Activity Sheet – Module 4

1.)

 Standard-setting process were mainly interpreted by three organizations, these are the
Financial Reporting Standard Council, the Auditing and Assurance Standard Council and the
Philippines Interpretations Committee. Accounting standards in the Philippines were adopted
from the International Financial Reporting Standards issued by the International Accounting
Standards. authoritative standards for financial reporting and are the primary source of
generally accepted accounting principles (GAAP). Accounting standards specify how
transactions and other events are to be recognized, measured, presented, and disclosed in
financial statements.

2.)

 Financial statement assertions are set of representation of the company and has an explicit
or implicit assertion that concerns the fundamental accuracy of information in the financial
statements that figures out the truthful representation of it with the applicable standards.

3.)

 Audit evidence are information used by the auditor in arriving at the conclusions on which
the auditor’s opinion is based. Audit evidence includes both information contained in the
accounting records underlying the financial statements and other information.

 The common source of audit evidence are confirmation letters to third parties to verify
the amounts recorded in the company’s book, Original source documents that an auditor can
verify an account balance or record by vouching (or comparing) it to third-party
documentation, Physical observations especially on assets to verify the existence of assets
 through physical observations and inspections, Comparison to external data auditors may
confirm the amounts claimed on the company’s financial statements by researching pricing
data, And recalculations by verifying in-house schedules and records by re-creating them by
an auditor.

4.)

 Materiality relates to the significance of transactions, balances and errors contained in

the financial statements. Materiality defines the threshold or cutoff point after which
financial information becomes relevant to the decision-making needs of the users.
Information contained in the financial statements must therefore be complete in all
material respects for them to present a true and fair view of the affairs of the entity. The
concept of materiality is applied by the auditor both in planning and performing the audit,
as it evaluates the effect of identified misstatements on the audit and of uncorrected
misstatements and helping auditor’s opinion on the responsibility of every aspects in the
financial statements.

5.)

 The risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of the risks of material
misstatement and detection risk. Implications of an audit risk there are risk of material
misstatements, there’s also potential risk that are common to all entities and may occur if
no treatment were applied to prevent them.

6.)

 The component of an audit risk is the inherent risk which is the risk that a material
misstatement could occur. It is also a general risk that consists in the possibility of the
appearance of significant errors given the particularity of the entity, its activities, its
 environment, the nature of the accounts and operations. The control risk which is the risk
that the entity's internal control system to prevent or detect no errors and the risk that
internal control system does not ensure the prevention or the detection errors, it being a
function of effective design, implementation and maintenance of internal control. And the
detection risk which is that the risk that material errors not identified by the auditor and
that it is a risk proper to the auditor which consists of the fact that by not using
substantive procedures, the latter is not able to detect the existence of a significant error
within the balance of an account or in a category of operation, isolated or cumulated with
wrong information from other balances or categories..

7.)

 Risk cannot be eliminated in a decision-making of an organizations because there are

what we called inherent limitations that are made because of the nature of every aspects
in an organization that has the possibility to make or have an error but it can be managed
to minimize the possibility of a risk to occur in the business.

8.)

 The Auditor perform procedures regarding the continuance of the client relationship
and the specific audit engagement, determine compliance with independence and ethics
requirements, and establish an understanding of the terms of the audit engagement with
the audit committee.

9.)

 The importance of the audit engagement letter is the information with it which is the
elaboration of the scope of the audit, including reference to applicable legislation,
regulations, PSAs, and ethical and other pronouncements of professional bodies to which
 the auditor adheres, the form of any other communication of results of the audit
engagement, the fact that because of the inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that some material
misstatements may not be detected, even though the audit is properly planned and
performed in accordance with PSAs, arrangements regarding the planning and
performance of the audit, including the composition of the audit team, and etc.

10.)

 The product of an audit process is the assessment of the final product/service and its
qualification for use evaluated versus the intent of the purpose of the product/service. It
ensures a thorough inspection of a final product before delivery to a supplier or a
customer.
 These are the examples when it is appropriate for each type of audit report. On
unqualified opinion is by giving the financial statements give a true and fair view of the
financial position. In qualified opinion is like the unqualified opinion but there are some
misstatements or errors in the financial statements and has inadequate disclosure. In
adverse opinion is when the auditor found the material misstatements in the financial
statements, but those misstatements are not pervasive, then the qualified opinion should
be issued because of the reliability on the information is risky. And in disclaimer opinion
are issued when auditor’s opinion based on their own knowledge to the financial
statements when they could not obtain sufficient and appropriate financial statements to
draw the conclusion or support their opinion and of its causes is because of the
limitations of the auditor’s control in evaluating the financial statements.