Professional Documents
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Manila
PREFACE TO PHILIPPINE STANDARDS ON QUALITY CONTROL, AUDITING, REVIEW, OTHER ASSURANCE AND RELATED
SERVICES
PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS (PSA 200 [Amended as a
result of PSA 700 (Revised)])
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the AASC’s 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 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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1. A three-party relationship involving:
A practitioner;
A responsible party; and
Intended users.
2. An appropriate subject matter;
3. Suitable criteria;
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance
engagement.
SUMMARY
Nature of service Audit Review Agreed-upon Compilation
Procedures
Level of Assurance High, but not absolute Moderate assurance No assurance No assurance
Provided assurance
Report provided Positive assurance on Negative assurance on Factual findings of Identification of
assertion(s) (Audit assertion(s) (Review procedures information compiled
Report) 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.
Management’s 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.
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.
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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.
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 entity’s 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
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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 entity’s 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 entity’s financial performance.
e.) Internal control.
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 entity’s 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 entity’s internal control and its importance in the
entity.
The auditor should obtain an understanding of the entity’s 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 entity’s 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 entity’s financial statements, including significant
accounting estimates and disclosures.
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:
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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.
PSA 330
THE AUDITOR’S 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 auditor’s 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
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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
2. The auditor’s 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 auditor’s documentation should demonstrate that the financial statements agree or reconcile with the underlying
accounting records.
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 auditor’s 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 entity’s financial statements:
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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 entity’s 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 auditor’s 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:
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 entity’s 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 auditor’s 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 auditing’s
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
auditor’s 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.
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 auditor’s 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 auditor’s judgment as to the risk of material misstatement of the area concerned;
The assessment of internal auditing; and
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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 auditor’s 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 expert’s 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 expert’s 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 expert’s work
b. A general outline as to the specific matters the auditor expects the expert’s report to cover
c. The intended use by the auditor of the expert’s work, including the possible communication to third
parties of the expert’s identity and extent f involvement
d. The extent of the expert’s access to appropriate records and files
e. Clarification of the expert’s relationship with the entity, if any.
f. Confidentiality of the entity’s 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 expert’s work as audit evidence regarding the financial
statement assertion being considered. This will involve assessment of whether the substance of the expert’s 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 expert’s work in the light of the auditor’s 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
9. If the results of the expert’s 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 auditor’s report
10. When issuing an unmodified auditor’s report, the auditor should not refer to the work of an expert. Such a reference
might be misunderstood to be a qualification of the auditor’s 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 auditor’s 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 expert’s 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.
PSA 500(REVISED)
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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
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
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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
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 expert’s assistance is needed.
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5. The auditor would review management’s instructions regarding:
The application of control procedures, for example, the collection of used stocksheets, accounting for unused
stocksheets, and count and recount procedures.
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 management’s procedures are adequately implemented the auditor would observe
employee’s 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 auditor’s report on the adequacy of third party’s 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 entity’s 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.
Management’s assessment of the outcome of the litigation or claim and its estimate of the financial implications,
including costs involved.
A request that the lawyer confirms the reasonableness of management’s 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 entity’s lawyers, this would be a scope
limitation and should ordinarily lead to a qualified opinion or a disclaimer of opinion.
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 auditor’s 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.
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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
respondent’s 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.
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.
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Assembly of the final audit file
10. The auditor should complete the assembly of the final audit file on a timely basis after the date of the auditor’s
report. As PSQC 1 indicates, 60 days after the date of the auditor’s report is ordinarily an appropriate time limit within
which to complete the assembly of the final audit file
PSA 240 (REVISED 2006) THE AUDITOR’S RESPONSIBILITY TO CONSIDER FRAUD IN AN AUDIT OF FINANCIAL
STATEMENTS
PSA 260 COMMUNICATIONS OF AUDIT MATTERS WITH THOSE CHARGED WITH GOVERNANCE
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 entity’s 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 entity’s assets for personal use
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 entity’s business
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Inherent limitations of an Audit in the context of Fraud
1. Owing to inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the
financial statements will not be detected, even though the audit is properly planned and performed in accordance
with PSAs
2. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a
material misstatement resulting from error because fraud may involve sophisticated and carefully organized schemes
designed to conceal it, such as:
Forgery
Deliberate failure to record transactions
Intentional misrepresentation being made to the auditor
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
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1. The auditor should consider whether analytical procedures that are performed at or near the end of audit when
forming an overall conclusion as to whether the financial statements as a whole are consistent with auditor’s
knowledge of the business indicate a previously unrecognized risk of material misstatement due to fraud
2. When the auditor identifies the misstatement, the auditor should consider whether such a misstatement may be
indicative of fraud and if there is such an indication the auditor should consider the implications of the misstatement
in relation to other aspects of the audit, particularly the reliability of management representations
3. When the auditor confirms that, or is unable to conclude whether, the financial statements are materially misstated
as a result of fraud, the auditor should consider the implications for the audit
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
entity’s financial statements communicated by the employees, former employees, analysts, regulators or
others
Documentation
1. The documentation of the auditor’s understanding of the entity and its environment and the auditor’s 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 entity’s 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 auditor’s 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
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
entity’s 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
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Responsibility of management for the compliance with laws and regulations
1. It is management’s responsibility to ensure that the entity’s operations conducted in accordance with laws and
regulations
2. The responsibility for the prevention and detection of noncompliance rests with management
3. The following policies and procedures, among others, may assist management in discharging its responsibilities for
the prevention and detection of noncompliance:
Monitoring legal requirements and ensuring that operating procedures are designed to meet these
requirements
Instituting and operating appropriate systems of internal control
Developing, publicizing and following a Code of Conduct
Ensuring employees are properly trained and understand the Code of Conduct
Monitoring compliance with the Code of Conduct and acting appropriately to discipline employees who fail
to comply with it
Engaging legal advisors to assist in monitoring legal requirements
Maintaining a register of significant laws with which the entity has to comply within its particular industry
and a record of complaints
AUDIT SAMPLING
(BASED ON PSA 530: AUDIT SAMPLING AND OTHER SELECTIVE TESTING PROCEDURES)
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.
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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
II. Nonstatistical sampling is a sampling approach that does not have characteristics (a) and (b).
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 entity’s 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
SAMPLING RISK
1. It arises from the possibility that the auditor’s 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.
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o The auditor’s understanding of the business (in particular, procedures undertaken to obtain an
understanding of the accounting and internal control systems)
o Charges in the personnel or in the accounting and internal control systems
o The results of audit procedures applied in prior periods
o The results of other audit procedures
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
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3. Choose an audit sampling technique
a. Statistical vs. Nonstatistical
b. Classical variables sampling vs. Probability-proportional-to-size sampling
4. Determine the sample size
The auditor considers the following:
a. Variation within the population
Sample size varies in the same direction as the variation in population amounts. As population variation
increases, so does the sample size
An estimate of population variation is made by determining a population standard deviation
b. Acceptable risk of incorrect rejection
c. Acceptable risk of incorrect acceptance
d. Tolerable error – the maximum monetary error that may exist in an account balance without causing
the financial statements to be materially misstated
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.
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.
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EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR SUBSTANTIVE PROCEDURES
(PSA 530, APPENDIX II)
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 auditor’s staff or an outside professionals
6. In planning the portions of the audit which may be affected by the client’s 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
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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
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:
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
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Review of general CIS controls
General CIS controls that relate to some or all applications are typically interdependent controls in that their
operation is often essential to the effectiveness of CIS application controls. Accordingly, it may be more efficient to review the
design of the general controls before reviewing the application controls.
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)
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a. Data sharing
b. Data independence
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 entity’s computer to another
entity’s 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
1. Auditing around the computer – the auditor ignores or bypasses the computer processing function of an entity’s EDP
system
2. Auditing with the computer – the computer is used as an audit tool
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3. Auditing through the computer – the auditor enters the client’s system and examines directly the computer and its
system and application software
26
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
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2. The following procedures are typically performed at or near the completion of the fieldwork to detect subsequent
events:
a. Read the latest available interim financial statements and compare them with the financial statements
being reported on
b. Read the available minutes of the meetings of stockholders, directors, and appropriate committees
c. Assemble pertinent findings resulting from inquiries of legal counsel and other auditing procedures for
litigation, claims, and assessments
d. Obtain a letter of representation from management
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)
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
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Indicate that you have recorded material regarding the capital per se
______________________
(Senior Executive Officer)
______________________
(Senior Financial Officer)
[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.
Auditor’s responsibility
29
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 auditor’s 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 entity’s preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the 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.
[Auditor’s signature]
[Date of Auditor’s report]
[Auditor’s address]
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 company’s 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 Company’s 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.
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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 … (auditor’s 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
company’s 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 … (auditor’s 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)
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 … (auditor’s 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
31
December 31,19X1, which restrictions was not disclosed in the company’s 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 … (auditor’s 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 auditor’s report but before the financial statements are issued
4. During the period from the date of the auditor’s 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
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 auditor’s 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
auditor’s report
7. When management does not amend the financial statements but the auditor believes they need to be amended and
the auditor’s report has not been released to the entity, the auditor should express a qualified opinion or an adverse
opinion.
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2. The auditor should consider whether the auditor’s own participation is sufficient to be able to act as principal auditor.
The following would be considered:
o The materiality of the portion of the financial statements which the principal auditor audits
o The principal auditor’s degree of knowledge regarding the business of the components
o The risk of material misstatements in the financial statements of the components audited by the other
auditor
o The performance of additional procedures as set out in PSA 600 regarding the components audited by other
auditor resulting in the principal auditor having significant participation in such audit
3. When planning to use the work of another auditor, the principal auditor should:
o Consider the professional competence of the other auditor in the context of specific assignment
o Perform procedures to obtain sufficient appropriate audit evidence that the work of the other auditor is
adequate for the principal auditor’s purposes in the context of the specific assignment
o Consider the significant findings of the other auditor
4. Reporting conclusions
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 auditor’s 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
auditor’s 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 auditor’s 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
3. When the incoming auditor decides to refer to the predecessor auditor’s report, the incoming auditor’s 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
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REPORTING – COMPARATIVE FINANCIAL STATEMENTS
CONTINUING AUDITOR
1. The auditor may express adverse or qualified opinion, disclaim an opinion, or include an emphasis of paragraph with
respect to one or more financial statements for one or more period, while issuing a different report on the other
financial statements
2. When finding the connectivity of the prior period financial statements with the current financial statements, if the
opinion on such prior period is different from the opinion previously expressed, the auditor should disclose the
substantive reasons for the different opinion in an emphasis of matter paragraph
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 auditor’s report should state that the prior period was audited by another auditor and the incoming
auditor’s 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
OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS (BASED ON PSA 720)
1. An entity ordinarily issues on an annual basis a document which includes its audited financial statements together
with the auditor’s 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 auditor’s 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
1. The objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures
which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s attention
that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance
with Philippine Financial Reporting Standards (negative assurance).
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 entity’s organization, accounting systems, operating characteristics and the nature of its assets,
liabilities, revenues, and expenses.
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5. Procedures for the review of financial statements will ordinarily include:
Obtaining an understanding of the entity’s business and the industry in which I operates.
Inquiries concerning the entity’s
Accounting principles and practices.
Procedures for recording, classifying, and summarizing transactions, and accumulating information for
disclosures.
Actions taken at meeting of stockholders, the board of directors, and committees.
Analytical procedures designed to identify relationships and individual items that appear unusual. Examples:
Comparison of the financial statements with those from prior periods.
Comparison of the statements with anticipated results, such as previously prepared budgets or
forecasts.
Study of the relationships of elements of the financial statements that are expected to form a
predictable pattern.
Reading the financial statements to consider, on the basis of information coming to the auditor’s attention,
whether the financial statements appear to conform to basis of accounting indicated.
Obtaining reports from other auditor’s, if any if considered necessary, who have been engaged to audit or review
the financial statements of components of the entity.
Inquiries of persons having responsibility for financial and accounting matters concerning, for example:
Whether all transactions have been recorded.
Whether the financial statements have been prepared in accordance with the basis of accounting
indicated.
Changes in the entity’s business activities and accounting principles and practices.
Matters as to which questions have arisen in the course of applying the foregoing procedures.
Obtaining written representations from managements when considered appropriate.
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
Company’s 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.
1. An engagement to perform agreed-upon procedures may involve the auditor in performing certain procedures
concerning:
Individual items of financial data (for example, accounts payable, accounts receivable, purchases from related
parties and sales and profits of a segment of an entity).
A financial statement (for example, a balance sheet).
A complete set of financial statements.
2. The objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an audit nature to
which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.
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 auditor’s 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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Title;
Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon procedures);
Identification of specific financial or non-financial information to which the agreed-upon procedures have been
applied;
A statement that the procedures performed was those agreed upon with the recipient;
A statement that the engagement was performed in accordance with the Philippine Standard on Related Services
applicable to agreed upon procedures engagements;
A statement that the auditor is not independent of the entity if such is the case;
Identification of the purpose for which the agreed-upon procedures were performed;
A listing of the specific procedures performed;
A description of the auditor’s 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 entity’s financial statements taken as a whole;
Date of the report;
Auditor’s address; and
Auditor’s signature.
1. A compilation engagement would ordinarily include the preparation of financial statements (which may or may not be a
complete set of financial statements) but may also include the collection, classification, and summarization o other
financial information.
2. The objective of a compilation engagement is for the accountant to use accounting expertise, as opposed to auditing
expertise, to collect, classify and summarize financial information.
3. The procedures employed are not designed and do not enable the accountant to express any assurance on the financial
information.
4. Independence is not a requirement for a compilation engagement. However, where the accountant is not independent,
a statement to that effect would be made in the accountant’s report.
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.
If the accountant becomes aware that information supplied by management is incorrect, incomplete, or otherwise
unsatisfactory, the accountant should consider performing the above procedures and request management to provide
additional information.
If management refuses to provide additional information, the accountant should withdraw from the engagement,
informing the entity of the reasons for the withdrawal.
7. The accountant should read the compiled information and consider whether it appears to be appropriate in form and
free from obvious material misstatements.
8. The accountant should obtain an acknowledgement from management of its responsibility for the appropriate
presentation of the financial information and of its approval of the financial information.
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 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.
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THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION
(Based on PSAE 3400)
1. “PROSPECTIVE FINANCIAL INFORMATION” means financial information based on assumptions about events that may
occur in the future and possible actions by an entity. It can be in the form of a forecast, a projection, or a combination of
both, for example, a one year forecast plus a five year projection.
2. A “FORECAST” means prospective financial information prepared on the basis of assumptions as to future events which
management expects to take place and the actions management expects to take as of the date the information is
prepared (best-estimate assumptions).
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.
5. Management is responsible for the preparation and presentation of the prospective financial information, including the
identification and disclosure of the assumptions on which it is based.
6. In an engagement to examine prospective financial information, the auditor should obtain sufficient appropriate
evidence as to whether:
Management’s best-estimate assumptions on which the prospective financial information is based are not
unreasonable and, in the case of hypothetical assumptions, such assumptions are consistent with the purpose of the
information.
The prospective financial information is properly presented and all material assumptions are adequately disclosed,
including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions; and
The prospective financial information is prepared on a consistent basis with historical financial statements, using
appropriate accounting principles.
7. The auditor should not express any opinion as to whether the results shown in the prospective financial information will
be achieved.
8. When reporting on the reasonableness of management’s assumptions, the auditor provides only a moderate level of
assurance.
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 management’s 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 management’s 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.
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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.
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 client’s or
employer’s 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;
2. Contains statements or information furnished recklessly or without any real knowledge of whether they are true
or false; or
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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 team’s 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
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
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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
client’s 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 client’s interests.
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 firm’s own systems and procedures
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k. Means of advising partners and professional staff of those assurance clients and related entities from which they
must be independent
l. A disciplinary mechanism to promote compliance with policies and procedures; and
m. Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence
and objectivity that concerns them; this includes informing staff of the procedures open to them
Safeguards within the firm’s 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 individual’s 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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