Financial Audit Manual

Veranda, Malaybalay City, Bukidnon

November 06-07,2019
DAY 1
Prayer Ms. Cassie Adriene Tagupa
Lupang Hinirang Ms. Fritzi Capacio ,
Opening Remarks Ms. Josephine Murillo
FAM lecturer Mr. Albert Lungay
Session 1 Explaning the general requirements and application of the Materiality Guidelines
Discussing the General Guidelines
Reviewing the General Guideleine
Materialiaty
It relates to misstatements, inclding omissions, that reasonably be expected
to influence the economic decisions of users taken on the basis of the finacial
statements
Users of FS: Public, Regulators (DILG), SP , Media

4 concepts:
Overall Planning Materiality
Specific Planning Materriality
Overall Performance Materiality
Specific Performance Materiality
consolidated FS basis of audit opinion
rules and regulations Specific like PRDP
lower- subset of overall planning
account or assertion level

Overall- FS as a whole
Specific- particular accounts, class of transactions

Other materiality thresholds:

Testing threshold
Threshold for clearly trivial matters

When to determine Planning Phase or after the UTA in the Planning Phase
What data to use Estimates (Previous Yr, Interim Balances, Annualized Balances)
What thresholds to use Stand Alone - Planning Execution and Reporting
Groups with Components- Planning and Execution Phases only

Annualized Balances only for nominal accounts (Revenues/Expenses)

Sept 90M
Divide /9
10M per month

Annualized Balances = 10M *12 Months = 120M Annualized Balance Estimate

The aditor's determination of materiality is infleced by law, regulation or other authority and by the financial information
needs of legislators and the public in relation to publicsector porgrams
Based on professional judgment (ISSAI 1320.4)

Session 2
Materilaity
Magnitude of misstatement.
Benchmark
Example Total Expenditures Damulog City of Malaybalay
Current Operating Expenses 97,971,888.03 1,006,910,832.84
Transfers, Assistance and Subsidy 5,497,504.55 42,118,616.47
0.50% 0.50%
Materiality 517,346.96 5,245,147.25
2.00% 2.00%
Materiality 2,069,387.85 20,980,588.99

Performance Materiality
Extent of misstatements Performance Materiality Extent of mistatements Total Monetary of Misstatement in PY (Corrected and Uncorrected)x100
in previous year (% of planning materiality) in prior year % Monetary amount of the overall planning materiality of CY
0-40% 80%
40.04-100% 60%
Above- 100% 50% AOM 1 18,794,224.94
AOM 2 1,555,000.00
AOM 3 22,140,000.00
42,489,224.94 Total Misstatement

42,489,224.94 Total Misstatement

5,245,147.25 Overall Planning Materiality
810.067343065484 >100%
so 50% of Overall Planning Materiality
So 5,245,147.25 Overall Planning Materiality
2,622,573.62 Performance Materiality
Material Significant
Cash Yes High Prioritize
AR No Instruction 2nd Prioritize
Other Income Yes - OMAs (Other Material Accounts) Analytical

Session 3 Execution
Testing Threshold
Risk of Material Misstatement (RMM)

The risk that the auditor may express an inappropriate opinion on the FS is known as audit risk. Although audit risks and agency risks
are dissimilar in nature, it is often the case that identification of significant agency risks lead to the detection of audit risks.

Inherent risk is the susceptibility of an assertion, about a class of transaction, account balance or
disclosure to a misstatement that could be material, either individually or when aggregated with
other misstatements, before consideration of any related controls

Control risk is the risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements will not be prevented, or detected and corrected, on a
timely manner by the entity’s internal control.

Detection risk is the risk that the auditor’s procedures will not detect a misstatement that exists
in an assertion that could be material, individually or when aggregated with misstatements.

Low Moderate High

For Asset/Income 51%-100% 26%-50% 10%-25%
For Liability/Expense/Equity 16%-25% 11%-15% 5%-10%

Accounts 2,622,573.62 Testing Threshold

CIB 10% 262,257.36 Yes
Inter Agency Rec 10% 262,257.36 Yes
Inventory 26% 681,869.14 Yes
CIP 26% 681,869.14 Yes
Loans Payable 16% 419,611.78 Yes
Trust Liability 5% 131,128.68 Yes
Other Income 51% 1,337,512.55 Yes
Travel Expense 5% 131,128.68 Yes
Other MOOE 5% 131,128.68 Yes

Clearly Trivial Matters are clearly inconsequential

Material
Not Material
(0.25-.50)% * Clearly Trivial No need to monitor Can issue AOM but no impact in Opinion
Overall Planning
Materiality
 Session 4 Using Materiality in Reporting Phase

Reversion
>Change in circumstances that occurred during the audit
>New information
>A change in the auditor's understanding of the entity and its operations, as a result of performing further audit procedures

We cannot change Overal Planning Materiality but we can revise the Performance Materiality

Misstatements:
Factual Misstatements Unbooked Amount, Arithmetical Error, Reclassification Error
Judgemental Misstatementals Dereciation, Provision
Projected Misstatements Based on Sampling

Size misstatement- Quatitative Materiality

Natre and Circustances- Qualitative Materiality
Effect of uncorrecred misstatement

DAY 2
Prayer Catherine Reynoso
Financial Audit Manual
Risk is the probability of an act or event occurring that would have an adverse effect in the achievement of an agency’s objectives.

Understanding the Agency

The resident auditors assigned in their respective agencies perform, among others, financial and compliance audits.

The UTA template may include the following:

a. A general overview of the entity’s organization and operations;

b. The agency’s main activities and critical processes;
c. Projects/Programs/Activities;
d. Results of previous audit;
e. Auditor’s notes on any component that may be significant to the conduct of financial audit.

To enhance Auditor’s understanding of the audit entity, the following steps shall be undertaken:

a. Updating information base for financial audit and conducting preliminary risk assessment;
b. Assessing other matters for consideration; and,
c. Assessing Related Parties transactions

A significant risk is where the assessed risk of material misstatement is so high that in the auditor’s judgment, it will require special audit consideration as in these cases:
a. large non-routine transactions;
b. matters requiring judgment or management intervention such as changes in accounting impairment policies;
c. error or fraud is high;
d. non-compliance with laws and regulations; or,
e. unreliable internal control.

SRPIR Summary Report on Preliminary Identification of Risks

Becomes the initial basis for conducting further risk assessment and updating the overall audit strategy.
Appendix 2.6
Agency-Level Control Checklist

The preliminary assessment of the Internal Control System of the agency is based on the five components of the internal control:

 Control Environment – sets the tone of an organization, influencing the control consciousness of its staff. It is the foundation for all other components of internal
control, providing discipline and structure.
 Risk Assessment – process of identifying and analyzing relevant risks to the achievement of the agency’s objectives and determining the appropriate response.
 Control Activities – The policies and procedures established to address risks and to achieve the agency’s objectives. The procedures that an organization puts in place to treat risk.
 Information & Communication – effective processes and systems that identify, capture and report operational, financial and compliance-related information in a form and
timeframe that enable people to carry out their responsibilities.
 Monitoring – the process that assesses the quality of the internal control system’s performance over time.

In COA
Quality Management
Quality Assurance
Quality Control

The following are examples of circumstances that may indicate the possibility that the FS may contain a material misstatement resulting from fraud.

Discrepancies in the accounting records, including:

i. Transactions that are not recorded in a complete or timely manner or are improperly recorded as to amount, accounting period, classification or entity policy;
ii. Unsupported or unauthorized balances or transactions;
iii. Last-minute adjustments that significantly affect financial results;
iv. Evidence of employees’ access to systems and records inconsistent with that necessary to perform their authorized duties; and,
v. Tips or complaints to the auditor about alleged fraud.

Conflicting or missing evidence, including:

i. Missing documents;
ii. Documents that appear to have been altered;
iii. Unavailability of documents other than photocopied or electronically transmitted documents when documents in original form are expected to exist;
iv. Significant unexplained items or reconciliations;
v. Unusual balance sheet changes, or changes in trends or important FS ratios or relationships – for example, receivables growing faster than revenues;
vi. Inconsistent, vague, or implausible responses from management or employees arising from inquiries or analytical procedures;
vii. Unusual discrepancies between the entity’s records and confirmation replies;
viii. Large number of credit entries and other adjustments made to accounts receivable records.
ix. Unexplained or inadequately explained differences between the accounts receivable sub-ledger and the control account, or between the customer statements and the accounts
receivable sub-ledger; and,
x. Missing or non-existent cancelled checks in circumstances where cancelled checks are ordinarily returned to the entity with the bank statement.