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June 3, 2020

Audit Process

Module Chapters:

Chapter 2 Overview of the Audit Process

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TOPIC 1 | Basic Concepts

Audit Process

2 major processes

1. Investigation - gather evidence about assertions Thru: Providing

2. Reporting - communicate results to users opinion contained
in an Audit Report
PSAs Philippine Standards on Auditing

1. The Standard applicable to audit of historical financial information

2. Minimum guide in the conduct of audit
3. Not a set of procedures to follow, but a set of guidelines
4. The generally accepted auditing standards (GAAS)

Failure to follow the PSAs (minimum guide) is an evidence of the auditor’s negligence.
A negligent auditor is liable for an incorrect opinion due to non-detection of material
misstatements. Thus, PSAs serve as benchmarks of the auditor’s quality of work.

By this time, you should be able to

Evidence An important basis in providing an opinion recall CRIES, the bases for opinion
(June 3 AT Intro. to Auditing)
Perform audit procedures to gather evidence.

Specific audit procedures

Inquiry
Inquiry deals with INTERNAL sources of evidence
1. Oral evidence
2. Inquiry of:
 Management Ex: Evidence about management’s
 People within the entity future actions may best be obtained
3. Primary, most-used audit procedures through inquiry (e.g., interview), as
4. As to usefulness: written plans may not be available.
 A valid source of evidence
 Highly useful if evidence does not exist in written form
 But, less reliable if external sources are available
5. Evidence is:
 Indirect
 Subjective - depends upon the person asked

Inspection

1. Inspection of:
 Asset
 Records and documents

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 Auditing Theory
2. Physical evidence - inspection of asset
3. Documentary evidence - inspection of records and documents
4. As to weight - more reliable than inquiry
5. Evidence is:
 Direct - auditor sees the evidence firsthand
 Objective
TIP: vouching starts from records
6. As to direction:
A. Vouching - backwards approach
 Inspect from accounting records back to supporting documents
 Inspect from the recorded assets to the physical assets
 This addresses the following assertions:
- Existence - for B/S accounts (e.g. receivable, PPE)
- Occurrence - for I/S accounts (e.g., sales, depreciation)

For Intangibles, say Illustration

Patent, their existence
may be tested by vouching
recorded Patent (record)
to registration or licensing
papers (documents).
TIP: tracing starts from
sources other than records
B. Tracing - forward approach
The records show A/R of P100,000 and Machinery of P400,000.
Vouching procedures:
- Vouch A/R from the general ledger (records) to the sales invoice
(documents) - existence of A/R
- Vouch Sales from the sales journal (records) to the bill of lading
(documents) - occurrence of Sales
- Vouch Machinery from PPE ledger (records) to the actual
machines in the plant or factory (physical) - existence of PPE
 Inspect from supporting documents to accounting records
 Inspect from physical assets to recorded assets
 This addresses the Completeness assertion

Illustration

Goods were shipped for P100,000 and machinery was acquired for
P400,000 and placed for use in the factory.

Tracing procedures:
- Trace bill of lading (documents) to the sales journal (records) to
check whether all shipments were recorded - completeness of
Sales
- Trace actual machinery located in the factory (physical) to the
recorded machinery in the ledger to check whether all assets
were recorded - completeness of PPE

Observation

1. Looking at others performing a process

2. As to weight - more reliable than inquiry

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Because controls
3. Evidence is: are made up of
 Direct processes and
 Objective procedures
4. As to appropriateness:
 More appropriate for testing internal controls (effectiveness)
 Less appropriates for substantive testing (detecting misstatements)

Recalculation

1. Audit of mathematical accuracy

2. Primarily for substantive testing (detecting material misstatements)
3. Direct evidence

Reperformance

1. Auditor’s independent execution of others’ processes

2. Primarily for testing internal controls (effectiveness)
3. Direct evidence

Confirmation

1. Special form of inquiry

2. Inquiry of third parties (outside)
3. More reliable than inquiry (internal)
4. More appropriate, if not best, for audit of the following:
 Existence of inventory held by consignees or warehouses
 Existence of A/R (ask customers)
 Existence of machinery leased to others (ask lessees)
 Existence of deposit accounts (ask banks)

Analytical procedures

1. Test of reasonableness of:

 Trends (e.g., 2020 Sales vs 2019 Sales)
 Ratios (e.g., ratio of gross profit to Sales)
 Relationships (e.g., increase in Selling expense to increase in Sales
 Entity ratios to industry ratios
2. Purpose - to identify fluctuations, inconsistencies, deviations
- If identified, investigate further

TOPIC 2 | Phases of audit 1. Details of balance

2. Details of transactions
Phases or stages of audit PAPUToC R

1. Pre-engagement 5. Testing of controls/ details

2. Acceptance 6. Completing
3. Planning 7. Reporting
4. Understanding the entity

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Acceptance Considerations before accepting an audit A PRIME

1. Auditability of information
2. Preconditions for an audit
3. Relevant ethical requirements
4. Integrity of client’s management
5. Mutual understanding of the terms of the engagement
6. Evidence available

Preconditions for an audit

An audit must not be accepted if the following preconditions are not met:

1. Acceptable reporting framework in used in the FSs

2. Management’s acceptance of its responsibility is obtained:
Responsibility for (see Chapter 2 for details)
 Preparation of FSs
 Internal controls relevant to the FSs
3. Management’s grant of unrestricted access to relevant information

Planning Development of:

1. Overall audit strategy - sets scope, direction and timing of audit

2. Audit plan - more detailed, describes procedures to be performed
Meaning, there could still be planning
Planning is:
even after the initial stages of the audit
1. Not a discrete (separate) phase of audit
2. Continuous
3. Dynamic - could change anytime
4. Iterative - in repetition

Understanding

2 aspects of understanding

1. Understanding the entity and its environment

2. Understanding the entity’s internal control

This is done by “risk assessment procedures”. (for June 24 handout)

Testing Nature of testing (details in July 1 handout)

1. Tests of controls - to determine effectiveness of controls

2. Substantive tests - to detect material misstatements
 Test of details of balances - for B/S accounts
 Test of details of transactions - I/S accounts, receipts, payments
 Substantive analytical procedures

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Completing Overall review of the FSs before providing opinion

Reporting Providing audit report containing the opinion

Repeated from page 2 for the memory
If the audit or examination is
TOPIC 3 | PSAs and other engagement rules on non-historical information,
Philippine Standards on Assurance
PSAs Philippine Standards on Auditing Engagements (PSAEs) shall govern

1. Scope - audit of historical financial information

2. Application - PSAs are applied to material matters
3. The auditor shall comply with all PSAs relevant to the audit

Relevance A PSA is relevant to the audit when:

1. The PSA is in effect; and

2. The circumstances addressed by the PSA exist.

Practice Statements

Philippine Auditing Practice Statements (PAPSs)

1. In implementing PSAs, they provide:

 Interpretive guidance
 Practical assistance PSAs > PAPSs
2. They promote good practice.
3. They are not Standards.
4. They do not have the same authority as PSAs.

Complementary

Review Chapter 2 discussion notes especially on departure from PSAs and its implications
and answer the Assessment Quiz 1 hour after studying this material and the online
Module.

Summary Quizzers (downloadable) per subject will be released before the end of June in
preparation for the 1st Pre-board examinations.

Let’s learn together!

Editor’s notes:
1. The notes in this material are presented in “Quick Facts” approach to provide an overall view of the topic.
2. Details about some items are presented in Chapter 2 in our online Module.

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