Professional Documents
Culture Documents
The financial statements subject to audit are those PSAs do not impose responsibilities on management
of the entity, prepared and or those charged
presented by management of the entity with with governance and do not override laws and
oversight from those charged with regulations that govern their
governance. responsibilities.
The audit of As the basis for the auditor’s opinion, PSAs require
the financial statements does not relieve the auditor to obtain
management or those charged with reasonable assurance about whether the financial
governance of their responsibilities. statements as a whole are free
from material misstatement, whether due to fraud or
error
The PSAs contain objectives, requirements and @ Identify and assess risks of material misstatement,
application and other explanatory whether due to fraud or
material that are designed to support the auditor in error, based on an understanding of the entity and its
obtaining reasonable assurance. environment, including
The PSAs require that the auditor exercise the entity’s internal control.
professional judgment and maintain • Obtain sufficient appropriate audit evidence about
professional skepticism throughout the planning whether material
and performance of the audit and, misstatements exist, through designing and
among other things: >>>>> implementing appropriate
responses to the assessed risks.
• Form an opinion on the financial statements based
on conclusions drawn
from the audit evidence obtained.
(a) To obtain reasonable assurance about whether (b) To report on the financial statements, and
the financial statements as a communicate as required by the
whole are free from material misstatement, whether PSAs, in accordance with the auditor’s findings.
due to fraud or error,
thereby enabling the auditor to express an opinion
on whether the financial
statements are prepared, in all material respects, in
accordance with an
applicable financial reporting framework; and
DEFINITIONS
(a) Applicable financial reporting framework – The term “fair presentation framework” is used to
The financial reporting refer to a financial
framework adopted by management and, where reporting framework that requires compliance with
appropriate, those charged the requirements of the
with governance in the preparation and framework and:
presentation of the financial (i) Acknowledges explicitly or implicitly that, to
statements that is acceptable in view of the nature achieve fair
of the entity and the presentation of the financial statements, it may be
objective of the financial statements, or that is necessary for
required by law or regulation. management to provide disclosures beyond those
specifically
required by the framework; or
(ii) Acknowledges explicitly that it may be necessary
for management to
depart from a requirement of the framework to
achieve fair
presentation of the financial statements. Such
departures are expected
to be necessary only in extremely rare
circumstances.
“compliance framework” is used to refer to a (b) Audit evidence – Information used by the auditor
financial reporting in arriving at the
framework that requires compliance with the conclusions on which the auditor’s opinion is based.
requirements of the - includes
framework, but does not contain the both information contained in the accounting records
acknowledgements in (i) or (ii) above underlying the financial
statements and other information. For purposes of
the PSAs:
(i) Sufficiency of audit evidence is the measure of the
quantity of audit
evidence. The quantity of the audit evidence needed
is affected by the
auditor’s assessment of the risks of material
misstatement and also by
the quality of such audit evidence.
(ii) Appropriateness of audit evidence is the measure
of the quality of audit
evidence; that is, its relevance and its reliability in
providing support for
the conclusions on which the auditor’s opinion is
based.
(c) Audit risk – The risk that the auditor expresses (d) Auditor – “Auditor” is used to refer to the person
an inappropriate audit opinion or persons conducting the
when the financial statements are materially audit, usually the engagement partner or other
misstated. members of the engagement
team, or, as applicable, the firm.
Audit risk is a
function of the risks of material misstatement and
detection risk.
The
related notes ordinarily comprise a summary of
significant accounting
policies and other explanatory information.
(g) Historical financial information – Information (h) Management – The person(s) with executive
expressed in financial terms in responsibility for the conduct of
relation to a particular entity, derived primarily from the entity’s operations. For some entities in some
that entity’s accounting jurisdictions, management
system, about economic events occurring in past includes some or all of those charged with
time periods or about governance, for example,
economic conditions or circumstances at points in executive members of a governance board, or an
time in the past. owner-manager.
(i) Misstatement – A difference between the (j) "Premise", relating to the responsibilities of
amount, classification, management and, where
presentation, or disclosure of a reported financial appropriate, those charged with governance, on
statement item and the which an audit is conducted
amount, classification, presentation, or disclosure –their responsibilities that are fundamental to the
that is required for the item conduct of an
to be in accordance with the applicable financial audit in accordance with PSAs.
reporting framework. (i) For the preparation and presentation of the
Misstatements can arise from error or fraud. When financial statements in
the auditor expresses an accordance with the applicable financial reporting
opinion on whether the financial statements are framework; this
presented fairly, in all includes the design, implementation and
material respects, misstatements also include those maintenance of internal control
adjustments of amounts, relevant to the preparation and presentation of
classifications, presentation, or disclosures that, in financial statements that
the auditor’s judgment, are free from material misstatement
are necessary for the financial statements to be (ii) To provide the auditor with:
presented fairly, in all a. All information, such as records and
material respects. documentation, and other
matters that are relevant to the preparation and
presentation of the
financial statements;
b. Any additional information that the auditor may
request from
management and, where appropriate, those charged
with
governance; and
c. Unrestricted access to those within the entity from
whom the
auditor determines it necessary to obtain audit
evidence.
(k) Professional judgment – The application of (l) Professional skepticism – An attitude that includes
relevant training, knowledge and a questioning mind, being
experience, within the context provided by auditing, alert to conditions which may indicate possible
accounting and ethical misstatement due to error or
standards, in making informed decisions about the fraud, and a critical assessment of audit evidence.
courses of action that are
appropriate in the circumstances of the audit
engagement.
(m) Reasonable assurance – In the context of an (n) Risk of material misstatement – The risk that the
audit of financial statements, a high, but not financial statements are
absolute, level of assurance. materially misstated prior to audit. This consists of
two components,
<Susceptibility - weakness, vulnerability> described as follows at the assertion level:
(i) Inherent risk – 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.
(ii) Control risk – 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 basis by the entity’s internal control.
REQUIREMENTS
Ethical Requirements Relating to an Audit of Professional Skepticism
Financial Statements - plan and perform an audit with professional
auditor shall comply with relevant ethical skepticism recognizing that circumstances may exist
requirements, including those that cause the financial statements to be
pertaining to independence, relating to financial materially misstated.
statement audit engagements.
Complying with PSAs Relevant to the Audit auditor shall use the
objectives stated in relevant PSAs in planning and
The auditor shall comply with all PSAs relevant to performing the audit, having
the audit. regard to the interrelationships among the PSAs, to
(Relevant: when the PSA is in effect and the
circumstances addressed by the PSA (a) Determine whether any audit procedures in
exist) addition to those required by the
PSAs are necessary in pursuance of the objectives
The auditor shall have an understanding of the stated in the PSAs; and
entire text of aPSA (b) Evaluate whether sufficient appropriate audit
evidence has been obtained.
The auditor shall not represent compliance with
PSAs in the auditor’s report
unless the auditor has complied with the
requirements of this PSA and all other
PSAs relevant to the audit.
As part of their responsibility for the preparation and General purpose FS-FS prepared to meet the needs of a wide
presentation of the financial range of users
statements, management and, where appropriate,
those charged with governance Special Purpose FS-FS prepared to meet the needs of specific
are responsible for: users
• The identification of the applicable financial
reporting framework, in the
context of any relevant laws or regulations.
• The preparation and presentation of the financial
statements in accordance
with that framework.
• An adequate description of that framework in the
financial statements.
The preparation of the financial statements requires
management to exercise
judgment in making accounting estimates that are
reasonable in the circumstances,
as well as to select and apply appropriate
accounting policies. These judgments
are made in the context of the applicable financial
reporting framework.
Where conflicts exist between the financial A6. The requirements of the applicable financial
reporting framework and the sources reporting framework determine the
from which direction on its application may be form and content of the financial statements.
obtained, or among the sources Although the framework may not
that encompass the financial reporting framework, specify how to account for or disclose all transactions
the source with the highest or events, it ordinarily
authority prevails. embodies sufficient broad principles that can serve
as a basis for developing and
applying accounting policies that are consistent with
the concepts underlying the
requirements of the framework.
A8. The requirements of the applicable financial Single FS as Complete FS: Cash Basis Accounting
reporting framework also determine
what the International Public Sector Accounting Standard
(IPSAS),
“Financial Reporting Under the Cash Basis of
Accounting” issued by the
International Public Sector Accounting Standards
Board states that the
primary financial statement is a statement of cash
receipts and payments
when a public sector entity prepares and presents its
financial statements in
accordance with that IPSAS.
Because of the significance of the premise to the
conduct of an audit, the auditor is The auditor is also required to obtain written
required to obtain agreement from management representations about
and, where appropriate, those whether management and, where appropriate, those
charged with governance that they acknowledge charged with governance have
and understand their fulfilled those responsibilities.7
responsibilities as a precondition for accepting the mandate-consent, authorization, command
audit
engagement.
Form of the Auditor’s Opinion A13. Where the financial reporting framework is a fair
presentation framework, as is
The form of the auditor’s opinion, however, will generally the case for general purpose financial
depend statements, the opinion required
upon the applicable financial reporting framework by the PSAs is on whether the financial statements
and any applicable laws or are presented fairly, in all
regulations. Most financial reporting frameworks material respects. Where the financial reporting
include requirements relating to framework is a compliance
the presentation of the financial statements; for framework, the opinion required is on whether the
such frameworks, preparation of financial statements are
the financial statements in accordance with the prepared, in all material respects, in accordance with
applicable financial reporting the framework.
framework includes presentation.
Unless
specifically stated otherwise, references in the PSAs to the auditor’s opinion
cover
both forms of opinion.
Ethical Requirements Relating to an Audit of A15. Part A of the Code of Ethics establishes the
Financial Statements fundamental principles of professional
Relevant ethics relevant to the auditor when conducting an
ethical requirements ordinarily comprise Parts A audit of financial statements and
and B of the Code of Ethics for provides a conceptual framework for applying those
Professional Accountants in the Philippines (the principles.
Code of Ethics) related to an
audit of financial statements together with national
requirements that are more
restrictive. (limiting)
A22. The auditor cannot be expected to disregard Professional Judgment (Ref: Para. 16)
past experience of the honesty and This is
integrity of the entity’s management and those because interpretation of relevant ethical
charged with governance. requirements and the PSAs and the
Nevertheless, a belief that management and those informed decisions required throughout the audit
charged with governance are cannot be made without the
honest and have integrity does not relieve the application of relevant knowledge and experience to
auditor of the need to maintain the facts and circumstances.
professional skepticism or allow the auditor to be - necessary in particular regarding decisions
satisfied with less-thanpersuasive about:
audit evidence when obtaining reasonable • Materiality and audit risk.
assurance. • The nature, timing, and extent of audit procedures
used to meet the
requirements of the PSAs and gather audit
evidence.
• Evaluating whether sufficient appropriate audit
evidence has been obtained
• The evaluation of management’s judgments in
applying the entity’s
applicable financial reporting framework.
• The drawing of conclusions based on the audit
evidence obtained,
Most of the auditor’s work in forming the auditor’s The sufficiency and appropriateness of audit
opinion consists of evidence are interrelated. The quantity of audit
obtaining and evaluating audit evidence. evidence
needed is affected by the auditor’s assessment of the
risks of misstatement
and also
by the quality of such audit evidence.
Obtaining more audit evidence, however, may not
compensate for its
poor quality.
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A33. For purposes of the PSAs, audit risk does not Further, audit risk is a
include the risk that the auditor technical term related to the process of auditing; it
might express an opinion that the financial does not refer to the auditor’s business risks such as
statements are materially misstated loss from litigation, adverse publicity, or other events
when they are not. This risk is ordinarily arising in connection with the audit of financial
insignificant. statements.
A36. Risks of material misstatement at the Auditors use various approaches to accomplish the
assertion level are assessed in order to objective of assessing the
determine the nature, timing, and extent of further risks of material misstatement. For example, the
audit procedures necessary to auditor may make use of a model
obtain sufficient appropriate audit evidence. that expresses the general relationship of the
components of audit risk in
mathematical terms to arrive at an acceptable level of
detection risk.
A37. The risks of material misstatement at the Inherent risk is higher for some assertions and
assertion level consist of two related classes of transactions,
components: inherent risk and control risk. Inherent account balances, and disclosures than for others.
risk and control risk are the For example, it may be higher
entity’s risks; they exist independently of the audit for complex calculations or for accounts consisting of
of the financial statements. amounts derived from
accounting estimates that are subject to significant
estimation uncertainty.
External circumstances giving rise to business risks Factors in the entity and its environment that relate to
may also influence inherent several or all of the classes
risk. For example, technological developments of transactions, account balances, or disclosures
might make a particular product may also influence the inherent
obsolete, thereby causing inventory to be more risk related to a specific assertion. Such factors may
susceptible to overstatement. include, for example, a lack
of sufficient working capital to continue operations or
a declining industry
characterized by a large number of business failures.
Control risk
Inherent Limitations of Internal Control
is a function of the effectiveness of the design,
implementation and These include, for example, the possibility of human
maintenance of internal control by management to errors or mistakes, or of controls being circumvented
address identified risks that by collusion or inappropriate
threaten the achievement of the entity’s objectives management override.
relevant to preparation of the
entity’s financial statements.
internal control, can only reduce, but not eliminate,
risks of material
misstatement in the financial statements, because
of the inherent limitations of
internal control.
the auditor is required to, or may choose The PSAs do not ordinarily refer to inherent risk and
to, test the operating effectiveness of controls in control risk separately, but
determining the nature, timing rather to a combined assessment of the “risks of
and extent of substantive procedures to be material misstatement.”
performed.15
The assessment of the risks of material misstatement
However, may be
the auditor may make separate or combined expressed in quantitative terms, such as in
assessments of inherent and control percentages, or in non-quantitative
risk depending on preferred audit techniques or terms.
methodologies and practical
considerations.
Detection risk, however, can only be reduced, not Inherent Limitations of an Audit
eliminated, because of the inherent limitations of an
audit. Accordingly, some The inherent limitations of an audit arise from:
detection risk will always exist. • The nature of financial reporting;
• The nature of audit procedures; and
• The need for the audit to be conducted within a
reasonable period of time and
at a reasonable cost.
A46. The preparation of financial statements A47. There are practical and legal limitations on the
involves judgment by management in auditor’s ability to obtain audit
applying the requirements of the entity’s applicable evidence. For example:
financial reporting framework • There is the possibility that management or others
to the facts and circumstances of the entity. may not provide,
intentionally or unintentionally, the complete
Consequently, some financial statement items are information that is relevant to
subject to an inherent level of the preparation and presentation of the financial
variability which cannot be eliminated by the statements or that has been
application of additional auditing requested by the auditor.
procedures. For example, this is often the case with • audit procedures used to gather audit evidence may
respect to certain accounting be ineffective for detecting an intentional
estimates. misstatement. example:
auditor is neither
trained as nor expected to be an expert in the
authentication of documents.
• An audit is not an official investigation into alleged
wrongdoing.
Timeliness of Financial Reporting and the Balance Notwithstanding this, the relevance of information,
between Benefit and Cost and thereby its value,
tends to diminish over time, and there is a balance to
A48. The matter of difficulty, time, or cost involved be struck between the
is not in itself a valid basis for the reliability of information and its cost.
auditor to omit an audit procedure for which there is Therefore, there is an
no alternative or to be expectation by users of financial statements that the
satisfied with audit evidence that is less than auditor will form an opinion
persuasive. on the financial statements within a reasonable
period of time and at a reasonable
cost, recognizing that it is impracticable to address all
information that may exist
or to pursue every matter exhaustively on the
assumption that information is in
error or fraudulent until proved otherwise.
Consequently, it is necessary for the auditor to:
• Plan the audit so that it will be performed in an risk assessment procedures
effective manner;
• Direct audit effort to areas most expected to
contain risks of material
Misstatement
• Use testing and other means of examining
populations for misstatements.
Conduct of an Audit in Accordance with PSAs
However, the inherent limitations of an Nature of the PSAs
audit are not a justification for the auditor to be
satisfied with less-than-persuasive A53. The PSAs, taken together, provide the
audit evidence. standards for the auditor’s work in fulfilling
the overall objectives of the auditor. The PSAs deal
with the general
responsibilities of the auditor, as well as the auditor’s
further considerations
relevant to the application of those responsibilities to
specific topics.
“smaller entity” refers to an entity which typically Use of Objectives to Evaluate Whether Sufficient
possesses qualitative Appropriate Audit Evidence Has Been
characteristics such as: Obtained
(a) Concentration of ownership and management in
a small number of A71. The auditor is required to use the objectives to
individuals (often a single individual – either a evaluate whether sufficient
natural person or another appropriate audit evidence has been obtained in the
enterprise that owns the entity provided the owner context of the overall
exhibits the relevant objectives of the auditor.
qualitative characteristics); and
(b) One or more of the following:
(i) Straightforward or uncomplicated transactions;
(ii) Simple record-keeping;
(iii) Few lines of business and few products within
business lines;
(iv) Few internal controls;
(v) Few levels of management with responsibility for
a broad range of
controls; or
(vi) Few personnel, many having a wide range of
duties.
Audit documentation that meets the requirements of
The PSAs do not call for compliance with a PSA 230 (Redrafted) and the
requirement that is not relevant in the specific documentation requirements of other
circumstances of the audit. relevant PSAs provides evidence of
the auditor’s basis for a conclusion about the
achievement of the overall objectives
of the auditor.
The documentation of a failure to achieve an
objective assists the auditor’s evaluation
of whether such a failure has prevented the auditor
from achieving the overall
objectives of the auditor.
Philippine Standards on Assurance Engagements
(PSAEs) are to be applied in
assurance engagements other than audits or
reviews
of historical financial information.