer D te eee |essumptions).. Further, in ur opinion, the projection “eer Jprepared on the basis of the assumptions ‘and is. presence | seecordance with (indicate the relevant financial reporting framenst) | | even if the events anticipated under the hypotheti | ical assumpti | described above occur, actual results are still ikely to be diferent ter | | he projection since other anticipated events frequently do not occur as erpecied and the variation may be material | | an ipa eee QUESTION 31 What opinion should the auditor express when the presentation and disclosure of the prospective financial information is in adequate? the causes us to ANSWER 31 .e presentation and disclosure of the When the auditor believes that the not adequate, the auditor should: prospective financial information is a. Express a qualified or adverse opinion in the report on the prospective financial information, or . Withdraw from the engagement as appropriate, WESTION 32 ns used tion What opinion should the auditor express when the assumpti 413basis for the preparatio,, nable oF reas Prog, vide 8 To Friemston : it one or more significant valet is for the prospecive Financia toy is of best-estimate assumptions o, that ay, ‘on the bask iptions do not provide a reasonabj, sig a asst formation given the hypothetica} assume hy inion in the report on the dverse opinic ess an e mation, Of cial infor b. atoraw from the engags Prose jement. IESTION 3: i te autor exB"688 When the exam, a ni bond ist preclude application of ong ont aT ee eoraliered igeessary in the circumstances? pr ANSWER 33 When the examination is affected by conditions that recht gpolcaion of one oF more procedures considered necessay inte circumstances, the auditor should: 2. Disclaim the opinion and describe the scope limitation in the rect on the prospective financial information, or b. Withdraw from the engagement.