Aud Theo Chapt 4

Audit Process-Accepting an Engagement

- an audit of fs generally begins with fs prepared by entity's mgnt.

- fs is the responsibility of the mgnt
- no fs, no audit will be performed
- Gen. Approach when auditing fs would require consideration of:

1. FS assertions
- ang iaaudit ni auditors
2. Audit Procedures
- paano iaaudit? will formaulate or plan procedures
3. Audit Evidence
- pag ipeperform na ang procedures, u need the audit evidence to support them.
- pag may AE you will evaluate, nakapasa ba yung procedure? did you get the results u
wanted? nahit mo ba ang assertions?
*then afterwards, or nagagree na na okay na sa results, this is where audit opinion comes in
*FS assertions - audit procedures - audit evidence-based audit opinion on fs

FS Assertions

A. Mgnt is resp to fair presentation of fs that reflects:

1. Nature of the entity
2. Operation of entity
B. In representing, fs should be in accordance with applicable Financial Reporting Framework
C. Mgnt make assertions regarding: of various elements of fs
1. Recognition
2. Measurement
3. Presentation
4. Disclosure
D. Core Assertions: Occurence, Completeness and Classification

Categories of Assertions
- each assertions are intended for a diff aspect on fs

1. Classes of transactions and events for the period under audit

- transactional, from jan to dec of the year
- transaction level of assertions
- mostly related or in regard to income statement
 a. Accuracy
- full amount of all transactions without error.
- walang bawas na zero, wala ring dagdag na zero
- accurate, have been recorded appropriately
b. Classification
-all transactions have been recorded within the correct/proper accounts in the general
ledger
-proper classification
c. Completeness
-all bus events where the company is involved or subjected to are all recorded
-all transactions/ events related to the entity have been recorded
-walang kulang, walang sobra
d. Cutoff
-all transactions are recorded within the correct reporting/ acctng period
-hindi lumagpas ng cutoff
e. Occurrence
-all bus transactions actually take place
-nangyari, have occured and pertain to entity

2. Account Balances/ Ending Balance Assertions at the period end

- related in ending balances in the accounts
- relation to balance sheet
a. Completeness
- all assets, liabilities and equity balances are reported
- walang bawas, walang sobra, complete
b. Existence
-all account balances exist for asset, liabilities and equity
-same as occurrence but then again existence is related to the ending balances or
mainly the balance sheet
-check the prob how is it questioned
c. Rights and Obligations
-company has the rights to the assets
-liabilities reported, the company has an obligation to pay them
-holds and controls the rights to assets
-liabilities as the company's obligations
-ending balances of the accounts
d. Valuation and allocation
-all asset, liabii and equity balances have been recorded at their proper valuations
-vinavalue at yr end, like receivables, inventories (obsolescence), properties na
vinavalue
 -appropriate amounts or valuation or allocation adjustments are recorded

3. Presentation and Disclosure Assertions

- hybrid/combination
- presentation of info in fs
- notes disclosure
- accompanying disclosures
a. Accuracy and Valuation
-correct amounts ang nagrereflect
-proper values
-financial and other info are disclosed fairlt and appropriate amounts
b. Completeness
-all transactions that need to be disclose on notes are disclosed
-all disclosures should have been included
-completeness of disclosures
c. Occurrence and rights and obligations
-disclosed transactions and events on notes actually occurred and pertain to entity
d. Classification and understandability
-note 1 about comp background, clearly understandable ba ang nature, kailan
nagumpisa, what date?
-clearly and understable notes and presentations
-financial info is appropriately presented and described and disclosures are clearly
expressed.

Audit Procedures can be:

- Solo, dalawa, In combination of marami
- but note that its not time consuming, over audit, tamang mahihit lang ung assertions
- these procedures are done to get evidence
- paano iquaquantify na ung evidence mo ay tama? it should be sufficient and appropriate
- sufficient-sakto, di kulang, di sobra but okay lang sobra but kaya
- it should be relevant (para ba talaga sa company)and reliable(tama ba ung data)

1. Inspection
-best procedure for the auditors
-when u inspect you see the actual documents
-legal documents, original documents
-examining of records, documents/tangible asset.

2. Observation
-chinecheck mo ung process if paano ginagawa ni client ung computation, recording
 -usually sa risk assessment ito ginagagawa, ung control's testing
-sa substantive applicable pa rin naman
-looking at process/procedures

3. Inquiry
-seeking information from knowledgeable person inside and out
-younask the contact person, they tell initial
-so u can ask another person from one person

4. Confirmation
-response to inquiry
-this is where u corroborate the information u have gathered
-(makadikit and magkasunid ni inquiry)

5. Computation
-checking the arithmetical accuracy
-magcocompute sa complicated na accounts
-like ppe, with its depr; interest sa loans; nirerecompute, nirerecalculate, rereperform ng
calculations

6. Analytical Procedures
-high level analysis
-significant ratios and trend
-including the resulting investigation of fluctuations and r-ships that are inconsistent with other
relevant infos

Overview of Audit Process

4 Phases
1. Audit Planning
2. Risk Assessment
3. Substantive Testing
4. Completion

Pre-engagement Activities or Planning Activities

1. Accepting an Engagement
-make decision whethere to accept/reject audit engagement
-evaluation of auditor's qualification
-auditability of prospective client's FS
 -PRELIMINARY UNDERSTANDING of client's business and BACKGROUND investigation of
prospective client
-(PSA 300) PRELIMINARY PLANNING ACTIVITIES
-auditor must evaluate his/her qualification. inside looking din not just outside looking
-need of initial understanding
-background investigation
-PSA 300
a. - performing procedures regarding continuance of client r-ship and specific audit
engagement
- procedures for recurring client (continuance) and (acceptance) brand new client
b. - evaluating compliance with ethical requirements including independence
- independence is observed (ind evaluation), like may kamaganak ka ba sa company
na ito, investment sa company na ito
        - expertise, proper assignment of personnel sa engagement team
c. - establishing understanding of the terms of the engagement

- Terms of engagement- ano ba nirerequest? full statury audit ba where u submit fs sa bir
(april 15) and sec o baka review or agrred upon lang?

2. Audit Planning
-budgeting, forecasting, staffing
-more detailed knowledge about client's business and industry
-to understand transactions and events affecting the FS
-to identify potential problems during audit
-PRELIMINARY ASSESSMENT OF RISK AND MATERIALITY
-to develop overall audit strategy and detailed approach
-manghihingi ng budgeting and forecasting nila
-planning analytical procedures, mga trends
-compute materiality-initial planning materiality
-makakapili ka na ng significant accnts, based on materiality
-vouching-checking of documents
-sampling,(non sampling), population 100 %, specific identification, judgment ni auditor un
ano ung best approach
-critical stage you plan hanggang completion of audit

3. Considering the Internal Control

-first question when we consider internal control: are ungoin to rely on internal control of
the company? if yes then you need to test it
-if natest siya and naconclude na pwede ka makapagrely and effective ng internal
 control, you can have less procedures in substantive because effective and reliable
ang internal control
-if hindi ka n magrerely, hindi ka na magtetest, full substantive or extensive
-more on risk assessment
-interviews, walkthroughs and control's testing
-pinapaulit natin from recording, review, approval
-adequate consideration to the entity's internal control
-because it directly affects reliability of the FS
- the stronger internal control, the more assurance it provides reliability of acctng data and FS
-involves OBTAINING UNDERSTANDING OF ENTITY'S CONTROL SYSTEMS and
ASSESSING THE LEVEL OF CONTROL RISK
-Control Risk - tama ba mga signatories? tama ba ang point persons? (sino nagcheck sino
nagprepare) may segregation of duties ba? (no to one man team) capabilities and
qualification(cpa ba ang nagprepare)
-Risk (that the client's internal control may not prevent or detect material misstatements in the
FS
-if auditor wants to assess control risk at less than high level, sufficient appropriate evidence
must be obtained
-evidence can be obtained by performing test of controls
-Control's Testing- odba process, nacheck mo kung sana ang control points (example of
process of how does the company purchase)
a. preparation prepared ni point person 1-(control #1)
b. nirereview ni point person 2 ( control #2)
c. inaapprove toh ni point person 3 ( control #3)
 
-control 1,2 and 3 - magkakaroon ka ng sampling. ano ba population mo diyan? lahat ng
purchases sa buong taon, kukunin mo ung listahan
-example marami siyang listahan, 100% population ba or sampling lang? ofc sampling lang
-kaoag control's testing mayroon yan criteria, depends on audit firms kasi kaikangan effective
and efficient ung testing mo dito
-kaya kailangan may materiality sa umpisa pa lang, kasi icoconsider mo un if ever may makita
kang mali
-HR na process
-kailangan mo rin maginterview, prep stage, review stage, approval stage -ang lalagyan ng
contro points
   -frequency, monthly quarterly - dito magvavary ang samples mo kung gaano karami 

4. Performing Substantive Testing

-in combination of audit procedures
-actual testing based of the accnts sa bs, is
 -combination of inspection, observation, inquiry, confirmation, computation and analytical
procedures as applicable
-using info from AP, CIC, auditor performs substantive tests;
-to.determine whether entity's FS is fairly presented in accordance of financial reporting standards
-involves examination of docu, evidence supporting amounts and disclosures in fs
-extent of ST is highly dependent on results of auditor's consideration of internal control;
-if functions effectively. scope of ST will be reduced, more extensive ST if internal control is weak
-materiality
  -you get the final results, may nakitang difference is it material or immaterial?
  -pasok ba sa threshold?
  -pag lumagpas sa threshold, magfufurther inquiry ka.

Completion
5. Completing Audit
-more on final evaluation
-reassessment of materiality, final analytical procedures, confirmation of subsequent events
-sufficient appropriate evidence in order to reach a conclusion on the fairness of the fs
-after completed testinfg, auditor performs additional audit procedures
-dapat natapos mo lahat ng testings, lahat ng accnt balances na pasok sa materiality mo
-planning is the key talaga and base sa materiality dapat ang pagpili ng mga itetest and
procedures and the sampling method

6. Issuing a Report
-forms conclusion in form of opinion
-communicated to various interested users through a audit report

Engagement Letter
-this is important, because this is ur contract bw u the auditor and the client
-di basta basta dinadraft, nirereview ng mga legal, legal teams of both auditors and client
-usual issuance is annual even if recurring in practice u should still reissue engagement letter
because of such circumstances
-obj of audit - to express opinion on fs
-mgnt is responsibility - resp of fs
-scope of audit - audit, review or agreed upon
-forms or any reports - mgnt repr. letter, audit opinion
-limitations with the audit - inherent limitations, where auditor may not discover some material
misstatements becauae of error and fraud (unavoidabke risks)
-binibigyan dapat ni client ng unrestricted access sa lahat ng records na iaaudit
- additional- billing arrangments. expectations na makakareceive si auditor ng mgnt repr. letter,
arrangemenrs regarding involvement of other ppl