Professional Documents
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Aud Theo
Aud Theo
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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OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
1. The OBJECTIVE of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in
all material respects, in accordance with an applicable financial reporting framework.
2. The auditor should comply with relevant ethical requirements relating to audit engagements.
3. The auditor should conduct the audit in accordance with PSAs.
4. “Scope of an audit” refers to the audit procedures that, in the auditor’s judgment and based on PSAs, are deemed appropriate in the circumstances
to achieve the objective of the audit.
5. The auditor should plan and perform an audit with an attitude of PROFESSIONAL SKEPTICISM recognizing that circumstances may exist that cause
the financial statements to be materially misstated.
6. In forming the audit opinion, the auditor obtains sufficient appropriate evidence to be able to draw conclusions on which to base that opinion.
7. The auditor’s opinion enhances the credibility of financial statements by providing a high, but not absolute, level of assurance.
8. Absolute assurance in auditing is not attainable as a result of such factors as:
The need for judgment;
The use of testing;
The inherent limitations of any accounting and internal control systems; and
The fact that most of the evidence available to the auditor is persuasive, rather than conclusive, in nature.
9. While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for the preparation and
presentation of the financial statements in accordance with the applicable financial reporting framework is that of the entity’s MANAGEMENT, with
oversight from those charged with governance.
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)
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
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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.
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.
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10.
2. The auditor should perform the following activities at the beginning of the current audit engagement:
Perform procedures regarding the continuance of the client relationship and the specific audit engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.
Planning Activities
3. The auditor should establish the overall audit strategy for the audit. The overall audit strategy sets the scope, timing and direction of the audit, and
guides the development of the more detailed audit plan
5. The auditor should develop an audit plan for the audit in order to reduce audit risk to an acceptably low level.
6. The audit plan is more detailed than the overall audit strategy and includes the nature, timing and extent of audit procedures to be performed by
engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
The overall audit strategy and the audit plan should be updated and changed as necessary during the course of the audit.
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.
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2. Discussions with those charged with governance ordinarily include the overall audit strategy and timing of the audit, including any limitations thereon, or
any additional requirements.
3. When discussion of matters included in the overall audit strategy or audit plan occur, care is required in order not to compromise the effectiveness of the
audit.
The auditor should perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit engagement.
2. Communicate with the previous auditor, where there has been a change of auditors, in compliance with relevant ethical requirements.
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
1. The auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of
material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures.
2. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal
control:
a.) Industry, regulatory, and other external factors, including the applicable financial reporting framework.
b.) Nature of the entity, including the 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.
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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:
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:
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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
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:
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.
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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
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;
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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)
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
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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
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
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5. RECALCULATION
Consists of checking the mathematical accuracy of documents or records
6. REPERFORMANCE
The auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control, either
manually or through the use of CAATs
7. ANALYTICAL PROCEDURES
Consists of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. It
also encompasses the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or
deviate significantly from predicted amounts.
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.
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.
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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.
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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3. “experience auditor” means an individual (whether internal or external to the firm) who has reasonable understanding of
Audit processes;
PSAs and applicable legal and regulatory requirements
The business environment in which the entity operates; and
Auditing and financial reporting issues relevant to the entity’s industry
4. Audit documentation may be recorded on paper or on electronic or other media
5. The auditor should prepare the audit documentation so as to enable an experiences auditor, having no precious connection with the audit, to
understand:
the nature, timing , and extent of the audit procedures performed to comply with PSAs and applicable legal and regulatory requirements
the results of the audit procedures and the audit evidence obtained; and
significant matters arising during the audit and the conclusions reached thereon
6. in documenting the nature, timing and extent of audit procedures performed, the auditor should record the identifying characteristics of the specific
items or matters beig tested
7. the auditor should document discussions of significant matters with management and others on a timely basis
8. where, in exceptional circumstances, the auditor judges it necessary to depart from a basic principle or an essential procedure that is relevant in the
circumstances of the audit, the auditor should document how the alternative audit procedures performed achieved the objective of the audit, and,
unless otherwise clear, the reasons for the departure
9. the auditor should record:
who performed the audit work and the date such work was completed
who reviewed the audit work performed and the date and extent of such review
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:
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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
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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Evaluation of audit evidences
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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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.
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
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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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c. Block selection or cluster sampling
It involves selecting a block(s) of contiguous items from within the population
It cannot be ordinarily used in audit sampling because most populations are structured such that items in sequence can be expected to
have similar characteristics to each other, but different characteristics from items elsewhere in the population
Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it would rarely be an appropriate
sample selection technique when the auditor intends to draw valid inferences about the entire population based on sample
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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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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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. A CIS environment exists when a computer of any type or size is involved in the processing by the entity of financial information of significance to
the audit, whether the computer is operated by the entity or by a third party
2. The overall objective and scope of an audit does not change in a CIS environment
3. A CIS environment may affect:
a. The procedures followed in obtaining a sufficient understanding of the accounting and internal control systems
b. The consideration of the inherent and control risk
c. The design and performance of tests of controls and substantive procedures
4. The auditor should have sufficient knowledge of the CIS to plan, direct, and review the work performed
5. If specialized skills are needed, the auditor would seek the assistance of a professional possessing such skills, who may be either on the 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
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
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INTERNAL CONTROLS IN A CIS ENVIRONMENT
GENERAL CIS CONTROLS – to establish a framework of overall control over the CIS activities and to provide a reasonable level of assurance that the overall
objectives of internal control are achieved
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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e. Electronic commerce activities
3. Types of terminals used in on-line systems:
A. General purpose terminals
1. Basic keyboard and screen
2. Intelligent terminal
3. PCs
B. Special purpose terminals
1. Point-of-sale devices
2. Automated teller machines (ATM)
5. Types of on-line computer systems:
a. On-line/ real time processing
Individual transactions are entered at terminal devices, validated, and used to update related computer files immediately.
b. On-line/batch processing
Individual transactions are entered at a terminal device, subjected to certain validation checks, and added to a transaction file
that contains other transactions entered during the period. Later, during a subsequent processing cycle, the transaction file may be validated further and then
used to update relevant master file.
c. On-line/Memo update (and subsequent Processing)
NETWORK ENVIRONMENT
1. A network environment is a communication system that enables computer users to share computer equipment, application software, data, and voice
and video transmissions
2. A file server is a computer with an operating system that allows multiple users in a network to access software applications and data files
3. Basic types of networks
a. Local area network (LAN)
b. Wide area network (WAN)
c. metropolitan area network (MAN)
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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
3. Auditing through the computer – the auditor enters the client’s system and examines directly the computer and its system and application software
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d. Transaction tagging – a transaction record is tagged and then traced through critical control points in the information
system
e. Extended records – this technique attaches additional audit data which would not otherwise be saved to regular historic
records and thereby helps to provide a more complete audit trail
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RELATED PARTY TRANSACTIONS
Identifying transactions with related parties
The following procedures may identify material transactions with known related parties or indicate the existence of previously unknown related parties:
1. Provide personnel performing all segments of the audit with the names of known related parties
2. Review the minutes of meetings of the board of directors and committees
3. Review filings with SEC and other regulatory agencies
4. Review conflict-of-interest statements obtained from the client’s management
5. Review business transacted with major customers, suppliers, borrowers, and lenders for indications of undisclosed relationships
6. Consider whether unrecognized transactions are occurring, such as receiving or providing accounting, management, or other services at no charge
7. Review accounting records for large, unusual, or nonrecurring transactions or balances, especially those near the end of the period
8. Review invoices from law firms
9. Review confirmations of loan receivable and payable for guarantees.
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).
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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
Indicate that you have recorded material regarding the capital per se
______________________
(Senior Executive Officer)
______________________
(Senior Financial Officer)
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INDEPENDENT AUDITOR’S REPORT
[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
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
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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.
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)
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On January 31,20X2, the Company issued debentures in the amount of… for the purpose of financing plant expansion. The debenture
agreement restricts the payment of future cash dividends to earnings after December 31,19X1, which restrictions was not disclosed in the
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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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
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
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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 a compliance with contractual agreements
1. Engagements to express an opinion as to an entity’s compliance with contractual agreements should be undertaken only when the overall aspects of
compliance relate to accounting and financial matters within the scope of the auditor’s professional competence
2. The report should state whether, in the auditor’s opinion, the entity has complied with the particular provisions of the agreement
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.
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.
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EXAMPLE OF AN UNQUALIFIED REVIEW REPORT
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.
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.
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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.
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.
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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.
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
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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
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
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THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance
client. Examples:
a. A direct financial interest or material indirect financial interest in an assurance client
b. A loan or guarantee to or from an assurance client or any of its directors or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements
2. SELF-REVIEWTHREAT
Occurs when:
a. Any product or judgment of a previous assurance engagement or non-assurance engagement needs to be reevaluated in reaching conclusions
on the assurance engagement or;
b. When a member of the assurance team was previously a director or officer of the assurance client, or was an employee in a position to exert
direct and significant influence over the subject matter of the assurance engagement
3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an assurance 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
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,
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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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