UNIVERSITY OF CALOOCAN CITY AUDITING AND ASSURANCE PRINCIPLES

Overview of the Audit Process

Preliminary Engagement Activities

Relevant References:
PSA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with
Philippine Standards on Auditing
PSA 210 Agreeing the Terms of Audit Engagement
PSA 500 Audit Evidence

OVERVIEW OF THE AUDIT PROCESS

 AUDIT PROCESS: A GENERAL APPROACH

The auditor The auditor

Entity prepares and The auditor gathers
performs audit expresses audit
presents financial audit evidence
procedures opinion
statements (Investigative Phase)
(Investigative Phase) (Reporting Phase)

 Entity Prepares and Presents FS

Assertions – these are representations made by the entity, whether implicit or explicit, through its management
and those charged with governance, as appropriate.

Category of Transactions
and events for the period
under audit (COCAC)
Account balances at the
period end (CERVa)
Presentation and
disclosure (OCCA)
 Occurence – transactions and events that have been recorded have occurred
and pertain to the entity
 Completeness – all transactions and events that should have been recorded
have been recorded.
 Cutoff – transactions and events have been recorded in the correct
accounting period.
 Accuracy – amounts and other data relating to recorded transactions and
events have been recorded appropriately.
 Classification – transactions and events have been recorded in the proper
accounts.
 Completeness – all assets, liabilities and equity interests that should have
been recorded have been recorded.
 Existence – assets, liabilities, and equity interests exist.
 Rights and obligations – the entity holds or controls the rights to assets, and
liabiilities are the obligations of the entity.
 Valuation and allocation – assets, liabilities and equity interests are included
in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.
 Occurence and rights and obligations – disclosed events, transactions and
other matters have occured and pertain to the entity.
 Completeness – all disclosures that should have been includedin the financial
statements have been included.
 Accuracy and valuation – financial and other information are disclosed fairly
and at appropriate amounts.
 Classification and understandability – financial information is appropriately
presented and described, and disclosures are clearly expressed.


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  The Auditor performs Audit Procedures

Major audit procedures:

1. Risk Assesment Procedures – performed to obtain an understanding of the entity and its environment,
including the entity’s internal control, to identify and assess the risks of material misstatement, whether
due to fraud or error, at the financial statements and assertion level. (In-In-Ob-A)
2. Test of Controls – audit procedure designed to evaluate the operating effectiveness of controls in
preventing, or detecting and correcting, material misstatements at the assertion level. (In-In-Ob-Re)
3. Substantive Procedures – audit procedure designed to detect material misstatements at the assertion
level. (Test of Details and Substantive Analytical Procedures)

 The Auditor gathers audit evidence

Through the procedures performed, the auditor obtains sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base audit opinion.

 The Auditor expresses an audit opinion

1. Unmodified or Unqualified Opinion

2. Modified Opinion
a. Qualified Opinion
b. Adverse Opinion
c. Disclaimer of Opinion

 AUDIT PROCESS: A MORE DETAILED APPROACH

Preliminary
Study and evaluation
Engagement Audit Planning
of Internal Control
Activities

Post-audit Completing the

Substantive Testing
responsibilities Audit

PRELIMINARY ENGAGEMENT ACTIVITIES

This phase will require a decision from the auditor whether or not to accept a new client or continue relationship
with an existing one.

Primary Objective: To minimize the likelihood of being associated to a client whose management lacks integrity.

 Major Preliminary Engagement Activities Procedures:

 Obtain a preliminary knowledge of the client’s business and industry to determine whether the auditor has
the degree of competence required by the engagement.
 Consider whether there are any threats to the firm’s independence and objectivity, and if so, whether
adequate safeguards can be established.
 Evaluate the firm’s ability to serve the prospective client.
 Evaluate auditability.

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  Investigate the integrity of the prospective client’s management

May be performed through:

1. Reading published articles
2. Inquiry to appropriate parties
3. Communication with the previous auditor, subject to client’s permission.
o Proposed Auditor (prev. Successor Auditor) – the auditor who might succeed the predecessor or
previous auditor
o Previous Auditor (prev. Predecessor Auditor)

Matters to be discussed with the Previous Auditor (RID):

1. Reasons for change in auditors
2. Integrity of the management
3. Disagreements between the previous auditor and management as to accounting principles, auditing
procedures, etc.

 Agree on the terms of the engagement and prepare an engagement letter

 Acceptance of an Engagement

The objective of the auditor is to accept or continue an audit engagement only when the basisi upon which it is to be
performed has been agreed, through:
a. Establishing whether the preconditions for an audit are present; and
b. Confirming that there is a common understanding between the auditor and management and, where appropriate,
those charged with governance of the terms of the audit engagement.

 Preconditions for an audit

o The use by management of an applicable financial reporting framework in the preparation of the
financial statements; and
o The agreement of management, and, where appropriate, those charged with governance to the
premise on which an audit is conducted.

 Agreeing the Terms of Audit Engagement

o Final output: Engagement Letter

o Contents of an Engagement Letter (MISUROT):
1. Management responsibilities
2. Inherent limitations of audit (presence of Audit Risk)
3. Scope of the audit
4. Unrestricted access to accounting records
5. Form of Report (any other communication of results of the audit engagement)
6. Objective of the audit
7. Timetable and Fees
8. Others (Expectation of receiving Management Representation Letter, Acknowledgement of
management of terms of Agreement, Arrangements regarding the Planning of the audit,
Description of any other letters or reports)

 Audit of Components

When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division (Component), the factors
that influence the decision whether to send separate engagement letter to the component include the following
(CLOSI):
 Who appoints the Component Auditor;
 Legal requirements;
 Degree of Ownership by parent;
 Whether a Separate auditor’s report is to be issued on the component;
 Degree of Independence of the component’s management from the parent entity

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  Recurring Audits

The auditor should consider whether circumstances require the terms of the engagement to be revised and whether
there is a need to remind the client of the existing terms of the engagement.

Factors that may make it appropriate to revise the terms of the engagement, remind the entity of existing terms,
and/or send a new letter:
 Any indication that the client misunderstands the objective and scope of the audit
 Any revised or special terms of engagement
 A recent change of management, board of directors or ownership
 A significant change in ownership
 A significant change in nature or size of the client’s business
 A change in legal or regulatory requirements
 A change in financial reporting framework adopted in the preparation of the financial statements
 A change in other reporting requirements

 Acceptance of a Change in Engagement

If, prior to completing the audit engagement, the auditor is requested to change the audit engagement to a lower level
of assurance, the auditor shall determine whether there is a reasonable justification for doing so. The auditor shall not
agree to a change in the terms of the audit engagement where there is no reasoable justification for doing so.

 With reasonable justification:

o Change in circumstances affecting the need for the service
o A misunderstanding as to the nature of an audit or related services originally requested

 Without reasonable justification:

o A restriction on the scope of the engagement, whether imposed by management or caused by
circumstances
o If the change relates to information that is incorrect, incomplete, or otherwise unsatisfactory
o The auditor is unable to obtain sufficient appropriate audit evidence regarding assertion.

 Auditor’s response

Is there a reasonable justification?

Yes No

 Stop performing the old engagement
 Stop referring to the old engagement, except
when the new engagement involves agreed-
upon procedures
 Start performing the new engagement.
 Continue the original audit engagement
 When prohibited to continue, withdraw from
the audit engagement (communicate to
necessary level of management)

=END OF LECTURE=
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