Professional Documents
Culture Documents
CPAR Auditing Theory
CPAR Auditing Theory
Auditing
Theory
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASCs Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the
AASCs engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.
ASSURANCE ENGAGEMENTS
1. Assurance engagement means an agreement in which a particular expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible
party about the outcome of the evaluation or measurement of a subject matter against criteria.
2. Subject matter information refers to the outcome of the evaluation or measurement of a
subject matter.
3. In some assurance engagements, the evaluation or measurement of the subject I performed by
the responsible party, and the subject matter information is in the form of an assertion by the
responsible party that is made available to intended users (assertion-based engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that
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has performed the evaluation or measurement that is not available to the intended users in the
assurance report (direct reporting engagements)
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ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS
1. The objective of a review of financial statements is to enable a practitioner to state whether, on
the basis of procedures which do not provide all the evidence that would be require in an audit,
anything has come to the practitioners attention that causes the practitioner to believe that the
financial statements are not prepared, in all material respects, in accordance with an identified
financial reporting framework (negative assurance)
2. A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review the
reliability of an assertion that is the responsibility of one party for use by another party.
3. A review does not ordinarily involve an assessment of accounting and internal control systems,
tests of records and of responses to inquiries by obtaining corroborating evidence through
inspection, observation, confirmation and computation, which are procedures ordinarily
performed during an audit.
4. The level of assurance provided in a review report is less that that given in an audit report.
SUMMARY
Nature of service Audit Review Agreed-upon Compilation
Procedures
Level of High, but not Moderate No assurance No assurance
Assurance absolute assurance
Provided assurance
Report provided Positive assurance Negative Factual findings of Identification of
on assertion(s) assurance on procedures information
(Audit Report) assertion(s) compiled
(Review Report) (Compilation
Report)
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSQC1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL
FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES
PSA 220 (REVISED)
QUALITY CONTROL FOR AUDITS OF HISTORICAL FINANCIAL INFORMATION
PSA 210 [AMENDED BY PSA 700(REVISED)]
TERMS OF AUDIT ENGAGEMENTS
PSQC 1
1. The firm should establish a System of Quality Control to provide it with reasonable assurance
that:
a. The firm and its personnel comply with professional standards and regulatory and
legal requirements; and
b. The reports issued by the firm or engagement partners are appropriate in the
circumstances.
2. Elements of a System of Quality Control
a. Leadership responsibility for quality within the firm
b. Ethical requirements
c. Acceptance and continuance of client relationships and specific engagements.
d. Human resources
e. Engagement performance
f. Monitoring
It is in the interest of both client and auditor that the auditor sends an engagement
letter, preferably before the commencement of the engagement, to help in avoiding
misunderstandings with respect to the engagement.
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Principal Contents
An engagement letter would generally include reference to:
The objective of the audit of financial statements.
Managements responsibility for the financial statements.
The financial reporting framework adopted by management in
preparing the financial statements.
The scope of the audit, including reference to applicable
legislation, regulations or pronouncements of professional
bodies to which the auditor adheres.
The form of any reports or other communication of results of
the engagement.
The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent limitations of
any accounting and internal controls system, there is an
unavoidable risk that even some material misstatement may
remain undiscovered.
Unrestricted access to whatever records, documentation and
other information requested in connection with the audit.
3. Acceptance of a Change in Engagement
1. An auditor who, before the completion of the engagement, is requested to change
the engagement tone which provides a lower level of assurance, should consider the
appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result
from:
a. A change in circumstances affecting the need for the service;
b. A misunderstanding as to the nature of an audit or related service originally
requested; or
c. A restriction on the scope of the engagement, whether imposed by
management or caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for requesting a
change in the engagement)
3. A change would not be considered reasonable if it appeared that the change relates
to information that is incorrect, incomplete or otherwise unsatisfactory.
4. Before agreeing to change an audit engagement to a related service, an auditor
would also consider any legal or contractual implications of the change.
5. If the auditor concludes that there is reasonable justification to change the
engagement and if the audit work performed complies with the PSAs applicable to
the change engagement, the report issued would be that appropriate for the revised
terms of the engagement.
6. In order to avoid confusing the reader, the report would not include reference to:
a. The original engagement; or
b. Any procedures that may have been performed by the original engagement,
except where the engagement is changed to undertake agreed-upon
procedures.
7. Where the terms of the engagement are changed, the auditor and the client should
agree in the new terms.
8. The auditor should not agree to a change of engagement where there is no
reasonable justification for doing so.
9. If the auditor is unable to agree to a change of engagement and is not permitted to
continue the original engagement, the auditor should withdraw and consider
whether there is any obligation, contractual or otherwise, to report to other parties,
such as the board of directors or shareholders, the circumstances necessitating the
withdrawal.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
2. The auditor should perform the following activities at the beginning of the current audit
engagement:
Perform procedures regarding the continuance of the client relationship and the specific
audit engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.
Planning Activities
3. The auditor should establish the overall audit strategy for the audit. The overall audit strategy sets
the scope, timing and direction of the audit, and guides the development of the more detailed
audit plan
5. The auditor should develop an audit plan for the audit in order to reduce audit risk to an
acceptably low level.
6. The audit plan is more detailed than the overall audit strategy and includes the nature, timing and
extent of audit procedures to be performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
The overall audit strategy and the audit plan should be updated and changed as necessary during the
course of the audit.
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Direction, Supervision and Review
1. The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review their work.
2. The nature, timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including:
3. The auditor plans the nature, timing and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement.
Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.
1. The auditor may discuss elements of planning with those charged with governance and the entitys
management.
2. Discussions with those charged with governance ordinarily include the overall audit strategy and
timing of the audit, including any limitations thereon, or any additional requirements.
3. When discussion of matters included in the overall audit strategy or audit plan occur, care is
required in order not to compromise the effectiveness of the audit.
The auditor should perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
2. Communicate with the previous auditor, where there has been a change of auditors, in compliance
with relevant ethical requirements.
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT
1. The auditor should obtain an understanding of the entity and its environment, including its internal
control, sufficient to identify and assess the risks of material misstatement of the financial
statements whether due to fraud or error, and sufficient to design and perform further audit
procedures.
2. The auditor should perform the following risk assessment procedures to obtain an understanding
of the entity and its environment, including its internal control:
a.) Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
b.) Nature of the entity, including the entitys selection and application of accounting policies.
c.) Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
d.) Measurement and review of the entitys financial performance.
e.) Internal control.
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INTERNAL CONTROL
1. Internal control is the process designed and effected by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of the
entitys objectives with regard to:
Reliability of financial reporting;
Effectiveness and efficiency of operations; and
Compliance with applicable laws and regulations.
The control environment includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management concerning the entitys
internal control and its importance in the entity.
The auditor should obtain an understanding of the entitys risk assessment process, i.e., the entity
process for identifying business risks relevant to financial reporting objectives and deciding about
actions to address those risks, and the results thereof.
The auditor should obtain an understanding of the information system, including the related
business processes, relevant to financial reporting, including the following areas:
The classes of transactions in the entitys operations that is significant to the financial
statements.
The procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed and reported in the financial statements.
The related accounting records, whether electronic or manual, supporting information, and
specific accounts in the financial statements, in respect of initiating, recording, processing
and reporting transactions.
How the information system captures events and conditions, other than classes of
transactions that are significant to the financial statements.
The financial reporting process used to prepare the entitys financial statements, including
significant accounting estimates and disclosures.
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Control activities are the policies and procedures to help ensure that management directives are
carried out. Examples of control activities include those relating to the following:
Authorization
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Monitoring of controls involves assessing the design and operation of controls on a timely basis
and taking the necessary corrective actions modified for changes in conditions.
1. The auditor should identify and assess the risks of material misstatement at the financial
statements level, and at the assertion level for classes of transactions, account balances, and
disclosures.
2. The auditor:
Identifies risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
Relates the identified risks to what can go wrong at the assertion level;
Considers whether the risks are of a magnitude that could result in a material
misstatement of the financial statements; and
Considers the likelihood that the risks could result in a material misstatement of the
financial statements.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 330
THE AUDITORS PROCEDURES IN REPONSE TO ASSESSED RISKS
Overall responses
1. The auditor should determine overall responses to address the risks of material misstatement at
the financial statement level. Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism n
gathering and evaluating audit evidence
Assigning more experienced staff or those with special skills or using experts
Providing more supervision
Incorporating additional elements of unpredictability in the selection of further
audit procedures to be performed
Making general changes to the nature, timing or extent of audit procedures
Timing refers to when audit procedures are performed or the period or date to which the audit
evidence applies.
TESTS OF CONTROLS
1. The auditor is required to perform tests of controls when:
a. The auditors risk assessment includes an expectation of the operating effectiveness
of controls; or
b. When the substantive procedures alone do not provide sufficient appropriate audit
evidence at the assertion level
2. Tests of the operating effectiveness of controls are performed only on those controls that
the auditor has determined are suitably designed to prevent, or detect and correct, a
material misstatement in an assertion
3. Testing the operating effectiveness of controls includes obtaining evidence about:
a. How controls were applied at relevant times during the period under audit;
b. The consistency with which they were applied; and
c. By whom or by what means they were applied.
SUBSTANTIVE PROCEDURES
1. Substantive test procedures are performed in order to detect material misstatements at the
assertion level, and include:
Tests of details of classes of transactions, account balances, and disclosures; and
Substantive analytical procedures
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2. The auditors substantive procedures should include the following audit procedures related to
the financial statement closing process:
Agreeing or reconciling the financial statements with accounting records; and
Examining material journal entries and other adjustments made during the
course of preparing the financial statements
3. The auditor should perform audit procedures to evaluate whether the overall presentation of
the financial statements, including the related disclosures, are in accordance with the applicable
financial reporting framework.
Documentation
1. The auditor should document:
The overall responses to address the assessed risks of material misstatement at
the financial statement level and the nature, timing, and extent of the further
audit procedures;
The linkage of those procedures with the assessed risks at the assertion level;
and
The results of the audit procedures
2. If the auditor plans to use audit evidence about the operating effectiveness of controls obtained
in prior audits, the auditor should document the conclusions reached with regard to relying on
vcfsuch controls that were tested in a prior audit.
3. The auditors documentation should demonstrate that the financial statements agree or
reconcile with the underlying accounting records.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 320
AUDIT MATERIALITY
1. Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements
2. There is an inverse relationship between materiality and the level of audit risk
3. In evaluating whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework, the auditor should assess whether
the aggregate of uncorrected misstatements that have been identified during the audit is
material.
4. If the auditor concludes that the aggregate of uncorrected misstatements may be material, the
auditor needs to consider:
Reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements for the
misstatements identified
5. If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should consider the appropriate modification to the
auditors report.
6. If the auditor has identified a material misstatement resulting from error, the auditor should
communicate the misstatements to the appropriate level of management on a timely basis, and
consider the need to report it to those charged with governance.
PSA 520
ANALYTICAL PROCEDURES
1. Analytical procedures means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or which deviate from predicted amounts.
2. Analytical procedures also include consideration of comparisons of the entitys financial
statements:
a. Comparable information for prior periods
b. Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation
c. Similar industry information
3. Analytical procedures also include consideration of relationships:
a. Among elements of financial information that would be expected to conform to a
predictable patter based on the entitys experience, such as gross margin
percentages.
b. Between financial information and relevant no-financial information, such as payroll
costs to numbers and employees
4. The auditor should apply analytical procedures at the planning stage to assist in understanding
the business and in identifying areas of potential risk. Analytical procedures in planning the use
both financial and non-financial information.
5. The auditor should apply analytical procedures at or near the end of the audit when performing
an overall conclusion as to whether the financial statements as a whole are consistent with the
auditors knowledge of the business.
6. The application of analytical procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the contrary. The presence of
these relationships provides audit evidence as to the completeness, accuracy and validity of the
data produced by the accounting system
7. The extent of reliance that the auditor places on the results of analytical procedures depends on
the following factors:
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a. Materiality of the items involved
b. Other audit procedures directed toward the same audit objectives
c. Accuracy with which the expected results of analytical procedures can be predicted.
8. When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should investigate and obtain adequate explanations and appropriate corroborative
evidence.
9. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by:
a. Corroboration of management responses; and
b. Consideration of the need to apply other audit procedures based on the results of
such inquiries, if management is unable to provide an explanation or if the
explanation is not considered adequate.
PSA 550
RELATED PARTIES
1. Management is responsible for the identification and disclosure of related parties and
transactions with such parties.
2. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and the
effect of related party transactions that are material to the financial statements. However, an
audit cannot be expected to detect all related party transactions.
3. The auditor needs to have a sufficient understanding of the entity and its environment to enable
identification of the events, transactions and practices that may result in a risk of material
misstatement regarding related parties and transactions with such parties.
4. When obtaining an understanding of the entitys internal control, the auditor should consider
the adequacy of control activities over the authorization and recording of related party
transactions.
5. In examining the identified related party transactions, the auditor should obtain sufficient
appropriate audit evidence as to whether these transactions have been properly recorded and
disclosed.
6. The auditor should obtain a written representation from management concerning:
a. The completeness of information provided regarding the identification of related
parties; and
b. The adequacy of related party disclosures in the financial statements
7. The auditor is unable to obtain sufficient appropriate audit evidence concerning related parties
and transactions with such parties or concludes that their disclosure in the financial statements
is not adequate; the auditor should modify the audit report appropriately.
PSA 610
CONSIDERING THE WORK OF INTERNAL AUDIT
1. The external auditor should obtain a sufficient understanding of internal audit activities to
identify and assess the risks of material misstatement of the financial statements and to design
and perform further audit procedures.
2. The external auditor should perform an assessment of the internal audit function when internal
auditing is relevant to the external auditors risk assessment.
3. When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the important criteria are:
a. Organizational status
b. Scope of the function
c. Technical competence
d. Due professional care
4. When planning to use the work of internal auditing, the external auditor will need to consider
internal auditings tentative plan for the period and discuss it as early a stage as possible.
5. Where the work of internal auditing is to be a factor in determining the nature, timing and
extent of the external auditors procedures, it is desirable to agree in advance the timing of such
work, the extent of audit coverage, materiality levels and proposed methods of sample
selection, documentation of the work performed and review and reporting procedures.
6. A liaison with internal auditing is more effective when meetings are held at appropriate intervals
during the period.
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7. When the external auditor intends to use specific work of internal auditing, the external auditor
should evaluate and perform audit procedures on that work to confirm its adequacy for the
external auditors purposes.
8. The evaluation of specific work of internal auditing involves consideration of the adequacy of
the scope of the work and related programs and whether the preliminary assessment of the
internal auditing remains appropriate.
9. The nature, timing and extent of audit procedures performed on the specific work of internal
auditing will depend on:
The external auditors judgment as to the risk of material misstatement of the
area concerned;
The assessment of internal auditing; and
The evaluation of the specific work by internal auditing.
10. The external auditor would record conclusions regarding the specific internal auditing work that
has been evaluated and the audit procedures performed on the internal auditors work.
PSA 620
USING THE WORK OF AN EXPERT
1. Expert means a person or firm possessing special skill, knowledge and experience in a
particular filed other than accounting and auditing.
2. An expert may be:
a. Contracted by the entity;
b. Contracted by the auditor;
c. Employed by the entity; or
d. Employed by the auditor.
3. When determining the need to use the work of an expert, the auditor would consider:
a. The materiality of the financial statement item being considered;
b. The risk of misstatement based on the nature and complexity of the matter being
considered; and
c. The quantity and quality of other audit evidence available
4. When planning t use the work of an expert, the auditor should evaluate the professional
competence and objectivity of the expert.
5. The risk that an experts objectivity will be impaired increases when the expert is:
a. Employed by the entity; or
b. Related in some other manner to the entity.
6. The auditor should obtain sufficient appropriate audit evidence that the scope of the experts
work is adequate for the purposes of the audit. Audit evidence may be obtained through a
review of the terms of reference which are often set out in written instructions from the entity
to the expert.
Such instructions to the expert may cover matters such as:
a. The objectives and scope of the experts work
b. A general outline as to the specific matters the auditor expects the experts report
to cover
c. The intended use by the auditor of the experts work, including the possible
communication to third parties of the experts identity and extent f involvement
d. The extent of the experts access to appropriate records and files
e. Clarification of the experts relationship with the entity, if any.
f. Confidentiality of the entitys information
g. Information regarding the assumptions and methods intended to be used by the
expert and their consistency with those used in prior periods.
7. The auditor should evaluate the appropriateness of the experts work as audit evidence
regarding the financial statement assertion being considered. This will involve assessment of
whether the substance of the experts findings is properly reflected in the financial statements
or supports the financial statement assertions, and consideration of:
a. Source data used.
b. Assumptions and methods used and their consistency with prior periods
c. Results of the experts work in the light of the auditors overall knowledge of the
business and of the results of other audit procedures.
8. When considering whether the expert has used source data which is appropriate in the
circumstances, the auditor would consider the following procedures:
a. Making inquiries regarding any procedures undertaken by the expert to establish
whether the source data is sufficient, relevant and reliable.
b. Reviewing or testing the data used by the expert
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9. If the results of the experts work do not provide sufficient audit evidence or if the results are
not consistent with other audit evidence, the auditor should resolve the matter. This may
involve:
a. Discussions with the entity and the expert
b. Applying additional audit procedures
c. Including possibly engaging another expert; or
d. Modifying the auditors report
10. When issuing an unmodified auditors report, the auditor should not refer to the work of an
expert. Such a reference might be misunderstood to be a qualification of the auditors opinion
or a division of responsibility, neither of which is intended.
11. If as a result of the work of an expert, the auditor decides to issue a modified auditors report, in
some circumstances it may be appropriate, in explaining the nature of the modification, to refer
to or describe the work o the expert (including the identity of the expert and the extent of the
experts involvement). In these circumstances, the auditor would obtain the permission of the
expert before making such a reference. If permission is refused and the auditor believes a
reference is necessary, the auditor may need to seek legal advice.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 500(REVISED)
AUDIT EVIDENCE
1. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion
2. Audit Evidence is all the information used by the auditor in arriving at the conclusions on
which the opinion is based, and includes the information contained in the accounting records
underlying the financial statements and other information
3. Accounting records generally include:
The records of initial entries and supporting records, such as checks and records
of electronic fund transfers;
Invoices
Contracts
The general and subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in formal journal entries; and
Records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures
4. Other information that the auditor may use as audit evidence includes:
Minutes of the meetings
Confirmations from third parties
Analysts reports
Comparable data about competitors (benchmarking)
Control manuals
Information obtained by auditors from such audit procedures as inquiry,
observation, and inspection; and
Other information developed by, or available to, the auditor that permits the
auditor to reach conclusions through valid reasoning
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5. When information produced by the entity is used by the auditor to perform audit procedures,
the auditor should obtain audit evidence about the accuracy and completeness of the
information
6. In forming an audit opinion, the auditor does not examine all the information available because
conclusions ordinarily can be reached by using sampling approaches and other means of
selecting items for testing.
CATEGORIES OF ASSERTIONS
a. Assertions about classes of transactions and events for the period under audit:
1. OCCURRENCE - transactions and events that have been recorded have
occurred and pertain to the entity
2. COMPLETENESS - all transactions and events that should have been recorded
have been recorded.
3. 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
5. CLASSIFICATION - transactions and events have been recorded in the proper
accounts
b. Assertions about account balances at the period end:
1. EXISTENCE -assets, liabilities, and equity interests exist
2. RIGHTS AND OBLIGATIONS - the entity holds or controls the right to assets,
and liabilities are obligations of the entity
3. COMPLETENESS - all assets, liabilities, and equity interests that
should have been recorded have been recorded
4. 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
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3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include analytical review
procedures and tests of details
PSA 501
AUDIT EVIDENCE ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
1. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable.
2. If unable to attend the physical inventory count on the date panned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an alternative date
and, when necessary, perform tests of intervening transactions.
3. Where attendance is impracticable, due to factors such as the nature and location of the
inventory, the auditor should consider whether alternative procedures provide sufficient
appropriate audit evidence of existence and condition to conclude that the auditor need not make
reference to a scope limitation.
4. In planning attendance at the physical inventory count or the alternative procedures, the auditor
would consider:
The nature of the accounting and internal control systems used regarding inventory.
Inherent, control, and detection risks, and materiality related to inventory.
Whether adequate procedures are expected to be established and proper instructions issued
for physical inventory counting.
The timing of the count.
The locations at which inventory is held.
Whether an experts assistance is needed.
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Accurate identification of the stage of completion of work in progress, of slow moving,
obsolete or damaged items and inventory by a third party, for example, on consignment.
Whether appropriate arrangements are made regarding the movement of inventory between
areas and the shipping and receipt of inventory before and after the cutoff date.
6. To obtain assurance that managements procedures are adequately implemented the auditor
would observe employees procedures and perform test counts.
7. The auditor would also consider cutoff procedures including details of the movement of inventory
just prior to, during, and after the count so that the accounting for such movements can be
checked at a later date.
8. The auditor would test the final inventory listing to assess whether it accurately reflects actual
inventory counts.
9. When inventory is under the custody and control of a third party, the auditor would ordinarily
obtain direct conformation from the third party as to the quantities and condition of inventory
held on behalf of the entity. Depending on the materiality of this inventory, the auditor would
consider:
The integrity and independence of the third party.
Observing, or arranging for another auditor to observe, the physical inventory count.
Obtaining another auditors report on the adequacy of third partys accounting and internal
control systems for ensuring that inventory is correctly counted and adequately safeguarded.
Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts, or obtaining confirmation from other parties when such inventory has been pledged
as collateral.
1. The auditor should carry out procedures in order to become aware of any litigation and claims
involving the entity, which may have a material effect on the financial statements.
2. When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should seek direct communication with the entitys lawyers.
3. The letter, which should be prepared by management and sent by the auditor, should request the
lawyer to communicate directly with the auditor. When it is considered unlikely that the lawyer
will respond to a general inquiry, the letter would ordinarily specify:
A list of litigation and claims.
Managements assessment of the outcome of the litigation or claim and its estimate of the
financial implications, including costs involved.
A request that the lawyer confirms the reasonableness of managements assessments and
provides the auditor with further information if the list is considered by the lawyer to be
incomplete or incorrect.
4. The auditor considers the status of legal matters up to date of the audit report.
5. If management refuses to give the auditor permission to communicate with the entitys lawyers,
this would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of
opinion.
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Valuation and disclosure of long-term investments
1. When long-term investments are material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding their valuation and disclosure.
2. Audit procedures ordinarily include considering evidence as to whether the entity has the ability
to continue to hold the investments on a long-term basis and discussing with management
whether the entity will continue to hold the investments as long-term investments and obtaining
written representations to that effect.
3. Other procedures would ordinarily include considering related financial statements and other
information, such as market quotations, which provide an indication of value and comparing such
values to the carrying amount of the investments up to the date of the auditors report.
Segment information
1. When segment information is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its disclosure in accordance with the applicable
financial reporting framework.
2. The auditor considers segment information in relation to the financial statements taken as a
whole, and is not ordinarily required to apply auditing procedures that would be necessary to
express an opinion on the segment information standing alone.
3. Audit procedures regarding segment information ordinarily consist of analytical procedures and
other audit test appropriate in the circumstances.
4. The auditor would discuss with management the methods used in determining segment
information, and consider whether such methods are likely to result in disclosure in accordance
with GAAP and test the application of such methods.
PSA 505
EXTERNAL CONFIRMATIONS
1. External confirmation is the process of obtaining and evaluating audit evidence through a direct
communication from a third party in response to a request for information about a particular item
affecting assertions made by management in the financial statements.
2. A positive external confirmation request asks the respondent to reply to the auditor in all cases
either by indicating the respondents agreement with the given information, or by asking the
respondent to fill in the information.
3. A negative external confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request.
4. Negative confirmation requests may be used to reduce the risk of material misstatement to an
acceptable level when:
The assessed risk of material misstatement is lower.
A large number of small balances are involved.
A substantial number of errors are not expected.
The auditor has no reason to believe that respondents will disregard these requests.
5. 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.
6. The auditor should perform alternative procedures where no response is received to a positive
external confirmation request. The alternative audit procedures should be such as to provide the
evidence the evidence about the financial statement assertions that the confirmation request was
intended to provide.
21
7. When the auditor forms a conclusion that the confirmation process and alternative procedures
have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should
undertake additional procedures to obtain sufficient audit evidence.
8. The auditor should evaluate whether the results of the external confirmation process together
with the results from any other procedures performed, provide sufficient appropriate audit
evidence regarding the assertion being audited.
22
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
FRAUD refers to an intentional act by one party or more individuals among management, those charged
with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal
advantage
Fraud involves:
Incentive or pressure to commit fraud
A perceived opportunity to act or to do so
Some rationalization of the act
Management fraud - fraud involving one or more members of management or those charged with
governance
Employee fraud - fraud involving only employees of the entity
(In either case, there may be collusion within the entity or with third parties outside of the entity)
2. MISAPPROPRIATION OF ASSETS
Involves the theft of an entitys assets and is often perpetrated by employees in
relatively small and immaterial amounts
Can also involve management who are usually more able to disguise or conceal
misappropriations in ways that are difficult to detect
Often accompanied by false or misleading records or documents in order to conceal the
fact that the aspects are missing or have been pledged without proper authorization
Can be accompanied in a variety of ways including:
o Embezzling receipts
o Stealing physical assets or intellectual property
o Causing an entity to pay for the goods and services not received
o Using an entitys assets for personal use
23
Responsibilities of Those charged with Governance and of Management
1. The primary responsibility for the prevention and detection of fraud rests with both those
charged with governance of the entity and with management
2. It is important management, with the oversight of those charged with governance, place a
strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place,
and fraud deterrence, which could persuade in individuals not to commit fraud because of the
likelihood detection and punishment
3. It is the responsibility of those charged with governance of the entity to ensure , through
oversight of management, that the entity establishes and maintains internal control to provide
reasonable assurance with regard to reliability of financial reporting, effectiveness and efficiency
of operations and compliance with applicable law and regulations
4. It is the responsibility of management, with oversight from those charged with governance, to
establish a control environment and maintain policies and procedures to assist in achieving the
objective ensuring, as far as possible, the orderly and efficient conduct of the entitys business
3. The risk of the auditor not detecting a material misstatement resulting from management fraud
is greater than for employee fraud, because management is frequently in a position to directly
or indirectly manipulate accounting records and present fraudulent financial information
4. The subsequent discovery of a material misstatement of the financial statements resulting from
fraud does not, in and of itself, indicate a failure to comply with PSAs
24
Responses to the risks of material misstatement due to fraud
1. The auditor should determine overall responses to address he assessed risks of material
misstatement due to fraud at the financial statement level and should design and perform
further audit procedures whose nature, timing and extent are responsive to the assessed risks at
the assertion level
2. In determining overall responses to address the risks of material misstatement due to fraud at
the financial statement level the auditor should:
Consider the assignment and supervision of personnel
Consider the accounting policies used by the entity; and
Incorporate an element of unpredictability in the selection of the nature, timing
and extent of audit procedures
3. Audit procedures responsive to risks of material misstatement due to fraud at the assertion
level
The auditors responses may include changing the nature, timing, and extent of audit
procedures in the following ways:
a. The nature of audit procedures to be performed may need to be changed to obtain
audit evidence that is more reliable and relevant to obtain additional corroborative
information
b. The timing of substantive procedures may need to be modified. The auditor may
conclude that performing substantive testing at or near the period end better addresses
an assessed risk of material misstatement due to fraud
c. The extent of the procedures applied reflects the assessment of the risks of material
misstatement due to fraud. For example, increasing sample sizes or performing
analytical procedures at a more detailed level may be appropriate
4. To respond to the risk of management override of controls, the auditor should design and
perform audit procedures to:
a. Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in the preparation of the financial statements
b. Review accounting estimates for biases that could result to material misstatement due
to fraud
c. Obtain an understanding of the business rationale of significant transactions that the
auditor become aware of that are outside the normal course of the business for the
entity, or that otherwise appear to be unusual given the auditors understanding of the
entity and its environment
Management representations
The auditor should obtain written representations from management that:
a. It acknowledges its responsibility for the design and implementation of internal control to
prevent and detect fraud
b. It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud
c. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity
involving:
i. Management
ii. Employees who have significant roles in internal control
iii. Others where the fraud could have a material effect on the financial statements
and
d. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected
fraud, affecting the entitys financial statements communicated by the employees,
former employees, analysts, regulators or others
25
Communication with management and those charged with governance
1. If the auditor has identified a fraud or has obtained information that indicates that a fraud may
exist, the auditor should communicate these matters as soon as practicable to the appropriate
level of management
2. If the auditor has identified fraud involving management, employers who have significant roles
in internal control, or others where the fraud results in a material misstatement in the financial
statements, the auditor considers seeking legal advice to assist in the determination of the
appropriate course of action
3. If the integrity or honesty of management or those charged with governance is doubted, the
auditor considers seeking legal advice to assist in the determination of the appropriate course of
action
4. The auditor should make those charged with governance and management aware, as soon as
practicable, and at the appropriate level of responsibility, of material weaknesses in the design
or implementation of internal control to prevent and detect fraud which may have come to the
auditors attention
5. The auditors professional duty to maintain the confidentiality of client information may
preclude reporting fraud to a party outside the client the entity. However, the duty of
confidentiality may be overridden by regulatory requirements
Documentation
1. The documentation of the auditors understanding of the entity and its environment and the
auditors assessment of the risks of material misstatement should include:
a. The significant decisions reached during the discussion among the engagement
team regarding the susceptibility of the entitys financial statements to material
misstatement due to fraud
b. The identified and assessed risks of material misstatement due to fraud at the
financial statement level and at the assertion level
2. The documentation of the auditors responses to the assessed risks of material misstatement
should include:
a. The overall responses to the assessed risks of material misstatement due to fraud at
the financial statement level and the nature, timing and extent of audit procedure,
and the linkage of those procedures with the assessed risks of material
misstatement due to fraud at the assertion level
b. The results of the audit procedures, including those designed to address the risk of
management override of controls
3. The auditor should document the communications about fraud made to management, those
charged with governance, regulators and others
4. When the auditor has concluded that the presumption that there is a risk of material
misstatement due to fraud related to revenue recognition is not applicable in the circumstances
of the engagement, the auditor should document the reasons for that conclusion
26
PSA 250
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
1. Noncompliance as used in PSA 250 refers to acts of omission or commission by he entity being
audited, either intentional and unintentional, which are contrary to the prevailing laws and
regulations
2. Noncompliance does not include personal misconduct (unrelated to the business activities of
the entity) by the entitys management or employees
3. When planning and performing audit procedures and in evaluating and reporting the results
thereof, the auditor should recognize that noncompliance by the entity with laws and regulation
may materially affect the financial statements
27
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDIT SAMPLING
1. Audit Sampling involves the application of audit procedures to less than 100% of items with an
account balance or class of transactions
2. Sampling may be statistical or nonstatistical.
I. Statistical sampling means any approach t sampling that has the following
characteristics:
a. Random selection of a sample
b. Use of probability theory to evaluate sample results
Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application. In
aids an auditor I forming conclusions about one r more characteristics or either a particular class of
transactions or a particular account balances
1. ATTRIBUTE SAMPLING
Applicable to tests of control
Used to test an entitys rate of deviation (also called rate of occurrence) from a
prescribed control procedure
2. VARIABLES SAMPLING
Applicable to substantive test
Most commonly used to test whether recorded account balances are fairly stated
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SAMPLING RISK
1. It arises from the possibility that the auditors conclusion, based on a sample may be different
from the conclusion reached if the entire population were subjected to the same audit
procedures
2. The confidence level (also called reliability level) is the mathematical complement of the
applicable sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level
when developing the sampling design
4. For tests of control, it has the following aspects:
a. Risk of assessing control risk too low (Risk of Overreliance)
The risk that the auditor would conclude that the control risk is lower
than it actually is
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of assessing control risk too high (Risk of under reliance)
The risk that the auditor would conclude that control risk is higher than
actually is
It affects audit efficiency as it would lead to additional work to establish
that initial conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
The risk that the auditor would conclude that a material error exists
when in fact it does
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of incorrect rejection
The risk that the auditor would conclude that a material error exists
when in fact it does not
It affects audit effectiveness as it would lead to additional work to
establish that initial conclusions were incorrect
NONSAMPLING RISK
It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related
to the size of the sample. For example, most audit evidence is persuasive rather than conclusive, the
auditor might use inappropriate procedures, or the auditor might misinterpret evidence and fail to
recognize an error.
29
The lower the rate of deviation that the auditor is willing to accept, the larger the
sample size needs to be
d. Haphazard selection
The auditor selects a sample without following a structured technique
It is not appropriate when using statistical sampling
e. Stratification
This involves subdividing the population into subpopulations or strata, i.e., a group of
sampling units which have similar characteristics (often monetary value)
The strata must be explicitly defined so that each sampling unit can belong to only one
stratum
This method enables the auditor to direct his efforts towards the items he considers
would potentially contain the greater monetary error
30
The maximum deviation rate is based on the sample size and the number of
deviations discovered. There are standard tables that yield maximum population
deviation rates at specified risks of assessing control risk too low
Allowance for sampling risk = Maximum Deviation Rate Sample Deviation Rate
c. Considering qualitative information
The auditor considers each of the deviations nature, importance, and probable cause
d. Reaching an overall conclusion
In assessing control risk, the auditor considers all available quantitative and qualitative
information
B. Difference estimation
It is a classical variables sampling technique that uses the average difference between
audited amounts and individual recorded amounts to estimate the total audited amount of a
population and an allowance for sampling risk.
31
C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited amounts to
recorded amount in the sample to estimate the total amount of the population and an
allowance for sampling risk
Ratio estimation is more appropriate when he differences are nearly proportional to book
values.
Difference estimation is more appropriate when there is little or n relationship between the
absolute amounts of the differences and the book values.
32
EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR TESTS OF CONTROL
(PSA 530, APPENDIX I)
33
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. A CIS environment exists when a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit, whether the computer is operated
by the entity or by a third party
2. The overall objective and scope of an audit does not change in a CIS environment
3. A CIS environment may affect:
a. The procedures followed in obtaining a sufficient understanding of the accounting
and internal control systems
b. The consideration of the inherent and control risk
c. The design and performance of tests of controls and substantive procedures
4. The auditor should have sufficient knowledge of the CIS to plan, direct, and review the work
performed
5. If specialized skills are needed, the auditor would seek the assistance of a professional
possessing such skills, who may be either on the auditors staff or an outside professionals
6. In planning the portions of the audit which may be affected by the clients CIS environment, the
auditor should obtain an understanding of the significance and complexity of the CIS activities
and the availability of data for use in the audit
7. When the CIS are significant, the auditor should also obtain an understanding of the CIS
environment and whether it may influence the assessment of inherent and control risks
8. The auditor should consider the CIS environment in designing audit procedures to reduce audit
risk to an acceptably low level. The auditor can use either manual audit procedures, computer-
assisted audit techniques, or a combination of both to obtain sufficient evidential matter
Organizational Structure
Characteristics of a CIS organizational structure includes:
a. Concentration of functions and knowledge
Although most systems employing CIS methods will include certain manual operations,
generally the number of persons involved in the processing of financial information is significantly
reduced.
b. Concentration of programs and data
Transaction and master file data are often concentrated, usually in machine-readable
form, either in one computer installation located centrally or in a number of installations distributed
throughout the entity.
Nature of Processing
The use of computers may result in the design of systems that provide less visible evidence than
those using manual procedures. In addition, these systems may be accessible by a larger number of
persons.
System characteristics that may result from the nature of CIS processing include:
a. Absence of input documents
Data may be entered directly into the computer system without supporting document
In some on-line transaction systems, written evidence of individual data entry
authorization (e.g., approval for order entry) may be replaced by other procedures, such
as authorization controls contained in computer programs (e.g., credit limit approval)
b. Lack of visible audit trail
The transaction trail may be partly in machine-readable form and may exist only for a
limited period of time (e.g., audit logs may be set to overwrite themselves after a period of time or
when the allocated disk space is consumed)
c. Lack of visible output
Certain transactions or results of processing may not be printed or only summary data
may be printed
34
Data and computer programs may be assessed and altered at the computer or through
the use of computer equipment at remote locations. Therefore, in the absence of appropriate controls,
there is an increased potential for unauthorized access to, and alteration of, data and programs by
persons inside or outside the entity
CIS APPLICATION CONTROLS to establish specific control procedures over the application systems in
order to provide reasonable assurance that all transactions are authorized, recorded and are processed
completely, accurately and on a timely basis. CIS application controls include:
35
a. Controls over Input designed to provide reasonable assurance that:
Transactions are properly authorized before being processed by the computer
Transactions are accurately converted into machine readable form and recorded in the
computer data files
Transactions are not lost, added, duplicated or improperly changed
Incorrect transactions are rejected, corrected and, if necessary, resubmitted on a timely
basis.
b. Controls over processing and computer data files designed to provide reasonable assurance
that:
Transactions, including system generated transactions, re properly processed by the
computer
Transactions are not lost, added, duplicated or improperly changed
Processing errors (i.e., rejected data and incorrect transactions) are identified and
corrected on a timely basis
c. Controls over output designed to provide reasonable assurance that:
Results of processing are accurate
Access to output is restricted to authorized personnel on a timely basis
Output is provided to appropriate authorized personnel on a timely basis
36
Individual transactions are entered at terminal devices, validated, and used to
update related computer files immediately.
b. On-line/batch processing
Individual transactions are entered at a terminal device, subjected to certain
validation checks, and added to a transaction file that contains other transactions entered during the
period. Later, during a subsequent processing cycle, the transaction file may be validated further and
then used to update relevant master file.
c. On-line/Memo update (and subsequent Processing)
NETWORK ENVIRONMENT
1. A network environment is a communication system that enables computer users to share
computer equipment, application software, data, and voice and video transmissions
2. A file server is a computer with an operating system that allows multiple users in a network to
access software applications and data files
3. Basic types of networks
a. Local area network (LAN)
b. Wide area network (WAN)
c. metropolitan area network (MAN)
37
c. Optical character recognition (OCR) reads characters directly from documents
based on their shapes and positions on the source document
d. Cathode ray tube (CRT) a typewriter-like device that decodes keystrokes into
electronic impulses
e. Key-to-tape and Key-to-disk systems in which input data can be entered directly
onto magnetic tape, magnetic disk, or floppy disk through CRT
10. STORAGE DEVICES devices which store data that can be subsequently used by the CPU
a. Random access data can be accessed directly regardless of how it is physically
stored (e.g., magnetic disk)
b. Sequential access data must be processed in the order in which it is physically
stored (e.g., magnetic tape)
11. OUTPUT DEVICES produce readable data or machine-readable data when further processing is
required. Examples are CRT, printer, and CRT COM (Computer output to Micro film)
12. TERMINALS CRT devices or microcomputers used for input/output (communication) with the
CPU
13. POINT-OF-SALE DEVICES a terminal connected to a computer. It takes the place of a cash
register or similar devices which allows instant recording and is capable of keeping perpetual
inventory
14. MODEM a device for interfacing communications equipment within communication networks
Software consists of computer programs which instruct the computer hardware to perform the desired
processing.
ELECTRONIC DATA INTERCHANGE (EDI) the electronic exchange of transactions, from one entitys
computer to another entitys computer through an electronic communications network. In electronic
fund transfer (EFT) Systems, for example, electronic transactions replace checks as a mean of payment.
EDI controls include:
a. Authentication controls must exist over the origin, proper submission, and proper delivery
of EDI communications to ensure that the EDI messages are accurately sent and received to
and from authorized customers and suppliers.
b. Encryption involves conversion of plain text data to cipher text data to make EDI messages
unreadable to unauthorized persons
c. VAN controls a value added network (VAN) is a computer service organization that
provides network, storage, and forwarding (mailbox) services for EDI messages
AUDIT APPROACHES
38
1. Auditing around the computer the auditor ignores or bypasses the computer processing
function of an entitys EDP system
2. Auditing with the computer the computer is used as an audit tool
3. Auditing through the computer the auditor enters the clients system and examines directly
the computer and its system and application software
39
d. Transaction tagging a transaction record is tagged and then traced
through critical control points in the information system
e. Extended records this technique attaches additional audit data which
would not otherwise be saved to regular historic records and thereby helps
to provide a more complete audit trail
III. Review of operating system and other system software
1. JOB ACCOUNTING DATA/ OPERATING SYSTEM LOGS these logs that track
particular functions, include reports of the resources use by the computer system.
The auditor may be able to use them to review the work processed, to determined
whether unauthorized applications were processed and to determine that
authorized applications were processed properly
2. LIBRARY MANAGEMENT SOFTWARE this logs changes in programs, program
modules, job control language, and other processing activities
3. ACCESS CONTROL AND SECURITY SOFTWARE this restricts access to computers to
authorized personnel through techniques such as only allowing certain users with
read-only access or through use of an encryption
COMPUTERIZED AUDIT TOOLS
1. AUDIT SOFTWARE computer programs used to process data of audit significance from the
clients accounting system
a. Package programs (generalized audit software)
1. Reading computer files
2. Selecting samples
3. Performing calculations
4. Creating data files
5. Printing reports in an auditor-specified format
b. Purpose written programs (special purpose or custom designed programs)
c. Utility programs they are generally not designed for audit purposes
2. Electronic spreadsheets contain a variety of predefined mathematical operations and
functions that can be applied to data entered into the cells of a spreadsheet
3. Automated work paper software designed to generate a trial balance, lead schedules, and
other reports useful for the audit. The schedules and reports can be created once the auditor
has either manually entered or electronically imported through using the clients account
balance information into the system
4. Text retrieval software allow user to view any text that ia available in an electronic format. The
software program allows the user to browse through text files much as a user would browse
through books.
5. Database management systems
6. Public databases
7. Word processing software
Factors to consider in using CAAT
1. Degree of technical competence in CIS
2. Availability of CAAT and appropriate computer facilities
3. Impracticability of manual tests
4. Effectiveness and efficiency
5. Timing of tests
40
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
41
3. When the auditor becomes aware of events which materially affect the financial statements, the
auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements
The representation letter is provided in connection with your audit of the financial statements of ABC Company for
the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial
statements present fairly, in all material aspects, the financial position of ABC Company as of December 31, 20X1
and of the results of its operations and its cash flows for the year time ended in accordance with (indicate relevant
financial reporting framework).
We acknowledge our responsibility for the fair presentation of the financial statements in accordance with
(indicate relevant financial reporting framework).
We confirm to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may include:
There have been no irregularities involving management or employees who have a significant role in
the accounting and internal control systems or that could have a material effect on the financial
statements
We have made available to you all the books of account and supporting documentation and all minutes
of meetings and shareholders and BOD (namely those held on (dates) respectively)
42
We confirm the completeness of the information provided regarding the identification of related
parties
The financial statements are free of material misstatements, including omissions
The company has complied with all aspects of contractual agreements that could have a material effect
on the financial statements in the event of noncompliance. There has been no noncompliance with
requirements of regulatory authorities that could have a material effect on the financial statements in
the event of noncompliance.
We have no plans or intentions that may affect or alter the carrying value or classification of asset and
liabilities reflected in the financial statement
(no plans regarding the inventory abandonment or no inventory were stated in an amount in excess of
net realizable value)
Indicate that there are no events subsequent to period which require adjustments in the statements
Indicate that the claim is settled in a specific amount and there are no other litigations are expected to
be received
Indicate that there are no formal or informal compensating balance arrangements with any of the cash,
except those that are disclosed
Indicate that you have recorded material regarding the capital per se
______________________
(Senior Executive Officer)
______________________
(Senior Financial Officer)
43
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
[Appropriate addressee]
We have audited the accompanying financial statements of ABC Company which comprise a balance
sheet as at date December 31, 20X1, and the income statement, statement of changes in equity and
cash flow statement for the year ended, and a summary of significant accounting policies and other
explanatory notes.
Auditors responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that
we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the financial statements are free from material misstatement. An audit involves performing
procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend upon the auditors judgment, including the assessment of the risks of
material misstatements on the financial statements whether due to fraud or error. In making those risk
assessments; the auditor considers internal control relevant to the entitys preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal
control of the entity. An audit also includes evaluating the appropriateness of the accounting policies
used and the reasonableness of accounting estimates made by the management, as well as evaluating
the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the financial statements fairly, in all material respects, the financial position of ABC
Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then
ended in accordance with the Philippine Financial Reporting Standards.
[Auditors signature]
[Date of Auditors report]
[Auditors address]
44
MODIFICATIONS TO THE INDEPENDENT AUDITORS REPORT (BASED ON PSA 701)
Matters that do not affect the auditors opinion
You may add an emphasis of matter paragraph to the report to highlight a matter
affecting the financial statements which is included in the note of the financial
statements that more extensively discuss the matter
The paragraph would preferably be included after the opinion paragraph but before the
section on any other reporting responsibilities, if any.
Emphasis of matter paragraph is used to highlight the existence of:
Material uncertainty relating to the event or condition that may cast significant
doubt on the entitys ability to continue as a going concern; or
Significant uncertainty (other than a going concern problem), the resolution of
which is dependent upon future events and which may affect the financial
statements
Emphasis of matter paragraph to report on matters other than those affecting the
financial statements. For example, if an amendment to other information in a document
containing audited financial statements is necessary and the entity refuses to make an
amendment
Without qualifying our opinion, we draw attention to Note X in the financial statements which
indicates that the Company incurred a net loss of P_____ during the year ended December 31,20X1 and,
as of date, the companys current liabilities exceeded its total assets by P_____. These conditions, along
with other matters, as set forth in Note X, indicate the existence of a material uncertainty which may
cast significant doubt about the Companys ability to continue as a going concern.
Qualified opinion
Should be expressed when the auditor concludes that the unqualified opinion cannot be
expressed but that the effect of any disagreement with management, or limitation on
scope is not so material and pervasive as to require an adverse opinion or a disclaimer
of opinion.
A qualified opinion should be expressed as being except for the effects of the matter
to which the qualification relates.
Adverse opinion
Should be expressed when the effect of the disagreement is so material and pervasive
to the financial statements that the auditor concludes that a qualification of the report
is not adequate to disclose the misleading or incomplete nature of the financial
statements.
Disclaimer of Opinion
Should be expressed when the possible effect of a limitation on the scope is so material
and pervasive that the auditor has not been able to obtain sufficient appropriate audit
evidence and accordingly is unable to express an opinion on the financial statements.
45
REPORT MODIFICATIONS
Limitation on scope
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with
(auditors responsibility paragraph)
We did not observe the counting of the physical inventories as of December 31, 20X1, since that
date was prior to the time we were initially engaged as auditors for the company. Owing to the
nature of the companys records, we were unable to satisfy ourselves as to inventory quantities
by other audit procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements fairly presents, in all material respects (opinion paragraph)
(The paragraph discussing the scope of the audit would either be omitted or amended according
to the circumstances)
We were not able to observe all physical inventories and confirm accounts receivables due to
limitations placed on the scope of our work by the company)
Because of the significance of the matters discussed in the preceding paragraph, we do not
express an opinion on the financial statements.
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with
(auditors responsibility paragraph)
As discussed in the Note X to the financial statements, no depreciation has been provided in the
financial statements which practice, in our opinion, is not in accordance in PFRS. The provision
for the year ended December 31, 20X1, should be xxx based on the straight-line method of
depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly,
the fixed assets should be reducedby accumulated depreciation of xxx and the loss for the year
and accumulated deficit should be increased by xxx and xxx, respectively.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements fairly presents, in all material respects (opinion paragraph)
46
4. DISAGREEMENT ON ACCOUNTING POLICIES INADEQUATE DISCLOSURES
QUALIFIED OPINION
We have audited (remaining words are the same as in the introductory page)
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with
(auditors responsibility paragraph)
On January 31,20X2, the Company issued debentures in the amount of for the purpose of
financing plant expansion. The debenture agreement restricts the payment of future cash
dividends to earnings after December 31,19X1, which restrictions was not disclosed in the
companys financial statements. Disclosure of this is required by the PAS 1, Presentation of
financial statements.
In our opinion, except for the omission of the information included in the preceding paragraph,
the financial statements present fairly, in all material respects (opinion paragraph)
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with
(auditors responsibility paragraph)
In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the
financial statements do not present fairly, in all material respects, the financial position of ABC
Company as of December 31,19X1, and of its financial performance and its cash flows for the
year then ended in accordance with PFRS (Opinion paragraph)
Facts discovered after the date of the auditors report but before the financial statements are
issued
4. During the period from the date of the auditors report to the date the financial
statements are issued:
o The responsibility to inform the auditor of facts which may affect the financial
statements rests with management
o When the auditor becomes aware of the facts that will materially affect the
financial statements, the auditor should:
Consider whether the financial statements needed amendment
Discuss the matter with the management
Take the action appropriate in the circumstances
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5. When the management amends the financial statements, the auditor would carry out
the procedures necessary in the circumstances and would provide management with a
new report on the amended financial statements
6. The new auditors report would be dated not earlier than the date the amended
financial statements are signed or approved and, accordingly, the procedures to identify
subsequent events would be extended to the date of the new auditors report
7. When management does not amend the financial statements but the auditor believes
they need to be amended and the auditors report has not been released to the entity,
the auditor should express a qualified opinion or an adverse opinion.
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o When the principal auditor concludes that the work of the other cannot be used
and the principal auditor has not been able to perform sufficient additional
procedures regarding financial information of the component audited by the
other auditor, the principal auditor should express a qualified or a disclaimer of
opinion because of a scope of limitation.
o If the auditor issues or intend to issue, a modified auditors report, the principal
auditor would consider whether the subject of modification is of such a nature
and significance, in relation to the financial statements of the entity on which the
principal auditor is reporting that a modification on the principal auditors report
is required.
5. Division of responsibility
o When the principal auditor bases the audit opinion on the financial statements
taken as a whole solely upon the report of another auditor regarding the audit of
one or more components, the principal auditors report should state this fact
clearly and should indicate the magnitude of the portion of the financial
statements audited by the other auditor.
CORRESPONDING FIGURES
o For the prior periods, these are an integral part of the current period financial
statements and have to be read in conjunction with the amounts and other
disclosures relating to the current period.
o These are not presented as complete financial statements capable of standing
alone
o The auditor should obtain sufficient appropriate audit evidence that the
corresponding figures meet the requirements of GAAP in the Philippine
o The auditor should assess whether:
Accounting policies used for the corresponding figures are consistent
with those of the current period or whether appropriate adjustments
and/or disclosures have been made
Corresponding figures agree with the amounts and other disclosures
presented in prior period or whether appropriate adjustments and/or
disclosures have been made
COMPARATIVE FINANCIAL STATEMENTS
These comparative financial statements for the prior period(s) are considered separate
financial statements.
These are presented for comparison with the financial statements of the current period,
but do not form part of the current period financial statements
The auditor should obtain sufficient appropriate evidence that the comparative financial
statements meet the requirements of GAAP in the Philippines
The auditor should assess whether:
o Accounting policies of the prior period are consistent with those of the current
period or whether appropriate adjustments and/or disclosures have been made
o Prior period figures presented agree with the amounts and other disclosures
presented in the prior period or whether appropriate judgments and disclosures
have been made
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a. Unresolved, and results in modification of the auditors report regarding the
current figures period, the auditors report should also be modified regarding the
corresponding figures
b. Unresolved, but does not result in a modification of the auditors report
regarding the current period figures, the auditors report should also be modified
regarding the corresponding figures
c. Resolved, and properly dealt with in the financial statements, the current period
report does not ordinarily refer to the previous modification. However, if the
matter is material to the current period, the auditor may include an emphasis of
the matter paragraph dealing with the situation
3. When the incoming auditor decides to refer to the predecessor auditors report, the
incoming auditors report should indicate:
a. That the financial statements of the prior period were audited by another
auditor
b. Type of report issued by the predecessor auditor and, if the report was modified,
the reasons therefore;
c. Date of that report
4. When the prior period financial statements were not audited, the incoming auditor
should state that the corresponding figures are unaudited.
5. If the incoming auditor identifies that the corresponding figures are materially
misstated, the auditor should request management to revise the corresponding figures
or if management refuses to do so, appropriately modify the report
INCOMING AUDITOR
When the financial statements of the prior period were audited by another auditor,
The predecessor auditor may reissue the audit report on the prior period with the
incoming auditor only reporting on the current period; or
The incoming auditors report should state that the prior period was audited by another
auditor and the incoming auditors report should indicate:
o That the financial statements of the prior period was audited by another auditor
o The type of report issued by the predecessor auditor, and if the report was
modified, the reasons; therefore
o Date of the report
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1. An entity ordinarily issues on an annual basis a document which includes its audited
financial statements together with the auditors report thereon, also called annual
report.
Material inconsistencies
2. This exists when the other information contradicts information contained in the audited
financial statements
3. If, on reading the other information, the auditor identifies material inconsistency, the
auditor should determine whether the financial statements need to be amended
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should express a qualified or adverse opinion
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should consider including in the auditor auditors
report an emphasis of matter paragraph.
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Reports on an other comprehensive basis of accounting financial statements
1. The report should include a statement that indicates the basis of accounting used or
should refer to the note to the financial statements giving that information
2. The opinion should state whether the financial statements are prepared, in all material
aspects, in accordance with the identified basis of accounting
3. If the financial statements are not suitably titled or the basis of accounting is not
adequately disclosed, the auditor should issue an appropriately modified report
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
2. For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate audit evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.
3. A review engagement provides a moderate level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of negative
assurance.
4. In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entitys organization, accounting
systems, operating characteristics and the nature of its assets, liabilities, revenues, and
expenses.
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6. If the auditor has reason to believe that the information subject to review may be
materially misstated, the auditor should carry out additional or more extensive procedures
as are necessary to be able to express negative assurance or to confirm that a modified
report is required.
We have reviewed the accompanying balance sheet of AAA Company at December 31, 19XX, and the related
statements of income, changes in equity and cash flows for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to issue a report on these financial statements
based on our review.
We conducted our review in accordance with the Philippines Standards on Review Engagements 2400. This
Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial
statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and
analytical procedures applied to financial data and thus provide less assurance than an audit. We have not performed
an audit an accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial
statements are not presented fairly, in all material respects in accordance with Philippine Financial Reporting
Standards.
3. As the auditor simply provides a report of the factual findings of agreed-upon procedures,
no assurance is expressed. Users of the report assess for themselves the procedures and
findings reported by the auditor and draw their own conclusions from the auditors work.
4. The report is restricted to those parties that have agreed to procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.
REPORTING
6. The report on an agreed-upon procedures engagement needs to describe the purpose and
the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.
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A description of the auditors factual findings including sufficient details of errors and exceptions found;
A statement that the procedures performed does not constitute either an audit or a review and, as such,
no assurance is expressed;
A statement that had the auditor performed additional procedures, an audit or a review, other matters
might have come to light that would have been reported;
A statement that the report is restricted to those parties that have agreed to the procedures to be
performed;
A statement (when applicable) that report relates only to the elements, accounts, items, or financial and
non-financial information specified and that it does not extend to the entitys financial statements taken
as a whole;
Date of the report;
Auditors address; and
Auditors signature.
3. The procedures employed are not designed and do not enable the accountant to express
any assurance on the financial information.
5. The accountant should obtain a general knowledge of the business and operations of the
entity and should be familiar with the accounting principles and practices of the industry in
which the entity operates and with the form and content of the financial information that
is appropriate in the circumstances.
7. The accountant should read the compiled information and consider whether it appears to
be appropriate in form and free from obvious material misstatements.
9. The financial information compiled by the accountant should contain a reference such as
Unaudited, Compiled without Audit or Review, or Refer to the Compilation report on
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each page of the financial information or on the front of the complete set of financial
statements.
On the basis of information provided by the management we have compiled, in accordance with the Philippine
Standard on Related Services applicable to compilation engagements, the balance sheet of XXX Company as of
December 31, 19XX and statements of income, changes in equity and cash flows for the year then ended.
Management is responsible for these financial statements. We have not audited or reviewed these financial
statements and accordingly express no assurance thereon.
4. Prospective financial information can include financial statement or one or more elements
of financial statements and may be prepared:
As an internal management tool, for example, to assist in evaluating a possible capital
investment; or
For distribution to third parties.
7. The auditor should not express any opinion as to whether the results shown in the
prospective financial information will be achieved.
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9. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective
financial information will be inappropriate for its intended use.
10. The auditor should obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of significant
management assumptions and managements acceptance of its responsibility for the
prospective financial information.
We have examined the forecast (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the forecast including the assumptions set out in Note X on which it is based.
Based on our examination of the evidence supporting the assumptions the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.
Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in
accordance with Philippine Financial Reporting Standards.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected
and the variation may be material.
We have learned the projection (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the projection including the assumptions set out in Note X on which it is based.
This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection has been
prepared using a set of assumptions that include hypothetical assumptions about future events and managements
actions that are not necessarily expected to occur. Consequently, readers are cautioned that this projection may not
be appropriate for purposes other than that described above.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which
causes us t believe that these assumptions do not provide a reasonable basis for the projection, assuming that (state
or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the basis of
the assumptions and is presented in accordance with Philippine Financial Reporting Standards.
Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still
likely to be different from the projection since other anticipated events frequently do not occur as expected and the
variation may be material.
When the auditor believes that the presentation and disclosure of the prospective information is
not adequate, the auditor should express a qualified or adverse opinion or withdraw from the
engagement as appropriate.
When the auditor believes that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information, the auditor should either express an adverse
opinion or withdraw from the engagement as appropriate.
When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw from
the engagement or disclaim the opinion describe the scope limitation in the report on the
prospective financial information.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
is based on the International Code of Ethics for professional accountants developed by the
International Federation of Accountants.
Is mandatory for all CPAs and is applicable to professional services performed in the
Philippines on or after January 1, 2004.
Is divided into three parts:
Part A - applies to all professional accountants unless otherwise specified
Part B - applies only to those professional accountants in public practice
Part C - applies to employed professional accountants, and may also apply, in
appropriate circumstances, to accountants employed in public practice
3. CONFIDENTIALITY
a. Professional accountants have an obligation to respect the confidentiality of information
about a clients or employers affairs acquired in the course of professional services.
b. The duty of confidentiality continues even after the end of the relationship between the
professional accountant and the client or employer.
4. TAX PRACTICE
a. The professional accountant should ensure that the client or the employer are aware of
the limitations attaching to tax advice and services so that they do not misinterpret an
expression of opinion as an assertion of fact.
b. A professional accountant should not be associated with any return or communication
in which there is reason to believe that it:
1. Contains a false or misleading statement;
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2. Contains statements or information furnished recklessly or without any real
knowledge of whether they are true or false; or
3. Omits or obscure information required to be submitted and such omission or
obscurity would mislead the revenue authorities.
c. When a professional accountant learns of a material error or omission in a tax return of
a prior year, or the failure to file a required tax return, he/she has a responsibility to:
1. Promptly advise the client or employer of the error or omission and recommend
that disclosure be made to the revenue authorities.
2. If the client or employer does not correct the error, he/she:
a. Should inform the client or the employer that it is possible to act for them in
connection with that return or other related information submitted to the
authorities; and
b. Should consider whether continued association with the client or employer in
any capacity is consistent with professional responsibilities.
When a professional accountant performs services in a country other than the home
country and differences on specific matters exist between ethical requirements of the two
countries, the following provisions should be applied:
1. When the ethical requirements of the country in which the services are being
performed are LESS STRICT than the Philippine Code of Ethics, then our code should be
applied.
2. When the ethical requirements of the country in which the services are being
performed are STRICTER than our code, then the ethical requirements in the country
where services are being performed should be applied.
3. When the ethical requirements of the Philippines are mandatory for services performed
outside the Philippines and are stricter than that set out in (1) and (2) above, then the
ethical requirements of the Philippines should be applied.
6. PUBLICITY
In the marketing and promotion of themselves and their work, professional accountants
should:
a. Not use means which brings the profession into disrepute.
b. Not make exaggerated claims for the services they are able to offer, the qualifications
they possess, or experience they have gained; and
c. Not denigrate the work of other accountants.
INDEPENDENCE
a. Independence requires:
1. Independence of mind The state of mind that permits the provision of an opinion
without being affected by influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism.
2. Independence in appearance The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all
relevant information, including safeguards applied, would reasonably conclude a
firms, or a member of the assurance teams integrity, objectivity or professional
skepticism had been compromised.
b. Members of assurance teams, firms, and network firms should identify THREATS to
independence, evaluate the significance of those threats, and, if the threats are other
than clearly insignificant, identify and apply SAFEGUARDS to eliminate the threats or
reduce them to acceptable level, such that independence of mind and independence in
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appearance are not compromised. In situations when no safeguards are available to
reduce the threat to an acceptable level. The only possible actions are to:
1. Eliminate the activities or interest creating the threat; or
2. Refuse to accept or continue the assurance engagement.
Network firm an entity under common control, ownership or management with the firm or any entity
that a reasonable and informed third party having knowledge of all relevant information would
reasonably conclude as being part of the firm nationally or internationally
Financial interest an interest in equity or other security, debenture, loan or other debt instrument of
an entity including rights and obligations to acquire such an interest and derivatives directly related to
such interest
THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a financial interest
in, or other self-interest conflict with, an assurance client. Examples:
a. A direct financial interest or material indirect financial interest in an assurance client
b. A loan or guarantee to or from an assurance client or any of its directors or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements
2. SELF-REVIEWTHREAT
Occurs when:
a. Any product or judgment of a previous assurance engagement or non-assurance
engagement needs to be reevaluated in reaching conclusions on the assurance engagement
or;
b. When a member of the assurance team was previously a director or officer of the assurance
client, or was an employee in a position to exert direct and significant influence over the
subject matter of the assurance engagement
3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to
promote, an assurance clients position or opinion to the point that objectivity may, or may be
perceived to be compromised
4. FAMILIARITY THREAT
Occurs when, by virtue of a close relationship with an assurance client, its directors, officers or
employees, a firm or a member of the assurance team becomes too sympathetic to the clients
interests.
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5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting objectively and
exercising professional skepticism by threats, actual or perceived, from the directors, officers or
employees of an assurance client
SAFEGUARDS
1. When the threats are identified, other than those that are clearly insignificant, appropriate
safeguards should be identified and applied to eliminate the threats or reduce them to an
acceptable level. This decision should be documented
2. When the safeguards are available are insufficient to eliminate the threats to independence or
to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or
interest creating the threat, the only course of action available will be the refusal to perform, or
withdrawal from, the assurance engagement
CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firms own systems and procedures
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Safeguards within the firms own systems and procedures may include ENGAGEMENT SPECIFIC
safeguards such as the following:
a. Involving an additional professional accountant to review the work done or otherwise advise as
necessary. This individual could be someone from outside the firm or network firm, or someone
with the firm or network firm who was not otherwise associated with the assurance team
b. Consulting a third party, such as a committee of independent directors, a professional
regulatory body or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged with governance,
e. Disclosing to audit committee, or others charged with governance, the nature of services
provided and extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client
g. Involving another firm to perform or re-perform part of the assurance engagement
h. Involving another firm to re-perform the non-assurance service to the extent necessary to
enable to take responsibility for that service; and
i. Removing an individual from the assurance team, when that individuals financial interest or
relationships create a threat to independence
ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of the assurance client
during the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the assurance services and
ends when the assurance report is issued, except when the assurance engagements is of a
recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance engagement ends
with the notification by either party that the professional relationship has terminated or the
issuance of the final assurance report, whichever is later
4. In the case of an audit engagement, the engagement period includes the period covered by the
financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by the financial
statements that the firm will report on, the firm should consider whether any thretas to
independence may be created by:
a. Financial or business relationships with the audit client during or after the period
covered by the financial statements, but prior to the acceptance of the audit
engagement; or
b. Previous services provided to the audit client
Similarly, in the case of an assurance engagement that is not an audit engagement, the firm
should consider whether any financial or business relationships or previous services may create
threats to independence.
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